As filed with the Securities and Exchange Commission on March 29, 1996
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark One
[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, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 [No Fee Required]
For the transition period from ________ to ________.
Commission file number 0-10777
CPB INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0212597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 South King Street, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(808) 544-0500
<PAGE>
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
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 or Regulation S-K 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 the Form 10-K or any amendment to this
Form 10-K. [X]
As of February 29, 1996, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $123,358,455.
Number of shares of common stock of the registrant
outstanding as of February 29, 1996: 5,263,222 shares
The following documents are incorporated by reference
herein:
Part of
Form 10-K
Into Which
Document Incorporated Incorporated
- ------------------------------------- ---------------
1995 Annual Report Parts II and IV
Definitive Proxy Statement for the
Annual Meeting of Shareholders which
will be filed within 120 days of the
fiscal year ended December 31, 1995 Part III
<PAGE>
PART I.
ITEM 1. BUSINESS
Organization
CPB Inc. (the "Company") is a Hawaii corporation organized on February
1, 1982 pursuant to a Plan of Reorganization and Agreement of Merger as a bank
holding company and is subject to the Bank Holding Company Act of 1956, as
amended. The Company's principal business is to serve as a holding company for
its sole subsidiary, Central Pacific Bank (the "Bank"). The Bank was
incorporated in its present form in the State of Hawaii on March 16, 1982 in
connection with the holding company reorganization, and its predecessor entity
was incorporated in the State of Hawaii on January 15, 1954. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
applicable limits. The Bank is not a member of the Federal Reserve System.
Based on total consolidated assets at December 31, 1995, the Company was the
fourth largest bank holding company in Hawaii.
The Bank owns 100% of the outstanding stock of CPB Properties, Inc.
("CPB Properties"), a company which is the managing partner and 50% owner of
CKSS Associates ("CKSS"), a Hawaii limited partnership. CKSS owns Central
Pacific Plaza, in which the Company's and Bank's headquarters and main office
are located. CKSS also developed the Kaimuki Plaza, in which one of the Bank's
branch offices is located. In addition, CPB Properties owns the properties on
which one of the Bank's branch offices and the Bank's operations center are
located, as well as the property underlying the Kaimuki Plaza. See "ITEM 2.
PROPERTIES."
The principal office of the Company is located at 220 South King
Street, Honolulu, Hawaii 96813, and its telephone number is (808) 544-0500.
Banking Services
The Bank is a full-service commercial bank which currently has 24
banking offices located throughout the State of Hawaii. Its administrative and
main office is located in Honolulu, and there are 17 other branches on the
island of Oahu. In addition, the Bank maintains one branch on the island of
Maui, two branches on the island of Kauai and three branches on the island of
Hawaii. In 1995, the Bank opened three in-store branches, two in Daiei Stores
on the island of Oahu and one in Sure Save Supermarket in Hilo, on the island of
Hawaii.
Through its network of banking offices, the Bank emphasizes
personalized services and offers a full range of banking services
to small- and medium-sized businesses, professionals and individuals in Hawaii.
3
<PAGE>
The Bank offers a variety of deposit instruments. These include
personal and business checking and savings accounts, including interest-bearing
negotiable order of withdrawal ("NOW") accounts, money market accounts and time
certificates of deposit.
The Bank engages in a broad range of lending activities including the
granting of commercial, consumer and real estate loans, with particular emphasis
on loans with short- to medium-term maturities and adjustable interest rates.
The Bank offers inventory and accounts receivable financing, furniture, fixture
and equipment financing, short-term operating loans, and commercial real estate
and construction loans. Consumer loans include home equity lines of credit,
loans for automobiles, home improvement and debt consolidation, personal and
professional lines of credit and other installment and term loans for other
personal needs.
The Bank also provides specialized services designed to
attract and service the needs of commercial customers and account
holders. These services include cash management services,
merchant windows, travelers' checks, safe deposit boxes,
international banking services, night depository facilities and
wire transfer services.
The Bank's Trust Division, which was established in 1993, offers asset
management and custody services for a variety of accounts including revocable
and irrevocable trusts, agency accounts, guardianships of property, charitable
remainder trusts and probates.
The Bank offers VISA and MasterCard credit card services to
its customers. Credit card transactions are cleared through
Bancard Association of Hawaii, Inc. ("BAHI"), a Hawaii
corporation, jointly owned by the Bank and two other Hawaii
banks. BAHI does not operate at a profit or provide the Bank
with a source of income, and the Bank's investment in, and
payment of operating expenses to, BAHI is not a material amount.
The Bank also offers CHECK CARD, a debit card service, to its
customers.
The Bank is a member of the Plus ATM Network. The related
capital investment was not a material amount. The Bank also
offers an Infoline service, providing telephonic account
information, bill payment and funds transfer services.
Market Area and Competition
The Bank competes in the financial services industry mainly
targeting the retail and small to midsized businesses. The
4
<PAGE>
market is highly competitive with 6 commercial banks, 6 savings
and loans and numerous credit unions and finance companies
operating in the State of Hawaii. The two largest banks in the
state are pursuing aggressive strategies to increase market share
and to deliver new services. Bancorp Hawaii, Inc. had over
$13.2 billion in total assets at year end 1995. Based on call
report data filed with the FDIC, Bank of Hawaii, the subsidiary
bank, maintains approximately 43% of the deposits held by banks in
the State of Hawaii.
First Hawaiian, Inc. is the second largest bank holding
company with over $7.5 billion in assets at year end 1995. Based
on call report data filed with the FDIC, First Hawaiian Bank, the
subsidiary bank, has approximately a 38% share of the deposit market.
Based on call report data filed with the FDIC, the Bank is
the third largest bank with market share of approximately 10%. At
$1.4 billion in assets, the Bank is building its position in the
marketplace as a community bank which is large enough to provide
a wide range of banking services and small enough to provide
personalized service. The two large banks tend to lead the
market with respect to new products and pricing. The Bank
competes by offering proven products with superior service levels
at competitive prices.
The Bank has a distribution network of 24 branches and has a
strong capital base to enable expansion opportunities in its
quest to better serve its targeted market of retail customers and
small to medium-sized businesses. With recent consolidation in
the financial industry, competition has intensified. The larger
institutions are very focused in the business banking and personal
banking areas, while leveraging their large branch and electronic
banking networks to attract retail customers.
The Bank faces substantial competition for deposits and
loans throughout its market areas. Competition for deposits
comes primarily from other commercial banks, savings
institutions, credit unions, money market funds and other
investment alternatives. The primary factors in competing for
deposits are interest rates, personalized services, the quality
and range of financial services, convenience of office locations
and office hours. Competition for loans comes primarily from
other commercial banks, savings institutions, mortgage banking
firms, credit unions and other financial intermediaries. The
primary factors in competing for loans are interest rates, loan
origination fees, the quality and range of lending services and
personalized services. The Bank faces competition for deposits
and loans throughout its market areas not only from local
institutions but also from out-of-state financial intermediaries
which have opened loan production offices or which solicit
deposits in its market areas. Many of the financial
intermediaries operating in the Bank's market areas offer certain
services, such as investment and international banking services,
5
<PAGE>
which the Bank does not offer directly. Additionally, banks with
larger capitalization and financial intermediaries not subject to
bank regulatory restrictions have larger lending limits and are
thereby able to serve the needs of larger customers. See
"ITEM 1. BUSINESS - Effect of Governmental Policies and Recent
Legislation."
Effect of Governmental Policies and Recent Legislation
Banking is a business that depends on rate differentials.
In general, the difference between the interest rate paid by the
Bank on its deposits and its other borrowings and the interest
rate received by the Bank on loans extended to its customers and
securities held in the Bank's portfolio comprise the major
portion of the Company's earnings. These rates are highly
sensitive to many factors that are beyond the control of the
Bank. Accordingly, the earnings and growth of the Company are
subject to the influence of domestic and foreign economic
conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by
general economic conditions but also influenced by the monetary
and fiscal policies of the federal government and the policies of
regulatory agencies, particularly the Federal Reserve Board. The
Federal Reserve Board implements national monetary policies (with
objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government
securities, by adjusting the required level of reserves for
financial institutions subject to its reserve requirements and by
varying the discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve Board in these
areas influence the growth of bank loans, investments and
deposits and also affect interest rates charged on loans and paid
on deposits. The nature and impact of any future changes in
monetary policies cannot be predicted.
From time to time, legislation is enacted which has the
effect of increasing the cost of doing business, limiting or
expanding permissible activities or affecting the competitive
balance between banks and other financial institutions.
Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, in
the Hawaii state legislature and before various bank regulatory and
other professional agencies. The Financial Services Modernization
Act recently proposed in the House of Representatives would
generally permit banks to expand activities further into the
areas of securities and insurance, and would reduce the regulatory
and paperwork burden that currently affects banks. Additionally,
the proposed legislation would force the conversion of savings and
6
<PAGE>
loan holding companies into bank holding companies, although unitary
savings and loan holding companies authorized to engage in activities
as of January 1, 1995 would be exempted. Similar legislation has
also been proposed in the Senate. In addition, legislation was
recently introduced in Congress that would merge the deposit insurance
funds applicable to commercial banks and savings associations and
impose a one-time assessment on savings associations to recapitalize
the deposit insurance fund applicable to savings associations.
The likelihood of any major legislative changes and the impact
such changes might have on the Company are impossible to predict.
See "ITEM 1. BUSINESS - Supervision and Regulation."
Supervision and Regulation
Bank holding companies and banks are extensively regulated
under both federal and state law. Set forth below is a summary
description of certain laws which relate to the regulation of the
Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to the
applicable laws and regulations.
The Company
The Company, as a registered bank holding company, is
subject to regulation under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). The Company is required to file with
the Federal Reserve Board quarterly and annual reports and such
additional information as the Federal Reserve Board may require
pursuant to the BHCA. The Federal Reserve Board may conduct
examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company
terminate an activity or terminate control of or liquidate or
divest certain subsidiaries or affiliates when the Federal
Reserve Board believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any of its banking
subsidiaries. The Federal Reserve Board also has the authority
to regulate provisions of certain bank holding company debt,
including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, the
Company must file written notice and obtain approval from the
Federal Reserve Board prior to purchasing or redeeming its equity
securities.
Under the BHCA and regulations adopted by the Federal
Reserve Board, a bank holding company and its nonbanking
subsidiaries are prohibited from requiring certain tie-in
arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, the Company
is required by the Federal Reserve Board to maintain certain
7
<PAGE>
levels of capital. See "ITEM 1. BUSINESS - Supervision and
Regulation - Capital Standards."
The Company is required to obtain the prior approval of the
Federal Reserve Board for the acquisition of more than 5% of the
outstanding shares of any class of voting securities or
substantially all of the assets of any bank or bank holding
company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and
another bank holding company.
The Company is prohibited by the BHCA, except in certain
statutorily prescribed instances, from acquiring direct or
indirect ownership or control of more than 5% of the outstanding
voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company,
subject to the prior approval of the Federal Reserve Board, may
engage in any, or acquire shares of companies engaged in,
activities that are deemed by the Federal Reserve Board to be so
closely related to banking or managing or controlling banks as to
be a proper incident thereto. In making any such determination,
the Federal Reserve Board is required to consider whether the
performance of such activities by the Company or an affiliate can
reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal
Reserve Board is also empowered to differentiate between
activities commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern.
Under Federal Reserve Board regulations, a bank holding
company is required to serve as a source of financial and
managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe or unsound manner. In addition, it
is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company
should stand ready to use available resources to provide adequate
capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility
and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its
subsidiary banks will generally be considered by the Federal
Reserve Board to be an unsafe and unsound banking practice or a
violation of the Federal Reserve Board's regulations or both.
This doctrine has become known as the "source of strength"
doctrine. Although the United States Court of Appeals for the
Fifth Circuit found the Federal Reserve Board's source of
strength doctrine invalid in 1990, stating that the Federal
8
<PAGE>
Reserve Board had no authority to assert the doctrine under the
BHCA, the decision, which is not binding on federal courts
outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the
source of strength doctrine is likely to continue to be the
subject of litigation until definitively resolved by the courts
or by Congress.
The Bank
The Bank, as a Hawaii state-chartered bank, is subject to
primary supervision, periodic examination and regulation by the
Hawaii Commissioner of Financial Institutions ("Commissioner")
and the FDIC. If, as a result of an examination of a bank, the
FDIC should determine that the financial condition, capital
resources, asset quality, earnings prospects, management,
liquidity or other aspects of the bank's operations are
unsatisfactory or that the bank or its management is violating or
has violated any law or regulation, various remedies are
available to the FDIC. Such remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to
correct any conditions resulting from any violation or practice,
to issue an administrative order that can be judicially enforced,
to direct an increase in capital, to restrict the growth of the
bank, to assess civil monetary penalties, to remove officers and
directors and ultimately to terminate a bank's deposit insurance,
which for a Hawaii state-chartered bank would result in a
revocation of the bank's charter. The Commissioner has many of
the same remedial powers. The Bank has never been the subject of
any such actions by the FDIC or the Commissioner.
The deposits of the Bank are insured by the FDIC in the
manner and to the extent provided by law. For this protection,
the Bank pays a semiannual statutory assessment. See "ITEM 1.
BUSINESS - Supervision and Regulation - Premiums for Deposit
Insurance." Although the Bank is not a member of the Federal
Reserve System, it is nevertheless subject to certain regulations
of the Federal Reserve Board.
Various requirements and restrictions under the laws of the
State of Hawaii and the United States affect the operations of
the Bank. State and federal statutes and regulations relate to
many aspects of the Bank's operations, including reserves against
deposits, interest rates payable on deposits, loans, investments,
mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital requirements. Further, the Bank is
required to maintain certain levels of capital. See "ITEM 1.
BUSINESS - Supervision and Regulation - Capital Standards."
9
<PAGE>
Restrictions on Transfers of Funds to the Company by the
Bank
The Company is a legal entity separate and distinct from the
Bank and its subsidiary.
There are statutory and regulatory limitations on the amount
of dividends which may be paid to the Company by the Bank.
Hawaii law provides that a state-chartered bank may not declare
or pay any dividend in an amount greater than its undivided
profits then on hand, deducting therefrom all losses; all debts,
unless the same are well secured, in which interest for a period
of one year is unpaid and debts upon which final judgment has
been recovered but has been for more than one year unsatisfied
and on which interest for a period of one year is unpaid, unless
the same are well secured; all assets which a banking examiner
may have required to be charged off; and all expenses, interest,
taxes, and depreciation.
The FDIC also has authority to prohibit the Bank from
engaging in activities that, in the FDIC's opinion, constitute
unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC could assert that the
payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further,
the FDIC and the Federal Reserve Board have established
guidelines with respect to the maintenance of appropriate levels
of capital by banks or bank holding companies under their
jurisdiction. Compliance with the standards set forth in such
guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could
limit the amount of dividends which the Bank or the Company may
pay. See "ITEM 1. BUSINESS - Supervision and Regulation - Prompt
Corrective Action and Other Enforcement Mechanisms" and "-
10
<PAGE>
Capital Standards" for a discussion of these additional
restrictions on capital distributions.
At present, substantially all of the Company's revenues,
including funds available for the payment of dividends and other
operating expenses, are, and will continue to be, primarily
dividends paid by the Bank. At December 31, 1995, the Bank had
$82.7 million in retained earnings available for the payment of
cash dividends.
The Bank is subject to certain restrictions imposed by
federal law on any extensions of credit to, or the issuance of a
guarantee or letter of credit on behalf of, the Company or other
affiliates, the purchase of or investments in stock or other
securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other
affiliates. Such restrictions prevent the Company and such other
affiliates from borrowing from the Bank unless the loans are
secured by marketable obligations of designated amounts.
Further, such secured loans and investments by the Bank to or in
the Company or to or in any other affiliate is limited to 10% of
the Bank's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited,
in the aggregate, to 20% of the Bank's capital and surplus (as
defined by federal regulations). Additional restrictions on
transactions with affiliates may be imposed on the Bank under the
prompt corrective action provisions of federal law. See "ITEM 1.
BUSINESS - Supervision and Regulation - Prompt Corrective Action
and Other Enforcement Mechanisms."
Capital Standards
The Federal Reserve Board and the FDIC have adopted
risk-based minimum capital guidelines intended to provide a
measure of capital that reflects the degree of risk associated
with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded
as off-balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off-balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
business loans.
A banking organization's risk-based capital ratios are
obtained by dividing its qualifying capital by its total risk-adjusted assets.
The regulators measure risk-adjusted assets,
which includes off-balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts
11
<PAGE>
of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
primarily of common stock, retained earnings, noncumulative
perpetual preferred stock (cumulative perpetual preferred stock
for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may
consist of a limited amount of the allowance for possible loan
and lease losses, cumulative preferred stock, long term preferred
stock, eligible term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion
of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies.
The federal banking agencies require a minimum ratio of
qualifying total capital to risk-adjusted assets of 8% and a
minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking
regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the
leverage ratio. For a banking organization rated in the highest
of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to
total assets is 3%. For all banking organizations not rated in
the highest category, the minimum leverage ratio must be at least
100 to 200 basis points above the 3% minimum, or 4% to 5%. In
addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final
regulations specifying that the agencies will include in their
evaluations of a bank's capital adequacy an assessment of the
exposure to declines in the economic value of the bank's capital
due to changes in interest rates. The final regulations, however,
do not include a measurement framework for assessing the level of
a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies
concurrently with the final regulations. The proposal would measure
interest rate risk in relation to the effect of a 200 basis point
change in market interest rates on the economic value of a bank.
Banks with high levels of measured exposure or weak management
systems generally will be required to hold additional capital for
interest rate risk. The specific amount of capital that may be
needed would be determined on a case-by-case basis by the examiner
and the appropriate federal banking agency. Because this proposal
has only recently been issued, the Bank currently is unable to
predict the impact of the proposal on the Bank if the policy
statement is adopted as proposed.
In January 1995, the federal banking agencies
issued a final rule relating to capital standards and the risks
arising from the concentration of credit and nontraditional
12
<PAGE>
activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking
activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory
minimums. The federal banking agencies have not imposed any
quantitative assessment for determining when these risks are
significant, but have identified these issues as important
factors they will review in assessing an individual bank's
capital adequacy.
In December 1993, the federal banking agencies issued an
interagency policy statement on the allowance for loan and lease
losses which, among other things, establishes certain benchmark
ratios of loan loss reserves to classified assets. The benchmark
set forth by such policy statement is the sum of (a) assets
classified loss; (b) 50 percent of assets classified doubtful;
(c) 15 percent of assets classified substandard; and (d)
estimated credit losses on other assets over the upcoming 12
months.
13
<PAGE>
Federally supervised banks and savings associations are
currently required to report deferred tax assets in accordance
with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes." See "ITEM 1. BUSINESS
- - Supervision and Regulation - Accounting Changes." The federal
banking agencies recently issued final rules effective April 1,
1995, which limit the amount of deferred tax assets that are
allowable in computing an institution's regulatory capital.
The standard has been in effect on an interim basis since March
1993. Deferred tax assets that can be realized for taxes paid
in prior carryback years and from future reversals of existing
taxable temporary differences are generally not limited. Deferred
tax assets that can only be realized through future taxable
earnings are limited for regulatory capital purposes to the lesser
of (i) the amount that can be realized within one year of the
quarter-end report date, or (ii) 10% of Tier 1 Capital. The
amount of any deferred tax in excess of this limit would be
excluded from Tier 1 Capital and total assets and regulatory
capital calculations. See Notes 1 and 18 to the Company's
Consolidated Financial Statements in the 1995 Annual Report to
Shareholders which is incorporated herein by reference. See
"ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Future changes in regulations or practices could further
reduce the amount of capital recognized for purposes of capital
adequacy. Such a change could affect the ability of the Bank to
grow and could restrict the amount of profits, if any, available
for the payment of dividends.
The following table presents the amounts of regulatory
capital and the capital ratios for the Company and the Bank, compared to its
minimum regulatory capital requirements as of December 31, 1995.
14
<PAGE>
The Company
December 31, 1995
Actual Minimum
----------------- Capital
Amount Ratio Requirement
------ ----- -----------
(Dollars in thousands)
Leverage capital $131,795 9.61% 3.00%
Tier 1 risk-based 131,795 12.35 4.00
capital
Total risk-based
capital 145,219 13.61 8.00
The Bank
December 31, 1995
Actual Minimum
----------------- Capital
Amount Ratio Requirement
------ ----- -----------
(Dollars in thousands)
Leverage capital $122,538 8.99% 3.00%
Tier 1 risk-based 122,538 11.05 4.00
capital
Total risk-based
capital 136,474 12.31 8.00
Prompt Corrective Action and Other Enforcement Mechanisms
Federal law requires each federal banking agency to take
prompt corrective action to resolve the problems of insured
depository institutions, including but not limited to those that
fall below one or more prescribed minimum capital ratios. The
law required each federal banking agency to promulgate
regulations defining the following five categories in which an
insured depository institution will be placed, based on the level
of its capital ratios: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized.
In September 1992, the federal banking agencies issued
uniform final regulations implementing the prompt corrective
action provisions of federal law. An insured depository
institution generally will be classified in the following
categories based on capital measures indicated below:
"Well capitalized" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital
Tier 1 risk-based capital of 6%; and of 8%;
Leverage ratio of 5%. Tier 1 risk-based capital
of 4%; and Leverage ratio
<PAGE>
of 4%.
"Undercapitalized" "Significantly
Total risk-based capital less than undercapitalized"
8%; Tier 1 risk-based capital less Total risk-based capital
than 4%; or Leverage ratio less than less than 6%; or Tier 1
4%. (3% if the institution receives risk-based capital less
the highest rating from its primary than 3%; or Leverage
regulator) ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less
than 2%.
15
<PAGE>
An institution that, based upon its capital levels, is
classified as "well capitalized," "adequately capitalized" or
"undercapitalized" may be treated as though it were in the next
lower capital category if the appropriate federal banking agency,
after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice
warrants such treatment. At each successive lower capital
category, an insured depository institution is subject to more
restrictions. The federal banking agencies, however, may not
treat an institution as "critically undercapitalized" unless its
capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from
paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions if after
such transaction the institution would be undercapitalized. If
an insured depository institution is undercapitalized, it will be
closely monitored by the appropriate federal banking agency,
subject to asset growth restrictions and required to obtain prior
regulatory approval for acquisitions, branching and engaging in
new lines of business. Any undercapitalized depository
institution must submit an acceptable capital restoration plan to
the appropriate federal banking agency 45 days after becoming
undercapitalized. The appropriate federal banking agency cannot
accept a capital plan unless, among other things, it determines
that the plan (i) specifies the steps the institution will take
to become adequately capitalized, (ii) is based on realistic
assumptions and (iii) is likely to succeed in restoring the
depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must
guarantee that the institution will comply with the capital plan
until the depository institution has been adequately capitalized
on an average basis during each of four consecutive calendar
quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is
limited to the lesser of (a) an amount equal to 5% of the
depository institution's total assets at the time the institution
became undercapitalized or (b) the amount which is necessary to
bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution
fails to comply with its capital restoration plan. Finally, the
appropriate federal banking agency may impose any of the
additional restrictions or sanctions that it may impose on
significantly undercapitalized institutions if it determines that
such action will further the purpose of the prompt corrective
action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or
in a material respect to implement, an acceptable capital
restoration plan, is subject to additional restrictions and
16
<PAGE>
sanctions. These include, among other things: (i) a forced sale
of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii)
restrictions on transactions with affiliates; (iii) further
limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the
receipt of deposits from correspondent institutions; (viii)
restrictions on capital distributions by the holding companies of
such institutions; (ix) required divestiture of subsidiaries by
the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the
foregoing restrictions or sanctions it will seek to impose, it is
required to force a sale of voting shares or merger, impose
restrictions on affiliate transactions and impose restrictions on
rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of
the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to its senior
executive officers or provide compensation to any of them at a
rate that exceeds such officer's average rate of base
compensation during the 12 calendar months preceding the month in
which the institution became undercapitalized.
Further restrictions and sanctions are required to be
imposed on insured depository institutions that are critically
undercapitalized. For example, a critically undercapitalized
institution generally would be prohibited from engaging in any
material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with
certain exceptions, make any payment of principal or interest on
its subordinated debt beginning 60 days after becoming critically
undercapitalized. Most importantly, however, except under
limited circumstances, the appropriate federal banking agency,
not later than 90 days after an insured depository institution
becomes critically undercapitalized, is required to appoint a
conservator or receiver for the institution. The board of
directors of an insured depository institution would not be
liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or
conservator or to an acquisition or merger as required by the
regulator.
In addition to measures taken under the prompt corrective
action provisions, commercial banking organizations may be
subject to potential enforcement actions by the federal
regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any
condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the
17
<PAGE>
imposition of a conservator or receiver, the issuance of a cease
and desist order that can be judicially enforced, the termination
of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the
issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would
be harmed if such equitable relief was not granted.
Safety and Soundness Standards
In July 1995, the federal banking agencies adopted final
guidelines establishing standards for safety and soundness, as
required by FDICIA. The guidelines set forth operational and
managerial standards relating to internal controls, information
systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth and compensation,
fees and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish
the safety and soundness standards that the agencies will use to
identify and address problems at insured depository institutions
before capital becomes impaired. If an institution fails to comply
with a safety and soundness standard, the appropriate federal
banking agency may require the institution to submit a compliance
plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
In December 1992, the federal banking agencies issued final
regulations prescribing uniform guidelines for real estate
lending. The regulations, which became effective on March 19,
1993, require insured depository institutions to adopt written
policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards
and loan to value limits that do not exceed the supervisory
limits prescribed by the regulations.
Appraisals for "real estate related financial transactions"
must be conducted by either state certified or state licensed
appraisers for transactions in excess of certain amounts. State
certified appraisers are required for all transactions with a
transaction value of $1,000,000 or more; for all nonresidential
transactions valued at $250,000 or more; and for "complex" 1-4
family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals.
However, appraisals performed in connection with "federally
related transactions" must now comply with the agencies'
appraisal standards. Federally related transactions include the
sale, lease, purchase, investment in, or exchange of, real
property or interests in real property, the financing or
18
<PAGE>
refinancing of real property, and the use of real property or
interests in real property as security for a loan or investment,
including mortgage-backed securities.
19
<PAGE>
Premiums for Deposit Insurance
Federal law has established several mechanisms to increase
funds to protect deposits insured by the Bank Insurance Fund
("BIF") administered by the FDIC. The FDIC is authorized to
borrow up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from
depository institutions that are members of the BIF. Any
borrowings not repaid by asset sales are to be repaid through
insurance premiums assessed to member institutions. Such
premiums must be sufficient to repay any borrowed funds within 15
years and provide insurance fund reserves of $1.25 for each $100
of insured deposits. The result of these provisions is that the
assessment rate on deposits of BIF members could increase in the
future. The FDIC also has authority to impose special
assessments against insured deposits.
The FDIC implemented a final risk-based assessment system,
as required by FDICIA, effective January 1, 1994, under which an
institution's premium assessment is based on the probability that
the deposit insurance fund will incur a loss with respect to the
institution, the likely amount of any such loss, and the revenue
needs of the deposit insurance fund. As long as BIF's reserve
ratio is less than a specified "designated reserve ratio," 1.25%,
the total amount raised from BIF members by the risk-based
assessment system may not be less than the amount that would be
raised if the assessment rate for all BIF members were .023% of
deposits. On August 8, 1995, the FDIC announced that the
designated reserve ratio had been achieved and, accordingly,
issued final regulations adopting an assessment rate schedule
for BIF members of 4 to 31 basis points effective on June 1,
1995. On November 14, 1995, the FDIC further reduced deposit
insurance premiums to a range of 0 to 27 basis points effective
for the semi-annual period beginning January 1, 1996.
Under the risk-based assessment system, a BIF member
institution such as the Bank is categorized into one of three
capital categories (well capitalized, adequately capitalized,
and undercapitalized) and one of three categories based on
supervisory evaluations by its primary federal regulator
(in the Bank's case, the FDIC). The three supervisory
categories are: financially sound with only a few minor
weaknesses (Group A), demonstrates weaknesses that could result
in significant deterioration (Group B), and poses a substantial
probability of loss (Group C). The capital ratios used by the
FDIC to define well-capitalized, adequately capitalized and
undercapitalized are the same in the FDIC's prompt corrective
action regulations. The BIF assessment rates are summarized
below; assessment figures are expressed in terms of cents per
$100 in deposits.
20
<PAGE>
Assessment Rates Effective Through the First Half of 1995
Group A Group B Group C
-------- -------- -------
Well Capitalized............................ 23 26 29
Adequately Capitalized...................... 26 29 30
Undercapitalized............................ 29 30 31
<TABLE>
<CAPTION>
Assessment Rates Effective through the Second Half of 1995
Group A Group B Group C
-------- -------- --------
<S> <C> <C> <C>
Well Capitalized............................ 4 7 21
Adequately Capitalized...................... 7 14 28
Undercapitalized............................ 14 28 31
</TABLE>
<TABLE>
<CAPTION>
Assessment Rates Effective January 1, 1996
Group A Group B Group C
-------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................ 0 3 17
Adequately Capitalized...................... 3<F1> 10 24
Undercapitalized............................ 10 24 27
<FN>
<F1> Subject to a statutory minimum assessment of $1,000 per
semi-annual period (which also applies to all other
assessment risk classifications).
</FN>
</TABLE>
A number of proposals have recently been introduced in
Congress to address the disparity in bank and thrift deposit
insurance premiums. On September 19, 1995, legislation was
introduced and referred to the House Banking Committee that
would, among other things: (i) impose a requirement on all
SAIF member institutions to fully recapitalize the SAIF by
paying a one-time special assessment of approximately 85 basis
points on all assessable deposits as of March 31, 1995, which
assessment would be due as of January 1, 1996; (ii) spread the
responsibility for FICO interest payments across all FDIC-insured
institutions on a pro-rata basis, subject to certain exceptions;
(iii) require that deposit insurance premium assessment rates
applicable to SAIF member institutions be no less than deposit
insurance premium assessment rates applicable to BIF member
institutions; (iv) provide for a merger of the BIF and the SAIF
as of January 1, 1998; (v) require savings associations to convert
to state or national bank charters by January 1, 1998; (vi)
21
<PAGE>
require savings associations to divest any activities not
permissible for commercial banks within five years; (vii) eliminate
the bad-debt reserve deduction for savings associations, although
savings associations would not be required to recapture into income
their accumulated bad-debt reserves; (viii) provide for the
conversion of savings and loan holding companies into bank holding
companies as of January 1, 1998, although unitary savings and loan
holding companies authorized to engage in activities as of
September 13, 1995 would have such authority grandfathered
(subject to certain limitations); and (ix) abolish the OTS and
transfer the OTS' regulatory authority to the other federal
banking agencies. The legislation would also provide that any
savings association that would become undercapitalized under
the prompt corrective action regulations as a result of the
special deposit premium assessment could be exempted from
payment of the assessment, provided that the institution would
continue to be subject to the payment of semiannual assessments
under the current rate schedule following the recapitalization of
the SAIF. The legislation was considered and passed by the House
Banking Committee's Subcommittee on Financial Institutions on
September 27, 1995, and has not yet been acted on by the full
House Banking Committee.
On September 20, 1995, similar legislation was introduced
in the Senate, although the Senate bill does not include a
comprehensive approach for merging the savings association
and commercial bank charters. The Senate bill remains pending
before the Senate Banking Committee.
The future of both these bills is linked with that of
pending budget reconciliation legislation since some of the
major features of the bills are included in the Seven-Year
Balanced Budget Reconciliation Act. The budget bill, which
was passed by both the House and Senate on November 17, 1995
and vetoed by the President on December 6, 1995, would: (i)
recapitalize the SAIF through a special assessment of between
70 and 80 basis points on deposits held by institutions as of
March 31, 1995; (ii) provide an exemption to this rule for weak
institutions, and a 20% reduction in the SAIF-assessable
deposits of so-called "Oakar banks;" (iii) expand the assessment
base for FICO payments to include all FDIC-insured institutions;
(iv) merge the BIF and SAIF on January 1, 1998, only if no
insured depository institution is a savings association on that
date; (v) establish a special reserve for the SAIF on January 1,
1998; and (vi) prohibit the FDIC from setting semiannual
assessments in excess of the amount needed to maintain the reserve
ratio of any fund at the designated reserve ratio. The bill does
not include a provision to merge the charters of savings
associations and commercial banks.
In light of ongoing debate over the content and fate of the
budget bill, the different proposals currently under consideration
and the uncertainty of the Congressional budget and legislative
22
<PAGE>
processes in general, management cannot predict whether any or all
of the proposed legislation will be passed, or in what form. Accordingly, the
effect of any such legislation on the Bank cannot be determined.
23
<PAGE>
Interstate Banking and Branching
In September 1994, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") became law.
Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized
and managed may obtain approval under the BHCA to acquire an
existing bank located in another state without regard to state
law. A bank holding company would not be permitted to make such
an acquisition if, upon consummation, it would control (a) more
than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits
in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any
one bank or bank holding company if application of such limitation
does not discriminate against out-of-state banks. An out-of-state
bank holding company may not acquire a state bank in existence for
less than a minimum length of time that may be prescribed by state
law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997,
mergers of insured banks located in different states and
conversion of the branches of the acquired bank into branches of
the resulting bank. Each state may permit such combinations
earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other
states by that state's banks. The same concentration limits
discussed in the preceding paragraph apply. The Interstate Act
also permits a national or state bank to establish branches in a
state other than its home state if permitted by the laws of that
state, subject to the same requirements and conditions as for a
merger transaction.
In April 1995, the Hawaii legislature enacted legislation to make
necessary changes to Hawaii law to harmonize it with the
interstate banking legislation passed by Congress. Currently, Hawaii law
permits limited reciprocal banking between Hawaii and Guam, American Samoa,
the Federated States of Micronesia, the Republic of Palau, the Commonwealth of
the Northern Marianas and the Republic of the Marshall Islands. In January
1996, legislation was introduced to permit interstate branching under the
Interstate Act. The Company cannot predict whether such legislation will be
enacted by the Hawaii legislature. The Interstate Act is likely to increase
competition in the Company's market areas especially from larger financial
institutions and their holding companies. It is difficult to assess the
impact such likely increased competition will have on the Company's
operations.
24
<PAGE>
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations
and Community Reinvestment Act ("CRA") activities. The CRA
generally requires the federal banking agencies to evaluate the
record of a financial institution in meeting the credit needs of
their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and
corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when regulating
and supervising other activities. The FDIC has rated the Bank
"Satisfactory" in complying with its CRA obligations.
In May 1995, the federal banking agencies issued final
regulations which change the manner in which they measure a bank's
compliance with its CRA obligations. The final regulations adopt
a performance-based evaluation system which bases CRA ratings on
an institution's actual lending service and investment performance
rather than the extent to which the institution conducts needs
assessments, documents community outreach or complies with other
procedural requirements.
In March 1994, the Federal Interagency Task Force on Fair
Lending issued a policy statement on discrimination in lending.
The policy statement describes the three methods that federal
agencies will use to prove discrimination: overt evidence of
discrimination, evidence of disparate treatment and evidence of
disparate impact.
Accounting Changes
In February 1992, the Financial Accounting Standards Board
("FASB") issued SFAS No. 109, "Accounting for Income Taxes,"
which superseded SFAS No. 96 of the same title. SFAS No. 109,
which became effective for fiscal years beginning after
December 31, 1992, employs an asset and liability approach in
accounting for income taxes payable or refundable at the date of
the financial statements as a result of all events that have been
recognized in the financial statements and as measured by the
provisions of enacted tax laws. Adoption by the Company of SFAS
No. 109 did not have a material impact on the Company's results
of operations.
In December 1991, the FASB issued SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments," which is effective
for fiscal years ending after December 15, 1992 (December 15,
1995 in the case of entities with less than $150 million in total
assets). SFAS No. 107 requires financial intermediaries to
disclose, either in the body of their financial statements or in
the accompanying notes, the "fair value" of financial instruments
25
<PAGE>
for which it is "practicable to estimate that value." SFAS
No. 107 defines "fair value" as the amount at which a financial
instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale.
Quoted market prices, if available, are deemed the best evidence
of the fair value of such instruments. Most deposit and loan
instruments issued by financial intermediaries are subject to
SFAS No. 107, and its effect will be to require financial
statement disclosure of the fair value of most of the assets and
liabilities of financial intermediaries such as the Company and
the Bank. The disclosure required by SFAS No. 107 at
December 31, 1995 and 1994 is presented in Note 23 to the Company's
Consolidated Financial Statements. See "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA." Management is unable to
predict what effect, if any, such disclosure requirements could
have on the market price of the common stock of the Company or
its ability to raise funds in the financial markets.
In May 1993, the FASB issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," which was subsequently
amended by SFAS No. 118 in October 1994. SFAS No. 114 prescribes
the recognition criterion for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are
modified in troubled debt restructurings. SFAS No. 114 states
that a loan is impaired when it is probable that a creditor will
be unable to collect all principal and interest amounts due
according to the contracted terms of the loan agreement. A
creditor is required to measure impairment by discounting
expected future cash flows at the loan's effective interest rate,
or by reference to an observable market price, or by the fair
value of the collateral if the loan is collateral dependent or if
foreclosure is probable. SFAS No. 114 also clarifies the
existing accounting for in-substance foreclosures by stating that
a collateral-dependent real estate loan would be reported as real
estate owned only if the lender had taken possession of
collateral.
SFAS No. 118 amended SFAS No. 114 to allow a creditor to use
existing methods for recognizing interest income on an impaired
loan. To accomplish that, it eliminated the provisions in
SFAS No. 114 that described how a creditor should report income
on an impaired loan. SFAS No. 118 did not change the provisions
in SFAS No. 114 that require a creditor to measure impairment
based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or as a
practical expedient, at the observable market price of the loan
or the fair value of the collateral if the loan is collateral
dependent. SFAS No. 118 amends the disclosure requirements in
SFAS No. 114 to require information about the recorded
investments in certain impaired loans and about how a creditor
recognizes interest income related to those impaired loans. SFAS
No. 114 is effective for financial statements issued for fiscal
years beginning after December 15, 1994. Although earlier
26
<PAGE>
application is encouraged, it is not required. SFAS No. 118 is
effective concurrent with the effective date of SFAS No. 114.
The Company adopted SFAS No. 114 and 118 as of January 1, 1995.
The effects of the new accounting pronouncements were not
material.
In May 1993, the FASB issued SFAS No. 115 "Accounting For
Certain Investments in Debt and Equity Securities" addressing the
accounting and reporting for investments in equity securities
that have readily determinable fair values and for all
investments in debt securities. These investments would be
classified in three categories and accounted for as follows: (i)
debt and equity securities that the entity has the positive
intent and ability to hold to maturity would be classified as
"held to maturity" and reported at amortized cost; (ii) debt and
equity securities that are held for current resale would be
classified as trading securities and reported at fair value, with
unrealized gains and losses included in operations; and (iii)
debt and equity securities not classified as either securities
held to maturity or trading securities would be classified as
securities available for sale, and reported at fair value, with
unrealized gains and losses excluded from operations and reported
as a separate component of shareholders' equity. The statement
is effective for financial statements for calendar year 1994, but
may be applied to an earlier fiscal year for which annual
financial statements have not been issued. The Company adopted
SFAS No. 115 as of January 1, 1994. The effects of adoption of
SFAS No. 115 are set forth in Note 1 to the Company's
Consolidated Financial Statements. See "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA."
In October 1994, the FASB issued SFAS No. 119, "Disclosures
about Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS No. 119 amends SFAS No. 105,
"Disclosures of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations
of Credit Risk," and SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." SFAS No. 119 requires the disclosure
of comparable information for options and other similar financial
instruments that previously were not within the scope of SFAS
No. 105. SFAS No. 119 defines a "derivative" financial
instrument as a future, forward, swap, option contract or other
financial instrument with similar characteristics. The Bank does
not use futures, forwards, swaps or option contracts either for
trading or for any other purposes, with the exception of a
limited amount of foreign exchange forward contracts used to
satisfy customer and operational needs. Foreign exchange forward
contracts outstanding at December 31, 1995 and 1994 were not
material.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121, effective for fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
<PAGE>
be disposed of. The application of SFAS No. 121, effective from January 1,
1996, is not expected to have a material impact to the consolidated financial
statements of the Company.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65." SFAS No. 122,
effective on a prospective basis for fiscal years beginning after December 15,
1995, requires mortgage banking enterprises and other entities (i.e., commercial
banks and thrift institutions that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise) to recognize
as separate assets the rights to service mortgage loans for others. SFAS No.
122 also requires the assessment of capitalized mortgage servicing rights for
impairment to be based on the current fair value of those rights. The
application of SFAS No. 122, effective from January 1, 1996, is not expected to
have a material impact to the consolidated financial statements of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123, effective for fiscal years beginning
after December 15, 1995, establishes a fair value based method of accounting for
stock-based compensation, but does not require an entity to adopt the new method
for purposes of preparing its basic financial statements. For entities not
adopting the new method, SFAS No. 123 requires that they disclose in their
footnotes pro forma net income and earnings per share information as if the fair
value based method had been adopted. The Company plans to comply with the
disclosure requirements of SFAS No. 123 in its consolidated financial statements
for 1996.
Certain amounts in the consolidated financial statements and notes
thereto for the previous two years have been reclassified to conform with the
current year's presentation. Such reclassifications had no effect on the
Company's results of operations.
27
<PAGE>
Employees
At January 31, 1996, the Company employed 596 persons, 587
on a full-time basis and 9 on a part-time basis. Management of
the Company believes that it has favorable employee relations.
The Company is not a party to any collective bargaining agreement.
28
<PAGE>
Selected Statistical Information
The following tables and data set forth, for the respective
periods shown, selected statistical information relating to the
Company and the Bank. These tables should be read in conjunction
with the information contained in "ITEM 6. SELECTED FINANCIAL
DATA," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
Loan Portfolio
Total loans declined slightly to $990.4 million at the end of 1995,
compared with $992.0 million at the end of 1994 and $945.8 million
at the end of 1993. Increases in loan volumes were recorded in the real
estate-mortgage-residential and -commercial loan categories.
The Bank emphasizes residential and commercial mortgage
loans, business loans to middle-market companies and
professionals and consumer installment loans. Its marketing
strategy for generating new loans includes a business calling
program which requires officers at all levels to make client
development visits to local businesses each month. In addition,
the Bank uses television, radio, print and direct mail marketing.
A significant portion of the Bank's loan portfolio is
secured by real estate. Management believes that the Bank's
underwriting guidelines, including collateral requirements,
provide the Bank with protection against losses on delinquent
loans. However, due to the slowdown in the Hawaiian economy,
delinquencies and charge-offs during 1994 increased over the
previous year. Continued recessionary conditions in Hawaii may
further negatively impact the Bank's real estate collateral and
adversely impact the level of nonperforming loans and provision
for loan losses in the future. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Provision and Allowance for Loan Losses," "--
Nonperforming Assets" and "-- Financial Condition."
At December 31, 1995, the Bank did not have any
concentration of loans in any industry classified under the
Standard Industrial Code which exceeded 10% of the Bank's total
loans.
The following table sets forth information regarding
outstanding loans by categories as of the dates indicated.
29
<PAGE>
Table I. Loans By Categories
December 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(Dollars in thousands)
Commercial,
financial
and agricultural $165,292 $211,257 $237,861 $232,544 $200,612
Real estate --
construction 47,853 52,811 41,572 49,024 48,483
Real estate --
mortgage --
residential 341,229 332,073 317,357 309,867 286,353
Real estate --
mortgage --
commercial 368,772 328,979 280,385 229,136 204,941
Installment 67,210 66,848 68,593 80,994 95,277
--------- --------- --------- --------- ---------
Total loans 990,356 991,968 945,768 901,565 835,666
Allowance for
loan losses 20,156 18,296 17,131 15,378 13,849
--------- --------- --------- --------- ---------
Net loans $970,200 $973,672 $928,637 $886,187 $821,817
========= ========= ========= ========= =========
30
<PAGE>
Commercial, Financial and Agricultural. Loans in this category
include loans primarily to small and middle market businesses and
professionals located in Hawaii. The Bank's agricultural loans at December 31,
1995 totaled $8,300.
Real Estate - Construction. Real estate - construction loans
decreased to $47.9 million at the end of 1995, from $52.8 million at the
end of 1994 and $41.6 million at the end of 1993. The majority of the
construction loans provided by the Bank in this category were used for
residential development projects.
Real Estate - Mortgage. The Bank emphasizes making residential
mortgage loans for owner-occupied primary residences and does not actively
seek to make loans for vacation condominiums or homes. The Bank has also
limited growth of residential mortgages for the higher-priced homes because
of higher volatility in their values. In order to limit such growth and
provide for adequate collateral, the Bank requires higher than normal
equity to loan ratios for loans secured by such homes.
The major components of the Bank's portfolio of commercial, industrial
and other mortgage loans at December 31, 1995 included $108.6 million for
stores and offices, $51.5 million for warehouses and industrial buildings,
$36.7 million for apartment buildings with 5 or more units and $5.8 million
for hotels. Mortgage loans held for sale at December 31, 1995
totalled $7.9 million.
31
<PAGE>
The following table sets forth certain information with respect to the
composition of the Bank's Real Estate - Mortgage loan portfolio as of the dates
indicated.
<TABLE>
Table II. Mortgage Loan Portfolio Composition
<CAPTION>
December 31,
1995 1994 1993 1992 1991
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential:
1-4 units $335,345 47.2% $328,282 49.7% $309,458 51.8% $300,710 55.8% $276,050 56.2%
5 or more
units 5,884 0.8 3,791 0.6 7,899 1.3 9,157 1.7 10,303 2.1
Commercial,
industrial
and other 368,772 52.0 328,979 49.7 280,385 46.9 229,136 42.5 204,941 41.7
-------- ------ -------- ------ --------- ------ -------- ------ -------- ------
Total $710,001 100.0% $661,052 100.0% $597,742 100.0% $539,003 100.0% $491,294 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
32
<PAGE>
Installment Loans. The following table sets forth the primary components of
the Bank's Installment loan portfolio as of the dates indicated.
Table III. Installment Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Automobile $ 26,368 39.2% $ 27,786 41.6% $ 26,357 38.4% $ 32,717 40.4% $ 38,919 40.8%
Credit cards
and related
plans 22,151 33.0 19,612 29.3 19,626 28.6 20,393 25.2 20,678 21.7
Other 18,691 27.8 19,450 29.1 22,610 33.0 27,884 34.4 35,680 37.5
-------- ----- -------- ------ -------- ------ -------- ------ -------- ------
Total $ 67,210 100.0 $ 66,848 100.0% $ 68,593 100.0% $ 80,994 100.0% $ 95,277 100.0%
======== ===== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
33
<PAGE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table sets forth the maturity distribution of the Bank's
loan portfolio at December 31, 1995. The table excludes real estate loans
(other than construction loans) and installment loans.
Table IV. Maturity Distribution of Commercial and Construction Loans
Maturing
---------------------------------
Over One
One Year Through Over
or Less Five Years Five Years Total
-------- ---------- ---------- ---------
(Dollars in thousands)
Commercial, financial
and agricultural $70,502 $44,197 $50,593 $165,292
Real estate --
construction 28,222 14,477 5,154 47,853
------- ------- ------- --------
Total $98,724 $58,674 $55,747 $213,145
======= ======= ======= ========
34
<PAGE>
The following table sets forth the sensitivity of the amounts due
after one year to changes in interest rates.
Table V. Maturity Distribution of Fixed and Variable Rate Loans
Maturing
-----------------------
Over One
Through Over
Five Years Five Years Total
---------- ---------- ----------
(Dollars in thousands)
With fixed
interest rates $22,900 $23,116 $ 46,016
With variable
interest rates 35,774 32,631 68,405
------- ------- --------
Total $58,674 $55,747 $114,421
======= ======= ========
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered
adequate to provide for potential losses on loans and other extensions of
credit, including off-balance sheet credit exposures. The adequacy of the
allowance for loan losses is based upon management's evaluation of the
quality, character and inherent risks in the loan portfolio, current and
projected economic conditions, and past loan loss experience.
During 1995, $3.3 million was provided for loan losses compared to
$3.3 million in 1994 and $3.2 million in 1993. In 1995, the Bank
experienced a net charge-off of $1.4 million, compared with net charge-offs
of $2.1 million and $1.4 million in 1994 and 1993, respectively. The
allowance for loan losses at December 31, 1995 was $20.2 million, compared
to $18.3 million at December 31, 1994 and $17.1 million at December 31,
1993. The ratio of allowance for loan losses to total loans was 2.04%, 1.84%
and 1.81% at December 31, 1995, 1994 and 1993, respectively.
Management believes that the allowance for loan losses at December 31,
1995 was adequate to absorb known and inherent risks in the portfolio.
However, no assurance can be given that economic conditions which may
adversely affect the Bank's service areas or other circumstances, such as
material and sustained declines in real estate values, will not result in
increased losses in the Bank's loan portfolio. See "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -- Provision and Allowance for Loan Losses" and "-- Nonperforming Assets."
35
<PAGE>
The following table sets forth certain information with
respect to the Bank's allowance for loan losses as of the dates or for
the periods indicated.
Table VI. Allowance for Loan Losses
Year Ended December 31,
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands)
Average amount of
loans outstanding $1,004,094 $947,433 $911,611 $865,316 $771,870
Allowance for
loan losses:
Balance at
beginning of year $ 18,296 $ 17,131 $ 15,378 $ 13,849 $ 11,687
---------- -------- -------- -------- --------
Charge-offs:
Commercial,
financial and
agricultural 146 129 225 257 17
Real Estate --
construction -- -- -- -- --
Real Estate --
mortgage --
residential 192 538 543 570 --
Real Estate --
mortgage --
commercial 943 1,360 254 -- --
Installment 540 492 620 537 375
---------- ------ ------ ------ --------
TOTAL 1,821 2,519 1,642 1,364 392
---------- ------ ------ ------ --------
Recoveries:
Commercial,
financial and
agricultural 192 160 12 74 2
Real Estate --
construction -- -- -- -- --
Real Estate --
mortgage --
residential 48 32 3 -- --
Real Estate --
mortgage --
commercial -- -- -- -- --
Installment 141 192 180 119 152
---------- ------ -------- -------- --------
TOTAL 381 384 195 193 154
36
<PAGE>
Net loans charged
off (recovered) 1,440 2,135 1,447 1,171 238
---------- ------- -------- -------- --------
Provision charged
to operations 3,300 3,300 3,200 2,700 2,400
---------- ------- -------- -------- --------
Balance at end
of year $20,156 $18,296 $17,131 $15,378 $13,849
========== ======= ======== ======== ========
Ratios:
Allowance for
loan losses to
loans outstand-
ing at end of
period 2.04% 1.84% 1.81% 1.71% 1.66%
Net loans charged
off (recovered)
during period to
average loans
outstanding
during period .14% .23% .16% .14% .03%
Over the five-year period ended December 31, 1995, the
allocation of the allowance for loan losses for the largest loan
category, commercial real estate mortgage loans, increased steadily
to correspond with increases in the total volume of loans and the
level of loan losses in these categories. The Bank's practice is
to make specific allocations to specific loans and unspecified
allocations to each loan category based on Management's risk
assessment. The following table sets forth the allocation of the
allowance for loan losses by loan category as of the dates
indicated.
37
<PAGE>
Table VII. Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
Allowance category Allowance category Allowance category Allowance category Allowance category
for loan to total for loan to total for loan to total for loan to total for loan to total
losses loans losses loans losses loans losses loans losses loans
---------- --------- --------- -------- --------- -------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $ 4,100 16.7% $ 5,100 21.3% $ 6,100 25.2% $ 5,200 25.8% $ 3,100 24.0%
Real estate --
construction 200 4.9 500 5.3 500 4.4 100 5.4 100 5.8
Real estate -
mortgage --
residential 1,800 34.4 3,000 33.5 3,800 33.6 500 34.4 500 34.3
Real estate -
mortgage --
commercial 7,800 37.2 5,500 33.2 5,300 29.5 3,800 25.4 2,400 24.5
Installment 600 6.8 400 6.7 600 7.3 1,200 9.0 900 11.4
Unallocated 5,656 N/A 3,796 N/A 831 N/A 4,578 N/A 6,849 N/A
------- ------- ------- -------- ------- ------- ------- ------ ------- ------
TOTAL $20,156 100.0% $18,296 100.0% $17,131 100.0% $15,378 100.0% $13,849 100.0%
======= ======= ======= ======= ======= ======= ======= ====== ======= ======
</TABLE>
38
<PAGE>
Investment Portfolio
The following table sets forth the amounts and the distribution of
investment securities held as of the dates indicated.
Table VIII. Distribution of Investment Securities
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1995 1994 1993
------------------------ ---------------------------- -------------
Held-to- Available Held-to- Available-
Maturity for Sale Maturity for Sale
(at Amor- (at Estimated (at Amor- (at Estimated
tized Cost) Fair Value) tized Cost) Fair Value)
----------- ------------- ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Government
agencies $123,073 $129,699 $146,216 $66,949 $209,938
States and political
subdivisions 11,620 2,836 13,885 -- 21,334
Other 2,000 14,399 1,997 14,741 19,396
-------- -------- -------- ------- --------
Total investment
securities $136,693 $146,934 $162,098 $81,690 $250,668
======== ======== ======== ======= ========
</TABLE>
39
<PAGE>
The Bank did not hold investments of any nonfederal issuer
in amounts exceeding 10% of stockholders' equity at December 31,
1995. Except for loans disclosed in "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Nonperforming Assets," the Bank did not have any
other nonperforming or potentially problem interest-bearing
assets at December 31, 1995.
Maturity Distribution of Investment Portfolio
The following table sets forth the maturity distribution of
the investment portfolio at December 31, 1995.
Table IX. Maturity Distribution of Investment Portfolio
Weighted
Portfolio Type and Maturity Grouping Book Average
Value Yield<F1>
-------- ------------
(Dollars in thousands)
Held-to-Maturity Portfolio
U.S. Treasury and other
U.S. Government agencies:
Within one year $ 32,400 4.731%
After one but within five years 80,100 5.724
After five but within ten years 10,573 6.870
After ten years -- --
--------
Total U.S. Treasury and other
U.S. Government agencies 123,073 5.561
--------
States and political subdivisions:
Within one year 2,499 6.859
After one but within five years 7,754 6.017
After five but within ten years 1,367 6.508
After ten years -- --
--------
Total states and political
subdivisions 11,620 6.256
--------
Other:
Within one year 2,000 4.447
After one but within five years -- --
After five but within ten years -- --
After ten years -- --
--------
Total other 2,000 4.447
--------
Total held-to-maturity
portfolio $136,693 5.604
========
40
<PAGE>
Available-for-Sale Portfolio
U.S. Treasury and other
U.S. Government agencies:
Within one year $ 28,143 6.321%
After one but within five years 38,053 5.532
After five but within ten years 9,868 5.251
After ten years 53,635 6.014
Total U.S. Treasury and other
U.S. Government agencies 129,699 5.881
--------
States and political subdivisions:
Within one year -- --
After one but within five years 2,836 6.151
After five but within ten years -- --
After ten years -- --
Total states and political
subdivisions 2,836 6.151
--------
Other:
Within one year -- --
After one but within five years -- --
After five but within ten years -- --
After ten years 14,399 7.268
--------
Total other 14,399 7.268
Total available-for-sale portfolio $146,934 6.022
========
Total investment securities $283,627
========
<F1> Weighted average yield is computed on an annual basis and
yields on tax-exempt obligations are computed on a
taxable-equivalent basis using an assumed tax rate of 35%.
Deposits
The Bank competes for deposits in Hawaii principally by
providing quality customer service at its branch offices. The
Bank, over the years, has developed a relatively large and stable
base of core deposits which consists of noninterest-bearing demand,
interest-bearing demand and savings deposits and time deposits
under $100,000. The Bank does not purchase brokered deposits.
Total deposits at December 31, 1995, 1994 and 1993 were
$1,138.3 million, $1,081.9 million and $1,078.3 million, respectively.
Deposits increased in 1995 by 5.2% compared with the 0.3% growth recorded for
1994. Interest-bearing deposits, excluding time deposits of $100,000 and
41
<PAGE>
greater, decreased by 1.2% in 1995 and 0.6% in 1994. Noninterest-bearing
deposits increased by 4.7% in 1995 and decreased by 9.7% in 1994. The Bank's
ratio of core deposits to total deposits was 77.1% at December 31, 1995, 81.2%
at December 31, 1994 and 83.5% at December 31, 1993. Time deposits of
$100,000 and greater increased by 28.1% to $260.3 million in 1995 over the
$203.2 million in 1994 which increased by 14.1% over the $178.1 million in
1993. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Financial Condition."
The following table sets forth information regarding the average
deposits and the average rates paid for certain deposit categories for each
of the periods indicated. Average balances are computed using daily
average balances.
42
<PAGE>
Table X. Average Balances and Average Rates on Deposits
Year ended December 31,
---------------------------------------------------------
1995 1994 1993
------------------ ----------------- ------------------
Average Average Average
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- ------- -------- ------- --------- -------
Noninterest-bearing
demand deposits $ 152,002 --% $ 152,941 --% $152,643 --%
Interest-bearing
demand deposits 98,303 1.36 104,847 1.36 100,577 1.58
Savings and money
market deposits 414,988 3.12 459,282 2.45 448,921 2.74
Time deposits 437,789 5.16 347,906 3.69 335,127 3.79
---------- ----------- ----------
TOTAL $1,103,082 3.34 $1,064,976 2.40 $1,037,268 2.56
========== =========== ==========
43
<PAGE>
The remaining maturities of the certificates of deposit in
denominations of $100,000 or greater are set forth in the following
table.
XI. Remaining Maturities of Large Certificates of Deposit
December 31, 1995
(Dollars in thousands)
Three months or less $109,212
Over three through six months 79,000
Over six through twelve months 60,850
Over twelve months 11,192
--------
Total $260,254
========
ITEM 2. PROPERTIES
The executive offices of the Company and the Bank are located
at 220 South King Street, Honolulu, Hawaii 96813.
All Bank properties, except for the properties in which the
Hilo and Moiliili branches and the operations center are situated,
are occupied under leases which expire on various dates through
2019, and, in most instances, include options to renew. For the
year ended December 31, 1995, net rent expense under these leases
aggregated $4.7 million. For additional information relating to
lease rental expense and commitments, see Note 16 to the Company's
Consolidated Financial Statements in the 1995 Annual Report which
is incorporated herein by reference.
CPB Properties is a general partner and the managing partner
with a 50% interest in CKSS. Other partners in CKSS are Kajima
Development Corporation, a general partner, Sumitomo Corporation
and Sumitomo Corporation of America, limited partners. CKSS was
formed to develop, construct and lease a 22-story office building
complex in the downtown financial district of Honolulu at the
corner of King and Alakea Streets, which now serves as the
Company's and the Bank's headquarters. The building contains
201,865 square feet of rentable space of which approximately 64,000
square feet are occupied by the Company. CKSS carried the building
complex on its books at a net book value of $39.5 million as of
December 31, 1995. To finance the building, CKSS entered into loan
agreements with The Sumitomo Bank, Limited ("Sumitomo") and the
Bank, whereby Sumitomo agreed to lend $20.0 million and the Bank
agreed to lend $4.0 million to CKSS. Both loans are secured by
real estate and are due on November 18, 1996. As of December 31,
1995, the Bank had advanced pursuant to this loan agreement the sum
of $500,000. As of the same date, Sumitomo had advanced
pursuant to its loan agreement the sum of $10.7 million. The
44
<PAGE>
investment in CKSS is carried on the books of the Company under the
equity method of accounting. See Notes 1 and 7 to the Company's
Consolidated Financial Statements in the 1995 Annual Report which
is incorporated herein by reference.
In October 1992, CPB Properties, as lessor, entered into a
lease agreement with CKSS for certain real property located in
Kaimuki, Hawaii, effective from January 1, 1993 to December 31,
2047. Under the terms of the lease, CKSS would develop a 4-story
office building (the "Kaimuki Plaza").
On April 30, 1993, CKSS and the Bank entered into a building
loan agreement to borrow up to $12.2 million at .75% above LIBOR to
finance the Kaimuki Plaza. At December 31, 1995, the Bank had
advanced $11.3 million pursuant to this loan agreement. The weighted average
interest rate on all loans related to the Company's headquarters and Kaimuki
Plaza at December 31, 1995 was 6.636%.
In November 1994, the Bank entered a 25-year lease agreement
with CKSS to lease office space in the Kaimuki Plaza for its
Kaimuki Branch. The lease is effective from November 1, 1994
through October 31, 2019.
The Bank holds title to the land and building in which the
Hilo branch office is situated. CPB Properties holds title to a
portion of the land and the building in which the Moiliili branch
office is situated. CPB Properties also holds title to the land on
which the operations center is located. There are no encumbrances
with respect to these properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation
incidental to its business, none of which is considered likely to
have a materially adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for a
vote during the fourth quarter of 1995.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 29, 1996, the
executive officers of the Company, their positions, principal
occupation during the past five years and ages. Each officer is
appointed by the Board of Directors of the Company and serves at
their pleasure.
45
<PAGE>
Principal Occupation
Name and Position During Past Five Years Age
Joichi Saito President and Chief Operating 60
Chairman of the Officer, Central Pacific Bank
Board and Chief (1989 - 1995)
Executive Officer
Naoaki Shibuya Executive Vice President of Bank 54
President (1993-1995); Executive Vice
President of The Sumitomo Bank of
California (1989-1993)
Austin Y. Imamura Executive Vice President 49
Vice President and and Secretary, Central Pacific
Secretary Bank (1991 - Present); Senior Vice
President and Secretary, Central
Pacific Bank (1991); Senior Vice
President, Central Pacific Bank
(1987 - 1991)
Neal K. Kanda Executive Vice President and 47
Vice President and Controller, Central Pacific Bank
Treasurer (1993 - Present); Senior Vice
President and Controller, Central
Pacific Bank (1990 - 1993); Vice
President and Controller, Central
Pacific Bank (1989 - 1990)
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
For information concerning the market for the Company's common
stock and related shareholder matters, see "Common Stock Price
Range and Dividends" contained in the 1995 Annual Report, which is
incorporated herein by reference, and "ITEM 1. BUSINESS --
Supervision and Regulation -- Restrictions on Transfers of Funds to
the Company by the Bank."
46
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see
"Selected Consolidated Financial Data" contained in the 1995 Annual
Report, which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For Management's discussion and analysis of financial
condition and results of operations, see, "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
contained in the 1995 Annual Report, which is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements of the Company, see the 1995 Annual
Report, which is incorporated herein by reference, and the
"Independent Auditors' Report" thereon. See "ITEM 14. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K" below for
financial statements filed as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as hereinafter noted, the information concerning
directors and executive officers of the Company is incorporated by
reference from the section entitled "Election of Directors" of the
Company's Proxy Statement, which is filed as Exhibit No. 99 to this
Annual Report on Form 10-K. For information concerning executive
officers of the Company, see "ITEM 4(A). EXECUTIVE OFFICERS OF THE
REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated
by reference from the section entitled "Compensation of Directors
and Executive Officers" of the Company's Proxy Statement, which is
filed as Exhibit No. 99 to this Annual Report on Form 10-K.
47
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning security ownership of certain
beneficial owners and management is incorporated by reference from
the sections entitled "Principal Shareholders," and "Election of
Directors" of the Company's Proxy Statement, which is filed as
Exhibit No. 99 to this Annual Report on Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related
transactions is incorporated by reference from the section entitled
"Certain Transactions" of the Company's Proxy Statement, which is
filed as Exhibit No. 99 to this Annual Report on Form 10-K.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
(1) The following financial statements included in the
registrant's 1995 Annual Report to Shareholders are incorporated
herein by reference. Page number references are to page numbers in
the 1995 Annual Report.
Page
CPB Inc. and Subsidiary:
Independent Auditors' Report 37
Consolidated Balance Sheets at December 31, 1995 and 1994 17
Consolidated Statements of Income for the Years
Ended December 31, 1995, 1994 and 1993 18
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1995, 1994 and 1993 19
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1995, 1994 and 1993 20
Notes to Consolidated Financial Statements 21
(2) All schedules are omitted because they are not
applicable, not material or because the information is included in
the financial statements or the notes thereto.
48
<PAGE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last
quarter of 1995.
(c) Exhibits
See Index to Exhibits included in this Annual Report on Form
10-K.
SIGNATURES
Pursuant to the requirements 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.
Dated: March 18, 1996.
CPB INC.
(Registrant)
By /s/ Joichi Saito
JOICHI SAITO
Chairman of the Board 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 in the capacities and on the dates
indicated.
Signature Title Date
/s/ Joichi Saito Chairman of the Board March 18, 1996
Joichi Saito Chief Executive Officer
(Principal Executive
Officer), Director
/s/ Neal K. Kanda Vice President, March 18, 1996
Neal K. Kanda Treasurer
(Principal Financial
Officer, Principal
Accounting Officer)
49
<PAGE>
/s/ Paul Devens Director March 18, 1996
Paul Devens
_____________________ Director March __, 1996
Alice F. Guild
/s/ Dennis I. Hirota Director March 18, 1996
Dennis I. Hirota, Ph.D.
/s/ Stanley Hong Director March 18, 1996
Stanley Hong
______________________ Director March __, 1996
Kensuke Hotta
/s/ Daniel M. Nagamine Director March 18, 1996
Daniel M. Nagamine
/s/ Yoshiharu Satoh Director March 18, 1996
Yoshiharu Satoh
/s/ Naoaki Shibuya Director March 18, 1996
Naoaki Shibuya
50
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Document
3.1 Articles of Incorporation of CPB Inc., as
amended<F1>
3.2 Amended Bylaws of CPB Inc.<F2>
10.3 Limited Partnership Agreement of CKSS Associates
Limited Partnership dated July 10, 1981 and among
CPB Properties, Inc., Kajima Hawaii Corporation,
Sumitomo Corporation and Sumitomo Corporation of
America<F3>
10.9 CPB Inc. 1986 Stock Option Plan, as amended<F4>
10.10 Lease dated February 1, 1983 by and between CKSS
Associates and Central Pacific Bank, as amended by
First Amendment of Lease between CKSS Associates and
Central Pacific Bank dated March 3, 1984, as amended
by Second Amendment of Lease between CKSS Associates
and Central Pacific Bank dated April 3, 1987, as
amended by Third Amendment of Lease between CKSS
Associates and Central Pacific Bank dated
September 24, 1992.<F2>
10.11 Share Purchase Agreement dated as of November 20,
1986 by and among The Sumitomo Bank, Limited and CPB
Inc.<F2>
10.16 Split Dollar Life Insurance Plan<F5>
10.17.1 Loan Agreement dated as of November 8, 1991 by and
between American Trust Co. of Hawaii, Inc., as
Trustee and The Sumitomo Bank, Limited, Los Angeles
Branch<F5>
10.17.2 $2,000,000 Promissory Note dated November 8,
1991<F5>
10.17.3 Collateral Agreement dated as of November 8, 1991 by
and among The Sumitomo Bank, Limited, Central
Pacific Bank and CPB Inc.<F5>
10.17.4 Annual Contributions Agreement dated as of November
8, 1991 by and between American Trust Co. of Hawaii,
Inc. and Central Pacific Bank<F5>
10.17.5 Guaranty Agreement dated as of November 8, 1991 by
and between The Sumitomo Bank, Limited, Los Angeles
Branch and CPB Inc.<F5>
51
<PAGE>
10.17.6 Stock Purchase Agreement by and between American
Trust Co. of Hawaii, Inc. and CPB Inc.<F5>
10.18 Common Stock Purchase Warrants issued November 13,
1991 to The Sumitomo Bank, Limited<F5>
10.19 Central Pacific Bank and Subsidiaries 1995 Annual
Executive Incentive Plan<F6>
10.20 Central Pacific Bank Supplemental Executive Retirement
Plan<F8>
13 Annual Report to Shareholders for the year ended
December 31, 1995 (parts not incorporated by
reference are furnished for informational purposes
and are not filed herewith)
21 Subsidiaries of CPB Inc.<F7>
23 Accountants' Consent
27 Financial Data Schedule
99 Proxy Statement for Annual Meeting of Shareholders
to be held on April 23, 1996
<F1> Filed as Exhibit 3.1 to registrant's Registration
Statement on Form S-2 (Registration No. 33-27575)
filed with the Securities and Exchange Commission on
March 17, 1989, which are incorporated herein by
this reference.
<F2> Filed as Exhibits 3.2, 10.10, 10.16 and 10.18 to the
registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, filed with the
Securities and Exchange Commission on March 17,
1994.
<F3> Filed as Exhibit 10.7 to registrant's Registration
Statement on Form S-14 (Registration No. 2-76608),
filed with the Securities and Exchange Commission on
March 23, 1982, which are incorporated herein by
this reference.
<F4> Filed as Exhibit 28.1 to registrant's Registration
Statement on Form S-8 (Registration No. 33-11462),
filed with the Securities and Exchange Commission on
January 22, 1987, which is incorporated herein by
this reference.
<F5> Filed as Exhibits 10.16, 10.17.1, 10.17.2, 10.17.3,
10.17.4, 10.17.5, 10.17.6 and 10.18, respectively,
to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991, filed with the
52
<PAGE>
Securities and Exchange Commission on March 27,
1992.
<F6> Filed as Exhibit 10.19 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1992, filed with the Securities and Exchange
Commission on March 30, 1993.
<F7> Filed as Exhibit 21 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, filed with the
Securities Exchange Commission on March 30, 1994.
<F8> To be filed by amendment.
53
Financial Highlights
<TABLE>
<CAPTION>
%
(in thousands, except per share data) 1995 1994 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
At Year End
Assets $1,371,909 $1,381,539 -0.7%
Deposits 1,138,319 1,081,909 5.2
Net Loans 970,200 973,672 -0.4
Stockholders' Equity 132,507 121,103 9.4
Number of Shares Outstanding 5,252 5,235 0.3
Book Value Per Share $25.23 $23.13 9.1
- -------------------------------------------------------------------------------------------------------------------
For the Year
Net Income $13,808 $13,483 2.4%
Per Share 2.64 2.58 2.3
Cash Dividends Declared 4,824 4,607 4.7
Per Share 0.92 0.88 4.5
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(Graph -- see Appendix I)
1
<PAGE>
Selected Consolidated Financial Data
The selected consolidated financial data set forth below with
respect to CPB Inc.'s consolidated statements of income for the years
ended December 31, 1995, 1994 and 1993 and with respect to the
consolidated balance sheets at December 31, 1995 and 1994, are derived
from the consolidated financial statements which have been audited by
KPMG Peat Marwick LLP, independent auditors, included elsewhere in
this Annual Report. The selected statements of income data for the
years 1992 and 1991, and the selected balance sheet data at December
31, 1993, 1992 and 1991 are derived from audited consolidated
financial statements which are not included in this Annual Report.
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in thousands, except per share data) 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Total interest income $107,802 $93,793 $91,995 $96,712 $97,992
Total interest expense 44,745 31,600 30,922 39,447 46,200
Net interest income 63,057 62,193 61,073 57,265 51,792
Provision for loan losses 3,300 3,300 3,200 2,700 2,400
Net interest income after provision for loan losses 59,757 58,893 57,873 54,565 49,392
Other operating income 10,776 10,708 11,169 9,089 8,569
Other operating expense 47,691 47,332 43,284 39,933 37,700
Income before income taxes and cumulative effect
of accounting change 22,842 22,269 25,758 23,721 20,261
Income taxes 9,034 8,786 10,026 9,119 7,554
Net income 13,808 13,483 15,940 <F1> 14,602 12,707
- --------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (Year-End):
Interest-bearing deposits in other banks $7,140 $40,277 $5,039 $13,104 $32,082
Federal funds sold - - 5,000 5,000 15,000
Investment securities <F2> 283,627 243,788 250,668 230,902 157,299
Loans 990,356 991,968 945,768 901,565 835,666
Allowance for loan losses 20,156 18,296 17,131 15,378 13,849
Total assets 1,371,909 1,381,539 1,303,102 1,253,663 1,134,589
Core deposits <F3> 878,065 878,660 900,218 907,852 821,370
Total deposits 1,138,319 1,081,909 1,078,326 1,074,055 990,862
Long-term debt - - - - 200
Total stockholders' equity 132,507 121,103 113,188 100,733 89,706
- -------------------------------------------------------------------------------------------------------------------
Per Share Data:
Net income $2.64 $2.58 $3.06 $2.81 $2.51
Cash dividends declared 0.92 0.88 0.88 0.80 0.70
Book value 25.23 23.13 21.64 19.39 17.30
Weighted average shares outstanding (in thousands) 5,240 5,234 5,216 5,192 5,054
- -------------------------------------------------------------------------------------------------------------------
Financial Ratios:
Return on average assets 1.00% 1.03% 1.29% 1.23% 1.21%
Return on average stockholders' equity 10.79 11.48 14.88 15.36 15.11
Average stockholders' equity to average assets 9.29 8.99 8.70 8.03 8.02
Net interest margin <F4> 4.95 5.18 5.42 5.31 5.48
Net charge-offs to average loans & other real estate 0.14 0.22 0.16 0.14 0.03
Nonperforming assets to year-end loans &
other real estate <F5> 0.59 1.84 0.66 0.64 0.26
Allowance for loan losses to year-end loans 2.04 1.84 1.81 1.71 1.66
Allowance for loan losses to nonaccrual loans 562.55 113.95 382.64 280.72 634.11
Dividend payout ratio 34.85 34.11 28.76 28.47 27.89
- -------------------------------------------------------------------------------------------------------------------
2
<PAGE>
<FN>
<F1> Includes a $208,000 credit for cumulative effect of accounting
change.
<F2> Available-for-sale securities at fair value, held-to-maturity
securities at amortized cost in 1995 and 1994. At amortized cost in
1993, 1992 and 1991.
<F3> Noninterest-bearing demand, interest-bearing demand and savings
deposits, and time deposits under $100,000.
<F4> Computed on a taxable equivalent basis.
<F5> Nonperforming assets include nonaccrual loans and other real
estate.
</FN>
</TABLE>
3
<PAGE>
Management's Discussion & Analysis Of
Financial Condition & Results Of Operations
OVERVIEW
CPB Inc. (the "Company") recorded net income of $13.8 million for
1995, increasing by $0.3 million or 2.4% from the $13.5 million earned
in 1994. A record high net income of $15.9 million was recorded in
1993. Total assets were $1,371.9 million at December 31, 1995,
decreasing by $9.6 million or 0.7% from the $1,381.5 million at
December 31, 1994. Net loans of $970.2 million decreased by $3.5 mil-
lion or 0.4%, and total deposits of $1,138.3 million increased by
$56.4 million or 5.2% over year-end 1994. Stockholders' equity of
$132.5 million at December 31, 1995 increased by $11.4 million or 9.4%
over year-end 1994.
The increase in 1995 net income was mainly attributable to an
increase in net interest income, a reduction in Federal Deposit
Insurance Corporation ("FDIC") deposit insurance premiums in 1995 and
expenses incurred in 1994 related to a Voluntary Early Retirement
Program. Return on average assets in 1995 of 1.00% decreased from
1.03% in 1994 and 1.29% in 1993. Return on average stockholders'
equity of 10.79% decreased from 11.48% in 1994 and 14.88% in 1993.
Earnings per share in 1995 of $2.64 increased by 2.3% from $2.58 in
1994, which decreased by 15.7% from the $3.06 earned in 1993. Cash
dividends per share of $0.92 in 1995 increased from $0.88 in 1994 and
1993.
During the past year, the State of Hawaii's economy continued its
slow recovery from the recession that began in 1991. Leading the
recovery was the State's tourism industry as eastbound visitor
arrivals, stimulated by a weaker U.S. dollar, reached a record high in
1995. The Hawaiian economy is expected to grow modestly in 1996;
however, a lack of significant improvement may have an adverse impact
on the Bank's growth and may also result in higher levels of
nonperforming loans and related loan losses.
RESULTS OF OPERATIONS
Net Interest Income
Table I sets forth information concerning average interest
earning assets and interest-bearing liabilities and the yields and
rates thereon, and Table 2 presents an analysis of changes in
components of net interest income between years. Interest income,
which includes loan fees, and resultant yield information presented in
the table and discussed in this section are expressed on a taxable
equivalent basis using an assumed income tax rate of 35%. Average
balances were computed on a daily average basis.
Net interest income in 1995 of $63.3 million increased by $0.8
million or 1.2% over the $62.5 million in 1994, which increased by
$1.0 million or 1.7% over the $61.5 million in 1993.
<PAGE>
4
<PAGE>
(Graph - See Appendix II)
Interest income in 1995 of $108.0 million increased by 14.8% over
the $94.1 million earned in 1994, which increased by 1.8% over 1993.
The increase in interest income in 1995 reflected the increase in both
average volume and yield on average interest earning assets over 1994.
Average interest earning assets of $1,277.4 million in 1995 increased
by 6.0% over the $1,205.6 million in 1994, which increased by 6.3%
over 1993. The average yield on those assets increased to 8.45% in
1995, mainly due to the increase in yield on loans, compared to 7.80%
in 1994 and 8.15% in 1993.
Interest and fees on loans in 1995 increased by 15.5% over 1994,
which increased by 1.8% over 1993. Average net loans increased by
6.0% in 1995 and by 3.8% in 1994. The average yield on net loans was
9.27% in 1995 compared to 8.51% in 1994 and 8.68% in 1993. Interest
on investment securities in 1995 increased by 3.4% over 1994, which
decreased by 2.6% from 1993. Average investment securities increased
by 1.2% in 1995 and 11.0% in 1994. The average yield on those
securities increased to 5.69% from 5.57% in 1994, which decreased from
6.35% in 1993.
Interest expense in 1995 of $44.7 million increased by 41.6% over
1994, which increased by 2.2% over 1993. The increase in 1995
primarily reflected the increase in the average rate paid on
interest-bearing deposits. Average interest-bearing liabilities of
$1,081.7 million increased by 5.9% over 1994, largely due to the
movement of deposits from savings and money market accounts into
higher-yielding certificates of deposit. Average interest-bearing
liabilities in 1994 increased by 6.5% over 1993. The average rate on
interest-bearing liabilities was 4.14% in 1995 compared to 3.09% in
1994 and 3.23% in 1993.
As a result, the net interest margin decreased to 4.95% in 1995
from 5.18% in 1994 and 5.42% in 1993.
5
<PAGE>
<TABLE>
Table 1. Average Balances, Interest Income and Expense, Yields and Rates (Taxable Equivalent)
<CAPTION> Year ended December 31,
1995 1994 1993
----------------------- ----------------------- -----------------------
Average Amount Average Amount Average Amount
Average Yield/ of Average Yield/ Of Average Yield/ of
(Dollars in thousands) Balance Rate Interest Balance Rate Interest Balance Rate Interest
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits in
other banks $34,224 5.84% $1,998 $24,673 4.27% $1,054 $11,376 3.17% $361
Federal funds sold 5,666 5.93 336 1,849 3.52 65 1,877 2.88 54
Taxable investment securities 249,412 5.69 14,198 241,062 5.57 13,437 210,792 6.40 13,484
Tax-exempt investment securities 3,631 5.76 209 8,984 5.48 492 14,492 5.67 821
Net loans 984,433 9.27 91,260 929,039 8.51 79,043 895,135 8.68 77,667
- --------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,277,366 8.45 108,001 1,205,607 7.80 94,091 1,133,672 8.15 92,387
Nonearning assets 99,369 100,094 97,236
- --------------------------------------------------------------------------------------------------------------------
Total assets $1,376,735 $1,305,701 $1,230,908
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits $98,303 1.36% $1,335 $104,847 1.36% $1,423 $100,577 1.58% $1,586
Savings and money market deposits 414,988 3.12 12,940 459,282 2.45 11,264 448,921 2.74 12,308
Time deposits under $100,000 188,574 4.78 9,021 163,479 3.77 6,161 168,076 4.49 7,540
Time deposits $100,000 and over 249,215 5.44 13,564 184,427 3.61 6,661 167,051 3.08 5,147
Federal funds purchased, securities sold
under agreements to repurchase
and other borrowed funds 130,645 6.04 7,885 109,150 5.58 6,091 73,874 5.88 4,341
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,081,725 4.14 44,745 1,021,185 3.09 31,600 958,499 3.23 30,922
Noninterest-bearing deposits 152,002 152,941 152,643
Other liabilities 15,075 14,145 12,660
Stockholders' equity 127,933 117,430 107,106
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and $1,376,735 $1,305,701 $1,230,908
stockholders' equity
- --------------------------------------------------------------------------------------------------------------------
Net interest income $63,256 $62,491 $61,465
- --------------------------------------------------------------------------------------------------------------------
Net interest margin 4.95% 5.18% 5.42%
</TABLE>
6
<PAGE>
Provision and Allowance for Loan Losses
The provision for loan losses is determined by Management's
ongoing evaluation of the loan portfolio and assessment of the ability
of the allowance for loan losses to cover inherent losses. The
Company's additions to the allowance for loan losses ("Allowance")
were $3,300,000, $3,300,000 and $3,200,000 during 1995, 1994 and 1993,
respectively. Net loans charged-off of $1,440,000 in 1995 were
comprised of $1,087,000 in mortgage loans and $399,000 in consumer
loans, offset by net recoveries of $46,000 in commercial loans. Net
charge-offs were $2,135,000 in 1994 and $1,447,000 in 1993. The
decrease in charge-offs was mainly due to the reduction of large
problem credits.
The Allowance, expressed as a percentage of loans, was 2.04% at
December 31, 1995, and 1.84% and 1.81% at the previous two year-ends.
The increase in this ratio reflected uncertainties in the trend of the
local economy.
Management believes the Allowance is adequate to cover the credit
risks inherent in the loan portfolio. Most of the Bank's commercial
and mortgage loans are secured by real estate and other collateral
situated in Hawaii. However, continuation of current economic
conditions in the State of Hawaii may adversely affect borrowers'
ability to repay, collateral values and, consequently, the level of
nonperforming loans and provision for loan losses.
Nonperforming Assets
Table 3 sets forth nonperforming assets, accruing loans which
were delinquent for 90 days or more and restructured loans still
accruing interest at the dates indicated.
Total nonperforming assets, accruing loans delinquent for 90 days
or more, and restructured loans still accruing interest totalled
$20,977,000 at December 31, 1995, compared to $39,656,000 at year-end
1994. Nonaccrual loans of $3,583,000 decreased during 1995 primarily
due to an $11,250,000 loan which was paid in full during the second
quarter of the year. Other real estate of $2,231,000, comprised of
several residential properties, remained relatively unchanged from a
year ago. Loans delinquent for 90 days or more of $9,189,000
decreased from the $12,872,000 reported a year ago, primarily due to
the paydown of a large secured loan. Restructured loans still
accruing interest totalling $5,974,000, comprised of a single loan
secured by real estate, also decreased from the $8,486,000 at year-end
1994.
7
<PAGE>
<TABLE>
Table 2. Analysis of Changes in Net Interest Income (Taxable Equivalent)
<CAPTION>
Year ended December 31,
1995 Compared to 1994 1994 Compared to 1993
------------------------------ ---------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
------------------- -------------------
(Dollars in thousands) Volume Rate Net Change Volume Rate Net Change
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing deposits in other banks $408 $536 $944 $422 $271 $693
Federal funds sold 134 137 271 (1) 12 11
Taxable investment securities 465 296 761 1,937 (1,984) (47)
Tax-exempt investment securities (293) 10 (283) (312) (17) (329)
Net loans 4,714 7,503 12,217 2,943 (1,567) 1,376
- --------------------------------------------------------------------------------------------------------------------
Total interest earning assets 5,428 8,482 13,910 4,989 (3,285) 1,704
- --------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits (89) 1 (88) 67 (230) (163)
Savings and money market deposits (1,085) 2,761 1,676 284 (1,328) (1,044)
Time deposits under $100,000 946 1,914 2,860 (206) (1,173) (1,379)
Time deposits $100,000 and over 2,339 4,564 6,903 535 979 1,514
Federal funds purchased, securities sold under
agreements to repurchase and other borrowed funds 1,199 595 1,794 2,074 (324) 1,750
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,310 9,835 13,145 2,754 (2,076) 678
- --------------------------------------------------------------------------------------------------------------------
Net interest income $2,118 $(1,353) $765 $2,235 (1,209) $1,026
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
Accrual of interest is generally discontinued on commercial loans
when the interest payments become delinquent for 90 days and prospects
for timely repayments appear compromised. Delinquent consumer loans
with principal balances of $20,000 or more are charged off after 120
days, unless determined to be adequately collateralized or in imminent
process of collection. Subsequent receipts are generally applied to
principal outstanding, and no interest income is recognized unless the
financial condition and payment record of the borrowers warrant such
recognition.
In May 1993 and October 1994, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," respectively. SFAS Nos. 114 and 118
prescribe the recognition criteria for loan impairment and the
measurement methods for certain impaired loans and loans whose terms
are modified in troubled debt restructuring. SFAS Nos. 114 and 118
are effective for fiscal years beginning after December 15, 1994. The
Bank implemented the provisions of SFAS Nos. 114 and 118 on January 1,
1995. Impaired loans at December 31, 1995 amounted to $8,567,000 and
included all nonaccrual and restructured loans greater than $500,000.
Other Operating Income
As detailed in Table 4, total other operating income of
$10,776,000 increased by 0.6% in 1995 over 1994, which decreased by
4.1% compared to 1993. Service charges on deposit accounts of
$2,645,000 decreased by 3.8% from 1994, which increased by 6.6% over
1993. Efforts to enhance fee income were affected by competitive
packaging and pricing of bank products. Other service charges and
fees of $5,258,000 increased by 3.6% over 1994, which increased by
5.1% over 1993, primarily due to fees related to charge card
operations. Partnership income is derived from the Company's 50%
investment in CKSS Associates, which owns the Company's headquarters
building and Kaimuki Plaza which was completed during the first
quarter of 1995. Partnership income totaled $1,223,000 in 1995,
decreasing by 10.2% from 1994, which decreased by 9.4% from 1993,
primarily due to lower occupancy rates in the office rental market in
Honolulu and the resultant highly competitive rent renegotiation
environment. Investment securities gains were not significant, except
for gains of $336,000 recorded in 1993, most of which was related to a
$300,000 recovery on a mortgage-backed security. Other income of
$529,000 decreased slightly from 1994, which decreased from $943,000
in 1993, largely due to a decrease in premiums earned from residential
mortgage loan sales. Total other operating income, expressed as a
percentage of average assets, was 0.78% in 1995, 0.82% in 1994 and
0.91% in 1993.
9
<PAGE>
<TABLE>
Table 3. Nonperforming Assets, Past Due Loans and Restructured Loans
<CAPTION>
December 31,
(Dollars in thousands) 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $3,583 $16,056 $4,477 $5,478 $2,184
Other real estate 2,231 2,242 1,750 296 -
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 5,814 18,298 6,227 5,774 2,184
Loans delinquent for 90 days or more 9,189 12,872 19,820 7,383 4,113
Restructured loans still accruing interest 5,974 8,486 - - -
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets, loans delinquent for 90 days or more
and restructured loans still accruing interest $20,977 $39,656 $26,047 $13,157 $6,297
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of loans and other real estate 0.59% 1.84% 0.66% 0.64% 0.26%
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming assets, loans delinquent for 90 days or more and
restructured loans still accruing interest as a percentage of
loans and other real estate 2.11% 3.99% 2.75% 1.46% 0.75%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Other Operating Expense
Total other operating expense of $47,691,000 in 1995, presented
in Table 5, increased by 0.8% over 1994, which increased by 9.4% over
1993. Salaries and employee benefits of $25,728,000 increased by 2.1
% over 1994, which increased by 10.0% over 1993. Contributing to the
increase were expenses related to three in-store branches which were
opened during 1995 in Daiei stores on the island of Oahu and Sure Save
Supermarket in Hilo, on the island of Hawaii. A bonus and other
expenses related to the retirement of the chairman of the board of
directors and chief executive officer of the Company also contributed
to the increase. A nonrecurring expense was recognized in 1994
related to a special retirement bonus offered to qualifying
individuals who elected to retire by April 1, 1994. Total cost of the
voluntary early retirement program, which included the retirement
bonus, accumulated vacation pay and related payroll taxes thereon,
amounted to approximately $915,000, which the Company is recovering by
way of lower salary and employee benefit levels. Other factors
contributing to the increase in personnel expenses in 1994 were the
establishment of the Trust and Real Estate Loan divisions and the
In-Store Branch Department, along with the opening of two new
full-service branches in the towns of Mililani and Kailua and the
Bank's first in-store branch in the Times Super Market in Royal Kunia
on the island of Oahu. An increase in pension plan expense also
contributed to the increase in 1994.
Net occupancy expense of $5,873,000 in 1995 increased by 14.9%
over 1994, which increased by 0.4% over 1993, primarily due to the
aforementioned expansion of branches and additional banking services.
Equipment expense of $2,545,000 increased by 0.7% in 1995 over 1994,
which increased by 14.7% over 1993, primarily due to increased
investment in personal computers and other expenses related to the
aforementioned new divisions and branches and the development of the
Bank's communications network. Other expense of $13,545,000 decreased
by 6.5% from 1994, which increased by 10.8% over 1993. FDIC deposit
insurance premiums of $1,244,000 in 1995 decreased by $1,158,000 due
to a reduction in the premium rate effective in June 1995. The FDIC
further decreased the premium for the first half of 1996 to the
minimum of $1,000. Other expense increased in 1994 primarily due to
losses from write-downs of other real estate of $320,000 and a
provision for losses of $300,000 related to an irregular transaction
involving a former employee, $200,000 of which was recovered and
recorded as a credit to other expense in 1995. Total other operating
expense as a percentage of average assets was 3.46%, 3.63% and 3.52%
in 1995, 1994 and 1993, respectively.
Income Taxes
Income tax expense totalled $9,034,000 in 1995, compared to
$8,786,000 in 1994 and $10,026,000 in 1993. The effective tax rate
for those years was 39.6%, 39.5% and 38.9%, respectively.
<PAGE>
11
<PAGE>
<TABLE>
Table 4. Components of Other Operating Income
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $2,645 $2,750 $2,580
Other service charges and fees 5,258 5,076 4,828
Partnership income 1,223 1,362 1,504
Fees on foreign exchange 1,060 980 978
Investment securities gains 61 - 336
Other 529 540 943
- --------------------------------------------------------------------------------------------------------------------------
Total $10,776 $10,708 $11,169
- --------------------------------------------------------------------------------------------------------------------------
Total other operating income as a
percentage of average assets 0.78% 0.82% 0.91%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Table 5. Components of Other Operating Expense
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $25,728 $25,209 $22,910
Net occupancy 5,873 5,112 5,094
Equipment 2,545 2,528 2,204
Other 13,545 14,483 13,076
- --------------------------------------------------------------------------------------------------------------------------
Total $47,691 $47,332 $43,284
- --------------------------------------------------------------------------------------------------------------------------
Total other operating expense as a
percentage of average assets 3.46% 3.63% 3.52%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Financial Condition
Average total assets of $1,376.7 million in 1995 increased by
$71.0 million or 5.4% over 1994, which increased by $74.8 million or
6.1% over 1993. Average net loans of $984.4 million increased by
$55.4 million or 6.0% and by $33.9 million or 3.8% in the respective
periods. The relatively low asset and loan growth rates during the
last two years, compared to higher growth rates experienced in prior
years, reflect the lower level of economic activity and increased
competition in the State of Hawaii. Average investment securities of
$253.0 million increased by 1.2% over 1994, which increased by 11.0%
over 1993. Interest-bearing deposits in other banks averaged $34.2
million compared to $24.7 million in 1994 and $11.4 million in 1993.
Commercial and residential mortgage loans of $714.2 million at
year-end 1995 increased by 7.4%, installment loans of $67.2 million
increased by 0.5%, commercial loans of $165.8 million decreased by
21.7% and construction loans of $48.1 million decreased by 9.5%
compared to year-end 1994.
Average total deposits of $1,103.1 million in 1995 increased by
$38.1 million or 3.6% over 1994, which increased by $27.7 million or
2.7% over 1993. Average core deposits (noninterest-bearing demand,
interest-bearing demand, savings and money market deposits and time
deposits under $100,000) of $853.9 million in 1995 decreased from
$880.5 million in 1994 and $870.2 million in 1993. Average time
deposits $100,000 and over increased to $249.2 million from $184.4
million in 1994 and $167.1 million in 1993. The increase in large
time deposits was a result of customers transferring funds into higher
yielding deposits. Management is monitoring the Bank's reliance upon
large certificates of deposit. To the extent this trend continues or
increases, further declines in net interest margin may be anticipated.
Average other borrowed funds of $130.6 million in 1995 increased by
19.7% over 1994, which increased by 47.8% over 1993. These funds were
primarily comprised of $81.0 million in advances from the Federal Home
Loan Bank of Seattle ("FHLB") which is used as a source of longer-term
fixed rate financing for loan customers and $45.0 million in customer
repurchase agreements, the balance of which decreased to $2.5 million
at year-end 1995.
13
<PAGE>
<TABLE>
Table 6. Distribution of Assets, Liabilities and Stockholders' Equity
<CAPTION>
Year ended December 31,
1995 1994 1993
----------------- ----------------- -----------------
Average Percent Average Percent Average Percent
(Dollars in thousands) Balance to Total Balance to Total Balance to Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $40,633 2.9% $43,986 3.4% $44,911 3.6%
Interest-bearing deposits in other banks 34,224 2.5 24,673 1.9 11,376 0.9
Federal funds sold 5,666 0.4 1,849 0.1 1,877 0.2
Taxable investment securities 249,412 18.1 241,062 18.5 210,792 17.1
Tax-exempt investment securities 3,631 0.3 8,984 0.7 14,492 1.2
Net loans 984,433 71.5 929,039 71.1 895,135 72.7
Premises and equipment 24,377 1.8 23,565 1.8 22,985 1.9
Other assets 34,359 2.5 32,543 2.5 29,340 2.4
- --------------------------------------------------------------------------------------------------------------------------
Total assets $1,376,735 100.0% $1,305,701 100.0% $1,230,908 100.0%
- --------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing demand $152,002 11.0% $152,941 11.7% $152,643 12.4%
Interest-bearing demand 98,303 7.1 104,847 8.0 100,577 8.2
Savings and money market 414,988 30.2 459,282 35.2 448,921 36.5
Time deposits under $100,000 188,574 13.7 163,479 12.5 168,076 13.6
Time deposits $100,000 and over 249,215 18.1 184,427 14.1 167,051 13.6
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 1,103,082 80.1 1,064,976 81.5 1,037,268 84.3
Federal funds purchased, securities sold under
agreements to repurchase and other borrowed
funds 130,645 9.5 109,150 8.4 73,874 6.0
Other liabilities 15,075 1.1 14,145 1.1 12,660 1.0
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,248,802 90.7 1,188,271 91.0 1,123,802 91.3
Stockholders' equity 127,933 9.3 117,430 9.0 107,106 8.7
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,376,735 100.0% $1,305,701 100.0% $1,230,908 100.0%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Asset/Liability Management
The Bank's net interest margin is subject to the risk of interest
rate fluctuations to the extent that rate-sensitive assets and
rate-sensitive liabilities mature or reprice at different times or in
differing amounts. Asset/liability management is the coordination of
the Bank's rate-sensitive assets and rate-sensitive liabilities to
reduce interest rate risk while maintaining targeted levels of
liquidity and capital.
The Company's asset/liability management policy is to minimize
interest rate risk and optimize net interest margin by closely
matching its level of rate-sensitive assets and rate-sensitive
liabilities. The Bank's Asset/Liability Committee monitors interest
rate risk through the use of income simulation and rate shock
analyses. This process is designed to measure the impact to net
interest margin of future changes in interest rates. Any identified
exposures to net interest margin are managed through the shortening or
lengthening of the duration of the Bank's assets and/or liabilities.
The Bank's asset/liability management activities do not include the
use of derivative financial instruments, such as interest rate swaps,
futures and options.
Table 7 sets forth information concerning the interest rate
sensitivity of the Company's assets, liabilities and stockholders'
equity at December 31, 1995. The assumptions used in determining the
interest rate sensitivity of various asset and liability products can
have a significant impact on the resulting table. For purposes of
this presentation, assets and liabilities are classified by the
earliest repricing date or maturity. All interest-bearing demand and
savings balances are included in the three months or less category
even though repricing of these accounts is not contractually required
and may not actually occur during that period.
As shown in Table 7, the amount of liabilities being repriced
exceeds the amount of assets in the three months or less and over
three through six months categories. In the remaining time periods,
repricing assets exceed repricing liabilities. Generally, where
rate-sensitive assets exceed rate-sensitive liabilities, the net
interest margin is expected to be positively impacted during periods
of increasing interest rates and negatively impacted during periods of
decreasing interest rates. The Company's net interest margin has
decreased during the last three years primarily due to the slowdown in
loan demand and competitive loan and deposit pricing.
15
<PAGE>
<TABLE>
Table 7. Rate Sensitivity of Assets, Liabilities and Stockholders'
Equity
<CAPTION>
Over One
Over Over Six Year
Three Three Through Through Over
Months Through Twelve Three Three Nonrate
(Dollars in thousands) or Less Six Months Months Years Years Sensitive Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits in other banks $7,140 $- $- $- $- $- $7,140
Investment securities 32,421 29,539 39,265 79,105 89,476 13,821 283,627
Net loans 454,062 92,000 164,552 175,930 83,656 - 970,200
Noninterest earnings assets - - - - - 110,942 110,942
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 493,623 121,539 203,817 255,035 173,132 124,763 1,371,909
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits - - - - - 170,494 170,494
Interest-bearing deposits 684,220 117,835 107,367 56,546 1,857 - 967,825
Federal funds purchased, securities sold under
agreements to repurchase and
other borrowed funds 23,194 7,722 6,878 21,918 24,892 - 84,604
Other liabilities - - - - - 16,479 16,479
Stockholders' equity - - - - - 132,507 132,507
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 707,414 125,557 114,245 78,464 26,749 319,480 1,371,909
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(213,791) $(4,018) $ 89,572 $176,571 $146,383 $(194,717) $-
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap $(213,791) $(217,809) $(28,237) $48,334 $194,717 $- $-
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
CAPITAL RESOURCES
The Company's objective is to maintain a level of capital that
will support sustained asset growth and anticipated credit risks and
to ensure that regulatory guidelines and industry standards are met.
Regulations on capital adequacy guidelines adopted by the Board of
Governors of the Federal Reserve System and the FDIC are as follows.
In 1989, a risk-based capital framework was adopted consisting of
capital comprised of a core capital component (Tier I), essentially
common stockholders' equity, less intangible assets, and a supple-
mental component (Tier II), which includes the allowance for loan
losses up to 1.25% of risk-weighted assets, and a system for assigning
assets and off-balance sheet items to one of four risk-weighted
categories. These capital standards require a minimum Tier I
risk-based capital ratio of 4.00% and total risk-based capital ratio
(Tier I plus Tier II) of 8.00%. The Federal Reserve Board and the FDIC
have also adopted a 3.00% minimum equity capital to assets ratio which
is Tier I capital as a percentage of total assets. This is referred
to as leverage ratio. Higher-risk banks as measured by the Federal
regulatory rating system are expected to maintain capital well above
the minimum leverage ratio requirement.
In addition, effective December 19, 1992, FDIC-insured
institutions such as the Bank must maintain leverage, Tier I and total
risk-based capital ratios of at least 5%, 6% and 10%, respectively, to
be considered "well capitalized" under the prompt corrective action
provisions of the Federal Deposit Insurance Corporation Improvement
Act of 1991.
Table 8 sets forth the Company's and Bank's capital ratios as of
the dates indicated.
17
<PAGE>
<TABLE>
Table 8. Regulatory Capital Ratios
<CAPTION>
December 31, 1995 December 31, 1994
------------------------- ------------------------
Required Actual Excess Required Actual Excess
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
Tier I risk-based capital ratio 4.00% 12.35% 8.35% 4.00% 11.31% 7.31%
Total risk-based capital ratio 8.00 13.61 5.61 8.00 12.56 4.56
Leverage capital ratio 3.00 9.61 6.61 3.00 8.84 5.84
- ------------------------------------------------------------------------------------------------------------
Bank:
Tier I risk-based capital ratio 6.00% 11.05% 5.05% 6.00% 10.11% 4.11%
Total risk-based capital ratio 10.00 12.31 2.31 10.00 11.37 1.37
Leverage capital ratio 5.00 8.99 3.99 5.00 8.28 3.28
- ------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
LIQUIDITY
The Company's objective in managing its liquidity is to maintain
a balance between sources and uses of funds in order to most
economically meet the cash requirements of customers for loans and
deposit withdrawals and to participate in investment opportunities as
they arise. Management monitors the Company's liquidity position
continuously in relation to trends of loans and deposits or
withdrawals by its customers for short-term and long-term
requirements. Liquid assets are monitored on a daily basis to assure
maximum utilization. An adequate level of readily marketable assets
and access to short-term funding sources are maintained.
The Company's liquidity improved during 1995. The increase in
average loans outstanding was funded primarily by increases in large
certificates of deposit and borrowings from the FHLB. Core deposits
at December 31, 1995 totaled $878.1 million, compared to $878.7
million at year-end 1994. Time deposits $100,000 and over totalled
$260.3 million, increasing by $57.0 million or 28.0% from a year ago.
The increase reflected customers' attraction to the higher rates paid
on those deposits during 1995. The increase in time deposits $100,000
and over was subject to the Bank's internal policy guidelines.
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 the
results of operations 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 a financial
institution are monetary in nature. As a result, interest rates have
a more significant impact on a financial institution's performance
than the effects of general levels of inflation.
19
<PAGE>
Consolidated Balance Sheets
CPB INC. AND SUBSIDIARY - DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $50,274 $61,604
Interest-bearing deposits in other banks 7,140 40,277
Investment securities:
Held to maturity, at cost (fair value $137,347 and $157,345
at December 31, 1995 and 1994, respectively) 136,693 162,098
Available for sale, at fair value 146,934 81,690
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities 283,627 243,788
- ---------------------------------------------------------------------------------------------------------------------------
Loans 990,356 991,968
Less allowance for loan losses 20,156 18,296
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 970,200 973,672
- ---------------------------------------------------------------------------------------------------------------------------
Premises and equipment 25,452 24,217
Accrued interest receivable 9,454 9,781
Investment in partnership 6,221 5,428
Due from customers on acceptances 1,443 1,459
Other assets 18,098 21,313
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $1,371,909 $1,381,539
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits $170,494 $162,776
Interest-bearing deposits 967,825 919,133
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 1,138,319 1,081,909
Federal funds purchased and securities sold under agreements to repurchase 2,500 67,355
Other borrowed funds 82,104 94,324
Bank acceptances outstanding 1,443 1,459
Other liabilities 15,036 14,889
Employee stock ownership plan note payable - 500
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,239,402 1,260,436
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares, none issued - -
Common stock, no par value, stated value $1.25 per share;
authorized 25,000,000 shares; issued and outstanding 5,251,762 and
5,235,331 shares at December 31, 1995 and 1994, respectively 6,565 6,544
Surplus 45,337 45,178
Retained earnings 80,370 71,386
Unrealized gain (loss) on investment securities, net of taxes 235 (1,505)
- ---------------------------------------------------------------------------------------------------------------------------
132,507 121,603
Employee stock ownership plan shares purchased with debt - (500)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 132,507 121,103
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,371,909 $1,381,539
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
20
<PAGE>
Consolidated Statements Of Income
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $91,134 $78,939 $77,577
Interest and dividends on investment securities:
Taxable interest 13,336 12,632 11,998
Tax-exempt interest 136 298 519
Dividends 862 805 1,486
Interest on deposits in other banks 1,998 1,054 361
Interest on Federal funds sold 336 65 54
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 107,802 93,793 91,995
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 36,860 25,509 26,581
Interest on Federal funds purchased, securities sold under
agreements to repurchase and other borrowed funds 7,885 6,091 4,341
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 44,745 31,600 30,922
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 63,057 62,193 61,073
Provision for loan losses 3,300 3,300 3,200
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 59,757 58,893 57,873
- ---------------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 2,645 2,750 2,580
Other service charges and fees 5,258 5,076 4,828
Partnership income 1,223 1,362 1,504
Fees on foreign exchange 1,060 980 978
Investment securities gains 61 - 336
Other 529 540 943
- ---------------------------------------------------------------------------------------------------------------------------
Total other operating income 10,776 10,708 11,169
- ---------------------------------------------------------------------------------------------------------------------------
Other operating expense:
Salaries and employee benefits 25,728 25,209 22,910
Net occupancy 5,873 5,112 5,094
Equipment 2,545 2,528 2,204
Other 13,545 14,483 13,076
- ---------------------------------------------------------------------------------------------------------------------------
Total other operating expense 47,691 47,332 43,284
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of accounting change 22,842 22,269 25,758
Income taxes 9,034 8,786 10,026
- ---------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 13,808 13,483 15,732
Cumulative effect of accounting change - - 208
- ---------------------------------------------------------------------------------------------------------------------------
Net income $13,808 $13,483 $15,940
- ---------------------------------------------------------------------------------------------------------------------------
Per common share:
Income before cumulative effect of accounting change $2.64 $2.58 $3.02
Cumulative effect of accounting change - - 0.04
- ---------------------------------------------------------------------------------------------------------------------------
Net income $2.64 $2.58 $3.06
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends declared $0.92 $0.88 $0.88
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
21
<PAGE>
Consolidated Statements Of Changes In Stockholders' Equity
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Employee
Unrealized stock ownership
gain(loss) on plan shares
Common Retained investment purchased
(Dollars in thousands, except per share data) stock Surplus earnings securities with debt Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 $6,495 $44,573 $51,165 $ - $(1,500) $100,733
Net income - - 15,940 - - 15,940
Cash dividends declared ($0.88 per share) - - (4,595) - - (4,595)
34,189 shares of common stock issued 43 567 - - - 610
Reduction of employee stock ownership plan
obligation guaranteed by Company - - - - 500 500
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 6,538 45,140 62,510 - (1,000) 113,188
Net income - - 13,483 - - 13,483
Cash dividends declared ($0.88 per share) - - (4,607) - - (4,607)
5,000 shares of common stock issued 6 38 - - - 44
Net change in unrealized gain (loss)
on investment securities - - - (1,505) - (1,505)
Reduction of employee stock ownership plan
obligation guaranteed by Company - - - - 500 500
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 6,544 45,178 71,386 (1,505) (500) 121,103
Net income - - 13,808 - - 13,808
Cash dividends declared ($0.92 per share) - - (4,824) - - (4,824)
16,431 shares of common stock issued 21 159 - - - 180
Net change in unrealized gain (loss)
on investment securities - - - 1,740 - 1,740
Reduction of employee stock ownership plan
obligation guaranteed by Company - - - - 500 500
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $6,565 $45,337 $80,370 $235 $ - $132,507
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
22
<PAGE>
Consolidated Statements Of Cash Flows
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $13,808 $13,483 $15,940
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 3,300 3,300 3,200
Provision for depreciation and amortization 2,574 2,386 2,151
Net amortization and accretion of investment securities 1,755 2,719 3,245
Net gain on investment securities (61) - (336)
Federal Home Loan Bank stock dividends received (862) (1,216) (1,076)
Net change in loans held for sale 872 6,408 (1,398)
Cumulative effect of accounting change - - (208)
Deferred income tax expense (benefit) (1,909) 4,068 (572)
Partnership income (1,223) (1,362) (1,504)
Decrease (increase) in accrued interest receivable and other assets 5,669 (6,306) (1,678)
Increase in accrued interest payable and other liabilities 59 949 105
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 23,982 24,429 17,869
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities held to maturity 56,891 83,311 207,593
Purchases of investment securities held to maturity (51,618) (56,550) (229,192)
Proceeds from sales, maturities and calls on investment securities available for sale 12,135 79,334 -
Purchases of investment securities available for sale (55,188) (103,218) -
Net decrease (increase) in interest-bearing deposits in other banks 33,137 (35,238) 8,065
Net loan originations over principal repayments (2,089) (52,978) (44,252)
Loans acquired in branch acquisition - (2,656) -
Purchases of premises and equipment (4,116) (3,321) (2,498)
Net proceeds from disposal of premises and equipment 307 - -
Distributions from partnership 430 600 540
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,111) (90,716) (59,744)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 56,410 (7,238) 4,271
Deposits acquired in branch acquisition - 10,821 -
Proceeds from Federal Home Loan Bank intermediate-term advances 32,120 14,600 20,455
Repayments of Federal Home Loan Bank intermediate-tern advances (19,320) (27,174) (1,057)
Net increase (decrease) in short-term borrowings (89,875) 78,292 13,850
Cash dividends paid (4,716) (4,606) (4,483)
Proceeds from sale of common stock 180 44 610
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (25,201) 64,739 33,646
- ---------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (11,330) (1,548) (8,229)
Cash and cash equivalents:
At beginning of year 61,604 63,152 71,381
- ---------------------------------------------------------------------------------------------------------------------------
At end of year $50,274 $61,604 $63,152
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $46,589 $29,663 $31,511
Cash paid during the year for income taxes 11,048 7,634 10,970
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities:
Transfer of held-to-maturity securities to available-for-sale category $18,331 $59,019 $ -
Reclassification of loans to other real estate 1,389 891 1,750
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
23
<PAGE>
Notes to Consolidated Financial Statements
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CPB Inc.'s (the "Company's") sole operating subsidiary, Central
Pacific Bank (the "Bank"), is a full-service commercial bank which
currently has 24 banking offices located throughout the State of
Hawaii. The Bank engages in a broad range of lending activities
including the granting of commercial, consumer and real estate loans,
with particular emphasis on loans with short- to medium-term
maturities and adjustable interest rates. Commercial loan products
include inventory and accounts receivable financing, furniture,
fixture and equipment financing and short-term operating loans.
Consumer loans include home equity lines of credit, loans for
automobiles, home improvement and debt consolidation, personal and
professional lines of credit and other installment and term loans for
other personal needs. The Bank also offers VISA and MasterCard credit
and services to its customers. Real estate loans include commercial,
construction and residential real estate loans with both fixed and
adjustable rates.
Other services offered include cash management services, merchant
windows, travelers' checks, safe deposit boxes, international banking
services, night depository facilities and wire transfer services. The
Bank's Trust Division, which was established in 1993, offers
management, asset custody and general consultation and planning
services for individuals. It accepts a variety of accounts including
revocable trusts, agency accounts, guardianships of property,
charitable remainder trusts and probates.
The Bank offers a variety of deposit instruments. These include
personal and business checking and savings accounts, including
interest-bearing negotiable order of withdrawal ("NOW") accounts,
money market accounts and time certificates of deposit.
The Bank's business depends on rate differentials which is the
difference between the interest rate paid by the Bank on its deposits
and other borrowings and the interest rate received by the Bank on
loans extended to its customers and securities held in the Bank's
portfolio. These rates are highly sensitive to many factors that are
beyond the control of the Bank. Accordingly, the earnings and growth
of the Company are subject to the influence of domestic and foreign
economic conditions, including inflation, recession and unemployment.
Principles of Consolidation
The consolidated financial statements include the accounts of CPB
Inc. and its wholly-owned subsidiary, Central Pacific Bank and its
wholly-owned subsidiary, CPB Properties, Inc. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
<PAGE>
24
<PAGE>
CPB Properties, Inc. is a general partner with a 50 percent
interest in CKSS Associates, a limited partnership. The investment in
partnership is accounted for by the equity method.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company
considers cash and cash equivalents to include cash and due from banks
and Federal funds sold.
Investment Securities
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires that
investments in debt securities and marketable equity securities be
designated as trading, held to maturity or available for sale.
Trading securities, of which the Company had none at December 31, 1995
and 1994, are reported at fair value, with changes in fair value
included in earnings. Available-for-sale securities are reported at
fair value, with net unrealized gains and losses included as a sepa-
rate component of stockholders' equity, net of taxes. Held-to-
maturity debt securities are reported at amortized cost.
As of January 1, 1994, investment securities with a carrying
value of $59,019,000 were reclassified to the available-for-sale
portfolio, and a valuation allowance of $33,000 before income taxes
was recorded thereon. The classification of investment securities as
available for sale was made to provide management with the
flexibility, under certain circumstances, to adjust the Company's
liquidity and interest rate positions as necessary. Investment
securities with a carrying value of $191,649,000 at January 1, 1994
were classified as held to maturity based on the Company's positive
intent and ability to hold such securities to maturity.
In November 1995, the Financial Accounting Standards Board
("FASB") issued a special report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." In connection with the guidance provided in the special
report, the FASB indicated that an enterprise may reassess the
appropriateness of the classifications of all securities held at that
time and account for any resulting reclassifications at fair value in
accordance with the requirements of SFAS No. 115. Such
reclassifications were required to occur no later than December 31,
1995, and be disclosed in accordance with the requirements of SFAS No.
115. The guidance indicated that reclassification from the
held-to-maturity category that resulted from this one-time
reassessment would not call into question the intent of an enterprise
to hold other debt securities to maturity in the future.
In accordance with the implementation guidance provided in the
special report, the Company transferred approximately $18,331,000 of
investment securities previously classified as
25
<PAGE>
<PAGE>
held-to-maturity securities to available-for-sale securities on
December 27, 1995.
Gains and losses from the disposition of investment securities
are computed using the specific identification method.
Loans and Allowance for Loan Losses
Loans are stated at the principal amount outstanding, net of
unearned income. The Company adopted the provisions of SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosure," on January 1, 1995. SFAS Nos. 114 and
118 address the accounting treatment of certain impaired loans.
However, these statements do not address the overall adequacy of the
allowance for loan losses and do not apply to large groups of
smaller-balance homogeneous loans unless such loans meet the
definition of troubled debt restructurings of SFAS No. 15, "Accounting
for Troubled Debt Restructurings." The Company, considering current
information and events regarding the borrowers' ability to repay their
obligations, treats a loan as impaired when it is probable that the
Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. When a loan is considered to
be impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, if the loan is considered to be collateral
dependent, based on the fair value of the collateral. Impairment
losses are included in the allowance for loan losses through a charge
to the provision for loan losses. Prior periods have not been
restated.
For smaller-balance homogeneous loans (primarily residential real
estate and consumer loans), the allowance for loan losses is based
upon management's evaluation of the quality, character and inherent
risks in the loan portfolio, current and projected economic
conditions, and past loan loss experience. The allowance is increased
by provisions charged to operating expense and reduced by charge-offs,
net of recoveries.
Loans are placed on nonaccrual status when management has
determined that the borrowers will be unable to meet contractual
principal and/or interest obligations. When a loan is placed on
nonaccrual status, all interest previously accrued but not collected
is reversed against current period interest income should management
determine that the collectibility of such accrued interest is
doubtful. All subsequent receipts are applied to principal
outstanding, and no interest income is recognized unless the financial
condition and payment record of the borrowers warrant such
recognition. A nonaccrual loan may be restored to an accrual basis
when principal and interest payments are current and full payment of
principal and interest is expected.
26
<PAGE>
Loan Origination and Commitment Fees
All loan origination fees, substantially all loan commitment fees
and certain direct loan origination costs are deferred and recognized
over the life of the related loan as an adjustment to yield.
Loans Held for Sale
Generally, fixed-rate residential mortgage loans are originated
with the intent to sell, and occasionally other loans are sold in
response to changes in interest rate risk. At December 31, 1995 and
1994, approximately $7,892,000 and $8,764,000, respectively, of loans
were held for sale and were valued at the lower of aggregate cost or
market value.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are
included in other operating expense and are computed under the
straight-line method over the estimated useful lives of the assets or
the applicable leases, whichever is shorter. Major improvements and
betterments are capitalized, while recurring maintenance and repairs
are charged to operating expense. Gains or losses on dispositions of
premises and equipment are included in other operating income or
expense.
Intangible Assets
Intangible assets, included in other assets, represent the excess
of purchase price over the estimated fair value of net assets acquired
from two branch acquisitions. Accumulated amortization amounted to
$405,000 and $319,000 at December 31, 1995 and 1994, respectively.
The intangible assets are being amortized on a straight-line basis
over the estimated benefit periods based on depositor relationships
existing at the acquisition dates. Amortization expense amounted to
$100,000, $112,000 and $92,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
Other Real Estate
Other real estate, included in other assets, is composed of
properties acquired through foreclosure proceedings and, prior to
January 1, 1995, in-substance foreclosures. An in-substance
foreclosure results when a borrower is having financial difficulty and
has little or no equity or prospects for building equity in the
collateral and when repayment of the loan is expected to come only
from the operation or sale of the collateral. The Company had no
loans classified as in-substance foreclosures as of December 31, 1994,
prior to the adoption of SFAS Nos. 114 and 118. Properties acquired
through foreclosure are valued at fair value which establishes the new
cost basis of other real estate. Losses arising at the time of
acquisition of such properties are charged against the allowance for
loan losses. Subsequent to acquisition, such properties are carried
at the lower of a) cost or b) fair value
<PAGE>
27
<PAGE>
less estimated selling expenses, determined on an individual asset
basis. Any deficiency resulting from the excess of cost over fair
value less estimated selling expenses is recognized as a valuation
allowance. Any subsequent increase in fair value up to its new cost
basis is recorded as a reduction of the valuation allowance.
Increases or decreases in the valuation allowance and gains or losses
recognized on the sale of these properties are included in other
operating income or expense. Other real estate amounted to $2,231,000
and $2,242,000 at December 31, 1995 and 1994, respectively.
Income Taxes
The Company and its subsidiary file consolidated Federal and
State tax returns. Effective January 1, 1993, the Company adopted the
provisions of SFAS No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 109, 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 the enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
SFAS No. 109, 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.
Use of Estimates
The Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these consolidated
financial statements. With respect to the allowance for loan losses,
the Company believes the allowance for loan losses is adequate to
provide for potential losses on loans and other extensions of credit,
including off-balance sheet credit exposures. While the Company
utilizes available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on
changes in economic conditions, particularly in the State of Hawaii.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
loan losses. Such agencies may require the Company to recognize
additions to the allowance based on their judgements about information
available to them at the time of their examination. Accordingly,
actual results could differ from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements and
notes thereto for the previous two years have been reclassified to
conform with the current year's presentation. Such reclassifications
had no effect on the Company's results of operations.
28
<PAGE>
2. RESERVE REQUIREMENTS
The Bank is required by the Federal Reserve Bank to maintain
reserves based on the amount of deposits held. The amount held as a
reserve at December 31, 1995 and 1994 was $18,831,000 and $19,077,000,
respectively.
3. INVESTMENT SECURITIES
A summary of investment securities at December 31, 1995 and 1994
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(Dollars in thousands) cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995:
Held to Maturity:
U.S. Treasury and
other U.S. Government
agencies $125,073 $980 $399 $125,654
States and political
subdivisions 11,620 82 9 11,693
- ---------------------------------------------------------------------------------------------------------------------------
Total $136,693 $1,062 $408 $137,347
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Treasury and
other U.S. Government
agencies $129,331 $848 $480 $129,699
States and political
subdivisions 2,831 7 2 2,836
Private-issuer mortgage-
backed securities 560 18 - 578
Federal Home Loan Bank
stock 13,821 - - 13,821
- ---------------------------------------------------------------------------------------------------------------------------
Total $146,543 $873 $482 $146,934
- ---------------------------------------------------------------------------------------------------------------------------
1994:
Held to Maturity:
U.S. Treasury and
other U.S. Government
agencies $148,213 $369 $4,902 $143,680
States and political
subdivisions 13,885 67 287 13,665
- ---------------------------------------------------------------------------------------------------------------------------
Total $162,098 $436 $5,189 $157,345
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Treasury and
other U.S. Government
agencies $69,377 $- $2,428 $66,949
Private-issuer mortgage-
backed securities 2,549 - 72 2,477
Federal Home Loan Bank
stock 12,264 - - 12,264
- ---------------------------------------------------------------------------------------------------------------------------
Total $84,190 $- $2,500 $81,690
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The amortized cost and estimated fair value of investment
securities at December 31, 1995, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
(Dollars in thousands) cost value
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity:
Due in one year or less $36,027 $35,906
Due after one year through five years 85,643 86,094
Due after five years through ten years 9,477 9,656
- --------------------------------------------------------------------------------------------------
131,147 131,656
Mortgage-backed securities 5,546 5,691
- --------------------------------------------------------------------------------------------------
Total $136,693 $137,347
- --------------------------------------------------------------------------------------------------
Available for Sale:
Due in one year or less $27,976 $28,143
Due after one year through five years 39,672 39,702
Mortgage-backed securities 65,074 65,268
Federal Home Loan Bank stock 13,821 13,821
- --------------------------------------------------------------------------------------------------
Total $146,543 $146,934
- --------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of investment securities available for sale
were $7,964,000 in 1995, resulting in gross realized gains of $8,000
and gross realized losses of $7,000. Investment securities gains of
$60,000 were also realized in 1995 as a result of call provisions
exercised by issuers of $2,500,000 of investment securities classified
as held to maturity. Investment securities gains in 1993 included a
$300,000 recovery of a 1992 write-down of a private-issuer
mortgage-backed security. The 1992 write-down was based on
management's assessment that the security had suffered an impairment
in value deemed other than temporary. During the first quarter of
1993, the full principal amount and $185,000 of previously unaccrued
interest were recovered. There were no sales of investment securities
during the years ended December 31, 1994 and 1993.
Investment securities of $150,453,000 and $205,960,000 at
December 31, 1995 and 1994, respectively, were pledged to secure
public funds on deposit, securities sold under agreements to
repurchase and other short-term borrowings.
As a member of the Federal Home Loan Bank of Seattle ("FHLB"),
the Bank is required to obtain and hold a specified number of shares
of capital stock of the FHLB based on the amount of its outstanding
FHLB advances. These shares are pledged to the FHLB as collateral to
secure outstanding advances (see note 10).
30
<PAGE>
4. LOANS
Loans consisted of the following at December 31, 1995 and 1994:
(Dollars in thousands) 1995 1994
- -----------------------------------------------------------------------
Real estate:
Mortgage - Commercial $371,089 $331,207
Mortgage - Residential 343,118 334,018
Construction 48,131 53,175
Commercial, financial
and agricultural 165,812 211,738
Installment 67,210 66,848
- -----------------------------------------------------------------------
995,360 996,986
Unearned income 5,004 5,018
- -----------------------------------------------------------------------
Total $990,356 $991,968
- -----------------------------------------------------------------------
In the normal course of business, the Bank has made loans to
certain directors, executive officers and their affiliates under terms
consistent with the Bank's general lending policies. An analysis of
the activity of such loans in 1995 follows:
(Dollars in thousands)
- ----------------------------------------------------------
Balance, beginning of year $6,312
Additions 5,016
Repayments (3,380)
Other changes 12,301
- ----------------------------------------------------------
Balance, end of year $20,249
- ----------------------------------------------------------
The amount of other changes represents sales of loans originated
by the Bank (included in additions) and the net change in loans due to
entities that were not considered related parties for the entire year.
Impaired loans at December 31, 1995, all of which had related
allowance for loan losses established (see note 5), amounted to
$8,567,000 and included all nonaccrual and restructured loans greater
than $500,000. The average recorded investment in impaired loans
during 1995 amounted to $15,797,000. Interest income recognized on
such loans amounted to $1,300,000 in 1995, of which $492,000 was
earned on nonaccrual loans, and $715,000 was recorded on restructured
loans still accruing interest.
Nonaccrual loans at December 31, 1995 and 1994 were $3,583,000
and $16,056,000, respectively. The Bank collected and recognized
interest of $533,000 on nonaccrual loans in 1995. The Bank would have
<PAGE>
recognized additional interest income of $308,000 had these loans been
accruing interest throughout 1995. Additionally, the Bank collected
interest of $61,000 on charged-off loans in 1995.
31
<PAGE>
Restructured loans still accruing interest at December 31, 1995
and 1994 amounted to $5,974,000 and $8,486,000, respectively. During
1995, the Bank recognized interest income of $616,000 on these loans
in accordance with their original and restructured contractual terms.
Substantially all of the Bank's loans are to residents of, or
companies doing business in, the State of Hawaii and are generally
secured by personal assets, business assets, residential properties or
income-producing or commercial properties.
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $18,296 $17,131 $15,378
Provision for loan losses 3,300 3,300 3,200
- ----------------------------------------------------------------------------------------------------------
21,596 20,431 18,578
- ----------------------------------------------------------------------------------------------------------
Charge-offs (1,821) (2,519) (1,642)
Recoveries 381 384 195
- ----------------------------------------------------------------------------------------------------------
Net charge-offs (1,440) (2,135) (1,447)
- ----------------------------------------------------------------------------------------------------------
Balance, end of year $20,156 $18,296 $17,131
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Changes in the allowance for loan losses for impaired loans
(included in the above amounts) for 1995 were as follows:
(Dollars in thousands)
- ---------------------------------------------------------------------
Balance, beginning of year $2,540
Provision for loan losses 584
Net charge-offs (943)
- ---------------------------------------------------------------------
Balance, end of year $2,181
- ---------------------------------------------------------------------
32
<PAGE>
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31,
1995 and 1994:
(Dollars in thousands) 1995 1994
- ---------------------------------------------------------------------
Land $6,000 $6,000
Office buildings and leasehold
improvements 19,828 18,246
Furniture, fixtures and equipment 13,561 13,077
- ---------------------------------------------------------------------
39,389 37,323
Less accumulated depreciation and
amortization 13,937 13,106
- ---------------------------------------------------------------------
Net $25,452 $24,217
- ---------------------------------------------------------------------
33
<PAGE>
Depreciation and amortization of premises and equipment were
charged to the following operating expenses:
<TABLE>
<CAPTION>
Useful
(Dollars in thousands) 1995 1994 1993 lives
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net occupancy $925 $787 $751 1 to 35
years
Equipment 1,649 1,599 1,400 2 to 20
years
- ---------------------------------------------------------------------------------------------------------
Total $2,574 $2,386 $2,151
- ---------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
7. INVESTMENT IN PARTNERSHIP
CPB Properties, Inc. is a general partner with a 50 percent
interest in CKSS Associates, a limited partnership. The partnership
developed an office building complex in Honolulu known as Central
Pacific Plaza, part of which serves as the Company's headquarters.
CPB Properties, Inc. contributed cash of $846,000 and land with a
carrying value of $1,381,000. CPB Properties, Inc. recorded its
contribution to the partnership at book value. The partnership has
agreed to a value of $5,200,000 for the land and has credited the
subsidiary with a contribution of $6,046,000. For accounting
purposes, the difference between the $1,381,000 carrying value of the
land and the $5,200,000 value of the land agreed upon by the
partnership in determining the amount of the contribution would be
recognized, if at all, only upon the sale of the subsidiary's interest
in the partnership or upon the sale of the land and building by the
partnership.
Financial information of CKSS Associates is summarized as
follows:
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1995 and 1994
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Office building
(including land valued at $5,200) $39,521 $25,832
Development in process - 12,286
Deferred costs 2,925 2,469
Other assets 862 772
- --------------------------------------------------------------------------------------------------------------------
Total assets $43,308 $41,359
Liabilities and Partners' Equity:
Notes payable $22,500 $20,600
Other liabilities 729 2,265
Partners' equity 20,079 18,494
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and partners' equity $43,308 $41,359
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income
Years ended December 31, 1995,
1994 and 1993
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Rental income from bank $2,132 $1,925 $1,785
Other rental income
and other revenues 5,173 5,603 6,033
- --------------------------------------------------------------------------------------------------------------------
Total revenues 7,305 7,528 7,818
Total costs and expenses 4,860 4,804 4,810
- --------------------------------------------------------------------------------------------------------------------
Net income $2,445 $2,724 $3,008
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Development in Process
In 1995 CKSS Associates completed its development of a four-story
office building known as the Kaimuki Plaza in Kaimuki, on the island
of Oahu, Hawaii, on land owned by CPB Properties, Inc. During 1992,
CKSS Associates and CPB Properties, Inc. entered into a lease
agreement effective from January 1, 1993 to December 31, 2047. This
lease agreement has been accounted for as an operating lease. Fixed
annual lease payments through 2007 are as follows:
1996 through 2002 $300,000
2003 through 2007 360,000
Thereafter, and until the end of the lease term, annual minimum lease
payments are $360,000 per year. Lease rent paid to CPB Properties,
Inc. during the years ended December 31, 1995 and 1994 was $300,000
and $250,000, respectively.
Notes Payable
At December 31, 1995, notes payable included $10,700,000 payable
to The Sumitomo Bank, Limited ("Sumitomo"), the principal stockholder
of CPB Inc., and $11,800,000 due to Central Pacific Bank. The note
payable to Sumitomo with an outstanding balance of $10,700,000 and a
note payable to the Bank with an outstanding balance of $500,000, both
due on November 18, 1996, are secured by a mortgage on Central Pacific
Plaza. The remaining $11,300,000 payable to the Bank represents the
outstanding balance on a $12,200,000 facility due on August 10, 2001,
which is secured by the leasehold interest in the Kaimuki Plaza and a
second mortgage on Central Pacific Plaza. All loans are priced at
0.75% above the London Interbank Offered Rate ("LIBOR"). The weighted
average interest rate on these notes was 6.636% at December 31, 1995.
8. DEPOSITS
Certificates of deposit with balances of $100,000 or more were
$260,254,000 and $203,249,000 at December 31, 1995 and 1994,
respectively.
Interest expense on certificates of deposit with balances of
$100,000 or more was $13,564,000, $6,661,000 and $5,336,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
9. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Federal funds purchased generally mature on the day following the
date of purchase. Securities sold under agreements to repurchase,
with a weighted average contractual maturity of 182 days at December
31, 1995, were treated as financings, and the obligations to
repurchase the identical securities sold were reflected as a liability
with the dollar amount of securities underlying the agreements
remaining in the asset accounts. At December 31, 1995, the underlying
securities were held in a custodial account subject to Bank control.
<PAGE>
36
<PAGE>
A summary of Federal funds purchased and securities sold under
agreements to repurchase follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Amount outstanding at
December 31 $ - $ - $ -
Average amount outstanding
during year 3,296 282 145
Highest month-end balance
during year 42,000 11,000 -
Weighted average interest rate
on balances outstanding
at December 31 - - -
Weighted average interest rate
during year 5.926% 4.819% 3.167%
- --------------------------------------------------------------------------------------------------------------------
Securities sold under agreements
to repurchase:
Amount outstanding at
December 31 $2,500 $67,355 $9,130
Average amount outstanding
during year 45,357 29,534 3,126
Highest month-end balance
during year 68,483 67,355 9,130
Weighted average interest rate
on balances outstanding
at December 31 5.688% 5.048% 2.781%
Weighted average interest rate
during year 5.629% 4.421% 2.990%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
10. OTHER BORROWED FUNDS
A summary of FHLB advances and other short-term borrowings at
December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FHLB intermediate-term advances with a
weighted average interest rate of 6.204% and
6.173% at December 31, 1995 and 1994,
respectively $81,107 $68,307
FHLB overnight advances - 25,000
Other short-term borrowings 997 1,017
- ------------------------------------------------------------------------------------------------------------------
Total $82,104 $94,324
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
FHLB advances are secured by the Bank's holdings of stock of the
FHLB, other unencumbered investment securities and certain real estate
loans in accordance with the collateral provisions of the Advances,
Security and Deposit Agreement dated May 8, 1991, between the Bank and
the FHLB. The Bank had available to it additional unused FHLB advances
of approximately $29,000,000 at December 31, 1995.
At December 31, 1995 approximate maturities of FHLB advances and
other short-term borrowings were as follows:
(Dollars in thousands)
- ---------------------------------------------------------------------
Year ending December 31:
1996 $33,265
1997 23,157
1998 626
1999 637
2000 10,316
Thereafter 14,103
- ---------------------------------------------------------------------
Total $82,104
- ---------------------------------------------------------------------
11. EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has an employee stock ownership plan ("ESOP") and
related trust covering substantially all full-time employees with at
least one year of service. Normal vesting occurs at the rate of 20
percent per year starting the second year of participation. The Bank
made contributions of $1,195,000, $1,164,000 and $1,350,000 for 1995,
1994 and 1993, respectively, which were charged to salaries and
38
<PAGE>
employee benefits.
On November 8, 1991, after obtaining the approval of the boards
of directors of the Company and the Bank, the trust purchased 125,000
shares of newly issued common stock of the Company. The purchase was
made with cash obtained through a four-year term loan for $2,000,000
from Sumitomo, $500,000 in existing funds held in the ESOP trust
account and $350,000 in Bank contributions. A portion of the shares
purchased was pledged as security for the loan.
The Company guaranteed repayment of the loan, and the Bank was
obligated to make cash contributions to the trust in amounts
sufficient to enable the trust to make four annual principal payments
of $500,000 plus interest on the loan. The interest rate floated at
LIBOR plus 1 percent, for periods of 3, 6, or 12 months at the option
of the borrower.
For financial reporting purposes, the ESOP loan was recorded as a
liability, and stockholders' equity was reduced by a like amount. As
principal payments were made, the liability was reduced and
stockholders' equity was increased by the amounts paid. The ESOP loan
was paid in full in November 1995.
12. STOCK OPTION PLAN
On November 7, 1986, the Company adopted the CPB Inc. 1986 Stock
Option Plan ("Stock Option Plan") for the purpose of granting stock
options to directors, officers and other key individuals. On April
28, 1992, the stockholders of the Company approved an amendment to the
Stock Option Plan which increased from 220,000 to 520,000 the number
of shares available for issuance upon the exercise of stock options
granted. During 1995, options to purchase 69,600 shares were granted.
At December 31, 1995, stock options to purchase 165,125 shares of the
Company's common stock were outstanding, of which 76,437 shares were
exercisable. These options expire ten years after the grant date.
The option price on 12,492 shares is $5.39, on 25,088 shares is
$14.32, on 64,945 shares is $25.45 and on the remaining 62,600 shares
is $26.08. These option prices were based on the fair market value of
the common stock on the dates granted. During the year ended December
31, 1995, options on 16,431 shares of the Company's common stock were
exercised for a total of 162,235 shares exercised through December 31,
1995.
13. SHARE PURCHASE AGREEMENT
On December 16, 1986, the stockholders of the Company ratified a
Share Purchase Agreement which gives Sumitomo the right to purchase
newly issued common stock of the Company for the purpose of
maintaining its pro rata ownership interest in the Company. Pursuant
to the agreement, warrants were issued giving Sumitomo the right to
purchase 35,025 shares at fair market value (at the time such warrants
are exercised), contingent upon the exercise of stock options by the
optionees. Warrants for 14,778 shares were exercised in September
1991 at $24.375 per share. Warrants for an additional 11,051 shares
were exercisable as of December 31, 1995, subject to the approval of
<PAGE>
39
<PAGE>
the Federal Reserve Board. Warrants for the remaining 9,196 shares,
which expire on December 23, 1996, will be exercisable as stock
options are exercised by the optionees.
In May 1993, Sumitomo exercised warrants for 19,901 shares at
$22.80 per share in connection with the Company's
40
<PAGE>
issuance of 125,000 shares of common stock to the ESOP in 1991 (see
note 11). No warrants were exercised in 1995 or 1994.
14. PENSION PLAN
The Bank has a defined benefit retirement plan covering
substantially all of its employees. The pension plan was curtailed in
1986, and accordingly, plan benefits were fixed as of that date.
Effective January 1, 1991, the Bank reactivated its defined benefit
retirement plan to address changes brought about by the Omnibus
Reconciliation Act of 1990 and to provide a more competitive employee
benefit program.
As a result of the reactivation, employees for whom benefits
became fixed in 1986 continued to accrue additional benefits under the
new formula that became effective on January 1, 1991. Employees who
were not participants at curtailment, but were subsequently eligible
to join, became participants effective January 1, 1991. Under the
reactivated plan, benefits are based upon the employees' years of
service and their highest average annual salaries in a 60-consec-
utive-month period of service, reduced by benefits provided from the
Bank's terminated money purchase pension plan.
The following table sets forth the plan's funded status and
amounts recognized in the consolidated balance sheets at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Estimated present value of vested benefits $(18,436) $(12,797)
Estimated present value of nonvested benefits (339) (382)
- --------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations (18,775) (13,179)
Value of future pay increases (5,353) (5,427)
- --------------------------------------------------------------------------------------------------------------------
Projected benefit obligations (24,128) (18,606)
Plan assets at fair value 18,835 16,087
- --------------------------------------------------------------------------------------------------------------------
Projected benefit obligations in excess of
plan assets (5,293) (2,519)
Unrecognized prior service cost 4,334 4,878
Unrecognized net loss resulting from changes
in plan experience and actuarial
assumptions 4,811 2,020
Unrecognized net asset being recognized
over 15 years (228) (273)
- --------------------------------------------------------------------------------------------------------------------
Prepaid pension cost included in other assets $3,624 $4,106
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.5
percent in 1995 and 8 percent in 1994. The weighted average rate of
compensation increase was 5 percent for 1995 and 1994.
41
<PAGE>
Net pension cost for the years ended December 31, 1995, 1994 and
1993 included the following components:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $739 $893 $829
Interest cost 1,597 1,518 1,349
Actual (gain) loss on plan assets (2,801) 899 (773)
Net amortization and deferral 1,989 (1,759) (136)
- ----------------------------------------------------------------------------------------------------------
Net pension cost $1,524 $1,551 $1,269
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the net
periodic pension cost was 8.0 percent, 6.9 percent, and 7.0 percent
in 1995, 1994 and 1993, respectively. The weighted average rate of
compensation increase was 5 percent, and the expected long-term rate
of return on plan assets was 9 percent for 1995, 1994 and 1993.
The reactivation of the defined benefit retirement plan on
January 1, 1991 resulted in an increase of $5,914,000 in the
unrecognized prior service cost, which is being amortized over a
period of 13 years.
In January 1995, the Bank established a Supplemental Executive
Retirement Plan ("SERP") which provides certain officers of the Bank
with supplemental retirement benefits in excess of limits imposed on
qualified plans by Federal tax law. The SERP, which is unfunded,
resulted in a net periodic pension cost in 1995, and a corresponding
accrued pension liability at December 31, 1995, of $502,000. Weighted
average discount rates and rates of compensation increase were
consistent with the rates used for the defined benefit retirement
plan.
The Bank also had a money purchase pension plan which covered all
full-time employees with at least one year of service. This plan was
curtailed on January 1, 1991 as part of the review of the employee
benefits program, which resulted in the reactivation of the defined
benefit retirement plan. Participants in the money purchase pension
plan became fully vested at the time of termination.
42
<PAGE>
15. PROFIT SHARING PLAN
The Bank's profit sharing plan covers substantially all employees
with at least one year of service. The board of directors has sole
discretion in determining the annual contribution to the plan, subject
to limitations of the Internal Revenue Code. Employees may elect to
receive up to 50% of their annual allocation in cash. The Bank made
contributions of $793,000, $784,000 and $897,000 for 1995, 1994 and
1993, respectively.
16. OPERATING LEASES
The Bank occupies a number of properties under leases which
expire on various dates through 2019 and, in most instances, provide
for renegotiation of rental terms at fixed intervals. These leases
generally contain renewal options for periods ranging from 5 to 20
years.
Total rent expense represents gross rent expense less the net
operating income from Company-owned properties of $1,181,000,
$1,121,000 and $1,038,000 for 1995, 1994 and 1993, respectively.
Net rent expense, charged to net occupancy expense, for all
operating leases is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total rent expense $4,789 $4,164 $4,325
Less sublease rental income (89) (83) (86)
- ----------------------------------------------------------------------------------------------------------
Net $4,700 $4,081 $4,239
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The following is a schedule of future minimum rental commitments
for all noncancellable operating leases that had initial lease terms
in excess of one year at December 31, 1995:
<TABLE>
<CAPTION>
Less
sublease Net
Rental rental rental
(Dollars in thousands) commitment income commitment
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year ending December 31:
1996 $3,570 $80 $3,490
1997 3,393 76 3,317
1998 3,106 67 3,039
1999 2,881 62 2,819
2000 2,729 - 2,729
Thereafter 16,333 - 16,333
- --------------------------------------------------------------------------------------------------------------------
Total $32,012 $285 $31,727
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
Rental commitments include $17,469,000 in commitments to CKSS by
the Bank for office space in the Central Pacific and Kaimuki Plazas.
In addition, the Bank and CPB Properties, Inc. lease certain
properties that they own. The following is a schedule of future
minimum rental income for those noncancellable operating leases that
had initial lease terms in excess of one year at December 31, 1995:
Minimum
(Dollars in thousands) rental income
- --------------------------------------------------------------------------------
Year ending December 31:
1996 $1,245
1997 1,026
1998 886
1999 831
2000 746
Thereafter 17,485
- --------------------------------------------------------------------------------
Total $22,219
- --------------------------------------------------------------------------------
In instances where the lease calls for a renegotiation of rental
payments, the lease rental payment in effect prior to renegotiation
was used throughout the remaining lease term.
17. OTHER EXPENSE
Components of other expense for the years ended December 31,
1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Charge card $2,047 $1,827 $1,648
Insurance 1,580 2,723 2,701
Advertising 1,200 1,200 1,202
Stationery and supplies 953 1,099 1,205
Other 7,765 7,634 6,320
- --------------------------------------------------------------------------------------------------------------------
Total $13,545 $14,483 $13,076
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
18. INCOME AND FRANCHISE TAXES
As discussed in note 1, the Company adopted SFAS No. 109 as of
January 1, 1993. The cumulative effect of this change in accounting
for income taxes of $208,000 was determined as of January 1, 1993 and
is reported separately in the consolidated statement of income for the
year ended December 31, 1993. Prior years' consolidated financial
statements have not been restated to apply the provisions of SFAS No.
109.
Components of income tax expense (benefit) for the years ended
December 31, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Current Deferred Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995:
Federal $9,025 $(1,676) $7,349
State 1,918 (233) 1,685
- -------------------------------------------------------------------------------------------------
Total $10,943 $(1,909) $9,034
- -------------------------------------------------------------------------------------------------
1994:
Federal $3,920 $3,225 $7,145
State 798 843 1,641
- -------------------------------------------------------------------------------------------------
Total $4,718 $4,068 $8,786
- -------------------------------------------------------------------------------------------------
1993:
Federal $8,672 $(557) $8,115
State 1,926 (15) 1,911
- -------------------------------------------------------------------------------------------------
Total $10,598 $(572) $10,026
- -------------------------------------------------------------------------------------------------
</TABLE>
Income tax expense amounted to $9,034,000, $8,786,000 and
$10,026,000 for 1995, 1994 and 1993, respectively. Income tax expense
for the periods presented differed from the "expected" tax expense
(computed by applying the U.S. Federal corporate tax rate of 35
percent to income before income taxes and cumulative effect of
accounting change) for the following reasons:
45
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $7,995 $7,794 $9,015
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (147) (194) (402)
State franchise tax, net of
Federal income tax benefit 1,095 1,067 1,242
Other 91 119 171
- --------------------------------------------------------------------------------------------------------------------
Total $9,034 $8,786 $10,026
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that gave rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $7,054 $6,404
Employee retirement benefits 1,404 1,115
Interest on nonaccrual loans 559 377
Accrued expenses 491 395
Other 77 87
- -----------------------------------------------------------------------------------------------------------------
Total deferred tax assets 9,585 8,378
- -----------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred gain on curtailed retirement plan 2,977 2,977
FHLB stock dividends received 1,795 1,425
Investment in unconsolidated subsidiary 1,051 832
Net deferred gain on investment securities 661 1,067
Deferred finance fees 558 238
Premises and equipment, principally
due to differences in depreciation 494 762
Accreted discounts receivable 390 328
Other 291 139
- -----------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 8,217 7,768
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax assets $1,368 $ 610
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
46
<PAGE>
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.
There was no valuation allowance for deferred tax assets as of
December 31, 1995 and 1994.
19. NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net income
by the weighted average number of shares outstanding of 5,240,000,
5,234,000 and 5,216,000 in 1995, 1994 and 1993, respectively. Stock
options and share purchase agreement warrants are considered common
stock equivalents for purposes of per-share data but have been
excluded from the computation since the dilutive effect is not
material.
47
<PAGE>
20. BRANCH ACQUISITION
In February 1994, the Bank acquired certain assets, including
$2,656,000 in loans, and assumed certain liabilities, including
$10,821,000 in deposits, of First Hawaiian Bank's Rice Branch in
Lihue, Kauai. The acquisition was accounted for using the purchase
method of accounting. The acquisition premium amounted to $67,000,
and the balance of $8,109,000 was received as a cash settlement.
21. CONTINGENT LIABILITIES AND OTHER COMMITMENTS
The Company and its subsidiary are involved in legal actions
arising in the ordinary course of business. Management, after
consultation with legal counsel, believes the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial statements.
In the normal course of business, there are outstanding
contingent liabilities and other commitments, such as unused letters
of credit, items held for collection and unsold travelers' checks,
which are not reflected in the accompanying consolidated financial
statements. Management does not anticipate any material losses as a
result of these transactions.
22. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit and
financial guarantees written. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract or
notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees
written is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
48
<PAGE>
At December 31, 1995 and 1994 financial instruments with
off-balance-sheet risk were as follows:
<TABLE>
<CAPTION>
Contract or notional
amount
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $351,072 $328,971
Standby letters of credit and
financial guarantees written 22,336 25,573
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counter-party. Collateral held
varies but may include accounts receivable, inventory, property, plant
and equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved
in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds collateral
supporting those commitments for which collateral is deemed necessary.
In October 1994, the FASB issued SFAS No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of Financial
Instruments." SFAS No. 119 amends SFAS No. 105, "Disclosures of
Information about Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentrations of Credit Risk," and
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments."
SFAS No. 119 requires the disclosure of comparable information for
options and other similar financial instruments that previously were
not within the scope of SFAS No. 105. SFAS No. 119 defines a
"derivative" financial instrument as a future, forward, swap, option
contract or other financial instrument with similar characteristics.
The Bank does not use futures, forwards, swaps or option contracts
either for trading or for any other purposes, with the exception of a
limited amount of foreign exchange forward contracts used to satisfy
customer and operational needs. Foreign exchange forward contracts
outstanding at December 31, 1995 and 1994 were not material.
49
<PAGE>
23. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," as amended by SFAS No. 119, requires that the Company
disclose estimated fair values for its financial instruments. Fair
value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Short-Term Financial Instruments
The carrying values of short-term financial instruments are
deemed to approximate fair values. Such instruments are considered
readily convertible to cash and include cash and due from banks,
interest-bearing deposits in other banks, Federal funds sold, accrued
interest receivable, due from customers on acceptances, Federal funds
purchased and securities sold under agreements to repurchase, bank
acceptances outstanding and accrued interest payable.
Investment Securities
The fair values of investment securities are based on market
price quotations received from securities dealers. Where quoted
market prices are not available, fair values are based on quoted
market prices of comparable securities. The equity investment in
common stock of the FHLB, which is redeemable for cash at par value,
is reported at its par value.
Loans
The fair values of loans are estimated based on discounted cash
flows of portfolios of loans with similar financial characteristics
including the type of loan, interest terms and repayment history. The
fair value of loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loans.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and
specific borrower information.
Deposit Liabilities
The fair values of deposits with no stated maturity, such as
noninterest-bearing demand deposits and interest-bearing demand and
savings accounts, is equal to the amount payable on demand. The fair
value of time deposits is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
Other Borrowed Funds and Employee Stock Ownership Plan Note Payable
The fair value of FHLB advances is estimated by discounting
scheduled cash flows over the contractual borrowing period at the
estimated market rate for similar borrowing arrangements. Due to the
short-term nature of the instruments, the fair value of other
short-term borrowings approximates carrying value. Likewise, the fair
<PAGE>
50
<PAGE>
value of the ESOP note payable, which repriced frequently as discussed
in note 11, was based on its carrying value.
Commitments to Extend Credit, Standby Letters of Credit and
Financial Guarantees Written
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. The fair value of standby
letters of credit and financial guarantees written is based on fees
currently charged for similar agreements.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------ ------------------------
Carrying Estimated Carrying Estimated
(Dollars in thousands) amount fair value amount fair value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $50,274 $50,274 $61,604 $61,604
Interest-bearing deposits in other banks 7,140 7,140 40,277 40,277
Investment securities 283,627 284,281 243,788 239,035
Loans 990,356 990,653 991,968 987,876
Accrued interest receivable 9,454 9,454 9,781 9,781
Due from customers on acceptances 1,443 1,443 1,459 1,459
Financial liabilities:
Deposits:
Noninterest-bearing deposits 170,494 170,494 162,776 162,776
Interest-bearing demand and savings deposits 515,242 515,242 552,998 552,998
Time deposits 452,583 453,780 366,135 364,581
Total deposits 1,138,319 1,139,516 1,081,909 1,080,355
Federal funds purchased and securities sold under
agreements to repurchase 2,500 2,505 67,355 67,355
FHLB advances 81,107 81,343 93,307 89,486
Other short-term borrowings 997 997 1,017 1,017
Bank acceptances outstanding 1,443 1,443 1,459 1,459
Accrued interest payable (included in other liabilities) 4,914 4,914 6,758 6,758
Employee stock ownership plan note payable - - 500 500
Off-balance-sheet financial instruments:
Commitments to extend credit 351,072 1,308 328,971 854
Standby letters of credit and financial guarantees written 22,336 168 25,573 192
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Limitations
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 Bank's entire
holdings of a particular financial instrument. Because no market
exists for a significant portion of the Bank'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
51
<PAGE>
estimates.
Fair value estimates are based on existing on- and off-bal-
ance-sheet financial instruments without attempting to estimate the
value of future business and the value of assets and liabilities that
are not considered financial instruments. For example, significant
assets and liabilities that are not considered financial assets or
liabilities include deferred tax assets, premises and equipment and
intangible assets. 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 many of
the estimates.
24. DECLARATION OF DIVIDENDS
The board of directors, at a special meeting held on December 5,
1995, declared a fourth quarter cash dividend of $0.24 per share in
addition to the three quarterly cash dividends previously declared for
a total of $0.92 per share for the year ended December 31, 1995.
25. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 1995, retained earnings of the parent company,
CPB Inc., included $82,587,000 of equity in undistributed income of
the Bank.
The Bank, as a Hawaii State chartered bank, is prohibited from
declaring or paying dividends greater than its retained earnings. As
of December 31, 1995, the retained earnings of the Bank totaled
$82,660,000.
Section 131 of the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") required the Federal Reserve Board, the
Federal Deposit Insurance Corporation, the Comptroller of the Currency
and the Office of Thrift Supervision (collectively, the "Agencies") to
develop a mechanism to take prompt corrective action to resolve the
problems of insured depository institutions. The final rules to
implement FDICIA's Prompt Corrective Action provisions became
effective on December 19, 1992. The regulatory capital standards used
to determine an insured depository institution's capital category
under the Prompt Corrective Action provisions represent minimum
standards that generally will be applied to all institutions.
However, the Agencies may impose higher minimum standards on
individual institutions or may downgrade an institution from one
capital category to a lower capital category because of safety and
soundness concerns.
The Prompt Corrective Action provisions impose certain
restrictions on institutions that are undercapitalized. The
restrictions become increasingly more severe as an institution's
capital category declines from "undercapitalized" to "critically
undercapitalized." As of December 31, 1995, the Bank's regulatory
capital ratios exceeded the minimum thresholds for a
"well-capitalized" institution.
<PAGE>
52
<PAGE>
Condensed financial statements, solely of the parent company, CPB
Inc., follow:
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1995 and 1994
(Dollars in thousands, except per share data) 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $844 $585
Investment securities:
Held to maturity - 2,577
Available for sale 7,823 4,926
Investment in and advances to subsidiary
bank, at equity in underlying net assets 125,125 114,588
Accrued interest receivable and other assets 55 106
- ------------------------------------------------------------------------------------------------------------------
Total assets $133,847 $122,782
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Employee stock ownership plan note payable $ - $500
Other liabilities 1,340 1,179
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 1,340 1,679
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value, authorized
1,000,000 shares, none issued - -
Common stock, no par value, stated value
$1.25 per share; authorized 25,000,000
shares; issued and outstanding 5,251,762
and 5,235,331 shares at December 31, 1995
and 1994, respectively 6,565 6,544
Surplus 45,337 45,178
Retained earnings 80,370 71,386
Unrealized gain (loss) on investment
securities net of taxes 235 (1,505)
- ------------------------------------------------------------------------------------------------------------------
132,507 121,603
Employee stock ownership plan shares
purchased with debt - (500)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 132,507 121,103
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $133,847 $122,782
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Income
Years ended December 31, 1995, 1994
and 1993
(Dollars in thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary bank $4,782 $4,623 $4,516
Interest income:
Interest on interest-bearing
deposits in other banks - - 1
Interest on investment securities 333 254 209
Interest from subsidiary bank 55 30 19
Investment securities gains 60 - -
- ------------------------------------------------------------------------------------------------------------------
Total income 5,230 4,907 4,745
Total expenses 281 251 225
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and
equity in undistributed income of
subsidiary bank 4,949 4,656 4,520
Income taxes 65 13 1
- ------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiary bank 4,884 4,643 4,519
Equity in undistributed income of
subsidiary bank 8,924 8,840 11,421
- ------------------------------------------------------------------------------------------------------------------
Net income $13,808 $13,483 $15,940
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows - Years ended December 31, 1995, 1994 and 1993
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $13,808 $13,483 $15,940
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income tax expense - 34 2
Equity in undistributed income of subsidiary bank (8,924) (8,840) (11,421)
Other,net 130 11 46
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,014 4,688 4,567
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease in interest-bearing deposits in other banks - - 3,019
Proceeds from maturities of investment securities held to maturity 2,560 65,200
Purchases of investment securities held to maturity - (2,666) (68,200)
Proceeds from maturities of investment securities available for sale - 34,700 -
Purchases of investment securities available for sale (2,844) (32,693) -
Investment in and advances to subsidiary bank 65 (19) (2)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (219) (678) 17
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 180 44 610
Dividends paid (4,716) (4,606) (4,483)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,536) (4,562) (3,873)
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 259 (552) 711
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At beginning of year 585 1,137 426
- --------------------------------------------------------------------------------------------------------------------
At end of year $844 $585 $1,137
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
26. ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS No. 121, effective for fiscal years beginning after
December 15, 1995, establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. The applica-
tion of SFAS No. 121, effective from January 1, 1996, is not expected
to have a material impact to the consolidated financial statements of
the Company.
In May 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights, an amendment of FASB Statement No. 65."
SFAS No. 122, effective on a prospective basis for fiscal years
beginning after December 15, 1995, requires mortgage banking
enterprises and other entities (i.e., commercial banks and thrift
institutions that conduct operations that are substantially similar to
the primary operations of a mortgage banking enterprise) to recognize
as separate assets the rights to service mortgage loans for others.
SFAS No. 122 also requires the assessment of capitalized mortgage
servicing rights for impairment to be based on the current fair value
55
<PAGE>
of those rights. The application of SFAS No. 122, effective from
January 1, 1996, is not expected to have a material impact to the
consolidated financial statements of the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123, effective for fiscal years
beginning after December 15, 1995, establishes a fair value based
method of accounting for stock-based compensation, but does not
require an entity to adopt the new method for purposes of preparing
its basic financial statements. For entities not adopting the new
method, SFAS No. 123 requires that they disclose in their footnotes
pro forma net income and earnings per share information as if the fair
value based method had been adopted. The Company plans to comply with
the disclosure requirements of SFAS No. 123 in its consolidated
financial statements for 1996.
56
<PAGE>
27. QUARTERLY INFORMATION (UNAUDITED)
A summary of unaudited quarterly operating results for the years
ended December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) First quarter Second quarter Third quarter Fourth quarter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995:
Interest income $25,964 $27,458 $27,500 $26,880 $107,802
Net interest income 15,372 16,092 15,908 15,685 63,057
Provision for loan losses 825 825 825 825 3,300
Net interest income after provision for loan losses 14,547 15,267 15,083 14,860 59,757
Income before income taxes 5,694 5,840 6,143 5,165 22,842
Net income 3,442 3,523 3,711 3,132 13,808
Net income per share 0.66 0.67 0.71 0.60 2.64
- ---------------------------------------------------------------------------------------------------------------------------
1994:
Interest income $22,486 $22,779 $23,568 $24,960 $93,793
Net interest income 15,318 15,406 15,628 15,841 62,193
Provision for loan losses 825 825 825 825 3,300
Net interest income after provision for loan losses 14,493 14,581 14,803 15,016 58,893
Income before income taxes 5,127 5,808 5,814 5,520 22,269
Net income 3,126 3,480 3,546 3,331 13,483
Net income per share 0.60 0.66 0.68 0.64 2.58
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
Independent Auditors' Report
The Stockholders and Board of Directors of CPB Inc.:
We have audited the accompanying consolidated balance sheets of
CPB Inc. and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period
ended December 31, 1995. 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 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of CPB Inc. and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements,
the Company changed its methods of accounting for impaired loans in
1995, investment securities in 1994 and income taxes in 1993.
KPMG PEAT MARWICK LLP
Honolulu, Hawaii
February 23, 1996
58
<PAGE>
Common Stock
Price Range & Dividends
The Company's common stock is traded on the Nasdaq National
Market ("Nasdaq") under the symbol "CPBI." The following table sets
forth quarterly per share information for the high and low sales
prices of the common stock for 1995 and 1994 as reported by Nasdaq and
cash dividends declared for those years.
<TABLE>
<CAPTION>
Cash
dividends
High Low declared
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995:
First quarter $25.69 $23.50 $0.22
Second quarter 27.00 23.50 0.22
Third quarter 35.50 25.50 0.24
Fourth quarter 33.75 30.50 0.24
- ------------------------------------------------------------------------------------------------------------------
Year $35.50 $23.50 $0.92
- ------------------------------------------------------------------------------------------------------------------
1994:
First quarter $27.25 $24.75 $0.22
Second quarter 29.00 24.50 0.22
Third quarter 28.75 24.75 0.22
Fourth quarter 26.00 22.25 0.22
- ------------------------------------------------------------------------------------------------------------------
Year $29.00 $22.25 $0.88
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The last sales price of the common stock as of January 31, 1996
as reported by Nasdaq was $32.75 per share.
On January 31, 1996, there were approximately 2,407 stockholders
of record of the common stock, excluding individuals and institutions
for whom shares were held in the names of nominees and brokerage
firms.
The Company and its predecessor have paid regular semi-annual
cash dividends on the common stock since 1958. Beginning in 1988, the
Company commenced paying regular quarterly cash dividends. It is the
present intention of the Company's board of directors ("Board") to
continue to pay regular quarterly cash dividends. However, since
substantially all of the funds available for the payment of dividends
are derived from Central Pacific Bank, future dividends will depend
upon the Bank's earnings, its financial condition, its capital needs,
applicable governmental policies and regulations and such other
matters as the Board may deem to be appropriate.
59
<PAGE>
APPENDIX I
BAR GRAPHS:
Deposits (In Millions)
91 $991
92 1,074
93 1,078
94 1,082
95 1,138
Net Loans (In Millions)
91 $882
92 886
93 929
94 974
95 970
Net Income (In Millions)
91 $12.7
92 14.6
93 15.9
94 13.5
95 13.8
60
<PAGE>
APPENDIX II
Bar Graphs:
Return on Average Assets (Percent)
91 1.21
92 1.23
93 1.29
94 1.03
95 1.00
Return on Average Stockholders Equity (Percent)
91 15.11
92 15.36
93 14.88
94 11.48
95 10.79
Net Interest Margin
Taxable Equivalent (Percent)
91 5.48
92 5.31
93 5.42
94 5.18
95 4.95
61
<PAGE>
Exhibit 23
The Board of Directors
CPB Inc.:
We consent to incorporation by reference in the registration
statements No. 33-11462 on Form S-8 of CPB Inc. of our report
dated February 23, 1996, relating to the consolidated balance
sheets of CPB Inc. and subsidiary as of December 31, 1995 and
1994, and the related consolidated statements of income, changes
in stockholders' equity, and cash flow for each of the years in
the three-year period ended December 31, 1995, which report is
contained in the December 31, 1995 annual report on Form 10-K of
CPB Inc.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
March 28, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE YEAR ENDED
DECEMBER
31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 50,274
<INT-BEARING-DEPOSITS> 7,140
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,693
<INVESTMENTS-CARRYING> 283,627
<INVESTMENTS-MARKET> 284,281
<LOANS> 990,356
<ALLOWANCE> 20,156
<TOTAL-ASSETS> 1,371,909
<DEPOSITS> 1,138,319
<SHORT-TERM> 3,497
<LIABILITIES-OTHER> 15,036
<LONG-TERM> 81,107
<COMMON> 6,565
0
0
<OTHER-SE> 125,942
<TOTAL-LIABILITIES-AND-EQUITY> 1,371,909
<INTEREST-LOAN> 91,134
<INTEREST-INVEST> 14,334
<INTEREST-OTHER> 2,334
<INTEREST-TOTAL> 107,802
<INTEREST-DEPOSIT> 36,860
<INTEREST-EXPENSE> 44,745
<INTEREST-INCOME-NET> 63,057
<LOAN-LOSSES> 3,300
<SECURITIES-GAINS> 61
<EXPENSE-OTHER> 47,691
<INCOME-PRETAX> 22,842
<INCOME-PRE-EXTRAORDINARY> 13,808
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,808
<EPS-PRIMARY> 2.64
<EPS-DILUTED> 2.64
<PAGE>
<PAGE>
<YIELD-ACTUAL> 4.95
<LOANS-NON> 3,583
<LOANS-PAST> 9,189
<LOANS-TROUBLED> 5,974
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,296
<CHARGE-OFFS> 1,821
<RECOVERIES> 381
<ALLOWANCE-CLOSE> 20,156
<ALLOWANCE-DOMESTIC> 14,500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,656
<PAGE>
</TABLE>
CPB INC.
220 South King Street
Honolulu, Hawaii 96813
(808) 544-0500
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
April 23, 1996
INTRODUCTION
This Proxy Statement is furnished in connection with the
solicitation of proxies ("Proxies") by the Board of Directors of
CPB Inc. (the "Company") for use at the Annual Meeting of
Shareholders (the "Meeting") of the Company to be held on the
third floor of the Central Pacific Plaza Building, 220 South King
Street, Honolulu, Hawaii 96813, on Tuesday, April 23, 1996, at
10:00 a.m., Hawaii time, and at any and all adjournments thereof.
This Proxy Statement and accompanying Notice will be mailed to
shareholders on or about March 25, 1996.
Matters to be Considered
The matters to be considered and voted upon at the Meeting
will be:
1. ELECTION OF DIRECTORS. To elect three persons to the
Board of Directors for a term of three years and to serve until
their successors are elected and qualified.
2. RATIFICATION OF THE APPOINTMENT OF INDEPENDENT
ACCOUNTANTS. To ratify the appointment of KPMG Peat Marwick LLP
as the Company's independent accountants for the fiscal year
ending December 31, 1996.
3. OTHER BUSINESS. To transact such other business as may
properly come before the Meeting and at any and all adjournments
thereof.
Voting and Revocability of Proxies
A Proxy for use at the Meeting is enclosed. Any shareholder
who executes and delivers such Proxy has the right to revoke it
at any time before it is exercised by filing with the Secretary
of the Company an instrument revoking it or a duly executed Proxy
bearing a later date. It may also be revoked by attendance at
the Meeting and election to vote in person thereat. Subject to
such revocation, all shares represented by a properly executed
Proxy received in time for the Meeting will be voted by the Proxy
<PAGE>
Holders in accordance with the instructions on the Proxy. If no
1
<PAGE>
instructions are specified with respect to matters to be acted
upon, the shares represented by the Proxy will be voted "FOR" the
election of all nominees as directors and "FOR" ratification of
the appointment of KPMG Peat Marwick LLP as the Company's
independent accountants for the fiscal year ending December 31,
1996. It is not anticipated that any matters will be presented
at the Meeting other than as set forth in the accompanying Notice
of the Meeting. If any other matters are presented properly at
the Meeting, however, the Proxy will be voted by the Proxy
Holders in accordance with the recommendations of the Board of
Directors.
If you hold your shares of common stock, no par value
("Common Stock") in "street name" and you fail to instruct your
broker or nominee as to how to vote your Common Stock, your
broker or nominee may, in its discretion, vote your Common Stock
"FOR" the election of the Board of Directors' nominees and "FOR"
the proposal to ratify the appointment of KPMG Peat Marwick LLP
as the Company's independent accountants for the fiscal year
ending December 31, 1996.
Cost of Solicitations of Proxies
This solicitation of Proxies is made on behalf of the Board
of Directors of the Company and the Company will bear the costs
of solicitation. The expense of preparing, assembling, printing
and mailing this Proxy Statement and the materials used in this
solicitation of Proxies also will be borne by the Company. It is
contemplated that Proxies will be solicited principally through
the mail, but directors, officers and regular employees of the
Company or its subsidiary, Central Pacific Bank (the "Bank"), may
solicit Proxies personally or by telephone. Although there is no
formal agreement to do so, the Company may reimburse banks,
brokerage houses and other custodians, nominees and fiduciaries
for their reasonable expenses in forwarding these proxy materials
to their principals. The Company does not intend to utilize the
services of other individuals or entities not employed by or
affiliated with the Company in connection with the solicitation
of Proxies.
Outstanding Securities and Voting Rights
The close of business on February 29, 1996 has been fixed as
the record date ("Record Date") for the determination of the
shareholders of the Company entitled to notice of and to vote at
the Meeting. There were 5,263,222 shares of Common Stock issued
and outstanding on the Record Date.
Each holder of Common Stock will be entitled to one vote, in
person or by proxy, for each share of Common Stock standing in
his or her name on the books of the Company as of the Record Date
on any matter submitted to the vote of the shareholders, except
2
<PAGE>
that in connection with the election of directors, the shares are
entitled to be voted cumulatively, provided that not less than
forty-eight hours prior to the time fixed for the Meeting, a
written request for such cumulative vote has been delivered to
the Secretary of the Company. If a shareholder has given such
request, all shareholders may cumulate their votes for candidates
in nomination. Cumulative voting entitles a shareholder to give
one nominee as many votes as is equal to the number of directors
to be elected multiplied by the number of shares of stock owned
by such shareholder, or to distribute his or her votes on the
same principle between two or more nominees as he or she sees
fit. Nominees receiving the highest number of votes on the
foregoing basis up to the total number of directors to be elected
will be elected directors. Accordingly, abstentions from voting
or votes withheld from the election of directors will have no
effect in an uncontested election. Discretionary authority to
cumulate is hereby solicited by the Board of Directors and return
of the Proxy shall grant such authority.
The proposal to ratify the appointment of KPMG Peat Marwick
LLP as the Company's independent accountants requires the
affirmative vote of shareholders holding not less than a majority
of the shares of the Company's Common Stock represented and
entitled to vote at the Meeting. Accordingly, an abstention from
voting on the proposal to ratify the appointment of KPMG Peat
Marwick LLP will have the effect of a vote "AGAINST" the
proposal.
Principal Shareholders
As of February 29, 1996, the following entities were the
only entities known to Management of the Company to beneficially
own more than five percent of the Company's outstanding Common
Stock.
3
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of
Title of Name and Address Beneficial Percent
Class of Beneficial Owner Ownership of Class
- -------- ------------------- ---------- --------
<S> <C> <C>
Common The Sumitomo Bank, Limited 722,801<F1> 13.73%<F2>
6-5 Kitahama 4-Chome,
Chuo-ku
Osaka, Japan
Common The Committee of the Central 540,562<F3> 10.27%
Pacific Bank Employee Stock
Ownership Plan
220 South King Street
Honolulu, Hawaii 96813
Common State of Wisconsin 275,000<F4> 5.22%
Investment Board
P.O. Box 7842
Madison, Wisconsin 53707
<FN>
<F1> Includes 11,051 additional shares issued pursuant to the
Share Purchase Agreement between the Company and The
Sumitomo Bank, Limited ("Sumitomo") and based upon the
exercise of Stock Options by participants of the Stock
Option Plan. See "ELECTION OF DIRECTORS -- Transactions."
<F2> This percentage is computed as if the 11,051 shares
described in footnote 1 were outstanding. However, the
11,051 shares are not deemed to be outstanding for the
purpose of computing the percentage of Common Stock owned by
any other person.
<F3> Under the terms of the Employee Stock Ownership Plan of
Central Pacific Bank ("ESOP"), shares of the Common Stock of
the Company are held in trust by Central Pacific Bank, the
trustee under the ESOP Trust ("Trustee"), for the exclusive
benefit of the participants. The Trustee is the
recordholder of the Common Stock held by the ESOP; however,
the Committee of the ESOP (the "ESOP Committee"), which
consists of five members, gives the Trustee investment
instructions with respect to all of the ESOP assets and
voting instructions with respect to those shares held by the
ESOP for which the voting rights have not passed through to
participants. At February 29, 1996, all of the shares of
Common Stock held by the ESOP had been allocated to the
accounts of participants. Although the members of the ESOP
Committee share among themselves as committee members
dispositive power, subject to the terms of the ESOP, over
all of the shares held by the ESOP and, therefore, pursuant
to the applicable regulations promulgated pursuant to the
Securities Exchange Act of 1934, as amended, are technically
the beneficial owners of such shares, the actual beneficial
owners are the employees who participate in the ESOP. The
members of the ESOP Committee, therefore, disclaim
4
<PAGE>
beneficial ownership of such shares held in trust which are
otherwise attributable to them by virtue of serving on such
ESOP Committee.
<F4> Based upon information provided by this shareholder.
</TABLE>
5
<PAGE>
ELECTION OF DIRECTORS
Under the Company's Restated Articles of Incorporation and
Bylaws, which provide for a "classified" Board, three directors
(out of a present total of nine) are to be elected at the Meeting
to serve three-year terms expiring at the 1999 Annual Meeting of
Shareholders and until their respective successors are elected
and qualified. The Company's Bylaws currently provide for nine
directors, three each serving as Class I, Class II and Class III
directors. Nominees for the election at the Meeting will serve
as Class II directors.
There are no family relationships among directors or
executive officers of the Company, and, except as set forth
below, as of the date hereof, no directorships are held by any
director with a company which has a class of securities
registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), or subject to the
requirements of Section 15(d) of the Exchange Act or any company
registered as an investment company under the Investment Company
Act of 1940. Mr. Stanley Hong, a director of the Company, serves
as director of the following companies: Capital Investment of
Hawaii, Inc., First Insurance Company of Hawaii, Ltd., Theo H.
Davies & Co., Ltd. and Hawaiian Tax Free Trust: Pacific Capital
Funds.
All nominees have indicated their willingness to serve and
unless otherwise instructed, Proxies will be voted for all of the
nominees. However, in the event that any of them should be
unable to serve, the Proxy Holders named on the enclosed Proxy
Card will vote in their discretion for such persons as the Board
of Directors may recommend.
The following table sets forth certain information, as of
February 29, 1996, with respect to each of the directors,
nominees and the Named Executives (as defined below) as well as
all continuing directors and executive officers of the Company,
as a group:
<TABLE>
<CAPTION>
Common Stock
Beneficially
First Year Owned on February
Elected or 29, 1996<F2>
Principal Appointed as -----------------------------------
Occupation Officer or Percent
for the Past Director of of Term
Name Five Years Age the Company<F1> Number Class<F3> Expires
- ----------- ---------------- ---- --------------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
DEVENS, Vice Chairman of 64 1980 2,221<F4> * 1997
Paul the Board of
(Class III Company; Attorney
Director) at Law; Of Counsel
(1994 - present),
Partner (1975 - 1994),
6
<PAGE>
Devens, Lo, Nakano
Saito, Lee & Wong
GUILD, Retired, former 61 1980 1,056 * 1996
Alice F. Managing Director, Iolani
(Class II Palace (1986-1991)
Director,
Nominee)
HIROTA, President, Sam O. 55 1980 2,900<F6> * 1998
Dennis I., Hirota, Inc. - Engineering
Ph.D. and Surveying (1986-present);
(Class I Registered Professional
Director) Engineer<F5>
HONG, Attorney-at-Law (1995- 59 1993 200<F7> * 1997
Stanley present); Senior Vice
(Class III President -- Properties,
Director) McCormack Corp.
(1993-1994); President
and Chief Executive
Officer, Hawaii Visitors
Bureau (1984-1993)
HOTTA, Senior Managing Director 57 1993 -- <F8> * 1998
Kensuke and Executive Committee
(Class I Member in Charge of Inter-
Director) national Banking at Head
Office, The Sumitomo Bank,
Limited (1993-present);
Senior Managing Director
and Member of the Executive
Committee of The Sumitomo
Bank, Limited (1992-1993);
Managing Director of The
Sumitomo Bank, Limited
(1990-1992)
NAGAMINE, President, Flamingo 54 1983 5,280<F9> * 1996
Daniel M. Enterprises, Inc.
(Class II (1985-present); General
Director, Partner, Flamingo
Nominee) Downtown, a limited
partnership (1981-
present); Certified
Public Accountant
7
<PAGE>
SAITO, Chairman and Chief 60 1989 16,697<F11> * 1998
Joichi Executive Officer of Company
(Class I) (1996-present); President
Director) of Company (1992-
1995); Executive Vice
President of Company
(1988-1992); Chairman
of the Board and Chief
Executive Officer of Bank
(1996-present); President
and Chief Operating
Officer of Bank (1989-1995);
<F5><F10>
SATOH, Retired; Chairman of the 67 1975 29,991<F13> * 1997
Yoshiharu Board and Chief Executive
(Class III Officer of Company
Director) (1992-1995); Chairman
of the Board, President
and Chief Executive
Officer of Company
(1990-1992); President
and Chief Executive
Officer of Company
(1982-1990); Chairman
of the Board and Chief
Executive Officer
of Bank (1988-1995)
<F5><F12>
SHIBUYA, President of Company 54 1995 388<F14> * 1996
Naoaki (1996-present);
(Class II Executive Vice President
Director, of Company (1993-1995);
Nominee) Vice President of Company
(1993-1995); President and
Chief Operating Officer of
Bank (1996-present);
Executive Vice President
of Bank (1993-1995); Executive
Vice President of The
Sumitomo Bank of California
(1989-1993)<F5>
8
<PAGE>
IMAMURA, Vice President and 49 1991 5,902<F15> * N/A
Austin Y. Secretary of Company
(1991-present); Executive
Vice President and
Secretary of Bank (1991-
present); Senior Vice
President and Secretary
of Bank (1991); Senior
Vice President of Bank
(1987-1991);
KANDA, Vice President and Treasurer 47 1991 5,450<F16> * N/A
Neal K. of the Company (1991-present);
Executive Vice President
and Controller of
Bank (1993-present);
Senior Vice President
and Controller of
Bank (1990-1993)
All Directors 90,689<F17> 1.72%
and Executive
Officers,
as a Group
(11 persons)
* Less than 1%.
9
<PAGE>
<FN>
<F1> All directors of the Company are also directors of the
Bank. Dates prior to the formation of the Company in
1982 indicate the year first appointed director of the
Bank. Dr. Hirota, Mrs. Guild and Messrs. Devens,
Nagamine, and Satoh commenced service as directors of the
Company on February 1, 1982, the date of formation of the
Company. Dr. Hirota, Mrs. Guild and Mr. Nagamine served
as directors of the Company until April 23, 1985 when the
Company's shareholders adopted a classified Board and
reduced the number of directors to nine. However, Dr.
Hirota, Mrs. Guild and Mr. Nagamine continued to serve on
the Bank's Board until they were reelected to the
Company's Board in 1986, 1990, and 1990, respectively.
Mr. Hong has been a director of the Bank since 1985. Mr.
Shibuya has been a director of the Bank since 1994.
<F2> Except as otherwise noted below, each person has sole
voting and investment powers with respect to the shares
listed.
<F3> In computing the percentage of shares beneficially owned,
the number of shares which the person (or group) has a
right to acquire within 60 days after February 29, 1996
are deemed outstanding for the purpose of computing the
percentage of Common Stock beneficially owned by that
person (or group) but are not deemed outstanding for the
purpose of computing the percentage of shares
beneficially owned by any other person.
<F4> Includes 1 share held of record by Devens, Lo, Nakano,
Saito, Lee and Wong, a partnership for which Mr. Devens
is of counsel.
<F5> Messrs. Hirota, Saito, Satoh and Shibuya are also
directors of CPB Properties, Inc., a wholly-owned
subsidiary of the Bank.
<F6> Includes 1,180 shares for which Dr. Hirota has shared
voting and investment powers with his wife, Kathryn
Hirota.
<F7> Includes 200 shares for which Mr. Hong has shared voting
and investment powers with his wife, Karen Ho Hong.
<F8> Does not include 711,750 shares held of record by
Sumitomo, of which Mr. Hotta is a Senior Managing
Director, and 11,051 shares which Sumitomo has the right
to acquire by the exercise of warrants. With respect to
shares described in the preceding sentence, Mr. Hotta
disclaims any beneficial ownership.
10
<PAGE>
<F9> Includes 5,280 shares for which Mr. Nagamine has shared
voting and investment powers with his wife, Maxine
Nagamine.
<F10> Mr. Saito was formerly an officer of Sumitomo and is now
retired from Sumitomo.
<F11> Includes 1,500 shares for which Mr. Saito has shared
voting and investment powers with his wife, Yoko Saito,
9,680 shares which Mr. Saito has the right to acquire by
the exercise of stock options vested pursuant to the
Company's 1986 Stock Option Plan and 5,517 shares
allocated to Mr. Saito's account under the Bank's ESOP.
<F12> Mr. Satoh was formerly an officer of Sumitomo and is now
retired from Sumitomo.
<F13> Includes 10,144 shares held in the name of Yoshiharu
Satoh Revocable Living Trust, Yoshiharu Satoh Trustee,
and 6,904 shares held in the name of Ikuko Satoh
Revocable Living Trust, Ikuko Satoh Trustee, for which
Mr. Satoh has shared voting and investment powers with
his wife, Ikuko Satoh. Also includes 12,943 shares
allocated to Mr. Satoh's account under the Bank's ESOP.
<F14> Includes 200 shares for which Mr. Shibuya has shared
voting and investment powers with his wife, Tsuneko
Shibuya and 188 shares allocated to Mr. Shibuya's account
under the Bank's ESOP.
<F15> Includes 1,000 shares for which Mr. Imamura has shared
voting and investment powers with his wife, Patricia
Imamura, and 4,902 shares allocated to Mr. Imamura's
account under the Bank's ESOP.
<F16> Includes 1,470 shares allocated to Mr. Kanda's account
under the Bank's ESOP. Also includes 3,780 share which
Mr. Kanda has the right to acquire by the exercise of
stock options vested pursuant to the Company's 1986 Stock
Option Plan.
<F17> Includes 16,065 shares for which certain directors and
officers have shared voting and investment powers, 13,640
shares which members of the group have the right to
acquire by the exercise of stock options vested pursuant
to the Company's 1986 Stock Option Plan and 25,020 shares
allocated to the accounts of executive officers under the
Bank's ESOP. Also includes 20,604 shares attributable to
members of the group who serve on the ESOP Committee
which have been released from the suspense account but
have not yet been allocated to the accounts of
participants, but does not include 519,958 shares held of
11
<PAGE>
record by the ESOP Trustee as to which voting rights have
passed through to participants and as to which such ESOP
Committee members disclaim beneficial ownership.
</TABLE>
12
<PAGE>
The Board of Directors and Committees
The Board of Directors of the Company has various standing
committees, including an Executive Committee, a Nominating
Committee, an Audit Committee and a Stock Option Plan Committee.
The Board has no standing Compensation Committee.
The Executive Committee, which did not hold any meetings
during 1995, is chaired by Mr. Devens, and Messrs. Hirota and
Satoh are members. The purpose of the Executive Committee is,
among other things, to manage the business affairs of the Company
while not in conflict with specific directives that may be given
by the Board of Directors.
The Nominating Committee held one meeting during 1995. The
committee is chaired by Mr. Devens, and Messrs. Hirota, Hong,
Nagamine and Satoh are members. It is responsible for
recommending nominees for directors of the Company. It will
consider nominees for election at the 1997 Annual Meeting of
Shareholders recommended by shareholders if such recommendations
are received in writing prior to December 15, 1996. Shareholder
recommendations should be addressed to the Company's Secretary,
P.O. Box 3590, Honolulu, Hawaii 96811.
The Audit Committee held one meeting during 1995. The
committee is chaired by Mr. Nagamine, and Messrs. Devens, Hirota
and Mrs. Guild are members. The primary functions of the Audit
Committee are to review various financial and audit reports and
to make recommendations concerning the appointment of independent
accountants.
The Stock Option Plan Committee held one meeting during
1995. This committee is chaired by Dr. Hirota, and Mr. Devens
and Mrs. Guild are members. The committee's primary functions
include determining individuals to whom options will be granted
and their terms and making periodic reports to the Board of
Directors as to the status of the Company's Stock Option Plan.
During the fiscal year ended December 31, 1995, the Board of
Directors of the Company held a total of six meetings. All of
the persons who were directors of the Company during 1995
attended at least 75% of the aggregate of (1) the total number of
such Board meetings and (2) the total number of meetings held by
all committees of the Board on which they served during the year,
except for Mr. Hotta.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE
BOARD OF DIRECTORS' NOMINEES.
13
<PAGE>
Compensation of Directors and Executive Officers
Executive Compensation
Summary of Cash and Certain Other Compensation
The following table sets forth certain summary information
concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the
four other executive officers of the Company (determined as of
the end of the last fiscal year) whose annual salary and bonus
exceeded $100,000 in 1995 (the "Named Executives") for each of
the fiscal years ended December 31, 1995, 1994 and 1993:
14
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
------------
Awards
------------ All Other
Name and Principal Position Year Salary Bonus Options (#) Compensation
- --------------------------- ----- ------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Yoshiharu Satoh 1995 $392,902 <F2> $446,510 -- $19,639<F3>
Chairman of the Board
and Chief 1994 363,328 -- -- 19,965<F4>
Officer<F1>
1993 320,000 200 -- 36,444<F5>
Joichi Saito 1995 244,992 -- -- 19,273<F6>
President<F7>
1994 236,661 -- -- 19,637<F8>
1993 213,333 200 -- 32,793<F9>
Naoaki Shibuya 1995 160,000 -- 9,500 18,648<F10>
Executive Vice President<F11>
1994 156,667 -- -- 35<F12>
1993 6,250 200 -- --
Austin Y. Imamura 1995 150,000 -- -- 18,447<F13>
Vice President and
Secretary 1994 145,667 -- -- 18,353<F14>
1993 133,000 200 -- 20,106<F15>
Neal K. Kanda 1995 112,000 -- -- 13,761<F16>
Vice President
and Treasurer 1994 109,333 -- -- 13,763<F17>
1993 97,167 200 -- 14,681<F18>
<FN>
<F1> Mr. Satoh retired from the Company as of December 31,
1995.
<F2> Includes $12,902 of accumulated vacation pay.
<F3> Includes contributions to the Bank's Cash or Deferred
Arrangement ("CODA")/Profit Sharing Plan, the Bank's ESOP,
the Bank's Split Dollar Life Insurance Plan and the SERP
for the account of Mr. Satoh of $7,294, $10,879, and
$1,466, respectively.
<F4> Includes contributions to the Bank's CODA/Profit Sharing
Plan, the Bank's ESOP and the Bank's Split Dollar Life
Insurance Plan for the account of Mr. Satoh of $7,500,
$11,155, and $1,310 respectively.
<F5> Includes contributions to the Bank's Profit Sharing Plan,
the Bank's ESOP and the Bank's Split Dollar Life Insurance
Plan for the account of Mr. Satoh of $14,073, $21,211, and
$1,160 respectively.
15
<PAGE>
<F6> Includes contributions to the Bank's CODA/Profit Sharing
Plan, the Bank's ESOP and the Bank's Split Dollar Life
Insurance Plan for the account of Mr. Saito of $7,294,
$10,879, and $1,100, respectively.
<F7> Mr. Saito was named Chairman of the Board and Chief
Executive Officer of the Company effective January 1, 1996
by the Board of Directors.
<F8> Includes contributions to the Bank's CODA/Profit Sharing
Plan, the Bank's ESOP and the Bank's Split Dollar Life
Insurance Plan for the account of Mr. Saito of $7,500,
$11,155, and $982, respectively.
<F9> Includes contributions to the Bank's Profit Sharing Plan,
the Bank's ESOP and the Bank's Split Dollar Life Insurance
Plan for the account of Mr. Saito of $12,730, $19,187, and
$876, respectively.
<F10> Includes contributions to the Bank's CODA/Profit Sharing
Plan, the Bank's ESOP and the Bank's Split Dollar Life
Insurance Plan for the account of Mr. Shibuya of $7,294,
$10,879, and $475, respectively.
<F11> Mr. Shibuya was named President of the Company on January
1, 1996 by the Board of Directors.
<F12> Represents a contribution to the Bank's Split Dollar Life
Insurance Plan for the account of Mr. Shibuya.
<F13> Includes contributions to the Bank's CODA/Profit Sharing
Plan, the Bank's ESOP and the Bank's Split Dollar Life
Insurance Plan for the account of Mr. Imamura of $7,294,
$10,879 and $274, respectively.
<F14> Includes contributions to the Bank's CODA/Profit Sharing
Plan, the Bank's ESOP and the Bank's Split Dollar Life
Insurance Plan for the account of Mr. Imamura of $7,284,
$10,833 and $236, respectively.
<F15> Includes contributions to the Bank's Profit Sharing Plan,
the Bank's ESOP and the Bank's Split Dollar Life Insurance
Plan for the account of Mr. Imamura of $7,937, $11,962,
and $207, respectively.
<F16> Includes contributions to the Bank's CODA/Profit Sharing
Plan, the Bank's ESOP and the Bank's Split Dollar Life
Insurance Plan for the account of Mr. Kanda of $5,446,
$8,123, and $192, respectively.
<F17> Includes contributions to the Bank's CODA/Profit Sharing
Plan, the Bank's ESOP and the Bank's Split Dollar Life
16
<PAGE>
Insurance Plan for the account of Mr. Kanda of $5,467,
$8,131 and $165, respectively.
<F18> Includes contributions to the Bank's Profit Sharing Plan,
the Bank's ESOP and the Bank's Split Dollar Life Insurance
Plan for the account of Mr. Kanda of $5,798, $8,739 and
$144, respectively.
</TABLE>
Option Grants
The following options were granted during 1995 to the
Named Executives:
<TABLE>
<CAPTION>
Option<F1> Grants in 1995
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
Individual Grants for Option Term <F3>
------------------------------------------------------------ -------------------------
% of Total Options Exercise or
Options Granted to Base Price Expiration 5% 10%
Name Granted (#) Employees in 1995 ($/#) Date ($) ($)
- ---------------- ------------ ----------------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
SATOH, Yoshiharu -- -- -- -- -- --
SAITO, Joichi -- -- -- -- -- --
SHIBUYA, Naoaki 9,500<F2> 13.6% $26.08 6/14/2005 $155,800 $394,820
IMAMURA, Austin -- -- -- -- -- --
KANDA, Neal K. -- -- -- -- -- --
<FN>
<F1> The Company has no compensation plans pursuant to which
stock appreciation rights may be granted.
<F2> The options were granted pursuant to the Stock Option Plan.
The options become exercisable in annual installments of 25%
on each of the first, second, third, fourth and fifth
anniversary dates of the grant. The options may be
exercised at any time prior to their expiration by tendering
the exercise price in cash, check or in shares of stock
valued at fair market value on the date of exercise. In the
event of a change in control (as defined) involving the
Company, the options will become exercisable in full. The
options may be amended by mutual agreement of the optionee
and the Company.
<F3> The Potential Realizable Value is the product of (a) the
difference between (i) the closing average market price per
share at the grant date and the sum of (A) 1 plus (B) the
assumed rate of appreciation of the Common Stock compounded
annually over the term of the option and (ii) the per share
exercise price of the option and (b) the number of shares of
Common Stock underlying the option on the date of the grant.
These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option
17
<PAGE>
exercises are dependent on a variety of factors, including
market conditions and the price performance of the Stock.
There can be no assurance that the rate of appreciation
presented in this table can be achieved.
</TABLE>
Option Exercises and Holdings
The following table provides information with respect to the
Named Executives concerning the exercise of options during the
fiscal year ended December 31, 1995 and unexercised options held
by the Named Executives as of December 31, 1995:
18
<TABLE>
<CAPTION>
Aggregated Option<F1> Exercises in 1995
and Year-End Option Values
Value of Unexercised
Number of Unexercised In-the-Money Options<F2>
Shares Options at 12/31/95 at 12/31/95
Acquired Value
on Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
SATOH, Yoshiharu -- N/A 9,240 -- $245,868 --
SAITO, Joichi -- N/A 9,680 -- 171,160 --
SHIBUYA, Naoaki -- N/A -- 9,500 -- 56,240
IMAMURA, Austin Y. -- N/A -- -- -- $--
KANDA, Neal K. -- N/A 3,780 2,520 24,759 16,506
<FN>
<F1> The Company has no compensation plans pursuant to which
stock appreciation rights may be granted.
<F2> The value of unexercised "in-the-money" options is the
difference between the market price of the Common Stock
on December 29, 1995 ($32.00 per share) and the exercise
price of the option, multiplied by the number of shares
subject to the option.
</TABLE>
Defined Benefit Pension Plan
The table below shows estimated annual retirement
benefits at age 65 for various levels of executive compensation
and service under the Bank's Defined Benefit Pension Plan.
<TABLE>
<CAPTION>
Pension Plan Table
Annualized Final Years of Service
Average ----------------------------------------------------------------------------------
Compensation 15 Years 20 Years 25 Years 30 Years 35 Years
- --------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$50,000 $ 11,250 $ 15,000 $ 18,750 $ 22,500 $ 26,250
100,000 22,500 30,000 37,500 45,000 52,500
150,000 33,750 45,000 56,250 67,500 78,750
200,000 45,000 60,000 75,000 90,000 105,000
250,000 56,250 75,000 93,750 112,500 131,250
300,000 67,500 90,000 112,500 135,000 157,500
350,000 78,750 105,000 131,250 157,500 183,750
400,000 90,000 120,000 150,000 180,000 210,000
450,000 101,250 135,000 168,750 202,500 236,250
500,000 112,500 150,000 187,500 225,000 262,500
</TABLE>
19
<PAGE>
Under the Defined Benefit Pension Plan, benefits are based
upon the employee's years of service and highest average annual
salary in the final 60-consecutive month period of service,
excluding the period between June 30, 1986 and January 1, 1991,
when the Defined Benefit Pension Plan was curtailed. The
credited years of service as of December 31, 1995 for Messrs.
Satoh, Saito, Shibuya, Imamura and Kanda are 23, 8, 2, 9, and 5,
respectively.
Compensation of Directors
The Company and the Bank each has a policy of paying fees to
directors for their attendance at board meetings and committee
meetings. The Company and the Bank pay $800 per board meeting to
all directors and $600 per board committee meeting to non-officer
directors. In addition, the Company pays $4,000 annually to each
director (excluding officers) and the Bank pays $10,000 annually
to each director (excluding officers). CPB Properties, Inc.
pays $600 per board meeting to its directors.
Non-officer directors of the Company are eligible to
participate in the Company's Stock Option Plan.
Report of Board of Directors to Shareholders
The Board of Directors of the Company establishes the
general policies regarding compensation for the Bank's employees,
adopts and amends employee compensation plans and approves
specific compensation levels for executive officers, including
the Named Executives. The Bank's Compensation Committee (the
"Compensation Committee") implements and monitors the Board's
policies regarding compensation, recommends changes to
compensation policies or compensation plans and makes
recommendations regarding specific compensation levels for
executives. Currently, the members of the Compensation Committee
are Paul Devens, Alice F. Guild, Dennis I. Hirota, Ph.D. (chair),
Clayton K. Honbo, M.D., Paul Kosasa and Gilbert J. Matsumoto.
Each member of the Compensation Committee is a non-employee
director of the Company and/or the Bank. The Company has also
retained the services of a compensation consultant to provide
input and data to the Compensation Committee.
Set forth below is a report of the Board of Directors
addressing the Company's compensation policies for 1995
applicable to the Company's executives, including the Named
Executives.
The Report of the Board of Directors on Executive
Compensation shall not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement
into any filing under the Securities Act of 1933 (the "Securities
Act") or under the Exchange Act, except to the extent that the
20
<PAGE>
Company specifically incorporates this information by reference,
and shall not otherwise be deemed filed under such Acts.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Company's compensation programs reflect the philosophy
that executive compensation levels should be linked to Company
performance, yet be competitive and consistent with that provided
to others holding positions of similar responsibility in the
banking and financial services industry. The Company's
compensation plans are designed to assist the Company in
attracting and retaining qualified employees critical to the
Company's long-term success, while enhancing employees'
incentives to perform to their fullest abilities to increase
profitability and maximize shareholder value. With the exception
of the 1995 Annual Executive Incentive Plan (the "Annual
Incentive Plan") and the Supplemental Executive Retirement Plan
(the "SERP"), the Company's compensation plans are generally
available to all employees, subject to certain hours and years
of service requirements. In addition, the Board of Directors has
reserved the authority to grant discretionary awards to
individual employees where deemed appropriate.
Salary Compensation
The Company pays cash salaries to its executive officers
which are competitive with salaries paid to executives of other
companies in the banking and financial services industry based
upon the individual's experience, performance and
responsibilities and past and potential contribution to the
Company. In determining the market rate, the Company obtains
information regarding executive salary levels for other companies
in the banking and financial services industry, especially among
the larger Hawaii banks. The relative asset size and
profitability levels of these institutions are also considered.
Based upon current asset size, the Company is the third largest
Hawaii bank. On April 25, 1995, the Company's Board of Directors
set the compensation for all executive officers for the ensuing
year, effective May 1, 1995.
In determining the compensation of the Company's Chief
Executive Officer, the Board considered the factors described
above, along with other performance criteria, such as the
Company's 1994 earnings performance, management of credit risk
and growth. The Company weighted each of these factors
relatively equally. The Company's 1994 net income decreased by
15.4% from 1993, compared with an increase of 9.2% over 1992.
Return on average assets was 1.03% in 1994, compared with 1.29%
in 1993. The level of nonperforming assets, past due loans and
charge-offs also increased. Total assets increased by 6.1% in
1994, compared with 4.0% in 1993. In assessing the Company's
performance, the Board also took into account economic conditions
21
<PAGE>
in Hawaii.
Based upon the foregoing, although the Bank's officers
received salary increases averaging 1-1/2% over the prior year,
the Named Executives, including the Chief Executive Officer, did
not receive increases in their base salary for 1995.
Incentive Compensation
During 1995, the Bank had four programs whereby individual
compensation was directly linked to the Company's performance:
the Incentive Cash Bonus Program (the "Bonus Plan"), the Profit
Sharing Plan, the ESOP and the Annual Incentive Plan.
Bonus Plan. The Bonus Plan was adopted in 1990 to provide
an opportunity pursuant to which employees could receive cash
bonuses annually. All employees of the Bank who are employed at
the end of the fiscal year and persons who retired during the
year after attaining age 62 are eligible to participate in the
Bonus Plan, except those executives who are participants in the
Annual Incentive Plan. Subject to Board approval, each
qualifying employee may be paid a cash bonus equal to a specified
percentage of the employee's regular annual salary. The
percentage, which ranges from 2% to 10%, is determined according
to a formula based upon increases of 15% or more in the Bank's
net income (excluding the after tax effect of the bonus) over the
prior fiscal year. During 1995, the Bank's net income (as
defined) increased 2.4% over the 1994 fiscal year. Therefore,
the Bank's employees did not receive any cash bonuses pursuant to
the Bonus Plan.
Profit Sharing Plan and ESOP. The Bank makes annual
contributions (the "Plan Contribution") to the Profit Sharing
Plan and ESOP (collectively, the "Plans") as determined by the
Bank's Board of Directors depending on the profitability of the
Bank during the year, subject to certain limitations on
contributions under the Internal Revenue Code and the Plans, and
further subject to the terms of an Annual Contributions Agreement
between the Bank and the ESOP Trustee with respect to the ESOP
Loan. See "ELECTION OF DIRECTORS -- Certain Transactions."
The assets of the Plans are held in trust for the exclusive
benefit of the participants. Employees with not less than one
year of service with the Bank are eligible to participate in the
Plans. The portion of the Plan Contribution contributed to each
Plan is allocated among the participating employees, including
the Named Executives, in the proportion which each participant's
compensation for the fiscal year bears to the total compensation
for all participating employees for such year. Benefits vest at
a rate of 20% per year and participants receive a distribution of
vested amounts allocated to their accounts only upon retirement
or termination of employment with the Bank.
22
<PAGE>
The Bank's Board makes its determination of the amount of
the Plan Contribution based upon management's recommendation at
the end of the fiscal year. For 1995, the Plan Contribution
equaled 10% of the pre-tax income of the Bank and CPB Properties,
Inc. (excluding the effect of the Plan Contribution expense),
less the amount of cash dividends paid by the Bank during the
fiscal year. The Plan Contribution is allocated between the
Profit Sharing Plan and the ESOP by the Bank's Board in its
discretion based upon management's recommendation. In
determining the allocation of the Plan Contribution, the Bank's
Board considers the countervailing concerns of investment
diversification through the Profit Sharing Plan and employee
Common Stock ownership through the ESOP. In addition, the Bank's
Board takes into account the funding requirements of the ESOP
Loan. On May 11, 1994, the Bank's Board of Directors approved
the Cash or Deferred Arrangement ("CODA") program which allows
each employee who is a participant in the Profit Sharing Plan to
elect to receive one-half of the current year's profit sharing
contribution in cash with the other half being allocated to such
employee's account under the Profit Sharing Plan. Elections not
made would be deferred into that employee's 401(k) Plan account.
For 1995, approximately 40% of the Plan Contribution was
allocated to the Profit Sharing Plan and 60% to the ESOP. In
1995, the Bank contributed $796,000 to the CODA and Profit
Sharing Plan and $1,196,000 to the ESOP, which equaled 2.4% and
7.3%, respectively, of total compensation paid to all
participating employees for the year.
Annual Incentive Plan. The Annual Incentive Plan was
adopted by the Board of Directors for the 1995 fiscal year.
Full- time employees of the Company or its subsidiaries who have
been granted the title of Senior Vice President or above prior to
October 1, 1995, were eligible to participate in the Annual
Incentive Plan. In addition, a participant must receive a
performance appraisal rating of "accomplished" or above during
the calendar year to be considered eligible for an award.
Participants in the Annual Incentive Plan were not eligible to
participate in the Bonus Plan. During 1995, 14 executives,
including each of the Named Executives, were eligible to
participate in the Annual Incentive Plan.
Subject to review by the Board of Directors, participants
were eligible to receive a cash bonus under the Annual Incentive
Plan, provided certain corporate objectives for financial
performance, as measured by return on equity ("ROE") and growth
in average assets, were met. During 1995, based upon the
Company's historical earnings and asset trends, the Board of
Directors established a target ROE of 13.5% and target asset
growth of 10.0%.
During 1995, the Company's return on equity was 10.79% and
its average assets in December increased 0.4% over average assets
23
<PAGE>
in December 1994. Because the target objectives for corporate
performance set forth in the Annual Incentive Plan were not met,
Messrs. Satoh, Saito, Shibuya, Imamura and Kanda received no cash
awards under the Annual Incentive Plan in 1995.
Stock Based Compensation
The Company also believes that stock ownership by employees,
including the Named Executives, provides valuable long-term
incentives for such persons who will benefit as the Common Stock
price increases and that stock-based performance compensation
arrangements are beneficial in aligning employees' and
stockholders' interests. To facilitate these objectives, the
Company adopted the Stock Option Plan.
Stock Option Plan. The Stock Option Plan was adopted in
1986 and amended in 1992 to increase the number of shares
available for issuance upon the exercise of stock options granted
under the plan. Through the Stock Option Plan, stock options
have been granted to key employees, including the Company's
executive officers. Non-employee directors and consultants are
eligible to participate in the Stock Option Plan, but to date the
Company has not granted stock options to such persons, in keeping
with the Company's philosophy that stock incentive programs
should be used to motivate employees and to tie their interests
to those of the shareholders. The Stock Option Plan is
administered by the Stock Option Plan Committee consisting of
three non-employee directors. In 1995, the Stock Option Plan
Committee, acting on management's recommendation, determined to
grant stock options covering 69,600 shares to employees,
including 9,500 shares to Mr. Naoaki Shibuya. None of the other
Names Executives received a grant of stock options during 1995.
Other Compensation
Discretionary Bonus. The Board approved a recommendation of
the Compensation Committee to grant Mr. Satoh a lump sum bonus of
$446,510 upon his retirement at December 31, 1995, in recognition
of his 23 years of service to the Bank and Company, his
unprecedented tenure as Chairman and Chief Executive Officer, and
in anticipation of the value of his continuing service as a
director of the Bank and the Company. In reaching such
determination, the Board took into account the unique knowledge
and expertise that Mr. Satoh would bring to the Board of
Directors in future years. The amount of the bonus was based
upon a review of Mr. Satoh's final salary level, the level of
pension benefits to which he would be entitled and a present
valuation of a reasonable consulting arrangement.
Other. The Company's executives are also eligible to
participate in the Bank's Defined Benefit Pension Plan (the
"Pension Plan"), Split Dollar Life Insurance Plan (the
24
<PAGE>
"Insurance Plan") and the SERP. The Pension Plan is a qualified
defined benefit plan which provides for monthly annuity payments
upon retirement. Benefits are based upon the employee's years of
service and highest average annualized compensation in the
employee's final 60-month period of employment. In 1995, the
maximum annual compensation allowable for determining benefits
payable under the Pension Plan was reduced to $150,000, which had
the effect of reducing the benefits payable under the Pension
Plan to the Company's executive officers whose annualized
compensation was likely to exceed $150,000. See "ELECTION OF
DIRECTORS -- Compensation of Directors and Executive Officers --
Executive Compensation -- Defined Benefit Plan." The SERP was
adopted by the Board of Directors effective January 1, 1995 as a
means of supplementing the benefits provided under the Pension
Plan in light of the recently imposed salary limitations. Under
the Insurance Plan, the Bank provides life insurance coverage for
certain senior officers, including the Named Executives. The
Split Dollar Agreements provide death benefits of approximately
two times the officers' normal annual salary during employment
and an amount approximating the officers' final normal annual
salary upon retirement.
The Named Executives also participate in the Company's
broad-based employee benefit plans, such as medical, supplemental
disability and term life insurance.
Dated: March 18, 1996. THE BOARD OF DIRECTORS
PAUL DEVENS
ALICE F. GUILD
DENNIS I. HIROTA, Ph.D.
STANLEY HONG
KENSUKE HOTTA
DANIEL M. NAGAMINE
JOICHI SAITO
YOSHIHARU SATOH
NAOAKI SHIBUYA
Compensation Committee Interlocks and Insider Participation
The Board of Directors of the Company does not have a
standing compensation committee. Decisions regarding executive
compensation are made by the entire Board of Directors based upon
recommendations of the Bank's Compensation Committee. See
"ELECTION OF DIRECTORS -- Report of Board of Directors to
Shareholders." During 1995, three of the Company's executive
officers, Yoshiharu Satoh, Joichi Saito and Neal Kanda,
participated in deliberations of the Board of Directors
concerning executive officer compensation.
Some of the directors and executive officers of the Company
25
<PAGE>
and the Bank and the companies with which they are associated
were customers of and had banking transactions with the Bank in
the ordinary course of the Bank's business during 1994, and the
Bank expects to conduct similar banking transactions in the
future. All such loans and commitments were made on
substantially the same terms, including interest rates,
collateral and repayment terms, as those prevailing at the time
for comparable transactions with other persons of similar
creditworthiness, and in the opinion of Management of the Bank,
did not involve more than a normal risk of collectibility or
present other unfavorable features.
Paul Devens, a director of the Company and a member of the
Bank's Compensation Committee, is of counsel to the law firm of
Devens, Lo, Nakano, Saito, Lee and Wong. The Company and the
Bank retained the legal services of Mr. Devens' law firm during
1995. Management is of the opinion that the fees paid to Mr.
Devens' law firm are comparable to those fees that would have
been paid for comparable legal services from a law firm not
affiliated with the Company or the Bank. It is anticipated that
Mr. Devens' law firm will perform certain legal services for the
Company and the Bank during 1996.
Performance Graph
The following graph compares the yearly percentage change in
the Company's cumulative total shareholder return on Stock with
(i) the cumulative total return of the Nasdaq market index and
(ii) the cumulative total return of banks and bank holding
companies listed on Nasdaq over the period from January 1, 1991
through December 31, 1995. The graph assumes an initial
investment of $100 and reinvestment of dividends. The graph is
not necessarily indicative of future price performance.
The graph shall not be deemed incorporated by reference by
any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act or under the
Exchange Act, except to the extent that the Company specifically
incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
26
<PAGE>
Comparison of Five Year Cumulative Total Return
Among Nasdaq U.S. Companies,
Nasdaq Banks/Bank Holding Companies,
and CPB Inc.
(Performance Graph -- Data Points)
NASDAQ-U.S. 1990 $100.00
1991 $161.00
1992 $187.00
1993 $215.00
1994 $210.00
1995 $296.00
NASDAQ-Banks/Bank 1990 $100.00
Holding Companies 1991 $164.00
1992 $239.00
1993 $272.00
1994 $271.00
1995 $404.00
CPB Inc. 1990 $100.00
1991 $151.00
1992 $159.00
1993 $155.00
1994 $162.00
1995 $206.00
(end of graph)
Certain Transactions
On June 21, 1991, the ESOP Committee filed a Notice of
Change in Bank Control ("Notice") with the Board of Governors of
the Federal Reserve System (the "FRB") pursuant to 12 U.S.C.
Section 1817(j) to permit the acquisition (the "Acquisition") on
behalf of the ESOP of 125,000 shares of Common Stock, which at
that time would have resulted in the ESOP Committee beneficially
owning more than 10% of the outstanding voting securities of the
Company. The FRB notified the ESOP Committee on August 30, 1991
that it would not disapprove the Acquisition, and on May 18,
1992, the Trustee on behalf of the ESOP consummated the
Acquisition. As a result of the Acquisition, the ESOP Committee
owned beneficially 540,562 shares of Common Stock or 10.27% of
the total outstanding Common Stock, as of February 29, 1996.
Pursuant to applicable regulations of the FRB, the Committee may
acquire up to 25% of the outstanding voting stock of the Company
on behalf of the ESOP without additional notification to the FRB.
In connection with the Acquisition, on November 8, 1991, the
Trustee under the ESOP entered into a loan agreement with
Sumitomo's Los Angeles Branch, pursuant to which the Trustee
27
<PAGE>
borrowed for the benefit of the ESOP Trust and the participants
the principal amount of $2,000,000. The loan was to be repaid in
four annual installments of $500,000 each plus interest
commencing November 8, 1992. Interest accrues at a rate of 1%
above The London Interbank Offered Rate ("LIBOR") for periods of
three, six or twelve months at the option of the borrower. The
Trustee held the shares acquired with the proceeds in a suspense
account as collateral for the loan. The Company guaranteed
repayment of the loan, and the Bank was obligated to make cash
contributions to the ESOP Trust in amounts equal to principal and
interest payments on the loan. The loan was repaid in full on
November 8, 1995.
On December 16, 1986, the shareholders of the Company
ratified an agreement ("Share Purchase Agreement") dated November
20, 1986 between the Company and Sumitomo (see "PRINCIPAL
SHAREHOLDERS"), which provides that the Company will not issue or
reissue shares of any class of the Company's authorized capital
stock, or issue any obligations or securities convertible into
shares of capital stock of the Company without first giving
written notice to Sumitomo describing the securities to be sold
and offering Sumitomo the opportunity to purchase an amount of
securities which will allow it to maintain its 13.734% level of
ownership of the Company's capital stock. Pursuant to the Share
Purchase Agreement, on December 24, 1986, the Company issued a
warrant (the "ISOP Warrant") to Sumitomo which gave it the right
to purchase from the Company 35,025 shares of Common Stock upon
the exercise of stock options at a price equal to the fair market
value of the Common Stock on the date Sumitomo exercises the ISOP
Warrant or any portion thereof. The Company notifies Sumitomo
when it grants stock options to its officers and employees and
when such options are exercised. The ISOP Warrant expires
December 23, 1996. Sumitomo currently has the right to acquire
11,051 shares by exercise of the ISOP Warrant.
CKSS Associates (the "Partnership"), a limited partnership
in which CPB Properties, Inc., a wholly-owned subsidiary of
Central Pacific Bank, is a general partner and 50% owner, has
entered into loan agreements with Sumitomo, and Central Pacific
Bank, whereby Sumitomo agreed to lend $20,000,000 and the Bank
agreed to lend $4,000,000 to the Partnership. Both loans are
secured by the real estate housing the Company's headquarters.
The loans are due on November 18, 1996, except for a portion
advanced by the Bank which is due on August 10, 2001. As of
December 31, 1995, the Bank had advanced pursuant to its loan
agreement the sum of $500,000. As of the same date, Sumitomo had
advanced pursuant to its loan agreement the sum of $10,700,000.
On April 30, 1993, the Partnership entered into a building
loan agreement with the Bank to develop a four-story building in
Kaimuki on the island of Oahu, Hawaii ("Kaimuki Plaza"), on land
owned by CPB Properties, Inc. During 1992, the Partnership and
28
<PAGE>
CPB Properties, Inc. entered into a lease agreement effective
from January 1, 1993 to December 31, 2047. The loan agreement
called for the Partnership to borrow up to $12.2 million for the
Kaimuki Plaza. The outstanding balance at December 31, 1995 was
$11,300,000. All loans related to the Company's headquarters and
Kaimuki Plaza are priced at 0.75% above LIBOR. The weighted
average interest rate on these loans was 6.636% at December 31,
1995.
Management of the Company believes that the terms of such
loans are as favorable as could be negotiated with unaffiliated
third parties.
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP has audited the Company's consolidated
financial statements since the Company's inception in 1982 and
has been the independent accountants for the Bank since 1975.
Accordingly, the Board of Directors has appointed KPMG Peat
Marwick LLP as the Company's independent accountants for the
fiscal year ending December 31, 1996 and the shareholders are
being asked to ratify such appointment. Representatives of KPMG
Peat Marwick LLP will be present at the Meeting to respond to
appropriate questions and will have an opportunity to make a
statement if they desire to do so.
Audit services of KPMG Peat Marwick LLP for fiscal year 1995
included the audit of the consolidated financial statements and
audits of certain employee benefit plans of the Bank.
All services provided to the Company and the Bank by KPMG
Peat Marwick LLP were approved in advance or ratified by the
Company's and Bank's Boards of Directors, and the possible effect
on the independence of KPMG Peat Marwick LLP by rendering such
services was considered. All professional services rendered by
KPMG Peat Marwick LLP during 1995 were furnished at customary
rates and terms.
The affirmative vote of the holders of at least a majority
of the outstanding shares of the Company's Common Stock
represented and entitled to vote at the Meeting will be required
for passage of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS
PROPOSAL.
OTHER BUSINESS
Management knows of no other business that will be presented
for consideration at the Meeting other than as stated in the
Notice of Meeting. If, however, other matters are properly
brought before the Meeting, it is the intention of the persons
29
<PAGE>
named in the accompanying form of Proxy to vote the shares
represented thereby on such matters in accordance with the
recommendation of the Board of Directors.
PROPOSALS OF SHAREHOLDERS
The 1997 Annual Meeting of Shareholders will be held on or
about April 22, 1997. Proposals of shareholders intended to be
presented at the 1997 Annual Meeting must be received by the
Secretary of the Company, Post Office Box 3590, Honolulu, Hawaii
96811, no later than November 18, 1996.
SHAREHOLDERS MAY OBTAIN WITHOUT CHARGE A COPY OF THE
COMPANY'S ANNUAL REPORT ON FORM 10-K INCLUDING FINANCIAL
STATEMENTS REQUIRED TO BE FILED WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 BY WRITING TO
AUSTIN Y. IMAMURA, VICE PRESIDENT AND SECRETARY, CPB INC., POST
OFFICE BOX 3590, HONOLULU, HAWAII 96811.
Dated: March 25, 1996.
CPB INC.
(signed)
Joichi Saito
Chairman of the Board and
Chief Executive Officer
30
<PAGE>
CPB INC.
Annual Meeting of Shareholders
To Be Held April 23, 1996
This Proxy is solicited on behalf of the Board of Directors
The undersigned shareholders of CPB Inc. (the "Company")
hereby nominate, constitute and appoint Messrs. Paul Devens,
Joichi Saito and Austin Y. Imamura, or any one of them, each with
full power of substitution, as the lawful attorneys, agents and
proxies of the undersigned, for the Annual Meeting of
Shareholders of CPB Inc. ("Annual Meeting") to be held on the
third floor of the Central Pacific Plaza Building, 220 South King
Street, Honolulu, Hawaii 96813, on Tuesday, April 23, 1996 at
10:00 a.m., Hawaii time, and at any and all adjournments thereof,
to represent the undersigned and to cast all votes to which the
undersigned would be entitled to cast if personally present, as
follows:
IMPORTANT: Continued and to be signed on reverse side.
31
<PAGE>
_________ [X] Please mark
COMMON your votes
as indicated in this example
1. ELECTION OF DIRECTORS, Class II, Term Will Expire in 1999.
[ ] FOR ALL NOMINEES (EXCEPT AS INDICATED TO THE CONTRARY
BELOW)
[ ] WITHHOLD AUTHORITY TO VOTE FOR ALL NOMINEES LISTED
BELOW.
Nominees: Alice F. Guild, Daniel M. Nagamine and Naoaki
Shibuya
(Instructions: To withhold authority to vote for any
individual nominee, write that nominee's name on the space
below.)
________________________________________________________
2. RATIFICATION OF THE APPOINTMENT OF INDEPENDENT ACCOUNTANTS.
To ratify the appointment of KPMG Peat Marwick LLP as the
Company's independent accountants for the fiscal year ending
December 31, 1996.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
3. OTHER BUSINESS. In their discretion, the Proxy Holders are
authorized to transact such other business as may properly
come before the meeting and any and all adjournments
thereof. The Board of Directors at present knows of no
other business to be presented by or on behalf of the
Company or its Board of Directors.
The Board of Directors recommends a vote "FOR" the election of
all nominees for director and "FOR" ratification of the
appointment of KPMG Peat Marwick LLP as the Company's independent
accountants. If any other business is properly presented at such
meeting, this Proxy shall be voted in accordance with the
recommendations of the Board of Directors.
32
<PAGE>
The undersigned hereby ratifies and confirms all that said
attorneys and Proxy Holders, or any of them, or their
substitutes, shall lawfully do or cause to be done by virtue
hereof, and hereby revokes any and all proxies heretofore given
by the undersigned to vote at the Annual Meeting. The
undersigned acknowledges receipt of the Notice of Annual Meeting
and the Proxy Statement accompanying said notice.
Date: ___________________________________________, 1996
_____________________________________
Signature
_____________________________________
Signature if held jointly
Please date this Proxy and sign above as your name(s) appear(s)
on this Proxy. Joint owners should each sign personally.
Corporate proxies should be signed by an authorized officer.
Partnership proxies should be signed by an authorized partner.
Personal representatives, executors, administrators, trustees or
guardians should give their full titles. This Proxy will be
voted "FOR" the election of all nominees unless authority to do
so is withheld for all nominees or for any individual nominee.
Unless "AGAINST" or "ABSTAIN" is indicated, this Proxy will be
voted "FOR" ratification of the appointment of KPMG Peat Marwick
LLP as the Company's independent accountants. PLEASE SIGN, DATE
AND RETURN THIS PROXY AS PROMPTLY AS POSSIBLE IN THE POSTAGE
PREPAID ENVELOPE PROVIDED.
33
