<PAGE>
As filed with the Securities and Exchange Commission on March 29, 2000
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, 1999
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 29, 2000, the aggregate market value of the common stock held by
non-affiliates of the registrant was approximately $156,488,000.
<PAGE>
Number of shares of common stock of the registrant outstanding as of February
29, 2000: 9,236,657 shares
The following documents are incorporated by reference herein:
<TABLE>
<CAPTION>
PART OF FORM 10-K
DOCUMENT INCORPORATED INTO WHICH INCORPORATED
- --------------------- -----------------------
<S> <C>
1999 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, 1999 Part III
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . 27
ITEM 4(A). Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . 28
ITEM 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 7A. Quantitative and Qualitative Disclosures Regarding Market Risk . . . . . . . . . . . . . . . . 28
ITEM 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART III
ITEM 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . 30
ITEM 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . 30
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . 31
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
INDEX TO EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</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, 1999, the Company was the third largest bank holding
company in Hawaii.
In 1997, the Company 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 owned 49%. Trans-Pacific
Mortgage Group LLC was formed to enhance the Company's market penetration in the
residential mortgage business. In December 1999, the Company relinquished its
ownership interest in Trans-Pacific Mortgage Group LLC. This transaction had no
material impact on the Company's consolidated financial statements.
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 and was established to provide the Company with an
alternate means of raising capital and to enhance federal and state tax
strategies. The impact of the tax strategies is discussed in Note 19 to the
Company's Consolidated Financial Statements in the 1999 Annual Report. In
November 1998, CPBREI issued 1,000 shares of preferred stock to the Bank and
certain employees of the Bank. At December 31, 1999, the Bank held 869 shares of
CPBREI preferred stock, and employees or former employees held 131 shares of
CPBREI preferred stock.
1
<PAGE>
The principal office of the Company is located at 220 South King Street,
Honolulu, Hawaii 96813, and its telephone number is (808) 544-0500.
Banking Services
The Bank is a full-service commercial bank which currently has 26 banking
offices and 61 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 two branches on the island of Hawaii.
Through its network of banking offices, the Bank emphasizes personalized
services and offers a full range of banking services to small- and medium-sized
businesses, professionals and individuals in Hawaii. 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 credit cards and VISA CHECK CARD, a debit card service, and
is a member of the Star ATM Network. The Bank also offers an internet banking
service through its website at cpbi.com as well as 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, 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, several finance companies and numerous
credit unions 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.
2
<PAGE>
Pacific Century Financial Corporation had $14.4 billion in total assets
at year-end 1999. Bank of Hawaii, its largest subsidiary bank, maintains
approximately 25% of the deposits in the state of Hawaii.
Bancwest Corporation had $16.7 billion in assets at year-end 1999. First
Hawaiian Bank, the Hawaii-based subsidiary bank, has approximately 25% of the
deposits in the state of Hawaii.
American Savings Bank, a subsidiary of Hawaiian Electric Industries, held
$5.8 billion in assets at year end 1999. American Savings Bank has approximately
18% of the deposits in the state of Hawaii.
Central Pacific Bank is the third largest commercial bank maintaining
deposit market share of close to 6% of deposits. At $1.6 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 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. Many 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 addition, recent
federal legislation may have the effect of further increasing the pace of
consolidation within the financial services industry. See "Item 1. Business --
Supervision and Regulation -- Financial Services Modernization Legislation."
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 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
3
<PAGE>
The Company's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between the
interest rates paid by the Bank on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received by the Bank on
its interest-earning assets, such as loans extended to its clients and
securities held in its investment portfolio, comprise the major portion of the
Company's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be predicted.
The business of the Company is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board implements national monetary policies
(with objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. Government securities by adjusting the required
level of reserves for depository institutions subject to its reserve
requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments,
and deposits and also affect interest rates earned on interest-earning assets
and paid on interest-bearing liabilities. The nature and impact on the Company
and the Bank of any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies, and other financial institutions and financial services providers are
frequently made in the U.S. Congress, in the state legislatures, and before
various 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 law. This regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
stockholders of the Company. Set forth below is a summary description of the
material laws and regulations which relate to the operations of the Company and
the Bank. The description is qualified in its entirety by reference to the
applicable laws and regulations.
The Company
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
is required to file with
4
<PAGE>
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 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.
5
<PAGE>
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 ("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 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 Commissioner has many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
Hawaii and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "-- Capital Standards."
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial
6
<PAGE>
banks, insurance companies, securities firms, and other financial service
providers by revising and expanding the BHCA framework to permit a holding
company system to engage in a full range of financial activities through a new
entity known as a Financial Holding Company. "Financial activities" is broadly
defined to include not only banking, insurance, and securities activities, but
also merchant banking and additional activities that the Federal Reserve Board,
in consultation with the Secretary of the Treasury, determines to be financial
in nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Generally, the Financial Services Modernization Act:
o Repeals historical restrictions on, and eliminates many
federal and state law barriers to, affiliations among banks,
securities firms, insurance companies, and other financial
service providers;
o Provides a uniform framework for the functional regulation of
the activities of banks, savings institutions, and their
holding companies;
o Broadens the activities that may be conducted by national
banks, banking subsidiaries of bank holding companies, and
their financial subsidiaries;
o Provides an enhanced framework for protecting the privacy of
consumer information;
o Adopts a number of provisions related to the capitalization,
membership, corporate governance, and other measures designed
to modernize the Federal Home Loan Bank system;
o Modifies the laws governing the implementation of the
Community Reinvestment Act ("CRA"), and
o Addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities
of financial institutions.
In order for the Company to take advantage of the ability to affiliate
with other financial services providers, the Company must become a "Financial
Holding Company" as permitted under an amendment to the BHCA. To become a
Financial Holding Company, the Company would file a declaration with the Federal
Reserve Board, electing to engage in activities permissible for Financial
Holding Companies and certifying that it is eligible to do so because all of its
insured depository institution subsidiaries are well-capitalized and
well-managed. See "-- Capital Standards." In addition, the Federal Reserve Board
must also determine that each insured depository institution subsidiary of the
Company has at least a "satisfactory" CRA rating. See "-- Community Reinvestment
Act and Fair Lending Developments." The Company currently meets the requirements
to make an election to become a Financial Holding Company. Management of the
Company has not
7
<PAGE>
determined at this time whether it will seek an election to become a Financial
Holding Company. The Company is examining its strategic business plan to
determine whether, based on market conditions, the relative financial conditions
of the Company and its subsidiaries, regulatory capital requirements, general
economic conditions, and other factors, the Company desires to utilize any of
its expanded powers provided in the Financial Services Modernization Act.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets, or $50 billion. A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary. The assets of the subsidiary may not be
consolidated with the bank's assets. The bank must also have policies and
procedures to assess financial subsidiary risk and protect the bank from such
risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of
the Federal Deposit Insurance Act governing subsidiaries of state banks that
engage in "activities as principal that would only be permissible" for a
national bank to conduct in a financial subsidiary. It expressly preserves the
ability of a state bank to retain all existing subsidiaries. Because, Hawaii
permits commercial banks chartered by the state to engage in any activity
permissible for national banks, with prior approval of the Commissioner, the
Bank will be permitted to form subsidiaries to engage in the activities
authorized by the Financial Services Modernization Act, to the same extent as a
national bank. In order to form a financial subsidiary, the Bank must be
well-capitalized, and the Bank would be subject to the same capital deduction,
risk management and affiliate transaction rules as applicable to national banks.
The Company and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may experience
further consolidation. The Financial Services Modernization Act is intended to
grant to community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis. Nevertheless, this act may
have the result of increasing the amount of competition that the Company and the
Bank face from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources than the Company and the Bank.
Dividends and Other Transfers of Funds
8
<PAGE>
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 $96.1
million at December 31, 1999. In addition, the 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 Commissioner also have authority to prohibit the Bank
from engaging in activities that, in the FDIC's and the 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 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 Regulatory 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. 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 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
9
<PAGE>
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 risk-based guidelines,
federal banking regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the leverage ratio. For
a banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios.
The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1999.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
ACTUAL REQUIRED EXCESS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----------- --------- ------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio............. $136,345 8.38% $ 65,118 >=4.00% $71,227 4.38%
Tier 1 risk-based ratio.... $136,345 10.47% $ 52,093 >=4.00% $84,252 6.47%
Total risk-based ratio..... $152,680 11.72% $104,187 >=8.00% $48,493 3.72%
</TABLE>
10
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------
ACTUAL REQUIRED EXCESS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----------- --------- ------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage ratio............. $146,703 9.00% $ 65,198 >=4.00% $81,505 5.00%
Tier 1 risk-based ratio.... $146,703 11.24% $ 52,199 >=4.00% $94,504 7.24%
Total risk-based ratio..... $163,070 12.50% $104,397 >=8.00% $58,673 4.50%
</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, 1999, 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 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
11
<PAGE>
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, 1999, 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 rates. Effective January 1, 2000, the rate paid to
retire the Fico Bonds of 2.12 basis points will be equal for members of the BIF
and the SAIF. Effective April 1, 2000, the rate paid to retire the Fico Bonds is
expected to be 2.08 basis points. 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.
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. 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
12
<PAGE>
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act activities. The CRA generally requires the federal banking
agencies to evaluate the record of a financial institution in meeting the credit
needs of its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based a performance-based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. When a bank holding company applies for approval to
acquire a bank or other bank holding company, the Federal Reserve Board will
review the assessment of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application. Based on
an examination conducted July 12, 1999, the Bank was rated Satisfactory in
complying with its CRA obligations.
Year 2000 Compliance
The Company successfully operated through year-end 1999 and into year 2000
with no significant problems or disruptions, and the Company will continue to
monitor its systems, vendors and customers for potential Year 2000 compliance
problems. While the Company has not experienced any adverse impact as a result
of Year 2000 compliance problems to date, no assurance can be given that the
Year 2000 problem will not have an adverse impact on the Company in the future.
Further 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 1999 Annual Report.
Accounting Changes
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 was to be effective for fiscal
years beginning after June 15, 1999. However, in June 1999, the FASB issued SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133," which deferred the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000.
Management believes that the adoption of SFAS No. 133 will not have a material
impact on the Company'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
13
<PAGE>
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 was effective for the first fiscal quarter beginning
after December 15, 1998. The adoption of SFAS No. 134 did not have a material
impact on the Company'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 29, 2000, the Company employed 570 persons, 497 on a full-time
basis and 73 on a part-time basis. Management of the Company believes that it
has favorable employee relations. The Company is not a party to any collective
bargaining agreement.
Selected Statistical Information
The following tables and data set forth, for the respective periods shown,
selected statistical information relating to the Company and the Bank. These
tables should be read in conjunction with the information contained in "ITEM 6.
SELECTED FINANCIAL DATA," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA."
Loan Portfolio
Total loans increased to $1,170.5 million at December 31, 1999, compared
with $1,105.9 million at the end of 1998, and $1,041.0 million at the end of
1997. Increases in loan volumes were recorded in the residential mortgage and
commercial mortgage categories.
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. After nine years of little or no growth in the Hawaii economy,
there are signs of improved economic activity. Consistent with these trends,
14
<PAGE>
delinquencies and charge-offs during 1999 decreased from the previous year.
However, a lack of significant improvement in the state's economy is likely to
have a negative impact on the Company's growth and levels of nonperforming loans
and related 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, 1999, 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.
15
<PAGE>
The following table sets forth information regarding outstanding loans by
categories as of the dates indicated.
Table I. Loans by Categories
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial,
financial
and agricultural $ 186,960 $ 189,796 $ 146,779 $ 141,735 $165,292
Real estate --
construction 45,388 61,375 45,082 43,520 47,853
Real estate --
mortgage --
residential 373,415 337,213 331,347 347,608 341,229
Real estate --
mortgage --
commercial 526,801 482,849 449,417 430,682 368,772
Consumer 37,912 34,679 68,398 78,431 67,210
------------ ------------- ------------- ------------ ----------
Total loans 1,170,476 1,105,912 1,041,023 1,041,976 990,356
Allowance for
loan losses 20,768 20,066 19,164 19,436 20,156
------------- ------------- ------------- ------------- ----------
Net loans $1,149,708 $1,085,846 $1,021,859 $1,022,540 $970,200
============= ============= ============= ============= ===========
</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. Consequently, commercial loan volumes
decreased slightly in 1999 to $187.0 million at December 31, 1999, from $189.8
million at year-end 1998, which was an increase of $43.0 million over year-end
1997.
16
<PAGE>
Real Estate--Construction. Real estate--construction loans decreased to
$45.4 million at year-end 1999, from $61.4 million at the end of 1998, which was
an increase over the prior year-end balance of $45.1 million in 1997. 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
$373.4 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, 1999 totaled $3.0 million.
Home equity lines of credit of $72.0 million at December 31, 1999, 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, 1999 included $147.1
million for stores and offices, $224.7 million for warehouses and industrial
buildings, and $113.4 million for apartment buildings with 5 or more units.
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,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
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 $364,465 40.5% $322,920 39.4% $323,283 41.4% $341,890 43.9% $335,345 47.2%
5 or more
units 8,950 1.0 14,293 1.7 8,064 1.0 5,718 0.7 5,884 0.8
Commercial,
industrial
and other 526,801 58.5 482,849 58.9 449,417 57.6 430,682 55.4 368,772 52.0
--------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $900,216 100.0% $820,062 100.0% $780,764 100.0% $778,290 100.0% $710,001 100.0%
========= ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
17
<PAGE>
Consumer Loans. The following table sets forth the primary
components of the Bank's Consumer loan portfolio as of the dates indicated.
Table III. Consumer Loan Portfolio Composition
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
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 $19,462 51.3% $20,214 58.3% $25,874 37.8% $35,424 45.2% $26,368 39.2%
Credit cards
and related
plans 7,955 21.0 4,003 11.5 26,058 38.1 23,989 30.6 22,151 33.0
Other 10,495 27.7 10,462 30.2 16,466 24.1 19,018 24.2 18,691 27.8
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total $37,912 100.0% $34,679 100.0% $68,398 100.0% $78,431 100.0% $67,210 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
Automobile loans, comprised primarily of indirect dealer loans, were
$19.5 million or 51.3% of the consumer loan portfolio in 1999. This figure
includes $19.2 million in indirect automobile loans.
Credit cards and related plans increased to $8.0 million at December
31, 1999, from $4.0 million at year-end 1998. In the third quarter of 1998, the
Bank sold its credit card portfolio, which resulted in a gain of $4.6 million.
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, 1999. 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 $ 87,215 $63,451 $37,452 $188,118
Real estate -- construction 18,718 15,087 11,898 45,703
-------- ------- ------- --------
Total $105,933 $78,538 $49,350 $233,821
======== ======= ======= ========
</TABLE>
18
<PAGE>
The following table sets forth the sensitivity of the amounts due after
one year to changes in interest rates.
Table V. Maturity Distribution of Fixed and Variable Rate Loans
<TABLE>
<CAPTION>
MATURING
----------------------------
OVER ONE
THROUGH OVER
FIVE YEARS FIVE YEARS TOTAL
---------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
With fixed interest rates $22,364 $ 4,628 $ 26,992
With variable interest rates 56,174 44,722 100,896
-------- -------- ---------
Total $78,538 $49,350 $127,888
======= ======= ========
</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 1999, $3.7 million was provided for loan losses compared to $6.6
million in 1998 and $3.5 million in 1997. In 1999, the Bank experienced net
charge-offs of $3.0 million, compared with net charge-offs of $5.7 million in
1998 and $3.8 million in 1997. The allowance for loan losses at December 31,
1999 was $20.8 million, compared to $20.1 million at December 31, 1998 and $19.2
million at December 31, 1997. The ratio of the allowance for loan losses to
total loans was 1.77%, 1.81% and 1.84% at December 31, 1999, 1998 and 1997,
respectively.
Management believes that the allowance for loan losses at December
31, 1999 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."
19
<PAGE>
The following table sets forth certain information with respect to the
Bank's allowance for loan losses as of the dates or for the periods indicated.
Table VI. Allowance for Loan Losses
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount of
loans outstanding $1,153,623 $1,071,350 $1,044,538 $1,010,255 $1,004,094
========== ========== ========== ========== ==========
Allowance for loan losses:
Balance at beginning
of year $ 20,066 $ 19,164 $ 19,436 $ 20,156 $ 18,296
---------- ---------- ---------- ---------- ----------
Charge-offs:
Commercial, financial
and agricultural 425 980 1,139 662 146
Real estate -- construction -- -- -- -- --
Real estate -- mortgage
-- residential 1,268 1,993 786 786 192
Real estate -- mortgage
-- commercial 1,569 2,102 867 1,250 943
Consumer 286 1,506 1,250 857 540
---------- ---------- ---------- ---------- ----------
TOTAL 3,548 6,581 4,042 3,555 1,821
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, financial
and agricultural 65 213 34 108 192
Real estate -- construction -- -- -- 19 --
Real estate -- mortgage
-- residential 144 52 44 31 48
Real estate -- mortgage
-- commercial 120 410 -- -- --
Consumer 221 208 192 177 141
---------- ---------- ---------- ---------- ----------
TOTAL 550 883 270 335 381
---------- ---------- ---------- ---------- ----------
Net loans charged
off 2,998 5,698 3,772 3,220 1,440
---------- ---------- ---------- ---------- ----------
Provision charged
to operations 3,700 6,600 3,500 2,500 3,300
---------- ---------- ---------- ---------- ----------
Balance at end of year $ 20,768 $ 20,066 $ 19,164 $ 19,436 $ 20,156
========== ========== ========== ========== ==========
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratios:
Allowance for loan losses
to loans outstanding at
end of year 1.77% 1.81% 1.84% 1.87% 2.04%
Net loans charged off
during year to average
loans outstanding
during year 0.26% 0.53% 0.36% 0.32% 0.14%
</TABLE>
The Bank's practice is to make specific allocations to specific loans and
unspecified allocations to each loan category based on Management's risk
assessment.
The following table sets forth the allocation of the allowance for loan
losses by loan category as of the dates indicated.
Table VII. Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
FOR LOAN TO TOTAL FOR LOAN TO TOTAL FOR LOAN TO TOTAL FOR LOAN TO TOTAL FOR LOAN TO TOTAL
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS
------- ------ ------- ------ ------- ------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural $ 2,600 16.0% $ 3,900 17.2% $ 2,700 14.1% $ 2,900 13.6% $ 4,100 16.7%
Real estate --
construction 100 3.9 100 5.5 100 4.3 100 4.2 200 4.9
Real estate --
mortgage --
residential 2,700 31.9 2,700 30.5 2,400 31.9 1,700 33.4 1,800 34.4
Real estate --
mortgage --
commercial 7,000 45.0 7,100 43.7 6,700 43.1 9,300 41.3 7,800 37.2
Consumer 300 3.2 400 3.1 900 6.6 600 7.5 600 6.8
Unallocated 8,068 N/A 5,866 N/A 6,364 N/A 4,836 N/A 5,656 N/A
------- ------ ------- ------ ------- ------ ------- ------ ------- -----
Total $20,768 100.0% $20,066 100.0% $19,164 100.0% $19,436 100.0% $20,156 100.0%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
21
<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,
1999 1998 1997
---- ---- ----
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)
------------ ------------- ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
U.S. Treasury and
other U.S. Government
agencies $ 48,733 $173,415 $ 67,304 $208,641 $114,374 $148,434
States and political
subdivisions 52,834 22,689 53,172 4,103 38,314 2,723
Other -- 23,999 -- 18,216 -- 16,866
------------ ------------- ----------- -------------- ------------ -------------
Total investment
securities $101,567 $220,103 $120,476 $230,960 $152,688 $168,023
============ ============= =========== ============== ============ =============
</TABLE>
The Bank did not hold investments of any nonfederal issuer in amounts
exceeding 10% of stockholders' equity at December 31, 1999. 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, 1999.
22
<PAGE>
Maturity Distribution of Investment Portfolio
The following table sets forth the maturity distribution of the investment
portfolio at December 31, 1999.
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 $ 5,000 5.875%
After one but within five years 19,217 6.655
After five but within ten years 16,834 6.469
After ten years 7,682 6.705
---------
Total U.S. Treasury and other U.S. Government agencies 48,733 6.519
---------
States and political subdivisions:
Within one year 5,504 6.243
After one but within five years 14,995 6.733
After five but within ten years 24,566 6.513
After ten years 7,769 8.616
---------
Total states and political subdivisions 52,834 6.857
---------
Total held-to-maturity portfolio $101,567 6.694%
=========
Available-for-sale portfolio:
U.S. Treasury and other U.S. Government agencies:
Within one year $ 9,013 5.872%
After one but within five years 33,732 6.179
After five but within ten years 61,469 6.035
After ten years 69,201 6.555
---------
Total U.S. Treasury and other U.S. Government agencies 173,415 6.262
---------
States and political subdivisions:
Within one year -- --
After one but within five years 2,547 8.097
After five but within ten years 10,160 7.029
After ten years 9,982 8.683
---------
Total states and political subdivisions 22,689 7.877
---------
</TABLE>
23
<PAGE>
<TABLE>
<S> <C> <C>
Other:
Within one year -- --
After one but within five years -- --
After five but within ten years -- --
After ten years 23,999 7.161
----------
Total other 23,999 7.161
----------
Total available-for-sale portfolio $ 220,103 6.526%
==========
Total investment securities $ 321,670 6.580%
==========
</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, 1999, 1998 and 1997 were $1,305.7 million,
$1,269.1 million and $1,193.2 million, respectively. Deposits increased by 2.9%
in 1999 compared with a 6.4% growth rate in 1998. Interest-bearing deposits,
excluding time deposits of $100,000 and over, increased by 1.7% in 1999 and 4.3%
in 1998. Noninterest-bearing deposits increased by 9.6% in 1999 and 10.9% in
1998. The Bank's ratio of core deposits to total deposits was 73.4% at December
31, 1999, compared to increased from 72.9% at year-end 1998 and 73.4% at
year-end 1997. Meanwhile, time deposits of $100,000 and over increased steadily
during the past several years to $346.9 million at December 31, 1999, from
$344.2 million at December 31, 1998, and $317.2 million at year-end 1997. See
"ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Financial Condition."
24
<PAGE>
The following table sets forth information regarding the average
deposits and the average rates paid for certain deposit categories for each of
the years indicated. Average balances are computed using daily average balances.
Table X. Average Balances and Average Rates on Deposits
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
---- ---- ----
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 $ 177,841 --% $ 162,625 --% $ 155,232 --%
Interest-bearing
demand deposits 104,320 1.10 99,059 1.30 95,056 1.35
Savings and money
market deposits 424,466 2.34 401,936 2.74 398,667 2.78
Time deposits 559,650 4.47 530,237 4.94 495,211 5.01
------------ ------------ ------------
TOTAL $1,266,277 2.85% $1,193,857 3.22% $1,144,166 3.25%
========== ========== ==========
</TABLE>
The remaining maturities of the certificates of deposit in
denominations of $100,000 and over are set forth in the following table.
Table XI. Remaining Maturities of Large Certificates of Deposit
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
(Dollars in thousands)
<S> <C>
Three months or less $121,787
Over three through six months 77,487
Over six through twelve months 111,150
Over twelve months 36,481
----------
Total $346,905
==========
</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
25
<PAGE>
dates through 2047, and, in most instances, include options to renew. For the
year ended December 31, 1999, net rent expense under these leases aggregated
$4.3 million. For additional information relating to lease rental expense and
commitments, see Note 17 to the Company's Consolidated Financial Statements in
the 1999 Annual Report.
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 64,000 square feet are occupied by the
Company. CKSS carried the building complex on its books at a net book value of
$24.1 million as of December 31, 1999. 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, 1999, Sumitomo had advanced pursuant to its loan agreement the sum of $7.8
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 1999 Annual Report.
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 0.75% above LIBOR to finance the
Kaimuki Plaza. At December 31, 1999, the Bank had advanced $9.3 million, due on
August 10, 2001, pursuant to this loan agreement. At December 31, 1999, an
additional $0.1 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, 1999 was 6.620%.
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 and
Kona branch offices 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.
26
<PAGE>
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 1999.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of February 29, 2000, 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 64
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 58
President Officer, Central Pacific Bank (1996-Present);
Executive Vice President, Central Pacific
Bank (1993-1995)
Austin Y. Imamura Executive Vice President and Secretary, 53
Vice President and Central Pacific Bank (1991-Present)
Secretary
Neal K. Kanda Executive Vice President, Central Pacific Bank 51
Vice President and (1996-Present); Executive Vice President and
Treasurer Controller, Central Pacific Bank (1993-1996)
</TABLE>
27
<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 1999 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."
On March 13, 2000, the Company's board of directors approved the repurchase
and retirement of up to $10 million or approximately 435,000 shares of the
Company's outstanding common stock. During 1998 and 1999, the Company's board of
directors approved stock repurchase programs totaling $32 million, the results
of which are discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the 1999 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
For selected financial data concerning the Company, see "Selected
Consolidated Financial Data" contained in the 1999 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 1999 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 1999 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 1999 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.
28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<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.
30
<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 1999
Annual Report are incorporated herein by reference. Page number references are
to page numbers in the 1999 Annual Report.
<TABLE>
<CAPTION>
PAGE
<S> <C>
CPB Inc. and Subsidiary:
Independent Auditors' Report 44
Consolidated Balance Sheets at December 31, 1999 and 1998 19
Consolidated Statements of Income for the Years ended
December 31, 1999, 1998 and 1997 20
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income for the Years ended
December 31, 1999, 1998 and 1997 21
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997 22
Notes to Consolidated Financial Statements 23
</TABLE>
(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
1999.
(c) Exhibits
31
<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, 2000
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ JOICHI SAITO Chairman of the Board March 24, 2000
- ------------------ and Chief Executive Officer
Joichi Saito (Principal Executive Officer),
Director
/s/ NEAL K. KANDA Vice President, Treasurer March 24, 2000
- ------------------ (Principal Financial Officer,
Neal K. Kanda Principal Accounting Officer)
/s/ PAUL DEVENS Director March 24, 2000
- ------------------
Paul Devens
/s/ ALICE F. GUILD Director March 24, 2000
- ------------------
Alice F. Guild
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ DENNIS I. HIROTA Director March 24, 2000
- ---------------------
Dennis I. Hirota, Ph.D.
/s/ CLAYTON K. HONBO Director March 24, 2000
- ---------------------
Clayton K. Honbo
/s/ STANLEY W. HONG Director March 24, 2000
- ---------------------
Stanley W. Hong
Director March __, 2000
Kensuke Hotta
/s/ DANIEL M. NAGAMINE Director March 24, 2000
- ---------------------
Daniel M. Nagamine
/s/ NAOAKI SHIBUYA President, Director March 24, 2000
- ---------------------
Naoaki Shibuya
</TABLE>
33
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<S> <C>
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)(f9)
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)(f9)
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 1999 Annual Executive Incentive
Plan (f9)
10.9 Central Pacific Bank Supplemental Executive Retirement Plan (f6)(f9)
10.10 CPB Inc. 1997 Stock Option Plan (f6)(f9)
10.11 License and Service Agreement dated July 30, 1997 by and between
Central Pacific Bank and Fiserv Solutions, Inc. (f7)
13 Annual Report to Shareholders for the year ended December 31, 1999
(parts not incorporated by reference are furnished for informational
purposes and are not filed herewith)
</TABLE>
34
<PAGE>
<TABLE>
<S> <C>
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
25, 2000 (f8)
</TABLE>
(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 as Exhibit 10.11 to the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, filed with the Securities and Exchange
Commission on March 30, 1999.
(f8) Filed with the Securities and Exchange Commission on March 17, 2000 and
incorporated herein by reference.
(f9) Denotes management contract or compensation plan or arrangement.
35
<PAGE>
04/99
CENTRAL PACIFIC BANK AND SUBSIDIARY
1999 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 1999 will have an annualized base salary of $120,000 for purposes of
calculating any annual incentive payment.
<PAGE>
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 1st 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, 1999. Participants becoming eligible after January 1, 1999 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, 1999 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), (b) return on assets (ROA) and (c)
Efficiency Ratio. All three criteria are standard banking industry performance
measurements.
Each measure will fund the total incentive pool as follows: (a) ROE will fund
50%, (b) ROA will fund 25% and (c) Efficiency Ratio will fund 25%. For each
measure, performance below a defined measure will produce no incentive pool;
e.g., for 1999 these values are 10.25% for ROE, 1.00% for ROA and 62% for
Efficiency Ratio. 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 ROA of
1.20% and 150% of the target pool for Efficiency Ratio of 60%. 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.
Total payout to all participants will be limited to twenty (20) percent of the
increase in net operating income over the 1999 budget.
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, 1999).
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 were 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, ROA and Efficiency
Ratio); 2) unit/production objectives; and 3) a discretionary amount.
The unit/production objectives will be agreed upon between each Participant and
the immediate supervising Officer by January 30 of the Plan year. These
objectives will emphasize those aspects of CPB's performance for which the
Participant is held accountable. These 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.
<PAGE>
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 payouts 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 (1999 for this Plan) to be considered eligible for
any potential payment under this Plan. The Compensation Committee, at their sole
discretion must approve any exceptions to this provision.
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.
<PAGE>
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 1999 on the 14th day
of April, 1999 by the CPB Board of Directors as indicated below.
<TABLE>
<S> <C>
/s/ Joichi Saito April 14, 1999
- -------------------------------------------- ---------------
/s/ Joseph F. Blanco April 14, 1999
- -------------------------------------------- ---------------
/s/ Paul Devens April 14, 1999
- -------------------------------------------- ---------------
/s/ Alice F. Guild April 14, 1999
- -------------------------------------------- ---------------
/s/ Dennis L. Hirota April 14, 1999
- -------------------------------------------- ---------------
/s/ Clayton K. Honbo April 14, 1999
- -------------------------------------------- ---------------
/s/ Stanley W. Hong April 14, 1999
- -------------------------------------------- ---------------
/s/ Paul Kosasa April 14, 1999
- -------------------------------------------- ---------------
/s/ Gilbert J. Matsumoto April 14, 1999
- -------------------------------------------- ---------------
/s/ Daniel M. Nagamine April 14, 1999
- -------------------------------------------- ---------------
/s/ Naoaki Shibuya April 14, 1999
- -------------------------------------------- ---------------
/s/ Minoru Ueda April 14, 1999
- -------------------------------------------- ---------------
</TABLE>
<PAGE>
1999 ANNUAL EXECUTIVE INCENTIVE PLAN
PARTICIPANTS
<TABLE>
<S> <C>
Joichi Saito Chairman of the Board & CEO
Naoaki Shibuya President & COO
Austin Imamura EVP Credit Administration Group Mgr.
Neal Kanda EVP Finance & Operations Group Mgr.
Wayne Kirihara SVP & Retail Banking Group Mgr.
Alwyn Chikamoto SVP & Commercial Finance Group Mgr.
Walter Horikoshi SVP & Credit and Legal Div. Mgr.
Raymond Kurosu SVP & Operations Div. Mgr.
David Chang SVP & Information Services Div. Mgr.
</TABLE>
<PAGE>
[LOGO]
1999 ANNUAL REPORT
Providing Financial Solutions
In The New Millennium
HOLDING COMPANY OF CENTRAL PACIFIC BANK
<PAGE>
[LOGO]
TABLE OF CONTENTS
<TABLE>
<S> <C>
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
21 Consolidated Statements of Changes in Stockholders'
Equity & Comprehensive Income
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
</TABLE>
<PAGE>
[LOGO]
MESSAGE TO SHAREHOLDERS
To Our Shareholders:
Aloha and welcome to the new millennium. As we cross this auspicious
threshold in time, we are pleased to report that CPB Inc. and its subsidiary,
Central Pacific Bank (CPB), are well-positioned to meet the challenges offered
by Hawaii's dynamic financial services industry.
This past year saw the Company mark several significant milestones.
Celebrating 45 years of CPB's service to Hawaii's people in 1999, the Company
recorded the highest net profit in its history. Despite the state's
still-recovering economy, the Company's net income of $16.3 million increased
by 8.3% over the previous year. Basic earnings per share of $1.70 increased by
16.4%. Total assets of $1.65 billion increased by 5.5% compared to 1998; total
deposits of $1.3 billion increased by 2.9%; and net loans of $1.15 billion
increased by 5.9%. Nonaccrual loans decreased by 25% to $9.7 million. Return
on average assets was 1.03%, and return on average equity was 10.93%.
Dividends totaled $0.55 per common share, increasing by 5.8% over the $0.52
declared in 1998.
[PHOTOGRAPH]
Naoaki Shibuya Joichi Saito
President Chairman of the Board
and Chief Executive Officer
In addition to a seamless Y2K transition at year-end, the Company's stock
price closed on December 31 at $28.50, up almost 63% from a year ago.
This outstanding performance was attributed to a combination of sound
business practices and bold new initiatives outlined in our new three-year
strategic plan. With a renewed vision for the future and a revitalized
commitment to our customers, major components of the new strategic plan are
already being implemented. Some key aspects are:
- - Strategic restructuring, which will allow the bank to operate more
efficiently in a highly competitive industry, while improving the high
level of customer service for which CPB is renowned.
- - Enhance support for small businesses with programs such as CPB Business
Advantage-SM- and CPBInternet-SM- for Business.
- - Expand consumer banking services by introducing a new Internet banking
application and expanding our automated teller machine (ATM) network.
- - Utilize new technology to centralize our operations and optimize work
force productivity.
- - Fulfill consumer demands for financial planning and non-traditional
products by implementing a retail investment program and further
promoting our trust services.
Only by remaining responsive to customer needs can we maintain the spirit
and wisdom that have guided the Company's growth through 45 years of change.
On this note, we would like to extend our appreciation to Yoshiharu Satoh, who
retired from the boards of CPB Inc. and CPB in April 1999, and Minoru Ueda,
who retired from the board of CPB in January 2000. Mr. Satoh, retired chairman
and chief executive officer, served on the CPB board since 1975 and the CPB
Inc. board since 1982. Mr. Ueda also served on the CPB Inc. board, and was
vice chairman of CPB and president of CPB Properties, Inc. Their experience
and knowledge proved invaluable, and we are pleased that they are now serving
as senior advisors for the Company.
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
[PHOTOGRAPH]
CENTRAL PACIFIC BANK RESPONDS TO THE NEEDS OF HAWAII'S BUSINESSES, NURTURING
LASTING RELATIONSHIPS LIKE THE FOUR SISTERS BAKERY ON MAUI - A THRIVING FAMILY
BUSINESS.
PROVIDING FINANCIAL SOLUTIONS IN THE NEW MILLENNIUM
CPB marked its 45th anniversary in 1999 by recording the highest net
profit in its history. Achieving this significant milestone, especially in
light of Hawaii's slowly recovering economy, is the result of creative,
forward-thinking decisions made by the Bank in order to best meet the needs
of its customers. As we step boldly into the new millennium, CPB embraces the
spirit of innovation and responsiveness that has guided the Bank throughout
its history.
RESPONSIVE DYNAMIC COLLABORATIVE
[PHOTOGRAPH]
CENTRAL PACIFIC BANK BECOMES THE FIRST BANK IN HAWAII TO OFFER INTERNET
BANKING FOR BUSINESSES AND CONSUMERS, PROVIDING A SECURE AND CONVENIENT MEANS
FOR MANAGING THEIR FINANCES.
PROGRESSING WITH CHANGE
In spite of its banner year and continued optimism for its future, CPB is
not content to rest on its accomplishments or be satisfied with the status
quo. The Bank is committed to making improvements firmly groundedin sound
business practices in order to remain on the cutting edge of the dynamic
financial services industry.
In August 1999, CPB announced its comprehensive three-year strategic
plan, which will position the Bank to achieve continued growth and prosperity.
With quality service and responsiveness to customer needs as its guideposts,
the strategic plan emphasizes employee training, new products and services for
businesses and consumers, and targeted increases in loans and deposits.
More than mere concepts, the plan encompasses a range of significant new
products and services, including:
- - INTERNET BANKING
The expanding role of computers in our daily lives is obvious. CPB
customers are able to conduct their bank transactions conveniently and
efficiently via their computers. Accessing their accounts through the
Internet, customers can check their balances and transactions, view CD and
loan accounts, pay bills, transfer funds, download their transaction history
for accounting purposes, generate financial reports, and more through a
single convenient interface. Through CPBInternet-SM- for Business and
CPBInternet-SM- for consumers, all of these financial functions are available
to our customers anytime, anywhere.
- - BUSINESS BENEFITS
CPB is committed to helping small businesses in Hawaii. In addition to
the benefits offered by banking on the Internet, CPB Business Advantage-SM-
offers a comprehensive package of products and services designed to assist
small business owners. Financial services include checking,
<PAGE>
savings, payroll, loans, retirement plans, leasing, investments and insurance.
Business discounts are available for car rentals, office supplies, computer
equipment, long distance telephone service and employee leasing. Even travel
and concierge services are included for airline, lodging, dining and
entertainment.
- - INVESTMENT AND FINANCIAL PLANNING
In December 1999, CPB formed a strategic alliance with Financial Network
Investment Corporation to market non-insured investment products through
licensed Bank employees. Under the agreement, the Bank will offer customers a
wide range of securities, mutual funds, annuities and life insurance
alternatives. The program features a choice of several pricing and service
level options, but will focus on retirement and financial planning.
INNOVATIVE DEPENDABLE VISIONARY
- - TRUST SERVICES
CPB's Trust Division, now in its seventh year of operation, provides a
full range of investment management, custodial and other fiduciary services.
In 1999, the division recorded substantial growth with a 52% increase in
assets under management, a 20% increase in accounts managed, and a 21%
increase in revenues over the prior year. The Bank was also honored to be
selected as a corporate trustee for Hawaii Community Foundation (HCF).
- - ATM EXPANSION
In October 1999, CPB signed an exclusive agreement with Tesoro Hawaii to
place ATMs in all 17 of Tesoro's gas express stations. With this addition,
CPB's ATM network expands to 72, providing greater convenience for CPB
customers while serving as a source of fee revenue. Tesoro is one of the
largest gasoline retailers in Hawaii and is part of Tesoro Petroleum, a
multi-national natural resource company headquartered in San Antonio, Texas.
Confidence in CPB's outstanding performance was reflected on September
13, 1999, when CPB Inc.'s Board authorized a third stock repurchase program,
enabling the Company to buy back 5%, or approximately 485,000 shares of its
9.7 million shares of common stock outstanding. As part of this program, the
Company repurchased 300,000 shares of its common stock from The Sumitomo Bank,
Limited. This sale reduced Sumitomo's holdings in the Company to 973,913
shares or 10.49% of total common stock outstanding at year-end, from 13.16%
held prior to the transaction. As of December 31, 1999, the Company
repurchased 1.37 million shares of its common stock, or 13% of the 10.6
million shares outstanding prior to the first repurchase program announced in
the second quarter of 1998.
[PHOTOGRAPH]
CENTRAL PACIFIC BANK AND FINANCIAL NETWORK INVESTMENT CORPORATION HAVE JOINED
FORCES AND ARE WORKING TO DEVELOP A VARIETY OF INVESTMENT SERVICES TO ASSIST
THE BANK'S CUSTOMERS IN PLANNING FOR THEIR FUTURE.
A NEW PARTNERSHIP BRINGS CENTRAL PACIFIC BANK ATMS TO TESORO GAS STATIONS,
PROVIDING GREATER CONVENIENCE FOR OUR CUSTOMERS.
<PAGE>
[LOGO]
MESSAGE TO SHAREHOLDERS
[PHOTOGRAPH]
IN 1999, CENTRAL PACIFIC BANK WAS APPOINTED AS A CORPORATE TRUSTEE FOR HAWAII
COMMUNITY FOUNDATION. RONALD "BUZZ" WO, HCF CHAIRMAN, BOARD OF GOVERNORS;
NAOAKI SHIBUYA, CPB PRESIDENT; JOICHI SAITO, CPB CHAIRMAN OF THE BOARD AND
CEO; KELVIN TAKETA, HCF PRESIDENT AND CEO; AND GARY MORIMOTO, CPB VICE
PRESIDENT AND MANAGER, TRUST DIVISION.
SUPPORTING OUR COMMUNITIES
Community involvement is an extension of CPB's true commitment to
Hawaii's communities. During the past year, CPB raised or awarded more than a
half-million dollars supporting a multitude of community causes, such as Aloha
United Way, Kapi`olani Medical Center for Women and Children, American Heart
Association, American Lung Association, YWCA, Association of Retired Citizens,
Business-Education Partnership, Immigrant Center, March of Dimes, Shriners
Hospital, Hawaii Foodbank, and the KSSK Radio Posse.
Towards the development of Hawaii's businesses, CPB assisted the Hawaii
Women's Business Center (HWBC) in expanding its outreach programs in the
state. HWBC provides training, counseling and mentoring services to current
and potential women entrepreneurs. The Bank's contribution helped the center
to secure a $147,000 grant - one of 25 grants awarded worldwide by the U.S.
Small Business Administration.
COMMITTED TO OUR COMMUNITY
BUILDING A LEGACY
In line with CPB's vision to serve its community, the following permanent
endowments were created to provide educational opportunities for future
business and community leaders and to help revitalize low- and moderate-income
areas in Hawaii:
- - The CPB Endowed Scholarship for the University of Hawaii at Manoa provides
financial assistance to low- and moderate-income student athletes majoring in
business administration.
- - The CPB Community Endowment Fund, administered by Hawaii Community
Foundation, supports a wide range of activities and services designed to help
in the development and rejuvenation of low- to moderate-income neighborhoods.
Selected projects must meet guidelines of the Community Reinvestment Act.
ADVANCING A VISION
[LOGO] CPB was founded by visionary leaders who saw a need in the local
community, and through their foresight we have made significant advancements
throughout our 45-year history. Learning from our past and embracing the
future, CPB pledges its continued commitment to be Hawaii's premier community
financial institution. The trust of our shareholders is our inspiration for
attaining higher standards to be the best provider of financial solutions for
our customers, our communities, and our future generations in the new
millennium.
<PAGE>
[LOGO]
BOARD OF DIRECTORS, OFFICERS, LEGAL COUNSEL, AUDITORS AND ADVISORS
AS OF JANUARY 31, 2000
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
and Special Advisor of Technology
Development, State of Hawaii
PAUL DEVENS
Attorney-at-Law; Of Counsel, Devens,
Nakano, Saito, Lee, Wong & Ching
ALICE F. GUILD
Executive 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
KENSUKE HOTTA
Deputy President,
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 (inactive)
JOICHI SAITO
Chairman of the Board & Chief
Executive Officer, CPB Inc. & Central
Pacific Bank; Chairman of the Board,
CPB Properties, Inc.; President, CPB
Real Estate, Inc.
NAOAKI SHIBUYA
President, CPB Inc.; President & Chief
Operating Officer, Central Pacific Bank;
President, CPB Properties, Inc.; Vice
President, CPB Real Estate, 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
ROBERT M. KAMEMOTO
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
CREDIT AND LEGAL DIVISION
WALTER K. HORIKOSHI
Senior Vice President & Manager
LOAN OPERATIONS DIVISION
CARL T. NAGASAKO
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
FINANCIAL TECHNOLOGIES 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
CUSTOMER SERVICE DIVISION
RAYMOND T. KUROSU
Senior Vice President & Manager
MARKETING DIVISION
TODD R. YAMANAKA
Vice President & Manager
RETAIL SALES DIVISION
WAYNE H. KIRIHARA
Senior Vice President & Acting Manager
CENTRAL PACIFIC BANK
BRANCHES
OAHU
REGION I
MICHAEL T. HIRAO
Vice President & Regional Manager
HAWAII KAI BRANCH
KAIMUKI BRANCH
KING-SMITH BRANCH
MAIN BRANCH
MAKIKI BRANCH
MOILIILI BRANCH
WAIKIKI BRANCH
WARD BRANCH
KAHALA BRANCH
in Times Super Market
KAHEKA BRANCH
in Daiei
KAIMUKI BRANCH
in Times Super Market
REGION II
BENNETTE M. EVANGELISTA
Vice President & Regional Manager
KAILUA BRANCH
KALIHI BRANCH
KANEOHE BRANCH
MAPUNAPUNA BRANCH
MILILANI BRANCH
PEARLRIDGE BRANCH
WAIPAHU BRANCH
PEARL CITY BRANCH
in Daiei
ROYAL KUNIA BRANCH
in Times Super Market
WAIPAHU BRANCH
in Daiei
REGION III
CLIFFORD Y. KAWANO
Vice President & Regional Manager
HAWAII
HILO BRANCH
KAILUA-KONA BRANCH
KAUAI
LIHUE BRANCH
KAPAA BRANCH
in Big Save Value Center
MAUI
KAHULUI BRANCH
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
YOSHIHARU SATOH
Chairman Emeritus
ERNEST H. HARA
DANIEL K. INOUYE, U.S. Senator
SIDNEY S. KOSASA
EATON MAGOON, JR.
SHINSUKE NAKAMINE
MINORU UEDA
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
<PAGE>
[LOGO]
FINANCIAL HIGHLIGHTS
CPB INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
(In thousands, except per share data) 1999 1998 Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
AT YEAR END
Assets $1,646,491 $1,560,885 5.5%
Deposits 1,305,654 1,269,123 2.9
Net Loans 1,149,708 1,085,846 5.9
Stockholders' Equity 144,079 148,066 -2.7
Number of Shares Outstanding 9,288 9,798 -5.2
Book Value Per Share $ 15.51 $ 15.11 2.6
FOR THE YEAR
Net Income $ 16,326 $ 15,069 8.3%
Per Share - Basic 1.70 1.46 16.4
Per Share - Diluted 1.68 1.45 15.9
Cash Dividends Declared 5,241 5,335 -1.8
Per Share 0.55 0.52 5.8
- -----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Deposits
(In millions)
<S> <C>
95 $1,138
96 $1,124
97 $1,193
98 $1,269
99 $1,306
Net Loans
(In millions)
95 $ 970
96 $1,023
97 $1,022
98 $1,086
99 $1,150
Net Income
(In millions)
95 $ 13.8
96 $ 14.1
97 $ 15.0
98 $ 15.1
99 $ 16.3
</TABLE>
<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,
1999, 1998 and 1997, and with respect to the consolidated balance sheets at
December 31, 1999 and 1998, 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 1996
and 1995, and the selected balance sheet data at December 31, 1997, 1996 and
1995, are derived from audited consolidated financial statements which are not
included in this Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands, except per share data) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Total interest income $ 113,312 $ 111,792 $ 110,332 $ 104,287 $ 107,802
Total interest expense 44,418 46,705 44,695 41,679 44,745
Net interest income 68,894 65,087 65,637 62,608 63,057
Provision for loan losses 3,700 6,600 3,500 2,500 3,300
Net interest income after provision for loan losses 65,194 58,487 62,137 60,108 59,757
Other operating income 12,631 16,822 10,827 10,715 10,723
Other operating expense 53,448 51,273 48,646 47,496 47,638
Income before income taxes 24,377 24,036 24,318 23,327 22,842
Income taxes 8,051 8,967 9,359 9,236 9,034
Net income 16,326 15,069 14,959 14,091 13,808
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (YEAR-END):
Interest-bearing deposits in other banks $ 9,828 $ 10,469 $ 34,188 $ 26,297 $ 7,140
Investment securities (1) 321,670 351,436 320,711 240,458 283,627
Loans 1,170,476 1,105,912 1,041,023 1,041,976 990,356
Allowance for loan losses 20,768 20,066 19,164 19,436 20,156
Total assets 1,646,491 1,560,885 1,497,101 1,403,165 1,371,909
Core deposits (2) 958,749 924,960 875,920 859,280 878,065
Total deposits 1,305,654 1,269,123 1,193,158 1,123,614 1,138,319
Long-term debt 98,279 118,289 127,705 115,840 81,107
Total stockholders' equity 144,079 148,066 151,742 140,882 132,507
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA: (3)
Basic earnings per share $ 1.70 $ 1.46 $ 1.42 $ 1.34 $ 1.32
Diluted earnings per share 1.68 1.45 1.40 1.33 1.31
Cash dividends declared 0.55 0.52 0.49 0.48 0.46
Book value 15.51 15.11 14.34 13.37 12.62
Weighted average shares outstanding (in thousands) 9,630 10,354 10,555 10,530 10,480
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS:
Return on average assets 1.03% 1.00% 1.04% 1.04% 1.00%
Return on average stockholders' equity 10.93 9.79 10.18 10.27 10.79
Average stockholders' equity to average assets 9.41 10.20 10.26 10.09 9.29
Efficiency ratio 65.36 62.79 63.62 64.77 64.62
Net interest margin (4) 4.67 4.65 4.89 4.89 4.87
Net charge-offs to average loans 0.26 0.53 0.36 0.32 0.14
Nonperforming assets to year-end loans &other real estate (5) 0.94 1.27 1.92 1.41 0.59
Allowance for loan losses to year-end loans 1.77 1.81 1.84 1.87 2.04
Allowance for loan losses to nonaccrual loans 214.21 155.17 116.76 143.97 562.55
Dividend payout ratio 32.35 35.62 34.51 35.82 34.85
- -----------------------------------------------------------------------------------------------------------------------------------
</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
<PAGE>
[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Share and per share information in this Management's Discussion and
Analysis and elsewhere in this Annual Report 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 record high net income in 1999 of $16.3 million increasing by
8.3% over $15.1 million earned in 1998. Net income of $15.0 million was reported
in 1997. The increase in net income in 1999 was primarily due to an increase in
net interest income and lower provision for loan losses, offset by the recording
of a $1.6 million restructuring charge to provide for staff reductions planned
in the Year 2000. Diluted earnings per share of $1.68 in 1999, which increased
by 15.9% over $1.45 in 1998, was enhanced by the Company's repurchase of its
common stock since July 1998. Earnings per share in 1998 increased by 3.6% over
$1.40 earned in 1997. Cash dividends per share of $0.55 in 1999 increased over
$0.52 in 1998 and $0.49 in 1997. Return on average assets was 1.03% in 1999
compared with 1.00% in 1998 and 1.04% in 1997. Return on average stockholders'
equity increased to 10.93% in 1999 from 9.79% in 1998 and 10.18% in 1997.
The Company recorded five years of earnings increases operating in the
state of Hawaii's economy, which is in its ninth consecutive year of little or
no growth. The 1999 year saw positive signs in the state's economic activity.
Tourism, the state's primary industry, improved in 1999 with total visitor
arrivals increasing over 1998. Visitor arrivals from the mainland USA increased
and was offset by a decline in Asian visitor arrivals. Home sales increased
during the year with average resale prices increasing. Personal bankruptcy
filings in Hawaii stabilized compared to the previous year, while the state's
unemployment rate decreased to 5.5%, the state's lowest rate since 1993.
The Company's balance sheet grew modestly during 1999, while nonaccrual and
delinquent loans decreased. Total assets at December 31, 1999 of $1,646.5
million increased by $85.6 million or 5.5%, with over half of the increase
related to Year 2000 liquidity funding. Investment securities of $321.7 million
decreased by $29.8 million or 8.5% from a year ago. Net loans of $1,149.7
million increased by $63.9 million or 5.9%, mainly due to increases in
residential and commercial mortgage loans. Nonperforming assets, loans
delinquent for 90 days or more and restructured loans decreased to $15.2 million
from $19.5 million a year ago.
Deposits increased by $36.5 million or 2.9% to $1,305.7 million at year-end
1999. Offsetting deposit growth were decreases in long-term debt of $20.0
million or 16.9% to $98.3 million and stockholders' equity of $4.0 million or
2.7% to $144.1 million, compared to year-end 1998. The decrease in stockholders'
equity was primarily due to the Company's stock repurchase program, which is
discussed in the Capital Resources section of this Management's Discussion.
Despite the continued strength of the U.S. economy, Management does not
expect significant growth in the local economy in 2000. 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 successfully operated through year-end 1999 and into the Year
2000 with no disruptions. No material Year 2000-related effects from vendors or
customers were evident to date. However, the Company will be monitoring its
operations and will be in contact with vendors and major customers throughout
the Year 2000 in anticipation of any residual effects that may occur. Up through
1999, equipment and software expenditures totaled approximately $4.0 million.
Expenditures related to the Company's technical staff and other Year 2000
remediation costs in the amount of $562,000 were expensed in 1999, in line with
projections. Future expenditures to monitor Year 2000-related issues are not
expected to have a material impact on the Company's results of operations.
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
<PAGE>
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, 1999.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Table 1 sets forth information concerning average interest earning assets
and interest-bearing liabilities and the yields and rates thereon. Table 2
presents an analysis of changes in components of net interest income between
years. Interest income, which includes loan fees, and resultant yield
information presented in the table and discussed in this section are expressed
on a taxable equivalent basis using an assumed income tax rate of 35%.
Net interest income in 1999 increased by $3.7 million or 5.6% primarily due
to the increase in volume of interest earning assets.
Interest income in 1999 of $114.3 million increased by $1.4 million or 1.3%
over 1998 due to an increase in average interest earning assets of $72.6 million
or 5.1%, primarily loans, offset by a decrease in average yield to 7.64% in 1999
from 7.93% in 1998. Interest and fees on loans increased by $2.7 million or 3.0%
due to an $82.3 million or 7.7% increase in average loans, offset by a decline
in loan yield to 8.06% from 8.42% in 1998. Interest on investment securities
decreased by $1.8 million or 8.5% due to lower average volume and a slight
decrease in yields. Interest on
Table 1. Average Balances, Interest Income and Expense, Yields and Rates
(Taxable Equivalent)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
Average Amount Average Amount Average Amount
Average Yield/ of Average Yield/ of Average Yield/ of
(Dollars in thousands) Balance Rate Interest Balance Rate Interest Balance Rate Interest
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits in
other banks $ 26,851 5.16% $ 1,385 $ 15,041 5.64% $ 849 $ 43,362 5.55% $ 2,405
Federal funds sold 673 4.75 32 70 5.71 4 85 5.88 5
Taxable investment securities (1) 269,909 6.35 17,140 302,774 6.41 19,400 251,693 6.32 15,895
Tax-exempt investment securities (1) 45,849 6.13 2,810 35,050 6.82 2,392 15,697 7.28 1,143
Loans (2) 1,153,623 8.06 92,945 1,071,350 8.42 90,237 1,044,538 8.77 91,559
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 1,496,905 7.64 114,312 1,424,285 7.93 112,882 1,355,375 8.19 111,007
Nonearning assets 90,525 83,920 77,063
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,587,430 $1,508,205 $1,432,438
===================================================================================================================================
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing demand deposits $ 104,320 1.10% $ 1,152 $ 99,059 1.30% $ 1,285 $ 95,056 1.35% $ 1,287
Savings and money market deposits 424,466 2.34 9,923 401,936 2.74 11,015 398,667 2.78 11,096
Time deposits under $100,000 217,683 4.07 8,868 207,584 4.59 9,538 204,871 4.73 9,700
Time deposits $100,000 and over 341,967 4.72 16,132 322,653 5.16 16,640 290,340 5.21 15,116
Short-term borrowings 36,602 5.28 1,931 13,281 5.45 724 5,528 5.39 298
Long-term debt 113,820 5.63 6,412 128,274 5.85 7,503 120,452 5.98 7,198
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,238,858 3.59 44,418 1,172,787 3.98 46,705 1,114,914 4.01 44,695
Noninterest-bearing deposits 177,841 162,625 155,232
Other liabilities 21,302 18,927 15,384
Stockholders' equity 149,429 153,866 146,908
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,587,430 $1,508,205 $1,432,438
===================================================================================================================================
Net interest income $ 69,894 $ 66,177 $ 66,312
===================================================================================================================================
Net interest margin 4.67% 4.65% 4.89%
===================================================================================================================================
</TABLE>
(1) At amortized cost.
(2) Includes nonaccrual loans.
<PAGE>
[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
interest-bearing deposits in other banks increased due to higher average volume
related to Year 2000 liquidity planning.
Interest expense in 1999 of $44.4 million decreased by $2.3 million or 4.9%
from 1998 due to a decrease in effective rate paid on average interest-bearing
liabilities to 3.59% from 3.98% in 1998. Effective rate paid decreased in all
categories of interest-bearing liabilities, while average volume increased by
$66.1 million or 5.6% over 1998, mainly in savings and money market accounts,
average time deposits $100,000 and over, and short-term borrowings.
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. Interest income
increased by $1.9 million or 1.7% primarily due to increase in average interest
earning assets. Interest income on investment securities accounted for most of
the increase in interest income due to higher volume. Interest expense increased
in 1998 by $2.0 million or 4.5% primarily due to increase in average time
deposits $100,000 and over, short-term borrowings and long-term debt.
As a result, net interest margin in 1999 was 4.67% compared to 4.65% in
1998 and 4.89% in 1997.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Provision for loan losses ("Provision") is determined by Management's
ongoing evaluation of the loan portfolio and its 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 and
general economic factors in Hawaii and a risk factor suitable to borrowers'
potential Year 2000-related failures. The Company's Provision was $3.7 million,
$6.6 million and $3.5 million in 1999, 1998 and 1997, respectively. Net loan
charge-offs decreased to $3.0 million in 1999 compared to $5.7 million in 1998
and $3.8 million in 1997, or when expressed as a percentage of average loans,
decreased to 0.26% in 1999 from 0.53% in 1998 and 0.36% in 1997. Net charge-offs
were mainly comprised of $1.4 million on loans secured by commercial real
estate, $1.1 million on loans secured by residential properties and $0.4 million
on commercial loans.
Net charge-offs on consumer loans of $65,000 in 1999 decreased from
Table 2. Analysis of Changes in Net Interest Income (Taxable Equivalent)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 Compared to 1998 1998 Compared to 1997
------------------------------ -------------------------------
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 $ 666 $ (130) $ 536 $(1,572) $ 16 $(1,556)
Federal funds sold 34 (6) 28 (1) - (1)
Taxable investment securities (2,107) (153) (2,260) 3,228 277 3,505
Tax-exempt investment securities 736 (318) 418 1,409 (160) 1,249
Loans 6,927 (4,219) 2,708 2,351 (3,673) (1,322)
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 6,256 (4,826) 1,430 5,415 (3,540) 1,875
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Interest-bearing demand deposits 68 (201) (133) 54 (56) (2)
Savings and money market deposits 617 (1,709) (1,092) 91 (172) (81)
Time deposits under $100,000 464 (1,134) (670) 128 (290) (162)
Time deposits $100,000 and over 997 (1,505) (508) 1,684 (160) 1,524
Short-term borrowings 1,271 (64) 1,207 418 8 426
Long-term debt (846) (245) (1,091) 468 (163) 305
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 2,571 (4,858) (2,287) 2,843 (833) 2,010
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 3,685 $ 32 $ 3,717 $ 2,572 $(2,707) $ (135)
===================================================================================================================================
</TABLE>
<PAGE>
$1.3 million in 1998 due to the sale of the company's credit card portfolio
during 1998. The Allowance expressed as a percentage of loans was 1.77% at
December 31, 1999 compared to 1.81% and 1.84% at the previous two year-ends. In
Management's judgment, the Allowance at year-end 1999 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 $15.2 million at
December 31, 1999 from $19.5 million a year ago. Nonaccrual loans of $9.7
million decreased from $12.9 million at year-end 1998. The reduction was mainly
due to the payoff of a $3.3 million loan. However, the Company continues to
experience problems with residential mortgage loans reflective of Hawaii's job
market and general economic conditions. Other real estate of $1.4 million,
compared with $1.2 million held a year ago, was comprised of six properties.
Loans delinquent for 90 days or more decreased to $3.6 million from $5.4 million
a year ago. One-half of the delinquent loan amount was attributed to three loans
secured by commercial properties with the remainder comprised of residential
mortgage loans. A restructured loan still accruing interest of $500,000, secured
by commercial property, was held at December 31, 1999 compared to none held a
year ago. Accounting for nonperforming assets is discussed in note 1 to the
consolidated financial statements on pages 23 and 24 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 $12.6 million in 1999 decreased by $4.2 million
from $16.8 million recorded in 1998 due to a non-recurring gain of $4.6 million
recognized in 1998 from the sale of the Company's credit card business. Other
operating income in 1998 increased by $6.0 million or 55.4% over 1997. Income
from fiduciary activities increased by 23.0% to $792,000 in 1999 and by 46.4% to
$644,000 in 1998. Service charges on deposit accounts and other service charges
and fees increased by $529,000 or 5.6% in 1999 due to enhanced collection
efforts. These charges and fees in 1998 increased by $860,000 or 9.9% over the
previous year, in which scheduled customer fees were increased. Equity in
earnings of unconsolidated subsidiaries of $476,000 in 1999 increased by $56,000
over 1998, which decreased by $69,000 compared to 1997. Equity in earnings of
unconsolidated subsidiaries takes into account losses recognized from the
Company's partnership in Trans-Pacific Mortgage Group LLC ("TPMG") of $78,000 in
1999, $80,000 in 1998 and $92,000 in 1997. TPMG was established in 1997 as a
mortgage banking partnership in which the Company held 49% ownership. In
December of 1999, the Company relinquished its ownership interest in this
partnership. Information on unconsolidated subsidiaries is presented in notes 1
and 7 to the consolidated financial statements on page 23, and page 28 and 29,
respectively, of this Annual Report.
Fees on foreign exchange of $582,000 in 1999 declined in the past three
years, reflecting the decreased Japanese yen currency activity in Hawaii.
Investment securities losses of $250,000 were realized in 1999 compared to
$254,000 in gains in 1998, as a result of interest rate duration adjustments to
the Company's investment securities portfolio. Losses from sale of loans totaled
$289,000 in 1999 while gains of $4.3 million were recorded in 1998, which
included a nonrecurring gain of $4.6 million realized from the sale of the
Bank's credit card portfolio. Income from bank-owned life insurance accounted
for the balance of 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 long-term liabilities related to the Bank's
defined benefit retirement plan. Total other operating income, expressed as a
percentage of average assets, was 0.80% in 1999, 1.12% in 1998 and 0.76% in
1997. Excluding the gain from sale of the credit card portfolio, the 1998
percentage was 0.81%.
<PAGE>
[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 $53.4 million increased by $2.2 million or 4.2%
over 1998, which increased by $2.6 million or 5.4% over 1997. Salaries and
employee benefits of $28.0 million increased by 5.8% over 1998, which increased
by 2.6% over 1997. The number of employees at year-end 1999 decreased to 540
from 587 and 600 employees at the end of 1998 and 1997, respectively. The
increase in other operating expense in 1999 was mainly due to $1.6 million in
restructuring charges recognized in the third quarter related to a planned 10%
reduction in staffing in conjunction with the implementation of the Bank's
three-year strategic plan. The initial staff reduction plans include 68
positions in retail banking and 8 positions in loan operations. In line with the
strategic plan, the Company is revising its employee benefits program to
increase focus on performance-based compensation. Accordingly, effective January
1, 2000, contributions to profit sharing and employee stock ownership plans will
be reduced from 10% to 5% of defined net income, while contributions to the
Bank's 401(k) plan will be increased from 50% to 100% of employee contributions
up to 4% of an employee's salary.
Table 3. Nonperforming Assets, Past Due and Restructured Loans
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans
Real estate:
Mortgage - commercial $ 2,981 $ 6,830 $13,979 $ 8,863 $ 2,012
Mortgage - residential 5,124 5,037 1,081 2,462 1,571
Construction - - - - -
Commercial, financial and agricultural 1,590 1,065 1,312 2,175 -
Installment - - 41 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 9,695 12,932 16,413 13,500 3,583
Other real estate 1,366 1,155 3,677 1,235 2,231
Total nonperforming assets 11,061 14,087 20,090 14,735 5,814
Loans delinquent for 90 days or more
Real estate:
Mortgage - commercial 1,749 315 311 341 3,094
Mortgage - residential 1,636 4,206 10,112 4,366 4,032
Construction - - - - -
Commercial, financial and agricultural 128 706 1,302 1,038 1,493
Installment 92 168 508 568 570
- ------------------------------------------------------------------------------------------------------------------------------------
Total 3,605 5,395 12,233 6,313 9,189
Restructured loans still accruing interest
Real estate:
Mortgage - commercial 500 - 2,727 11,095 5,974
Commercial, financial and agricultural - - - 1,723 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 500 - 2,727 12,818 5,974
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets, loans delinquent for 90 days or more
and restructured loans still accruing interest $15,166 $19,482 $35,050 $33,866 $20,977
====================================================================================================================================
Total nonperforming assets as a percentage of
loans and other real estate 0.94% 1.27% 1.92% 1.41% 0.59%
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets and loans delinquent for 90 days or more
as a percentage of loans and other real estate 1.25% 1.76% 3.09% 2.02% 1.51%
- ------------------------------------------------------------------------------------------------------------------------------------
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 1.29% 1.76% 3.36% 3.25% 2.11%
====================================================================================================================================
</TABLE>
<PAGE>
Profit sharing contributions made to profit sharing and employee stock ownership
plans totaled $2.1 million in each of the last three years, while the Bank's
contribution to the 401(k) plan amounted to $334,000, $318,000 and $288,000 in
1999, 1998, and 1997, respectively. Employee stock ownership and 401(k) plans
are discussed in notes 12 and 16 to the consolidated financial statements on
page 31 and 34, respectively.
Net occupancy expense of $6.2 million in 1999 decreased slightly from the
previous two years. An in-store branch closure in 1999, an in-store branch
opening in 1998 and two branch relocations during 1997 affected net occupancy
and equipment expense in the respective years. Equipment expense of $2.7 million
in 1999 also decreased from the previous two years. Other expense of $16.5
million increased by $976,000 or 6.3% over 1998, which increased by $2.0 million
or 14.3% over 1997. The increase in 1999 was mainly due to a $746,000 or 27.7%
increase in expenses related to merchant and bank card services, while the 1998
increase was due to donations, training and other expenses related to the
conversion of the Company's integrated banking system in 1998, legal fees and
write-downs on other real estate. Total other operating expense as a percentage
of average assets was 3.37% in 1999 and 3.40% in both 1998 and 1997.
INCOME TAXES
Income tax expense totaled $8.1 million in 1999, $9.0 million in 1998 and
$9.4 million in 1997. The effective tax rate decreased to 33.0% from 37.3% and
38.5% in the previous two years due to an increase in income from investments
exempt from federal income taxes.
FINANCIAL CONDITION
Table 6 sets forth the distribution of assets, liabilities and
stockholders' equity.
Average total assets of $1,587.4 million increased by $79.2 million or 5.3%
in 1999 over 1998, which increased by $75.8 million or 5.3% over 1997. Average
net loans of $1,132.8 million increased by $81.0 million or 7.7% compared to the
1998 increase of $26.7 million or 2.6% over 1997. Average investment securities
of $315.8 million decreased by $22.1 million or 6.5% from 1998, which increased
by $70.4 million or 26.3% over 1997. The proportion to total assets of 19.9% in
1999 compared to 22.4% in 1998 and 18.7% in 1997. Average interest-bearing
deposits in other banks increased to $26.9 million in 1999 over $15.0 million in
1998, which decreased from $43.4 million in 1997. Funding asset growth was an
increase in average total deposits of $72.4 million or 6.1% to $1,266.3 million
in 1999 and $49.7 million or 4.3% to $1,193.9 million in 1998. Average
short-term borrowings of $36.6 million increased by $23.3 million in 1999
offsetting the decrease in long-term debt, due to liquidity provisions related
to the Year 2000.
Loans at year-end 1999 of $1,170.5 million increased by $64.6 million or
5.8% over year-end 1998. Accounting for the increase were commercial mortgage
and residential mortgage loans, which increased by $44.1 million or 9.1% to
$528.5 million and $37.1 million or 10.9% to $376.0 million, respectively.
Construction loans decreased by $16.0 million or 25.9% to $45.7 million. See
note 4 to the consolidated financial statements on page 27 of this Annual
Report.
Table 4. Components of Other Operating Income
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from fiduciary activities $ 792 $ 644 $ 440
Service charges on deposit accounts 3,235 3,064 2,678
Other service charges and fees 6,802 6,444 5,970
Equity in earnings of
unconsolidated subsidiaries 476 420 489
Fees on foreign exchange 582 616 700
Investment securities gains (losses) (250) 254 -
Gains (losses) on sales of loans (289) 4,340 (64)
Other 1,283 1,040 614
- ---------------------------------------------------------------------------------------
Total $ 12,631 $16,822 $ 10,827
=======================================================================================
Total other operating income as a
percentage of average assets 0.80% 1.12% 0.76%
=======================================================================================
</TABLE>
Table 5. Components of Other Operating Expense
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $27,989 $26,466 $25,795
Net occupancy 6,186 6,349 6,314
Equipment 2,718 2,879 2,908
Other 16,555 15,579 13,629
- ---------------------------------------------------------------------------------
Total $53,448 $51,273 $48,646
=================================================================================
Total other operating expense as a
percentage of average assets 3.37% 3.40% 3.40%
=================================================================================
</TABLE>
<PAGE>
[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Average core deposits, defined as total deposits excluding time deposits
$100,000 and over, of $924.3 million in 1999 increased by $53.1 million or 6.1%
over 1998, which also increased by $17.4 million or 2.0% over 1997. The Bank's
ongoing incentive programs place increasing emphasis on marketing and sales
efforts targeting core deposit growth. In 1998, a core deposit campaign was held
which was successful in increasing core deposits. Average time deposits $100,000
and over of $342.0 million increased by $19.3 million or 6.0% compared to an
increase in 1998 of $32.3 million or 11.1% to $322.7 million. The proportion of
large time deposits as a percentage of total deposits was 27.0% in both 1999 and
1998 and 25.4% in 1997.
Average stockholders' equity as a percentage of total assets decreased to
9.4% from 10.2% in 1998 and 10.3% in 1997. The decrease was the result of the
Company's stock repurchase program, which is detailed in the Capital Resources
section of this Management's Discussion.
ASSET/LIABILITY MANAGEMENT
The Company's earnings and capital are subject to risk of interest rate
fluctuations to the extent the 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.
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 management committee monitors its interest rate risk through the
use of income
Table 6. Distribution of Assets, Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
------------------ ------------------ ------------------
Average Percent Average Percent Average Percent
(Dollars in thousands) Balance to Total Balance to Total Balance to Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 40,648 2.6% $ 35,260 2.3% $ 36,138 2.5%
Interest-bearing deposits in other banks 26,851 1.7 15,041 1.0 43,362 3.0
Federal funds sold 673 - 70 - 85 -
Taxable investment securities 269,909 17.0 302,774 20.12 51,693 17.6
Tax-exempt investment securities 45,849 2.9 35,050 2.3 15,697 1.1
Loans 1,153,623 72.7 1,071,350 71.1 1,044,538 72.9
Allowance for loan losses (20,796) (1.3) (19,567) (1.3) (19,456) (1.3)
Premises and equipment 25,846 1.6 26,696 1.8 25,331 1.8
Other assets 44,827 2.8 41,531 2.7 35,050 2.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,587,430 100.0% $ 1,508,205 100.0% $ 1,432,438 100.0%
====================================================================================================================================
Liabilities and Stockholders' Equity:
Deposits:
Noninterest-bearing demand $ 177,841 11.2% $ 162,625 10.8% $ 155,232 10.8%
Interest-bearing demand 104,320 6.6 99,059 6.6 95,056 6.6
Savings and money market 424,466 26.7 401,936 26.639 8,667 27.8
Time deposits under $100,000 217,683 13.7 207,584 13.7 204,871 14.3
Time deposits $100,000 and over 341,967 21.6 322,653 21.4 290,340 20.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,266,277 79.8 1,193,857 79.1 1,144,166 79.8
Short-term borrowings 36,602 2.3 13,281 0.9 5,528 0.4
Long-term debt 113,820 7.2 128,274 8.5 120,452 8.4
Other liabilities 21,302 1.3 18,927 1.3 15,384 1.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,438,001 90.6 1,354,339 89.8 1,285,530 89.7
Stockholders' equity 149,429 9.4 153,866 10.2 146,908 10.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,587,430 100.0% $ 1,508,205 100.0% $ 1,432,438 100.0%
====================================================================================================================================
</TABLE>
<PAGE>
simulation and rate shock analysis. 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 and
options.
Table 7 sets forth information concerning interest rate sensitivity of the
Company's assets, liabilities and stockholders' equity at December 31, 1999. The
assumptions used in determining interest rate sensitivity of various asset and
liability products had a significant impact on the resulting table. For purposes
of this presentation, assets and liabilities are classified by the earliest
repricing date or maturity. All interest-bearing demand and savings balances are
included in the three months or less category, even though repricing of these
accounts is not contractually required and may not actually occur during that
period.
As shown in Table 7, the amount of liabilities being repriced exceeds the
amount of assets in the three months or less and over three through six months
categories. In the remaining time periods, repricing assets exceed repricing
liabilities. Generally, where rate-sensitive 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
Federal Deposit Insurance Corporation ("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
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 $ 9,828 $ - $ - $ - $ - $ - $ 9,828
Investment securities 40,044 13,097 20,136 70,714 162,717 14,962 321,670
Loans 378,866 72,113 163,897 322,535 223,759 9,306 1,170,476
Other assets - - - - - 144,517 144,517
Total assets 428,738 85,210 184,033 393,249 386,476 168,785 1,646,491
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits - - - - - 204,850 204,850
Interest-bearing deposits 712,953 138,971 170,270 75,385 3,225 - 1,100,804
Short-term borrowings 78,000 - 1,000 - - - 79,000
Long-term debt 42,167 677 11,049 17,010 27,376 - 98,279
Other liabilities - - - - - 19,479 19,479
Stockholders' equity - - - - - 144,079 144,079
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 833,120 139,648 182,319 92,395 30,601 368,408 1,646,491
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $(404,382) $ (54,438) $ 1,714 $ 300,854 $355,875 $(199,623) $ -
================================================================================================================================
Cumulative interest rate sensitivity gap $(404,382) $(458,820) $(457,106) $(156,252) $199,623 $ - $ -
================================================================================================================================
</TABLE>
<PAGE>
[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
includes the allowance for loan losses up to 1.25% of risk-weighted assets, and
a system for assigning assets and off-balance sheet items to one of four
risk-weighted categories. The capital standards require a minimum Tier I
risk-based capital ratio of 4.00% and total risk-based capital ratio (Tier I
plus Tier II) of 8.00%. The Federal Reserve Board and the FDIC have also adopted
a 3.00% minimum leverage ratio which is Tier I capital as a percentage of total
assets. Higher-risk banks as measured by the Federal regulatory rating system
are expected to maintain capital above the minimum leverage ratio requirement.
In addition, effective December 19, 1992, FDIC-insured institutions such as
the Bank must maintain leverage, Tier I and total risk-based capital ratios of
at least 5%, 6% and 10%, respectively, to be considered "well capitalized" under
the prompt corrective action provisions of the FDIC Improvement Act of 1991.
Table 8 sets forth the Company's and Bank's capital ratios as of the dates
indicated.
During 1999, the Company's board of directors authorized the repurchase and
retirement of CPB Inc. common stock for a total consideration of $12 million, in
addition to the $20 million authorized during 1998. During the year, 529,560
shares were repurchased for a total consideration of $12.0 million at an average
price of $22.61 per share. As of December 31, 1999, the Company repurchased
1,366,548 shares for a total consideration of $26.5 million or an average of
$19.39 per share, or approximately 12.9% of the 10.6 million shares outstanding
prior to the initial repurchase transactions.
Capital levels for the Company and the Bank were in excess of minimum
regulatory required levels at December 31, 1999 and 1998. The relatively low
rate of asset growth in the last three years and increasing earnings contributed
towards 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 $13.3 million, $26.7
million and $14.4 million in 1999, 1998 and 1997, respectively. The decrease in
1999 and increase in 1998 were mainly due to the net increase in other assets in
1999 and 1997 due to purchases of bank-owned life insurance.
Investing activities represent a use of cash. Net cash used in investing
activities was $49.2 million in 1999, $77.6 million in 1998 and $96.8 million in
1997. Cash used in net loan originations over principal repayments was $73.8
million in 1999, $69.5 million in 1998 and $6.2 million in 1997. Activities from
investment securities and interest-bearing deposits in other banks provided cash
of $25.5 million in 1999 and used cash of $4.9 million in 1998 and $86.1 million
in 1997.
In addition to cash flows from operating activities, financing activities
generally provide funding for growth in loans and investment securities with
increased deposits supplemented by the
Table 8. Regulatory Capital Ratios
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------- -------------------------
Minimum Minimum
Required Actual Excess Required Actual Excess
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
Tier I risk-based capital ratio 4.00% 11.24% 7.24% 4.00% 12.10% 8.10%
Total risk-based capital ratio 8.00 12.50 4.50 8.00 13.36 5.36
Leverage capital ratio 4.00 9.00 5.00 4.00 9.71 5.71
===============================================================================================
Bank:
Tier I risk-based capital ratio 6.00% 10.47% 4.47% 6.00% 11.28% 5.28%
Total risk-based capital ratio 10.00 11.72 1.72 10.00 12.54 2.54
Leverage capital ratio 5.00 8.38 3.38 5.00 9.05 4.05
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Company's 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 $36.5 million in 1999, $76.0 million in 1998 and
$69.5 million in 1997. The Company's total borrowings provided cash of $57.0
million in 1999 and $12.7 million in 1997 and used cash of $13.7 million in
1998. The increase in total borrowings in 1999 was due to short-term borrowings
provided for Year 2000-related liquidity. Accordingly, net cash provided by
financing activities was $76.6 million in 1999, $42.9 million in 1998 and $77.6
million in 1997.
The increase in loans was funded primarily by an increase in deposits and a
reduction in investment securities. The Bank's core deposits of $959.0 million
at December 31, 1999 increased by $33.8 million or 3.7%. Investment securities
decreased by $29.8 million or 8.5% over the year.
The primary uses of funds, as reflected in the Company's parent company
condensed statements of cash flows, were $12.0 million used to repurchase CPB
Inc. common stock and $5.2 million, $5.4 million and $5.1 million in 1999, 1998
and 1997, respectively, for payment of dividends to shareholders. The Company's
primary source of funds was dividends received from the Bank of $17.3 million,
$20.8 million and $5.1 million in 1999, 1998 and 1997, 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, 1999, retained earnings of the Bank was $96.1 million.
IMPACT OF NEW ACCOUNTING STANDARDS
During 1999, the Financial Accounting Standards Board issued statements on
financial accounting standards which are discussed in note 28 to the
consolidated financial statements on page 43 of this Annual Report. The
statements are not expected to have a material impact on the Company's
consolidated financial statements.
[LOGO]
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
A summary of unaudited quarterly operating results for the years ended
December 31, 1999 and 1998 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>
1999:
Interest income $27,758 $27,661 $28,986 $28,907 $113,312
Net interest income 16,998 16,971 17,690 17,235 68,894
Provision for loan losses 1,500 700 800 700 3,700
Net interest income after provision for loan losses 15,498 16,271 16,890 16,535 65,194
Income before income taxes 5,765 6,080 6,244 6,288 24,377
Net income 3,679 3,975 4,297 4,375 16,326
Basic earnings per share 0.38 0.41 0.44 0.47 1.70
Diluted earnings per share 0.37 0.41 0.44 0.46 1.68
==================================================================================================================================
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
==================================================================================================================================
</TABLE>
<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. Economic impact of
interest rate risk may occur as interest rates change resulting in gains or
losses in future net interest income, cash flows, or current fair market
value. The Company utilizes product pricing and investment and debt
management strategies to manage its interest rate risk. Financial derivatives
are not currently used.
The following table presents information on the Company's financial
instruments which are sensitive to changes in interest rates. Expected
maturities of interest-sensitive assets and liabilities are contractual
maturities. Interest-bearing demand and savings deposits, which have
indeterminate maturities, are included in the earliest maturity category. The
resulting table is based on assumptions that include prepayment rates on
mortgage-related assets and a forecast of market interest rates. See note 24
to the consolidated financial statements on page 38 and 39 of this Annual
Report for a discussion of the calculation of fair values.
At December 31, 1999, holdings of relatively longer-term loans and
investments and short-term borrowings increased from year-end 1998. Fair
value of interest-sensitive assets and liabilities, as a percentage of book
value, declined as market interest rates rose throughout the year. Maturities
and fair values of interest-sensitive assets and liabilities may vary from
expectations if actual experience differs from assumptions used.
<TABLE>
<CAPTION>
Expected Maturity Date
Book Total
(Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Value Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Interest-bearing deposits in other
banks $ 9,828 - - - - - $ 9,828 $ 9,828
Weighted average interest rates 5.37% - - - - - 5.37%
Fixed rate investments $ 43,156 $ 37,886 $ 32,828 $ 48,953 $ 31,812 $ 81,952 $ 276,587 $ 274,856
Weighted average interest rates 6.84% 5.96% 6.34% 6.27% 6.41% 5.64% 6.15%
Variable rate investments $ 3,262 $ 5,225 $ 3,978 $ 2,699 $ 2,316 $ 8,069 $ 25,549 $ 25,521
Weighted average interest rates 6.80% 7.08% 6.43% 5.53% 5.92% 6.47% 6.48%
Equity investments $ 19,534 - - - - - $ 19,534 $ 19,534
Weighted average interest rates 6.70% - - - - - 6.70%
Fixed rate loans $ 113,426 $ 59,195 $ 50,327 $ 38,484 $ 27,357 $117,299 $ 406,088 $ 399,973
Weighted average interest rates 8.44% 8.47% 8.22% 8.06% 7.97% 6.95% 7.92%
Variable rate loans $ 154,091 $ 99,258 $ 96,713 $ 67,701 $ 55,510 $291,115 $ 764,388 $ 754,551
Weighted average interest rates 8.83% 8.73% 8.50% 7.78% 7.88% 7.95% 8.28%
Total - 1999 $ 343,297 $201,564 $183,846 $157,837 $116,995 $498,435 $1,501,974 $1,484,263
Total - 1998 $ 477,202 $223,749 $179,519 $136,825 $127,857 $322,665 $1,467,817 $1,473,180
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE LIABILITIES:
Interest-bearing demand and
savings deposits $ 537,059 - - - - - $ 537,059 $ 537,059
Weighted average interest rates 2.07% - - - - - 2.07%
Time deposits $ 485,136 $ 56,978 $ 18,407 $ 1,513 $ 1,705 $ 6 $ 563,745 $ 562,394
Weighted average interest rates 4.61% 5.03% 4.30% 4.99% 4.75% 4.01% 4.64%
Short-term borrowings $ 79,000 - - - - - $ 79,000 $ 79,000
Weighted average interest rates 5.56% - - - - - 5.56%
Long-term debt $ 32,394 $ 18,461 $ 20,049 $ 4,444 $ 4,865 $ 18,066 $ 98,279 $ 96,231
Weighted average interest rates 5.87% 5.46% 6.35% 6.36% 6.07% 6.41% 6.03%
Total - 1999 $1,133,589 $ 75,439 $ 38,456 $ 5,957 $ 6,570 $ 18,072 $1,278,083 $1,274,684
Total - 1998 $1,057,827 $ 84,859 $ 31,427 $ 6,603 $ 5,512 $ 16,306 $1,202,534 $1,207,512
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[LOGO]
CONSOLIDATED BALANCE SHEETS
CPB INC. AND SUBSIDIARY - DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 83,425 $ 42,735
Interest-bearing deposits in other banks 9,828 10,469
Investment securities:
Held to maturity, at amortized cost (fair value of $99,808 and $123,226
at December 31, 1999 and 1998, respectively) 101,567 120,476
Available for sale, at fair value 220,103 230,960
- ----------------------------------------------------------------------------------------------------------------------
Total investment securities 321,670 351,436
Loans 1,170,476 1,105,912
Less allowance for loan losses 20,768 20,066
- ----------------------------------------------------------------------------------------------------------------------
Net loans 1,149,708 1,085,846
Premises and equipment 24,774 26,833
Accrued interest receivable 9,606 9,122
Investment in unconsolidated subsidiaries 8,451 7,990
Due from customers on acceptances 12 32
Other real estate 1,366 1,155
Other assets 37,651 25,267
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,646,491 $1,560,885
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 204,850 $ 186,892
Interest-bearing deposits 1,100,804 1,082,231
- ----------------------------------------------------------------------------------------------------------------------
Total deposits 1,305,654 1,269,123
Short-term borrowings 79,000 2,014
Long-term debt 98,279 118,289
Bank acceptances outstanding 12 32
Other liabilities 19,467 23,361
Total liabilities 1,502,412 1,412,819
- ----------------------------------------------------------------------------------------------------------------------
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 9,288,457 and 9,797,596 shares at
December 31, 1999 and 1998, respectively 6,540 6,637
Surplus 45,848 45,848
Retained earnings 94,436 94,954
Accumulated other comprehensive income (loss) (2,745) 627
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 144,079 148,066
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,646,491 $1,560,885
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
[LOGO]
CONSOLIDATED STATEMENTS OF INCOME
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 92,945 $ 90,158 $ 91,367
Interest and dividends on investment securities:
Taxable interest 15,795 18,125 14,713
Tax-exempt interest 1,810 1,381 660
Dividends 1,345 1,275 1,182
Interest on deposits in other banks 1,385 849 2,405
Interest on Federal funds sold 32 4 5
- ------------------------------------------------------------------------------------------------------------
Total interest income 113,312 111,792 110,332
- ------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 36,075 38,478 37,199
Interest on short-term borrowings 1,931 724 298
Interest on long-term debt 6,412 7,503 7,198
- ------------------------------------------------------------------------------------------------------------
Total interest expense 44,418 46,705 44,695
- ------------------------------------------------------------------------------------------------------------
Net interest income 68,894 65,087 65,637
Provision for loan losses 3,700 6,600 3,500
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 65,194 58,487 62,137
- ------------------------------------------------------------------------------------------------------------
Other operating income:
Income from fiduciary activities 792 644 440
Service charges on deposit accounts 3,235 3,064 2,678
Other service charges and fees 6,802 6,444 5,970
Equity in earnings of unconsolidated subsidiaries 476 420 489
Fees on foreign exchange 582 616 700
Investment securities gains (losses) (250) 254 -
Gains (losses) on sales of loans (289) 4,340 (64)
Other 1,283 1,040 614
- ------------------------------------------------------------------------------------------------------------
Total other operating income 12,631 16,822 10,827
- ------------------------------------------------------------------------------------------------------------
Other operating expense:
Salaries and employee benefits 27,989 26,466 25,795
Net occupancy 6,186 6,349 6,314
Equipment 2,718 2,879 2,908
Other 16,555 15,579 13,629
- ------------------------------------------------------------------------------------------------------------
Total other operating expense 53,448 51,273 48,646
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 24,377 24,036 24,318
Income taxes 8,051 8,967 9,359
- ------------------------------------------------------------------------------------------------------------
Net income $ 16,326 $ 15,069 $ 14,959
- ------------------------------------------------------------------------------------------------------------
Per share data:
Basic earnings per share $ 1.70 $ 1.46 $ 1.42
Diluted earnings per share 1.68 1.45 1.40
Cash dividends declared 0.55 0.52 0.49
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
[LOGO]
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
other
Common Retained comprehensive
(Dollars in thousands, except per share data) stock Surplus earnings income (loss) Total
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 6,586 $45,481 $ 89,405 $ (590) $ 140,882
Net income - - 14,959 - 14,959
Net change in unrealized gain (loss)
on investment securities, net of taxes of $454 - - - 684 684
Comprehensive income 15,643
Cash dividends declared ($0.49 per share) - - (5,176) - (5,176)
41,435 shares of common stock issued 26 367 - - 393
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 6,612 45,848 99,188 94 151,742
Net income - - 15,069 - 15,069
Net change in unrealized gain (loss)
on investment securities, net of taxes of $355 - - - 533 533
Comprehensive income 15,602
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)
Balance at December 31, 1998 6,637 45,848 94,954 627 148,066
Net income - - 16,326 - 16,328
Net change in unrealized gain (loss)
on investment securities, net of taxes of $(2,244)
and net of reclassification (see disclosure) - - - (3,372) (3,372)
Comprehensive income 12,954
Cash dividends declared ($0.55 per share) - - (5,241) - (5,241)
20,421 shares of common stock issued 271 - - - 271
529,560 shares of common stock repurchased (368) - (11,603) - (11,971)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 6,540 $45,848 $ 94,436 $(2,745) $ 144,079
- -------------------------------------------------------------------------------------------------------------------------------
Disclosure of reclassification amount:
Year ended December 31, 1999:
Unrealized holding loss on investment securities
during period, net of taxes of $(2,137) - - - (3,211) (3,211)
Less reclassification adjustment for losses included
in net income, net of taxes of $107 - - - 161 161
- -------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized gain (loss)
on investment securities - - - $(3,372) $ (3,372)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
[LOGO]
CONSOLIDATED STATEMENTS OF CASH FLOWS
CPB INC. AND SUBSIDIARY - YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,326 $ 15,069 $ 14,959
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 3,700 6,600 3,500
Provision for depreciation and amortization 2,848 2,979 2,974
Net amortization and accretion of investment securities 312 300 310
Net loss (gain) on investment securities 250 (254) -
Federal Home Loan Bank stock dividends received (1,318) (1,275) (1,182)
Net loss (gain) on sale of loans 289 (4,340) 64
Proceeds from sales of loans held for sale 35,524 69,147 21,834
Originations and purchases of loans held for sale (32,299) (66,711) (21,958)
Deferred income tax expense (benefit) 4,417 (871) (347)
Equity in earnings of unconsolidated subsidiaries (476) (420) (489)
Net (increase) decrease in other assets (11,977) 1,127 (7,098)
Net (decrease) increase in other liabilities (4,344) 5,345 1,831
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,252 26,696 14,398
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of and calls on investment securities held to maturity 19,881 60,489 41,290
Purchases of investment securities held to maturity (1,087) (28,354) (84,973)
Proceeds from sales of investment securities available for sale 37,163 20,574 -
Proceeds from maturities of and calls on investment securities available for sale 54,097 26,351 28,077
Purchases of investment securities available for sale (85,149) (107,668) (62,637)
Net decrease (increase) in interest-bearing deposits in other banks 641 23,719 (7,891)
Net loan originations over principal repayments (73,817) (69,529) (6,209)
Purchases of premises and equipment (948) (3,226) (4,607)
Net proceeds from disposal of premises and equipment 159 90 29
Distributions from unconsolidated subsidiaries 375 380 322
Contributions to unconsolidated subsidiaries (469) (418) (200)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (49,154) (77,592) (96,799)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 36,531 75,965 69,544
Proceeds from long-term debt 22,550 30,000 50,500
Repayments of long-term debt (42,560) (39,416) (38,635)
Net increase (decrease) in short-term borrowings 76,986 (4,234) 821
Cash dividends paid (5,215) (5,436) (5,061)
Proceeds from sale of common stock 271 583 393
Repurchases of common stock (11,971) (14,526) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 76,592 42,936 77,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 40,690 (7,960) (4,839)
Cash and cash equivalents:
At beginning of year 42,735 50,695 55,534
- ------------------------------------------------------------------------------------------------------------------------------------
At end of year $ 83,425 $ 42,735 $ 50,695
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 44,017 $ 47,207 $ 44,184
Cash paid during the year for income taxes 12,800 2,301 10,243
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing and financing activities:
Reclassification of loans to other real estate $ 2,741 $ 846 $ 3,450
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CPB INC. AND SUBSIDIARY--YEARS
ENDED DECEMBER 31, 1999, 1998, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CPB Inc.'s (the "Company's") sole operating subsidiary, Central Pacific
Bank (the "Bank"), is a full-service commercial bank which had 26 banking
offices located throughout the state of Hawaii at December 31, 1999. 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 and credit card services, Internet banking
services, cash management 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, CPB Properties, 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.
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 owned 49%. In December
1999, the Company relinquished its ownership interest in Trans-Pacific Mortgage
Group LLC. The investment was 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, 1999 and 1998, 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.
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.
<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 $1,153,000 and
$863,000 at December 31, 1999 and 1998, 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 $322,000, $262,000 and $151,000 for the years ended December 31,
1999, 1998 and 1997, respectively. Accumulated amortization amounted to
$1,254,000 and $932,000 at December 31, 1999 and 1998, 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 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,
whereby compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value based method defined in SFAS No.
<PAGE>
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 taxes 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 1999 totaled $2,000. 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 PRINCIPLE
MORTGAGE-BACKED SECURITIES
In October 1998, the Financial Accounting Standards Board ("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, 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,
1999 and 1998 was $61,316,000 and $21,967,000, respectively.
<PAGE>
[Logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES
A summary of investment securities at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
(Dollars in thousands) cost gains losses value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Held to Maturity:
U.S. Treasury and
other U.S. Government
agencies $ 48,733 $ 4 $ 787 $ 47,950
States and political
subdivisions 52,834 40 1,016 51,858
- ---------------------------------------------------------------------------------------------
Total $101,567 $ 44 $1,803 $ 99,808
=============================================================================================
Available for Sale:
U.S. Treasury and
other U.S. Government
agencies $177,629 $ 27 $4,241 $173,415
States and political
subdivisions 22,905 9 225 22,689
Privately-issued mortgage-
backed securities 4,608 - 143 4,465
Federal Home Loan Bank
of Seattle stock 18,709 - - 18,709
Other 825 - - 825
- ---------------------------------------------------------------------------------------------
Total $224,676 $ 36 $4,609 $220,103
=============================================================================================
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
=============================================================================================
</TABLE>
The amortized cost and estimated fair value of investment securities at
December 31, 1999, 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 $ 10,504 $ 10,484
Due after one year through five years 16,508 16,297
Due after five years through ten years 28,484 27,756
Due after ten years 7,204 7,076
Mortgage-backed securities 38,867 38,195
- -------------------------------------------------------------------------------
Total $101,567 $ 99,808
===============================================================================
Available for Sale:
Due in one year or less $ 9,005 $ 9,013
Due after one year through five years 36,835 36,166
Due after five years through ten years 10,316 10,160
Due after ten years 10,034 9,982
Mortgage-backed securities 138,952 135,248
Federal Home Loan Bank of Seattle stock 18,709 18,709
Other 825 825
- -------------------------------------------------------------------------------
Total $224,676 $220,103
===============================================================================
</TABLE>
Proceeds from sales of investment securities available for sale were
$37,163,000 in 1999 and $20,574,000 in 1998, resulting in gross realized gains
of $232,000 and $254,000, respectively, and gross realized losses of $482,000 in
1999. There were no sales of investment securities during the year ended
December 31, 1997.
Investment securities of $169,516,000 and $160,539,000 at December 31, 1999
and 1998, 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).
<PAGE>
4. LOANS
Loans consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Real estate:
Mortgage - commercial $ 528,461 $ 484,396
Mortgage - residential 376,005 338,914
Construction 45,703 61,685
Commercial, financial and agricultural 188,118 190,781
Consumer 37,912 34,679
- -------------------------------------------------------------------------------
1,176,199 1,110,455
Less unearned income 5,723 4,543
Total $1,170,476 $1,105,912
===============================================================================
</TABLE>
Loans held for sale, consisting primarily of fixed-rate residential
mortgage loans which were originated with the intent to sell, amounted to
$3,010,000 and $6,235,000 at December 31, 1999 and 1998, respectively, and were
valued at the lower of aggregate cost or market value.
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 1999 follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------------------
<S> <C>
Balance, beginning of year $ 10,670
Additions 2,553
Repayments (6,436)
Other changes (200)
Balance, end of year $ 6,587
==============================================
</TABLE>
Impaired loans at December 31, 1999 and 1998, all of which had related
allowance for loan losses established (see note 5), amounted to $6,085,000 and
$12,301,000, respectively, and included all nonaccrual and restructured loans
greater than $500,000. The average recorded investment in impaired loans
amounted to $9,533,000 in 1999, $20,199,000 in 1998 and $16,268,000 in 1997.
Interest income recognized on such loans amounted to $350,000 in 1999, $749,000
in 1998 and $2,102,000 in 1997, of which $260,000, $3,000 and $1,505,000,
respectively, was earned on nonaccrual loans, and $1,000 and $431,000, was
recorded in 1999 and 1997, respectively, on restructured loans still accruing
interest.
Nonaccrual loans at December 31, 1999 and 1998 totaled $9,695,000 and
$12,932,000, respectively. The Bank collected and recognized interest of
$268,000 on nonaccrual loans in 1999. The Bank would have recognized additional
interest income of $584,000 had these loans been accruing interest throughout
1999. Additionally, the Bank collected and recognized interest of $29,000 on
charged-off loans in 1999.
Restructured loans still accruing interest at December 31, 1999 amounted to
$500,000. There were no restructured loans still accruing interest 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.
<PAGE>
[Logo]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $20,066 $19,164 $19,436
Provision for loan losses 3,700 6,600 3,500
- ----------------------------------------------------------------
23,766 25,764 22,936
- ----------------------------------------------------------------
Charge-offs (3,548) (6,581) (4,042)
Recoveries 550 883 270
- ----------------------------------------------------------------
Net charge-offs (2,998) (5,698) (3,772)
- ----------------------------------------------------------------
Balance, end of year $20,768 $20,066 $19,164
================================================================
</TABLE>
Changes in the allowance for loan losses for impaired loans (included in
the above amounts) were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 2,960 $ 3,790 $ 5,877
Provision for loan losses 2,615 2,555 853
Net charge-offs (2,175) (2,997) (933)
Other changes (853) (388) (2,007)
- ----------------------------------------------------------------
Balance, end of year $ 2,547 $ 2,960 $ 3,790
================================================================
</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, 1999, $5,459,000 of impaired loans were measured based on
the fair value of the underlying collateral, while $626,000 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, 1999 and
1998:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Land $ 6,753 $ 6,753
Office buildings and improvements 23,140 23,124
Furniture, fixtures and equipment 16,701 17,421
- -------------------------------------------------------------------------------
46,594 47,298
Less accumulated depreciation and amortization 21,820 20,465
- -------------------------------------------------------------------------------
Net $24,774 $26,833
===============================================================================
</TABLE>
Depreciation and amortization of premises and equipment were charged to the
following operating expenses:
<TABLE>
<CAPTION>
Useful
(Dollars in thousands) 1999 1998 1997 lives
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net occupancy $1,151 $1,201 $1,027 1 to 39
years
Equipment 1,697 1,778 1,947 1 to 20
years
- -------------------------------------------------------------------------------
Total $2,848 $2,979 $2,974
===============================================================================
</TABLE>
7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
CKSS ASSOCIATES
CPBProperties, Inc. is a general partner with a 50% interest in CKSS
Associates, a limited partnership. The partnership developed an office building
complex in Honolulu known as Central Pacific Plaza, part of which serves as the
Company's headquarters. CPB Properties, Inc. contributed cash of $846,000 and
land with a carrying value of $1,381,000. CPB Properties, Inc. recorded its
contribution to the partnership at book value. The partnership has agreed to a
value of $5,200,000 for the land and has credited the subsidiary with a
contribution of $6,046,000. For accounting purposes, the difference between the
$1,381,000 carrying value of the land and the $5,200,000 value of the land
agreed upon by the partnership in determining the amount of the contribution
would be recognized, if at all, only upon the sale of the subsidiary's interest
in the partnership or upon the sale of the land and building by the partnership.
<PAGE>
Financial information of CKSS Associates is summarized as follows:
CKSS Associates
Condensed Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Assets:
Office buildings and improvements
(including land valued at $5,200) $37,172 $38,818
Furniture, fixtures and equipment 346 372
Other assets 2,797 2,150
Total assets $40,315 $41,340
- -----------------------------------------------------------------------------
Liabilities and Partners'Equity:
Notes payable $17,201 $18,601
Other liabilities 538 520
Partners' equity 22,576 22,219
Total liabilities and partners' equity $40,315 $41,340
- -----------------------------------------------------------------------------
</TABLE>
CKSS Associates
Condensed Statements of Income
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Rental income from bank $1,890 $1,903 $2,039
Other rental income
and other revenues 6,351 6,234 6,514
Total revenues 8,241 8,137 8,553
Total costs and expenses 7,134 7,137 7,390
Net income $1,107 $1,000 $1,163
- -------------------------------------------------------------------------
</TABLE>
NOTES PAYABLE
At December 31, 1999, notes payable included $7,801,000 payable to The
Sumitomo Bank, Limited ("Sumitomo"), the principal stockholder of CPB Inc., and
$9,400,000 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 $9,300,000 due on August 10, 2001, which is secured by a mortgage
on the Kaimuki Plaza, and $100,000 due on April 10, 2001, which is secured by
second mortgages on the Central Pacific Plaza and Kaimuki Plaza properties. The
notes payable bear interest at either a fixed rate or a variable rate based upon
the London Interbank Offered Rate ("LIBOR") or the Federal Funds rate. The
weighted average interest rate on these notes was 6.620% at December 31, 1999.
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
2000 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, 1999, 1998
and 1997.
8. DEPOSITS
Certificates of deposit of $100,000 or more totaled $346,905,000 and
$344,163,000 at December 31, 1999 and 1998, respectively.
Interest expense on certificates of deposit of $100,000 or more totaled
$16,132,000, $16,640,000, and $15,116,000 for the years ended December 31, 1999,
1998 and 1997, 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, 1999, 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, 1999, the underlying
securities were held in a custodial account subject to Bank control.
<PAGE>
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other short-term borrowings consist primarily of the Treasury Tax and Loan
balance, which represents tax payments collected on behalf of the U.S.
government, and FHLB short -term advances. The Treasury Tax and Loan balances
bear market interest rates and are callable at any time.
A summary of short-term borrowings follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Amount outstanding at
December 31 $ - $ - $ -
Average amount outstanding
during year 3,266 998 81
Highest month-end balance
during year 34,000 - -
Weighted average interest rate
on balances outstanding
at December 31 - - -
Weighted average interest rate
during year 5.07% 5.05% 5.82%
- ------------------------------------------------------------------------------------------------
Securities sold under agreements to repurchase:
Amount outstanding at
December 31 $ 1,000 $ 1,000 $3,500
Average amount outstanding
during year 1,548 2,342 3,945
Highest month-end balance
during year 1,000 2,500 4,400
Weighted average interest rate
on balances outstanding
at December 31 5.55% 4.70% 5.43%
Weighted average interest rate
during year 4.86% 5.43% 5.49%
- ------------------------------------------------------------------------------------------------
Other short-term borrowings:
Amount outstanding at
December 31 $78,000 $ 1,014 $2,748
Average amount outstanding
during year 31,788 9,941 1,502
Highest month-end balance
during year 78,000 33,992 3,429
Weighted average interest rate
on balances outstanding
at December 31 5.56% 3.95% 5.27%
Weighted average interest rate
during year 5.31% 5.50% 5.07%
================================================================================================
</TABLE>
10. LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 consisted of intermediate-term
FHLB advances with a weighted average interest rate of 6.029% and 5.573%,
respectively. FHLB advances outstanding at December 31, 1999 were secured by
interest-bearing deposits at the FHLB of $9.8 million, the Bank's holdings of
FHLB stock, other unencumbered investment securities with a carrying value of
$157.9 million and certain real estate loans totaling $286.2 million in
accordance with the collateral provisions of the Advances, Security and Deposit
Agreement between the Bank and the FHLB. At December 31, 1999 the Bank had
available to it additional unused FHLB advances of approximately $47.5 million.
At December 31, 1999, approximate maturities of FHLB advances were as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------------
<S> <C>
Year ending December 31:
2000 $32,394
2001 18,461
2002 20,049
2003 4,444
2004 4,865
Thereafter 18,066
- ------------------------------------------------------------
Total $98,279
- ------------------------------------------------------------
</TABLE>
11. SHAREHOLDER RIGHTS PLAN
On August 26, 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.
<PAGE>
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% per year starting the second
year of participation. The Bank made contributions of $1,280,000, $1,241,000 and
$1,283,000 for 1999, 1998 and 1997, respectively, which were charged to salaries
and employee benefits. Effective January 1, 2000, contributions to the profit
sharing plan and ESOP combined will be reduced from 10% to 5% of defined net
income.
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 10-year terms.
Incentive stock options vest at the rate of 20% 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 10-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
qualified 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 10 years or the number of years to age 70. 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 1999, 1997 and 1995 of $9.53, $5.47 and $4.54, respectively, was
determined using the Black Scholes option-pricing model with the following
weighted average assumptions: expected dividend yield of 2.32%, 2.63% and 3.07%,
expected volatility of 36%, 28% and 30%, risk-free interest rate of 6.25%, 5.45%
and 6.10% and expected life of 7.5 years for 1999, 1997 and 1995, respectively.
There were no grants in 1998 or 1996.
The following table presents information on options outstanding under the
1986 and 1997 Stock Option Plans:
<TABLE>
<CAPTION>
Options Options
outstanding exercisable
- ------------------------------------------------------------------------------
Remaining
average
Date Exercise contractual
of grant price Shares life (months) Shares
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
July 8, 1992 $ 12.725 78,339 30.3 78,339
June 14, 1995 13.04 86,370 65.5 68,760
July 30, 1997 17.875 243,800 91.0 72,920
November 2, 1999 24.175 103,200 118.1 -
- ------------------------------------------------------------------------------
Total 511,709 220,019
Weighted average 82.9
Weighted average
exercise price $ 17.54 $ 14.53
- ------------------------------------------------------------------------------
</TABLE>
The Company applied APB Opinion No. 25 in accounting for its stock option
plans, and accordingly, no compensation cost was
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
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 434,390 $ 15.73 501,390 $15.09 296,026 $11.98
Granted 103,200 24.18 - - 253,400 17.88
Exercised (20,421) 13.29 (55,400) 10.52 (41,436) 9.49
Forfeited (5,460) 14.37 (11,600) 12.73 (6,600) 17.88
- ------------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31 511,709 $17.544 34,390 $15.73 501,390 $15.09
Options exercisable at December 31 220,019 14.53 183,230 13.90 179,470 12.11
Shares available for future grants 946,760 1,049,960 1,049,960
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognized for its options in the consolidated financial statements. The
following table presents pro forma disclosures of the impact that the 1999, 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) 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
As reported:
Net income $16,326 $15,069 $14,959
Basic earnings per share 1.70 1.46 1.42
Diluted earnings per share 1.68 1.45 1.40
Pro forma:
Net income $15,933 $14,706 $14,741
Basic earnings per share 1.66 1.42 1.40
Diluted earnings per share 1.64 1.42 1.38
=============================================================================
</TABLE>
Pro forma net income and earnings per share reflect only those options
granted since 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, 1999,
Sumitomo held exercisable warrants for 46,219 shares and warrants for 28,462
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, 1999.
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.
<PAGE>
The following table sets forth information pertaining to the defined
benefit retirement plan for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1 $ 23,285 $ 22,221 $ 20,830
Service cost 203 304 209
Interest cost 1,549 1,612 1,562
Actuarial loss (gain) (2,369) 685 1,050
Benefits paid (1,586) (1,537) (1,430)
Benefit obligation at
December 31 $ 21,082 $ 23,285 $ 22,221
- ------------------------------------------------------------------------------------------------
Benefit obligation actuarial assumptions:
Weighted average discount rate 8.00% 7.00% 7.50%
Weighted average rate of
compensation increase 3.00 3.00 5.00
- ------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of assets at January 1 $ 22,737 $ 22,086 $ 19,872
Actual return on plan assets 3,016 2,188 3,346
Employer contributions 242 - 298
Benefits paid (1,586) (1,537) (1,430)
Fair value of assets at
December 31 $ 24,409 $ 22,737 $ 22,086
- ------------------------------------------------------------------------------------------------
Funded status:
Benefit obligation at December 31 $(21,082) $(23,285) $(22,221)
Fair value of plan assets 24,409 22,737 22,086
Unrecognized transition asset (46) (91) (137)
Unamortized prior service cost (569) (294) (19)
Unrecognized net actuarial loss 368 3,909 3,586
Prepaid benefit cost $ 3,080 $ 2,976 $ 3,295
- ------------------------------------------------------------------------------------------------
Components of net periodic cost:
Service cost $ 203 $ 304 $ 209
Interest cost 1,549 1,612 1,562
Expected return on plan assets (1,987) (1,922) (1,727)
Amortization of unrecognized
transition asset (46) (46) (46)
Recognized prior service cost 275 275 275
Recognized net loss 143 96 156
Net periodic cost $ 137 $ 319 $ 429
- ------------------------------------------------------------------------------------------------
Net periodic cost actuarial assumptions:
Weighted average discount rate 8.00% 7.50% 7.75%
Weighted average rate of
compensation increase 3.00 3.00 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1 $ 682 $ 611 $ 570
Service cost 14 7 14
Interest cost 48 46 44
Actuarial loss (gain) (68) 65 30
Benefits paid (47) (47) (47)
- ---------------------------------------------------------------------------------
Benefit obligation at
December 31 $ 629 $ 682 $ 611
- ---------------------------------------------------------------------------------
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 $(629) $(682) $(611)
Unrecognized transition obligation 20 22 25
Unrecognized net actuarial loss 4 82 16
- ---------------------------------------------------------------------------------
Accrued benefit cost $(605) $(578) $(570)
- ---------------------------------------------------------------------------------
Components of net periodic cost:
Service cost $ 14 $ 7 $ 14
Interest cost 48 46 44
Amortization of unrecognized
transition obligation 3 3 29
Recognized net (gain) loss 10 (1) (26)
- ---------------------------------------------------------------------------------
Net periodic cost $ 75 $ 55 $ 61
- ---------------------------------------------------------------------------------
</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.
<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 $853,000, $826,000 and
$855,000 for 1999, 1998 and 1997, 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
$334,000, $318,000 and $288,000 in 1999, 1998 and 1997, respectively.
Effective January 1, 2000, combined contributions to the profit sharing
plan and ESOP will be reduced from 10% to 5% of defined net income, while
contributions to the Bank's 401(k) plan will be increased from 50% to 100% of
employee contributions up to 4% of the employee's salary.
17. OPERATING LEASES
The Bank occupies a number of properties under leases which expire on
various dates through 2047 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 $544,000, $459,000 and $392,000 for
1999, 1998 and 1997, respectively.
Net rent expense, charged to net occupancy expense, for all operating
leases is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Total rent expense $4,566 $4,661 $4,709
Less sublease rental income (289) (295) (313)
- -----------------------------------------------------------------------------
Net $4,277 $4,366 $4,396
=============================================================================
</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, 1999:
<TABLE>
<CAPTION>
Less
sublease Net
Rental rental rental
(Dollars in thousands) commitment income commitment
- ------------------------------------------------------------
<S> <C> <C> <C>
Year ending December 31:
2000 $ 3,808 $ (105) $ 3,703
2001 3,808 (44) 3,764
2002 3,430 (18) 3,412
2003 3,158 - 3,158
2004 2,894 - 2,894
Thereafter 16,158 - 16,158
- ------------------------------------------------------------
Total $33,256 $ (167) $33,089
============================================================
</TABLE>
Rental commitments include $11,543,000 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, 1999:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------
<S> <C>
Year ending December 31:
2000 $ 1,214
2001 919
2002 690
2003 508
2004 415
Thereafter 16,022
- -----------------------------------------------------------
Total $19,768
- -----------------------------------------------------------
</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.
<PAGE>
18. OTHER EXPENSE
Components of other expense for the years ended December 31, 1999, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Merchant and bank card services $ 3,441 $ 2,695 $ 2,354
Advertising 1,200 1,245 1,020
Computer software 1,353 1,235 1,141
Other 10,561 10,404 9,114
Total $16,555 $15,579 $13,629
============================================================================
</TABLE>
19. INCOME AND FRANCHISE TAXES
Components of income tax expense (benefit) for the years ended December 31,
1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Current Deferred Total
- -------------------------------------------------------------------
<S> <C> <C> <C>
1999:
Federal $3,297 $ 3,580 $6,877
State 337 837 1,174
- -------------------------------------------------------------------
Total $3,634 $ 4,417 $8,051
===================================================================
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
===================================================================
</TABLE>
Income tax expense amounted to $8,051,000, $8,967,000 and $9,359,000 for
1999, 1998 and 1997, 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) 1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected"
tax expense $8,532 $8,413 $8,511
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (842) (708) (321)
Other tax-exempt income (267) (128) (50)
State franchise tax, net of
Federal income tax benefit 763 1,130 1,157
Other (135) 260 62
- ---------------------------------------------------------------
Total $8,051 $8,967 $9,359
===============================================================
</TABLE>
At December 31, 1999, current Federal income taxes receivable of $1,912,000
were included in other assets, and current state franchise taxes payable of
$3,953,000 were included in other liabilities. At December 31, 1998, current
Federal income taxes payable of $7,592,000 and current state franchise taxes
payable of $3,615,000 were included in other liabilities.
<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,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 6,772 $ 6,544
Employee retirement benefits 1,861 1,903
Accrued expenses 1,175 604
Interest on nonaccrual loans 749 893
State franchise tax 570 710
Premises and equipment, principally due to
differences in depreciation 86 -
Net unrealized gain on available-for-sale securities - 417
Other 165 233
- ---------------------------------------------------------------------------------------
Total deferred tax assets $11,378 $11,304
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
FHLB stock dividends received 3,623 3,097
Deferred gain on curtailed retirement plan 2,771 2,771
Net unrealized loss on
available-for-sale securities 1,827 -
Investment in unconsolidated subsidiaries 802 989
Deferred finance fees 650 422
Accreted discounts receivable 279 317
Premises and equipment, principally
due to differences in depreciation - 57
Other 150 202
- ---------------------------------------------------------------------------------------
Total deferred tax liabilities $10,102 $ 7,855
- ---------------------------------------------------------------------------------------
Net deferred tax assets $ 1,276 $ 3,449
=======================================================================================
</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, 1999 and 1998.
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 $1,900,000 as of December 31, 1999.
20. COMPREHENSIVE INCOME
Components of other comprehensive income for the years ended December 31,
1999, 1998 and 1997 were comprised solely of unrealized holding (losses) gains
on available-for-sale investment securities. Accumulated other comprehensive
income, net of taxes, is presented below as of the dates indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 627 $ 94 $(590)
Current-year change (3,372) 533 684
- --------------------------------------------------------------------------
Balance at end of year $(2,745) $627 $ 94
==========================================================================
</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) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share computation Numerator:
Income available to
common stockholders $16,326 $15,069 $14,959
Denominator:
Weighted average common
shares outstanding 9,630 10,354 10,555
Basic earnings per share $ 1.70 $ 1.46 $ 1.42
==================================================================================================
Diluted earnings per share computation Numerator:
Income available to
common stockholders $16,326 $15,069 $14,959
Denominator:
Weighted average common
shares outstanding 9,630 10,354 10,555
Incremental shares from
conversion of options and share
purchase agreement warrants 110 78 100
- --------------------------------------------------------------------------------------------------
9,740 10,432 10,655
Diluted earnings per share $ 1.68 $ 1.45 $ 1.40
==================================================================================================
</TABLE>
<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, 1999 and 1998 financial instruments with off-balance sheet
risk were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $322,464 $261,200
Standby letters of credit and
financial guarantees written 12,864 11,990
Financial instruments whose contract
amounts exceed the amount
of credit risk:
Forward foreign exchange contracts $ 43 $ 207
- --------------------------------------------------------------------------------
</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.
<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 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.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
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 $ 83,425 $ 83,425 $ 42,735 $ 42,735
Interest-bearing deposits in other banks 9,828 9,828 10,469 10,469
Investment securities 321,670 319,911 351,436 354,186
Net loans 1,149,708 1,133,756 1,085,846 1,088,459
Accrued interest receivable 9,606 9,606 9,122 9,122
Due from customers on acceptances 12 12 32 32
Financial liabilities:
Deposits:
Noninterest-bearing deposits 204,850 204,850 186,892 186,892
Interest-bearing demand and savings deposits 537,059 537,059 531,551 531,551
Time deposits 563,745 562,394 550,680 552,974
Total deposits 1,305,654 1,304,303 1,269,123 1,271,417
Short-term borrowings 79,000 79,000 2,014 2,014
Long-term debt 98,279 96,231 118,289 120,973
Bank acceptances outstanding 12 12 32 32
Accrued interest payable (included in other liabilities) 5,303 5,303 4,902 4,902
Off-balance sheet financial instruments:
Commitments to extend credit 322,464 1,019 261,200 697
Standby letters of credit and financial guarantees written 12,864 97 11,990 90
Forward foreign exchange contracts 43 - 207 (2)
===================================================================================================================================
</TABLE>
<PAGE>
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 13,
1999, declared a fourth quarter cash dividend of $0.14 per share, in addition to
the three quarterly cash dividends previously declared, for a total of $0.55 per
share for the year ended December 31, 1999.
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.
<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, 1999:
Net interest income (expense) $ (8,762) $ 67,642 $ 7,378 $ 2,636 $ 68,894
Intersegment net interest income (expense) 45,060 (44,758) 772 (1,074) -
Provision for loan losses 405 3,172 - 123 3,700
Other income 4,614 293 (196) 7,920 12,631
Other expense 15,602 3,311 344 34,191 53,448
Administrative and overhead expense allocation 18,165 3,932 338 (22,435) -
Income taxes 2,224 4,071 2,481 (725) 8,051
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,516 $ 8,691 $ 4,791 $ (1,672) $ 16,326
- ----------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999:
Investment securities $ - $ - $ 321,670 $ - $ 321,670
Loans 290,183 861,449 - 18,844 1,170,476
Other 30,091 23,257 46,567 54,430 154,345
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 320,274 $ 884,706 $ 368,237 $ 73,274 $1,646,491
==================================================================================================================================
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 taxes 2,493 3,154 2,589 731 8,967
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 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 taxes 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
==================================================================================================================================
</TABLE>
<PAGE>
27. PARENT COMPANY AND REGULATORY RESTRICTIONS
At December 31, 1999, retained earnings of the parent company, CPB Inc.,
included $94,763,000 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, 1999,
retained earnings of the Bank totaled $96,110,000.
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, 1999 and 1998, 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>
Minimum Minimum
required for capital required to be
Actual adequacy purposes well-capitalized
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Company:
AS OF DECEMBER 31, 1999:
Tier I risk-based capital $146,703 11.24% $ 52,199 4.00% $ 78,298 6.00%
Total risk-based capital 163,070 12.50 104,397 8.00 130,497 10.00
Leverage capital 146,703 9.00 65,198 4.00 81,498 5.00
As of December 31, 1998:
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
Leverage capital 147,338 9.71 60,722 4.00 75,903 5.00
- ----------------------------------------------------------------------------------------------------------------------------------
Bank:
AS OF DECEMBER 31, 1999:
Tier I risk-based capital $136,345 10.47% $ 52,093 4.00% $ 78,140 6.00%
Total risk-based capital 152,680 11.72 104,187 8.00 130,234 10.00
Leverage capital 136,345 8.38 65,118 4.00 81,397 5.00
As of December 31, 1998:
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
Leverage capital 137,233 9.05 60,636 4.00 75,795 5.00
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed financial statements, solely of the parent company, CPB Inc.,
follow:
<TABLE>
<CAPTION>
CPB Inc.
Condensed Balance Sheets
December 31, 1999 and 1998
(Dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash $ 8,381 $ 7,969
Investment securities available for sale 1,969 2,012
Investment in subsidiary bank, at equity in underlying net assets 133,725 138,017
Dividends receivable from subsidiary bank 1,320 1,275
Accrued interest receivable and other assets 61 139
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 145,456 $149,412
===============================================================================================================
Liabilities and Stockholders' Equity:
Dividends payable $ 1,300 $ 1,274
Other liabilities 77 72
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 1,377 1,346
- ---------------------------------------------------------------------------------------------------------------
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 9,288,457 and 9,797,596 shares at
December 31, 1999 and 1998, respectively 6,540 6,637
Surplus 45,848 45,848
Retained earnings 94,436 94,954
Accumulated other comprehensive income (2,745) 627
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 144,079 148,066
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 145,456 $149,412
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CPB Inc.
Condensed Statements of Income
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiary bank $ 5,322 $ 6,801 $ 5,100
Equity in loss from unconsolidated subsidiary (78) (80) (92)
Interest income:
Interest on investment securities 78 55 75
Interest from subsidiary bank 253 271 279
- -------------------------------------------------------------------------------------------------------------------------
Total income 5,575 7,047 5,362
Total expenses 346 339 286
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes and equity
in undistributed income of subsidiary bank 5,229 6,708 5,076
Income taxes (37) (37) (10)
Income before equity in undistributed income of subsidiary bank 5,266 6,745 5,086
Equity in undistributed income of subsidiary bank 11,060 8,324 9,873
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 16,326 $ 15,069 $ 14,959
=========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CPB Inc.
Condensed Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(Dollars in thousands) 1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,326 $ 15,069 $ 14,959
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income tax expense 16 10 -
Increase in dividends receivable from subsidiary bank (45) (1,275) -
Equity in undistributed income of subsidiary bank (11,060) (8,324) (9,873)
Other, net 120 54 (38)
-------- --------- --------
Net cash provided by operating activities 5,357 5,534 5,048
-------- --------- --------
Cash flows from investing activities:
Proceeds from maturities of investment securities available for sale - 760 4,000
Purchases of investment securities available for sale - (1,242) (750)
Investment in and advances to subsidiaries (30) (60) (80)
Distribution of capital by subsidiary bank 12,000 13,988 -
-------- --------- --------
Net cash provided by investing activities 11,970 13,446 3,170
Cash flows from financing activities:
Proceeds from sale of common stock 271 583 393
Repurchases of common stock (11,971) (14,526) -
Dividends paid (5,215) (5,436) (5,066)
-------- --------- --------
Net cash used in financing activities (16,915) (19,379) (4,673)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 412 (399) 3,545
-------- --------- --------
Cash and cash equivalents:
At beginning of year 7,969 8,368 4,823
-------- --------- --------
At end of year $ 8,381 $ 7,969 $ 8,368
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28. ACCOUNTING PRONOUNCEMENTS
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. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of SFAS Statement No. 133," which deferred the effective date of SFAS
No. 133. SFAS No. 133, as amended, is now effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Earlier application is permitted
only as of the beginning of a fiscal quarter. The application of SFAS No. 133,
as amended, effective from January 1, 2001, is not expected to have a material
impact on the Company's consolidated financial statements.
In February 1999, the FASB issued SFAS No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections." SFAS No. 135, effective for fiscal
years ending after February 15, 1999, rescinds SFAS No. 75, "Deferral of the
Effective Date of Certain Accounting Requirements for Pension Plans of State and
Local Governmental Units," and amends SFAS No. 35, "Accounting and Reporting by
Defined Benefit Pension Plans," to exclude from its scope plans that are
sponsored by and provide benefits for employees of state and local governmental
units. SFAS No. 135 also amends other existing authoritative guidance to make
various technical corrections, clarify meanings, or describe applicability under
changed conditions. As the rescission of SFAS No. 75 and amendment of SFAS No.
35 relate solely to governmental entities, and as the technical corrections do
not significantly change existing authoritative guidance, the application of
SFAS No. 135 did not have a material impact on the Company's consolidated
financial statements.
<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, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and comprehensive income,
and cash flows for each of the years in the three-year period ended December 31,
1999. 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, 1999and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Honolulu, Hawaii
February 16, 2000
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 1999
and 1998 as reported by Nasdaq and cash dividends declared for those years.
<TABLE>
<CAPTION>
Cash
dividends
High Low declared
- ----------------------------------------------------------
<S> <C> <C> <C>
1999:
First quarter $18.00 $16.56 $0.13
Second quarter 27.00 17.63 0.14
Third quarter 26.50 21.38 0.14
Fourth quarter 29.13 22.13 0.14
- ----------------------------------------------------------
Year $29.13 $16.56 $0.55
==========================================================
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
==========================================================
</TABLE>
The closing price of the common stock as of January 31, 2000 as reported by
Nasdaq was $24.75 per share.
On January 31, 2000, there were approximately 2,165 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 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 Company's board of directors may deem to be appropriate.
<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. 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 up to applicable limits. Central Pacific Bank is
not a member of the Federal Reserve System, but is a member of the Federal
Home Loan Bank of Seattle.
Central Pacific Bank owns 100% of the outstanding stock of CPB
Properties, Inc., the general and managing partner and 50% 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.
Central Pacific Bank owns 100% 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 26 branch
offices statewide, including seven supermarket branches which offer extended
hours, seven days a week. Twenty-one branches are located on the island of
Oahu. The Bank also operates two 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 and credit card services;
traveler's checks; safe deposit boxes; international banking services; wire
transfer services; ATM, Internet banking services 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 American Stock Transfer &
Trust Company by calling toll-free 1-800-937-5449 between 8 a.m. and 5 p.m.
(eastern standard time), Monday through Friday. Written correspondence may be
sent to: American Stock Transfer & Trust Company, 40 Wall Street, New York, NY
10005 or contact American Stock Transfer & Trust Company's World Wide Web
address at www.amstock.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, 1999, by writing to: Austin Y.
Imamura, Vice President and Secretary, CPB Inc., P.O. Box 3590, Honolulu,
Hawaii 96811-3590.
[LOGO]
<PAGE>
EXHIBIT 23
The Board of Directors
CPB Inc.:
We consent to incorporation by reference in the registration statements No.
33-11462 and No. 333-35999 on Form S-8 of CPB Inc. of our report dated February
16, 2000, with respect to the consolidated balance sheets of CPB Inc. and
subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and comprehensive income,
and cash flows for each of the years in the three-year period ended December 31,
1999, which report appears in the December 31, 1999 annual report on Form 10-K
of CPB Inc.
/s/ KPMG LLP
- ----------------
Honolulu, Hawaii
March 23, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000701347
<NAME> CPB INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 83,425
<INT-BEARING-DEPOSITS> 9,828
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 220,103
<INVESTMENTS-CARRYING> 101,567
<INVESTMENTS-MARKET> 99,808
<LOANS> 1,170,476
<ALLOWANCE> 20,768
<TOTAL-ASSETS> 1,646,491
<DEPOSITS> 1,305,654
<SHORT-TERM> 790,000
<LIABILITIES-OTHER> 19,467
<LONG-TERM> 98,279
0
0
<COMMON> 6,540
<OTHER-SE> 137,539
<TOTAL-LIABILITIES-AND-EQUITY> 1,646,491
<INTEREST-LOAN> 92,945
<INTEREST-INVEST> 18,950
<INTEREST-OTHER> 1,417
<INTEREST-TOTAL> 113,312
<INTEREST-DEPOSIT> 36,075
<INTEREST-EXPENSE> 44,418
<INTEREST-INCOME-NET> 68,894
<LOAN-LOSSES> 3,700
<SECURITIES-GAINS> (250)
<EXPENSE-OTHER> 53,448
<INCOME-PRETAX> 24,377
<INCOME-PRE-EXTRAORDINARY> 16,326
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,326
<EPS-BASIC> 1.70
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 4.67
<LOANS-NON> 9,695
<LOANS-PAST> 3,605
<LOANS-TROUBLED> 500
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,066
<CHARGE-OFFS> 3,548
<RECOVERIES> 550
<ALLOWANCE-CLOSE> 20,768
<ALLOWANCE-DOMESTIC> 12,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,068
</TABLE>
