Back to GetFilings.com
1
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
OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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) 535-2500
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 March 6, 2000, registrant had outstanding 3,242,782 shares of common
stock. The aggregate market value of registrant's Common Stock held by
non-affiliates based on the closing price on March 6, 2000 was approximately
$82,269,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on April 27, 2000 are incorporated by reference into Part III and IV.
1
2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, included in this report that address results or
developments that CB Bancshares, Inc. (the "Company") expects or anticipates
will or may occur in the future, where statements are preceded by, followed by
or included the words "believes", "plans", "intends", "expects", "anticipates"
or similar expressions, including such things as (i) business strategy; (ii)
economic trends and market condition, particularly in Hawaii; (iii) the
direction of interest rates and prepayment speeds of mortgage loans and
mortgage-backed securities; (iv) the adequacy of the Company's allowances for
credit and real estate losses based on credit risks inherent in the lending
processes; (v) expansion and growth of the Company's business and operations;
(vi) renewal of existing credit agreements with and availability of additional
advances from the Federal Home Loan Bank of Seattle (the "FHLB"); and (vii)
other matters are forward-looking statements. These statements are based upon
certain assumptions and analyses made by the Company in light of its experience
and its perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. These statements are subject to a number of risks and
uncertainties, many of which are beyond the control of the Company, including
general economic, market or business conditions; real estate market conditions,
particularly in Hawaii; the opportunities (or lack thereof) that may be
presented to and pursued by the Company; competitive actions by other companies;
changes in laws and regulations; decisions by the FHLB regarding renewal or
increase of the Company's credit agreements; and other factors. Actual results
could differ materially from those contemplated by these forward-looking
statements. Consequently, all of the forward-looking statements made in this
report are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even substantially realized, that they will have the
expected consequences to or effects on the Company and its business or
operations. Forward-looking statements made in this report speak as of the date
hereof. The Company undertakes no obligation to update or revise any
forward-looking statement in this report.
ITEM 1. BUSINESS
CB BANCSHARES, INC.
CB Bancshares, Inc. 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 three
wholly-owned subsidiaries, City Bank, International Savings and Loan
Association, Limited, 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 W of Notes to the Company's Consolidated Financial
Statements for segment information. At December 31, 1999, the Company had
consolidated total assets of $1,619.5 million, and total stockholders' equity of
$114.7 million.
CITY BANK
City Bank (the "Bank") is a state-chartered bank organized under the laws of the
State of Hawaii in 1959. The Bank is insured by the Federal Deposit Insurance
Corporation (the "FDIC"), and provides full commercial banking services through
nine 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;
2
3
handling domestic and foreign collections; selling travelers' checks and bank
money orders; and renting safe deposit boxes.
The Bank's primary focus has been corporate lending to small- to medium-sized
businesses by maintaining relationships and expertise within business segments
and providing personal customer service. Efforts will continue to develop and
enhance the expertise of the corporate sales force and to leverage these
corporate relationships to generate core deposit growth. The Bank also has
restructured in order to link the corporate wholesale lending to retail banking
with the intent of developing seamless service between the corporate loan
officers and the branch personnel and to increase cross-sales opportunities
between business customers and derivative retail customers.
The Consumer Loan Center was established in 1999 to provide additional retail
credit products and enhanced customer service to retail customers. One product
launched was the Premier Consumer Credit Line for which line draws can be taken
by writing checks.
The Bank also plans to further develop its electronic banking force by
continuing to develop internet banking capability for both business and retail
customers. In 1999, the Bank launched its "iCityBanker" product to its business
customers, the first internet-based delivery system in the State of Hawaii,
which enables customers to access their accounts, transfer funds and pay bills
using a standard Web browser. In the near future, the Bank plans to extend this
product availability to retail customers and intends to provide additional
functionality including wire transfer, electronic data interchange, mortgage
lending and E-commerce capability.
The Bank's efforts materialized in a 9.9% increase in its loan portfolio from
$576.5 million at December 31, 1998 to $633.3 million at December 31, 1999. The
increase was due to an 18.4%, or $33.3 million increase in commercial and
industrial loans, offset by a 36.4%, or $7.6 million decrease in commercial real
estate loans. Increases in commercial loans were accomplished by diversifying
the portfolio outside of Hawaii. Participations and purchases of United States
("U.S.") mainland-based credits and investments in United States Department of
Agriculture ("U.S.D.A.") guaranteed loans all served to increase commercial loan
volume.
The Bank's source of funds aside from core and time certificate of deposits
includes short- and long-term advances from the FHLB.
The Bank is subject to regular examinations by the FDIC 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, 1999, the Bank had total assets of $887.7 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 branch on the island of Maui.
The Association's principal business consists of attracting deposits from the
general public and utilizing advances from the FHLB and other borrowings to fund
its real estate lending activities, which consist primarily of lending on
one-to-four family residential properties.
3
4
The Association originates both fixed-rate and adjustable rate mortgage ("ARM")
loans. Its ability to originate ARM loans as opposed to fixed-rate loans is
dependent upon customer demand, which is affected by the current and expected
future level of interest rates. At origination or time of purchase, the
Association designates loans as held for investment or held for sale. Loans held
for sale have been sold in the secondary market to the Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC") and other
investors. The Association generally retains the servicing rights on most loans
sold, but certain loans are sold servicing released. The determination to sell a
specific loan or pool of loans is made based upon the Association's investment
needs, growth objectives and market opportunities.
Due to the rising interest rate environment experienced in 1999, the Association
decreased its loan sales activities and increased loans held for investment in
its portfolio. As a result, its mortgage loan portfolio increased 26.4%, or
$106.0 million, to $507.1 million at December 31, 1999 from $401.1 million at
December 31, 1998.
In order to increase its penetration in a contracting mortgage lending market,
the Association is continuing its efforts to establish and nurture relationships
and/or controlled business arrangements with real estate-related businesses such
as realtors, brokers and credit unions.
FHLB advances represent the Association's primary source of funds, aside from
core deposits and time certificates of deposit.
The Association has seven wholly-owned subsidiaries, ISL Services, Inc.
(inactive), DRI Assurance, Inc. (inactive), USA Investment Corporation
(inactive), ISL Realty Investment Corporation (inactive), ISL Funding
Corporation (inactive), ISL Capital Corporation and ISL Financial Corp. ISL
Capital Corporation engaged in mortgage banking activities and is currently
inactive. 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, 1999, the Association had total assets of $732.7 million.
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.
FHLB BORROWINGS
A primary source of funds for the Company is advances from the FHLB. The Bank
and the Association have credit line agreements allowing for both short- and
long-term advances, which are expected to be renewed in May 2000. The current
agreements provide for the Bank and the Association to borrow up to 25% and 40%
of total qualified assets, respectively provided that adequate mortgage loans
are available to be pledged as security. At December 31, 1999, the Company had
$154.4 million in short-term advances from the FHLB ranging in maturity from
January 2000 to October 2000 and rates from 4.93% to 6.11% and $223.4 million in
long-term debt from the FHLB ranging in maturity from March 2000 to September
2014 and rates from 5.15% to 8.22%. Advances are priced at the date of advance
as either fixed or LIBOR-based. Both credit line agreements have normal FHLB
default provisions which, among other matters, accelerate the maturity date if
there are material adverse changes to the financial condition of the Bank or
Association and/or if repayment ability becomes impaired. As of December 31,
1999, these borrowings were secured by $29.8 million of securities, $620.3
million in loans and all stock in the FHLB. See the Liquidity section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations as well as Notes J and K of Notes to the Company's Consolidated
Financial Statements for further information.
4
5
MERGER OF BANK AND ASSOCIATION
In December 1999, the Boards of Directors of the Company, the Bank and the
Association approved the Agreement and Plan of Merger by and between the Bank
and the Association (the "Merger"). Subject to regulatory approvals, the
Association and the Bank will be merged, with the Bank being the surviving
corporation. This Merger is expected to occur by July 1, 2000. The resulting
Bank will, by operation of law, possess all of the rights, privileges,
immunities and franchises of the Association and will be responsible and liable
for all liabilities and obligations of the Association, which will cease to
exist as a separate legal entity. In connection with the Merger, all Association
branches will become Bank branches. Two Association branches, which are already
housed in the same location with the Bank branches will be merged into the
respective Bank branch. Additionally, Association loan and deposit accounts will
become Bank accounts. See Note C of Notes to the Company's Consolidated
Financial Statements for further information.
COMPETITION AND ECONOMIC ENVIRONMENT
The earnings and growth of the Company and its subsidiaries are affected by the
changes in the monetary and fiscal policies of the 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.
According to "Blue Chip Economic Indicators," the expected growth rate for the
U.S. economy is 3.2% for 2000 as compared to 3.9% in 1999. Consumer price
inflation is anticipated to rise to 2.5% in 2000 as compared to 2.2% in 1999.
Additionally, forecasters expect unemployment to remain at a low 4.3% in 2000.
Recent forecasts for the State of California, on which Hawaii is highly
dependent, indicate that real personal income is expected to grow by 3.6% in
2000 (as compared to 3.7% in 1999) although unemployment is also expected to
increase to 2.6% in 2000 from 2.2% in 1999.
Recoveries in the Japanese economy were modest at a growth rate of 1.1% while
the rest of East Asia (South Korea, Taiwan, Singapore, Hong Kong and China) all
appear to have recovered from the economic and financial crisis that began in
1997 with positive growth rates in 1999. Growth rates in those regions are
expected to range from 2.9% to 6.8%.
5
6
In Hawaii, the latest labor market indicators report that unemployment continued
its decline in 1999, ranging from 5.6% to 5.8% as compared to an average 6.2% in
1998. Personal income and the gross state product growth were 2.5% and 2.7%,
respectively. Visitor arrivals, visitor census and length of stay, as well as
hotel occupancy rates, also increased in 1999 as compared to 1998. For most
economic indicators discussed, these increases, although modest, are promising
since the same indicators reflected smaller increases or slight decreases in
1998 as compared to 1997.
Although the median sales prices for single family homes ($281,000) and
condominium ($122,000) resale prices have declined 4.7% and 3.2%, respectively,
the Hawaii real estate market sales activity continued to strengthen in 1999.
There were 2,853 single family home resales and 3,298 condominium resales which
represent increases of 14.3% and 25.3%, respectively from 1998. From low sales
in 1996, the housing market has shown increases of 10.4%, 24.3% and 20.0% in
number of housing resales in 1997, 1998 and 1999, respectively. "Baby boomers"
reaching retirement as well as the "high-tech" professionals from California
have shown considerable interest in luxury vacation homes on the neighboring
islands of Maui, Kauai and Hawaii.
The construction industry got off to a strong start in the first two quarters of
1999 as increases from those periods in the prior year were significantly larger
than the second half of 1999 in the areas of the contracting general excise tax
base (measure of completed construction), value of private building permits
(measure of future construction) and number of units authorized (single- and
multi-family). Most of the reduction in growth in the second half of 1999
resulted from a 15.5% decrease in the third quarter of 1999 in permit values in
Honolulu City and County, which was offset by large increases in Maui, Kauai and
Hawaii Counties.
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.
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 laws, or regulations, 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.
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: (i) acquiring control (as defined) of another
insured institution (or holding company
6
7
thereof) without prior OTS approval, (ii) acquiring voting shares of another
insured institution (or holding company thereof) which is not a subsidiary,
subject to certain exceptions, (iii) 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.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act (the "CRA") requires
lenders to identify the communities served by the Company's offices and to
identify the types of credit the institution is prepared to extend within such
communities. The CRA also requires the OTS to assess the performance of the
institution in meeting the credit needs of its community and to take such
assessment into consideration when reviewing applications for mergers,
acquisitions, and other transactions. An unsatisfactory CRA rating may be the
basis for denying such an application.
Under the CRA regulations of the OTS and the other federal banking agencies, an
institution's performance in making loans and investments and maintaining
branches and providing services in low- and moderate-income areas within the
communities that it serves is evaluated. In connection with its assessment of
CRA performance, the OTS assigns a rating of "outstanding," "satisfactory,"
"needs to improve," or "substantial noncompliance."
THE FEDERAL HOME LOAN BANKS. The Federal Home Loan Banks provide a credit
facility for member institutions. As a member of the FHLB, the institution is
required to own capital stock in the FHLB in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential loans,
residential purchase contracts and similar obligations at the end of each
calendar year, assuming for such purposes that at least 30% of its assets were
residential mortgage loans, or 5% of its advances from the FHLB. The stock is
recorded as a restricted investment security at par. Furthermore, FHLB advances
must be collateralized with certain types of assets. Accordingly, the Company
has pledged certain loans to the FHLB as collateral for its advances.
TERMINATION OF MEMORANDUM OF UNDERSTANDING. 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. This MOU was terminated in
April 1999.
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 1999 totaled $12.0 million. Under
the laws of Hawaii, payment of dividends by the Bank and the Association is
subject to certain restrictions, and payment of dividends by the Company is
likewise subject to certain restrictions. Under the resolution, as discussed
above, the Bank is restricted from the payment of cash dividends without the
prior approval of the FDIC.
The Company reduced its quarterly dividend in the first quarter of 1998 from
$0.325 per share to $0.05 per share and increased to $0.06 per share in the
second quarter of 1998. The quarterly dividend was subsequently increased to
$0.07 per share in the second quarter of 1999. 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
7
8
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, 1999, 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 the greater of 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 1999, 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.
8
9
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 is also 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 economic value of
its total 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
9
10
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, 1999, the Company, the Bank and the Association exceeded applicable capital
requirements. The consolidated capital position of the Company at December 31,
1999 was as follows:
Company ratio Minimum required ratio
------------- ----------------------
Risk-based Capital:
Tier 1 capital ratio 11.95% 4.00%
Total capital ratio 13.21% 8.00%
Leverage ratio 7.69% 4.00%
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-backed securities collateralized 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
housing-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, 1999.
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.
10
11
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. FDICIA requires each federal banking regulatory agency to
prescribe, by regulation, standards for all insured depository institutions and
depository institution holding companies relating to (i) internal controls,
information systems and audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi)
compensation, fees and benefits; and (vii) such other operational and managerial
standards as the agency determines to be appropriate. The compensation standards
would prohibit employment contracts, compensation or benefit arrangements, stock
option plans, fee arrangements or other compensatory arrangements that provide
excessive compensation, fees or benefits or could lead to material financial
loss. In addition, each federal banking regulatory agency must prescribe by
regulation standards specifying (i) a maximum ratio of classified assets to
capital; (ii) minimum earnings sufficient to absorb losses without impairing
capital (iii) to the extent feasible, a minimum ratio of market value to book
value for publicly traded shares of depository institutions and depository
institution holding companies; and (iv) such other standards relating to asset
quality, earnings and valuation as the agency determines to be appropriate. If
an insured depository institution or its holding company fail to meet any of the
standards promulgated by regulations, then such company will be required to
submit a plan to its federal regulator specifying the steps it will take to
correct the deficiency. The federal banking agencies have uniform rules
concerning these standards.
PROMPT CORRECTIVE ACTION. Under FDICIA, each federal banking agency is required
to take prompt corrective action to resolve the problems of insured depository
institutions that do not meet minimum capital ratios. The extent of an agency's
power to take prompt corrective action depends upon whether an institution is
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized."
The federal banking agencies have adopted regulations to implement the prompt
corrective action provisions of FDICIA. Under the regulations, an institution
shall be deemed to be (i) "well capitalized" if it has total risk-based capital
of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a Tier
1 leverage capital ratio of 5% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital
measure, (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a Tier
1 leverage capital ratio of 4% or more (3% under certain circumstances) and does
not meet the definition of "well capitalized," (iii) "undercapitalized" if it
has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based
capital ratio of 4% or more 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%.
11
12
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 BHCA to create certain interstate banking and branching
opportunities. The IBBEA generally applies only to traditional savings banks and
commercial banks. Under the IBBEA, 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 insured institutions 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.
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
12
13
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 (the "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 the 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 (the "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. As a result, beginning January 1, 2000, both BIF- and
SAIF-insured deposits will be assessed the same rate by FICO. BIF- and
SAIF-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
insured deposits.
RECENT LEGISLATION. On November 12, 1999, the President of the U.S. signed into
law, the Gramm-Leach-Bliley Act (the "GLB Act") which revises and expands the
existing BHCA and certain sections of the 1933 Glass-Steagall Act to permit a
holding company system to engage in a full range of financial activities,
including but not limited to, banking, insurance, securities, merchant banking
and other activities incidental to financial services. The GLB Act permits the
scope of financial and incidental activities to evolve with technology and
competition. It also provides expanded financial affiliation opportunities for
existing bank holding companies ("BHC") and allows all financial holding
companies to control a full-service insured bank. These expanded permissible
activities are allowable for a BHC if it becomes a financial holding company
("FHC"). In order to become a FHC, a BHC must file a declaration with the FRB
electing to engage in activities under the new BHCA Section 4(k) and certifying
that it is eligible to do so because all of its insured depository institution
subsidiaries are well-capitalized and well-managed. An institution is
"well-capitalized" if it meets the primary regulator's definition for that
status under the Federal Deposit Insurance Act for prompt corrective action
purposes. Additionally, the FRB must determine that each depository institution
controlled by a FHC has a satisfactory or better rating under the CRA in order
for a company to become a FHC or for a FHC to engage in new financial activities
or acquire, directly or indirectly, a company engaged in any activity under
subsection (k) or (n). The FRB will be the overall regulatory agency and, along
with the Department of Treasury, will have joint oversight to determine new
financial activities of FHC companies.
It is anticipated that this change in legislation will serve to provide
consumers added convenience and savings as FHCs will be able to provide
"one-stop" shops for financial services. It also provides for added privacy for
consumers as policies on collecting, using and protecting personal financial
information must be disclosed in writing to customers and customers will have
the option to block information sharing with unaffiliated third parties, such as
telemarketing companies.
13
14
The GLB Act also amends the HOLA and states that no company may acquire through
any type of combination control of an insurance savings association after May 4,
1999, unless (i) it engages and continues to engage, only in activities
permissible for a FHC under the BHCA as amended or for a multiple Savings and
Loan holding company or (ii) unless it is grandfathered as a unitary savings and
loan holding company ("Unitary Thrift"). A company is grandfathered as a Unitary
Thrift if such company was operating as a Unitary Thrift on May 4, 1999 or will
become a Unitary Thrift pursuant to an application pending on that date. Such a
company may continue to operate under present law as long as the company
continues to meet the Unitary Thrift tests in existing Section 10(c)(3): it can
control only one savings institution, excluding supervisory acquisitions, and
each such institution must meet the Qualified Thrift Lender test. A
grandfathered Unitary Thrift also must continue to control at least one savings
association, or a successor institution, that it controlled on May 4, 1999.
REGULATORY DEVELOPMENT. In August 1999, the Board of Directors of the FDIC (the
"FDIC Board") adopted certain revisions to the FDIC's regulation governing
deposit insurance assessments. The FDIC Board believes the changes will enhance
the present system by allowing institutions with improving capital positions to
benefit from the improvement at a faster pace, while requiring those whose
capital is falling to pay higher assessments sooner. The final rule will take
effect April 1, 2000. Basically, the capital group determinations under the
FDIC's risk-based assessment system on Call Report data will be based on the
quarter-ended period before the beginning of the assessment period instead of
the current six months. Additionally, the FDIC's prior notice to institutions
advising them of their assessment risk classification for the following period
is shortened from 30 to 15 days.
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, 1999 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.
14
15
STATISTICAL DISCLOSURES
Guide 3 of the "Guides for the Preparation and Filing of Reports and
Registration Statements" under the Securities Act of 1933 sets forth certain
statistical disclosures to be included in the "Description of Business" section
of bank holding company filings with the Securities and Exchange Commission (the
"SEC").
The statistical information required is presented in the index shown below and
as part of Items 6 or 7 of this Form 10-K for the fiscal year ended December 31,
1999. The tables and information contained therein have been prepared by the
Company and have not been audited or reported upon by the Company's independent
accountants.
PAGE
DISCLOSURE REQUIREMENTS NUMBERS
----------------------- --------
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential -
A. Average balance sheets 22
B. Analysis of net interest earnings 22
C. Dollar amount of change in interest income and interest 23
expense
II. Investment Portfolio -
A. Book value of investment securities 33
B. Investment securities by maturities and weighted average
yields 33
III. Loan Portfolio -
A. Types of loans 28
B. Maturities and sensitivities of loans to changes in
interest rates 29
C. Risk elements
1. Nonaccrual, past due and restructured loans 30 - 31
2. Potential problem loans 31
IV. Summary of Loan Loss Experience -
A. Analysis of loss experience 25 - 26
B. Breakdown of the allowance for loan losses 26
V. Deposits -
A. Average amount and average rate paid on deposits 32
B. Maturity distribution of domestic time certificates of
deposits of $100,000 or more 32
VI. Return on Equity and Assets 18
VII. Short-Term Borrowings and Long-Term Debt 34
ITEM 2. PROPERTIES
The operations of the Bank and the Association are transacted through its main
banking offices and 22 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
15
16
maintenance. See Note H 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 Bank's administrative offices and main branch are
currently located to an unrelated third party in a transaction similar to a
sale-leaseback transaction. See Note N of Notes to the Company's Consolidated
Financial Statements.
The Company also owns the ground lease for the International Savings Building
which has over 30 tenants, one of which is the Association's Bishop Branch. See
Note H of Notes to the Company's Consolidated Financial Statements for
disclosure of sublease income from this property.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in 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 1999 to a vote of security
holders through the solicitation of proxies or otherwise.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Company's common stock is traded on The Nasdaq Stock Market under the symbol
"CBBI". At March 1, 2000, 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:
HIGH LOW DIVIDENDS
------ ------- ---------
1999:
FIRST QUARTER $32.00 $25.00 $0.06
SECOND QUARTER 33.25 26.25 0.07
THIRD QUARTER 32.50 28.75 0.07
FOURTH QUARTER 31.00 28.00 0.07
1998:
First quarter $43.00 $35.25 $0.05
Second quarter 43.00 35.25 0.06
Third quarter 40.00 30.75 0.06
Fourth quarter 34.00 30.00 0.06
16
17
The Company's ability to pay dividends is limited by certain restrictions
generally imposed on Hawaii corporations. In general, dividends may be paid only
out of a Hawaii corporation's surplus, as defined in the Hawaii Revised
Statutes, or net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. The Company may pay dividends out of funds
legally available therefore at such times as the Board of Directors determines
that dividend payments are appropriate, after considering the Company's net
income, capital requirements, financial condition, alternate investment options,
prevailing economic conditions, industry practices and other factors deemed to
be relevant at the time.
The Company's principal source of income for the year ended December 31, 1999
was dividends from the Bank and the Association. The payment of dividends and
other capital distributions by the subsidiaries to the Company are subject to
regulation by the FDIC, OTS and the State of Hawaii.
17
18
ITEM 6. SELECTED FINANCIAL DATA
(in thousands of dollars, except per share data) 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Income Statement Data:
Interest income $ 112,440 $ 112,060 $ 112,529 $ 111,247 $ 111,716
Interest expense 52,717 53,811 53,859 53,477 57,686
---------- ---------- ---------- ---------- ----------
Net interest income 59,723 58,249 58,670 57,770 54,030
Provision for credit losses 4,975 7,436 6,250 2,410 980
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for credit losses 54,748 50,813 52,420 55,360 53,050
Noninterest income 9,121 9,789 7,112 8,115 10,328
Noninterest expense 58,336 46,768 47,557 51,785 50,114
---------- ---------- ---------- ---------- ----------
Income before income taxes 5,533 13,834 11,975 11,690 13,264
Provision for income taxes 5,227 5,465 4,757 4,631 5,251
---------- ---------- ---------- ---------- ----------
Net income $306 $8,369 $7,218 $7,059 $8,013
========== ========== ========== ========== ==========
Operating earnings(1) $9,111 $8,369 $7,218 $7,059 $8,013
========== ========== ========== ========== ==========
Operating cash earnings(1), (2) $9,963 $9,066 $8,328 $10,944 $9,910
========== ========== ========== ========== ==========
Cash dividends $931 $818 $1,863 $3,462 $4,617
End of Year Balance Sheet Data:
Total assets $1,619,549 $1,428,438 $1,435,226 $1,397,169 $1,501,513
Total earning assets 1,511,219 1,323,055 1,347,105 1,320,318 1,395,210
Total loans 1,149,413 984,456 1,054,747 1,037,059 1,128,525
Total deposits 1,106,145 1,084,610 1,008,728 951,910 1,011,483
Long-term debt 225,140 171,087 141,048 94,825 101,371
Stockholders' equity 114,691 132,372 125,065 119,411 116,506
Average Balances:
Total assets $1,491,947 $1,424,793 $1,399,719 $1,412,197 $1,479,149
Total earning assets 1,391,681 1,343,524 1,338,769 1,330,401 1,381,827
Total loans 1,077,769 1,063,541 1,061,925 1,111,661 1,117,976
Total deposits 1,082,642 1,038,751 955,203 958,387 983,290
Long-term debt 205,098 168,934 113,414 104,025 146,102
Stockholders' equity 127,567 128,889 122,419 117,843 113,727
Common Stock Data:
Per share (diluted):
Net income $ 0.09 $ 2.35 $ 2.03 $ 1.99 $ 2.26
Operating earnings(1) 2.63 2.35 2.03 1.99 2.26
Operating cash earnings(1), (2) 2.88 2.55 2.35 3.08 2.79
Cash dividends declared 0.27 0.23 0.98 0.98 1.30
Book value (at December 31) 35.23 37.27 35.22 33.63 32.81
Market price (close at December 31) 29.44 30.94 43.75 29.00 29.00
Average shares outstanding 3,464,292 3,558,905 3,551,228 3,551,228 3,551,228
Selected Ratios:
Return on average:
Total assets 0.02% 0.59% 0.52% 0.50% 0.54%
Total tangible assets(3) 0.67 0.64 0.60 0.78 0.68
Stockholders' equity 0.24 6.49 5.90 5.99 7.05
Tangible stockholders' equity(3) 8.45 7.69 7.55 10.52 10.19
Dividend payout ratio(4) 10.27 9.79 25.86 48.99 57.52
Average stockholders' equity to average total assets 7.08 9.27 8.71 8.55 7.76
Year ended December 31:
Net interest margin (taxable equivalent basis) 4.33 4.36 4.40 4.36 3.93
Net loans charged off to average loans 0.45 0.57 0.50 0.14 0.07
Noninterest expense to average assets(1) 3.28 3.28 3.40 3.67 3.39
At December 31:
Risk-based capital ratios:
Tier I 11.95 13.54 12.73 12.64 11.58
Total 13.21 14.80 13.99 13.90 12.83
Tier I leverage ratio 7.69 8.65 7.46 7.17 6.96
Allowance for credit losses to total loans 1.56 1.81 1.55 1.49 1.29
Nonperforming assets to total loans
and other real estate owned 1.57 2.20 2.66 2.40 1.42
Nonperforming assets to total assets 1.12 1.53 1.96 1.79 1.07
Allowance for credit losses to nonperforming loans 152.28 133.95 66.86 66.78 101.67
========== ========== ========== ========== ==========
(1) Excludes after-tax restructuring and merger-related charges of $932,000 and
write-off of goodwill of $7,873,000 incurred in 1999.
(2) Excludes amortization of goodwill and other intangible assets.
(3) Defined as operating cash earnings as a percentage of average total assets
or average stockholders' equity minus average goodwill and other intangible
assets.
(4) Defined as cash dividends declared as a percentage of operating earnings.
18
19
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 and financial condition, inflation and results of litigation.
Accordingly, historical performance, as well as reasonably applied projections
and assumptions, may not be a reliable indicator of future earnings due to risks
and uncertainties.
As circumstances, conditions or events change that affect the Company's
assumptions and projections on which any of the statements are based, the
Company disclaims any obligation to issue any update or revision to any
forward-looking statement contained herein.
RESULTS OF OPERATIONS
In December 1999, the Company approved the Merger of its two principal
subsidiaries, the Bank and the Association, which is expected to occur by July
1, 2000. In connection with the Merger, the Company recorded restructuring and
merger-related charges of $1.6 million ($0.9 million on an after-tax basis) in
the fourth quarter of 1999.
Additionally, in the fourth quarter of 1999, the Company changed its method of
evaluating the recoverability of goodwill from an undiscounted cash flow to a
discounted cash flow basis. See Note B - "Change in Accounting for Goodwill" of
Notes to the Company's Consolidated Financial Statements for further discussion.
As a result of this change in accounting method, the Company recorded a
write-off of goodwill of $7.9 million in the fourth quarter of 1999.
The increase in noninterest expense and decrease in net income of the Company
for the year ended December 31, 1999 as compared to the amounts reported in the
prior year primarily resulted from the one-time charges described above. Other
significant factors affecting the Company's results of operations and financial
position are described in the applicable sections below.
Consolidated net income for 1999 was $306,000, a decrease of $8.1 million from
the $8.4 million in 1998. Diluted earnings per share was $0.09 in 1999, as
compared to $2.35 in 1998.
Operating earnings (defined as consolidated net income excluding after-tax
restructuring and merger-related charges and write-off of goodwill) was $9.1
million in 1999, an increase of 8.9%, or $742,000, over $8.4 million in 1998.
Diluted operating earnings per share was $2.63 in 1999, an increase of 11.9%,
over last year.
Operating cash earnings (defined as operating earnings before amortization of
goodwill and other intangible assets) was $10.0 million in 1999, an increase of
9.9% over 1998. Diluted operating cash earnings per share was $2.88, an increase
of 12.9% over last year. On the same basis, return on average tangible assets
was 0.67% and return on average tangible stockholders' equity was 8.45% in 1999,
as compared to 0.64% and 7.69%, respectively in 1998.
19
20
Despite the growth in the loan portfolio in 1999, the rise in interest rates
and the slower growth in deposits served to negatively impact the growth in net
interest income. Net interest income increased by $1.5 million, or 2.5%, over
1998.
Noninterest income decreased from $9.8 million in 1998 to $9.1 million in 1999,
a decrease of 6.8%. The decrease was primarily due to gains on sales of
securities of $4.1 million, partially offset by losses on sales of loans of $3.1
million.
Noninterest expense increased from $46.8 million in 1998 to $58.3 million in
1999, an increase of 24.7%. The increase reflected certain restructuring and
merger-related charges of $1.6 million (after tax, $0.9 million) and write-off
of goodwill of $7.9 million (before and after-tax). The increase was also a
result of a $2.1 million increase in commissions related to mortgage loans and
outside services and a reversal of $0.4 million of certain benefits upon the
death of a key employee in 1998.
The Company's efficiency ratio (calculated as noninterest expense minus
amortization of goodwill and other intangible assets and nonrecurring charges as
a percentage of total operating revenue) was 69.8%, 67.7% and 70.6% in 1999,
1998 and 1997, respectively.
The provision for credit losses was $5.0 million, $7.4 million and $6.3 million
in 1999, 1998 and 1997, respectively. Net charge-offs to average loans and
leases were 0.45%, 0.57% and 0.50% for 1999, 1998 and 1997, respectively. The
allowance for credit losses was $17.9 million, or 1.56% of total loans and
leases, at December 31, 1999, compared with $17.8 million, or 1.81%, at December
31, 1998. Nonperforming assets totaled 1.12%, 1.53% and 1.96% of total assets as
of December 31, 1999, 1998 and 1997, respectively. The improvements in the
nonperforming assets ratio was primarily due to the Company's continued efforts
to improve asset quality.
At December 31, 1999, the Company's ratios of Tier 1 Capital to risk-weighted
assets and Total Capital to risk-weighted assets were 11.95% and 13.21%,
respectively, compared with 13.54% and 14.80%, respectively, at December 31,
1998. These ratios were in excess of the "well-capitalized" ratios of 6.00% and
10.00%, respectively, specified by the Federal Reserve Board.
Consolidated net income for 1998 increased $1.2 million, or 15.9%, over 1997.
Diluted earnings per share for 1998 was $2.35 compared to $2.03 in 1997. The
increase in consolidated net income was primarily due to: (i) net gain of $4.1
million recognized in 1998 upon the sale of $150.7 million of securities; (ii)
$1.3 million, or 6.7%, decline in salaries and employee benefits; and (iii) $1.7
million decrease in legal and professional fees. These decreases were partially
offset by: (i) a $2.4 million loss on the sale of $12.9 million of delinquent
real estate loans; and (ii) a $1.16 million increase in the provision for other
real estate owned losses.
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 $60.3 million in 1999, an
increase of $1.8 million, or 3.0%, from 1998. During 1999, the Company's net
interest margin declined to 4.33%, compared to 4.36% for 1998.
As summarized on Table 2, the $1.8 million increase in net interest income for
1999 consisted of a $0.7 million increase in interest income coupled with a $1.1
million decrease in interest expense.
20
21
The average yield on earning assets in 1999 declined by 24 basis points to
8.12%, which offset the $48.2 million increase in the average balance of earning
assets. The $0.7 million increase in interest income was primarily due to the
$36.5 million increase in the average balance of taxable investment and
mortgage-backed securities.
Interest costs on interest-bearing deposits and liabilities decreased to $52.7
million in 1999. The 1999 increase in the average balance of interest-bearing
deposits and liabilities of $67.0 million was partially offset by the 34 basis
point decrease in the average cost of funds to 4.28%. 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.
Net interest income, on a taxable equivalent basis, was $58.5 million in 1998, a
decrease of $0.3 million, or 0.5%, from 1997. During 1998, the Company's net
interest margin declined to 4.36%, compared to 4.40% for 1997. This decrease was
due to a 6 basis point decrease in the yield on average earning assets,
partially offset by a 7 basis point decrease in the rate paid for sources of
funds used for average earning assets.
Average earning assets increased $4.8 million, or 0.4%, in 1998 over 1997.
Average interest-bearing deposits and liabilities increased $16.1 million, or
1.4%, in 1998 over 1997.
21
22
TABLE 1: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES
1999 1998 1997
INTEREST Interest Interest
(in thousands AVERAGE INCOME/ YIELD/ Average Income/ Yield/ Average Income/ Yield/
of dollars) BALANCE EXPENSE RATE Balance Expense Rate Balance Expense Rate
---------- -------- ------ ---------- -------- ------ ------------ -------- ------
ASSETS
Earning assets:
Interest-bearing deposits
in other banks $ 23,004 $ 1,093 4.75% $ 8,539 $ 525 6.15% $ 19,387 $ 1,176 6.07%
Federal funds sold
and securities
purchased under
agreements to resell 5,908 309 5.23 34,489 1,766 5.12 3,908 213 5.45
Taxable investment and
mortgage-backed
securities 264,783 18,272 6.90 228,321 15,843 6.94 249,938 17,908 7.16
Nontaxable investment
securities 20,217 1,592 7.88 8,634 668 7.74 3,611 318 8.81
Loans(1) 1,077,769 91,754 8.51 1,063,541 93,558 8.80 1,061,925 93,104 8.77
---------- -------- ---------- -------- ----------- --------
Total earning assets 1,391,681 113,020 8.12 1,343,524 112,360 8.36 1,338,769 112,719 8.42
---------- -------- ---------- -------- ----------- --------
Nonearning assets:
Cash and due from
banks 44,624 31,590 24,964
Premises and
equipment 13,338 20,114 11,182
Other assets 60,448 46,606 41,050
Less allowance for
credit losses (18,144) (17,041) (16,246)
---------- ---------- -----------
Total assets $1,491,947 $1,424,793 $1,399,719
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 364,366 $ 8,927 2.45% $ 349,398 $ 9,393 2.69% $ 342,463 $ 8,940 2.61%
Time deposits 599,920 28,645 4.77 581,952 30,547 5.25 508,379 27,026 5.32
Short-term borrowings 62,390 3,282 5.26 64,472 3,536 5.48 184,430 11,364 6.16
Long-term debt 205,098 11,863 5.78 168,934 10,335 6.12 113,414 6,529 5.76
---------- -------- ---------- -------- ----------- --------
Total interest-bearing
deposits and liabilities 1,231,774 52,717 4.28 1,164,756 53,811 4.62 1,148,686 53,859 4.69
---------- -------- ---------- -------- ----------- --------
Noninterest-bearing
liabilities:
Demand deposits 118,356 107,401 104,361
Other liabilities 14,250 23,747 24,253
---------- ---------- -----------
Total liabilities 1,364,380 1,295,904 1,277,300
Stockholders' equity 127,567 128,889 122,419
---------- ---------- -----------
Total liabilities and
stockholders'
equity $1,491,947 $1,424,793 $1,399,719
========== ========== ==========
Net interest income
and margin on total
earning assets 60,303 4.33% 58,549 4.36% 58,860 4.40%
Taxable equivalent
adjustment (580) (300) (190)
-------- -------- --------
Net interest income $ 59,723 $ 58,249 $ 58,670
======== ======== ========
(1) Yields and amounts earned include loan fees. Nonaccrual loans have been
included in earning assets for purposes of these computations.
22
23
TABLE 2: INTEREST DIFFERENTIAL
1999 COMPARED TO 1998 1998 Compared to 1997
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
------- ------- ---------- ------- ------- ----------
Earning assets:
Interest-bearing deposits
in other banks $ 889 $ (321) $ 568 $ (667) $ 16 $ (651)
Federal funds sold and
securities purchased under
agreements to resell (1,463) 6 (1,457) 1,567 (14) 1,553
Taxable investment and
mortgage-backed securities 2,530 (101) 2,429 (1,513) (552) (2,065)
Nontaxable investment
securities 896 28 924 393 (43) 350
Loans(2) 1,251 (3,055) (1,804) 142 312 454
======= ======= ======= ======= ======= =======
Total earning assets 4,103 (3,443) 660 (78) (281) (359)
Interest-bearing liabilities:
Savings deposits 402 (869) (467) 183 269 452
Time deposits 943 (2,844) (1,901) 3,866 (344) 3,522
Short-term borrowings (114) (140) (254) (7,391) (437) (7,828)
Long-term debt 2,213 (685) 1,528 3,196 610 3,806
------- ------- ------- ------- ------- -------
Total interest-bearing
deposits and liabilities 3,444 (4,538) (1,094) (146) 98 (48)
------- ------- ------- ------- ------- -------
Increase (decrease) in
net interest income (taxable
equivalent basis) $ 659 $ 1,095 $ 1,754 $ 68 $ (379) $ (311)
======= ======= ======= ======= ======= =======
(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. Nonaccrual loans have been
included in earning assets for purposes of these computations.
23
24
NONINTEREST INCOME
In 1999, total noninterest income was $9.1 million as compared to $9.8 million
in 1998 and $7.1 million in 1997. The $668,000 decrease in noninterest income
was due to various items. Service charges and fees increased $698,000, or 16.0%,
as a result of the Company's concerted effort to increase fee income related to
deposit and credit products. Net gains on sales of loans increased from a loss
of $447,000 in 1998 to a gain of $2.7 million in 1999. In 1998, the Company sold
$12.9 million of delinquent real estate loans resulting in a loss of $2.4
million. Net realized gains on sales of securities decreased from a gain of $4.1
million in 1998 to a net loss of $32,000 in 1999. In 1998, the Company sold
$150.7 million of securities at a net gain of $4.1 million. Other noninterest
income decreased $421,000, or 23.9%, due to, among other things, an increase in
net losses on sales of Other Real Estate Owned ("OREO") property.
Total noninterest income increased $2.7 million, or 37.6%, from 1997 to 1998.
During 1998, the Company sold $150.7 million of securities at a gain of $4.1
million, as compared to gains of $0.2 million in 1997. Such gain was offset by a
$2.4 million loss on the sale of $12.9 million of delinquent real estate loans.
Service charges on deposits and other fees and service charges also increased.
The following table sets forth information by category of noninterest income for
the years indicated:
(in thousands of dollars) 1999 1998 1997
------ ------ ------
Service charges on deposits $2,060 $1,740 $1,632
Other service charges and fees 3,008 2,630 2,460
Net realized gains (losses) on sales
of securities (32) 4,104 177
Net gains (losses) on sales of loans 2,744 (447) 1,174
Other 1,341 1,762 1,669
------ ------ ------
Total $9,121 $9,789 $7,112
====== ====== ======
24
25
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The following table summarizes changes in the allowance for credit losses for
the years indicated:
(in thousands of dollars) 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Balance at beginning of year $17,771 $16,365 $15,431 $14,576 $14,326
Charge-offs:
Commercial and financial 442 533 2,489 537 87
Real estate - mortgage 4,085 5,854 2,315 495 563
Installment and consumer 896 737 1,121 873 602
------- ------- ------- ------- -------
Total charge-offs 5,423 7,124 5,925 1,905 1,252
------- ------- ------- ------- -------
Recoveries:
Commercial and financial 94 107 233 30 92
Real estate - mortgage 314 534 26 74 142
Installment and consumer 211 453 350 246 288
------- ------- ------- ------- -------
Total recoveries 619 1,094 609 350 522
------- ------- ------- ------- -------
Net loans charged-off 4,804 6,030 5,316 1,555 730
Provision for credit losses 4,975 7,436 6,250 2,410 980
------- ------- ------- ------- -------
Balance at end of year $17,942 $17,771 $16,365 $15,431 $14,576
------- ------- ------- ------- -------
Net charge-offs to
average loans outstanding 0.45% 0.57% 0.50% 0.14% 0.07%
Allowance for credit
losses to year-end loans 1.56% 1.81% 1.55% 1.49% 1.29%
Allowance for credit losses to
year-end nonperforming loans 152.28% 133.95% 66.86% 66.78% 101.67%
The provision for credit losses is based upon periodic evaluations by management
as to the adequacy of the allowance for credit losses. 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 amount. Thus, the provision for
credit losses may fluctuate and may not be comparable from year to year.
25
26
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 December 31 for the years indicated:
1999 1998 1997 1996 1995
(in thousands ----------------- ----------------- ----------------- ----------------- ------------------
of dollars) AMT. %(1) Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1)
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Commercial &
Financial $ 7,359 19.55% $ 4,539 19.41% $ 3,718 17.67% $ 4,808 16.42% $ 5,039 14.91%
Real estate -
Construction -- 1.31 -- 2.59 -- 3.89 -- 2.77 184 1.62
Real estate -
Mortgage 7,680 71.17 9,519 69.31 10,744 70.91 7,021 72.67 5,053 75.46
Installment and
Consumer 1,432 7.97 1,264 8.69 476 7.53 1,412 8.14 1,510 8.01
Unallocated 1,471 N/A 2,449 n/a 1,427 n/a 2,190 n/a 2,790 n/a
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $17,942 100.00% $17,771 100.00% $16,365 100.00% $15,431 100.00% $14,576 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
(1) Represents percentage of loans in each category to total loans.
Provision for credit losses was $5.0 million in 1999, a decrease of $2.5
million, or 33.1%, from 1998. The decrease in the provision was consistent with
the reduction in nonperforming loans as discussed below. The Company's allowance
for credit losses increased to $17.9 million at December 31, 1999, from $17.8
million at December 31, 1998 and $16.4 million at December 31, 1997. The
allowance for credit losses as a percentage of total loans was 1.56% at December
31, 1999, compared to 1.81% and 1.55% at December 31, 1998 and 1997,
respectively.
Allowance for credit losses as a percentage of nonperforming loans increased to
152.28% at December 31, 1999 from 133.95% at December 31, 1998. Total
nonperforming loans at December 31, 1999 amounted to $11.8 million, a decrease
of $1.5 million, or 11.2%, from the $13.3 million at December 31, 1998. During
1998, the Company sold $12.9 million in delinquent loans, including $6.8 million
of nonperforming loans at a loss of $2.4 million. The investment in loans that
are considered to be impaired was $20.0 million at December 31, 1999, an
increase of $4.8 million from the $15.2 million at December 31, 1998. The
increase in impaired loans was due primarily to commercial loans restructured in
1999. Additional information on impaired loans is presented in Note F of Notes
to the Company's Consolidated Financial Statements.
26
27
NONINTEREST EXPENSE
The following table sets forth information by category of noninterest expense
for the years indicated:
(in thousands of dollars) 1999 1998 1997
------- ------- -------
Salaries and employee benefits $20,427 $18,338 $19,652
Net occupancy expense 8,022 9,024 8,325
Equipment expense 3,441 3,803 3,176
Legal and professional fees 3,224 3,085 4,748
Advertising and promotion 2,181 1,631 2,273
Stationery and supplies 1,347 1,157 1,023
Provision for other real estate owned losses 927 1,407 248
Deposit insurance premiums 652 595 406
Restructuring and merger-related charges and
write-off of goodwill 9,424 -- --
Other 8,691 7,728 7,706
------- ------- -------
Total $58,336 $46,768 $47,557
======= ======= =======
Total noninterest expense, excluding restructuring
and merger-related charges and write-off of
goodwill as a percentage of average assets 3.28% 3.28% 3.40%
======= ======= =======
Noninterest expense, excluding restructuring and merger-related charges and
write-off of goodwill, increased $2.1 million, or 4.6%, in 1999, as compared to
1998. The Company's operating expense ratio, which is a commonly used indicator
of operating efficiency, remained flat at 3.3% in 1999, as compared to 1998.
Salaries and employment benefits increased by $2.1 million, or 11.4%, in 1999 to
$20.4 million, compared to $18.3 million in 1998. The increase in salaries and
employee benefits over 1998 was due to higher commissions related to mortgage
loans in 1999 and the reversal of certain benefits amounting to $0.4 million
upon the death of a key employee in 1998.
Net occupancy expense was $8.0 million in 1999, which compares to $9.0 million
in 1998. The decrease in net occupancy expense in 1999 was primarily
attributable to the decreased net expenses of the Company's rental property.
Equipment expense decreased by $362,000, or 9.5%, in 1999 due to a $259,000
decrease in equipment maintenance and a $181,000 decrease in equipment rentals,
offset by a $79,000 increase in depreciation.
Legal and professional fees increased by $139,000, or 4.5%, in 1999 primarily
due to an increase in attorneys' fees and fees related to certain management
consulting projects.
Provision for OREO losses totaled $927,000 for 1999, a decrease of $480,000 from
the $1.4 million in 1998. At December 31, 1999, OREO (net of valuation
allowance) amounted to $6.4 million, a decrease of $2.2 million, or 25.6%, from
December 31, 1998. The decrease in the 1999 OREO balance and provision for OREO
losses reflected the Company's continued efforts to improve asset quality.
Deposit insurance premiums amounted to $652,000 in 1999, compared to $595,000 in
1998, reflecting an
27
28
increase in the deposit base.
Total noninterest expense decreased $0.8 million, or 1.7%, from 1997 to 1998.
The primary reason for the decrease in noninterest expense was the $1.3 million
reduction in salaries and employment benefits and the $1.7 million decrease in
legal and professional fees, which was offset by the $1.2 million increase in
provision for other real estate owned losses.
INCOME TAXES
Total income tax expense of the Company was $5.2 million, $5.5 million and $4.8
million in 1999, 1998 and 1997, respectively. The corresponding effective income
tax rate was 94.5%, 39.5% and 39.7%, respectively. The primary reason for the
increase in the effective tax rate from 1998 to 1999 was the write-off of
goodwill which is not deductible for tax purposes. Note M of Notes to the
Company's Consolidated Financial Statements presents a reconciliation of the
Company's effective and statutory income tax rates.
LOAN PORTFOLIO
Total loans at December 31, 1999 increased to $1,149.4 million, a $165.0
million, or 16.8% increase over the previous year-end. The increase in total
loans was primarily due to increases in commercial and real estate-mortgage
loans.
The amount of loans outstanding at December 31 for the years indicated are shown
in the following table categorized as to types of loans:
(in thousands of dollars) 1999 1998 1997 1996 1995
---------- -------- ---------- ---------- ----------
Commercial and financial $ 224,660 $191,128 $ 186,418 $ 170,228 $ 168,497
Real estate - construction 15,096 25,453 41,069 28,699 18,408
Real estate - mortgage 818,010 682,313 747,897 753,676 851,242
Installment and consumer 91,647 85,562 79,363 84,456 90,378
---------- -------- ---------- ---------- ----------
$1,149,413 $984,456 $1,054,747 $1,037,059 $1,128,525
========== ======== ========== ========== ==========
COMMERCIAL AND FINANCIAL. Loans outstanding in this category increased to $224.7
million, an increase of $33.5 million, or 17.5%, over year-end 1998. Loans in
this category are primarily loans to small- and medium-sized businesses and
professionals doing business in Hawaii. As mentioned previously, the Company
increased U.S. mainland-based participations and purchased loans as well as
U.S.D.A. guaranteed loans in 1999. The average loan balance was $172,000 at
December 31, 1999. These loans have been made primarily on a collateralized
basis. Typically, real estate serves as collateral as well as equipment,
receivables and personal assets as deemed necessary.
REAL ESTATE - MORTGAGE. Real estate - mortgage loans increased to $818.0 million
at December 31, 1999, an increase of $135.7 million, or 19.9%, over year-end
1998. The primary reason for this increase in the mortgage portfolio was the
decreased loan sales activity which resulted in loans being originated for
investment versus for sale. This occurrence was a reflection of the rising
interest rate environment experienced in the second half of 1999. During 1999,
the Company securitized $59.0 million of mortgage loans into mortgage-backed
securities. The Company also sold $12.9 million in delinquent loans in 1998 -
see further discussion in "Noninterest Income" on page 24. The average size of
loans in this category at December 31, 1999 was $170,000.
28
29
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the contractual maturities of the Company's loan
portfolio by category (excluding "real estate-mortgage" and "installment and
consumer") at December 31, 1999. Demand loans are included as due within one
year:
After
Within But Within After
(in thousands of dollars) 1 year 5 years 5 years Total
-------- ---------- -------- --------
Commercial and financial $ 98,716 $83,882 $ 42,062 $224,660
Real estate - construction 7,178 5,608 2,310 15,096
-------- ------- -------- --------
$105,894 $89,490 $ 44,372 $239,756
======== ======= ======== ========
The following table sets forth the interest rate sensitivity of the above
amounts due after one year at December 31, 1999:
Fixed Variable
(in thousands of dollars) Rate Rate Total
------- -------- --------
After 1 but within 5 years $19,632 $69,858 $ 89,490
After 5 years 19,662 24,710 44,372
------- ------- --------
$39,294 $94,568 $133,862
======= ======= ========
29
30
RISK ELEMENTS IN LENDING ACTIVITIES
Nonperforming assets and past due and restructured loans at December 31 are
reflected below for the years indicated:
(in thousands of dollars) 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Nonperforming loans:
Commercial $ 1,831 $ 1,291 $ 1,207 $ 2,843 $ 3,798
Real estate:
Commercial 518 933 2,997 3,312 1,365
Residential 8,992 10,803 20,010 16,796 9,084
------- ------- ------- ------- -------
Total real estate loans 9,510 11,736 23,007 20,108 10,449
------- ------- ------- ------- -------
Consumer 441 240 261 157 90
------- ------- ------- ------- -------
Total nonperforming loans 11,782 13,267 24,475 23,108 14,337
Other real estate owned 6,385 8,583 3,686 1,844 1,715
------- ------- ------- ------- -------
Total nonperforming assets $18,167 $21,850 $28,161 $24,952 $16,052
======= ======= ======= ======= =======
Past due loans:
Commercial $ 96 $ 2,433 $ 15 $ 381 $ 175
Real estate 3,481 3,602 3,569 1,474 2,762
Consumer 592 381 490 524 176
------- ------- ------- ------- -------
Total past due loans(1) $ 4,169 $ 6,416 $ 4,074 $ 2,379 $ 3,113
======= ======= ======= ======= =======
Restructured loans:
Commercial $ 4,440 $-- $-- $ 276 $--
Real estate:
Commercial 1,231 1,284 -- 226 1,322
Residential 11,280 11,108 424 -- --
------- ------- ------- ------- -------
Total restructured loans(2) $16,951 $12,392 $ 424 $ 502 $ 1,322
======= ======= ======= ======= =======
Nonperforming assets to total loans
and other real estate owned (end of year):
Excluding 90 days past due
accruing loans 1.57% 2.20% 2.66% 2.40% 1.42%
Including 90 days past due
accruing loans 1.93% 2.85% 3.05% 2.63% 1.70%
Nonperforming assets to total assets (end of year):
Excluding 90 days past due
accruing loans 1.12% 1.53% 1.96% 1.79% 1.07%
Including 90 days past due
accruing loans 1.38% 1.98% 2.25% 1.96% 1.28%
(1) Represents loans which are past due 90 days or more as to principal and/or
interest, are still accruing interest and are in the process of collection.
(2) Represents loans which have been restructured, are current and still
accruing interest.
30
31
Nonperforming loans declined to $11.8 million at December 31, 1999 a decrease of
$1.5 million, or 11.2%, from the $13.3 million at year-end 1998. During 1998,
the Company sold $12.9 million in delinquent loans (including $6.8 million of
nonperforming loans). This sale resulted in a loss of $2.4 million -see further
discussion in "Noninterest Income" of Management's Discussion and Analysis of
Financial Condition and Results of Operations. Interest income which would have
been accrued in 1999 on nonaccrual loans (had these loans been current) amounted
to $0.7 million, as compared to the $0.2 million of interest income recorded on
these loans during 1999.
At December 31, 1999, OREO (net of valuation allowance) amounted to $6.4
million, a decrease of $2.2 million, or 25.6%, from the prior year-end. Despite
the decrease in the 1999 OREO balance and provision for OREO losses, the 1999
balance remains at levels higher than pre-1998 years and reflects the continued
weakness in the Hawaii economy and related decline in real estate values.
Additionally, the Company has also been more aggressive in its delinquent loan
collection efforts resulting in a higher level of foreclosures and related OREO.
Past due loans which are still accruing interest decreased $2.2 million, or
35.0%, to $4.2 million at December 31, 1999. The decrease reflects the Company's
proactive collection efforts which resulted in the removal of a $2.2 million
credit from this category in 1999. Primarily all loans in this category are both
well-collateralized and in the process of collection.
Restructured loans increased $4.6 million, or 36.8%, as compared to 1998 due to
the restructuring of certain commercial loans in 1999.
At December 31, 1999, the Company was not aware of any significant potential
problem loans (not otherwise classified as nonperforming or past due) where
possible credit problems of the borrower caused management to have serious
concerns as to the ability of such borrower to comply with the present loan
repayment terms.
31
32
DEPOSITS
The Company competes for deposits in Hawaii principally by providing quality
customer service at its branch offices.
The Company has a network of 22 branch offices which seek to provide a stable
core deposit base. A new branch in Kihei, Maui, is scheduled to open during the
second quarter of 2000. The deposit base provided by these branches consists of
interest and noninterest-bearing demand and savings accounts, money market
certificates and time certificates of deposit. The Company had brokered deposits
of $5.0 million at December 31, 1999.
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:
1999 1998 1997
-------------------- -------------------- ------------------
(in thousands of dollars) AMOUNT RATE Amount Rate Amount Rate
---------- ---- ---------- ---- -------- ----
Noninterest-bearing
demand deposits $ 118,356 --% $ 107,401 --% $104,361 --%
Interest-bearing
demand deposits 198,379 2.55 141,391 2.69 166,632 2.61
Savings 165,987 2.33 208,007 2.69 175,831 2.61
Time deposits 599,920 4.77 581,952 5.25 508,379 5.32
---------- ---- ---------- ---- -------- ----
Total $1,082,642 3.47% $1,038,751 4.29% $955,203 3.73%
========== ==== ========== ==== ======== ====
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 1999 is summarized below:
(in thousands of dollars)
3 months or less $ 85,715
Over 3 months through 6 months 58,338
Over 6 months through 12 months 78,240
Over 12 months 9,305
--------
Total $231,598
========
32
33
INVESTMENT AND MORTGAGE-BACKED SECURITIES PORTFOLIO
The following table sets forth the book value and the distribution by category
of investment securities at December 31 for the years indicated:
(in thousands of dollars) 1999 1998 1997
-------- -------- --------
HELD-TO-MATURITY
State and political subdivisions $ -- $ -- $ 101
Mortgage-backed securities -- -- 88,296
-------- -------- --------
Total $-- $-- $ 88,397
======== ======== ========
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S. $ 15,795 $ 11,966 $ 49,423
government agencies and corporations
State and political subdivisions 30,353 9,719 5,098
Mortgage-backed securities 270,350 120,079 65,799
-------- -------- --------
Total $316,498 $141,764 $120,320
======== ======== ========
FHLB STOCK $ 31,727 $ 29,481 $ 27,348
======== ======== ========
The following table sets forth the maturities of available-for-sale investment
securities at December 31, 1999 and 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):
After 1 After 5
Within But Within But Within After
1 year 5 years 10 years 10 years
----------------- ----------------- ----------------- -------------------
(in thousands of dollars) Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- ----- -------- -----
U.S. Treasury and other U.S.
government agencies and
corporations $ -- --% $15,993 5.94% $ -- --% $ -- --%
State and political subdivisions 974 6.23 382 4.59 21,181 5.90 9,785 4.92
Mortgage-backed securities 12,635 7.91 72,906 7.72 54,119 6.77 140,455 7.25
------- ---- ------- ---- ------- ---- -------- ----
$13,609 7.44% $89,281 6.41% $75,300 6.38% $150,240 7.10%
======= ==== ======= ==== ======= ==== ======== ====
A table setting forth information regarding investment and mortgage-backed
securities, including estimated fair value and carrying value of such securities
is included in Note D of Notes to the Company's Consolidated Financial
Statements.
33
34
SHORT-TERM BORROWINGS AND LONG TERM DEBT
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 $471.9
million, of which $94.1 million was undrawn at December 31, 1999. See Notes J
and K of Notes to the Company's Consolidated Financial Statements.
At December 31, 1999, there were four long-term FHLB advances totaling $28.0
million, callable beginning January 13, 2000 to July 10, 2003.
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.
On a stand-alone basis, the Company's primary source of liquidity is dividends
from the Bank and Association. The Bank and Association's ability to pay
dividends is subject to regulatory restrictions.
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, brokered deposits 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. The Company's
operating activities provided $28.1 million in 1999, an increase of $160.3
million from the $132.1 million used in 1998. The primary source of cash flows
from operations in 1999 was the sale of $148.3 million of loans held for sale,
which amounted to $7.8 million at December 31, 1999.
Due to the Company's growth strategies in 1999 as well as liquidity needs due to
the Year 2000 date change, the Company's use of FHLB advances increased in the
current year. At December 31, 1999, the Company had $377.8 million (25.1% of
total liabilities) in advances outstanding from the FHLB compared to $183.6
million (14.2% of total liabilities) at December 31, 1998. The maximum amount of
advances that the Company had outstanding at any month-end was $377.8 million.
As of December 31, 1999, the Bank and the Association had available unused
credit lines of $94.1 million from the FHLB. During 2000, $154.4 million of
short-term and $28.2 million of long-term borrowings from the FHLB mature. The
borrowing agreements with the FHLB are currently being negotiated for renewal in
May 2000 and the Company anticipates that the FHLB maturities will be covered by
such renewals. The Company is also currently applying for an increased credit
line with the FHLB (calculated as a percentage of total qualified assets) to be
applied to the Company on a combined basis, subsequent to the Merger. In
addition, the Company anticipates that the available unused credit line will
increase to $270.4 million, versus $94.1 million, based on combined qualified
assets as of December 31, 1999. The Company anticipates continued growth in the
loan portfolio in 2000. The Company intends to fund this anticipated increase in
the use of funds by time certificates of deposit, brokered deposits and FHLB
advances.
34
35
The Company's most liquid assets are cash, interest bearing deposits, Federal
funds sold and investment securities available for sale. The levels of these
assets are dependent on the Company's operating, financing, lending and
investment activities during any given period. At December 31, 1999, cash,
interest bearing deposits, Federal funds sold and available for sale investment
and mortgage-backed securities totaled $389.2 million, an increase of 43.5% from
$271.2 million at December 31, 1998.
Investing activities provided (used) cash flow of $(221.3) million in 1999,
$158.8 million during 1998, and $(22.9) million in 1997. The primary use of cash
for investing activities in 1999 was the net increase in loans of $150.2 million
and purchases of available for sale securities of $205.3 million.
Financing activities provided (used) cash flow of $198.4 million in 1999,
$(10.1) million during 1998, and $29.6 million in 1997. During 1999, a $133.0
million net increase in short-term borrowings and $150.0 million in proceeds
from long-term debt were the primary source of cash flows from financing
activities.
At any time, the Company has outstanding commitments to extend credit. See Note
P of Notes to the Company's Consolidated Financial Statements.
See Note O of Notes to the Company's Consolidated Financial Statements for
further discussion and disclosure of risk management activities.
CAPITAL RESOURCES
The Company has a strong capital base with a Tier I capital ratio of 11.95% at
December 31, 1999. 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, 1999, the Company's
total capital to risk-adjusted assets ratio was 13.21%.
During the second quarter of 1999, the Company announced that its Board of
Directors had authorized a stock repurchase program to repurchase up to 10%, or
approximately 360,000 shares, of its 3.6 million shares of common stock
outstanding. As of December 31,1999, 297,000 shares had been repurchased at
prices ranging from $28.250 to $33.625 per share, at a total cost of $9.2
million.
YEAR 2000
The "Year 2000" problem was 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, could have been unable to distinguish the year 2000. This would
have produced erroneous results or systems may have failed in the year 2000 when
the two digit year became "00".
In 1998, the Company established a Year 2000 committee comprised of senior
managers from each major operational unit. The Year 2000 committee had prepared
a comprehensive program to address this problem to ensure that the Company's
computer systems would function properly in the years 2000 and thereafter.
The Company successfully completed its Year 2000 program in a timely and
effective manner. The Company did not experience any significant disruptions to
the financial or operating activities caused by failure of the computerized
systems resulting from Year 2000 issues.
Although there has been no impact to date, the Company may be affected by the
Year 2000 effects of governmental agencies, businesses and other entities who
provide data to, or receive data from, the Company,
35
36
and by entities, such as borrowers, vendors and customers, whose financial
condition or operational capability is significant to the Company. The Company
is also subject to credit risk to the extent borrowers failed to adequately
address their Year 2000 issues. While the Company continued discussions with,
obtained written certification from, tested such external parties' Year 2000
compliance efforts, and have not experienced to date any adverse impact as a
result of the failure of these companies to resolve their Year 2000 issues,
there is no assurance that there will be no future adverse impact on the Company
as a result of unresolved Year 2000 issues of third parties.
The Company has expended, and will continue to expend, the resources necessary
to address future issues in a timely manner. Through December 31, 1999,
cumulative incremental expenditures of less than $0.2 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 did not separately track
internal costs related to the internal allocation of personnel and other costs
related to the Year 2000 project. Most of these incremental expenditures related
to the acquisition and implementation of new and enhanced systems and/or
equipment, which was capitalized and amortized over their respective useful
lives. Expenses related to the Company's internal resources and Year 2000
remediation costs were expensed as incurred. Minimal 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 that the Year 2000
problem will not have an adverse impact on the Company's future earnings.
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.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Operating earnings for the fourth quarter of 1999 were $2.5 million, or $0.74
per diluted share, a 15.5% increase over operating earnings of $2.1 million, or
$0.60 per diluted share for the same quarter in 1998. Operating cash earnings
for the fourth quarter of 1999 were $2.7 million, or $0.82 per diluted share, a
13.9% increase over the same quarter in 1998.
As previously mentioned, during the fourth quarter of 1999, the Company recorded
a non-cash after-tax charge of $7.9 million ($2.38 per share) related to its
change in method for evaluating the recoverability of goodwill, from an
undiscounted cash flow to a discounted cash flow basis. In addition, the Company
recorded an after-tax charge of $0.9 million ($0.28 per share) related to the
impending merger of its two principal subsidiaries, the Bank and the
Association. Inclusive of these two charges, there was a net loss for the fourth
quarter of 1999 of $6.3 million, or $1.92 per diluted share.
36
37
The following table summarizes the Company's quarterly results for the years
1999 and 1998:
QUARTER
(IN THOUSANDS OF DOLLARS, --------------------------------------------------------------
EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH TOTAL
------- ------- ------- -------- --------
1999:
TOTAL INTEREST INCOME $26,425 $26,810 $28,999 $ 30,206 $112,440
TOTAL INTEREST EXPENSE 12,018 12,009 13,752 14,938 52,717
------- ------- ------- -------- --------
NET INTEREST INCOME 14,407 14,801 15,247 15,268 59,723
PROVISION FOR CREDIT LOSSES 1,175 1,090 1,333 1,377 4,975
NONINTEREST INCOME 2,657 2,305 2,011 2,148 9,121
NONINTEREST EXPENSE 12,618 12,460 11,862 21,396 58,336
------- ------- ------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 3,271 3,556 4,063 (5,357) 5,533
INCOME TAX EXPENSE 1,295 1,357 1,583 992 5,227
------- ------- ------- -------- --------
NET INCOME (LOSS) $ 1,976 $ 2,199 $ 2,480 $ (6,349) $ 306
======= ======= ======= ======== ========
BASIC EARNINGS PER SHARE $ 0.56 $ 0.62 $ 0.72 $ (1.92) $ 0.09
DILUTED EARNINGS PER SHARE $ 0.56 $ 0.62 $ 0.72 $ (1.92) $ 0.09
1998:
Total interest income $28,487 $28,612 $28,772 $ 26,189 $112,060
Total interest expense 13,936 13,794 13,320 12,761 53,811
------- ------- ------- -------- --------
Net interest income 14,551 14,818 15,452 13,428 58,249
Provision for credit losses 1,300 1,525 2,986 1,625 7,436
Noninterest income 1,695 2,221 3,921 1,952 9,789
Noninterest expense 11,668 12,020 12,593 10,487 46,768
------- ------- ------- -------- --------
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
======= ======= ======= ======== ========
Basic earnings per share $ 0.55 $ 0.60 $ 0.61 $ 0.60 $ 2.36
Diluted earnings per share $ 0.55 $ 0.60 $ 0.60 $ 0.60 $ 2.35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
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 matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest-rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that
37
38
time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-bearing assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that time period. A gap is considered positive when the amount
of interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of falling interest rates, the net earnings of an institution
with a positive gap theoretically may be adversely affected due to its
interest-earning assets repricing to a greater extent than its interest-bearing
liabilities. Conversely, during a period of rising interest rates,
theoretically, the net earnings of an institution with a positive gap position
may increase as it is able to invest in higher yielding interest-earning assets
at a more rapid rate than its interest-bearing liabilities reprice.
The Company also measures and monitors its sensitivity to interest rates using
net interest income simulations on a quarterly basis. Any identified exposure is
managed primarily through the use of off-balance sheet instruments such as
swaps, caps, floors and options on mortgage-backed securities and through
extending or shortening the duration of the investment and mortgage-backed
securities portfolio, retail certificates of deposit and FHLB advances. The
Company currently does not engage in the use of trading activities, high-risk
derivatives and synthetic instruments in controlling its interest rate risk.
Such uses are permitted at the recommendation of ALCO with the approval of the
Board of Directors.
38
39
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amounts of
assets and liabilities shown which reprice or mature during a particular period
were determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability. Since all interest rates and yields
do not adjust at the same velocity or magnitude, and since volatility is subject
to change, the gap is only a general indicator of interest rate sensitivity.
0-90 91-180 181-365 Over 1-5 Over 5 Non-rate
(in thousands of dollars) days days days years years sensitive Total
--------- --------- --------- --------- -------- --------- ----------
Assets:
Investment and mortgage-
backed securities and
interest-bearing deposits
in other banks $ 68,423 $ 6,438 $ 18,772 $ 91,139 $163,529 $ -- $ 348,301
Federal funds sold 5,700 -- -- -- -- -- 5,700
Commercial loans 140,143 11,783 13,252 25,773 25,960 -- 216,911
Real estate loans 99,458 77,254 153,159 280,515 209,480 -- 819,866
Consumer loans 47,453 3,261 5,551 24,879 9,063 -- 90,207
Other assets -- -- -- -- -- 138,564 138,564
--------- --------- --------- --------- -------- --------- ----------
Total assets $ 361,177 $ 98,736 $ 190,734 $ 422,306 $408,032 $ 138,564 $1,619,549
========= ========= ========= ========= ======== ========= ==========
Liabilities and stockholders' equity:
Noninterest-bearing
deposits $ -- $ -- $ -- $ -- $ -- $ 120,544 $ 120,544
Time and savings deposits 294,547 191,889 192,968 74,876 231,321 -- 985,601
Short-term borrowings 114,884 -- 40,000 -- -- -- 154,884
Long-term debt 75,003 32,652 5,505 105,047 6,933 -- 225,140
Other liabilities -- -- -- -- -- 18,689 18,689
Stockholders' equity -- -- -- -- -- 114,691 114,691
--------- --------- --------- --------- -------- --------- ----------
Total liabilities and
stockholders' equity $ 484,434 $ 224,541 $ 238,473 $ 179,923 $238,254 $ 253,924 $1,619,549
========= ========= ========= ========= ======== ========= ==========
Interest rate
sensitivity gap $(123,257) $(125,805) $ (47,739) $ 242,383 $169,778 $(115,360) $ --
Cumulative interest rate
sensitivity gap $(123,257) $(249,062) $(296,801) $ (54,418) $115,360 $ -- $ --
The Company's policy is to 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 the use of these
instruments.
39
40
The financial instruments used and their notional amounts outstanding at
December 31 for the years indicated were as follows:
(in thousands of dollars) 1999 1998 1997
---- ---- --------
Interest rate swaps:
Pay-fixed swaps-notional amount $-- $-- $10,000
Average receive rate --% --% 5.88%
Average pay rate --% --% 6.25%
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.
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 consist 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, 1999 and 1998 consisted of the following:
1999 1998
----------------------- -----------------------
NOTIONAL ESTIMATED Notional Estimated
(in thousands of dollars) AMOUNT FAIR VALUE Amount Fair Value
-------- ---------- -------- ----------
Caps $ -- $-- $ 5,000 $ --
Floors 10,000 (1) 10,000 (144)
-------- --- ------- -----
Total interest rate options $ 10,000 $(1) $15,000 $(144)
======== === ======= =====
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 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
40
41
over a 12-month period is assumed. The following reflects the Company's NII
sensitivity analysis as of December 31, 1999.
Estimated NII Sensitivity
-------------------------
Rate Change 1999 1998
------- -------
+200bp (3.65)% (1.16)%
-200bp 1.06 % (2.29)%
Loan growth from December 31, 1998 to 1999 of $356.1 million, or 36.2%, has been
predominantly longer-term fixed rate or prime-based loans while funding has been
mainly a combination of short-term time certificates of deposit and FHLB
advances. These changes have made the balance sheet more liability sensitive and
more negatively exposed to continued upward movement in interest rates. As a
result, the Company has been and will continue efforts to extend terms of time
certificates of deposits and use of putable FHLB advances to extend funding
terms.
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.
41
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
AND INDEPENDENT AUDITORS' REPORTS
CB BANCSHARES, INC. AND SUBSIDIARIES
December 31, 1999, 1998 and 1997
PAGE
CONTENTS NUMBERS
-------- -------
INDEPENDENT AUDITORS' REPORTS 43 - 44
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 45
CONSOLIDATED STATEMENTS OF INCOME 46
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS) 47
CONSOLIDATED STATEMENTS OF CASH FLOWS 48 - 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 50
42
43
INDEPENDENT AUDITORS' REPORT
CB Bancshares, Inc. and Subsidiaries
The Board of Directors and Stockholders
CB Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of CB Bancshares,
Inc. and Subsidiaries as of December 31, 1999, and the related consolidated
statements of income, changes in stockholders' equity and comprehensive income
(loss), and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CB Bancshares, Inc.
and Subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
As discussed in note B to the consolidated financial statements, the Company
changed its method for assessing recoverability of goodwill in 1999.
/s/ KPMG LLP
- ------------------------
Honolulu, Hawaii
February 18, 2000
43
44
INDEPENDENT AUDITORS' REPORT
CB Bancshares, Inc. and Subsidiaries
Board of Directors and Stockholders
CB Bancshares, Inc.
We have audited the accompanying consolidated balance sheet of CB Bancshares,
Inc. (a Hawaii corporation) and Subsidiaries as of December 31, 1998, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the two 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 the consolidated results of
their operations and their consolidated cash flows for each of the two years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ GRANT THORNTON LLP
- -----------------------------
Honolulu, Hawaii
February 12, 1999
44
45
CONSOLIDATED BALANCE SHEETS
CB Bancshares, Inc. and Subsidiaries
DECEMBER 31,
------------------------
(in thousands, except number of shares and per share data) 1999 1998
---------- ----------
ASSETS
Cash and due from banks (note A) $ 66,918 $ 61,658
Interest-bearing deposits in other banks (note K) 76 20,000
Federal funds sold 5,700 47,752
Investment and mortgage-backed securities (notes D, J and K):
Available-for-sale 316,498 141,764
FHLB stock 31,727 29,481
Loans held for sale 7,805 99,602
Loans, net (notes E, F, J and K) 1,126,984 961,924
Premises and equipment, net (note H) 18,008 20,916
Other real estate owned and other repossessed property (note G) 6,385 8,583
Accrued interest receivable and other assets (notes M and R) 39,448 36,758
---------- ----------
TOTAL ASSETS $1,619,549 $1,428,438
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note I):
Noninterest-bearing $ 120,544 $ 119,649
Interest-bearing 985,601 964,961
---------- ----------
Total deposits 1,106,145 1,084,610
---------- ----------
Short-term borrowings (note J) 154,884 21,926
Accrued expenses and other liabilities (notes M and N) 18,689 18,443
Long-term debt (note K) 225,140 171,087
---------- ----------
Total liabilities 1,504,858 1,296,066
---------- ----------
Commitments and contingencies (notes H, K, O, P, Q and R) Stockholders' equity
(notes R and S):
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 3,255,282 shares in 1999
and 3,552,228 shares in 1998 3,255 3,552
Additional paid-in capital 56,219 65,108
Retained earnings 62,159 62,784
Accumulated other comprehensive income (loss), net of tax (6,942) 928
---------- ----------
Total stockholders' equity 114,691 132,372
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,619,549 $1,428,438
========== ==========
See accompanying notes to the consolidated financial statements.
45
46
CONSOLIDATED STATEMENTS OF INCOME
CB Bancshares, Inc. and Subsidiaries
YEARS ENDED DECEMBER 31,
-------------------------------
(in thousands, except per share data) 1999 1998 1997
-------- -------- --------
Interest income:
Interest and fees on loans $ 91,731 $ 93,491 $ 93,025
Interest and dividends on investment and
mortgage-backed securities:
Taxable interest income 16,023 13,708 15,907
Nontaxable interest income 1,035 435 207
Dividends 2,249 2,135 2,001
Other interest income 1,402 2,291 1,389
-------- -------- --------
Total interest income 112,440 112,060 112,529
======== ======== ========
Interest expense:
Deposits (note I) 37,572 39,940 35,966
FHLB advances and other short-term borrowings 3,282 3,536 11,364
Long-term debt 11,863 10,335 6,529
-------- -------- --------
Total interest expense 52,717 53,811 53,859
======== ======== ========
Net interest income 59,723 58,249 58,670
Provision for credit losses (note F) 4,975 7,436 6,250
-------- -------- --------
Net interest income
after provision for credit losses 54,748 50,813 52,420
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 2,060 1,740 1,632
Other service charges and fees 3,008 2,630 2,460
Net realized gains (losses) on sales of securities
(notes D and T) (32) 4,104 177
Net gains (losses) on sales of loans 2,744 (447) 1,174
Other 1,341 1,762 1,669
-------- -------- --------
Total noninterest income 9,121 9,789 7,112
======== ======== ========
Noninterest expense:
Salaries and employee benefits (note R) 20,427 18,338 19,652
Net occupancy expense (note H) 8,022 9,024 8,325
Equipment expense (note H) 3,441 3,803 3,176
Write-off of goodwill (note B) 7,873 -- --
Restructuring and merger-related charges (note C) 1,551 -- --
Other (note L) 17,022 15,603 16,404
-------- -------- --------
Total noninterest expense 58,336 46,768 47,557
======== ======== ========
Income before income taxes 5,533 13,834 11,975
Income tax expense (note M) 5,227 5,465 4,757
======== ======== ========
NET INCOME $ 306 $ 8,369 $ 7,218
======== ======== ========
Per share data (note S):
Basic $ 0.09 $ 2.36 $ 2.03
Diluted $ 0.09 $ 2.35 $ 2.03
======== ======== ========
See accompanying notes to the consolidated financial statements.
46
47
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
CB Bancshares, Inc. and Subsidiaries
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
---------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
(IN THOUSANDS OF DOLLARS, EXCEPT PER ------------------ PAID-IN RETAINED INCOME
SHARE DATA) SHARES AMOUNT CAPITAL EARNINGS (LOSS) TOTAL
----- ------ ---------- -------- ------------- --------
YEAR ENDED DECEMBER 31, 1999:
BALANCE AT JANUARY 1, 1999 3,552 $3,552 $65,108 $62,784 $ 928 $132,372
COMPREHENSIVE INCOME (LOSS)
NET INCOME -- -- -- 306 -- 306
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
UNREALIZED LOSSES ON SECURITIES,
NET OF RECLASSIFICATION
ADJUSTMENT -- -- -- -- (7,870) (7,870)
----- ------ ------- ------- ------- --------
TOTAL COMPREHENSIVE INCOME (LOSS) -- -- -- 306 (7,870) (7,564)
----- ------ ------- ------- ------- --------
CASH DIVIDENDS:
$0.270 PER SHARE -- -- -- (931) -- (931)
CANCELLED AND RETIRED SHARES (297) (297) (8,889) -- -- (9,186)
----- ------ ------- ------- ------- --------
BALANCE AT DECEMBER 31, 1999 3,255 $3,255 $56,219 $62,159 $(6,942) $114,691
===== ====== ======= ======= ======= ========
Year ended December 31, 1998:
Balance at January 1, 1998 3,551 $3,551 $65,080 $55,233 $ 1,201 $125,065
Comprehensive income:
Net income -- -- -- 8,369 -- 8,369
Other comprehensive income (loss), net of tax
Unrealized losses on securities,
net of reclassification
adjustment -- -- -- -- (273) (273)
----- ------ ------- ------- ------- --------
Total comprehensive income -- -- -- 8,369 (273) 8,096
----- ------ ------- ------- ------- --------
Options exercised 1 1 28 -- -- 29
Cash dividends:
$0.230 per share -- -- -- (818) -- (818)
----- ------ ------- ------- ------- --------
Balance at December 31, 1998 3,552 $3,552 $65,108 $62,784 $ 928 $132,372
===== ====== ======= ======= ======= ========
Year ended December 31, 1997:
Balance at January 1, 1997 3,551 $3,551 $65,080 $49,878 $ 902 $119,411
Comprehensive income:
Net income -- -- -- 7,218 -- 7,218
Other comprehensive income, net of tax
Unrealized gains on securities,
net of reclassification
adjustment -- -- -- -- 299 299
----- ------ ------- ------- ------- --------
Total comprehensive income -- -- -- 7,218 299 7,517
----- ------ ------- ------- ------- --------
Cash dividends:
$0.975 per share -- -- -- (1,863) -- (1,863)
----- ------ ------- ------- ------- --------
Balance at December 31, 1997 3,551 $3,551 $65,080 $55,233 $ 1,201 $125,065
===== ====== ======= ======= ======= ========
See accompanying notes to the consolidated financial statements.
47
48
CONSOLIDATED STATEMENTS OF CASH FLOWS
CB Bancshares, Inc. and Subsidiaries
Years ended December 31,
----------------------------------------
(in thousands of dollars) 1999 1998 1997
--------- --------- --------
Cash flows from operating activities:
Net income $ 306 $ 8,369 $ 7,218
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 4,975 7,436 6,250
Loss on disposition of premises and equipment -- 103 805
Depreciation and amortization 4,492 3,460 3,576
Deferred income taxes 1,409 (1,429) 416
Decrease (increase) in accrued interest receivable (2,203) 561 (133)
Increase (decrease) in accrued interest payable 822 (3,330) 1,022
Loans originated for sale (144,342) (288,460) (78,570)
Sale of loans held for sale 148,323 141,072 57,906
Decrease (increase) in other assets 1,743 (1,295) (491)
Increase in income taxes payable 908 105 1,246
Increase (decrease) in other liabilities 2,553 106 (2,220)
Write-off of goodwill 7,873 -- --
Restructuring and merger-related charges 1,551 -- --
Other (297) 1,163 1,212
--------- --------- --------
Net cash provided by (used in) operating
activities 28,113 (132,139) (1,763)
--------- --------- --------
Cash flows from investing activities:
Net decrease(increase) in interest-bearing deposits
in other banks 19,924 10,000 (13,500)
Net decrease(increase) in federal funds sold 42,052 (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
Proceeds from sales of available-for-sale securities 32,883 81,605 12,862
Proceeds from maturities of available-for-sale
securities 42,581 29,233 22,640
Purchase of available-for-sale securities (205,303) (44,064) (17,634)
Purchase of FHLB stock (2,246) (2,133) (2,248)
Net loan originations over principal payments (150,222) 22,396 (27,751)
Proceeds from sales of loans -- 10,257 --
Proceeds from sales of premises and equipment -- 23 467
Capital expenditures (1,233) (4,493) (4,823)
Proceeds from sales of foreclosed assets 10,282 5,058 2,400
Purchase of bank owned life insurance (10,000) -- --
--------- --------- --------
Net cash provided by (used in) investing
activities (221,282) 158,760 (22,850)
--------- --------- --------
Subtotal carried forward (193,169) 26,621 (24,613)
--------- --------- --------
48
49
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
CB Bancshares, Inc. and Subsidiaries
YEARS ENDED DECEMBER 31,
----------------------------------------
(in thousands of dollars) 1999 1998 1997
--------- --------- --------
Subtotal brought forward (193,169) 26,621 (24,613)
--------- --------- --------
Cash flows from financing activities:
Net increase in time deposits 31,073 44,128 62,187
Net increase (decrease) in other deposits (9,538) 31,754 (5,369)
Net increase (decrease) in short-term borrowings 132,958 (115,286) (71,469)
Proceeds from long-term debt 150,000 58,000 89,672
Principal payments on long-term debt (95,947) (27,961) (43,696)
Cash dividends paid (931) (777) (1,694)
Stock repurchase (9,186) -- --
Stock options exercised -- 29 --
--------- --------- --------
Net cash provided by (used in) financing activities 198,429 (10,113) 29,631
--------- --------- --------
Increase in cash and due from banks 5,260 16,508 5,018
Cash and due from banks at beginning of year 61,658 45,150 40,132
========= ========= ========
Cash and due from banks at end of year $ 66,918 $ 61,658 $ 45,150
========= ========= ========
Supplemental disclosures of cash flow information:
Interest paid on deposits and other borrowings $ 51,895 $ 57,141 $ 52,837
Income taxes paid 3,213 6,854 3,711
Supplemental schedule of non-cash operating and investing activity:
The Company converted $9,038, $11,355 and $8,524 of loans into
other real estate owned and repossessed personal property in 1999, 1998
and 1997, respectively.
During 1999, the Company transferred $47,142 of loans classified as
held-for-sale to held-for-investment
During 1999, the Company securitized $58,965 of mortgage loans into
mortgage-backed securities classified as available-for-sale. In
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 1998, the Company transferred $12,859 of securities classified as
held-to-maturity to available-for-sale
See accompanying notes to the consolidated financial statements.
49
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CB Bancshares, Inc. and Subsidiaries
NOTE A - BASIS OF PRESENTATION AND 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 significant accounting policies of the Company are as follows:
PRINCIPLES OF CONSOLIDATION AND PRESENTATION. 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"); and O.R.E., Inc. Significant
intercompany transactions and balances have been eliminated in consolidation.
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.
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS. The credit risk of a financial
instrument is the possibility that a loss may result from the failure of another
party to perform in accordance with the terms of the contract. The most
significant credit risk associated with the Company's financial instruments is
concentrated in its loans receivable.
Concentrations of credit risk would exist for groups of borrowers when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The ability of the Company's borrowers to repay their commitments is
contingent on several factors, including the economic conditions in the
borrowers' geographic area and the individual financial condition of the
borrowers. The Company generally requires collateral or other security to
support borrower commitments on loans receivable. This collateral may take
several forms. Generally, on the Company's mortgage loans, the collateral will
be the underlying mortgaged property. The Company's lending activities are
primarily concentrated in the state of Hawaii.
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The Company does not
currently engage in trading activities. The Company is subject to interest rate
risk to the degree that its interest-earning assets reprice on a different
frequency or schedule than its interest-bearing liabilities. The Company closely
monitors the pricing sensitivity of its financial instruments.
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 $3,499,000 and $8,365,000 in
50
51
1999 and 1998, respectively.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment and mortgage-backed
securities are classified into the following categories:
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 accumulated other
comprehensive income (loss) in stockholders' equity. Premiums and discounts are
included in interest income over the period to maturity using the interest
method. 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 of Seattle (the "FHLB"), the Company
is required to maintain a minimum investment in the capital stock of the FHLB in
an amount at least equal to the greater of 1% of the aggregate principal amount
of its unpaid residential loans, residential purchase contracts and similar
obligations at the end of each calendar year, assuming for such purposes that at
least 30% of its assets were residential mortgage loans, or 5% of its advances
from the FHLB. The stock is recorded as a restricted investment security at par.
LOANS HELD TO MATURITY. Interest income on loans receivable is accrued as it is
earned. 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. Accretion of discounts and deferred loan fees is discontinued when
loans are placed on nonaccrual status. 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
principal or interest will not be collected when contractually due 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
51
52
is reversed and subsequently, interest income is recognized as payments are
received.
The Company generally places loans on nonaccrual status that are 90 days past
due as to principal or interest unless well-collateralized and in the process of
collection, or when management believes that collection of principal or interest
has become doubtful, or when a loan is first classified as impaired. When loans
are placed on nonaccrual status, previously accrued and uncollected interest is
reversed against interest income of the current period. Cash interest payments
received on nonaccrual and impaired loans are applied as a reduction of
principal balance when doubt exists as to the ultimate collection of the
principal; otherwise, such payments are recorded as income.
Nonaccrual loans are generally returned to accrual status when they become both
current as to principal and interest or become both well collateralized and in
the process of collection.
LOANS HELD FOR SALE. The Company sells loans and participations in loans with
yield rates to the investors based upon current market rates. Gain or loss on
the sale of loans is recognized to the extent that the selling prices differ
from the carrying value of the loans sold based on the estimated relative fair
values of the assets sold and any retained interests. Residential mortgage loans
originated for sale are classified as loans held for sale and are accounted for
at the lower of aggregate cost or fair value. Loan fees collected upon
origination are deferred and recognized as an adjustment of yield until the time
of sale when the remaining deferred balance is recognized in full.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS. A transfer of financial assets is
accounted for as a sale when control is surrendered over the assets transferred
and when consideration other than beneficial interests in the assets sold is
received in the exchange. Servicing rights and other retained interests in the
assets sold are recorded by allocating the previous recorded investment between
the asset sold and the interest retained based on their relative fair values, if
practicable to determine, at the date of transfer.
The Company recognizes as separate assets the rights to service mortgage loans
for others, whether the servicing rights are acquired through purchases or
retained upon sales of loans originated. For purposes of evaluating and
measuring impairment of mortgage servicing rights, the Company stratifies its
portfolio on the basis of certain risk characteristics including loan type and
note rate. Based upon current fair values, mortgage servicing rights are
periodically assessed for impairment. Impairment is recognized in the statement
of income during the period in which impairment occurs as an adjustment to the
corresponding valuation allowance. Mortgage servicing rights are amortized over
the period of estimated net servicing income and take into account appropriate
prepayment assumptions.
At December 31, 1999 and 1998, servicing assets net of the related amortization
of $1.7 million and $1.3 million, respectively were included in other assets.
GOODWILL. Effective December 24, 1999, the Company's accounting policy for
assessing recoverability of goodwill is as follows:
Goodwill is amortized on a straight-line basis over its estimated useful life,
principally over a fifteen year period. It is the Company's policy to review
goodwill for impairment whenever events or changes in circumstances indicate
that its investment in the underlying assets/businesses which gave rise to such
goodwill may not be recoverable. The Company evaluates the recoverability of
goodwill by estimating the future discounted cash flows of the businesses to
which the goodwill relates. When estimated future discounted cash flows are less
than the carrying value of the net assets (tangible and identifiable intangible)
and related goodwill, impairment losses of goodwill are charged to operations.
Impairment losses, limited to the carrying value of goodwill, represent the
excess of the sum of the carrying value of the net assets (tangible and
identifiable intangible) and goodwill over the discounted cash flows of the
business being evaluated. In determining the estimated future cash flows, the
Company considers current and projected future levels of income as well as
business trends,
52
53
prospects and market and economic conditions. Prior to December 24, 1999, the
assessment of recoverability and measurement of impairment of goodwill was based
on undiscounted cash flows.
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 is 3 to 45 years for premises and
leasehold improvements and 3 to 20 years for equipment.
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. Losses arising at the time of
acquisition of such properties are charged against the allowance for credit
losses. 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.
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.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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. Gains and losses on other interest
rate derivative financial instruments that do not qualify as hedges are
recognized as other income or expense.
Gains and losses on hedges of existing assets or liabilities 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 designated 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 are deferred and 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.
STOCK-BASED COMPENSATION. The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for
53
54
Stock-Based Compensation," established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123.
EARNINGS PER SHARE. Basic earnings per common share are based on the
weighted-average number of common shares outstanding for the year. 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.
NEW ACCOUNTING PRINCIPLES. In June 1998, the Financial Accounting Standards
Board ("FASB") 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 January 1, 2000. The adoption of
this standard is not expected to have a material effect on the Company's
consolidated financial statements.
NOTE B - CHANGE IN ACCOUNTING FOR GOODWILL
In December 1999, the Company elected to change its method for assessing
recoverability of goodwill from one based on undiscounted cash flows to one
based on discounted cash flows. The Company determined that using a discounted
cash flow methodology was a preferable policy. The rate used in determining
discounted cash flows was a rate corresponding to the Company's cost of capital.
The Company believes that fair value (i.e., discounted cash flows) is preferable
because it is consistent with the basis used for investment decisions
(acquisitions and capital projects) and takes into account the specific and
detailed operating plans and strategies of the related business segment. This
change represents a change in accounting principle which is indistinguishable
from a change in estimate. Accordingly, the effect of the change was recorded as
part of noninterest expense. For the years ended December 31, 1999, 1998 and
1997, amortization of goodwill was $851,000.
As a result of the change to a discounted cash flow methodology, the Company
recorded a non-cash write-off of goodwill of $7.9 million ($2.38 per share) in
1999. This charge represented the amount required to writedown the carrying
value of the goodwill to the Company's estimate, as of December 24, 1999, of the
estimated future discounted cash flows using the methodology described in Note
A.
NOTE C - RESTRUCTURING AND MERGER-RELATED CHARGES
In the fourth quarter of 1999, the Company announced plans to merge its two
principal subsidiaries, the Bank and the Association (the "Merger"). Subject to
regulatory approvals, the Merger is expected to be effective July 1, 2000. After
the Merger, the combined institution will operate under the "City Bank" name.
In connection with the Merger, the Company recorded $1.6 million ($0.9 million
and $0.28 per share, after taxes) of restructuring and merger-related charges
primarily comprised of write-offs of improvements associated with excess leased
commercial property.
54
55
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of the Company's investment and
mortgage-backed securities portfolio at December 31, 1999 and 1998 were as
follows:
Gross Gross
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
(in thousands of dollars) COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
1999:
AVAILABLE-FOR-SALE SECURITIES:
U.S. TREASURY AND OTHER
U.S. GOVERNMENT AGENCIES
AND CORPORATIONS $ 15,993 $ -- $ 198 $ 15,795
STATES AND POLITICAL SUBDIVISIONS 32,322 10 1,979 30,353
MORTGAGE-BACKED SECURITIES 280,115 1,197 10,962 270,350
-------- ------ ------- --------
TOTAL AVAILABLE-FOR-SALE $328,430 $1,207 $13,139 $316,498
======== ====== ======= ========
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
======== ====== ==== ========
Securities with an aggregate carrying value of $97,282,000 and $85,519,000, at
December 31, 1999 and 1998, respectively, were pledged to collateralize public
deposits and for other purposes required by law.
55
56
The following presents the amortized cost and estimated fair value of
available-for-sale investment securities at December 31, 1999 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 $ 974 $ 982
DUE AFTER ONE YEAR THROUGH FIVE YEARS 16,375 16,153
DUE AFTER FIVE YEARS THROUGH TEN YEARS 21,181 19,876
DUE AFTER TEN YEARS 9,785 9,137
-------- --------
48,315 46,148
MORTGAGE-BACKED SECURITIES 280,115 270,350
-------- --------
TOTAL $328,430 $316,498
======== ========
In 1998, held-to-maturity securities of $69,510,000 were sold due to a change in
investment strategy, 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. Proceeds from sales of
securities available-for-sale during 1999, 1998, and 1997 were $32,883,000,
$81,605,000, and $12,862,000, respectively. These sales resulted in gross
realized gains of $267,000, $502,000, and $268,000 and gross realized losses of
$299,000, $110,000, and $91,000, respectively. Income tax benefit recognized on
net securities losses was $13,000 in 1999. Income tax expense recognized on net
securities gains were $157,000 and $71,000 in 1998 and 1997, respectively.
56
57
NOTE E - LOANS
The loan portfolio consisted of the following at December 31, 1999 and 1998:
(in thousands of dollars) 1999 1998
---------- --------
Commercial and financial $ 224,660 $191,128
Real estate:
Construction 15,096 25,453
Commercial 196,810 150,690
Residential 621,200 531,623
Installment and consumer 91,647 85,562
---------- --------
Gross loans 1,149,413 984,456
Less:
Unearned discount 4 5
Net deferred loan fees 4,483 4,756
Allowance for credit losses 17,942 17,771
---------- --------
Loans, net $1,126,984 $961,924
========== ========
Substantially all of the Company's real estate loans are collateralized by
properties located in the State of Hawaii. 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 $461,305,000,
$466,462,000 and $399,497,000 at December 31, 1999, 1998 and 1997, respectively.
Custodial escrow balances maintained with the foregoing loan servicing, and
included in demand deposits, were $2,696,000, $2,703,000 and $2,893,000 at
December 31, 1999, 1998 and 1997, respectively.
Nonaccrual loans at December 31, 1999 and 1998 were $11,782,000 and $13,267,000,
respectively. The amount of interest income which would have been accrued in
1999 and 1998 on nonaccrual loans (had these loans been current) amounted to
$0.7 million and $1.72 million, 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 1999:
(in thousands of dollars)
BALANCE AT BEGINNING OF YEAR $ 7,636
NEW LOANS 4,504
REPAYMENTS (3,395)
-------
BALANCE AT END OF YEAR $ 8,745
=======
57
58
NOTE F - ALLOWANCE FOR CREDIT LOSSES
The changes in the allowance for credit losses for the years indicated were as
follows:
(in thousands of dollars) 1999 1998 1997
------- ------- -------
Balance at beginning of year $17,771 $16,365 $15,431
Provision charged to expense 4,975 7,436 6,250
Recoveries 619 1,094 609
Charge-offs (5,423) (7,124) (5,925)
------- ------- -------
Balance at end of year $17,942 $17,771 $16,365
======= ======= =======
Information related to loans considered to be impaired for the years indicated
were as follows:
(in thousands of dollars) 1999 1998 1997
------- ------- ------
Recorded investment in impaired loans $20,038 $15,187 $9,151
Impaired loans with related allowance
for credit losses calculated under
SFAS. No. 114 8,224 7,996 8,134
Total allowance for credit losses on impaired loans 2,262 989 1,360
Average recorded investment in
impaired loans during the year 19,147 10,741 9,997
Interest income on impaired loans using
cash basis of income recognition 1,499 1,420 131
------- ------- ------
NOTE G - OTHER REAL ESTATE OWNED
The carrying value of foreclosed real estate, net of the following allowance for
losses, were $6,385,000, $8,583,000 and $3,686,000 at December 31, 1999, 1998
and 1997, respectively. Activity in the allowance for losses on other real
estate owned was as follows:
(in thousands of dollars) 1999 1998 1997
------- ------ ----
Balance at beginning of year $ 1,102 $ 188 $ --
Provision charged to expense 927 1,407 248
Charge-offs, net of recoveries (1,089) (493) (60)
------- ------ ----
Balance at end of year $ 940 $1,102 $188
======= ====== ====
58
59
NOTE H - PREMISES AND EQUIPMENT
The Company's premises and equipment at December 31, 1999 and 1998 were as
follows:
(in thousands of dollars) 1999 1998
------- -------
Premises $21,299 $21,493
Equipment 23,105 22,236
------- -------
Total cost 44,404 43,729
Less accumulated depreciation
and amortization 26,396 22,813
------- -------
Net carrying value $18,008 $20,916
======= =======
Depreciation and amortization charged to operations for the years ended December
31, 1999, 1998 and 1997 were as follows:
(in thousands of dollars) 1999 1998 1997
------ ------ ------
Net occupancy expense $ 816 $ 746 $ 715
Equipment expense 2,057 2,017 1,751
------ ------ ------
Total depreciation and amortization $2,873 $2,763 $2,466
====== ====== ======
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) 1999 1998 1997
------ ------ ------
Rental expense $6,223 $6,071 $6,989
Sublease income 799 643 1,380
------ ------ ------
Total rent $5,424 $5,428 $5,609
====== ====== ======
59
60
The following are future minimum rental commitments for long-term noncancelable
operating leases as of December 31, 1999. Future rentals subject to
renegotiations are computed at the latest annual rents.
LESS NET
OPERATING SUBLEASE OPERATING
(in thousands of dollars) LEASES INCOME LEASES
--------- -------- ---------
2000 $ 5,166 $ 453 $ 4,713
2001 4,447 360 4,087
2002 3,855 284 3,571
2003 3,729 226 3,503
2004 3,979 93 3,886
THEREAFTER 27,077 44 27,033
------- ------ -------
TOTAL $48,253 $1,460 $46,793
======= ====== =======
NOTE I - DEPOSITS
Deposits consisted of the following at December 31, 1999 and 1998:
(in thousands of dollars) 1999 1998
---------- ----------
Noninterest-bearing deposits $ 120,544 $ 119,649
Interest-bearing deposits:
Demand deposits 190,363 197,054
Savings 165,814 169,556
Time deposits of $100,000 more 231,598 230,123
Time deposits less than $100,000 397,826 368,228
---------- ----------
Total interest-bearing
deposits 985,601 964,961
---------- ----------
Total deposits $1,106,145 $1,084,610
========== ==========
Interest expense on deposits for the years ended December 31, 1999, 1998 and
1997 were as follows:
(in thousands of dollars) 1999 1998 1997
------- ------- -------
Demand deposits $ 5,058 $ 6,146 $ 4,488
Savings 3,869 3,247 4,452
Time deposits of $100,000 or more 11,392 11,184 9,400
Time deposits less than $100,000 17,253 19,363 17,626
------- ------- -------
Total interest expense $37,572 $39,940 $35,966
======= ======= =======
60
61
At December 31, 1999, the scheduled maturities of time deposits were as follows:
(in thousands of dollars)
2000 $616,673
2001 5,248
2002 2,486
2003 5,010
2004 7
--------
TOTAL $629,424
========
NOTE J - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1999 and 1998 consisted of the following:
(in thousands of dollars) 1999 1998
-------- -------
Advances from the FHLB $154,375 $15,450
Federal funds purchased -- 6,000
Federal treasury tax and loan note 509 476
-------- -------
Total short-term borrowings $154,884 $21,926
======== =======
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 year was 30% or more of stockholders' equity at
December 31 for the years indicated:
(in thousands of dollars) 1999 1998 1997
-------- --------- --------
Advances from the FHLB:
Average interest rate at year-end 5.70% 5.37% 5.63%
Maximum outstanding at any month-end $154,375 $ 134,447 $232,651
Average outstanding 44,829 60,978 177,855
Average interest rate for the year 5.22% 5.52% 6.19%
Federal funds purchased:
Average interest rate at year-end --% 4.84% --%
Maximum outstanding at any month-end 51,880 12,700 17,800
Average outstanding 16,893 2,871 6,111
Average interest rate for the year 5.45% 5.47% 5.78%
61
62
NOTE K - LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 consisted of the following:
(in thousands of dollars) 1999 1998
-------- --------
Advances from the FHLB $223,409 $168,119
Collateralized mortgage obligation 1,731 2,968
-------- --------
Total long-term debt $225,140 $171,087
======== ========
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
$29,800,000 and $43,478,000, loans of $620,282,000 and $579,105,000,
interest-bearing deposits in other banks of $nil and $20,000,000 in 1999 and
1998, respectively, and all stock in the FHLB. FHLB advances are under credit
line agreements of $471,881,000 and $453,931,000 in 1999 and 1998, respectively.
Aggregate maturities of long-term advances from the FHLB as of December 31, 1999
were as follows:
The collateralized mortgage obligation matures on May 20, 2018 and accrues
interest at 9.1%.
(in thousands of dollars)
2000 $ 28,150
2001 107,000
2002 40,000
2003 20,000
2004 10,000
THEREAFTER 18,259
--------
TOTAL $223,409
========
62
63
NOTE L - OTHER NONINTEREST EXPENSE
Other noninterest expense for the years ended December 31, 1999, 1998 and 1997
were as follows:
(in thousands of dollars) 1999 1998 1997
------- ------- -------
Legal and professional fees $ 3,224 $ 3,085 $ 4,748
Advertising and promotion 2,181 1,631 2,273
Stationery and supplies 1,347 1,157 1,023
Provision for other real estate owned
losses 927 1,407 248
Deposit insurance premiums 652 595 406
Other 8,691 7,728 7,706
------- ------- -------
Total other noninterest expense $17,022 $15,603 $16,404
======= ======= =======
NOTE M - INCOME TAXES
The components of income tax expense for the years ended December 31, 1999, 1998
and 1997 were as follows:
(in thousands of dollars) 1999 1998 1997
------ ------- ------
Current:
Federal $3,345 $ 5,658 $3,949
State 473 1,236 392
------ ------- ------
Total current 3,818 6,894 4,341
------ ------- ------
Deferred:
Federal 1,234 (1,135) 232
State 175 (294) 184
------ ------- ------
Total deferred 1,409 (1,429) 416
------ ------- ------
Total income tax expense $5,227 $ 5,465 $4,757
====== ======= ======
63
64
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities as of December 31, 1999 and
1998 were as follows:
(in thousands of dollars) 1999 1998
-------- -------
Deferred tax assets:
Allowance for credit losses $ 4,880 $ 5,684
Hawaii state franchise taxes 59 535
Gain on sale of building 1,637 1,704
Deferred compensation 1,149 1,211
Net unrealized losses on
available-for-sale securities 4,262 --
Other 1,948 1,704
-------- -------
Total deferred tax assets 13,935 10,838
-------- -------
Deferred tax liabilities:
FHLB stock dividends 7,649 6,720
Deferred loan fees 1,639 2,545
Net unrealized gains on
available-for-sale securities -- 458
Other 1,851 1,630
-------- -------
Total deferred tax liabilities 11,139 11,353
-------- -------
Net deferred tax (assets) liabilities $ (2,796) $ 515
======== =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences. There was no valuation
allowance provided for deferred tax assets as of December 31, 1999 and 1998.
64
65
Reconciliation of the federal statutory rate to the Company's effective income
tax rate for the years ended December 31, 1999, 1998 and 1997 was as follows:
1999 1998 1997
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
Tax exempt interest (2.3) (3.0) (2.7)
Hawaii state franchise taxes,
net of federal tax benefit 11.3 4.6 4.6
Amortization and write-off of goodwill 55.2 2.2 2.5
Tax exempt earnings on bank owned
life insurance (4.1) (1.2) (1.4)
Other (0.6) 1.9 1.7
---- ---- ----
Effective income tax rate 94.5% 39.5% 39.7%
==== ==== ====
During 1996, legislation was passed requiring the Association to recapture as
taxable income $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 credit 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, 1999 is an amount of $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 N - 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 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 credits to other noninterest income of
$447,000. As of December 31, 1999, the unamortized deferred gain was $4,097,000.
65
66
NOTE O - RISK MANAGEMENT ACTIVITIES
The Company's principal objectives 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 objectives, 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 upon notional amount. At
December 31, 1999 and 1998 there were no interest rate swaps outstanding. For
the majority of its swaps outstanding at December 31, 1997, the Company paid the
fixed rate and received the floating rate. The notional principal amounts of
interest rate swaps outstanding at December 31, 1997 were $10,000,000. The
estimated fair values of outstanding interest rate swaps were $(127,000) payable
at December 31, 1997.
Interest rate options, which primarily consist 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.
66
67
Interest rate options at December 31, 1999 and 1998 consisted of the following:
1999 1998
------------------------ ------------------------
NOTIONAL ESTIMATED Notional Estimated
(in thousands of dollars) AMOUNT FAIR VALUE Amount Fair Value
-------- ---------- -------- ----------
Caps $ -- $-- $ 5,000 $ --
Floors 10,000 (1) 10,000 (144)
------- --- ------- -----
Total interest rate
options $10,000 $(1) $15,000 $(144)
======= === ======= =====
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 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) 1999 1998 1997
---- ---- -------
Pay fixed swaps - notional amounts $-- $-- $10,000
Average receive rate -- -- 5.88%
Average pay rate -- -- 6.25%
=== === =======
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, may be
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 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. At December 31, 1999, there were outstanding written
option contracts with a notional principal amount of $3,000,000 and an estimated
fair value of $16,000. 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.
67
68
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 P - 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) 1999 1998
-------- --------
Loan commitments $176,836 $166,447
Guarantees and letters of credit 6,461 5,516
-------- --------
Totals $183,297 $171,963
======== ========
These credit-related financial instruments have off-balance sheet risk because
only origination fees and accruals for probable losses are recognized in the
consolidated financial statements 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.
At December 31, 1999, loans held for sale of $7,805,000 were committed to be
sold.
NOTE Q - COMMITMENTS AND CONTINGENCIES
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.
68
69
NOTE R - EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. The Company has an Employee Stock Ownership Plan
(the "ESOP") for all employees of the Company who satisfy length of service
requirements. Trust assets under the plan are invested primarily in the shares
of stock of the Company. Employer contributions are to be paid in cash, shares
of stock or other property as determined by the Board of Directors; provided,
however, contributions may not be made in amounts which cannot be allocated to
any participant's account by reason of statutory limitations. No participant
shall be required or permitted to make contributions to the plan or trust.
Contributions to the plan were $240,000 for 1999 and $350,000 in 1998. There
were no contributions to the plan in 1997. At December 31, 1999, there were
222,468 shares allocated to the Plan. There were no committed-to-be-released or
suspense shares held by the ESOP.
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 eligible participants, and additional amounts
determined by the Board of Directors at their discretion. Effective January 1,
2000, the Company will contribute an amount equal to 3% of the compensation of
eligible participants. Contributions to the plan for 1999, 1998 and 1997 were
$462,000, $173,000 and $407,000, respectively.
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, 1999, 1998 and 1997 amounted to $216,000, $234,000 and
$641,000, respectively. The Company is the beneficiary of life insurance
policies, with an aggregate cash surrender value of $11,297,000 at December 31,
1999, that were purchased as a method of partially financing benefits under this
plan.
STOCK COMPENSATION PLAN. On September 16, 1994, the Board of Directors adopted a
Stock Compensation Plan (the "SCP") which the stockholders approved 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 19, 1999, January 2, 1998 and December 15, 1997, the Company granted
additional stock options of 49,000, 12,500 and 72,500 shares, respectively. The
exercise prices of these options are $30.50, $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.
69
70
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:
1999 1998 1997
--------- ---------- ---------
Net income:
As reported $ 306,000 $8,369,000 $7,218,000
Pro forma (106,000) 7,498,000 7,032,000
Pro forma earnings per share:
Basic $ (0.03) $ 2.11 $ 1.98
Diluted $ (0.03) $ 2.10 $ 1.98
========= ========== =========
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 1999, 1998 and 1997, the
following weighted-average assumptions were used; expected dividend of 0.61%,
0.51% and 0.41%, expected volatility of 32.15%, 32.91% and 33.89%, risk-free
interest rate of 6.36%, 5.62% and 5.78%, and expected life of 6.0 years, 6.0
years and 5.7 years. The weighted-average fair value of options granted during
1999, 1998 and 1997 was $13.37, $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, 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
GRANTED 49,000 $30.50
FORFEITED (9,500) $38.03
------- ------
BALANCE AT DECEMBER 31, 1999 177,450 $36.62
======= ======
As of December 31, 1999 and 1998, stock options outstanding had exercise prices
between $29.00 and $43.00. At December 31, 1999, the weighted-average remaining
contractual life was 6.9 years and 128,950 stock options were exercisable with a
weighted-average exercise price of $38.92. As of December 31, 1998, the
weighted-average remaining contractual life was 8 years and 125,450 stock
options were exercisable with
70
71
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. The
Committee also 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 1999, 1998 and 1997.
Upon the occurrence of a reorganization event, as defined in the SCP, the
Committee may, in its discretion, provide that the options granted shall be
terminated unless exercised within 30 days of notice and advance the exercise
dates of any, or all, outstanding options.
NOTE S - STOCKHOLDERS' EQUITY
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.
71
72
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, 1999 and 1998. No amounts were deducted from the
Association's capital for interest rate risk in 1999 and 1998. Management
believes that the Company, the Bank and the Association meet all capital
adequacy requirements to which they are subject as of December 31, 1999.
For Capital To Be Well
Actual Adequacy Purposes Capitalized
-------------------- ------------------ ------------------
(in thousands of dollars) Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ----- ------- ------
December 31, 1999:
Tier 1 capital (to risk weighted assets):
Consolidated $121,344 11.95% $40,601 4.00% $ N/A%
Bank 71,051 10.12 28,095 4.00 42,143 6.00
Association 49,198 13.06 15,070 4.00 22,606 6.00
Total capital (to risk weighted assets):
Consolidated 134,124 13.21 81,202 8.00 N/A
Bank 79,875 11.37 56,190 8.00 70,238 10.00
Association 51,804 13.75 30,141 8.00 37,676 10.00
Tier 1 capital (to average assets):
Consolidated 121,344 7.69 63,114 4.00 N/A
Bank 71,051 8.17 34,806 4.00 43,508 5.00
Association 49,198 6.92 28,433 4.00 35,541 5.00
Tangible capital (to adjusted total assets):
Association 49,198 6.60 11,179 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, 1998:
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 12,279 4.00 18,418 6.00
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 average assets):
Consolidated 122,455 8.65 56,643 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
-------- ----- ------- ---- ------- -----
72
73
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, 1999, there are no conditions or events since that notification that
management believes have changed the Company's capital category.
REGULATORY AGREEMENTS. During 1996, the Company entered into an informal
agreement, a Memorandum of Understanding (the "MOU"), with the Federal Reserve
Bank of San Francisco (the "FRB"). This MOU was terminated by the FRB in April
1999.
In September 1998, 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.
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,
1999, 1998 and 1997:
1999 1998 1997
---------- ---------- ----------
Numerator:
Net income $ 306,000 $8,369,000 $7,218,000
========== ========== ==========
Denominator:
Weighted average shares outstanding 3,463,971 3,551,891 3,551,228
Effect of dilutive securities-stock
options 321 7,014 7,859
---------- ---------- ----------
Adjusted weighted average shares
outstanding, assuming dilution 3,464,292 3,558,905 3,559,087
========== ========== ==========
Earnings per share - basic $ 0.09 $ 2.36 $ 2.03
Earnings per share - assuming dilution $ 0.09 $ 2.35 $ 2.03
========== ========== ==========
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, 1999, outstanding options to
purchase 164,600 shares ranged from $30.50 to $43.00. At December 31, 1998,
outstanding options to purchase 96,625 shares ranged from $37.22 to $43.00. At
December 31, 1997, there were outstanding options to purchase 72,500 shares at
$43.00.
73
74
NOTE T - OTHER COMPREHENSIVE INCOME (LOSS)
The schedule below presents the reclassification amount to adjust for gains and
losses on securities included in net income, including the amount of income
taxes allocated, and also included in other comprehensive income as unrealized
gains (losses) in the year in which they arose:
BEFORE TAX NET OF
TAX (EXPENSE) TAX
(in thousands of dollars) AMOUNT BENEFIT AMOUNT
-------- --------- -------
1999:
UNREALIZED LOSSES ON SECURITIES:
UNREALIZED HOLDING LOSSES
ARISING DURING THE YEAR $(13,302) $5,413 $(7,889)
LESS: RECLASSIFICATION ADJUSTMENT
FOR GAINS (LOSSES) REALIZED IN
NET INCOME (32) 13 (19)
-------- ------ -------
OTHER COMPREHENSIVE INCOME (LOSS) $(13,770) $5,400 $(7,870)
======== ====== =======
1998:
Unrealized gains (losses) on securities:
Unrealized holding gains
arising during the year $ (209) $ 171 $ (38)
Less: reclassification adjustment
for gains realized in net income 392 (157) 235
-------- ------ -------
Other comprehensive income (loss) $ (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
======== ====== =======
NOTE U - FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because a limited or no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
74
75
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include premises and equipment,
goodwill, core deposit intangibles, and deferred income taxes. In addition, the
tax ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in any of the estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
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 approximates 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, fair values are based on pricing models or formulas using
current assumptions (interest rate swaps and options).
75
76
The following table provides a summary of the carrying and fair values of the
Company's financial instruments at December 31, 1999 and 1998:
1999 1998
-------------------------- --------------------------
CARRYING ESTIMATED Carrying Estimated
OR NOTIONAL FAIR or Notional Fair
(in thousands of dollars) VALUE VALUE Value Value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 66,918 $ 66,918 $ 61,658 $ 61,658
Interest-bearing deposits in other
banks 76 76 20,000 20,000
Federal funds sold 5,700 5,700 47,752 47,752
Investment securities 316,498 316,498 141,764 141,764
FHLB stock 31,727 31,727 29,481 29,481
Loans 1,126,984 1,127,387 961,924 1,014,427
Financial liabilities:
Deposits 1,106,145 1,107,183 1,084,610 1,086,734
Short-term borrowings 154,884 154,250 21,926 21,926
Long-term debt 225,140 224,212 171,087 155,689
Off-balance sheet financial instruments:
Derivative financial instruments:
Interest rate cap -- -- 5,000 --
Interest rate floor 10,000 (1) 10,000 (144)
Interest rate options 3,000 16 15,000 77
Loan commitments 176,836 168 166,447 320
Guarantees and letters of credit 6,461 60 5,516 53
========== ========== ========== ==========
76
77
NOTE V - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
Condensed financial statements of CB Bancshares, Inc. (Parent company only)
follows:
CONDENSED BALANCE SHEETS
DECEMBER 31,
(in thousands, except number -----------------------
of shares and per share data) 1999 1998
-------- --------
ASSETS
Cash on deposit with the
Bank and Association $ 617 $ 658
Investment in subsidiaries:
Bank 68,487 67,936
Association 44,817 63,610
Other 274 423
Premises and equipment, net 176 205
Other assets 520 513
-------- --------
TOTAL ASSETS $114,891 $133,345
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Advances from the Bank, net $ -- $ 7
Dividends payable -- 210
Other liabilities 200 756
-------- --------
Total liabilities 200 973
-------- --------
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, 3,255,282
and 3,552,228 shares, respectively 3,255 3,552
Additional paid-in capital 56,219 65,108
Retained earnings 62,159 62,784
Accumulated other comprehensive
income (loss), net of tax (6,942) 928
-------- --------
Total stockholders' equity 114,691 132,372
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $114,891 $133,345
======== ========
77
78
NOTE V - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
(CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------
(in thousands of dollars) 1999 1998 1997
-------- ------ -------
Income:
Dividends from subsidiaries:
Bank $ 2,600 $ 500 $ 1,400
Association 9,439 250 1,179
Other interest income 9 25 165
-------- ------ -------
Total income 12,048 775 2,744
Total expenses 2,314 1,406 3,850
-------- ------ -------
Operating profit (loss) 9,734 (631) (1,106)
-------- ------ -------
Equity in undistributed income (loss) of subsidiaries:
Bank 3,824 5,830 3,364
Association (14,208) 2,744 3,404
Other -- -- (2)
-------- ------ -------
(10,384) 8,574 6,766
-------- ------ -------
Income (loss) before income taxes (650) 7,943 5,660
Income tax benefit 956 426 1,558
-------- ------ -------
NET INCOME $ 306 $8,369 $ 7,218
======== ====== =======
78
79
NOTE V - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31,
------------------------------------
(in thousands of dollars) 1999 1998 1997
-------- ------- -------
Cash flows from operating activities:
Net income $ 306 $ 8,369 $ 7,218
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Deficiency (excess) of equity in
earnings of subsidiaries over
dividends received 10,384 (8,574) (6,766)
Decrease in dividend receivable
from the Bank -- -- 1,500
Decrease (increase) in other assets 171 -- (1)
Increase in other liabilities (785) (247) (2,730)
-------- ------- -------
Net cash provided by (used in) operating activities 10,076 (452) (779)
-------- ------- -------
Cash flows from investing activities:
Proceeds from sale of equipment -- 391 303
-------- ------- -------
Net cash provided by investing activities -- 391 303
-------- ------- -------
Cash flows from financing activities:
Cash dividends (931) (777) (1,694)
Stock options exercised -- 29 --
Stock repurchase (9,186) -- --
-------- ------- -------
Net cash used in financing activities (10,117) (748) (1,694)
-------- ------- -------
Decrease in cash (41) (809) (2,170)
Cash at beginning of year 658 1,467 3,637
-------- ------- -------
Cash at end of year $ 617 $ 658 $ 1,467
======== ======= =======
79
80
NOTE W - SEGMENT INFORMATION
The Company's business segments are organized around services, products provided
and regulatory environments. The two operating segments are a bank whose primary
focus has been corporate lending to small- to medium-sized businesses in
targeted business segments and a savings institution whose principal business is
lending on one-to-four family residential properties in the State of Hawaii. The
segment data presented below was prepared on the same basis of accounting as the
consolidated financial statements as described in Note A. Internal income and
expense allocations are independently negotiated between operating segments and,
where possible, service and price is measured against comparable services
available in the external marketplace.
PARENT
COMPANY
(in thousands of dollars) BANK ASSOCIATION AND OTHER ELIMINATIONS CONSOLIDATED
-------- ----------- --------- ------------ ------------
1999:
Interest income $ 62,174 $ 50,266 $ 9 $ (9) $ 112,440
Interest expense 25,598 27,128 -- (9) 52,717
Depreciation and amortization 2,544 1,948 -- -- 4,492
Income (loss) before income taxes 10,376 (2,538) (650) (1,655) 5,533
Income tax expense (benefit) 3,952 2,231 (956) -- 5,227
Total assets 887,721 732,735 114,890 (115,797) 1,619,549
Capital expenditures 879 354 -- -- 1,233
======== ========= ========= ========= ==========
1998:
Interest income $ 59,907 $ 52,401 $ 775 $ (1,023) $ 112,060
Interest expense 25,465 28,371 -- (25) 53,811
Depreciation and amortization 1,874 1,586 -- -- 3,460
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 1,727 -- -- 3,576
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
======== ========= ========= ========= ==========
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.
80
81
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers
required by this Item is incorporated by reference to the Company's Proxy
Statement.
The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(2) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the Registrant and its
subsidiaries are included in Item 8:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - For years ended December 31, 1999, 1998 and
1997
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income (Loss) - For years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - For years ended December 31, 1999, 1998
and 1997
Notes to the Consolidated Financial Statements
81
82
(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.
10.5 Agreement and Plan of Merger dated as of December 22, 1999, by
and between City Bank and International Savings and Loan
Association, Limited.
82
83
10.6 Advances, Security and Deposit Agreement dated as of May 20, 1999 by
and between City Bank, including its successors, and the Federal Home
Loan Bank of Seattle.
10.7 Advances, Security and Deposit Agreement dated as of May 19, 1999 by
and between International Savings and Loan Association, Limited,
including its successors, and the Federal Home Loan Bank of Seattle.
10.8 Director Stock Option Plan, incorporated by reference to Exhibit 4
filed with the Registrant's Registration Statement on Form S-8,
Registration No. 333-81279, filed on June 22, 1999.*
10.9 Directors Deferred Compensation Plan effective April 29, 1999.*
16 Letter re: change in certifying accountant incorporated by reference
to Exhibit 16 filed with the Registrant's Form 8-K, SEC file number
000-12396, on August 30, 1999.
18 Letter re: change in accounting principles.
21 Subsidiaries of the Registrant.
23.1 Consent of experts and counsel.
23.2 Consent of experts and counsel.
27.1 Financial Data Schedule (Fiscal year ended December 31, 1999).
- ----------
* 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 ON FORM 8-K
The Company has filed no reports on form 8-K for the quarter ended December 31,
1999.
83
84
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 15, 2000 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 15, 2000
- ----------------------------------- ----------------------------------
Donald J. Andres, Director Tomio Fuchu, Director
/s/ James H. Kamo /s/ Colbert M. Matsumoto
- ----------------------------------- ----------------------------------
James H. Kamo, Secretary Colbert M. Matsumoto, Director
/s/ Larry K. Matsuo /s/ Ronald K. Migita
- ----------------------------------- ----------------------------------
Larry K. Matsuo, Director Ronald K. Migita, President, Chief
Executive Officer and Director
/s/ Caryn S. Morita /s/ Hiroshi Sakai
- ----------------------------------- ----------------------------------
Caryn S. Morita, Senior Vice Hiroshi Sakai, Director
President and Director
/s/ Lionel Y. Tokioka
- ----------------------------------- ----------------------------------
Yoshiki Takada, Director Lionel Y. Tokioka, Chairman of the
Board
/s/ Dwight L. Yoshimura
- ----------------------------------- ----------------------------------
H. Clifton Whiteman, Director Dwight L. Yoshimura, Director
/s/ Dean K. Hirata
- -----------------------------------
Dean K. Hirata, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
84