Back to GetFilings.com
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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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. [X]
As of January 31, 1997, 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, 1997 was
approximately $83,497,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on April 30, 1997 are incorporated by reference into Part III and IV.
Exhibit Index on page 92.
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., a state-chartered financial services
company organized under the laws of the State of Hawaii in 1990, to provide
first and second mortgage loans, is inactive.
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 and the company is inactive.
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 six other commercial banks and six 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 Japanese 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. During the same period, Hawaii
construction activity slowed and foreign investment in Hawaii (particularly
by Japanese real estate investors) sharply declined.
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 over the past few years has helped to improve
visitor arrivals from Japan. After experiencing three years of decline,
total visitor arrivals rebounded--increasing by 5.0 percent in 1994, 3.1
percent in 1995, and by 5.2 percent for the first nine months of 1996.
The relatively positive conditions in Hawaii's major visitor markets, such
as California, whose economy is expected to grow 5.5 percent in 1996 and 4.0
percent in 1997, and Japan, whose economy is expected to grow by 3.0 percent
in 1996 and 2.3 percent in 1997, should translate to continued economic
recovery for the State of Hawaii. Based on current trends, state economists
expect that the recovery in the visitor industry will continue, with the
number of visitor arrivals increasing 4.0 percent in 1997.
Hawaii's Real Gross State Product, which grew by about 1.3 percent in 1996,
is expected to grow at a 2.5 percent pace in 1997. The number of jobs are
also expected to grow 1.5 percent in 1997, after annual declines from 1993
to 1995.
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 or 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 non-banking subsidiaries are limited
to the business of banking and activities closely related or incidental to
banking. In addition, 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.
The statute has been eliminated, effective September 29, 1995, which had
prohibited the acquisition of more than 5% of the stock of the Company by a
bank holding company whose operations are principally conducted in a state
other than Hawaii, and the acquisition by the Company of more than 5% of the
stock of any bank located in a state other than Hawaii unless the statutory
law of the state in which such bank is located specifically authorized such
acquisition. Accordingly, at the present time and subject to certain limits,
the BHCA allows adequately capitalized and adequately managed bank holding
companies to acquire control of banks in any state.
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 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.
Proposed Merger of Subsidiaries and Informal Agreement. On October 18, 1996,
the Company announced plans to merge its two subsidiaries, City Bank and
International Savings, to improve operating efficiency. The merger is
expected to be completed in the first half of 1997, subject to the approval of
the applicable regulators. After the merger, the combined institutions will
operate under the City Bank name.
On October 16, 1996, the Company entered into an informal agreement, or a
Memorandum of Understanding ("MOU"), with the Federal Reserve Bank of San
Francisco (FRB), with respect to issues raised in an inspection of the Company
as of June 30, 1996 by the FRB, OTS and State of Hawaii Division of Financial
Institutions.
Under the terms of the MOU agreement, the Company must first obtain
concurrence from the FRB on matters concerning the payment of cash dividends,
incurring debt, or the redemption of its stock. The MOU agreement also
addresses a number of issues that require FRB concurrence including an
increase in director and executive compensation, entering into agreements to
acquire or divest businesses, management and organizational structure,
liquidity and capital needs, interest rate risk, audit, record keeping and
compliance control systems. In response to the MOU agreement, the Company is
reviewing and evaluating its operations and management and organizational
structure.
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 1996 totaled $10.86 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. Under the Memorandum of Understanding with the Federal
Reserve Bank of San Francisco, as discussed above, the Company is restricted
from the payment of cash dividends without the prior approval of the FRB.
The Company reduced its quarterly dividend in the first quarter of 1997 from
$0.325 per share to $0.05 per share. The reduced dividend reflects a review
of the Company's current financial requirements, including earnings and the
cost associated with the consolidation of its two subsidiary institutions and
other expenses incurred in restructuring the Company and re-aligning its
management. The Company will continue to evaluate the dividend on a quarterly
basis. 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.
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, 1996, 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 1996, 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, non-cumulative 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 4% 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
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), non-cumulative 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), non-cumulative 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
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, 1996, the Company, the Bank and ISL exceeded applicable capital
requirements. The consolidated capital position of the Company at December
31,1996 was as follows:
Company ratio Minimum required ratio
Risk-based Capital:
Tier 1 capital ratio 12.64% 4%
Total capital ratio 13.90% 8%
Leverage ratio 7.17% 4%
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, 1996.
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 has 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 ("FDICIA") 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
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."
The federal banking agencies have 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.
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 non-
discriminatory 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 State of Hawaii has enacted a statute, effective June 1, 1997, which will
authorize out-of-state banks to engage in "interstate merger transactions"
(mergers and consolidations with and purchases of all or substantially all of
the assets and branches of) with Hawaii banks, following which any such out-
of-state bank may operate the branches of the Hawaii bank it has acquired.
The Hawaii bank must have been in continuous operation for at least five years
prior to such an acquisition, unless it is subject to or in danger of becoming
subject to certain types of supervisory action. This statute does not permit
out-of-state banks to acquire branches of Hawaii banks other than through an
"interstate merger transaction" (except in the case of a bank that is subject
to or in danger of becoming subject to certain types of supervisory action)
nor to open branches in Hawaii on a de novo basis.
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.
Deposit Insurance. 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.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was signed into law to recapitalize the SAIF, which generally insures the
deposits of savings associations. This legislation required the FDIC to
impose a one-time special assessment on SAIF-assessable deposits. Based
upon the Association's deposit base as of March 31, 1995, the Company's one-
time special assessment totaled approximately $2.4 million in 1996. Other
changes proposed in this area include adding approximately 1.3 cents per
$100 of domestic deposits to the deposit insurance costs of BIF-insured
banks, and 6.4 cents per $100 of SAIF-assessable deposits, in order to make
The Financing Corporation's (FICO) 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.
The Funds Act for the three year period beginning in 1997, subjects BIF-
insured deposits (such as those of City Bank) to a Financing Corporation
("FICO") premium assessment on domestic deposits at one-fifth of the premium
rate (approximately 1.3 cents) imposed on SAIF-insured deposits (approximately
6.5 cents). Deposits held by ISL are SAIF-insured deposits. In addition,
service debt funding on FICO bonds for the first half of 1997 is expected to
result in BIF-insured institutions paying 0.64 cents for each $100 of assessed
deposits, and SAIF-insured institutions paying 3.2 cents on each $100 of
deposits. City Bank will be required to continue to pay both BIF and SAIF
assessments after the merger of ISL into City Bank, based on the amount of
such BIF and SAIF deposits held by each institution respectively at the time
or merger.
For at least the first half of 1997, BIF premiums will be maintained at their
current level. Accordingly, institutions in the lowest risk category will
continue to pay no premiums, and other institutions will be assessed based on
a range of rates, with those in the highest risk category paying 27 cents for
every $100 of BID-insured deposits. Rates in the SAIF assessment schedule,
previously ranging from 4 to 31 cents, have recently been adjusted by 4 cents
to a range of 0 to 27 cents (as of October 1, 1996).
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from the SAIF to BIF in order to avoid higher assessment
rates. Accordingly, the FDIC recently proposed a rule that would, if adopted
as proposed, impose entrance and exit fees on depository institutions
attempting to shift deposits from the SAIF to the BIF as contemplated by the
Funds Act.
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.
NUMBER OF EMPLOYEES
As of December 31, 1996 the Company and its subsidiaries employed 499
persons; 469 on a full-time basis and 30 on a part-time basis. 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 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) 1996 1995 1994
----------------------------
Held-to-Maturity
U.S. Treasury securities $ - $ - $ 97,823
and other U.S. government
agencies and corps.
State and political subdivisions 102 102 4,954
Mortgage-backed securities 97,729 9,142 123,970
Other - - -
----------------------------
$ 97,831 $ 9,244 $226,747
============================
Available-for-sale
U.S. Treasury securities $ 51,997 $ 95,257 $ 11,912
and other U.S. government
agencies and corps.
State and political subdivisions 3,219 3,470 -
Mortgage-backed securities 81,490 106,878 2,676
Other - - -
----------------------------
$136,706 $205,605 $ 14,588
============================
Restricted securities
(See Note A2 to the Company's
Consolidated Financial
Statements) $ 25,100 $ 23,226 $ 21,248
============================
The following table sets forth the maturities of investment securities at
December 31, 1996, 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. $ - - % $ - - $ - - $ - -
State subdivisions - - 102 6.00% - - - -
Mortgage-backed securities - - 9,930 6.50% 83,869 8.87% 3,930 8.37%
Other - - - - - - - -
--------------------------------------------------------------
$ - - % $10,032 6.49% $ 83,869 8.87% 3,930 8.37%
==============================================================
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. $3,002 5.73% $ 41,004 6.15% $ 7,991 7.41% $ - - %
State subdivisions - - 1,225 6.44% 1,450 6.13% 544 5.78%
Mortgage-backed securities 754 8.24% 8,989 6.59% 23,939 6.83% 47,808 7.37%
Other - - - - - - - -
------------------------------------------------------------------------
$3,756 6.23% $ 51,218 6.24% $ 33,380 6.94% $ 48,352 7.35%
=================================================================
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, 1996 decreased to $1,037.06 million, a $91.47
million or 8.10% decline over the previous year-end. The decrease in total
loans was due primarily to a decline in real estate mortgage loans, which
decreased by $97.57 million or 11.46% Substantially all of the Company's
loan portfolio, including real estate mortgage loans, are located in the
State of Hawaii.
The amount of loans outstanding at December 31 for the years indicated are
shown in the following table categorized as to types of loans:
At December 31,
(In thousands) 1996 1995 1994 1993 1992
----------------------------------------------------------------
Commercial and financial $ 170,228 $ 168,497 $ 167,460 $163,394 $181,063
Real estate - construction 28,699 18,408 24,448 12,983 19,691
Real estate - mortgage 753,676 851,242 797,997 294,855 254,748
Installment 84,456 90,378 91,738 81,016 83,955
----------------------------------------------------------------
$1,037,059 $1,128,525 $1,081,643 $552,248 $539,457
================================================================
Commercial and financial. Loans outstanding in this category increased to
$170.23 million, up $1.73 million or 1.03% from year-end 1995. Loans in
this category are primarily loans to small and medium-sized businesses and
professionals doing business in Hawaii. The average loan balance was
$119,000 at year end 1996. 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 declined to $753.68
million at year-end 1996, a decrease of $97.57 million or 11.46% from year-
end 1995. This decline was primarily attributable to the securitization of
$81 million in residential mortgage loans by ISL. The average size of loans
in
this category at December 31, 1996 was approximately $142,000. In 1996, the
Bank has not made any loans to finance homes in excess of $1 million.
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, 1996,
which, based on remaining scheduled repayments of principal, are due in the
periods indicated:
At December 31, 1996
Maturing
within after 1 after
1 yr. Within 5 yrs. 5 yrs. Total
------------------------------------------
(in thousands)
Commercial and financial $87,393 $10,017 $ 72,818 $170,228
Real estate-construction 12,586 13,834 2,279 28,699
------------------------------------------
$99,979 $23,851 $ 75,097 $198,927
==========================================
The following table sets forth the sensitivity of the above amounts due
after one year:
At December 31, 1996
Fixed Variable
(in thousands) rate rate Total
---------------------------------
Due after 1 but within 5 years $14,427 $ 9,424 $ 23,851
Due after 5 years 33,680 41,417 75,097
---------------------------------
$48,107 $ 50,841 $ 98,948
=================================
RISK ELEMENTS IN LENDING ACTIVITIES
The table on the following page 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,
1996 1995 1994 1993 1992
-------------------------------------------
Loans accounted for on a
non-accrual basis
Commercial & Industrial $ 4,321 $ 2,538 $1,484 $ 680 $1,904
Real Estate 19,064 11,800 5,882 3,097 1,886
Installment - - - - -
--------------------------------------------
$23,385 $14,338 $7,366 $3,777 $3,790
Loans contractually past
due 90 days or more as
to principal or interest 2,379 3,113 5,946 1,965 2,061
-------------------------------------------
Total non-performing loans 25,764 17,451 13,312 5,742 5,851
Other real estate owned 1,844 1,715 2,122 - 2 000
-------------------------------------------
Total non performing assets $27,608 $19,166 $15,434 $5,742 $7,851
===========================================
Ratio of non-performing loans
to period end total loans 2.48% 1.54% 1.23% 1.05% 1.09%
Ratio of non-performing assets
to period end total assets 1.98% 1.27% 1.07% 0.73% 1.08%
The increase in non accrual loans in 1996 was due primarily to an increase
in non-accruing mortgage loans, which increased by $9.7 million to $20.1
million
at the end of 1996. The increase in non-accruing mortgage 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.
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
was comprised primarily of mortgage loans on one-to-four family residential
property.
The increase in non-performing loans in 1994 was due primarily to ISL's non-
accrual loans and loans past due ninety-days of $5.2 million and $3.3
million, respectively, included in 1994 amounts.
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, 1996 the recorded investment in loans that are considered to be impaired
was $10.79 million. The total allowance for loan losses related to these
loans
was $2.1 million - see Note E of Notes to Consolidated Financial Statements.
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.
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) 1996 1995 1994 1993 1992
---------------------------------------
Balance of allowance
for credit losses at
beginning of year $14,576 $14,326 $9,816 $8,715 $7,542
Allowance of ISL at
acquisition date - - 3,128 - -
Charge offs:
Commercial and financial 537 87 602 816 1,244
Real estate - construction - - - - -
Real estate - mortgage 495 563 300 443 376
Installment 873 602 694 777 1,371
---------------------------------------
Total charge-offs 1,905 1,252 1,596 2,036 2,991
Recoveries: ---------------------------------------
Commercial and financial 30 92 609 528 105
Real estate - construction - - - - -
Real estate - mortgage 74 142 14 72 -
Installment 246 288 391 473 334
---------------------------------------
Total recoveries 350 522 1,014 1,073 439
---------------------------------------
Net loans charged-off 1,555 730 582 963 2,552
Provision for loan losses 2,410 980 1,964 2,064 3,725
---------------------------------------
Balance at year-end $15,431 $14,576 $14,326 $9,816 $8,715
=======================================
SUMMARY OF LOAN LOSS EXPERIENCE (continued)
Years ended December 31,
(dollars in thousands) 1996 1995 1994 1993 1992
---------------------------------------
Ratio of net charge-offs to
average net loans outstanding 0.14% 0.07% 0.07% 0.18% 0.50%
Ratio of allowance for credit
losses to period-end loans 1.49% 1.29% 1.32% 1.79% 1.62%
Ratio of allowance for credit
losses to non-performing loans 59.89% 83.53% 107.62% 170.95% 148.95%
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 1.49% at December 31, 1996, compared to 1.29% and 1.32% at 1995
and 1994, respectively. On the other hand, the allowance for loan losses
has decreased from 83.53% of non-performing loans in 1995 to 59.89% of such
loans in 1996. The increase in non-performing loans in 1996 was primarily
attributable to residential mortgage loans. Since the majority of these
loans are adequately collateralized by the underlying property values,
management believes that the allowance for loan losses are more than
adequate to cover any potential losses.
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,
1996 1995 1994 1993 1992
Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1)
--------------------------------------------------------------------------------
Commercial &
financial $4,808 16.42% $5,039 14.91% $ 3,649 15.47% $ 4,280 29.82% $4,153 33.78%
Real estate -
Construction - 2.77% 184 1.62% 378 2.25% 128 2.36% 127 3.67%
Real estate -
Mortgage 7,021 72.67% 5,053 75.46% 4,097 73.79% 2,210 53.06% 1,928 46.90%
Installment 1,412 8.14% 1,510 8.01% 1,563 8.49% 1,063 14.76% 1,138 15.65%
Unallocated 2,190 n/a 2,790 n/a 4,639 n/a 2,135 n/a 1,369 n/a
-----------------------------------------------------------------------------------
Total $15,431 100% $14,576 100% $14,326 100% $ 9,816 100% $8,715 100%
=================================================================================
(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.
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,
1996 1995 1994
Average Average Average
Balance rate Balance rate Balance rate
--------------------------------------------------
Non-interest bearing
demand deposits $109,878 0.00% $120,396 0.00% $108,996 0.00%
Interest bearing
demand deposits 166,118 2.51% 153,168 2.28% 140,732 1.61%
Savings 181,900 2.50% 196,795 2.45% 224,365 2.34%
Time deposits 500,491 5.28% 512,931 5.49% 355,265 4.08%
--------------------------------------------------
Total $958,387 3.67% $983,290 3.71% $829,358 2.65%
==================================================
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 1996 is summarized below:
(in thousands)
3 months or less $ 90,656
Over 3 months through 6 months 45,456
Over 6 months through 12 months 26,242
Over 12 months 14,515
----------
Total $176,869
==========
SHORT-TERM BORROWINGS
The following table sets forth outstanding balances of short-term borrowings
at year-end :
At December 31,
(in thousands) 1996 1995 1994
----------------------------------
Federal funds purchased and
securities sold under
repurchase agreements $ 9,300 $ 38,698 $ 69,006
Federal treasury tax and loan 571 2,577 1,422
Advances from the FHLB 198,810 194,085 195,475
Notes payable to banks - 4,000 9,000
----------------------------------
Total $208,681 $239,360 $274,903
==================================
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) 1996 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, 5.55% 5.82% 6.29%
Maximum outstanding at any month-end $226,515 $238,693 $198,600
Average outstanding 199,870 195,538 141,819
Average interest rate for the period 5.87% 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 $444.14 million, of which $142.39 million was undrawn at
December 1996. 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 2010. 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.
ITEM 3. LEGAL PROCEEDINGS
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 (ISL Building) at 1111 Bishop Street
in Honolulu, Hawaii, for recission, special, general and punitive damages.
The plaintiffs seek recission of sale of the ISL building to them (made in
May 1988 for $7,450,000), 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, and
intentional or negligent infliction of emotional distress in connection
with the vacation of the ISL Building by the Association as a substantial
tenant of the building. The Company and the Association defendants have
answered plaintiffs' complaint denying any liability in connection with
plaintiffs' allegations. While the Company and the Association defendants
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 Association, which previously leased approximately 56% of the building,
vacated its leased portion in March 1997. On March 11, 1997, the Company
was informed by the landowner that the plaintiffs, as lessee, had failed to
make timely payment of the monthly rent due March 1, 1997, and real property
taxes due February 20, 1997. The consent of the landowner given in 1988 to
the assignment by the Association of the underlying ground lease to
plaintiffs did not release the Association from ground lease obligations
upon default by the assignee, and thus the Association, may also have
liability to the landowner in the underlying ground lease ($65,333 per
month) to the landowner in connection with any default by plaintiffs in
lease payments to the landowner, even though THE Association no longer
occupies such leased space. The monthly rental payments of $65,333 required
by the ground lease are substantially in excess of current rental market
values, which will restrict the ability of the Association to mitigate
potential losses. The ground lease rent is fixed until 2002, at which time
the rent will be renegotiated. The ground lease term expires in 2021.
In another matter, a director of the Company and two former executives of
the Association have threatened to file a lawsuit in the First Circuit Court
of the State of Hawaii against the Company, the Bank and the Association to
recover damages, penalties pursuant to Hawaii Revised Statutes Chapter 394B,
attorneys' fees, and costs related to the termination of their employment.
The Company is negotiating a possible settlement with the group through
outside legal counsel and management is unable to determine the likelihood
of the outcome of this threatened lawsuit.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1996 to a vote of
security holders through the solicitation of proxies or otherwise.
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 28, 1997, 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:
1996 High Low Dividends
----------------------------
First quarter $31.00 $29.00 $0.325
Second quarter 33.25 30.50 0.325
Third quarter 31.50 27.50 0.325
Fourth quarter 30.50 24.50 -
1995
First quarter $31.25 $29.50 $0.325
Second quarter 31.00 29.50 0.325
Third quarter 30.50 29.00 0.325
Fourth quarter 30.25 28.75 0.325
Under the MOU agreement with the FRB, the Company is restricted from the
payment of cash dividends without prior approval of the FRB. In March,
1997, the Company announced a reduction in the first quarter dividend to
$0.05 per share. The reduced dividend reflects a review of the Company's
current financial requirements, including earnings and the cost associated
with the consolidation of its two subsidiary institutions and other expenses
incurred in restructuring the Company and re-aligning its management. The
Company will continue to evaluate the dividend on a quarterly basis.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data and selected ratios)
1996 1995 1994 1993 1992
-----------------------------------------------
Income Statement Data:
Interest income $ 111,247 $ 111,716 $ 89,350 $ 58,582 $ 61,297
Interest expense 53,477 57,686 34,445 17,048 22,554
Net interest income 57,770 54,030 54,905 41,534 38,743
Provision for credit losses 2,410 980 1,964 2,064 3,725
Net income 7,059 8,013 11,071 7,926 7,810
End of Period Balance Sheet Data:
Total assets 1,397,169 1,501,513 1,439,511 789,541 726,565
Total loans 1,037,059 1,128,525 1,081,643 552,248 539,547
Total deposits 951,910 1,011,483 923,444 622,084 594,855
Long-term debt 94,825 101,371 106,850 65,000 35,000
Stockholders' equity 119,411 116,506 111,165 78,586 56,703
Per Share Data:
Net income 1.99 2.26 3.32 3.12 3.66
Cash dividends declared 0.98 1.30 1.30 0.98 1.30
Outstanding Shares:
Average during period 3,551 3,551 3,335 2,538 2,131
Selected Ratios
Return on average total assets 0.50% 0.54% 0.95% 1.06% 1.09%
Return on average equity 5.99% 7.05% 10.92% 10.92% 14.13%
Average total stockholders'
equity to average assets 8.34% 7.69% 8.67% 9.67% 7.72%
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.
Results of Operations.
Consolidated net income for 1996 was $7.06 million, a decrease of 11.91%
from the $8.01 million in 1995, and a 36.24% decline from the $11.07 million
reported in 1994. Net income on a per share basis was $1.99 in 1996, as
compared to $2.26 in 1995 and $3.32 in 1994. The Company's return on average
stockholders' equity was 5.99% in 1996, 7.05% in 1995, and 10.92% in 1994.
The return on average total assets for 1996 was 0.50%, as compared to 0.54%
for 1995 and 0.95% for 1994. Net interest margin (on a tax equivalent basis)
improved to 4.36% in 1996, compared to 3.93% and 4.96% in 1995 and 1994,
respectively. Despite the improvement in net interest income, consolidated
net income for 1996 was negatively impacted by a $2.21 million decline in
non-interest income, a $1.67 million increase in non-interest expenses, and
a $1.43 million addition to the loan loss provision. Further details are
provided in the sections immediately following this discussion.
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, 1996 1995 1994
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------
ASSETS (dollars in thousands)
Interest-earning assets:
Loans $1,111,661 $96,825 8.71% $1,117,976 $94,142 8.42% $ 879,184 $73,007 8.30%
Taxable investment
securities 208,881 13,776 6.60 254,565 17,249 6.78 222,577 15,964 7.17
Non-taxable investment
securities 3,526 474 13.44 4,485 388 8.65 5,369 465 8.66
Federal funds sold
and securities
purchased under
agreements to resell 6,333 437 6.90 4,801 257 5.35 6,054 239 3.95
Total interest-earning
assets 1,330,401 111,512 8.38 1,381,827 112,036 8.11 1,113,184 89,675 8.06
Non-interest-earning assets:
Cash and due
from banks 35,698 35,240 24,118
Premises and
equipment-net 10,761 11,696 9,417
Other assets 50,345 64,800 35,209
Less allowance for
credit losses (15,008) (14,414) (12,729)
- ----------------------------------------------------------------------------------------------
Total assets $1,412,197 $1,479,149 $1,169,199
TABLE 1: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
Years ended December 31, 1996 1995 1994
(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 $ 348,018 $ 8,692 2.50% $ 349,963 $ 8,322 2.38% $ 365,097 $ 7,511 2.06%
Time deposits 500,491 26,450 5.28 512,931 28,138 5.49 355,265 14,499 4.08
Short-term borrowings 199,870 11,725 5.87 195,538 12,915 6.60 100,823 7,665 7.60
Long-term debt 104,025 6,610 6.35 146,102 8,311 5.69 130,682 4,770 3.65
Total interest-bearing
liabilities 1,152,404 53,477 4.64 1,204,534 57,686 4.79 951,867 34,445 3.62
Non-interest bearing liabilities:
Demand deposits 109,878 120,396 108,996
Other liabilities 32,072 40,492 6,935
Stockholders' equity 117,843 113,727 101,401
- ----------------------------------------------------------------------------------------------
Total $1,412,197 $1,479,149 $1,169,199
Net interest income $58,035 $ 54,350 $ 55,230
Net interest margin 4.36% 3.93% 4.96%
TABLE 2: INTEREST DIFFERENTIAL
1996 compared to 1995 1995 compared to 1994
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 $ (534) $ 3,217 $ 2,683 $20,094 $ 1,041 $21,135
Taxable investment securities (3,024) (449) (3,473) 2,203 (918) 1,285
Non-taxable investment securities (96) 182 86 (76) (1) (77)
Federal funds sold and
securities purchased under
agreements to resell 94 86 180 (56) 74 18
Total interest-earning assets $(3,560) $ 3,036 $ (524) $22,165 $ 196 $22,361
Interest-bearing liabilities:
Savings deposits $ (46) $ 416 $ 370 $ (322) $ 1,133 $ 811
Time deposits (672) (1,016) (1,688) 7,682 5,957 13,639
Short-term borrowings 281 (1,471) (1,190) 6,372 (1,122) 5,250
Long-term debt (2,593) 892 (1,701) 618 2,923 3,541
Total interest-bearing
liabilities $(3,030) $(1,179) $(4,209) $14,350 $ 8,891 $23,241
- ---------------------------------------------------------------------------------------------
Net interest income $ (530) $ 4,215 $ 3,685 $ 7,815 $(8,695) $ (880)
(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 $58.04
million in 1996, an increase of $3.69 million or 6.78% from 1995.
As summarized on Table 2, the $3.69 million increase in net interest income
for 1996 consisted of a $4.21 million decrease in interest expense that was
only partly offset by a $0.52 million decline in interest income.
The $4.21 million decline in interest paid on interest-bearing liabilities
was principally due to a $42.08 million decrease in the average level of
long-term debt. Also contributing to the decrease in interest expense was a
15 basis point decline in the average cost of funds from 4.79% in 1995 to
4.64% in 1996. Table 2 summarizes the dollar effect of the volume decrease
in interest-bearing liabilities, which had a $3.03 million positive effect
on net interest income, supplemented by the $1.18 million positive effect of
the 15 basis point drop in the average cost of funds for 1996.
The $0.52 million decrease in interest income was primarily due to the
$45.68 million decline in the average level of investment securities.
Partly offsetting the negative impact of this decline was the 27 basis point
increase in the average yield on interest-earning assets from 8.11% in 1995
to 8.38% in 1996.
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 $15.43 million
at December 31, 1996, from $14.58 million in 1995 and $14.33 million in
1994. Allowances for possible loan losses as a percentage of period-end
total loans was 1.49% at December 31, 1996, compared to 1.29% and 1.32% at
1995 and 1994.
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), 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, 1996 and 1995, the recorded
investment in loans that are considered to be impaired under SFAS 114 was
$10.79 million and $4.43 million, respectively. The total allowance for
loan losses related to these loans was $2.13 million and $1.05 million on
December 31, 1996 and 1995, respectively. See Note E of Notes to
Consolidated Financial Statements.
Other Income
In 1996, other income was $8.12 million as compared to $10.33 million in
1995 and $9.16 million in 1994. The decline in 1996 was primarily
attributable to the $1 million gain recognized in 1995, when the Bank sold
its merchant accounts portfolio due to declining volume and reduced profit
margins from such activities. Along similar lines, the Bank sold its
remaining credit card portfolio in 1996, to an unrelated third party for a
gain of $623,000. Contributing to the decline in other income for 1996 was
the loss of commissions and fees relating to the discontinued credit card
operations. 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 1996 1995 1994
(dollars in thousands)
Service charges on deposits $ 1,716 $ 1,716 $ 1,773
Other service charges and fees 2,660 5,515 6,917
Net trading account gains (losses) (5) 61 (174)
Net realized gains on sales of
available-for-sale-securities 1,401 4 195
Other 2,343 3,032 450
Total $ 8,115 $10,328 $ 9,161
Other Expenses
The following table sets forth information by category of other operating
expenses of the Company for the years indicated:
For the Year 1996 1995 1994
(dollars in thousands)
Salaries and employee benefits $19,640 $21,340 $18,234
Net occupancy expense 7,678 7,295 6,887
Equipment expense 2,957 2,929 2,332
Professional fees 4,467 2,904 2,686
Voluntary separation benefits 3,162 - -
Merchant interchange fees - 1,616 1,739
Charge card processing 252 640 795
Stationery and supplies 958 1,074 922
Deposit insurance premiums 3,282 1,472 1,918
Advertising and promotion 1,917 1,880 1,752
Commissions 1,007 1,082 1 123
Other 6,465 7,882 5,986
Total $51,785 $50,114 $44,374
Total operating expenses as a percent
of average assets 3.67% 3.39% 3.80%
Other operating expenses increased to $51.79 million, compared to $50.11
million in 1995 and $44.37 in 1994. The Company's operating expense ratio
(total operating expense as a percentage of average assets), which is a
commonly used indicator of operating efficiency, increased by 28 basis
points in 1996 to 3.67%, compared to 3.39% in 1995. The primary reasons for
the efficiency ratio decline were the increase in deposit insurance premiums
and the payment of benefits under the Company's Voluntary Separation Program
(VSP). Both factors are discussed in greater detail in the sections
following.
Total compensation expense, which comprises the largest category of other
operating expenses, decreased by $1.70 million in 1996 to $19.64 million.
This decrease was attributable to the implementation of the Company's VSP in
1996.
On January 31, 1996, the Company announced a major initiative to further
improve operating efficiency and decrease expenses by offering a voluntary
work force separation program ("VSP") to all employees. The program offered
all eligible employees the opportunity of electing to terminate their
employment. Under the program, the Company reserved the right to deny or
delay an employee's election. The voluntary separation program was to be
the first phase of a cost reduction plan. If the response to this first
phase was not sufficient to achieve the Company's goals, Phase II of the
cost reduction plan was to be implemented which would incorporate executive
pay reductions of up to 10% and involuntary staff reductions.
Ninety seven employees participated in the VSP and voluntary separation
benefits of approximately $3.16 million were expensed and paid. Since the
program exceeded projected results, Phase II of the cost reduction plan was
not implemented.
Deposit insurance premiums, which increased by $1.81 million to $3.28
million in 1996, included a special assessment on the Association's deposit
base as of March 31, 1995. The special assessment, which totaled $2.38
million in 1996, was the result of recent legislation passed by the United
States Congress to strengthen the insurance fund administered by the Savings
Association Insurance Fund (SAIF).
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.
Income Taxes
Total income tax expense of the Company was $4.63 million, $5.25 million and
$6.66 million in 1996, 1995 and 1994, respectively. The Company's effective
income tax rate for the years 1996, 1995 and 1994 was 39.6%, 39.6% and 7.6%,
respectively. Note L to the Company's Consolidated Financial Statements
presents a reconciliation of the Company's effective and statutory income
tax rates.
During August 1996, the President signed the Small Business Job Protection
Act of 1996 ("the Job Act"), which contains certain provisions that require
all savings banks and thrifts to account for bad debts for income tax
reporting purposes in the same manner as banks. The effect on a large
thrift such as the Association is that it must change its method of
accounting for determining its allowable bad debt deduction from the reserve
method to the specific charge-off method. As a result, the bad debt
deduction based on a percentage of taxable income or the experience method
is no longer allowed for years beginning after December 31, 1995.
During 1996, legislation was passed requiring the Association to recapture
as taxable income approximately $565,000 of its bad debt reserves, an amount
which represents additions to the reserve after June 30, 1988. See Note L
to the Company's Financial Statements for further discussion.
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, 1996. 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 1996 was $16.68 million
compared to $7.38 and $28.47 million for 1995 and 1994, respectively. Cash
provided by operating activities consists primarily of the Company's net
income from operations.
Investing activities increased cash flow by $61.47 million during 1996,
compared to reductions of $35.06 million and $211.50 million in 1995 and
1994, respectively. The primary source of cash flow from investing
activities in 1996 was from the sale and maturity of investment securities.
Financing activities reduced cash flow by $101.63 million during 1996,
compared to increased cash flows of $42.55 million and $180.58 million in
1995 and 1994, respectively. During 1996, reduced deposit levels accounted
for much of the decline in cash flows from financing activities.
As of December 31, 1996, the Bank and Association had available unused
credit lines of $142.39 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 Notes I, J and O of Notes
to Consolidated Financial Statements.
Parent Company Liquidity
Primarily, the parent company depends on dividends from the Bank and ISL as
its cash flow source. In 1996, the Company received $10.86 million in
dividends from its subsidiaries to pay its expenses, retire short term debt
and to pay shareholder dividends. The 1996 dividends from subsidiaries
constituted 90.86% of their current operating earnings and such heavy
capital distributions were a concern of the regulatory authorities. Future
dividends from each subsidiary are subject to a regulatory authority who is
authorized to prohibit the subsidiary from paying dividends which would
constitute an unsafe and unsound banking practice. In addition, a
subsidiary is prohibited from making a capital distribution or paying
management fees to its holding company, if it would cause it to be
undercapitalized.
Under the MOU agreement with the FRB, the Company is restricted from the
payment of cash dividends without the prior approval of the FRB. The
Company will assess quarterly its core earnings, capital position, economic
conditions, growth and asset quality before submitting its intent to declare
dividends to the FRB. The Company intends to keep its rating as a "well-
capitalized" institution.
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.
The financial instruments used and their notional amounts outstanding at
year-end were as follows:
December 31,
1996 1995 1994
(dollars in thousands)
- ------------------------------------------------------------------------
Interest rate swaps
(Pay) Receive-fixed swaps
notional amount $(25,000) $(50,000) $ 75,000
Average receive rate 5.50% 5.88% 6.25%
Average pay rate 6.52% 6.50% 6.14%
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. The
Company pays the fixed rate and receives the floating rate under the majority
of its swaps outstanding at December 31, 1996, 1995 and 1994, respectively.
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, 1996. 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.
0-90 91-180 181-365 1-5 Over 5 Non-rate
days days days years years sensitive Total
- -----------------------------------(in thousands)------------------------------
Assets:
Investment securities $ 17,216 $ 9,906 $ 19,132 $111,046 $ 78,714 $ 25,116 $ 261,130
Commercial loans 122,735 8,667 5,895 9,511 23,420 - 170,228
Real estate loans 130,379 101,718 155,354 304,862 90,062 - 782,375
Consumer loans 47,247 3,663 6,490 26,984 72 - 84,456
Other assets - - - - - 98,980 98,980
Total assets $317,577 $123,954 $186,871 $452,403 $192,268 $124,096 $1,397,169
Liabilities and
stockholders' equity:
Non-interest bearing
demand deposits $ - $ - $ - $ - $ - $113,043 $ 113,043
Savings deposits 346,831 - - - - - 346,831
Time deposits 168,649 121,399 108,215 88,831 4,942 - 492,036
Short-term borrowings 158,631 30,050 20,000 - - - 208,681
Long-term debt 9,939 2,469 15,361 64,986 2,070 - 94,825
Other liabilities - - - - - 22,342 22,342
Stockholders' equity - - - - - 119,411 119,411
Total liabilities and
stockholders' equity $684,050 $153,918 $143,576 $153,817 $ 7,012 $254,796 $1,397,169
- ----------------------------------------------------------------------------------------------
Interest rate
sensitivity gap $(366,473) $ (29,964) $ 43,295 $298,586 $185,256 $(130,700) $ -
Cumulative interest rate
sensitivity gap $(366,473) $(396,437)$(353,142) $(54,556) $130,700 $ - $ -
==============================================================================================
Capital Resources
The Company has a strong capital base with a Tier 1 capital ratio of 12.64%
at December 31, 1996. 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, 1996, the Company's total capital to risk-adjusted
assets ratio was 13.90%.
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.
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.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was signed into law to recapitalize the SAIF, which generally insures the
deposits of savings associations. This legislation required the FDIC to
impose a one-time special assessment on SAIF-assessable deposits. Based
upon the Association's deposit base as of March 31, 1995, the Company's one-
time special assessment totaled approximately $2.4 million in 1996. Other
changes proposed in this area include adding approximately 1.3 cents per
$100 of domestic deposits to the deposit insurance costs of BIF-insured
banks, and 6.4 cents per $100 of SAIF-assessable deposits, in order to make
The Financing Corporation's (FICO) 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.
The Funds Act for the three year period beginning in 1997, subjects BIF-
insured deposits (such as those of City Bank) to a Financing Corporation
("FICO") premium assessment on domestic deposits at one-fifth of the premium
rate (approximately 1.3 cents) imposed on SAIF-insured deposits (approximately
6.5 cents). Deposits held by ISL are SAIF-insured deposits. In addition,
service debt funding on FICO bonds for the first half of 1997 is expected to
result in BIF-insured institutions paying 0.64 cents for each $100 of assessed
deposits, and SAIF-insured institutions paying 3.2 cents on each $100 of
deposits. City Bank will be required to continue to pay both BIF and SAIF
assessments after the merger of ISL into City Bank, based on the amount of
such BIF and SAIF deposits held by each institution respectively at the time
or merger.
For at least the first half of 1997, BIF premiums will be maintained at their
current level. Accordingly, institutions in the lowest risk category will
continue to pay no premiums, and other institutions will be assessed based on
a range of rates, with those in the highest risk category paying 27 cents for
every $100 of BID-insured deposits. Rates in the SAIF assessment schedule,
previously ranging from 4 to 31 cents, have recently been adjusted by 4 cents
to a range of 0 to 27 cents (as of October 1, 1996).
Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from the SAIF to BIF in order to avoid higher assessment
rates. Accordingly, the FDIC recently proposed a rule that would, if adopted
as proposed, impose entrance and exit fees on depository institutions
attempting to shift deposits from the SAIF to the BIF as contemplated by the
Funds Act.
Proposed Merger of Subsidiaries and Informal Agreement
On October 19, 1996, the Company announced plans to merge its two
subsidiaries, City Bank and International Savings, to improve operating
efficiency. The merger is expected to be completed in the first half of
1997, subject to approval by the Bank's regulators. In addition, the
Company has entered into an informal agreement with the Federal Reserve Bank
of San Francisco (FRB). The terms of this agreement requires the
concurrence from the FRB on certain matters concerning the payment of
dividends, redemption of stock and the incurrence of debt. Further details
are provided in Note S2 to the Financial Statements.
Effects Of Changes Issued By The Financial Accounting Standards Board
In 1996, the Company adopted the provisions of 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 were
effective for the Company's 1996 year end and are described further in Note
A of Notes to the Company's Consolidated Financial Statements. The adoption
of SFAS 121, 122 and 123 did not have a significant impact on the Company's
operating results or financial position.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (SFAS 125) and
Statement of Financial Accounting Standards 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125" (SFAS 127).
Provisions of SFAS 125 are generally effective for transactions occurring
after December 31, 1996. However, provisions with respect to secured
borrowings and transfers of financial assets that are part of repurchase
agreements, dollar rolls, securities lending, and similar transactions are
effective for transactions occurring after December 31, 1997. SFAS 127
defers the effective date of certain provisions of SFAS 125 until January 1,
1998. The Company has made no assessment of the potential impact of
adopting SFAS 125 and SFAS 127 at this time.
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
Earnings for the fourth quarter of 1996 were $3.13 million ($0.88 per
share), an increase of $1.87 million over the $1.27 million ($0.36 per
share) during the same quarter in 1995. The increase in earnings was
primarily attributable to the decease in non-interest expenses, which
declined by $3.95 million when compared to the same quarter in 1995. See
further discussion in Management's Discussion and Analysis of Other
Expenses.
The following table summarizes the Company's quarterly results for the years
1996 and 1995:
1996 Quarter
March June September December
- --------------------------------(in thousands, except per share data)------
Total Interest Income $27,769 $27,797 $28,244 $27,437
Total Interest Expense 13,991 13,248 13,165 13,073
Net Interest Income 13,778 14,549 15,079 14,364
Provision for Possible Loan Losses 310 1,280 360 460
Other Non-Interest Income 2,960 2,443 1,840 872
Other Non-Interest Expense 15,477 13,483 13,228 9,597
Income Before Income Taxes 951 2,229 3,331 5,179
Provision for Income Taxes 377 883 1,326 2,045
- ---------------------------------------------------------------------------
Net Income $ 574 $ 1,346 $ 2,005 $ 3,134
===========================================================================
Per common share:
Net Income $ 0.16 $ 0.38 $ 0.57 $ 0.88
===========================================================================
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
===========================================================================
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,
1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. 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, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Honolulu, Hawaii
February 14, 1997 (EXCEPT FOR NOTE P AS TO WHICH THE DATE IS MARCH 11, 1997)
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except shares and per share data)
December 31,
1996 1995
---------- ----------
ASSETS
Cash and due from banks (including amounts
restricted for the Federal Reserve
requirement of $3,187 in 1996 and
$4,276 in 1995) $ 40,132 $ 63,619
Interest-bearing deposits in other banks 16,500 11,500
Investment securities (notes C, I and J)
Held-to-maturity - market values of $102,388 in
1996 and $9,521 in 1995 97,831 9,244
Available-for-sale 138,199 208,269
Trading - net of unrealized holding gains
of $5 in 1995 - 96
Restricted investment securities 25,100 23,226
Loans held for sale 5,629 14,350
Loans, net (notes D, E, J and O) 1,016,123 1,106,610
Premises and equipment (note G) 18,227 16,960
Goodwill (net of accumulated amortization of
$2,348 in 1996 and $1,497 in 1995) (note B) 10,426 11,277
Other assets (note 4) 29,002 36,362
--------- ---------
TOTAL ASSETS $1,397,169 $1,501,513
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes F and H)
Non-interest bearing $ 113,043 $ 137,287
Interest bearing 838,867 874,196
--------- ---------
Total deposits 951,910 1,011,483
Short-term borrowings (note I) 208,681 239,360
Other liabilities (notes L and M) 22,342 32,793
Long-term debt (note J) 94,825 101,371
--------- ---------
Total liabilities 1,277,758 1,385,007
Commitments and contingencies
(notes F, P and Q) - -
Stockholders' equity (notes R5 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 on
available-for-sale securities, net of tax 902 1,596
Retained earnings 49,878 46,279
--------- ---------
Total stockholders' equity 119,411 116,506
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,397,169 $1,501,513
========= =========
The accompanying notes are an integral part of these statements.
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
(in thousands of dollars, except per share data)
1996 1995 1994
-------- -------- -------
Interest and dividend income
Interest and fees on loans $ 96,825 $ 93,958 $72,840
Interest and dividends on investment
securities
Taxable interest income 10,501 15,563 14,652
Nontaxable interest income 209 252 307
Dividends 1,874 1,467 1,231
Trading account interest - 47 81
Other interest income 1,838 429 239
------- ------- ------
Total interest income 111,247 111,716 89,350
Interest expense
Deposits (note H) 35,142 36,460 22,010
Short-term borrowings 11,725 12,915 7,665
Long-term debt 6,610 8,311 4,770
------- ------- ------
Total interest expense 53,477 57,686 34,445
------- ------- ------
Net interest income 57,770 54,030 54,905
Provision for credit losses (note E) 2,410 980 1,964
------- ------- ------
Net interest income after
provision for credit losses 55,360 53,050 52,941
Other income
Service charges on deposit accounts 1,716 1,716 1,773
Other service charges and fees 2,660 5,515 6,917
Net trading account (losses) gains (5) 61 (174)
Net realized gains on sales of available-
for-sale securities (note C) 1,401 4 195
Other (notes M and O) 2,343 3,032 450
------- ------- ------
Total other income 8,115 10,328 9,161
Other expenses
Salaries and employee benefits (note R) 19,640 21,340 18,234
Net occupancy expense of premises (note Q) 7,678 7,295 6,887
Equipment expense 2,957 2,929 2,332
Other (note K) 21,510 18,550 16,921
------- ------- ------
Total other expenses 51,785 50,114 44,374
------- ------- -------
Income before income taxes $ 11,690 $ 13,264 $17,728
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
(in thousands of dollars, except per share data)
1996 1995 1994
-------- -------- -------
Income before income taxes $ 11,690 $ 13,264 $17,728
Income tax expense (note L) 4,631 5,251 6,657
------- ------- -------
NET INCOME $ 7,059 $ 8,013 $11,071
======= ======= ======
Per share data
Net income $1.99 $2.26 $3.32
==== ==== ====
The accompanying notes are an integral part of these statements.
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1996
(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, 1994 $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, net of tax - - (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, net of tax - - 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
Net income for the year
ended December 31, 1996 - - - 7,059 7,059
Net unrealized loss on
available-for-sale
securities, net of tax - - (694) - (694)
Cash dividends - $0.975
per share - - - (3,460) (3,460)
----- ------ ----- ------ -------
Balance at December 31, 1996 $3,551 $65,080 $ 902 $49,878 $119,411
===== ====== ===== ====== =======
The accompanying notes are an integral part of this statement.
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(in thousands of dollars)
Increase (decrease) in cash 1996 1995 1994
--------- -------- ---------
Cash flows from operating activities:
Net income $ 7,059 $ 8,013 $ 11,071
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 2,410 980 1,964
Loss on disposition of premises and equipment 280 386 -
Depreciation and amortization 2,273 2,102 1,510
Net decrease (increase) in loans held for sale 8,721 (13,806) 17,156
Deferred income taxes 1,799 (1,878) 2,762
Net decrease (increase) in trading securities 96 4,901 (2,112)
Increase in restricted investment securities (1,874) (2,035) (1,893)
Decrease (increase) in interest receivable 804 (1,600) (1,979)
(Decrease) increase in interest payable (1,405) 649 1,409
Decrease (increase) in other assets 6,470 (5,391) (9,780)
(Decrease) increase in income taxes payable (4,008) 5,985 (943)
(Decrease) increase in other liabilities (5,513) 6,713 8,402
Other (437) 2,364 900
-------- ------- --------
Net cash provided by operating activities 16,675 7,383 28,467
Cash flows from investing activities:
Net increase in interest-bearing deposits in
other banks (5,000) (11,500) -
Net decrease in federal funds sold and securities
purchased under agreements to resell - - 25,000
Proceeds from maturities of held-to-maturity
investment securities 2,704 43,096 43,189
Purchases of held-to-maturity investment
securities (9,962) (4,946) (112,019)
Proceeds from sales of available-for-sale
securities 87,049 1,511 98,304
Proceeds from maturities of available-for-sale
securities 78,009 5,695 2,320
Purchase of available-for-sale securities (94,733) (18,445) (65,615)
Purchase of International Holding Capital Corp.,
net of cash acquired of $4,515 - - (21,720)
Net increase in loans (20,344) (49,150) (173,417)
Capital expenditures (3,852) (2,382) (7,540)
Proceeds from sale of premises and equipment 32 221 -
Proceeds from sale of foreclosed assets 2,191 843 -
Proceeds from sale of loans 25,373 - -
-------- ------- --------
Net cash provided by (used in)
investing activities 61,467 (35,057) (211,498)
-------- ------- --------
Subtotal carried forward $ 78,142 $(27,674) $(183,031)
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31,
(in thousands of dollars, except share data)
1996 1995 1994
--------- -------- ---------
Subtotal brought forward $ 78,142 $(27,674) $(183,031)
Cash flows from financing activities:
Net decrease in other deposits (30,802) (2,883) (70,677)
Net (decrease) increase in time deposits (28,771) 90,922 73,988
Net (decrease) increase in short-term borrowings (30,679) (35,543) 230,647
Proceeds from long-term debt 45,335 27,500 10,350
Principal payments on long-term debt (52,098) (32,831) (59,660)
Cash dividends paid (4,614) (4,620) (4,068)
-------- ------- --------
Net cash (used in) provided by
financing activities (101,629) 42,545 180,580
-------- ------- --------
(DECREASE) INCREASE IN CASH (23,487) 14,871 (2,451)
Cash and due from banks at beginning of year 63,619 48,748 51,199
-------- ------- --------
Cash and due from banks at end of year $ 40,132 $ 63,619 $ 48,748
======== ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings $ 54,881 $ 57,037 $ 33,036
Income taxes 6,538 3,874 4,838
Supplemental schedule of non-cash investing activity:
During 1996, the Company securitized $81,329,000 mortgage loans into mortgage-
backed securities classified as held-to-maturity.
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.
The accompanying notes are an integral part of these statements.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
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 economy and the real estate market in the State
of Hawaii.
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
---------------------
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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities (continued)
---------------------------------
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.
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.
Institutions that are members of the Federal Home Loan Bank (FHLB) system
are required to maintain a minimum investment in FHLB stock. The company
accounts for its investment in FHLB as a restricted investment security
carried at cost and evaluated for impairment. The stock is issued at $100
per share par value and can only be sold back at par value to the FHLB or
other member institutions.
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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
Loan origination fees and certain direct origination costs are deferred and
recognized as an adjustment of the yield of the related loan.
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.
Loans are impaired when it is probable that principal or interest will not
be received at scheduled maturity or collection will be unreasonably
delayed. Management considers loans which become 90 days past due to be
impaired. Impaired loans are 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. Large groups of smaller balance
homogeneous loans are collectively evaluated for impairment, except for
those loans restructured under a troubled debt restructuring. Smaller
balance homogeneous loans include credit card, residential mortgage, and
consumer installment loans. 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.
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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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, loan 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 carrying amount or fair value less cost to sell. Revenue and
expenses from operations and changes to the valuation allowance are included
in operations.
7. Goodwill
--------
Effective January 1, 1996, the Company adopted 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). The
adoption of SFAS 121 did not have a material effect on the Company's
financial position or results of operations.
On an ongoing basis, management reviews the valuation and amortization of
goodwill to determine possible impairment. When conditions and events are
identified that lead the Company to believe impairment exists, the Company
estimates the value of and the estimated undiscounted future net income
expected to be generated by the related subsidiary. If the sum of the
estimated undiscounted future net income is less than the amortized cost,
the Company recognizes an impairment loss by revising its amortization
period or the amortized cost is reduced to reflect the fair value of the
goodwill. Goodwill is currently being amortized on the straight-line method
over 15 years.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
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.
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. Stock-Based Compensation
------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," (SFAS 123) encourages, but does not require companies
to record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
(APB Opinion 25) and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted
market price of the Company's stock at the date of the grant over the amount
an employee must pay to acquire the stock. Compensation cost for stock
appreciation rights is recorded annually based on the quoted market price of
the Company's stock at the end of the period.
10. 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
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Risk Management Instruments (continued)
---------------------------------------
liabilities are deferred and amortized as an adjustment to the yield of the
related assets or liabilities over their remaining lives.
11. 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.
12. Net Income Per Share
--------------------
Net income per share is based on the weighted average number of shares
outstanding of 3,551,228 for 1996 and 1995, and 3,335,869 for 1994.
13. 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."
14. Loan Servicing
--------------
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards 122, "Accounting for Mortgage Servicing Rights" (SFAS
122), which amended Statement of Financial Accounting Standards No. 65,
"Accounting for Certain
Mortgage Banking Activities." SFAS 122 requires that mortgage servicing
rights be capitalized when acquired through the purchase or origination of
mortgage loans that are subsequently sold or securitized with the servicing
rights retained and when the relative fair values of the loans and the
related mortgage servicing rights can be estimated. The adoption of SFAS
122 did not have a material effect on the Company's financial position or
results of operations.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
14. Loan Servicing (continued)
--------------------------
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified based on the following predominant risk
characteristics of the underlying loans: loan type, interest rate, date of
origination and geographic location. The amount of impairment recognized is
the amount by which the capitalized mortgage servicing rights for a stratum
exceed their fair value.
15. 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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Values of Financial Instruments (continued)
------------------------------------------------
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.
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).
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Values of Financial Instruments (continued)
------------------------------------------------
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.
16. 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.
17. Reclassifications
------------------
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
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 1994:
1994
-------
(in thousands of dollars,
except per share data)
Interest income $99,102
Interest expense 38,863
Other income 10,661
Other expenses 59,617
------
NET INCOME $11,283
======
Income per share $3.18
====
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE C - INVESTMENT SECURITIES
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. During December 1995,
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 and held-to-maturity securities
held at December 31 are summarized as follows:
1996
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
(in thousands of dollars)
Held-to-Maturity Securities:
States and political
subdivisions $ 102 $ 2 $ - $ 104
Mortgage-backed securities 97,729 4,759 204 102,284
------- ----- --- -------
TOTAL $ 97,831 $4,761 $204 $102,388
======= ===== === =======
Available-for-Sale Securities:
U.S. Treasury and other
U.S. Government agencies
and corporations $ 51,997 $ 562 $ 95 $ 52,464
States and political
subdivisions 3,219 188 - 3,407
Mortgage-backed securities 81,490 1,060 222 82,328
------- ----- --- ------
TOTAL $136,706 $1,810 $317 $138,199
======= ===== === =======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE C - INVESTMENT SECURITIES (continued)
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 106,878 1,846 348 108,376
------- ----- --- -------
TOTAL $205,605 $3,362 $698 $208,269
======= ===== === =======
At December 31, 1996 and 1995, securities with an aggregate carrying value
of $71,850,000 and $133,015,000, 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).
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE C - INVESTMENT SECURITIES (continued)
The scheduled maturities of securities classified as held-to-maturity and
available-for-sale at December 31, 1996 are as follows. 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 $ - $ - $ 3,002 $ 3,008
Due after one year
through five years 102 104 42,229 42,698
Due after five years
through ten years - - 9,441 9,589
Due after ten years - - 544 576
------ ------- ------- -------
Subtotal 102 104 55,216 55,871
Mortgage-backed securities 97,729 102,284 81,490 82,328
------ ------- ------- -------
TOTAL $97,831 $102,388 $136,706 $138,199
====== ======= ======= =======
Proceeds on sale of securities classified as available-for-sale during 1996,
1995, and 1994 were $87,049,000, $1,511,000, and $98,304,000, respectively.
Gross realized gains on sales of securities classified as available-for-sale
were $1,664,000, $4,000, and $671,000 during 1996, 1995, and 1994,
respectively. Gross realized losses on sales of securities classified as
available-for-sale were ($263,000), $-0-, and ($476,000) during 1996, 1995,
and 1994, respectively. The Company provided for income tax expenses of
approximately $560,000 on net securities gains during 1996.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE D - LOANS
The carrying amounts and estimated fair value of the loan portfolio at
December 31, are as follows:
1996 1995
--------------------- ---------------------
Estimated Estimated
Carrying fair Carrying fair
amounts value amounts value
---------- ---------- ---------- --------
(in thousands of dollars)
Commercial and financial $ 170,228 $ 169,518 $ 168,497 $166,140
Real estate
Construction 28,699 28,634 18,408 18,259
Commercial 144,466 135,407 132,624 125,604
Residential 609,210 625,976 718,618 726,839
Installment and consumer 84,456 84,504 90,378 86,452
--------- --------- --------- -------
Total loans 1,037,059 1,044,039 1,128,525 $1,123,294
Less
Unearned discount 7 - 12 -
Net deferred loan fees and costs 5,498 - 7,327 -
Allowance for credit losses 15,431 - 14,576 -
--------- --------- --------- --------
LOANS, NET $1,016,123 $1,044,039 $1,106,610 $1,123,294
========= ========= ========= =========
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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE D - LOANS (continued)
During 1996, loans to such parties are summarized as follows:
(in thousands
of dollars)
Balance at January 1, 1996 $14,260
New loans 1,239
Repayments (9,670)
Other changes (531)
------
Balance at December 31, 1996 $ 5,298
======
Other changes include loans outstanding at January 1, 1996 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:
1996 1995 1994
------- ------- -------
(in thousands of dollars)
Balance at January 1, $14,576 $14,326 $ 9,816
Provisions charged to expense 2,410 980 1,964
Recoveries 350 522 1,014
Loans charged-off (1,905) (1,252) (1,596)
Allowance applicable to loans
of purchased company at
April 4, 1994 - - 3,128
------ ------ ------
Balance at December 31, $15,431 $14,576 $14,326
====== ====== ======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE E - ALLOWANCE FOR CREDIT LOSSES (continued)
As of January 1, 1995, the Company adopted the provisions of 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 Disclosure" (SFAS 118). The adoption of this accounting
policy had no material effect on the consolidated financial statements of
the Company. At December 31, 1996 and 1995, the recorded investment in
loans that are considered to be impaired under SFAS 114 was $10,787,000 and
$4,431,000, respectively. The total allowance for loan losses related to
these loans was $2,129,000 and $1,054,000 on December 31, 1996 and 1995,
respectively. The average recorded investment in impaired loans during the
years ended December 31, 1996 and 1995 was $5,574,000 and $3,554,000,
respectively. For the years ended December 31, 1996 and 1995, the Company
recognized $109,000 and $1,000, respectively, of interest income on impaired
loans using the cash basis of income recognition.
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
$417,753,000 and $360,402,000 at December 31, 1996 and 1995, respectively.
The unpaid principal balances of mortgage loans serviced for others were
$431,743,000 and $377,935,000 at December 31, 1996 and 1995, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $2,843,000
and $4,644,000 at December 31, 1996 and 1995, respectively.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE G - PREMISES AND EQUIPMENT
The consolidated premises and equipment at December 31, are as follows:
1996 1995
------- -------
(in thousands
of dollars)
Premises $18,819 $17,624
Equipment 18,350 16,601
------ ------
Total cost 37,169 34,225
Less accumulated depreciation
and amortization 18,942 17,265
------ ------
NET CARRYING VALUE $18,227 $16,960
====== ======
Depreciation and amortization charged to operations for the years ended
December 31, are as follows:
1996 1995 1994
------ ------ ------
(in thousands of dollars)
Net occupancy expenses $ 389 $ 380 $ 347
Equipment expenses 1,884 1,722 1,163
------ ------ -----
TOTAL DEPRECIATION
AND AMORTIZATION $2,273 $2,102 $1,510
===== ===== =====
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE H - DEPOSITS
The carrying amounts and estimated fair value of deposits at December 31,
consist of the following:
1996 1995
------------------- ---------------------
Estimated Estimated
Carrying fair Carrying fair
amounts value amounts value
-------- --------- ---------- ---------
(in thousands of dollars)
Non-interest bearing $113,043 $113,043 $ 137,287 $ 137,287
Interest bearing
Savings, money market and
NOW deposits 346,831 346,831 353,389 353,389
Time deposits of $100,000 or more 176,869 176,801 207,759 208,845
Time deposits of less than $100,000 315,167 314,411 313,048 312,189
-------- ------- --------- ---------
Total interest bearing 838,867 838,043 874,196 874,423
------- ------- --------- ---------
TOTAL DEPOSITS $951,910 $951,086 $1,011,483 $1,011,710
======= ======= ========= =========
Interest expense on deposits for the years ended December 31, are as follows:
1996 1995 1994
------- ------- -------
(in thousands of dollars)
Savings, money market and
NOW deposits $ 8,692 $ 8,322 $ 7,511
Time deposits of $100,000 or more 9,578 12,675 6,335
Time deposits of less than $100,000 16,872 15,463 8,164
------ ------ ------
TOTAL INTEREST EXPENSE $35,142 $36,460 $22,010
====== ====== ======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE H - DEPOSITS (continued)
At December 31, 1996, the scheduled maturities of time deposits are as
follows:
1997 $401,764
1998 61,401
1999 12,499
2000 9,831
2001 6,541
-------
$492,036
=======
NOTE I - SHORT-TERM BORROWINGS
The carrying amounts of short-term borrowings at December 31, consist of the
following:
1996 1995
-------- --------
(in thousands
of dollars)
Federal funds purchased and securities
sold under agreements to repurchase $ 9,300 $ 38,698
Advances from the Federal Home Loan Bank 198,810 194,085
Notes payable to banks - 4,000
Federal treasury tax and loan note 571 2,577
------- -------
TOTAL SHORT-TERM BORROWINGS $208,681 $239,360
======= =======
Securities sold under agreements to repurchase of $31,198,000 in 1995 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, the Company had notes payable of $4,000,000 with banks
with a weighted average interest rate of 7.92%.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE I - SHORT-TERM BORROWINGS (continued)
Information concerning the securities sold under the reverse repurchase
agreements at December 31, is summarized as follows:
1996 1995
-------- --------
(dollars in
thousands)
Average balance during the period $14,635 $40,195
Average interest rate during the period 5.75% 6.00%
Maximum month-end balance during the period 30,606 47,484
U.S. Treasury notes underlying the
agreements at period end:
Carrying value, including
accrued interest - 31,510
Estimated market value - 30,672
The U.S. Treasury notes sold under the reverse repurchase agreements were
delivered to the broker-dealers who arranged the transactions. The
agreements at December 31, 1995 were 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:
1996 1995
-------------------- --------------------
Estimated Estimated
Carrying fair Carrying fair
amounts value amounts value
-------- --------- -------- ---------
(in thousands of dollars)
Advances from the Federal Home
Loan Bank $93,067 $97,822 $ 97,448 $ 98,212
Collateralized mortgage
obligations 1,758 1,758 3,923 3,923
------ ------ ------- -------
TOTAL LONG-TERM DEBT $94,825 $99,580 $101,371 $102,135
====== ====== ======= =======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE J - LONG-TERM DEBT (continued)
The advances from the FHLB bear interest at rates ranging from 4.65% 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
collateralized by a blanket pledge of certain securities with carrying
values of $168,655,000 and $77,091,000, and loans of $580,663,000 and
$716,324,000, in 1996 and 1995, respectively, and all stock in the FHLB.
FHLB advances are under credit line agreements of $444,144,000, in 1996.
The collateralized mortgage obligations, including a premium of $247,000,
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 $4,964,000.
Aggregate maturities of long-term advances from the FHLB for the five years
following December 31, 1996 are as follows:
(in thousands
of dollars)
1997 $43,000
1998 35,000
1999 3,000
2000 10,000
2001 2,000
NOTE K - OTHER EXPENSES
Other expenses for the year ended December 31, are as follows:
1996 1995 1994
------- ------- -------
(in thousands of dollars)
Legal and professional fees $ 4,467 $ 2,904 $ 2,686
Voluntary separation benefits 3,162 - -
Merchant interchange fees - 1,616 1,739
Advertising and promotion 1,917 2,083 1,752
Commissions 1,007 1,082 1,123
Deposit insurance premium 3,282 1,472 1,918
Other 7,675 9,393 7,703
------ ------ ------
TOTAL $21,510 $18,550 $16,921
====== ====== ======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE L - INCOME TAXES
The consolidated provision for income taxes for the years ended December 31,
consist of the following:
1996 1995 1994
------ ------- ------
(in thousands of dollars)
Currently payable
Federal $2,434 $ 5,048 $3,195
Hawaii 398 2,081 700
----- ------ -----
Total currently payable 2,832 7,129 3,895
Deferred
Federal 1,459 (1,554) 2,242
Hawaii 340 (324) 520
----- ------ -----
Total deferred 1,799 (1,878) 2,762
----- ------ -----
TOTAL INCOME TAXES $4,631 $ 5,251 $6,657
===== ====== =====
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE L - INCOME TAXES (continued)
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:
1996 1995
------- ------
(in thousands
of dollars)
Deferred tax assets
Allowance for credit losses $ 4,570 $4,253
Hawaii state franchise taxes 184 516
Gain on sale of building 2,039 2,207
Deferred compensation 1,445 1,782
Other 1,539 889
------ -----
Total deferred tax assets 9,777 9,647
Deferred tax liabilities
FHLB stock dividends 5,076 4,331
Deferred loan fees 3,407 2,480
Purchase accounting - net premiums 747 1,323
Net unrealized gain on available-for-sale
securities 591 1,058
Unrealized losses on loans 382 64
Other 1,141 734
------ -----
Total deferred tax liabilities 11,344 9,990
------ -----
NET DEFERRED TAX LIABILITIES $ 1,567 $ 343
====== =====
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE L - INCOME TAXES (continued)
The Company's effective income tax rate differed from the federal statutory
rate as follows:
1996 1995 1994
----- ----- -----
Federal statutory rate 35.0% 35.0% 35.0%
Tax exempt interest (3.2) (2.8) (2.3)
Hawaii State franchise taxes, net of
federal tax benefit 4.6 5.6 6.0
Amortization of goodwill 2.6 2.1 1.3
Other 0.6 (0.3) (2.4)
---- ---- ----
Effective income tax rate 39.6% 39.6% 37.6%
==== ==== ====
During August 1996, the President signed the Small Business Job Protection
Act of 1996 ("the Job Act") which contains certain provisions that require
all savings banks and thrifts to account for bad debts for income tax
reporting purposes in the same manner as banks. The effect on a large
thrift such as the Association is that it must change its tax method of
accounting for determining its allowable bad debt deduction from the reserve
method to the specific charge-off method. Consequently, the bad debt
deduction based on a percentage of taxable income or the experience method
is no longer allowed for years beginning after December 31, 1995.
During 1996, legislation was passed requiring the Association to recapture
as taxable income approximately $565,000 of its bad debt reserves, which
amount represents additions to the reserve after June 30, 1988. The
Association has provided deferred taxes for the amount, and will be
permitted to amortize the recapture of its bad debt reserve over six years.
Income taxes have been provided for the temporary difference between the
allowance for losses and the increase in the bad debt reserve maintained for
tax purposes since the June 30, 1988 base year. Consequently, the
Association has notCB Bancshares, Inc. and Subsidiaries provided deferred
taxes on the balance of its tax bad debt reserves as of the June 30, 1988
base year. The Association may defer the recapture up to an additional two
years if it meets certain residential lending requirements during tax years
beginning before January 1, 1998.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE L - INCOME TAXES (continued)
Included in the retained earnings of the Association at December 31, 1996 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. These amounts may be restored to income if the Association or
successor institution liquidates, redeems shares or pays a dividend in
excess of tax basis earnings and profits. If the Association is required to
restore any of these amounts to income, a tax liability will be imposed for
these amounts at the then current income tax rates.
NOTE M - DEFERRED GAIN
In previous years, Citibank Properties, Inc. (a wholly-owned subsidiary of
the Bank) 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
1996, 1995 and 1994.
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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE N - RISK MANAGEMENT ACTIVITIES (continued)
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
$25,000,000; $50,000,000; and $75,000,000 at December 31, 1996, 1995 and
1994, respectively. The estimated fair values of those interest-rate swaps
were $(127,000), $(940,000), and $(1,891,000) at December 31, 1996, 1995 and
1994, 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
under the majority of its swaps outstanding at December 31, 1996, 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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
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
maturing within two years.
1996 1995 1994
-------- -------- --------
(dollars in thousands)
(Pay)receive-fixed swaps - notional amount $(25,000) $(50,000) $75,000
Average receive rate 5.50% 5.88% 6.25%
Average pay rate 6.52% 6.50% 6.14%
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
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE N - RISK MANAGEMENT ACTIVITIES (continued)
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, 1996, the
Company had no outstanding options.
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.
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.
NOTE O - CREDIT-RELATED INSTRUMENTS
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.
1996 1995 1994
------------------ ------------------ ------------------
Estimated Estimated Estimated
Notional fair Notional fair Notional fair
amount value amount value amount value
-------- --------- -------- --------- -------- ---------
(in thousands of dollars)
Loan commitments $155,928 $620 $157,158 $408 $146,100 $122
Credit card
commitments - - 20,784 81 16,812 114
Guarantees and
letters of credit 9,336 107 7,863 92 12,207 90
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 CB Bancshares,
Inc. and Subsidiaries
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE O - CREDIT-RELATED INSTRUMENTS (continued)
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. In 1996, the
Company sold its credit card portfolio to an unrelated third party resulting
in a gain of $623,000.
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 (ISL Building) at 1111 Bishop Street
in Honolulu, Hawaii, for recission, special, general and punitive damages.
The plaintiffs seek recission of sale of the ISL building to them (made in
May 1988 for $7,450,000), 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, and
intentional or negligent infliction of emotional distress in connection
with the vacation of the ISL Building by the Association as a substantial
tenant of the building. The Company and the Association defendants have
answered plaintiffs' complaint denying any liability in connection with
plaintiffs' allegations. While the Company and the Association defendants
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 Association, which previously leased approximately 56% of the building,
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE P - COMMITMENTS AND CONTINGENCIES (continued)
vacated its leased portion in March 1997. On March 11, 1997, the Company
was informed by the landowner that the plaintiffs, as lessee, had failed to
make timely payment of the monthly rent due March 1, 1997, and real property
taxes due February 20, 1997. The consent of the landowner given in 1988 to
the assignment by the Association of the underlying ground lease to
plaintiffs did not release the Association from ground lease obligations
upon default by the assignee, and thus the Association, may also have
liability to the landowner in the underlying ground lease ($65,333 per
month) to the landowner in connection with any default by plaintiffs in
lease payments to the landowner, even though THE Association no longer
occupies such leased space. The monthly rental payments of $65,333 required
by the ground lease are substantially in excess of current rental market
values, which will restrict the ability of the Association to mitigate
potential losses. The ground lease rent is fixed until 2002, at which time
the rent will be renegotiated. The ground lease term expires in 2021.
In another matter, a director of the Company and two former executives of
the Association have threatened to file a lawsuit in the First Circuit Court
of the State of Hawaii against the Company, the Bank and the Association to
recover damages, penalties pursuant to Hawaii Revised Statutes Chapter 394B,
attorneys' fees, and costs related to the termination of their employment.
The Company is negotiating a possible settlement with the group through
outside legal counsel and management is unable to determine the likelihood
of the outcome of this threatened lawsuit.
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 2010. Certain leases provide for
renegotiation of rental at fixed intervals. Rent charged against
operations, including equipment rental, are as follows:
1996 1995 1994
------ ------ ------
(in thousands of dollars)
Rental expense $7,236 $7,392 $6,164
Sublease income 853 789 646
------ ------ ------
TOTAL RENT $6,383 $6,603 $5,518
===== ===== =====
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE Q - LEASE COMMITMENTS (continued)
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)
1997 $ 4,426
1998 4,133
1999 4,353
2000 3,958
2001 3,035
Later years 18,996
------
TOTAL $38,901
======
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 AND VOLUNTARY SEPARATION PROGRAM
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. 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 1996, 1995, and 1994.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE R - EMPLOYEE BENEFIT PLANS AND VOLUNTARY SEPARATION PROGRAM (continued)
2. Profit Sharing Retirement Savings Plan
--------------------------------------
The Company has an Employee Profit Sharing Retirement Savings Plan for all
employees 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 1996,
1995 and 1994 were $408,000, $486,000 and $492,000, respectively.
3. Voluntary Separation Program
----------------------------
During 1996, the Company offered a Voluntary Separation Program (VSP) to all
employees to reduce the work force. Ninety-seven employees participated in
the VSP and voluntary separation benefits of approximately $3,162,000 were
expensed and paid.
4. 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, 1996, 1995 and 1994 amounted to $444,000, $1,421,000 and
$444,000, respectively. The Company is the beneficiary of life insurance
policies with a cash surrender value of $18,318,000 that have been purchased
as a method of partially financing benefits under this plan.
During 1996, the Company terminated the majority of the deferred
compensation agreements. The employees with deferred compensation
agreements who participated in the Voluntary Separation Program were
credited with five years of additional service and all employees with
terminated agreements received a lump-sum payment equal to the present value
of the future benefit.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE R - EMPLOYEE BENEFIT PLANS AND VOLUNTARY SEPARATION PROGRAM
(continued)
5. Stock Compensation Plan
-----------------------
On September 16, 1994, the Board of Directors adopted a Stock Compensation
Plan (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).
During 1995 and 1994, one-half of the option grants were performance options
and the other one-half of the option grants were index options. The options
have a term of ten years. The performance options are exercisable in five
years from date of grant and may be exercisable sooner depending upon the
financial results of the Company. The index options are exercisable in one
year from date of grant. The exercise price of an index option increases
from year-to-year according to increases in the cost of living.
The original exercise price of each option equals the market price of the
Company's stock on the date of grant. Accordingly, no compensation cost has
been recognized for the plan. Had compensation cost for the plan been
determined based on the fair value of the options at the grant dates
consistent with the method of SFAS 123, the Company's 1996 pro forma net
income and pro forma earnings per share would have been $6,969,000 and
$1.96, respectively.
During the initial phase-in period in 1996, the effects of applying SFAS 123
are not likely to be representative of the effects on reported net income
for future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1995: expected dividend yield of 3.3%;
expected volatility of 13.4%; risk-free interest rate of 5.35%; and expected
life of 5 years.
CB Bancshares, Inc. and Subsidiaries
OTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE R - EMPLOYEE BENEFIT PLANS AND VOLUNTARY SEPARATION PROGRAM
(continued)
5. Stock Compensation Plan (continued)
-----------------------------------
Transactions involving stock options are summarized as follows:
Stock options Weighted-average
Description outstanding exercise price
----------- ------------- ----------------
Balance, January 1, 1994 - -
Granted 51,450 $33.50
Exercised - -
Canceled - -
-------
Balance, December 31, 1994 51,450 $33.50
Granted 54,200 $29.00
Exercised - -
Canceled (4,400) $34.94
-------
Balance, December 31, 1995 101,250 $31.43
Granted - -
Exercised - -
Canceled (12,300) $31.75
-------
Balance, December 31, 1996 88,950 $32.05
=======
As of December 31, 1996, stock options outstanding had exercise prices
between $29.00 and $36.25 and a weighted-average remaining contractual life
of 8.4 years and 41,975 stock options were exercisable with a weighted-
average exercise price of $33.15.
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 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 1996, 1995, and 1994.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE R - EMPLOYEE BENEFIT PLANS AND VOLUNTARY SEPARATION PROGRAM
(continued)
5. Stock Compensation Plan (continued)
-----------------------------------
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. Regulatory Matters
------------------
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined). Management believes, as of December 31,
1996, that the Company meets all capital adequacy requirements to which it
is subject.
The Bank and 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
Association's capital classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Management believes that, as of December 31, 1996, the Bank and
the Association met all capital requirements to which it was subject. As of
December 31, 1996, the most recent notification from the regulatory agencies
categorized the Company as well capitalized under the regulatory framework
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE S - STOCKHOLDERS' EQUITY
1. Regulatory Matters (continued)
------------------
for prompt corrective action. To be categorized as well or adequately
capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the institution's category.
The Company's actual capital amounts and ratios are also presented in the
table on the following page. No amounts were deducted from the
Association's capital for interest rate risk in 1996.
To be well
capitalized
under
prompt
For capital corrective
adequacy action
Actual purposes provisions
---------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ----- ------- -----
(in thousands of dollars)
As of December 31, 1996
Total capital (to risk
weighted assets)
Consolidated $117,810 13.90% $67,827 8.00% N/A
Bank 68,074 11.14% 46,896 8.00% $58,620 10.00%
Association 49,921 16.49% 24,220 8.00% 30,275 10.00%
Tier I capital (to risk
weighted assets)
Consolidated 107,152 12.64% 33,914 4.00% N/A
Bank 57,926 9.88% 23,448 4.00% 35,172 6.00%
Association 46,944 15.51% 9,083 3.00% 18,165 6.00%
Tier I capital (to
average assets)
Consolidated 107,152 7.17% 59,769 4.00% N/A
Bank 57,926 7.76% 29,853 4.00% 37,316 5.00%
Association 46,944 7.47% 25,149 4.00% 31,436 5.00%
Tangible capital (to
adjusted total assets)
Association 46,944 7.47% 9,431 1.50% N/A
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE S - STOCKHOLDERS' EQUITY
1. Regulatory Matters (continued)
------------------
The United States Congress passed 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.
The special assessment totaled approximately $2,383,000 during the year
ended December 31, 1996.
2. Proposed Merger of Subsidiaries and Informal Agreement
------------------------------------------------------
On October 18, 1996, the Company announced plans to merge its two
subsidiaries, the Bank and the Association, to improve operating efficiency.
The merger is expected to be completed in the first half of 1997, subject to
the approval of the Bank's regulators. After the merger, the combined
institutions will operate under the City Bank name.
The announcement of the merger plan follows a review and analysis of the
Company's operations and strategic assessment of the future growth
opportunities. As part of this process, the Company has had a series of
discussions with the regulatory authorities on the management, operations
and structure of the Company. As a result, the Company entered into an
informal agreement with the Federal Reserve Bank of San Francisco (FRB).
Under the terms of the agreement, the Company must first obtain concurrence
from the FRB on matters concerning payment of cash dividends, incurring
debt, or the redemption of its stock. The agreement also addresses a number
of issues that require FRB concurrence including an increase in director and
executive compensation, entering into agreements to acquire or divest
businesses, management and organizational structure, liquidity and capital
needs, interest rate risk, audit, record keeping and compliance control
systems.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE T - FINANCIAL INFORMATION OF CB BANCSHARES, INC. (PARENT COMPANY)
The balance sheets of CB Bancshares, Inc. as of December 31, 1996 and 1995,
and the related statements of income, and cash flows for each of the three
years in the period ended December 31, 1996 are as follows:
BALANCE SHEETS
ASSETS 1996 1995
-------- --------
(in thousands
of dollars, except share
and per share)
Cash on deposit with the Bank
and Association $ 3,637 $ 2,124
Investment in Subsidiaries
The Bank 58,778 57,854
The Association 57,413 57,920
Other 425 443
Dividend receivable from the Bank 1,500 700
Premises and equipment 899 -
Other assets 512 2,740
------- -------
TOTAL ASSETS $123,164 $121,781
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings $ - $ 3,000
Advances from the Bank, net 7 238
Dividends payable - 1,154
Other liabilities 3,746 883
------- -------
Total liabilities 3,753 5,275
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 of available-for-sale
securities, net of tax 902 1,596
Retained earnings 49,878 46,279
------- -------
Total stockholders' equity 119,411 116,506
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $123,164 $121,781
======= =======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE T - FINANCIAL INFORMATION OF CB BANCSHARES, INC.
(PARENT COMPANY) (continued)
STATEMENTS OF INCOME
1996 1995 1994
------- ------- -------
(in thousands of dollars)
Income
Dividends from Subsidiaries
The Bank $ 6,262 $12,780 $ 5,169
The Association 4,600 2,200 -
Other - - 2,519
Other 462 932 795
------ ------ ------
Total income 11,324 15,912 8,483
Expenses
Professional services 2,357 1,067 1,074
Salaries and employee benefits 4,083 3,778 1,594
Travel 89 90 80
Directors' fees 134 126 263
Interest 293 174 388
Advertising and promotion 148 166 84
Net occupancy expenses 343 406 254
Equipment expenses 10 53 13
Other 845 786 581
------ ------ ------
Total expenses 8,302 6,646 4,331
------ ------ ------
Operating profit 3,022 9,266 4,152
Equity in undistributed (dividends from
subsidiaries in excess of) income
of Subsidiaries
The Bank 1,010 (4,830) 4,788
The Association 100 1,170 3,203
Other (19) (161) (2,447)
------ ------ ------
1,091 (3,821) 5,544
------ ------ ------
Income before income tax benefit 4,113 5,445 9,696
Income tax benefit 2,946 2,568 1,375
------ ------ ------
NET INCOME $ 7,059 $ 8,013 $11,071
====== ====== ======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE T - FINANCIAL INFORMATION OF CB BANCSHARES, INC.
(PARENT COMPANY) (continued)
STATEMENTS OF CASH FLOWS
1996 1995 1994
-------- ------- --------
Increase (decrease) in cash (in thousands of dollars)
Cash flows from operating activities:
Net income $7,059 $8,013 $11,071
Adjustments to reconcile net income
to net cash provided by operations:
Dividend from Subsidiaries in excess of
(equity in undistributed) income
of Subsidiaries (1,091) 3,821 (5,544)
(Increase) decrease in dividend
receivable from the Bank (800) 462 (280)
Decrease (increase) in other assets 2,227 (86) 1,026
Increase (decrease) in other liabilities 2,862 (1,037) 1,405
------ ------ -------
Net cash provided by operating
activities 10,257 11,173 7,678
Cash flows from investing activities:
Purchase of International Holding Capital
Corp., net of cash acquired of $163 - - (26,072)
Proceeds from sale of investment securities - - 6,005
Capital expenditures (899) - -
------ ------ -------
Net cash used in investing activities (899) - (20,067)
Cash flows from financing activities:
Net (decrease) increase in short-term
borrowings (3,000) (5,000) 8,000
Cash dividends 4,614) (4,620) (4,068)
Decrease in advances from the Bank, net (231) - -
------ ------ -------
Net cash (used in) provided by
financing activities (7,845) (9,620) 3,932
------ ------ -------
INCREASE (DECREASE) IN CASH 1,513 1,553 (8,457)
Cash at beginning of year 2,124 571 9,028
------ ------ -------
Cash at end of year $ 3,637 $ 2,124 $ 571
====== ====== =======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
NOTE U - ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (SFAS 125) and
Statement of Financial Accounting Standards 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125 (SFAS 127). SFAS 125
particularly affects the accounting for transfers of financial assets in
which the seller has some type of continuing involvement with the
transferred assets. The carrying amount of the financial assets transferred
are allocated to the various components of the transaction based on their
relative fair values. The components are then accounted for separately,
with parties to the transaction recognizing only assets they control and
liabilities incurred, and removing from the balance sheet assets if control
is surrendered and liabilities if extinguished. If the transfer does not
qualify as a sale, it is accounted for as a secured borrowing. SFAS 125
provides that a liability is removed from the balance sheet only if the
debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor. Provisions
of SFAS 125 are generally effective for transactions occurring after
December 31, 1996. However, SFAS defers certain provisions of SFAS 125 with
respect to secured borrowings and transfers of financial assets that are
part of repurchase agreement, dollar-roll, securities lending, and similar
transactions occurring after December 31, 1997. The Company has made no
assessment of the potential impact of adopting SFAS 125 and SFAS 127 at this
time.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1996, 1995, and 1994
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.
1996 1995
--------------------------- ---------------------------
Carrying Carrying
or or
notional Estimated notional Estimated
amount fair value amount fair value
of assets or of assets or of assets or of assets or
(liabilities) (liabilities) (liabilities) (liabilities)
------------- ------------- ------------- -------------
(in thousands of dollars)
Cash and due from
banks $ 40,132 $ 40,132 $ 63,619 $ 63,619
Interest-bearing
deposits in
other banks 16,500 16,500 11,500 11,500
Investment secu-
rities (note C) 236,030 240,587 217,513 217,790
Restricted investment
securities 25,100 25,100 23,226 23,226
Loans receivable
(note D) 1,016,123 1,044,039 1,106,610 1,123,294
Deposits (note H) (951,910) (951,086) (1,011,483) (1,011,710)
Long-term debt (note J) (94,825) (99,580) (101,371) (102,135)
Commitments and letters
of credit (note C) 165,264 727 185,805 581
Derivative financial
instruments (note N)
In a net payable
position (25,000) (127) (50,000) (940)
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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.
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, 1996 and 1995
Consolidated Statements of Income - Years ended December 31, 1996, 1995
and 1994
Consolidated Statement of Changes in Stockholders' Equity for the three
years
December 31, 1996
Consolidated Statement of Cash Flows - Years ended December 31, 1996, 1995
and 1994
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
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, 1996.
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 27, 1997 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 27, 1997
/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)
EXHIBIT INDEX
Exhibit Description Page Number
21 Subsidiaries of the Registrant 93
CB BANCSHARES, INC. AND SUBSIDIARIES
The following exhibit is submitted:
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 Corporation 1985, California
ISL Financial Corp. 1987, Virginia
DRI Assurance, Inc. 1985, Hawaii
All subsidiaries are included in the consolidated financial statements of
the Registrant.