<PAGE>
As filed with the Securities and Exchange Commission on March 30, 1999
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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________.
Commission file number 0-10777
CPB INC.
(Exact name of registrant as specified in its charter)
HAWAII 99-0212597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 SOUTH KING STREET, HONOLULU, HAWAII 96813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(808) 544-0500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of class)
Preferred Share Purchase Rights
(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 26, 1999, the aggregate market value of the common stock held by
non-affiliates of the registrant was approximately $127,501,000.
<PAGE>
Number of shares of common stock of the registrant outstanding as of February
26, 1999: 9,777,036 shares
The following documents are incorporated by reference herein:
<TABLE>
<CAPTION>
PART OF FORM 10-K
DOCUMENT INCORPORATED INTO WHICH INCORPORATED
- --------------------- -----------------------
<S> <C>
1998 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, 1998 Part III
</TABLE>
<PAGE>
<TABLE>
<S><C>
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . 26
ITEM 4(A). Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 26
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . 27
ITEM 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 7A. Quantitative and Qualitative Disclosures Regarding Market Risk . . . . . . 27
ITEM 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 27
PART III
ITEM 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . 28
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . 28
ITEM 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . 28
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . 29
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</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, 1998, the
Company was the third largest bank holding company in Hawaii.
The Company 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 Bank owns 100% of the outstanding stock of CPB Properties, Inc.
("CPB Properties"), a company which is the managing partner and 50% owner of
CKSS Associates ("CKSS"), a Hawaii limited partnership. CKSS owns Central
Pacific Plaza, in which the Company's and Bank's headquarters and main office
are located. CKSS also developed the Kaimuki Plaza, in which one of the
Bank's branch offices is located. In addition, CPB Properties owns the
property on which the Bank's Moiliili branch office is located, as well as
the property underlying the Kaimuki Plaza. See "ITEM 2. PROPERTIES."
The Bank also owns 100% of the outstanding common stock of CPB Real
Estate, Inc. ("CPBREI"), a real estate investment trust, which acquires and
holds stable, long-term real estate related assets including residential
mortgage loans, commercial real estate loans and mortgage-backed securities.
CPBREI was incorporated in March 1998. In November 1998, the Bank issued 132
shares of CPBREI preferred stock to certain employees of the Bank.
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 27
banking offices and 63 ATMs located throughout the State of Hawaii. Its
administrative and main office is located in Honolulu, and there are 20 other
branches on the island of Oahu. In addition, the Bank operates 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
<PAGE>
offers a full range of banking services to small- and medium-sized
businesses, professionals and individuals in Hawaii. 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 CHECK CARD, a debit card service, to its customers.
The Bank is also a member of the Star ATM Network and offers an Infoline
service, providing telephonic account information and funds transfer services.
Specialized services designed to service the needs of businesses and
individuals include business PC banking, merchant services, 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 mid-sized businesses. The market is highly competitive
with 6 commercial banks, 3 savings and loans, 7 finance companies and
numerous credit unions and finance companies operating in the State of
Hawaii. The two largest banks in the state have expanded their markets
out-of-state through merger and acquisition activity. Pacific Century
Financial Corporation had $15.0 billion in total assets at year-end 1998.
Bank of Hawaii, the subsidiary bank, maintains approximately 23% of the
individual, partnership and corporate ("IPC") deposits in the state of Hawaii.
Bancwest Corporation had $15.0 billion in assets at year-end 1998.
First Hawaiian Bank, the subsidiary bank, has approximately 22% of the IPC
deposits in Hawaii.
American Savings Bank, a subsidiary of Hawaiian Electric Industries,
held $5.7 billion in assets at year end 1998. Bank of America-Hawaii, which
purchased Honolulu Federal Savings and Loan in 1992 and Liberty Bank in 1994,
was purchased by American Savings Bank in 1997. American Savings Bank has
approximately 19% of the IPC deposits in the state of Hawaii.
Central Pacific Bank is the third largest commercial bank maintaining
IPC 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 yet small enough to
deliver personalized service. Central Pacific Bank offers a full range of
banking
<PAGE>
services to small- and medium-sized businesses, professionals and
individuals. The Bank remains competitive with pricing and superior service
levels. The Bank also has a strong capital base to provide for expansion
opportunities in its quest to better serve the 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 two large banks
also tend to lead the market with respect to new products and pricing.
The banking and financial services industry in Hawaii generally, and in
the Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The
Bank competes for loans, deposits, and customers with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
companies, insurance companies, finance companies, money market funds, credit
unions, and other nonbank financial service providers. Some of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader range of financial services
than the Bank. In order to compete with the other financial services
providers, the Bank principally relies upon local promotional activities,
personal relationships established by officers, directors, and employees with
its customers, and specialized services tailored to meet the needs of the
communities served. In those instances where the Bank is unable to
accommodate a customer's needs, the Bank may arrange for those services to be
provided by its correspondents.
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.
<PAGE>
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."
Supervision and Regulation
General
Bank holding companies and banks are extensively regulated under both
federal and state laws. 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 the material 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 next 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 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
<PAGE>
of services. Further, the Company is required by the Federal Reserve Board
to maintain certain levels of capital. See "--Capital Standards."
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares
of any class of voting securities or substantially all of the assets of any
bank or bank holding company. Prior approval of the Federal Reserve Board is
also required for the merger or consolidation of the Company and another bank
holding company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company, subject to
the prior approval of the Federal Reserve Board, may engage in any, or
acquire shares of companies engaged in, activities that are deemed by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
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 chartered bank, is subject to primary supervision,
periodic examination, and regulation by the Hawaii Commissioner of Financial
Institutions ("Hawaii Commissioner") and the Federal Deposit Insurance
Corporation ("FDIC"). To a lesser extent, the Bank is also subject to
certain regulations promulgated by the Federal Reserve Board. 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
<PAGE>
be judicially enforced, to direct an increase in capital, to restrict the
growth of the Bank, to assess civil monetary penalties, to remove officers
and directors and ultimately to terminate the Bank's deposit insurance, which
for a Hawaii 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, capital
requirements and disclosure obligations to depositors and borrowers.
Further, the Bank is required to maintain certain levels of capital. See
"--Capital Standards."
Dividends and Other Transfers of Funds
Dividends from the Bank constitute the principal source of income to the
Company. The Company is a legal entity separate and distinct from the Bank.
The Bank is subject to various statutory and regulatory restrictions on its
ability to pay dividends to the Company. Under such restrictions, the amount
available for payment of dividends to the Company by the Bank totaled $97.1
million at December 31, 1998. In addition, the Hawaii Commissioner and the
Federal Reserve Board have the authority to prohibit the Bank from paying
dividends, depending upon the Bank's financial condition, if such payment is
deemed to constitute an unsafe or unsound practice.
The FDIC and the Hawaii Commissioner also have authority to prohibit the
Bank from engaging in activities that, in the FDIC's and the Hawaii
Commissioner'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 and the Hawaii Commissioner
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 Action and Other Enforcement Mechanisms" and "--Capital
Standards" for a discussion of these additional restrictions on capital
distributions.
The Federal Reserve Board also has the authority to prohibit the Bank
from engaging in activities that, in the Federal Reserve Board'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 Federal Reserve Board could assert that the payment
of dividends or other payments might, under some circumstances, be an unsafe
or unsound practice.
<PAGE>
Further, the Federal Reserve Board has established guidelines with respect to
the maintenance of appropriate levels of capital by banks or bank holding
companies under its 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. The Hawaii Commissioner may
impose similar limitations on the conduct of Hawaii-chartered banks. See
"--Capital Standards" and "--Prompt Corrective Action and Other Enforcement
Mechanisms," for a discussion of these additional restrictions on capital
distributions.
The Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, the Company or other affiliates, the purchase of, or
investments in, stock or other securities thereof, the taking of such
securities as collateral for loans, and the purchase of assets of the Company
or other affiliates. Such restrictions prevent the Company and such other
affiliates from borrowing from the Bank unless the loans are secured by
marketable obligations of designated amounts. Further, such secured loans and
investments by the Bank to or in the Company or to or in any other affiliate
are 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, to 20.0% of the Bank's capital and surplus (as
defined by federal regulations). Hawaii law also imposes certain restrictions
with respect to transactions involving the Company and other controlling
persons of the Bank. Additional restrictions on transactions with affiliates
may be imposed on the Bank under the prompt corrective action provisions of
federal law. See "--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.
<PAGE>
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, 1998.
<TABLE>
<CAPTION>
As of December 31, 1998
ACTUAL REQUIRED EXCESS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio $137,233 9.05% $60,636 4.00% $76,597 5.05%
Tier 1 risk-based ratio 137,233 11.28 48,661 4.00 88,572 7.28
Total risk-based ratio 152,500 12.54 97,322 8.00 55,178 4.54
</TABLE>
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, 1998.
<TABLE>
<CAPTION>
As of December 31, 1998
ACTUAL REQUIRED EXCESS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio $147,338 9.71% $60,722 4.00% $86,616 5.71%
Tier 1 risk-based ratio 147,338 12.10 48,698 4.00 98,640 8.10
Total risk-based ratio 162,616 13.36 97,395 8.00 65,221 5.36
</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, 1998, 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.
In addition to measures taken under the prompt corrective action
provisions, commercial
<PAGE>
banking organizations may be subject to potential enforcement actions by the
federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation, or any condition
imposed in writing by the agency or any written agreement with the agency.
Safety and Soundness Standards
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, 1998, 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 "Paperwork Reduction 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
Paperwork Reduction Act, the FDIC is not permitted to establish SAIF
assessment rates that are lower than comparable BIF assessment
<PAGE>
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 Paperwork
Reduction Act also provided for the merging of the BIF and the SAIF by
January 1, 1999 provided there were no financial institutions still chartered
as savings associations at that time. However, as of January 1, 1999, there
were still financial institutions chartered as savings associations. 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.
Interstate Banking and Branching
The BHCA 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, including the state of Hawaii.
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.
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 determined using a
performance-based evaluation system which rates 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 as of August 25, 1997, the
Bank was rated outstanding, the highest possible rating, in complying with
its CRA obligations.
Year 2000 Compliance
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,
<PAGE>
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. If a federal banking agency
determines that the Bank is operating in an unsafe and unsound manner, the
Bank may be required to submit a compliance plan. Failure to submit a
compliance plan or to implement an accepted plan may result in enforcement
action being taken, which may include a cease and desist order and fines.
Compliance examinations were conducted by the FDIC in April and November 1998
and by the Federal Reserve Board in December 1998. A discussion of the
Company's Year 2000 compliance effort is provided in Management's Discussion
and Analysis of Financial Condition and Results of Operations which is
included in the 1998 Annual Report to Shareholders.
Accounting Changes
In June 1996, the FASB issued 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 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 on January 1, 1997 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 statements did not have a material impact on the Company's
results of operations or financial position when adopted.
In February 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
<PAGE>
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. The application of the statement in
December 1997 did not have a material impact on the Company's results of
operations or financial position when adopted.
In February 1997, the 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. The application of the statement in December 1997 did not have a
material impact on the Company's results of operations or financial position
when adopted.
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 the statement,
effective from January 1, 1998, did not have a material impact on the
Company's results of operations or financial position when adopted.
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 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 financial statements for periods beginning after
December 15, 1997. The application of the statement, effective from January
1, 1998, did not have a material impact on the Company's results of
operations or financial position when adopted.
In February 1998, the FASB issued SFAS No. 132, "Statement on Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 does not change the measurement or recognition of those
plans and is effective for fiscal years beginning after December 15, 1997.
The application of the statement, effective for the year
<PAGE>
ended December 31, 1998, did not have a material impact on the Bank's results
of operations or financial position when adopted.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. Management of the
Bank does not expect the adoption of SFAS No. 133 to have a material impact
on the Bank's results of operations or financial position when adopted.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," which
establishes accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct operations
that are substantially similar. SFAS No. 134 requires that after the
securitization of mortgage loans held for sale, the resulting mortgage-backed
securities and other retained interests should be classified in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," based on the company's ability and intent to sell or hold those
investments. SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. Management of the Bank does not expect
the adoption of SFAS No. 134 to have a material impact on the Bank's results
of operations or financial position when adopted.
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.
Employees
At February 26, 1999, the Company employed 592 persons, 574 on a
full-time basis and 18 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."
<PAGE>
Loan Portfolio
Total loans increased to $1,105.9 million at December 31, 1998, compared
with $1,041.0 million at the end of 1997, and $1,042.0 million at the end of
1996. Increases in loan volumes were recorded in all major loan categories
except consumer loans.
The Bank emphasizes residential and commercial mortgage loans, business
loans to professionals and middle-market companies 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 1998 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, 1998, the Bank did not have any concentration of loans
in any industry classified under the Standard Industrial Code which exceeded
10% of the Bank's total loans.
The following table sets forth information regarding outstanding loans
by categories as of the dates indicated.
Table I. Loans by Categories
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ----- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial,
financial
and agricultural $189,796 $146,779 $141,735 $165,292 $211,257
Real estate --
construction 61,375 45,082 43,520 47,853 52,811
Real estate --
mortgage --
residential 337,213 331,347 347,608 341,229 332,073
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Real estate --
mortgage --
commercial 482,849 449,417 430,682 368,772 328,979
Consumer 34,679 68,398 78,431 67,210 66,848
--------- --------- --------- ------- -------
Total loans 1,105,912 1,041,023 1,041,976 990,356 991,968
Allowance for
loan losses 20,066 19,164 9,436 20,156 18,296
--------- --------- --------- ------- -------
Net loans $1,085,846 $1,021,859 $1,022,540 $970,200 $973,672
--------- --------- --------- ------- -------
--------- --------- --------- ------- -------
</TABLE>
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. Nonetheless,
commercial loan volumes increased in 1998 to $189.8 million at December 31,
1998, after experiencing declines in three of the previous four years.
Real Estate - Construction. Real estate - construction loans increased
to $61.4 million at year-end 1998, from $45.1 million at the end of 1997 and
$43.5 million at the end of 1996. 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
$337.2 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, 1998 totaled $29.0
million.
Home equity lines of credit of $79.0 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 mortgage loans at December 31, 1998 included $277.3
million for stores and offices, $80.0 million for warehouses and industrial
buildings, and $94.7 million for apartment
<PAGE>
buildings with 5 or more units.
<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,
1998 1997 1996 1995 1994
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 $322,920 39.4% $323,283 41.4% $341,890 43.9% $335,345 47.2% $328,282 49.7%
5 or more
units 14,293 1.7 8,064 1.0 5,718 0.7 5,884 0.8 3,791 0.6
Commercial,
industrial
and other 482,849 58.9 449,417 57.6 430,682 55.4 368,772 52.0 328,979 49.7
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total $820,062 100.0% $780,764 100.0% $778,290 100.0% $710,001 100.0% $661,052 100.0%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
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,
1998 1997 1996 1995 1994
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 $20,214 58.3% $25,874 37.8% $35,424 45.2% $26,368 39.2% $27,786 41.6%
Credit cards
and related
plans 4,003 11.5 26,058 38.1 23,989 30.6 22,151 33.0 19,612 29.3
Other 10,462 30.2 16,466 24.1 19,018 24.2 18,691 27.8 19,450 29.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $34,679 100.0% $68,398 100.0% $78,431 100.0% $67,210 100.0% $66,848 100.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
</TABLE>
Automobile loans, comprised primarily of indirect dealer loans, were $20.2
million or 58.3% of the consumer loan portfolio in 1998. This figure includes
$19.8 million in indirect automobile loans.
Credit cards and related plans decreased by $22.1 million in 1998 due to
the sale of the Bank's credit card portfolio in the third quarter of 1998. The
sale resulted in a gain of $4.6 million.
<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, 1998. 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 FIVE
OR LESS FIVE YEARS YEARS TOTAL
------- ---------- --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $108,213 $ 72,853 $ 8,730 $189,796
Real estate -- construction 28,677 30,788 1,910 61,375
-------- -------- ------- --------
Total $136,890 $103,641 $10,640 $251,171
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
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 $ 30,112 $ 2,538 $ 32,650
With variable
interest rates 73,529 8,102 81,076
-------- ------- --------
Total $103,641 $10,640 $113,726
-------- ------- --------
-------- ------- --------
</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 1998, $6.6 million was provided for loan losses compared to $3.5
million in 1997 and $2.5 million in 1996. In 1998, the Bank experienced net
charge-offs of $5.7 million,
<PAGE>
compared with net charge-offs of $3.8 million in 1997 and $3.2 million in
1996. The allowance for loan losses at December 31, 1998 was $20.1 million,
compared to $19.2 million at December 31, 1997 and $19.4 million at December
31, 1996. The ratio of the allowance for loan losses to total loans was
1.81%, 1.84% and 1.87% at December 31, 1998, 1997 and 1996, respectively.
Management believes that the allowance for loan losses at December 31, 1998
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."
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,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount of
loans outstanding $1,071,350 $1,044,538 $1,010,255 $1,004,094 $947,433
---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- --------
Allowance for loan losses:
Balance at beginning
of year $19,164 $19,436 $20,156 $18,296 $17,131
Charge-offs: ------- ------- ------- ------- -------
Commercial, financial
and agricultural 980 1,139 662 146 129
Real estate -- construction -- -- -- -- --
Real estate -- mortgage
-- residential 1,993 786 786 192 538
Real estate -- mortgage
-- commercial 2,102 867 1,250 943 1,360
Consumer 1,506 1,250 857 540 492
----- ----- ----- ----- -----
TOTAL 6,581 4,042 3,555 1,821 2,519
----- ----- ----- ----- -----
Recoveries:
Commercial, financial
and agricultural 213 34 108 192 160
Real estate -- construction -- -- 19 -- --
Real estate -- mortgage
-- residential 52 44 31 48 32
Real estate -- mortgage
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
-- commercial 410 -- -- -- --
Consumer 208 192 177 141 192
----- ----- ----- ----- -----
TOTAL 883 270 335 381 384
----- ----- ----- ----- -----
Net loans charged
off 5,698 3,772 3,220 1,440 2,135
Provision charged ----- ----- ----- ----- -----
to operations 6,600 3,500 2,500 3,300 3,300
----- ----- ----- ----- -----
Balance at end of year $20,066 $19,164 $19,436 $20,156 $18,296
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratios:
Allowance for loan losses
to loans outstanding at
end of year 1.81% 1.84% 1.87% 2.04% 1.84%
Net loans charged off
during year to average
loans outstanding
during year 0.53% 0.36% 0.32% 0.14% 0.23%
</TABLE>
Over the five-year period ended December 31, 1998, 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.
<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>
December 31,
1998 1997 1996 1995
PERCENT PERCENT PERCENT PERCENT
------- ------- ------- -------
OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- --------
IN EACH IN EACH IN EACH IN EACH
------- ------- ------- -------
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
--------- -------- --------- -------- --------- -------- --------- --------
FOR LOAN TO TOTAL FOR LOAN TO TOTAL FOR LOAN TO TOTAL FOR LOAN TO TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $ 3,900 17.23% $ 2,700 14.1% $ 2,900 13.6% $ 4,100 16.7%
Real estate --
construction 100 5.5 100 4.3 100 4.2 200 4.9
Real estate --
mortgage --
residential 2,700 30.5 2,400 31.9 1,700 33.4 1,800 34.4
Real estate --
mortgage --
commercial 7,100 43.7 6,700 43.1 9,300 41.3 7,800 37.2
Consumer 400 3.1 900 6.6 600 7.5 600 6.8
Unallocated 5,866 N/A 6,364 N/A 4,836 N/A 5,656 N/A
------- ------ ------- ------ ------- ------ ------- ------
Total $20,066 100.0% $19,164 100.0% $19,436 100.0% $20,156 100.0%
------- ------ ------- ------ ------- ------ ------- -----
------- ------ ------- ------ ------- ------ ------- -----
<CAPTION>
1994
PERCENT
-------
OF LOANS
--------
IN EACH
-------
ALLOWANCE CATEGORY
--------- --------
FOR LOAN TO TOTAL
-------- --------
LOSSES LOANS
------ -----
<S> <C> <C>
Commercial,
financial and
agricultural $ 5,100 21.3%
Real estate --
construction 500 5.3
Real estate --
mortgage --
residential 3,000 33.5
Real estate --
mortgage --
commercial 5,500 33.2
Consumer 400 6.7
Unallocated 3,796 N/A
------- ------
Total $18,296 100.0%
------- ------
------- ------
</TABLE>
<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,
1998 1997 1996
---- ---- ----
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 $ 67,304 $208,641 $114,374 $148,434 $100,153 $113,339
States and political
subdivisions 53,172 4,103 38,314 2,723 9,091 2,791
Other -- 18,216 -- 16,866 -- 5,084
-------- -------- -------- -------- -------- --------
Total investment
securities $120,476 $230,960 $152,688 $168,023 $109,244 $131,214
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
The Bank did not hold investments of any nonfederal issuer in amounts
exceeding 10% of stockholders' equity at December 31, 1998. 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, 1998.
<PAGE>
Maturity Distribution of Investment Portfolio
The following table sets forth the maturity distribution of the investment
portfolio at December 31, 1998.
Table IX. Maturity Distribution of Investment Portfolio
<TABLE>
<CAPTION>
WEIGHTED
BOOK AVERAGE
PORTFOLIO TYPE AND MATURITY GROUPING VALUE YIELD(f1)
- ------------------------------------ ----- ---------
<S> <C> <C>
(Dollars in thousands)
Held-to-maturity portfolio:
U.S. Treasury and other U.S. Government agencies:
Within one year $ 2,993 6.164%
After one but within five years 24,096 6.767
After five but within ten years 27,190 6.566
After ten years 13,025 7.136
---------
Total U.S. Treasury and other U.S. Government agencies 67,304 6.730
---------
States and political subdivisions:
Within one year -- --
After one but within five years 21,290 6.704
After five but within ten years 24,179 6.526
After ten years 7,703 8.706
---------
Total states and political subdivisions 53,172 6.913
---------
Total held-to-maturity portfolio $120,476 6.811%
---------
---------
Available-for-sale portfolio:
U.S. Treasury and other U.S. Government agencies:
Within one year $ 23,811 4.672%
After one but within five years 41,073 5.829
After five but within ten years 65,224 5.951
After ten years 78,533 6.287
---------
Total U.S. Treasury and other U.S. Government agencies 208,641 5.902
---------
States and political subdivisions:
Within one year -- --
After one but within five years 1,187 6.786
After five but within ten years 1,124 5.738
After ten years 1,792 7.962
---------
Total states and political subdivisions 4,103 7.012
---------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Other:
Within one year -- --
After one but within five years -- --
After five but within ten years -- --
After ten years 18,216 7.339
---------
Total other 18,216 7.330
---------
Total available-for-sale portfolio $230,960 6.035%
---------
---------
Total investment securities $351,436 6.301%
---------
---------
</TABLE>
(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%.
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, 1998, 1997 and 1996 were $1,269.1 million,
$1,193.2 million, and $1,123.6 million, respectively. Deposits increased by
6.4% in 1998 compared with a 6.2% growth rate in 1997. Interest-bearing
deposits, excluding time deposits of $100,000 and over, increased by 4.3% in
1998 and 2.4% in 1997. Noninterest-bearing deposits increased by 10.9% in 1998
and 0.2% in 1997. The Bank's ratio of core deposits to total deposits has
declined steadily over the past several years to 72.9% at December 31, 1998,
from 73.4% at year-end 1997 and 76.5% at year-end 1996. Meanwhile, time deposits
of $100,000 and over increased to $344.2 million at December 31, 1998, from
$317.2 million at year-end 1997 and $264.3 million at year-end 1996. See "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Financial Condition."
<PAGE>
The following table sets forth information regarding the average deposits
and the average rates paid for certain deposit categories for each of the year
indicated. Average balances are computed using daily average balances.
Table X. Average Balances and Average Rates on Deposits
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
------- ---- ------- ---- ------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 162,625 --% $ 155,232 --% $ 153,288 --%
Interest-bearing
demand deposits 99,059 1.30 95,056 1.35 94,389 1.36
Savings and money
market deposits 401,936 2.74 398,667 2.78 392,603 2.80
Time deposits 530,237 4.94 495,211 5.01 461,771 5.00
---------- ---------- ----------
TOTAL $1,193,857 3.22% $1,144,166 3.25% $1,102,051 3.21%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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, 1998
-----------------
(Dollars in thousands)
<S> <C>
Three months or less $168,160
Over three through six months 80,923
Over six through twelve months 83,017
Over twelve months 12,063
--------
Total $344,163
--------
--------
</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 2038, and, in most
instances, include options to renew. For the year ended
<PAGE>
December 31, 1998, net rent expense under these leases aggregated $4.4
million. For additional information relating to lease rental expense and
commitments, see Note 17 to the Company's Consolidated Financial Statements
in the 1998 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 approximately 235,000 square feet
of rentable space of which approximately 59,000 square feet are occupied by
the Company. CKSS carried the building complex on its books at a net book
value of $23.2 million as of December 31, 1998. 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, 1998, Sumitomo had advanced pursuant
to its loan agreement the sum of $8.5 million, due on June 18, 2001.
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 1998 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, 1998, the Bank had advanced $9.9 million, due
on August 10, 2001, pursuant to this loan agreement. At December 31, 1998, 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, 1998 was 6.638%.
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
<PAGE>
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 1998.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 28, 1999, 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.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND POSITION DURING PAST FIVE YEARS AGE
- ----------------- ---------------------- ---
<S> <C> <C>
Joichi Saito Chairman of the Board and Chief Executive 63
Chairman of the Officer, Central Pacific Bank (1996-Present);
Board and Chief President and Chief Operating Officer,
Executive Officer Central Pacific Bank (1989-1995)
Naoaki Shibuya President and Chief Operating 57
President Officer, Central Pacific Bank (1996-Present);
Executive Vice President, Central Pacific
Bank (1993-1995)
Austin Y. Imamura Executive Vice President and Secretary, 52
Vice President and Central Pacific Bank (1991-Present)
Secretary
Neal K. Kanda Executive Vice President, Central Pacific Bank 50
Vice President and (1996-Present); Executive Vice President and
Treasurer Controller, Central Pacific Bank (1993-1996)
</TABLE>
<PAGE>
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 1998 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."
ITEM 6. SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see "Selected
Consolidated Financial Data" contained in the 1998 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 1998 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," in the 1998 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 1998 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.
<PAGE>
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.
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.
<PAGE>
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 1998
Annual Report are incorporated herein by reference. Page number references are
to page numbers in the 1998 Annual Report.
PAGE
----
CPB Inc. and Subsidiary:
Independent Auditors' Report 44
Consolidated Balance Sheets at December 31, 1998 and 1997 19
Consolidated Statements of Income and Comprehensive Income
for the Years ended December 31, 1998, 1997 and 1996 20
Consolidated Statements of Changes in Stockholders' Equity
for the Years ended December 31, 1998, 1997 and 1996 21
Consolidated Statements of Cash Flows for the Years ended
December 31, 1998, 1997 and 1996 22
Notes to Consolidated Financial Statements 23
(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.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fourth quarter of 1998.
(c) Exhibits
<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 24, 1999
CPB INC.
(Registrant)
JOICHI SAITO
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
/S/ JOICHI SAITO Chairman of the Board March 24, 1999
- ---------------- and Chief Executive Officer
Joichi Saito (Principal Executive Officer),
Director
/S/ NEAL K. KANDA Vice President, March 24, 1999
- ----------------- Treasurer
Neal K. Kanda (Principal Financial Officer,
Principal Accounting Officer)
/S/ PAUL DEVENS Director March 24, 1999
- ---------------
Paul Devens
/S/ ALICE F. GUILD Director March 24, 1999
- ------------------
Alice F. Guild
<PAGE>
/S/ DENNIS I. HIROTA Director March 24, 1999
- --------------------
Dennis I. Hirota, Ph.D.
/S/ STANLEY W. HONG Director March 24, 1999
- -------------------
Stanley W. Hong
/S/ DANIEL M. NAGAMINE Director March 24, 1999
- ----------------------
Daniel M. Nagamine
Director March __, 1999
Shunichi Okuyama
/S/ YOSHIHARU SATOH Director March 24, 1999
- -------------------
Yoshiharu Satoh
/S/ NAOAKI SHIBUYA Director March 24, 1999
- ------------------
Naoaki Shibuya
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DOCUMENT
3.1 Restated Articles of Incorporation of CPB Inc., as amended (f1)
3.2 Amended Bylaws of CPB Inc. (f2)
10.1 Limited Partnership Agreement of CKSS Associates Limited
Partnership dated July 10, 1981 and among CPB Properties, Inc., Kajima
Hawaii Corporation, Sumitomo Corporation and Sumitomo Corporation of
America (f3)
10.2 CPB Inc. 1986 Stock Option Plan, as amended (f4)(f8)
10.3 Lease dated February 1, 1983 by and between CKSS Associates and
Central Pacific Bank, as amended by First Amendment of Lease between
CKSS Associates and Central Pacific Bank dated March 3, 1984, as
amended by Second Amendment of Lease between CKSS Associates and
Central Pacific Bank dated April 3, 1987, as amended by Third Amendment
of Lease between CKSS Associates and Central Pacific Bank dated
September 24, 1992 (f2)
10.4 Share Purchase Agreement dated as of November 20, 1986 by and
among the Sumitomo Bank, Limited and CPB Inc. (f2)
10.5 Split Dollar Life Insurance Plan (f5)(f8)
10.6 Common Stock Purchase Warrant issued December 16, 1996 to The
Sumitomo Bank, Limited (f6)
10.7 Form of Common Stock Purchase Warrant issued July 30, 1997 to the
Sumitomo Bank, Limited (f1)
10.8 Central Pacific Bank and Subsidiaries 1998 Annual Executive
Incentive Plan (f8)
10.9 Central Pacific Bank Supplemental Executive Retirement Plan
(f6)(f8)
10.10 CPB Inc. 1997 Stock Option Plan (f6)(f8)
10.11 License and Service Agreement dated July 30, 1997 by and between
Central Pacific Bank and Fiserv Solutions, Inc.
13 Annual Report to Shareholders for the year ended December 31,
1998 (parts not incorporated by reference are furnished for
informational purposes and are not filed herewith)
<PAGE>
21 Subsidiaries of CPB Inc. (f1)
23 Consent of KPMG LLP
27 Financial Data Schedule
99 Proxy Statement for Annual Meeting of Shareholders to be held on
April 27, 1999 (f7)
(f1) Filed as Exhibit 3.1, 10.7 and 21 to registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, filed with the
Securities and Exchange Commission on March 30, 1998.
(f2) Filed as Exhibits 3.2, 10.10 and 10.11 to the registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993, filed with the
Securities and Exchange Commission on March 17, 1994.
(f3) Filed as Exhibit 10.7 to registrant's Registration Statement on Form
S-14 (Registration No. 2-76608), filed with the Securities and Exchange
Commission on March 23, 1982, which is incorporated herein by this reference.
(f4) Filed as Exhibit 28.1 to registrant's Registration Statement on Form S-8
(Registration No. 33-11462), filed with the Securities and Exchange Commission
on January 22, 1987, which is incorporated herein by this reference.
(f5) Filed as Exhibit 10.16 to registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991, filed with the Securities and Exchange
Commission on March 27, 1992.
(f6) Filed as Exhibit 10.6, 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.
(f7) Filed with the Securities and Exchange Commission on March 23, 1999 and
incorporated herein by reference.
(f8) Denotes management contract or compensation plan or arrangement.
<PAGE>
01/07/98
CENTRAL PACIFIC BANK AND SUBSIDIARY
1998 ANNUAL EXECUTIVE INCENTIVE PLAN
PURPOSE:
The purpose of this plan is to reinforce the mission and corporate goals of CPB
Inc. and Central Pacific Bank (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 1998 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
<PAGE>
the average assets in the fourth quarter of the respective years.
ADMINISTRATION:
The Plan will be administered by the Compensation Committee, as ratified by the
Board of Directors, who may delegate certain aspects of recordkeeping 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.
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. 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, 1998. Participants becoming eligible after January 1, 1998 will be
eligible for consideration of payment, pro-rated by the first day of the month
on which they met the eligibility requirements. For example, a Participant
meeting eligibility requirements on April 1, 1998 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 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 any
other CPB incentive bonus programs.
<PAGE>
FUNDING:
The plan will be funded according to the success of CPB as measured by the
following (a) return on equity (ROE, from CPB Inc.), (b) asset growth and (c)
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 year to year growth in average assets for the fourth quarter.
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 1998 these values are 10.25% 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 attached diagram.
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, 1998).
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.
<PAGE>
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 objectives 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.
Central Pacific Bank
Determining Payouts
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Groups
- --------------------------------------------------------------------------------
Measures CEO COO EVP/Group SVPs
Manager
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate 100% 100% 50% 50%
- --------------------------------------------------------------------------------
Unit/Production 0% 0% 25% 30%
Objectives
- --------------------------------------------------------------------------------
Discretionary 0% 0% 25% 20%
- --------------------------------------------------------------------------------
Total 100% 100% 100% 100%
- --------------------------------------------------------------------------------
Targets as a 30% 30% 30% 25%
% of
Base Salary
- --------------------------------------------------------------------------------
</TABLE>
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 (1998 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.
<PAGE>
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 1998 on the ____ day
of _______, 1998 by the CPB Board of Directors as indicated below.
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
- -------------------------------------------- -------------
<PAGE>
1998 ANNUAL EXECUTIVE INCENTIVE PLAN
PARTICIPANTS
Joichi Saito Chairman of the Board & CEO
Naoaki Shibuya Pres. & COO
Austin Imamura EVP & Secretary & Commercial Banking Group Mgr
Neal Kanda EVP & Asst. Secretary & Admin. Group Mgr
Wayne Kirihara SVP & Retail Banking Group Mgr
Walter Horikoshi SVP & Credit and Legal Div Mgr.
Raymond Kurosu SVP & ODS Div. Mgr.
David Chang SVP & ISD Mgr.
<PAGE>
[LOGO]
LICENSE AND SERVICE AGREEMENT
This LICENSE AND SERVICE AGREEMENT numbered 3810165 is entered into as of the
Effective Date below by and between
FISERV SOLUTIONS, INC.
a Corporation whose registered office is located at
2601 TECHNOLOGY DRIVE
ORLANDO, FL 32804
(hereinafter called 'Company') and
CENTRAL PACIFIC BANK
whose registered office is located at
220 SOUTH KING STREET
HONOLULU, HAWAII 96813
(hereinafter called 'Client')
This Agreement shall be construed and enforced under the laws of the State of
Hawaii.
Effective Date: July 30, 1997
-------------
Confidential US Comb 05/15/96 DC/JOM
------
Initials
<PAGE>
WITNESSETH:
WHEREAS, Company is the licensor of the Software System (as hereinafter
defined), and
WHEREAS, Client wishes to install and Use (as hereinafter defined), the
Software System in Client's premises.
NOW, THEREFORE, the parties hereto agree from the Effective Date as follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1. DEFINITIONS
The following are the definitions of various terms used in this Agreement:
1.1 'Accounts' means the total number of individually designated accounts
processed by the Transaction, Time, and Loan subsystem of the Software
System.
1.2 'Basic Maintenance Services' means services to correct a Nonconformity or
Major Nonconformity in the original, unmodified Software System. Basic
Maintenance Services are available only with respect to the current and
last prior release of the Software System.
1.3 'Business Requirements' means the description of the Client's business
needs and the functionality required.
1.4 'Client Confidential Information' means any confidential information
concerning Client's business, that is labeled as such and all data
pertaining to Client's customers.
1.5 'Computer System' means that dedicated computer machinery and manufacturer-
supplied software identified on Schedule 2. Client shall have sole
responsibility to own or lease, unpack, plan, install, test, and maintain
the equipment according to any and all applicable building or electrical
codes, regulations or requirements, as well as the manufacturer and Company
recommendations.
1.6 'Effective Date' means the date identified as such in this Agreement as the
date upon which this Agreement shall commence.
1.7 'Enhancements' means modifications made to the Software System which add
program features or functions not originally within the Software System and
which are generally provided upon payment of additional License Fees.
Company reserves the right to define which changes are upgrades or
separately priced enhancements.
1.8 'Functional Specifications' means the description of the detailed
functionality changes to product, account and customer level processing.
1.9 'Location' means only those premises identified on Schedule 1.
1.10 'Maintenance Fee' means that fee for the time being in effect for the
provision of the Maintenance Services hereunder.
1.11 'Nonconformity' means a failure of the Software System to accurately
process Client's data or to perform functions described in Company's
documentation.
(i) Level One: A Major Nonconformity which renders the Software System
inoperative.
(ii) Level Two: Any nonconformity which significantly degrades the
performance of the Software System or which affects regulatory
compliance, including, but not limited to, the calculation of
interest, fees and balances, and errors affecting the accuracy of
customer statements.
(iii) Level Three: A nonconformity which has a significant impact on the
Client's ability to perform its normal business functions and for
which no circumvent procedure is available.
(iv) Level Four: A nonconformity which negatively impacts the ability of
the Client to perform its normal business functions but for which
there is a relative cost effective circumvent procedure available.
(v) Level Five: A nonconformity which does not fit into any of the above
categories.
1.12 'Professional Service Fees' means the greater of the sums of amounts
derived by multiplying either the minimum number of days specified on
Schedule(s) 1 or the number of days or fractions of days worked within each
grade by the daily fee rate as defined on the Schedule(s) 1. Additional
fees may be raised in respect of hours worked outside these at the request
of Client at the rates previously agreed in writing by Client.
1.13 'Software System' means the standard, unmodified computer programs in
object code, unless otherwise specified on Schedule 1, and procedure
statements in machine readable form, together with one set of Company
standard documentation as listed on Schedule 1. The Software System
does not include separate, independent, and stand-alone modules or
subsystems which Client has developed and maintained without Company's
assistance.
1.14 'Special Maintenance Services' means any other services as specified on
Schedule 1.
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1.15 'Specification Nonconformity' means a failure of the modified Software
System to operate in accordance with the Functional Specifications.
1.16 'Taxes' means all sales, use, excise, value added, and other taxes and
duties however designated which are levied by any taxing authority having
jurisdiction over the Location. Taxes shall not include any levies by any
taxing authority which are based upon the net income of Company.
1.17 'Third Party' means any party other than Company's employees or
subcontractors and Client.
1.18 'Total License Fee' means the total sum specified as such on Schedule 1 for
standard, unmodified modules of the Software System. Any fees for
modifications, enhancements, upgrades, or additions to the Software System
are excluded from this Agreement unless otherwise specified.
1.19 'Upgrades' means changes made to maintain compatibility with new system
software releases or to improve upon previously existing features and
operations with the Software System. This primarily includes program fixes
to the existing Software System.
1.20 'Use' means copying or loading any portion of the Software System from
storage units or media into any equipment for the processing of data by the
Software System once so loaded, or the operation of any procedure or
machine instruction utilizing any portion of either the computer program or
instructional material supplied with the Software System. Use is deemed to
occur at the location where any of the above processes happen. Use is
limited to type of operations described in Company documentation solely to
process Client's own work and that of majority-owned financial
institutions. Use specifically excludes any service bureau or time-share
services to minority-owned or unaffiliated third parties without prior
written consent by Company and payment by Client of additional fees in
accordance with mutually agreed terms.
1.21 'Workday' means Company's working day for the purposes of this Agreement,
as specified on Schedule 1.
2. LICENSE TO USE THE SOFTWARE SYSTEM
2.1 Company agrees to furnish the Software System to Client and does hereby
grant to Client a non-exclusive, nontransferable License to Use the
Software System at the Location to process the designated number of
Accounts as specified on Schedule 1.
2.2 Client may change the Location, without cost to Client, in the event Client
transfers its data processing department to a new location within the same
country as the Location. Client will provide Company with fifteen (15)
days advance notice of any proposed transfer of operations.
2.3 The Company prohibits the copying of any portions of the Software System
except that Client may copy reasonable quantities of any standard end user
documentation; and may copy machine language code, in whole or in part, in
reasonable quantities, in printed or electronic form, for use by Client at
the Location for archive, back-up or emergency restart purposes, or to
replace copy made on defective media. The original, and any copies of the
Software System, or any part thereof, shall be the property of Company.
2.4 Client shall maintain any such copies and the original at the Location and
one Client archive site in the same country as the Location, which site is
specified on Schedule 1. Client may transport or transmit a copy of the
Software System from the Location or the Archive Site to another location
in the same country as the Location for back-up use when required by
Computer System malfunction, provided that the copy or original is
destroyed or returned to the Location or Archive Site when the malfunction
is corrected. Client shall reproduce and include Company's copyright and
other proprietary notices on all copies, in whole or in part, in any form,
of the Software System made in accordance with this Section.
2.5 Company grants to Client the right to Use any modifications furnished or
authorized by Company pursuant to a separate written agreement.
3. PROFESSIONAL SERVICES TERMS
3.1 In consideration of the payment to Company by Client of the Fees and the
cost of all items and services provided and any other expenses incurred by
Company in connection with this Agreement, as defined on Schedule(s) 1,
Company hereby agrees to provide personnel of the grades, and between the
dates specified on Schedule(s) 1 to work on behalf of Client in accordance
with the terms and conditions set out below.
3.2 All work which is to be performed by Company hereunder shall be based upon
the preliminary Business Requirements listed on Schedule 3. Client shall
utilize Schedule 3 to provide Company with all necessary information
concerning its requirements for modifications to the Software System or
other information requested by Company related to Company's performance of
its obligations under this Agreement. Any estimates of costs and
completion dates listed on the Schedules are referenced solely for the
purpose of allowing Client to plan its budgets and schedules based upon the
then available information.
3.3 Company shall provide a Preliminary Project Plan based upon the Business
Requirements which shall be incorporated as Schedule 4 when appropriate.
Schedule 4 shall contain a preliminary listing of the nature and timing of
tasks for the project, some of which are to be performed by Company and
some by
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Client. Company shall utilize reasonable efforts to meet the dates set
forth in the Project Plan or any replacement thereof.
3.4 In the event that Company is to provide installation, conversion or
training to Client for the Software System, the fees therefore shall be as
specified on Schedule 4. The nature and timing of any installation,
conversion and training shall be as specified in the Project Plan mutually
agreed upon by the parties.
3.5 In the event that Company is to provide modifications to the Software
System, the modifications shall be based upon specifications created by
Company and approved by Client as provided below:
(i) During the phase referred to on the Project Plan as "Functional
Specifications", Company may develop Functional Specifications based
upon the descriptions contained on Schedule 3 for Client's written
approval. Company shall not be obligated to perform any further
development work until Specifications have been accepted in writing
by Client which acceptance shall not be unreasonably withheld or
unduly delayed.
(ii) Modifications, changes, enhancements, conversions, upgrades or
additions to the Software System beyond those stated in the
Functional Specifications shall be added only upon mutual written
agreement. In the event the parties agree to add any such items, the
Project Plan shall automatically be modified to the extent necessary
to allow for the implementation or provision of the items.
(iii) The Project Plan shall also set forth the time period after the
acceptance of the Functional Specifications within which Company
shall prepare "Functional Specifications" including an acceptance
test script for the adaptations described therein. After Client's
written acceptance of the Functional Specifications, which acceptance
shall not be unreasonably withheld or delayed, Company shall commence
activities to modify the Software System for use by Client in
accordance with the Project Plan.
(iv) The Software System adaptations shall be deemed to have been accepted
by Client either upon the completion of a formal Acceptance Test (as
set forth in the test scripts) or 30 days after delivery of the
modified Software System, whichever occurs first. Acceptance by
Client will not be unreasonably withheld or unduly delayed. Client
agrees promptly to notify Company in writing (and with reasonable
particularity) upon conclusion of the Acceptance Test or earlier upon
discovery of any Specification Nonconformities disclosed by such
testing or use. Company shall correct any Specification
Nonconformities disclosed by such testing without further charge to
Client within a reasonable time of Client's notice.
3.6 The Professional Services Fees are based on a workday as defined on
Schedule(s) 1. Additional Professional Services Fees may be raised in
respect of hours worked outside these at the request of Client at the rates
previously agreed in writing by Client.
3.7 If support is primarily required in part days, Company may notify Client
that an hourly fee rate shall apply. The hourly rate will be calculated
pro-rata of the stated daily rate unless otherwise agreed.
3.8 The daily rates quoted in the table will be valid for three months from the
effective date listed on the relevant Schedule 1. Thereafter, they will be
subject to change by Company on one-month's notice.
4. MAINTENANCE SERVICES TERMS
4.1 In consideration of the payment to Company by Client of the Maintenance
Fee, Company agrees to furnish to Client Maintenance Services as described
and subject to the terms and conditions contained in this Agreement.
4.2 Client may elect to receive Basic Maintenance Services and/or Special
Maintenance Services by designating the services selected on Schedule 1.
4.3 Company shall maintain the Software System in compliance with applicable
Federal regulations.
4.4 Client agrees to train current and future employed staff members on the
technical and user operations of the Software System. If the Client
chooses, training can be provided at the Company's location or at the
Client's location at the then current training rates. Phone training will
also be invoiced at the said rate.
4.5 As part of Basic Maintenance Services, Company shall provide telephone
support for reporting of Level One, Two, and Three Nonconformities twenty-
four hours per day, seven days per week. Company shall provide services to
correct or resolve any other Nonconformity of the Software System only on
Workdays. Telephone cost for remote dial-up is Client's expense. Company
may utilize remote diagnostic software and dial-up telephone lines in
providing these services.
4.6 Company and Client shall promptly assign such technical personnel as are
necessary to identify, isolate, and reconstruct any reported Level One
Nonconformity and, provided that such Nonconformity is capable of
reconstruction and is due to a defect in the Software System, Company and
Client shall utilize its best efforts to correct or utilize a circumvent
procedure to restore system operation within twenty-four hours of
Company's receipt of the call or before the next occurrence of the
nonconformity. Company shall provide such services to Client free of any
additional fees and
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charges, including but not limited to any reimbursement for travel of
Company technical personnel incurred during the resolution of the Major
Nonconformity.
4.7 Company and Client shall use its best efforts to correct or adopt a
circumvent procedure with respect to a Level Two Nonconformity within
forty-eight hours of its receipt of the Level Two Nonconformity report.
4.8 Company and Client shall use its commercially reasonable best efforts to
correct a Level Three Nonconformity within five business days of its
receipt of the Level Three Nonconformity report by providing a circumvent
procedure or code, whichever is most reasonable.
4.9 Company shall use its commercially best efforts to adopt a circumvent
procedure with respect to a Level Four Nonconformity within five (5)
business days of its receipt of the Nonconformity or the next occurrence of
the issue. If a circumvent procedure has been adopted, Company may deliver
a software coded correction to the Level Four Nonconformity with the next
scheduled base release of the Software System that is still open for
development changes at the time of the notice of the Level Four
Nonconformity.
4.10 Company shall use its commercially reasonable best efforts to correct a
Level Five Nonconformity with the next Software System Release open for
development at the time of the notice of the Level Five Nonconformity.
4.11 Should Company's review of the Level One, Two or Three Nonconformity
indicate, in Company's reasonable opinion, that the reported problem is not
in the Software System but is due to Client's abuse or misuse of the
Software System, or by a modification or addition to the Software System
not performed by Company (inclusive of the integration of Third Party
products with the software system), or by Client's failure to properly
maintain the Computer System or to install the required system software
release as instructed by Company, then:
(i) Client agrees, if required by Company, to reimburse Company the
related costs of work performed by Company in investigating the
problem including related system calculated on a time-and-materials
basis at Company's then standard professional service rates, and
(ii) Company, on request of Client, shall advise Client whether Company
can correct or assist in resolving such problem, and the terms under
which Company shall undertake the same, and on written acceptance by
Client shall correct or assist in resolving the problem in accordance
with such terms.
4.12 Maintenance Fees cover twenty (20) hours of support per month through
Client's acceptance of Software System at conversion and, thereafter, ten
(10) hours of support per month for support not related to Nonconformity's.
If such support hours are greater than those specified, Client will be
contacted and invoiced for hourly support at the Company's then current
rates.
4.13 The initial Maintenance Fee and adjustment terms are specified on Schedule
1. Maintenance Fees shall be subject to annual increases and shall also be
subject to increase following delivery of new versions of, or modifications
or additions to the Software System or changes in the number of accounts
processed as specified in the License and Service Agreement.
4.14 All such increases to the Maintenance Fee shall be incorporated by amending
Schedule 1.
4.15 Invoicing of the Maintenance Fee will commence as specified on Schedule 1.
5. USE OF AND RIGHTS TO COMPANY'S WORK PRODUCT
All information, reports, studies, object or source code, flow charts,
diagrams and other tangible or intangible material of any nature whatsoever
produced by or as a result of any of the services performed hereunder shall
be the sole and exclusive property of Company or its corporate parent.
Client shall be entitled to Use all such work product produced by Company
in accordance with the terms and conditions of the License and Service
Agreement. Nothing contained in this Agreement shall be deemed to provide
greater rights with respect to the Software System, as modified for
Client's use herein, than those provided in the License and Service
Agreement.
6. TERM
6.1 The term of the License grant shall begin on the Effective Date and
continue in perpetuity unless terminated earlier as provided herein.
6.2 The provision of the Maintenance Services by Company shall commence on the
Effective Date specified on Page 1 hereto and shall continue for a period
of five years.
6.3 A Maintenance Services agreement may be renewed for successive one year
terms at Company's then current fees for all modules then under License.
7. DELIVERY
The Company agrees to deliver the Software System to the Location.
8. PAYMENT
8.1 Company shall add to each invoice for reimbursement by Client an amount
equal to any
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applicable Taxes. Company shall remit such Taxes to the appropriate taxing
authorities.
8.2 Each payment to be made to Company under this Agreement shall be paid by
Client, in funds as specified on Schedule 1, within fifteen (15) days of
the date of an invoice in respect thereof and the time of payment shall be
of the essence of this Agreement.
8.3 If the whole or any part of any invoice remains outstanding for thirty (30)
days or more, Client shall pay an agreed financial charge calculated at the
rate of one and one half percent (1-1/2%) per part or complete month on the
overdue balance. Company shall pay the same financial charge on the amount
of any credit due to Client for sums previously paid by Client which were
the subject of a dispute resolved in Client's favor.
8.4 Except as expressly provided in this Agreement to the contrary, Client
agrees to pay the reasonable travel and living expenses of any employees of
Company and its authorized contractors who render services at either the
Location or any other Client site in connection with the activities
described in this Agreement. All expenses shall be itemized on invoices
submitted by Company and shall be due and payable upon presentation of each
invoice as provided herein.
9. PERFORMANCE
9.1 Client shall give Company full access to the Location, the Software System,
and the Computer System to enable Company to provide Services and shall
make available information, facilities, and services reasonably required by
Company for the performance of its obligations under this Agreement.
9.2 Work in determining the nature of any problem or in making corrections,
amendments, or additions to the Software System may be carried out at
Company's site or at the Location at the discretion of Company.
9.3 Client agrees to maintain the Computer System and Software System according
to Company recommendations during the term of this Agreement.
10. RESCHEDULING
If Client is unable to provide access to required facilities or personnel
or is unable to meet its tasks assigned on Schedules 3 and 4 in a timely
manner, Company will endeavor to reschedule tasks to minimize the non-
productive time arising. All such non-productive time is chargeable to
Client. If such non-productive time is expected to be significant, Company
will endeavor to reassign its personnel to other suitable work. In this
event, Client will not be charged for the time personnel were reassigned.
11. SCHEDULES
The attached Schedules form part of and are included in this Agreement.
12. WARRANTIES
12.1 Company warrants that the Software System will perform the functions
specified in the Documentation identified on Schedule 1. For a period of
ninety (90) days after delivery, Company will promptly provide replacements
or corrections to any part of the Software System which does not so perform
where such failure is material and is notified in writing to Company within
such period. This warranty shall not apply if the problem has been caused
by unauthorized amendment to the Software System, or by incorrect Use.
Company acknowledges that the Software System is designed to operate on the
Computer System specified on Schedule 2 and both parties acknowledge that
the warranties given by Company are conditional upon the procurement and
maintenance by Client of the Computer System in accordance with such
configuration.
12.2 The Company's obligation under the warranty stated in the foregoing
paragraph shall be to repair or replace defective or non-conforming parts
of the Software System at its own expense and within a reasonable time.
12.3 The Company warrants that it has the right to License the Use of the
Software System.
12.4 Company warrants that the Services described in this Agreement shall be
performed in a workmanlike manner and in accordance with standards
applicable to the financial software services industry.
12.5 THE WARRANTIES STATED ABOVE ARE LIMITED WARRANTIES AND ARE THE ONLY
WARRANTIES MADE BY COMPANY. COMPANY DOES NOT MAKE, AND CLIENT HEREBY
EXPRESSLY WAIVES, ALL OTHER WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE STATED EXPRESS WARRANTIES ARE IN LIEU OF ALL
LIABILITIES OR OBLIGATIONS OF COMPANY FOR DAMAGES ARISING OUT OF OR IN
CONNECTION WITH THE DELIVERY, USE OR PERFORMANCE OF THE SOFTWARE SYSTEM.
13. INDEMNITY
13.1 Company shall indemnify Client and hold it harmless against any claim or
action which alleges that the use of the Software System infringes a
patent, copyright or other proprietary right of a third person enforceable
in the Location. Client agrees that it will notify Company promptly in
writing of any such claim and grants Company sole right to control the
defense and disposition of such claim.
13.2 If as a result of any such claim Company or Client is permanently enjoined
from using the Software System by a final, nonappealable decree, Company
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at its sole option and expense may procure for Client the right to continue
to use the Software System or at its sole option and expense, may provide a
replacement or modification for the Software System so as to settle such
claim. If modification of the Software System is not reasonably practical
in the sole opinion of Company (reasonably given), Company shall
discontinue and terminate this License upon written notice to Client and
shall refund to Client all License Fees paid to Company under this
Agreement. In making this determination, Company will give due
consideration to all factors including financial expense.
13.3 The foregoing states the entire liability of Company for the infringement
of any copyrights, patents or other proprietary rights of a third person by
the Software System or any parts thereof, and Client hereby expressly
waives any other liabilities on the part of Company arising therefrom.
13.4 The Company shall have no liability for any claim which is based upon
(a) the Use of any part of the Software System in combination with
Materials or software not provided by Company; or
(b) modifications made by Client or any Third Party.
14. LIMITATION OF LIABILITY OF THE PARTIES
14.1 Each party shall indemnify and hold the other harmless against any
(a) loss of or any damage to any tangible property or
(b) injury to or death of any person;
caused by the negligence of, breach of statutory duty by, or willful
misconduct of the indemnifying party's employees, agents, or sub-
contractors.
14.2 COMPANY SHALL HAVE NO LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS
AGREEMENT OR OTHERWISE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT,
CONSEQUENTIAL, OR INCIDENTAL DAMAGES, WHETHER IN TORT OR IN CONTRACT, EVEN
IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ANY EVENT,
THE LIABILITY OF COMPANY TO CLIENT FOR ANY REASON AND UPON ANY CAUSE OF
ACTION WHATSOEVER SHALL BE LIMITED TO THE AMOUNT OF ANY LICENSE FEE WHICH
CLIENT HAS PAID TO COMPANY AS OF THE DATE ON WHICH SUCH CAUSE OF ACTION
ACCRUES.
15. TITLE
15.1 Nothing in this agreement shall convey to Client any title to or any rights
in the Software System including but not limited to all proprietary rights
or ownership of any modifications. The Client's sole right in relation to
the Software System or any modifications is to Use the same for the
duration of this Agreement under the terms and conditions herein contained.
15.2 The Software System and all modifications, enhancements, or upgrades made
to the Software System and all patents, copyrights, or other proprietary
rights related to each of the above are the sole and exclusive property of
Company, whether made by Company, Client, or any of their employees or
agents.
16. NON-DISCLOSURE
16.1 Company has granted Client the limited right to use the Software System as
provided in this Agreement. Client acknowledges that
(a) the Software System, including all specifications, work product,
translations and other materials developed by Company, and
(b) the terms and conditions of this Agreement
contain highly confidential, unique, secret and valuable information of
Company. Client agrees that it shall not decompile, disassemble or reverse
engineer the Software System and that it shall not sell, transfer, publish,
disclose, display or otherwise make available to others the Software
System, any materials relating to or forming a part of the Software System
or any other proprietary information of Company without the prior written
consent of Company. Client agrees to secure and protect the Software
System and proprietary information and to take appropriate action by
written agreement with its employees who are permitted access to such
materials to satisfy its obligations hereunder. Client further agrees that
it shall use its best efforts to assist Company in identifying and
preventing any use or disclosure of any portion of the Software System or
proprietary information. As a precondition of Client's request to Company
for consent to disclose the Software System, in whole or in part, to a
Third Party, Client shall obtain from such party an executed Schedule 5.
All obligations and undertakings of Client relating to confidentiality and
nondisclosure, whether contained in this Section or elsewhere in this
Agreement, shall survive the termination of this Agreement for any reason.
16.2 Company shall protect any Client Confidential Information from disclosure
with the same degree of care afforded by Company to its own confidential
information. All obligations and undertakings of Company specified herein
with respect to Client Confidential Information shall survive the
termination of this Agreement for whatever reason.
16.3 Client shall permit Company's authorized representatives at all reasonable
times during Client's normal hours of operation to audit Client's
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Use at the Location to determine that the provisions of this Agreement are
being faithfully performed. For that purpose, Company shall be entitled to
enter into any of Client's premises and Client hereby irrevocably grants
authority to Company and authorized representative to enter such premises
for such purpose. Any such audit shall be conducted in such a manner as to
minimize the disruption to Client's business and/or the Use of the Software
System.
16.4 Client shall promptly notify Company if it becomes aware of any breach of
confidence relating to the Software System or other Company proprietary
information and give Company all reasonable assistance in connection with
Company's investigation of same.
17. TERMINATION
17.1 The termination of this Agreement shall automatically, and without further
action by Company, terminate and extinguish the License, and all rights in
and to the Software System shall automatically revert irrevocably to
Company. Company shall have the right to take immediate possession of the
Software System and all copies thereof wherever located without further
notice or demand.
17.2 Client may terminate the Agreement in the event of a material default by
Company that is not cured within the applicable cure period specified in
this Agreement, or a reasonable cure period (with the minimum being thirty
(30) days if no other cure period is stated) from receipt by Company of
written notice specifying the nature of the default with reasonable
particularity.
17.3 If Client violates any of the Non-Disclosure, Non-Assignment, or License to
Use provisions of this Agreement and fails to remedy any such breach within
five (5) days of notice thereof from Company, Company may terminate this
Agreement without further notice.
17.4 If Client violates or fails to perform any of the terms or conditions other
than those specifically expressed in Sub-clause (17.3) and fails to remedy
any such breach within thirty (30) days of notice thereof from Company, or
if Client shall become insolvent or ceases to do business, then Company may
give a written notice declaring this Agreement is terminated at the
expiration of such notice period.
17.5 Exercise of the right of termination afforded to either party shall not
prejudice legal rights or remedies either party may have against the other
in respect of any breach of the terms of this Agreement.
17.6 Client's failure to pay on a timely basis is cause for termination of this
agreement and the License.
18. FORCE MAJEURE
Neither party shall be responsible for delays or failures in performance
resulting from acts reasonably beyond the control of that party.
19. NON-ASSIGNMENT
19.1 In the event of the sale of fifty percent (50%) or more of Client's common
stock, or the sale of all or substantially all of Client's assets, or in
the event of any merger in which Client is not the surviving organization,
Client may transfer this Agreement and the License upon the prior written
consent of Company, which consent shall not be unreasonably withheld or
delayed.
19.2 If the organization acquiring Client's common stock, assets or surviving a
merger is an organization deriving more than five percent (5%) of its gross
revenues from providing service bureau, time share, computer software
consulting services, computer software licensing or computer hardware
sales, Company shall be under no obligation to consent to such transfer.
19.3 Except as expressly provided above, neither party may assign or transfer
its rights, duties or obligations under this Agreement to any person or
entity, in whole or in part, without the prior written consent of the other
party, which consent shall not be unreasonably withheld or delayed.
20. ENTIRE AGREEMENT
20.1 This instrument constitutes the complete and exclusive statement of the
Agreement between the parties as to the subject matter hereof and
supersedes all previous agreements with respect thereto.
20.2 Each party hereby acknowledges that it has not entered into this Agreement
in reliance upon any representation made by the other party but not
embodied herein.
20.3 This Agreement may not be modified or altered except by a written
instrument executed by both parties.
21. VARIATION
No variation of this Agreement shall be binding on either party unless such
variation is incorporated in a revised Schedule to this Agreement and
signed by the duly authorized representatives of both parties.
22. NOTICES
Any notice required to be given hereunder shall be given by sending the
same
(a) by air courier to the addresses as first set out above or to any
subsequent address designated by either party for the purpose of
receiving notices pursuant to this Agreement, and any notice so sent
shall be deemed to have been
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given three (3) business days after the same was mailed; or
(b) by confirmed facsimile.
23. ACTION
No action, regardless of form, arising out of this agreement shall be
brought by Client more than two (2) years after such cause of action shall
have accrued.
24. GENERAL TERMS
24.1 In the event that a dispute arises concerning the terms of this Agreement
the aggrieved party shall refer such dispute to arbitration as specified
herein. Such arbitration shall be held in the City or suburbs of Orlando,
Florida, in accordance with the rules of the American Arbitration
Association pertaining to the Resolution of Computer Disputes ("AAA Rules")
then in effect. Judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction over the parties. The arbitrators
shall have the authority to grant any legal remedies that would be
available in any judicial proceeding instituted to resolve a disputed
matter.
24.2 The prevailing party in an action brought against the other to enforce the
terms of this Agreement or any rights or obligations hereunder, shall be
entitled to receive its reasonable costs and expenses of bringing such
action including its reasonable attorneys fees.
24.3 Company and Client agree that each provision in this Agreement is deemed
equally essential to each party.
24.4 The section headings used herein are inserted only as a matter of
convenience and for reference and shall not affect the construction or
interpretation of this Agreement.
24.5 If any provision of this Agreement is held to be unenforceable, the other
provisions shall nevertheless continue in full force and effect.
24.6 The failure of either of the parties to insist upon strict performance of
any of the provisions of this Agreement shall not be construed as the
waiver of any subsequent default of a similar nature.
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IN WITNESS whereof this Agreement has been executed as of the Effective Date set
forth on Page 1 by the following duly authorized representatives:
For and on behalf of Client By: /s/ Joichi Saito
---------------------------------
JOICHI SAITO, Chairman of the Board & CEO
Name: David J. W. Chang
Title: SVP & Chief Information Officer
For and on behalf of Company By: /s/ John E. O'Malley
-----------------------------------
Name: John E. O'Malley
Title: President CBS-USA
Confidential US Comb 7/23/97 10 DC/JOM
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[LOGO]
ADDENDUM NO. 1
TO
COMPREHENSIVE BANKING SYSTEM
LICENSE AND SERVICE AGREEMENT
Between Central Pacific Bank, Honolulu, Hawaii ("Client") and Fiserv
Solutions, Inc. ("Company").
PURPOSE
Client and Company wish to amend Agreement No. 3810165 with an Effective Date
of July 30, 1997. Notwithstanding anything in that Agreement to the
contrary, in the event of a conflict between the terms of the Agreement and
this Addendum, the provisions of this Addendum shall take precedence.
SECTION 2 - LICENSE TO USE THE SOFTWARE SYSTEM
The following Section is modified to read as follows:
2.3 "Company, prohibits the copying of any portions of the Software System
except that Client may copy reasonable quantities of any standard end user
documentation; and may copy machine language code, in whole or in part, in
reasonable quantities, in printed or electronic form, for use by Client at
the Location for archive, TESTING AND TRAINING IN A NON-PRODUCTION
ENVIRONMENT, back-up or emergency restart purposes, or to replace copy
made on defective media. The original, and any copies of the Software
System, or any part thereof, shall be the property of Company."
SECTION 4 - MAINTENANCE SERVICES TERMS
The following Section is modified to read as follows:
4.6 Company and Client shall promptly assign such technical personnel as are
necessary to identify, isolate, and reconstruct any reported Level One
Nonconformity and, provided that such Nonconformity is capable of
reconstruction and is due to a defect in the Software System, Company and
Client shall utilize its best efforts to correct or utilize a circumvent
procedure to restore system operation within TWELVE (12) hours of
Company's receipt of the call or before the next occurrence of the
nonconformity. Company shall provide such services to Client free of any
additional fees and charges, including but not limited to any
reimbursement for travel of Company technical personnel incurred during
the resolution of the Major Nonconformity.
Confidential US Comb 7/24/97 1 DC/JOM
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SECTION 9 - PERFORMANCE
The following Section is modified to read as follows:
9.4 "COMPANY WARRANTS IT WILL PROVIDE CLIENT, FOR A PERIOD OF NINETY (90)
DAYS FOLLOWING CONVERSION, WITH PERFORMANCE TEST RESULTS THAT MEET OR
EXCEED THE FOLLOWING CRITERIA UNDER NORMAL OPERATING CONDITIONS:
(i.) "END OF DAY" BATCH PROCESSING NOT TO EXCEED FOUR (4) HOURS FOR UP TO
150,000 ACCOUNTS.
(ii.) AVERAGE PROCESSING OF ON-LINE TRANSACTIONS FOR UP TO 600 DEVICES SHALL NOT
AVERAGE MORE THAN 2 SECONDS FOR LOCALLY ATTACHED DEVICES.
THE CONDITIONS UNDER WHICH THESE TEST RESULTS CAN BE DUPLICATED BY
CLIENT ARE AS FOLLOWS:
CLIENT'S ACQUISITION OF THE COMPUTER SYSTEM.
B. OPERATION OF THE SOFTWARE SYSTEM IN ACCORDANCE WITH THE OPERATING
INSTRUCTIONS PROVIDED IN THE DOCUMENTATION.
C. COMPANY APPROVED MEMORY AND MACHINE CONFIGURATION PARAMETERS.
D. DISK CAPACITIES ARE MAINTAINED UNDER AN EIGHTY PERCENT (80%) TOTAL DISK
SATURATION LEVEL.
E. BATCH JOBS ARE NOT RUN CONCURRENTLY IN THE SAME MEMORY AND MACHINE
POOLS WITH INTERACTIVE JOBS.
F. THE COMPUTER SYSTEM IS OPERATED UTILIZING VERSION V3R7 OR EQUIVALENT
OPERATING SYSTEM AND THE TEST IS CONDUCTED UTILIZING AN UNMODIFIED
VERSION OF THE CURRENT SOFTWARE SYSTEM RELEASE.
G. ACCOUNT MIX DOES NOT EXCEED FIFTY PERCENT (50%) TRANSACTION ACCOUNTS,
TWENTY-FIVE PERCENT (25%) TIME ACCOUNTS AND TWENTY-FIVE PERCENT (25%)
LOAN ACCOUNTS.
H. "END OF DAY" PROCESSING IS TO BE MEASURED EXCLUSIVE OF TIME REQUIRED
FOR STATEMENT PROCESSING, BACK-UPS AND REPORT PRODUCTION.
RESPONSE TIME SHALL BE MEASURED ON A MONTHLY BASIS TO ACHIEVE
SUCH STANDARD NO FEWER THAN EIGHT (8) TIMES PER MONTH. MEASUREMENT
SHALL BE BY STOPWATCH FROM THE TIME THE ENTER KEY IS DEPRESSED UNTIL
THE TERMINAL SCREEN COMPLETES ITS RESPONSE. MEASUREMENTS TO BE TAKEN
AT OPENING, MID-MORNING, NOON AND MID-AFTERNOON ON EACH MEASUREMENT
DAY FOR AVERAGE PROCESSING OF ON-LINE TRANSACTIONS FOR UP TO 600
DEVICES SHALL NOT AVERAGE MORE THAN 2 SECONDS FOR LOCALLY ATTACHED
DEVICES.
OPERATING ENVIRONMENT EXCLUDES NON-COMPANY CBS PROVIDED APPLICATIONS
RUNNING ON THE COMPUTER SYSTEM.
UPON NOTIFICATION BY CLIENT TO COMPANY OF THE SOFTWARE SYSTEM'S FAILURE
TO MEET THE CRITERIA SET FORTH IN (i.) AND/OR (ii.) STATED ABOVE,
CLIENT SHALL PROVIDE WRITTEN DOCUMENTATION SUPPORTING SUCH CLAIM, AND
COMPANY WILL PROMPTLY COMMENCE TO VERIFY AND CORRECT THE FAILURE. IN
THE EVENT SUCH FAILURE CAN BE CORRECTED THROUGH MODIFICATION OF THE
SOFTWARE SYSTEM, COMPANY SHALL, AT ITS SOLE COST AND EXPENSE, PROMPTLY
MAKE SUCH MODIFICATION. IN THE EVENT SUCH FAILURE CAN BE CORRECTED
ONLY THROUGH
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UTILIZATION OF MORE POWERFUL OR ADDITIONAL HARDWARE AND/OR OPERATING SYSTEM
SOFTWARE, COMPANY SHALL PROCURE SUCH HARDWARE AND/OR OPERATING SYSTEM SOFTWARE
FOR CLIENT AT COMPANY'S THEN CURRENT COST FOR THE REQUIRED HARDWARE AND/OR
OPERATING SYSTEM SOFTWARE. IN EITHER EVENT, COMPANY WILL CONDUCT THESE SERVICES
IN A TIMELY MANNER AS TO NOT DISRUPT THE DAILY BUSINESS OPERATIONS OF THE
CLIENT.
THE FOREGOING REPRESENTS COMPANY'S SOLE OBLIGATION AND CLIENT'S SOLE REMEDY FOR
A FAILURE OF THE SOFTWARE SYSTEM TO MEET THE PERFORMANCE CRITERIA OUTLINED
ABOVE.
SECTION 12 - WARRANTIES
The following Section is modified to read as follows:
12.1 Company warrants that the Software System will perform the functions
specified in the Documentation identified on Schedule 1. For a period of
ninety (90) days after delivery, Company will promptly provide
replacements or corrections to any part of the Software System which does
not so perform where such failure is A LEVEL ONE, LEVEL TWO, OR LEVEL
THREE NONCONFORMITY, AS DEFINED IN PARAGRAPH 1.11, and is notified in
writing to Company within such period. This warranty shall not apply if
the problem has been caused by unauthorized amendment to the Software
System, or by incorrect Use. Company represents the Software System is
designed to operate on the Computer System specified on Schedule 2 and
both parties acknowledge that the warranties given by Company are
conditional upon the procurement and maintenance by Client of the Computer
System in accordance with such configuration.
12.3 Company warrants that it has the right to License the Use of the Software
System AND HAS NOT KNOWINGLY
(i) INFRINGED A PATENT, COPYRIGHT, OR OTHER PROPRIETARY RIGHT, OR
(ii) MISAPPROPRIATED A TRADE SECRET;
OF A THIRD PERSON ENFORCEABLE IN THE LOCATION.
12.6 COMPANY WILL COMPLETE THE RENOVATION PHASE AND HAVE COMPLETED A
SIGNIFICANT PORTION OF TESTING OF COMPANY'S "YEAR 2000" PROJECT BY
DECEMBER 31, 1998. COMPANY SHALL MAKE THE RENOVATED SYSTEM AVAILABLE TO
CLIENT TO ALLOW THEM TO COMPLETE A SIGNIFICANT PORTION OF TESTING OF
CLIENT'S "YEAR 2000" PROJECT BY DECEMBER 31, 1998. "YEAR 2000"
CAPABILITIES ARE THE ABILITY OF THE SOFTWARE SYSTEM TO MANAGE AND
MANIPULATE DATA INVOLVING DATES, INCLUDING SINGLE-CENTURY FORMULAS, AND
MULTI-CENTURY FORMULAS, AND THAT A SUBSEQUENT ABNORMALLY ENDING SCENARIO
WITHIN THE SOFTWARE SYSTEM OR THE GENERATION OF INCORRECT VALUES INVOLVING
SUCH DATES WILL NOT OCCUR.
SECTION 13 - INDEMNITY
The following Section is modified to read as follows:
13.1 Company shall indemnify Client and hold it harmless against any claim or
action which alleges that the use of the Software System
(i) INFRINGES A PATENT, COPYRIGHT, OR OTHER PROPRIETARY RIGHT,
(ii) MISAPPROPRIATED A TRADE SECRET;
of a third person enforceable in the Location.
Client agrees that it will notify Company promptly in writing of any such
claim and grants Company sole right to control the defense and disposition
of such claim. COMPANY SHALL REIMBURSE THE CLIENT FOR REASONABLE DIRECT
EXPENSES INCURRED AS A RESULT OF ANY SUCH CLAIM.
13.2 If as a result of any such claim Company or Client is enjoined from using
the Software System, Company at its sole option and expense may procure
for Client the right to continue to use the Software System or at its sole
option and expense, may provide a replacement or modification for the
Software System so as to settle such claim. If modification of the
Software System is not
Confidential US Comb 7/24/97 3 DC/JOM
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reasonably practical in the sole opinion of Company (reasonably given),
Company shall discontinue and terminate this License upon written notice
to Client and shall refund to Client all License Fees paid to Company
under this Agreement. In making this determination, Company will give due
consideration to all factors including financial expense.
SECTION 14 - LIMITATION OF LIABILITY OF THE PARTIES
The following Section is modified to read as follows:
14.2 COMPANY SHALL HAVE NO LIABILITY WITH RESPECT TO ITS OBLIGATIONS UNDER THIS
AGREEMENT OR OTHERWISE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT,
CONSEQUENTIAL, OR INCIDENTAL DAMAGES, WHETHER IN TORT OR IN CONTRACT, EVEN
IF IT HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ANY EVENT,
EXCEPT AS PROVIDED IN SECTION 14.1, THE LIABILITY OF COMPANY TO CLIENT FOR
ANY REASON AND UPON ANY CAUSE OF ACTION WHATSOEVER SHALL BE LIMITED TO THE
AMOUNT OF ANY LICENSE FEE WHICH CLIENT HAS PAID TO COMPANY AS OF THE DATE
ON WHICH SUCH CAUSE OF ACTION ACCRUES.
SECTION 17 - TERMINATION
The following Section is modified to read as follows:
17.2 Client may terminate the Agreement, OR THE MAINTENANCE SERVICES
PROVISION OF THE AGREEMENT, IF COMPANY SHALL CEASES TO DO BUSINESS,
OR in the event of a material default by company that is not cured
within the applicable cure period specified in this agreement, or a
reasonable cure period (with the minimum being thirty (30) days if no
other cure period is stated) from receipt by company of written notice
specifying the nature of the default with reasonable particularity.
SECTION 18 - FORCE MAJEURE
The following Section is modified to read as follows:
18 NEITHER PARTY SHALL BE LIABLE TO THE OTHER NOR DEEMED IN DEFAULT UNDER
THIS AGREEMENT IF AND TO THE EXTENT THAT SUCH PARTY'S PERFORMANCE OF THIS
AGREEMENT IS PREVENTED BY REASON OF FORCE MAJEURE. THE TERM "FORCE
MAJEURE" MEANS AN OCCURRENCE THAT IS BEYOND THE CONTROL OF THE PARTY
AFFECTED AND OCCURS WITHOUT ITS FAULT OR NEGLIGENCE. WITHOUT LIMITING THE
FOREGOING, FORCE MAJEURE INCLUDES ACTS OF GOD, WAR, RIOTS, STRIKES, LABOR
DISPUTES, CIVIL DISTURBANCE, FIRE, FLOOD, COURT ORDERS, GOVERNMENTAL
INTERVENTION, FAILURES, OR REFUSAL TO ACT BY GOVERNMENT AUTHORITY, AND
OTHER SIMILAR OCCURRENCES. UPON THE COMMENCEMENT OF A FORCE MAJEURE
EVENT, THE TIME FOR PERFORMANCE HEREUNDER SHALL BE AUTOMATICALLY EXTENDED
UNTIL THE FORCE MAJEURE EVENT NO LONGER PREVENTS THE PARTY FROM RESUMING
PERFORMANCE IN ACCORDANCE WITH THIS AGREEMENT.
Confidential US Comb 7/24/97 4 DC/JOM
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SECTION 20 - ENTIRE AGREEMENT
The following Section is modified to read as follows:
20.1 This instrument constitutes the complete and exclusive statement of the
Agreement between the parties as to the subject matter hereof and
supersedes all previous agreements with respect thereto. EACH PARTY
HEREBY ACKNOWLEDGES THE DOCUMENTS LISTED IN EXHIBIT ONE TO ADDENDUM ONE AS
INTERPRETIVE OR SUPPLEMENTAL MATERIAL. IN THE EVENT OF A CONFLICT BETWEEN
THE TERMS AND CONDITIONS OF THE AGREEMENT AND ANY OF THE AFOREMENTIONED
MATERIAL, THE TERMS AND CONDITIONS OF THE AGREEMENT SHALL CONTROL.
SECTION 24 - GENERAL TERMS
The following Section is modified to read as follows:
24.1 In the event that a dispute arises concerning the terms of this Agreement
the aggrieved party shall refer such dispute to arbitration as specified
herein. Such arbitration shall be held in the City or suburbs of
HONOLULU, HAWAII in accordance with the rules of the American Arbitration
Association pertaining to the Resolution of Computer Disputes ("AAA
Rules") then in effect. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction over the
parties. The arbitrators shall have the authority to grant any legal
remedies that would be available in any judicial proceeding instituted to
resolve a disputed matter.
COMPANY AND CLIENT EACH RECOGNIZE THAT THE EMPLOYEES OF EACH COMPANY AND SUCH
EMPLOYEES' LOYALTY AND SERVICE TO THAT COMPANY CONSTITUTE A VALUABLE ASSET
OF THAT COMPANY. ACCORDINGLY, CLIENT AND COMPANY HEREBY AGREE NOT TO MAKE
ANY OFFER OF EMPLOYMENT TO, OR ENTER INTO A CONSULTING RELATIONSHIP WITH,
ANY PERSON WHO WAS EMPLOYED BY THE OTHER WITHIN ONE (1) YEAR OF SUCH
PERSON'S LAST DATE OF EMPLOYMENT WITHOUT THE EXPRESS WRITTEN CONSENT OF
THE OTHER.
================================================================================
For and on behalf of Client By: /s/ David J. W. Chang
-------------------------------------
Name: David J. W. Chang
-----------------------------------
Title: SVP & Chief Information Officer
----------------------------------
For and on behalf of Company By: /s/ John E. O'Malley
------------------------------------
Name: John E. O'Malley
-----------------------------------
Title: President CBS-USA
----------------------------------
Execution Date: July 30, 1997
-------------------------
Confidential US Comb 7/24/97 5 DC/JOM
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EXHIBIT 1 TO ADDENDUM 1
EXHIBIT 1 TO ADDENDUM NO. 1
TO
COMPREHENSIVE BANKING SYSTEM
LICENSE AND SERVICE AGREEMENT
Between Central Pacific Bank, Honolulu, Hawaii ("Client") and Fiserv
Solutions, Inc. ("Company").
PURPOSE
EACH PARTY HEREBY ACKNOWLEDGES THE DOCUMENTS LISTED IN EXHIBIT ONE TO
ADDENDUM ONE AS INTERPRETIVE OR SUPPLEMENTAL MATERIAL. IN THE EVENT OF A
CONFLICT BETWEEN THE TERMS AND CONDITIONS OF THE AGREEMENT AND ANY OF THE
AFOREMENTIONED MATERIAL, THE TERMS AND CONDITIONS OF THE AGREEMENT SHALL
CONTROL.
DOCUMENT
1. Fiserv CBS proposal for Central Pacific Bank entitled "Vendor Information
for Central Pacific Bank" dated 12/3/96.
2. Fiserv's "Comprehensive Banking System, An overview of the leading AS/400
software solution for the financial industry", 28 pages.
3. Fiserv's "Launch into Remote Banking", 2 pages.
4. Fiserv's "Complementary Products", 4 pages.
5. Letter from Alice Sennott to Diane Nakasone dated December 23, 1996,
transmitting Original RFP document with responses, 91 pages attached.
6. Fiserv's response to CPB's request for additional information, 32 pages;
entitled "Additional Information Integrated Banking Selection Database,
Response from Fiserv" dated 03/04/97.
7. Fax from Scott Johnson to David Chang dated March 21, 1997, Teller
Platform System Requirements.
8. Document composed by David J W Chang on 03/21/97 with title "Additional
Information; Integrated Banking Selection Database" and subject "Loans
Issues / Platform Issues - Conference Call - 3/2197"
9. Document composed by Diane E Nakasone on 04/01/97 with title "Additional
Information; Integrated Banking Selection Database" and subject "Request
for Cost for Enhancements - Deposit Items"
10. Document composed by Diane E Nakasone on 04/02/97 with title "Additional
Information; Integrated Banking Selection Database" and subject "CBS
Modification Response 4/02/97".
11. Document composed by David J W Chang on 04/02/97 with title "Additional
Information; Integrated Banking Selection Database" and subject
"Conference Call - Controller Issues - 4/2/96"
12. Document composed by Diane E Nakasone on 04/04/97 with title "Additional
Information; Integrated Banking Selection Database" and subject
"Enhancement List - Loan Items"
13. Letter from Scott Johnson and Jerald C. Landkammer to David J. W. Chang
dated April 14, 1997 on the revised pricing for the Fiserv Comprehensive
Banking System.
14. Letter from Scott Johnson and Jerald C. Landkammer to David J. W. Chang
dated April 16, 1977 on additional financial incentives.
15. Master Implementation Schedule for Central Pacific Bank dated April 28,
1997, 4 pages.
16. Document composed by David J W Chang on 05/08/97 with title "Main Subject;
Integrated Banking Conversion Database"; category "ATM" and subject
"Conference Call (5/7/97)"
17. Central Pacific Bank's Travel Expense Policy Effective May 12, 1997.
18. Document composed by Byron M Uyechi on 05/15/97 with the title "Main
Subject Integrated Banking Conversion Database"; category "Technical
Support Issues"; and subject "AS-400 hardware configuration"
19. Fax from Jerry Landkammer to Diane Nakasone dated June 19, 1997, Subject
"Updated Questions / Answers", 10 pages, with title "Central Pacific Bank
Follow-up Questions June 19, 1997"
Confidential US Comb 7/29/97 1 DC/JOM
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EXHIBIT 1 TO ADDENDUM 1
20. Fax from Scott Johnson to David Chang dated June 25, 1997, Subject
"Preliminary CBS Enhancements for 1998", 5 pages.
21. Fax from Jerry Landkammer to Diane Nakasone dated June 25, 1997, Subject
"Questions Central Pacific Bank", 4 pages, with title "Central Pacific
Bank Follow-up to Diane Nakasone June 18, 1997 Questions, June 26, 1997"
22. Fax from Jerry Landkammer to Diane Nakasone dated June 27, 1997, Subject
"Questions Central Pacific Bank", 5 pages, with title "Central Pacific
Bank, Follow-up to Diane Nakasone June 24, 1997 Questions, June 26, 1997"
23. Fax from Jerry Landkammer to Diane Nakasone dated June 29, 1997, Subject
"June 26 Questions", 2 pages, with title "Central Pacific Bank Follow-up
to Diane Nakasone June 26, 1997 Questions, June 26, 1997"
24. Fax from Jerry Landkammer to Diane Nakasone dated July 3, 1997, Subject,
"Fiserv CBS Agreement", 7 pages, with title Central Pacific Bank, Follow-
up Questions, June 30, 1997"
25. Fax from Jerry Landkammer to Byron Uyechi dated July 3, 1997, Subject
"A/S 400 Configuration", 2 pages.
26. Fax from Jerry Landkammer to Diane Nakasone dated July 9, 1997, Subject,
"Central Pacific Bank July 2 Follow-up", 5 pages, with title "Central
Pacific Bank, Follow-up to Diane Nakasone July 2, 1997 Questions, July 9,
1997"
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[LOGO]
LICENSE AND SERVICE AGREEMENT NO. 3810165
-----------------
SCHEDULE 1
Company: FISERV SOLUTIONS INC.
Client: CENTRAL PACIFIC BANK
Effective Date: July 30, 1997
--------------------------
LICENSE SECTION
A. SOFTWARE SYSTEM BASED ON NUMBER OF ACCOUNTS PROCESSED 200,000
-------
1. The following modules of the Fiserv Comprehensive Banking Systems
software to function on the Computer System listed on Schedule 2.
COMPREHENSIVE BANKING SYSTEM:
Source Code License for CBS Core Applications (up to 200,000
accounts)
Common File
CIF
GL
Loans
FTMS
Time
Tran
ACH Origination
Acct Reconciliation
Safe Deposit
Chargeback
Account Analysis
FHLMC & FNMA Reporting
Loan Packaging
NOW Reclass
100 CBS for Windows
ADDITIONAL COMPREHENSIVE BANKING SYSTEM PRODUCTS:
ATM Switch Interface (Plus, Maestro, Isle Pay)
ATM Driver Software (NCR and Diebold)
ATM Card Management
ATM Language Japanese
ATM Language Tagalog
ATM Language Korean
Host Teller and Application Interface
CBS Collection System
Call Report Interface (Sheshunoff)
CFI Laser Pro & Mortgage Ware Interface
RAC Interface
Sendero A/L Management Interface
Wire Transfer Interface (Fundtech)
Item Processing Interface (Wausau)
CBS Corporate Cash Management (100 Copies)
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COMPLEMENTARY PRODUCTS
Fiserv FAST Account Sales and Teller Mode (254 Copies)
VRU (InterVoice V8) 24 Line System
IPS Customer Profitability for Windows
IPS Product Profitability upgrade to Windows/Level III
IPS Organizational Profitability upgrade to Windows/Level III
IPS Accounts Payable with ACH for Windows
IPS Accounts Payable Create-a-Check
IPS Fixed Assets for Windows
IPS Executive Insight - Network
All IPS products listed above included interface to CBS
Check Free VRU Touch Tone Banking Software
2. System Documentation which are Instruction Manuals for use of the
Software System and for the completion of documents for the Software
System, including one set of hard copy documentation.
B. LOCATION:
220 South King Street
Honolulu, Hawaii 96813
ARCHIVE SITE:
TBD BY CLIENT.
C. TOTAL LICENSE FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
MODULES LICENSE FEE
- ---------------------------------------------------------------------------------
<S> <C>
Initial license fee to process up to 200,000
accounts in the software system and subsequent
license fees of $97,750 for each $75,000
accounts.
a: CBS BASE LICENSE FEES:
CBS Core Applications $ 275,000
----------
b: ADDITIONAL CBS PRODUCTS LICENSE FEES INCLUDE:
ATM Switch Interface (Plus, Maestro, Isle Pay) $75,000
ATM Driver Software (NCR and Diebold) $60,000
ATM Card Management $50,000
ATM Language Japanese $5,000
ATM Language Tagalog $5,000
ATM Language Korean $5,000
Host Teller and Application Interface $60,000
CBS Collection System $20,000
Call Report Interface (Sheshunoff) $5,000
CFI Laser Pro & Mortgage Ware Interface $15,000
RAC Interface $7,500
Sendero A/L Management Interface $10,000
Wire Transfer Interface (Fundtech) $8,800
Item Processing Interface (Wausau) $10,000
CBS Corporate Cash Management (55 Copies) $125,000
----------
SUB-TOTAL OF ADDITIONAL CBS PRODUCTS LICENSE FEES $461,300
- ---------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
c: COMPLEMENTARY PRODUCTS LICENSE FEES INCLUDE:
FAST Account Sales and Teller Module (254 Copies) $368,300
VRU (Intervoice V8) 24 Line System $117,010
IPS Customer Profitability for Windows $39,500
IPS Product Profitability upgrade to Windows/Level III $23,500
IPS Organizational Profitability upgrade to Windows/Level III $23,500
IPS Accounts Payable with ACH for Windows $4,600
IPS Accounts Payable Create-a-Check $1,000
IPS Fixed Assets for Windows $3,750
IPS Executive Insight-Network $39,500
Check Free VRU TouchTone Banking Software $17,500
----------
SUB-TOTAL OF COMPLEMENTARY PRODUCTS LICENSE FEES $638,160
TOTAL $1,374,460
LESS FISERV CBS PRODUCTS 15% DISCOUNT -110,445
LESS CONVERSION ALLOWANCE FISERV FAST; 254 UNITS@$250 -63,500
LESS FISERV FAST 20% DISCOUNT -73,660
LESS FISERV 10% DISCOUNT OTHER COMPLEMENTARY PRODUCTS -26,986
----------
TOTAL FISERV LICENSE FEES $1,099,869
----------
----------
- -----------------------------------------------------------------------------------------
</TABLE>
D. LICENSE FEE PAYMENT TIMETABLE
The Amount Payable is due according to the following timetable:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Date Event Amount Payable
- ---------------------------------------------------------------------------
<S> <C> <C>
TBD Upon Execution of this Agreement $366,623
- ---------------------------------------------------------------------------
TBD Upon Completion and Client Acceptance of $366,623
Data Verification Phase
- ---------------------------------------------------------------------------
TBD Upon 30 Days following Live Conversion $366,623
- ---------------------------------------------------------------------------
</TABLE>
PROFESSIONAL SERVICES SECTION
A. PROFESSIONAL SERVICES FEES (CONVERSION AND IMPLEMENTATION)
Estimated costs for professional services fees regarding the conversion
and implementation of Central Pacific Bank are $214,000. Any additional
costs regarding conversion and implementation will be billed to Client
at $880 per day.
B. PROFESSIONAL SERVICES FEES PAYMENT TIMETABLE
The Amount Payable is due according to the following timetable:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
Date Event Amount Payable
- ---------------------------------------------------------------------------
<S> <C> <C>
TBD Upon Execution of this Agreement $71,333.33
- ---------------------------------------------------------------------------
TBD Upon Completion and Client Acceptance
of Data Verification Phase $71,333.33
- ---------------------------------------------------------------------------
TBD Upon 30 Days Following Live Conversation Remaining Balance
- ---------------------------------------------------------------------------
</TABLE>
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C. TRAINING $118,000
1. PRE-CONVERSION TRAINING - Company proposes to include in this training
package (30) days of on-site training support. The actual content
and nature of this training would be jointly determined between the
Client's project team and Company's project manager during the
project kick-off phase.
2. ADVANCED TRAINING - Company proposes including twelve (12) days of
Orlando based advanced training as part of the training
package. This advanced training provision would be in effect
until December 31, 1998. These student days can be converted
to on-site days at the rate of four (4) Orlando student days
equal one (1) on-site day.
3. FAST TRAINING - Company proposes including six days of onsite training
(three days Account Sales and three days Teller).
D. PROFESSIONAL SERVICES PREVAILING RATES:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
DAILY RATE EXPENSES
- ---------------------------------------------------------------------------
<S> <C> <C>
MODIFICATIONS $880 As Incurred
- ---------------------------------------------------------------------------
TRAINING $600 per Student On-Site As Incurred
($3,000 Maximum Per Day)
- ---------------------------------------------------------------------------
CONVERSION $800 As Incurred
- ---------------------------------------------------------------------------
INSTALLATION $880 As Incurred
- ---------------------------------------------------------------------------
</TABLE>
MAINTENANCE SERVICES SECTION
A. MAINTENANCE SECTION
Effective Date for Maintenance Services only: JULY 30, 1997
-------------
---------------------------------------------------------------------------
MODULES: (Same as Section A.1.)
CBS Modules listed in Section C.a, C.b and C.c
BASIC MAINTENANCE:
CBS Modules listed in Section C.a and C.b $13,867.00. Company will
provide ongoing support for the products and interfaces contacted for
maintenance, provide updates to the interface software as necessary to
maintain support for new releases of supported products as long as a valid
maintenance agreement is in effect for these products.
SPECIAL MAINTENANCE:
INTERVOICE: $511.00 per month, beginning 13 months after hardware ships.
InterVoice will provide Real Care Maintenance Agreement and Services.
INTERACTIVE PLANNING SYSTEMS (IPS): $2,567.00 per month beginning ninety
days after delivery of software (see Exhibit A to Schedule 1).
CHECKFREE: Account Based (see Exhibit B to Schedule 1).
ANNUAL INCREASE AMOUNT:
Shall be limited to the lesser of ten percent (10%) or the change in the
U.S. Department of Labor, Consumer Price Index (CPI) for the Urban Wage
Earners and Clerical Workers, All Cities, (1982 = 100) for the twelve (12)
month period preceding the anniversary date.
INTERFACE MAINTENANCE:
Company will maintain the current functionality of the interfaces it
provides as listed in Section A.1. with new releases of the software system
(CBS) and Third Party software. If the interface is a generic interface
requiring the third party to provided data in a particular format or
manipulate the data Company provides. Company will continue to provide or
accept the data in the current format. Client will be provided changes to
the interfaces and support for the interfaces in exchange for the monthly
maintenance fee.
---------------------------------------------------------------------------
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B. BASIC MAINTENANCE FEE PAYMENT TIMETABLE
$13,867.00 payable six months after physical delivery of unmodified code or
conversion (live processing of first account), whichever occurs first, and
monthly thereafter.
================================================================================
This Schedule 1 replaces all previous Schedule 1 forms for the Agreement as of
the Execution Date noted below.
For and on behalf of Client By: /s/ David J. W. Chang
-------------------------------------
Name: David J. W. Chang
-----------------------------------
Title: SVP & Chief Information Officer
----------------------------------
For and on behalf of Company By: /s/ John E. O'Malley
-------------------------------------
Name: John E. O'Malley
-----------------------------------
Title: President CBS-USA
----------------------------------
Execution Date: July 30, 1997
-------------------
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EXHIBIT A TO SCHEDULE 1
INTERACTIVE PLANNING SYSTEMS, INC.
330 Research Court, Suite 100
Norcross, Georgia 30092
SOFTWARE MAINTENANCE SUPPORT AGREEMENT
1. This Agreement is by and between Interactive Planning Systems, Inc., 330
Research Court, Suite 100, Norcross, Georgia 30092 (hereinafter referred to
as IPS) and Central Pacific Bank (hereinafter referred to as Licensee).
2. IPS will provide maintenance and support under this agreement for a period
of one year from the date of this agreement in the following manner:
a. Within 60 days of notification, IPS will cure any defects in the
software which render it unable to perform the functions for which it
was intended. Notification consists of written communication
delivered to IPS at the above address. IPS may waive the need for
written communication at its discretion.
b. IPS periodically releases operating enhancements to the software. To
the extent that these become part of the product, IPS will mail these
enhancements to the licensee at no extra charge. IPS will determine
the extent to which specific enhancements become part of the product.
Any enhancements in the form of new or partial programs or
documentation as may be provided under this Agreement shall remain the
proprietary property of IPS.
c. Access to IPS' toll-free Software Support Hotline is limited to
software error reporting and correction for those users who are
licensed to use the software through an authorized IPS distributor.
Those users who are licensed directly through IPS may also use the
Software Support Hotline for procedural matters relating to the user
of the licensed software.
3. The Licensee agrees to maintain the software in a manner consistent with
the related License Agreement, including:
a. Following proper operating instructions.
b. Making regular backups of data.
c. Ensuring that only authorized employees and other personnel have
access to the software.
4. This agreement does not cover damage to Licensee's data base resulting from
hardware failures or other factors beyond control of IPS. In the event
that IPS agrees to repair Licensee's data base, and said damage is not
attributable to the software IPS may bill Licensee at the then current
hourly rate for such repair.
Confidential US Comb 7/15/97 1 DC/JOM
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<PAGE>
5. This agreement will be automatically renewed for successive one year
periods, unless written notice of cancellation is given by Licensee to IPS
at least 60 days prior to the expiration of the contract period. The
current yearly fee for maintenance is set forth below. This fee shall be
billed by IPS to the Licensee or to the Licensee's distributor, at IPS'
discretion. Fees are subject to change without notice.
6. Those Licensee's who are licensed through an authorized distributor of IPS
may be billed by the authorized distributor.
Confidential US Comb 7/15/97 2 DC/JOM
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<PAGE>
EXHIBIT B TO SCHEDULE 1
CHECKFREE TOUCHTONE/BILL PAY PRICE LIST
I. ONE TIME IMPLEMENTATION FEES (Reflected in Schedule 1 C.c)
Single Platform Service (TouchTone or PC) $17,500
II. MONTHLY ACCOUNT MAINTENANCE FEES (Not reflected in Schedule 1)
<TABLE>
<CAPTION>
# OF TOUCHTONE SERVICE
CUSTOMERS (1) WITH C/S (2) WITHOUT C/S
-----------------------------------------------------------
<S> <C> <C>
1 - 100 2.40 1.25
101 - 250 2.30 1.15
251 - 500 2.20 1.05
501 - 1,000 2.10 .95
1,001 + 2.00 .85
</TABLE>
(1) Price includes 7x24 hour Customer Service.
(2) Remote On-Line Access Fees:
One Time Remote Access Set-Up Fee $2,500
One Time Port Fee $1,500
Monthly Fee $ 500
III. TRANSACTION FEES (Not reflected in Schedule 1)
<TABLE>
<CAPTION>
<S> <C>
ON-LINE BILL PAY $.25 per Transaction
OFF-LINE BILL PAY $.29 per Transaction
</TABLE>
IV. OTHER FEES (Not reflected in Schedule 1)
1. MONTHLY MINIMUMS* (Not reflected in Schedule 1)
<TABLE>
<CAPTION>
MONTH 1-3** MONTH 4*** MONTH 5,6 MONTH 7-9 MONTH 10+
------------------------------------------------------------------
<S> <C> <C> <C> <C>
n/a free $300 $600 $1,200
</TABLE>
* Monthly minimums are based upon an aggregate of Monthly Account
Maintenance Fees (II), plus Transaction Fees (III).
** Month 1 begins on the date the contract has been signed.
*** During Month 4, there will be no charge for Monthly Account
Maintenance Fees or Transaction Fees and Monthly Minimums will be
waived. All other applicable fees (Training, Fulfillment Kits,
Miscellaneous Fees, etc.) will be charged as normal.
IV. OTHER FEES (Not reflected in Schedule 1)
1. MONTHLY MINIMUMS* (Not reflected in Schedule 1)
<TABLE>
<CAPTION>
MONTH 1-3** MONTH 4*** MONTH 5,6 MONTH 7-9 MONTH 10+
------------------------------------------------------------------
<S> <C> <C> <C> <C>
n/a free $300 $600 $1,200
</TABLE>
* Monthly minimums are based upon an aggregate of Monthly Account
Maintenance Fees (II), plus Transaction Fees (III).
** Month 1 begins on the date the contract has been signed.
Confidential US Comb 7/15/97 1 DC/JOM
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<PAGE>
*** During Month 4, there will be no charge for Monthly Account
Maintenance Fees or Transaction Fees and Monthly Minimums will be
waived. All other applicable fees (Training, Fulfillment Kits,
Miscellaneous Fees, etc.) will be charged as normal.
IV. OTHER FEES CONTINUED (Not reflected in Schedule 1)
2. COMMUNICATION FEES
<TABLE>
<S> <C> <C>
TouchTone $ .10 per minute
(includes direct communication costs, maintenance and support)
3. SET UP FEES
Customization of the CheckFree's voice response unit $ 1,250
4. TRAINING
Client does customer service No Charge
(requires mandatory three day training)
CheckFree does customer service No Charge
(requires mandatory one day training)
Follow-up training after the initial implementation:
At CheckFree $ 500 per day
At Client's Site $ 1,500 first day
$ 500 each additional day
</TABLE>
5. FULFILLMENT MATERIALS
Marketing Brochures, Applications, and Fulfillment Kits are provided
by Fiserv Forms & Graphics. This material is Institution branded and
customized to the institution's specifications. Prices are quoted on
an individual basis.
Inventory Control & Warehousing, Posting and Handling are provided by
CheckFree. These costs are $1.50 per TouchTone Kit and $2.00 per PC
Kit and are billed monthly based on the number of kits actually
processed and delivered.
6. MISCELLANEOUS
<TABLE>
<S> <C>
Optional CheckFree Monthly Statements (TouchTone only) $ .65 each
New Merchant List $ .65 each
Insufficient Funds Items:
On-Line Transactions denied due to NSF $ .25 each
Off-Line Transactions denied due to NSF $ 5.00
(CheckFree processes NSF letter and re-tries next day)
Stop Payments & Re-issue of Check $ 15.00
Payment Cancellations Inside 4 Days $ 15.00
Overnight Payment Delivery $ 15.00
Custom Programming/Testing $ 150.00 per hour
Database Scans (to identify bank's clients) $ 150.00 per request
Custom VRU Development/Integration $ 150.00 per hour
</TABLE>
NOTE: Pricing is valid only for Financial Institutions which are Fiserv
Clients. Pricing and Terms of the contract will change if the
Financial Institution changes its relationship with Fiserv.
Confidential US Comb 7/15/97 2 DC/JOM
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<PAGE>
[LOGO]
LICENSE AND SERVICE AGREEMENT NO. 3810165
-------
SCHEDULE 2 THIRD PARTY HARDWARE AND
OPERATING SYSTEM SOFTWARE
1. IBM HARDWARE AND OPERATING SOFTWARE:
A. The following components make up the Computer System referred to in
Schedule 1.
Based upon the Client's current account volumes, on-line devices and
branches listed below:
<TABLE>
<CAPTION>
CURRENT VOLUMES POTENTIAL VOLUMES
--------------- -----------------
<S> <C> <C>
Accounts 125,000 500,000
On Line Devices 455 600
Branches 26 70
</TABLE>
Company recommends the following two IBM AS/400 with the understanding that
once the potential volumes are reached an upgrade requirement will most
likely occur.
IBM HARDWARE & SOFTWARE - IBM AS/400, Model 510/2143 for Core
Processing with 768 MB of Main Memory & 104.8 GB of Disk Storage (88
GB useable) including RAID 5 Disk Storage Protection and includes
(Configuration CPBHI007):
<TABLE>
<S> <C>
0044 - Data Loss Protection
2143 - Model 510 Processor
2609 - EIA 232/V.24 Two-Line Adapter
2613 - V.35 One-Line Adapter
2619 - 16/4MBPS Token-Ring HP
2621 - Removable Media Device
2623 - Six Line Communication Controller
3154 - (2) 128 MB Main Storage
5051 - 8 Disk Unit Storage Expansion
5540 - Attach TwinAxal Workstation Controller
6501 - DASD Controller
6512 - (2) Disk Unit Controller for RAID
6607 - (24)419 GB Disk Unit
7255 - (2) Base 256 MB Main Storage
7607 - Disk Unit (4.19 GB)
9245 - Standard Battery Back-up
9520 - Base CD-ROM
</TABLE>
Confidential Comb 7/30/97 1 DC/JOM
-----------
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<PAGE>
<TABLE>
<S> <C> <C>
9835 - (3) V.24 Enhanced 50 ft. Cable
9838 - V.35 50 ft. Cable
7857 - Modem
9348 - Magnetic Tape Unit
3590 - Magnetic Tape Subsystem
9309 - Rack enclosure
3486 - HG3 Console Workstation
IBM AS/400, Model 510/2143 PURCHASE TOTAL $352,408
The IBM AS/400, Model 510/2143 includes the following Operating
Software:
5798 - Pre Install Planning Manual
5755 - (2101) Operating System/400
5755 - (2108) Query for OS/400
5755 - (2111) DB2 QM & SQL for OS/400
5755 - (2112) ILE RPG for OS/400
5755 - (2125) Performance Tools for OS/400
5755 - (2126) Application Development Toolset for OS/400
5755 - (2129) TCP/IP Utilities
5755 - (2156) Performance Manager for OS/400
5755 - (2180) Client Access for OS/400
5755 - (2181) DOS with Extended Memory
5755 - (2182) OS/2 1.3
5755 - (2183) DOS
5755 - (2184) Windows 3.1
5755 - (2186) Optimized for OS/2
5755 - (2196) Windows 95 Client
5755 - (2210) Performance Tools Manager
5755 - (2924) Primary English U/L
5755 - (3410) CD ROM
IBM AS/400, Model 510/2143 OPERATING SOFTWARE PURCHASE $163,200
IBM HARDWARE & SOFTWARE - IBM AS/400, Model 400/2131 for ATM
Processing with 96 MB of Main Memory & 17.7 GB of Disk Storage
including RAID 5 Disk Storage Protection and includes (Configuration
CPBHI004):
0044 - Data Loss Protection
2131 - Model 400 Processor
2609 - EIA 232/V.24 Two-Line Adapter
2619 - 16/4MBPS Token-Ring HP
2623 - Six Line Communication Controller
</TABLE>
Confidential Comb 7/30/97 2 DC/JOM
-----------
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<PAGE>
<TABLE>
<S> <C> <C>
3110 - 64 MB Main Storage
6380 - 2.5 GB 1/4-Inch Cart Tape
6501 - Tape/Disk Device Controller
6522 - Disk Unit Controller for RAID
6606 - (8) 1.96 GB Disk Unit
7000 - Panel Key Lock Feature
7117 - Integrated Expansion Unit
9242 - Base Power Supply
9520 - Base CD-ROM
9835 - (7) V.24 Enhanced 50 ft. Cable
7857 - Modem
9910 - Exide Prestige Battery Pack
3487 - HG3 Console Workstation
IBM AS/400, Model 400/2131 PURCHASE TOTAL $ 59,779
The IBM AS/400, Model 400/2131 includes the following Operating
Software:
5798 - Pre Install Planning Material
5755 - (2101) Operating System/400
5755 - (2112) ILE RPG for OS/400
5755 - (2126) Application Development Toolset for OS/400
5755 - (2129) TCP/IP Utilities
5755 - (2156) Performance Manager for OS/400
5755 - (2196) Windows 95 Client
5755 - (2924) Primary English U/L
5755 - (3410) CD ROM
IBM AS/400, Model 510/2143 OPERATING SOFTWARE PURCHASE $ 16,600
TOTAL IBM HARDWARE AND OPERATING SOFTWARE $591,897
Installation $5,000
Training TBD
LESS FISERV CBS DISCOUNT -$59,189
--------
TOTAL $537,798
</TABLE>
B. IBM HARDWARE AND SOFTWARE PAYMENT TIMETABLE
The Amount Payable is due according to the following timetable:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Date Event Amount Payable
- ----------------------------------------------------------------------
<S> <C> <C>
TBD 25% Upon Execution of this Agreement $134,450
- ----------------------------------------------------------------------
TBD Upon Delivery $403,348
- ----------------------------------------------------------------------
</TABLE>
Confidential Comb 7/30/97 3 DC/JOM
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<PAGE>
C. IBM MAINTENANCE SERVICES
Effective Date for Maintenance Services only: July 30, 1997
---------------
----------------------------------------------------------------------
MODULES: IBM Hardware and Software described in Section A.
----------------------------------------------------------------------
BASIC MAINTENANCE: NOT APPLICABLE
----------------------------------------------------------------------
SPECIAL MAINTENANCE:
IBM will contract for and provided the following services:
SSA 5 Year Maintenance - With Software Upgrade Protection
$103,382 one time
----------------------------------------------------------------------
- --------------------------------------------------------------------------------
For and on Behalf of Client By: /s/ David J. W. Chang
-------------------------------------
Name: David J. W. Chang
-----------------------------------
Title: SVP & Chief Information Officer
----------------------------------
For and on Behalf of Company By: /s/ John E. O'Malley
-------------------------------
Name: John E. O'Malley
-----------------------------------
Title: President CBS-USA
----------------------------------
Confidential Comb 7/30/97 4 DC/JOM
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<PAGE>
[LOGO]
LICENSE AND SERVICE AGREEMENT NO. 3810165
-------
SCHEDULE 3 BUSINESS REQUIREMENTS
Company: FISERV SOLUTIONS, INC.
Client: CENTRAL PACIFIC
Effective Date: JULY 30, 1997
-------------
A. The Business Requirements referred to in Section A are committed.
<TABLE>
<CAPTION>
ANNUAL ANNUAL
COST MAINTENANCE INTEGRATION
---- ----------- -----------
<S> <C> <C> <C>
LOANS
* INTERFACE TO MORTGAGEWARE, PSR0002772
Modification Bid: 0 0 0
Work-Around: NA
MISCELLANEOUS
* 366 DAY INTEREST ACCRUAL FOR BOTH DEPOSITS
AND LOANS, MODIFICATION TO BE INCLUDED IN
BASE CBS IN 1999. PSR0002776
Modification Bid: 0 0 0
Work-Around: NA
</TABLE>
B. The Business Requirements referred to in section B are not committed.
Customer may elect to commit to part or all of the Business Requirements by
notifying Company in writing. The cost estimates are committed to by
Company until October 15, 1997.
<TABLE>
<CAPTION>
ANNUAL ANNUAL
COST MAINTENANCE INTEGRATION
<S> <C> <C> <C>
ANNUAL BASE FEE FOR RETROFIT SERVICES $0 $0 $16,000
LOANS
-----
* DETAILED YEAR END MORTGAGE LOAN STATEMENT. PSR0002787
Modification Bid: 14,000 2,380 676
Work-Around: Non-Detailed statement in base CBS
* MULTIPLE COLLATERAL THROUGH LOAN PLATFORM (CFI
LASERPRO). PSR0002788
Modification Bid: 10,000 1,700 338
Work-Around: Manually enter additional collateral
directly in CBS
* RECALCULATE PRINCIPAL, INTEREST AND ESCROW SPLITS FOR
PAYMENT REVERSALS. PSR0002789
Modification Bid: 50,000 8,500 1,901
Work-Around: Reapply payment splits as they
previously were applied.
* ATTACH UP TO 99 ESCROWS TO AN INDIVIDUAL LOAN.
PSR0002805
Modification Bid: 10,000 1,750 250
Work-Around: CBS supports up to 9 escrows per loan.
* CHANGE LOAN PAYMENT FOR FORCED PLACED INSURANCE.
PSR0002790
Modification Bid: 40,000 6,800 1,373
Work-Around: Manually prompt CBS to generate
a new payment plan.
</TABLE>
Confidential Comb 7/24/97 1 DC/JOM
-----------
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<PAGE>
<TABLE>
<S> <C> <C> <C>
* AUTOMATE 1099-M15 FOR CONSTRUCTION LOANS.
PSR0002803
Modification Bid: 40,000 6,800 1,373
Work-Around: Track 1099-manually.
* AUTOMATIC PRINTING OF ESCROW CHECKS THROUGH
IPS ACCOUNTS PAYABLE. PSR0002804
Modification Bid: 57,200 14,960 1,795
Work-Around: Generate escrow checks manually
TIME
----
* EARLY DELIVERY OF ENHANCEMENT TO AUTOMATICALLY
CALCULATE MINIMUM DISTRIBUTION FOR IRA. PSR0002779
Modification Bid: 20,000 3,400 5,886
Work-Around: Modification to be included in base
CBS in first release of 1998, until then
distribution can be calculated manually
* EARLY DELIVERY OF ENHANCEMENT TO AUTOMATIC PAYOUT
FROM IRA BASED ON ACCOUNT BALANCE, INTEREST RATE OR
AGE OF ACCOUNT. PSR0002778
Modification Bid: 50,000 8,500 2,534
Work-Around: Modification to be included in
base CBS in first release of 1998 until
then account can be selected manually.
* PROCESSING STEP RATE CD. PSR0002777
Modification Bid: 28,000 4,760 1,373
Work-Around: No work-around available, but
Central Pacific is not offering this
product today.
ATM
---
* THE ATM SYSTEM NEEDS TO HANDLE TRANSACTION ROUTING
BASED ON TRANSACTION CODE AND DUAL DES KEYS. PSR0002809
Modification Bid: 6,160 1,232 154
Work-Around: Re-issue all debit cards.
MISCELLANEOUS
-------------
* COMBINE UNLIMITED NUMBER OF ACCOUNTS INCLUDING CREDIT
CARDS FOR RELATED SERVICES CHARGES. PSR0002809
Modification Bid: 50,160 10,032 1,204
Work-Around: CBS supports up to 5 accounts for
related services charges.
* AUTOMATICALLY CHANGE PRODUCT TYPE OR FEE PLANS BASED
ON CUSTOMERS AGE. PSR0002808
Modification Bid: 9,600 1,963 232
Work-Around: Manually maintain the customers
accounts.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
For and on Behalf of Client By: /s/ David J. W. Chang
-------------------------------------
Name: David J. W. Chang
-----------------------------------
Title: SVP and Chief Information Officer
----------------------------------
For and on Behalf of Company By: /s/ John E. O'Malley
-------------------------------------
Name: John E. O'Malley
-----------------------------------
Title: President CBS-USA
----------------------------------
Confidential Comb 7/24/97 2 DC/JOM
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<PAGE>
[LOGO]
LICENSE AND SERVICE AGREEMENT NO. 3810165
-------
SCHEDULE 4 PRELIMINARY PROJECT PLAN
Company: FISERV
Client: CENTRAL PACIFIC BANK
Effective Date: JULY 30, 1997
---------------
IT IS ACKNOWLEDGED BY CUSTOMER AND COMPANY THAT TARGET CONVERSION DATES
ARE AS FOLLOWS:
TBD FOR CENTRAL PACIFIC BANK
A PROJECT PLAN WILL BE GENERATED TO REFLECT THESE DATES MUTUALLY AGREED
UPON BY BOTH PARTIES.
===============================================================================
For and on behalf of Client By: /s/ David J. W. Chang
-------------------------------------
Name: David J. W. Chang
-----------------------------------
Title: SVP and Chief Information Officer
----------------------------------
For and on behalf of Company By: /s/ John E. O'Malley
-------------------------------------
Name: John E. O'Malley
-----------------------------------
Title: President CBS-USA
----------------------------------
Confidential Comb 11/29/95 1 DC/JOM
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<PAGE>
[LOGO]
LICENSE AND SERVICE AGREEMENT NO. 3810165
-------
SCHEDULE 5
CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENT
WITNESSETH:
WHEREAS Fiserv Solutions, Inc. (hereinafter called the "Company"), is the owner
and licensor of certain computer software, and
WHEREAS, the Client has entered into a License Agreement for the use of the
Company's Software System (as such items are defined therein), and
WHEREAS, the undersigned party (hereinafter called the "Consultant") desires
access to certain confidential information of Company in order to fulfill its
obligations to Client:
NOW THEREFORE, in consideration of Consultant's original and continuing access
to Company's confidential information, Consultant agrees as follows:
===============================================================================
For purposes of this Agreement, "Confidential Information" shall mean
information or material proprietary to the Company, which the Consultant
develops or obtains knowledge or access through or as a result of the
Consultant's relationship with the Company or its Client (including
information conceived, originated, discovered or developed in whole or in
part by the Consultant). The Confidential Information includes, but is not
limited to, the following types of information (whether or not reduced to
writing): discoveries, ideas, concepts, software in various stages of
development, designs, drawings, specifications, techniques, models, data,
source code, object code, documentation, diagrams, flow charts, research,
development, processes, procedures, "know-how," marketing techniques and
materials, marketing and development plans, customer names and other
information related to customers, price lists, pricing policies and financial
information. Confidential Information also includes any information
described above which the Company obtains from another party and which it
treats as proprietary or designates as Confidential Information. INFORMATION
PUBLICLY KNOWN THAT IS GENERALLY EMPLOYED BY THE TRADE AT OR AFTER THE TIME
THE CONSULTANT FIRST LEARNS OF SUCH INFORMATION, OR GENERIC INFORMATION OR
KNOWLEDGE WHICH THE CONSULTANT WOULD HAVE LEARNED IN THE COURSE OF SIMILAR
EMPLOYMENT OR WORK ELSEWHERE IN THE TRADE, SHALL NOT BE DEEMED PART OF THE
CONFIDENTIAL INFORMATION.
All notes, materials or records, of any kind, in any way incorporating or
reflecting any of the Confidential Information shall belong exclusively to the
Company and the Consultant agrees to turn over all copies of such materials in
its control to the Company upon request or upon termination of its assignment to
the Company.
The Consultant agrees during its assignment to the Company's Client and
thereafter to hold in confidence and not to directly or indirectly reveal,
report, publish, disclose or transfer any of the Confidential Information to any
person or utilize any of the Confidential Information for any purpose, except
in the course of its work for the Company's Client.
The Consultant agrees that any inventions, ideas or original works of
authorship in whole or in part conceived or made by the Consultant during or
after the term of the Company's assignment to the Company's Client which are
made through the use of any of the Confidential Information shall belong
exclusively to the Company and shall be considered part of the Confidential
Information for purposes of this Agreement whether or not fixed in a tangible
medium of expression. Without limiting the foregoing, the Consultant agrees
that any such original works of authorship shall be deemed to be "works made
for hire" of which the Company shall be deemed the author, provided that in
the event and to the extent such works are determined not to constitute
"works made for hire" as a matter of law, the Consultant hereby irrevocably
assigns and transfers to the Company all rights, title, and interest in such
works, including but not limited to Copyrights, patent rights, trade secrets
industrial property rights, and moral rights and shall execute all documents
reasonably requested by the Company for the purpose of registering such
rights.
This Agreement shall be governed by and construed in accordance with the laws of
Florida.
The Consultant agrees to the above terms, which terms constitute the entire
agreement between the parties, and acknowledges receipt of a copy of this
Agreement.
================================================================================
Consultant:
- ---------------------------------- ----------------------------------------
By Address
- ---------------------------------- ----------------------------------------
Name
- ---------------------------------- ----------------------------------------
Title Phone
JULY 30, 1997
- ----------------------------------
Date
Confidential US Comb 7/23/97 1 DC/JOM
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<PAGE>
[LOGO]
ADDENDUM NO. 2 TO
COMPREHENSIVE BANKING SYSTEM
LICENSE AND SERVICE AGREEMENT NO. 3810165
-------
Between Central Pacific Bank, Honolulu, Hawaii ("Client") and Fiserv Solutions,
Inc. ("Company").
PURPOSE
Client and Company wish to amend Agreement No. 3810165 with an effective Date of
July 30, 1997 by replacing Schedule 2 - Third Party Hardware and Operating
System Software with Addendum No. 2. Notwithstanding anything in that Agreement
to the contrary, in the event of a conflict between the terms of the Agreement
and this Addendum, the provisions of this Addendum shall take precedence.
SCHEDULE 2.1 THIRD PARTY HARDWARE AND OPERATING
SYSTEM SOFTWARE
1. IBM HARDWARE AND OPERATING SOFTWARE:
A. The following components make up the Computer System referred to in
Schedule 1.
Based upon the Client's current account volumes, on-line devices and
branches listed below:
<TABLE>
<CAPTION>
CURRENT VOLUMES POTENTIAL VOLUMES
--------------- -----------------
<S> <C> <C>
Accounts 125,000 500,000
On Line Devices 455 600
Branches 26 70
</TABLE>
Company recommends the following two IBM AS/400 with the understanding that
once the potential volumes are reached an upgrade requirement will most
likely occur.
IBM HARDWARE & SOFTWARE - IBM AS/400, Model 620/2180 for Core
Processing with 1024 MB of Main Memory & 120.2 GB of Disk Storage (103
GB useable) including RAID 5 Disk Storage Protection and includes:
9406-620 AS/400 System Unit
0024 - 9348-002 LCL
0037 - 3590-B11 LCL
0044 - Data Loss Protection
0333 - V.24/EIA232 50 Ft ENH Cable
0339 - V.35 50 Ft Cable
0351 - (3) V.24/EIA232 50 Ft E PCI Cable
2180 - Model 620 Processor
2629 - LAN/WAN/Workstation IOP
Confidential Com 8/20/97 1 DC/JOM
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<PAGE>
<TABLE>
<S> <C> <C>
2688 - Optical Link processor
2699 - (2) Two-Line WAN I0A
2726 - PCI RAID Disk Controller
2924 - English
3002 - (6) 128 MB Main Storage
5000 - TSP Specify Code
5023 - Software Version V4R1
5073 - 1063MBPS Sys Unit Exp Tower
5507 - Alternate IPL for 9348
5520 - Complete System Order
6149 - 16/4MBPS Token Ring IOA
6532 - Raid Disk Unit Controller
6534 - (2) Magnetic Media Controller
6813 - (B) 8.58GB Disk Unit
7128 - DASD Expansion Unit
8813 - OPT Base 8.58GB Disk Unit
9082 - 14 Ft Line Cord
9083 - Locking Line Cord Plug
9331 - Base PCI Exp Unit for SPD CDS
9364 - Base System Unit Expansion
9720 - Base PCI WAN/TWINAXIAL IOA
9309-002 - RACK Enclosure, 1.6 Meter
9081 - Non-Watertight Power Cord
9171 - General Purpose I/O Rack
7857-017 - Modem
9348 - Magnetic Tape Unit
9068 - Black Cover Feature
9081 - Non-Watertight Line Cord
9834 - 4 Meter Cable
3590-B11 - Tape Drive w/RACL
5112 - 12M SCSI Cable
8001 - 1 Magazine
8002 - 1 Cleaning Cartridge
8130 - 30 Data Cartridges (Plant)
9221 - First B11 in Rack
9400 - Attached to AS/400
3486-BG-3 - Color, 3-Yr Warranty $300.00
9122 - 122-Key Typewriter KBD
9201 - Tilt/Swivel Stand
NAC-16 - Hypercom Adapter w/(3) ATM Cards
IBM AS/400, Model 620/2180 PURCHASE TOTAL $360,844
</TABLE>
Confidential Comb 8/20/97 2 DC/JOM
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<PAGE>
The IBM AS/400, Model 620/2180 includes the following Operating Software:
<TABLE>
<S> <C> <C>
5769-SS1 Operating System/400
5769-XW1 AS400 Client Access Win Family
5716-PW1 App Dev Toolset OS/400 V3
5769-QU1 Query for AS/400
5716-RG1 Int Lang Env (R) RPG OS/400 V3
5716-PT1 Performance Tools OS/400 V3
5755-AS5 V4 System Program Order
IBM AS/400, Model 620/2180 OPERATING SOFTWARE PURCHASE $82,550
</TABLE>
IBM HARDWARE & SOFTWARE - IBM AS/400, Model 600/2135 for ATM Processing
with 128 MB of Main Memory & 20.9 GB of Disk Storage including RAID 5 Disk
Storage Protection and includes (Configuration CPBH1004):
<TABLE>
<S> <C> <C>
9406-600 - AS/400E System Unit
0044 - Data Loss Protection
0351 - (7) V.24/EIA232 50 Ft. E PCI Cable
2135 - Model 600 Processor
2721 - (3) PCI Two-Line WAN IOA
2724 - PCI 16/4MBPS Token-Ring IOA
2726 - PCI Raid Disk Unit Controller
2809 - PCI LAN/WAN/Workstation IOP
2924 - English
2961 - 240 Volt Power Cord
3110 - 64MB Main Storage
5000 - TSP Specify Code
5023 - Software Version V4R1
5520 - Complete System Order
6481 - 2.5GB 1/4-Inch Cart Tape
6807 - (4) 4.19GB Disk Unit
9082 - 14 Ft Line Cord
9083 - Locking Line Cord Plug
9707 - Base 4.19GB Disk Unit
9720 - Base PCI WAN/Twinaxial IOA
7857-017 - Modem
9910-B31 - Unity/I Ext 3.0 KVA
5000 - TSP Specify
6612 - Battery Pack B30/B50
3486-BG3 - Color 3-Yr Warranty
9122 - 122 Key Typewriter KBD
9201 - Tilt/Swivel Stand
IBM AS/400, Model 600/2135 PURCHASE TOTAL $79,530
</TABLE>
Confidential Comb 8/20/97 3 DC/JOM
------
Initials
<PAGE>
The IBM AS/400, Model 600/2135 includes the following Operating Software:
<TABLE>
<S> <C> <C>
5769-SS1 Operating System/400
5716-PW1 App Dev Toolset OS/400 V3
5716-RG1 Int Lang Env (R) RPG OS/400 V3
5755-AS5 V4 System Program Order
IBM AS/400, Model 600/2135 OPERATING SOFTWARE PURCHASE $4,500
TOTAL IBM HARDWARE AND OPERATING SOFTWARE $527,424
Installation $5,000
Training TBD
--------
TOTAL $532,424
Color Monitor 600
---------
$533,024
</TABLE>
B. IBM HARDWARE AND SOFTWARE PAYMENT TIMETABLE
The Amount Payable is due according to the following timetable:
<TABLE>
<CAPTION>
- ------------------------------------------------------
Date Event Amount Payable
- ------------------------------------------------------
<S> <C> <C>
TBD 25% Paid 7/30/97 $134,450
TBD Upon Delivery $397,974
</TABLE>
C. IBM MAINTENANCE SERVICES
Effective Date for Maintenance Services only: Upon Delivery
------------------
------------------------------------------------------------------
MODULES: IBM Hardware and Software described in Section A.
------------------------------------------------------------------
BASIC MAINTENANCE: NOT APPLICABLE
------------------------------------------------------------------
SPECIAL MAINTENANCE:
IBM will contract for and provided the following services:
SSA 5 Year Maintenance - With Software Upgrade Protection
------------------------------------------------------------------
Confidential Comb 8/20/97 4 DC/JOM
------
Initials
<PAGE>
- --------------------------------------------------------------------------------
For and on Behalf of Client By: /s/ David J. W. Chang
-------------------------------------
Name: David J. W. Chang
-----------------------------------
Title: Senior Vice President
----------------------------------
For and on Behalf of Company By: /s/ John E. O'Malley
-------------------------------------
Name: John O'Malley
-----------------------------------
Title: President CBS-USA
----------------------------------
Confidential Comb 08/20/97 5 DC/JOM
------
Initials
<PAGE>
[LETTERHEAD]
October 21, 1998
Mr. Norman Osumi, Vice President
Manager, Systems & Programming
Central Pacific Bank
222 North School Street
Honolulu, Hawaii 96817
Subject: Professional Services Agreement No's PSR 0003549
Dear Mr. Osumi,
Enclosed for your records are fully executed copies of the above referenced
Professional Services Agreements, Schedule 2, 1M, and 1P.
We appreciate your business, and please don't hesitate to contact us should you
require any further assistance.
Sincerely,
/s/ Tom Baum for
Kent Holtzclaw
Project Manager, Customization Services
cc: Pam Rice - Fiserv, Orlando
<PAGE>
[LOGO]
PROFESSIONAL SERVICES AGREEMENT NO. PSR0003549
SCHEDULE 2 - PSR0003549 - Additions to Property Tax Interface
BUSINESS REQUIREMENTS
TMK Functional Specification Provided by Central Pacific Bank - Hawaii
Company: Fiserv
Client: Central Pacific Bank
Effective Date: 10-07-1998
Location: 2601 Technology Drive, Orlando, FL 32804
For and on Behalf of Client By: Central Pacific Bank
------------------------------------
Name: /s/ Norman Osumi
----------------------------------
Title: Vice President
---------------------------------
For and on Behalf of Company By: /s/ Jerra Willman
-----------------------------------
Name: Jerra Willman
----------------------------------
Title: Manager, Customization Services
---------------------------------
Confidential ps bus 06/17/96 1
<PAGE>
[LOGO]
PROFESSIONAL SERVICES AGREEMENT NO. PSR0003549
SCHEDULE 1P - PSR0003549 - Additions to Property Tax Interface
Company: Fiserv
Client: Central Pacific Bank
The License Agreement is that Agreement number 3810165 between the parties
dated: 07-30-97
Effective Date: 10-07-1998
Location: 2601 Technology Drive, Orlando, FL 32804
Workday: eight hours equal one day
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Estimated Availability Dates
Project Type Daily Rate No. of ---------------------------------------------------------
Days From To
- ------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <S>
MD $1,000.00 10 Scheduled upon receipt of Scheduled upon receipt
approved schedules of approved schedules
- ------------------------------------------------------------------------------------------------------------
</TABLE>
KEY TO PROJECT TYPES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Project Project Type Description Personnel Grades Comments
Type
- ------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S>
MD Modification Programmer Analyst/ The project duration shall
Financial Analyst be based on time and
materials and shall not exceed
the indicated number of days
by ten percent (10%) without
the prior approval of Client.
- ------------------------------------------------------------------------------------------------------------
FO Functional Specifications Only Programmer Analyst/ Original estimates for
Financial Analyst this project exceed twenty-five
days; a functional
specification is necessary to
prepare a project sizing to
narrow the final estimate to
an accuracy within a ten
percent (10%) margin. The
project duration for preparing
the functional specification
is based on time and materials
and shall not exceed fifteen
(15) days without prior
approval of Client.
- ------------------------------------------------------------------------------------------------------------
PO Programming Only Programmer Analyst This project requires
performance of system testing
at Client location and may
require participation of Client
staff.
- ------------------------------------------------------------------------------------------------------------
CS Consulting Only Programmer Analyst/ The project duration shall
Financial Analyst be based on time and
materials and shall not exceed
the indicated number of days
without the prior approval of the
client.
- ------------------------------------------------------------------------------------------------------------------------
MN Modification; No System Test Programmer Analyst/ This project adopts
Financial Analyst the same characteristics as
the Modification (MD) with
the exception that system
testing is performed by
Client, not Company.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Confidential PS Proj 06/17/96 1
<PAGE>
[LOGO]
PAYMENT TIMETABLE
The Amount Payable is due in lawful currency of US according to the following
timetable:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
DATE EVENT AMOUNT PAYABLE
- -------------------------------------------------------------------------------------------------------
<C> <S> <C>
Upon delivery Additions to Property Tax Interface $10,000.00
- -------------------------------------------------------------------------------------------------------
Upon delivery Modification Quote Fee - Credit ($200.00)
- -------------------------------------------------------------------------------------------------------
Invoice Amount $9,800.00 +/-10%
- -------------------------------------------------------------------------------------------------------
</TABLE>
For and on Behalf of Client By: Central Pacific Bank
-------------------------------------
Name: /s/ Norman Osumi
-----------------------------------
Title: Vice President
----------------------------------
For and on behalf of Company By: /s/ Jerra Willman
------------------------------------
Name: Jerra Willman
-----------------------------------
Title: Manager, Customization Services
----------------------------------
Confidential PS Proj 06/17/96 2
<PAGE>
[LOGO]
MAINTENANCE AGREEMENT NO. PSR0003549
SCHEDULE 1M - PSR0003549 - Additions to Property Tax Interface
Company: Fiserv
Client: Central Pacific Bank
The License Agreement is that Agreement number 3810165 between the parties
dated: 7/30/97
Location: 2601 Technology Drive, Orlando, FL 32804
Workday: eight hours equals one day
Effective Date: one month following project delivery
Maintenance Fee: $2,000.00 payable in the lawful currency of US on the
Effective Date above and annually thereafter.
- --------------------------------------------------------------------------------
MODULES:
PSR0003549 - Additions to Property Tax Interface
- --------------------------------------------------------------------------------
BASIC MAINTENANCE:
Maintenance coverage for the project shall be available on standard business
days from 8:30 a.m. to 5:30 p.m.
- --------------------------------------------------------------------------------
REGULATORY COMPLIANCE SERVICES:
Regulatory compliance maintenance is covered for this project and shall be
scheduled based on a mutually acceptable date between the Company and Client.
- --------------------------------------------------------------------------------
SPECIAL MAINTENANCE:
Integration services is excluded from this agreement unless otherwise specified
within another agreement.
- --------------------------------------------------------------------------------
ANNUAL INCREASE AMOUNT:
There may be an increase in the specified Maintenance Fee on each anniversary of
the effective date. The Maintenance Fee shall not be increased by more than ten
percent (10%) per year or the change in the US Department of Labor, Consumer
Price Index for Urban Wage Earners and Clerical Workers, All Cities, (1982 =
100%) for the twelve month period preceding the anniversary date.
- --------------------------------------------------------------------------------
This Schedule 1M replaces all previous Schedule 1M forms for the Agreement as of
the Execution Date noted below.
For and on behalf of Client By: Central Pacific Bank
-------------------------------------
Name: /s/ Norman Osumi
-----------------------------------
Title: Vice President
----------------------------------
For and on behalf of Company By: /s/ Jerra Willman
-------------------------------------
Name: Jerra Willman
-----------------------------------
Title: Manager, Customization Services
----------------------------------
Execution Date: 10/20/98
Confidential PS Maint. 06/17/96 1
<PAGE>
[LOGO]
PROFESSIONAL SERVICES AGREEMENT NO. 3810165-ITS001
SCHEDULE 1
Company: Fiserv, CIR, Inc.
Client: Central Pacific Bank
The License Agreement is that Agreement number 3810165 between the parties
dated: 7/30/97.
Effective Date: July 1, 1998
This agreement will be in effect through June 30, 1999, and is not subject to
termination until that time unless mutually agreed between Company and Client.
This agreement may renew at the beginning of each year for a term of one year if
mutually agreed between Company and Client. Any changes to this schedule will
be disclosed 90 days prior to the renewal date.
Location: 2601 Technology Drive, Orlando, Florida 32804
Workday: 8 hours
Fee Structure:
Integration Services fee structure is based on a flat monthly retainer plus a
per diem for actual Integration Activities performed (as defined in Schedule 2).
This fee schedule will be activated starting on the effective date contained in
this schedule.
INTEGRATION SERVICES ANNUAL RETAINER: $16,000.00
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
ESTIMATED AVAILABILITY DATES
PERSONNEL ESTIMATED DAILY MINIMUM ---------------------------------
GRADE QUANTITY RATE NO. OF DAYS FROM TO
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IC 15 days (annual) $1,200.00 5.00 TBD TBD
- --------------------------------------------------------------------------------------------------
</TABLE>
KEY TO PERSONNEL GRADES
IC INTEGRATION SERVICES COORDINATOR
Confidential PS Page 1 of 2 DC/JW
-----
Initials
<PAGE>
PAYMENT TIMETABLE
The Amount Payable is due in lawful currency of USA according to the following
timetable:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
DATE EVENT AMOUNT PAYABLE
- ----------------------------------------------------------------------------------
<S> <C> <C>
Upon Billing Annual Retainer $16,000.00
Upon Billing Integration Activities TBD
- -----------------------------------------------------------------------------------
</TABLE>
For and on Behalf of Client By: /s/ David Chang
--------------------------------------
Name: David Chang
-------------------------------------
Title: SVP
------------------------------------
For and on Behalf of Company By: /s/ Jerra Willman
--------------------------------------
Name: Jerra Willman
-------------------------------------
Title: Manager, Customization Services
------------------------------------
Confidential PS Page 2 of 2 DC/JW
-----
Initials
<PAGE>
[LOGO]
PROFESSIONAL SERVICES AGREEMENT NO. 3810165-ITS01
SCHEDULE 2 BUSINESS REQUIREMENTS
Company: Fiserv, CIR, Inc.
Client: Central Pacific Bank
Effective Date: July 1, 1998
OVERVIEW:
The company will assign the client an Integration Coordinator, who will act
as a project manager for all of the client's integration needs. This
coordinator will be responsible for handling the client's communications and
correspondence regarding CBS release retrofitting, including scheduling,
coordination, consultation, and Additional Services as requested. The
services provided and described below are inclusive of all CBS major and
point releases. Bulletins, emergency code fixes, beta, contracted customer
modifications, and pre-release code integration are not provided, unless
otherwise specified in this Schedule or specifically requested by the client
as an Additional Service.
The Client may submit any or all of their modifications for integration. The
Company reserves the right to review and deem those modifications ineligible
for integration. Integration is performed on a library by library basis and
therefore, the Company may request that the Client segregate ineligible
modifications outside of the libraries to be integrated. If for any reason a
modification becomes ineligible for integration due to the nature of the CBS
software enhancements, the Client will be notified of this occurrence. The
Client will be responsible for securing the resources and any costs
associated with the re-coding of the modification, unless the modification is
under a CBS maintenance contract. Once re-coded the Client may have that
software delivered to the Company for incorporation in the Integration
Release as part of the Integration Activities.
SCHEDULING AND PREPARATION:
Upon determination of the estimated release dates by the Company, for major
CBS releases, the Company will prepare an estimated schedule for the client
and communicate that information along with a checklist of items that the
client must perform and prepare for the integration activities. The Client
will be responsible for ensuring that the information provided is supplied in
a format usable by the Company. All changes to source code members or
objects, by any party, must be tracked and incorporated into integrated
source code member or object by the Client, from the date of data preparation
until the production installation for all integration releases.
The Client will be responsible for validating that the estimated dates for
the project meet their requirements and communicate any conflicts to the
Company. An adjusted mutually agreed upon date will be determined based upon
the clients requirements and the Company's resource availability.
If for any reason, the Company determine that it will be unable to meet the
estimated dates for any release integration, the Client will be notified and
given the adjusted dates as soon as the situation is identified and assessed.
All Client Confidential Information received from the Client will be for the
explicit use of the integration activities unless other usage is granted by
the Client either verbally or in writing.
INTEGRATION ACTIVITIES:
The following activities will occur during the Integration of the Clients
Modifications for a CBS Release:
Confidential PS Page 1 of 2 DC/JW
-----
Initials
<PAGE>
- - Match the Clients modified CBS members with the distributed CBS release and
merge the modified CBS software into the modified member
- - Identify and compile client specific objects that use CBS files and
copybooks
- - Identify and notify the Client of CBS members and objects in the
modification libraries that are no longer used by CBS
- - Review the program usage in the modification libraries to identify and
notify the client of any obsolete members
- - Perform a parallel nightly processing for all major releases
- - Balance the monetary reports produced in the parallel run and resolve any
differences that are not due to the release content
- - Provide Integration Release Instructions including pre and post
installation considerations and summary of release installation steps.
The Client is responsible for the installation of this Integration release as
well as the CBS release, unless otherwise specified in this Schedule or
specifically requested by the client as an Additional Service. Integration
testing activities are limited to the verification of monetary activity based
on the test data supplied by the Client. Therefore, acceptance testing by the
client is strongly suggested prior to production installation to ensure that
prior release functionality still exists.
SUPPORT:
The Company will provide support of the integration release for a period of
30 days at no additional fee. After that time the hourly Integration
Coordinator fee will be applicable. Support of the test and production
installation of each release will also be provided. All support will be
provided under the Fiserv Service Level Agreements in place at that time.
ADDITIONAL SERVICES:
Additional services are available upon request. If the need arises to utilize
these services, the client should contact the Company to discuss these
requirements and fee schedules. Typical additional services include, but are
not limited to:
- - Release Installation - Extended Functional Testing
- - Environment creation - Software consolidation/Distribution
- - Library consolidation - Change Management Consultation
- - Modification review/itemization - Installation of "fixes" or CBS
Bulletins
For and on Behalf of Client By: /s/ David Chang
--------------------------------------
Name: David Chang
-------------------------------------
Title: SVP
------------------------------------
For and on Behalf of Company By: /s/ Jerra Willman
--------------------------------------
Name: Jerra Willman
-------------------------------------
Title: Manager, Customization Services
------------------------------------
Confidential PS Page 2 of 2 DC/JW
-----
Initials
<PAGE>
[LOGO] TABLE OF CONTENTS
- -------------------------------------------------------------------------------
1 Message to Shareholders
5 Board of Directors, Officers, Legal Counsel,
Auditors & Advisors
6 Financial Highlights
7 Selected Consolidated Financial Data
8 Management's Discussion & Analysis
of Financial Condition & Results of Operations
17 Supplementary Financial Information
18 Market Risk
19 Consolidated Financial Statements & Notes
19 Consolidated Balance Sheets
20 Consolidated Statements of Income and Comprehensive Income
21 Consolidated Statements of Changes in Stockholders' Equity
22 Consolidated Statements of Cash Flows
23 Notes to Consolidated Financial Statements
44 Independent Auditors' Report
44 Common Stock Price Range & Dividends
Corporate Organization - INSIDE BACK COVER
<PAGE>
[LOGO] MESSAGE TO SHAREHOLDERS
- --------------------------------------------------------------------------------
[PHOTOGRAPH--NAOAKI SHIBUYA, PRESIDENT, CPB INC. (LEFT),
AND JOICHI SAITO, CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER, CPB INC. (RIGHT)]
To Our Shareholders:
We are pleased to report that CPB Inc. and its subsidiary, Central
Pacific Bank (CPB), continued to generate steady earnings in 1998 despite
Hawaii's sluggish economic climate, which is now entering its ninth year.
This economic environment has prompted our organization to refocus our
resources and aggressively seek operating efficiencies. Significant steps
were taken in 1998 to provide for long-term earnings growth and to secure a
competitive position in Hawaii's dynamic financial services industry.
The company enjoyed its fourth consecutive year of increased earnings,
with reported net income of $15.07 million for the year ended December 31,
1998, an increase of 0.7 percent over 1997. Earnings per share of $1.46
increased by 2.8 percent over the $1.42 earned last year. Total assets of
$1.56 billion increased by 4.3 percent compared to a year ago; total deposits
of $1.27 billion increased by 6.4 percent; and net loans of $1.09 billion
increased by 6.3 percent. Return on average assets was 1.00 percent, and
return on average equity was 9.79 percent in 1998. Dividends totaled $0.52
per common share, increasing by 6.1 percent over the $0.49 declared in 1997.
The Bank remains focused on strengthening its loan loss reserve and on
improving asset quality. Allowance for loan losses of $20.1 million at
year-end 1998 increased by 4.7 percent over the $19.2 million recorded a year
ago. Provision for loan losses of $6.6 million in 1998 increased by 88.6
percent from $3.5 million in 1997. Aggressive management of problem assets
resulted in a decrease of nonperforming assets and delinquent loans by 44.4
percent compared to a year ago.
In 1998 we took several important steps to strengthen our company's
future. Major accomplishments included:
- Conversion of CPB's mainframe computer system to an integrated banking
system that will provide for improved efficiencies and new products and
services.
- CPB's Year 2000 (Y2K) task force implemented an aggressive program and
is on track toward meeting Y2K compliance requirements.
- Opening of a new supermarket branch with extended banking hours seven
days a week, making it CPB's eighth supermarket branch in a network of
27 branches statewide. Our traditional branch banking hours were also
extended and certain branches will remain open on selected federal and
state holidays.
- Repurchase of 836,988 shares of CPB Inc. common stock, and the adoption
of a Shareholder Rights Plan to prevent unfair tender offers and other
abusive takeover tactics.
- An "outstanding" rating from the Federal Deposit Insurance Corporation
(FDIC) for our Community Reinvestment Act (CRA) activities in Hawaii.
We believe these achievements provide a solid base for CPBto succeed in
the rapidly changing financial services industry.
As CPB enters 1999, our 45th year of business in Hawaii, we remain
committed to our mission TO BE THE BEST PROVIDER OF FINANCIAL SOLUTIONS FOR
OUR CUSTOMERS. We approach the new millennium with the vision of being a
market-driven company highly focused on internal efficiencies and superior
customer service. By leveraging the technological enhancements made during
the past year, we will be able to streamline operations, develop enhanced
customer relationships and provide value-added products and services to
better meet our customers' needs.
We also want to assure our customers that the accuracy and security of
their account information and their ability to access funds are top
priorities in our aggressive program to achieve Y2K readiness.
We regret to report the passing of Charlie Kimura in January 1999. Mr.
Kimura served as a member of the board of directors and as a senior advisor
to CPB. He was instrumental in the founding of the Bank and has had a
significant impact on its growth and success throughout the years. We are
grateful for his 30 years of wise counsel and dedicated service.
On behalf of the board of directors, management team and employees, we
wish to express our sincere appreciation for your continued support and
confidence in CPB Inc. and Central Pacific Bank.
Sincerely,
/s/ Joichi Saito /s/ Naoaki Shibuya
Joichi Saito Naoaki Shibuya
Chairman of the Board President
and Chief Executive Officer
<PAGE>
[LOGO] MESSAGE TO SHAREHOLDERS
- --------------------------------------------------------------------------------
CHARTING A COURSE FOR THE NEW MILLENNIUM
The financial services industry is experiencing a period of rapid
change. With the banking industry continuing to change dramatically, we
remain committed to providing customers with the financial resources
necessary to make sound and prudent financial decisions in the new millennium.
Central Pacific Bank undertook a number of important initiatives in 1998
that are summarized below.
CAPITALIZING ON NEW TECHNOLOGY FOR THE FUTURE
[PHOTOGRAPH--STOCK PHOTO OF FIBER OPTIC CABLE (LEFT TOP EDGE)]
CENTRAL PACIFIC BANK'S FIBER-OPTIC
NETWORK PROVIDES RELIABLE AND
SECURE TRANSFER OF INFORMATION
WHILE ALLOWING FOR FUTURE
TELECOMMUNICATIONS EXPANSION.
Over the past several years, CPB has invested significant time and
resources in the development of a highly efficient computer system and
communication network to ensure the Bank can effectively compete in the new
millennium.
In July 1998, the Bank successfully upgraded and converted its mainframe
computer system to a state-of-the-art integrated banking system to provide
customers with increased convenience and enhanced products and services, as
well as to improve operational efficiency.
ACHIEVING YEAR 2000 COMPLIANCE
Detecting and solving the Y2K computer problem--the inability of some
computers to recognize and process dates in the year 2000 and beyond--is the
Bank's top corporate priority. Efforts to address Y2K issues extend
company-wide, with committed involvement of financial, technical and
management resources focused on achieving Y2K compliance. CPB has
substantially completed its work to ensure that its computer systems are
operating properly to process information at the turn of the century and
beyond. The Bank's comprehensive plan to address and resolve the Y2K problem
includes the following:
> The Bank's internal Y2K task force, formed nearly three years ago,
has actively evaluated and assessed the Y2K date change and the potential
impact on the Bank's computer systems.
> The Bank successfully converted its major banking hardware and
software systems to a new integrated banking system during 1998. This
integrated banking system is expected to solve a substantial part of the
Bank's Y2K computer issues.
> Interface testing with internal and external systems has already
begun and is targeted for completion in 1999. We will also have sufficient
time for retesting and resolving outstanding issues by year-end.
> The Bank is also working with its customers, vendors and other
institutions to coordinate Y2K preparedness and compliance.
> CPB is working with bank regulators to ensure that the Company is on
schedule to meet Y2K requirements.
[PHOTOGRAPH--Y2K SOLUTIONS GRAPHIC (BOTTOM LEFT EDGE)]
2
- ---
<PAGE>
ENHANCING PRODUCT AND SERVICE DELIVERY
There continues to be increased competition from traditional, as well
as non-traditional financial institutions. To provide added convenience and
to meet these challenges, CPB has invested in a retail delivery network that
reflects the changes in customer expectations. CPB offers a full range of
financial services to its customers, with products such as trust and
investment services, and PC business banking, which provides one-stop
shopping for consumers.
In addition, CPB's Internet web site continues to provide information
on Bank products and services, and includes financial tools such as
automobile and mortgage loan calculators, as well as Company news and
financial highlights. This established presence on the World Wide Web will
better position the Bank for future interactive electronic banking delivery
systems.
In March 1998, a supermarket branch was opened in Daiei Kaheka in
Honolulu, making it CPB's eighth supermarket branch in a network of 27
branches statewide. Since its opening, the branch has recorded strong growth.
In addition, most CPB branches statewide are operating with extended hours,
and certain branches remain open for business on selected federal and state
holidays.
In the fourth quarter of 1998, CPB successfully completed the sale of
its credit card portfolio to MBNA America Bank N.A. (MBNA), one of the
largest providers of credit card services in the nation. The Bank sold its
credit card portfolio in the interest of giving customers an enhanced credit
card program, to streamline its bank card operations and to provide for
improved cost efficiencies. CPB-branded credit cards continue to be marketed
by the Bank and serviced through MBNA.
The Bank's Trust Division, now in its sixth year of operation, provides
a full range of investment management, custodial and other fiduciary
services. In 1998, the division recorded substantial growth with a 22 percent
increase in assets under management, a 30 percent increase in accounts
managed and a 45 percent increase in revenues over the previous year.
BUILDING SHAREHOLDER VALUE
During the past year, CPB Inc.'s board of directors implemented the
following strategic initiatives to enhance shareholder value.
Affirming confidence in the future of the Company, the board of
directors authorized a program to repurchase up to 5 percent of common stock
outstanding in April 1998. A decline in third quarter market prices provided
the Company an opportunity to further optimize capital levels and enhance
shareholder value. This resulted in the authorization of a second stock
repurchase program in September to repurchase an additional 5 percent of its
outstanding shares. A total of 836,988 shares of common stock was repurchased
during the year.
[PHOTOGRAPH--NEW CPB KAHEKA DAIEI SUPERMARKET BRANCH (TOP RIGHT EDGE)]
CENTRAL PACIFIC BANK CONTINUES TO RESPOND TO THE GROWING CUSTOMER NEED
FOR CONVENIENT, COST-EFFECTIVE BANKING SOLUTIONS AND IN 1998 OPENED ITS
EIGHTH SUPERMARKET BRANCH. THE BANK HAS A CURRENT NETWORK OF 19 TRADITIONAL
BRANCHES, 8 SUPERMARKET BRANCHES AND 62 AUTOMATED TELLER MACHINES (ATM)
THROUGHOUT THE STATE.
3
---
<PAGE>
[LOGO] MESSAGE TO SHAREHOLDERS
- -------------------------------------------------------------------------------
In August, a Shareholder Rights Plan was adopted. The purpose of this
Plan is to help ensure that shareholders receive fair and equal treatment in
the event of unsolicited or coercive attempts to acquire CPB Inc. The Plan is
also intended to guard against unfair tender offers and other abusive
takeover tactics. Although management knows of no planned or threatened
offers to acquire CPB Inc., this measure was deemed to be in the best
interest of its shareholders.
INVESTING IN HAWAII'S COMMUNITIES
CPB considers active community involvement an important element in
building strong business relationships. The Bank's commitment to the
communities it serves extends far beyond the banking services it provides.
Among the many community causes the Bank supports are: Aloha United Way;
American Cancer Society; Boy Scouts of America; Chamber of Commerce
organizations; Kapi'olani Medical Center for Women & Children; the KSSK Radio
Posse, a crime-solving program; University of Hawaii at Manoa Endowed
Scholarship Fund and many other organizations.
In addition, CPB is a strong proponent of small business in Hawaii and
is proud to provide funding to the Immigrant Center--a 25-year-old nonprofit
organization with headquarters in Kalihi that provides loans and
entrepreneurship training to start-up and small businesses. Funds contributed
by the Bank are used to administer loans throughout the state of Hawaii using
the highly successful model developed for the U.S. Small Business
Administration Microloan Demonstration Program.
CPB's chairman and CEO, Joichi Saito, was appointed president of the
Hawaii Bankers Association (HBA) in fiscal year 1998. This position will
enable CPB to play a major role in Hawaii's financial community. Mr. Saito is
responsible for leading its membership and setting the Association's course
for the year. HBA is the state's premier financial trade organization whose
membership comprises all Hawaii's commercial banks.
CENTRAL PACIFIC BANK'S MISSION
For the past 45 years, CPB's emphasis on providing superior customer
service and quality products has allowed us to strategically position CPB as
Hawaii's premier community bank. As we approach the new millennium, we
reaffirm our commitment to our shareholders and employees who have supported
us in our mission TO BE THE BEST PROVIDER OF FINANCIAL SOLUTIONS FOR OUR
CUSTOMERS.
[PHOTOGRAPH--HAWAII IMMIGRANT CENTER CHECK PRESENTATION. DR. MYAING
THEIN, EXECUTIVE DIRECTOR, THE IMMIGRANT CENTER (LEFT). JOICHI
SAITO, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, CPB INC.
(RIGHT)]
CENTRAL PACIFIC BANK'S COMMITMENT TO SUPPORTING PROGRAMS AND
ORGANIZATIONS THAT SERVE TO BENEFIT HAWAII'S ECONOMIC EXPANSION IS
DEMONSTRATED BY ITS SUPPORT OF THE IMMIGRANT CENTER. THE NONPROFIT CENTER IS
DEDICATED TO PROVIDING IMMIGRANTS AND REFUGEES WITH LOANS AND
ENTREPRENEURSHIP TRAINING FOR START-UP AND SMALL BUSINESSES.
4
- ---
<PAGE>
[LOGO] BOARD OF DIRECTORS, OFFICERS, LEGAL COUNSEL, AUDITORS AND ADVISORS
- -------------------------------------------------------------------------------
As of January 31, 1999
CPB INC.
JOICHI SAITO
Chairman of the Board &
Chief Executive Officer
NAOAKI SHIBUYA
President
AUSTIN Y. IMAMURA
Vice President & Secretary
NEAL K. KANDA
Vice President & Treasurer
BOARD OF DIRECTORS
JOSEPH F. BLANCO*
Executive Assistant to the
Governor, State of Hawaii
PAUL DEVENS
Attorney-at-Law; Of Counsel, Devens,
Nakano, Saito, Lee, Wong & Ching
ALICE F. GUILD
Managing Director, Iolani Palace
DENNIS I. HIROTA, PH.D.
Registered Professional Engineer;
Licensed Professional Land Surveyor;
President, Sam O. Hirota, Inc.,
Engineering and Surveying
CLAYTON K. HONBO, M.D.*
Obstetrics & Gynecology
STANLEY W. HONG
President and Chief Executive Officer,
The Chamber of Commerce of Hawaii;
Attorney-at-Law
SHUNICHI OKUYAMA
Senior Managing Director,
The Sumitomo Bank, Ltd.
PAUL KOSASA*
President & Chief Executive Officer,
MNS, Ltd., dba ABC Stores
GILBERT J. MATSUMOTO*
Certified Public Accountant;
Principal-President,
The Matsumoto Group,
Certified Public Accountants
DANIEL M. NAGAMINE
President-Treasurer,
Flamingo Enterprises, Inc.;
Certified Public Accountant
JOICHI SAITO
Chairman of the Board & Chief
Executive Officer, CPB Inc. &
Central Pacific Bank;
Chairman of the Board,
CPB Properties, Inc.
YOSHIHARU SATOH
Retired Chairman of the Board
& Chief Executive Officer,
CPB Inc. & Central Pacific Bank;
retired Chairman of the Board, CPB
Properties, Inc.
NAOAKI SHIBUYA
President, CPB Inc.; President
& Chief Operating Officer, Central
Pacific Bank; President, CPB
Properties, Inc.
MINORU UEDA*
Retired Vice Chairman of the Board,
Central Pacific Bank; retired
President, CPB Properties, Inc.
*CENTRAL PACIFIC BANK ONLY
AUDIT DEPARTMENT
JON K. NAKAMOTO
Vice President & Manager
LOAN REVIEW DEPARTMENT
RUTH MENDE-YANAGIDA
Vice President
CENTRAL PACIFIC BANK
EXECUTIVE OFFICE
JOICHI SAITO
Chairman of the Board
& Chief Executive Officer
NAOAKI SHIBUYA
President & Chief
Operating Officer
COMPLIANCE DEPARTMENT
KATHLEEN M. RODRIGUEZ
Compliance Officer
SERVICE QUALITY DEPARTMENT
BERNADETTE B. ESHIMA
Acting Manager
TRUST DIVISION
GARY S. MORIMOTO
Vice President & Manager
COMMERCIAL FINANCE GROUP
ALWYN S. CHIKAMOTO
Senior Vice President & Manager
BUSINESS BANKING DIVISION
CANDICE Y. NAITO
Vice President & Manager
CORPORATE BANKING DIVISION
ALWYN S. CHIKAMOTO
Senior Vice President & Manager
REAL ESTATE LOAN DIVISION
CLIFFORD K. FUJIWARA
Senior Vice President & Manager
CREDIT ADMINISTRATION GROUP
AUSTIN Y. IMAMURA
Executive Vice President, Manager
& Secretary
LOAN OPERATIONS DIVISION
CARL T. NAGASAKO
Vice President & Manager
CREDIT AND LEGAL DIVISION
WALTER K. HORIKOSHI
Senior Vice President & Manager
SPECIAL CREDITS & COLLECTIONS
DIVISION
ALLAN M. KOMATSU
Vice President & Manager
FINANCE & OPERATIONS GROUP
NEAL K. KANDA
Executive Vice President & Manager
CONTROLLERS DIVISION
SHERRI Y. YIM
Vice President & Manager
OPERATIONS DIVISION
RAYMOND T. KUROSU
Senior Vice President & Manager
INFORMATION SERVICES DIVISION
DAVID J.W. CHANG
Senior Vice President & Manager
HUMAN RESOURCES DIVISION
RITA S. FLYNN
Vice President & Manager
RETAIL BANKING GROUP
WAYNE H. KIRIHARA
Senior Vice President & Manager
BRANCH ADMINISTRATION
DIVISION
CLIFFORD Y. KAWANO
Vice President & Manager
CONSUMER BANKING DIVISION
NORMAN M. NAKASONE
Vice President & Manager
MARKETING DIVISION
TODD R. YAMANAKA
Vice President & Manager
CENTRAL PACIFIC BANK
BRANCHES
OAHU
MAIN BRANCH
FREDERICK T. TAKAMOTO
Senior Vice President & Manager
REGION I
MICHAEL T. HIRAO
Vice President & Regional Manager
HAWAII KAI BRANCH
KAIMUKI BRANCH
KING-SMITH BRANCH
MAKIKI BRANCH
MOILIILI BRANCH
WAIKIKI BRANCH
WARD BRANCH
REGION II
ROLAND H.H. CHANG
Vice President & Regional Manager
KAILUA BRANCH
KALIHI BRANCH
KANEOHE BRANCH
MAPUNAPUNA BRANCH
MILILANI BRANCH
PEARLRIDGE BRANCH
WAIPAHU BRANCH
REGION III
CLIFTON K. TSUJI
Senior Vice President &
Regional Manager
HAWAII
HILO BRANCH
KAILUA-KONA BRANCH
KAUAI
LIHUE BRANCH
MAUI
KAHULUI BRANCH
IN-STORE BRANCHES
BENNETTE M. EVANGELISTA
Vice President & Manager
OAHU
KAHALA BRANCH
in Times Super Market
KAHEKA BRANCH
in Daiei
KAIMUKI BRANCH
in Times Super Market
PEARL CITY BRANCH
in Daiei
ROYAL KUNIA BRANCH
in Times Super Market
WAIPAHU BRANCH
in Daiei
HAWAII
HILO BRANCH
in Sure Save Supermarket
KAUAI
KAPAA BRANCH
in Big Save Value Center
CPB REAL ESTATE INC.
JOICHI SAITO
President
NAOAKI SHIBUYA
Vice President
AUSTIN Y. IMAMURA
Secretary
NEAL K. KANDA
Treasurer
CPB Properties, Inc.
JOICHI SAITO
Chairman of the Board
NAOAKI SHIBUYA
President
AUSTIN Y. IMAMURA
Senior Vice President
& Secretary
NEAL K. KANDA
Senior Vice President
& Treasurer
LEGAL COUNSEL
DEVENS, NAKANO, SAITO,
LEE, WONG & CHING
MANATT, PHELPS & PHILLIPS, LLP
AUDITORS
KPMG LLP
SENIOR ADVISORS
SAKAE TAKAHASHI
Chairman Emeritus
ERNEST H. HARA
DANIEL K. INOUYE, U.S. SENATOR
SIDNEY S. KOSASA
EATON MAGOON, JR.
SHINSUKE NAKAMINE
HAROLD K. YAMANAKA
LESTER B.K. YEE, M.D.
NEIGHBOR ISLAND ADVISORS
ISLAND OF HAWAII (HILO)
TSUNEO AKIYAMA
ROLAND HIGASHI
THOMAS HIRANO
JAMES T. LAMBETH, M.D.
GERRIT R. LUDWIG, M.D.
REX MATSUNO
JACK MIYASHIRO
ERNEST A. SAKAMOTO, D.D.S.
ISLAND OF HAWAII
(KAILUA-KONA)
JAMES W. HIGGINS
WALLY K. ICHISHITA
WILLIAM KIMI, JR.
JEAN A. MURPHY, GRI, CIPS
ISLAND OF KAUAI
LINDBERGH AKITA
DENNIS M. ESAKI
CLYDE T. ISHIDA, D.M.D.
JOSEPH N. KOBAYASHI, ESQ.
RICHARD MAEDA
CAROLYN A. NII, CPA
FRANK NONAKA
ALLAN A. SMITH
ROY TANAKA
DENNIS R. YAMADA, ESQ.
ISLAND OF MAUI
HILARIO A. AQUILIZAN, M.D.
HITOSHI HIRAYAMA
LAWRENCE N. C. ING, ESQ.
HOWARD MIYAMOTO, D.D.S.
NAOKI TOKUHISA
MARIA A. UNEMORI, CPA
MASARU "PUNDY" YOKOUCHI
5
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<PAGE>
[LOGO] FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997 Change
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AT YEAR END
Assets $1,560,885 $1,497,101 4.3%
Deposits 1,269,123 1,193,158 6.4
Net Loans 1,085,846 1,021,859 6.3
Stockholders' Equity 148,066 151,742 -2.4
Number of Shares Outstanding 9,798 10,579 -7.4
Book Value Per Share $ 15.11 $ 14.34 5.4
- -------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net Income $ 15,069 $ 14,959 0.7%
Per Share - Basic 1.46 1.42 2.8
Per Share - Diluted 1.45 1.40 3.6
Cash Dividends Declared 5,335 5,176 3.1
Per Share 0.52 0.49 6.1
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
94 95 96 97 98
-- -- -- -- --
DEPOSITS
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
$1,082 $1,138 $1,124 $1,193 $1,269
<CAPTION>
NET LOANS
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
$ 974 $ 970 $1,024 $1,022 $1,066
<CAPTION>
NET INCOME
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
$13.5 $13.9 $14.1 $15.0 $15.1
</TABLE>
6
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<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,
1998, 1997 and 1996, and with respect to the consolidated balance sheets at
December 31, 1998 and 1997, are derived from the consolidated financial
statements which have been audited by KPMG LLP, independent auditors,
included in this Annual Report. The selected statement of income data for the
years 1995 and 1994, and the selected balance sheet data at December 31,
1996, 1995 and 1994, are derived from audited consolidated financial
statements which are not included in this Annual Report.
Year Ended December 31,
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total interest income $ 111,792 $ 110,332 $ 104,287 $ 107,802 $ 93,793
Total interest expense 46,705 44,695 41,679 44,745 31,600
Net interest income 65,087 65,637 62,608 63,057 62,193
Provision for loan losses 6,600 3,500 2,500 3,300 3,300
Net interest income after provision for loan losses 58,487 62,137 60,108 59,757 58,893
Other operating income 16,822 10,827 10,715 10,723 10,708
Other operating expense 51,273 48,646 47,496 47,638 47,332
Income before income taxes 24,036 24,318 23,327 22,842 22,269
Income taxes 8,967 9,359 9,236 9,034 8,786
Net income 15,069 14,959 14,091 13,808 13,483
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (YEAR-END):
Interest-bearing deposits in other banks $ 10,469 $ 34,188 $ 26,297 $ 7,140 $ 40,277
Investment securities (1) 351,436 320,711 240,458 283,627 243,788
Loans 1,105,912 1,041,023 1,041,976 990,356 991,968
Allowance for loan losses 20,066 19,164 19,436 20,156 18,296
Total assets 1,560,885 1,497,101 1,403,165 1,371,909 1,381,539
Core deposits (2) 924,960 875,920 859,280 878,065 878,660
Total deposits 1,269,123 1,193,158 1,123,614 1,138,319 1,081,909
Long-term debt 118,289 127,705 115,840 81,107 68,307
Total stockholders' equity 148,066 151,742 140,882 132,507 121,103
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA: (3)
Basic earnings per share $ 1.46 $ 1.42 $ 1.34 $ 1.32 $ 1.29
Diluted earnings per share 1.45 1.40 1.33 1.31 1.28
Cash dividends declared 0.52 0.49 0.48 0.46 0.44
Book value 15.11 14.34 13.37 12.62 11.57
Weighted average shares outstanding (in thousands) 10,354 10,555 10,530 10,480 10,468
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Return on average assets 1.00% 1.04% 1.04% 1.00% 1.03%
Return on average stockholders' equity 9.79 10.18 10.27 10.79 11.48
Average stockholders' equity to average assets 10.20 10.26 10.09 9.29 8.99
Net interest margin (4) 4.65 4.89 4.89 4.87 5.10
Net charge-offs to average loans 0.53 0.36 0.32 0.14 0.23
Nonperforming assets to year-end loans &other real estate (5) 1.27 1.92 1.41 0.59 1.84
Allowance for loan losses to year-end loans 1.81 1.84 1.87 2.04 1.84
Allowance for loan losses to nonaccrual loans 155.17 116.76 143.97 562.55 113.95
Dividend payout ratio 35.62 34.51 35.82 34.85 34.11
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Held-to-maturity securities at amortized cost, available-for-sale
securities at fair value.
(2) Noninterest-bearing demand, interest-bearing demand and savings deposits,
and time deposits under $100,000.
(3) Adjusted for a two-for-one split of CPB Inc. common stock effective
November 14, 1997.
(4) Computed on a taxable equivalent basis.
(5) Nonperforming assets include nonaccrual loans and other real estate.
7
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<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Share and per share information in Management's Discussion and Analysis
and elsewhere in this Annual Report have 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 1998 of $15.1 million increasing by 0.7% over
$15.0 million earned in 1997. Net income of $14.1 million was reported in
1996. Net income in 1998 was primarily impacted by a $4.6 million gain
realized from the sale of the Company's credit card portfolio, offset by a
$3.1 million increase in provision for loan losses. Basic earnings per share
of $1.46 in 1998 increased by 2.8% over $1.42 in 1997, which increased by
6.0% over $1.34 in 1996. Cash dividends per share of $0.52 in 1998 increased
from $0.49 and $0.48 in 1997 and 1996, respectively. Return on average assets
of 1.00% decreased from 1.04% posted in each of the two previous years.
Return on average stockholders' equity declined to 9.79% from 10.18% in 1997
and 10.27% in 1996.
The Company recorded four years of earnings increases operating in the
state of Hawaii's economy, which experienced economic difficulties for the
eighth consecutive year. Tourism, the state's primary industry, was
negatively impacted by the Asian financial crisis as eastbound visitor
arrivals declined by roughly 10% from 1997 levels. Westbound visitor arrivals
grew at a pace to significantly offset the eastbound decline. The state's
construction activity also declined; however, certain indicators of future
construction activity showed positive signs during the second half of 1998.
Home resale activity increased during the year but average resale prices
continued to decline. Personal bankruptcy filings in Hawaii increased by 29%
over the previous year and for a twelve-month period in 1998, Hawaii led the
nation in percentage increase in filings. The state's unemployment rate for
the year peaked at 6.6% in June 1998, ending at 5.4% in December compared to
the 4.3% national rate.
Nonetheless, the Company's balance sheet grew during 1998, while
nonaccrual and delinquent loans decreased. Total assets at December 31, 1998
of $1,560.9 million increased by $63.8 million or 4.3%. Investment securities
of $351.4 million increased by $30.7 million or 9.6%. Net loans of $1,085.8
million increased by $64.0 million or 6.3%, mainly due to increases in
commercial and commercial mortgage loans. Nonperforming assets and loans
delinquent for 90 days or more decreased to $19.5 million from $35.1 million
a year ago.
Deposits increased by $76.0 million or 6.4% to $1,269.1 million at
year-end 1998. Offsetting deposit growth were decreases in long-term debt of
$9.4 million or 7.4% to $118.3 million and stockholders' equity of $3.7
million or 2.4% to $148.1 million, compared to year-end 1997. The decrease in
stockholders' equity was due to the Company's stock repurchase program, which
is discussed in the Capital Resources section.
Despite the continued strength of the U. S. economy, Management does not
expect significant growth in the local economy in 1999. Furthermore, the
economic weakness in Japan and the rest of Asia is expected to prolong the
adverse effect on tourism and foreign investment in Hawaii. Consequently,
lack of significant improvement in the state's economy is likely to continue
to have a negative impact on the Company's growth and levels of nonperforming
loans and related loan losses.
The Company has been evaluating its computer systems to assess the
nature and extent of Year 2000 problems. The Company successfully converted
its major banking hardware and software systems to a new integrated banking
system during 1998. This integrated banking system is expected to solve a
substantial part of the Bank's Year 2000 problem. Assessments of the Year
2000 impact of this system and all other mission-critical computer systems
have been completed and the testing phase has been substantially completed.
Year 2000 examinations of the Bank's mission-critical systems were conducted
by the Federal Reserve Bank of San Francisco and the Federal Deposit
Insurance Corporation ("FDIC") in the fourth quarter of 1998. Additionally,
the Company has communicated with third parties, including all major vendors
and customers, with respect to Year 2000 compliance efforts. As the Company
has not yet received all necessary assurances, contingency plans have been
reviewed and updated to prepare for possible problems with these third
parties. Year 2000 compliance has also been incorporated into the Company's
loan underwriting standards, and a Year 2000 risk factor has been
incorporated into the allowance for loan losses to address potential Year
2000-related defaults. Expenditures related to the new integrated banking
system have been capitalized and are being amortized over their respective
useful lives. To date, equipment and software expenditures totaled
approximately $3.5 million out of a projected $4 million to be spent.
Expenditures related to the Company's technical staff and other Year 2000
remediation costs are being expensed during the periods incurred. Future
expenditures to address the Year 2000 issue are not expected to have a
material impact on the Company's results of operations.
8
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<PAGE>
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, partnership income and liquidity that involve certain risks and
uncertainties. Important factors that could cause the results to differ from
those discussed in this report include, but are not limited to, general
business conditions in the state of Hawaii, the real estate market in Hawaii,
competitive conditions among financial institutions, regulatory changes in
the financial services industry, 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, 1998.
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
Table 1. Average Balances, Interest Income and Expense, Yields and Rates
(Taxable Equivalent)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
--------------------------------- ------------------------------
Average Amount Average Amount
Average Yield/ of Average Yield/ of
(Dollars in thousands) Balance Rate Interest Balance Rate Interest
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits in
other banks $ 15,041 5.64% $ 849 $ 43,362 5.55% $ 2,405
Federal funds sold 70 5.71 4 85 5.88 5
Taxable investment securities(1) 302,774 6.41 19,400 251,693 6.32 15,895
Tax-exempt investment securities(1) 35,050 6.82 2,392 15,697 7.28 1,143
Loans (2) 1,071,350 8.42 90,237 1,044,538 8.77 91,559
- -------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,424,285 7.93 112,882 1,355,375 8.19 111,007
Nonearning assets 83,920 77,063
- -------------------------------------------------------------------------------------------------------------------------
Total assets $1,508,205 $1,432,438
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits $ 99,059 1.30% $ 1,285 $ 95,056 1.35% $ 1,287
Savings and money market deposits 401,936 2.74 11,015 398,667 2.78 11,096
Time deposits under $100,000 207,584 4.59 9,538 204,871 4.73 9,700
Time deposits $100,000 and over 322,653 5.16 16,640 290,340 5.21 15,116
Short-term borrowings 13,281 5.45 724 5,528 5.39 298
Long-term debt 128,274 5.85 7,503 120,452 5.98 7,198
Total interest-bearing liabilities 1,172,787 3.98 46,705 1,114,914 4.01 44,695
Noninterest-bearing deposits 162,625 155,232
Other liabilities 18,927 15,384
Stockholders' equity 153,866 146,908
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,508,205 $1,432,438
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 66,177 $ 66,312
- -------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.65% 4.89%
- -------------------------------------------------------------------------------------------------------------------------
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>
(1) At amortized cost.
(2) Includes nonaccrual loans.
9
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<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
thereon. 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%.
Net interest income in 1998 decreased by $0.1 million or 0.2% from 1997,
mainly due to a decline in yields on interest earning assets. Investment
securities increased over 1997 as higher yielding loans decreased as a
percentage of total assets.
Interest income in 1998 increased by $1.9 million or 1.7% due to a $68.9
million or 5.1% increase in average interest earning assets, primarily
investment securities, offset by a decrease in average yield to 7.93% from
8.19% in 1997. Interest on investment securities increased by $4.8 million or
27.9% due to higher average volume. Interest on interest-bearing deposits in
other banks decreased by $1.6 million or 64.7% due to lower average volume.
Interest and fees on loans decreased by $1.3 million or 1.4% due to lower
average yield, affected by interest forgone on nonaccrual loans totaling $1.2
million and the general decline in interest rates.
Interest expense in 1998 increased by $2.0 million or 4.5% due to an
increase of $57.9 million or 5.2% in average interest-bearing liabilities.
The average rate paid on those liabilities in 1998 decreased to 3.98% from
4.01% in 1997 reflecting the general decline in interest rates. Average time
deposits $100,000 and over increased by $32.3 million or 11.1% and accounted
for 76% of the increase in interest expense. The average rate on those funds
was 5.16% in 1998, relatively unchanged from the previous two years. Average
short-term borrowings and long-term debt, which increased identically by $7.8
million, accounted for the remainder of the increase in interest expense.
Average interest-bearing deposits, excluding large time deposits, increased
by $10.0 million or 1.4% with related interest expense decreasing by $0.2
million or 1.1% from 1997.
Net interest income in 1997 increased by $3.5 million or 5.5% over 1996.
Interest income increased by $6.5 million or 6.2% primarily due to the
increase in volume on interest earning assets. Interest income on
interest-bearing deposits in other banks and interest and fees on loans
accounted for most of the increase in interest income. Interest expense
increased in 1997 by $3.0 million or 7.2% primarily due to increases in
average time deposits $100,000 and over and long-term debt.
As a result, net interest margin in 1998 decreased to 4.65% from 4.89%
in both 1997 and 1996. The decline in 1998 may not be
Table 2. Analysis of Changes in Net Interest Income (Taxable Equivalent)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 Compared to 1997 1997 Compared to 1996
-------------------------------- --------------------------------
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 $(1,572) $ 16 $(1,556) $1,871 $ 116 $1,987
Federal funds sold (1) -- (1) 3 1 4
Taxable investment securities 3,228 277 3,505 (608) 935 327
Tax-exempt investment securities 1,409 (160) 1,249 482 441 923
Loans 2,351 (3,673) (1,322) 2,996 253 3,249
- -----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 5,415 (3,540) 1,875 4,744 1,746 6,490
- -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits 54 (56) (2) 9 (6) 3
Savings and money market deposits 91 (172) (81) 170 (51) 119
Time deposits under $100,000 128 (290) (162) 476 (124) 352
Time deposits $100,000 and over 1,684 (160) 1,524 1,214 147 1,361
Short-term borrowings 418 8 426 (183) (7) (190)
Long-term debt 468 (163) 305 1,427 (56) 1,371
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,843 (833) 2,010 3,113 (97) 3,016
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 2,572 $(2,707) $ (135) $1,631 $1,843 $3,474
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
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<PAGE>
indicative of a downward trend to the extent that nonaccrual and charged-off
loans decrease in 1999.
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 the
Provision takes into account many factors, including the level and trend of
nonperforming and potential problem loans, net charge-off experience, current
repayment by borrowers, fair value of collateral securing specific loans,
general economic factors in Hawaii and a risk factor attributable to
borrowers' potential Year 2000-related failures. The Company's Provision was
$6.6 million, $3.5 million and $2.5 million in 1998, 1997 and 1996,
respectively. Net loan charge-offs increased to $5.7 million compared to $3.8
million in 1997 and $3.2 million in 1996, or when expressed as a percentage
of average loans, increased to 0.53% from 0.36% in 1997 and 0.32% in 1996.
Net charge-offs of $3.6 million on loans secured by real estate in 1998
increased from $1.6 million charged off in 1997, with $1.9 million from
residential mortgage loans and the remainder primarily attributed to
commercial mortgage loans to a large borrower. Commercial, financial and
agricultural loan net charge-offs of $0.8 million decreased from $1.1 million
in 1997. Consumer loan net charge-offs of $1.3 million increased from $1.1
million in 1997, one-half from credit card receivables and the remainder
primarily due to indirect automobile loans. The Allowance expressed as a
percentage of loans was 1.81% at December 31, 1998 compared to 1.84% and
1.87% at the previous two year-ends. In Management's judgment, the Allowance
at year-end 1998 was adequate to cover losses inherent in the loan portfolio.
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 decreased to $19.5
million at December 31, 1998 from $35.1 million a year ago. Nonaccrual loans
of $12.9 million decreased from $16.4 million at year-end 1997. The reduction
was due to payments on three loans totaling $4.5 million and charge-offs of
$1.4 million during 1998. Additions to nonaccrual loans were comprised of a
$1.7 million loan secured by a multi-family residential building and a number
of loans secured by residential properties. Other real estate of $1.2
million, which decreased from $3.7 million held a year ago, was comprised of
two residential properties. Loans delinquent for 90 days or more, which
decreased to $5.4 million from $12.2 million a year ago, were primarily
comprised of residential mortgage loans. Loans transferred to nonaccrual
status accounted for $4.1 million of the reduction. There were no
restructured loans still accruing interest at December 31, 1998, compared to
$2.7 million reported a year ago. Accounting for nonperforming assets is
discussed in note 1 to the consolidated financial statements on page 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 of $16.8 million in 1998 increased by $6.0
million or 55.4% over 1997, which increased by $112,000 or 1.0% over 1996.
Income from fiduciary activities increased by 46.4% to $644,000 in 1998, and
service charges on deposit accounts increased by 16.7% due to enhanced
collection efforts of fees for business services and changes in the Bank's
fee schedule. Fee increases were originated in 1997, which resulted in that
year's income increasing by 8.6% over 1996. Equity in earnings of
unconsolidated subsidiaries decreased to $420,000 from $489,000 in 1997 and
$681,000 in 1996, due to the continued decline in earnings from
partnership-owned properties reflecting the oversupply of office space in
Honolulu. Losses related to Trans-Pacific Mortgage Group LLC, a mortgage
banking partnership established in 1997 in which the Company has 49%
ownership, also contributed to the decline in income. A description of
unconsolidated subsidiaries is presented in note 7 to the consolidated
financial statements on pages 28 and 29 of this Annual Report.
Fees on foreign exchange of $616,000 in 1998 declined from the past two
years, reflecting the decreased Japanese yen currency activity in Hawaii.
Investment securities gains of $254,000 were recorded during the year. Gains
on sales of loans of $4.3 million resulted from a nonrecurring gain of $4.6
million realized from the sale of the
11
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<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Bank's credit card portfolio. As a result of the sale, the Bank will see
decreases in interest income from the higher-yielding portfolio, as well as
interchange and other fees related to the use of the credit cards. Income
from bank-owned life insurance accounted for the increase in other income in
each of the last two years. Bank-owned life insurance provides an opportunity
to earn tax-advantaged income as an indirect financing source for liabilities
related to the Bank's defined benefit retirement plan. Total other operating
income expressed as a percentage of average assets was 1.12% in 1998, 0.76%
in 1997 and 0.79% in 1996. Excluding the gain from sale of the credit card
portfolio, the 1998 percentage was 0.81%.
OTHER OPERATING EXPENSE
Table 5 sets forth components of other operating expense and the total
as a percentage of average assets.
Other operating expense of $51.3 million increased by $2.6 million or
5.4% over 1997, which increased by $1.2 million or 2.4% over 1996. Salaries
and employee benefits of $26.5 million increased by 2.6% over 1997, which
also increased by 3.2% over 1996, while the number of employees decreased to
587 at year-end 1998 from 600 a year ago. The increase in 1998 was mainly
attributed to annual merit increases and bonuses and overtime compensation
related to the Year 2000 project and integrated banking system conversion.
Pension
Table 3. Nonperforming Assets, Past Due and Restructured Loans
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Real estate:
Mortgage - commercial $ 6,830 $13,979 $ 8,863 $ 2,012 $ 2,278
Mortgage - residential 5,037 1,081 2,462 1,571 10
Construction -- -- -- -- 1,612
Commercial, financial and agricultural 1,065 1,312 2,175 -- 12,156
Installment -- 41 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total 12,932 16,413 13,500 3,583 16,056
Other real estate 1,155 3,677 1,235 2,231 2,242
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets 14,087 20,090 14,735 5,814 18,298
Loans delinquent for 90 days or more
Real estate:
Mortgage - commercial 315 311 341 3,094 535
Mortgage - residential 4,206 10,112 4,366 4,032 4,244
Construction -- -- -- -- 227
Commercial, financial and agricultural 706 1,302 1,038 1,493 7,550
Installment 168 508 568 570 316
- -----------------------------------------------------------------------------------------------------------------------------------
Total 5,395 12,233 6,313 9,189 12,872
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 $19,482 $35,050 $33,866 $20,977 $39,656
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets as a percentage of
loans and other real estate 1.27% 1.92% 1.41% 0.59% 1.84%
- -----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets and loans delinquent for 90 days or more
as a percentage of loans and other real estate 1.76% 3.09% 2.02% 1.51% 3.14%
- -----------------------------------------------------------------------------------------------------------------------------------
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 1.76% 3.36% 3.25% 2.11% 3.99%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
- -----
<PAGE>
expense decreased in 1998 and 1997 due to a revision in the Company's defined
benefit pension plan.
Net occupancy expense of $6.3 million in 1998 remained relatively
unchanged from 1997, which decreased by 7.6% from 1996, primarily due to
reduction in lease rent related to relocation of a branch office in 1996. An
in-store branch opening during 1998 and two branch relocations during 1997
affected net occupancy and equipment expense in the respective years.
Equipment expense of $2.9 million in 1998 decreased slightly from 1997, which
increased by 8.1% over 1996. Retirement of obsolete computer equipment,
ongoing investments in personal computers and enhancement of the Company's
communications network, mainly in 1997, accounted for the year-to-year
changes. Annual amortization of hardware and software expenses related to the
integrated banking system are expected to impact 1999 expense. Other expense
of $15.6 million increased by 14.3% over 1997 due to donations, training and
other expenses related to the integrated banking system conversion, legal
fees and write-downs of other real estate. Other expense of $13.6 million in
1997 increased by 5.0% over 1996, due to legal and professional fees and
expenses associated with other real estate. Total other operating expense as
a percentage of average assets was 3.40% in both 1998 and 1997 and 3.49% in
1996.
INCOME TAXES
Income tax expense totaled $9.0 million in 1998, $9.4 million in 1997
and $9.2 million in 1996. The effective tax rate decreased to 37.3% from
38.5% and 39.6% in the previous two years due to an increase in income from
investments exempt from federal income taxes.
Table 4. Components of Other Operating Income
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from fiduciary activities $ 644 $ 440 $ 312
Service charges on deposit accounts 3,124 2,678 2,465
Other service charges and fees 6,384 5,970 5,875
Equity in earnings of
unconsolidated subsidiaries 420 489 681
Fees on foreign exchange 616 700 876
Investment securities gains (losses) 254 -- (6)
Gains (losses) on sales of loans 4,340 (64) (18)
Other 1,040 614 530
- -------------------------------------------------------------------------------
Total $ 16,822 $ 10,827 $ 10,715
- -------------------------------------------------------------------------------
Total other operating income as a
percentage of average assets 1.12% 0.76% 0.79%
- -------------------------------------------------------------------------------
</TABLE>
FINANCIAL CONDITION
Table 6 sets forth the distribution of assets, liabilities and
stockholders' equity.
Average total assets of $1,508.2 million increased by $75.8 million or
5.3% in 1998 over 1997, which showed identical growth numbers over 1996.
Average net loans of $1,051.8 million increased by $26.7 million or 2.6%
compared to the 1997 increase of $34.8 million or 3.5% over 1996. The
proportion of average net loans to assets decreased to 69.7% from 71.6% and
72.8% in the previous two years. Average investment securities of $337.8
million increased by $70.4 million or 26.3% compared to $267.4 million in
1997, which increased by $0.5 million over 1996. The proportion to total
assets was 22.4%, up from 18.7% in 1997 and 19.6% in 1996. Average
interest-bearing deposits in other banks decreased by $28.3 million to $15.0
million compared to 1997, reflecting the shift to higher-yielding investment
securities, while the $7.9 million 1996 average was due to the higher
proportion of loans during that year. Funding asset growth were increases in
average total deposits of $49.7 million or 4.3% to $1,193.9 million in 1998
and short-term borrowings and long-term debt, each of which increased by $7.8
million compared to 1997. Total deposits in 1997 increased by $42.1 million
or 3.8% over 1996.
Loans at year-end 1998 were $1,105.9 million, an increase of $64.9
million or 6.2% over year-end 1997. Accounting for the increase were
commercial, financial and agricultural loans, which increased by $43.6
million or 29.6% to $190.8 million, commercial mortgage loans, which
increased by $33.1 million or 7.3% to $484.4
Table 5. Components of Other Operating Expense
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $26,466 $25,795 $24,998
Net occupancy 6,349 6,314 6,833
Equipment 2,879 2,908 2,690
Other 15,579 13,629 12,975
- -------------------------------------------------------------------------
Total $51,273 $48,646 $47,496
- -------------------------------------------------------------------------
Total other operating expense as a
percentage of average assets 3.40% 3.40% 3.49%
- -------------------------------------------------------------------------
</TABLE>
13
----
<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
million and construction loans, which increased by $16.4 million or 36.3% to
$61.7 million, compared to year-end 1997. Consumer loans, however, decreased
by $33.7 million or 49.3% to $34.7 million due to sale of the Bank's $18.4
million credit card portfolio during the year and a reduction in indirect
automobile loans.
Average core deposits, defined as total deposits excluding time deposits
$100,000 and over, of $871.2 million in 1998 increased by $17.4 million or
2.0% over 1997, which increased by $18.6 million or 2.2% over 1996. The Bank
has established incentive programs which place increasing emphasis on
marketing and sales efforts targeting core deposit growth. A core deposit
campaign held in 1998 was successful in increasing core deposits. Average
time deposits $100,000 and over increased by $32.3 million or 11.1% to $322.7
million in 1998 and by $23.5 million or 8.8% in 1997. The proportion to total
liabilities and stockholders' equity increased to 21.4% from 20.3% and 19.6%
in the previous two years.
Average stockholders' equity comprised 10.2% of total assets compared to
10.3% in 1997 and 10.1% in 1996. The decrease was the result of the Company's
stock repurchase program which was implemented in 1998 and resulted in the
Company's repurchase of 7.9% of the outstanding stock at an average price of
$17.36 per share.
Asset/Liability Management
The Company's earnings and capital are subject to risk of interest rate
fluctuations to the extent that rate-sensitive assets and rate-sensitive
liabilities mature or reprice during different periods or in differing
amounts. Asset/liability management attempts to coordinate the Company's
rate-sensitive assets and rate-sensitive liabilities to meet its financial
objectives.
Table 6. Distribution of Assets, Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------------- ---------------------- -------------------------
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 $ 35,260 2.3% $ 36,138 2.5% $ 38,959 2.9%
Interest-bearing deposits in other banks 15,041 1.0 43,362 3.0 7,924 0.6
Federal funds sold 70 -- 85 -- 22 --
Taxable investment securities 302,774 20.1 251,693 17.6 261,934 19.3
Tax-exempt investment securities 35,050 2.3 15,697 1.1 4,917 0.3
Loans 1,071,350 71.1 1,044,538 72.9 1,010,255 74.3
Allowance for loan losses (19,567) (1.3) (19,456) (1.3) (20,018) (1.5)
Premises and equipment 26,696 1.8 25,331 1.8 24,756 1.8
Other assets 41,531 2.7 35,050 2.4 30,981 2.3
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,508,205 100.0% $1,432,438 100.0% $1,359,730 100.0%
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing demand $ 162,625 10.8% $ 155,232 10.8% $ 153,288 11.3%
Interest-bearing demand 99,059 6.6 95,056 6.6 94,389 6.9
Savings and money market 401,936 26.6 398,667 27.8 392,603 28.9
Time deposits under $100,000 207,584 13.7 204,871 14.3 194,950 14.3
Time deposits $100,000 and over 322,653 21.4 290,340 20.3 266,821 19.6
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,193,857 79.1 1,144,166 79.8 1,102,051 81.0
Short-term borrowings 13,281 0.9 5,528 0.4 8,844 0.7
Long-term debt 128,274 8.5 120,452 8.4 96,741 7.1
Other liabilities 18,927 1.3 15,384 1.1 14,923 1.1
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,354,339 89.8 1,285,530 89.7 1,222,559 89.9
Stockholders' equity 153,866 10.2 146,908 10.3 137,171 10.1
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,508,205 100.0% $1,432,438 100.0% $1,359,730 100.0%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
- ----
<PAGE>
The Company's asset/liability management policy is to maximize
risk-adjusted return to shareholders while maintaining consistently
acceptable levels of liquidity, interest rate risk, and capitalization. The
Company's asset/liability committee monitors its interest rate risk exposures
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 and market value of portfolio equity. Adverse exposures are
managed through the shortening or lengthening of the duration of the
Company's assets or liabilities. The Company's asset/liability management
activities do not include the use of derivative financial instruments, such
as interest rate swaps, futures or options.
Table 7 sets forth information concerning interest rate sensitivity of
the Company's assets, liabilities, and stockholders' equity at December 31,
1998. 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 their earliest repricing date or maturity. All
interest-bearing demand and savings balances are included in the three months
or less category, even though repricing of these accounts is not
contractually required and may not actually occur during that period.
As shown in Table 7, the amount of liabilities being repriced exceeds
the amount of assets in the three months or less category. In the remaining
time periods, repricing assets exceed repricing liabilities. Generally, where
rate-sensitive liabilities exceed rate-sensitive assets in the short term,
net interest margin is expected to be negatively impacted when interest rates
increase and positively impacted when interest rates decrease.
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
Table 7. Rate Sensitivity of Assets, Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Over One
Over Over Six Year
Three Three Through Through Over
Months Through Twelve Three Three Nonrate
(Dollars in thousands) or Less Six Months Months Years Years Sensitive Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits in other banks $ 10,469 $ -- $ -- $ -- $ -- $ -- $ 10,469
Investment securities 67,110 18,999 20,045 66,739 159,283 19,260 351,436
Loans 402,452 130,443 160,387 262,982 136,735 12,913 1,105,912
Other assets -- -- -- -- -- 93,068 93,068
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 480,031 149,442 180,432 329,721 296,018 125,241 1,560,885
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits -- -- -- -- -- 186,892 186,892
Interest-bearing deposits 747,718 136,661 143,914 50,829 3,109 -- 1,082,231
Short-term borrowings 1,014 -- 1,000 -- -- -- 2,014
Long-term debt 52,116 625 1,279 38,957 25,312 -- 118,289
Other liabilities -- -- -- -- -- 23,393 23,393
Stockholders' equity -- -- -- -- -- 148,066 148,066
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 800,848 137,286 146,193 89,786 28,421 358,351 1,560,885
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(320,817) $ 12,156 $ 34,239 $239,935 $267,597 $(233,110) $ -
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap $(320,817) $(308,661) $(274,422) $(34,487) $233,110 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
----
<PAGE>
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
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.
During 1998, the Company's board of directors authorized the repurchase and
retirement of CPB Inc. common stock for a total consideration of up to $20
million or approximately 13% of stockholders' equity. As of December 31, 1998,
836,988 shares were repurchased for a total consideration of $14.5 million or an
average of $17.36 per share. Book value per share at year-end 1998 was $15.11.
Based on beginning-of-year balances, the repurchases represented 9.6% of
total stockholders' equity and 7.9% of outstanding shares.
Capital levels for the Company and the Bank were in excess of minimum
regulatory required levels at December 31, 1998 and 1997. The relatively low
rate of asset growth in the last three years coupled with stable earnings
contributed to the excess.
LIQUIDITY
The Company's objective in managing its liquidity is to maintain a balance
between sources and uses of funds in order to economically meet the cash
requirements of customers for loans and deposit withdrawals and to participate
in investment opportunities as they arise. Management monitors the Company's
liquidity position 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 22 of this Annual Report, the
Company's operating activities provided cash totaling $4.0 million, $14.4
million and $22.5 million in 1998, 1997 and 1996, respectively. The decrease in
1998 was mainly due to the net increase in loans held for sale while the
decrease in 1997 was from an increase in other assets due to the purchase of
bank-owned life insurance.
Investing activities represent a use of cash. Net cash used in investing
activities was $54.8 million in 1998, $96.8 million in 1997 and $34.3 million in
1996. Cash used in net loan originations over principal repayments was $46.8
million in 1998, $6.2 million in 1997 and $54.8 million in 1996. Activities from
investment securities and interest-bearing deposits in other banks used cash of
$4.9 million in 1998 and $86.1 million in 1997, 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.
Increased deposits were supplemented by the Company's
Table 8. Regulatory Capital Ratios
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------------- -----------------------------
Required Actual Excess Required Actual Excess
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
Tier I risk-based capital ratio 4.00% 12.10% 8.10% 4.00% 12.45% 8.45%
Total risk-based capital ratio 8.00 13.36 5.36 8.00 13.71 5.71
Leverage capital ratio 3.00 9.71 6.71 3.00 10.41 7.41
- ------------------------------------------------------------------------------------------------------------
Bank:
Tier I risk-based capital ratio 6.00% 11.28% 5.28% 6.00% 11.63% 5.63%
Total risk-based capital ratio 10.00 12.54 2.54 10.00 12.88 2.88
Leverage capital ratio 5.00 9.05 4.05 5.00 9.72 4.72
- ------------------------------------------------------------------------------------------------------------
</TABLE>
16
- ----
<PAGE>
borrowing sources, which include short-term sources such as Federal funds
purchased and securities sold under agreements to repurchase and longer-term
Federal Home Loan Bank of Seattle advances.
Deposits increased by $76.0 million in 1998 and $69.5 million in 1997
compared to a decline of $14.7 million in 1996. The Company's total borrowings
used cash of $13.7 million in 1998 and provided cash of $12.7 million and $36.7
million in 1997 and 1996, respectively. 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 $42.9 million in 1998, $77.6 million in
1997 and $17.1 million in 1996.
The increase in loans was funded primarily by increases in
noninterest-bearing demand and time deposits $100,000 and over. The Bank's core
deposits of $925.0 million at December 31, 1998 increased by $49.0 million or
5.6%, noninterest-bearing demand deposits of $186.9 million increased by $18.4
million or 10.9%, and time deposits $100,000 and over of $344.2 million
increased by $26.9 million or 8.5% over year-end 1997. Long-term debt of $118.3
million decreased by $9.4 million or 7.4% from a year ago.
The primary uses of funds, as reflected in the Company's parent company
condensed statements of cash flows, were $14.5 million used to repurchase CPB
Inc. common stock and approximately $5.4 million, $5.1 million and $5.1 million
in 1998, 1997 and 1996, respectively, for payment of dividends to shareholders.
The Company's primary source of funds was dividends received from the Bank for
payment of dividends to shareholders of approximately $19.5 million, $5.1
million and $5.1 million in 1998, 1997 and 1996, respectively. As presented in
note 27 to the consolidated financial statements on page 41 of this Annual
Report, the Bank's retained earnings, as defined, is the maximum amount
permitted to be distributed as a dividend without prior regulatory approvals. At
December 31, 1998, retained earnings of the Bank approximated $97.1 million.
SUPPLEMENTARY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
A summary of unaudited quarterly operating results for the years ended
December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) First quarter Second quarter Third quarter Fourth quarter Full year
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Interest income $27,862 $28,306 $28,137 $27,487 $111,792
Net interest income 16,208 16,352 16,378 16,149 65,087
Provision for loan losses 975 1,125 3,300 1,200 6,600
Net interest income after provision for
loan losses 15,233 15,227 13,078 14,949 58,487
Income before income taxes 5,655 5,590 6,834 5,957 24,036
Net income 3,628 3,775 3,890 3,776 15,069
Basic earnings per share 0.34 0.36 0.38 0.38 1.46
Diluted earnings per share 0.34 0.35 0.38 0.38 1.45
- ------------------------------------------------------------------------------------------------------------------------------
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 1.40
</TABLE>
17
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<PAGE>
[LOGO] MARKET RISK
- -------------------------------------------------------------------------------
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 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, 1998. 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
---------------------------------------------------------------
(Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Interest-bearing deposits in other banks $ 10,469 $ - $ - $ - $ - $ - $ 10,469 $ 10,469
Weighted average interest rates 4.65% -% -% -% -% -% 4.65%
Fixed rate investments $ 49,589 $49,281 $ 17,457 $12,840 $38,763 $107,680 $275,610 $278,360
Weighted average interest rates 6.19% 6.22% 6.05% 6.36% 6.01% 5.80% 6.02%
Variable rate investments $ 37,913 $10,126 $ 4,227 $ 2,014 $ 969 $ 2,361 $ 57,610 $ 57,610
Weighted average interest rates 5.31% 6.20% 6.93% 5.72% 5.62% 6.59% 5.66%
Equity investments $ 18,216 $ - $ - $ - $ - $ - $ 18,216 $ 18,216
Weighted average interest rates 6.68% -% -% -% -% -% 6.68%
Fixed rate loans $171,737 $67,525 $ 51,993 $27,257 $30,369 $ 77,169 $426,050 $424,593
Weighted average interest rates 7.78% 8.37% 8.05% 8.15% 7.83% 6.40% 7.68%
Variable rate loans $189,278 $96,817 $105,842 $94,714 $57,756 $135,455 $679,862 $683,932
Weighted average interest rates 8.28% 8.11% 8.61% 7.99% 7.83% 8.16% 8.21%
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
Interest-bearing demand and savings
deposits $531,551 $ $ - $ - $ - $ - $531,551% $531,551
Weighted average interest rates 2.13% -% -% -% -% -% 2.13%
Time deposits $496,742 $37,535 $ 13,294 $ 1,742 $ 1,367 $ - $550,680 $552,974
Weighted average interest rates 4.63% 5.00% 4.52% 5.31% 5.12% -% 4.66%
Short-term borrowings $ 2,014 $ - $ - $ - $ - $ - $ 2,014 $ 2,014
Weighted average interest rates 2.33% -% -% -% -% -% 2.33%
Long-term debt $ 27,520 $47,324 $ 18,133 $ 4,861 $ 4,145 $ 16,306 $118,289 $120,973
Weighted average interest rates 5.32% 5.42% 5.56% 6.58% 6.39% 6.44% 5.64%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
- ----
<PAGE>
[LOGO] CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 42,735 $ 50,695
Interest-bearing deposits in other banks 10,469 34,188
Investment securities:
Held to maturity, at amortized cost (fair value of $123,226 and $153,494
at December 31, 1998 and 1997, respectively) 120,476 152,688
Available for sale, at fair value 230,960 168,023
- -------------------------------------------------------------------------------------------------------------------
Total investment securities 351,436 320,711
- -------------------------------------------------------------------------------------------------------------------
Loans 1,105,912 1,041,023
Less allowance for loan losses 20,066 19,164
- -------------------------------------------------------------------------------------------------------------------
Net loans 1,085,846 1,021,859
- -------------------------------------------------------------------------------------------------------------------
Premises and equipment 26,833 26,676
Accrued interest receivable 9,122 9,404
Investment in unconsolidated subsidiaries 7,990 7,622
Due from customers on acceptances 32 59
Other real estate 1,155 3,677
Other assets 25,267 22,210
- -------------------------------------------------------------------------------------------------------------------
Total assets $1,560,885 $1,497,101
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing deposits $ 186,892 $ 168,505
Interest-bearing deposits 1,082,231 1,024,653
- -------------------------------------------------------------------------------------------------------------------
Total deposits 1,269,123 1,193,158
Short-term borrowings 2,014 6,248
Long-term debt 118,289 127,705
Bank acceptances outstanding 32 59
Other liabilities 23,361 18,189
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 1,412,819 1,345,359
- -------------------------------------------------------------------------------------------------------------------
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 9,797,596 and 10,579,184 shares at
December 31, 1998 and 1997, respectively 6,637 6,612
Surplus 45,848 45,848
Retained earnings 94,954 99,188
Accumulated other comprehensive income 627 94
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 148,066 151,742
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,560,885 $1,497,101
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
----
<PAGE>
[LOGO] CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 90,158 $ 91,367 $ 88,157
Interest and dividends on investment securities:
Taxable interest 18,125 14,713 14,454
Tax-exempt interest 1,381 660 143
Dividends 1,275 1,182 1,114
Interest on deposits in other banks 849 2,405 418
Interest on Federal funds sold 4 5 1
- ---------------------------------------------------------------------------------------------------
Total interest income 111,792 110,332 104,287
- ---------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 38,478 37,199 35,364
Interest on short-term borrowings 724 298 488
Interest on long-term debt 7,503 7,198 5,827
- ---------------------------------------------------------------------------------------------------
Total interest expense 46,705 44,695 41,679
- ---------------------------------------------------------------------------------------------------
Net interest income 65,087 65,637 62,608
Provision for loan losses 6,600 3,500 2,500
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 58,487 62,137 60,108
- ---------------------------------------------------------------------------------------------------
Other operating income:
Income from fiduciary activities 644 440 312
Service charges on deposit accounts 3,124 2,678 2,465
Other service charges and fees 6,384 5,970 5,875
Equity in earnings of unconsolidated subsidiaries 420 489 681
Fees on foreign exchange 616 700 876
Investment securities gains (losses) 254 -- (6)
Gains (losses) on sales of loans 4,340 (64) (18)
Other 1,040 614 530
- ---------------------------------------------------------------------------------------------------
Total other operating income 16,822 10,827 10,715
- ---------------------------------------------------------------------------------------------------
Other operating expense:
Salaries and employee benefits 26,466 25,795 24,998
Net occupancy 6,349 6,314 6,833
Equipment 2,879 2,908 2,690
Other 15,579 13,629 12,975
- ---------------------------------------------------------------------------------------------------
Total other operating expense 51,273 48,646 47,496
- ---------------------------------------------------------------------------------------------------
Income before income taxes 24,036 24,318 23,327
Income taxes 8,967 9,359 9,236
- ---------------------------------------------------------------------------------------------------
Net income $ 15,069 $ 14,959 $ 14,091
- ---------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities,
net of income taxes of $355, $454 and $(548)
in 1998, 1997 and 1996, respectively 533 684 (825)
- ---------------------------------------------------------------------------------------------------
Comprehensive income $ 15,602 $ 15,643 $ 13,266
- ---------------------------------------------------------------------------------------------------
Per share data:
Basic earnings per share $ 1.46 $ 1.42 $ 1.34
Diluted earnings per share 1.45 1.40 1.33
Cash dividends declared 0.52 0.49 0.48
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
- ----
<PAGE>
[LOGO] CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
other
Common Retained comprehensive
(Dollars in thousands, except per share data) stock Surplus earnings income Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 gain (loss)
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 gain (loss)
on investment securities, net of taxes -- -- -- 684 684
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,612 45,848 99,188 94 151,742
Net income -- -- 15,069 -- 15,069
Cash dividends declared ($0.52 per share) -- -- (5,335) -- (5,335)
55,400 shares of common stock issued 583 -- -- -- 583
836,988 shares of common stock repurchased (558) -- (13,968) -- (14,526)
Net change in unrealized gain (loss)
on investment securities, net of taxes -- -- -- 533 533
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $6,637 $45,848 $94,954 $ 627 $148,066
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
----
<PAGE>
[LOGO] CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,069 $ 14,959 $ 14,091
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 6,600 3,500 2,500
Provision for depreciation and amortization 2,979 2,974 2,716
Net amortization and accretion of investment securities 300 310 949
Net (gain) loss on investment securities (254) -- 6
Federal Home Loan Bank stock dividends received (1,275) (1,182) (1,114)
Net increase in loans held for sale (20,308) (124) (655)
Net (gain) loss on sale of loans (4,340) 64 (18)
Deferred income tax benefit (871) (347) (1,121)
Equity in earnings of unconsolidated subsidiaries (420) (489) (681)
Net decrease (increase) in other assets 1,127 (7,098) 4,292
Increase in other liabilities 5,345 1,831 1,548
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,952 14,398 22,513
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities held to maturity 60,489 41,290 46,803
Purchases of investment securities held to maturity (28,354) (84,973) (20,306)
Proceeds from sales of investment securities available for sale 20,574 -- 17,807
Proceeds from maturities of and calls on investment securities available for sale 26,351 28,077 33,991
Purchases of investment securities available for sale (107,668) (62,637) (36,341)
Net decrease (increase) in interest-bearing deposits in other banks 23,719 (7,891) (19,157)
Net loan originations over principal repayments (46,785) (6,209) (54,786)
Purchases of premises and equipment (3,226) (4,607) (2,372)
Net proceeds from disposal of premises and equipment 90 29 36
Distributions from unconsolidated subsidiaries 380 322 --
Contributions to unconsolidated subsidiaries (418) (200) --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (54,848) (96,799) (34,325)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 75,965 69,544 (14,705)
Proceeds from long-term debt 30,000 50,500 67,000
Repayments of long-term debt (39,416) (38,635) (32,267)
Net (decrease) increase in short-term borrowings (4,234) 821 1,930
Cash dividends paid (5,436) (5,061) (5,051)
Proceeds from sale of common stock 583 393 165
Repurchases of common stock (14,526) -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 42,936 77,562 17,072
- ----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (7,960) (4,839) 5,260
Cash and cash equivalents:
At beginning of year 50,695 55,534 50,274
- ----------------------------------------------------------------------------------------------------------------------------
At end of year $ 42,735 $ 50,695 $ 55,534
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 47,207 $ 44,184 $ 41,700
Cash paid during the year for income taxes 2,301 10,243 7,588
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities:
Reclassification of loans to other real estate $ 846 $ 3,450 $ 619
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
- ----
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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 27 banking
offices located throughout the state of Hawaii at December 31, 1998. 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 debit card services, cash management services,
merchant services, 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, 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
investment 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 subsidiary, Central Pacific Bank and its subsidiaries, CPBProperties, Inc.
(wholly-owned) and CPB Real Estate, Inc. CPB Real Estate, Inc. was incorporated
in 1998 and was formed for the purpose of acquiring, holding and managing real
estate mortgage loans and mortgage-backed securities. All significant
intercompany accounts and transactions have been eliminated in consolidation.
CPB Inc. owns 49% 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% interest in
CKSS Associates, 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, 1998 and 1997, would be 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 in accumulated other comprehensive income. Held-to-maturity
debt securities are reported at amortized cost.
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
$28,979,000 and $8,671,000 at December 31, 1998 and 1997, respectively, and were
valued at the lower of aggregate cost or market value.
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.
23
----
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 remaining principal, then to the allowance as
recoveries, and finally to unaccrued interest.
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 are charged off within 120 days, unless determined to
be adequately collateralized or in imminent process of collection.
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 $863,000 and
$481,000 at December 31, 1998 and 1997, respectively, and were comprised of
mortgage servicing rights and deposit purchase premiums which represent the
excess of the 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 $262,000, $151,000 and $114,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Accumulated amortization amounted to $932,000
and $670,000 at December 31, 1998 and 1997, 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 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.
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
24
- ----
<PAGE>
earnings per share disclosures for employee stock option grants made in 1995 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 1998 or 1997.
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
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("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, did not have a
material impact on the Company's consolidated financial statements.
SEGMENTS AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997, although it need not be applied to
interim periods in the initial year of implementation. SFAS No. 131 establishes
standards for the way public companies report selected information about
business segments, including information on products and services, geographic
areas and major customers, based on a management approach to reporting.
Reclassification of financial statements for prior periods is required for
comparative purposes. The application of SFAS No. 131, effective from January 1,
1998, did not have a material impact on the consolidated financial statements of
the Company.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," an amendment of SFAS 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,
25
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<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
standardizes the disclosure requirements for pensions and other
postretirement benefits, requires additional information on changes in the
benefit obligations and fair values of plan assets to facilitate financial
analysis and eliminates certain disclosures that are no longer considered
useful. The application of SFAS No. 132, effective as of the year ended
December 31, 1998, did not have a material 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, 1998 and 1997 was $21,967,000 and $19,814,000, respectively.
3. INVESTMENT SECURITIES
A summary of investment securities at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(Dollars in thousands) cost gains losses value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Held to Maturity:
U.S. Treasury and
other U.S. Government
agencies $ 67,304 $1,538 $ -- $ 68,842
States and political
subdivisions 53,172 1,212 -- 54,384
- -------------------------------------------------------------------------------
Total $120,476 $2,750 $ -- $123,226
- -------------------------------------------------------------------------------
Available for Sale:
U.S. Treasury and
other U.S. Government
agencies $207,631 $1,420 $410 $208,641
States and political
subdivisions 4,069 34 -- 4,103
Federal Home Loan Bank
of Seattle stock 17,391 -- -- 17,391
Other 825 -- -- 825
- -------------------------------------------------------------------------------
Total $229,916 $1,454 $410 $230,960
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
</TABLE>
26
- ----
<PAGE>
The amortized cost and estimated fair value of investment securities at
December 31, 1998, 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 $ 2,993 $ 3,031
Due after one year through five years 36,291 37,040
Due after five years through ten years 29,026 29,742
Due after ten years 7,703 7,747
Mortgage-backed securities 44,463 45,666
- ---------------------------------------------------------------------
Total $120,476 $123,226
- ---------------------------------------------------------------------
Available for Sale:
Due in one year or less $ 23,818 $ 23,811
Due after one year through five years 41,464 42,024
Due after five years through ten years 1,117 1,124
Due after ten years 1,791 1,791
Mortgage-backed securities 143,510 143,994
Federal Home Loan Bank of Seattle stock 17,391 17,391
Other 825 825
- ---------------------------------------------------------------------
Total $229,916 $230,960
- ---------------------------------------------------------------------
</TABLE>
Proceeds from sales of investment securities available for sale were
$20,574,000 in 1998 and $17,807,000 in 1996, resulting in gross realized
gains of $254,000 and $140,000, respectively, and gross realized losses of
$146,000 in 1996. There were no sales of investment securities during the
year ended December 31, 1997.
Investment securities of $160,539,000 and $170,138,000 at December 31,
1998 and 1997, 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, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Real estate:
Mortgage - commercial $ 484,396 $ 451,250
Mortgage - residential 338,914 332,698
Construction 61,685 45,266
Commercial, financial and agricultural 190,781 147,167
Consumer 34,679 68,398
- --------------------------------------------------------------------------
1,110,455 1,044,779
Unearned income 4,543 3,756
- --------------------------------------------------------------------------
Total $1,105,912 $1,041,023
- --------------------------------------------------------------------------
</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 1998 follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------------------------------
<S> <C>
Balance, beginning of year $11,234
Additions 377
Repayments (861)
Other changes (80)
- ----------------------------------------------------------
Balance, end of year $10,670
- ----------------------------------------------------------
</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, 1998 and 1997, all of which had related
allowance for loan losses established (see note 5), amounted to $12,301,000
and $21,808,000, respectively, and included all nonaccrual and restructured
loans greater than $500,000. The average recorded investment in impaired
loans amounted to $20,199,000 in 1998, $16,268,000 in 1997 and $11,292,000 in
1996. Interest income recognized on such loans amounted to $749,000 in 1998,
$2,102,000 in 1997 and $1,714,000 in 1996, of which $3,000, $1,505,000 and
$860,000, respectively, was earned on nonaccrual loans, and $431,000 and
$854,000, was recorded in 1997 and 1996, respectively, on restructured loans
still accruing interest.
27
----
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Nonaccrual loans at December 31, 1998 and 1997 totaled $12,932,000 and
$16,413,000, respectively. The Bank collected and recognized interest of
$248,000 on nonaccrual loans in 1998. The Bank would have recognized
additional interest income of $1,229,000 had these loans been accruing
interest throughout 1998. Additionally, the Bank collected and recognized
interest of $81,000 on charged-off loans in 1998.
Restructured loans still accruing interest at December 31, 1997 amounted
to $2,727,000. There were no restructured loans still accruing interest
outstanding at December 31, 1998.
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) 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $19,164 $19,436 $20,156
Provision for loan losses 6,600 3,500 2,500
- ------------------------------------------------------------
25,764 22,936 22,656
- ------------------------------------------------------------
Charge-offs (6,581) (4,042) (3,555)
Recoveries 883 270 335
- ------------------------------------------------------------
Net charge-offs (5,698) (3,772) (3,220)
- ------------------------------------------------------------
Balance, end of year $20,066 $19,164 $19,436
- ------------------------------------------------------------
</TABLE>
Changes in the allowance for loan losses for impaired loans (included in
the above amounts) were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $3,790 $5,877 $2,181
Provision for loan losses 2,555 853 872
Net charge-offs (2,997) (933) (1,981)
Other changes (388) (2,007) 4,805
- ------------------------------------------------------------
Balance, end of year $2,960 $3,790 $5,877
- ------------------------------------------------------------
</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, 1998, $11,284,000 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, 1998
and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 6,753 $ 6,753
Office buildings and leasehold improvements 23,124 22,448
Furniture, fixtures and equipment 17,421 15,743
- --------------------------------------------------------------------------------
47,298 44,944
Less accumulated depreciation and amortization 20,465 18,268
- --------------------------------------------------------------------------------
Net $26,833 $26,676
- --------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization of premises and equipment were charged to
the following operating expenses:
<TABLE>
<CAPTION>
Useful
(Dollars in thousands) 1998 1997 1996 lives
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Net occupancy $1,201 $1,027 $ 995 1 to 35
years
Equipment 1,778 1,947 1,721 2 to 20
years
- -------------------------------------------------------------
Total $2,979 $2,974 $2,716
- -------------------------------------------------------------
</TABLE>
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
28
- ----
<PAGE>
the partnership or upon the sale of the land and building by the partnership.
Financial information of CKSS Associates is summarized as follows:
CKSS Associates
Condensed Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Assets:
Office building
(including land valued at $5,200) $36,459 $37,462
Deferred costs 3,305 3,517
Other assets 1,576 1,823
- ----------------------------------------------------------------------------
Total assets $41,340 $42,802
- ----------------------------------------------------------------------------
Liabilities and Partners' Equity:
Notes payable $18,601 $20,201
Other liabilities 520 642
Partners' equity 22,219 21,959
- ----------------------------------------------------------------------------
Total liabilities and partners' equity $41,340 $42,802
- ----------------------------------------------------------------------------
</TABLE>
CKSS Associates
Condensed Statements of Income
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Rental income from bank $1,903 $2,039 $2,162
Other rental income
and other revenues 6,234 6,514 6,438
- ----------------------------------------------------------
Total revenues 8,137 8,553 8,600
Total costs and expenses 7,137 7,390 7,238
- ----------------------------------------------------------
Net income $1,000 $1,163 $1,362
- ----------------------------------------------------------
</TABLE>
NOTES PAYABLE
At December 31, 1998, notes payable included $8,501,000 payable to The
Sumitomo Bank, Limited ("Sumitomo"), the principal stockholder of CPB Inc.,
and $10,100,000 due to the Bank. The notes payable to Sumitomo, due on June
18, 2001, are secured by a mortgage on Central Pacific Plaza. The notes
payable to the Bank include $9,900,000 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 6.638% at December 31, 1998.
OPERATING LEASE
In 1995 CKSS Associates completed its development of a four-story office
building known as the Kaimuki Plaza in Kaimuki, on the island of Oahu,
Hawaii, on land owned by CPB Properties, Inc. In 1992, CKSS Associates and CPB
Properties, Inc. entered into a lease agreement effective from January 1,
1993 to December 31, 2047. This lease agreement has been accounted for as an
operating lease. Fixed annual lease payments through 2007 are $300,000 for
1999 through 2002 and $360,000 for 2003 through 2007. 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, 1998, 1997
and 1996.
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 $344,163,000 and
$317,238,000 at December 31, 1998 and 1997, respectively.
Interest expense on certificates of deposit of $100,000 or more totaled
$16,640,000, $15,116,000, and $13,755,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
9. SHORT-TERM BORROWINGS
Federal funds purchased generally mature on the day following the date
of purchase.
Securities sold under agreements to repurchase with a weighted average
contractual maturity of 365 days at December 31, 1998, 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, 1998, 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.
29
----
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of short-term borrowings follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Amount outstanding at
December 31 $ -- $ -- $ --
Average amount outstanding
during year 998 81 4,589
Highest month-end balance
during year -- -- 8,000
Weighted average interest rate
on balances outstanding
at December 31 -- -- --
Weighted average interest rate
during year 5.05% 5.82% 5.48%
- -----------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase:
Amount outstanding at
December 31 $ 1,000 $ 3,500 $ 4,400
Average amount outstanding
during year 2,342 3,945 2,433
Highest month-end balance
during year 2,500 4,400 4,400
Weighted average interest rate
on balances outstanding
at December 31 4.70% 5.43% 5.32%
Weighted average interest rate
during year 5.43% 5.49% 5.62%
- -----------------------------------------------------------------------------------------------
Other short-term borrowings:
Amount outstanding at
December 31 $ 1,014 $ 2,748 $ 1,027
Average amount outstanding
during year 9,941 1,502 1,822
Highest month-end balance
during year 33,992 3,429 21,003
Weighted average interest rate
on balances outstanding
at December 31 3.95% 5.27% 5.11%
Weighted average interest rate
during year 5.50% 5.07% 5.50%
- -----------------------------------------------------------------------------------------------
</TABLE>
10. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consisted of
intermediate-term FHLB advances with a weighted average interest rate of
5.573% and 5.938%, respectively. FHLB advances outstanding at December 31,
1998 were secured by interest-bearing deposits at the FHLB of $10.5 million,
the Bank's holdings of FHLB stock, other unencumbered investment securities
with a carrying value of $163.6 million and certain real estate loans
totaling $237.9 million in accordance with the collateral provisions of the
Advances, Security and Deposit Agreement between the Bank and the FHLB. At
December 31, 1998 the Bank had available to it additional unused FHLB
advances of approximately $86.9 million.
At December 31, 1998, approximate maturities of FHLB advances were as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ---------------------------------------------------------
<S> <C>
Year ending December 31:
1999 $ 27,520
2000 32,324
2001 18,133
2002 9,861
2003 14,145
Thereafter 16,306
- ---------------------------------------------------------
Total $118,289
- ---------------------------------------------------------
</TABLE>
11. SHAREHOLDER RIGHTS PLAN
On August 29, 1998, the Company's board of directors adopted a
Shareholder Rights Plan (the "Rights Plan") which entitled holders of common
stock to receive one right for each share of common stock outstanding as of
September 16, 1998. Each right entitles the registered holder to purchase
from the Company one one-hundredth (1/100th) of a share of the Company's
Junior Participating Preferred Stock, Series A, no par value per share, at a
price of $75.00 per one one-hundredth (1/100th) of a share, subject to
adjustment. The rights are exercisable only upon the occurrence of specific
events and will expire on August 26, 2008. The Rights Plan was designed to
ensure that shareholders receive fair and equal treatment in the event of
unsolicited or coercive attempts to acquire the Company. The Rights Plan was
also intended to guard against unfair tender offers and other abusive
takeover tactics. The Rights Plan was not intended to prevent an acquisition
bid for the Company on terms that are fair to all shareholders.
12. 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 $1,241,000,
$1,283,000 and $1,199,000 for 1998, 1997 and 1996, respectively, which were
charged to salaries and employee benefits.
30
- ----
<PAGE>
13. 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 was determined using
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 1998 or 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- --------------------------
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 1 501,390 $ 15.09 296,026 $ 11.98 330,250 $ 11.24
Granted -- -- 253,400 17.88 -- --
Exercised (55,400) 10.52 (41,436) 9.49 (34,224) 4.83
Forfeited (11,600) 12.73 (6,600) 17.88 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 434,390 $ 15.73 501,390 $ 15.09 296,026 $ 11.98
Options exercisable at December 31 183,230 13.90 179,470 12.11 169,778 11.24
Shares available for future grants 1,049,960 1,049,960 303,360
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table presents information on options outstanding under
the 1986 and 1997 Stock Option Plans:
<TABLE>
<CAPTION>
Options Options
outstanding exercisable
- ------------------------------------------------------------------
Remaining
average
Exercise contractual
price Shares life (months) Shares
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
$12.725 84,910 42.2 84,910
13.040 102,680 77.5 60,360
17.875 246,800 103.0 37,960
- ------------------------------------------------------------------
Total 434,390 183,230
Weighted average 85.1
Weighted average
exercise price $15.73 $13.90
- ------------------------------------------------------------------
</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) 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
As reported:
Net income $15,069 $14,959 $14,091
Basic earnings per share 1.46 1.42 1.34
Diluted earnings per share 1.45 1.40 1.33
Pro forma:
Net income $14,706 14,741 13,977
Basic earnings per share 1.42 1.40 1.33
Diluted earnings per share 1.42 1.38 1.32
- ------------------------------------------------------------
</TABLE>
31
----
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1995 is not
considered.
14. 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 were
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, 1998, Sumitomo held exercisable warrants for 42,968
shares and warrants for 31,713 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, 1998.
15. PENSION PLANS
The Bank has a defined benefit retirement plan covering substantially
all of its employees. The 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.
32
- ----
<PAGE>
The following table sets forth information pertaining to the defined
benefit retirement plan for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1 $ 22,221 $ 20,830 $ 20,344
Service cost 304 209 654
Interest cost 1,612 1,562 1,479
Actuarial loss (gain) 685 1,050 (377)
Benefits paid (1,537) (1,430) (1,270)
- --------------------------------------------------------------------------------------------
Benefit obligation at
December 31 $ 23,285 $ 22,221 $ 20,830
- --------------------------------------------------------------------------------------------
Benefit obligation actuarial assumptions:
Weighted average discount rate 7.00% 7.50% 7.75%
Weighted average rate of
compensation increase 5.00 5.00 5.00
- --------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of assets at January 1 $ 22,086 $ 19,872 $ 18,836
Actual return on plan assets 2,188 3,346 1,463
Employer contributions -- 298 843
Benefits paid (1,537) (1,430) (1,270)
- --------------------------------------------------------------------------------------------
Fair value of assets at
December 31 $ 22,737 $ 22,086 $ 19,872
- --------------------------------------------------------------------------------------------
Funded status:
Benefit obligation at December 31 $(23,285) $(22,221) (20,830)
Fair value of plan assets 22,737 22,086 19,872
Unrecognized transition asset (91) (137) (182)
Unamortized prior service cost (294) (19) 255
Unrecognized net actuarial loss 3,909 3,586 4,311
- --------------------------------------------------------------------------------------------
Prepaid benefit cost $ 2,976 $ 3,295 $ 3,426
- --------------------------------------------------------------------------------------------
Components of net periodic cost:
Service cost $ 304 $ 209 654
Interest cost 1,612 1,562 1,479
Expected return on plan assets (1,922) (1,727) (1,686)
Amortization of unrecognized
transition asset (46) (46) (46)
Recognized prior service cost 275 275 455
Recognized net loss 96 156 185
- --------------------------------------------------------------------------------------------
Net periodic cost $ 319 $ 429 $ 1,041
- --------------------------------------------------------------------------------------------
Net periodic cost actuarial assumptions:
Weighted average discount rate 7.50% 7.75% 7.50%
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>
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 information pertaining to the SERP for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1 $ 611 $ 570 $ 624
Service cost 7 14 24
Interest cost 46 44 47
Actuarial loss (gain) 65 30 (78)
Benefits paid (47) (47) (47)
- -----------------------------------------------------------------------------
Benefit obligation at
December 31 $ 682 $ 611 $ 570
- -----------------------------------------------------------------------------
Change in plan assets:
Fair value of assets at January 1 $ -- $ -- $ --
Employer contributions 47 47 47
Benefits paid (47) (47) (47)
- -----------------------------------------------------------------------------
Fair value of assets at
December 31 $ -- $ -- $ --
- -----------------------------------------------------------------------------
Funded status:
Benefit obligation at December 31 $(682) $(611) $(570)
Unrecognized transition obligation 22 25 53
Unrecognized net actuarial loss 82 16 (40)
- -----------------------------------------------------------------------------
Accrued benefit cost $(578) $(570) $(557)
- -----------------------------------------------------------------------------
Components of net periodic cost:
Service cost $ 7 $ 14 $ 24
Interest cost 46 44 47
Amortization of unrecognized
transition obligation 3 29 29
Recognized net (gain) loss (1) (26) 2
- -----------------------------------------------------------------------------
Net periodic cost $ 55 $ 61 $ 102
- -----------------------------------------------------------------------------
</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.
33
----
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. 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 $826,000, $855,000
and $810,000 for 1998, 1997 and 1996, 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
$318,000, $288,000 and $88,000 in 1998, 1997 and 1996, respectively.
17. OPERATING LEASES
The Bank occupies a number of properties under leases which expire on
various dates through 2038 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 $459,000, $392,000 and $577,000 for
1998, 1997 and 1996, respectively.
Net rent expense, charged to net occupancy expense, for all operating
leases is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Total rent expense $4,661 $4,709 $5,510
Less sublease rental income (295) (313) (205)
- -----------------------------------------------------------
Net $4,366 $4,396 $5,305
- -----------------------------------------------------------
</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, 1998:
<TABLE>
<CAPTION>
Less
sublease Net
Rental rental rental
(Dollars in thousands) commitment income commitment
- ---------------------------------------------------------------
<S> <C> <C> <C>
Year ending December 31:
1999 $ 3,802 $(167) $ 3,635
2000 3,652 (105) 3,547
2001 3,642 (43) 3,599
2002 3,261 (18) 3,243
2003 2,977 -- 2,977
Thereafter 17,958 -- 17,958
- ---------------------------------------------------------------
Total $35,292 $(333) $34,959
- ---------------------------------------------------------------
</TABLE>
Rental commitments include $12,192,000 in commitments to CKSS Associates
by the Bank for office space in the Central Pacific Plaza and Kaimuki Plaza
buildings.
In addition, the Bank and CPBProperties, 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, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ---------------------------------------------------------
<S> <C>
Year ending December 31:
1999 $ 1,204
2000 1,066
2001 806
2002 621
2003 455
Thereafter 16,378
- ---------------------------------------------------------
Total $20,530
- ---------------------------------------------------------
</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.
34
- ----
<PAGE>
18. OTHER EXPENSE
Components of other expense for the years ended December 31, 1998, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Merchant and bank card services $ 2,695 $ 2,354 $ 2,455
Advertising 1,245 1,020 1,160
Computer software 1,235 1,141 1,115
Stationery and supplies 1,038 947 1,044
Other 9,366 8,167 7,201
- -----------------------------------------------------------------------
Total $15,579 $13,629 $12,975
- -----------------------------------------------------------------------
</TABLE>
19. INCOME AND FRANCHISE TAXES
Components of income tax expense (benefit) for the years ended December
31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Current Deferred Total
- -----------------------------------------------------------
<S> <C> <C> <C>
1998:
Federal $ 7,962 $ (734) $ 7,228
State 1,876 (137) 1,739
- -----------------------------------------------------------
Total $ 9,838 $ (871) $ 8,967
- -----------------------------------------------------------
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
- -----------------------------------------------------------
</TABLE>
Income tax expense amounted to $8,967,000, $9,359,000 and $9,236,000 for
1998, 1997 and 1996, 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% to income before income taxes) for the
following reasons:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $8,413 $8,511 $8,164
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (708) (321) (192)
State franchise tax, net of
Federal income tax benefit 1,130 1,157 1,120
Other 132 12 144
- --------------------------------------------------------------------------
Total $8,967 $9,359 $9,236
- --------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, current Federal income taxes payable of
$7,611,000 and $131,000, respectively, and current State franchise taxes
payable of $3,618,000 and $3,539,000, respectively, were included in other
liabilities.
35
----
<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,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 6,544 $ 6,249
Employee retirement benefits 1,903 1,776
Interest on nonaccrual loans 893 888
State franchise tax 710 735
Accrued expenses 604 622
Net unrealized gain on available-for-sale securities 417 62
Other 233 189
- ---------------------------------------------------------------------------------------
Total deferred tax assets $11,304 $10,521
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
FHLB stock dividends received 3,097 2,587
Deferred gain on curtailed retirement plan 2,771 2,771
Investment in unconsolidated subsidiaries 989 1,161
Deferred finance fees 422 449
Accreted discounts receivable 317 303
Premises and equipment, principally
due to differences in depreciation 57 226
Other 202 91
- ---------------------------------------------------------------------------------------
Total deferred tax liabilities $ 7,855 $ 7,588
- ---------------------------------------------------------------------------------------
Net deferred tax assets $ 3,449 $ 2,933
- ---------------------------------------------------------------------------------------
</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, 1998 and 1997.
In 1998, the Company completed a corporate reorganization which was
intended to reduce the Company's overall effective tax rate. The Company
believes that the associated tax benefits are realizable; however, the state of
Hawaii has indicated that it may challenge the tax treatment of this
reorganization. Estimated tax benefits which have not yet been recognized
amounted to approximately $1,100,000 as of December 31, 1998.
20. COMPREHENSIVE INCOME
Components of other comprehensive income for the years ended December 31,
1998, 1997 and 1996 were comprised solely of unrealized holding gains (losses)
on available-for-sale investment securities. Accumulated other comprehensive
income is presented below as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 94 $ (590) $ 235
Current-year change 533 684 (825)
- -------------------------------------------------------------
Balance at end of year $ 627 $ 94 $ (590)
- -------------------------------------------------------------
</TABLE>
21. 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) 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share computation
Numerator:
Income available to
common stockholders $15,069 $14,959 $14,091
Denominator:
Weighted average common
shares outstanding 10,354 10,555 10,530
Basic earnings per share $ 1.46 $ 1.42 $ 1.34
- -----------------------------------------------------------------------------------
Diluted earnings per share computation
Numerator:
Income available to
common stockholders $15,069 $14,959 $14,091
Denominator:
Weighted average common
shares outstanding 10,354 10,555 10,530
Incremental shares from
conversion of options and share
purchase agreement warrants 78 100 70
- -----------------------------------------------------------------------------------
10,432 10,655 10,600
Diluted earnings per share $ 1.45 $ 1.40 $ 1.33
- -----------------------------------------------------------------------------------
</TABLE>
36
- ----
<PAGE>
22. 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.
23. 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, 1998 and 1997 financial instruments with off-balance sheet
risk were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $261,200 $353,764
Standby letters of credit and
financial guarantees written 11,990 16,883
- --------------------------------------------------------------------------------------------------
Financial instruments whose contract
amounts exceed the amount of credit risk:
Forward foreign exchange contracts $ 207 $ 95
- --------------------------------------------------------------------------------------------------
</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.
37
----
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
24. 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.
DEPOSIT LIABILITIES
The fair values of deposits with no stated maturity, such as
noninterest-bearing demand deposits and interest-bearing
<TABLE>
<CAPTION>
DECEMBER 31, 1998 December 31, 1997
--------------------------- ----------------------------
Carrying/ Carrying/
notional Estimated notional Estimated
(Dollars in thousands) amount fair value amount fair value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 42,735 $ 42,735 $ 50,695 $ 50,695
Interest-bearing deposits in other banks 10,469 10,469 34,188 34,188
Investment securities 351,436 354,186 320,711 321,517
Net loans 1,085,846 1,088,459 1,021,859 1,023,367
Accrued interest receivable 9,122 9,122 9,404 9,404
Due from customers on acceptances 32 32 59 59
Financial liabilities:
Deposits:
Noninterest-bearing deposits 186,892 186,892 168,505 168,505
Interest-bearing demand and savings deposits 531,551 531,551 503,144 503,144
Time deposits 550,680 552,974 521,509 519,258
Total deposits 1,269,123 1,271,417 1,193,158 1,190,907
Short-term borrowings 2,014 2,014 6,248 6,248
Long-term debt 118,289 120,973 127,705 128,197
Bank acceptances outstanding 32 32 59 59
Accrued interest payable (included in other liabilities) 4,902 4,902 5,404 5,404
Off-balance sheet financial instruments:
Commitments to extend credit 261,200 697 353,764 998
Standby letters of credit and financial guarantees written 11,990 90 16,883 127
Forward foreign exchange contracts 207 (2) 95 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
- ----
<PAGE>
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.
25. DECLARATION OF DIVIDENDS
The Company's board of directors, at a special meeting held on December 14,
1998, 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 $0.52 per
share for the year ended December 31, 1998.
26. SEGMENT INFORMATION
The Company has three reportable segments: retail branches, commercial
finance and treasury. The segments reported are consistent with internal
functional reporting lines. They are managed separately because each unit has
different target markets, technological requirements, marketing strategies and
specialized skills. The retail branch segment includes all retail branch
offices. Products and services offered include checking, savings, money market
and time deposits; real estate, commercial and consumer loans; safe deposit
boxes; and various other bank services. The commercial finance segment focuses
on lending to corporate customers; residential mortgage lending; construction
and real estate development lending and international banking services. The
treasury segment is responsible for managing the Company's investment securities
portfolio and wholesale funding activities.
The accounting policies of the segments are consistent with those described
in note 1. The majority of the Company's net income is derived from net interest
income. Accordingly, Management focuses primarily on net interest income
(expense), rather than gross interest income and expense amounts, in evaluating
segment profitability. Intersegment net interest income (expense) is allocated
to each segment based on the amount of net investable funds provided (used) by
that segment at a rate equal to the Bank's average rate on interest-sensitive
assets and liabilities. All administrative and overhead expenses are allocated
to the segments at cost. Cash, investment securities, loans and their related
balances are allocated to the segment responsible for acquisition and
maintenance of those assets. Segment assets also include all premises and
equipment used directly in segment operations.
39
---
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Segment profits and assets are provided in the following table for the periods
indicated.
<TABLE>
<CAPTION>
Retail Commercial
(Dollars in thousands) Branch Finance Treasury All Others Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Net interest income (expense) $ (9,284) $ 60,998 $ 8,514 $ 4,859 $ 65,087
Intersegment net interest income (expense) 44,926 (42,424) (334) (2,168) --
Provision for loan losses 1,202 4,253 -- 1,145 6,600
Other income 4,356 573 283 11,610 16,822
Other expense 15,994 3,850 311 31,118 51,273
Administrative and overhead expense allocation 16,177 2,629 1,064 (19,870) --
Income tax expense 2,493 3,154 2,589 731 8,967
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 4,132 $ 5,261 $ 4,499 $ 1,177 $ 15,069
- -----------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1998:
Investment securities $ -- $ -- $351,436 $ -- $ 351,436
Loans 286,221 799,745 -- 19,946 1,105,912
Other 23,291 20,279 34,741 25,226 103,537
Total assets $309,512 $820,024 $386,177 $ 45,172 $1,560,885
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Net interest income (expense) $ (7,721) $ 59,706 $ 7,246 $ 6,406 $ 65,637
Intersegment net interest income (expense) 43,571 (40,445) (96) (3,030) --
Provision for loan losses 298 2,356 -- 846 3,500
Other income 3,821 546 8 6,452 10,827
Other expense 15,463 3,750 241 29,192 48,646
Administrative and overhead expense allocation 14,742 3,132 629 (18,503) --
Income tax expense (benefit) 3,525 4,058 2,424 (648) 9,359
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,643 $ 6,511 $ 3,864 $ (1,059) $ 14,959
- ----------------------------------------------------------------------------------------------------------------------------
At December 31, 1997:
Investment securities $ -- $ -- $320,711 $ -- $320,711
Loans 297,213 697,057 -- 46,753 1,041,023
Other 22,007 15,671 59,748 37,941 135,367
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $319,220 $712,728 $380,459 $ 84,694 $1,497,101
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Net interest income (expense) $ (5,022) $ 56,051 $ 5,287 $ 6,292 $ 62,608
Intersegment net interest income (expense) 37,878 (37,655) 2,625 (2,848) --
Provision (credit) for loan losses (24) 2,001 -- 523 2,500
Other income 3,508 995 2 6,210 10,715
Other expense 15,147 3,059 214 29,076 47,496
Administrative and overhead expense allocation 14,877 3,889 (54) (18,712) --
Income tax expense (benefit) 2,517 4,135 3,069 (485) 9,236
- ----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,847 $ 6,307 $ 4,685 $ (748) $ 14,091
- ----------------------------------------------------------------------------------------------------------------------------
At December 31, 1996:
Investment securities $ -- $ -- $240,458 $ -- $ 240,458
Loans 302,828 682,540 -- 56,608 1,041,976
Other 22,317 13,843 48,673 35,898 120,731
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $325,145 $696,383 $289,131 $92,506 $1,403,165
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
- ----
<PAGE>
27. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 1998, retained earnings of the parent
company, CPB Inc., included $95,703,000 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, 1998,
retained earnings of the Bank totaled $97,050,000.
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, 1998 and 1997, 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>
Company:
As of December 31, 1998:
Tier I leverage capital $147,338 9.71% $60,722 4.00% $ 75,903 5.00%
Tier I risk-based capital 147,338 12.10 48,698 4.00 73,047 6.00
Total risk-based capital 162,616 13.36 97,395 8.00 121,744 10.00
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
- ----------------------------------------------------------------------------------------------------------------------------
Bank:
As of December 31, 1998:
Tier I leverage capital $137,233 9.05% $60,636 4.00% $ 75,795 5.00%
Tier I risk-based capital 137,233 11.28 48,661 4.00 72,992 6.00
Total risk-based capital 152,500 12.54 97,322 8.00 121,653 10.00
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
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
41
----
<PAGE>
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Condensed financial statements, solely of the parent company, CPB Inc., follow:
CPB Inc.
Condensed Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 7,969 $ 8,368
Investment securities available for sale 2,012 1,516
Investment in subsidiary bank, at equity in underlying net assets 138,017 143,162
Dividends receivable from subsidiary bank 1,275 --
Accrued interest receivable and other assets 139 140
- --------------------------------------------------------------------------------------------------------------------------
Total assets $149,412 $153,186
- --------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Dividends payable $ 1,274 $ 1,375
Other liabilities 72 69
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,346 1,444
- --------------------------------------------------------------------------------------------------------------------------
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 9,797,596 and 10,579,184 shares at
December 31, 1998 and 1997, respectively 6,637 6,612
Surplus 45,848 45,848
Retained earnings 94,954 99,188
Accumulated other comprehensive income 627 94
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 148,066 151,742
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $149,412 $153,186
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
CPB Inc.
Condensed Statements of Income
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary bank $ 6,801 $ 5,100 $ 5,101
Equity in loss from unconsolidated subsidiary (80) (92) --
Interest income:
Interest on investment securities 55 75 281
Interest from subsidiary bank 271 279 116
- ---------------------------------------------------------------------------------------------------------------------------
Total income 7,047 5,362 5,498
Total expenses 339 286 259
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed income of subsidiary bank 6,708 5,076 5,239
Income taxes (37) (10) 55
- ---------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiary bank 6,745 5,086 5,184
Equity in undistributed income of subsidiary bank 8,324 9,873 8,907
- ---------------------------------------------------------------------------------------------------------------------------
Net income $15,069 $14,959 $14,091
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
42
- ----
<PAGE>
CPB Inc.
Condensed Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,069 $ 14,959 $ 14,091
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense 10 -- 4
Increase in dividends receivable from subsidiary bank (1,275) -- --
Equity in undistributed income of subsidiary bank (8,324) (9,873) (8,907)
Other, net 54 (38) 63
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,534 5,048 5,251
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale 760 4,000 3,000
Purchases of investment securities available for sale (1,242) (750) --
Investment in and advances to subsidiaries (60) (80) 614
Distribution of capital by subsidiary bank 13,988 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 13,446 3,170 3,614
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 583 393 165
Repurchases of common stock (14,526) -- --
Dividends paid (5,436) (5,066) (5,051)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (19,379) (4,673) (4,886)
- --------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (399) 3,545 3,979
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
At beginning of year 8,368 4,823 844
- --------------------------------------------------------------------------------------------------------------------------------
At end of year $ 7,969 $ 8,368 $ 4,823
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28. ACCOUNTING PRONOUNCEMENTS
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Earlier application is permitted only as of the beginning of a
fiscal quarter. The application of SFAS No. 133, effective from January 1,
2000, is not expected to have a material impact on the Company's consolidated
financial statements.
MORTGAGE-BACKED SECURITIES
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise," an amendment of SFAS
No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 134,
effective for the first fiscal quarter beginning after December 15, 1998,
requires that after the securitization of mortgage loans held for sale, the
resulting mortgage-backed securities or other retained interests be
classified in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," based on the entity's ability and
intent to sell or hold those investments. The application of SFAS No. 134,
effective from January 1, 1999, is not expected to have a material impact on
the Company's consolidated financial statements.
43
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<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, 1998 and 1997, and the related consolidated
statements of income and comprehensive income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Honolulu, Hawaii
February 26, 1999
COMMON STOCK PRICE RANGE AND 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 1998 and 1997 as reported by Nasdaq and cash dividends declared for those
years.
<TABLE>
<CAPTION>
Cash
dividends
High Low declared
- ----------------------------------------------------------
<S> <C> <C> <C>
1998:
First quarter $21.00 $18.00 $0.13
Second quarter 20.38 17.81 0.13
Third quarter 19.63 15.00 0.13
Fourth quarter 17.75 15.88 0.13
- ----------------------------------------------------------
Year $21.00 $15.00 $0.52
- ----------------------------------------------------------
- ----------------------------------------------------------
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
- ----------------------------------------------------------
- ----------------------------------------------------------
</TABLE>
The last sales price of the common stock as of January 29, 1999 as
reported by Nasdaq was $17.00 per share.
On January 29, 1999, there were approximately 2,246 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.
44
- ----
<PAGE>
[LOGO] CORPORATE ORGANIZATION
- -------------------------------------------------------------------------------
CPB Inc. is a Hawaii corporation organized on February 1, 1982 as a bank
holding company pursuant to a Plan of Reorganization and Agreement of Merger
and is subject to the Bank Holding Company Act of 1956, as amended. CPB
Inc.'s principal business is to serve as a holding company for its
subsidiary, Central Pacific Bank. Central Pacific 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. Central Pacific
Bank's deposits are insured by the Federal Deposit Insurance Corporation up
to applicable limits. Central Pacific Bank is not a member of the Federal
Reserve System. Central Pacific Bank is a member of the Federal Home Loan
Bank of Seattle.
Central Pacific Bank owns 100 percent of the outstanding stock of CPB
Properties, Inc., the general and managing partner and 50 percent owner of
CKSS Associates, a Hawaii limited partnership. CKSS Associates owns Central
Pacific Plaza in fee, which is where CPB Inc. and Central Pacific Bank's
administrative headquarters and Main Branch offices are located. CKSS
Associates also owns the Kaimuki Plaza building where the Bank's Kaimuki
Branch office is located. CPB Properties, Inc. holds the fee interest in the
land underlying Kaimuki Plaza. CPB Properties, Inc. also owns in leasehold
University Square, the building where the Bank's Moiliili Branch office is
located. Central Pacific Bank owns the land and buildings where its Hilo and
Kailua-Kona Branch offices are located and the building where its Operations
Center facility is located.
CPB Inc. maintains a 49 percent share of Trans-Pacific Mortgage Group
LLC, a limited liability residential mortgage brokerage firm in Hawaii formed
between the Company and Source Management LLC. The agreement was approved by
the Federal Reserve Bank in 1997.
Central Pacific Bank owns 100 percent of the outstanding common stock of
CPB Real Estate, Inc., which aquires, holds and manages real estate mortgage
loans and mortgage-backed securites. CPB Real Estate, Inc. was incorporated
in 1998.
BANKING SERVICES
Central Pacific Bank is a full-service commercial bank with 27 branch
offices statewide, including eight supermarket branches which offer extended
hours, seven days a week. Twenty-one branches are located on the island of
Oahu. The Bank also operates three branches on the island of Hawaii, two on
the island of Kauai, and a branch on the island of Maui. Its administrative
offices are located in Honolulu.
The Bank's services include personal and business deposit instruments;
commercial, consumer and real estate loans; debit card services; merchant
services; traveler's checks; safe deposit boxes; international banking
services; wire transfer services; ATM and other electronic banking services;
and trust services.
CORPORATE HEADQUARTERS
220 South King Street
Honolulu, Hawaii - 96813
Mailing Address: P.O. Box 3590
Honolulu, Hawaii - 96811-3590
Telephone: (808) 544-0500
Fax: (808) 531-2875
SWIFT: CEPBUS77
FEDWIRE: CENT PAC HONO 121301578
Telex: CENPACBANK HONOLULU
MCI CENPAC 634261
Internet Address: http://www.cpbi.com/
NASDAQ Symbol: CPBI
Shareholders having inquiries about their account, lost stock certificate,
dividend checks or change of address may contact ChaseMellon Shareholder
Services, Shareholder Relations, by calling toll-free 1-800-356-2017 between 9
a.m. and 7 p.m. Monday through Friday Eastern Standard Time.
Written correspondence may be sent to:
ChaseMellon Shareholder Services, Shareholder Relations,
85 Challenger Road, Ridgefield Park, NJ 07660 or contact ChaseMellon's
World Wide Web address at www.chasemellon.com.
Shareholders may obtain without charge a copy of the Company's Annual Report
on Form 10-K including financial statements required to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1998, by writing to: Austin Y.
Imamura, Vice President and Secretary, CPB Inc., P.O. Box 3590, Honolulu,
Hawaii 96811-3590.
[LOGOS]
<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
February 26, 1999, with respect to the consolidated balance sheets of CPB
Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-K of CPB Inc.
/s/ KPMG LLP
Honolulu, Hawaii
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000701347
<NAME> CPB INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,735
<INT-BEARING-DEPOSITS> 10,469
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 2
<INVESTMENTS-HELD-FOR-SALE> 230,960
<INVESTMENTS-CARRYING> 120,476
<INVESTMENTS-MARKET> 123,226
<LOANS> 1,105,912
<ALLOWANCE> 20,066
<TOTAL-ASSETS> 1,560,885
<DEPOSITS> 1,269,123
<SHORT-TERM> 2,014
<LIABILITIES-OTHER> 23,361
<LONG-TERM> 118,289
0
0
<COMMON> 6,637
<OTHER-SE> 141,429
<TOTAL-LIABILITIES-AND-EQUITY> 1,560,885
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<INTEREST-OTHER> 853
<INTEREST-TOTAL> 111,792
<INTEREST-DEPOSIT> 38,478
<INTEREST-EXPENSE> 46,705
<INTEREST-INCOME-NET> 65,087
<LOAN-LOSSES> 6,600
<SECURITIES-GAINS> 254
<EXPENSE-OTHER> 51,273
<INCOME-PRETAX> 24,036
<INCOME-PRE-EXTRAORDINARY> 15,069
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,069
<EPS-PRIMARY> 1.46
<EPS-DILUTED> 1.45
<YIELD-ACTUAL> 4.65
<LOANS-NON> 12,932
<LOANS-PAST> 5,395
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<ALLOWANCE-OPEN> 19,164
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</TABLE>
