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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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, 1998, 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, 1998 was approximately
$125,640,742.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on April 30, 1998 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 three wholly-owned subsidiaries, City Bank, International Savings
and Loan Association, Limited (which the Company acquired in April 1994) 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.
O.R.E., Inc.
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 compete for
deposits and loans with six other commercial banks and three 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.
The economic growth in the state of California, which was expected to grow 5.4
percent in 1997 after growing 4.8 percent in 1996, is having a positive effect
on tourism. Visitor arrivals grew slightly in the first eleven months of 1997
due to an improvement in westbound arrivals (1.2 percent). This increase more
than offset the 0.6 percent decrease in eastbound arrivals.
Military spending remains a stable and important source of revenue in Hawaii.
Although the U.S. mainland has experienced reductions in defense spending,
Hawaii has experienced only a limited reduction due to its strategic location
in the Pacific.
The Hawaii real estate market strengthened in 1997 with resales of single
family residences up 15.5 percent on Oahu, 24.7 percent on Maui, 18.0 percent
on the island of Hawaii, and 22.8 percent on Kauai. Similarly, condominium
resales were also up. The Hawaii real estate market improved due to declining
mortgage rates and a view that the Hawaiian economy and home prices had
bottomed. The combination of lower rates and home prices helped to overcome
the affordability issue which has been a major obstacle for the average Hawaii
homebuyer.
Hawaii's Real Gross State Product, which grew by 1.1 percent in 1997, is
expected to grow at the same 1.1 percent pace in 1998. The declining trend in
jobs leveled in 1997 and is expected to reverse course in 1998 and beyond.
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 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 Memorandum of Understanding. On
October 19, 1996, the Company announced plans to merge its two subsidiaries,
City Bank and International Savings and Loan Association, Limited, to improve
operating efficiency. After subsequent review and analysis by management, the
Company announced the decision not to merge the two subsidiaries on October 17,
1997. The Company's decision was based on its desire to preserve the separate
market niches in which each subsidiary is successfully serving the community.
The Company will, however, continue to consolidate and integrate internal
operations and support functions.
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.
In September 1997, City Bank also entered into an MOU with the Federal Deposit
Insurance Corporation ("FDIC"). The MOU requires, among other things, that
City Bank obtain approval from the FDIC for the payment of cash dividends, and
to reduce certain classified assets to specified levels within time frames set
forth.
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 1997 totaled $2.58 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, 1997, 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 the amount that would reduce by 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 1997, 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.
Under the OTS regulations, 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.
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 director of the OTS, or his
or her designee, is authorized 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, 1997, the Company, the Bank and ISL exceeded applicable capital
requirements. The consolidated capital position of the Company at December
31,1997 was as follows:
Company ratio Minimum required ratio
Risk-based Capital:
Tier 1 capital ratio 12.73% 4%
Total capital ratio 13.99% 8%
Leverage ratio 7.46% 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, 1997.
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. Hawaii enacted an
interstate branching and bank mergers law which expressly permits interstate
branching under Sections 102 and 103 of the IBBEA.
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.
Hawaii law authorizes 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. Hawaii
law imposes no state deposit caps or concentration limits. It also permits the
State Commissioner of Financial Institutions to waive, on a case-by-case
basis, federal statewide concentration limits, in accordance with standards
that do not discriminate against out-of-state banks.
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.
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.
BIF-insured 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 BIF-
insured deposits. Rates in the SAIF assessment schedule, range from 0 for
institutions in the lowest risk category to 27 cents for institutions in the
highest risk category.
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 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, 1997 the Company and its subsidiaries employed 546 persons;
510 on a full-time basis and 36 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) 1997 1996 1995
----------------------------
Held-to-Maturity
State and political subdivisions 101 102 102
Mortgage-backed securities 88,296 97,729 9,142
----------------------------
$ 88,397 $ 97,831 $ 9,244
============================
Available-for-sale
U.S. Treasury securities $ 49,104 $ 51,997 $ 95,257
and other U.S. government
agencies and corps.
State and political subdivisions 4,923 3,219 3,470
Mortgage-backed securities 64,306 81,490 106,878
----------------------------
$118,333 $136,706 $205,605
============================
Restricted securities
(See Note A2 to the Company's
Consolidated Financial
Statements) $ 27,348 $ 25,100 $ 23,226
===========================
The following table sets forth the maturities of investment securities at
December 31, 1997, 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. $ - - % $ 101 6.00% $ - - %
$ - - %
Mortgage-backed securities - - 8,932 6.50 - 27 8.79
79,337 8.98
- -----------------
$ - % $ 9,033 6.49% $ 27 8.79%
$ 79,337 8.98%
=================================================================
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. $ 6,983 6.14% $ 31,528 6.29% $ 10,593 6.86%
$ - - %
State subdivisions 725 6.51 2,210 5.34 211 6.60
1,777 6.60
Mortgage-backed securities 414 7.50 2,831 7.34 20,700 6.75
40,361 7.67
--------------------------------------------------------
- -----------------
$ 8,122 6.24% $ 36,569 6.31% $ 31,504 6.79%
$ 42,138 7.62%
==================================================================
A table setting forth information regarding investments in securities,
including estimated fair value and carrying value of such securities is
included in Note B to the Company's Consolidated Financial Statements.
LOAN PORTFOLIO
Total loans at December 31, 1997 increased to $1,054.75 million, a 1.71%
increase over the previous year-end. The increase in total loans was
primarily due to increases in commercial and real estate construction
lending. A comparative breakdown of the portfolio and interest and fees
earned on loans during 1997 and 1996 are presented below:
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) 1997 1996 1995 1994
1993
----------------------------------------------------
- ------------
Commercial and financial $ 186,418 $ 170,228 $ 168,497 $ 167,460
$163,394
Real estate - construction 41,069 28,699 18,408 24,448
12,983
Real estate - mortgage 747,897 753,676 851,242 797,997
294,855
Installment 79,363 84,456 90,378 91,738
81,016
----------------------------------------------------
- ------------
$1,054,747 $1,037,059 $1,128,525 $1,081,643
$552,248
================================================================
Commercial and financial. Loans outstanding in this category increased to
$186.42 million, up $16.19 million or 9.51% from year-end 1996. Loans in
this category are primarily loans to small and medium-sized businesses and
professionals doing business in Hawaii. The average loan balance was
$127,000 at year end 1997. 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 $747.90
million at year-end 1997, a decrease of $5.78 million or 0.77% from year-
end 1996. This decline was primarily attributable to the $14.86 million
decrease in commercial mortgages which was partially offset by the $9.08
million increase in residential mortgages. The average size of loans in
this category at December 31, 1997 was approximately $102,000. In 1997,
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, 1997,
which, based on remaining scheduled repayments of principal, are due in the
periods indicated:
At December 31, 1997
Maturing
within after 1 after
1 yr. Within 5 yrs. 5 yrs. Total
------------------------------------------
(in thousands)
Commercial and financial $ 83,817 $ 26,558 $ 76,043 $186,418
Real estate-construction 37,306 1,914 1,849 41,069
------------------------------------------
$121,123 $ 28,472 $ 77,892 $227,487
==========================================
The following table sets forth the sensitivity of the above amounts due after
one year:
At December 31, 1997
Fixed Variable
(in thousands) rate rate Total
---------------------------------
Due after 1 but within 5 years $ 6,373 $ 22,099 $ 28,472
Due after 5 years 41,625 36,267 77,892
---------------------------------
$ 47,998 $ 58,366 $106,364
=================================
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,
1997 1996 1995 1994 1993
-------------------------------------------
Loans accounted for on a
non-accrual basis
Commercial & Industrial $ 2,996 $ 4,321 $ 2,538 $1,484 $ 680
Real Estate 21,480 19,064 11,800 5,882 3,097
--------------------------------------------
$24,476 $23,385 $14,338 $7,366 $3,777
Loans contractually past
due 90 days or more as
to principal or interest 3,913 2,379 3,113 5,946 1,965
-------------------------------------------
Total non-performing loans 28,389 25,764 17,451 13,312 5,742
Other real estate owned 3,686 1,844 1,715 2,122 -
-------------------------------------------
Total non performing assets $32,075 $27,608 $19,166 $15,434 $5,742
===========================================
Ratio of non-performing loans
to period end total loans 2.69% 2.48% 1.54% 1.23% 1.05%
Ratio of non-performing assets
to period end total assets 2.23% 1.98% 1.27% 1.07% .73%
The $1.09 million increase in non accrual loans in 1997 was due primarily to
an increase in ISL's non accruing mortgage loans and reflects the prolonged
weakness in the Hawaiian economy. Although there is some improvement in the
Hawaii real estate market, the amount of real estate owned increased by
$1.84 million in 1997. The real estate owned consists of twenty-seven
single family residences.
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.
At December 31, 1997 the recorded investment in loans that are considered to
be impaired was $8.48 million. The total allowance for loan losses related to
these loans was $2.1 million - see Note D 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 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) 1997 1996 1995 1994 1993
---------------------------------------
Balance of allowance
for credit losses at
beginning of year $15,431 $14,576 $14,326 $9,816 $8,715
Allowance of ISL at
acquisition date - - - 3,128 -
Charge offs:
Commercial and financial 2,489 537 87 602 816
Real estate - construction - - - - -
Real estate - mortgage 2,315 495 563 300 443
Installment 1,121 873 602 694 777
---------------------------------------
Total charge-offs 5,925 1,905 1,252 1,596 2,036
Recoveries: ---------------------------------------
Commercial and financial 233 30 92 609 528
Real estate - construction - - - - -
Real estate - mortgage 26 74 142 14 72
Installment 350 246 288 391 473
---------------------------------------
Total recoveries 609 350 522 1,014 1,073
---------------------------------------
Net loans charged-off 5,316 1,555 730 582 963
Provision for credit losses 6,250 2,410 980 1,964 2,064
---------------------------------------
Balance at year-end $16,365 $15,431 $14,576 $14,326 $9,816
=======================================
SUMMARY OF CREDIT LOSS EXPERIENCE (continued)
Years ended December 31,
(dollars in thousands) 1997 1996 1995 1994 1993
---------------------------------------
Ratio of net charge-offs to
average net loans outstanding 0.50% 0.14% 0.07% 0.07% 0.18%
Ratio of allowance for credit
losses to period-end loans 1.55% 1.49% 1.29% 1.32% 1.79%
Ratio of allowance for credit
losses to non-performing loans 57.65% 59.89% 83.53% 107.62% 170.95%
The amount of the allowance for credit 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 credit 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 credit losses as a percentage of period-end total loans was
1.55% at December 31, 1997, compared to 1.49% and 1.29% at 1996 and 1995,
respectively. On the other hand, the allowance for credit losses has
decreased from 59.89% of non-performing loans in 1996 to 57.65% of such loans
in 1997. The increase in non-performing loans in 1997 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 credit losses are more than adequate to cover
any potential losses.
The allowance for credit 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,
1997 1996 1995 1994
1993
Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1)
Amt. %(1)
---------------------------------------------------------------
- -----------------
Commercial &
financial $ 3,718 17.67% $ 4,808 16.42% $ 5,039 14.91% $ 3,649 15.47%
$4,280 29.82%
Real estate -
Construction - 3.89% - 2.77% 184 1.62% 378 2.20%
128 2.36%
Real estate -
Mortgage 10,744 70.91% 7,021 72.67% 5,053 75.46% 4,097 73.79%
2,210 53.06%
Installment 476 7.53% 1,412 8.14% 1,510 8.01% 1,563 8.49%
1,063 14.76%
Unallocated 1,427 n/a 2,190 n/a 2,790 n/a 4,639 n/a
2,135 n/a
------------------------------------------------------------------
- -----------------
Total $16,365 100% $15,431 100% $14,576 100% $14,326 100%
$9,816 100%
===============================================================================
==
(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,
1997 1996 1995
Average Average Average
Balance rate Balance rate Balance rate
--------------------------------------------------
Non-interest bearing
demand deposits $104,361 0.00% $109,878 0.00% $120,396 0.00%
Interest bearing
demand deposits 166,632 2.61% 166,118 2.51% 153,168 2.28%
Savings 175,831 2.61% 181,900 2.50% 196,795 2.45%
Time deposits 508,379 5.32% 500,491 5.28% 512,931 5.49%
--------------------------------------------------
Total $955,203 3.73% $958,387 3.67% $983,290 3.71%
==================================================
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 1997 is summarized below:
(in thousands)
3 months or less $101,962
Over 3 months through 6 months 55,917
Over 6 months through 12 months 30,065
Over 12 months 23,370
---------
Total $211,314
=========
SHORT-TERM BORROWINGS
The following table sets forth outstanding balances of short-term borrowings
at year-end :
At December 31,
(in thousands) 1997 1996 1995
----------------------------------
Federal funds purchased and
securities sold under
repurchase agreements $ - $ 9,300 $ 38,698
Federal treasury tax and loan 512 571 2,577
Advances from the FHLB 136,700 198,810 194,085
Notes payable to banks - - 4,000
----------------------------------
Total $137,212 $208,681 $239,360
==================================
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) 1997 1996 1995
--------------------------------
Securities sold under repurchase
agreements :
Average interest rate at December 31, - - 6.01%
Maximum outstanding at any month-end - - $ 47,484
Average outstanding - - 40,195
Average interest rate for the period - - 6.00%
Advances from the Federal Home Bank :
Average interest rate at December 31, 5.63% 5.55% 5.82%
Maximum outstanding at any month-end $232,651 $226,515 $238,693
Average outstanding 184,430 199,870 195,538
Average interest rate for the period 5.71% 5.87% 6.60%
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 $456.37 million, of which $179.63 million was undrawn at
December 1997. The interest paid monthly on this line floats and is based on
the overnight interbank borrowing rate. See Notes H and I to the Audited
Financial Statements.
ITEM 2. PROPERTIES
The operations of the Company are transacted through its main banking offices
and twenty-three 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 P 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 L 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 intentionaly 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.
The Association, which previously leased approximately 56% of the building,
terminated its lease in March 1997. Prior to the Association terminating its
sublease, the plaintiffs became delinquent in their lease rent to the fee
owner and in their real property tax payments despite having collected
sublease rents and real property tax assessments in advance from the
Association and other tenants. 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 had a liability to the landowner for
the underlying ground lease ($65,333 per month) in connection with any default
by plaintiffs in lease payments to the landowner, even though the Association
no longer occupied such leased space. The monthly rental payments of $65,333
required by the ground lease were substantially in excess of current rental
market values, which restricted the ability of the Association to mitigate
potential losses.
The landowner subsequently sued the Association and the plaintiff. The action
was never served on the Association and was settled and dismissed after the
filing of a motion for the appointment of a receiver. Effective June 1, 1997,
the plaintiffs reassigned the lease and legal title of the ISL Building to the
Association pursuant to an agreement among the landowner, the Association and
the plaintiff. As a result, the Association currently controls the operation
of the 1111 Bishop Street Building. However, the agreement did not release
the Association from obligations under the lease or terminate the litigation
between the Association and the plaintiff. The agreement also established a
$5,000,000 cap on the amount of damages the Association can recover from the
plaintiff with respect to the assignment. The ground lease rent is fixed
until 2002, at which time the rent will be renegotiated for two subsequent
ten-year periods. The ground lease term expires in 2021. In no event would
the negotiated lease rent for any period be less than $30,000 per year. 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 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 1997 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, 1998, 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:
1997 High Low Dividends
----------------------------
First quarter $39.50 $28.00 $0.375
Second quarter 35.50 29.50 0.050
Third quarter 45.00 34.75 0.050
Fourth quarter 45.00 40.50 0.050
1996
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 -
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)
1997 1996 1995 1994
1993
-----------------------------------------------
Income Statement Data:
Interest income $ 112,529 $ 111,247 $ 111,716 $
89,350 $ 58,582
Interest expense 53,859 53,477 57,686
34,445 17,048
Net interest income 58,670 57,770 54,030
54,905 41,534
Provision for credit losses 6,250 2,410 980
1,964 2,064
Net income 7,218 7,059 8,013
11,071 7,926
End of Period Balance Sheet Data:
Total assets 1,435,226 1,397,169 1,501,513
1,439,511 789,541
Total loans 1,054,747 1,037,059 1,128,525
1,081,643 552,248
Total deposits 1,008,728 951,910 1,011,483
923,444 622,084
Long-term debt 141,048 94,825 101,371
106,850 65,000
Stockholders' equity 125,065 119,411 116,506
111,165 78,586
Per Share Data:
Net income 2.03 1.99 2.26
3.32 3.12
Cash dividends declared 0.53 0.98 1.30
1.30 0.98
Outstanding Shares:
Average during period 3,551 3,551 3,551
3,335 2,538
Selected Ratios
Return on average total assets 0.52% 0.50% 0.54%
0.95% 1.06%
Return on average equity 5.90% 5.99% 7.05%
10.92% 10.92%
Average total stockholders'
equity to average assets 8.75% 8.34% 7.69%
8.67% 9.67%
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is intended to facilitate the understanding and
assessment of significant changes in trends related to the financial condition
of the Company and the results of its operations. The Management's Discussion
and Analysis should be read in conjunction with the Selected Consolidated
Financial Data and the Company's Consolidated Financial Statements and related
notes thereto appearing elsewhere in this Annual Report.
It should be noted that the Company is affected by various factors such as
regulatory actions, economic conditions, the general business environment, as
well as by the competition. Accordingly, historical performance may not be a
reliable indicator of future earnings.
Results of Operations.
Consolidated net income for 1997 was $7.22 million, an increase of 2.25% from
the $7.06 million in 1996, and a 9.92% decrease from the $8.01 million
reported in 1995. Net income on a per share basis was $2.03 in 1997, as
compared to $1.99 in 1996 and $2.26 in 1995. The Company's return on average
stockholders' equity was 5.90% in 1997, 5.99% in 1996, and 7.05% in 1995. The
return on average total assets for 1997 was 0.52%, as compared to 0.50% for
1996 and 0.54% for 1995. Net interest margin (on a tax equivalent basis)
improved to 4.40% in 1997, compared to 4.36% and 3.93% in 1996 and 1995,
respectively.
Despite the improvement in net interest income, consolidated net income for
1997was negatively impacted by a $1.0 million decline in non-interest income
and a $3.8 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, 1997 1996
1995
Average Yield/ Average Yield/ Average
Yield/
Balance Interest Rate Balance Interest Rate Balance
Interest Rate
- -------------------------------------------------------------------------------
- ---------------
ASSETS (dollars in thousands)
Interest-earning assets:
Loans $1,061,925 $ 93,104 8.77% $1,111,661 $ 96,825 8.71%
$1,117,976 $ 94,142 8.42%
Taxable investment
securities 249,938 17,908 7.16 208,881 13,776 6.60
254,565 17,249 6.78
Non-taxable investment
securities 3,611 318 8.81 3,526 474 13.44
4,485 388 8.65
Federal funds sold
and securities
purchased under
agreements to resell 3,908 213 5.45 6,333 437 6.90
4,801 257 5.35
Interest bearing
Deposits 19,387 1,176 6.07 - - -
- - - -
Total interest-earning
assets 1,338,769 112,719 8.42 1,330,401 111,512 8.38
1,381,827 112,036 8.11
Non-interest-earning assets:
Cash and due
from banks 24,964 35,698
35,240
Premises and
equipment-net 11,182 10,761
11,696
Other assets 41,050 50,345
64,800
Less allowance for
credit losses (16,246) (15,008)
(14,414)
- -------------------------------------------------------------------------------
- ---------------
Total assets $1,399,719 $1,412,197
$1,479,149
TABLE 1: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES
Years ended December 31, 1997 1996
1995
(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 $ 342,463 $ 8,941 2.61% $ 348,018 $ 8,692 2.50% $
349,963 $ 8,322 2.38%
Time deposits 508,379 27,025 5.32 500,491 26,450 5.28
512,931 28,138 5.49
Short-term borrowings 184,430 10,531 5.71 199,870 11,725 5.87
195,538 12,915 6.60
Long-term debt 113,414 7,362 6.49 104,025 6,610 6.35
146,102 8,311 5.69
Total interest-bearing
liabilities 1,148,686 53,859 4.69 1,152,404 53,477 4.64
1,204,534 57,686 4.79
Non-interest bearing liabilities:
Demand deposits 104,361 -
120,396
Other liabilities 24,253 32,072
40,492
Stockholders' equity 122,419 117,843
113,727
- -------------------------------------------------------------------------------
- ---------------
Total $1,399,719 $1,412,197
$1,479,149
Net interest income $58,860 $58,035
$54,350
Net interest margin 4.40% 4.36%
3.93%
TABLE 2: INTEREST DIFFERENTIAL
1997 compared to 1996 1996 compared
to 1995
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:
Interest bearing deposits $ 588 $ 588 $ 1,176 $ - $ -
$ -
Loans (4,357) 636 (3,721) (534)
3,217 2,683
Taxable investment securities 2,870 1,262 4,132 (3,024)
(449) (3,473)
Non-taxable investment securities 11 (167) (156) (96)
182 86
Federal funds sold and
securities purchased under
agreements to resell (145) (79) (224) 94
86 180
- -------------------------------------------------------------------------------
- ------------
Total interest-earning assets $(1,033) $ 2,240 $ 1,207 $(3,560) $
3,036 $ (524)
Interest-bearing liabilities:
Savings deposits $ (140) $ 389 $ 249 $ (46) $
416 $ 370
Time deposits 419 156 575 (672)
(1,016) (1,688)
Short-term borrowings (888) (306) (1,194) 281
(1,471) (1,190)
Long-term debt 607 145 752 (2,593)
892 (1,701)
- -------------------------------------------------------------------------------
- ------------
Total interest-bearing
liabilities $ (2) $ 384 $ 382 $(3,030)
$(1,179) $(4,209)
- -------------------------------------------------------------------------------
- ------------
Net interest income $(1,031) $ 1,856 $ 825 $ (530) $ 4,215
$ 3,685
(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 $58.86 million in 1997, an
increase of $0.83 million or 1.42% from 1996.
As summarized on Table 2, the $0.83 million increase in net interest income
for 1997 consisted of a $1.21 million increase in interest income that was
partly offset by a $0.38 million increase in interest expense.
The $1.21 million increase in interest income was primarily due to the $41.06
million increase in the average level of taxable investment securities and the
56 basis point increase in yields which offset the effect to the $49.74
million decrease in average loans outstanding.
Interest costs on interest bearing liabilities were relatively stable with an
increase of only $0.38 million in 1997. The increase primarily was a result
of deposit shifts from the lower cost savings deposits to higher cost time
deposits.
Provision and Allowance for Credit Losses
The amount of the allowance for credit 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 credit 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 credit losses
may fluctuate and may not be comparable from year to year.
The Company's allowance for credit losses increased to $16.37 million at
December 31, 1997, from $15.43 million in 1996 and $14.58 million in 1995.
The allowance for credit losses as a percentage of period-end total loans was
1.55% at December 31, 1997, compared to 1.49% and 1.29% at 1996 and 1995.
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired was $8.48 million and $10.79 million, respectively.
The total allowance for loan losses related to these loans was $2.10 million
and $2.13 million on December 31, 1997 and 1996, respectively. See Note D of
Notes of Consolidated Financial Statements.
Other Income
In 1997, other income was $7.11 million as compared to $8.12 million in 1996
and $10.33 million in 1995. The decline in 1997 was primarily attributable to
the $1.22 million decline in net realized gains on sales of available for sale
securities. The Company sold its merchant accounts portfolio in 1995 and its
credit card portfolio in 1996 resulting in the loss of commissions and fees
relating to these discontinued operations. Other income includes an annual
$0.45 million gain resulting from the amortization of the deferred gain
recognized in a manner similar to a sale-lease-back transaction of the
Company's headquarters in 1989. This deferred gain of $8.57 million is
amortized over a period of 20 years. See Note L 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 1997 1996 1995
(dollars in thousands)
Service charges on deposits $ 1,632 $ 1,716 $ 1,716
Other service charges and fees 2,460 2,660 5,515
Net trading account gains (losses) - (5) 61
Net realized gains on sales of
available-for-sale-securities 177 1,401 4
Other 2,843 2,343 3,032
- -------------------------------------------------------------------------
Total $ 7,112 $ 8,115 $10,328
=========================================================================
Other Expenses
The following table sets forth information by category of other operating
expenses of the Company for the years indicated:
For the Year 1997 1996 1995
(dollars in thousands)
Salaries and employee benefits $19,652 $20,647 $22,422
Net occupancy expense 8,325 7,678 7,295
Equipment expense 3,176 2,957 2,929
Professional fees 4,748 4,467 2,904
Voluntary separation benefits - 3,162 -
Merchant interchange fees - - 1,616
Charge card processing - 252 640
Stationery and supplies 1,038 958 1,074
Deposit insurance premiums 406 3,282 1,472
Advertising and promotion 2,273 1,917 1,880
Other 7,939 6,465 7,882
- -------------------------------------------------------------------------
Total $47,557 $51,785 $50,114
=========================================================================
Total operating expenses as a percent
of average assets 3.40% 3.67% 3.39%
=========================================================================
Other operating expenses decreased to $47.56 million, compared to $51.79
million in 1996 and $50.11 in 1995. The Company's operating expense ratio
(total operating expense as a percentage of average assets), which is a
commonly used indicator of operating efficiency, decreased by 27 basis points
in 1997 to 3.40%, compared to 3.67% in 1996. The primary reasons for the
improvement in the efficiency ratio were the decrease in deposit insurance
premiums and the reduced salary and benefit costs resulting from the Company's
1996 voluntary separation plan (VSP).
On January 31, 1996, the Company announced a major initiative to further
improve operating efficiency and decrease expenses by offering a VSP to all
employees. The program offered all eligible employees the opportunity of
electing to terminate their employment
Ninety seven employees participated in the VSP and voluntary separation
benefits of approximately $3.16 million were expensed and paid
Total compensation expense, which comprises the largest category of other
operating expenses, decreased by $1.00 million in 1997 to $19.65 million.
This decrease was attributable to the implementation of the Company's VSP in
1996 and its resulting reduction of personnel.
The increase in net occupancy expense in 1997 was primarily attributable to
the increased occupancy costs of the Association from its ground lease
obligation of vacated premises. See Note O of the Company's Consolidated
Financial Statements.
Deposit insurance premiums decreased $2.88 million to $0.41 million in 1997.
A special assessment on the Association's deposit base as of March 31, 1995 of
$2.38 million was recorded in 1996. The assessment was the result of
legislation passed by the United States Congress to strengthen the insurance
fund administered by the Savings Association Insurance Fund (SAIF).
Income Taxes
Total income tax expense of the Company was $4.76 million, $4.63 million and
$5.25 million in 1997, 1996 and 1995, respectively. The Company's effective
income tax rate for the years 1997, 1996 and 1995 was 39.7%, 39.6% and 39.6%,
respectively. Note K to the Company's Consolidated Financial Statements
presents a reconciliation of the Company's effective and statutory income tax
rates.
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 statements of cash flows identify three major sources and
uses of cash as operating, investing and financing activities. Cash generated
from operations represents a source of liquidity. As presented in the
consolidated statements of cash flows of this Annual Report, the Company's
operating activities used $4.01 million in 1997, compared to providing $16.68
million in 1996, and $7.38 million in 1995.
Investing activities reduced cash flow by $20.60 million during 1997, compared
to an increase of $61.47 million in 1996, and a reduction of $35.06 million in
1995. The primary source of cash flow from investing activities in 1997 was
from the sales and maturities of investment securities.
Financing activities increased cash flow by $29.63 million during 1997,
compared to a reduction of $101.63 million in 1996 and an increase of $42.55
million in 1995. During 1997, increases in time deposits accounted for the
increase in cash flows from financing activities.
As of December 31, 1997, the Bank and Association had available unused credit
lines of $178.11 million from the FHLB and committed available lines of credit
from other sources. At any time, the Company has outstanding commitments to
extend credit. See Notes H, I and N of Notes to Consolidated Financial
Statements.
Asset/Liability Management
Asset/liability management involves the maintenance of an appropriate balance
between interest-sensitive assets and interest-sensitive liabilities to reduce
interest rate exposure while also providing liquidity.
The Company's management has placed an increased emphasis on interest rate
sensitivity management. Interest-earnings assets and interest-bearing
liabilities are those which have yields or rates which are subject to change
within a future time period due to either the maturity of the instrument or
changes in the rate environment. Gap refers to the difference between the
rate-sensitive assets and rate-sensitive liabilities. When the amount of rate-
sensitive assets is in excess of rate-sensitive liabilities, a "positive" gap
exists, and when the opposite occurs, a "negative" gap exists. Generally,
when rate-sensitive assets exceed rate-sensitive liabilities, the net interest
margin is expected to be positively impacted during periods of increasing
interest rates and negatively impacted during periods of decreasing interest
rates. Interest rate shifts, resulting from movements in the economic
environment, can cause interest-sensitive assets and liabilities to reprice
within relatively short time frames. As a result, major fluctuations in net
interest income and net earnings could occur due to imbalances between rate-
sensitive assets and liabilities. Asset/liability management seeks to protect
earnings by maintaining an appropriate balance between interest-earning assets
and interest-bearing liabilities in order to minimize fluctuations in the net
interest margin and net earnings in periods of volatile interest rates.
The Company's policy is to closely match its level of interest-earning assets
and interest-bearing liabilities within a limited range, thereby reducing its
exposure to interest rate fluctuations. In connection with these asset and
liability management objectives, various actions have been taken, including
changes in the composition of assets and liabilities, and the use of financial
instruments.
The financial instruments used and their notional amounts outstanding at year-
end were as follows:
December 31,
1997 1996 1995
(dollars in thousands)
- --------------------------------------------------------------------------
Interest rate swaps
Pay-fixed swaps
notional amount $(10,000) $(25,000) $(50,000)
Average receive rate 5.88% 5.50% 5.88%
Average pay rate 6.25% 6.52% 6.50%
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, 1997, 1996 and 1995, 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 M 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, 1997. 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
and interest bearing
deposits in other
banks $ 24,800 $ 13,254 $ 39,120 $ 119,139 $ 42,404 $
27,348 $ 266,065
Commercial loans 136,848 5,052 4,578 8,007 31,933
- - 186,418
Real estate loans 86,265 88,523 159,107 329,014 126,057
- - 788,966
Consumer loans 46,839 3,507 7,022 20,711 1,284
- - 79,363
Other assets - - - - -
114,414 114,414
- -------------------------------------------------------------------------------
- ---------------
Total assets $ 294,752 $ 110,336 $ 209,827 $ 476,871 $ 201,678 $
141,762 $1,435,226
- -------------------------------------------------------------------------------
- ---------------
Liabilities and
stockholders' equity:
Non-interest bearing
deposits $ - $ - $ - $ - $ - $
110,577 $ 110,577
Time and savings deposits 488,965 115,901 175,716 117,569 -
- - 898,151
Short-term borrowings 99,047 10,825 27,340 - -
- - 137,212
Long-term debt 33,751 4,650 52,590 49,763 294
- - 141,048
Other liabilities - - - - -
23,173 23,173
Stockholders' equity - - - - -
125,065 125,065
- -------------------------------------------------------------------------------
- ---------------
Total liabilities and
stockholders' equity $ 621,763 $ 131,376 $ 255,646 $ 167,332 $ 294 $
258,815 $1,435,226
- -------------------------------------------------------------------------------
- ---------------
Interest rate
sensitivity gap $(327,011)$ (21,040)$ (45,819)$ 309,539 $ 201,384
$(117,053)$ -
- -------------------------------------------------------------------------------
- ---------------
Cumulative interest rate
sensitivity gap $(327,011)$(348,051)$(393,870)$ (84,331)$ 117,053 $
- - $ -
===============================================================================
===============
ITEM 7a.
Market Risk
Other Than Trading Activities
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices and equity prices. The Company's primary
market risk exposure is interest rate risk. The ongoing monitoring and
management of this risk is an important component of the Company's
asset/liability management process which is governed by policies established
by its Board of Directors that are reviewed and approved annually. The Board
of Directors delegates responsibility for carrying out the asset/liability
management policies to the Asset/Liability Committee (ALCO). In this capacity
ALCO develops guidelines and strategies impacting the Company's
asset/liability management related activities based upon estimated market risk
sensitivity, policy limits and overall market interest rate levels/trends.
Interest Rate Risk
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change the interest income and expense
streams associated with the Company's financial instruments also change
thereby impacting net interest income (NII), the primary component of the
Company's earnings. ALCO utilizes the results of detailed and dynamic
simulation model to quantify the estimated exposure if NII to sustained
interest rate changes. While ALCO routinely monitors simulated NII
sensitivity over a rolling two-year horizon, it also utilizes additional tools
to monitor potential longer-term interest rate risk.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and
liabilities reflected on the Company's balance sheet as well as for off
balance sheet derivative financial instruments. This sensitivity analysis is
compared to ALCO policy limits which specify a maximum tolerance level for NII
exposure over a one year horizon, assuming no balance sheet growth, given both
a 200 basis point (bp) upward and downward shift in interest rates. A
parallel and pro rata shift in rates over a 12-month period is assumed. The
following reflects the Company's NII sensitivity analysis as of
December 31, 1997.
Estimated
Rate Change NII Sensitivity
----------- ---------------
+200bp -1.93%
-200bp -0.87%
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including:
the nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cashflows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including haw customer preferences or
competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to: prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps
or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes, and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions
that ALCO might take in responding to or anticipating changes in interest rates
When appropriate ALCO may utilize off balance sheet instruments such as
interest rate floors, caps and swaps to hedge its interest rate risk position.
A Board of Directors approved hedging policy statement governs use of these
instruments. As of December 31, 1997 the Company had $10,000,000 in notional
principal amounts of interest rate swaps outstanding. See Note M of Notes to
Consolidated Financial Statements for further discussion.
The estimated effects of these derivative financial instruments on the
Company's earnings are included in the sensitivity analysis presented above.
Capital Resources
The Company has a strong capital base with a Tier 1 capital ratio of 12.73% at
December 31, 1997. 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, that 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, 1997, the Company's total capital to risk-adjusted assets
ratio was 13.99%.
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.
In 1996, the Company entered into a Memorandum of Understanding (MOU) with the
Federal Reserve Bank of San Francisco ("FRB"). Under the terms of the MOU,
the Company is required to receive the approval of the FRB prior to the
payment of dividends, redemption of stock and incurring debt. In September
1997, City Bank also entered into a MOU with the Federal Deposit Insurance
Corporation ("FDIC"). The MOU requires, among other things, that City Bank
obtain approval from the FDIC for the payment of cash dividends, and to reduce
certain classified assets to specified levels within time frames set forth.
Effects of Changes issued by The Financial Accounting Standards Board
In 1997, the company adopted Statement of Financial Accounting Standard No.
128, "Earnings per Share" (SFAS 128) which superseded APB Opinion No. 15 and
specifies the computation, presentation, and disclosure requirements for
earnings per share for publicly held entities. See Notes A and R of Notes to
Consolidated Financial Statements for further discussion.
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
Earnings for the fourth quarter of 1997 were $1.32 million ($0.37 per share),
a decrease of $1.81 million from the $3.13 million ($0.88 per share) during
the same quarter in 1996. The decrease in earnings was primarily attributable
to the increase in provision for credit losses, which increased by $1.72
million when compared to the same quarter in 1996. See further discussion in
Management's Discussion and Analysis of Other Expenses.
The following table summarizes the Company's quarterly results for the years
1997 and 1996:
1997 Quarter
- -------------------------------------------------------------------------
March June September December
- -------------------------------------------------------------------------
(in thousands, except per share data)
Total Interest Income $27,656 $28,069 $28,182 $28,622
Total Interest Expense 12,923 13,430 13,665 13,841
- -------------------------------------------------------------------------
Net Interest Income 14,733 14,639 14,517 14,781
Provision for Credit Losses 1,050 1,500 1,517 2,183
Other Non-Interest Income 1,442 1,598 1,867 2,205
Other Non-Interest Expense 12,057 11,322 11,563 12,615
- -------------------------------------------------------------------------
Income Before Income Taxes 3,068 3,415 3,304 2,188
Provision for Income Taxes 1,218 1,465 1,202 872
- -------------------------------------------------------------------------
Net Income $ 1,850 $ 1,950 $ 2,102 $ 1,316
=========================================================================
Per common share:
Net Income $ 0.52 $ 0.55 $ 0.59 $ 0.37
=========================================================================
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
=========================================================================
Year 2000
The "Year 2000" problem relates to the fact that many computer software
programs store years as only two digits, assuming that all years are in the
twentieth century. Accordingly, the Year 2000 may produce erroneous results
since there is a question as to how existing application software will react
when the two-digit year becomes "00".
The Company is taking steps toward ensuring that its computer systems will be
Year 2000 compliant. In 1998, both subsidiary institutions are scheduled to
convert their core processing to the FiServ Comprehensive Banking System. The
FiServ Comprehensive Banking System is widely used in the banking industry and
FiServ has given certain assurances that its system will be Year 2000
compliant.
In 1997, the Company and its subsidiaries formed Year 2000 project teams to
identify additional software systems and computer-related devices that require
modification for the year 2000. A project plan with goals and target dates was
developed. The project teams regularly monitor the progress of the plan. The
Company has incurred expenses in 1997 related to this project and will
continue to incur expenses over the next two years. Expenses that the Company
has incurred are primarily those related to the reassignment of existing
personnel to the project. Incremental expenses are not expected to
materiallyimpact operating results in any one period. The Company could be
impacted by the year 2000 date change to the extent that third parties and
customers have not successfully addressed the Year 2000 issues. The Company
has taken actions to help reduce this exposure and will continue to do so on an
ongoing basis. The Company will continue to monitor the progress of critical
third parties and will implement contingency plans in the event that such third
parties fail to achieve their plans. However, there can be no assurance that
any contingency plans will fully mitigate the effects of any such failure.
PAGE
PAGE 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CB BANCSHARES, INC. AND SUBSIDIARIES
December 31, 1997, 1996 and 1995
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF INCOME 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 7
CONSOLIDATED STATEMENTS OF CASH FLOWS 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10
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,
1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Honolulu, Hawaii
January 28, 1998
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except shares and per share data)
December 31,
1997 1996
---------- ----------
ASSETS
Cash and due from banks (including amounts
restricted for the Federal Reserve
requirement of $4,887 in 1997 and
$3,187 in 1996) $ 45,150 $ 40,132
Interest-bearing deposits in other banks (note I) 30,000 16,500
Investment securities (notes B, H and I)
Held-to-maturity - market values of $92,440 in
1997 and $102,388 in 1996 88,397 97,831
Available-for-sale 120,320 138,199
Restricted investment securities 27,348 25,100
Loans held for sale 26,293 5,629
Loans, net (notes C, D, I and N) 1,032,940 1,016,123
Premises and equipment (notes F and O) 19,312 18,227
Other assets (note Q4) 45,466 39,428
--------- ---------
TOTAL ASSETS $1,435,226 $1,397,169
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes E and G)
Non-interest bearing $ 110,577 $ 113,043
Interest bearing 898,151 838,867
--------- ---------
Total deposits 1,008,728 951,910
Short-term borrowings (note H) 137,212 208,681
Other liabilities (notes K and L) 23,173 22,342
Long-term debt (note I) 141,048 94,825
--------- ---------
Total liabilities 1,310,161 1,277,758
Commitments and contingencies
(notes E, O and P) - -
Stockholders' equity (notes Q5 and R)
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 1,201 902
Retained earnings 55,233 49,878
--------- ---------
Total stockholders' equity 125,065 119,411
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,435,226 $1,397,169
========= =========
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)
1997 1996 1995
-------- -------- --------
Interest and dividend income
Interest and fees on loans $ 93,025 $ 96,825 $ 93,958
Interest and dividends on investment
securities
Taxable interest income 15,907 10,501 15,563
Nontaxable interest income 207 209 252
Dividends 2,001 1,874 1,467
Other interest income 1,389 1,838 476
------- ------- -------
Total interest income 112,529 111,247 111,716
Interest expense
Deposits (note G) 35,966 35,142 36,460
Short-term borrowings 11,364 11,725 12,915
Long-term debt 6,529 6,610 8,311
------- ------- -------
Total interest expense 53,859 53,477 57,686
------- ------- -------
Net interest income 58,670 57,770 54,030
Provision for credit losses (note D) 6,250 2,410 980
------- ------- -------
Net interest income after
provision for credit losses 52,420 55,360 53,050
Other income
Service charges on deposit accounts 1,632 1,716 1,716
Other service charges and fees 2,460 2,660 5,515
Net trading account (losses) gains - (5) 61
Net realized gains on sales of available-
for-sale securities (note B) 177 1,401 4
Other (notes L and N) 2,843 2,343 3,032
------- ------- -------
Total other income 7,112 8,115 10,328
Other expenses
Salaries and employee benefits (note Q) 19,652 20,647 22,422
Net occupancy expense of
premises (notes F, O and P) 8,325 7,678 7,295
Equipment expense 3,176 2,957 2,929
Other (note J) 16,404 20,503 17,468
------- ------- -------
Total other expenses 47,557 51,785 50,114
------- ------- -------
Income before income taxes $ 11,975 $ 11,690 $ 13,264
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
(in thousands of dollars, except per share data)
1997 1996 1995
-------- -------- --------
Income before income taxes $ 11,975 $ 11,690 $ 13,264
Income tax expense (note K) 4,757 4,631 5,251
------- ------- -------
NET INCOME $ 7,218 $ 7,059 $ 8,013
======= ======= =======
Per share data (note R3)
Basic $2.03 $1.99 $2.26
==== ==== ====
Diluted $2.03 $1.99 $2.26
==== ==== ====
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, 1997
(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, 1995 $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
Net income for the year
ended December 31, 1997 - - - 7,218 7,218
Net unrealized gain on
available-for-sale
securities, net of tax - - 299 - 299
Cash dividends - $0.525
per share - - - (1,863) (1,863)
----- ------ ----- ------ -------
Balance at December 31, 1997 $3,551 $65,080 $1,201 $55,233 $125,065
===== ====== ===== ====== =======
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 1997 1996
1995
--------- --------- --
- ------
Cash flows from operating activities:
Net income $ 7,218 $ 7,059 $
8,013
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 6,250 2,410
980
Loss on disposition of premises and equipment 805 280
386
Depreciation and amortization 2,466 2,273
2,102
Net (increase) decrease in loans held for sale (20,664) 8,721
(13,806)
Deferred income taxes 416 1,799
(1,878)
Net decrease in trading securities - 96
4,901
Increase in restricted investment securities (2,248) (1,874)
(2,035)
(Increase) decrease in interest receivable (133) 804
(1,600)
Increase (decrease) in interest payable 1,022 (1,405)
649
(Increase) decrease in other assets (491) 6,470
(5,391)
Increase (decrease) in income taxes payable 1,246 (4,008)
5,985
(Decrease) increase in other liabilities (2,220) (5,513)
6,713
Other 2,322 (437)
2,364
-------- -------- -
- ------
Net cash (used in) provided by
operating activities (4,011) 16,675
7,383
Cash flows from investing activities:
Net increase in interest-bearing deposits in
other banks (13,500) (5,000)
(11,500)
Net increase in federal funds sold (4,700) -
- -
Proceeds from maturities of held-to-maturity
investment securities 9,437 2,704
43,096
Purchases of held-to-maturity investment
securities - (9,962)
(4,946)
Proceeds from sales of available-for-sale
securities 12,862 87,049
1,511
Proceeds from maturities of available-for-sale
securities 22,640 78,009
5,695
Purchase of available-for-sale securities (17,634) (94,733)
(18,445)
Net increase in loans (27,751) (20,344)
(49,150)
Capital expenditures (4,823) (3,852)
(2,382)
Proceeds from sale of premises and equipment 467 32
221
Proceeds from sale of foreclosed assets 2,400 2,191
843
Proceeds from sale of loans - 25,373
- -
-------- -------- -
- ------
Net cash (used in) provided by
investing activities (20,602) 61,467
(35,057)
-------- -------- -
- ------
Subtotal carried forward $(24,613) $ 78,142
$(27,674)
CB Bancshares, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31,
(in thousands of dollars)
1997 1996
1995
--------- --------- --
- ------
Subtotal brought forward $ (24,613) $ 78,142
$(27,674)
Cash flows from financing activities:
Net decrease in other deposits (5,369) (30,802)
(2,883)
Net increase (decrease) in time deposits 62,187 (28,771)
90,922
Net decrease in short-term borrowings (71,469) (30,679)
(35,543)
Proceeds from long-term debt 89,672 45,335
27,500
Principal payments on long-term debt (43,696) (52,098)
(32,831)
Cash dividends paid (1,694) (4,614)
(4,620)
-------- -------- -
- ------
Net cash provided by (used in)
financing activities 29,631 (101,629)
42,545
-------- -------- -
- ------
INCREASE (DECREASE) IN CASH 5,018 (23,487)
14,871
Cash and due from banks at beginning of year 40,132 63,619
48,748
-------- -------- -
- ------
Cash and due from banks at end of year $ 45,150 $ 40,132 $
63,619
======== ========
=======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings $ 52,837 $ 54,882 $
57,037
Income taxes 3,711 6,538
3,874
Supplemental schedule of non-cash investing activity:
During 1996, the Company securitized $81,329 mortgage loans into mortgage-
backed securities classified as held-to-maturity.
The accompanying notes are an integral part of these statements.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
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.
Held-to-Maturity. Bonds, notes, mortgage-backed securities and debentures
for which the Company has the positive intent CB Bancshares, Inc. and
Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities (continued)
---------------------------------
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,
mortgage-backed securities, 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, 1997, 1996, and 1995
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 adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on origination loans.
Loan origination fees and certain direct origination costs are deferred and
recognized as an adjustment of the yield of the related loan. 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.
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.
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 CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
4. Loans (continued)
-----------------
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 residential mortgage, and consumer installment
loans.
5. Premises and Equipment
----------------------
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided on both the straight-line and
accelerated methods over the estimated useful lives of each type of asset.
Leasehold improvements are amortized over the life of the respective lease
or the estimated useful lives of the improvements, whichever is shorter.
The estimated lives for depreciation and amortization are 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
--------
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 CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
7. Goodwill (continued)
--------------------
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.
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 CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
9. Stock-Based Compensation (continued)
------------------------------------
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
---------------------------
As part of its risk management activities, the Company uses interest rate
swaps and caps to modify the interest rate characteristics of certain
assets and liabilities. Amounts receivable or payable under interest rate
swap and cap agreements are recognized as interest income or expense under
the accrual method 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.
Unrealized gains and losses on the swaps are not recognized in the balance
sheet.
Gains and losses on hedges of existing assets or liabilities from interest
rate options and forward contracts are included in the carrying amounts of
those assets or liabilities and are ultimately recognized in income as part
of those carrying amounts. The derivatives contracts are designed as
hedges when acquired. They are expected to be effective economic hedges
and have high correlation with the items being hedged at inception and
throughout the hedge period. Movements in the item being hedged and in the
hedging instruments are monitored throughout the period of the hedge for
high correlation.
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
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
10. Risk Management Instruments (continued)
---------------------------------------
when the hedged transaction occurs. Gains and losses on early terminations
of contracts that modify the characteristics of designated assets or
liabilities are deferred and amortized as an adjustment to the yield of the
related assets or liabilities over their remaining lives.
11. Net Income Per Share
--------------------
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which
specifies the computation, presentation, and disclosure requirements for
earnings per share.
Basic earnings per common share are based on the weighted average number of
common shares outstanding of 3,551,228 for 1997, 1996 and 1995.
Diluted earnings per common share are based on the assumption that all
dilutive potential common shares and dilutive stock options were converted
at the beginning of the year.
12. Cash and Cash Equivalents
-------------------------
For purposes of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the
balance sheet caption "cash and due from banks."
13. Loan Servicing
--------------
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
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
13. Loan Servicing (continued)
--------------------------
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.
14. Repurchase Agreements and Reverse Repurchase Agreements
-------------------------------------------------------
The Company adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125), as amended by Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statements No. 125 - An Amendment of FASB
Statement No. 125" (SFAS 127), on January 1, 1997. SFAS 125 applies a
control oriented, financial components approach to financial-asset-transfer
transactions whereby the Company (1) recognizes the financial and servicing
assets it controls and the liabilities it has incurred, (2) derecognizes
financial assets when control has been surrendered, and (3) derecognizes
liabilities once they have been extinguished. Under SFAS 125, control is
considered to have been surrendered only if: (i) the transferred assets
have been isolated from the transferor and its creditors, even in
bankruptcy or other receivership, (ii) the transferee has the right to
pledge or exchange the transferred assets, or is a qualifying special-
purpose entity (as defined) and the holders of beneficial interests in that
entity have the right to pledge or exchange those interest and (iii) the
transferor does not maintain effective control over the transferred assets
through an agreement with both entities and obligates it to repurchase or
redeem those assets if they were not readily obtainable elsewhere.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
14. Repurchase Agreements and Reverse Repurchase Agreements
(continued)
-------------------------------------------------------
If any of these conditions are not met, the Company accounts for the
transfer as a secured borrowing. Securities purchased under agreements to
resell and securities sold under agreements to repurchase generally qualify
as financing transactions under SFAS 125, and are carried at the amounts at
which the securities subsequently will be resold or reacquired as specified
in the respective agreements; such amounts include accrued interest.
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
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Values of Financial Instruments (continued)
------------------------------------------------
instrument. The carrying amounts are the amounts at which the financial
instruments are reported in the financial statements.
Cash and due from banks, and interest-bearing deposits in other banks: The
balance sheet carrying amounts for cash and short-term instruments
approximate the estimated fair values of such assets.
Trading account assets: The balance sheet carrying amounts for trading
account assets are based on quoted market prices where available. If
quoted market prices are not available, fair values are estimated on quoted
market prices of comparable instruments, except in the case of certain
options and swaps for which pricing models are used.
Investment securities (including mortgage-backed securities): Fair values
for investment securities are based on quoted market prices, if available.
If quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
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,
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
15. Fair Values of Financial Instruments (continued)
------------------------------------------------
considering the remaining terms of the agreements and the counterparties'
credit standing.
Derivative financial instruments: Estimated fair values for derivative
financial instruments (swaps, caps, forwards, and options) are based upon
current settlement values (financial forwards); or if there are no relevant
comparables, on pricing models or formulas using current assumptions
(interest rate swaps and options).
Deposits: The fair values estimated for demand deposits (e.g., interest
and non-interest bearing checking accounts, passbook savings, and certain
types of money market accounts) are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying amounts).
The carrying amounts of variable-rate, fixed-term money market accounts and
time deposits approximate their fair values at the reporting date. Fair
values of fixed rate time deposits are estimated using a discounted cash
flow calculation that applies interest rates currently being offered to a
schedule of aggregated expected monthly time deposit maturities. The
carrying amount of accrued interest payable approximates its fair value.
Short-term borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, advances from the Federal Home Loan
Bank (FHLB) and other short-term borrowings approximate their fair values.
Long-term debt: The fair values of the Company's long-term debt (other
than deposits) are estimated using discounted cash flow analyses, based on
the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
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
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
16. Use of Estimates (continued)
----------------------------
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 1996 and 1995 financial
statements to conform to the 1997 presentation.
NOTE B - INVESTMENT SECURITIES
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:
1997
--------------------------------------------
- -
Gross Gross
Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- --------
- -
(in thousands of dollars)
Held-to-Maturity Securities:
States and political
subdivisions $ 101 $ 3 $ - $ 104
Mortgage-backed securities 88,296 4,081 41 92,336
------- ----- --- -------
TOTAL $ 88,397 $4,084 $ 41 $92,440
======= ===== === ======
Available-for-Sale Securities:
U.S. Treasury and other
U.S. Government agencies
and corporations $ 49,104 $ 347 $ 28 $ 49,423
States and political
subdivisions 4,923 175 - 5,098
Mortgage-backed securities 64,306 1,552 59 65,799
------- ----- --- -------
TOTAL $118,333 $2,074 $ 87 $120,320
======= ===== === =======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE B - INVESTMENT SECURITIES (continued)
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
======= ===== === =======
At December 31, 1997 and 1996, securities with an aggregate carrying value
of $100,002,000 and $71,850,000, respectively, were pledged as collateral
for public deposits, securities sold under agreements to repurchase and for
other purposes required or permitted by law (notes H and I).
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE B - INVESTMENT SECURITIES (continued)
The scheduled maturities of securities classified as held-to-maturity and
available-for-sale at December 31, 1997 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 $ - $ - $ 6,984 $ 7,004
Due after one year
through five years 101 104 32,252 32,483
Due after five years
through ten years - - 13,815 14,043
Due after ten years - - 976 991
------ ------- ------- -------
Subtotal 101 104 54,027 54,521
Mortgage-backed securities 88,296 92,336 64,306 65,799
------ ------- ------- -------
TOTAL $88,397 $ 92,440 $118,333 $120,320
====== ======= ======= =======
Proceeds on sale of securities classified as available-for-sale during
1997, 1996, and 1995 were $12,862,000, $87,049,000, and $1,511,000,
respectively. Gross realized gains on sales of securities classified as
available-for-sale were $268,000, $1,664,000, and $4,000 during 1997, 1996,
and 1995, respectively. Gross realized losses on sales of securities
classified as available-for-sale were $91,000, $263,000, and $-0- during
1997, 1996, and 1995, respectively. The Company provided for income tax
expenses of approximately $71,000 on net securities gains during 1997
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE C - LOANS
The carrying amounts and estimated fair value of the loan portfolio at
December 31, are as follows:
1997 1996
---------------------- -----------------
- -----
Estimated
Estimated
Carrying fair Carrying
fair
amounts value amounts
value
---------- ---------- ---------- -----
- -----
(in thousands of dollars)
Commercial and financial $ 186,418 $ 183,763 $ 170,228 $
169,518
Real estate
Construction 41,069 34,548 28,699
28,634
Commercial 129,603 121,722 144,466
135,407
Residential 618,294 622,140 609,210
625,976
Installment and consumer 79,363 77,835 84,456
84,504
--------- --------- --------- ----
- -----
Total loans 1,054,747 1,040,008 1,037,059
1,044,039
Less
Unearned discount 5 - 7
- -
Net deferred loan fees and costs 5,437 - 5,498
- -
Allowance for credit losses 16,365 - 15,431
- -
--------- --------- --------- ----
- -----
LOANS, NET $1,032,940 $1,040,008 $1,016,123
$1,044,039
========= ========= =========
=========
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, 1997, 1996, and 1995
NOTE C - LOANS (continued)
During 1997, loans to such parties are summarized as follows:
(in thousands
of dollars)
Balance at January 1, 1997 $ 5,298
New loans 3,658
Repayments (1,603)
Other changes (1,557)
------
Balance at December 31, 1997 $ 5,796
======
Other changes include loans outstanding at January 1, 1997 to companies and
individuals not previously affiliated with officers and directors of the
Company less loans to former officers and directors.
NOTE D - ALLOWANCE FOR CREDIT LOSSES
Changes in the consolidated allowance for credit losses are as follows:
1997 1996 1995
------- ------- -------
(in thousands of dollars)
Balance at January 1, $15,431 $14,576 $14,326
Provisions charged to expense 6,250 2,410 980
Recoveries 609 350 522
Loans charged-off (5,925) (1,905) (1,252)
------ ------ ------
Balance at December 31, $16,365 $15,431 $14,576
====== ====== ======
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired was $8,483,000 and $10,787,000, respectively.
The total allowance for credit losses related to these loans was $2,101,000
and $2,129,000 on December 31, 1997 and 1996, respectively. The average
recorded investment in impaired
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE D - ALLOWANCE FOR CREDIT LOSSES (continued)
loans during the years ended December 31, 1997 and 1996 was $10,544,000 and
$5,574,000, respectively. For the years ended December 31, 1997 and 1996,
the Company recognized $131,000 and $109,000, respectively, of interest
income on impaired loans using the cash basis of income recognition.
NOTE E - LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage
loans, including those underlying mortgage-backed securities serviced for
others, were $399,497,000 and $431,743,000 at December 31, 1997 and 1996,
respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits, were approximately $2,893,000
and $2,843,000 at December 31, 1997 and 1996, respectively.
NOTE F - PREMISES AND EQUIPMENT
The consolidated premises and equipment at December 31, are as follows:
1997 1996
------- -------
(in thousands
of dollars)
Premises $20,684 $18,819
Equipment 18,962 18,350
------ ------
Total cost 39,646 37,169
Less accumulated depreciation
and amortization 20,334 18,942
------ ------
NET CARRYING VALUE $19,312 $18,227
====== ======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE F - PREMISES AND EQUIPMENT (continued)
Depreciation and amortization charged to operations for the years ended
December 31, are as follows:
1997 1996 1995
------ ------ ------
(in thousands of dollars)
Net occupancy expenses $ 715 $ 389 $ 380
Equipment expenses 1,751 1,884 1,722
------ ------ -----
TOTAL DEPRECIATION
AND AMORTIZATION $2,466 $2,273 $2,102
===== ===== =====
NOTE G - DEPOSITS
The carrying amounts and estimated fair value of deposits at December 31,
consist of the following:
1997 1996
---------------------- --------------
- -----
Estimated
Estimated
Carrying fair Carrying
fair
amounts value amounts
value
---------- ---------- -------- ----
- -----
(in thousands of dollars)
Non-interest bearing $ 110,577 $ 110,577 $113,043
$113,043
Interest bearing
Savings, money market and
NOW deposits 343,928 343,928 346,831
346,831
Time deposits of $100,000 or more 211,314 210,735 176,869
176,801
Time deposits of less than $100,000 342,909 343,185 315,167
314,411
--------- --------- ------- --
- -----
Total interest bearing 898,151 897,848 838,867
838,043
--------- --------- ------- --
- -----
TOTAL DEPOSITS $1,008,728 $1,008,425 $951,910
$951,086
========= ========= =======
=======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE G - DEPOSITS (continued)
Interest expense on deposits for the years ended December 31, are as
follows:
1997 1996 1995
------- ------- -------
(in thousands of dollars)
Savings, money market and
NOW deposits $ 8,940 $ 8,692 $ 8,322
Time deposits of $100,000 or more 9,400 9,578 12,675
Time deposits of less than $100,000 17,626 16,872 15,463
------ ------ ------
TOTAL INTEREST EXPENSE $35,966 $35,142 $36,460
====== ====== ======
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
(in thousands
of dollars)
1998 $479,880
1999 48,188
2000 17,518
2001 5,993
2002 2,644
-------
$554,223
=======
NOTE H - SHORT-TERM BORROWINGS
The carrying amounts of short-term borrowings at December 31, consist of
the following:
1997 1996
-------- --------
(in thousands
of dollars)
Federal funds purchased $ - $ 9,300
Advances from the Federal Home Loan Bank 136,700 198,810
Federal treasury tax and loan note 512 571
------- -------
TOTAL SHORT-TERM BORROWINGS $137,212 $208,681
======= =======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE I - LONG-TERM DEBT
The carrying amounts and estimated fair values of long-term borrowings
consist of the following at December 31:
1997 1996
-------------------- -------------------
- -
Estimated
Estimated
Carrying fair Carrying fair
amounts value amounts value
-------- --------- -------- --------
- -
(in thousands of dollars)
Advances from the Federal Home
Loan Bank $140,040 $127,090 $93,067 $97,822
Collateralized mortgage
obligations 1,008 1,008 1,758 1,758
------- ------- ------ ------
TOTAL LONG-TERM DEBT $141,048 $128,098 $94,825 $99,580
======= ======= ====== ======
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 $99,180,000 and $152,155,000, loans of $585,413,000 and
$580,663,000, and interest-bearing deposits in other banks of $30,000,000
and $16,500,000 in 1997 and 1996, respectively, and all stock in the FHLB.
FHLB advances are under credit line agreements of $456,371,000 in 1997.
The collateralized mortgage obligations, including a premium of $186,000,
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 $4,214,000.
Aggregate maturities of long-term advances from the FHLB for the five years
following December 31, 1997 are as follows: 1998, $65,000,000; 1999,
$30,000,000; 2000, $23,000,000; 2001, $2,000,000, 2002, $20,000,000.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE J - OTHER EXPENSES
Other expenses for the year ended December 31, are as follows:
1997 1996 1995
------- ------- -------
(in thousands of dollars)
Legal and professional fees $ 4,748 $ 4,467 $ 2,904
Voluntary separation benefits - 3,162 -
Merchant interchange fees - - 1,616
Advertising and promotion 2,273 1,917 2,083
Deposit insurance premium 406 3,282 1,472
Other 8,977 7,675 9,393
------ ------ ------
TOTAL $16,404 $20,503 $17,468
====== ====== ======
NOTE K - INCOME TAXES
The consolidated provision for income taxes for the years ended December
31, consist of the following:
1997 1996 1995
------ ------ -------
(in thousands of dollars)
Currently payable
Federal $3,949 $2,434 $ 5,048
Hawaii 392 398 2,081
----- ------ ------
Total currently payable 4,341 2,832 7,129
Deferred
Federal 232 1,459 (1,554)
Hawaii 184 340 (324)
----- ----- ------
Total deferred 416 1,799 (1,878)
----- ----- ------
TOTAL INCOME TAXES $4,757 $4,631 $ 5,251
===== ===== ======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE K - 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:
1997 1996
------- -------
(in thousands
of dollars)
Deferred tax assets
Allowance for credit losses $ 4,953 $ 4,570
Hawaii state franchise taxes 317 184
Gain on sale of building 1,872 2,039
Deferred compensation 1,437 1,445
Other 1,602 1,539
------ ------
Total deferred tax assets 10,181 9,777
Deferred tax liabilities
FHLB stock dividends 5,871 5,076
Deferred loan fees 3,844 3,407
Net unrealized gain on available-for-sale
securities 786 591
Unrealized losses on loans 143 382
Other 1,712 1,888
------ ------
Total deferred tax liabilities 12,356 11,344
------ ------
NET DEFERRED TAX LIABILITIES $ 2,175 $ 1,567
====== ======
The Company's effective income tax rate differed from the federal statutory
rate as follows:
1997 1996 1995
----- ----- -----
Federal statutory rate 35.0% 35.0% 35.0%
Tax exempt interest (2.7) (3.2) (2.8)
Hawaii State franchise taxes, net of
federal tax benefit 4.6 4.6 5.6
Amortization of goodwill 2.5 2.6 2.1
Other 0.3 0.6 (0.3)
---- ---- ----
Effective income tax rate 39.7% 39.6% 39.6%
==== ==== ====
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE K - INCOME TAXES (continued)
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, 1996.
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.
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.
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 not provided deferred taxes on the balance of its tax bad
debt reserves as of the June 30, 1988 base year.
Included in the retained earnings of the Association at December 31, 1997
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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE L - 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 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 1997,
1996 and 1995. As of December 31, 1997, the deferred gain was $5,235,000.
NOTE M - RISK MANAGEMENT ACTIVITIES
The Company's principal objective in holding or issuing derivatives and
certain other financial instruments for purposes other than trading is the
management of interest rate and mortgage banking activities risks arising
out of non-trading assets and liabilities. The operations of the Company
are subject to risk of interest rate fluctuations to the extent that
interest-earning assets (including investment securities) and interest-
bearing liabilities mature or reprice at different times or in differing
amounts. Risk management activities are aimed at optimizing net interest
income, given levels of interest rate and mortgage banking activities risks
consistent with the Company's business strategies.
Asset-liability risk management activities are conducted in the context of
the Company's asset sensitivity to interest rate changes. This asset
sensitivity arises due to interest-earning assets repricing more frequently
than interest-bearing liabilities. This means that if interest rates are
declining, margins will narrow as assets reprice downward more quickly than
liabilities. The converse applies when rates are rising.
To achieve its risk management objective, the Company uses a combination of
derivative financial instruments, particularly interest rate swaps and
caps, options and forward contracts.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE M - RISK MANAGEMENT ACTIVITIES
The notional principal amounts of interest-rate swaps outstanding were
$10,000,000; $25,000,000; and $50,000,000 at December 31, 1997, 1996 and
1995, respectively. The estimated fair values of those interest-rate swaps
were $(17,000), $(127,000), and $(940,000) at December 31, 1997, 1996 and
1995, 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, 1997, 1996
and 1995, respectively.
Purchased interest rate caps require the payment of a fee for the right to
receive interest payments on the contractual notional amount when a
floating rate (typically LIBOR) rises above a strike rate. The impact on
net interest income is the excess of the floating rate over the strike rate
less the periodic amortization of the premium paid. The notional principal
amounts of purchased interest rate caps outstanding and estimated fair
values were $5,000,000 and $5,066 at December 31, 1997, respectively. The
interest rate caps have terms maturing within two years.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE M - RISK MANAGEMENT ACTIVITIES (continued)
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.
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
outstanding at December 31, 1997 have terms maturing within one year.
1997 1996 1995
------- ------- -------
(dollars in thousands)
Pay fixed swaps - notional amount $10,000 $25,000 $50,000
Average receive rate 5.88% 5.50% 5.88%
Average pay rate 6.25% 6.52% 6.50%
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 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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE M- RISK MANAGEMENT ACTIVITIES (continued)
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 consolidated
balance sheets as either other assets or other liabilities. The deferred
gains and losses are included in the carrying amounts of the securities
until they are sold, which normally occurs within one year of entering into
the commitment.
Interest rate options written and purchased - Interest rate options are
contracts that allow the holder of the option to purchase or sell a
financial instrument at a specified price and within a specified period of
time from the seller or "writer" of the option. As a writer of options,
the Company receives a premium at the outset and then bears the risk of an
unfavorable change in the price of the financial instrument underlying the
option. As a purchaser of options, the Company pays a premium and may then
exercise the option if the price movement of the underlying financial
instrument is favorable to the Company. As of December 31, 1997, 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.
NOTE N - CREDIT-RELATED INSTRUMENTS
At any time, the Company has outstanding a significant number of
commitments to extend credit. These commitments take the form of approved
lines of credit and loans, 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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE N - CREDIT-RELATED INSTRUMENTS (continued)
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.
1997 1996 1995
------------------ ------------------ ------------------
Estimated Estimated Estimated
Notional fair Notional fair Notional fair
amount value amount value amount value
-------- --------- -------- --------- -------- ---------
(in thousands of dollars)
Loan commitments $165,153 $438 $155,928 $620 $157,158 $408
Credit card
commitments - - - - 20,784 81
Guarantees and
letters of credit 6,828 76 9,336 107 7,863 92
These credit-related financial instruments have off-balance-sheet risk
because only origination fees and accruals for probable losses are
recognized in the consolidated balance sheets until the commitments are
fulfilled or expire. Credit risk represents the accounting loss that would
be recognized at the reporting date if counterparties failed completely to
perform as contracted. The credit risk amounts are equal to the
contractual amounts, assuming that the amounts are fully advanced and that
the collateral or other security is of no value.
The Company's policy is to require suitable collateral to be provided by
certain customers prior to the disbursement of approved loans. For retail
loans, the Company usually retains a security interest in the property or
products financed, which provides repossession rights in the event of
default by the customer. Guarantees and letters of credit also are subject
to strict credit assessments before being provided. Those agreements
specify monetary limits to the Company's obligations. Collateral for
commercial loans, guarantees, and letters of credit is usually in the form
of cash, inventory, marketable securities, or other property. In 1996, the
Company sold its credit card portfolio to an unrelated third party
resulting in a gain of $623,000.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE O - 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.
The Association, which previously leased approximately 56% of the building,
terminated its lease in March 1997. Prior to the Association terminating
its sublease, the plaintiffs became delinquent in their lease rent to the
fee owner and in their real property tax payments despite having collected
sublease rents and real property tax assessments in advance from the
Association and other tenants. 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 had a liability to
the landowner for the underlying ground lease ($65,333 per month) in
connection with any default by plaintiffs in lease payments to the
landowner, even though the Association no longer occupied such leased
space. The monthly rental payments of $65,333 required by the ground lease
were substantially in excess of current rental market values, which
restricted the ability of the Association to mitigate potential losses.
The landowner subsequently sued the Association and the plaintiff. The
action was never served on the Association and was settled and dismissed
after the filing of a motion for the appointment of a
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE O - COMMITMENTS AND CONTINGENCIES (continued)
receiver. Effective June 1, 1997, the plaintiffs reassigned the lease and
legal title of the ISL Building to the Association pursuant to an agreement
among the landowner, the Association and the plaintiff. As a result, the
Association currently controls the operation of the 1111 Bishop Street
Building. However, the agreement did not release the Association from
obligations under the lease or terminate the litigation between the
Association and the plaintiff. The agreement also established a $5,000,000
cap on the amount of damages the Association can recover from the plaintiff
with respect to the assignment. The ground lease rent is fixed until 2002,
at which time the rent will be renegotiated for two subsequent ten-year
periods. The ground lease term expires in 2021. In no event would the
negotiated lease rent for any period be less than $30,000 per year. 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 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 P - 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:
1997 1996 1995
------ ------ ------
(in thousands of dollars)
Rental expense $6,989 $7,236 $7,392
Sublease income 1,380 853 789
----- ----- -----
TOTAL RENT $5,609 $6,383 $6,603
===== ===== =====
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE P - 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)
1998 $ 5,508
1999 5,239
2000 4,814
2001 3,891
2002 3,373
Later years 33,737
------
TOTAL $56,562
======
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 Q - 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. 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 1997, 1996, and 1995.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE Q - 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 1997, 1996, and 1995 were $407,000, $408,000 and $486,000,
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, 1997, 1996 and 1995 amounted
to $641,000, $444,000, and $1,421,000, respectively. The Company is the
beneficiary of life insurance
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE Q - EMPLOYEE BENEFIT PLANS AND VOLUNTARY SEPARATION PROGRAM
(continued)
4. Deferred Compensation (continued)
---------------------------------
policies with a cash surrender value of $10,320,000 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.
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.
During 1997, the Company amended the terms of the options granted in 1995
and 1994. The amendment provides that the performance options granted
shall become exercisable in full on
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE Q - EMPLOYEE BENEFIT PLANS AND VOLUNTARY SEPARATION PROGRAM
(continued)
5. Stock Compensation Plan (continued)
-----------------------------------
the later of the first anniversary of the grant date or the effective date
of the amendment. The amendment also fixes the exercise price of the index
options granted in 1995 and 1994 at $31.29 and $37.22, respectively. On
December 15, 1997, the Company granted an additional 72,500 stock options.
The exercise price of these options is $43.00 per share. The options
become exercisable on the first anniversary of the grant date and terminate
ten years after the grant date.
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 net income and net
income per share would have been the pro forma amounts below:
1997 1996
---------- ----------
Pro forma:
Net income $7,032,000 $6,969,000
Earnings per share:
Basic $1.99 $1.96
Diluted $1.99 $1.96
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 1997; and grants in 1995, respectively;
expected dividend of 0.41% and 3.30%; expected volatility of 33.89% and
13.40%; risk-free interest rate of 5.78% and 5.35%; and expected life of
5.7
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE Q - EMPLOYEE BENEFIT PLANS AND VOLUNTARY SEPARATION PROGRAM
(continued)
5. Stock Compensation Plan (continued)
-----------------------------------
years and 5.0 years. The weighted-average fair value of options granted
during 1997 and 1995 was $17.05 and $4.06, respectively.
Transactions involving stock options are summarized as follows:
Stock options Weighted-average
Description outstanding exercise price
----------- ------------- ----------------
Balance, January 1, 1995 51,450 $33.50
Granted 54,200 $29.00
Forfeited (4,400) $34.94
-------
Balance, December 31, 1995 101,250 $31.43
Forfeited (12,300) $31.75
-------
Balance, December 31, 1996 88,950 $32.05
Granted 72,500 $43.00
Forfeited (26,750) $32.72
-------
Balance, December 31, 1997 134,700 $38.59
=======
As of December 31, 1997, stock options outstanding had exercise prices
between $29.00 and $43.00 and a weighted-average remaining contractual life
of 8.4 years and 62,200 stock options were exercisable with a weighted-
average exercise price of $32.56. 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 price of $33.15.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE Q - EMPLOYEE BENEFIT PLANS AND VOLUNTARY SEPARATION PROGRAM
(continued)
5. Stock Compensation Plan (continued)
-----------------------------------
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 1997, 1996, and 1995.
Upon the occurrence of a reorganization event, as defined in the SCP, the
Committee may in its discretion provide that the options granted shall be
terminated unless exercised within 30 days of notice and advance the
exercise dates of any or all outstanding options.
NOTE R - STOCKHOLDERS' EQUITY
1. Regulatory Matters
------------------
The Company, the Bank and the Association are 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
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE R - STOCKHOLDERS' EQUITY (continued)
1. Regulatory Matters (continued)
------------------------------
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, 1997, that the Company, the Bank and the Association meet
all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the regulatory
agencies categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as 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.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE R - STOCKHOLDERS' EQUITY (continued)
1. Regulatory Matters (continued)
------------------------------
The Company's actual capital amounts and ratios are also presented in the
table following. No amounts were deducted from the Association's capital
for interest rate risk in 1997.
To be well
capitalized
under
prompt
For capital corrective
adequacy action
Actual purposes provisions
---------------- -------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ----- ------- ------
(dollars in thousands)
As of December 31, 1997
Total capital (to risk
weighted assets)
Consolidated $125,325 13.99% $71,669 8.00% N/A
Bank 69,181 11.57% 47,831 8.00% $59,788 10.00%
Association 53,957 16.00% 26,977 8.00% 33,722 10.00%
Tier I capital (to risk
weighted assets)
Consolidated 114,065 12.73% 35,835 4.00% N/A
Bank 61,687 10.32% 23,915 4.00% 35,873 6.00%
Association 51,178 15.18% 10,117 3.00% 20,233 6.00%
Tier I capital (to
average assets)
Consolidated 114,065 7.46% 61,154 4.00% N/A
Bank 61,687 8.14% 30,318 4.00% 37,897 5.00%
Association 51,178 7.76% 26,373 4.00% 32,966 5.00%
Tangible capital (to
adjusted total assets)
Association 51,178 7.76% 9,890 1.50% N/A
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE R- STOCKHOLDERS' EQUITY (continued)
1. Regulatory Matters (continued)
------------------------------
To be well
capitalized
under
prompt
For capital corrective
adequacy action
Actual purposes provisions
---------------- -------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ----- ------- ------
(dollars in thousands)
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, 1997, 1996, and 1995
NOTE R STOCKHOLDERS' EQUITY (continued)
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. Memorandum of Understanding
---------------------------
During 1996, the Company entered into a Memorandum of Understanding (MOU)
with the Federal Reserve Bank of San Francisco (FRB). Under the terms of
the MOU, 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.
In September 1997, the Bank also entered into a MOU with the Federal
Deposit Insurance Corporation (FDIC). The MOU requires, among other
things, that the Bank obtain concurrence from the FDIC for payment of cash
dividends, and requires the Bank to reduce certain classified assets to
specified levels within time frames set forth in the informal agreement.
3. Earnings Per Share
------------------
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which
specifies the computation, presentation, and disclosure requirements for
earnings per share.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE R STOCKHOLDERS' EQUITY (continued)
3. Earnings Per Share (continued)
------------------------------
The table below presents the information used to compute basic and diluted
earnings per common share for the year ended December 31, 1997:
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
Basic:
Income available to common
stockholders $7,218,000 3,551,228 $2.03
====
Effect of dilutive securities
Stock options - 7,859
--------- ---------
Diluted:
Income available to common
stockholders and effect
of assumed conversions $7,218,000 3,559,087 $2.03
========= ========= ====
Options to purchase 72,500 shares of common stock at $43.00 a share were
not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
common shares. The options, which expire on December 15, 2007, were still
outstanding at December 31, 1997.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE S - FINANCIAL INFORMATION OF CB BANCSHARES, INC.
(PARENT COMPANY) (continued)
The balance sheets of CB Bancshares, Inc. as of December 31, 1997 and 1996,
and the related statements of income, and cash flows for each of the three
years in the period ended December 31, 1997 are as follows:
BALANCE SHEETS
ASSETS 1997 1996
-------- --------
(in thousands of
dollars, except share
and per share data)
Cash on deposit with the Bank
and Association $ 1,467 $ 3,637
Investment in Subsidiaries
The Bank 62,591 58,778
The Association 60,667 57,413
Other 423 425
Dividend receivable from the Bank - 1,500
Premises and equipment 596 899
Other assets 513 512
------- -------
TOTAL ASSETS $126,257 $123,164
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Advances from the Bank, net $ 7 $ 7
Dividends payable 169 -
Other liabilities 1,016 3,746
------- -------
Total liabilities 1,192 3,753
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 1,201 902
Retained earnings 55,233 49,878
------- -------
Total stockholders' equity 125,065 119,411
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $126,257 $123,164
======= =======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE S - FINANCIAL INFORMATION OF CB BANCSHARES, INC.
(PARENT COMPANY) (continued)
STATEMENTS OF INCOME
1997 1996 1995
------- ------- -------
(in thousands of dollars)
Income
Dividends from Subsidiaries
The Bank $ 1,400 $ 6,262 $12,780
The Association 1,179 4,600 2,200
Other 165 462 932
------ ------ ------
Total income 2,744 11,324 15,912
Expenses 3,850 8,302 6,646
------ ------ ------
Total expenses 3,850 8,302 6,646
------ ------ ------
Operating (loss) profit (1,106) 3,022 9,266
Equity in undistributed (dividends from
subsidiaries in excess of) income
of Subsidiaries
The Bank 3,364 1,010 (4,830)
The Association 3,404 100 1,170
Other (2) (19) (161)
------ ------ ------
6,766 1,091 (3,821)
------ ------ ------
Income before income tax benefit 5,660 4,113 5,445
Income tax benefit 1,558 2,946 2,568
------ ------ ------
NET INCOME $ 7,218 $ 7,059 $ 8,013
====== ====== ======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE S - FINANCIAL INFORMATION OF CB BANCSHARES, INC.
(PARENT COMPANY) (continued)
STATEMENTS OF CASH FLOWS
1997 1996 1995
------- ------- -------
(Decrease) increase in cash (in thousands of dollars)
Cash flows from operating activities:
Net income $ 7,218 $ 7,059 $ 8,013
Adjustments to reconcile net income to net
cash (used in) provided by operations:
(Equity in undistributed) dividend from
Subsidiaries in excess of income
of Subsidiaries (6,766) (1,091) 3,821
Decrease (increase) in dividend
receivable from the Bank 1,500 (800) 462
(Increase) decrease in other assets (1) 2,227 (86)
(Decrease) increase in other liabilities (2,730) 2,862 (1,037)
------ ------ ------
Net cash (used in) provided by
operating activities (779) 10,257 11,173
Cash flows from investing activities:
Net capital expenditures 303 (899) -
------ ------ ------
Net cash provided by (used in)
investing activities 303 (899) -
Cash flows from financing activities:
Net decrease in short-term borrowings - (3,000) (5,000)
Cash dividends (1,694) (4,614) (4,620)
Decrease in advances from the Bank, net - (231) -
------ ------ ------
Net cash used in financing activities (1,694) (7,845) (9,620)
------ ------ ------
(DECREASE) INCREASE IN CASH (2,170) 1,513 1,553
Cash at beginning of year 3,637 2,124 571
------ ------ ------
Cash at end of year $ 1,467 $ 3,637 $ 2,124
====== ====== ======
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE T - ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 130, "Reporting Comprehensive Income"
(SFAS 130) and Statement of Financial Accounting Standards 131,
"Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in financial statements that are displayed with the same
prominence as other financial statements. SFAS 131 requires information to
be provided about the different types of business activities in which an
enterprise engages and the different economic environments in which it
operates. The effective date for SFAS 130 and 131 is fiscal years
beginning after December 15, 1997. The adoption of these standards is not
expected to have a material effect on the Company's consolidated financial
statements.
CB Bancshares, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1997, 1996, and 1995
NOTE U - 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.
1997 1996
--------------------------- ---------------------------
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 $ 45,150 $ 45,150 $ 40,132 $ 40,132
Interest-bearing
deposits in
other banks 30,000 30,000 16,500 16,500
Investment securities
(note B) 208,717 212,760 236,030 240,587
Restricted investment
securities 27,348 27,348 25,100 25,100
Loans receivable
(note C) 1,032,940 1,040,008 1,016,123 1,044,039
Deposits (note G) (1,008,728) (1,008,425) (951,910) (951,086)
Long-term debt (note I) (141,048) (128,098) (94,825) (99,580)
Commitments and letters
of credit (note N) 171,981 514 165,264 727
Derivative financial
instruments (note M)
In a net payable
position (10,000) (17) (25,000) (127)
Interest rate cap 5,000 5 - -
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 fill 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, 1997 and 1996
Consolidated Statements of Income - Years ended December 31, 1997, 1996 and
1995
Consolidated Statement of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows - Years ended December 31, 1997, 1996 and
1995
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, Inc. and Subsidiaries
All other schedules are omitted because they are not applicable, not material,
or because the information is included in the financial statement 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,
1997.
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 30, 1998 CB BANCSHARES, INC.
/s/ Ronald K. Migita
------------------------------------
Ronald K. Migita, 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 30, 1998
/s/ Raymond Y. Arakawa
- ------------------------------------ --------------------------------
- ---
Donald J. Andres, Director Raymond Y. Arakawa, Director
/s/ Frederic K. T. Chun
- ------------------------------------ --------------------------------
- ---
Frederic K. T. Chun, Director Tomio Fuchu, Director
/s/ James H. Kamo /s/ Ronald K. Migita
- ------------------------------------ --------------------------------
- ---
James H. Kamo, Chairman of the Ronald K. Migita, President, CEO
Board & Secretary & Director
/s/ Caryn S. Morita
- ------------------------------------ --------------------------------
- ---
Caryn S. Morita, Senior Vice Yoshiki Takada, Director
President, Assistant Secretary
& Director
/s/ Lionel Y. Tokioka
- ------------------------------------ --------------------------------
- ---
Lionel Y. Tokioka, Director H. Clifton Whiteman, Director
/s/ James M. Morita /s/ Daniel Motohiro
- ------------------------------------ --------------------------------
- ---
James M. Morita, Chairman Emeritus Daniel Motohiro, Senior Vice
President, Treasurer & Chief
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
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.