As filed with the Securities and Exchange Commission on March 28, 1997
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
For the fiscal year ended December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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 28, 1997, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $127,527,840.
Number of shares of common stock of the registrant
outstanding as of February 28, 1997: 5,269,874 shares
The following documents are incorporated by reference
herein:
Part of
Form 10-K
Into Which
Document Incorporated Incorporated
- ------------------------------------- ---------------
1996 Annual Report to Shareholders 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, 1996 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, 1996, the Company was the
third 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 property on
which the Bank's Moiliili branch office is 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 26
banking offices located throughout the State of Hawaii. Its administrative and
main office is located in Honolulu, and there are 19 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 1996, the Bank opened two in-store branches in Times Super Markets
on the island of Oahu and relocated its Kapaa Branch to the Big Save
Supermarket in Kapaa, on the island of Kauai.
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.
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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.
Lending activities include granting of commercial, consumer and real
estate loans. 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 offers VISA and MasterCard credit card services and CHECK
CARD, a debit card service, to its customers. The Bank is also a member of
the Plus ATM Network and offers an Infoline service, providing telephonic
account information, bill payment and funds transfer services.
Specialized services designed to attract and service the needs of
commercial customers and account holders include cash management and
lockbox services, merchant windows, travelers' checks, safe deposit boxes,
international banking services, night depository facilities and
wire transfer services.
The Bank's Trust Division 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.
Market Area and Competition
The Bank competes in the financial services industry mainly
targeting retail and small to midsized businesses. The
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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. During 1996, First Hawaiian, Inc. and CB Bancshares, Inc. announced
plans to merge their respective thrift subsidiaries into First Hawaiian Bank and
City Bank, respectively. The two largest banking organizations in the state,
Bancorp Hawaii, Inc. and First Hawaiian, Inc., are pursuing aggressive
strategies to expand through acquisitions outside of the state of Hawaii.
Bancorp Hawaii, Inc. had over $14.0 billion in total assets at year end
1996. Based on call report data filed with the FDIC, Bank of Hawaii, the
subsidiary bank, maintains approximately 44% of the deposits held by banks in
the State of Hawaii. First Hawaiian, Inc. was the second largest bank holding
company with over $8.0 billion in assets at year end 1996. Based
on call report data filed with the FDIC, First Hawaiian Bank, the
subsidiary bank, has approximately a 38% share of the deposit market in Hawaii.
At $1.4 billion in assets, the Company was the third largest bank
holding company, and based on call report data filed with the FDIC, the Bank
was the third largest bank with market share of approximately 10%. The Bank
is building its position in the marketplace as a community bank committed to
serving the financial needs of Hawaii's residents and businesses, 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 26 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,
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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 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 investment portfolio comprises 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 is 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 services providers. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies
and other financial services providers are frequently made in
Congress, in the Hawaii state legislature and before various bank
regulatory and other professional agencies. 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."
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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 subsidiary.
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
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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. In 1996, the Economic Growth and
Regulatory Paperwork Reduction Action of 1996 (the "Budget Act") eliminated the
requirement that bank holding companies seek Federal Reserve Board approval
before engaging de novo in permissible nonbanking activities listed in
Regulation Y, which governs bank holding companies, if the holding company
and its lead depository institution are well-managed and well-capitalized and
certain other criteria specified in the statute are met. For purposes of
determining the capital levels at which a bank holding company shall be
considered "well-capitalized" under this section of the Budget Act and
Regulation Y, the FRB adopted on February 28, 1997, risk-based capital ratios
(on a consolidated basis) that are the same as the levels set for determining
that a state member bank is well capitalized under the provisions established
under the prompt corrective action provisions of federal law, except that
there is no minimum leverage ratio requirement for a well-capitalized bank
holding company. See "Item 1. Business - Supervision and Regulation--Prompt
Corrective Action and Other Enforcement Mechanisms."
8
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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
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.
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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."
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 "-
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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, 1996, the Bank had
$91.6 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
commercial 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, including off-balance
sheet items, against both total qualifying capital (the sum of Tier 1 capital
and limited amounts
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of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists
of, among other things, (i) common stockholder's equity
(which includes common stock and related surplus and undivided profits);
(ii) noncumulative perpetual preferred stock (cumulative perpetual preferred
stock for bank holding companies), including any related surplus; and (iii)
minority interests in certain subsidiaries, less most intangible assets.
Tier 2 capital may consist of (i) a limited amount of the allowance for
loan and lease losses; (ii) cumulative perpetual preferred stock;
(iii) perpetual preferred stock (and any related surplus); and (iv)
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 must be 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 June 1996, the federal banking agencies adopted a joint agency
policy statement to provide guidance on managing interest rate risk. These
agencies indicated that the adequacy and effectiveness of a bank's interest
rate risk management process and the level of its interest rate exposures are
critical factors in the agencies' evaluation of the bank's capital adequacy. A
bank with material weaknesses in its risk management process or high levels of
exposure relative to its capital will be directed by the agencies to take
corrective action. Such actions will include recommendations or directions to
raise additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
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In December 1993, the federal banking agencies issued an
interagency policy statement on the allowance for loan and lease
losses ("ALLL") 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. This amount is neither a "floor" nor a "safe harbor" level for an
institution's ALLL.
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 issued final rules governing banks and
bank holding companies, which became effective April 1, 1995, which limit the
amount of deferred tax assets that are allowable in computing an institution's
regulatory capital. 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, based on projected taxable income for
that year 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 1996 Annual Report to Shareholders
("1996 Annual Report") 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, 1996.
The Company
December 31, 1996
Actual Minimum
----------------- Capital
Amount Ratio Requirement
------ ----- -----------
(Dollars in thousands)
Leverage capital $141,391 10.28% 3.00%
Tier 1 risk-based 141,391 12.10 4.00
capital
Total risk-based
capital 156,058 13.35 8.00
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The Bank
December 31, 1996
Actual Minimum
----------------- Capital
Amount Ratio Requirement
------ ----- -----------
(Dollars in thousands)
Leverage capital $131,534 9.60% 3.00%
Tier 1 risk-based 131,534 11.27 4.00
capital
Total risk-based
capital 146,181 12.53 8.00
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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. In accordance
with federal law, each federal banking agency has promulgated
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.
An insured depository institution generally will be
classified in the following categories based, in part, on the
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
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%. risk-based capital less
than 4%; or Leverage
ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less
than 2%.
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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 a significantly undercapitalized 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 receiving notice,
or is deemed to have notice that the institution is undercapitalized.
The appropriate federal banking agency cannot accept a capital plan
unless, among other things, it determines that the plan (i) specifies
(a) the steps the institution will take to become adequately capitalized;
(b) the levels of capital to be attained during each year in which the
plan will be in effect; (c) how the institution will comply with the
restrictions or requirements then in effect under Section 38 of the
Federal Deposit Insurance Act; and (d) the types and levels of activities
in which the institution will engage; (ii) is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital; and (iii) would not appreciably increase the risk (including
credit risk, interest rate risk, and other types of risk) to which
the institution is exposed. 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 average during each of four consecutive calendar
quarters and must otherwise provide appropriate 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.
16
<PAGE>
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 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 (i) force a sale of shares or obligations of the
bank, or require the bank to be acquired by or combine with
another institution; (ii) impose restrictions on affiliate
transactions; and (iii) 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.
17
<PAGE>
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.
Safety and Soundness Standards
Effective July 1995, the federal banking agencies adopted final
guidelines establishing standards for safety and soundness, as
required by the FDIC Improvement Act ("FDICIA"). These standards are designed
to identify potential safety-and-soundness concerns and ensure that
action is taken to address those concerns before they pose a risk to the
deposit insurance funds. The standards relate to (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation,
fees and benefits. If a federal banking agency determines that an
institution fails to meet any of these standards, the agency may
require the institution to submit to the agency an acceptable plan
to achieve compliance with the standard. In the event the institution
fails to submit an acceptable plan within the time allowed by the agency
or fails in any material respect to implement an accepted plan, the
agency must, by order, require the institution to correct the deficiency.
Effective October 1, 1996, the federal banking agencies promulgated
safety and soundness regulations and accompanying interagency compliance
guidelines on asset quality and earnings standards. These new guidelines
provide six standards for establishing and maintaining a system to
identify problem assets and prevent those assets from deteriorating.
The institution should: (i) conduct periodic asset quality reviews to
identify problem assets; (ii) estimate the inherent losses in those
assets and establish reserves that are sufficient to absorb estimated
losses; (iii) compare problem asset totals to capital; (iv) take
appropriate corrective action to resolve problem assets; (v) consider
the size and potential risks of material asset concentrations; and
(vi) provide periodic asset reports with adequate information for
management and the board of directors to assess the level of asset
risk. These new guidelines also set forth standards for evaluating
and monitoring earnings and for ensuring that earnings are sufficient
for the maintenance of adequate capital and reserves. If an institution
18
<PAGE>
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.
Premiums for Deposit Insurance
The FDIC has adopted final regulations implementing
a risk-based premium system required by federal law. On
November 14, 1995, the FDIC issued regulations that establish a new
assessment rate schedule ranging from 0 cents per $100 of
deposits to 27 cents per $100 of deposits applicable to members
of the Bank Insurance Fund ("BIF"). To determine the risk-based assessment
for each institution, the FDIC will categorize an institution as well
capitalized, adequately capitalized or undercapitalized based on its capital
ratios using the same standards used by the FDIC for its prompt
corrective action regulations. A well-capitalized institution is
generally one that has at least a 10% total risk-based capital ratio,
a 6% Tier 1 risk-based capital ratio and a 5% leverage
capital ratio. An adequately capitalized institution will generally
have at least an 8% total risk-based capital ratio, a 4% Tier 1
risk-based capital ratio and a 4% Tier 1 leverage capital ratio.
An undercapitalized institution will generally be one that does not
meet either of the above definitions. The FDIC will also assign
each institution to one of three subgroups based upon reviews by
the institution's primary federal or state regulator, statistical
analyses of financial statements and other information relevant
to evaluating the risk posed by the institution. 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).
19
<PAGE>
The BIF assessment rates are set forth below for institutions
based on their risk-based assessment categorization.
<TABLE>
Assessment Rates Effective January 1, 1996
(expressed in terms of cents per $100 of deposits)
Group A Group B Group C
-------- ------- -------
<S> <C> <C> <C>
Well Capitalized............................ 0<F1> 3 17
Adequately Capitalized...................... 3 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>
On September 30, 1996, Congress passed the Budget Act
which capitalized the Savings Association Insurance Fund ("SAIF")
through a special assessment on SAIF-insured deposits and required
banks to share in part of the interest payments on the Financing
Corporation ("FICO") bonds which were issued to help fund the
federal government costs associated with the savings and loan crisis
of the late 1980's. The special thrift SAIF assessment has been
set at 65.7 cents per $100 insured by the thrift funds as of
March 31, 1995. Effective January 1, 1997, for the FICO payments,
SAIF-insured institutions will pay 3.2 cents per $100 in
domestic deposits and BIF-insured institutions, like the Bank,
will pay 0.64 cents per $100 in domestic deposits. Full pro
rata sharing of the FICO interest payments takes effect on January 1,
2000.
The federal banking regulators are also authorized to
prohibit depository institutions and their holding companies from
facilitating or encouraging the shifting of deposits from SAIF to
BIF for the purpose of evading thrift assessment rates. The Budget
Act also prohibits the FDIC from setting premiums above the amount
needed to meet the designated reserve ratio (currently 1.25%).
20
<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 is not 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 or bank holding
companies. 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. Hawaii's Interstate
Banking Law provides that, effective June 1, 1997, out of
state banks may establish branches in Hawaii by merger, subject
to certain limitations. However, an out-of-state bank that does not
operate a branch in Hawaii may not acquire a branch or establish
one de novo. In addition, foreign banks may establish "wholesale"
branches and agencies in Hawaii after June 1, 1997; provided,
however, that such banks may not accept retail deposits of less
than $100,000 from individuals who are U.S. citizens or residents.
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.
21
<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
its 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 activities 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.
22
<PAGE>
Potential Enforcement Actions
Commercial banking organizations, such as the Bank,
and their institution-affiliated parties, which include the
Company, may be subject to potential enforcement actions by the
Federal Reserve Board, the FDIC and the Hawaii Commissioner 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 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 the Bank), 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 imposition of restrictions and sanctions under the
prompt corrective action provisions of the FDICIA. Additionally, a
holding company's inability to serve as a source of strength to its
subsidiary banking organizations could serve as an additional basis
for a regulatory action against the holding company. Neither the
Company nor the Bank have ever been subject to any such enforcement actions.
23
<PAGE>
Accounting Changes
In June 1996, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." This statement provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This
statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are
secured borrowings. A transfer of financial assets in which the
transferor surrenders control over those assets is accounted for
as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in exchange.
This statement also requires that liabilities and derivatives
incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value, if practicable.
It also requires that servicing assets and other retained interests
in the transferred assets be measured by allocating the previous
carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair value at the date
of the transfer. Furthermore, this statement requires that debtors
reclassify financial assets pledged as collateral, and that
secured parties recognize those assets and their obligation to
return them in certain circumstances in which the secured party has
taken control of those assets. In addition, the statement requires
that a liability be derecognized if and only if either (a) the
debtor pays the creditor and is relieved of its obligation for
the liability or (b) the debtor is legally released from being
the primary obligor under the liability either judicially or by
the creditor. Accordingly, a liability is not considered extinguished
by an in-substance defeasance. SFAS 125 is effective for transfers
and servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996, and is to be applied prospectively.
Management does not believe that the application of this statement
will have a material impact on the Company's financial
statements.
24
<PAGE>
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 criteria 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
25
<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 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 application of SFAS No. 121, effective from January 1,
1996, did not have a material impact on 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, did not
have a material impact on 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 has not adopted the new
accounting method, but has provided pro forma disclosures in accordance with the
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.
26
<PAGE>
Employees
At February 28, 1997, the Company employed 605 persons, 595
on a full-time basis and 10 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.
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 increased to $1,042.0 million at the end of 1996,
compared with $990.4 million at the end of 1995 and $992.0 million
at the end of 1994. Increases in loan volumes were recorded in the real
estate - mortgage - commercial and installment loan categories, which offset
declines in commercial and real estate - construction loans.
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 1996 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, 1996, 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.
27
<PAGE>
The following table sets forth information regarding
outstanding loans by categories as of the dates indicated.
Table I. Loans by Categories
December 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in thousands)
Commercial,
financial
and agricultural $141,735 $165,292 $211,257 $237,861 $232,544
Real estate --
construction 43,520 47,853 52,811 41,572 49,024
Real estate --
mortgage --
residential 347,608 341,229 332,073 317,357 309,867
Real estate --
mortgage --
commercial 430,682 368,772 328,979 280,385 229,136
Installment 78,431 67,210 66,848 68,593 80,994
---------- --------- --------- --------- --------
Total loans 1,041,976 990,356 991,968 945,768 901,565
Allowance for
loan losses 19,436 20,156 18,296 17,131 15,378
----------- --------- --------- --------- --------
Net loans $1,022,540 $970,200 $973,672 $928,637 $886,187
=========== ========= ========= ========= ========
28
<PAGE>
Commercial, Financial and Agricultural. Loans in this category
consist primarily of small and middle-market businesses and
professionals located in Hawaii. The Bank typically looks to the borrower's
business as the principal source of repayment, although the Bank's underwriting
policy generally requires additional sources of collateral, including real
estate. Because the Bank has maintained its underwriting standards during
the recent periods of recession and slow growth in the local economy, there
are fewer lending opportunities which meet the Bank's underwriting criteria.
Because of that and competition among financial institutions for loans,
commercial loan volumes have declined during the past several years, from
$237.9 million at December 31, 1993 to $141.7 million at December 31, 1996.
Real Estate - Construction. Real estate - construction loans
decreased to $43.5 million at the end of 1996, from $47.9 million at the
end of 1995 and $52.8 million at the end of 1994. The majority of the
construction loans provided by the Bank in this category were used for
residential development projects. Each construction project is evaluated
for economic viability, and maximum loan-to-value ratios of 80% on commercial
projects and 85% on residential projects are generally required.
Real Estate - Mortgage - Residential. Residential mortgage loans of
$347.6 million have grown steadily over the past several years and are
comprised primarily of adjustable rate one-to-four family first mortgages.
In general, the Bank requires a maximum loan-to-value ratio of 80%, although
higher levels are permitted with accompanying mortgage insurance. 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 mortgages for high-end
residences because of higher volatility in their values. In order to
limit such growth and provide for adequate collateral, the Bank requires
lower than normal loan-to-value ratios for loans secured by such homes.
Mortgage loans held for sale at December 31, 1996 totaled $8.5 million.
Home equity lines of credit of $90.7 million, with maximum loan-to-
value ratios of 75%, were also included in residential mortgage loans.
Real Estate - Mortgage - Commercial. The major components of the
Bank's portfolio of commercial, industrial and other mortgage loans at
December 31, 1996 included $140.3 million for stores and offices,
$50.2 million for warehouses and industrial buildings, and $34.4 million for
apartment buildings with 5 or more units.
29
<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 II. Mortgage Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
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 $341,890 43.9% $335,345 47.2% $328,282 49.7% $309,458 51.8% $300,710 55.8%
5 or more
units 5,718 0.7 5,884 0.8 3,791 0.6 7,899 1.3 9,157 1.7
Commercial,
industrial
and other 430,682 55.4 368,772 52.0 328,979 49.7 280,385 46.9 229,136 42.5
-------- ------ -------- ------ --------- ------ -------- ------ -------- ------
Total $778,290 100.0% $710,001 100.0% $661,052 100.0% $597,742 100.0% $539,003 100.0%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
30
<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,
1996 1995 1994 1993 1992
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 $ 35,424 45.2% $ 26,368 39.2% $ 27,786 41.6% $ 26,357 38.4% $ 32,717 40.4%
Credit cards
and related
plans 23,989 30.6 22,151 33.0 19,612 29.3 19,626 28.6 20,393 25.2
Other 19,018 24.2 18,691 27.8 19,450 29.1 22,610 33.0 27,884 34.4
-------- ----- -------- ------ -------- ------ -------- ------ -------- ------
Total $ 78,431 100.0% $ 67,210 100.0% $ 66,848 100.0% $ 68,593 100.0% $ 80,994 100.0%
======== ===== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
Automobile loans, comprised primarily of indirect dealer loans,
increased by $9.1 million or 34.3% in 1996 due to the purchase of $9.0 million
in indirect automobile loans.
Credit cards and related plans have increased steadily over the past
two years, following a national trend toward increased consumer debt.
However, stagnation of the Hawaii economy has resulted in an increase in
personal bankruptcies and consequently consumer loan losses. As detailed in
Table VI, net charge-offs on installment loans have increased by 70% over
1995 levels, which increased by 33% over 1994 net charge-offs. In response
to rising delinquency and loss rates, the Bank has discontinued the practice
of extending pre-approved credit on installment loans and has provided
additional resources to supplement collection efforts.
31
<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, 1996. 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 $56,597 $54,113 $31,025 $141,735
Real estate --
construction 26,831 9,718 6,971 43,520
------- ------- ------- --------
Total $83,428 $63,831 $37,996 $185,255
======= ======= ======= ========
32
<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 $17,526 $20,856 $ 38,382
With variable
interest rates 46,305 17,140 62,902
------- ------- --------
Total $63,831 $37,996 $101,284
======= ======= ========
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 1996, $2.5 million was provided for loan losses compared to
$3.3 million in 1995 and 1994. In 1996, the Bank experienced net
charge-offs of $3.2 million, compared with net charge-offs
of $1.4 million and $2.1 million in 1995 and 1994, respectively. The
allowance for loan losses at December 31, 1996 was $19.4 million, compared
to $20.2 million at December 31, 1995 and $18.3 million at December 31,
1994. The ratio of allowance for loan losses to total loans was 1.87%, 2.04%
and 1.84% at December 31, 1996, 1995 and 1994, respectively.
Management believes that the allowance for loan losses at December 31,
1996 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."
33
<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,
1996 1995 1994 1993 1992
----------- ---------- -------- --------- ---------
(Dollars in thousands)
Average amount of
loans outstanding $1,010,255 $1,004,094 $947,433 $911,611 $865,316
Allowance for
loan losses:
Balance at
beginning of year $ 20,156 $ 18,296 $ 17,131 $ 15,378 $ 13,849
---------- ---------- -------- -------- --------
Charge-offs:
Commercial,
financial and
agricultural 662 146 129 225 257
Real estate --
construction -- -- -- -- --
Real estate --
mortgage --
residential 786 192 538 543 570
Real estate --
mortgage --
commercial 1,250 943 1,360 254 --
Installment 857 540 492 620 537
---------- ------ ------ ------ ------
TOTAL 3,555 1,821 2,519 1,642 1,364
---------- ------ ------ ------ ------
Recoveries:
Commercial,
financial and
agricultural 108 192 160 12 74
Real estate --
construction 19 -- -- -- --
Real estate --
mortgage --
residential 31 48 32 3 --
Real estate --
mortgage --
commercial -- -- -- -- --
Installment 177 141 192 180 119
---------- ------ ------ ------ ------
TOTAL 335 381 384 195 193
---------- ------ ------ ------ ------
34
<PAGE>
Net loans charged
off (recovered) 3,220 1,440 2,135 1,447 1,171
---------- ------- -------- -------- --------
Provision charged
to operations 2,500 3,300 3,300 3,200 2,700
---------- ------- -------- -------- --------
Balance at end
of year $19,436 $20,156 $18,296 $17,131 $15,378
========== ======= ======== ======== ========
Ratios:
Allowance for
loan losses to
loans outstand-
ing at end of
period 1.87% 2.04% 1.84% 1.81% 1.71%
Net loans charged
off (recovered)
during period to
average loans
outstanding
during period .32% .14% .23% .16% .14%
Over the five-year period ended December 31, 1996, 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.
35
<PAGE>
The following table sets forth the allocation of the
allowance for loan losses by loan category as of the dates
indicated.
Table VII. Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
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
---------- --------- --------- -------- --------- -------- --------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $ 2,900 13.6% $ 4,100 16.7% $ 5,100 21.3% $ 6,100 25.2% $ 5,200 25.8%
Real estate --
construction 100 4.2 200 4.9 500 5.3 500 4.4 100 5.4
Real estate -
mortgage --
residential 1,700 33.4 1,800 34.4 3,000 33.5 3,800 33.6 500 34.4
Real estate -
mortgage --
commercial 9,300 41.3 7,800 37.2 5,500 33.2 5,300 29.5 3,800 25.4
Installment 600 7.5 600 6.8 400 6.7 600 7.3 1,200 9.0
Unallocated 4,836 N/A 5,656 N/A 3,796 N/A 831 N/A 4,578 N/A
------- ------- ------- -------- ------- ------- ------- ------ ------- ------
TOTAL $19,436 100.0% $20,156 100.0% $18,296 100.0% $17,131 100.0% $15,378 100.0%
======= ======= ======= ======== ======= ======= ======= ====== ======= ======
</TABLE>
36
<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,
--------------------------------------------------------------------------------------
1996 1995 1994
------------------------ ---------------------------- -----------------------------
Held to Available Held to Available Held to Available
maturity for sale maturity for sale maturity for sale
(at amor- (at estimated (at amor- (at estimated (at amor- (at estimated
tized cost) fair value) tized cost) fair value) tized cost) fair value)
----------- ------------- ----------- -------------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
other U.S. Government
agencies $100,153 $113,339 $123,073 $129,699 $146,216 $66,949
States and political
subdivisions 9,091 2,791 11,620 2,836 13,885 --
Other -- 15,084 2,000 14,399 1,997 14,741
-------- -------- -------- -------- -------- -------
Total investment
securities $109,244 $131,214 $136,693 $146,934 $162,098 $81,690
======== ======== ======== ======== ======== =======
</TABLE>
37
<PAGE>
The Bank did not hold investments of any nonfederal issuer
in amounts exceeding 10% of stockholders' equity at December 31,
1996. 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, 1996.
Maturity Distribution of Investment Portfolio
The following table sets forth the maturity distribution of
the investment portfolio at December 31, 1996.
Table IX. Maturity Distribution of Investment Portfolio
Weighted
Book average
Portofolio Type and Maturity value yield<F1>
Grouping -------- ------------
(Dollars in thousands)
Held-to-maturity portfolio:
U.S. Treasury and other
U.S. Government agencies:
Within one year $ 28,569 5.298%
After one but within five years 61,005 6.314
After five but within ten years 10,579 6.481
After ten years -- --
--------
Total U.S. Treasury and other
U.S. Government agencies 100,153 6.042
States and political subdivisions:
Within one year 2,205 5.350
After one but within five years 6,886 6.321
After five but within ten years -- --
After ten years -- --
--------
Total states and political
subdivisions 9,091 6.085
Other:
Within one year -- --
After one but within five years -- --
After five but within ten years -- --
After ten years -- --
--------
Total other -- --
Total held-to-maturity
portfolio $109,244 6.045%
========
38
<PAGE>
Available-for-sale portfolio:
U.S. Treasury and other
U.S. Government agencies:
Within one year $ 8,019 5.722%
After one but within five years 41,883 5.805
After five but within ten years 18,897 5.726
After ten years 44,539 6.060
--------
Total U.S. Treasury and other
U.S. Government agencies 113,338 5.886
States and political subdivisions:
Within one year 2,018 6.108
After one but within five years 773 6.338
After five but within ten years -- --
After ten years -- --
--------
Total states and political
subdivisions 2,791 6.172
Other:
Within one year -- --
After one but within five years -- --
After five but within ten years -- --
After ten years 15,085 7.828
--------
Total other 15,085 7.828
Total available-for-sale portfolio $131,214 6.115%
========
Total investment securities $240,458 6.084%
========
<F1> Weighted average yields are 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%.
39
<PAGE>
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, 1996, 1995 and 1994 were
$1,123.6 million, $1,138.3 million and $1,081.9 million, respectively.
Deposits decreased in 1996 by 1.3% compared with the 5.2% growth recorded for
1995. Interest-bearing deposits, excluding time deposits of $100,000 and
over, decreased by 2.3% in 1996 and 1.2% in 1995. Noninterest-bearing
deposits decreased by 1.4% in 1996 and increased by 4.7% in 1995. The Bank's
ratio of core deposits to total deposits was 76.5% at December 31, 1996, 77.1%
at December 31, 1995 and 81.2% at December 31, 1994. Time deposits of
$100,000 and over increased by 1.6% to $264.3 million in 1996 over the
$260.3 million in 1995, which increased by 28.1% over the $203.2 million in
1994. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Financial Condition."
40
<PAGE>
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.
Table X. Average Balances and Average Rates on Deposits
Year ended December 31,
--------------------------------------------------------
1996 1995 1994
------------------ ----------------- ------------------
Average Average Average
Average rate Average rate Average rate
balance paid balance paid balance paid
---------- ------- -------- ------- --------- -------
Noninterest-bearing
demand deposits $ 153,288 --% $ 152,002 --% $ 152,941 --%
Interest-bearing
demand deposits 94,389 1.36 98,303 1.36 104,847 1.36
Savings and money
market deposits 392,603 2.80 414,988 3.12 459,282 2.45
Time deposits 461,771 5.00 437,789 5.16 347,906 3.69
---------- ----------- ----------
TOTAL $1,102,051 3.21% $1,103,082 3.34% $1,064,976 2.40%
========== =========== ==========
41
<PAGE>
The remaining maturities of the certificates of deposit in
denominations of $100,000 and over are set forth in the following
table.
XI. Remaining Maturities of Large Certificates of Deposit
December 31, 1996
(Dollars in thousands)
Three months or less $127,762
Over three through six months 64,900
Over six through twelve months 59,587
Over twelve months 12,085
--------
Total $264,334
========
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, 1996, net rent expense under these leases
aggregated $5.3 million. For additional information relating to
lease rental expense and commitments, see Note 16 to the Company's
Consolidated Financial Statements in the 1996 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 67,000
square feet are occupied by the Company. CKSS carried the building
complex on its books at a net book value of $24.6 million as of
December 31, 1996. To finance the building, CKSS entered into a loan
agreement with The Sumitomo Bank, Limited ("Sumitomo") which is secured by a
mortgage on Central Pacific Plaza. The loan agreement, as amended, allows
CKSS to borrow up to $12.5 million at 0.75% above LIBOR. As of December 31,
1996, Sumitomo had advanced pursuant to its loan agreement the sum of
$10.7 million, due on June 18, 2001.
42
<PAGE>
The 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 1996 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, 1996, the Bank had
advanced $10.7 million, due on August 10, 2001, pursuant to this loan agreement.
At December 31, 1996, an additional $1.4 million was payable to the Bank, at
0.75% above LIBOR, pursuant to a loan agreement secured by second mortgages
on the Central Pacific and Kaimuki Plazas, which matures on April 10, 2001.
The weighted average interest rate on all loans related to the
Company's headquarters and Kaimuki Plaza at December 31, 1996 was 6.3125%.
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 and operations center are situated. CPB Properties
holds title to a portion of the land and the building in which the
Moiliili branch office is situated. In August 1996, ownership of the
operations center property was transferred from CPB Properties to the
Bank at net book value in exchange for CPB Properties common stock,
which was recorded as treasury stock.
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 1996.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 28, 1997, 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.
43
<PAGE>
Principal Occupation
Name and Position During Past Five Years Age
Joichi Saito Chairman of the Board and Chief 61
Chairman of the Executive Officer, Central Pacific
Board and Chief Bank (1996-Present); President
Executive Officer and Chief Operating Officer,
Central Pacific Bank (1989-1995)
Naoaki Shibuya President and Chief Operating 55
President Officer, Central Pacific
Bank (1996-Present); Executive
Vice President, Central Pacific
Bank (1993-1995); Executive
Vice President, The Sumitomo
Bank of California (1989-1993)
Austin Y. Imamura Executive Vice President 50
Vice President and and Secretary, Central Pacific
Secretary Bank (1991-Present)
Neal K. Kanda Executive Vice President, Central 48
Vice President and Pacific Bank (1996-Present);
Treasurer Executive Vice President and
Controller, Central Pacific Bank
(1993-1996); Senior Vice
President and Controller, Central
Pacific Bank (1990-1993)
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 1996 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."
44
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see
"Selected Consolidated Financial Data" contained in the 1996 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 1996 Annual Report, which is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For financial statements of the Company, see "Supplementary
Financial Information," and "Consolidated Financial Statements and
Notes," including the "Independent Auditor's Report" thereon, in the
1996 Annual Report, which is incorporated herein by reference.
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.
45
<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 1996 Annual Report are incorporated herein by reference.
Page number references are to page numbers in the 1996 Annual Report.
Page
CPB Inc. and Subsidiary:
Independent Auditors' Report 39
Consolidated Balance Sheets at December 31, 1996 and 1995 17
Consolidated Statements of Income for the Years
ended December 31, 1996, 1995 and 1994 18
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended December 31, 1996, 1995 and 1994 19
Consolidated Statements of Cash Flows for the Years
ended December 31, 1996, 1995 and 1994 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 consolidated financial statements or the notes thereto.
46
<PAGE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last
quarter of 1996.
(c) Exhibits
Exhibit No. Document
3.1 Articles of Incorporation of CPB Inc., as
amended<F1>
3.2 Amended Bylaws of CPB Inc.<F2>
10.1 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>
10.2 CPB Inc. 1986 Stock Option Plan, as amended<F4><F8>
10.3 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>
10.4 Share Purchase Agreement dated as of November 20, 1986
by and among The Sumitomo Bank, Limited and CPB Inc.<F2>
10.5 Split Dollar Life Insurance Plan<F5><F8>
10.6 Common Stock Purchase Warrant issued December 16,
1996 to The Sumitomo Bank, Limited
10.7 Central Pacific Bank and Subsidiaries 1996 Annual
Executive Incentive Plan<F8>
10.8 Central Pacific Bank Supplemental Executive Retirement Plan
<F6><F8>
10.9 CPB Inc. 1997 Stock Option Plan <F8>
13 Annual Report to Shareholders for the year ended
December 31, 1996 (parts not incorporated by
reference are furnished for informational purposes
and are not filed herewith)
47
<PAGE>
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 22, 1997
<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 is 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 is 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 Exhibit 10.16 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991,
filed with the Securities and Exchange Commission on
March 27, 1992.
<F6> Filed as Exhibit 10.20 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995,
filed with the Securities and Exchange Commission on
March 29, 1996.
<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 and Exchange Commission on March 30, 1994.
<F8> Denotes management contract or compensation plan or
arrangement.
48
<PAGE>
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 25, 1997.
CPB INC.
(Registrant)
By /s/ Joichi Saito
JOICHI SAITO
Chairman of the Board and
Chief Executive Officer
49
<PAGE>
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 25, 1997
Joichi Saito and Chief Executive
Officer (Principal
Executive Officer),
Director
/s/ Neal K. Kanda Vice President, March 25, 1997
Neal K. Kanda Treasurer
(Principal Financial
Officer, Principal
Accounting Officer)
/s/ Paul Devens Director March 25, 1997
Paul Devens
/s/ Alice F. Guild Director March 25, 1997
Alice F. Guild
/s/ Dennis I. Hirota Director March 25, 1997
Dennis I. Hirota, Ph.D.
/s/ Stanley W. Hong Director March 25, 1997
Stanley W. Hong
______________________ Director March __, 1997
Kensuke Hotta
/s/ Daniel M. Nagamine Director March 25, 1997
Daniel M. Nagamine
/s/ Yoshiharu Satoh Director March 25, 1997
Yoshiharu Satoh
/s/ Naoaki Shibuya Director March 25, 1997
Naoaki Shibuya
50
EXHIBIT 10.6
COMMON STOCK PURCHASE WARRANT
OF
CPB INC.
This certifies that, for value received, the Sumitomo Bank,
Limited ("Sumitomo") is entitled to purchase from CPB Inc., a Hawaii
corporation (the "Company") at any time prior to 12:00 a.m. Honolulu, Hawaii
Time on June 14, 2006, 37,340 fully paid and nonassessable shares (the
"Shares") of the Company, $1.25 stated value ("Common Stock"), at such price
and upon such terms and conditions as are set forth below.
This Warrant is issued pursuant to that certain Share Purchase
Agreement, dated November 20, 1986, by and between the Company and Sumitomo
(the "Share Purchase Agreement").
1. EXERCISE.
a. The term ("Term") of this Warrant shall commence on
December 16, 1996 and end on June 14, 2006. Sumitomo may not exercise this
Warrant until the stock options ("Option"), or portion thereof, representing
this Warrant are exercised. The Company will give Sumitomo notice ("Stock
Option Notice") of the exercise of any Options issued pursuant to the CPB Inc.
1986 Stock Option Plan ("Plan") within thirty (30) days after June 30 and
December 31 of each year setting forth the number of Options exercised, the
purchase price paid and the number of shares subject to the Warrant that may
be exercised by Sumitomo. After the receipt of the Stock Option Notice,
Sumitomo may exercise the Warrant to the extent specified in the Stock Option
Notice, in whole or in part, at any time or from time to time during the Term.
Sumitomo may exercise the Warrant by delivering to the Company at its
principal office, located at 220 South King Street, Honolulu, Hawaii 96813, or
at such other office or agency as the Company may designate, the form of
Election to Exercise Warrant attached hereto duly executed by Sumitomo, and
accompanied by payment of an amount equal to the product of the fair market
value of the Common Stock on the date such Warrant is exercised (the "Warrant
Price") and number of Shares to be acquired on such exercise. Payment shall
be made in United States Dollars. If Sumitomo shall exercise less than the
entire Warrant represented hereby, the Company shall promptly issue and
deliver to Sumitomo a Warrant of like tenor and dated the date hereof in the
name of Sumitomo and providing for the right to purchase the number of Shares
with respect to which this Warrant has not been exercised. Notwithstanding
the foregoing, the shares issuable upon the exercise of this Warrant shall be
adjusted consistent with any adjustments pursuant to Section 9 of the Plan to
the Option to which such shares relate (or the adjustments which would have
occurred to the Option but for its exercise before the exercise of this
Warrant).
b. Upon the exercise of this Warrant in full or in part,
Sumitomo shall be entitled to receive a certificate or certificates for the
number of fully paid and nonassessable shares of the Common Stock of the
Company purchasable of such exercise, and Sumitomo shall pay all transfer
taxes in receipt of the issuance thereof. If a fraction of a share would be
issuable on any exercise of this Warrant, Sumitomo will be paid by the Company
the cash value of that fractional share, as determined in good faith by the
Board of Directors of the Company. Appropriate certificates shall be sent to
Sumitomo promptly after the exercise of this Warrant in full or in part.
c. The Company covenants that it will at all times
reserve and keep available, solely for issuance on exercise of this Warrant,
<PAGE>
all shares of Common Stock or other securities or property from time to time
issuable on such exercise.
2. RIGHTS OF WARRANTHOLDERS.
Sumitomo shall not, by virtue of the ownership of this Warrant, be
considered a shareholder of the Company for any purpose, nor shall anything in
this Warrant be construed to confer on Sumitomo any rights of a shareholder of
the Company, including without limitation any right to vote, give or withhold
consent to any corporate action, receive notice of meetings of shareholders or
receive dividends in respect of the Shares issuable upon the exercise of this
Warrant until the Warrant has been exercised and the Shares purchasable upon
the exercise thereof have been issued.
3. TRANSFER.
a. The securities issuable upon exercise of this Warrant
have not been registered under the Securities Act of 1933, as amended (the
"Act"), and may be sold, assigned, pledged, hypothecated or otherwise
transferred, or offered for sale, assignment, pledge, hypothecation or
transfer only if registered under that Act or if an exemption from
registration is available.
b. The rights represented by and title to this Warrant
may not be transferred or assigned; however, the securities issuable upon
exercise of this Warrant may be transferred or assigned subject to Section 3a.
above.
c. Each certificate for shares issued upon exercise of
this Warrant shall bear a legend substantially in the form set forth below:
The securities evidenced by this certificate have not
been registered under the Securities Act of 1933, as
amended, and may not be sold, pledged, hypothecated,
transferred or otherwise disposed of except as may be
authorized under such Act or the rules and regulations
promulgated thereunder.
d. Sumitomo represents that this Warrant and any shares
it may acquire upon exercise of all or part of this Warrant is being acquired
for its own account and not with a view to or for sale in connection with any
distribution thereof. The holder agrees to furnish confirmation of the
foregoing representation upon exercise of all or any part of this Warrant in
such form as the Company shall reasonably require.
4. GOVERNING LAW.
This Warrant shall be governed by and construed and enforced in
accordance with the laws of the State of Hawaii applicable to contracts made
and to be performed wholly within that state.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its authorized officer as of the l6th day of December, 1996.
CPB INC.
By: /s/ Joichi Saito
------------------------------
Joichi Saito
Chairman of the Board
and Chief Executive Officer
<PAGE>
ELECTION TO EXERCISE WARRANT
-----------------------------
TO: CPB INC.
220 South King Street
Honolulu, Hawaii 96813
Attention: Mr. Joichi Saito
The Sumitomo Bank, Limited ("Warrantholder") hereby irrevocably
elects to exercise the right to purchase represented by the Common Stock
Purchase Warrant issued on December 16, 1996 pursuant to the Share Purchase
Agreement dated November 20, 1986 (the "Warrant"), and to purchase thereunder,
______________ shares of Common Stock provided for under the Warrant. Within
three (3) business days after notification by you of the average of the
closing bid and asked prices for the Common Stock for the five (5) business
days immediately preceding the date of this Election to Exercise Warrant,
which is agreed to be the fair market value of such shares on the date hereof,
Warrantholder will tender payment to the order of CPB Inc. for such shares of
Common Stock in full. Warrantholder requests that certificates for such
shares be issued as follows:
Name: ______________________________
Address: ______________________________
______________________________
and that if said number of shares of Common Stock shall not be all the shares
of Common Stock purchasable under the Warrant that a new Warrant for the
balance remaining of the shares of Common Stock purchasable under the Warrant
be registered in the name of and delivered to the undersigned Warrantholder at
the address stated below:
Name of Warrantholder: THE SUMITOMO BANK, LIMITED
Address: _______________________________
_______________________________
Dated: __________________ THE SUMITOMO BANK, LIMITED
By ____________________________
Name: _________________________
Title: __________________________
EXHIBIT 10.7
Central Pacific Bank and Subsidiaries
1996 Annual Executive Incentive Plan
PURPOSE:
The purposes of this plan are to reinforce the mission and corporate goals of
CPB Inc. (CPB). The plan is designed to help CPB attract, retain and motivate
a talented executive team. This team's performance, both as a team and as
individuals, contributes directly to serving CPB's customers and communities,
sustaining CPB's strong financial performance, and adding value for the
shareholders.
DEFINITIONS:
The following terms will have the indicated meanings throughout this document.
Whenever appropriate, words used in the singular may include the plural and
vice-versa.
"Plan" will be used throughout as a description of this particular incentive
plan.
"Company" will be used throughout as Central Pacific Bank and its
subsidiaries.
"Compensation Committee" will be used throughout as the Compensation Committee
of the Board of Directors of the Company.
"CEO" will be used throughout as Chairman of the Board and Chief Executive
Officer of CPB, Inc.
"Participant" will be used throughout as the individual in a given position
who is eligible to participate in this Plan.
"Base salary" will be used throughout as the base salary, excluding any other
bonus, commission payments, or other extra cash compensation on an annualized
basis, paid to the Participant on the last day of the calendar year. For
example, a Participant who is paid a monthly salary of $10,000 as of the last
day of 1996 will have an annualized base salary of $120,000 for purposes of
calculating any annual incentive payment.
"Asset growth" will be calculated as the growth in assets, year over prior
year, as measured by the average assets in December of the respective year.
ADMINISTRATION:
The Plan will be administered by the Compensation Committee, as ratified by
the Board of Directors, who may delegate certain aspects of record keeping and
administration to specified individuals, at their sole discretion. The
Compensation Committee, or its specific delegates, is given full authority to
develop such rules, regulations, record keeping procedures, and communications
deemed necessary to administer the Plan and interpret its provisions. Any
determination, decision, or action of the Compensation Committee (as ratified
by the Board of Directors) in connection with this plan will be considered
final and binding upon all Participants and any person validly claiming access
to a potential award.
Payment of any award amounts will be made after audited financial statements
are made available, but no later than April 1 of the year following the Plan
year (e.g., April 1, 1997).
<PAGE>
PARTICIPATION:
Any full-time active employee of the Company who has been granted the
corporate title of Senior Vice President or above (e.g., Executive Vice
President, President) is ELIGIBLE to participate in the plan. The CEO will
present annually names, with position responsibility, to the Compensation
Committee for approval and inclusion in the Plan. The Board will approve this
Participant list no later than January 30 of the plan year (e.g., January 30,
1996 for the 1996 Plan). Participants will be notified in writing no later
than February 1 of the Plan year. This communication will notify Participants
of their participation and the target percentages of their incentive.
To be eligible, the employee must have been placed on full-time active status
with the corporate title of Senior Vice President or above, no later than
October 1, 1996. Participants becoming eligible after January 1, 1996 will be
eligible for consideration of payment, prorated by the first day of the month
on which they met the eligibility requirements. For example, a Participant
meeting eligibility requirements on April 1, 1996 will be eligible, once
approved by the Compensation Committee, for consideration for 9/12 or 3/4 of
the potential award. Any exception to these minimum eligibility requirements
must be recommended by the CEO and approved by the Compensation Committee.
A participant must have received at least an "Accomplished" performance
appraisal rating during the calendar year (e.g., 1996 for the 1996 Plan) to be
eligible for consideration for payment. Any exceptions from this provision
must be recommended by the CEO and approved by the Compensation Committee, at
their sole discretion.
All participants in this Plan will become INELIGIBLE for participation in the
annual all staff Cash Incentive Bonus program.
FUNDING:
The plan will be funded according to the success of CPB as measured by return
on equity (ROE, from CPB Inc.), asset growth and the ratio of CPB's return on
assets (ROA, from CPB Inc.) to the unweighted average ROA's of the other
Hawaii bank holding companies. Asset growth will be measured as the growth
year to year in the average assets for the month of December. The specific
values for each of these measures will be reviewed and adjusted, if deemed
appropriate, annually.
Each measure will fund the total incentive pool as follows: (a) ROE will fund
50%, (b) asset growth will fund 25% and (c) ROA ratio will fund 25%. For each
measure performance below a defined measure will produce no incentive pool;
e.g., for 1996 these values are 11% for ROE, 10% for asset growth and 105%
ratio for ROA. Each measure will also have a maximum payout percentage; e.g.,
150% of the target pool for ROE of 17% and 150% of the target pool for asset
growth of 17% and 150% of the ROA ratio of 130%. The actual amount of the
pool funded will be extrapolated, using the determined scale values, between
the minimum funded value of 25% of the pool and maximum of 150%.
The target amounts funded are calculated as the sum of each Participant's
target incentive, expressed as a percentage of base salary, multiplied by that
individual's base salary.
The funding of the pool is described graphically in the following diagram.
<PAGE>
ALLOCATION OF AWARDS:
The calculation of any actual awards will be based on each Participant's base
salary, annualized, as of the last day of the calendar year (e.g., for this
Plan, December 31, 1996).
The awards, expressed as a percentage of base salary, are shown, by corporate
title, in the following table; e.g., a target incentive of 25% for Senior Vice
President. These target awards will be adjusted by the percentage of the
target pool that is funded through corporate performance. For example, if 75%
of the pool is funded, the target award for Senior Vice Presidents would be
18.75%.
ACTUAL AWARDS:
Actual awards will be calculated according to the mix of three performance
elements shown in the following table: 1) corporate (ROE and asset growth); 2)
unit/production objectives; and 3) a discretionary amount.
The unit/production objectives will be agreed upon between each Participant
and the immediate supervising Officer by January 30 of the Plan year. These
objectives will emphasize those aspects of CPB's performance for which the
Participant is held accountable. These will be submitted to the CEO for
review and thereafter, reported to the Board of Directors for its approval and
subsequent filing of the report.
<PAGE>
<TABLE>
<CAPTION>
CENTRAL PACIFIC BANK AND SUBSIDIARIES
FUNDING OF ANNUAL INCENTIVE PLAN<F1>*
Return on Equity Asset ROA Ratio
Above Threshold Incentive Pool Growth to Hawaii Banks
---------------- -------------- ------ ---------------
<S> <C> <C> <C> <C> <C> <C>
150% 17.00 17.00 150% 130 150%
---------------- ------ ------------
125% 15.75 16.25 125% 125 125%
---------------- ------ ------------
100% 15.00 [Diagram] 15.00 100% 120 100%
---------------- ------ ------------
75% 14.00 13.00 75% 115 75%
---------------- ------ ------------
50% 13.50 10.00 50% 110 50%
---------------- ------ ------------
25% 10.50 25% 105 25%
---------------- ------------
0% 0% 0%
---------------- ------------
<FN>
<F1> * Each component funds the following portions of pool: 2/20/96
*Return on Equity = 50%
*Asset Growth = 25%
*ROA Ratio = 25%
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CENTRAL PACIFIC BANK
Determining Payouts
Groups
===============================================================================================================================
Measures CEO COO EVP/Group SVPs- SVPs-
Manager Profit Center Admin. Areas
========= ==== ==== ========= ============= ============
<S> <C> <C> <C> <C> <C>
Corporate 100% 100% 50% 50% 50%
- --------- ---- ---- --------- ------------- ------------
Unit/ 0% 0% 25% 30% 30%
Production
Objectives
- ---------- ---- ---- --------- ------------- ------------
Discretionary 0% 0% 25% 20% 20%
===============================================================================================================================
Total 100% 100% 100% 100% 100%
===============================================================================================================================
Targets as 40% 35% 30% 25% 25%
a % of
Base Salary
2/20/96
</TABLE>
<PAGE>
The discretionary percentages will be recommended by the CEO to the
Compensation Committee for approval. These percentages and amounts may be
used to reward individual or team accomplishments not specifically measured by
either corporate financial performance or specific individual objectives.
PROJECTED COST OF THE PLAN:
[See attached for estimates of pay outs and list of participants.]
TERMINATION OF EMPLOYMENT:
The Participant must remain actively employed by the Company on the last day
of the designated calendar year (1996 for this Plan) to be considered eligible
for any potential payment under this Plan. Any exceptions to this provision
must be approved by the Compensation Committee, at their sole discretion.
NON-TRANSFERABILITY OF AWARD:
An award, or potential award, granted under this Plan shall not be assignable
or transferable by the Participant other than by will or the laws of descent
and distribution.
NO RIGHT TO EMPLOYMENT:
This Plan does not constitute a contract between the Company and its
employees. Neither establishing this Plan or taking any action as a result of
the Plan shall be construed as giving any employee the right to be retained by
the Company for any period of time, or to be employed in any particular
position, at any particular rate of pay, or to provide any other job-related
benefits.
AMENDMENT OR TERMINATION OF PLAN:
The Compensation Committee, with ratification from the Board of Directors, may
from time to time or at any time amend or terminate the Plan at their sole
discretion. Review and amendment of the Plan is expected annually when a new
Plan document will be considered for establishment. Amendment or termination
of the Plan is not expected within a Plan year, but that right is retained by
the Compensation Committee.
<PAGE>
This Plan has been approved and ratified for the Plan year 1996 on the
__________ day of _______________, 1996 by the CPB Board of Directors as
indicated below.
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
____________________________________________ _____________
<PAGE>
1996 ANNUAL EXECUTIVE INCENTIVE PLAN
PARTICIPANTS
Joichi Saito Chairman of the Board & CEO
Naoaki Shibuya Pres. & COO
Austin Imamaura EVP & Secretary & Commercial Banking
Group Mgr.
Neal Kanda EVP & Controller & Asst. Secretary &
Admin. Group Mgr.
Wayne Kirihara SVP & Retail Banking Group Mgr.
Alwyn Chikamoto SVP & Corporate Banking Div. Mgr.
Clifford Fujiwara SVP & Real Estate Loan Div. Mgr.
Walter Horikoshi SVP & Credit and Legal Div.Mgr.
Raymond Kurosu SVP & ODS Div. Mgr.
Barbara Southern SVP & Sales and Marketing Div. Mgr.
David Chang SVP & ISD Mgr.
EXHIBIT 10.8
CENTRAL PACIFIC BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
CENTRAL PACIFIC BANK hereby adopts this Supplemental Executive
Retirement Plan in order to provide (in conjunction with Social Security and
the Company's qualified pension plan) adequate retirement benefits to selected
key management employees of the Bank.
ARTICLE I
DEFINITIONS
For the purposes of this Plan, the following terms shall have the
meanings indicated, unless the context clearly indicates otherwise:
1.1 BENEFIT. "Benefit" means the retirement benefit payable to a
Participant or to his Beneficiary under Article II.
1.2 CODE. "Code" means the Internal Revenue Code of 1986 and the
rules and regulations promulgated thereunder.
1.3 COMMITTEE. "Committee" means the Committee appointed to
administer the Plan as described in Section 5.1.
1.4 COMPANY. "Company" means Central Pacific Bank.
1.5 COMPENSATION. "Compensation" means the Participant's compensation
as defined under the Pension Plan for the purpose of calculating the
Participant's benefits under that Plan, without application of the $150,000
limit set forth in Section 1.8(a) of the Pension Plan.
1.6 COVERED COMPENSATION. "Covered Compensation" means the
Participant's compensation as defined under the Pension Plan for the purpose
of calculating the Participant's benefits under that Plan, subject to all of
the limits set forth in that definition.
1.7 EFFECTIVE DATE. "Effective Date" means January 1, 1995.
1.8 ERISA. "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended, and the regulations promulgated thereunder.
1.9 PARTICIPANT. "Participant" means the Company employees designated
in accordance with Article II.
1.10 PENSION PLAN. "Pension Plan" means the Central Pacific Bank
Deferred Benefit Retirement Plan.
1.11 PLAN. "Plan" means this Central Pacific Bank Supplemental
Executive Retirement Plan.
1.12 PLAN YEAR. "Plan Year" means the tax year adopted by the Company,
currently ending on December 31.
1.13 SPOUSE. "Spouse" means a Participant's spouse qualified to
receive a death benefit under the Pension Plan.
<PAGE>
ARTICLE II
PARTICIPATION
2.1 ELIGIBILITY. Only "management or highly compensated employees"
(as those terms are used in ERISA Section 401(a)(i)) of the Company are
eligible to Participate in this Plan.
2.2 DESIGNATION. The Company may from time to time designate Company
employees eligible under Section 2.1 to become Plan Participants. The names
of such designees shall be entered on Exhibit A attached hereto, along with
the effective date of their participation.
2.3 TERMINATION. The Company may in its discretion terminate an
employee's participation under this Plan, in which event the date of such
termination shall be entered on Exhibit A. A terminated Participant's benefit
under Article III shall be frozen as of the date of termination, as if his
employment with the Company had also terminated on that date (although payment
of his benefit shall not begin until his benefit under the Pension Plan is
actually payable).
ARTICLE III
BENEFITS
3.1 CALCULATION OF BENEFIT. The Participant shall receive a Benefit
under this Plan equal to the benefit which he would have accrued (whether or
not vested) under the Pension Plan if that benefit had been based on his
actual Compensation rather than Covered Compensation, reduced by the benefit
that he actually accrues under the Pension Plan. If the Participant is not
entitled to a benefit under the Pension Plan (for any reason other than a
failure to vest in his accrued benefit), or if his benefit under the Pension
Plan has not been reduced by the Covered Compensation limits, neither he nor
his Spouse shall be entitled to a Benefit hereunder.
3.2 PAYMENT OF BENEFIT. The Participant's Benefit shall be payable on
the dates and in the forms available to him with respect to his benefit under
the Pension Plan, except that the Participant shall also be eligible to elect
to receive his Benefit in the form of a single lump sum payment at any time
after the Company is dissolved, merged into or acquired by any other company
or group in a transaction which changes the ownership of the Company by more
than 50%. The Participant shall make his election as to the time and form of
Benefit payment in writing to the Committee within 90 days after the Effective
Date, and he may change such election by further written notice to the
Committee at any time prior to the first day of the calendar year in which
Benefit payments would have commenced under his prior election. If the
Participant elects to have his Benefit under this Plan paid at a different
time or in a different form than his benefit under the Pension Plan, his
Benefit shall be the actuarial equivalent of a Benefit payable at the same
time and in the same form as his benefit under the Pension Plan, using the
adjustments and actuarial assumptions set forth in the Pension Plan for
calculating such equivalency. If the Participant elects to have his Benefit
hereunder commence earlier than his Pension Plan benefit, his Benefit payments
shall not be increased by subsequent increases in Compensation or service.
3.3 DEATH BENEFIT. Subject to the last sentence of Section 3.1, the
Participant's Spouse shall receive a Benefit hereunder if such Spouse is or
<PAGE>
would have been entitled to a benefit under the Pension Plan had the
Participant elected the timing and form of benefit distribution elected
hereunder and been vested in his accrued benefit under the Pension Plan at the
time of his death. Such death Benefit shall be equal to the benefit which the
Spouse would have received under the Pension Plan if that benefit had been
based on the Participant's actual Compensation rather than Covered
Compensation, reduced by the benefit actually payable to the Spouse under the
Pension Plan (or that would have been so payable had the Participant elected
the timing and form of benefit distribution elected hereunder and been vested
in his accrued benefit at the time of his death).
3.4 FORFEITURE. The Participant's Benefit under this Plan (or the
undistributed balance thereof) shall be forfeited if (i) the Participant's
employment with the Company is terminated before he attains the age of 62 for
any reason, or (ii) the Participant cannot be located as described in Section
4.5, or (iii) the Participant's employment with the Company is terminated
because of embezzlement or the commission of any other felony in the course of
his employment or if the Participant is found after termination to have
committed such a crime in the course of his employment, or (iv) the
Participant enters into the employ of any bank in the State of Hawaii within
two years after termination of his employment with the Company. Subsection
(i) above shall not apply if the Participant's employment is terminated after
or because of the dissolution, merger or acquisition of the Company as
described in Section 3.2.
ARTICLE IV
FUNDING AND PAYMENT
4.1 FUNDING. This is an "unfunded" deferred compensation plan as that
term is used in Section 401(a)(1) of ERISA. All Benefits shall be paid from
the general assets of the Company. The Company may, in its discretion, elect
to set aside money into one or more separate investment accounts, insurance
policies, annuity contracts or grantor trusts to assist it in funding the
Benefits as they become due, but the assets of any such account, policy,
contract or trust shall remain the property of the Company, subject to the
claims of its unsecured general creditors, and no Participant shall have any
claim to those particular assets.
4.2 BENEFITS NONASSIGNABLE. The rights of a Participant or Spouse to
receive a Benefit hereunder shall not be transferable, assignable,
mortgageable or otherwise able to be encumbered in advance of payment, which
payments are expressly declared to be non-assignable and non-transferable.
Neither shall these payments be subject to seizure for the payment of a
Participant's or Spouse's public or private debts, judgments, alimony or
separate maintenance or by a proceeding at law or in equity, or be
transferable by operation of law in the event of a Participant's or Spouse's
bankruptcy, insolvency or otherwise, or be subject to any domestic relations
order.
4.3 WITHHOLDING; PAYROLL TAXES. The Company may withhold from
payments made hereunder any taxes required to be withheld from such payments
under federal, state or local law.
4.4 PAYMENT TO GUARDIAN. If a Participant or Spouse has been declared
incompetent or is otherwise incapable of handling the disposition of his
property, the Committee may direct payment of his Benefit to the guardian,
legal representative or person having the care and custody of such person.
<PAGE>
The Committee may require proof of incompetency, incapacity or guardianship as
it may deem appropriate prior to distribution of the Benefit. Such
distribution shall completely discharge the Company's obligations under this
Plan with respect to the payments made to such guardian, legal representative
or custodian.
4.5 PLACE OF PAYMENT. Payment to any person under this Plan shall be
made in person or by mailing such payment to the last known address of such
person as shown on the Company's records. It shall be the responsibility of
any person to whom a Benefit is due hereunder to keep a current address on
file with the Company. If the Committee cannot with reasonable diligence
locate a person entitled to a Benefit hereunder, such Benefit shall be
forfeited.
ARTICLE V
ADMINISTRATION
5.1 COMMITTEE. This Plan shall be administered by a Committee
designated by the Company from time to time. The Committee shall have the
authority to make, amend, interpret, and enforce all appropriate rules and
regulations for the administration of this Plan, decide or resolve any and all
questions or interpretations concerning this Plan, and invest all assets held
in trust pursuant to this Plan. A Participant may be a member of the
Committee.
5.2 AGENTS. The Committee may, from time to time, employ other agents
and delegate to them such administrative duties as it sees fit, and may from
time to time consult with counsel who may be counsel to the Company.
5.3 INDEMNITY OF COMMITTEE. To the extent permitted by applicable
law, the Company shall indemnify, hold harmless, and defend the Committee and
its members against any and all claims, losses, damages, expenses or
liabilities arising from any action or failure to act with respect to this
Plan, except in the case of gross negligence or willful misconduct.
ARTICLE VI
CLAIMS PROCEDURE
6.1 CLAIM. Any person claiming a Benefit, requesting an
interpretation or ruling under the Plan, or requesting information under the
Plan shall present the request in writing to the Committee, which shall
respond in writing as soon as practicable.
6.2 DENIAL OF CLAIM. If the claim or request is denied, the written
notice of denial shall state:
(a) The reasons for denial, with specific reference to the
Plan provisions on which the denial is based.
(b) A description of any additional material or
information required and an explanation of why it is necessary.
(c) An explanation of the Plan's claim review procedure.
<PAGE>
6.3 REVIEW OF CLAIM. Any person whose claim or request is denied or
who has not received a response within 30 days may request review by notice
given in writing to the Committee. The claim or request shall be reviewed by
the Committee which may, but shall not be required to, grant the claimant a
hearing. On review, the claimant may have representation, examine pertinent
documents, and submit issues and comments in writing.
6.4 FINAL DECISION. The decision on review shall normally be made
within 60 days. If an extension of time is required for a hearing or other
special circumstances, the claimant shall be notified and the time limit shall
be 120 days. The decision shall be in writing and shall state the reasons and
the relevant Plan provisions. All decisions on review shall be final and bind
all parties concerned.
ARTICLE VII
AMENDMENT AND TERMINATION OF THE PLAN
7.1 AMENDMENT. The Company may at any time amend the Plan in whole or
in part; provided, however, that no amendment shall decrease or eliminate the
accrued Benefit of any Participant whose Benefit is in pay status or who would
be entitled to a Benefit if he separated from the service of the Company on
the later of the effective date of the amendment or the date on which it is
adopted by the Company's Board of Directors.
7.2 TERMINATION. The Company may terminate the Plan at any time.
After such termination, Benefits shall continue to be paid in accordance with
Article III, but (i) pay increases after the date of Plan termination shall
not be taken into account in calculating the Benefits, and (ii) service after
the date of Plan termination shall not be taken into account in calculating
the Benefits but it shall be taken into account in determining vesting.
ARTICLE VIII
MISCELLANEOUS
8.1 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this
Plan shall not be deemed to constitute a contract of employment between the
Company and any Participant, and the Participants shall have no rights against
the Company except as may otherwise be specifically provided herein.
Moreover, nothing in this Plan shall be deemed to give the Participants the
right to be retained in the service of the Company or to interfere with the
right of the Company to discipline or discharge them at any time.
8.2 TERMS. Whenever any words are used herein in the masculine, they
shall be construed as though they were used in the feminine in all cases where
they would so apply, and wherever any words are used herein in the singular or
in the plural, they shall be construed as though they were used in the plural
or the singular, as the case may be, in all cases where they would so apply.
8.3 CAPTIONS. The captions of the articles sections and paragraphs of
this Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
8.4 GOVERNING LAW. The provisions of this Plan shall be construed,
interpreted and governed in all respects in accordance with ERISA and other
<PAGE>
applicable federal law and, to the extent not preempted by such federal law,
in accordance with the laws of the State of Hawaii.
8.5 VALIDITY. If any provision of this Plan shall be held illegal or
invalid for any reason, said illegality or invalidity shall not affect the
remaining parts hereof, but this Plan shall be construed and enforced as if
such illegal or invalid provision had never been inserted herein.
8.6 SUCCESSORS. The provisions of this Plan shall bind and inure to
the benefit of the Company and its successors and assigns. The term
successors as used herein shall include any corporate or other business entity
which shall, whether by merger, consolidation, purchase or otherwise, acquire
all or substantially all of the business and assets of the Company, and
successors of any such corporation or other business entity.
Dated: April 20, 1995
CENTRAL PACIFIC BANK
By: /s/ Yoshiharu Satoh
-----------------------------------
Its
<PAGE>
EXHIBIT A
Date Participation Date Participation
Name of Participant Began Terminated
- ------------------- ------------------ --------------------
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
___________________ __________________ ____________________
<PAGE>
[Letterhead of Central Pacific Bank]
April 20, 1995
Top Hat Plan Exemption
Pension and Welfare Benefits Administration
Room N-5644
200 Constitution Ave., N.W.
WASHINGTON DC 20210
Re: STATEMENT OF DEFERRED COMPENSATION PLAN
Gentlemen:
You are hereby notified, pursuant to Reg. Section 2520.104-23, that the
following employer maintains a plan primarily for the purpose of providing
deferred compensation for a select group of management and/or highly
compensated employees:
Name of Employer: Central Pacific Bank
Address of Employer: P.O. Box 3590
Honolulu, Hawaii 96811
EIN of Employer: 99-0080213
Number of Plans: 1
Number of Participants: 6
Effective Date of Plan: January 01, 1995
Sincerely yours,
CENTRAL PACIFIC BANK
By: /s/ Yoshiharu Satoh
-------------------------------
Its
<PAGE>
CENTRAL PACIFIC BANK
RESOLUTION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP)
RESOLVED by the Board of Directors of Central Pacific Bank, that
effective January 1, 1995, the Central Pacific Bank Supplemental Executive
Retirement Plan ("SERP"), as presented to the Board, is hereby approved.
RESOLVED, FURTHER, that the officers of the Bank are hereby authorized
to execute the SERP and take all other actions necessary and proper to
effectuate these resolutions:
RESOLVED, FURTHER, that the following Bank employees are designated as
participants under the SERP, effective January 1, 1995:
Yoshiharu Satoh
Joichi Saito
Minoru Ueda
Naoaki Shibuya
Austin Imamura
Neal Kanda
I, Austin Imamura, Secretary of Central Pacific Bank, a Hawaii
Corporation, do hereby certify that the foregoing is a full, true and correct
copy of a resolution duly adopted by the Board of Directors of said
Corporation, at its meeting duly called and held at the office of the
Corporation, 220 South King Street, Honolulu, Hawaii, on the 19th day of
April, 1995, at which a quorum was present and acting throughout; and that
said resolution has not been modified, amended, or rescinded and continues in
full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal of said Central Pacific Bank this 20th day of April, 1995.
/s/ Austin Imamura
--------------------------------------
Austin Imamura, Secretary
EXHIBIT 10.9
CPB INC.
1997 STOCK OPTION PLAN
Adopted by the Compensation Committee as of February 18, 1997
Adopted by the Board of Directors as of February 19, 1997
Approved by the Shareholders on April 23, 1997
1. PURPOSE.
(a) The purpose of the CPB Inc. 1997 Stock Option Plan (the
"1997 Plan") is to strengthen CPB Inc. (the "Company") and those
corporations which are or hereafter become subsidiary corporations of the
Company, within the meaning of Section 424 of the Internal Revenue Code of
1986, as amended (the "Code"), by providing to participating full-time
salaried employees (the "Employees"), full-time salaried employee directors
(the "Employee Directors") and directors who are not full-time salaried
employees (the "Non-Employee Directors") added incentives for high levels of
performance and to encourage stock ownership in the Company. The 1997 Plan
seeks to accomplish these performance goals by providing a means whereby
such Employees, Employee Directors and Non-Employee Directors of the Company
and its subsidiaries may be given an opportunity to purchase by way of
option common stock of the Company. The performance goal for those eligible
to participate in the 1997 Plan is an increase in the value of the Company's
shares over the option exercise price.
(b) The Company, by means of the 1997 Plan, seeks to secure and
retain the services of such Employees, Employee Directors and Non-Employee
Directors of the Company or any of its subsidiaries and to provide
incentives for such persons to exert maximum efforts for the success of the
Company.
(c) The Company intends that the options issued under the 1997
Plan shall, in the discretion of the committee responsible for
administration of the 1997 Plan, be either incentive stock options as that
term is used in Section 422 of the Code or any successor thereto ("incentive
stock options"), or options which do not qualify as incentive stock options
("non-qualified stock options"). All options shall be separately designated
as incentive stock options or non-qualified stock options at the time of
grant, and a separate certificate or certificates shall be issued for shares
purchased on the exercise of each type of option.
2. ADMINISTRATION.
(a) The 1997 Plan has been adopted and shall be administered
solely by a committee ("Committee"). The Board and the Committee have
evidenced their adoption and approval of the 1997 Plan by their signatures
at the end of the 1997 Plan.
(b) The Committee shall have the authority, in its discretion,
in connection with the administration of the 1997 Plan, subject to and
within the limitations of the express provisions of the 1997 Plan:
(i) To determine from time to time which of the persons
eligible under the 1997 Plan shall be granted an option; when and how the
option shall be granted; whether the option will be an incentive stock
option or a non-qualified stock option; the provisions of each option
granted (which need not be identical), including, without limitation, the
time or times during the term of each option within which all or portions of
such option may be exercised; the duration of and purposes of leaves of
absence which may be granted to participants without constituting a
<PAGE>
termination of their employment for purposes of the 1997 Plan; and the
number of shares for which an option shall be granted to each such person.
(ii) To determine any conditions or restrictions imposed
on stock acquired pursuant to the exercise of an option (including, but not
limited to, repurchase rights, forfeiture restrictions and restrictions on
transferability).
(iii) To construe and interpret the 1997 Plan and the
options granted under it, to construe and interpret any conditions or
restrictions imposed on stock acquired pursuant to the exercise of an
option, to define the terms used herein, and to establish, amend and revoke
rules and regulations for its administration, to establish and administer
performance goals under the 1997 Plan and, to the extent required by the
Code and Treasury Regulations, ensure and certify that performance goals
have been attained; provided, however, that the Committee has no authority
to change the performance goals of the 1997 Plan after the shareholders of
the Company have approved the 1997 Plan and any amendments thereto. The
Committee, in the exercise of this power, may correct any defect, omission
or inconsistency in the 1997 Plan or in any option agreement, in a manner
and to the extent it shall deem necessary or expedient to make the 1997 Plan
fully effective.
(iv) To cancel, at any time and from time to time, with
the consent of the affected optionee or optionees, any or all outstanding
options granted under the 1997 Plan and the grant and substitution therefor
of new options under the 1997 Plan (subject to limitations hereof) covering
the same or different number of shares of stock at an option price per share
in all events not less than the fair market value on the new grant date.
(v) Generally, to exercise such powers and to perform
such acts as it deems necessary or expedient to promote the best interests
of the Company.
(c) The Committee shall be composed of not fewer than two (2)
members of the Company's Board of Directors (the "Board"). All members of
the Committee shall qualify as "outside directors" within the meaning of
Section 162(m) of the Code and Treasury Regulation Section 1.162-27(c)(3)
("Outside Directors"). Members of the Committee shall serve at the pleasure
of the Board and the Board may from time to time remove members from, or add
members to, the Committee; provided, however, that any attempted appointment
to the Committee of a person who does not qualify as an Outside Director
shall be null and void. Any member of the Committee who loses the status of
an Outside Director shall automatically and without further action cease to
be a member of the Committee as soon as such status is lost. In the event
the Company registers or has registered any class of equity security
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended
(the "1934 Act") as in effect from time to time, from the effective date of
such registration until six months after termination of such registration,
all of the members of the Committee also shall be "nonemployee directors" as
provided in Rule 16b-3 promulgated pursuant to the 1934 Act. The Committee
shall comply with the provisions of Rule 16b-3, to the extent applicable to
the 1997 Plan.
(d) Any action of the Committee with respect to administration
of the 1997 Plan shall be taken pursuant to a majority vote or to the
unanimous written consent of its members.
<PAGE>
(e) The determinations of the Committee on matters referred to
in this paragraph 2 shall be final and conclusive.
(f) Notwithstanding any other provision herein, the Board may
at any time abolish the Committee and administer the 1997 Plan itself.
3. SHARES SUBJECT TO THE 1997 PLAN. Subject to the provisions of
paragraph 9 relating to adjustments upon changes in stock, the stock that
may be offered pursuant to options granted under the 1997 Plan shall not
exceed the aggregate of 500,000 shares of the Company's common stock. If
any option granted under the 1997 Plan shall for any reason expire, be
canceled or otherwise terminate without having been exercised in full, the
stock not purchased under such option shall again become available for the
1997 Plan.
4. ELIGIBILITY.
(a) All Employees and Employee Directors of the Company or its
subsidiaries shall be eligible to receive incentive stock options. Non-
Employee Directors of the Company or its subsidiaries shall not be eligible
to receive incentive stock options.
(b) All Employees, Employee Directors and Non-Employee
Directors of the Company or its subsidiaries shall be eligible to receive
non-qualified stock options.
(c) No person shall be eligible for the grant of an incentive
stock option under the 1997 Plan if, at the time of grant, such person owns
(or is deemed to own pursuant to Section 425(d) of the Code) stock
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or of any of its affiliates unless the
exercise price of such incentive stock option is at least one hundred ten
percent (110%) of the fair market value (determined without regard to any
restriction other than a restriction which, by its terms, will never lapse)
of such stock at the date of grant and such incentive stock option by its
terms is not exercisable after the expiration of five (5) years from the
date such incentive stock option was granted.
(d) The Company may issue incentive stock options provided that
the aggregate fair market value (determined at the time the incentive stock
option is granted) of the stock with respect to which incentive stock
options are exercisable for the first time by the optionee during any
calendar year (under all incentive stock option plans of the Company) shall
not exceed One Hundred Thousand Dollars ($100,000). Should it be determined
that any incentive stock option granted pursuant to the 1997 Plan exceeds
such maximum, such incentive stock option shall be considered to be a
non-qualified option and not to qualify for treatment as an incentive stock
option under Section 422 of the Code to the extent, but only to the extent,
of such excess.
(e) Notwithstanding anything to the contrary contained in this
Plan, no person may be granted an option under this Plan if such person at
the time of grant holds options to purchase more than 10% of the outstanding
shares of common stock of the Company. In addition, no person may be
granted options to purchase more than 100,000 shares of common stock in any
calendar year, or more than 100,000 shares of common stock in the aggregate,
subject to adjustment pursuant to Paragraph 9. The amount of compensation
any eligible person could receive under an option grant is based solely on
<PAGE>
an increase in value of the Company's common stock after the date of the
grant of the option.
5. OPTION PROVISIONS. Each option shall be in such form and shall
contain such terms and conditions as the Committee shall deem appropriate.
The provisions of separate options need not be identical, but each option
shall include (through incorporation of provisions hereof by reference in
the option or otherwise) the substance of each of the following provisions:
(a) Each option granted and all rights or obligations
thereunder by its terms shall expire on such date as the Committee may
determine as set forth in such stock option agreement, but not later than
ten (10) years from the date the option was granted and shall be subject to
earlier termination as provided elsewhere in the 1997 Plan. Notwithstanding
the foregoing, any incentive stock option granted to an optionee who owns
(or is deemed to own pursuant to Section 424(d) of the Code) stock
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any of its affiliates shall expire
not later than five (5) years from the date of grant. For purposes of the
1997 Plan, the date of grant of an option shall be the date on which the
Committee takes final action approving the award of the option,
notwithstanding the date the optionee accepts the option, the date of
execution of the option agreement, or any other date with respect to such
option.
(b) The exercise price of each option shall be determined by
the Committee and shall be not less than one hundred percent (100%) of the
fair market value of the stock subject to the option on the date the option
is granted; provided, however, that the purchase price of common stock
subject to an incentive stock option may not be less than one hundred ten
percent (110%) of such fair market value (without regard to any restriction
other than a restriction which, by its terms, will never lapse) where the
optionee owns (or is deemed to own pursuant to Section 424(d) of the Code)
stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company. The fair market value of such
stock shall be determined by the Committee in accordance with any reasonable
valuation method, including the valuation method described in Treasury
Regulation Section 20.2031-2.
(c) The purchase price of stock acquired pursuant to an option
shall be paid, as specified in the option, either (i) in cash at the time
the option is exercised, or (ii) at the discretion of the Committee, (A) by
delivery to the Company of other common stock of the Company, (B) according
to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other common stock of
the Company) with the person to whom the option is granted or to whom the
option is transferred pursuant to subparagraph 5(d), or (C) in any other
form of legal consideration that may be acceptable to the Committee in its
discretion, either at the time of grant or exercise of the option. Shares
of stock given as part of the purchase price shall be valued at fair market
value determined by the Board or the Committee in accordance with any
reasonable valuation, including the valuation methods described in Treasury
Regulation section 20.2031.2.
In the case of any deferred payment arrangement specified at the
time of grant, an interest rate shall be stated which is not less than the
rate then specified which will prevent any imputation of higher interest
under the Code. If other than the optionee, the person or persons
exercising the option shall be required to furnish the Company appropriate
<PAGE>
documentation that such person or persons have the full legal right and
power to exercise the option on behalf of and for the optionee.
(d) An option by its terms may only be transferred by will or
by the laws of descent and distribution upon the death of the optionee,
shall not be transferable during the optionee's lifetime other than pursuant
to a qualified domestic relations order (within the meaning of the Code),
and shall be exercisable during the lifetime of the person to whom the
option is granted only by such person or a permitted transferee.
(e) At the discretion of the Committee the total number of
shares of stock subject to an option granted to an eligible participant may,
but need not, be allotted in periodic installments (which may, but need not,
be equal) and upon such contingencies as the Committee may determine. In
addition, the Committee shall have the power to accelerate the time (other
than, except as provided in paragraph 10, the expiration date) during which
an option may be exercised, notwithstanding the provisions in the option
stating the time during which it may be exercised.
(f) From time to time during each of such installment periods,
the option may be exercised with respect to some or all of the shares
allotted to that period, and/or with respect to some or all of the shares
allotted to any prior period as to which the option was not fully exercised.
During the remainder of the term of the option (if its term extends beyond
the end of the installment periods), the option may be exercised from time
to time with respect to any shares then remaining subject to the option.
The provisions of this subparagraph (5)(f) are subject to any option
provisions governing the minimum number of shares as to which an option may
be exercised.
(g) The Company may require any optionee, or any person to whom
an option is transferred under subparagraph 5(d), as a condition of
exercising any such option, to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the
option for such person's own account and not with any present intention of
selling or otherwise distributing the stock. The requirement of providing
written assurances, and any assurances given pursuant to the requirement,
shall be inoperative if (i) the shares to be issued upon the exercise of the
option have been registered under a then currently effective registration
statement under the Securities Act of 1933, as amended (the "Securities
Act"), or (ii) a determination is made by counsel for the Company that such
written assurances are not required in the circumstances under the then
applicable federal or state securities laws.
(h) If an Employee or Employee Director optionee ceases to be
employed by the Company or its subsidiaries or a Non-Employee Director
optionee ceases to serve as a director of the Company or its subsidiaries,
then such optionee's option shall terminate three (3) months thereafter, and
during such three-month period, such option shall be exercisable only as to
those shares with respect to which installments, if any, had accrued as of
the date on which the optionee ceased to be employed by the Company or its
subsidiaries or ceased to serve as a director of the Company or its
subsidiaries, unless:
(i) Such termination or cessation of service is due to
such person's permanent and total disability, within the meaning of Section
22(e)(3) of the Code, in which case such person's stock option agreement
may, but need not, provide that it may be exercised at any time within a
period of not more than one (1) year following such termination of
<PAGE>
employment, or cessation of service as a director and provided further that
if such optionee dies during such one (1) year specified period following
such termination of employment or cessation of service, then the stock
option agreement may, but need not, provide that such option may be
exercised at any specified time up to one (1) year following the death of
the optionee, but only to the extent that the optionee was entitled to
exercise said option immediately prior to the termination of the optionee's
employment or cessation of service as a director;
(ii) The optionee dies while in the employ of the Company
or its subsidiaries or while serving as a director, in which case options
may be exercised at any time within a period of not more than one (1) year
following the death of the optionee, but only to the extent that the
optionee was entitled to exercise said option immediately prior to the
termination of optionee's employment or cessation of service; and, provided
further that if an optionee dies within not more than three (3) months after
termination of such employment or cessation of service, then such person's
option may, but need not, provide that it may be exercised at any time
within one (1) year following the death of the optionee, and provided
further that, unless the option provides otherwise, such option shall only
be exercisable to the extent that the optionee was entitled to exercise said
option immediately prior to the termination of the optionee's employment or
cessation of service as a director as provided herein;
(iii) The option by its terms specifies (a) that it shall
terminate sooner than three (3) months after termination of the optionee's
employment or cessation of the optionee's directorship or (b) that it may be
exercised more than three (3) months after termination of the optionee's
employment, provided that, unless the option provides otherwise, such option
shall only be exercisable to the extent that the optionee was entitled to
exercise said option immediately prior to the optionee's termination;
(iv) The optionee's employment is terminated due to the
optionee's retirement at age sixty-five (65), in which case the option may,
but need not, provide that it may be exercised for a period greater or less
than three (3) months after termination on the optionee's employment,
provided that, unless the option provides otherwise, such option shall only
be exercisable to the extent that the optionee was entitled to exercise said
option immediately prior to the optionee's termination;
(v) The Employee or Employee Director optionee's
employment is terminated for cause, whereupon the option terminates
immediately unless such termination is waived by the Committee. Termination
for cause shall include termination for malfeasance or gross misfeasance in
the performance of duties, or conviction of illegal activity in connection
therewith, conviction for a felony, or any significant conduct detrimental
to the interest of the Company or any of its subsidiaries, and the
determination of the Committee with respect thereto shall be final and
conclusive; or
(v) The Employee Director or Non-Employee Director
optionee is removed from the Board for cause, whereupon the option
terminates immediately on the date of such removal unless such termination
is waived by the Committee. Removal for cause shall include removal of a
director who has been declared of unsound mind by an order of court or
convicted of a felony.
This subparagraph 5(h) shall not be construed to extend
the term of any option or to permit anyone to exercise the option after
<PAGE>
expiration of its term, nor shall it be construed to increase the number of
shares as to which any option is exercisable from the amount exercisable on
the date of termination of the optionee's employment or service as director.
(i) Options may be exercised by ten (10) days' written notice
delivered to the Company stating the number of shares with respect to which
the option is being exercised together with payment for such shares. Not
less than ten (10) shares may be purchased at any one time unless the number
purchased is the total number of shares which may be purchased under the
option.
(j) Any option granted hereunder shall provide as determined by
the Committee for appropriate arrangements for the satisfaction by the
Company or its subsidiaries and the optionee of all federal, state, local or
other income, excise or employment taxes or tax withholding requirements
applicable to the exercise of the option or the later disposition of the
shares of stock thereby acquired. Such arrangements shall include, without
limitation, the right of the Company or any subsidiary thereof to deduct or
withhold in the form of cash or, if permitted by law, shares of stock from
any transfer or payment to an optionee or, if permitted by law, to receive
transfers of shares of stock or other property from the optionee, in such
amount or amounts deemed required or appropriate by the Committee in its
discretion. Any shares of stock issued pursuant to the exercise of an
option and transferred by the optionee to the Company for purposes of
satisfying any withholding obligation shall not again be available for
purposes of the 1997 Plan.
6. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the 1997
Plan, the Company shall keep available at all times the number of shares of
stock required to satisfy such options.
(b) The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the 1997 Plan or the Company
such authority as may be required to issue and sell shares of stock upon
exercise of the options granted under the 1997 Plan; provided, however, that
this undertaking shall not require the Company to register under the
Securities Act either the 1997 Plan, any option granted under the 1997 Plan
or any stock issued or issuable pursuant to any such option or grant. If
the Company is unable to obtain from any such regulatory commission or
agency the authority which counsel for the Company deems necessary for the
lawful issuance and sale of stock under the 1997 Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon grant
or upon exercise of such options unless and until such authority is
obtained.
(c) The Company shall indemnify and hold harmless the members
of the Committee in any action brought against any member in connection with
the administration of the 1997 Plan to the maximum extent permitted by then
applicable law.
7. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock
pursuant to options granted under the 1997 Plan shall constitute general
funds of the Company.
<PAGE>
8. MISCELLANEOUS.
(a) The Board or the Committee shall have the power to
accelerate the time during which an option may be exercised, notwithstanding
the provisions in the option stating the time during which it may be
exercised.
(b) Neither an optionee nor any person to whom an option is
transferred under subparagraph 5(d) shall be deemed to be the holder of, or
to have any of the rights of a holder with respect to, any shares subject to
such option unless and until such person has satisfied all requirements for
exercise of the option pursuant to its terms.
(c) Nothing contained in the 1997 Plan, or in any option
granted pursuant to the 1997 Plan, shall obligate the Company, or any of its
subsidiaries, to employ any employee for any period or interfere in any way
with the right of the Company, or any of its subsidiaries, to reduce the
compensation of any employee.
9. ADJUSTMENTS UPON CHANGES IN STOCK. If the outstanding shares of
the stock of the Company are increased, decreased, or changed into, or
exchanged for a different number or kind of shares or securities of the
Company, without receipt of consideration by the Company, through
reorganization, merger, recapitalization, reclassification, stock split,
stock dividend, stock consolidation, or otherwise, an appropriate and
proportionate adjustment shall be made in the number and kind of shares as
to which options may be granted. A corresponding adjustment changing the
number or kind of shares and the exercise price per share allocated to
unexercised options, or portions thereof, which shall have been granted
prior to any such change shall likewise be made. Any such adjustment,
however, in an outstanding option shall be made without change in the total
price applicable to the unexercised portion of the option but with a
corresponding adjustment in the price for each share subject to the option.
Adjustments under this section shall be made by the Committee whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final and conclusive. No fractional shares of stock shall be
issued under the 1997 Plan on account of any such adjustment.
10. TERMINATING EVENT. Not less than thirty (30) days prior to the
dissolution or liquidation of the Company, or a reorganization, merger, or
consolidation of the Company with one or more corporations as a result of
which the Company will not be the surviving or resulting corporation, or a
sale of substantially all the assets of the Company to another person, or a
reverse merger in which the Company is the surviving corporation but the
shares of the Company's stock outstanding immediately preceding the merger
are converted by virtue of the merger into other property, or in the event
of any other capital reorganization or in which shares of stock of the
Company possessing more than fifty percent (50%) of the voting power of the
Company are exchanged (a "Terminating Event"), the Committee shall notify
each optionee of the pendency of the Terminating Event. Upon delivery of
said notice, any option granted prior to the Terminating Event shall be,
notwithstanding the provisions of paragraph 5 hereof, exercisable in full
and not only as to those shares with respect to which installments, if any,
have then accrued, subject, however, to earlier expiration or termination as
provided elsewhere in the 1997 Plan. Upon the date thirty (30) days after
delivery of said notice, any option or portion thereof not exercised shall
terminate, and upon the effective date of the Terminating Event, the 1997
Plan shall terminate, unless provision is made in connection with the
Terminating Event for assumption of options theretofore granted, or
<PAGE>
substitution for such options of new options covering stock of a successor
employer corporation, or a parent or subsidiary corporation thereof, solely
at the option of such successor corporation or parent or subsidiary
corporation, with appropriate adjustments as to number and kind of shares
and prices.
11. AMENDMENT OF THE 1997 PLAN.
(a) The Committee at any time, and from time to time, may amend
the 1997 Plan. However, except as provided in paragraph 9 relating to
adjustments upon changes in stock, no amendment shall be effective unless,
within twelve (12) months before or after the adoption of the amendment, the
amendment is approved by the vote of a majority of the outstanding shares of
the Company represented and voting at a shareholders meeting or by the
written consent of a majority of the outstanding shares of the Company where
the amendment will:
(i) Increase the number of shares reserved for options
under the 1997 Plan;
(ii) Materially modify the requirements as to eligibility
for participation in the 1997 Plan; or
(iii) Materially increase the benefits accruing to
participants under the 1997 Plan.
It is expressly contemplated that the Board may amend the 1997
Plan in any respect the Board deems necessary or advisable to provide
optionees with the maximum benefits provided or to be provided under the
provisions of the Code and the regulations promulgated thereunder relating
to incentive stock options and/or to bring the 1997 Plan and/or options
granted under it into compliance therewith.
(b) Rights and obligations under any option granted pursuant to
the 1997 Plan, while the 1997 Plan is in effect, shall not be altered or
impaired by any amendment, suspension or termination of the 1997 Plan,
except with the consent of the person to whom the stock or option was
granted.
12. TERMINATION OR SUSPENSION OF THE 1997 PLAN.
(a) The Committee may suspend or terminate the 1997 Plan at any
time. Unless sooner terminated, the 1997 Plan shall terminate ten (10)
years from the effective date of the 1997 Plan. No options may be granted
under the 1997 Plan while the 1997 Plan is suspended or after it is
terminated.
(b) Rights and obligations under any option granted pursuant to
the 1997 Plan, while the 1997 Plan is in effect, shall not be altered or
impaired by suspension or termination of the 1997 Plan, except with the
consent of the person to whom the stock or option was granted.
13. EFFECTIVE DATE OF PLAN. The 1997 Plan shall be deemed adopted
as of February 18, 1997. The 1997 Plan shall become effective as determined
by the Board, but no options granted under the 1997 Plan shall be exercised
unless and until the 1997 Plan has been approved within twelve (12) months
after February 18, 1997 by the vote of the holders of a majority of the
outstanding shares of the Company represented and voting at a shareholders
meeting or by the written consent of a majority of the outstanding shares of
<PAGE>
the Company and, if required, an appropriate permit has been issued by the
Director of Business Registration of the Hawaii Department of Commerce and
Consumer Affairs.
The CPB Inc. 1997 Stock Option Plan is hereby approved and
adopted in all respects.
STOCK OPTION PLAN COMMITTEE
________________________________
Stanley W. Hong
________________________________
Dennis I. Hirota, Ph.D.
________________________________
Daniel M. Nagamine
BOARD OF DIRECTORS
________________________________
Paul Devens
________________________________
Alice J. Guild
________________________________
Dennis I. Hirota, Ph.D.
________________________________
Stanley W. Hong
________________________________
Kensuke Hotta
________________________________
Daniel M. Nagamine
________________________________
Joichi Saito
________________________________
Yoshihara Satoh
________________________________
Naoaki Shibuya
EXHIBIT 13
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, 1996, 1995 and 1994, and with respect to the
consolidated balance sheets at December 31, 1996 and 1995, 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 1993 and 1992, and the selected balance sheet data at December
31, 1994, 1993 and 1992, 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) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Total interest income $104,287 $107,802 $93,793 $91,995 $96,712
Total interest expense 41,679 44,745 31,600 30,922 39,447
Net interest income 62,608 63,057 62,193 61,073 57,265
Provision for loan losses 2,500 3,300 3,300 3,200 2,700
Net interest income after provision for loan losses 60,108 59,757 58,893 57,873 54,565
Other operating income 10,771 10,764 10,708 11,169 9,089
Other operating expense 47,552 47,679 47,332 43,284 39,933
Income before income taxes and cumulative effect
of accounting change 23,327 22,842 22,269 25,758 23,721
Income taxes 9,236 9,034 8,786 10,026 9,119
Net income 14,091 13,808 13,483 15,940<F1> 14,602
- ---------------------------------------------------------------------------------------------------------------------
Balance Sheet Data (Year-End):
Interest-bearing deposits in other banks $26,297 $7,140 $40,277 $5,039 $13,104
Federal funds sold -- -- -- 5,000 5,000
Investment securities <F2> 240,458 283,627 243,788 250,668 230,902
Loans 1,041,976 990,356 991,968 945,768 901,565
Allowance for loan losses 19,436 20,156 18,296 17,131 15,378
Total assets 1,403,165 1,371,909 1,381,539 1,303,102 1,253,663
Core deposits <F3> 859,280 878,065 878,660 900,218 907,852
Total deposits 1,123,614 1,138,319 1,081,909 1,078,326 1,074,055
Long-term debt 115,840 81,107 68,307 80,881 61,483
Total stockholders' equity 140,882 132,507 121,103 113,188 100,733
- ---------------------------------------------------------------------------------------------------------------------
Per Share Data:
Net income $2.68 $2.64 $2.58 $3.06 $2.81
Cash dividends declared 0.96 0.92 0.88 0.88 0.80
Book value 26.74 25.23 23.13 21.64 19.39
Weighted average shares outstanding (in thousands) 5,265 5,240 5,234 5,216 5,192
- ---------------------------------------------------------------------------------------------------------------------
Financial Ratios:
Return on average assets 1.04% 1.00% 1.03% 1.29% 1.23%
Return on average stockholders' equity 10.27 10.79 11.48 14.88 15.36
Average stockholders' equity to average assets 10.09 9.29 8.99 8.70 8.03
Net interest margin <F4> 4.89 4.87 5.10 5.34 5.24
Net charge-offs to average loans 0.32 0.14 0.23 0.16 0.14
Nonperforming assets to year-end loans &
other real estate <F5> 1.41 0.59 1.84 0.66 0.64
Allowance for loan losses to year-end loans 1.87 2.04 1.84 1.81 1.71
Allowance for loan losses to nonaccrual loans 143.97 562.55 113.95 382.64 280.72
Dividend payout ratio 35.82 34.85 34.11 28.76 28.47
- ---------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Includes a $208,000 credit for cumulative effect of accounting
change.
<F2> Held-to-maturity securities at amortized cost, available-for-sale
securities at fair value in 1996, 1995 and 1994. At amortized cost in 1993 and 1992.
<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>
7
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
OVERVIEW
CPB Inc.'s (the "Company's") net income in 1996 was $14.1 million
increasing by 2.0% over the $13.8 million earned in 1995. Net income of
$13.5 million was recorded in 1994. The increase in 1996 net income
reflected decreases in the provision for loan losses, Federal Deposit
Insurance Corporation ("FDIC") deposit insurance premiums and salaries and
employee benefits. The return on average assets in 1996 was 1.04%,
compared to 1.00% in 1995 and 1.03% in 1994, while the return on average
stockholders' equity in 1996 declined to 10.27% from 10.79% in 1995 and
11.48% in 1994. Earnings per share of $2.68 in 1996 increased by 1.5% over
the $2.64 in 1995, which increased by 2.3% over the $2.58 in 1994. Cash
dividends per share of $0.96 in 1996 increased from $0.92 in 1995 and
$0.88 in 1994.
Total assets of $1,403.2 million at December 31, 1996 increased
by 2.3%, net loans of $1,022.5 million increased by 5.4% and stockholders'
equity of $140.9 million increased by 6.3% compared to year-end 1995.
However, total deposits of $1,123.6 million decreased by 1.3% during 1996.
The relatively low asset and loan growth rates and the decrease in deposits
reflected the slow economic recovery in the state of Hawaii during 1996.
The state's tourism industry improved due to increased visitor arrivals,
but this improvement was negated by continued weakness in the construction
industry. The Hawaiian economy is expected to grow modestly in 1997;
however, a lack of significant improvement may continue to have an adverse
impact on the Company's growth and levels of nonperforming loans and
related loan losses.
Certain matters discussed in this Annual Report may constitute
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward looking statements relate to,
among other things, net interest income, net interest margin, the levels of
nonperforming loans, loan losses and the allowance for loan losses, partnership
income and liquidity that involve certain risks and uncertainties. Important
factors that could cause the results to differ from those discussed in this
report include, but are not limited to, general business conditions in the
state of Hawaii, the real estate market in Hawaii, competitive conditions
among financial institutions, regulatory changes in the financial services
industry and the other risks detailed in the Company's reports filed with the
Securities and Exchange Commission, including the Annual Report on Form 10-K
for the year ended December 31, 1996.
RESULTS OF OPERATIONS
Net Interest Income
Table 1 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.
Investment securities are valued at amortized cost, and nonaccrual loans are
included in total loans for purposes of computing yields.
Net interest income in 1996 of $62.8 million decreased by 0.8% from
$63.3 million in 1995, which increased by 1.3% over $62.5 million in 1994.
Total interest income in 1996 of $104.5 million decreased by 3.2% from
$108.0 million in 1995, which increased by 14.8% over the $94.1 million earned
in 1994. The decrease in interest income in 1996 reflected the decrease in
interest earning assets and lower yields compared to 1995. The increase in
total interest income in 1995 over 1994 was due to volume increase and higher
yields resulting from the increase in the general level of interest rates
during 1994. Average interest earning assets of $1,285.1 million decreased
by 1.0% from $1,297.7 million in 1995, which increased by 5.9% over the
$1,225.1 million average in 1994. The average yield on interest earning
assets decreased to 8.13% from 8.32% in 1995, which increased from 7.68% in
1994.
8
<PAGE>
Interest and fees on loans of $88.3 million in 1996 decreased by
3.2% from $91.3 million in 1995, which increased by 15.5% over 1994.
Average loans increased by 0.6% in 1996 and by 6.0% in 1995, while the
average yield on loans was 8.74% in 1996 compared with 9.09% in 1995 and 8.34%
in 1994. Interest on taxable and tax-exempt investment securities
of $15.8 million in 1996 increased by 9.6% over 1995, which increased by 3.4%
over 1994. The increases during the last two years were due to increases in
average investment securities of 5.2% in 1996 and 1.0% in 1995 and in average
yield which increased to 5.80% from 5.69% in 1995 and 5.55% in 1994. Interest
on deposits in other banks decreased by $1.6 million or 79.1% due primarily to
two large short-term deposits received from customers in 1995 which were
invested in interest-bearing deposits in other banks or in Federal funds.
Interest expense in 1996 of $41.7 million decreased by 6.9% from
$44.7 million in 1995, which increased by 41.6% over 1994. Despite the trend
of deposit movement from savings and money market accounts into higher-yielding
certificates of deposit, the decrease in effective rates paid on deposits in
1996 combined with the decrease in average interest-bearing liabilities by 2.5%
from 1995 resulted in lower interest expense for 1996. The large increase in
interest expense in 1995 was a result of the increase in the general level of
interest rates in 1994 combined with the aforementioned deposit movement to
certificates of deposit. Additionally, average interest-bearing liabilities in
Table 1. Average Balances, Interest Income and Expense, Yields and Rates
(Taxable Equivalent)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
----------------------------- --------------------------- -----------------------------
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 $ 7,924 5.28% $ 418 $ 34,224 5.84% $ 1,998 $ 24,673 4.27% $ 1,054
Federal funds sold 22 4.55 1 5,666 5.93 336 1,849 3.52 65
Taxable investment
securities<F1> 261,934 5.94 15,568 250,101 5.68 14,198 242,137 5.55 13,437
Tax-exempt investment
securities<F1> 4,917 4.47 220 3,631 5.76 209 8,984 5.48 492
Loans<F2> 1,010,255 8.74 88,310 1,004,094 9.09 91,260 947,433 8.34 79,043
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,285,052 8.13 104,517 1,297,716 8.32 108,001 1,225,076 7.68 94,091
Nonearning assets 74,678 79,019 80,625
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,359,730 $1,376,735 $1,305,701
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders'
Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits $ 94,389 1.36% $ 1,284 $ 98,303 1.36% $ 1,335 $ 104,847 1.36% $ 1,423
Savings and money market deposits 392,603 2.80 10,977 414,988 3.12 12,940 459,282 2.45 11,264
Time deposits under $100,000 194,950 4.80 9,348 188,574 4.78 9,021 163,479 3.77 6,161
Time deposits $100,000 and over 266,821 5.16 13,755 249,215 5.44 13,564 184,427 3.61 6,661
Short-term borrowings 8,844 5.52 488 50,703 5.64 2,860 32,873 4.49 1,476
Long-term debt 96,741 6.02 5,827 79,942 6.29 5,025 76,277 6.05 4,615
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,054,348 3.95 41,679 1,081,725 4.14 44,745 1,021,185 3.09 31,600
Noninterest-bearing deposits 153,288 152,002 152,941
Other liabilities 14,923 15,075 14,145
Stockholders' equity 137,171 127,933 117,430
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,359,730 $1,376,735 $1,305,701
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 62,838 $63,256 $62,491
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.89% 4.87% 5.10%
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> At amortized cost.
<F2> Includes nonaccrual loans.
</FN>
</TABLE>
9
<PAGE>
1995 increased by 5.9% over 1994. The effective rate on interest-bearing
liabilities was 3.95% in 1996 compared to 4.14% in 1995 and 3.09% in 1994.
As a result, net interest margin increased to 4.89% in 1996 from 4.87% in
1995, which decreased from 5.10% in 1994.
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 ("Allowance") to cover inherent losses. The Company
provided $2,500,000, $3,300,000 and $3,300,000 to the Allowance in 1996, 1995
and 1994, respectively. Net loan charge-offs of $3,220,000 in 1996 were
comprised of $1,986,000 in loans secured by real estate, $554,000 in commercial
and industrial loans and $680,000 in consumer loans. Net loan charge-offs
were $1,440,000 in 1995 and $2,135,000 in 1994. Net loan charge-offs expressed
as a percentage of average loans were 0.32%, 0.14% and 0.23% in 1996, 1995 and
1994, respectively. The increase in charge-offs in 1996 was mainly due to
partial charge-offs on several residential mortgage loans and two commercial
loans secured by real estate.
The Allowance expressed as a percentage of loans was 1.87% at
December 31, 1996, and 2.04% and 1.84% at the previous two year-ends. The
decrease in this ratio in 1996 was due to higher net loan charge-offs and the
recent growth of the loan portfolio. Management believes that the current
level of provision for loan losses is consistent with the state of Hawaii's
relative economic stability experienced during the last three years.
Delinquencies, bankruptcies and foreclosures occurring in 1996 were the result
of past economic conditions which had been provided for in the Allowance in
previous years. Notwithstanding the increase in nonperforming assets since
1992, the Company's net loan charge-offs have remained relatively low as a
percentage of total loans. During the fourth quarter of 1996, higher than
anticipated charge-offs were recorded, related primarily to planned
foreclosures on residential mortgages and the deterioration of one borrower's
financial condition, which prompted management to increase the provision for
loan losses. Should current economic conditions continue, adverse effects on
borrowers' financial situations and collateral values may negatively impact
nonperforming assets, charge-offs and provision for loan losses.
Table 2. Analysis of Changes in Net Interest Income (Taxable Equivalent)
<TABLE>
<CAPTION>
Year ended December 31,
1996 Compared to 1995 1995 Compared to 1994
------------------------------ ------------------------------
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 $(1,536) $ (44) $(1,580) $ 408 $536 $944
Federal funds sold (335) -- (335) 134 137 271
Taxable investment securities 672 698 1,370 442 319 761
Tax-exempt investment securities 74 (63) 11 (293) 10 (283)
Loans 560 (3,510) (2,950) 4,726 7,491 12,217
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets (565) (2,919) (3,484) 5,417 8,493 13,910
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits (53) 2 (51) (89) 1 (88)
Savings and money market deposits (698) (1,265) (1,963) (1,085) 2,761 1,676
Time deposits under $100,000 305 22 327 946 1,914 2,860
Time deposits $100,000 and over 958 (767) 191 2,339 4,564 6,903
Short-term borrowings (2,361) (11) (2,372) 801 583 1,384
Long-term debt 1,057 (255) 802 222 188 410
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities (792) (2,274) (3,066) 3,134 10,011 13,145
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 227 $ (645) $ (418) $2,283 $(1,518) $765
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
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 totaled $33,866,000 at
December 31, 1996, compared to $20,977,000 at year-end 1995, an increase of
61.4%. Nonaccrual loans of $13,500,000 increased during 1996 from $3,583,000
in 1995 primarily due to four commercial real estate loans and several
residential mortgage loans. A $1.6 million commercial loan secured by a
retail/apartment complex and various other properties and a $6.0 million loan
secured by commercial properties in Honolulu are in the workout process. Two
loans totaling $2.7 million to a borrower are secured by residential
properties, one of which is in the foreclosure process. Specific allocations
for these loans have been made in the Allowance. Other real estate of
$1,235,000 decreased from the $2,231,000 held at year-end 1995. Loans
delinquent for 90 days or more of $6,313,000 decreased from $9,189,000 reported
a year ago, primarily due to the transfer of a large commercial real estate
loan to nonaccrual status. Delinquencies were primarily comprised of
residential mortgage loans. Restructured loans still accruing interest totaled
$12,818,000, increasing from $5,974,000 at year-end 1995, and were comprised of
loans to three borrowers. Loans totaling $6.0 million to a borrower are
secured by commercial property, loans totaling $3.8 million to another borrower
are secured by commercial and residential properties, and loans totaling $3.0
million to the third borrower are secured by various commercial and residential
properties, all of which had specific allocations in the Allowance.
Accounting for nonperforming assets is discussed in note 1 to the
consolidated financial statements on pages 21 and 22 of this Annual Report.
Table 3. Nonperforming Assets, Past Due Loans and Restructured Loans
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $13,500 $ 3,583 $16,056 $ 4,477 $ 5,478
Other real estate 1,235 2,231 2,242 1,750 296
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 14,735 5,814 18,298 6,227 5,774
Loans delinquent for 90 days or more 6,313 9,189 12,872 19,820 7,383
Restructured loans still accruing interest 12,818 5,974 8,486 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets, loans delinquent for 90 days or more
and restructured loans still accruing interest $33,866 $20,977 $39,656 $26,047 $13,157
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of loans and other real estate 1.41% 0.59% 1.84% 0.66% 0.64%
- ------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets and loans delinquent for 90 days or more
as a percentage of loans and other real estate 2.02% 1.51% 3.14% 2.75% 1.46%
- ------------------------------------------------------------------------------------------------------------------------------
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 3.25% 2.11% 3.99% 2.75% 1.46%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Other Operating Income
Table 4 sets forth components of other operating income and
the total as a percentage of average assets.
Other operating income of $10,771,000 increased by 0.1% over
1995, which increased by 0.5% over 1994. Service charges on deposit accounts
of $2,795,000 and other service charges and fees of $5,545,000 increased by
5.7% and 5.5%, respectively. Partnership income is derived from the Company's
50% investment in CKSS Associates, which owns the Company's headquarters
building and the Kaimuki Plaza which was completed in the fourth quarter of
1994. The investment in partnership is discussed in note 7 to the consolidated
financial statements on page 27 of this Annual Report. Partnership income
totaled $681,000 in 1996, decreasing by 44.3% from 1995 due to depreciation
and interest expense related to the Kaimuki Plaza and the effects of
vacancies and declines in lease rates resulting from an oversupply of office
space in the Honolulu area. Partnership income in 1995 decreased by 10.2%
from 1994. Fees on foreign exchange of $876,000 in 1996 decreased by 17.4%
mainly due to a reduction in volume. Forward foreign exchange contracts are
discussed in note 1 to the consolidated financial statements on page 23 of
this Annual Report. Other income of $880,000 increased by 70.2% due to a
one-time credit of $191,000 in interest income on income tax refunds received.
Other Operating Expense
Table 5 sets forth components of other operating expense and the
total as a percentage of average assets.
Total other operating expense of $47,552,000 in 1996 decreased by
0.3% from 1995, which increased by 0.7% over 1994. Salaries and employee
benefits of $24,998,000 decreased by 2.8% from 1995, which increased by
2.1% over 1994. Contributing to the decrease was the revision of the
defined benefit pension plan during the year which reduced pension expense by
$484,000 or 31.7%. A bonus and other expenses related to the retirement of the
chairman of the board in 1995 also contributed to the decrease in 1996. 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 costs 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 expected to recover by
lowering salary and employee benefit levels.
Net occupancy expense of $6,833,000 in 1996 increased by 16.3% over
1995, which increased by 14.9% over 1994, primarily due to the opening of
five branches during the last two years. Equipment expense of $2,690,000
increased by 5.7% in 1996 over 1995, which increased by 0.7% over 1994,
primarily due to investments in personal computers related to additional
locations and development of the Bank's communications network. Other expense
of $13,031,000 decreased by 3.7% from 1995, which also decreased by 6.6% from
1994. FDIC deposit insurance premiums decreased by $1,242,000 and $1,158,000
in 1996 and 1995, respectively, due to the reduction in premium rate effective
in June 1995. Charge card related expenses increased by $408,000 or 19.9%
mainly due to an increase in interchange fees, and expenses related to legal,
audit and professional services increased by $286,000 or 39.3%. Regulatory
examination fees and consulting fees related to business recovery planning
contributed to the increase.
Income Taxes
Income tax expense totaled $9,236,000 in 1996, compared to
$9,034,000 in 1995 and $8,786,000 in 1994. The effective tax rate was
39.6%, 39.6% and 39.5%, respectively.
Table 4. Components of Other Operating Income
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 2,795 $ 2,645 $2,750
Other service charges and fees 5,545 5,258 5,076
Partnership income 681 1,223 1,362
Fees on foreign exchange 876 1,060 980
Investment securities (losses) gains (6) 61 --
Other 880 517 540
- ----------------------------------------------------------------------------------------------------------
Total $10,771 $10,764 $10,708
- ----------------------------------------------------------------------------------------------------------
Total other operating income as a
percentage of average assets 0.79% 0.78% 0.82%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Table 5. Components of Other Operating Expense
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $24,998 $25,728 $25,209
Net occupancy 6,833 5,873 5,112
Equipment 2,690 2,545 2,528
Other 13,031 13,533 14,483
- --------------------------------------------------------------------------------------------------------------------------
Total $47,552 $47,679 $47,332
- --------------------------------------------------------------------------------------------------------------------------
Total other operating expense as a
percentage of average assets 3.50% 3.46% 3.63%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Financial Condition
Table 6 sets forth the distribution of assets, liabilities and
stockholders' equity.
Average total assets of $1,359.7 million in 1996 decreased by
$17.0 million or 1.2% from 1995, which increased by $71.0 million or 5.4%
over 1994. Average loans of $1,010.3 million increased by $6.2 million or
0.6% and by $56.7 million or 6.0% in the respective periods. The recent
performance of assets, loans and deposits reflected the level of economic
activity in the state of Hawaii, compounded by increased competition. Average
taxable and tax-exempt investment securities of $266.9 million increased by
5.2% over 1995, which increased by 1.2% over 1994. Interest-bearing deposits
in other banks averaged $7.9 million in 1996, compared to $34.2 million in
1995 and $24.7 million in 1994.
Commercial and residential mortgage loans of $781.7 million at
year-end 1996 increased by 9.4%, and consumer loans of $78.4 million increased
by 16.7% compared to year-end 1995. Commercial loans of $142.4 million
decreased by 14.1%, and construction loans of $43.7 million decreased by
9.2% during the same period. Note 4 to the consolidated financial statements
on page 25 of this Annual Report sets forth loan information by category.
Average total deposits of $1,102.1 million in 1996 decreased by
$1.0 million or 0.1% from 1995, which increased by $38.1 million or 3.6% over
1994. Average core deposits (noninterest-bearing demand, interest-bearing
demand, savings, money market and time deposits under $100,000) of $835.2
million in 1996 decreased from $853.9 million in 1995 and $880.5 million in
1994. Average time deposits $100,000 and over increased to $266.8 million
from $249.2 million in 1995 and $184.4 million in 1994, continuing the trend
since 1994 of customers transferring funds into higher yielding deposits.
Average short-term borrowings and long-term debt of $105.6 million in 1996
decreased by 19.2% from 1995, which increased by 19.7% over 1994. These funds
were primarily comprised of $96.7 million, $79.9 million
Table 6. Distribution of Assets, Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
----------------- ----------------- -----------------
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 $ 38,959 2.9% $ 40,633 2.9% $ 43,986 3.4%
Interest-bearing deposits in other banks 7,924 0.6 34,224 2.5 24,673 1.9
Federal funds sold 22 -- 5,666 0.4 1,849 0.1
Taxable investment securities 261,934 19.3 250,101 18.2 242,137 18.6
Tax-exempt investment securities 4,917 0.3 3,631 0.3 8,984 0.7
Loans 1,010,255 74.3 1,004,094 72.9 947,433 72.5
Allowance for loan losses (20,018) (1.5) (19,661) (1.4) (18,395) (1.4)
Premises and equipment 24,756 1.8 24,377 1.8 23,565 1.8
Other assets 30,981 2.3 33,670 2.4 31,469 2.4
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,359,730 100.0% $1,376,735 100.0% $1,305,701 100.0%
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing demand $ 153,288 11.3% $ 152,002 11.0% $ 152,941 11.7%
Interest-bearing demand 94,389 6.9 98,303 7.1 104,847 8.0
Savings and money market 392,603 28.9 414,988 30.2 459,282 35.2
Time deposits under $100,000 194,950 14.3 188,574 13.7 163,479 12.5
Time deposits $100,000 and over 266,821 19.6 249,215 18.1 184,427 14.1
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,102,051 81.0 1,103,082 80.1 1,064,976 81.5
Short-term borrowings 8,844 0.7 50,703 3.7 32,873 2.5
Long-term debt 96,741 7.1 79,942 5.8 76,277 5.9
Other liabilities 14,923 1.1 15,075 1.1 14,145 1.1
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,222,559 89.9 1,248,802 90.7 1,188,271 91.0
Stockholders' equity 137,171 10.1 127,933 9.3 117,430 9.0
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,359,730 100.0% $1,376,735 100.0% $1,305,701 100.0%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
and $76.3 million in advances from the Federal Home Loan Bank of Seattle
("FHLB") in 1996, 1995 and 1994, respectively. These advances provide
medium- and long-term financing for loan customers.
Asset/Liability Management
The Company'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 re-price during differing periods or in differing
amounts. Asset/liability management is the coordination of the Company's
rate-sensitive assets and rate sensitive liabilities to minimize interest
rate risk while maintaining targeted levels of return, 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 Company'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 of future changes in interest rates on net interest margin.
Any identified exposures to net interest margin are managed through the
shortening or lengthening of the duration of the Company's assets and/or
liabilities. The Company's asset/liability management activities do not
include the use of derivative financial instruments, such as interest rate
swaps, futures or options.
Table 7 sets forth information concerning the interest rate
sensitivity of the Company's assets, liabilities and stockholders'
equity at December 31, 1996. The assumptions used in determining interest
rate sensitivity of various asset and liability products had a significant
impact on the resulting table. For purposes of this presentation, assets and
liabilities are classified by the earliest re-pricing date or maturity.
All interest-bearing demand and savings balances are included in the three
months or less category, even though re-pricing 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 re-priced
exceeds the amount of assets in the three months or less and the over
three through six months categories. In the remaining time periods,
re-pricing assets exceed re-pricing liabilities. Generally, where rate-
sensitive liabilities exceed rate-sensitive assets, net interest margin is
expected to be negatively impacted during periods of increasing interest
rates and positively impacted during periods of decreasing interest rates.
Accordingly, net interest margin improved slightly in 1996, when market
interest rates declined. The Company's net interest margin during the
last three years has also been adversely impacted by a slowdown in loan
demand, competitive loan and deposit pricing and the reduction in core
deposits.
Table 7. Rate Sensitivity of Assets, Liabilities and Stockholders'
Equity
<TABLE>
<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 $ 26,297 $ -- $ -- $ -- $ -- $ -- $ 26,297
Federal funds sold -- -- -- -- -- -- --
Investment securities 39,137 23,639 26,977 66,867 68,904 14,934 240,458
Loans 377,620 92,063 129,058 318,418 111,317 13,500 1,041,976
Other assets -- -- -- -- -- 94,434 94,434
- -----------------------------------------------------------------------------------------------------------------------------
Total assets 443,054 115,702 156,035 385,285 180,221 122,868 1,403,165
- -----------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits -- -- -- -- -- 168,170 168,170
Interest-bearing deposits 662,102 122,141 118,225 51,411 1,565 -- 955,444
Short-term borrowings 1,427 3,000 1,000 -- -- -- 5,427
Long-term debt 55,674 135 12,276 16,188 31,567 -- 115,840
Other liabilities -- -- -- -- -- 17,402 17,402
Stockholders' equity -- -- -- -- -- 140,882 140,882
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 719,203 125,276 131,501 67,599 33,132 326,454 1,403,165
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(276,149) $ (9,574) $ 24,534 $317,686 $ 147,089 $(203,586) $ --
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap $(276,149) $(285,723) $(261,189) $ 56,497 $ 203,586 $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<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 supplemental 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. The
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 leverage
ratio which is Tier I capital as a percentage of total assets. 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 FDIC
Improvement Act of 1991.
Table 8 sets forth the Company's and Bank's capital ratios as of
the dates indicated.
Capital levels for the Company and the Bank were well in excess of
minimum regulatory required levels at December 31, 1996 and 1995. The
relatively low rate of asset growth over the last three years, coupled with
stable earnings, contributed to the excess.
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
participate in investment and lending opportunities as they arise. Management
monitors the Company's liquidity position in relation to trends of loan demand
and deposit growth on a daily basis to assure maximum utilization and
maintenance of an adequate level of readily marketable assets and access to
short-term funding sources.
The consolidated statements of cash flows identify three major
sources and uses of cash as operating, investing and financing activities.
Cash generated from operations represents a major source of liquidity. As
presented in the consolidated statements of cash flows on page 20 of this
Annual Report, the Company's operating activities provided a stable source of
cash totaling $22.5 million, $24.0 million and $24.4 million in 1996, 1995 and
1994, respectively.
Investing activities represent a use of cash, with the increase being
attributed primarily to the growth of the Company's loan and investment
securities portfolios. Net cash used in investing activities during 1996
amounted to $34.3 million, compared to $10.1 million in 1995 and $90.7 million
in 1994. Net loan originations of $54.8 million in 1996 matched the 1994 level
of $53.0 million, compared to $2.1 million in 1995. Activities from investment
securities and interest-bearing deposits in other banks provided net cash of
$22.8 million in 1996 compared to net cash used of $4.6 million in 1995 and
$32.4 million in 1994.
In addition to cash flows from operating activities, financing
activities generally provided funding for the growth in loans and investment
securities with increased deposits supplemented by the Company's borrowing
sources. The Company's borrowing sources have included short-term sources
such as Federal funds purchased and securities sold under agreements to
repurchase and longer-term FHLB advances.
Table 8. Regulatory Capital Ratios
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------- -------------------------
Required Actual Excess Required Actual Excess
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
Tier I risk-based capital ratio 4.00% 12.10% 8.10% 4.00% 12.35% 8.35%
Total risk-based capital ratio 8.00 13.35 5.35 8.00 13.61 5.61
Leverage capital ratio 3.00 10.28 7.28 3.00 9.61 6.61
- ----------------------------------------------------------------------------------------------------------------
Bank:
Tier I risk-based capital ratio 6.00% 11.27% 5.27% 6.00% 11.05% 5.05%
Total risk-based capital ratio 10.00 12.53 2.53 10.00 12.31 2.31
Leverage capital ratio 5.00 9.60 4.60 5.00 8.99 3.99
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
Except for 1995, deposits have been a net user of cash during the
last three years, reflecting the lack of economic growth in the state of
Hawaii. Deposits declined by $14.7 million in 1996 and $7.2 million in 1994
compared to an increase of $56.4 million in 1995. The composition of the
Bank's deposits reflected a trend since 1994 of increases in certificates of
deposit due to the attraction of higher interest rates. The increase in 1995
was primarily due to an increase in time deposits of $100,000 and over of
approximately $57.0 million. The increase in such deposits was subject to the
Bank's internal policy guidelines to minimize the risks associated with these
types of deposit products. The Company's total borrowings increased by
$36.7 million in 1996 after decreasing by $77.1 million in 1995 and increasing
by $65.7 million in 1994. The increase in total borrowings in 1996 reflected
the increase in loans originated and the decrease in deposits, usually a net
cash provider. Accordingly, net cash provided by financing activities
approximated $17.1 million in 1996 and $64.7 million in 1994, compared to the
$25.2 million used in 1995.
The increase in loans outstanding was funded primarily by increases in
borrowings from the FHLB. The Bank's core deposits of $859.3 million at
December 31, 1996 decreased by 2.1%, and time deposits of $100,000 and over of
$264.3 million increased by 1.5% from a year ago. Although the Company's
liquidity was relatively stable during 1996, management's concern over the
lack of deposit growth has caused the Bank to increase its branch network and
place increased emphasis on marketing and sales efforts in order to enhance
core deposit growth.
The primary uses of funds, as reflected in the Company's parent
company condensed statements of cash flows, of approximately $5.1 million,
$4.7 million and $4.6 million in 1996, 1995 and 1994, respectively, were for
the payment of dividends. The Company's primary source of funds was dividends
received from the Bank of approximately $5.1 million, $4.8 million and
$4.6 million in 1996, 1995 and 1994, respectively. As presented in note 25 to
the consolidated financial statements on page 36 of this Annual Report, the
Bank's retained earnings, as defined, is the maximum amount permitted to be
distributed as a dividend without prior regulatory approvals. At December 31,
1996, retained earnings of the Bank approximated $91.6 million.
Supplementary Financial Information
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
A summary of unaudited quarterly operating results for the years ended
December 31, 1996 and 1995 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>
1996:
Interest income $26,375 $25,835 $25,848 $26,802 $104.287
Net interest income 15,786 15,681 15,504 15,637 62,608
Provision for loan losses 450 450 450 1,150 2,500
Net interest income after provision for loan losses 15,336 15,231 15,054 14,487 60,108
Income before income taxes 5,885 5,938 6,211 5,293 23,327
Net income 3,554 3,577 3,757 3,203 14,091
Net income per share 0.68 0.68 0.71 0.61 2.68
- ---------------------------------------------------------------------------------------------------------------------------
1995:
Interest income $25,964 $27,458 $27,500 $26,800 $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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Consolidated Balance Sheets
CPB INC. AND SUBSIDIARY - DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 55,534 $ 50,274
Interest-bearing deposits in other banks 26,297 7,140
Investment securities:
Held to maturity, at amortized cost (fair value of $109,288 and $137,347
at December 31, 1996 and 1995, respectively) 109,244 136,693
Available for sale, at fair value 131,214 146,934
- ------------------------------------------------------------------------------------------------------------
Total investment securities 240,458 283,627
- ------------------------------------------------------------------------------------------------------------
Loans 1,041,976 990,356
Less allowance for loan losses 19,436 20,156
- ------------------------------------------------------------------------------------------------------------
Net loans 1,022,540 970,200
- ------------------------------------------------------------------------------------------------------------
Premises and equipment 25,072 25,452
Accrued interest receivable 8,674 9,454
Investment in partnership 6,902 6,221
Due from customers on acceptances 1,162 1,443
Other assets 16,526 18,098
- ------------------------------------------------------------------------------------------------------------
Total assets $1,403,165 $1,371,909
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits $ 168,170 $ 170,494
Interest-bearing deposits 955,444 967,825
- ------------------------------------------------------------------------------------------------------------
Total deposits 1,123,614 1,138,319
Short-term borrowings 5,427 3,497
Long-term debt 115,840 81,107
Bank acceptances outstanding 1,162 1,443
Other liabilities 16,240 15,036
- ------------------------------------------------------------------------------------------------------------
Total liabilities 1,262,283 1,239,402
- ------------------------------------------------------------------------------------------------------------
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 5,268,874 and
5,251,762 shares at December 31, 1996 and 1995, respectively 6,586 6,565
Surplus 45,481 45,337
Retained earnings 89,405 80,370
Unrealized (loss) gain on investment securities, net of taxes (590) 235
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 140,882 132,507
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,403,165 $1,371,909
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
Consolidated Statements of Income
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 88,157 $91,134 $78,939
Interest and dividends on investment securities:
Taxable interest 14,454 13,336 12,632
Tax-exempt interest 143 136 298
Dividends 1,114 862 805
Interest on deposits in other banks 418 1,998 1,054
Interest on Federal funds sold 1 336 65
- ------------------------------------------------------------------------------------------------------------------------
Total interest income 104,287 107,802 93,793
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 35,364 36,860 25,509
Interest on short-term borrowings 488 2,860 1,476
Interest on long-term debt 5,827 5,025 4,615
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 41,679 44,745 31,600
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 62,608 63,057 62,193
Provision for loan losses 2,500 3,300 3,300
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 60,108 59,757 58,893
- ------------------------------------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 2,795 2,645 2,750
Other service charges and fees 5,545 5,258 5,076
Partnership income 681 1,223 1,362
Fees on foreign exchange 876 1,060 980
Investment securities (losses) gains (6) 61 --
Other 880 517 540
- ------------------------------------------------------------------------------------------------------------------------
Total other operating income 10,771 10,764 10,708
- ------------------------------------------------------------------------------------------------------------------------
Other operating expense:
Salaries and employee benefits 24,998 25,728 25,209
Net occupancy 6,833 5,873 5,112
Equipment 2,690 2,545 2,528
Other 13,031 13,533 14,483
- ------------------------------------------------------------------------------------------------------------------------
Total other operating expense 47,552 47,679 47,332
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 23,327 22,842 22,269
Income taxes 9,236 9,034 8,786
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 14,091 $13,808 $13,483
- ------------------------------------------------------------------------------------------------------------------------
Per common share:
Net income $ 2.68 $ 2.64 $ 2.58
Cash dividends declared 0.96 0.92 $ 0.88
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized Employee
(loss) gain on stock ownership
investment plan shares
Common Retained securities, purchased
(Dollars in thousands, except per share data) stock Surplus earnings net of taxes with debt Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 (loss) gain
on investment securities, net of taxes -- -- -- (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 (loss) gain
on investment securities, net of taxes -- -- -- 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
Net Income -- -- 14,091 -- -- 14,091
Cash dividends declared ($0.96 per share) -- -- (5,056) -- -- (5,056)
17,112 shares of common stock issued 21 144 -- -- -- 165
Net change in unrealized (loss) gain
on investment securities, net of taxes -- -- -- (825) -- (825)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $6,586 $45,481 $89,405 $ (590) $ -- $140,882
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Consolidated Statements of Cash Flows
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $14,091 $13,808 $ 13,483
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 2,500 3,300 3,300
Provision for depreciation and amortization 2,716 2,574 2,386
Net amortization and accretion of investment securities 949 1,755 2,719
Net loss (gain) on investment securities 6 (61) --
Federal Home Loan Bank stock dividends received (1,114) (862) (1,216)
Net change in loans held for sale (655) 872 6,408
Deferred income tax (benefit) expense (1,121) (1,909) 4,068
Partnership income (681) (1,223) (1,362)
Decrease (increase) in accrued interest receivable and other assets 4,292 5,669 (6,306)
Increase in other liabilities 1,548 59 949
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 22,531 23,982 24,429
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities held to maturity 46,803 56,891 83,311
Purchases of investment securities held to maturity (20,306) (51,618) (56,550)
Proceeds from sales of investment securities available for sale 17,807 7,964 --
Proceeds from maturities of and calls on investment securities available for sale 33,991 4,171 79,334
Purchases of investment securities available for sale (36,341) (55,188) (103,218)
Net (increase) decrease in interest-bearing deposits in other banks (19,157) 33,137 (35,238)
Net loan originations over principal repayments (54,804) (2,089) (52,978)
Loans acquired in branch acquisition -- -- (2,656)
Purchases of premises and equipment (2,372) (4,116) (3,321)
Net proceeds from disposal of premises and equipment 36 307 --
Distributions from partnership -- 430 600
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,343) (10,111) (90,716)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (14,705) 56,410 (7,238)
Deposits acquired in branch acquisition -- -- 10,821
Proceeds from long-term debt 67,000 32,120 14,600
Repayments of long-term debt (32,267) (19,320) (27,174)
Net increase (decrease) in short-term borrowings 1,930 (89,875) 78,292
Cash dividends paid (5,051) (4,716) (4,606)
Proceeds from sale of common stock 165 180 44
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 17,072 (25,201) 64,739
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,260 (11,330) (1,548)
Cash and cash equivalents:
At beginning of year 50,274 61,604 63,152
- ---------------------------------------------------------------------------------------------------------------------------
At end of year $55,534 $50,274 $ 61,604
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $41,700 $46,589 $ 29,663
Cash paid during the year for income taxes 7,588 11,048 7,634
- ---------------------------------------------------------------------------------------------------------------------------
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 619 1,389 891
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
Notes to Consolidated Financial Statements
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 had 26 banking offices located throughout the state of
Hawaii at December 31, 1996. The Bank engages in a broad range
of lending activities including the granting of commercial,
consumer and real estate loans. The Bank also offers a variety
of deposit instruments. These include personal and business
checking and savings accounts, money market accounts and time
certificates of deposit.
Other services include cash management services, merchant
windows, traveler's checks, safe deposit boxes, international
banking services, night depository facilities and wire transfer
services. The Bank's Trust Division offers management, asset
custody and general consultation and planning services.
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.
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.
Investment Securities
The Company accounts for its investment securities in
accordance with 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, 1996
and 1995, 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, net of
taxes, included as a separate component of stockholders' equity.
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 held to maturity
to the available-for-sale category on December 27, 1995.
Gains and losses from the disposition of investment securities
are computed using the specific identification method.
Loans
Loans are stated at the principal amount outstanding, net of unearned
income. Unearned income represents net deferred loan fees which are recognized
over the life of the related loan as an adjustment to yield.
Loans held for sale, consisting primarily of fixed-rate residential
mortgage loans which were originated with the intent to sell, amounted to
$8,547,00 and $7,892,000 at December 31, 1996 and 1995, respectively, and
were valued at the lower of aggregate cost or market value.
21
<PAGE>
Interest income on loans is generally recognized on an accrual basis.
Loans are placed on nonaccrual status when interest payments are 90 days
past due, or earlier should management determine that the borrowers will be
unable to meet contractual principal and/or interest obligations, unless the
loans are well-secured and in the process of collection. 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.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for
loan losses charged against income. Loans deemed to be uncollectible are
charged off against the allowance, and all interest previously accrued but not
collected is reversed against current period interest income. Subsequent
receipts, if any, are credited first to the allowance as recoveries, then to
any remaining principal and unaccrued interest.
Effective January 1, 1995, 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." 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. The Company, considering current
information and events regarding the borrower's 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. Interest income continues
to be recognized on an accrual basis unless the loan is placed on nonaccrual
status. 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. Delinquent installment loans other than charge card loans are
charged off after 120 days, unless determined to be adequately
collateralized or in imminent process of collection. Delinquent charge card
loans are generally charged off within 180 days.
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. Net gains or losses on dispositions of
premises and equipment are included in other operating expense.
Intangible Assets
Intangible assets are carried at the lower of amortized cost
or fair value and are included in other assets. Intangible
assets totaled $491,000 and $477,000 at December 31, 1996 and
1995, respectively, and were comprised of mortgage servicing
rights and deposit purchase premiums, which represent the excess
of purchase price over the estimated fair value of net assets
acquired from two branch acquisitions. Intangible assets are
amortized on a straight-line basis over their estimated benefit
periods. Amortization expense amounted to $114,000, $100,000 and
$112,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Accumulated amortization amounted to $519,000 and
$405,000 at December 31, 1996 and 1995, respectively.
Other Real Estate
Other real estate, included in other assets, is composed of properties
acquired through foreclosure proceedings. 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 cost or fair value
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
$1,235,000 and $2,231,000 at December 31, 1996 and 1995, respectively.
22
<PAGE>
Income Taxes
Deferred tax assets and liabilities are recognized using the liability
method 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 net 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. 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.
Forward Foreign Exchange Contracts
The Bank periodically is a party to a limited amount of forward
foreign exchange contracts to satisfy customer requirements for foreign
currencies. These contracts are not utilized for trading purposes and are
carried at market value, with realized gains and losses included in fees on
foreign exchange. Net (losses) gains for 1996, 1995 and 1994 were ($6,000),
$0 and $6,000, respectively.
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
judgments 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.
Accounting Changes
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of
The Company adopted the provisions of SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," on January 1, 1996. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less estimated selling expenses. Adoption of SFAS No. 121 did not
have a material impact on the Company's consolidated financial statements.
Mortgage Servicing Rights
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights, an amendment of FASB Statement No. 65," on January 1, 1996.
SFAS No. 122 requires an entity engaged in mortgage banking activities to
recognize as separate assets any rights to service mortgage loans for others
based on their relative fair values, if it is practicable to estimate those
fair values. SFAS No. 122 also requires a servicer to assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. The adoption of SFAS No. 122 was not material to the consolidated
financial statements of the Company. However, SFAS No. 122 could have a
material impact on the Company's future consolidated financial statements
should market conditions result in an increased volume of mortgage banking
activities or the recognition of impairment valuation allowances.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
SFAS No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures for
employee stock option grants made in 1994 and future years as if the fair-value
based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
23
<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, 1996 and 1995 was $27,453,000 and $18,831,000,
respectively.
3. INVESTMENT SECURITIES
A summary of investment securities at December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(Dollars in thousands) cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Held to Maturity:
U.S. Treasury and
other U.S.
Government agencies $100,153 $ 348 $ 320 $100,181
States and political
subdivisions 9,091 25 9 9,107
- ---------------------------------------------------------------------------------------------------------------------------
Total $109,244 $ 373 $ 329 $109,288
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale:
U.S. Treasury and
other U.S.
Government agencies $114,330 $ 168 $1,159 $113,339
States and political
subdivisions 2,784 7 -- 2,791
Private-issuer mortgage-
backed securities 148 2 -- 150
Federal Home Loan Bank
of Seattle stock 14,934 -- -- 14,934
- ---------------------------------------------------------------------------------------------------------------------------
Total $132,196 $ 177 $1,159 $131,214
- ---------------------------------------------------------------------------------------------------------------------------
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 of Seattle
stock 13,821 -- -- 13,821
- ----------------------------------------------------------------------------------------------------------------------------
Total $146,543 $ 873 $ 482 $146,934
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
The amortized cost and estimated fair value of investment
securities at December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because issuers 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 $30,243 $30,207
Due after one year through five years 62,364 62,319
Due after five years through ten years 8,028 8,037
Mortgage-backed securities 8,609 8,725
- --------------------------------------------------------------------------------------------------
Total $109,244 $109,288
- --------------------------------------------------------------------------------------------------
Available for Sale:
Due in one year or less $10,019 $10,038
Due after one year through five years 39,533 39,194
Due after five years through ten years 3,062 3,058
Mortgage-backed securities 64,648 63,990
Federal Home Loan Bank stock 14,934 14,934
- --------------------------------------------------------------------------------------------------
Total $132,196 $131,214
- --------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from sales of investment securities available for sale were
$17,807,000 in 1996 and $7,964,000 in 1995, resulting in gross realized
gains of $140,000 and $8,000 and gross realized losses of $146,000 and
$7,000, respectively. 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. There were
no sales of investment securities during the year ended December 31, 1994.
Investment securities of 155,650,000 and $150,453,000 at
December 31, 1996 and 1995, 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).
4. LOANS
Loans consisted of the following at December 31, 1996 and 1995:
(Dollars in thousands) 1996 1995
- ------------------------------------------------------------
Real estate:
Mortgage - commercial $ 432,567 $371,089
Mortgage - residential 349,129 343,118
Construction 43,710 48,131
Commercial, financial
and agricultural 142,365 165,812
Installment 78,431 67,210
- ------------------------------------------------------------
1,046,202 995,360
Unearned income 4,226 5,004
- ------------------------------------------------------------
Total $1,041,976 $990,356
- ------------------------------------------------------------
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 1996 follows:
(Dollars in thousands)
- ----------------------------------------------------------
Balance, beginning of year $20,249
Additions 2,906
Repayments (2,688)
Other changes (9,360)
- ----------------------------------------------------------
Balance, end of year $11,107
- ----------------------------------------------------------
The amount of other changes includes loans sold during the year and
the net change in loans due to entities that were not considered related
parties for the entire year.
Impaired loans at December 31, 1996 and 1995, all of which had
related allowance for loan losses established (see note 5), amounted to
$24,044,000 and $8,567,000 respectively and included all nonaccrual and
restructured loans greater than $500,000. The average recorded investment in
impaired loans amounted to $11,292,000 in 1996 and $15,797,000 in 1995.
Interest income recognized on such loans amounted to $1,714,000 in 1996 and
$1,300,000 in 1995, of which $860,000 and $492,000, respectively, was earned on
nonaccrual loans, and $854,000 and $715,000, respectively, was recorded on
restructured loans still accruing interest.
Nonaccrual loans at December 31, 1996 and 1995 totaled 13,500,000,
and $3,583,000, respectively. The Bank collected and recognized interest of
$257,000 on nonaccrual loans in 1996. The Bank would have
recognized additional interest income of $1,125,000 had these loans been
accruing interest throughout 1996. Additionally, the Bank collected and
recognized interest of $43,000 on charged-off loans in 1996.
25
<PAGE>
Restructured loans still accruing interest at December 31, 1996
and 1995 amounted to $12,818,000 and $5,974,000, respectively. During
1996, the Bank recognized interest income of $975,000 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) 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $20,156 $18,296 $17,131
Provision for loan losses 2,500 3,300 3,300
- -------------------------------------------------------------------------------------------
22,656 21,596 20,431
- -------------------------------------------------------------------------------------------
Charge-offs (3,555) (1,821) (2,519)
Recoveries 335 381 384
- -------------------------------------------------------------------------------------------
Net charge-offs (3,220) (1,440) (2,135)
- -------------------------------------------------------------------------------------------
Balance, end of year $19,436 $20,156 $18,296
- -------------------------------------------------------------------------------------------
</TABLE>
Changes in the allowance for loan losses for impaired loans
(included in the above amounts) for 1996 and 1995 were as follows:
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------
Balance, beginning of year $2,181 $ --
Provision for loan losses 872 584
Net charge-offs (1,981) (943)
Other changes 4,805 2,540
- ------------------------------------------------------------
Balance, end of year $5,877 $2,181
- ------------------------------------------------------------
The amount of other changes represents the net transfer of allocated
allowances for loans which were not classified as impaired for the entire year.
At December 31, 1996, $22,773,000 of impaired loans were measured
based on the fair value of the underlying collateral, while $1,271,000 of
impaired loans were measured based on the present value of expected future
cash flows.
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31,
1996 and 1995:
(Dollars in thousands) 1996 1995
- ---------------------------------------------------------------------
Land $ 6,000 $ 6,000
Office buildings and leasehold
improvements 20,389 19,828
Furniture, fixtures and equipment 14,671 13,561
- ---------------------------------------------------------------------
41,060 39,389
Less accumulated depreciation and
amortization 15,988 13,937
- ---------------------------------------------------------------------
Net $25,072 $25,452
- ---------------------------------------------------------------------
Depreciation and amortization of premises and equipment were
charged to the following operating expenses:
<TABLE>
<CAPTION>
Useful
(Dollars in thousands) 1996 1995 1994 lives
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net occupancy $ 995 $ 925 $ 787 1 to 35
years
Equipment 1,721 1,649 1,599 2 to 20
years
- ---------------------------------------------------------------------------------------------------------
Total $2,716 $2,574 $2,386
- ---------------------------------------------------------------------------------------------------------
</TABLE>
26
<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>
CKSS Associates
Condensed Balance Sheets
December 31, 1996 and 1995
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Office building
(including land valued at $5,200) $38,517 $39,521
Deferred costs 4,386 2,925
Other assets 2,241 862
- --------------------------------------------------------------------------------------------
Total assets $45,144 $43,308
- --------------------------------------------------------------------------------------------
Liabilities and Partners' Equity:
Notes payable $22,801 $22,500
Other liabilities 902 729
Partners' equity 21,441 20,079
- --------------------------------------------------------------------------------------------
Total liabilities and partners' equity $45,144 $43,308
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CKSS Associates
Condensed Statements of Income
Years ended December 31, 1996, 1995 and 1994
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Rental income from bank $2,162 $2,132 $1,925
Other rental income
and other revenues 6,438 5,173 5,603
- --------------------------------------------------------------------------------------------
Total revenues 8,600 7,305 7,528
Total costs and expenses 7,238 4,860 4,804
- --------------------------------------------------------------------------------------------
Net income $1,362 $2,445 $2,724
- --------------------------------------------------------------------------------------------
</TABLE>
Notes Payable
At December 31, 1996, notes payable included $10,701,000 payable to
The Sumitomo Bank, Limited ("Sumitomo"), the principal stockholder of CPB Inc.,
and $12,100,000 due to the Bank. The notes payable to Sumitomo, due on
June 18, 2001, are secured by a mortgage on Central Pacific Plaza. The notes
payable to the Bank include $10,700,000 due on August 10, 2001, which is
secured by a mortgage on the Kaimuki Plaza, and $1,400,000 due on April 10,
2001, which is secured by second mortgages on the Central Pacific Plaza and
Kaimuki Plaza properties. All loans are priced at 0.75% above the London
Interbank Offered Rate ("LIBOR"). The weighted average interest rate on these
notes was 6.3125% at December 31, 1996.
Operating Lease
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. In 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:
1997 through 2002 $300,000
2003 through 2007 $360,000
Thereafter, and until the end of the lease term, minimum annual lease payments
will be renegotiated to a rate not less than $360,000 per year. Lease rent
paid to CPB Properties, Inc. totaled $300,000 during each of the years ended
December 31, 1996 and 1995, and $250,000 during the year ended December 31,
1994.
8. DEPOSITS
Certificates of deposit of $100,000 or more totaled $264,334,000 and
$260,254,000 at December 31, 1996 and 1995, respectively.
Interest expense on certificates of deposit of $100,000 or more
totaled $13,755,000, $13,564,000 and $6,661,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
9. SHORT-TERM BORROWINGS
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 214 days at December 31, 1996, 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
27
<PAGE>
remaining in the asset accounts. At December 31, 1996, the
underlying securities were held in a custodial account
subject to Bank control.
Other short-term borrowings consist primarily of the Treasury Tax and
Loan balance, which represents tax payments collected on behalf of the U.S.
government, and FHLB short term advances. The Treasury Tax and Loan balances
bear market interest rates and are callable at any time.
A summary of short-term borrowings follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Amount outstanding at
December 31 $ -- $ -- $ --
Average amount outstanding
during year 4,589 3,296 282
Highest month-end balance
during year 8,000 42,000 11,000
Weighted average interest rate
on balances outstanding
at December 31 -- -- --
Weighted average interest rate
during year 5.48% 5.93% 4.82%
- --------------------------------------------------------------------------------------------------
Securities sold under agreements
to repurchase:
Amount outstanding at
December 31 $ 4,400 $ 2,500 $67,355
Average amount outstanding
during year 2,433 45,357 29,533
Highest month-end balance
during year 4,400 68,483 67,355
Weighted average interest rate
on balances outstanding
at December 31 5.32% 5.69% 5.05%
Weighted average interest rate
during year 5.62 5.63 4.42
- --------------------------------------------------------------------------------------------------
Other short-term borrowings:
Amount outstanding at
December 31 $ 1,027 $ 997 $26,017
Average amount outstanding
during year 1,822 2,050 3,058
Highest month-end balance
during year 21,003 6,000 26,017
Weighted average interest rate
on balances outstanding
at December 31 5.11% 5.16% 6.74%
Weighted average interest rate
during year 5.50 5.44 5.13
- --------------------------------------------------------------------------------------------------
</TABLE>
10. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consisted of
intermediate-term FHLB advances with a weighted average interest rate of
5.875% and 6.204%, respectively. 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 between the Bank and the FHLB. At
December 31, 1996 the Bank had available to it additional unused FHLB advances
of approximately $9,600,000.
At December 31, 1996, approximate maturities of FHLB advances were
as follows:
(Dollars in thousands)
- ---------------------------------------------------------------------
Year ending December 31:
1997 $ 33,085
1998 25,577
1999 25,611
2000 10,235
2001 6,017
Thereafter 15,315
- ---------------------------------------------------------------------
Total $115,840
- ---------------------------------------------------------------------
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 $1,199,000, $1,195,000 and $1,164,000 for 1996, 1995
and 1994, respectively, which were charged to salaries and employee benefits.
On November 8, 1991, with 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.
28
<PAGE>
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 to 520,000 the number of shares available for issuance upon
the exercise of stock options granted.
Options are granted with an exercise price equal to the stock's
fair market value at the date of the grant. All options have 10 year terms
and vest at the rate of 20 percent per year.
During 1995, options to purchase 69,600 shares were granted. There
were no options granted in 1996 or 1994.
The per share weighted-average fair value of options granted during
1995 was $9.07 on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: expected dividend
yield of 3.07%, expected volatility of 30%, risk-free interest rate of 6.10%
and expected life of 7.5 years.
The Company applied APB Opinion No. 25 in accounting for its Stock
Option Plan, and accordingly, no compensation cost was recognized for its
options in the consolidated financial statements. Had the Company determined
compensation cost based on the fair values at the date of grant for its
options under SFAS No. 123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below:
(Dollars in thousands,
except per share data) 1996 1995 1994
- -----------------------------------------------------------------
As reported:
Net income $14,091 $13,808 $13,483
Net income per share 2.68 2.64 2.58
Pro forma:
Net income 13,977 13,751 13,483
Net income per share 2.65 2.62 2.58
- -----------------------------------------------------------------
Pro forma net income and net income per share reflects only those
options granted in 1995. Therefore, the full impact of calculating
compensation cost for options under SFAS No. 123 is not reflected in the pro
forma net income and net income per share amounts presented above because
compensation cost is reflected over the options' vesting period of five years
and compensation cost for options granted prior to January 1, 1994 is not
considered.
At December 31, 1996, stock options to purchase 148,013 shares of the
Company's common stock were outstanding, of which 84,889 shares were
exercisable. These options expire ten years after the grant date. The option
price on 23,288 shares is $14.32, on 62,725 shares is $25.45 and on the
remaining 62,000 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, 1996, options on 17,112 shares of the Company's common stock were
exercised for a total of 179,347 shares exercised through December 31, 1996.
The Stock Option Plan expired on November 7, 1996, and no new options
will be granted under this plan. Outstanding options may be exercised by
optionees until the expiration of the respective options in accordance with
the original terms of the Stock Option Plan.
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 13,775 shares
were exercisable as of December 31, 1996, subject to the approval of
the Federal Reserve Board. Warrants for the remaining 6,472 shares,
which expire on June 14, 2006, will be exercisable as stock
options are exercised by the optionees. No warrants were exercised during
the three-year period ended December 31, 1996.
29
<PAGE>
14. PENSION PLANS
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.
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
terminated in 1991 as part of a review of the employee benefits program.
Participants in the money purchase pension plan became fully vested at the
time of termination.
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-consecutive-month period of service, reduced by benefits provided from
the Bank's terminated money purchase pension plan. 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.
Effective September 1, 1996, the Bank revised the benefit
calculations under the defined benefit retirement plan reducing benefit
levels to 0.75% per year of service from 1.50% per year. This revision
resulted in a $3,623,000 reduction in unrecognized prior service cost.
The following table sets forth the plan's funded status and
amounts recognized in the consolidated balance sheets at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Estimated present value of vested benefits $(19,232) $(18,436)
Estimated present value of nonvested benefits (323) (339)
- -----------------------------------------------------------------------------------------
Accumulated benefit obligations (19,555) (18,775)
Value of future pay increases (705) (5,353)
- -----------------------------------------------------------------------------------------
Projected benefit obligations (20,260) (24,128)
Plan assets at fair value 19,872 18,835
- -----------------------------------------------------------------------------------------
Projected benefit obligations in excess of
plan assets (388) (5,293)
Unrecognized prior service cost 256 4,334
Unrecognized net loss resulting from changes
in plan experience and actuarial
assumptions 3,740 4,811
Unrecognized net asset being recognized
over 15 years (182) (228)
- -----------------------------------------------------------------------------------------
Prepaid pension cost included in other assets $ 3,426 $ 3,624
- -----------------------------------------------------------------------------------------
Actuarial assumptions:
Weighted average discount rate 7.75% 7.50%
Weighted average rate
of compensation increase 5.00 5.00
- -----------------------------------------------------------------------------------------
</TABLE>
Net pension cost for the years ended December 31, 1996, 1995 and
1994 included the following components:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 654 $ 739 $ 893
Interest cost 1,479 1,597 1,518
Actual (gain) loss on plan assets (1,463) (2,801) 899
Net amortization and deferral 371 1,989 (1,759)
- --------------------------------------------------------------------------------------------
Net pension cost $ 1,041 $ 1,524 $ 1,551
- --------------------------------------------------------------------------------------------
Actuarial assumptions:
Weighted average discount rate 7.50% 8.00% 6.90%
Weighted average rate
of compensation increase 5.00 5.00 5.00
Expected long-term rate of
return on plan assets 9.00 9.00 9.00
- --------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
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 following table sets forth the plan's unfunded status and amounts
recognized in the consolidated balance sheets at December 31, 1996 and 1995:
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Estimated present value of vested benefits $456 $473
Estimated present value of nonvested benefits 97 70
- --------------------------------------------------------------------------
Accumulated benefit obligations 553 543
Value of future pay increases 17 78
- --------------------------------------------------------------------------
Projected benefit obligations 570 621
Unrecognized net loss (gain) 40 (37)
Net transition liability (54) (82)
- --------------------------------------------------------------------------
Accrued pension cost included
in other liabilities $556 $502
- --------------------------------------------------------------------------
Components of net periodic pension cost for the years ended
December 31, 1996 and 1995 are provided below:
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------
Service cost $ 24 $ 37
Interest cost 47 41
Net amortization and deferral (17) 424
- --------------------------------------------------------------------------
Net pension cost $ 54 $502
- --------------------------------------------------------------------------
Actuarial assumptions, including weighted average discount rates and
rates of compensation increase, were consistent with the rates used for the
defined benefit retirement plan.
15. PROFIT SHARING AND 401(K) PLANS
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 $810,000, $793,000 and $784,000 for 1996, 1995 and
1994, respectively.
Effective March 31, 1996, the profit sharing plan was merged with an
existing employee-funded 401(k) plan which allows employees to direct their own
investments. Effective September 1, 1996, the Bank instituted a 50% employer-
matching program for the 401(k) plan, contributing up to 2% of qualifying
employees' salaries. Bank contributions to the 401(k) plan in 1996 totaled
$88,000.
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 $577,000, $1,092,000
and $1,038,000 for 1996, 1995 and 1994, respectively.
Net rent expense, charged to net occupancy expense, for all
operating leases is summarized as follows:
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------
Total rent expense $5,510 $4,668 $4,037
Less sublease rental income (205) (89) (83)
- -----------------------------------------------------------------------
Net $5,305 $4,579 $3,954
- -----------------------------------------------------------------------
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, 1996:
Less
sublease Net
Rental rental rental
(Dollars in thousands) commitment income commitment
- -------------------------------------------------------------------------
Year ending December 31:
1997 $ 3,577 $(182) $ 3,395
1998 3,292 (172) 3,120
1999 3,063 (167) 2,896
2000 2,910 (105) 2,805
2001 2,714 (59) 2,655
Thereafter 14,609 (18) 14,591
- -------------------------------------------------------------------------
Total $30,165 $(703) $29,462
- -------------------------------------------------------------------------
Rental commitments include $16,886,000 in commitments to CKSS
Associates by the Bank for office space in the Central Pacific and Kaimuki
Plazas.
31
<PAGE>
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, 1996:
(Dollars in thousands)
- ---------------------------------------
Year ending December 31:
1997 $ 1,053
1998 953
1999 892
2000 811
2001 598
Thereafter 16,973
- ---------------------------------------
Total $21,280
- ---------------------------------------
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,
1996, 1995 and 1994 were as follows:
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------
Charge card $ 2,455 $ 2,047 $ 1,827
Advertising 1,160 1,200 1,200
Computer software 1,115 1,008 750
Stationery and supplies 1,044 953 1,099
Insurance 316 1,580 2,723
Other 6,941 6,745 6,884
- -----------------------------------------------------------------
Total $13,031 $13,533 $14,483
- -----------------------------------------------------------------
18. INCOME AND FRANCHISE TAXES
Components of income tax expense (benefit) for the years ended
December 31, 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Current Deferred Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996:
Federal $ 8,387 $ (874) $7,513
State 1,970 (247) 1,723
- -------------------------------------------------------------------------------------------------
Total $10,357 $(1,121) $9,236
- -------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------
</TABLE>
Income tax expense amounted to $9,236,000, $9,034,000 and $8,786,000
for 1996, 1995 and 1994, 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) for the following reasons:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $8,164 $7,995 $7,794
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (192) (147) (194)
State franchise tax, net of
Federal income tax benefit 1,120 1,095 1,067
Other 144 91 119
- -----------------------------------------------------------------------------------------
Total $9,236 $9,034 $8,786
- -----------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
The tax effects of temporary differences that gave rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 6,338 $6,537
Employee retirement benefits 1,471 855
Interest on nonaccrual loans 973 341
Accrued expenses 726 299
State franchise tax 639 469
Deferred finance fees 303 340
Other 108 60
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 10,558 8,901
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred gain on curtailed retirement plan 2,771 2,759
FHLB stock dividends received 2,115 1,663
Investment in unconsolidated subsidiary 1,263 974
Net deferred gain on investment securities 567 836
Premises and equipment, principally
due to differences in depreciation 365 615
Accreted discounts receivable 300 486
Other 137 200
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities 7,518 7,533
- -------------------------------------------------------------------------------------------------
Net deferred tax assets $ 3,040 $1,368
- -------------------------------------------------------------------------------------------------
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers projected future
taxable income and tax planning strategies in making this assessment.
There was no valuation allowance for deferred tax assets as of
December 31, 1996 and 1995.
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 5,265,000, 5,240,000
and 5,234,000 in 1996, 1995 and 1994, 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.
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.
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 traveler's 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,
standby letters of credit and financial guarantees written, and forward foreign
exchange contracts. Those instruments involve, to varying degrees, elements
of credit, interest rate and foreign exchange risk in excess of the amounts
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.
For forward foreign exchange contracts, the contract amounts do not represent
exposure to credit loss. The Bank controls the credit risk of its forward
foreign exchange contracts through credit approvals, limits and monitoring
procedures. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
33
<PAGE>
At December 31, 1996 and 1995 financial instruments with
off-balance sheet risk were as follows:
<TABLE>
<CAPTION>
Contract or notional
amount
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $359,819 $351,072
Standby letters of credit and
financial guarantees written 16,477 22,336
- -----------------------------------------------------------------------------------------
Financial instruments whose contract
amounts exceed the amount of credit risk:
Forward foreign exchange contracts $ 164 $ 665
- -----------------------------------------------------------------------------------------
</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 credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary is based on management's credit evaluation of the counterparty.
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.
Forward foreign exchange contracts represent commitments to purchase
or sell foreign currencies at a future date at a specified price. Risks arise
from the possible inability of counterparties to meet the terms of their
contracts and from movements in foreign currency exchange rates.
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.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------ ------------------------
Carrying/ Carrying/
notional Estimated notional Estimated
(Dollars in thousands) amount fair value amount fair value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 55,534 $ 55,534 $ 50,274 $ 50,274
Interest-bearing deposits in other banks 26,297 26,297 7,140 7,140
Investment securities 240,458 240,502 283,627 284,281
Loans 1,041,976 1,039,618 990,356 990,653
Accrued interest receivable 8,674 8,674 9,454 9,454
Due from customers on acceptances 1,162 1,162 1,443 1,443
Financial liabilities:
Deposits:
Noninterest-bearing deposits 168,170 168,170 170,494 170,494
Interest-bearing demand and savings deposits 492,017 492,017 515,242 515,242
Time deposits 463,427 461,433 452,583 453,780
Total deposits 1,123,614 1,121,620 1,138,319 1,139,516
Short-term borrowings 5,427 5,427 3,497 3,497
Long-term debt 115,840 115,104 81,107 81,343
Bank acceptances outstanding 1,162 1,162 1,443 1,443
Accrued interest payable (included in other liabilities) 4,893 4,893 4,914 4,914
Off-balance sheet financial instruments:
Commitments to extend credit 359,819 1,106 351,072 1,308
Standby letters of credit and financial
guarantees written 16,477 124 22,336 168
Forward foreign exchange contracts 164 -- 666 6
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
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, accrued interest receivable,
due from customers on acceptances, short-term borrowings, bank
acceptances outstanding and accrued interest payable.
Investment Securities
The fair value of investment securities is 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 value of loans is 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, are 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.
Long-Term Debt
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.
Off-Balance Sheet Financial Instruments
The fair values of off-balance sheet financial instruments are
estimated based on 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, current settlement values or
quoted market prices of comparable instruments.
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
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 16,
1996, 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 $0.96 per share for the year ended December 31, 1996.
35
<PAGE>
25. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 1996, retained earnings of the parent company,
CPB Inc., included $91,494,000 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, 1996, retained earnings of the Bank totaled
$91,567,000.
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 established minimum
regulatory capital standards to determine an insured depository institution's
capital category. 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, 1996 and 1995, the Bank's regulatory
capital ratios exceeded the minimum thresholds for a
well-capitalized institution.
The following table sets form actual and required capital and
capital ratios for the Company and the Bank as of the dates indicated:
<TABLE>
<CAPTION>
Required
for capital Required to be
Actual adequacy purposes well-capitalized
------------------- ------------------ -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
As of December 31, 1996:
Tier I leverage capital $141,391 10.28% $55,012 4.00% $ 68,766 5.00%
Tier I risk-based capital 141,391 12.10 46,745 4.00 70,117 6.00
Total risk-based capital 156,058 13.35 93,490 8.00 116,862 10.00
As of December 31, 1995:
Tier I leverage capital 131,795 9.61 54,587 4.00 68,572 5.00
Tier I risk-based capital 131,795 12.35 42,686 4.00 64,029 6.00
Total risk-based capital 145,219 13.61 85,372 8.00 106,716 10.00
- ---------------------------------------------------------------------------------------------------------------
Bank:
As of December 31, 1996:
Tier I leverage capital $131,534 9.60% $54,806 4.00% $ 68,508 5.00%
Tier I risk-based capital 131,534 11.27 46,679 4.00 70,018 6.00
Total risk-based capital 146,181 12.53 93,358 8.00 116,697 10.00
As of December 31, 1995:
Tier I leverage capital 122,538 8.99 54,521 4.00 68,151 5.00
Tier I risk-based capital 122,538 11.05 44,345 4.00 66,518 6.00
Total risk-based capital 136,474 12.31 88,690 8.00 110,863 10.00
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Condensed financial statements, solely of the parent company, CPB
Inc., follow:
<TABLE>
CPB Inc.
Condensed Balance Sheets
December 31, 1996 and 1995
<CAPTION>
(Dollars in thousands, except per share data) 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 4,823 $ 844
Investment securities available for sale 4,787 7,823
Investment in and advances to subsidiary
bank, at equity in underlying net assets 132,647 125,186
Accrued interest receivable and other assets 46 59
- ----------------------------------------------------------------------------------------
Total assets $142,303 $133,912
- ----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Dividends payable $ 1,265 $ 1,260
Other liabilities 156 145
- ----------------------------------------------------------------------------------------
Total liabilities 1,421 1,405
- ----------------------------------------------------------------------------------------
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 5,268,874
and 5,251,762 shares at December 31, 1996
and 1995, respectively 6,586 6,565
Surplus 45,481 45,337
Retained earnings 89,405 80,370
Unrealized (loss) gain on investment
securities, net of taxes (590) 235
- ----------------------------------------------------------------------------------------
Total stockholders' equity 140,882 132,507
- ----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $142,303 $133,912
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
CPB Inc.
Condensed Statements of Income
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary bank $ 5,101 $ 4,782 $ 4,623
Interest income:
Interest on investment securities 281 333 254
Interest from subsidiary bank 116 55 30
Investment securities gains -- 60 --
- ---------------------------------------------------------------------------------------------------
Total income 5,498 5,230 4,907
Total expenses 259 281 251
- ---------------------------------------------------------------------------------------------------
Income before income taxes and
equity in undistributed income of
subsidiary bank 5,239 4,949 4,656
Income taxes 55 65 13
- ---------------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiary bank 5,184 4,884 4,643
Equity in undistributed income of
subsidiary bank 8,907 8,924 8,840
- ---------------------------------------------------------------------------------------------------
Net income $14,091 $13,808 $13,483
- ---------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
CPB Inc.
Condensed Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $14,091 $13,808 $13,483
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income tax expense 4 -- 34
Equity in undistributed income of subsidiary bank (8,907) (8,924) (8,840)
Other, net 63 130 11
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,251 5,014 4,688
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from calls on investment securities held to maturity -- 2,560 --
Purchases of investment securities held to maturity -- -- (2,666)
Proceeds from maturities of investment securities available for sale 3,000 34,700
Purchases of investment securities available for sale - (2,844) (32,693)
Investment in and advances to subsidiary bank 614 65 (19)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,614 (219) (678)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 165 180 44
Dividends paid (5,051) (4,716) (4,606)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,886) (4,536) (4,562)
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,979 259 (552)
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At beginning of year 844 585 1,137
- -----------------------------------------------------------------------------------------------------------------
At end of year $4,823 $ 844 $ 585
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
26. ACCOUNTING PRONOUNCEMENTS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
SFAS No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. In December 1996, the FASB issued
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125." SFAS No. 127 defers the effective date of
SFAS No. 125 for one year for certain transactions occurring after
December 31, 1997. Transactions subject to deferral under SFAS No. 127
include transactions addressing secured borrowings and collateral and
transactions addressing financial assets that are part of repurchase
agreements, dollar rolls, securities lending, and similar transactions.
The Company does not expect that the adoption of SFAS No. 125 and the
transactions covered under SFAS No. 127 will have a material
impact on the Company's consolidated financial statements.
38
<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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
Honolulu, Hawaii
February 26, 1997
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 1996 and 1995 as reported by Nasdaq and
cash dividends declared for those years.
<TABLE>
<CAPTION>
Cash
dividends
High Low declared
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996:
First quarter $34.00 $29.50 $0.24
Second quarter 34.50 31.00 0.24
Third quarter 32.50 28.50 0.24
Fourth quarter 30.75 28.25 0.24
- ---------------------------------------------------------------------------------------------------
Year $34.50 $28.25 $0.96
- ---------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------
</TABLE>
The last sales price of the common stock as of January 31, 1997
as reported by Nasdaq was $29.50 per share.
On January 31, 1997, there were approximately 2,343 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.
39
Exhibit 23
The Board of Directors
CPB Inc.:
We consent to incorporation by reference in the registration
statement No. 33-11462 on Form S-8 of CPB Inc. of our report
dated February 26, 1997, relating to the consolidated balance
sheets of CPB Inc. and subsidiary as of December 31, 1996 and
1995, 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, 1996, which report
appears in the December 31, 1996 annual report on Form 10-K of
CPB Inc.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
March 25, 1997
<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, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1000
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 55,534
<INT-BEARING-DEPOSITS> 26,297
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,214
<INVESTMENTS-CARRYING> 240,458
<INVESTMENTS-MARKET> 240,502
<LOANS> 1,041,976
<ALLOWANCE> 19,436
<TOTAL-ASSETS> 1,403,165
<DEPOSITS> 1,123,614
<SHORT-TERM> 5,427
<LIABILITIES-OTHER> 16,240
<LONG-TERM> 115,840
<COMMON> 6,586
0
0
<OTHER-SE> 134,296
<TOTAL-LIABILITIES-AND-EQUITY> 1,403,165
<INTEREST-LOAN> 88,157
<INTEREST-INVEST> 15,711
<INTEREST-OTHER> 419
<INTEREST-TOTAL> 104,287
<INTEREST-DEPOSIT> 35,364
<INTEREST-EXPENSE> 41,679
<INTEREST-INCOME-NET> 62,608
<LOAN-LOSSES> 2,500
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 47,552
<INCOME-PRETAX> 23,327
<INCOME-PRE-EXTRAORDINARY> 14,091
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,091
<EPS-PRIMARY> 2.68
<EPS-DILUTED> 2.68
<PAGE>
<YIELD-ACTUAL> 4.89
<LOANS-NON> 13,500
<LOANS-PAST> 6,313
<LOANS-TROUBLED> 12,818
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,156
<CHARGE-OFFS> 3,555
<RECOVERIES> 335
<ALLOWANCE-CLOSE> 19,436
<ALLOWANCE-DOMESTIC> 14,600
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,836
<PAGE>
</TABLE>
