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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, 1998
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, 1999, registrant had outstanding 3,552,228 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, 1999 was approximately
$104,244,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on April 29, 1999 are incorporated by reference into Part III and IV.
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. The Company is also registered with the Office of Thrift
Supervision (the "OTS") as a savings and loan holding company. The Company has
four wholly-owned subsidiaries, City Bank, International Savings and Loan
Association, Limited (which the Company acquired in April 1994), City Finance
and Mortgage, Inc. and O.R.E., Inc. which are discussed below. City Bank and
International Savings and Loan Association, Limited, are the Company's primary
operating segments - see Note U of Notes to the Company's Consolidated Financial
Statements for segment information. At December 31, 1998, the Company had
consolidated total assets of $1,428.44 million, and total stockholders' equity
of $132.37 million.
CITY BANK
City Bank (the "Bank") is a state-chartered bank organized under the laws of the
State of Hawaii("Hawaii") in 1959. The Bank is insured by the Federal Deposit
Insurance Corporation (the "FDIC"), and provides full commercial banking
services through eleven branches on the island of Oahu, one branch on the island
of Hawaii, and one branch on the island of 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.
At December 31, 1998, the Bank had total assets of $788.91 million.
INTERNATIONAL SAVINGS AND LOAN ASSOCIATION, LIMITED
International Savings and Loan Association, Limited (the "Association") was
chartered by the Territory of Hawaii in 1925. The Association is insured with
funds administered by the FDIC and conducts its business through ten branches on
the island of Oahu and one on the island of Maui.
The Association's principal business consists of attracting deposits from the
general public and utilizing advances from the Federal Home Loan Bank (the
"FHLB") 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.
At December 31, 1998, the Association had total assets of $639.44 million.
CITY FINANCE AND MORTGAGE, INC.
City Finance and Mortgage, Inc. (inactive), a wholly-owned subsidiary of the
Company, is in the process of being liquidated.
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 and its subsidiaries are affected by the
changes in the monetary and fiscal policies of the United States of America
("U.S."), 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 the Association compete
for deposits and loans with five other commercial banks and two other savings
associations located in Hawaii. In addition to other commercial banks and
savings associations, the Bank and the Association 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. They also compete for mortgage
loans with insurance and mortgage companies.
The economy of Hawaii is supported principally by tourism, governmental
expenditures (primarily for the military), agriculture and manufacturing. A
small island economy like that 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 their related negative impact on the tourist industry. This
condition 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 5.2
percent in 1998 after growing 5.0 percent in 1997, is having a positive effect
on tourism. Visitor arrivals contracted slightly in the first eleven months of
1998 due to an improvement in westbound arrivals (3.8 percent). This increase
was not able to offset the 10.4 percent decrease in eastbound arrivals. At the
same time, Japan and the rest of Asia's influence has caused potential growth in
the islands to stall from nearly zero to negative growth in visitors and
investments.
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 sales activity strengthened in 1998, although
median resale prices continues to decline. Resale volume of single family
residences up 24.8 percent on the island of Oahu, 18.5 percent on the island of
Maui, 21.2 percent on the island of Hawaii, and 55.3 percent on Kauai. The
statewide median home resale price dropped 0.3 percent to $240,718 from $241,462
in 1997. Similarly, condominium resales rose 26.8 percent to 4,405 from 3,475 in
1997, but the median price for condominium fell 3.6 percent to $139,554, down
from $144,729 in 1997. The Hawaii real estate sales volume 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 2.0 percent in 1998, is
expected to grow at 1.2 percent in 1999. The declining trend in jobs leveled in
1998 and is expected to improve in 1999 and beyond.
REGULATORY CONSIDERATIONS
The following discussion sets forth certain elements of the regulatory framework
applicable to the Company, the Bank and the Association. 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, the
Association 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 and to certain
expressly permitted nonbanking activities. 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 the
Association, the Company is subject to OTS regulations as a savings and loan
holding company within the meaning of the Home Owners Loan Act (the "HOLA").
Among other things, the 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 Savings Association Insurance Fund (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.
On October 16, 1996, the Company entered into an informal agreement, a
Memorandum of Understanding (the "MOU"), with the Federal Reserve Bank of San
Francisco (the "FRB"), with respect to issues raised in an inspection of the
Company as of June 30, 1996 by the FRB, OTS and Hawaii Division of Financial
Institutions.
Under the terms of the MOU, 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 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 an MOU with the FDIC. This MOU was
terminated by the FDIC in March 1999, based on the adoption of a resolution by
the Bank's Board of Directors. This resolution, approved by the Bank's Board of
Directors in February 1999, requires, among other things, that the 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 in the
resolution.
Dividend Restrictions. The principal source of the Company's cash flow has been
dividend payments received from the Bank and the Association. Dividends paid to
the Company by the Bank and the Association in 1998 totaled $0.82 million. Under
the laws of Hawaii, payment of dividends by the Bank and the Association, is
subject to certain restrictions, and payments of dividends by the Company are
likewise subject to certain restrictions. Under the MOU, 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 quarterly dividend was subsequently
increased to $0.06 per share in the second quarter of 1998. 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 FRB 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 the Association, 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, 1998, the Association
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 1998, the minimum ratio of total capital
to risk-weighted assets, provided for in the guidelines adopted by the FRB,
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 FRB for bank holding companies.
The FRB 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.
FRB 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 FRB 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. The Association
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, 1998, the Company, the Bank and the Association exceeded applicable capital
requirements. The consolidated capital position of the Company at December
31,1998 was as follows:
Company ratio Minimum required ratio
Risk-based Capital:
Tier 1 capital ratio 13.54% 4%
Total capital ratio 14.80% 8%
Leverage ratio 7.90% 4%
Qualified Thrift Lender Test. All savings associations, including the
Association, are required to meet a qualified thrift lender ("QTL") test to
avoid certain restrictions on their operations. Under the Federal Deposit
Insurance Corporation Improvements Act of 1991 ("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 the Association sold within 90 days of
origination, shares of stock issued by any FHLB and shares of stock issued by
FHLMC or FNMA. The Association was in compliance with the QTL test as of
December 31, 1998.
Company Support of the Bank and the Association. 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 FRB 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 FRB'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 FRB to be an unsafe and unsound banking practice or a
violation of the FRB 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 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.
Insured depository institutions are also required to have written plans and
reports relating to such institutions' efforts to achieve Year 2000 readiness.
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 insured depository
institutions 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 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 the Bank) to a Financing Corporation ("FICO") premium
assessment on domestic deposits at one-fifth of the premium rate (approximately
1.2 cents) imposed on SAIF-insured deposits (approximately 6.0 cents). Deposits
held by the Association are SAIF-insured 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 promulgated regulations that impose entrance and
exit fees on depository institutions attempting to transfer insured deposits
from the SAIF to the BIF or from the BIF to the SAIF as contemplated by the
Funds Act.
Other Regulatory Considerations. The Bank and the Association 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, 1998 the Company and its subsidiaries employed 536 persons;
499 on a full-time basis and 37 on a part-time basis. Neither the Company nor
any of its subsidiaries is a party to any collective bargaining agreements.
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:
December 31,
(in thousands of dollars) 1998 1997 1996
----------------------------
Held-to-maturity
- ----------------
State and political subdivisions - 101 102
Mortgage-backed securities - 88,296 97,729
----------------------------
$ - $ 88,397 $97,831
============================
Available-for-sale
- ------------------
U.S. Treasury $ 11,900 $ 49,104 $ 51,997
and other U.S. government
agencies and corporations
State and political subdivisions 9,581 4,923 3,219
Mortgage-backed securities 118,908 64,306 81,490
----------------------------
$140,389 $118,333 $136,706
============================
Restricted securities
- ---------------------
(See Note A3 of Notes to the
Company's Consolidated
Financial Statements $ 29,481 $ 27,348 $ 25,100
===========================
The following table sets forth the maturities of investment securities at
December 31, 1998, 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 years under 10 years 10 years
(in thousands of dollars) Amount Yield Amount Yield Amount Yield Amount Yield
-----------------------------------------------------------------
Available-for-sale
- ------------------
U.S. Treasury
and other U.S. government
agencies and corporations $ 11,900 6.33% $ - - % $ - - % $ - - %
State and political
subdivisions 725 6.37 1,003 6.29 3,382 4.87 4,471 7.27
Mortgage-backed securities 5,378 9.24 12,006 6.71 18,113 7.55 83,411 6.21
-------- -------- -------- --------
$ 18,003 7.20% $ 13,009 6.68% $ 21,495 7.13% $ 87,882 6.26%
==================================================================
A table setting forth information regarding investments in securities, including
estimated fair value and carrying value of such securities is included in Note B
of Notes to the Company's Consolidated Financial Statements.
LOAN PORTFOLIO
Total loans at December 31, 1998 decreased to $984.46 million, a $70.29 million
or 6.66% decrease over the previous year. The reduction in total loans was
primarily due to decreases in real estate loans. A comparative breakdown of the
portfolio during the last five years is 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:
December 31,
(in thousands of dollars) 1998 1997 1996 1995 1994
------------------------------------------------------------
Commercial and financial $ 191,128 $ 186,418 $ 170,228 $ 168,497 $ 167,460
Real estate - construction 25,453 41,069 28,699 18,408 24,448
Real estate - mortgage 682,313 747,897 753,676 851,242 797,997
Installment and consumer 85,562 79,363 84,456 90,378 91,738
------------------------------------------------------------
$ 984,456 $1,054,747 $1,037,059 $1,128,525 $1,081,643
============================================================
Commercial and financial. Loans outstanding in this category increased to
$191.12 million, an increase of $4.71 million or 2.52% from year-end 1997. Loans
in this category are primarily loans to small and medium-sized businesses and
professionals doing business in Hawaii. The average loan balance was $154,000 at
year end 1998. 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 Company has made a limited number
of unsecured loans in this category.
Real estate - mortgage. Real estate - mortgage loans decreased to $682.31
million at year-end 1998, a decrease of $65.58 million or 8.77% from year-end
1997. During 1998, the Company securitized $90.85 million of mortgage loans into
mortgage-based securities. The Company also sold $12.89 million in delinquent
loans - see further discussion in "Other Income" of Management's Discussion and
Analysis of Financial Condition. The average size of loans in this category at
December 31, 1998 was approximately $135,000. In 1998, the Company 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 and consumer") outstanding as of December 31,
1998, which, based on remaining scheduled repayments of principal, are due in
the periods indicated:
December 31, 1998 Maturing
Within After 1 After
(in thousands of dollars) 1 year Within 5 years 5 years Total
---------------------------------------------
Commercial and financial $153,714 $ 20,435 $ 16,979 $191,128
Real estate-construction 13,345 8,332 3,776 25,453
---------------------------------------------
$167,059 $ 28,767 $ 20,755 $216,581
=============================================
The following table sets forth the sensitivity of the above amounts due after
one year:
December 31, 1998
Fixed Variable
(in thousands of dollars) Rate Rate Total
------------------------------
Due after 1 but within 5 years $ 11,213 $ 17,554 $ 28,767
Due after 5 years 15,291 5,464 20,755
------------------------------
$ 26,504 $ 23,018 $ 49,522
==============================
RISK ELEMENTS IN LENDING ACTIVITIES
The following table presents information concerning the aggregate amount of
non-performing assets. Non-performing assets are comprised of: (a) assets
accounted for on a non-accrual basis; and (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 (a) or (b) above.
December 31,
(in thousands of dollars) 1998 1997 1996 1995 1994
--------------------------------------------
Loans accounted for on a non-accrual basis:
Commercial & financial $ 4,106 $ 2,996 $ 4,321 $ 2,538 $ 1,484
Real estate 12,505 21,480 19,064 11,800 5,882
---------------------------------------------
$16,611 $24,476 $23,385 $14,338 $ 7,366
Loans contractually past
due 90 days or more as
to principal or interest 2,832 3,913 2,379 3,113 5,946
--------------------------------------------
Total non-performing loans 19,443 28,389 25,764 17,451 13,312
Other real estate owned - net of
valuation allowance 8,583 3,686 1,844 1,715 2,122
--------------------------------------------
Total non performing assets $28,026 $32,075 $27,608 $19,166 $15,434
============================================
Restructured loans
Real estate $11,149 $ 2,917 - - -
============================================
Ratio of non-performing loans
to period end total loans 1.97% 2.69% 2.48% 1.54% 1.23%
Ratio of non-performing assets
to period end total assets 1.96% 2.23% 1.98% 1.27% 1.07%
Non-accrual loans declined to $16.61 million at December 31, 1998 a decrease of
$7.87 million, or 32.15%, from the $24.48 million at year end 1997. During 1998,
the Company sold $12.89 million in delinquent loans (including $6.8 million
non-accrual). This sale resulted in a loss of $2.36 million -see further
discussion in "Other Income" of Management's Discussion and Analysis of
Financial Condition and Operating Results. Interest income which would have been
accrued in 1998 on non-accrual loans (had these loans been current) amounted to
approximately $1.72 million, which compares to the $0.30 million interest income
recorded on these loans during 1998.
At December 31, 1998, OREO (net of valuation allowance) amounted to $8.58
million, an increase of $4.90 million, or 132.85%, from the prior year. The
increase in the 1998 OREO balance and provision for OREO losses reflects the
continued weakness in the Hawaii economy and related decline in real estate
values. The Company has also been more aggressive in its delinquent loan
collection efforts resulting in a higher level of foreclosures and related OREO.
Restructured loans increased to $11.15 million at December 31, 1998, an increase
of $8.23 million from the prior year end. The increase was due to the
restructuring of mortgage loans to a group of investors in a condominium project
located on the island of Maui. These mortgage loans are to 139 individual
investors. The average loan amount is approximately $83,000 and is secured by
the individual condominum units.
It is the Company's policy to discontinue accrual of interest on loans when, in
management's opinion, the borrower may be unable to make scheduled payments.
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.
SUMMARY OF CREDIT LOSS EXPERIENCE
The following table summarizes 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,
(in thousands of dollars) 1998 1997 1996 1995 1994
----------------------------------------
Balance at
beginning of year $16,365 $15,431 $14,576 $14,326 $ 9,816
Allowance of the Association
at acquisition date - - - - 3,128
Charge offs:
Commercial and financial 533 2,489 537 87 602
Real estate - mortgage 5,854 2,315 495 563 300
Installment and consumer 737 1,121 873 602 694
----------------------------------------
Total charge-offs 7,124 5,925 1,905 1,252 1,596
Recoveries: ----------------------------------------
Commercial and financial 107 233 30 92 609
Real estate - mortgage 534 26 74 142 14
Installment and consumer 453 350 246 288 391
----------------------------------------
Total recoveries 1,094 609 350 522 1,014
----------------------------------------
Net loans charged-off 6,030 5,316 1,555 730 582
Provision charged to expense 7,436 6,250 2,410 980 1,964
----------------------------------------
Balance at end of year $17,771 $16,365 $15,431 $14,576 $14,326
========================================
Years ended December 31,
1998 1997 1996 1995 1994
---------------------------------------
Net charge-offs to
average loans outstanding 0.57% 0.50% 0.14% 0.07% 0.07%
Allowance for credit
losses to year-end loans 1.81% 1.55% 1.49% 1.29% 1.32%
Allowance for credit
losses to year-end
non-performing loans 91.40% 57.65% 59.89% 83.53% 107.62%
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, loan loss experience and management's estimate 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 credit losses may fluctuate and may not be
comparable from year to year.
The allowance for credit losses as a percentage of year-end total loans was
1.81% at December 31, 1998, compared to 1.55% and 1.49% at December 31, 1997 and
1996, respectively. On the other hand, the allowance for credit losses as a
percentage of non-performing loans was 91.40% at December 31, 1998, an increase
from the 57.65% and 59.89% at the end of 1997 and 1996, respectively.
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:
December 31,
(in thousands 1998 1997 1996 1995 1994
of dollars) Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1)
-----------------------------------------------------------------------------
Commercial &
financial $ 4,539 19.41% $ 3,718 17.67% $ 4,808 16.42% $ 5,039 14.91% $ 3,649 15.47%
Real estate -
Construction - 2.59% - 3.89% - 2.77% 184 1.62% 378 2.20%
Real estate -
Mortgage 9,519 69.31% 10,744 70.91% 7,021 72.67% 5,053 75.46% 4,097 73.79%
Installment and
consumer 1,264 8.69% 476 7.53% 1,412 8.14% 1,510 8.01% 1,563 8.49%
Unallocated 2,449 n/a 1,427 n/a 2,190 n/a 2,790 n/a 4,639 n/a
-----------------------------------------------------------------------------
Total $17,771 100% $16,365 100% $15,431 100% $14,576 100% $14,326 100%
=============================================================================
(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,
1998 1997 1996
Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------
Non-interest bearing
demand deposits $ 107,401 0.00% $104,361 0.00% $109,878 0.00%
Interest bearing
demand deposits 141,391 2.69% 166,632 2.61% 166,118 2.50%
Savings 208,007 2.69% 175,831 2.61% 181,900 2.50%
Time deposits 581,952 5.25% 508,379 5.32% 500,491 5.28%
---------- -------- --------
Total $1,038,751 4.29% $955,203 3.73% $958,387 3.67%
=====================================================
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 1998 is summarized below:
(in thousands of dollars)
3 months or less $111,031
Over 3 months through 6 months 73,057
Over 6 months through 12 months 35,977
Over 12 months 10,058
---------
Total $230,123
=========
SHORT-TERM BORROWINGS
The following table sets forth outstanding balances of short-term borrowings at
year-end :
December 31,
(in thousands of dollars) 1998 1997 1996
--------------------------------
Advances from the FHLB $ 56,450 $136,700 $198,810
Federal treasury tax and loan 476 512 571
Federal funds purchased and
securities sold under
repurchase agreements - - 9,300
--------------------------------
Total $ 56,926 $137,212 $208,681
================================
Average interest 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
year-end:
December 31,
(in thousands of dollars) 1998 1997 1996
--------------------------------
Advances from the FHLB:
Average interest rate at year-end 5.37% 5.63% 5.55%
Maximum outstanding at any month-end $134,447 $232,651 $226,515
Average outstanding 109,653 184,430 199,870
Average interest rate for the period 5.62% 6.16% 5.87%
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 FHLB were made under credit line agreements totaling $453.93
million, of which $264.47 million was undrawn at December 1998. See Notes H and
I of Notes to the Company's Consolidated Financial Statements.
ITEM 2. PROPERTIES
The operations of the Bank and Association 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 F of Notes 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 of Notes to the Company's
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company has prevailed in a case filed in 1996 by Plaintiffs, the purchasers
of the International Savings Building (the "ISL Building"). The plaintiffs
sought recission of the sale of the ISL Building based on alleged
misrepresentations and non-disclosure regarding ground lease negotiations and
land appraisals concerning the property. Further, the plaintiffs alleged
unreasonable demands by the fee-simple owner. In October 1998, the Company
received a jury verdict in its favor finding no defendants liable on the
Plaintiff's claims and finding the Plaintiff liable on the Company's
counterclaims. In December 1998, the trial court judge awarded the Company its
requested reimbursement of attorneys' fees. The Plaintiff has subsequently filed
a motion for reconsideration, which has not yet been decided. The Company has
not recorded any recovery amounts related to this judgement as collectibity is
uncertain.
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 consolidated
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 1998 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 March 1, 1999, 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:
1998 High Low Dividends
----------------------------
First quarter $43.00 $35.25 $0.050
Second quarter 43.00 35.25 0.060
Third quarter 40.00 30.75 0.060
Fourth quarter 34.00 30.00 0.060
1997
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
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.
Beginning in the second quarter of 1998, the quarterly dividend was increased to
$0.06 per share. The Company will continue to evaluate the dividend payments on
a quarterly basis.
ITEM 6. SELECTED FINANCIAL DATA
(in thousands of dollars,
except per share data) 1998 1997 1996 1995 1994 (1)
----------------------------------------------------------
Income Statement Data:
Interest income $ 112,060 $ 112,529 $ 111,247 $ 111,716 $ 89,350
Interest expense 53,898 53,859 53,477 57,686 34,445
Net interest income 58,162 58,670 57,770 54,030 54,905
Provision for credit losses 7,436 6,250 2,410 980 1,964
Net income 8,369 7,218 7,059 8,013 11,071
End of Year Balance Sheet Data:
Total assets 1,428,438 1,435,226 1,397,169 1,501,513 1,439,511
Total loan portfolio 984,456 1,054,747 1,037,059 1,128,525 1,081,643
Total deposits 1,084,610 1,008,728 951,910 1,011,483 923,444
Long-term debt 133,004 141,048 94,825 101,371 106,850
Stockholders' equity 132,372 125,065 119,411 116,506 111,165
Per Share Data:
Net income (basis) 2.36 2.03 1.99 2.26 3.32
Net income (diluted) 2.35 2.03 1.99 2.26 3.32
Cash dividends declared 0.23 0.53 0.98 1.30 1.30
Outstanding Shares:
Average during year 3,551,891 3,551,228 3,551,228 3,551,228 3,335,869
Selected Ratios
Return on average total assets 0.59% 0.52% 0.50% 0.54% 0.95%
Return on average
stockholder's equity 6.49% 5.90% 5.99% 7.05% 10.92%
Average stockholders'
equity to average total assets 9.05% 8.75% 8.34% 7.69% 8.67%
(1) Results include the Association from the April 4, 1994 date of acquisition.
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 of Financial Condition and Results of Operations 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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements relating to future results of the Company
(including certain projections and business trends) that are considered
"forward-looking statements." Actual results may differ materially from those
projected as a result of certain risks and uncertainties including, but not
limited to, changes in political and economic conditions, interest rate
fluctuations, competitive product and pricing pressures within the Company's
market, equity and bond market fluctuations, personal and corporate customers'
bankruptcies, inflation, acquisitions and integrations of acquired businesses,
and risks relating to Year 2000 issues. Accordingly, historical performance may
not be a reliable indicator of future earnings.
Results of Operations
Consolidated net income for 1998 was $8.37 million, an increase of 15.95% over
the $7.22 million in 1997, and an 18.56% increase from the $7.06 million
reported in 1996. Basic earnings per share was $2.36 in 1998, as compared to
$2.03 in 1997 and $1.99 in 1996. The Company's return on average stockholders'
equity was 6.49% in 1998, 5.90% in 1997 and 5.99% in 1996. The return on average
total assets for 1998 was 0.59%, as compared to 0.52% for 1997 and 0.50% for
1996. The net interest margin (on a taxable equivalent basis) was 4.35% in 1998,
compared to 4.40% and 4.36% in 1997 and 1996, respectively.
Net Interest Income
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 taxable equivalent basis, was $58.46 million in 1998, a
decrease of $0.40 million, or 0.68%, from 1997. During 1998, the Company's net
interest margin declined to 4.35%, compared to 4.40% for 1997.
As summarized on Table 2, the $0.40 million decrease in net interest income for
1998 consisted of a $0.36 million decrease in interest income coupled with a
$0.04 million increase in interest expense.
The average yield on interest-earning assets in 1998 declined by six basis
points to 8.36%, which offset the $4.76 million increase in the average balance
of interest-earning assets. The $0.36 million decrease in interest income was
primarily due to the $21.62 million decrease in the average balance of taxable
investment securities.
Interest costs on interest-bearing deposits and liabilities were relatively
stable with an increase of only $0.04 million in 1998. The 1998 increase in the
average balance of interest-bearing deposits and liabilities of $16.94 million
was partially offset by the seven basis point decrease in the average cost of
funds to 4.62%.The following table sets forth the condensed consolidated average
balance sheets, an analysis of interest income/expense and average yield/rate
for each major category of earning assets and interest-bearing deposits and
liabilities for the years indicated on a taxable equivalent basis. The taxable
equivalent adjustment is made for items exempt from federal income taxes
(assuming a 35% tax rate) to make them comparable with taxable items before any
income taxes are applied.
TABLE 1: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES
1998 1997 1996
(in thousands Average Yield/ Average Yield/ Average Yield/
of dollars) Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Interest-bearing
deposits in other
banks $ 8,539 $ 525 6.15% $ 19,387 $ 1,176 6.07% $ - $ - - %
Federal funds sold
and securities
purchased under
agreements to
resell 34,489 1,766 5.12 3,908 213 5.45 6,333 437 6.90
Taxable investment
securities 228,321 15,843 6.94 249,938 17,908 7.16 208,881 13,776 6.60
Non-taxable investment
securities 8,634 668 7.74 3,611 318 8.81 3,526 474 13.44
Loans (2) 1,063,541 93,558 8.80 1,061,925 93,104 8.77 1,111,661 96,825 8.71
------------------- ------------------ ------------------
Total interest-earning
assets 1,343,524 112,360 8.36 1,338,769 112,719 8.42 1,330,401 111,512 8.38
---------------------------------------------------------------------------------
Non-interest earning
assets:
Cash and due from
banks 31,590 24,964 35,698
Premises and
equipment 20,114 11,182 10,761
Other assets 46,606 41,050 50,345
Less allowance for
credit losses (17,041) (16,246) (15,008)
---------- ---------- ----------
Total assets $1,424,793 $1,399,719 $1,412,197
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 349,398 $ 9,393 2.69% $ 342,463 $ 8,941 2.61% $ 348,018 $ 8,692 2.50%
Time deposits 581,952 30,547 5.25 508,379 27,025 5.32 500,491 26,450 5.28
Short-term borrowings 109,653 6,158 5.62 184,430 11,364 6.16 199,870 11,725 5.87
Long-term debt 124,625 7,800 6.26 113,414 6,529 5.76 104,025 6,610 6.35
------------------- ------------------ ------------------
Total interest-bearing
deposits and
liabilities 1,165,628 53,898 4.62 1,148,686 53,859 4.69 1,152,404 53,477 4.64
---------------------------------------------------------------------------------
Non-interest-bearing
liabilities:
Demand deposits 107,401 104,361 109,878
Other liabilities 22,875 24,253 32,072
---------- ---------- ----------
Total liabilities 1,295,904 1,277,300 1,294,354
Stockholders' equity 128,889 122,419 117,843
---------- ---------- ----------
Total liabilities and
stockholders'
equity $1,424,793 $1,399,719 $1,412,197
========== ========== ==========
Net interest income
and margin on total
earning assets 58,462 4.35% 58,860 4.40% 58,035 4.36%
Taxable equivalent
adjustment (300) (190) (265)
-------- -------- --------
Net interest income $ 58,162 $ 58,670 $ 57,770
======== ======== ========
TABLE 2: INTEREST DIFFERENTIAL
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
due to Change in:(1) due to Change in: (1)
(in thousands of dollars) Volume Rate Net Change Volume Rate Net Change
----------------------------------------------------------------
Interest-earning assets:
Interest-bearing deposits
in other banks ............. $ (667) $ 16 $ (651) $ 588 $ 588 $ 1,176
Federal funds sold and
securities purchased under
agreements to resell ...... 1,567 (14) 1,553 (145) (79) (224)
Taxable investment securities (1,513) (552) (2,065) 2,870 1,262 4,132
Non-taxable investment
securities ................. 393 (43) 350 11 (167) (156)
Loans (2) ................... 142 312 454 (4,357) 636 (3,721)
---------------------------------------------------------------
Total interest-earning assets . (78) (281) (359) (1,033) 2,240 1,207
Interest-bearing liabilities:
Savings deposits ............ 183 269 452 (140) 389 249
Time deposits ............... 3,866 (344) 3,522 419 156 575
Short-term borrowings ....... (4,273) (933) (5,206) (933) 572 (361)
Long-term debt .............. 675 596 1,271 569 (650) (81)
---------------------------------------------------------------
Total interest-bearing
deposits and liabilities .... 451 (412) 39 (85) 467 382
---------------------------------------------------------------
Net interest income (taxable
equivalent basis) ........... $ (529) $ 131 $ (398) $ (948) $ 1,773 $ 825
===============================================================
(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) Yields and amounts earned include loan fees. Non-accrual loans have been
included in interest-earning assets for purposes of these computations.
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, loan loss experience and management's estimate 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.
Provision for credit losses was $7.44 million in 1998, an increase of $1.19
million, or 18.98%, from 1997. The Company's allowance for credit losses
increased to $17.77 million at December 31, 1998, from $16.37 million in 1997
and $15.43 million in 1996. The allowance for credit losses as a percentage of
period-end total loans was 1.81% at December 31, 1998, compared to 1.55% and
1.49% at 1997 and 1996.
Allowance for credit losses as a percentage of the period-end non-performing
loans was 91.40% at December 31, 1998, which compares to 57.65% at December 31,
1997. Total non-performing loans at December 31, 1998 amounted to $19.44
million, a decrease of $8.95 million, or 31.53%, from the $28.39 million at
December 31, 1997. During 1998, the Company sold $12.89 million in delinquent
loans, including $6.8 million of non-performing loans at a loss of $2.36 million
- - see related discussion in "Other Income".
The net investment in loans that are considered to be impaired was $2.36 million
at December 31, 1998, a decrease of $4.02 million from the $6.38 million at
December 31, 1997. The decrease in impaired loans was due primarily to
settlement of loans through acquisition of the real estate collateral or
principal repayments. Additional information on impaired loans is presented in
Notes A4 and D of Notes to the Company's Consolidated Financial Statements.
Other Income
In 1998, total other income was $9.40 million as compared to $7.11 million in
1997 and $8.12 million in 1996. The $2.29 million increase in other income was
due primarily to gains on the sale of securities. During 1998, the Company sold
$150.73 million of securities at a net gain of $4.10 million, which compares to
gains of $0.18 million and $1.40 million in 1997 and 1996, respectively - see
Note B of Notes to the Company's Consolidated Financial Statements.
Other income was $0.92 million for 1998, a decrease of $1.92 million, or 67.57%,
from 1997. Other income includes a loss of $2.36 million on the sale of $12.89
million of delinquent real estate loans made to enhance the asset quality of the
Company's loan portfolio. The other income decline in 1997 compared to 1996 was
primarily attributable to the $1.22 million decline in net realized gains on
sales of available for sale securities. The Company sold its credit card
portfolio in 1996 resulting in the loss of commissions and fees relating to
these discontinued operations. Other income also includes a $0.45 million
amortization of gain. See Note L of Notes 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:
(in thousands of dollars) 1998 1997 1996
--------------------------------
Net realized gains on sales of securities $ 4,104 $ 177 $ 1,401
Other service charges and fees 2,630 2,460 2,660
Service charges on deposits 1,740 1,632 1,716
Net trading account losses - - (5)
Other 922 2,843 2,343
--------------------------------
Total $ 9,396 $ 7,112 $ 8,115
================================
Other Expenses
The following table sets forth information by category of other operating
expenses of the Company for the years indicated:
(in thousands of dollars) 1998 1997 1996
--------------------------------
Salaries and employee benefits $ 18,338 $ 19,652 $ 20,647
Net occupancy expense 8,277 8,325 7,678
Equipment expense 3,803 3,176 2,957
Legal and professional fees 3,085 4,748 4,467
Advertising and promotion 1,631 2,273 1,917
Provision for other real estate owned losses 1,407 248 71
Deposit insurance premiums 595 406 3,282
Voluntary separation benefits - - 3,162
Other 9,152 8,729 7,604
--------------------------------
Total $ 46,288 $ 47,557 $ 51,785
================================
Total operating expenses as a
percent of average assets 3.25% 3.40% 3.67%
Other operating expenses decreased by $1.27 million in 1998 to $46.29 million,
compared to $47.56 million in 1997 and $51.79 in 1996. 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 15 basis
points in 1998 to 3.25%, compared to 3.40% in 1997 and 3.67% in 1996.
The primary reasons for the decrease in other expenses were the $1.31 million
reduction in salaries and employment benefits plus the $1.66 million decrease in
legal and professional fees, which offset the $1.16 million increase in
provision for other real estate owned losses ("OREO").
Salaries and employment benefits declined by $1.31 million, or 6.67%, in 1998 to
$18.34 million, compared to $19.65 million and $20.65 million in 1997 and 1996,
respectively. The reduction in salaries and employee benefits over the last
three years reflect management's continuing efforts to improve operating
efficiency and reduce overhead costs.
On January 31, 1996, the Company announced a voluntary separation plan for all
employees. The program offered all eligible employees the opportunity of
electing to terminate their employment. Ninety-seven employees participated in
the program and voluntary separation benefits of $3.16 million were expensed and
paid.
Legal and professional fees dropped by $1.66 million, or 24.41%, in 1998 due, in
part, to management's close monitoring of such expenses and reduction in the use
of consultants and other external resources. Legal and professional fees are
anticipated to increase in 1999 as a result of external resources utilized in
connection with the Company's Year 2000 efforts see "Year 2000" discussion.
Provision for OREO losses totaled $1.41 million for 1998, an increase of $1.16
million from the $0.25 million in 1997. At December 31, 1998, OREO (net of
valuation allowance) amounted to $8.58 million, an increase of $4.90 million, or
132.85%, from the prior year. The increase in the 1998 OREO balance and
provision for OREO losses reflects the continued weakness in the Hawaii economy
and related decline in real estate values. The Company has also been more
aggressive in its delinquent loan collection efforts resulting in a higher level
of foreclosures and related OREO.
Net occupancy expense was $8.28 million in 1998, which compares to $8.33 million
and $7.68 million in 1997 and 1996, respectively. The increase in net occupancy
expense in 1997 was primarily attributable to the increased occupancy costs of
the Association from the reacquisition through assignment of its ground lease
obligation of vacated premises. See Note O of Notes to the Company's
Consolidated Financial Statements.
Deposit insurance premiums amounted to $0.60 million in 1998, compared to $0.41
million and $3.28 million in 1997 and 1996, respectively.
In 1997, deposit insurance premiums decreased by $2.88 million to $0.41 million.
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.
Income Taxes
Total income tax expense of the Company was $5.47 million, $4.76 million and
$4.63 million in 1998, 1997 and 1996, respectively. The Company's effective
income tax rate for the years 1998, 1997 and 1996 was 39.50%, 39.70% and 39.60%,
respectively. Note K of Notes 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. As presented in the
consolidated statements of cash flows, the Company's operating activities used
$56.98 million in 1998, an increase of $52.97 million from the $4.01 million in
1997. The primary use of cash flows from operations in 1998 was the $73.31
million net increase in loans held for sale, which amounted to $99.60 million at
December 31, 1998.
Investing activities provided cash flow of $86.81 million in 1998 compared to a
net use of $20.60 million during 1997, and an increase in cash flow of $61.47
million in 1996. The primary source of cash flow from investing activities in
1998 was from the proceeds on sales of securities which totalled $154.83
million, an increase of $141.97 million from the prior year.
Financing activities used cash flow of $13.33 million in 1998, compared to
providing $29.63 million during 1997, and a reduction in cash flow of $101.63
million in 1996. During 1998, an $80.29 million net decrease in short-term
borrowings and $66.18 million in principal payments on long-term debt were the
primary use of cash flows from financing activities.
As of December 31, 1998, the Bank and Association had available unused credit
lines of $264.47 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 the Company's Consolidated
Financial Statements.
Capital Resources
The Company has a strong capital base with a Tier I capital ratio of 13.54% at
December 31, 1998. This is well above the minimum regulatory guideline of 4.00%
for Tier I 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, 1998, the Company's
total capital to risk-adjusted assets ratio was 14.80%.
Year 2000
The "Year 2000" problem is a significant issue facing financial institutions.
Because computers frequently use only two digits to recognize years (instead of
four digits), many computer systems, as well as equipment using embedded
computer chips, may be unable to distinguish the year 2000. This could produce
erroneous results or systems may fail in the year 2000 when the two digit year
becomes "00".
In 1997, the Company established a Year 2000 committee comprised of senior
managers from each major operational unit. The Year 2000 committee has prepared
a comprehensive program to address this problem and ensure that the Company's
computer systems will function properly in the years 2000 and thereafter.
The Company's Year 2000 effort is divided in phases for awareness, assessment,
renovation, validation, and implementation. The Company has already completed
the awareness and assessment phase of its Year 2000 program and has already
undertaken renovation and validation of its critical systems. As of August 1998,
both the Bank and the Association completed the conversion of all core
operations to the FiServ Comprehensive Banking System, a major step in the
Company's Year 2000 compliance effort.
Initial validation testing of critical systems throughout the Company was
substantially completed by the end of 1998.
The Company expects to successfully complete its Year 2000 program in a timely
and effective manner. Even though the Company's efforts should adequately
address year 2000 issues, there can be no assurance that unforeseen difficulties
will not arise. The Company may be impacted by the Year 2000 compliance issues
of governmental agencies, businesses and other entities who provide data to, or
receive data from, the Company, and by entities, such as borrowers, vendors and
customers, whose financial condition or operational capability is significant to
the Company. The Company's Year 2000 program also includes the identification of
third party service providers, customers and other external parties upon which
the Company relies, or with whom it must interface its critical systems or
applications. The Company is also subject to credit risk to the extent borrowers
fail to adequately address their Year 2000 issues. While the Company continues
to discuss these matters with, obtain written certifications from and test such
external parties' Year 2000 compliance efforts, there is no assurance that the
failure of these parties to resolve their Year 2000 issues would not have an
adverse impact on the Company.
To address this external risk, contingency plans are also being developed to
ensure that the Company is prepared to handle the most reasonably likely
worst-case scenarios, including the inability of customers, vendors and other
third parties to adequately address the Year 2000 problem. Contingency plans
include identifying triggering events for the plan, assessing mission-critical
systems failures on core business processes, developing business resumption
alternatives, and testing the effectiveness and viability of these plans. The
development and testing of these contingency plans are scheduled to be completed
by June 1999.
The Company has expended, and will continue to expend, the resources necessary
to address this issue in a timely manner. Through December 31, 1998, cumulative
incremental expenditures of less than $0.1 million have been incurred out of a
total projected $0.5 million. The incremental expenditures exclude internal cost
and the approximately $2.50 million cost incurred in converting to the FiServ
Comprehensive Banking System. The Company does not separately track internal
costs related to the internal allocation of personal and other costs related to
the Year 2000 project. Most of these incremental expenditures relate to the
acquisition and implementation of new and enhanced systems and/or equipment,
which will be capitalized and amortized over their respective useful lives.
Expenses related to the Company's internal resources and Year 2000 remediation
costs are being expensed as incurred. Future expenditures are expected to take
place over the next year, funded by operating cash flows, and are not expected
to have a material impact on the Company's financial condition or results of
operations. No assurance, however, can be given at this time that all aspects of
the Company's operations will be Year 2000 ready or that the Year 2000 problem
will not have an adverse impact on the Company's future earnings.
The foregoing year 2000 discussion contains "forward-looking" statements. Such
statements, including without limitation, anticipated costs and the dates by
which the Company expects to substantially complete the various Year 2000
phases, are based on management's best current estimates. These estimates were
derived utilizing numerous assumptions about future events, including the
continued availability of certain resources, representations received from third
party service providers and other factors. However, there can be no guarantee
that these estimates will be achieved, and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to: results of year 2000
testing; adequate resolution of year 2000 issues by governmental agencies,
businesses or other third parties that are service providers, suppliers,
borrowers or customers of the Company; unanticipated system costs; the need to
replace hardware; the adequacy of and ability to implement contingency plans;
and similar uncertainties. The forward-looking statements made in the foregoing
year 2000 discussion speak only as of the date on which such statements are
made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
Effects Of Inflation
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rate changes have a more
significant impact on the Company's performance than the effects of general
levels of inflation.
Recent Regulatory Developments
In 1996, the Company entered into a Memorandum of Understanding (the "MOU") with
the Federal Reserve Bank of San Francisco (the "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,
the Bank also entered into an MOU with the Federal Deposit Insurance Corporation
(the "FDIC"). This MOU was terminated by the FDIC in March 1999, based on the
adoption of a resolution by the Bank's Board of Directors. This resolution,
approved by the Bank's Board of Directors in February 1999, 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 in the internal agreement.
Recent Accounting Developments
In October 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. The adoption of this standard did not have a material effect on the
Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires entities to recognize all derivatives in their financial statements as
either assets or liabilities measured at fair value. The effective date for SFAS
No. 133 is the first fiscal quarter for fiscal years beginning after June 15,
1999. The adoption of this standard is not expected to have a material effect on
the Company's consolidated financial statements.
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Earnings for the fourth quarter of 1998 were $2.13 million ($0.60 per share), an
increase of 61.55% from the $1.32 million ($0.37 per share) during the same
quarter in 1997. The increase in earnings was primarily attributable to the
decrease in other expenses. See further discussion under "Other Expenses."
The following table summarizes the Company's quarterly results for the years
1998 and 1997;
Quarter
(in thousands of dollars,
except per share data) First Second Third Fourth Total
----------------------------------------------------
1998:
Total interest income $28,487 $28,612 $29,101 $25,860 $112,060
Total interest expense 13,936 13,794 13,320 12,848 53,898
----------------------------------------------------
Net interest income 14,551 14,818 15,781 13,012 58,162
Provision for credit losses 1,300 1,525 2,986 1,625 7,436
Other income 1,695 2,221 3,921 1,559 9,396
Other expenses 11,668 12,020 12,922 9,678 46,288
----------------------------------------------------
Income before income taxes 3,278 3,494 3,794 3,268 13,834
Income tax expense 1,326 1,357 1,640 1,142 5,465
----------------------------------------------------
Net income $ 1,952 $ 2,137 $ 2,154 $ 2,126 $ 8,369
====================================================
Per common share: Net income (basic) $0.55 $0.60 $0.61 $0.60 $2.36
1997:
Total interest income $27,656 $28,069 $28,182 $28,622 $112,529
Total interest expense 12,923 13,430 13,665 13,841 53,859
----------------------------------------------------
Net interest income 14,733 14,639 14,517 14,781 58,670
Provision for credit losses 1,050 1,500 1,517 2,183 6,250
Other income 1,442 1,598 1,867 2,205 7,112
Other expenses 12,057 11,322 11,563 12,615 47,557
----------------------------------------------------
Income before income taxes 3,068 3,415 3,304 2,188 11,975
Income tax expense 1,218 1,465 1,202 872 4,757
----------------------------------------------------
Net income $ 1,850 $ 1,950 $ 2,102 $ 1,316 $ 7,218
====================================================
Per common share: Net income (basic) $0.52 $0.55 $0.59 $0.37 $2.03
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 and trends.
The Company's management has placed an increased emphasis on interest rate
sensitivity management. Interest-earning 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 table below page sets forth information concerning interest rate sensitivity
of the Company's consolidated assets and liabilities as of December 31, 1998.
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, all 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
(in thousands of dollars) days days days years years sensitive Total
--------------------------------------------------------------------------
Assets:
Investment securities and
interest-bearing deposits
in other banks $ 24,282 $ 8,753 $ 24,748 $ 59,250 $ 44,730 $ 29,482 $191,245
Federal funds sold 47,752 - - - - - 47,752
Commercial loans 133,688 15,543 4,483 20,435 16,979 - 191,128
Real estate loans 96,542 80,832 163,445 241,661 125,286 - 707,766
Consumer loans 54,635 4,675 4,887 20,480 885 - 85,562
Other assets - - - - - 204,985 204,985
--------------------------------------------------------------------------
Total assets $356,899 $109,803 $197,563 $341,826 $187,880 $234,467 $1,428,438
==========================================================================
Liabilities and stockholders' equity:
Non-interest bearing
deposits $ - $ - $ - $ - $ - $119,649 $119,649
Time and savings deposits 388,806 180,814 93,337 75,738 226,266 - 964,961
Short-term borrowing 16,770 8,402 31,754 - - - 56,926
Long-term borrowing 10,000 - 39,755 83,087 162 - 133,004
Other liabilities - - - - - 21,526 21,526
Stockholders' equity - - - - - 132,372 132,372
--------------------------------------------------------------------------
Total liabilities and
stockholders' equity $415,576 $189,216 $164,846 $158,825 $226,428 $273,547 $1,428,438
==========================================================================
Interest rate
sensitivity gap $(58,677) $(79,413) $ 32,717 $183,001 $(38,548) $(39,080) $ -
Cumulative interest rate
sensitivity gap $(58,677) $(138,090) $(105,373) $ 77,628 $ 39,080 $ - $ -
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.
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.
The financial instruments used and their notional amounts outstanding at
year-end were as follows:
December 31,
(in thousands of dollars) 1998 1997 1996
--------------------------------
Interest rate swaps:
Pay-fixed swaps-notional amount - $10,000 $25,000
Average receive rate - 5.88% 5.50%
Average pay rate - 6.25% 6.52%
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 paid the fixed rate and received the floating rate under the majority of
its swaps outstanding at December 31, 1997 and 1996.
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.
Interest rate options, which primarily consists of caps and floors, are interest
rate protection instruments that involve the payment from the seller to the
buyer of an interest rate differential in exchange for a premium paid by the
buyer. This differential represents the difference between current interest
rates and an agreed upon rate applied to a notional amount. Interest rate caps
limit the cap holder's risk associated with an increase in interest rates.
Interest rate floors limit the risk associated with a decline in interest rates.
Interest rate options at December 31, 1998 and 1997 consisted of the following:
1998 1997
Notional Estimated Notional Estimated
(in thousands of dollars) Amount Fair Value Amount Fair Value
--------------------------------------------
Caps $ 5,000 $ - $ 5,000 $ 5,066
Floors 10,000 144 - -
--------------------------------------------
Total interest rate options $ 15,000 $ 144 $ 5,000 $ 5,066
============================================
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 a detailed and dynamic simulation model
to quantify the estimated exposure of 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, 1998.
Estimated
Rate Change NII Sensitivity
---------------------------------------
+200bp (1.16)%
-200bp (2.29)%
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 how 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.
See Note M of Notes to the Company's Consolidated Financial Statements for
further discussion and disclosure of financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CB BANCSHARES, INC. AND SUBSIDIARIES
December 31, 1998, 1997 and 1996
C O N T E N T S
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CB Bancshares, Inc. and Subsidiaries
Board of Directors and Stockholders
CB Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of CB Bancshares,
Inc. (a Hawaii corporation) and Subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Honolulu, Hawaii
February 12, 1999
(except for Note Q2,
as to which the date is March 5, 1999)
CONSOLIDATED BALANCE SHEETS
CB Bancshares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------
December 31,
------------------------------
(in thousands, except number of shares and per share data) 1998 1997
- --------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (note A2) $ 61,658 $ 45,150
Interest-bearing deposits in other banks (note I) 20,000 30,000
Federal funds sold 47,752 4,705
Investment securities (notes B, H and I):
Held-to-maturity (market value of $92,440 in 1997) - 88,397
Available-for-sale 141,764 120,320
Restricted investment securities 29,481 27,348
Loans held for sale 99,602 26,293
Loans, net (notes C, D, I and N) 961,924 1,032,940
Premises and equipment, net (note F) 20,916 19,312
Other assets (notes E, J and P4) 45,341 40,761
- -------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,428,438 $ 1,435,226
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (notes C and G):
Non-interest bearing $ 119,649 $ 110,577
Interest bearing 964,961 898,151
------------- -------------
Total deposits 1,084,610 1,008,728
Short-term borrowings (note H) 56,926 137,212
Other liabilities (notes K and L) 21,526 23,173
Long-term debt (note I) 133,004 141,048
- --------------------------------------------------------------------------------------------
Total liabilities 1,296,066 1,310,161
- --------------------------------------------------------------------------------------------
Commitments and contingencies (notes C, F and O)
Stockholders' equity (notes P5 and Q):
Preferred stock $1 par value
Authorized and unissued 25,000,000 shares - -
Common stock $1 par value
Authorized 50,000,000 shares;
issued and outstanding 3,552,228
and 3,551,228 shares, respectively 3,552 3,551
Additional paid-in capital 65,108 65,080
Accumulated other comprehensive income, net of tax 928 1,201
Retained earnings 62,784 55,233
- --------------------------------------------------------------------------------------------
Total stockholders' equity 132,372 125,065
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,428,438 $ 1,435,226
============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF INCOME
CB Bancshares, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------------------
Years ended December 31,
-----------------------------------------
(in thousands, except number of
shares and per share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 93,491 $ 93,025 $ 96,825
Interest and dividends on investment securities:
Taxable interest income 13,708 15,907 10,501
Nontaxable interest income 435 207 209
Dividends 2,135 2,001 1,874
Other interest income 2,291 1,389 1,838
- ----------------------------------------------------------------------------------------------
Total interest income 112,060 112,529 111,247
- ----------------------------------------------------------------------------------------------
Interest expense:
Deposits (note G) 39,940 35,966 35,142
Short-term borrowings 6,158 11,364 11,725
Long-term debt 7,800 6,529 6,610
- ----------------------------------------------------------------------------------------------
Total interest expense 53,898 53,859 53,477
- ----------------------------------------------------------------------------------------------
Net interest income 58,162 58,670 57,770
Provision for credit losses (note D) 7,436 6,250 2,410
- ----------------------------------------------------------------------------------------------
Net interest income
after provision for credit losses 50,726 52,420 55,360
- ----------------------------------------------------------------------------------------------
Other income:
Service charges on deposit accounts 1,740 1,632 1,716
Other service charges and fees 2,630 2,460 2,660
Net trading account losses - - (5)
Net realized gains on sales of securities
(notes B and R) 4,104 177 1,401
Other (notes C, L and N) 922 2,843 2,343
- ----------------------------------------------------------------------------------------------
Total other income 9,396 7,112 8,115
- ----------------------------------------------------------------------------------------------
Other expenses:
Salaries and employee benefits (note P) 18,338 19,652 20,647
Net occupancy expense (note F) 8,277 8,325 7,678
Equipment expense 3,803 3,176 2,957
Other (notes E, J, P and Q) 15,870 16,404 20,503
- ----------------------------------------------------------------------------------------------
Total other expenses 46,288 47,557 51,785
- ----------------------------------------------------------------------------------------------
Income before income taxes 13,834 11,975 11,690
Income tax expense (note K) 5,465 4,757 4,631
==============================================================================================
NET INCOME $ 8,369 $ 7,218 $ 7,059
==============================================================================================
Per share data (note Q3):
Basic $2.36 $2.03 $1.99
Diluted $2.35 $2.03 $1.99
==============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CB Bancshares, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------
Years ended December 31, 1998, 1997 and 1996
--------------------------------------------------------
Accumulated
Other Additional
(in thousands of dollars, except per Retained Comprehensive Common Paid-In
share data) Total Earnings Income Stock Capital
- ------------------------------------------------------------------------------------------------
Balance at January 1, 1996 $ 116,506 $ 46,279 $ 1,596 $ 3,551 $ 65,080
Comprehensive income:
Net income - 1996 7,059 7,059 - - -
Other comprehensive income, net of tax
Unrealized gains on securities,
net of reclassification
adjustment (note R) (694) - (694) - -
----------
Comprehensive income subtotal 6,365
----------
Cash dividends:
$0.975 per share (3,460) (3,460) - - -
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1996 119,411 49,878 902 3,551 65,080
Comprehensive income:
Net income - 1997 7,218 7,218 - - -
Other comprehensive income, net of tax
Unrealized gains on securities,
net of reclassification
adjustment (note R) 299 - 299 - -
----------
Comprehensive income subtotal 7,517
----------
Cash dividends:
$0.525 per share (1,863) (1,863) - - -
- -----------------------------------------------------------------------------------------------
Balance at December 31, 1997 125,065 55,233 1,201 3,551 65,080
Comprehensive income:
Net income - 1998 8,369 8,369 - - -
Other comprehensive income, net of tax
Unrealized gains on securities,
net of reclassification
adjustment (note R) (273) - (273) - -
----------
Comprehensive income subtotal 8,096
----------
Options exercised (note P5) 29 - - 1 28
Cash dividends:
$0.230 per share (818) (818) - - -
===============================================================================================
Balance at December 31, 1998 $ 132,372 $ 62,784 $ 928 $ 3,552 $ 65,108
===============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CB Bancshares, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------
Years ended December 31,
------------------------------------
(in thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 8,369 $ 7,218 $ 7,059
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 7,436 6,250 2,410
Loss on disposition of premises and equipment 103 805 280
Depreciation and amortization 2,763 2,466 2,273
Deferred income taxes (1,429) 416 1,799
Decrease (increase) in interest receivable 561 (133) 804
Increase (decrease) in interest payable (247) 1,022 (1,405)
Net decrease in trading securities - - 96
Increase in restricted investment securities (2,133) (2,248) (1,874)
Net decrease (increase) in loans held for sale (73,309) (20,664) 8,721
Decrease (increase) in other assets (1,295) (491) 6,470
Increase (decrease) in income taxes payable 105 1,246 (4,008)
Increase (decrease) in other liabilities 106 (2,220) (5,513)
Other 1,992 2,322 (437)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (56,978) (4,011) 16,675
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits
in other banks 10,000 (13,500) (5,000)
Net increase in federal funds sold (43,047) (4,700) -
Proceeds from sales of held-to-maturity securities 73,222 - -
Proceeds from maturities of held-to-maturity securities 20,703 9,437 2,704
Purchases of held-to-maturity securities - - (9,962)
Proceeds from sales of available-for-sale securities 81,605 12,862 87,049
Proceeds from maturities of available-for-sale
securities 29,233 22,640 78,009
Purchase of available-for-sale securities (44,064) (17,634) (94,733)
Net increase in loans (51,683) (27,751) (20,344)
Proceeds from sale of loans 10,257 - 25,373
Proceeds from sale of premises and equipment 23 467 32
Capital expenditures (4,493) (4,823) (3,852)
Proceeds from sale of foreclosed assets 5,058 2,400 2,191
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 86,814 (20,602) 61,467
- ---------------------------------------------------------------------------------------------
Subtotal carried forward 29,836 (24,613) 78,142
- ---------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
CB Bancshares, Inc. and Subsidiaries
- ---------------------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------
(in thousands of dollars) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
Subtotal brought forward 29,836 (24,613) 78,142
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in time deposits 44,128 62,187 (28,771)
Net increase (decrease) in other deposits 31,754 (5,369) (30,802)
Net decrease in short-term borrowings (80,286) (71,469) (30,679)
Proceeds from long-term debt 58,000 89,672 45,335
Principal payments on long-term debt (66,176) (43,696) (52,098)
Cash dividends paid (777) (1,694) (4,614)
Stock options exercised 29 - -
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities (13,328) 29,631 (101,629)
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash 16,508 5,018 (23,487)
Cash and due from banks at beginning of year 45,150 40,132 63,619
=============================================================================================
Cash and due from banks at end of year $ 61,658 $ 45,150 $ 40,132
=============================================================================================
Supplemental disclosures of cash flow information:
Interest paid on deposits and other borrowings $ 54,145 $ 52,837 $ 54,882
Income taxes paid 6,854 3,711 6,538
Supplemental schedule of non-cash investing activity:
During 1998, the Company securitized $76,153 and $14,693 of mortgage loans
into mortgage-backed securities classified as available-for-sale and
held-to-maturity, respectively. During 1996, $81,329 of mortgage loans
were securitized into mortgage-backed securities classified as
held-to-maturity.
During 1998, the Company transferred $12,859 of securities classified as
held-to-maturity to available-for-sale.
The accompanying notes are an integral part of these consolidated financial
statements.
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CB Bancshares, Inc. and Subsidiaries (the "Company") provide financial 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 consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and conform to prevailing
practices within the banking and thrift industries. Preparing financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes and the disclosure of
contingent assets and liabilities. Actual results could differ from those
estimates. Also, certain reclassifications have been made to the consolidated
financial statements and accompanying notes for the previous two years to
conform to the current year's presentation. Such reclassifications did not have
a material effect on the consolidated financial statements.
The significant accounting and reporting policies of the Company are as 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 and
its wholly-owned subsidiary (the "Bank"); International Savings and Loan
Association, Limited and its wholly-owned subsidiaries (the "Association");
City Finance and Mortgage, Inc.; and O.R.E., Inc. Significant intercompany
transactions and balances have been eliminated in consolidation.
2. Cash and Cash Equivalents
For purposes of 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". Included in cash are amounts restricted
for the Federal Reserve requirement of $8,365,000 and $4,887,000 in 1998 and
1997, respectively.
3. Investment Securities
Investment securities are classified into the following categories:
Trading securities are securities that are bought and held principally
for resale in the near term. Trading securities are reported at fair
value with unrealized gains and losses included in other income.
Held-to-maturity securities are securities the Company has the positive
intent and ability to hold to maturity. Held-to-maturity securities are
reported at amortized cost with premiums and discounts included in
interest income over the period to maturity, using the interest method.
Available-for-sale securities are securities not classified as either
trading or held-to-maturity. Securities available-for-sale are reported
at fair value with unrealized gains and losses, net of tax, included as
other comprehensive income in stockholders' equity. Gains and losses on
sale are determined using the specific identification method.
For individual held-to-maturity and available-for-sale securities, declines
in fair value below cost for other than temporary market conditions, would
result in write-downs of the carrying value to the current fair value and
the realized losses included in earnings.
As a member of the Federal Home Loan Bank (the "FHLB"), the Company is
required to maintain a minimum investment in the FHLB stock. The stock is
recorded as a restricted investment security at par.
4. Loans
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.
Loans the Company has the intent and ability to hold until maturity are
reported at the outstanding principal balance, adjusted for any charge offs,
the allowance for credit losses, any deferred fees or costs on originated
loans, and unamortized premiums or discounts on purchased loans.
Loan origination fees and costs are deferred and recognized as an adjustment
of the yield. Loan commitment fees received are deferred as other
liabilities until the loan is advanced and are then recognized over the loan
term as an adjustment of the yield. At expiration, unused commitment fees
are recognized as fees and commission revenue. Guarantee fees received are
recognized as fee revenue over the related terms.
The allowance for credit losses is periodically evaluated for adequacy by
management. Factors considered include the Company's loan loss experience,
known and inherent risks in the portfolio, current economic conditions,
adverse situations that may affect the borrower's ability to repay,
regulatory policies, and the estimated value of underlying collateral, if
any. The allowance for credit losses is increased by provision for credit
losses and decreased by charge-offs (net of recoveries).
Loans are impaired when, based on current information and events, it is
probable that principal or interest will not be collected at scheduled
maturity or will be unreasonably delayed. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's
effective interest rate or the fair value of the collateral, if the loan is
collateral dependent. Large groups of smaller balance homogeneous loans,
such as residential mortgages and consumer installment loans, are
collectively evaluated for impairment, except for loans restructured under a
troubled debt restructuring.
Interest accrual on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to make scheduled payments. When
interest accrual is discontinued, any outstanding accrued interest is
reversed and subsequently, interest income is recognized as payments are
received.
5. Loan Servicing
The cost of mortgage servicing rights ("MSR") is amortized in proportion to
the estimated net servicing revenues over the period of the underlying
mortgages. Impairment of MSR is assessed based on fair value, which is
estimated using discounted cash flows based on a current market interest
rate. For purposes of measuring impairment, the MSR are stratified on the
following predominant risk characteristics of the underlying loans; loan
type, interest rate, origination date and geographic location. Impairment is
recognized to the extent that the MSR for a stratum exceed its fair value.
6. Other Real Estate Owned
Other real estate owned properties acquired through, or in lieu of,
foreclosure proceedings are recorded at the fair value on the date of
foreclosure establishing a new cost basis. After foreclosure, management
performs periodic valuations and the properties are carried at the lower of
cost or fair value, less estimated costs to sell. Revenues, expenses and
provisions to the valuation allowance are included in operations as
incurred.
7. Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using both the
straight-line and accelerated methods over the estimated useful lives of the
assets or the applicable facility leases, whichever is shorter. The range of
estimated useful lives are 3 to 45 years for premises and leasehold
improvements and 3 to 20 years for equipment.
8. Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired and is currently amortized on a straight-line basis
over 15 years. It is Company policy that management periodically reviews
goodwill to determine if it has been permanently impaired by events or
conditions that might affect the underlying business. Such reviews would
include an analysis of current results and the projection of future net
income on an undiscounted basis.
9. Income Taxes
The Company files consolidated income tax returns. The Bank and the
Association pay to or receive from the Parent Company the amount of income
taxes they would have paid or received had they filed separate income tax
returns.
Deferred tax assets and liabilities are recorded based on the expected tax
effect of future taxable income or deductions resulting from differences in
the financial statement and tax bases of assets and liabilities. Changes are
adjusted through the provision for income taxes.
10. Risk Management Instruments
As part of its risk management activities, the Company uses interest rate
swaps, caps and floors to modify the interest rate characteristics of
certain assets and liabilities. Amounts receivable or payable under interest
rate swap, cap and floor 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 derivative 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 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. Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over
the assets has been surrendered. Control over transferred assets is deemed
to be surrendered when (1) assets have been isolated from the Company, (2)
the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred
assets, and (3) the Company does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
12. Stock-Based Compensation
The Company uses the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations to account for stock-based
compensation. Accordingly, the compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to
acquire the stock. The 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. The required disclosures are included in Note P5,
"Stock Compensation Plan".
13. Earnings Per Share
Basic earnings per common share are based on the weighted-average number of
common shares outstanding for the period. Diluted earnings per common share
are based on the assumption that all potentially dilutive common shares and
dilutive stock options were converted at the beginning of the year.
14. New Accounting Principles
In October 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise". SFAS No. 134 requires
that after the securitization of mortgage loans held for sale, an entity
engaged in mortgage banking activities classify the resulting
mortgage-backed securities or other retained interests based on its ability
and intent to sell or hold those investments. The adoption of this standard
did not have a material effect on the Company's consolidated financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
requires entities to recognize all derivatives in their financial statements
as either assets or liabilities measured at fair value. The effective date
for SFAS No. 133 is the first fiscal quarter for fiscal years beginning
after June 15, 1999. The adoption of this standard is not expected to have a
material effect on the Company's consolidated financial statements.
NOTE B - INVESTMENT SECURITIES
The amortized cost and estimated fair values of the Company's investment
portfolio at December 31, 1998 and 1997 were as follows:
- --------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
(in thousands of dollars) Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------
1998:
Available-for-sale securities:
U.S. Treasury and other
U.S. Government agencies
and corporations $ 11,900 $ 66 $ - $ 11,966
States and political subdivisions 9,581 285 147 9,719
Mortgage-backed securities 118,908 1,558 387 120,079
- --------------------------------------------------------------------------------------
Total available-for-sale $ 140,389 $ 1,909 $ 534 $ 141,764
======================================================================================
- --------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
(in thousands of dollars) Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------
1997:
Held-to-maturity securities:
States and political subdivisions $ 101 $ 3 $ - $ 104
Mortgage-backed securities 88,296 4,081 41 92,336
- --------------------------------------------------------------------------------------
Total held-to-maturity $ 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 available-for-sale $ 118,333 $ 2,074 $ 87 $ 120,320
======================================================================================
Securities with an aggregate carrying value of $85,519,000 and $100,002,000, at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
and for other purposes required by law.
The following presents the amortized cost and estimated fair value of
available-for-sale investment securities at December 31, 1998 by contractual
maturity. Expected maturity will differ from contractual maturity because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The stated maturity of mortgage-backed securities are
presented in total since the principal cash flows of these securities are not
received at a single maturity date.
---------------------------------------------------------------------
Amortized Estimated
(in thousands of dollars) Cost Fair Value
---------------------------------------------------------------------
Due in one year or less $ 12,625 $ 12,697
Due after one year through five years 1,003 1,074
Due after five years through ten years 3,382 3,523
Due after ten years 4,471 4,391
---------------------------------------------------------------------
21,481 21,685
Mortgage-backed securities 118,908 120,079
---------------------------------------------------------------------
Totals $ 140,389 $ 141,764
=====================================================================
In 1998, held-to-maturity securities of $69,510,000 were sold, resulting in
gross realized gains of $3,712,000. Due to the sales of the held-to-maturity
securities during 1998, the Company transferred $12,859,000 of securities
classified as held to maturity to available for sale. The related net unrealized
gain from this reclassification was $232,000. There were no sales of
held-to-maturity securities in 1997 and 1996. Proceeds from sales of securities
available-for-sale during 1998, 1997, and 1996 were $81,605,000, $12,862,000,
and $87,049,000, respectively. These sales resulted in gross realized gains of
$502,000, $268,000, and $1,664,000 and gross realized losses of $110,000,
$91,000, and $263,000, respectively. Income tax expense recognized on net
securities gain were $1,642,000, $71,000 and $560,000 in 1998, 1997 and 1996,
respectively.
NOTE C - LOANS
The loan portfolio consisted for the following at December 31, 1998 and 1997:
---------------------------------------------------------------------
(in thousands of dollars) 1998 1997
---------------------------------------------------------------------
Commercial and financial $ 191,128 $ 186,418
Real estate:
Construction 25,453 41,069
Commercial 150,690 129,603
Residential 531,623 618,294
Installment and consumer 85,562 79,363
---------------------------------------------------------------------
Gross loans 984,456 1,054,747
Less:
Unearned discount 5 5
Net deferred loan fees 4,756 5,437
Allowance for credit losses 17,771 16,365
---------------------------------------------------------------------
Loans, net $ 961,924 $ 1,032,940
=====================================================================
In 1998, certain delinquent loans were sold to improve the asset quality of the
Company's loan portfolio. Proceeds from the sale totaled $10,257,000 with a
resulting loss of $2,636,000.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans,
including mortgage-backed securities serviced for others, were $466,462,000 and
$399,497,000 at December 31, 1998 and 1997, respectively. Custodial escrow
balances maintained with the foregoing loan servicing, and included in demand
deposits, were $2,703,000 and $2,893,000 at December 31, 1998 and 1997,
respectively.
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 and loan commitments were made at
the Company's normal credit terms, including interest rates and collateral
requirements, and do not represent more than a normal risk of collection. The
following is the activity of loans to such parties in 1998. Other changes
include the net change in loans to parties not considered related for the entire
year.
-------------------------------------------------
(in thousands of dollars)
-------------------------------------------------
Balance at beginning of year $ 5,796
New loans 1,844
Repayments (1,460)
Other changes 349
-------------------------------------------------
Balance at end of year $ 6,529
=================================================
NOTE D - ALLOWANCE FOR CREDIT LOSSES
The changes in the allowance for credit losses for the years indicated were as
follows:
----------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
----------------------------------------------------------------------------
Balance at beginning of year $ 16,365 $ 15,431 $ 14,576
Provisions charged to expense 7,436 6,250 2,410
Recoveries 1,094 609 350
Charge-offs (7,124) (5,925) (1,905)
----------------------------------------------------------------------------
Balance at end of year $ 17,771 $ 16,365 $ 15,431
============================================================================
Information related to loans considered to be impaired for the years indicated
were as follows:
----------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
----------------------------------------------------------------------------
Recorded investment
in impaired loans $ 2,798 $ 8,483 $ 10,787
Total allowance on impaired loans 429 2,101 2,129
Average recorded investment
in impaired loans during the year 8,474 10,544 5,574
Interest income on impaired loans
using cash basis of income recognition 422 131 109
----------------------------------------------------------------------------
Note E - other real estate owned
The carrying value of foreclosed real estate, net of the following allowance for
losses, were $8,583,000, $3,686,000 and $1,844,000 at December 31, 1998, 1997
and 1996, respectively. Activity in the allowance for losses on other real
estate owned were as follows:
--------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
--------------------------------------------------------------------------
Balance at beginning of year $ 188 $ - $ -
Provisions charged to expense 1,407 248 71
Charge-offs, net of recoveries (493) (60) (71)
--------------------------------------------------------------------------
Balance at end of year $ 1,102 $ 188 $ -
==========================================================================
NOTE F - PREMISES AND EQUIPMENT
The Company's premises and equipment at December 31, 1998 and 1997 were as
follows:
----------------------------------------------------------------
(in thousands of dollars) 1998 1997
----------------------------------------------------------------
Premises $ 21,493 $ 20,684
Equipment 22,236 18,962
----------------------------------------------------------------
43,729 39,646
Less accumulated depreciation
and amortization 22,813 20,334
----------------------------------------------------------------
Net carrying value $ 20,916 $ 19,312
================================================================
Depreciation and amortization charged to operations for the years ended December
31, 1998, 1997 and 1996 were as follows:
------------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
------------------------------------------------------------------------------
Net occupancy expenses $ 746 $ 715 $ 389
Equipment expenses 2,017 1,751 1,884
------------------------------------------------------------------------------
Total depreciation and amortization $ 2,763 $ 2,466 $ 2,273
==============================================================================
The Company leases certain properties and equipment under leases that expire on
various dates through 2010. Certain leases provide for renegotiations at fixed
intervals and require payment of real estate taxes, maintenance, insurance and
certain other operating expenses. Rent charged against operations, including
equipment rental, were as follows:
----------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
----------------------------------------------------------------------------
Rental expense $ 6,071 $ 6,989 $ 7,236
Sublease income 643 1,380 853
----------------------------------------------------------------------------
Total rent $ 5,428 $ 5,609 $ 6,383
============================================================================
The following are future minimum rental commitments for long-term non-cancelable
operating leases as of December 31, 1998. Future rentals subject to
renegotiations are computed at the latest annual rents.
----------------------------------
(in thousands of dollars)
----------------------------------
1999 $ 5,267
2000 4,838
2001 3,938
2002 3,436
2003 3,321
Later years 30,333
----------------------------------
Total $ 51,133
==================================
NOTE G - DEPOSITS
Deposits consisted of the following at December 31, 1998 and 1997:
-------------------------------------------------------------------
(in thousands of dollars) 1998 1997
-------------------------------------------------------------------
Non-interest bearing deposits $ 119,649 $ 110,577
Interest bearing deposits:
Savings, money market & NOW 366,610 343,928
Time deposits of $100 or more 230,123 211,314
Time deposits less than $100 368,228 342,909
-------------------------------------------------------------------
Total interest bearing
deposits 964,961 898,151
===================================================================
Total deposits $ 1,084,610 $ 1,008,728
====================================================================
Interest expense on deposits for the years ended December 31, 1998, 1997 and
1996 were as follows:
-------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
-------------------------------------------------------------------------
Savings, money market & NOW $ 9,393 $ 8,940 $ 8,692
Time deposits of $100 or more 11,184 9,400 9,578
Time deposits less than $100 19,363 17,626 16,872
-------------------------------------------------------------------------
Total interest expense $ 39,940 $ 35,966 $ 35,142
=========================================================================
At December 31, 1998, the scheduled maturities of time deposits were as follows:
------------------------------------
(in thousands of dollars)
------------------------------------
1999 $ 530,282
2000 50,677
2001 11,851
2002 2,893
2003 2,648
------------------------------------
Total $ 598,351
====================================
NOTE H - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1998 and 1997 consisted of the following:
-------------------------------------------------------------------------
(in thousands of dollars) 1998 1997
-------------------------------------------------------------------------
Advances from the FHLB $ 56,450 $ 136,700
Federal treasury tax and loan note 476 512
-------------------------------------------------------------------------
Total short-term borrowings $ 56,926 $ 137,212
=========================================================================
NOTE I - LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consisted of the following:
------------------------------------------------------------------
(in thousands of dollars) 1998 1997
------------------------------------------------------------------
Advances from the FHLB $ 133,004 $ 140,040
Collateralized mortgage obligations - 1,008
------------------------------------------------------------------
Total long-term debt $ 133,004 $ 141,048
==================================================================
The advances from the FHLB bear interest at rates ranging from 4.53% 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
$43,478,000 and $99,180,000, loans of $579,105,000 and $585,413,000, and
interest-bearing deposits in other banks of $20,000,000 and $30,000,000 in 1998
and 1997, respectively, and all stock in the FHLB. FHLB advances are under
credit line agreements of $453,931,000 and $456,371,000 in 1998 and 1997,
respectively. Aggregate maturities of long-term advances from the FHLB as of
December 31, 1998 were as follows:
------------------------------------
(in thousands of dollars)
------------------------------------
1999 $ 49,755
2000 38,105
2001 41,982
2002 -
2003 3,000
Later years 162
------------------------------------
Total $ 133,004
====================================
NOTE J - OTHER EXPENSES
Other expenses for the years ended December 31, 1998, 1997 and 1996 were as
follows:
-----------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
-----------------------------------------------------------------------------
Legal and professional fees $ 3,085 $ 4,748 $ 4,467
Advertising and promotion 1,631 2,273 1,917
Provision for other real estate owned 1,407 248 71
Deposit insurance premium 595 406 3,282
Voluntary separation benefits - - 3,162
Other 9,152 8,729 7,604
-----------------------------------------------------------------------------
Total other expenses $ 15,870 $ 16,404 $ 20,503
=============================================================================
NOTE K - INCOME TAXES
The components of income tax expense for the years ended December 31, 1998, 1997
and 1996 were as follows:
--------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
--------------------------------------------------------------------
Current:
Federal $ 5,658 $ 3,949 $ 2,434
State 1,236 392 398
--------------------------------------------------------------------
Total current 6,894 4,341 2,832
--------------------------------------------------------------------
Deferred:
Federal (1,135) 232 1,459
State (294) 184 340
--------------------------------------------------------------------
Total deferred (1,429) 416 1,799
--------------------------------------------------------------------
Total income taxes expense $ 5,465 $ 4,757 $ 4,631
====================================================================
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities as of December 31, 1998 and
1997 were as follows:
-----------------------------------------------------------------
(in thousands of dollars) 1998 1997
-----------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $ 5,684 $ 4,953
Hawaii state franchise taxes 535 317
Gain on sale of building 1,704 1,872
Deferred compensation 1,211 1,437
Other 1,704 1,602
------------------------------------------------------------------
Total deferred tax assets 10,838 10,181
------------------------------------------------------------------
Deferred tax liabilities:
FHLB stock dividends 6,720 5,871
Deferred loan fees 2,545 3,844
Net unrealized gain on
available-for-sale securities 458 786
Unrealized losses on loans - 143
Other 1,630 1,712
------------------------------------------------------------------
Total deferred tax liabilities 11,353 12,356
------------------------------------------------------------------
Net deferred tax liabilities $ 515 $ 2,175
=================================================================
Reconciliation of the federal statutory rate to the Company's effective income
tax rate for the years ended December 31, 1998, 1997 and 1996 was as follows:
-----------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
Tax exempt interest (3.0) (2.7) (3.2)
Hawaii state franchise taxes,
net of federal tax benefit 4.6 4.6 4.6
Amortization of goodwill 2.2 2.5 2.6
Other 0.7 0.3 0.6
-----------------------------------------------------------------------
Effective income tax rate 39.5% 39.7% 39.6%
=======================================================================
The Small Business Job Protection Act of 1996 (the "Job Act") contains
provisions that require the Association to account for bad debts in the same
manner as banks for income tax reporting purposes. Accordingly, the Association
changed its tax method for 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 represents
additions to the reserve after June 30, 1988. The Association has provided
deferred taxes for the amount and will recapture its bad debt reserves over six
years. Recapture may be deferred up to two years if certain residential lending
requirements are met 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, 1998 is an amount of approximately $10,001,000,
which represents the accumulation of bad debt deductions for which no provision
for federal income taxes has been made. These amounts may be restored to income
if the Association or successor institution liquidates, redeems shares or pays a
dividend in excess of tax basis earnings and profits. If the Association is
required to restore any of these amounts to income, a tax liability will be
imposed for these amounts at the then current income tax rates.
NOTE L - DEFERRED GAIN
Previously, Citibank Properties, Inc. (a wholly owned subsidiary of City 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"). Prior to the sale, the
Bank had entered into a 20-year office lease agreement with the partnership for
the ground floor, mezzanine and first four floors of the building. The Bank's
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 annual gains of $447,000. As of December 31,
1998, the unamortized deferred gain was $4,544,000.
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, caps,
floors, options and forward contracts. 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. At
December 31, 1998 there were no interest rate swaps outstanding. For the
majority of its swaps outstanding at December 31, 1997 and 1996, the Company
paid the fixed rate and received the floating rate. The notional principal
amounts of interest rate swaps outstanding at December 31, 1997 and 1996 were
$10,000,000 and $25,000,000, respectively. The estimated fair values of
outstanding interest rate swaps were $(17,000) and $(127,000) at December 31,
1997 and 1996, respectively.
Interest rate options, which primarily consists of caps and floors, are interest
rate protection instruments that involve the payment from the seller to the
buyer of an interest rate differential in exchange for a premium paid by the
buyer. This differential represents the difference between current interest
rates and an agreed upon rate applied to a notional amount. Interest rate caps
limit the cap holder's risk associated with an increase in interest rates.
Interest rate floors limit the risk associated with a decline in interest rates.
Interest rate options at December 31, 1998 and 1997 consisted of the following:
- --------------------------------------------------------------------------------
1998 1997
----------------------- -----------------------
Notional Estimated Notional Estimated
(in thousands of dollars) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
Caps $ 5,000 $ - $ 5,000 $ 5,066
Floors 10,000 144 - -
- --------------------------------------------------------------------------------
Total interest rate
options $ 15,000 $ 144 $ 5,000 $ 5,066
================================================================================
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.
----------------------------------------------------------------------------
(in thousands of dollars) 1998 1997 1996
----------------------------------------------------------------------------
Pay fixed swaps - notional amounts - $10,000 $25,000
Average receive rate - 5.88% 5.50%
Average pay rate - 6.25% 6.52%
============================================================================
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, floating rate loans are funded by short-term
liability pools that reprice frequently, while fixed rate loans are funded by
longer-term liability pools that reprice less frequently.
As part of the Company's asset-liability management, various assets and
liabilities, such as investment securities financed by borrowings, are
effectively modified by derivatives to lock in spreads and reduce the risk of
losses in value due to interest rate changes. The deferred gains and losses
arising through those instruments are included in the carrying amounts of the
related assets and liabilities, and are recognized in income as part of the
revenue or expense arising from those assets and liabilities.
Interest rate options written and purchased and forward exchange contracts are
used in hedging the risks associated with commitments to sell securities in
connection with mortgage banking activities. The hedging gains and losses are
explicitly deferred on a net basis in the 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. At December 31, 1998, there were outstanding purchased interest rate
options with a notional principal amount of $15,000,000 and estimated fair value
of $77,000.
Forward contracts are commitments to either purchase or sell a financial
instrument at a future date for a specified price and are settled through
delivery of the underlying financial instrument. The credit risk of forward
contracts arises 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 a significant number of outstanding 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. 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.
------------------------------------------------------------
(in thousands of dollars) 1998 1997
------------------------------------------------------------
Loan commitments $ 172,555 $ 165,153
Guarantees and letters of credit 5,516 6,828
------------------------------------------------------------
Totals $ 178,071 $ 171,981
============================================================
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.
NOTE O - COMMITMENTS AND CONTINGENCIES
The Company has prevailed in a case filed in 1996 by Plaintiffs, the purchasers
of the International Savings Building (the "ISL Building"). The plaintiffs
sought rescission of the sale of the ISL Building based on alleged
misrepresentations and non-disclosure regarding ground lease negotiations and
land appraisals concerning the property. Further, the plaintiffs alleged
unreasonable demands by the fee-simple owner. In October 1998, the Company
received a jury verdict in its favor finding no defendants liable on the
Plaintiff's claims and finding the Plaintiff liable on the Company's
counterclaims. In December 1998, the trial court judge awarded the Company their
requested reimbursement of attorneys' fees. The Plaintiff has subsequently filed
a motion for reconsideration, which has not yet been decided. The Company has
not recorded any recovery amounts related to this judgement as our counsel
anticipates an appeal will be filed.
The Company is a defendant in various legal proceedings arising from normal
business activities. While the results of these proceedings can not be predicted
with certainty, management believes, based on advice of counsel, the aggregate
liability, if any, resulting from these proceedings would not have a material
effect on the Company's consolidated financial position or results of
operations.
NOTE P - EMPLOYEE BENEFIT PLANS and VOLUNTARY SEPARATION PROGRAM
1. Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan 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. Contributions to
the plan were $350,000 for 1998. There were no contributions to the plan in
1997 and 1996.
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 15% 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 participant's
compensation. In addition, the Company will contribute an amount equal to 2%
of the compensation of all participants, and additional amounts determined
by the Board of Directors at their discretion. Contributions to the plan for
1998, 1997 and 1996 were $173,000, $407,000 and $408,000, respectively.
3. Voluntary Separation Program
During 1996, the Company offered a Voluntary Separation Program to all
employees to reduce the work force. Ninety-seven employees participated in
the program and voluntary separation benefits of $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, 1998, 1997 and 1996 amounted to $234,000, $641,000 and
$444,000, respectively. The Company is the beneficiary of life insurance
policies, with an aggregate cash surrender value of $10,807,000 at December
31, 1998, that were 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 (the "SCP") and the stockholders approved it on January 26, 1995. On
April 30, 1998, the stockholders approved the increase of shares of common
stock reserved under the SCP to 400,000 shares. Such shares may be granted
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 (the
"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, the option grants were performance and index options
with a term of ten years. During 1997, the Company amended the terms of
these options. The amendment provides that the performance options granted
shall become exercisable in full on 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 January 2, 1998 and December 15, 1997, the Company granted additional
stock options of 12,500 and 72,500, respectively. The exercise prices of
these options are $42.50 and $43.00 per share, respectively. 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 using the fair value based method, the Company's net income and
net income per share would have been the pro forma amounts below:
-----------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------
Pro forma:
Net income $7,491,000 $7,032,000 $6,969,000
Earnings per share:
Basic $2.11 $1.98 $1.96
Diluted $2.10 $1.98 $1.96
=======================================================================
During the initial phase-in period in 1996, the effects of applying the fair
value based method 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. For grants in 1998 and 1997, the
following weighted-average assumptions were used; expected dividend of 0.51%
and 0.41%, expected volatility of 32.91% and 33.89%, risk-free interest rate
of 5.62% and 5.78%, and expected life of 6.0 years and 5.7 years. The
weighted-average fair value of options granted during 1998 and 1997 were
$17.26 and $17.05, respectively.
Transactions involving stock options are summarized as follows:
--------------------------------------------------------------------------
Stock Options Weighted-Average
Description Outstanding Exercise Price
--------------------------------------------------------------------------
Balance at December 31, 1995 101,250 $31.43
Forfeited (12,300) $31.75
--------------------------------------------------------------------------
Balance at December 31, 1996 88,950 $32.05
Granted 72,500 $43.00
Forfeited (26,750) $32.72
--------------------------------------------------------------------------
Balance at December 31, 1997 134,700 $38.59
Granted 12,500 $42.50
Forfeited (8,250) $33.92
Exercised (1,000) $29.00
--------------------------------------------------------------------------
Balance at December 31, 1998 137,950 $38.85
==========================================================================
As of December 31, 1998, stock options outstanding had exercise prices
between $29.00 and $43.00 and a weighted-average remaining contractual life
of 8.0 years and 125,450 stock options were exercisable with a
weighted-average exercise price of $38.49. 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 8.8 years and 62,200 stock
options were exercisable with a weighted-average exercise price of $32.56.
Under the SCP, the Committee may grant a specified number of shares to an
employee subject to terms and conditions prescribed by the Committee. And
the Committee has the authority to grant any participant SARs and 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 stock or SARs were granted during 1998, 1997 and 1996.
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 Q - STOCKHOLDERS' EQUITY
1. Regulatory Matters
The Company is subject to various capital requirements administered by
federal regulatory agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary -
actions by regulators that, if undertaken could have a direct material
effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Company's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Total and Tier
1 capital (as defined in the regulations) to risk-weighted assets (as
defined) and Tier I capital (as defined) to average assets (as defined). The
following table presents the actual and required regulatory capital amounts
and ratios of the Company as of December 31, 1998 and 1997. No amounts were
deducted from the Association's capital for interest rate risk in 1998 and
1997. Management believes that the Company, the Bank and the Association
meet all capital adequacy requirements to which they are subject as of
December 31, 1998.
----------------------------------------------------------------------------------------------
For Capital To Be Well
Actual Adequacy Purposes Capitalized
----------------- ----------------- ------------------
(in thousands of dollars) Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------------
December 31, 1998:
Total capital (to risk weighted assets):
Consolidated $133,836 14.80% $ 72,327 8.00% N/A
Bank 75,002 12.12% 49,514 8.00% $ 61,893 10.00%
Association 57,782 18.82% 24,557 8.00% 30,697 10.00%
Tier 1 capital (to risk weighted assets):
Consolidated 122,455 13.54% 36,163 4.00% N/A
Bank 67,227 10.86% 24,754 4.00% 37,136 6.00%
Association 54,664 17.81% 9,209 3.00% 18,418 6.00%
Tier 1 capital (to average assets):
Consolidated 122,455 7.90% 62,034 4.00% N/A
Bank 67,227 8.70% 30,926 4.00% 38,658 5.00%
Association 54,664 8.51% 25,684 4.00% 32,105 5.00%
Tangible capital (to adjusted total assets):
Association 54,664 8.51% 9,632 1.50% N/A
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
For Capital To Be Well
Actual Adequacy Purposes Capitalized
----------------- ----------------- -----------------
(in thousands of dollars) Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------------
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 1 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 1 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
==============================================================================================
The most recent notification from the federal regulatory agencies
categorized the Company as "well capitalized" under the regulatory framework
for prompt corrective action. To be capitalized as "well capitalized", the
Company must maintain minimum Tier 1 and Total risk-based capital ratios and
Tier 1 leverage ratios as set forth in the table above. 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. As
of December 31, 1998, there are no conditions or events since that
notification that management believes have changed the Company's capital
category.
The United States Congress passed legislation to strengthen the insurance
fund administered by the Savings Association Insurance Fund through a
special assessment on the Association's deposit base as of March 31, 1995.
The special assessment totaled $2,383,000 during the year ended December 31,
1996.
2. Regulatory Agreements
During 1996, the Company entered into a Memorandum of Understanding (the
"MOU") with the Federal Reserve Bank of San Francisco (the "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 (the "FDIC"). This MOU was terminated by the FDIC in
March 1999, based on the adoption of a resolution by the Bank's Board of
Directors. This resolution, approved by the Bank's Board of Directors in
February 1999, 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 SFAS No. 128, "Earnings per
Share", which specifies the computation, presentation, and disclosure
requirements for earnings per share. The table below presents the
information used to compute basic and diluted earnings per common share for
the years ended December 31, 1998, 1997 and 1996:
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------
Numerator:
Net income $8,369,000 $7,218,000 $7,059,000
==========================================================================================
Denominator:
Weighted average shares outstanding 3,551,891 3,551,228 3,551,228
Effect of dilutive securities-stock
options 7,014 7,859 -
------------------------------------------------------------------------------------------
Adjusted weighted average shares
outstanding, assuming dilution 3,558,905 3,559,087 3,551,228
==========================================================================================
Earnings per share - basic $2.36 $2.03 $1.99
Earnings per share - assuming dilution $2.35 $2.03 $1.99
==========================================================================================
The following options 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. At December 31, 1998, outstanding
options to purchase 96,625 shares at a range of $37.22 to $43.00. At
December 31, 1997, outstanding options to purchase 72,500 shares at $43.00.
For the year ended December 31, 1996, there were no options.
NOTE R - COMPREHENSIVE INCOME
The tax effects allocated to each component of other comprehensive income for
the years ended December 31, 1998, 1997, and 1996 were as follows:
------------------------------------------------------------------------------
Before Tax Net of
Tax (Expense) Tax
(in thousands of dollars) Amount or Benefit Amount
------------------------------------------------------------------------------
1998:
Unrealized gains (losses) on securities:
Unrealized holding losses
arising during the year $ (209) $ 171 $ (38)
Less: reclassification adjustment
for gains realized in net income 392 (157) 235
------------------------------------------------------------------------------
Other comprehensive income $ (601) $ 328 $ (273)
==============================================================================
1997:
Unrealized gains on securities:
Unrealized holding gains
arising during the year $ 671 $ (266) $ 405
Less: reclassification adjustment
for gains realized in net income 177 (71) 106
------------------------------------------------------------------------------
Other comprehensive income $ 494 $ (195) $ 299
==============================================================================
1996:
Unrealized gains (losses) on securities:
Unrealized holding gains
arising during the year $ 230 $ (83) $ 147
Less: reclassification adjustment
for gains realized in net income 1,401 (560) 841
------------------------------------------------------------------------------
Other comprehensive income $ (1,171) $ 477 $ (694)
==============================================================================
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments is determined by the Company
using available market information and appropriate valuation methodologies.
However, the Company used considerable judgment in interpreting market data to
develop the estimates of fair value. In addition, significant estimations and
present value calculations were used for purposes of the disclosure.
Accordingly, the estimates presented are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use of
different market assumptions and estimations methodologies may have a material
effect on the estimated fair value amounts. In estimating the fair value of its
financial instruments, the Company used the following methods and assumptions:
Cash and due from banks, and interest-bearing deposits in other banks: The
carrying amounts approximate fair values.
Investment securities (including mortgage-backed securities): Fair values
for securities are based on quoted market prices, if available. If not
available, quoted market prices of comparable instruments are used except in
the case of certain options and swaps that utilize pricing models. For
restricted investment securities, the carrying amount approximate fair
value.
Loans: For variable rate loans that reprice frequently and entail no
significant change in credit risk, fair values are based on carrying values.
For certain mortgage loans (e.g., one-to-four family residential), fair
values are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. For other loans, fair values 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.
Deposits: The estimated fair values of deposits with no stated maturities,
which includes demand deposits, checking accounts, passbook savings and
certain types of money market accounts, is equal to the amount payable on
demand. The estimated fair values of fixed maturity deposits is estimated
using a discounted cash flow calculation with rates currently offered by the
Company for deposits of similar remaining maturity. 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 FHLB and other
short-term borrowings approximate their fair values.
Long-term debt (other than deposits): The fair values are estimated using
discounted cash flow analyses using the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Off-balance sheet financial instruments: Fair values for letters of credit,
guarantees, and lending commitments are based on fees currently charged to
enter into similar agreements, considering the remaining terms of the
agreements and the counterparties' credit standing.
Derivative financial instruments: Fair values for swaps, caps, floors,
forwards, and options are based upon current settlement values (financial
forwards), if available. If there are no relevant comparables, on pricing
models or formulas using current assumptions (interest rate swaps and
options).
The following table provides a summary of the carrying and fair values of the
Company's financial instruments at December 31, 1998 and 1997:
--------------------------------------------------------------------------------------------
1998 1997
------------------------ -------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in thousands of dollars) Value Value Value Value
--------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 61,658 $ 61,658 $ 45,150 $ 45,150
Interest-bearing deposits in other
banks 20,000 20,000 30,000 30,000
Federal funds sold 47,752 47,752 4,705 4,705
Investment securities 141,764 141,764 208,717 212,760
Restricted investment securities 29,481 29,481 27,348 27,348
Loans 961,924 1,014,427 1,032,940 1,040,008
Financial liabilities:
Deposits (1,084,610) (1,086,734) (1,008,728) (1,008,425)
Short-term borrowings (56,926) (56,926) (137,212) (137,212)
Long-term debt (133,004) (121,631) (141,048) (128,098)
Off-balance sheet financial instruments:
Derivative financial instruments:
In a net payable position - - (10,000) (17)
Interest rate cap 5,000 - 5,000 5
Interest rate floor 10,000 144 - -
Interest rate options 15,000 77 - -
Loan commitments 172,555 1,213 165,153 438
Guarantees and letters of credit 5,516 53 6,828 76
============================================================================================
NOTE T - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
Condensed financial statements of CB Bancshares, Inc. (Parent only) follows:
CONDENSED BALANCE SHEETS
-----------------------------------------------------------------------------------
December 31,
(in thousands, except number -----------------------------
of shares and per share data) 1998 1997
-----------------------------------------------------------------------------------
ASSETS
Cash on deposit with the
Bank and Association $ 658 $ 1,467
Investment in subsidiaries:
Bank 67,936 62,591
Association 63,610 60,667
Other 423 423
Premises and equipment, net 205 596
Other assets 513 513
-----------------------------------------------------------------------------------
Total assets $ 133,345 $ 126,257
===================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Advances from the Bank, net $ 7 $ 7
Dividends payable 210 169
Other liabilities 756 1,016
-----------------------------------------------------------------------------------
Total liabilities 973 1,192
-----------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock $1 par value
Authorized and unissued
25,000,000 shares - -
Common stock $1 par value
Authorized 50,000,000 shares;
issued and outstanding, 3,552,228
and 3,551,228 shares, respectively 3,552 3,551
Additional paid-in capital 65,108 65,080
Accumulated other comprehensive
income, net of tax 928 1,201
Retained earnings 62,784 55,233
-----------------------------------------------------------------------------------
Total stockholders' equity 132,372 125,065
-----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 133,345 $ 126,257
===================================================================================
NOTE T - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
(continued)
CONDENSED STATEMENTS OF INCOME
-------------------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------------------
(in thousands of dollars) 1998 1997 1996
-------------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries:
Bank $ 500 $ 1,400 $ 6,262
Association 250 1,179 4,600
Other interest income 25 165 462
-------------------------------------------------------------------------------------------
Total income 775 2,744 11,324
Total expenses 1,406 3,850 8,302
-------------------------------------------------------------------------------------------
Operating (loss) profit (631) (1,106) 3,022
-------------------------------------------------------------------------------------------
Equity in undistributed income of subsidiaries:
Bank 5,830 3,364 1,010
Association 2,744 3,404 100
Other - (2) (19)
-------------------------------------------------------------------------------------------
8,574 6,766 1,091
-------------------------------------------------------------------------------------------
Income before income taxes 7,943 5,660 4,113
Income tax benefit 426 1,558 2,946
-------------------------------------------------------------------------------------------
NET INCOME $ 8,369 $ 7,218 $ 7,059
===========================================================================================
NOTE T - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
(continued)
CONDENSED STATEMENTS OF CASH FLOW
---------------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------------------
(in thousands of dollars) 1998 1997 1996
---------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 8,369 $ 7,218 $ 7,059
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in undistributed
income of subsidiaries (8,572) (6,766) (1,091)
Decrease (increase) in dividend
receivable from the Bank - 1,500 (800)
Decrease (increase) in other assets - (1) 2,227
Increase (decrease) in other liabilities (249) (2,730) 2,862
---------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (452) (779) 10,257
---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net capital expenditures 391 303 (899)
----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities 391 303 (899)
----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends (777) (1,694) (4,614)
Stock options exercised 29 - -
Net decrease in short-term borrowings - - (3,000)
Decrease in advances from the Bank, net - - (231)
----------------------------------------------------------------------------------------------
Net cash used in financing activities (748) (1,694) (7,845)
----------------------------------------------------------------------------------------------
Increase (decrease) in cash (809) (2,170) 1,513
Cash at beginning of year 1,467 3,637 2,124
-----------------------------------------------------------------------------------------------
Cash at end of year $ 658 $ 1,467 $ 3,637
==============================================================================================
NOTE U - SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1998. The Company's business segments are organized
around services, products provided and regulatory environments. The two
operating segments are a bank and a savings institution. The segment data
presented below was prepared on the same basis of accounting as the consolidated
financial statements as described in Note A. Intersegment income and expense are
valued at prices comparable to those for unaffiliated companies.
- --------------------------------------------------------------------------------------------------
Parent
Company
(in thousands of dollars) Bank Association and Other Eliminations Consolidated
- --------------------------------------------------------------------------------------------------
1998:
Interest income $ 59,907 $ 52,401 $ 775 $ (1,023) $ 112,060
Interest expense 25,544 28,371 8 (25) 53,898
Depreciation and amortization 1,874 889 - - 2,763
Income before income taxes 9,970 5,244 7,943 (9,323) 13,834
Income tax expense (benefit) 3,640 2,251 (426) - 5,465
Total assets 788,913 639,442 133,513 (133,430) 1,428,438
Capital expenditures 1,877 2,616 - - 4,493
==================================================================================================
1997:
Interest income $ 59,093 $ 53,755 $ 2,601 $ (2,920) $ 112,529
Interest expense 25,630 28,182 47 - 53,859
Depreciation and amortization 1,849 617 - - 2,466
Income before income taxes 7,474 8,189 5,657 (9,345) 11,975
Income tax expense (benefit) 2,710 3,606 (1,559) - 4,757
Total assets 769,293 663,433 126,426 (123,926) 1,435,226
Capital expenditures 2,841 1,982 - - 4,823
==================================================================================================
1996:
Interest income $ 58,351 $ 53,251 $ 10,906 $ (11,261) $ 111,247
Interest expense 24,942 28,282 290 (37) 53,477
Depreciation and amortization 1,870 403 - - 2,273
Income before income taxes 11,401 8,159 4,084 (11,954) 11,690
Income tax expense (benefit) 4,130 3,458 (2,957) - 4,631
Total assets 762,074 634,066 123,336 (122,307) 1,397,169
Capital expenditures 2,074 879 899 - 3,852
==================================================================================================
Expenses of the Company are fully allocated to each segment. Parent Company
expenses are not allocated to the segments. Significant elimination amounts
reflect the following: (a) dividends received by the Parent Company; (b)
interest income on loans held by the Bank and serviced by the Association; (c)
rental income and expense for rent charged by the Bank to the Association; and
(d) checking accounts of the Parent Company and the Association held by the
Bank.
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, 1998 and 1997
Consolidated Statements of Income - For years ended December 31, 1998, 1997 and
1996
Consolidated Statements of Changes in Stockholders' Equity - For years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows - For years ended December 31, 1998, 1997
and 1996
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
3.1 Articles of Incorporation of CB Bancshares, Inc.,
incorporated by reference to Exhibit 3.1 filed with the
Registrant's Registration Statement on Form S-4,
Registration No. 33-72340.
3.2 By-laws of CB Bancshares, Inc., incorporated by reference to
Exhibits 3.2 and 3.3 filed with the Registrant's Registration
Statement on Form S-4, Registration
No. 33-72340.
4.0 No instrument which defines the rights of holders of long-term
debt, of the registrant and all of its consolidated
subsidiaries, is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
4.1 Rights Agreement dated as of March 16, 1989, between CB
Bancshares, Inc. and City Bank, Rights Agent, incorporated by
reference to Form 8-A, filed on April 24, 1989 (File No.
0-12396).
4.2 Amendment to Rights Agreement made as of June 21, 1989,
incorporated by reference to Form 8 Amendment No. 1 to Form
8-A, filed on July 11, 1989 (File No. 0-12396).
4.3 Amendment No. 2 to Rights Agreement entered into as of
August 15, 1990, incorporated by reference to Form 8
Amendment No. 2 to Form 8-A, filed on August 28, 1990
(File No. 0-12396).
4.4 Amendment No. 3 to Rights Agreement entered into as of
February 17, 1993, incorporated by reference to Exhibit 4.4
to Form 8-A/A, Amendment No. 3, filed on March 25, 1999.
4.5 Amendment No. 4 to Rights Agreement entered into as of
March 25, 1999, incorporated by reference to Exhibit 4.5 to
Form 8-A/A, Amendment No.3, filed on March 25, 1999.
10.1 Stock Compensation Plan, incorporated by reference to Exhibit
A and B to the Registrant's Proxy Statement for the January
25, 1995 Special Meeting of Shareholders, filed on
December 9, 1995. *
10.2 Form of Stock Option Agreement incorporated by reference to
Exhibit 10.6 of Form 10-K filed on April 1, 1996. *
10.3 Employment agreement between CB Bancshares, Inc. and Ronald
M. Migita, dated May 31,1995, is incorporated by reference to
Exhibit 10 to Registrant's Form 10-Q filed on
August 14, 1995. *
10.4 Form of Change in Control Agreement is incorporated by
reference to Exhibit 99.2 of Form 8-K filed on
April 18, 1996.
21 Subsidiaries of the Registrant incorporated by reference to
Exhibit 21 filed with the Registrant's Form 10-K filed on
March 31, 1998.
27.1 Financial Data Schedule (Fiscal year ended December 31, 1998)
* Management contract or compensatory plan or arrangement.
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,
1998.
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, 1999 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, 1999
- ----------------------------------- ----------------------------------
Donald J. Andres, Director Tomio Fuchu, Director
/s/ James H. Kamo /s/ Larry K. Matsuo
- ----------------------------------- ----------------------------------
James H. Kamo, Chairman of the Larry K. Matsuo, Director
Board & Secretary
/s/ Ronald K. Migita /s/ Caryn S. Morita
- ----------------------------------- ----------------------------------
Ronald K. Migita, President, Chief Caryn S. Morita, Senior Vice
Executive Officer & Director President & Director
/s/ Hiroshi Sakai
- ----------------------------------- ----------------------------------
Hiroshi Sakai, Director Yoshiki Takada, Director
/s/ Lionel Y. Tokioka
- ----------------------------------- ----------------------------------
Lionel Y. Tokioka, Director H. Clifton Whiteman, Director
/s/ Daniel Motohiro /s/ Dwight L. Yoshimura
- ----------------------------------- ----------------------------------
Daniel Motohiro, Senior Vice Dwight L. Yoshimura, Director
President, Treasurer & Chief
Financial Officer (Principal
Financial Officer)
EXHIBIT INDEX
Exhibit Description
3.1 Articles of Incorporation of CB Bancshares, Inc.,
incorporated by reference to Exhibit 3.1 filed with the
Registrant's Registration Statement on Form S-4,
Registration No. 33-72340.
3.2 By-laws of CB Bancshares, Inc., incorporated by reference to
Exhibits 3.2 and 3.3 filed with the Registrant's Registration
Statement on Form S-4, Registration
No. 33-72340.
4.0 No instrument which defines the rights of holders of long-term
debt, of the registrant and all of its consolidated
subsidiaries, is filed herewith pursuant to Regulation S-K,
Item 601(b)(4)(iii)(A). Pursuant to this regulation, the
registrant hereby agrees to furnish a copy of any such
instrument to the SEC upon request.
4.1 Rights Agreement dated as of March 16, 1989, between CB
Bancshares, Inc. and City Bank, Rights Agent, incorporated by
reference to Form 8-A, filed on April 24, 1989 (File No.
0-12396).
4.2 Amendment to Rights Agreement made as of June 21, 1989,
incorporated by reference to Form 8 Amendment No. 1 to Form
8-A, filed on July 11, 1989 (File No. 0-12396).
4.3 Amendment No. 2 to Rights Agreement entered into as of
August 15, 1990, incorporated by reference to Form 8
Amendment No. 2 to Form 8-A, filed on August 28, 1990
(File No. 0-12396).
4.4 Amendment No. 3 to Rights Agreement entered into as of
February 17, 1993, incorporated by reference to Exhibit 4.4
to Form 8-A/A, Amendment No. 3, filed on March 25, 1999.
4.5 Amendment No. 4 to Rights Agreement entered into as of
March 25, 1999, incorporated by reference to Exhibit 4.5 to
Form 8-A/A, Amendment No.3, filed on March 25, 1999.
10.1 Stock Compensation Plan, incorporated by reference to Exhibit
A and B to the Registrant's Proxy Statement for the January
25, 1995 Special Meeting of Shareholders, filed on
December 9, 1995. *
10.2 Form of Stock Option Agreement incorporated by reference to
Exhibit 10.6 of Form 10-K filed on April 1, 1996. *
10.3 Employment agreement between CB Bancshares, Inc. and Ronald
M. Migita, dated May 31,1995, is incorporated by reference to
Exhibit 10 to Registrant's Form 10-Q filed on
August 14, 1995. *
10.4 Form of Change in Control Agreement is incorporated by
reference to Exhibit 99.2 of Form 8-K filed on
April 18, 1996.
21 Subsidiaries of the Registrant incorporated by reference to
Exhibit 21 filed with the Registrant's Form 10-K filed on
March 31, 1998.
27.1 Financial Data Schedule (Fiscal year ended December 31, 1998)
* Management contract or compensatory plan or arrangement.