UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-12396
CB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0197163
(State of Incorporation) (IRS Employer Identification No.)
201 Merchant Street Honolulu, Hawaii 96813
(Address of principal executive offices)
(808) 546-2411
(Registrant's Telephone Number)
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 [ ]
The number of shares outstanding of registrant's common stock at October 31,
1996 was 3,551,228 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except shares and per share data)
- -------------------------------------------------------------------------------
September 30, December 31, September 30,
1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 60,637 $ 75,119 $ 46,317
Federal Funds Sold and securities
purchased 4,005 0 1,705
Investment securities:
Held-to-maturity 17,161 9,244 202,266
Available for sale 170,926 231,495 49,856
Trading 0 96 568
Loans held for sale 2,981 14,350 -
Gross loans 1,093,755 1,121,186 1,128,063
Less allowance for loan losses (15,619) (14,576) (14,426)
Net Loans 1,078,136 1,106,610 1,113,637
Premises and equipment 17,355 16,960 17,695
Other assets 28,280 36,362 43,748
Goodwill 10,639 11,277 11,490
- -------------------------------------------------------------------------------
Total assets $1,390,120 $1,501,513 $1,487,282
===============================================================================
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits
Non-interest bearing $ 112,735 $ 137,287 $ 123,501
Interest bearing 845,531 874,196 897,686
- -------------------------------------------------------------------------------
Total deposits 958,266 1,011,483 1,021,187
Short-term borrowings 219,958 239,360 264,908
Other liabilities 21,714 32,793 39,535
Long-term debt 74,829 101,371 46,820
- -------------------------------------------------------------------------------
Total liabilities 1,274,767 1,385,007 1,372,450
Contingencies (Note B)
Stockholders' equity
$1 par value, 50,000,000 shares
authorized, Issued and
outstanding - 3,551,228 shares 3,551 3,551 3,551
Additional paid-in capital 65,080 65,080 65,080
Retained earnings 46,743 46,279 46,170
Unrealized valuation adjustment (21) 1,596 31
Total stockholders' equity 115,353 116,506 114,832
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,390,120 $1,501,513 $1,487,282
===============================================================================
</TABLE>
2
<PAGE>
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
(in thousands, except per share data) Quarter ended Nine months ended
- ------------------------------------------------------------------------------------------------------------
September 30, September 30,
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $24,779 $24,111 $73,110 $70,776
Interest and dividends on investment securities
Taxable 2,269 4,038 7,613 12,157
Non taxable 191 63 276 203
Dividends 506 198 1,377 529
Other interest income 499 180 1,434 684
- -------------------------------------------------------------------------------------------------------------
Total interest income 28,244 28,590 83,810 84,349
Interest Expense
Deposits 8,717 9,816 26,357 26,774
Short-term borrowings 2,387 2,930 8,464 9,955
Long-term debt 2,061 1,874 5,583 6,416
- -------------------------------------------------------------------------------------------------------------
Total interest expense 13,165 14,620 40,404 43,145
- -------------------------------------------------------------------------------------------------------------
Net interest income 15,079 13,970 43,406 41,204
Provision for loan losses 360 420 1,950 660
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 14,719 13,550 41,456 40,544
Other income
Service charges and fees 1,377 2,221 4,124 6,595
Other 463 20 3,119 243
- -------------------------------------------------------------------------------------------------------------
Total other income 1,840 2,241 7,243 6,838
Other expenses
Salaries and employee benefits 3,856 5,236 17,843 15,487
Net occupancy and equipment expense 2,303 2,320 6,915 7,210
Other 7,069 4,419 17,430 13,875
- -------------------------------------------------------------------------------------------------------------
Total other expenses 13,228 11,975 42,188 36,572
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 3,331 3,816 6,511 10,810
Provision for income taxes 1,326 1,434 2,586 4,064
- -------------------------------------------------------------------------------------------------------------
Net income $2,005 $2,382 $3,925 $ 6,746
=============================================================================================================
Per common share:
Net income $ 0.56 $ 0.67 $ 1.11 $ 1.90
=============================================================================================================
</TABL
>
3
<PAGE>
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOW
</TABLE>
<TABLE>
<CAPTION>
(in thousands, except per share data) Nine months ended
September 30,
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,925 $6,746
Net adjustments to reconcile net income to
cash (used in) provided by operating activities (1,174) 12,741
- -------------------------------------------------------------------------------
Net cash (used in) provided by operating
activities 2,751 19,487
Cash flows from investing activities:
Net increase in federal funds sold and
securities under resale agreements (4,005) (1,700)
Purchase of investment securities (111,696) (17,094)
Proceeds from maturities/ sales of
investment securities 164,348 26,965
Net decrease (increase) in loans 38,800 (52,639)
Capital expenditures (2,058) (1,706)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 85,389 (46,174)
Cash flows from financing activities:
Net (decrease) increase in deposits (53,217) 97,743
Net (decrease) in short-term borrowings (19,402) (9,995)
Decrease in long-term debt (26,542) (60,030)
Cash dividends paid (3,462) (3,462)
- -------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (102,623) 24,256
DECREASE IN CASH (14,483) (2,431)
- -------------------------------------------------------------------------------
Cash and due from banks at beginning of period 75,119 48,748
- -------------------------------------------------------------------------------
Cash and due from banks at end of period $60,637 $46,317
===============================================================================
</TABLE>
4
<PAGE>
CB BANCSHARES, INC. AND SUBSIDIARIES
Note to consolidated Financial Statements
September 30,, 1996
NOTE A - BASIS FOR PRESENTATION
The unaudited financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all information and footnotes
necessary for a fair presentation of the financial condition, results of
operations, and cash flows of CB Bancshares, Inc., and subsidiaries, in
conformity with generally accepted accounting principles.
The financial statements reflect all adjustments of a normal and recurring
nature which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods.
NOTE B - CONTINGENCIES
On January 30, 1996, a lawsuit was filed in the Circuit Court of the First
Circuit, State of Hawaii, by Hamamoto Corporation and Shinsuke Hamamoto
("Plaintiffs") against International Savings and Loan Association, Limited
("ISL"), ISL Services, Inc., DRI Realty, Inc., Richard C Lim, as an officer
and director of ISL (the foregoing defendants are referred to herein as the
"ISL defendants"), as well as CB Bancshares, Inc. (The "Company") and other
entities and individuals. The lawsuit is an action by Plaintiffs, as
purchasers of the International Savings Building at 1111 Bishop Street in
Honolulu, Hawaii, for rescission, special, general and punitive damages.
Plaintiffs seek rescission of a $7.45 million sale, made in May 1988, based on
allegations that various parties negligently or intentionally misrepresented
and/or fraudulently failed to disclose unsuccessful negotiations for a new
ground lease with the fee simple landowner (the "Landowner")and the alleged
unreasonableness of demands by the fee simple owner. Plaintiffs also allege
failure to disclose land appraisals concerning the property and presence of
toxic asbestos in the cooling system, pipes, walls and ceiling tiles of the
building. On March 1, 1996, the Company and the ISL Defendants filed an Answer
to Plaintiffs' Complaint denying any liability in connection with the matters
alleged in Plaintiffs' Complaint, and a Counterclaim against Plaintiffs
alleging breach of contract, abuse of process and related claims. While the
Company and the ISL Defendants believe they have meritorious defenses in this
action, due to the uncertainties inherent in the early stages of litigation, no
assurances can be given as to the ultimate outcome of the lawsuit at this time.
ISL , which currently leases approximately 56% of the building, is currently
scheduled to vacate its leased portion in the first quarter of 1997. The
consent of the Landowner given in 1988 to the assignment by ISL of the
underlying ground lease to Plaintiffs did not release ISL from ground lease
obligations upon default by the assignee, and thus ISL may also have liability
in the underlying ground lease ($65,333 per month) to the Landowner in the
event Plaintiffs default in lease payments to the Landowner, an event which has
been threatened by Plaintiffs but has not yet occurred as of the date of this
Filing. Accordingly, no provision for any loss or recovery that may result
upon resolution of the lawsuit and the underlying ground lease obligations has
been made in the Company's Consolidated Financial Statements.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
NET INCOME
Consolidated net income for the quarter ended September 30, 1996, totaled
$2.01 million, or $0.56 per share, as compared to $2.38 million, or $0.67 per
share for the same quarter last year. Consolidated net income for the nine
months ended September 30, 1996 totaled $3.93 million, or $1.11 per share, as
compared to $6.75 million, or $1.90 per share for the same period year.
The decrease in net earnings for the nine months ended September 30, 1996 was
due primarily to the accrual of expenses related to the Voluntary Separation
Program ("VSP"), which the Company announced in January 1996, amounting to
$3.3 million ($2.0 million after tax) - See further discussion in the section
titled "Other Expenses". Excluding the $2.0 million after tax effect of the
VSP, the Company's net earnings for the first three quarters of 1996 would have
been approximately $6 million .
The Company's annualized return on average assets (ROA) for the nine months
ended September 30, 1996 was 0.37%, as compared to 0.61% for the same period
last year. The Company's annualized return on average stockholder's equity
(ROE) was 4.54% for the nine months ended September 30, 1996, as compared to
7.96% for the same period last year. Excluding the aforementioned $2.0
million effect of the VSP discussed above, ROA and ROE would have been 0.55%
and 6.58%, respectively.
NET INTEREST INCOME
A comparison of net interest income for the nine months ended September 30,
1996 and 1995 is set forth below on a taxable basis:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
(dollars in thousands)
<S> <C> <C>
Interest income $83,952 $84,454
Interest Expense 40,404 43,145
------- -------
Net interest income $43,548 $41,309
======= =======
Net interest margin 4.33% 4.01%
======= =======
</TABLE>
Interest income for the nine months ended September 30, 1996 decreased by $0.50
million to $83.95 million from the $84.45 million during the same period in
1995. The weighted average yield on interest-earning assets was 8.34% for the
nine months ended September 30, 1996 compared to 8.20% for the respective 1995
period. The increase in yield was due primarily to a 25 basis point increase
in the weighted average yield on loans to 8.76%. The average balance of
interest earning assets declined by $32.17 million to $1,345.16 million, which
had a $1.49 million negative effect on net interest income.
6
<PAGE>
Interest expense decreased by $2.74 million to $40.40 million for the nine
months ended September 30, 1996. The weighted average cost of interest-bearing
liabilities decreased to 4.67% for the nine month periods ended September 30,
1996, as compared to 4.79% for the respective 1995 period. Also contributing
to the decrease in interest expense was a $47.53 million decrease in the
average balance of interest bearing liabilities, which reduced interest expense
by $2.10 million. The reduction in the average balance of interest bearing
liabilities was due primarily to a reduction in borrowings.
As a result of the foregoing, the Company's net interest margin increased by 32
basis points to 4.33% for the nine months ended September 30, 1996.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 1996 was $15.6 million, and
represented 1.43% of total loans. The ratio at December 31, 1995 and September
30, 1995, was 1.29% and 1.28%, respectively. The increase in the provision for
loan losses, which amounted to $1.95 million for the nine months ended
September 30, 1996, was made in consideration of the increase in non-performing
loans - see further discussion below.
Changes in the allowances for loan losses were as follows:
<TABLE>
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $15,498 $14,429 $14,576 $14,326
Provision charged to expense 670 420 1,950 660
Net recoveries(charge-offs) (549) (423) (907) (560)
-------- -------- ------- --------
Balance at end of period $ 15,619 $14,426 $15,619 $14,426
</TABLE>
NON-PERFORMING ASSETS
A summary of non-performing assets follows:
<TABLE>
<CAPTION>
9/30/96 12/31/95 9/30/95
---------------------------------
<S> <C> (dollars in thousands) <C>
Loan accounted for on a
non-accrual basis $20,349 $14,338 $8,783
Loan contractually past due
ninety days or more as to
interest or principal payments 6,125 3,113 5,170
----------------------------------
Total non-performing loans 26,474 17,451 13,953
Other Real Estate Owned 1,215 1,715 3,453
----------------------------------
Total non-performing assets $27,689 $19,166 $17,406
===================================
</TABLE>
7
<PAGE>
The increase in non-accrual loans at September 30, 1996 from the same time last
year was due primarily to an increase in ISL's delinquent mortgages, which
increased to $14.5 million at September 30, 1996 from $5.8 million at September
30, 1995. ISL's delinquent loans consists primarily of loans on 1-4 family
residential property. The increase in ISL's non-accrual loans is a reflection
of the continued weakness in the Hawaii economy and real estate market. In
consideration of the above factors, provision for loan losses provided for
during the first three quarters of 1996 increased to $1.95 million, an increase
of $1.3 million for the same period in 1995.
OTHER OPERATING INCOME
Other operating income totaled $7.24 million for the nine month period ended
September 30, 1996, which compares to $6.84 million for the comparable period
in 1995.
OTHER OPERATING EXPENSES
Other operating expenses totaled $42.19 million for the nine months ended
September 30, 1996, an increase of $5.62 million over the same period in 1995.
The increase in other operating expenses was due primarily to the accrual of
$3.29 million of voluntary separation expenses (included in salary and benefit
expenses recorded in the first quarter of 1996 -see discussion below) and the
third quarter 1996 accrual of a $2.2 million one-time SAIF insurance assessment
(included in other expenses -see "RECENT REGULATORY DEVELOPMENTS").
On January 31, 1996, the Company announced a major initiative to further
improve operating efficiency and decrease expenses by offering a Voluntary
Separation Program ("VSP") to all employees. The program offered all eligible
employees the opportunity of electing to terminate their employment. Voluntary
separation agreements were accepted by 97 employees. During the first quarter
of 1996, the Company accrued VSP expenses of $3.29 million for estimated
separation payments (in addition to the $.5 million previously accrued for
certain officer benefits) and, as of September 31, 1996, all VSP payments have
been made. Of the total 97 employees separated in accordance with the VSP,
approximately 57 positions are currently expected to be refilled and the
remaining positions are expected to be eliminated. The positions not replaced
are currently anticipated to result in an estimated annual savings of $2
million in salaries and employee benefits.
The above discussion of projected annual savings from the VSP are forward
looking statements, and as such, the actual results could differ materially
from those projected in such statements. While management of the Company
believes the projected savings described above are reasonable based on current
information, some assumptions may not materialize and unanticipated events and
circumstances may occur, causing actual results to differ from the projections
described above. Factors which could cause the actual results to differ from
those described above include: unanticipated legal actions taken by employees
(or third parties) in response to the Company's program; material and
unforeseen changes in the Company's current operational needs; material changes
in the Hawaii economy impacting the Company's current operational needs; or
other unanticipated external developments materially impacting the Company's
operational and financial performance
8
<PAGE>
CAPITAL
At September 30, 1996, the Company and its banking subsidiaries exceeded all
minimum capital requirements and is classified as considered "well
capitalized" under applicable banking regulations. The consolidated leverage,
Tier 1 and total capital ratios at September 30, 1996 was 6.88%, 12.14% and
13.98%, respectively. The Company intends to maintain its "well capitalized"
levels of regulatory capital.
RECENT REGULATORY DEVELOPMENTS
On September 30, 1996, legislation to recapitalize the Savings Association
Insurance Fund (SAIF) was adopted. The new legislation will impose a one-time
assessment of $0.657 cents per $100 in deposits at SAIF-insured institutions
(such as the Association) based on the amount of SAIF-insured deposits held as
of March 31, 1995. The $2.2 million one-time assessment for the Association
was accrued as of September 30, 1996 (assessment is due on November 27, 1996).
All of the proposed changes in this area include adding approximately 2.5 cents
per $100 of domestic deposits to the deposit insurance costs of BIF insured
banks in order to make FICO bond payments which stem from bonds issued in 1987
to recapitalize the thrift insurance fund. A number of alternative plans,
which include contributions by the Federal Reserve or other resources, have
been proposed to aid in the full capitalization of SAIF, which proposals
currently call for the eventual merger of SAIF and BIF. All of the various
aspects of the proposed legislation could have significant effects on the
Company, the Bank and Association.
PROPOSED MERGER OF SUBSIDIARIES AND MEMORANDUM OF UNDERSTANDING
On October 18, 1996, the Company announced plans to merge its two subsidiaries,
City Bank and International Savings, to improve operating efficiency. The
merger is expected to be completed in the first half of 1997, subject to the
approval of the Bank's regulators. After the merger, the combined banks will
operate under the City Bank name.
The announcement of the merger plan follows a review and analysis of the
Company's operations and strategic assessment of future growth opportunities.
As part of this process, the Company has had a series of discussions with
regulatory authorities on the management, operations and structure of the
Company. As a result, CB Bancshares entered into a informal agreement
(commonly known as a Memorandum of Understanding) with the Federal Bank of San
Francisco (FRB) filed as exhibit 10 hereto.
Under the memorandum, CB Bancshares is restricted from paying dividends,
incurring debt, or redeeming its stock without prior approval of the FRB. The
memorandum also addresses a number of issues that require FRB approval
including: increases in director and executive compensation; entering into
agreements to acquire or divest businesses; management and organizational
structure; liquidity and capital needs; interest rate risk; and audit, record
keeping and compliance control systems.
9
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Item 10. Memorandum of Understanding executed on October 16, 1996 between
CB Bancshares, Inc. and the Federal Reserve Bank of San Francisco
b) The following reports on Form 8-K were filed during the quarter ended
September 30, 1996.
ITEM REPORTED DATE FILED
------------------------------- --------------
Press release on key executives 7-11-96
Press release on merger of subsidiaries
and signing of Memorandum of Understanding 10-18-96
10
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
CB BANCSHARES, INC. AND SUBSIDIARIES
November 14, 1996 By /s/ James M. Morita
James M. Morita, Chairman of the
Board and Chief Executive Officer
By /s/ Daniel Motohiro
Daniel Motohiro, Treasurer
and Principal Financial Officer
11
<PAGE>
EXHIBIT INDEX
10.1 Memorandum of Understanding page 12
MEMORANDUM OF UNDERSTANDING
between
CB Bancshares, Inc.
Honolulu, Hawaii
and the
Federal Reserve Bank of San Francisco
CB Bancshares, Inc., Honolulu, Hawaii (Bancshares), a registered one-bank
holding company and the Federal Reserve Bank of San Francisco (the Reserve
Bank), as evidenced by the signatures of their duly appointed officers below,
have hereby entered into this Memorandum of Understanding (the Memorandum).
This Memorandum evidences the understanding of Bancshares and the Reserve Bank
regarding the satisfactory resolution of issues disclosed in the June 30, 1996
Report of Inspection (the Report) prepared jointly by the Department of
Commerce and Consumer Affairs for the State of Hawaii (the State), the Office
of Thrift Supervision (the OTS) and the Reserve Bank (referred jointly herein
as the Agencies).
Accordingly, Bancshares agrees to adopt the following plans, policies,
procedures, and courses of action:
1. (a) Bancshares shall not declare or pay any cash dividends without the
prior written approval of the Reserve Bank. Requests for prior approval shall
be received in writing by the Reserve Bank at least thirty (30 days prior to
the proposed declaration date. Such requests shall contain sufficient
documentation to demonstrate that the proposed dividend is in compliance with
the Board of Governors of the Federal Reserve System's (the Board of Governors)
Policy Statement dated November 14, 1985 (the Policy Statement), concerning the
payment of cash dividends by bank holding companies, and is otherwise
consistent with the Board of Governors' Capital Adequacy Guidelines (12 C.F.R.
Part 225, App. A & D).
(b) Within sixty (60) days of the effective date of this Memorandum,
Bancshares shall submit to the Reserve Bank an acceptable written dividend
policy concerning the payment of corporate dividends by Bancshares and the
receipt of dividends from either City or International that shall, at a
minimum, include:
(i) A review of the capacity of Bancshares' operating cash flow to
accommodate any proposed dividend payment, (specifically whether the proposed
dividend payment is consistent with the Policy Statement);
(ii) a requirement that the dividend payment is not made while
wither City or International has been informed by either their primary State or
Federal Regulator that there is a need for additional capital; and
(iii) a requirement that any dividends received from either City or
International will not place undue financial pressure on the capital base of
those institutions.
2. (a) At lease thirty (30) days prior to fiscal year end, beginning
December 31, 1996, Bancshares shall submit to the Agencies a written
consolidated strategic plan concerning proposed corporate development and
operational strategies for Bancshares, City, International and the consolidated
organization (the Company) for the succeeding two year period. The plan shall,
at a minimum, address and consider:
(i) Identification of the means by which the Company will seek to
improve its operating performance, particularly with a view towards achieving
reductions in the Company's overhead and operating costs;
(ii) Bancshares financial performance objectives, including
projections for cash flow, earnings, capital, asset quality, and asset growth
or reduction, as the case may be, and the basis for such projections;
(iii) realistic and comprehensive budgets (projecting quarterly
financial statement data for the two year period, including liquidity ratios
and parent company fixed cost coverage ratios under both an "expected" and
"worst" case economic scenario);
(iv) a budget review process to monitor the income and expenses of
Bancshares in order to compare actual figures with budgetary projections;
(v) a description of the operating assumptions that form the
basis for, and adequately support, major projected asset, liability, income and
expense components;
(vi) organizational, management and staffing requirements of
Bancshares, City and International in light of present and planned business
activities and operational strategies; and,
(vii) Bancshares' plans for the sale or merger of any assets, or
the discontinuation or consolidation of any operations, particularly in view of
the requirements of this Memorandum.
(b) The strategic plan required by this paragraph shall be reviewed
quarterly by Bancshares' board of directors and a written report detailing
substantive variances from Bancshares' projected performance shall be included
in the quarterly progress report required by paragraph 16 hereof.
3. (a) Within thirty (30) days of the effective date of this Memorandum,
the board of directors shall establish a committee comprised entirely of
outside directors which shall, within ninety (90) days of the effective date of
this Memorandum, review Bancshares', City's, International's, and the Company's
organizational and managerial structure and prepare a written report of its
findings. A copy of this report, along with a written description of any
proposed changes in senior or executive management's compensation or duties
shall be submitted to the Agencies within one hundred and twenty (120) days of
the effective date of this Memorandum. The primary purpose of this review is
to aid in the development of a management structure that reflects Bancshares'
present and planned business activities. The review shall, at a minimum, focus
on and consider:
(i) Bancshares' current policies and procedures regarding
communications between the management of Bancshares and the management and
staff of City and International;
(ii) the development of written duties and reporting
responsibilities for all of the Company's management positions;
(iii) Bancshares' management's ability to comply with the
requirements of the Memorandum;
(iv) Bancshares' management's ability to develop realistic and
comprehensive budgets;
(v) Bancshares' management succession plans;
(vi) the establishment of a clear delineation of duties and
responsibilities for each of the members of the Company's executive officers,
including, but not limited to, Chairman of the Board, Chief Executive Officer,
President, Chief Operating Officer and Chief Financial Officer for each of the
entities; and,
(vii) all existing personal service, employment, severance,
discretionary retirement, discretionary bonus, and management incentive, plans
and contracts, for all senior and executive officers of Bancshares, City and
International, that Bancshares is either a party to or is directly or
indirectly obligated to fund (collectively referred to herein as the Employment
Contract).
(b) Within one hundred and twenty (120) days of the effective date of
this Memorandum, Bancshares' board of directors shall certify, in writing, that
any such
Employment Contract and the obligations thereunder of Bancshares are consistent
with applicable law and regulations and safe and sound banking practices,
particularly in regard to the current financial condition of Bancshares, City,
and International, the future prospects of the company, each senior executive
officer's responsibility for the financial condition of the consolidated
organization, and related to the services actually rendered to Bancshares,
City, and International by each officer.
(c) Bancshares shall not execute any new employment, service,
severance, or consulting contract, renew or modify existing contracts, with any
senior executive officer without providing the Agencies ten (10) days prior
written notice, which should include all details pertinent to the transaction.
The Reserve Bank shall have the right to disapprove any such contract or
portion thereof. If the Reserve Bank disapproves any contract or renewal or
modification thereof, Bancshares shall not execute said contract or renewal or
modification, and the case may be.
(d) For the purposes of this Memorandum, the term "outside director"
shall be defined as a director who does nor; (i) hold a managerial or officer
position with Bancshares, City, or International, or (ii) own or control,
directly or indirectly, more than 5 percent of the outstanding stock of
Bancshares.
(e) Nothing contained in this paragraph shall limit, in any manner,
the authority or ability of the Reserve Bank or the Board of Governors to take
all appropriate supervisory actions regarding Bancshares' Employment Contracts,
or discretionary bonus or incentive payments.
4. (a) Bancshares' board of directors shall at all times maintain an
Asset/Liability Management Committee (the ALCO) a majority of whose members
shall at all times be comprised of outside directors. Within 90 days of the
effective date of this Memorandum, the ALCO shall have the responsibility for
reviewing and revising, as needed, Bancshares' asset/liability management
policies and procedures. Such policies and procedures shall not be revised or
amended without the prior written approval of the Reserve Bank, and for
monitoring compliance with such policies and procedures. The ALCO shall
review, on a monthly basis, all asset/liability management decisions made by
Bancshares', City's and International's management, paying particular attention
to whether each decision was made in accordance with the approved policies and
procedures. All exceptions to the policies and procedures shall be documented
by the ALCO as to the reason for the exceptions and the continuance of the
exceptions, taking into account the Company's overall goals and strategies.
The continuance of any exception shall be approved by a majority of the ALCO
members and the board of directors, and shall be documented in the minutes of
the board of directors meetings, which shall be available, upon request, to the
Agencies for supervisory review.
(b) Bancshares shall not amend or revise its written asset/liability
management policies and procedures and asset/liability model for the
consolidated operations of the Company without the prior written approval of
the Agencies.
5. Within sixty (60) days of the effective date of this Memorandum,
Bancshares shall submit to the Agencies an acceptable plan to maintain an
adequate capital position for City, International, and the consolidated
organization. The plan shall, at a minimum, address and consider:
(a) The current and future capital requirements of City, International
and the consolidated organization, particularly in view of:
(i) the risk profile of City's, International's and the Company's
asset and liability structure;
(ii) the requirements of the Capital Adequacy Guidelines for Bank
Holding Companies: Risk-Based Measure and Tier 1 Leverage Measure, Appendices A
and D of Regulation Y of the Board of Governors of the Federal Reserve System
(12 C.F.R. Part 225, App. A and D);
(iii) the adequacy of City's and International's loan loss reserves
and its effects on the consolidated financial condition of Bancshares;
(iv) the anticipated levels of earnings at City and International;
and,
(v) the requirements of Bancshares' dividend policies as
delineated in paragraph 1 of this Memorandum.
6. (a) Within ninety (90) days of the effective date of this Memorandum,
the board of directors of Bancshares shall submit to the Agencies a written
statement concerning the steps that the board of directors proposes to take to
maintain the satisfactory condition of City and International and to restore
the consolidated organization to a satisfactory condition. The statement
shall, at a minimum, address, consider, or describe:
(i) The responsibilities of Bancshares' board of directors
regarding the definition, approval, implementation and monitoring of the
proposed corrective steps;
(ii) an identification of the major areas in and the means by
which Bancshares will seek to strengthen the condition of City, International
and the consolidated organization;
(iii) an identification of the detailed information that will be
assessed by the members of the board of directors in the review process,
including data on City's and International's adversely classified assets, loan
loss reserve adequacy, risk based capital and liquidity;
(iv) the development of realistic and comprehensive budgets;
(v) the establishment of a periodic, internal review process to
monitor compliance with the board of director's objectives; and,
(vi) a review of the appropriateness of the current schedule of
board meetings and the appropriateness of fees paid by Bancshares to board
members for attending said meetings.
(b) Bancshares shall not increase the fees paid to any director for
attendance at board or committee meetings above the level in effect as of the
effective date of this Memorandum or increase their compensation in any form,
and shall not pay any bonuses, or increase the compensation in any form, to any
executive officer without providing the Agencies with at least thirty (30) days
prior written notice of such proposed increase or bonus. The Reserve Bank
shall have the right to disapprove any proposed fee increase or bonus.
7. (a) Within sixty (60) days of the effective date of this Memorandum,
Bancshares' Audit Committee, which shall at all times consist entirely of
outside directors, shall conduct a review of the internal audit program,
policies, and procedures and shall forward to the Agencies its written findings
and a written description of any managerial or operational changes that may be
proposed as a result of this review. The review shall include an assessment of
audit staffing, coverage, frequency, scope and reporting and shall take into
consideration the comments on the audit function cited in the Report.
(b) Within sixty (60) days of the effective date of this Memorandum,
the Audit Committee shall review and revise, as needed, Bancshares' policies
and procedures to ensure that each audit finding by either internal or external
auditors, will be responded to, in writing, and that any unresolved or repeat
findings by internal or external auditors will be reviewed and addressed by the
audit committee.
8. Within sixty (60) days of the effective date of this Memorandum,
Bancshares shall develop and submit to the Agencies acceptable written
procedures designed to strengthen and maintain its records, systems and
internal controls. These procedures shall include, without limitation:
(a) Corrective steps which are responsive to the criticisms of
Bancshares current procedures set forth in the Report; and,
(b) any recommendations set forth in Bancshares most recent
accountant's report and management letter.
9. Within thirty (30) days of the effective date of this Memorandum,
Bancshares shall submit to the Agencies an acceptable written employee and
directorate conflict of interest policy. The policy shall include, but no be
limited to, guidelines on:
(a) Reporting and permissibility of outside employment of directors
and executive officers of Bancshares, City, and International; and,
(b) the drafting of consulting contracts for senior and executive
officers having board of directors-approved consulting arrangements.
10. Within sixty (60) days of the effective date of this Memorandum,
Bancshares shall submit to the Agencies acceptable written plans addressing the
specific action that Bancshares has taken or intends to take regarding the
development of written corporate funds management policies and procedures,
which, at a minimum, require the maintenance of an adequate liquidity position
at Bancshares, City, and International.
11. Bancshares shall not, directly or indirectly, increase its borrowings
or incur any debt without the prior written approval of the Reserve Bank.
12. Bancshares shall no purchase, redeem or otherwise acquire, directly or
indirectly, any of its stock without the prior written approval of the Reserve
Bank.
13. (a) Bancshares shall not engage, directly or indirectly, in any
violation or in any activity resulting in any violation of sections 23A and 23B
of the Federal Reserve Act, and shall not, directly or indirectly, cause, in
any manner, City to violate sections 23A and 23B of the Federal Reserve Act.
(b) Bancshares shall immediately initiate an affirmative compliance
program in order to ensure compliance with the provisions of sections 23A and
23B of the Federal Reserve Act. Pursuant thereto, the management and
directorate of Bancshares shall familiarize themselves with the applicable
provisions of sections 23A and 23B of the Federal Reserve Act.
14. Bancshares shall not, directly or indirectly, enter into any
agreements to acquire or divest of any interest in any entities or portfolios,
or engage in any new line of business, without the prior written approval of
the Reserve Bank. Requests pursuant to this paragraph shall be in writing,
received at least thirty (30) days prior to the consummation of the proposed
transaction, and contain a full description of the proposed acquisition to
assist the Reserve Bank in its review of the proposed transaction. Should the
Reserve Bank disapprove, Bancshares will not proceed with the transaction.
15. The plans, policies and procedures required by paragraphs 1, 4, 5, 9,
and 10 hereof, shall be submitted to the Agencies for review and to the Reserve
Bank for approval. Acceptable plans, policies and procedures shall be
submitted to the Agencies within the required time periods set forth in the
Memorandum. Bancshares shall adopt the approved plans, policies and procedures
upon receipt of approval by the Reserve Bank and then fully comply with them.
During the term of this Memorandum the approved plans, policies and procedures
shall not be amended rescinded unless agreed to in writing by the Reserve Bank.
16. Within ten (10) days of the effective date of this Memorandum,
Bancshares' board of directors shall form a committee to monitor compliance
with the provisions of the Memorandum. Within forty-five (45) days of the end
of each calendar quarter (December 31, March 31, June 30, and September 30)
following the effective date of this Memorandum, said committee shall submit to
the Agencies a written progress report detailing the form and manner of all
actions taken to comply with this Memorandum and the results thereof. Along
with such reports, Bancshares shall submit to the Agencies:
(a) Bancshares' parent company only cash flow statement for the period
ending that quarter;
(b) City's Report of Condition as of the end of that quarter;
(c) City's Report of Income for the period ending that quarter; and,
(d) International's quarterly financial statement as filed with the
OTS.
For the purposes of the above reporting requirements, parent company only
financial statements (without audit) shall be prepared in accordance with
generally accepted accounting principles and shall be certified by an officer
of Bancshares. Such reports may be discontinued when the corrections required
by this Memorandum have been accomplished and the Reserve Bank has, in writing,
released Bancshares from making further reports.
17. All correspondence regarding this Memorandum shall be sent to:
(a) Mr. Harold J. Blum
Director, Banking Supervision
Federal Reserve Bank of San Francisco
P.O. Box 7702
San Francisco, California 94120
(b) Mr. Darrell Dochow
Assistant Regional Director
Western Region, 11th District
Office of Thrift Supervision
101 Stewart Street
Seattle, Washington 98101
(c) Ms. Lynn Wakatsuki
Commissioner of Financial Institutions
Department of Commerce and Consumer Affairs
P.O. Box 2054
Honolulu, Hawaii 96805
(d) Mr. James M. Morita
Chairman of the Board
CB Bancshares
201 Merchant Street
Honolulu, Hawaii 96813
(e) Mr. James H. Kamo
Corporate Secretary
CB Bancshares
201 Merchant Street
Honolulu, Hawaii 96813
18. The provisions of this Memorandum shall be binding upon Bancshares and
each of its institution affiliated parties in their capacities as such, and
their successors and assigns.
19. Each provision of this Memorandum shall remain effective until stayed,
modified, terminated or suspended in writing by the Reserve Bank.
IN WITNESS WHEREOF, the parties, through their authorized representatives,
have caused this Memorandum to be executed as of the 16th day of October, 1996.
CB BANCSHARES, INC. FEDERAL RESERVE BANK OF SAN FRANCISCO
By /s/ James M. Morita By /s/ Harold H. Blum
The undersigned directors each acknowledge that they have read the
foregoing Memorandum and approve of the consent thereto by CB Bancshares, Inc.
/s/ Raymond Y. Arakawa /s/ Marcelino J. Avecilla
/s/ Frederic K.T. Chun /s/ Tomio Fuchu
/s/ James H. Kamo /s/ Norman Mizuguchi
/s/ Caryn S. Morita /s/ James M. Morita
/s/ Robert R. Taira /s/ Lionel Y. Tokioka
/s/ Kazuo E. Yamane
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 60,637
<INT-BEARING-DEPOSITS> 845,531
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