<PAGE>
As filed with the Securities and Exchange Commission on March 30, 1998
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, 1997
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)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code:
(808) 544-0500
<PAGE>
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange
on which registered
NONE NONE
</TABLE>
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 27, 1998, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $156,168,000.
Number of shares of common stock of the registrant
outstanding as of February 27, 1998: 10,585,184 shares
The following documents are incorporated by reference
herein:
<TABLE>
<CAPTION>
Part of
Form 10-K
Into Which
Document Incorporated Incorporated
- ------------------------------------- ---------------
<S> <C>
1997 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, 1997 Part III
</TABLE>
<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 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, 1997, 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."
In 1998, the Bank established CPB Real Estate, Inc. as a Real Estate
Investment Trust ("REIT") to acquire and hold stable, long-term real estate
related assets including participation interests in residential mortgage
loans and commercial real estate loans and mortgage-backed securities. An
application and notice to form the REIT as an operating subsidiary of the
Bank was filed with the Hawaii Commissioner of Financial Institutions (the
"Hawaii Commissioner") on January 8, 1998, and a similar notice was filed
with the Regional Director of the Federal Deposit Insurance Corporation
("FDIC") on that same date. Approval from the Hawaii Commissioner of
Financial Institutions was issued on February 20, 1998, and a "no-objection"
letter was issued by the FDIC on February 17, 1998. On February 25, 1998,
the Executive Committee of the Bank approved, confirmed, and ratified the
establishment and formation of the REIT. On March 2, 1998, the Bank
transferred its interest in $518.9 million of real estate loans and
mortgage-backed securities to the REIT in exchange for 100% of the issued
and outstanding common stock of the REIT.
The Company also owns 49% of Trans-Pacific Mortgage Group LLC.
Trans-Pacific Mortgage Group LLC was formed to enhance the Company's market
penetration in the residential mortgage business.
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.
Through its network of banking offices, the Bank emphasizes
personalized services and offers a full range of banking services to small-
and medium-sized businesses, professionals and individuals in Hawaii.
3
<PAGE>
The Bank offers a variety of deposit instruments. These include
personal and business checking and savings accounts, including
interest-bearing negotiable order of withdrawal ("NOW") accounts, money
market accounts and time certificates of deposit.
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 market is highly
competitive with
4
<PAGE>
6 commercial banks, 4 savings and loans as well as numerous credit unions and
finance companies operating in the State of Hawaii. The two largest banks in
the state are pursuing aggressive strategies to increase market share and to
deliver new services. Pacific Century Financial Corporation had $15.0
billion in total assets at year end 1997. Bank of Hawaii, one of its
subsidiary banks, maintains approximately 58% of the assets held by banks in
the State of Hawaii.
First Hawaiian, Inc. is the second largest bank holding company with
$8.1 billion in assets at year end 1997. First Hawaiian Bank, the subsidiary
bank, has approximately a 30% share of the commercial banking market in Hawaii.
American Savings Bank, a subsidiary of Hawaiian Electric Industries,
Inc., held $5.4 billion in assets at year end 1997, following the acquisition
during 1997 of most of the assets of Bank of America-Hawaii, which had
purchased Honolulu Federal Savings and Loan in 1992 and Liberty Bank in 1994.
Central Pacific Bank is the third largest commercial bank
maintaining market share of close to 7%. At $1.5 billion in assets, The Bank
is building its position in the marketplace as a local community bank
which is large enough to provide a wide range of banking services and yet,
small enough to deliver personalized service. Bank of Hawaii and First
Hawaiian Bank tend to lead the market with respect to new products and
pricing. Central Pacific Bank offers a full range of banking services to
small- and medium-sized businesses, professionals and individuals. Banking
services include a variety of deposit, loans, personal trust and other proven
products and services. The Bank also remains competitive with pricing and
superior service levels.
The Bank has a distribution network of 26 branches and a strong
capital base to provide for expansion opportunities in our quest to better
serve our community. With recent consolidation in the financial services
industry, competition has intensified. The larger institutions are very
focused in the business banking and personal banking areas, while leveraging
their large branch and electronic banking networks to attract retail
customers.
The Bank faces substantial competition for deposits and loans
throughout its market areas. Competition for deposits comes primarily from
other commercial banks, savings institutions, credit unions, money market
funds and other investment alternatives. The primary factors in competing
for deposits are interest rates, personalized services, the quality and range
of financial services, convenience of office locations and office hours.
Competition for loans comes primarily from other commercial banks, savings
institutions, mortgage banking firms, credit unions and other financial
intermediaries. The primary factors in competing for loans are interest
rates, loan origination fees, the quality and range of lending services and
personalized services. The Bank faces competition for deposits and loans
throughout its market areas not only from local institutions but also from
out-of-state financial intermediaries which have opened loan production
offices or which solicit deposits in its market areas. Many of the financial
intermediaries operating in the Bank's market areas offer certain services,
such as investment and international banking services,
5
<PAGE>
which the Bank does not offer directly. Additionally, banks with larger
capitalization and financial intermediaries not subject to bank regulatory
restrictions have larger lending limits and are thereby able to serve the
needs of larger customers. See "ITEM 1. BUSINESS - Economic Conditions,
Government Policies, Legislation and Regulation."
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like most financial institutions, is
primarily dependent on interest rate differentials. In general, the
difference between the interest rates paid by the Bank on interest-bearing
liabilities, such as deposits and other borrowings, and the interest rates
received by the Bank on its interest-earning assets, such as loans extended
to its clients and securities held in its investment portfolio, comprise the
major portion of the Company's earnings. These rates are highly sensitive to
many factors that are beyond the control of the Company and the Bank, such as
inflation, recession and unemployment, and the impact which future changes in
domestic and foreign economic conditions might have on the Company and the
Bank cannot be predicted.
The business of the Company is also influenced by the monetary and
fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) through its open-market operations in U.S. Government securities
by adjusting the required level of reserves for depository institutions
subject to its reserve requirements and by varying the target federal funds
and 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 earned on
interest-earning assets and paid on interest-bearing liabilities. The nature
and impact on the Company and the Bank of any future changes in monetary and
fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are
enacted which have 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 institutions are frequently
made in the U.S. Congress, in the state legislatures and before various bank
regulatory agencies. See "Item 1. Business - Supervision and Regulation."
6
<PAGE>
SUPERVISION AND REGULATION
GENERAL
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the
protection of depositors and the deposit insurance fund and not for the
benefit of stockholders of the Company. Set forth below is a summary
description of certain laws and regulations which relate to the operations 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.
In recent years, significant legislative proposals and reforms affecting
the financial services industry have been discussed and evaluated by
Congress. Such proposals include legislation to revise the Glass-Steagall Act
and the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to
expand permissible activities for banks, principally to facilitate the
convergence of commercial and investment banking. Certain proposals also
sought to expand insurance activities of banks. It is unclear whether any of
these proposals, or any form of them, will be introduced in the current
Congress and become law. Consequently, it is not possible to determine what
effect, if any, they may have on the Company and the Bank.
THE COMPANY
The Company, as a registered bank holding company, is subject to regulation
under the BHCA. The Company is required to file with the Federal Reserve Board
quarterly, semi-annual and annual reports and such additional information as the
Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve
Board may conduct examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries
or affiliates when the Federal Reserve Board believes the activity or the
control of the subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any of its banking subsidiaries.
The Federal Reserve Board also has the authority to regulate provisions of
certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
the Company must file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels
of capital. See "--Capital Standards."
7
<PAGE>
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.
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.
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As such, the Company is subject to the information, proxy solicitation,
insider trading, and other requirements and restrictions of the Exchange Act.
THE BANK
The Bank, as a Hawaii state-chartered bank, is subject to primary
supervision, periodic examination, and regulation by the Hawaii Commissioner
and the Federal Deposit Insurance Corporation ("FDIC"). If, as a result of
an examination of the 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
8
<PAGE>
officers and directors and ultimately to terminate the Bank's deposit
insurance, which for a Hawaii state-chartered bank would result in a
revocation of the Bank's charter. The Hawaii Commissioner has many of the
same remedial powers. The Bank has never been subject to any such actions by
the FDIC or the Hawaii Commissioner.
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, ownership of deposit
accounts, 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 "--Capital Standards."
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
The Company is a legal entity separate and distinct from the Bank and
its subsidiary. The Bank is subject to various statutory and regulatory
restrictions on its ability to pay dividends to the Company. 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. Under such
restrictions, the amount available for payment of dividends to the Company by
the Bank totaled $101.3 million at December 31, 1997.
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. An insured depository
institution is prohibited 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. See
"--Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and
"--Capital Standards" for a discussion of these additional restrictions on
capital distributions.
The Bank is subject to certain restrictions imposed by state and 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 of its affiliates, the taking of
9
<PAGE>
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
collateral having a market value equal to the amount required by law.
Further, the appropriate amount of covered transactions of the Bank with any
affiliate is limited, individually, to 10.0% of the Bank's capital and
surplus (as defined by federal regulations), and such secured loans and
investments are limited, in the aggregate, as to all affiliates, to 20.0% 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.
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 risked-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%. 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.
The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1997.
<TABLE>
<CAPTION>
As of December 31, 1997
----------------------------------------------------------------------------------
Actual Required Excess
---------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ----- ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio . . . . . . $141,405 9.72% $58,187 4.0% $83,218 5.72%
Tier 1 risk-based ratio . . 141,405 11.63 48,634 4.0 92,771 7.63
Total risk-based ratio . . 156,652 12.88 97,268 8.0 59,384 4.88
</TABLE>
10
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The following table presents the amounts of regulatory capital and the
capital ratios for the Company, compared to its minimum regulatory capital
requirements as of December 31, 1997.
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------------------------------------------------------------------
Actual Required Excess
---------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio . . . . . . $151,575 10.41% $58,252 4.0% $ 93,323 6.41%
Tier 1 risk-based ratio . . 151,575 12.45 48,682 4.0 102,893 8.45
Total risk-based ratio . . 166,837 13.71 97,365 8.0 69,472 5.71
</TABLE>
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective and
other supervisory action to resolve the problems of insured depository
institutions, including but not limited to those institutions that fall below
one or more prescribed minimum capital ratios. Each federal banking agency
has promulgated regulations defining the following five categories in which
an insured depository institution will be placed, based on its capital
ratios: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December
31, 1997, the Bank and the Company exceeded the required ratios for
classification as "well capitalized."
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.
A bank may fall into the critically undercapitalized category if its
"tangible equity" does not exceed two-percent of the bank's total assets.
Federal guidelines generally define "tangible equity" as a bank's tangible
assets less liabilities. Federal regulators may, among other alternatives,
require the appointment of a conservator or a receiver for a critically
undercapitalized bank.
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.
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SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating 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. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, an insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem 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 quality 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.
PREMIUMS FOR DEPOSIT INSURANCE
The Bank's deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1997, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Act"), at January 1, 1997, the Bank began
paying, in addition to its normal deposit insurance premium as a member of the
BIF, an amount equal to approximately 1.3 basis points per $100 of insured
deposits toward the retirement of the Financing Corporation bonds ("Fico Bonds")
issued in the 1980s to assist in the recovery of the savings and loan industry.
Members of the Savings Association Insurance Fund ("SAIF"), by contrast, pay, in
addition to their normal deposit insurance premium, approximately 6.4 basis
points. Under the Act, the FDIC is not permitted to establish SAIF assessment
rates that are lower than comparable BIF assessment rates. Beginning no later
than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999 provided there are no financial institutions
still chartered as savings associations at that time. Should the insurance
funds be merged before January 1, 2000, the rate paid by all members of this new
fund to retire the Fico Bonds would be equal.
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INTERSTATE BANKING AND BRANCHING
The BHCA currently permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to certain
conditions, including certain nationwide- and state-imposed concentration
limits. The Bank has the ability, subject to certain restrictions, to acquire
by acquisition or merger branches outside its home state. The establishment of
new interstate branches is also possible in those states with laws that
expressly permit it. Interstate branches are subject to certain laws of the
states in which they are located. Competition may increase further as banks
branch across state lines and enter new markets.
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's Interstate Banking Law provides that
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; provided, however, that such banks may not accept retail deposits of
less than $100,000 from individuals who are U.S. citizens or residents. These
changes are 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.
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. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a
performance-based evaluation system which bases CRA ratings on an
institution's lending service and investment performance. When a bank holding
company applies for approval to acquire a bank or other bank holding company,
the Federal Reserve Board will review the assessment of each subsidiary bank
of the applicant bank holding company, and such records may be the basis for
denying the application. Based on an examination conducted August 25, 1997,
the Bank was rated outstanding in complying with its CRA obligations.
13
<PAGE>
YEAR 2000 COMPLIANCE
In May 1997, the Federal Financial Institutions Examination Council issued
an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the Year 2000, there will be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the Year 2000
problem. The federal banking agencies intend to conduct Year 2000 compliance
examinations, and the failure to implement a Year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account Year 2000
compliance programs when analyzing applications and may deny an application
based on Year 2000 related issues.
The Company has evaluated its computer systems to assess the nature and
extent of Year 2000 problems. The Company is currently converting its major
banking hardware and software systems to a new integrated banking system
which is scheduled for installation in mid-1998. The conversion is expected
to solve a substantial part of the Bank's Year 2000 problem. This system and
all other computer-based systems are scheduled to be fully tested and
certified for Year 2000 compliance by the end of 1998. Additionally, the
Company is communicating with external entities, including vendors and
customers, to ensure that they are Year 2000 compliant. Expentitures related
to the new integrated banking system are expected to be capitalized and
amortized over their respective useful lives. Expenditures related to the
Company's technical staff, which are being expensed during the period
incurred, and other expenditures of addressing the Year 2000 issue are not
expected to be material.
14
<PAGE>
ACCOUNTING CHANGES
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement provides 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 the exchange. This statement requires that liabilities and
derivative securities incurred or obtained by transferors as part of a
transfer of financial assets be initially valued at fair value, if
practicable. It also requires that servicing rights 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 values at the date of transfer.
Furthermore, SFAS No. 125 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. Finally, SFAS No. 125 requires that
a liability be eliminated 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
15
<PAGE>
judicially or by the creditor. Accordingly, a liability is not considered
extinguished by an in-substance defeasance. SFAS No. 125 supersedes SFAS No.
122, "Accounting for Mortgage Servicing Rights," which was adopted by the
Company effective January 1, 1996 and which management of the Company determined
had no material impact on the Company's results of operations or financial
position. 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 for one year the effective date of SFAS No. 125 as it relates to
transactions involving secured borrowings and collateral and transfers and
servicing of financial assets. This Statement also provides additional
guidance on these types of transactions. The Company adopted those provisions
of SFAS No. 125 which were not subject to deferral by SFAS No. 127 on January 1,
1997. Servicing assets were deemed immaterial and, accordingly, no
disclosures were required, as permitted by SFAS No. 125. Further, the Company
does not expect that the future application of SFAS No. 125 to the
transactions covered under SFAS No. 127 will have a material impact on the
Company's consolidated financial statements.
In August 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. The statement also requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures and requires a reconciliation of the numerators and
denominators between the two calculations. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Adoption of the statement in December 1997 did
not have a material impact on the Company's results of operations or
financial position.
In August 1997, FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and
privileges of various securities outstanding. SFAS No. 129 is effective for
financial statements for periods ending after December 15, 1997. Adoption of
the the statement in December 1997 did not have a material impact on the
Company's results of operations or financial position.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. This statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The application of SFAS No. 130, effective
January 1, 1998 is not expected to have a material impact on the Company's
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business
16
<PAGE>
enterprises report information about operating segments in both annual
financial statements and interim financial reports issued to shareholders.
The statement also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This Statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The application of SFAS No. 131, effective
January 1, 1998, is not expected to have a material impact on the Company's
consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," an amendment of FASB
Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans,"
and No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132, effective for fiscal years beginning after
December 15, 1997, standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis and eliminates certain disclosures that
are no longer as useful as they were when SFAS Nos. 87, 88 and 106 were issued.
The application of SFAS No. 132, effective from January 1, 1998, is not expected
to have a material impact on the consolidated financial statements.
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.
17
<PAGE>
Employees
At February 27, 1998, the Company employed 610 persons, 597
on a full-time basis and 13 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 decreased to $1,041.0 million at December 31, 1997,
compared with $1,042.0 million at the end of 1996, and $990.4 million at the
end of 1995. Increases in loan volumes were recorded in the real estate -
mortgage - commercial and commercial, financial and agricultural loan
categories, which was offset by declines in real estate-mortgage residential
and consumer loans.
The Bank emphasizes residential and commercial mortgage
loans, business loans to middle-market companies and
professionals and consumer 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 1997 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, 1997, 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.
18
<PAGE>
The following table sets forth information regarding
outstanding loans by categories as of the dates indicated.
Table I. Loans by Categories
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial,
financial
and agricultural $146,779 $141,735 $165,292 $211,257 $237,861
Real estate --
construction 45,082 43,520 47,853 52,811 41,572
Real estate --
mortgage --
residential 331,347 347,608 341,229 332,073 317,357
Real estate --
mortgage --
commercial 449,417 430,682 368,772 328,979 280,385
Consumer 68,398 78,431 67,210 66,848 68,593
---------- ---------- -------- -------- --------
Total loans 1,041,023 1,041,976 990,356 991,968 945,768
Allowance for
loan losses 19,164 19,436 20,156 18,296 17,131
---------- ---------- -------- -------- --------
Net loans $1,021,859 $1,022,540 $970,200 $973,672 $928,637
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
</TABLE>
19
<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 $146.8 million at December 31, 1997.
Real Estate - Construction. Real estate - construction loans
increased to $45.1 million at the end of 1997, from $43.5 million at
the end of 1996 and $47.9 million at the end of 1995. 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
$331.3 million 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, 1997 totaled $8.7 million.
Home equity lines of credit of $88.6 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, 1997 included $158.4 million for stores and offices,
$49.8 million for warehouses and industrial buildings, and $34.3 million for
apartment buildings with 5 or more units.
20
<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,
1997 1996 1995 1994 1993
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 $323,283 41.4% $341,890 43.9% $335,345 47.2% $328,282 49.7% $309,458 51.8%
5 or more
units 8,064 1.0 5,718 0.7 5,884 0.8 3,791 0.6 7,899 1.3
Commercial,
industrial
and other 449,417 57.6 430,682 55.4 368,772 52.0 328,979 49.7 280,385 46.9
-------- ------ -------- ------ --------- ------ -------- ------ -------- ------
Total $780,764 100.0% $778,290 100.0% $710,001 100.0% $661,052 100.0% $597,742 100.0%
-------- ------ -------- ------ --------- ------ -------- ------ -------- ------
-------- ------ -------- ------ --------- ------ -------- ------ -------- ------
</TABLE>
21
<PAGE>
Consumer Loans. The following table sets forth the primary components of
the Bank's Consumer loan portfolio as of the dates indicated.
Table III. Consumer Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
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 $25,874 37.8% $35,424 45.2% $26,368 39.2% $27,786 41.6% $26,357 38.4%
Credit cards
and related
plans 26,058 38.1 23,989 30.6 22,151 33.0 19,612 29.3 19,626 28.6
Other 16,466 24.1 19,018 24.2 18,691 27.8 19,450 29.1 22,610 33.0
-------- ------ -------- ----- -------- ------- -------- ------ -------- ------
Total $68,398 100.0% $78,431 100.0% $67,210 100.0% $66,848 100.0% $68,593 100.0%
-------- ------ -------- ----- -------- ------- -------- ------ -------- ------
-------- ------ -------- ----- -------- ------- -------- ------ -------- ------
</TABLE>
Automobile loans, comprised primarily of indirect dealer loans,
were $25.9 million or 37.8% of the Consumer loan portfolio in 1997. This
figure includes $25.0 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 consumer loans have increased by 45.9% over
1996 levels, which increased by 58.7% over 1995 net charge-offs. In response
to rising delinquency and loss rates, the Bank has discontinued the practice
of extending pre-approved credit on consumer loans and has provided
additional resources to supplement collection efforts.
22
<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, 1997. The table excludes real estate loans
(other than construction loans) and consumer loans.
Table IV. Maturity Distribution of Commercial and Construction Loans
<TABLE>
<CAPTION>
Maturing
------------------------------------
Over one
One year through Over
or less five years five years Total
-------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $75,553 $42,978 $28,248 $146,779
Real estate --
construction 30,207 11,164 3,711 45,082
------- ------- ------- --------
Total $105,760 $54,142 $31,959 $191,861
======= ======= ======= ========
</TABLE>
23
<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
<TABLE>
<CAPTION>
Maturing
----------------------
Over one
through Over
five years five years Total
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
With fixed
interest rates $12,259 $12,447 $24,706
With variable
interest rates 41,882 19,512 61,000
------- ------- -------
Total $54,141 $31,959 $85,706
======= ======= =======
</TABLE>
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 1997, $3.5 million was provided for loan losses compared to
$2.5 million in 1996 and $3.3 million in 1995. In 1997, the Bank experienced
net charge-offs of $3.8 million, compared with net charge-offs of
$3.2 million in 1996 and $1.4 million in 1995. The allowance for loan losses
at December 31, 1997 was $19.2 million, compared to $19.4 million at
December 31, 1996 and $20.2 million at December 31, 1995. The ratio of
allowance for loan losses to total loans was 1.84%, 1.87% and 2.04% at
December 31, 1997, 1996 and 1995, respectively.
Management believes that the allowance for loan losses at December 31,
1997 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."
24
<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
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995 1994 1993
----------- ----------- ---------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount of
loans outstanding $1,044,538 $1,010,255 $1,004,094 $947,433 $911,611
Allowance for
loan losses:
Balance at
beginning of year $ 19,436 $ 20,156 $ 18,296 $ 17,131 $ 15,378
---------- ---------- ---------- -------- --------
Charge-offs:
Commercial,
financial and
agricultural 1,139 662 146 129 225
Real estate --
construction -- -- -- -- --
Real estate --
mortgage --
residential 786 786 192 538 543
Real estate --
mortgage --
commercial 867 1,250 943 1,360 254
Consumer 1,250 857 540 492 620
---------- ---------- ---------- -------- --------
TOTAL 4,042 3,555 1,821 2,519 1,642
---------- ---------- ---------- -------- --------
Recoveries:
Commercial,
financial and
agricultural 34 108 192 160 12
Real estate --
construction -- 19 -- -- --
Real estate --
mortgage --
residential 44 31 48 32 3
Real estate --
mortgage --
commercial -- -- -- -- --
Consumer 192 177 141 192 180
---------- ---------- ---------- -------- --------
TOTAL 270 335 381 384 195
---------- ---------- ---------- -------- --------
25
<PAGE>
Net loans charged
off (recovered) 3,772 3,220 1,440 2,135 1,447
---------- ---------- ---------- -------- --------
Provision charged
to operations 3,500 2,500 3,300 3,300 3,200
---------- ---------- ---------- -------- --------
Balance at end
of year $19,164 $19,436 $20,156 $18,296 $17,131
========== ========== ========== ======== ========
Ratios:
Allowance for
loan losses to
loans outstand-
ing at end of
period 1.84% 1.87% 2.04% 1.84% 1.81%
Net loans charged
off (recovered)
during period to
average loans
outstanding
during period .36% .32% .14% .23% .16%
</TABLE>
Over the five-year period ended December 31, 1997, 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.
26
<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>
1997 1996 1995 1994 1993
--------------------- ------------------- ------------------ ------------------- --------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in cash
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 $ 2,700 14.1% $ 2,900 13.6% $ 4,100 16.7% $ 5,100 21.3% $ 6,100 25.2%
Real estate --
construction 100 4.3 100 4.2 200 4.9 500 5.3 500 4.4
Real estate -
mortgage --
residential 2,400 31.9 1,700 33.4 1,800 34.4 3,000 33.5 3,800 33.6
Real estate -
mortgage --
commercial 6,700 43.1 9,300 41.3 7,800 37.2 5,500 33.2 5,300 29.5
Consumer 900 6.6 600 7.5 600 6.8 400 6.7 600 7.3
Unallocated 6,364 N/A 4,836 N/A 5,656 N/A 3,796 N/A 831 N/A
------- ------- ------- -------- ------- ------- ------- ------ ------- -------
TOTAL 19,164 100.0% $19,436 100.0% $20,156 100.0% $18,296 100.0% $17,131 100.0%
======= ======= ======= ======== ======= ======= ======= ====== ======= =======
</TABLE>
27
<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,
--------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ---------------------------- -----------------------------
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 $114,374 $148,434 $100,153 $113,339 $123,073 $129,699
States and political
subdivisions 27,613 766 9,091 2,791 11,620 2,836
Other 10,701 18,823 -- 15,084 2,000 14,399
-------- -------- -------- -------- -------- --------
Total investment
securities $152,688 $168,023 $109,244 $131,214 $136,693 $146,934
======== ========= ======== ======== ======== ========
</TABLE>
28
<PAGE>
The Bank did not hold investments of any nonfederal issuer
in amounts exceeding 10% of stockholders' equity at December 31,
1997. 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, 1997.
Maturity Distribution of Investment Portfolio
The following table sets forth the maturity distribution of
the investment portfolio at December 31, 1997.
Table IX. Maturity Distribution of Investment Portfolio
<TABLE>
<CAPTION>
Weighted
Book average
Portfolio Type and Maturity value yield<F1>
Grouping -------- ------------
(Dollars in thousands)
<S> <C> <C>
Held-to-maturity portfolio:
U.S. Treasury and other
U.S. Government agencies:
Within one year $ 27,937 5.855%
After one but within five years 47,058 6.694
After five but within ten years 25,536 6.811
After ten years 13,843 6.733
--------
Total U.S. Treasury and other
U.S. Government agencies 114,374 6.520
States and political subdivisions:
Within one year -- --
After one but within five years 6,880 6.220
After five but within ten years 20,733 6.716
After ten years -- --
--------
Total states and political
subdivisions 27,613 6.592
Other:
Within one year -- --
After one but within five years 4,904 8.500
After five but within ten years -- --
After ten years 5,797 9.500
--------
Total other 10,701 9.042
Total held-to-maturity
portfolio $152,688 6.710%
========
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
Available-for-sale portfolio:
U.S. Treasury and other
U.S. Government agencies:
Within one year $ 2,993 5.624%
After one but within five years 51,391 5.820
After five but within ten years 36,813 5.944
After ten years 57,237 6.595
--------
Total U.S. Treasury and other
U.S. Government agencies 148,434 6.146
States and political subdivisions:
Within one year 766 6.357
After one but within five years -- --
After five but within ten years -- --
After ten years -- --
--------
Total states and political
subdivisions 766 6.357
Other:
Within one year -- --
After one but within five years -- --
After five but within ten years -- --
After ten years 18,823 7.416
--------
Total other 18,823 7.416
Total available-for-sale portfolio $168,023 6.289%
========
Total investment securities $320,711 6.489%
========
<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%.
</TABLE>
30
<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.
Total deposits at December 31, 1997, 1996 and 1995 were $1,193.2
million, $1,123.6 million and $1,138.3 million, respectively. Deposits
increased in 1997 by 6.2% compared with the 1.3% decrease recorded for 1996.
Interest-bearing deposits, excluding time deposits of $100,000 and over,
increased by 2.4% in 1997, compared with a decrease of 2.3% in 1996.
Noninterest-bearing deposits increased by 0.2% in 1997 and decreased by 1.4%
in 1996. The Bank's ratio of core deposits to total deposits was 73.4% at
December 31, 1997, 76.5% at December 31, 1996 and 77.1% at December 31, 1995.
Time deposits of $100,000 and over increased by 20.0% to $317.2 million in
1997 over the $264.3 million in 1996, which increased by 1.5% over the $260.3
million in 1995. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition."
31
<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
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1997 1996 1995
------------------ ----------------- ------------------
Average Average Average
Average rate Average rate Average rate
balance paid balance paid balance paid
---------- ------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 155,232 --% $ 153,288 --% $ 152,002 --%
Interest-bearing
demand deposits 95,056 1.35 94,389 1.36 98,303 1.36
Savings and money
market deposits 398,667 2.78 392,603 2.80 414,988 3.12
Time deposits 495,211 5.01 461,771 5.00 437,789 5.16
---------- ---------- ----------
TOTAL $1,144,166 3.25% $1,102,051 3.21% $1,103,082 3.34%
========== ========== ==========
</TABLE>
32
<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
<TABLE>
<CAPTION>
December 31, 1997
(Dollars in thousands)
----------------------
<S> <C>
Three months or less $151,342
Over three through six months 63,413
Over six through twelve months 86,522
Over twelve months 15,961
--------
Total $317,238
========
</TABLE>
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, Kailua-Kona 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, 1997, net rent expense under these leases
aggregated $4.4 million. For additional information relating to
lease rental expense and commitments, see Note 16 to the Company's
Consolidated Financial Statements in the 1997 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 $23.9 million as of
December 31, 1997. 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,
1997, Sumitomo had advanced pursuant to its loan agreement the sum of
$9.3 million, due on June 18, 2001.
33
<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 1997 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, 1997, the Bank had
advanced $10.7 million, due on August 10, 2001, pursuant to this loan agreement.
At December 31, 1997, an additional $0.2 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, 1997 was 6.947%.
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 1997.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 28, 1998, 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.
34
<PAGE>
<TABLE>
Principal Occupation
Name and Position During Past Five Years Age
<S> <C> <C>
Joichi Saito Chairman of the Board and Chief 62
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 56
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 51
Vice President and and Secretary, Central Pacific
Secretary Bank (1991-Present)
Neal K. Kanda Executive Vice President, Central 49
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)
</TABLE>
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 1997 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."
35
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see
"Selected Consolidated Financial Data" contained in the 1997 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 1997 Annual Report, which is incorporated herein
by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
For quantitative and qualitative disclosures regarding market risk,
see "Quantitative and Qualitative Disclosures About Market Risk" contained
in the 1997 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
1997 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.
36
<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 1997 Annual Report are incorporated herein by reference.
Page number references are to page numbers in the 1997 Annual Report.
<TABLE>
<CAPTION>
Page
<S> <C>
CPB Inc. and Subsidiary:
Independent Auditors' Report 40
Consolidated Balance Sheets at December 31, 1997 and 1996 18
Consolidated Statements of Income for the Years
ended December 31, 1997, 1996 and 1995 19
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended December 31, 1997, 1996 and 1995 20
Consolidated Statements of Cash Flows for the Years
ended December 31, 1997, 1996 and 1995 21
Notes to Consolidated Financial Statements 22
(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.
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 20, 1997 reporting
under Item 5 - Other Business a 2-for-1 stock split effective November
14, 1997.
(c) Exhibits
Exhibit No. Document
3.1 Restated Articles of Incorporation of CPB Inc., as amended
3.2 Amended Bylaws of CPB Inc.(1)
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(2)
10.2 CPB Inc. 1986 Stock Option Plan, as amended (3)(6)
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.(1)
10.4 Share Purchase Agreement dated as of November 20, 1986 by and
among The Sumitomo Bank, Limited and CPB Inc.(1)
10.5 Split Dollar Life Insurance Plan(4)(6)
10.6 Common Stock Purchase Warrant issued December 16, 1996 to
The Sumitomo Bank, Limited(5)
10.7 Form of Common Stock Purchase Warrant issued July 30, 1997 to
The Sumitomo Bank, Limited
10.8 Central Pacific Bank and Subsidiaries 1997 Annual Executive
Incentive Plan(6)
10.9 Central Pacific Bank Supplemental Executive Retirement Plan(5)
(6)
10.10 CPB Inc. 1997 Stock Option Plan(5)(6)
13 Annual Report to Shareholders for the year ended December 31,
1997 (parts not incorporated by reference are furnished for
informational purposes and are not filed herewith)
38
<PAGE>
21 Subsidiaries of CPB Inc.
23 Accountants' Consent
27.1 Financial Data Schedule (Fiscal year ended December 31, 1997)
27.2 Amended Financial Data Schedule (Fiscal years ending December 31,
1996 and 1995; quarters ending March 31, 1997, June 30, 1997 and
September 30, 1997)
27.3 Amended Financial Data Schedule (Quarters ending March 31, 1996,
June 30, 1996 and September 30, 1996)
99 Proxy Statement for Annual Meeting of Shareholders to be held on
April 21, 1998 (7)
- ----------------------
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) Filed as Exhibits 10.6, 10.8 and 10.9 to registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996,
filed with the Securities and Exchange Commission on March 28,
1997.
(6) Denotes management contract or compensation plan or arrangement.
(7) Filed with the Securities and Exchange Commission on March 25, 1998
and incorporated herein by this reference.
</TABLE>
<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, 1998.
CPB INC.
(Registrant)
By /s/ Joichi Saito
JOICHI SAITO
Chairman of the Board and
Chief Executive Officer
38
<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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Joichi Saito Chairman of the Board March 25, 1998
- --------------------- and Chief Executive
Joichi Saito Officer (Principal
Executive Officer),
Director
/s/ Neal K. Kanda Vice President, March 25, 1998
- --------------------- Treasurer
Neal K. Kanda (Principal Financial
Officer, Principal
Accounting Officer)
/s/ Paul Devens Director March 25, 1998
- ---------------------
Paul Devens
/s/ Alice F. Guild Director March 25, 1998
- ---------------------
Alice F. Guild
/s/ Dennis I. Hirota Director March 25, 1998
- ---------------------
Dennis I. Hirota, Ph.D.
/s/ Stanley W. Hong Director March 25, 1998
- ---------------------
Stanley W. Hong
Director March __, 1998
- ---------------------
Daniel M. Nagamine
- --------------------- Director March __, 1998
Shunichi Okuyama
/s/ Yoshiharu Satoh Director March 25, 1998
- ---------------------
Yoshiharu Satoh
/s/ Naoaki Shibuya Director March 25, 1998
- ---------------------
Naoaki Shibuya
</TABLE>
39
<PAGE>
EX 3.1
NONREFUNDABLE FILING FEE: $50.00 DOMESTIC PROFIT
GENERAL AMENDMENT
SUBMIT ORIGINAL AND
ONE TRUE COPY
STATE OF HAWAII
DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS
BUSINESS REGISTRATION DIVISION
1010 RICHARDS STREET
MAILING ADDRESS: P.O. BOX 40, HONOLULU, HAWAII 96810
EXPEDITED
REVIEW
RECEIVED DEPARTMENT OF COMMERCE
OCT 20 1997 AND CONSUMER AFFAIRS
11:00 AM STATE OF HAWAII
DEPT OF COMMERCE AND CONSUMER AFFAIRS FILED ON
STATE OF HAWAII OCTOBER 20, 1997
ARTICLES OF AMENDMENT
(SECTION 415-61, HAWAII REVISED STATUTES)
PLEASE TYPE OR PRINT LEGIBLY IN BLACK INK
AMD 00039591 2-10/20/97 100.00
The undersigned, duly authorized officers of the corporation submitting
these Articles of Amendment, certify as follows:
1. The name of the corporation is:
CPB INC.
--------------------------------------------------------------------------
2. The Amendment(s) adopted are attached to these Articles of Amendment (see
page 2).
3. The total number of shares outstanding is: 5,288,512-Common; 0-Preferred
-----------------------------
4. If adoption of the amendment(s) was at a meeting, complete the following:
The meeting of the directors was held on October 8, 1997 and a majority
--------------------------------
(MONTH DAY YEAR)
of the directors adopted the amendment.
- ------------------------------------------------------------------------------
NUMBER OF SHARES VOTING NUMBER OF SHARES VOTING
CLASS/SERIES FOR AMENDMENT AGAINST AMENDMENT
- ------------------------------------------------------------------------------
Approval by the Shareholders is not required pursuant to Section 415-59(1) of
the Hawaii Business Corporation Act.
- ------------------------------------------------------------------------------
5. If adoption of the amendment(s) was by unanimous consent, complete the
following:
By written consent dated
-------------------------------------------------
(MONTH DAY YEAR)
the shareholders unanimously adopted the amendment(s).
6. If the amendment(s) provides for any exchange, reclassification, or
cancellation of issued shares, attach a statement describing the manner in
which the exchange, reclassification, or cancellation shall be effected.
See attached
--------------------------------------------------------------------------
We certify under the penalties of Section 415-136, Hawaii Revised Statutes,
that we have read the above statements, and that the same are true and
correct.
Witness our hands this 8th day of October, 1997.
--- --------------
JOICHI SAITO, Chairman and AUSTIN Y. IMAMURA, Vice President
Chief Executive Officer and Secretary
- -------------------------------- ----------------------------------
(TYPE/PRINT NAME & TITLE) (TYPE/PRINT NAME & TITLE)
/s/ Joichi Saito /s/ Austin Y. Imamura
- -------------------------------- ----------------------------------
(SIGNATURE OF OFFICER) (SIGNATURE OF OFFICER)
SIGNATURES MUST BE IN BLACK INK.
ARTICLES MUST BE SIGNED BY TWO INDIVIDUALS WHO ARE OFFICERS OF THE
CORPORATION.
(SEE REVERSE SIDE FOR INSTRUCTIONS)
<PAGE>
Attachment to Articles of Amendment of CPB Inc. (Item 6):
1. Section 1 of Article IV of the Articles of Incorporation of the
Corporation, as amended, is amended to read as follows:
"1. The amount of the authorized capital stock
of the Corporation shall be FIFTY MILLION (50,000,000)
shares of common stock, no par value per share, and ONE
MILLION (1,000,000) shares of preferred stock, no par
value per share. The Corporation shall have the privilege
of subsequent extensions of its capital stock from time to
time in the manner provided by law."
2. At the time the foregoing amendment becomes effective, each
outstanding share of common stock of this Corporation shall be converted into
two (2) fully paid and nonassessable shares of common stock of the
Corporation.
<PAGE>
P.2
FILING FEE: $25.00 DOMESTIC PROFIT
DISHONORED CHECK: $7.50 GENERAL AMENDMENT
STATE OF HAWAII
DEPARTMENT OF COMMERCE AND CONSUMER AFFAIRS
BUSINESS REGISTRATION DIVISION
1010 RICHARDS STREET
MAILING ADDRESS: P.O. BOX 40, HONOLULU, HAWAII 96810
RECEIVED
MAY 2 1990
11:42 AM
DEPT OF COMMERCE AND CONSUMER AFFAIRS
STATE OF HAWAII
ARTICLES OF AMENDMENT
(SECTION 415-61, HAWAII REVISED STATUTES)
The undersigned, duly authorized officers of the corporation submitting
these Articles of Amendment, certify as follows:
1. The name of the corporation is:
CPB INC.
--------------------------------------------------------------------------
2. The Amendment(s) adopted are attached to these Articles of Amendment.
3. The total number of shares outstanding is: 5,008,588
-----------------------------
4. If adoption of the amendment(s) was at a meeting, complete the following:
The meeting of the shareholders was held on April 24, 1990
--------------------------------
(MONTH DAY YEAR)
- ------------------------------------------------------------------------------
NUMBER VOTING NUMBER VOTING
CLASS/SERIES FOR AMENDMENT AGAINST AMENDMENT
- ------------------------------------------------------------------------------
Common 3,860,377 52,097
- ------------------------------------------------------------------------------
Approval by the Shareholders is not required pursuant to Section 415-59(1) of
the Hawaii business Corporation Act.
5. If adoption of the amendment(s) was by unanimous consent, complete the
following:
By written consent dated
-------------------------------------------------
(MONTH DAY YEAR)
The shareholders unanimously adopted the amendment(s).
6. If the amendment(s) provides for any exchange, reclassification, or
cancellation of issued shares, attach a statement describing the manner in
which the exchange, reclassification, or cancellation shall be effected.
--------------------------------------------------------------------------
7. If amendment(s) effects a change in the amount of the stated capital,
give the amount of the stated capital as changed: no change
-------------------------
We certify under the penalties of Section 415-136, Hawaii Revised Statutes,
that we have read the above statements, and that the same are true and
correct.
Witness our hands this 1st day of May, 1990.
--- --------------
JOICHI SAITO, Executive HAROLD K. YAMANDA, Sr. Vice
Vice President Pres. & Secretary
- -------------------------------- ----------------------------------
(TYPE/PRINT NAME & TITLE) (TYPE/PRINT NAME & TITLE)
/s/ Joichi Saito /s/ Harold K. Yamanka
- -------------------------------- ----------------------------------
(SIGNATURE OF OFFICER) (SIGNATURE OF OFFICER)
(SEE REVERSE SIDE FOR INSTRUCTIONS)
<PAGE>
Attachment to Articles of Amendment
of CPB Inc.
1. Section 1 of Article IV of the Corporation's Articles of
Incorporation, as amended, is amended to read as follows:
"1. The amount of authorized capital stock of
the Corporation shall be TWENTY-FIVE MILLION (25,000,000)
shares of common stock, no par value per share, and ONE
MILLION (1,000,000) shares of preferred stock, no par
value per share. The Corporation shall have the privilege
of subsequent extensions of its capital stock from time to
time in the manner provided by law."
<PAGE>
RESTATED
ARTICLES OF INCORPORATION
OF
CPB INC.
That the undersigned, desiring to become incorporated as a corporation
under and in accordance with the laws of the State of Hawaii and to obtain the
benefits conferred by said laws upon corporations, do hereby mutually agree upon
and enter into the following Articles of Incorporation, the terms whereof shall
be equally obligatory upon the undersigned as well as upon all other persons who
from time to time may be stockholders in the Corporation.
ARTICLE I
The name of this corporation shall be CPB INC.
ARTICLE II
The place of the principal office of the Corporation shall be at Honolulu,
City and County of Honolulu, State of Hawaii; 50 North King Street, Honolulu,
Hawaii 96817, there may be such subordinate or branch offices in such place or
places within or without said State as may be deemed necessary or requisite by
the Board of Directors to transact the business of the Corporation, which
business may be conducted anywhere in the world, with such branch or subordinate
offices to be in charge of such person or persons as may be appointed by the
Board of Directors.
<PAGE>
ARTICLE III
The primary specific purpose for which said Corporation is organized is to
own and hold the stocks, bonds, and other securities of other corporation, to
receive the dividends, interest, and income thereon, and to distribute the same
to stockholders of this Corporation; to acquire, own and hold the stocks, bonds,
and other securities and evidences of indebtedness of any corporation, domestic
or foreign, and to issue in exchange therefor, its own stocks, the purport and
intent of the powers herein defined being that this Corporation is organized
primarily for the purpose of owing and holding property, and distributing its
avails, and doing such acts as are necessary for the maintenance of its
corporate existence and management of its internal affairs.
1. In addition to the foregoing, the said Corporation is organized for
the following purposes, including the transaction of any or all lawful
businesses for which corporations may be incorporated pursuant to Chapter 416,
Hawaii Revised Statutes, and shall have the following powers:
(a) Without restrictions or limit as to amount, to buy or otherwise
acquire, own, hold, use, improve, develop, subdivide, mortgage, lease or take on
lease, sell, convey and in any and every other manner deal in and with and
dispose of real estate, buildings and other improvements, hereditaments,
-2-
<PAGE>
easements and appurtenances of every kind in connection therewith, or any estate
or interests therein, of any tenure or description, on any terms or conditions,
to the fullest extent permitted by law, and also any and all kinds of chattels,
goods, wares, merchandise, and agricultural, manufacturing and mercantile
products and commodities, and patents, licenses, debentures, securities, stocks,
bonds, commercial paper, and other forms of assets, rights and interests and
evidences of property or indebtedness, tangible or intangible; to take or hold
mortgages for any unpaid balance of the purchase money on any of the lands,
buildings or other improvements and properties sold, and to sell, foreclose or
otherwise dispose of said mortgages;
(b) To manufacture, purchase, sell, exchange, export and import and
otherwise deal in all kinds of goods, wares and merchandise; to engage in such
other business as may be necessary, suitable or proper to the accomplishment of
the purposes connected with or relating thereto;
(c) To acquire any and all rights, permits, privileges and franchises
suitable or convenient for the purposes of the Corporation;
(d) To acquire and carry on all or any part of the business or
property and to undertake any liabilities of any person, firm, association,
estate, company, or corporation and as
-3-
<PAGE>
the consideration for the same to pay cash, property, and/or to issue any
shares of stock and/or obligations of this Corporation;
(e) To enter into limited or general partnership or into any
arrangement for sharing profits, joint adventure, reciprocal considerations or
cooperation with any persons, partnerships, or corporations, syndicates,
companies, trusts and associations of all kinds carrying on, engaged in, or
about to carry on or engage in, any business or transaction which the
Corporation is authorized to carry on or engage in, or in which the Corporation
shall have directly or indirectly any interest, or any business or transaction
capable of being conducted so as directly or indirectly to benefit this
Corporation, and to take or otherwise acquire and hold, sell, reissue, or
otherwise deal with shares of stock in or securities or obligations of, to
advance and lend money, with or without security, and to subsidize or otherwise
assist any such company, and to guarantee the principal or interest of any such
security or obligations, or any dividends upon any such shares of stock, and to
discharge and cancel without payment any indebtedness thus arising;
(f) To purchase and acquire from any of its officers, directors, or
stockholders, any property, interests, or shares of stock and other assets
belonging to them or any of them which the Board of Directors may deem it
advisable to acquire;
-4-
<PAGE>
(g) To purchase and acquire shares of the capital stock (of any
class), bonds, and other obligations of this Corporation, from time to time, to
such extent, in such manner, and upon such terms as its Board of Directors shall
determine; and from time to time to accept any such shares, bonds, and
obligations as security for, or in payment on accounts, or in satisfaction of,
any claims, or demands of this Corporation, and to reissue the same from time to
time, upon such terms, prices, and conditions as may be fixed by its Board of
Directors or Executive Committee;
(h) To acquire by purchase, subscription, or otherwise, and to own,
hold, sell, negotiate, assign, deal in, exchange, transfer, mortgage, pledge, or
otherwise dispose of any shares of the capital stock, script, or any voting
trust certificates in respect of the shares of capital stock of, or any bonds,
mortgages, securities, or evidence of indebtedness issued or created by, any
other corporation, joint stock company, or association, public or private, or of
the government of the United States of America, or of any foreign government, or
of any state, territory, municipality, or other political subdivision or of any
governmental agency; and to issue in exchange therefor, in the manner permitted
by law, shares of the capital stock, bonds, or other obligations of the
Corporation; and while the holder or owner of any such shares of capital stock,
script, voting trust
-5-
<PAGE>
certificates, bonds, mortgages, or other securities or evidence of
indebtedness, to possess and exercise in respect thereof any and all rights,
powers, and privileges of ownership, including the right to vote thereon;
(i) To borrow and/or raise money and/or to obtain and maintain credit
for any of the purposes of the Corporation, in any amount, even in excess of its
capital stock, by the sale or issue of bonds, notes, debentures, collateral
trust certificates, or other obligations of any nature, or in any manner, and to
secure the same by mortgage or other liens upon any and all of the property,
real, personal, or in action, of every description whatsoever, or any portion
thereof, of this Corporation, whether at the time owned or thereafter acquired,
or to issue bonds, debentures, debenture stock, warrants, notes or other
obligations without any security and with the right to subordinate payment of
such obligations to other borrowings whether made before, simultaneous with, or
after the issue of said obligations; to redeem any debt or other obligation
before the same shall fall due, on any terms and at any advance or premium;
(j) The Corporation, at the time of its organization, or at any time
or times thereafter, may purchase or acquire shares, stocks, bonds, debentures,
and other securities or obligations, or any property, real, personal, or mixed,
from any person or persons, corporation or corporations, who may be
-6-
<PAGE>
promoters, officers, or directors of this Corporation, and each stockholder
of this Corporation shall be deemed, by reason of his having become such, to
have waived any and all objections to such acquisition of shares, stocks,
bonds, debentures, and other securities, obligations, or property, real,
personal, or mixed, and to have agreed that no promoter, officer, or director
shall be liable to account to this Corporation for any profit or benefit
derived by him by reason of such transaction;
(k) The Corporation shall possess all the powers necessary to conduct
said businesses and to carry out the purposes and objects herein expressed, and
shall have all the powers now or hereafter expressly conferred upon corporations
under the laws of the State of Hawaii, together with such additional and implied
powers as may now or hereafter be provided thereby, including, but not limited
to, the right to incur debts in excess of its capital stock.
2. The clauses set forth in this Article II are to be construed both as
purposes and powers; and it is hereby expressly provided that the enumeration
herein of specific purposes and powers shall not be held to limit or restrict in
any manner the general powers of the Corporation. It is the intention that the
purposes, objects, and powers specified in each of the said clauses shall,
except as otherwise expressly provided, in no wise be limited or restricted by
reference to or inference from the
-7-
<PAGE>
terms of any other clause or paragraph of this article, or of any other
article of these Articles of Incorporation.
ARTICLE IV
1. The amount of the authorized capital stock of the Corporation shall be
FIFTY MILLION (50,000,000) shares of common stock, no par value per share, and
ONE MILLION (1,000,000) shares of preferred stock, no par value per share. The
Corporation shall have the privilege of subsequent extensions of its capital
stock from time to time in the manner provided by law.
2. No shares of stock shall be sold or transferred except in accordance
with the provisions of the by-laws of this Corporation.
3. All future issues of stock, whether at present authorized or future
increases, shall, from time to time, be subject to the sale and disposal by the
Board of Directors at such price, to the purchasers, and upon such terms as the
Board of Directors shall determine to be in the best interests of the
Corporation; and this provision shall apply also to any issue of notes, bonds,
debentures, warrants, rights or preferred stock, that shall be hereinafter
authorized, which are convertible into common or preferred stock.
4. The Corporation shall have power from time to time to create an
additional class or additional classes of shares of
-8-
<PAGE>
capital stock with such preferences, voting powers, restrictions and
qualifications thereof as shall be fixed by the resolution authorizing the
issuance thereof.
5. Anything herein contained to the contrary notwithstanding, the rights
of the holders of all classes of stock of the Corporation in respect of
dividends shall at all times be subject to the power of the Board of Directors
from time to time to set aside such reserves and/or to make such other
provision, if any, for working capital and for additions and improvements to its
plant, for acquisition of real or personal property for the enlargement of its
business, for general expansion of its business, and for any other reserve or
reserves for any proper purpose as said Board shall deem to be necessary or
advisable.
6. The name of the initial subscriber for shares, the numbers of shares
subscribed for by such initial subscriber, the subscription price for such
shares, and the amount of capital and paid-in-surplus paid in by such initial
subscriber, whether in cash, non-cash consideration, or a combination of both,
are as follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
Amount
Amount of Paid-In
Capital Surplus
Paid In, Amount Paid-In,
Amount of by Non- Paid-In by Non-
No. of Capital Cash Surplus Cash
Name of Shares Subscription Paid In, Considera- Paid-In, Considera-
Subscriber Subscribed Price In Cash tion In Cash tion
<S> <C> <C> <C> <C> <C> <C>
SAKAE 68 $340.00 $340.00 NONE NONE NONE
TAKAHASHI
YOSHIHARU 66 330.00 330.00 NONE NONE NONE
SATOH
MINORU 66 330.00 330.00 NONE NONE NONE
UEDA
200 $1000.00 $l000.00
</TABLE>
-10-
<PAGE>
ARTICLE V
1. There shall be a Board of Directors of not less than five (5) members,
who shall be elected at the annual meeting of the stockholders, as, and in the
manner prescribed in the By-Laws of the Corporation. At least one member of the
Board of Directors shall be a resident of the State of Hawaii. The directors
shall be elected or appointed and any vacancies at any time occurring shall be
filled by the stockholders or the directors or any thereof in such manner and
for such terms as the by-laws may prescribe.
Except as otherwise limited by these Articles, By-Laws, or by law, all
corporate powers and authority of the Corporation shall be vested in the Board
of Directors; however, an Executive Committee may be appointed by the Board of
Directors as provided in the By-Laws and during the intervals between meetings
of the Board of Directors, the Executive Committee shall possess and may execute
any of the powers delegated to it by the Board of Directors.
2. The officers of the Corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer, who shall be elected by the Board of
Directors as shall be prescribed by the by-laws. There may also be as officers
of the Corporation a Chairman of the Board, a Chief Executive Officer,
secretaries and treasurers. The officers need not be stockholders, except as
<PAGE>
may otherwise be provided by the by-laws of the Corporation. There may also be
such other officers and agents as the business of the Corporation may require,
who shall be elected or appointed as the by-laws may prescribe. The same person
may hold at the same time two or more offices.
3. The persons who are the first officers and directors of the
Corporation who shall serve until the first annual meeting of the shareholders
or until their successors are elected and qualify, are as follows:
<TABLE>
<S> <C>
YOSHIHARU SATOH President and Director
Residence Address 616 Ulili Street
Honolulu, Hawaii 96816
MINORU UEDA Executive Vice President
and Director
Residence Address 2499 Kapiolani Boulevard
Apartment 1701
Honolulu, Hawaii 96826
HAROLD YAMANAKA Senior Vice President
and Secretary
Residence Address 314 Puamamane Street
Honolulu, Hawaii 96821
DONALD KAMEMOTO Senior Vice President
and Treasurer
Residence Address 1480 Akeke Place
Kailua, Hawaii 96734
DANIEL K. INOUYE Director
Residence Address 469 Ena Road
Honolulu, Hawaii 96815
PAUL DEVENS Director
Residence Address 5631 Hoihi Place
Honolulu, Hawaii 96821
ALICE F. GUILD Director
Residence Address 2108 Keeaumoku Street
Honolulu, Hawaii 96834
<PAGE>
DENNIS I. HIROTA Director
Residence Address 1279 Puualoha Street
Kailua, Hawaii 96734
CHARLES H. KIMURA Director
Residence Address 738 Honua Street
Honolulu, Hawaii 96816
SIDNEY S. KOSASA Director
Residence Address 820 Onaha Street
Honolulu, Hawaii 96816
EATON MAGOON, JR. Director
Residence Address 3641 Diamond Head Road
Honolulu, Hawaii 96816
WALLACE Y. MATSUMOTO Director
Residence Address 3062 Kahaloa Drive
Honolulu, Hawaii 96822
SHINSUKE NAKAMINE Director
Residence Address 414 Uhini Place
Honolulu, Hawaii 96813
ELTON H. SAKAMOTO Director
Residence Address 1133 Nehoa Street
Honolulu, Hawaii 96822
SAKAE TAKAHASHI Director
Residence Address 3828 Old Pali Road
Honolulu, Hawaii 96817
GORDON I. TANIOKA Director
Residence Address 2904 Oahu Avenue
Honolulu, Hawaii 96822
LESTER B. K. YEE Director
Residence Address 4145 Papu Circle
Honolulu, Hawaii 96816
</TABLE>
4. No contract or other transaction between the Corporation and any other
corporation or any firm, association or other organization, and no act of the
Corporation, shall in any
<PAGE>
way be affected or invalidated by the fact that any of the directors or
officers of the Corporation are parties to such contract or transaction or
act or are pecuniarily or otherwise interested in the same or are directors
or officers or members of any such corporation or any such firm, association
or other corporation; provided that the interest of such director or officer
shall be disclosed or shall have been known to the Board of Directors
authorizing or approving the same, or to a majority thereof. Any director of
the Corporation who is pecuniarily or otherwise interested in or is a
director or officer or member of such other corporation or any other firm,
association or other organization, may be counted in determining a quorum of
any meeting of the Board of Directors which shall authorize or approve any
such contract, transaction or act, and may vote thereon with like force and
effect as if he were in no way interested therein. Neither any director or
officer of the Corporation, being so interested in any such contract,
transaction, or act of the Corporation which shall be approved by the Board
of Directors of the Corporation, nor any corporation, firm, association, or
other organization in which such director, or officer may be interested,
shall be liable or accountable to the Corporation, or to any stockholder
thereof, for any loss incurred by the Corporation pursuant to or by reason of
such
<PAGE>
contract, transaction or act, or for any gain received by any such other
party pursuant thereto or by reason thereof.
5. Any director of the Corporation may vote upon any contract or other
transaction between the Corporation and any subsidiary or affiliated
corporation, including any corporation which owns all or substantially all of
the shares of the capital stock of the Corporation, without regard to the fact
that he may also be a director or officer or stockholder of or otherwise
interested in or connected with such subsidiary or affiliated corporation; and
no contract or other transaction entered into by and between the Corporation and
any such subsidiary or affiliated corporation shall be affected or invalidated
by the fact that any director or officer of the Corporation may also be a
director, officer, or stockholder of or otherwise interested in or connected
with such subsidiary or affiliated corporation, or by the fact that said
contract or transaction may be entered into by officers of the Corporation or
may be authorized or ratified by the vote of the directors who may also be
directors, officers, or stockholders of or otherwise interested in or connected
with such subsidiary or affiliated corporation.
ARTICLE VI
1. The Corporation hereby organized shall be a body corporate under the
laws of the State of Hawaii, with all rights,
<PAGE>
powers, privileges and immunities which are now or may hereafter be secured
by law to corporations, and shall be subject to all general laws now in
effect or hereafter enacted in regard to corporations.
2. The Corporation shall have succession by its corporate name for a term
of perpetual duration and shall have all the powers herein enumerated or implied
herefrom, and the powers now or which may hereafter be provided by law for
incorporated companies.
ARTICLE VII
Service of legal process may be made upon the Corporation in the manner
provided by law.
ARTICLE VIII
SPECIAL VOTING PROVISIONS
1. Vote Required for Certain Business Combinations
1.1 HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS. In addition to
any affirmative vote required by law or these Articles of Incorporation and
except as otherwise expressly provided in Section 2 of this Article VIII the
affirmative vote of the holders of at least 75% of the voting power of the then
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (the "Voting
<PAGE>
Stock"), voting together as a single class shall be required for any of the
following:
(1) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (i) any Interested Stockholder (as
hereinafter defined) or (ii) any other corporation (whether or not itself an
Interested Stockholder) which is, or after such merger or consolidation would
be, an Affiliate (as hereinafter defined) of an Interested Stockholder, or
(2) any sale, lease, license, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of transactions)
to or with any Interested Stockholder or any Affiliate of any Interested
Stockholder of any assets of the Corporation or any Subsidiary having an
aggregate Fair Market Value (as hereinafter defined) of $2,000,000 or more; or
(3) the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of any securities of
the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate
of any Interested Stockholder having an aggregate Fair Market Value of
$2,000,000 or more; or
(4) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on
<PAGE>
behalf of an Interested Stockholder or any Affiliate of any Interested
Stockholder, or
(5) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an Interested
Stockholder) which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary which is directly or
indirectly owned by any Interested Stockholder or any Affiliate of any
Interested Stockholder;
The affirmative vote required in this Section 1.1 of Article VIII shall be
required notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
1.2 DEFINITION OF "BUSINESS COMBINATION". The term "Business
Combination" as used in this Article VIII shall mean any transaction which is
referred to in any one or more of clauses (1) through (5) of Section 1.1 of this
Section 1.
2. When Higher Vote is Not Required
<PAGE>
The provisions of Section 1 shall not be applicable to any particular
Business Combination, and such Business Combination shall require only such
affirmative vote as is required by law and by any other provision of these
Articles of Incorporation, if all of the conditions specified in either of the
following Sections 2.1 or 2.2 are met:
2.1 APPROVAL BY DISINTERESTED DIRECTORS. The Business Combination
shall have been approved by a majority of the Disinterested Directors (as
hereinafter defined).
2.2 PRICE AND PROCEDURAL REQUIREMENTS. All of the following
conditions shall have been met:
(1) the aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of the Corporation's common
stock, no par value ("Common Stock") in such Business Combination shall be at
least equal to the higher of the following:
(a) (if applicable) the highest per share price (including
any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Stockholder for any shares of Common Stock acquired by it (i)
within the five-year period immediately prior to the first public announcement
of the terms of the proposed Business Combination
<PAGE>
(the "Announcement Date") or (ii) in the transaction in which it became an
Interested Stockholder, whichever is higher; and
(b) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested Stockholder became an
Interested Stockholder (such latter date is referred to in this Article VIII as
the "Determination Date"), whichever is higher.
(2) The aggregate amount of the cash and the Fair Market Value
as of the date of the consummation of the Business Combination of consideration
other than cash to be received per share by holders of shares of any class of
outstanding Voting Stock other than Common Stock shall be at least equal to the
highest of the following (it being intended that the requirements of this clause
(2) shall be required to be met with respect to every class of outstanding
Voting Stock, whether or not the Interested Stockholder has previously acquired
any shares of a particular class of Voting Stock):
(a) (if applicable) the highest per share price (including
any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Stockholder for any shares of such class of Voting Stock acquired
by it (i) within the five-year period immediately prior to the Announcement Date
or (ii) in the transaction in which it became an Interested Stockholder,
whichever is higher;
<PAGE>
(b) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date or on the Determination Date, whichever is
higher, and
(c) (if applicable) the highest preferential amount per
share to which the holders of shares of such class of Voting Stock are entitled
in the event of any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary.
(3) The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock) shall be in cash or
in the same form as the Interested Stockholder has previously paid for shares of
such class of Voting Stock. If the Interested Stockholder has paid for shares
of any class of Voting Stock with varying forms of consideration, the form of
consideration for such class of Voting Stock shall be either cash or the form
used to acquire the largest number of shares of such class of Voting Stock
previously acquired by it. The price determined in accordance with clauses (1)
and (2) of this Section 2.2 shall be subject to appropriate adjustment in the
event of any stock dividend, stock split, combination of shares or similar
event.
(4) After such Interested Stockholder has proposed such a
Business Combination and prior to the consummation of such Business
Combination: (a) except as
<PAGE>
approved by a majority of the Disinterested Directors, there shall have been
no failure to declare and pay at the regular date therefor any full
semi-annual dividends (whether or not cumulative) on the outstanding
Preferred Stock of the Corporation; (b) there shall have been (i) no
reduction in that semi-annual rate of dividends paid on the Common Stock
(except as necessary to reflect any subdivision of the Common Stock), except
as approved by a majority of the Disinterested Directors, and (ii) an
increase in such quarterly rate of dividends paid on such Common Stock as
necessary to reflect any reclassification (including any reverse stock
split), recapitalization, reorganization or any similar transaction which has
the effect of reducing the number of outstanding shares of the Common Stock,
unless the failure so to increase such annual rate is approved by a majority
of the Disinterested Directors; and (c) such Interested Stockholder shall not
have become the beneficial owner of any additional shares of Voting Stock
except as part of the transaction which results in such Interested
Stockholder becoming an Interested Stockholder.
(5) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended (or any subsequent provisions replacing such)
(hereinafter referred to as the "Act"), and the rules and regulations of the
<PAGE>
Securities and Exchange Commission thereunder shall be mailed to public
stockholders of the Corporation at least 30 days prior to the consummation of
such Business Combination (whether or not such proxy or information statement is
required to be mailed pursuant to the Act).
(6) The holders of all outstanding shares of Voting Stock not
beneficially owned by the Interested Stockholder prior to the consummation of
any Business Combination shall be entitled to receive in such Business
Combination cash or other consideration for their shares of such Voting Stock in
compliance with clauses (1), (2) and (3) of Section 2.2 of Article VIII
(provided, however, that the failure of any such holders who are exercising
their statutory rights to dissent from such Business Combination and receive
payment of the fair value of their shares to exchange their shares in such
Business Combination shall not be deemed to have prevented the condition set
forth in this clause (6) from being satisfied).
3. Certain Definitions
For the purpose of this Article VIII the following shall be deemed to
have the meanings specified below:
3.1 The term "person" shall mean any individual, firm, corporation or
other entity.
<PAGE>
3.2 The term "Interested Stockholder" shall mean any person (other
than the Corporation or any Subsidiary) who or which:
(1) is the beneficial owner, directly or indirectly, of more
than 10% of the voting power of the then outstanding Voting Stock; or
(2) is an Affiliate of the Corporation and at any time within
the five-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the then outstanding Voting Stock; or
(3) is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the five-year period immediately
prior to the date in question beneficially owned by an Interested Stockholder,
if such assignment or succession shall have occurred in the course of a
transaction or series of transactions not involving a public offering within the
meaning of the Securities Act of 1933, as amended (or any subsequent provisions
replacing such).
3.3 A person shall be deemed a "beneficial owner" of any Voting
Stock:
(1) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
<PAGE>
(2) which such person or any of its Affiliates or Associates has
(a) the right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (b) the right to vote pursuant to any
agreement, arrangement or understanding; or
(3) which is beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or Associates has
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of any shares of Voting Stock.
3.4 For the purpose of determining whether a person is an Interested
Stockholder pursuant to Section 3.2 of Article VIII, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned through
application of Section 3.3 of Article VIII but shall not include any other
shares of Voting Stock which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights, warrants or
options, or otherwise.
3.5 The terms "Affiliate" or "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Act, as in effect on November 1, 1986.
<PAGE>
3.6 The term "Subsidiary" shall mean any corporation of which a
majority of any class of equity security is owned, directly or indirectly, by
the Corporation; provided, however, that for the purposes of the definition of
Interested Stockholder set forth in Section 3.2 of Article VIII, the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is owned, directly or indirectly, by the Corporation.
3.7 The term "Fair Market Value" shall mean: (1) in the case of
stock, the highest closing sale price during the 30-day period immediately
preceding the date in question of a share of such stock on the National
Association of Securities Dealers, Inc. Automated Quotations System or any
similar system then in use, or if no such quotations are available, the fair
market value on the date in question of a share of such stock as determined by a
majority of the Disinterested Directors in good faith, in each case with respect
to any class of such stock, appropriately adjusted for any dividend or
distribution in shares of such stock or any subdivision or reclassification of
outstanding shares of such stock into a greater number of shares of such stock
or any combination or reclassification of outstanding shares of such stock into
a smaller number of shares of such stock; and (2) in the case of property other
than cash or stock, the fair market value of such property on the date in
<PAGE>
question as determined by a majority of the Disinterested Directors in good
faith.
3.8 In the event of any Business Combination in which the Corporation
is the survivor, the phrase "consideration other than cash to be received" as
used in clauses (1) and (2) of Section 2.2 of Article VIII shall include the
shares of Common Stock and/or the shares of any other class of outstanding
Voting Stock retained by the holders of such shares.
3.9 The term "Disinterested Director" shall mean any member of the
Board of Directors of the Corporation who is unaffiliated with the Interested
Stockholder and who was a member of the Board of Directors prior to the
Determination Date, and any successor of a Disinterested Director who is
unaffiliated with the Interested Stockholder and is recommended to succeed a
Disinterested Director by a majority of the total number of Disinterested
Directors then on the Board of Directors.
3.10 References to "highest per share price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any dividend
or distribution in shares of such stock or any subdivision or reclassification
of outstanding shares of such stock into a greater number of shares of such
stock or any combination or reclassification of outstanding shares of such stock
into a smaller number of shares of such stock.
<PAGE>
4. Powers of the Board of Directors
A majority of the Board of Directors of the Corporation shall have the
power and duty to determine for the purpose of this Article VIII, on the basis
of information known to them after reasonable inquiry, whether a person is an
Interested Stockholder. Once the Board of Directors has made a determination,
pursuant to the preceding sentence, that a person is an Interested Stockholder,
a majority of the total number of Directors of the Corporation who would qualify
as Disinterested Directors shall have the power and duty to interpret all of the
terms and provisions of this Article VIII, and to determine on the basis of
information known to them after reasonable inquiry all facts necessary to
ascertain compliance with this Article VIII, including, without limitation, (A)
the number of shares of Voting Stock beneficially owned by any person, (B)
whether a person is an Affiliate or Associate of another, (C) whether the assets
which are the subject of any Business Combination have, or the consideration to
be received for the issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination has, an aggregate Fair Market Value of
$2,000,000 or more and (D) whether all of the applicable conditions set forth in
Section 2.2 of this Article VIII have been met with respect to any Business
Combination. Any determination pursuant to this
<PAGE>
Section 4 made in good faith shall be binding and conclusive on all parties.
5. No Effect on Fiduciary Obligations of Interested Stockholders
Nothing contained in this Article VIII shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
6. Amendment, Repeal, Etc.
Notwithstanding any other provisions of these Articles of
Incorporation or the by-laws of the Corporation (and notwithstanding the fact
that a lesser percentage may be specified by law, these Articles of
Incorporation or the by-laws of the Corporation), the affirmative vote of the
holders of 75% or more of the outstanding Voting Stock, voting together as a
single class, shall be required to amend or repeal, or adopt any provisions
inconsistent with, this Article VIII.
<PAGE>
IN WITNESS WHEREOF, the undersigned to these Articles of Incorporation have
hereunto caused this instrument to be executed this 1st day of February, 1982.
/s/ Sakae Takahasi
----------------------------
SAKAE TAKAHASHI
/s/ Yoshiharu Satoh
----------------------------
YOSHIHARU SATOH
/s/ Minoru Ueda
----------------------------
MINORU UEDA
/s/ Harold K. Yamanaka
----------------------------
HAROLD YAMANAKA
/s/ Donald Kamemoto
----------------------------
DONALD KAMAMOTO
<PAGE>
STATE OF HAWAII )
: SS.
CITY AND COUNTY OF HONOLULU )
On this 1st day of February, 1982, before me personally appeared YOSHIHARU
SATOH, MINORU UEDA, HAROLD YAMANAKA and DONALD KAMEMOTO, to me known to be the
person described in and who executed the foregoing instrument, and acknowledged
that they executed the same as their free act and deed.
/s/ Helen C. Hamada
----------------------------
Notary Public, State of Hawaii
My commission expires: 7-2-83
<PAGE>
EXHIBIT 10.7
Warrant No. 2 Date of Option Grant:
39,292 SHARES JULY 30, 1997
COMMON STOCK PURCHASE WARRANT
OF
CPB INC.
This certifies that, for value received, The Sumitomo Bank, Ltd.
("Sumitomo") is entitled to purchase from CPB Inc., a Hawaii corporation (the
"Company"), at any time prior to 12:00 a.m., Hawaii Time on July 30, 2002,
39,292 fully paid and nonassessable shares (the "Shares") of the Company common
stock, no par value ("Common Stock"), at such price and upon such terms and
conditions as are set forth below.
This Warrant is issued in connection with 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 July 30,
1997 and end on July 30, 2002. Sumitomo may not exercise this Warrant until the
stock options ("Option"), or portion thereof, representing this Warrant is
exercised. The Company will give Sumitomo notice ("Stock Option Notice") of the
exercise of any Options issued pursuant to the CPB Inc. 1997 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 that may be acquired by Sumitomo pursuant to the Warrant.
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, subject to approval by the Federal
Reserve Board or other regulatory authorities. Sumitomo will 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 the Warrant is exercised (the "Warrant Price") and the 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 new 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 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.)
<PAGE>
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 on 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, in lieu of the issuance of such fractional share,
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, 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 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, ("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 3(a) 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 hereby represents that this Warrant and any shares
it may acquire upon exercise of all or part of this Warrant are 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
<PAGE>
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 officers as of the 30th day of July, 1997.
CPB INC.
By
------------------------------------
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 No. ___ issued on __________________ 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 business days after notification by you of the average of the closing bid
and asked price for the Common Stock for the five 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 of Common
Stock 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:
---------------------------------------
<PAGE>
EXHIBIT 10.8
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.
<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.
<PAGE>
[LOGO] 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, 1997, 1996 and 1995, and with respect to the consolidated balance sheets
at December 31, 1997 and 1996, are derived from the consolidated financial
statements which have been audited by KPMG Peat Marwick LLP, independent
auditors, included in this Annual Report. The selected statement of income
data for the years 1994 and 1993, and the selected balance sheet data at
December 31, 1995, 1994 and 1993, 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) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total interest income $ 110,332 $ 104,287 $ 107,802 $ 93,793 $ 91,995
Total interest expense 44,695 41,679 44,745 31,600 30,922
Net interest income 65,637 62,608 63,057 62,193 61,073
Provision for loan losses 3,500 2,500 3,300 3,300 3,200
Net interest income after
provision for loan losses 62,137 60,108 59,757 58,893 57,873
Other operating income 10,891 10,697 10,735 10,494 10,615
Other operating expense 48,710 47,478 47,650 47,118 42,730
Income before income taxes
and cumulative effect of
accounting change 24,318 23,327 22,842 22,269 25,758
Income taxes 9,359 9,236 9,034 8,786 10,026
Net income 14,959 14,091 13,808 13,483 15,940
- --------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (YEAR-END):
Interest-bearing deposits in other banks $ 34,188 $ 26,297 $ 7,140 $ 40,277 $ 5,039
Federal funds sold -- -- -- -- 5,000
Investment securities (2) 320,711 240,458 283,627 243,788 250,668
Loans 1,041,023 1,041,976 990,356 991,968 945,768
Allowance for loan losses 19,164 19,436 20,156 18,296 17,131
Total assets 1,497,101 1,403,165 1,371,909 1,381,539 1,303,102
Core deposits (3) 875,920 859,280 878,065 878,660 900,218
Total deposits 1,193,158 1,123,614 1,138,319 1,081,909 1,078,326
Long-term debt 127,705 115,840 81,107 68,307 80,881
Total stockholders' equity 151,742 140,882 132,507 121,103 113,188
- --------------------------------------------------------------------------------------------------
PER SHARE DATA: (4)
Basic earnings per share $ 1.42 $ 1.34 $ 1.32 $ 1.29 $ 1.53
Diluted earnings per share 1.40 1.33 1.31 1.28 1.52
Cash dividends declared 0.49 0.48 0.46 0.44 0.44
Book value 14.34 13.37 12.62 11.57 10.82
Weighted average shares
outstanding (in thousands) 10,555 10,530 10,480 10,468 10,432
- --------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Return on average assets 1.04% 1.04% 1.00% 1.03% 1.29%
Return on average stockholders' equity 10.18 10.27 10.79 11.48 14.88
Average stockholders' equity to
average assets 10.26 10.09 9.29 8.99 8.70
Net interest margin (5) 4.89 4.89 4.87 5.10 5.34
Net charge-offs to average loans 0.36 0.32 0.14 0.23 0.16
Nonperforming assets to year-end loans
& other real estate (6) 1.92 1.41 0.59 1.84 0.66
Allowance for loan losses to year-end loans 1.84 1.87 2.04 1.84 1.81
Allowance for loan losses to
nonaccrual loans 116.76 143.97 562.55 113.95 382.64
Dividend payout ratio 34.51 35.82 34.85 34.11 28.76
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a $208,000 credit for cumulative effect of accounting change.
(2) Held-to-maturity securities at amortized cost, available-for-sale securities
at fair value in 1997, 1996, 1995 and 1994 and at amortized cost in 1993.
(3) Noninterest-bearing demand, interest-bearing demand and savings deposits,
and time deposits under $100,000.
(4) Adjusted for a two-for-one split of CPB Inc. common stock effective
November 14, 1997.
(5) Computed on a taxable equivalent basis.
(6) Nonperforming assets include nonaccrual loans and other real estate.
7
<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------------------------------
Share and per share information in this Management's Discussion and
Analysis and elsewhere in this Annual Report has been adjusted for a
two-for-one split of CPB Inc. common stock effective November 14, 1997.
OVERVIEW
CPB Inc. (the "Company") and its subsidiary, Central Pacific Bank (the
"Bank"), reported net income in 1997 of $15.0 million increasing by 6.2% over
the $14.1 million earned in 1996. Net income of $13.8 million was reported in
1995. The increase in 1997's net income was primarily the result of an
increase in net interest income combined with a minimal increase in other
operating expenses. Return on average assets of 1.04% equaled that of 1996
which increased from 1.00% in 1995. Return on average stockholders' equity
continued to decline to 10.18% from 10.27% in 1996 and 10.79% in 1995 due to
continued growth in retained earnings. Basic earnings per share of $1.42 in
1997 increased by 6.0% over $1.34 in 1996, which increased by 1.5% over $1.32
in 1995. Cash dividends per share of $0.49 in 1997 increased from $0.48 in
1996 and $0.46 in 1995.
In 1997, the state of Hawaii's economy experienced little growth for
the seventh consecutive year. Tourism, the state's primary industry, saw
visitor count remain unchanged from 1996 with employment continuing to
decline as the unemployment rate increased to 5.7%. Construction activity
also continued to decline. Although there was increased activity in home
sales during the year, the median sales price of those homes declined.
Despite the stagnant local economy, the Company managed to increase
total assets by $93.9 million or 6.7% to $1,497.1 million at December 31,
1997. Funding this increase were deposits which increased by $69.6 million or
6.2% to $1,193.2 million; long-term debt which increased by $11.9 million or
10.2% to $127.7 million; and stockholders' equity which increased by $10.9
million or 7.7% to $151.7 million, compared to year-end 1996.
Investment securities increased by $80.3 million or 33.4% to $320.7
million. Loans, however, reflected the economic situation, with net loans of
$1,021.9 million decreasing by 0.1% due to decreases in commercial and
consumer loans. In addition, problem loans increased to $35.1 million from
$33.9 million a year ago.
The Hawaiian economy is not expected to grow in 1998. Furthermore,
recent devaluation of currencies in Asia and economic weakness in Japan may
adversely affect tourism and new investments in Hawaii. Consequently, lack of
significant improvement in the state's economy may continue to have a
negative impact on the Company's growth and levels of nonperforming loans and
related loan losses.
The Company has evaluated its computer systems to assess the nature and
extent of Year 2000 problems. The Company is currently converting its major
banking hardware and software systems to a new integrated banking system
which is scheduled for installation in mid-1998. The conversion is expected
to solve a substantial part of the Bank's Year 2000 problem. This system and
all other computer-based systems are scheduled to be fully tested and
certified for Year 2000 compliance by the end of 1998. Additionally, the
Company is communicating with external entities, including vendors and
customers, to ensure that they are Year 2000 compliant. Expenditures related
to the new integrated banking system are expected to be capitalized and
amortized over their respective useful lives. Expenditures related to the
Company's technical staff, which are being expensed during the period
incurred, and other expenditures of addressing the Year 2000 issue are not
expected to be material.
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, Year 2000 compliance, net interest income, net interest margin, the
levels of nonperforming loans, loan losses and the allowance for loan losses,
liquidity and quantitative and qualitative disclosures about market risk 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, the ability of other
entities to become Year 2000 compliant, differences between actual and
estimated market rates or price changes upon which certain assumptions are
based, the makeup of the Company's portfolio of risk-sensitive instruments
and 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, 1997.
8
<PAGE>
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 tables and discussed in this section are
expressed on a taxable equivalent basis using an assumed income tax rate of
35%. Average balances were computed on a daily average basis.
Net interest income increased by $3.5 million or 5.5% over 1996, mainly
due to the increases in volume and yield on interest earning assets.
Interest income in 1997 increased by $6.5 million or 6.2%, due to a
$70.3 million or 5.5% increase in average interest earning assets and an
increase in average yield to 8.19% from 8.13% in 1996. Interest on
interest-bearing deposits in other banks increased by $2.0 million or 475.4%
and interest and fees on loans increased by $3.2 million or 3.7% mainly due
to increased average volume.
Interest expense in 1997 increased by $3.0 million or 7.2% over 1996
due to a $60.6 million or 5.7% increase in average interest-bearing
liabilities. Average time deposits $100,000 and over, which increased by
$23.5 million or 8.8%, accounted for $1.4 million of the increase in interest
expense. Average long-term debt, which increased by $23.7 million or 24.5%,
accounted for
Table 1. Average Balances, Interest Income and Expense, Yields and Rates
(Taxable Equivalent)
<TABLE>
<CAPTION>
Year ended December 31,
1997
------------------------------------------------
Average Amount
Average Yield/ of
(Dollars in thousands) Balance Rate Interest
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits in
other banks $ 43,362 5.55% $ 2,405
Federal funds sold 85 5.88 5
Taxable investment securities (1) 251,693 6.32 15,895
Tax-exempt investment securities(1) 15,697 7.28 1,143
Loans (2) 1,044,538 8.77 91,559
- -------------------------------------------------------------------------------------------------
Total interest earning assets 1,355,375 8.19 111,007
Nonearning assets 77,063
- -------------------------------------------------------------------------------------------------
Total assets $1,432,438
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits $95,056 1.35% $ 1,287
Savings and money market deposits 398,667 2.78 11,096
Time deposits under $100,000 204,871 4.73 9,700
Time deposits $100,000 and over 290,340 5.21 15,116
Short-term borrowings 5,528 5.39 298
Long-term debt 120,452 5.98 7,198
- -------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,114,914 4.01 44,695
Noninterest-bearing deposits 155,232
Other liabilities 15,384
Stockholders' equity 146,908
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,432,438
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net interest income $66,312
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net interest margin 4.89%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
1996
------------------------------------------------
Average Amount
Average Yield/ of
(Dollars in thousands) Balance Rate Interest
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits in
other banks $ 7,924 5.28% $418
Federal funds sold 22 4.55 1
Taxable investment securities (1) 261,934 5.94 15,568
Tax-exempt investment securities(1) 4,917 4.47 220
Loans (2) 1,010,255 8.74 88,310
- -------------------------------------------------------------------------------------------------
Total interest earning assets 1,285,052 8.13 104,517
Nonearning assets 74,678
- -------------------------------------------------------------------------------------------------
Total assets $1,359,730
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits $ 94,389 1.36% $ 1,284
Savings and money market deposits 392,603 2.80 10,977
Time deposits under $100,000 194,950 4.80 9,348
Time deposits $100,000 and over 266,821 5.16 13,755
Short-term borrowings 8,844 5.52 488
Long-term debt 96,741 6.02 5,827
- -------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,054,348 3.95 41,679
Noninterest-bearing deposits 153,288
Other liabilities 14,923
Stockholders' equity 137,171
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,359,730
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net interest income $62,838
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net interest margin 4.89%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
1995
------------------------------------------------
Average Amount
Average Yield/ of
(Dollars in thousands) Balance Rate Interest
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits in
other banks $ 34,224 5.84% $1,998
Federal funds sold 5,666 5.93 336
Taxable investment securities (1) 250,101 5.68 14,198
Tax-exempt investment securities(1) 3,631 5.76 209
Loans (2) 1,004,094 9.09 91,260
- -------------------------------------------------------------------------------------------------
Total interest earning assets 1,297,716 8.32 108,001
Nonearning assets 79,019
- -------------------------------------------------------------------------------------------------
Total assets $1,376,735
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits $ 98,303 1.36% 1,335
Savings and money market deposits 414,988 3.12 12,940
Time deposits under $100,000 188,574 4.78 9,021
Time deposits $100,000 and over 249,215 5.44 13,564
Short-term borrowings 50,703 5.64 2,860
Long-term debt 79,942 6.29 5,025
- -------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,081,725 4.14 44,745
Noninterest-bearing deposits 152,002
Other liabilities 15,075
Stockholders' equity 127,933
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,376,735
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net interest income $63,256
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Net interest margin 4.87%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) At amortized cost.
(2) Includes nonaccrual loans.
9
<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
another $1.4 million in interest expense. The effective rate paid on total
interest-bearing liabilities, which increased to 4.01% in 1997 from 3.95% in
1996, had little impact on the increase in interest expense.
Net interest income in 1996 decreased by $0.4 million or 0.7% from 1995.
Interest income decreased by $3.5 million or 3.2%, mainly due to the decline in
effective yield on interest earning assets to 8.13% from 8.32%, reflecting the
decline in interest rates. Interest and fees on loans accounted for most of the
decrease in interest income due to decrease in effective yield. Interest
expense decreased by $3.1 million or 6.9% mainly due to a decline in the
effective rate paid on interest-bearing liabilities to 3.95% in 1996 from 4.14%
in 1995.
As a result, net interest margin remained relatively stable at 4.89% in
1997, compared to 4.89% in 1996 and 4.87% in 1995.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Provision for loan losses ("Provision") is determined by Management's
ongoing evaluation of the loan portfolio and their assessment of the ability of
the allowance for loan losses ("Allowance") to cover inherent losses. The
Company's methodology for determining the adequacy of the allowance and
provision for loan losses takes into account many factors, including the level
and trend of nonperforming and potential problem loans, net charge-off
experience, the current repayment ability of borrowers, the fair value of
collateral securing specific loans and general economic factors in Hawaii. The
Company's provision was $3.5 million, $2.5 million and $3.3 million in 1997,
1996 and 1995, respectively. Net loan charge-offs increased to $3.8 million in
1997 compared to $3.2 million in 1996 and $1.4 million in 1995 or, when
expressed as a percentage of average loans, increased to 0.36% from 0.32% in
1996 and 0.14% in 1995. Net charge-offs on loans secured by real estate totaled
$1.6 million in 1997 decreasing by 19% from 1996; commercial and industrial loan
net charge-offs of $1.1 million doubled in 1997 from 1996, mainly from loans to
two borrowers; consumer loan net charge-offs of $1.1 million increased from
$0.7 million in 1996 due to an increase in indirect consumer loan charge-offs
combined with more personal bankruptcies and delinquencies as a result of
economic conditions in Hawaii.
The Allowance expressed as a percentage of loans was 1.84% at December 31,
1997, and 1.87% and 2.04% at the previous two year-ends. Although this ratio
decreased during the last two years due to net loan charge-offs exceeding the
Provision, in Management's judgment, the Allowance at year-end 1997 was adequate
to cover losses inherent in the loan portfolio. Furthermore, Management's
assessment is that the Company's additional risk exposure in its loan portfolio
attributable to the Asian economic crisis is not material.
Table 2. Analysis of Changes in Net Interest Income (Taxable Equivalent)
<TABLE>
<CAPTION>
Year ended December 31,
1997 COMPARED TO 1996 1996 Compared to 1995
---------------------------------------- ----------------------------------------
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 $1,871 $ 116 $1,987 $(1,536) $ (44) $(1,580)
Federal funds sold 3 1 4 (335) - (335)
Taxable investment securities (608) 935 327 672 698 1,370
Tax-exempt investment securities 482 441 923 74 (63) 11
Loans 2,996 253 3,249 560 (3,510) (2,950)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 4,744 1,746 6,490 (565) (2,919) (3,484)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits 9 (6) 3 (53) 2 (51)
Savings and money market deposits 170 (51) 119 (698) (1,265) (1,963)
Time deposits under $100,000 476 (124) 352 305 22 327
Time deposits $100,000 and over 1,214 147 1,361 958 (767) 191
Short-term borrowings (183) (7) (190) (2,361) (11) (2,372)
Long-term debt 1,427 (56) 1,371 1,057 (255) 802
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 3,113 (97) 3,016 (792) (2,274) (3,066)
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $1,631 $1,843 $3,474 $ 227 $ (645) $ (418)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Continuation of stagnant economic conditions in the state of Hawaii has
adversely affected and may continue to adversely affect borrowers' ability to
repay, value of collateral and consequently the level of nonperforming loans,
net charge-offs, provision for loan losses and net income.
NONPERFORMING ASSETS
Table 3 sets forth nonperforming assets, accruing loans 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 increased to $35.1 million at
December 31, 1997 from $33.9 million a year ago. Nonaccrual loans of $16.4
million increased by $2.9 million during 1997 primarily due to loans to several
borrowers as follows: $5.4 million secured by hotel property, $3.8 million
secured by residential properties, $2.7 million secured by an office building
and $1.8 million secured by business assets. Specific allocations for these
loans have been made in the Allowance. Other real estate of $3.7 million, which
increased from $1.2 million a year ago, were comprised of several residential
properties located in Hawaii. Loans delinquent for 90 days or more of $12.2
million increased from $6.3 million reported a year ago. Delinquencies were
primarily comprised of mortgage loans with the increase mainly due to a block of
condominium loans totaling $4.3 million and a $2.4 million loan secured by
commercial property. Restructured loans still accruing interest decreased to
$2.7 million from $12.8 million at year-end 1996, of which $6.7 million were
placed on nonaccrual status and $3.8 million were paid off. The balance of
restructured loans still accruing interest at year-end 1997 was primarily
comprised of
Table 3. Nonperforming Assets, Past Due Loans and Restructured Loans
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Real estate:
Mortgage - commercial $13,979 $ 8,863 $ 2,012 $ 2,278 $ 2,760
Mortgage - residential 1,081 2,462 1,571 10 1,717
Construction -- -- -- 1,612 --
Commercial, financial and agricultural 1,312 2,175 -- 12,156 --
Installment 41 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 16,413 13,500 3,583 16,056 4,477
Other real estate 3,677 1,235 2,231 2,242 1,750
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 20,090 14,735 5,814 18,298 6,227
Loans delinquent for 90 days or more
Real estate:
Mortgage - commercial 311 341 3,094 535 1,206
Mortgage - residential 10,112 4,366 4,032 4,244 1,242
Construction -- -- -- 227 1,276
Commercial, financial and agricultural 1,302 1,038 1,493 7,550 15,815
Installment 508 568 570 316 281
- ------------------------------------------------------------------------------------------------------------------------------------
Total 12,233 6,313 9,189 12,872 19,820
Restructured loans still accruing interest
Real estate:
Mortgage - commercial 2,727 11,095 5,974 7,561 --
Commercial, financial and agricultural -- 1,723 -- 925 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,727 12,818 5,974 8,486 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets, loans delinquent for 90 days or
more and restructured loans still accruing interest $35,050 $33,866 $20,977 $39,656 $26,047
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of
loans and other real estate 1.92% 1.41% 0.59% 1.84% 0.66%
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets and loans delinquent for 90 days
or more as a percentage of loans and other real estate 3.09% 2.02% 1.51% 3.14% 2.75%
- ------------------------------------------------------------------------------------------------------------------------------------
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 3.36% 3.25% 2.11% 3.99% 2.75%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
loans to three borrowers secured by commercial real estate. Accounting for
nonperforming assets is discussed in note 1 to the consolidated financial
statements on pages 22 and 23 of this Annual Report.
OTHER OPERATING INCOME
Table 4 sets forth components of other operating income and the total as a
percentage of average assets.
Other operating income showed little growth during the past three years.
The 1997 total of $10,891,000 increased by 1.8% over 1996 which decreased by
0.4% from 1995. Service charges on deposit accounts of $3,039,000 increased by
8.7%, mainly due to fee pricing changes effected during the year. However,
equity in earnings of unconsolidated subsidiaries decreased to $489,000 in 1997
from $681,000 in 1996 and $1,223,000 in 1995, due to the continued decline in
earnings from partnership-owned properties reflecting the oversupply of office
space in Honolulu. Startup losses related to Trans-Pacific Mortgage Group LLC,
a mortgage banking partnership in which the Company has 49 percent ownership,
also contributed to the decline in income. See note 7 to the consolidated
financial statements on page 28 of this Annual Report for a description of the
subsidiaries.
Fees on foreign exchange of $700,000 in 1997 also continued its decline
over the past three years, reflecting the decreased Japanese tourist activity in
Hawaii during that period. Other income of $1,054,000 increased by 30.8% due to
an increase in income from fiduciary activities and income on bank-owned life
insurance. Other income of $806,000 in 1996 increased by 65.2% largely due to a
one-time credit of $191,000 in interest income on income tax refunds received.
Total other operating income, expressed as a percentage of average assets,
declined to 0.76% in 1997 from 0.79% in 1996 and 0.78% in 1995.
Table 4. Components of Other Operating Income
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 3,039 $ 2,795 $ 2,645
Other service charges and fees 5,609 5,545 5,258
Equity in earnings of
unconsolidated subsidiaries 489 681 1,223
Fees on foreign exchange 700 876 1,060
Investment securities (losses) gains -- (6) 61
Other 1,054 806 488
- --------------------------------------------------------------------------------
Total $10,891 $10,697 $10,735
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total other operating income as a
percentage of average assets 0.76% 0.79% 0.78%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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 remained relatively stable during the last
three years reflecting Management's cost containment efforts. The 1997 total of
$48.7 million increased by 2.6% over 1996, which decreased by 0.4% from 1995.
Salaries and employee benefits of $25.8 million increased by 3.2% over 1996,
which decreased by 2.8% from 1995. The increase in 1997 was mainly attributed to
expenses related to employee incentive programs established by the Company,
along with matching contributions to the 401(k) plan. Pension expense decreased
in 1997 and 1996 due to a revision in the Company's defined benefit pension. A
bonus and other expenses related to the retirement of the Company's former
chairman of the board in 1995 also contributed to the decrease in 1996.
Net occupancy expense in 1997 decreased by 7.6% to $6,314,000 mainly due to
reduction in lease rent related to relocation of a branch office. Net occupancy
expense in 1996 increased by 16.3% over 1995, primarily due to the opening of
five branches. Equipment expense increases of 8.1% and 5.7% during the last two
years were mainly attributed to the opening of the new branches, ongoing
investments in personal computers and the enhancement of the Company's
communications network. Other expense increased by $736,000 or 5.7% in 1997
primarily due to legal and professional fees along with expenses associated with
other real estate. The increase in professional fees was due to a comprehensive
earnings enhancement study that began in the fourth quarter of 1997, the
benefits of which are anticipated to accrue in 1998 and subsequent years. Other
expense decrease of $547,000 or 4.1% in 1996 was mainly due to Federal Deposit
Insurance Corporation ("FDIC") deposit insurance premium decreasing by $1.2
million offset by an increase in charge card
Table 5. Components of Other Operating Expense
<TABLE>
<CAPTION>
Year ended December 31,
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $25,795 $24,998 $25,728
Net occupancy 6,314 6,833 5,873
Equipment 2,908 2,690 2,545
Other 13,693 12,957 13,504
- --------------------------------------------------------------------------------
Total $48,710 $47,478 $47,650
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total other operating expense as a
percentage of average assets 3.40% 3.49% 3.46%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
related expenses of $408,000 or 19.9% and legal and professional fees of
$286,000 or 39.3%. Total other operating expense as a percentage of average
assets decreased to 3.40% from 3.49% and 3.46% in 1996 and 1995, respectively.
INCOME TAXES
Income tax expense totaled $9.4 million in 1997, compared to $9.2 million
in 1996 and $9.0 million in 1995. The effective tax rate decreased to 38.5% from
39.6% in the previous two years due to an increase in income from investments
exempt from federal income taxes.
FINANCIAL CONDITION
Table 6 sets forth the distribution of assets, liabilities and
stockholders' equity.
Average total assets of $1,432.4 million increased by $72.7 million or 5.3%
in 1997 over 1996, which decreased by $17.0 million or 1.2% from 1995. Average
loans of $1,044.5 million increased by $34.3 million or 3.4% and by $6.2 million
or 0.6% in 1997 and 1996, respectively. Loans at year-end 1997, however,
decreased to $1,041.0 million. The relatively low asset and loan growth rates
reflected the level of economic activity in the state of Hawaii and the
heightened level of competition. Average investment securities of $267.4 million
increased from $266.9 million in 1996 and $253.7 million in 1995. Year-end 1997
investment securities, however, increased to $320.7 million. Interest-bearing
deposits in other banks averaged $43.4 million in 1997 compared to $7.9 million
in 1996 and $34.2 million in 1995, reflecting increased liquidity levels in
absence of loan growth.
Commercial mortgage and residential mortgage loans of $783.9 million at
year-end 1997 increased by 0.3%, commercial loans of $147.2 million increased by
3.4%, while consumer loans of $68.4 million decreased by 12.8% compared to
year-end 1996. Construction loans of $45.3 million increased by 3.6% during the
same period.
Average total deposits of $1,144.2 million in 1997 increased by $42.1
million or 3.8% in 1997 over 1996, which decreased by
Table 6. Distribution of Assets, Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
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 $ 36,138 2.5% $ 38,959 2.9% $ 40,633 2.9%
Interest-bearing deposits in other banks 43,362 3.0 7,924 0.6 34,224 2.5
Federal funds sold 85 -- 22 -- 5,666 0.4
Taxable investment securities 251,693 17.6 261,934 19.3 250,101 18.2
Tax-exempt investment securities 15,697 1.1 4,917 0.3 3,631 0.3
Loans 1,044,538 72.9 1,010,255 74.3 1,004,094 72.9
Allowance for loan losses (19,456) (1.3) (20,018) (1.5) (19,661) (1.4)
Premises and equipment 25,331 1.8 24,756 1.8 24,377 1.8
Other assets 35,050 2.4 30,981 2.3 33,670 2.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,432,438 100.0% $1,359,730 100.0% $1,376,735 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing demand $155,232 10.8% $153,288 11.3% $152,002 11.0%
Interest-bearing demand 95,056 6.6 94,389 6.9 98,303 7.1
Savings and money market 398,667 27.8 392,603 28.9 414,988 30.2
Time deposits under $100,000 204,871 14.3 194,950 14.3 188,574 13.7
Time deposits $100,000 and over 290,340 20.3 266,821 19.6 249,215 18.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,144,166 79.8 1,102,051 81.0 1,103,082 80.1
Short-term borrowings 5,528 0.4 8,844 0.7 50,703 3.7
Long-term debt 120,452 8.4 96,741 7.1 79,942 5.8
Other liabilities 15,384 1.1 14,923 1.1 15,075 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,285,530 89.7 1,222,559 89.9 1,248,802 90.7
Stockholders' equity 146,908 10.3 137,171 10.1 127,933 9.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,432,438 100.0% $1,359,730 100.0% $1,376,735 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
$1.0 million or 0.1% from 1995. Average time deposits $100,000 and over, which
increased by $23.5 million or 8.8% and $17.6 million or 7.1% in the respective
periods, provided much of the funding growth and continued the trend of
customers transferring funds into higher yielding deposits. Long-term debt which
represents borrowings from the Federal Home Loan Bank of Seattle ("FHLB"), of
which the Bank is a member, supplemented the Bank's funding by increasing $23.7
million or 24.5% in 1997 and $16.8 million or 21.0% in 1996. Average core
deposits (noninterest-bearing demand, interest-bearing demand and savings
deposits and time deposits under $100,000) of $853.8 million increased over
$835.2 million in 1996 and equaled the $853.9 million in 1995, again reflecting
the economic and competitive conditions in Hawaii.
Average stockholders' equity increased to 10.3% of assets compared to 10.1%
in 1996 and 9.3% in 1995.
ASSET/LIABILITY MANAGEMENT
The Company's net interest margin is subject to 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. Exposures to
changes in 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 and options.
Table 7 sets forth information concerning interest rate sensitivity of the
Company's assets, liabilities and stockholders' equity at December 31, 1997. 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.
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
or Less Six Months Months Years Years Sensitive Total
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits in other banks $ 34,188 $ -- $ -- $ -- $ -- $ -- $ 34,188
Investment securities 43,322 24,116 47,844 86,535 101,872 17,022 320,711
Loans 371,423 93,621 142,142 317,064 103,836 12,937 1,041,023
Other assets -- -- -- -- -- 101,179 101,179
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 448,933 117,737 189,986 403,599 205,708 131,138 1,497,101
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits -- -- -- -- -- 168,505 168,505
Interest-bearing deposits 698,684 118,288 141,854 63,498 2,329 -- 1,024,653
Short-term borrowings 3,748 1,500 1,000 -- -- -- 6,248
Long-term debt 52,112 621 28,271 15,105 31,596 -- 127,705
Other liabilities -- -- -- -- -- 18,248 18,248
Stockholders' equity -- -- -- -- -- 151,742 151,742
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity 754,544 120,409 171,125 78,603 33,925 338,495 1,497,101
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(305,611) $ (2,672) $ 18,861 $324,996 $171,783 $(207,357) $ --
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap $(305,611) $(308,283) $(289,422) $ 35,574 $207,357 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
As shown in Table 7, the amount of liabilities being re-priced exceeds the
amount of assets in the three months or less and 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 was unchanged in
1997 compared to 1996 as market interest rates were relatively stable. The
Company's net interest margin during the last three years was also adversely
impacted by a slowdown in loan demand and competitive loan and deposit pricing.
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 ("Federal Reserve Board") 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 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, 1997 and 1996. The relatively low
rate of asset growth in the last three years coupled with stable earnings
contributed toward 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 economically meet the cash
requirements of customers for loans and deposit withdrawals and participate in
investment 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 21 of this Annual Report, the
Company's operating activities provided cash totaling $14.3 million, $22.5
million and $24.0 million in 1997, 1996 and 1995, respectively. The decrease in
1997 was from an increase in other assets due to purchase of bank-owned life
insurance.
Investing activities represent a use of cash, with the increase in 1997
being attributed primarily to growth of the Company's
Table 8. Regulatory Capital Ratios
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
------------------------------------- -------------------------------------
Required Actual Excess Required Actual Excess
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
Tier I risk-based capital ratio 4.00% 12.45% 8.45% 4.00% 12.10% 8.10%
Total risk-based capital ratio 8.00 13.71 5.71 8.00 13.35 5.35
Leverage capital ratio 3.00 10.41 7.41 3.00 10.28 7.28
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Bank:
Tier I risk-based capital ratio 6.00% 11.63% 5.63% 6.00% 11.27% 5.27%
Total risk-based capital ratio 10.00 12.88 2.88 10.00 12.53 2.53
Leverage capital ratio 5.00 9.72 4.72 5.00 9.60 4.60
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
investment securities portfolios. Net cash used in investing activities during
1997 was $96.7 million, compared to $34.3 million in 1996 and $10.1 million in
1995. Cash used in net loan originations over principal repayments was $6.1
million in 1997 compared to $54.8 million in 1996 and $2.1 million in 1995.
Activities from investment securities and interest-bearing deposits in other
banks used cash of $86.1 million in 1997 and $4.6 million in 1995 compared to
$22.8 million provided in 1996.
In addition to cash flows from operating activities, financing activities
generally provide funding for growth in loans and investment securities with
increased deposits supplemented by the Company's borrowing sources, which
include short-term sources such as Federal funds purchased and securities sold
under agreements to repurchase and longer-term FHLB advances.
Deposits increased by $69.5 million in 1997 and $56.4 million in 1995
compared to a decline of $14.7 million in 1996. The Company's total borrowings
provided cash of $12.7 million in 1997 and $36.7 million in 1996 after using
$77.1 million in 1995. The increase in total borrowings in 1997 reflected
management's plan to use this source to help match fund certain longer term
loans and also leverage the Bank's capital. Accordingly, net cash provided by
financing activities was $77.6 million in 1997 and $17.1 million in 1996. Net
cash of $25.2 million was used in 1995 due to the decrease in short-term
borrowings.
The increase in investment securities was funded primarily by increases
in time deposits $100,000 and over and long-term borrowings from the FHLB.
The Bank's core deposits of $875.9 million at December 31, 1997 increased by
1.9%, time deposits $100,000 and over of $317.2 million increased by 20.0%
and long-term borrowings of $127.7 million increased by 10.2% from a year
ago. Although the Company's liquidity was relatively stable during 1997,
management has placed 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, were approximately $5.1 million, $5.1
million and $4.7 million in 1997, 1996 and 1995, respectively, for payment of
dividends. The Company's primary sources of funds were dividends received from
the Bank of approximately $5.1 million, $5.1 million and $4.8 million in 1997,
1996 and 1995, respectively. As presented in note 25 to the consolidated
financial statements on page 37 of this Annual Report, the Bank's retained
earnings, as defined, is the maximum amount permitted to be distributed as a
dividend
[LOGO] SUPPLEMENTARY FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
A summary of unaudited quarterly operating results for the years ended
December 31, 1997 and 1996 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>
1997:
Interest income $26,454 $27,219 $28,497 $28,162 $110,332
Net interest income 15,770 16,252 17,061 16,554 65,637
Provision for loan losses 750 750 1,250 750 3,500
Net interest income after provision for loan losses 15,020 15,502 15,811 15,804 62,137
Income before income taxes 5,912 6,035 6,161 6,210 24,318
Net income 3,591 3,680 3,823 3,865 14,959
Basic earnings per share 0.34 0.35 0.36 0.37 1.42
Diluted earnings per share 0.34 0.35 0.36 0.36 1.41
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
1996:
Interest income $26,375 $25,835 $25,848 $26,229 $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
Basic earnings per share 0.34 0.34 0.36 0.30 1.34
Diluted earnings per share 0.34 0.34 0.36 0.30 1.34
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
[LOGO] MARKET RISK
- --------------------------------------------------------------------------------
without prior regulatory approvals. At December 31, 1997, retained earnings of
the Bank approximated $101.3 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of its business, the Company is exposed to market
risk, primarily in the form of interest rate risk. Interest rate risk is the
potential of economic losses due to adverse movements in interest rates. These
economic losses can be reflected as a loss of future net interest income, cash
flows, or a loss of current fair market value. The Company does not currently
use derivative financial instruments, such as interest rate swaps, futures or
options, to manage its interest rate risk.
The following table presents in tabular form information about the
Company's financial instruments that are sensitive to changes in interest rates.
The table presents principal cash flows and related weighted average interest
rates by expected maturity dates and fair values as of December 31, 1997.
Expected maturities of assets are contractual maturities adjusted for
anticipated prepayments based upon historical experience and market estimates.
Interest-bearing demand and savings deposits are included in the earliest
maturity category, even though withdrawal of these balances is not contractually
required and may not actually occur during that period. Weighted average
interest rates on variable rate instruments are based upon the Company's
interest rate forecast. Actual maturities of interest-sensitive assets and
liabilities could vary substantially from expectations if different assumptions
are used or if actual experience differs from the assumptions used.
<TABLE>
<CAPTION>
Expected Maturity Date
There- Fair-
(Dollars in thousands) 1998 1999 2000 2001 2002 after Total Value
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Fixed rate investments $79,715 $41,497 $45,039 $21,514 $2,672 $77,686 $268,123 $268,929
Weighted average interest rates 6.28% 6.41% 6.32% 6.26% 6.70% 6.11% 6.26%
Variable rate investments 7,242 21,214 3,883 2,340 762 281 35,722 35,722
Weighted average interest rates 6.86% 5.33% 6.21% 6.04% 6.01% 6.59% 5.81%
Equity investments 16,866 -- -- -- -- -- 16,866 16,866
Weighted average interest rates 6.69% 6.69%
Fixed rate loans 95,161 51,150 33,118 23,223 16,122 60,998 279,772 281,876
Weighted average interest rates 8.48% 8.72% 8.43% 8.00% 7.81% 8.30% 8.40%
Variable rate loans 188,821 91,812 76,357 84,531 90,247 229,483 761,251 760,655
Weighted average interest rates 8.91% 8.20% 7.85% 7.79% 7.63% 8.36% 8.28%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
Interest-bearing demand and savings
deposits 503,144 -- -- -- -- -- 503,144 503,144
Weighted average interest rates 2.51% 2.51%
Time deposits 455,682 43,905 19,593 967 1,246 116 521,509 519,258
Weighted average interest rates 5.06% 5.09% 5.35% 5.41% 5.48% 5.81% 5.08%
Short-term borrowings 6,248 -- -- -- -- -- 6,248 6,248
Weighted average interest rates 5.26% 5.26%
Long-term debt 39,505 27,659 22,446 7,901 9,871 20,323 127,705 128,197
Weighted average interest rates 5.96% 5.50% 5.17% 4.97% 5.98% 6.43% 5.74%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
[LOGO] CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $50,695 $55,534
Interest-bearing deposits in other banks 34,188 26,297
Investment securities:
Held to maturity, at amortized cost
(fair value of $153,494 and $109,288
at December 31, 1997 and 1996, respectively) 152,688 109,244
Available for sale, at fair value 168,023 131,214
- --------------------------------------------------------------------------------
Total investment securities 320,711 240,458
- --------------------------------------------------------------------------------
Loans 1,041,023 1,041,976
Less allowance for loan losses 19,164 19,436
- --------------------------------------------------------------------------------
Net loans 1,021,859 1,022,540
- --------------------------------------------------------------------------------
Premises and equipment 26,676 25,072
Accrued interest receivable 9,404 8,674
Investment in unconsolidated subsidiaries 7,269 6,902
Due from customers on acceptances 59 1,162
Other real estate 3,677 1,235
Other assets 22,563 15,291
- --------------------------------------------------------------------------------
Total assets $1,497,101 $1,403,165
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $168,505 $168,170
Interest-bearing deposits 1,024,653 955,444
- --------------------------------------------------------------------------------
Total deposits 1,193,158 1,123,614
Short-term borrowings 6,248 5,427
Long-term debt 127,705 115,840
Bank acceptances outstanding 59 1,162
Other liabilities 18,189 16,240
- --------------------------------------------------------------------------------
Total liabilities 1,345,359 1,262,283
- --------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000
shares, none issued -- --
Common stock, no par value, authorized 50,000,000
shares; issued and outstanding 10,579,184 and
10,537,748 shares at December 31, 1997 and
1996, respectively 6,612 6,586
Surplus 45,848 45,481
Retained earnings 99,188 89,405
Unrealized gain (loss) on investment
securities, net of taxes 94 (590)
- --------------------------------------------------------------------------------
Total stockholders' equity 151,742 140,882
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,497,101 $1,403,165
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
[LOGO] CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $91,367 $88,157 $91,134
Interest and dividends on investment securities:
Taxable interest 14,713 14,454 13,336
Tax-exempt interest 660 143 136
Dividends 1,182 1,114 862
Interest on deposits in other banks 2,405 418 1,998
Interest on Federal funds sold 5 1 336
- -----------------------------------------------------------------------------------------------
Total interest income 110,332 104,287 107,802
- -----------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 37,199 35,364 36,860
Interest on short-term borrowings 298 488 2,860
Interest on long-term debt 7,198 5,827 5,025
- -----------------------------------------------------------------------------------------------
Total interest expense 44,695 41,679 44,745
- -----------------------------------------------------------------------------------------------
Net interest income 65,637 62,608 63,057
Provision for loan losses 3,500 2,500 3,300
- -----------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 62,137 60,108 59,757
- -----------------------------------------------------------------------------------------------
Other operating income:
Service charges on deposit accounts 3,039 2,795 2,645
Other service charges and fees 5,609 5,545 5,258
Equity in earnings of unconsolidated subsidiaries 489 681 1,223
Fees on foreign exchange 700 876 1,060
Investment securities (losses) gains -- (6) 61
Other 1,054 806 488
- -----------------------------------------------------------------------------------------------
Total other operating income 10,891 10,697 10,735
- -----------------------------------------------------------------------------------------------
Other operating expense:
Salaries and employee benefits 25,795 24,998 25,728
Net occupancy 6,314 6,833 5,873
Equipment 2,908 2,690 2,545
Other 13,693 12,957 13,504
- -----------------------------------------------------------------------------------------------
Total other operating expense 48,710 47,478 47,650
- -----------------------------------------------------------------------------------------------
Income before income taxes 24,318 23,327 22,842
Income taxes 9,359 9,236 9,034
- -----------------------------------------------------------------------------------------------
Net income $14,959 $14,091 $13,808
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Per share data:
Basic earnings per share $1.42 $1.34 $1.32
Diluted earnings per share 1.40 1.33 1.31
Cash dividends declared 0.49 0.48 0.46
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
19
<PAGE>
[LOGO] CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<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, 1994 $6,544 $45,178 $71,386 $(1,505) $(500) $121,103
Net income -- -- 13,808 -- -- 13,808
Cash dividends declared ($0.46 per share) -- -- (4,824) -- -- (4,824)
32,862 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 ($0.48 per share) -- -- (5,056) -- -- (5,056)
34,224 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
Net income -- -- 14,959 -- -- 14,959
Cash dividends declared ($0.49 per share) -- -- (5,176) -- -- (5,176)
41,436 shares of common stock issued 26 367 -- -- -- 393
Net change in unrealized (loss) gain
on investment securities, net of taxes -- -- -- 684 -- 684
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $6,612 $45,848 $99,188 $94 -- $151,742
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
20
<PAGE>
[LOGO] CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $14,959 $14,091 $13,808
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 3,500 2,500 3,300
Provision for depreciation and amortization 2,974 2,716 2,574
Net amortization and accretion
of investment securities 310 949 1,755
Net loss (gain) on investment securities -- 6 (61)
Federal Home Loan Bank stock dividends received (1,182) (1,114) (862)
Net change in loans held for sale (124) (655) 872
Deferred income tax benefit (347) (1,121) (1,909)
Equity in earnings of unconsolidated subsidiaries (489) (681) (1,223)
Net (increase) decrease in accrued
interest receivable and other assets (7,098) 4,292 5,669
Increase in other liabilities 1,831 1,548 59
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,334 22,531 23,982
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of and calls on
investment securities held to maturity 41,290 46,803 56,891
Purchases of investment securities
held to maturity (84,973) (20,306) (51,618)
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 28,077 33,991 4,171
Purchases of investment securities
available for sale (62,637) (36,341) (55,188)
Net (increase) decrease in interest-bearing
deposits in other banks (7,891) (19,157) 33,137
Net loan originations over principal repayments (6,145) (54,804) (2,089)
Purchases of premises and equipment (4,607) (2,372) (4,116)
Net proceeds from disposal of premises and equipment 29 36 307
Distributions from unconsolidated subsidiary 322 -- 430
Contributions to unconsolidated subsidiary (200) -- --
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (96,735) (34,343) (10,111)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 69,544 (14,705) 56,410
Proceeds from long-term debt 50,500 67,000 32,120
Repayments of long-term debt (38,635) (32,267) (19,320)
Net increase (decrease) in short-term borrowings 821 1,930 (89,875)
Cash dividends paid (5,061) (5,051) (4,716)
Proceeds from sale of common stock 393 165 180
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 77,562 17,072 (25,201)
- -----------------------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents (4,839) 5,260 (11,330)
Cash and cash equivalents:
At beginning of year 55,534 50,274 61,604
- -----------------------------------------------------------------------------------------------
At end of year $50,695 $55,534 $50,274
- -----------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $44,184 $41,700 $46,589
Cash paid during the year for income taxes 10,243 7,588 11,048
- -----------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities:
Transfer of held-to-maturity securities to
available-for-sale category $ -- $ -- $18,331
Reclassification of loans to other real estate 3,450 619 1,389
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
21
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997. 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 credit and debit card services, 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, CPBProperties, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CPB Inc. owns 49 percent of Trans-Pacific Mortgage Group LLC, a mortgage
brokerage company. The investment is accounted for by the equity method.
CPB Properties, Inc. is a general partner with a 50 percent interest in
CKSSAssociates, a limited partnership. The investment 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, 1997 and 1996, 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.
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
$8,671,000 and $8,547,000 at December 31, 1997 and 1996, respectively, and were
valued at the lower of aggregate cost or market value.
22
<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.
The Company follows 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 borrowers'
ability to repay their obligations, treats a loan as impaired when it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. When a loan is considered to be
impaired, the amount of the impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
if the loan is considered to be collateral dependent, based on the fair value of
the collateral. Impairment losses are included in the allowance for loan losses
through a charge to the provision for loan losses. Interest income is
recognized on an accrual basis unless the loan is placed on nonaccrual status.
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 consumer loans other than charge card loans are charged off within
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 $481,000 and
$491,000 at December 31, 1997 and 1996, 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
$151,000, $114,000 and $100,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Accumulated amortization amounted to $670,000 and $519,000
at December 31, 1997 and 1996, respectively.
OTHER REAL ESTATE
Other real estate 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.
23
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK OPTION PLANS
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.
Effective 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.
INCOME TAXES
Deferred tax assets and liabilities are recognized using the asset and
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 for 1996 totaled $6,000. There were no gains or losses in 1997 or 1995.
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.
NEWLY ADOPTED ACCOUNTING PRINCIPLES
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
The Company adopted the provisions of SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
on January 1, 1997. 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. Under that approach, subsequent to a transfer of
financial assets, an entity is required to recognize the financial and servicing
assets it controls and the liabilities it has incurred, derecognize financial
assets when control has been surrendered, and derecognize liabilities when
extinguished. It distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 125 also requires that
servicing assets related to loans sold be initially measured based on their
relative fair values and subsequently measured by (1) amortization in proportion
to and over the period of estimated net servicing income or loss and (2)
assessment for impairment based on their fair values.
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 certain provisions of SFAS No. 125 to transactions occurring
24
<PAGE>
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 adopted those provisions of SFAS No. 125 which were not subject
to deferral by SFAS No. 127 on January 1, 1997. Servicing assets were deemed
immaterial, and accordingly, no disclosures were required, as permitted by SFAS
No. 125. Further, the Company does not expect the future application of SFAS
No. 125 to the transactions covered under SFAS No. 127 to have a material impact
on the Company's consolidated financial statements.
EARNINGS PER SHARE
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
in December 1997. SFAS No. 128 requires the presentation of basic earnings per
share, representing net income available to common shareholders divided by the
weighted average number of common shares outstanding for the period, and diluted
earnings per share, which is adjusted for the assumed conversion of all
potentially dilutive common shares. The treasury stock method is used to
calculate the dilutive effect of options and warrants. The treasury stock
method is applied using the average market price of the Company's common stock
during the period rather than the higher of the average market price or the
ending market price. Adoption of SFAS No. 128 did not have a material impact on
the Company's previously reported earnings per share.
CAPITAL STRUCTURE
The Company adopted the provisions of SFAS No. 129, "Disclosure of
Information about Capital Structure," in December 1997. SFAS No. 129
consolidates existing accounting guidance related to required disclosures about
capital structure. Adoption of SFAS No. 129 did not have an impact on the
Company's consolidated financial statements.
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,
1997 and 1996 was $19,814,000 and $27,453,000, respectively.
3. INVESTMENT SECURITIES
A summary of investment securities at December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(Dollars in thousands) cost gains losses value
- -------------------------------------------------------------------------------------------
1997:
Held to Maturity:
U.S. Treasury and
other U.S. Government
agencies $114,374 $ 674 $320 $114,728
States and political
subdivisions 38,314 452 -- 38,766
- -------------------------------------------------------------------------------------------
Total $152,688 $1,126 $320 $153,494
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Available for Sale:
U.S. Treasury and
other U.S. Government
agencies $148,280 $449 $295 $148,434
States and political
subdivisions 2,721 2 -- 2,723
Federal Home Loan Bank
of Seattle stock 16,116 -- -- 16,116
Other 750 -- -- 750
- -------------------------------------------------------------------------------------------
Total $167,867 $451 $295 $168,023
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities at
December 31, 1997, 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 $ 27,014 $ 26,995
Due after one year through five years 55,038 55,387
Due after five years through ten years 25,558 26,070
Due after ten years 5,797 5,797
Mortgage-backed securities 39,281 39,245
- --------------------------------------------------------------------------------
Total $152,688 $153,494
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Available for Sale:
Due in one year or less $ 3,757 $ 3,759
Due after one year through five years 50,844 50,874
Due after ten years 1,957 1,957
Mortgage-backed securities 94,443 94,567
Federal Home Loan Bank stock 16,116 16,116
Other 750 750
- --------------------------------------------------------------------------------
Total $167,867 $168,023
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</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, 1997.
Investment securities of $170,138,000 and $155,650,000 at December 31, 1997
and 1996, 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, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate:
Mortgage - commercial $451,250 $432,567
Mortgage - residential 332,698 349,129
Construction 45,266 43,710
Commercial, financial
and agricultural 147,167 142,365
Consumer 68,398 78,431
- --------------------------------------------------------------------------------
1,044,779 1,046,202
Unearned income 3,756 4,226
- --------------------------------------------------------------------------------
Total $1,041,023 $1,041,976
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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 1997 follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Balance, beginning of year $11,107
Additions 2,170
Repayments (2,003)
Other changes (40)
- --------------------------------------------------------------------------------
Balance, end of year $11,234
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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, 1997 and 1996, all of which had related
allowance for loan losses established (see note 5), amounted to $21,808,000 and
$24,044,000, respectively, and included all nonaccrual and restructured loans
greater than $500,000. The average recorded investment in impaired loans
amounted to $16,268,000 in 1997, $11,292,000 in 1996 and $15,797,000 in 1995.
Interest income recognized on such loans amounted to $2,102,000 in 1997,
$1,714,000 in 1996 and $1,300,000 in 1995, of which $1,505,000, $860,000 and
$492,000, respectively, was earned on nonaccrual loans, and $431,000, $854,000
and $715,000, respectively, was recorded on restructured loans still accruing
interest.
Nonaccrual loans at December 31, 1997 and 1996 totaled $16,413,000 and
$13,500,000, respectively. The Bank collected and recognized interest of
$734,000 on nonaccrual loans in 1997. The Bank would have recognized additional
interest income of $708,000 had these loans been accruing interest throughout
1997. Additionally, the Bank collected and recognized interest of $164,000 on
charged-off loans in 1997.
26
<PAGE>
Restructured loans still accruing interest at December 31, 1997 and 1996
amounted to $2,727,000 and $12,818,000, respectively. During 1997, the Bank
recognized interest income of $244,000 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) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $19,436 $20,156 $18,296
Provision for loan losses 3,500 2,500 3,300
- --------------------------------------------------------------------------------
22,936 22,656 21,596
- --------------------------------------------------------------------------------
Charge-offs (4,042) (3,555) (1,821)
Recoveries 270 335 381
- --------------------------------------------------------------------------------
Net charge-offs (3,772) (3,220) (1,440)
- --------------------------------------------------------------------------------
Balance, end of year $19,164 $19,436 $20,156
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Changes in the allowance for loan losses for impaired loans (included in the
above amounts) were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $5,877 $2,181 $ --
Provision for loan losses 853 872 584
Net charge-offs (933) (1,981) (943)
Other changes (2,007) 4,805 2,540
- --------------------------------------------------------------------------------
Balance, end of year $3,790 $5,877 $2,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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, 1997, $20,791,000 of impaired loans were measured based on
the fair value of the underlying collateral, while $1,017,000 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, 1997 and
1996:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 6,753 $ 6,000
Office buildings and leasehold improvements 22,448 20,389
Furniture, fixtures and equipment 15,743 14,671
- --------------------------------------------------------------------------------
44,944 41,060
Less accumulated depreciation and amortization 18,268 15,988
- --------------------------------------------------------------------------------
Net $26,676 $25,072
- --------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment were charged to the
following operating expenses:
<TABLE>
<CAPTION>
Useful
(Dollars in thousands) 1997 1996 1995 lives
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net occupancy $1,027 $ 995 $ 925 1 to 35
years
Equipment 1,947 1,721 1,649 2 to 20
years
- --------------------------------------------------------------------------------
Total $2,974 $2,716 $2,574
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
CKSS ASSOCIATES
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 CKSSAssociates is summarized as follows:
CKSS Associates
Condensed Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Office building
(including land valued at $5,200) $37,462 $38,517
Deferred costs 3,517 4,386
Other assets 1,823 2,241
- --------------------------------------------------------------------------------
Total assets $42,802 $45,144
- --------------------------------------------------------------------------------
Liabilities and Partners'Equity:
Notes payable $20,201 $22,801
Other liabilities 642 902
Partners' equity 21,959 21,441
- --------------------------------------------------------------------------------
Total liabilities and partners' equity $42,802 $45,144
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
CKSS Associates
Condensed Statements of Income
Years ended December 31, 1997,
1996 and 1995
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Rental income from bank $2,039 $2,162 $2,132
Other rental income
and other revenues 6,514 6,438 5,173
- --------------------------------------------------------------------------------
Total revenues 8,553 8,600 7,305
Total costs and expenses 7,390 7,238 4,860
- --------------------------------------------------------------------------------
Net income $1,163 $1,362 $2,445
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
NOTES PAYABLE
At December 31, 1997, notes payable included $9,301,000 payable to The
Sumitomo Bank, Limited ("Sumitomo"), the principal stockholder of CPB Inc., and
$10,900,000 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 $200,000 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 6.947% at
December 31, 1997.
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, CKSSAssociates 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:
1998 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, 1997, 1996 and 1995.
TRANS-PACIFIC MORTGAGE GROUP LLC
During 1997, CPB Inc. formed a limited liability company with Source
Management LLC to create a residential mortgage brokerage firm named
Trans-Pacific Mortgage Group LLC, of which the Company owns 49 percent. This
entity is expected to enhance the Company's market penetration in the
residential mortgage business.
8. DEPOSITS
Certificates of deposit of $100,000 or more totaled $317,238,000 and
$264,334,000 at December 31, 1997 and 1996, respectively.
Interest expense on certificates of deposit of $100,000 or more totaled
$15,116,000, $13,755,000, and $13,564,000 for the years ended December 31, 1997,
1996 and 1995, 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
28
<PAGE>
weighted average contractual maturity of 191 days at December 31, 1997, were
treated as financings, and the obligations to repurchase the identical
securities sold were reflected as a liability with the dollar amount of
securities underlying the agreements remaining in the asset accounts. At
December 31, 1997, 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) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Amount outstanding at
December 31 $ -- $ -- $ --
Average amount outstanding
during year 81 4,589 3,296
Highest month-end balance
during year -- 8,000 42,000
Weighted average interest rate
on balances outstanding
at December 31 -- -- --
Weighted average interest rate
during year 5.82% 5.48% 5.93%
- --------------------------------------------------------------------------------
Securities sold under agreements
to repurchase:
Amount outstanding at
December 31 $3,500 $4,400 $2,500
Average amount outstanding
during year 3,945 2,433 45,357
Highest month-end balance
during year 4,400 4,400 68,483
Weighted average interest rate
on balances outstanding
at December 31 5.43% 5.32% 5.69%
Weighted average interest rate
during year 5.49 5.62 5.63
- --------------------------------------------------------------------------------
Other short-term borrowings:
Amount outstanding at
December 31 $2,748 $1,027 $ 997
Average amount outstanding
during year 1,502 1,822 2,050
Highest month-end balance
during year 3,429 21,003 6,000
Weighted average interest rate
on balances outstanding
at December 31 5.27% 5.11% 5.16%
Weighted average interest rate
during year 5.07 5.50 5.44
- --------------------------------------------------------------------------------
</TABLE>
10. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of intermediate-term
FHLB advances with a weighted average interest rate of 5.938% and 5.875%,
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, 1997 the Bank had
available to it addi-tional unused FHLB advances of approximately $72.1 million.
At December 31, 1997, approximate maturities of FHLB advances were as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
Year ending December 31:
<S> <C>
1998 $ 39,505
1999 27,659
2000 22,446
2001 7,901
2002 9,871
Thereafter 20,323
- --------------------------------------------------------------------------------
Total $127,705
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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 $1,283,000,
$1,199,000 and $1,195,000 for 1997, 1996 and 1995, 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 250,000 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
29
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
reduced and stockholders' equity was increased by the amounts paid. The ESOP
loan was paid in full in November 1995.
12. STOCK OPTION PLANS
The Company has adopted stock option plans for the purpose of granting
options to purchase CPB Inc. common stock to directors, officers and other key
individuals. Options are granted with an exercise price equal to the stock's
fair market value at the date of grant. All options have ten-year terms.
Incentive stock options vest at the rate of 20 percent per year while
nonqualified stock options, which do not qualify as incentive stock options
("nonqualified stock options"), vest annually over the respective periods.
In November 1986, the Company adopted the 1986 Stock Option Plan ("1986
Plan") making available 440,000 shares for grants to employees. In 1992, the
Company's stockholders approved an increase to 1,040,000 shares for grants. The
1986 Plan expired in 1997, 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 1986 Plan.
In February 1997, the Company adopted the 1997 Stock Option Plan ("1997
Plan") basically as a continuance of the previous plan for a ten-year term. In
April 1997, the Company's stockholders approved the 1997 Plan which provides for
1,000,000 shares of the Company's common stock for grants to employees as
incentive stock options and to directors as nonqualified stock options. During
1997, in addition to employee grants, each director of the Company and the Bank
received a grant based on 1,500 shares multiplied by the lesser of ten years or
the number of years to age seventy. Vesting is 1,500 shares annually beginning a
year from July 30, 1997, the date of grant.
The table below presents activity of the 1986 and 1997 Stock Option Plans
for the years indicated. The per share weighted average fair value of options
granted during 1997 of $5.47 and 1995 of $4.54 used the Black Scholes
option-pricing model with the following weighted average assumptions: expected
dividend yield of 2.63% and 3.07%, expected volatility of 28% and 30%, risk-free
interest rate of 5.45% and 6.10% and expected life of 7.5 years and 7.5 years
for 1997 and 1995, respectively. There were no grants in 1996.
The following table presents information on options outstanding under the
1986 and 1997 Stock Option Plans:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Remaining
Average
Exercise Contractual
Price Shares Life (Months) Shares
- --------------------------------------------------------------------------------------------------------
$7.159 22,160 11.7 22,160
12.725 114,310 54.2 114,310
13.040 118,120 89.5 43,000
17.875 246,800 80.0 --
- --------------------------------------------------------------------------------------------------------
Total 501,390 179,470
Weighted average 73.3
Weighted average
exercise price $15.09 $12.11
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
The Company applied APB Opinion No. 25 in accounting for its stock option
plans, and accordingly, no compensation cost was recognized for its options in
the consolidated financial statements. The following table presents pro forma
disclosures of the impact that the 1997 and 1995 option grants would have had on
net income and earnings per share had the grants been measured using the fair
value of accounting prescribed by SFAS No. 123.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
As reported:
Net income $14,959 $14,091 $13,808
Basic earnings per share 1.42 1.34 1.32
Diluted earnings per share 1.40 1.33 1.31
Pro forma:
Net income 14,741 13,977 13,751
Basic earnings per share 1.40 1.33 1.31
Diluted earnings per share 1.38 1.32 1.30
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
Pro forma net income and earnings per share reflect only those options
granted in 1997 and 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 earnings 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.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ----------------------- ------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 296,026 $ 11.98 330,250 $ 11.24 251,712 $9.67
Granted 253,400 17.88 -- -- 139,200 13.04
Exercised (41,436) 9.49 (34,224) 4.83 (32,862) 5.47
Forfeited (6,600) 17.88 -- -- (27,800) 12.88
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 501,390 $ 15.09 296,026 $11.98 330,250 $11.24
Options exercisable at December 31 179,470 12.11 169,778 11.24 152,874 9.26
Shares available for future grants 1,049,960 303,360 303,360
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
13. SHARE PURCHASE AGREEMENT
On December 16, 1986, the Company's stockholders 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 are issued giving Sumitomo the
right to purchase shares at fair market value at the time such warrants are
exercised, contingent upon the exercise of stock options by the optionees and
subject to the approval of the Federal Reserve Board. At December 31, 1997,
Sumitomo held exercisable warrants for 34,148 shares and warrants for 40,533
shares which will be exercisable as stock options are exercised by the
optionees. All warrants will expire on June 14, 2006. No warrants were exercised
during the three-year period ended December 31, 1997.
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, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Estimated present value of
vested benefits $(21,014) $(19,232)
Estimated present value of
nonvested benefits (269) (323)
- --------------------------------------------------------------------------------
Accumulated benefit obligations (21,283) (19,555)
Value of future pay increases (939) (705)
- --------------------------------------------------------------------------------
Projected benefit obligations (22,222) (20,260)
Plan assets at fair value 22,086 19,872
- --------------------------------------------------------------------------------
Projected benefit obligations
in excess of plan assets (136) (388)
Unrecognized prior service cost (19) 256
Unrecognized net loss resulting
from changes in plan experience
and actuarial assumptions 3,587 3,740
Unrecognized net asset being
recognized over 15 years (137) (182)
- --------------------------------------------------------------------------------
Prepaid pension cost
included in other assets $3,295 $3,426
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Actuarial assumptions:
Weighted average discount rate 7.50% 7.75%
Weighted average rate
of compensation increase 5.00 5.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Net pension cost for the years ended December 31, 1997, 1996 and 1995
included the following components:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 209 $ 654 $ 739
Interest cost 1,562 1,479 1,597
Actual gain on plan assets (3,346) (1,463) (2,801)
Net amortization and deferral 2,004 371 1,989
- --------------------------------------------------------------------------------
Net pension cost $ 429 $ 1,041 $ 1,524
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Actuarial assumptions:
Weighted average discount rate 7.75% 7.50% 8.00%
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>
31
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Estimated present value of vested benefits $564 $456
Estimated present value of nonvested benefits 29 97
- --------------------------------------------------------------------------------
Accumulated benefit obligations 593 553
Value of future pay increases 18 17
- --------------------------------------------------------------------------------
Projected benefit obligations 611 570
Unrecognized net (gain) loss (16) 40
Net transition liability (25) (54)
- --------------------------------------------------------------------------------
Accrued pension cost included
in other liabilities $570 $556
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Components of net periodic pension cost for the years ended December 31,
1997 and 1996 are provided below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Service cost $14 $24
Interest cost 44 47
Net amortization and deferral 3 (17)
- --------------------------------------------------------------------------------
Net pension cost $61 $54
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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 $855,000, $810,000 and
$793,000 for 1997, 1996 and 1995, 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 totaled
$288,000 and $88,000 in 1997 and 1996, respectively.
16. OPERATING LEASES
The Bank occupies a number of properties under leases which expire on
various dates through 2019 and, in most instances, provide for renegotiation of
rental terms at fixed intervals. These leases generally contain renewal options
for periods ranging from 5 to 20 years.
Total rent expense represents gross rent expense less the net operating
income from Company-owned properties of $392,000, $577,000 and $1,092,000 for
1997, 1996 and 1995, respectively.
Net rent expense, charged to net occupancy expense, for all operating
leases is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total rent expense $4,709 $5,510 $4,668
Less sublease rental income (313) (205) (89)
- --------------------------------------------------------------------------------
Net 4,396 $5,305 $4,579
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The following is a schedule of future minimum rental commitments for all
noncancellable operating leases that had initial lease terms in excess of one
year at December 31, 1997:
<TABLE>
<CAPTION>
Less
sublease Net
Rental rental rental
(Dollars in thousands) commitment income commitment
- --------------------------------------------------------------------------------
Year ending December 31:
<S> <C> <C> <C>
1998 $3,638 $(173) $3,465
1999 3,405 (167) 3,238
2000 3,255 (105) 3,150
2001 3,245 (59) 3,186
2002 2,948 (18) 2,930
Thereafter 15,184 -- 15,184
- --------------------------------------------------------------------------------
Total $31,675 $(522) $31,153
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Rental commitments include $15,074,000 in commitments to CKSS Associates by
the Bank for office space in the Central Pacific and Kaimuki Plazas.
32
<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, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Year ending December 31:
1998 $ 961
1999 845
2000 781
2001 622
2002 487
Thereafter 16,733
- --------------------------------------------------------------------------------
Total $20,429
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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, 1997, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Charge card $ 2,354 $ 2,455 $ 2,047
Advertising 1,020 1,160 1,200
Computer software 1,141 1,115 1,008
Stationery and supplies 947 1,044 953
Insurance 457 316 1,580
Other 7,774 6,867 6,716
- --------------------------------------------------------------------------------
Total $13,693 $12,957 $13,504
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
18. INCOME AND FRANCHISE TAXES
Components of income tax expense (benefit) for the years ended December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Current Deferred Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
1997:
Federal $ 7,846 $ (266) $7,580
State 1,860 (81) 1,779
- --------------------------------------------------------------------------------
Total $ 9,706 $ (347) $9,359
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Income tax expense amounted to $9,359,000, $9,236,000 and $9,034,000 for
1997, 1996 and 1995, 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) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $8,511 $8,164 $7,995
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (321) (192) (147)
State franchise tax, net of
Federal income tax benefit 1,157 1,120 1,095
Other 12 144 91
- --------------------------------------------------------------------------------
Total $9,359 $9,236 $9,034
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 6,249 $ 6,338
Employee retirement benefits 1,776 1,471
Interest on nonaccrual loans 888 973
Accrued expenses 622 726
State franchise tax 735 639
Deferred finance fees -- 303
Other 251 108
- ---------------------------------------------------------------------------
Total deferred tax assets $10,521 $10,558
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Deferred gain on curtailed retirement plan 2,771 2,771
FHLB stock dividends received 2,587 2,115
Investment in unconsolidated subsidiary 1,161 1,263
Deferred finance fees 449 --
Premises and equipment, principally
due to differences in depreciation 226 365
Accreted discounts receivable 303 300
Net deferred gain on investment securities -- 567
Other 91 137
- ---------------------------------------------------------------------------
Total deferred tax liabilities $ 7,588 $ 7,518
- ---------------------------------------------------------------------------
Net deferred tax assets $ 2,933 $ 3,040
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</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, 1997 and 1996.
19. EARNINGS PER SHARE
On October 8, 1997, the board of directors declared a two-for-one split of
the common stock effective November 14, 1997 to stockholders of record on
October 20, 1997.
Basic earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding. Stock options and share purchase
agreement warrants are considered common stock equivalents for purposes of
calculating diluted earnings per share.
<TABLE>
<CAPTION>
(In thousands, except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE COMPUTATION
Numerator:
Income available to
common stockholders $14,959 $14,091 $13,808
Denominator:
Weighted average common
shares outstanding 10,555 10,530 10,480
Basic earnings per share $ 1.42 $ 1.34 $ 1.32
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE COMPUTATION
Numerator:
Income available to
common stockholders $14,959 $14,091 $13,808
Denominator:
Weighted average common
shares outstanding 10,555 10,530 10,480
Incremental shares from
conversion of options and share
purchase agreement warrants 100 70 78
- ------------------------------------------------------------------------------
10,655 10,600 10,558
Diluted earnings per share $ 1.40 $ 1.33 $ 1.31
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
20. 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.
34
<PAGE>
21. 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.
At December 31, 1997 and 1996 financial instruments with off-balance sheet
risk were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $353,764 $359,819
Standby letters of credit and
financial guarantees written 16,883 16,477
- ----------------------------------------------------------------------
Financial instruments whose contract
amounts exceed the amount
of credit risk:
Forward foreign exchange contracts $ 95 $ 164
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, 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.
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," as
amended by SFAS No. 119, requires that the Company disclose estimated fair
values for its financial instruments. Fair value estimates, methods and
assumptions are set forth below for the Company's financial instruments.
SHORT-TERM FINANCIAL INSTRUMENTS
The carrying values of short-term financial instruments are deemed to
approximate fair values. Such instruments are considered readily convertible to
cash and include cash and due from banks, interest-bearing deposits in other
banks, 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
risks inherent in the loans. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
35
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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-balance 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.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 December 31, 1996
------------------------ ------------------------
Carrying/ Carrying/
notional Estimated notional Estimated
amount fair value amount fair value
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 50,695 $ 50,695 $ 55,534 $ 55,534
Interest-bearing deposits in other banks 34,188 34,188 26,297 26,297
Investment securities 320,711 321,517 240,458 240,502
Net Loans 1,021,859 1,023,367 1,022,540 1,020,182
Accrued interest receivable 9,404 9,404 8,674 8,674
Due from customers on acceptances 59 59 1,162 1,162
Financial liabilities:
Deposits:
Noninterest-bearing deposits 168,505 168,505 168,170 168,170
Interest-bearing demand and savings deposits 503,144 503,144 492,017 492,017
Time deposits 521,509 519,258 463,427 461,433
Total deposits 1,193,158 1,190,907 1,123,614 1,121,620
Short-term borrowings 6,248 6,248 5,427 5,427
Long-term debt 127,705 128,197 115,840 115,104
Bank acceptances outstanding 59 59 1,162 1,162
Accrued interest payable (included in other liabilities) 5,404 5,404 4,893 4,893
Off-balance sheet financial instruments:
Commitments to extend credit 353,764 998 359,819 1,106
Standby letters of credit and financial guarantees written 16,883 127 16,477 124
Forward foreign exchange contracts 95 -- 164 --
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
23. DECLARATION OF DIVIDENDS
The board of directors, at a special meeting held on December 15, 1997,
declared a fourth quarter cash dividend of $0.13 per share, in addition to the
three quarterly cash dividends previously declared, for a total of $0.49 per
share for the year ended December 31, 1997.
24. SUBSEQUENT EVENT
On March 2, 1998, the Bank capitalized a real estate investment trust
subsidiary with approximately $520 million in real estate mortgage loans and
mortgage-backed securities. The subsidiary was formed for the purpose of
acquiring, holding and managing real estate mortgage loans and mortgage-backed
securities.
25. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 1997, retained earnings of the parent company, CPB Inc.,
included $101,367,000 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, 1997,
retained earnings of the Bank totaled $101,333,000.
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, 1997 and 1996, the Bank's
regulatory capital ratios exceeded the minimum thresholds for a
"well-capitalized" institution.
The following table sets forth 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, 1997:
Tier I leverage capital $151,575 10.41% $58,252 4.00% $ 72,815 5.00%
Tier I risk-based capital 151,575 12.45 48,682 4.00 73,023 6.00
Total risk-based capital 166,837 13.71 97,365 8.00 121,706 10.00
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
- -----------------------------------------------------------------------------------------------------------------------------------
Bank:
As of December 31, 1997:
Tier I leverage capital $141,405 9.72% $58,187 4.00% $ 72,733 5.00%
Tier I risk-based capital 141,405 11.63 48,634 4.00 72,951 6.00
Total risk-based capital 156,652 12.88 97,268 8.00 121,586 10.00
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
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed financial statements, solely of the parent company, CPB Inc., follow:
<TABLE>
<CAPTION>
CPB Inc.
Condensed Balance Sheets
December 31, 1997 and 1996
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 8,368 $ 4,823
Investment securities available for sale 1,516 4,787
Investment in and advances to subsidiary bank, at equity in underlying net assets 143,162 132,647
Accrued interest receivable and other assets 140 46
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $153,186 $142,303
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Dividends payable $ 1,375 $ 1,265
Other liabilities 69 156
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,444 1,421
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000 shares, none issued -- --
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 10,579,184 and 10,537,748 shares at
December 31, 1997 and 1996, respectively 6,612 6,586
Surplus 45,848 45,481
Retained earnings 99,188 89,405
Unrealized gain (loss) on investment securities, net of taxes 94 (590)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 151,742 140,882
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $153,186 $142,303
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CPB Inc.
Condensed Statements of Income
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary bank $ 5,100 $ 5,101 $ 4,782
Equity in loss from unconsolidated subsidiary (92) -- --
Interest income:
Interest on investment securities 75 281 333
Interest from subsidiary bank 279 116 55
Investment securities gains -- -- 60
- ----------------------------------------------------------------------------------------------------------------------------------
Total income 5,362 5,498 5,230
Total expenses 286 259 281
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed income of subsidiary bank 5,076 5,239 4,949
Income taxes (10) 55 65
- ----------------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiary bank 5,086 5,184 4,884
Equity in undistributed income of subsidiary bank 9,873 8,907 8,924
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $14,959 $14,091 $13,808
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
CPB Inc.
Condensed Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $14,959 $14,091 $13,808
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense -- 4 --
Equity in undistributed income of subsidiary bank (9,873) (8,907) (8,924)
Other, net (38) 63 130
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,048 5,251 5,014
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from calls on investment securities held to maturity -- -- 2,560
Proceeds from maturities of investment securities available for sale 4,000 3,000 --
Purchases of investment securities available for sale (750) -- (2,844)
Investment in and advances to subsidiaries (80) 614 65
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,170 3,614 (219)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 393 165 180
Dividends paid (5,066) (5,051) (4,716)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,673) (4,886) (4,536)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,545 3,979 259
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At beginning of year 4,823 844 585
- ----------------------------------------------------------------------------------------------------------------------------------
At end of year $ 8,368 $ 4,823 $ 844
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26. ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130, effective for fiscal years beginning after December 15,
1997, establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income is defined as all changes in equity, including net income,
except those resulting from investment by and distributions to owners. SFAS No.
130 requires reclassification of financial statements for earlier periods
provided for comparative purposes. The application of SFAS No. 130, effective
from January 1, 1998, is not expected to have a material impact on the
consolidated financial statements of the Company.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131, effective for fiscal years
beginning after December 15, 1997, establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers based on a
management approach to reporting. SFAS No. 131 requires restatement of
comparative information for earlier years. The application of SFAS No. 131,
effective from January 1, 1998, is not expected to have a material impact on the
consolidated financial statements of the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," an amendment of FASB
Statements No. 87, "Employers' Accounting for Pensions," No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans,"
and No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132, effective for fiscal years beginning after December 15,
1997, standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis and eliminates certain disclosures that
are no longer as useful as they were when SFAS Nos. 87, 88 and 106 were issued.
The application of SFAS No. 132, effective from January 1, 1998, is not expected
to have a material impact on the consolidated financial statements.
39
<PAGE>
[LOGO]
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Honolulu, Hawaii
March 2, 1998
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 1997
and 1996 as reported by Nasdaq and cash dividends declared for those years.
<TABLE>
<CAPTION>
Cash
dividends
High Low declared
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1997:
First quarter $17.50 $14.25 $0.12
Second quarter 18.63 16.63 0.12
Third quarter 22.00 17.50 0.12
Fourth quarter 22.38 19.50 0.13
- ------------------------------------------------------------------------------
Year $22.38 $14.25 $0.49
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
1996:
First quarter $17.00 $14.75 $0.12
Second quarter 17.25 15.50 0.12
Third quarter 16.25 14.25 0.12
Fourth quarter 15.38 14.13 0.12
- ------------------------------------------------------------------------------
Year $17.25 $14.13 $0.48
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The last sales price of the common stock as of January 30, 1998 as reported
by Nasdaq was $19.56 per share.
On January 30, 1998, there were approximately 2,292 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.
40
<PAGE>
EXHIBIT 21
Subsidiaries of CPB Inc.
Central Pacific Bank (Hawaii)
CPB Properties, Inc. (Hawaii)
CKSS Associates Limited Partnership (Hawaii)
Trans-Pacific Mortgage Group LLC (Hawaii)
CPB Real Estate, Inc. (Hawaii)
<PAGE>
EXHIBIT 23
The Board of Directors
CPB Inc.:
We consent to incorporation by reference in the registration statement No.
33-11462 and No. 333-35999 on Form S-8 of CPB Inc. of our report dated March
2, 1998, relating to the consolidated balance sheets of CPB Inc. and
Subsidiary as of December 31, 1997 and 1996, 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, 1997, which
report appears in the December 31, 1997 annual report on Form 10-K of CPB Inc.
/s/ KPMG Peat Marwick LLP
- ----------------------------------
Honolulu, Hawaii
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 50,695
<INT-BEARING-DEPOSITS> 34,180
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 168,023
<INVESTMENTS-CARRYING> 152,688
<INVESTMENTS-MARKET> 153,494
<LOANS> 1,041,023
<ALLOWANCE> 19,164
<TOTAL-ASSETS> 1,497,101
<DEPOSITS> 1,193,158
<SHORT-TERM> 6,248
<LIABILITIES-OTHER> 18,189
<LONG-TERM> 127,705
0
0
<COMMON> 6,612
<OTHER-SE> 145,130
<TOTAL-LIABILITIES-AND-EQUITY> 1,497,101
<INTEREST-LOAN> 91,367
<INTEREST-INVEST> 16,555
<INTEREST-OTHER> 2,410
<INTEREST-TOTAL> 110,332
<INTEREST-DEPOSIT> 37,199
<INTEREST-EXPENSE> 44,695
<INTEREST-INCOME-NET> 65,637
<LOAN-LOSSES> 3,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 48,710
<INCOME-PRETAX> 24,318
<INCOME-PRE-EXTRAORDINARY> 14,959
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,959
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 4.89
<LOANS-NON> 16,413
<LOANS-PAST> 12,233
<LOANS-TROUBLED> 2,727
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,436
<CHARGE-OFFS> 4,042
<RECOVERIES> 270
<ALLOWANCE-CLOSE> 19,164
<ALLOWANCE-DOMESTIC> 12,763
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,401
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 6-MOS
9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1997
DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1997 JAN-01-1997
JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1995 MAR-31-1997 JUN-30-1997
SEP-30-1997
<CASH> 55,534 50,274 56,029 45,734
39,173
<INT-BEARING-DEPOSITS> 26,297 7,140 47,436 36,265
23,564
<FED-FUNDS-SOLD> 0 0 0 0
0
<TRADING-ASSETS> 0 0 0 0
0
<INVESTMENTS-HELD-FOR-SALE> 131,214 146,934 134,652 130,986
141,944
<INVESTMENTS-CARRYING> 109,244 136,693 115,655 142,380
144,546
<INVESTMENTS-MARKET> 109,288 137,347 114,632 142,199
145,015
<LOANS> 1,041,976 990,356 1,045,849 1,052,991
1,043,820
<ALLOWANCE> 19,436 20,156 19,775 19,275
19,103
<TOTAL-ASSETS> 1,403,165 1,371,909 1,437,127 1,450,153
1,442,190
<DEPOSITS> 1,123,614 1,138,319 1,154,499 1,163,271
1,140,902
<SHORT-TERM> 5,427 3,497 5,000 6,929
6,500
<LIABILITIES-OTHER> 16,240 15,036 16,346 16,126
17,421
<LONG-TERM> 115,840 81,107 118,114 117,906
128,197
0 0 0 0
0
0 0 0 0
0
<COMMON> 6,586 6,565 6,591 6,594
6,607
<OTHER-SE> 134,296 125,942 136,327 139,325
142,486
<TOTAL-LIABILITIES-AND-EQUITY> 1,403,165 1,371,909 1,437,127 1,450,153
1,442,190
<INTEREST-LOAN> 88,157 91,134 22,204 44,869
68,440
<INTEREST-INVEST> 15,711 14,334 3,617 7,554
11,943
<INTEREST-OTHER> 419 2,334 633 1,250
1,787
<INTEREST-TOTAL> 104,287 107,802 26,454 53,673
82,170
<INTEREST-DEPOSIT> 35,364 36,860 8,893 18,024
27,596
<INTEREST-EXPENSE> 41,679 44,745 10,684 21,651
33,087
<INTEREST-INCOME-NET> 62,608 63,057 15,770 32,022
49,083
<LOAN-LOSSES> 2,500 3,300 750 1,500
2,750
<SECURITIES-GAINS> (6) 61 0 0
0
<EXPENSE-OTHER> 47,478 47,650 11,735 23,779
36,210
<INCOME-PRETAX> 23,327 22,842 5,912 11,947
18,108
<INCOME-PRE-EXTRAORDINARY> 14,091 13,808 3,591 7,271
11,094
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 14,091 13,808 3,591 7,271
11,094
<EPS-PRIMARY> 1.34 1.32 0.34 0.69
1.05
<EPS-DILUTED> 1.33 1.31 0.34 0.69
1.05
<YIELD-ACTUAL> 4.89 4.87 4.75 4.80
4.89
<LOANS-NON> 13,500 3,583 12,239 8,926
11,115
<LOANS-PAST> 6,313 9,189 8,096 15,402
10,042
<LOANS-TROUBLED> 12,818 5,974 2,925 2,802
2,696
<LOANS-PROBLEM> 0 0 0 0
0
<ALLOWANCE-OPEN> 20,156 18,296 19,436 19,436
19,436
<CHARGE-OFFS> 3,555 1,821 479 1,785
3,281
<RECOVERIES> 335 381 68 124
198
<ALLOWANCE-CLOSE> 19,436 20,156 19,775 19,275
19,103
<ALLOWANCE-DOMESTIC> 14,544 14,516 13,023 14,595
13,102
<ALLOWANCE-FOREIGN> 0 0 0 0
0
<ALLOWANCE-UNALLOCATED> 4,892 5,640 6,752 4,680
6,001
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 49,034 46,929 42,584
<INT-BEARING-DEPOSITS> 49 184 9,285
<FED-FUNDS-SOLD> 0 0 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 176,581 147,003 131,354
<INVESTMENTS-CARRYING> 120,870 113,713 113,043
<INVESTMENTS-MARKET> 120,584 112,929 112,516
<LOANS> 991,764 1,019,120 1,028,509
<ALLOWANCE> 20,500 20,582 19,467
<TOTAL-ASSETS> 1,378,930 1,364,981 1,362,745
<DEPOSITS> 1,121,693 1,109,935 1,100,477
<SHORT-TERM> 27,048 12,634 2,499
<LIABILITIES-OTHER> 14,787 15,541 15,218
<LONG-TERM> 80,914 90,698 105,519
0 0 0
0 0 0
<COMMON> 6,579 6,584 6,585
<OTHER-SE> 126,908 128,769 131,659
<TOTAL-LIABILITIES-AND-EQUITY> 1,378,930 1,364,981 1,362,745
<INTEREST-LOAN> 22,134 43,785 65,844
<INTEREST-INVEST> 4,223 8,333 12,079
<INTEREST-OTHER> 18 92 135
<INTEREST-TOTAL> 26,375 52,210 78,058
<INTEREST-DEPOSIT> 9,157 17,775 26,484
<INTEREST-EXPENSE> 10,589 20,743 31,087
<INTEREST-INCOME-NET> 15,786 31,467 46,971
<LOAN-LOSSES> 450 900 1,350
<SECURITIES-GAINS> 0 (6) (6)
<EXPENSE-OTHER> 12,028 23,999 35,609
<INCOME-PRETAX> 5,885 11,823 18,034
<INCOME-PRE-EXTRAORDINARY> 3,554 7,131 10,888
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,554 7,131 10,888
<EPS-PRIMARY> 0.34 0.68 1.04
<EPS-DILUTED> 0.34 0.68 1.04
<YIELD-ACTUAL> 4.94 4.93 4.91
<LOANS-NON> 3,582 13,380 11,289
<LOANS-PAST> 22,582 12,271 16,630
<LOANS-TROUBLED> 5,974 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 20,156 20,156 20,156
<CHARGE-OFFS> 155 630 2,332
<RECOVERIES> 49 156 293
<ALLOWANCE-CLOSE> 20,500 20,582 19,467
<ALLOWANCE-DOMESTIC> 13,178 13,478 17,800
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 7,322 7,104 1,667
</TABLE>
