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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 0-12396
CB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0197163
(State of Incorporation) (IRS Employer Identification No.)
201 Merchant Street Honolulu, Hawaii 96813
(Address of principal executive offices)
(Registrant's Telephone Number) (808) 535-2500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par value $1.00 per share
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
of Regulation S-K (Section 229.405 of this chapter) 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 this
Form 10-K or any amendment to this Form 10-K. [X]
As of January 31, 2001, registrant had outstanding 3,188,534 shares of common
stock. The aggregate market value of registrant's Common Stock held by
non-affiliates based on the closing price on January 31, 2001 was approximately
$100,970,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of shareholders to be
held on April 26, 2001 are incorporated by reference into Part III and IV.
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PART I
Page
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46
PART III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and Management 47
Item 13. Certain Relationships and Related Transactions 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports On Form 8-K 47
Signatures 49
Exhibit Index 50
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of the Securities Exchange Act of 1934, as amended by the Private
Securities Litigation Reform Act of 1995. All statements, other than statements
of historical facts, included in this report that address results or
developments that CB Bancshares, Inc. (the "Company") expects or anticipates
will or may occur in the future, where statements are preceded by, followed by
or included the words "believes", "plans", "intends", "expects", "anticipates"
or similar expressions, including such things as (i) business strategy; (ii)
economic trends and market condition, particularly in Hawaii; (iii) the
direction of interest rates and prepayment speeds of mortgage loans and
mortgage-backed securities; (iv) the adequacy of the Company's allowances for
credit and real estate losses based on credit risks inherent in the lending
processes; (v) expansion and growth of the Company's business and operations;
(vi) renewal of existing credit agreements with and availability of additional
advances from the Federal Home Loan Bank of Seattle (the "FHLB"); and (vii)
other matters are forward-looking statements. These statements are based upon
certain assumptions and analyses made by the Company in light of its experience
and its perception of historical trends, current conditions and expected future
developments as well as other factors it believes are appropriate in the
circumstances. These statements are subject to a number of risks and
uncertainties, many of which are beyond the control of the Company, including
general economic, market or business conditions; real estate market conditions,
particularly in Hawaii; the opportunities (or lack thereof) that may be
presented to and pursued by the Company; competitive actions by other companies;
changes in laws and regulations; and other factors. Actual results could differ
materially from those contemplated by these forward-looking statements.
Consequently, all of the forward-looking statements made in this report are
qualified by these cautionary statements and there can be no assurance that the
actual results or developments anticipated by the Company will be realized or,
even substantially realized, and that they will have the expected consequences
to or effects on the Company and its business or operations. Forward-looking
statements made in this report speak as of the date hereof. The Company
undertakes no obligation to update or revise any forward-looking statement in
this report.
PART I
ITEM 1. BUSINESS
CB BANCSHARES, INC.
CB Bancshares, Inc. is a bank holding company incorporated in the State of
Hawaii in 1980. As a bank holding company, the Company has the flexibility to
directly or indirectly engage in certain bank-related activities other than
banking, subject to regulation by the Board of Governors of the Federal Reserve
System. The Company has three wholly-owned subsidiaries, City Bank (the "Bank"),
Datatronix Financial Services, Inc. ("Datatronix") and O.R.E., Inc., which are
discussed below.
On July 1, 2000, International Savings and Loan Association, Limited (the
"Association") a wholly-owned subsidiary of the Company, and the Bank merged
with the Bank being the surviving corporation.
CITY BANK
City Bank is a state-chartered bank organized under the laws of the State of
Hawaii in 1959. The Bank is insured by the Federal Deposit Insurance Corporation
(the "FDIC"), and provides full commercial banking services through 18 branches
on the island of Oahu, 1 branch on the island of Hawaii, and 2 branches on the
island of Maui. These services include receiving demand, savings and time
deposits; making commercial, real estate and consumer loans; financing
international trade activities; issuing letters of credit; handling domestic and
foreign collections; selling travelers' checks and bank money orders; and
renting safe deposit boxes.
The Bank's primary focus has been corporate lending to small- to medium-sized
businesses by maintaining relationships and expertise within business segments
and providing personal customer service. Efforts will continue to develop and
enhance the expertise of the corporate sales force and to leverage these
corporate relationships to generate core deposit growth. The Bank also has
restructured in order to link the corporate and wholesale lending to the retail
banking group with the intent of developing seamless service between the
corporate loan officers and the branch personnel and to increase cross-sale
opportunities between business customers and derivative retail customers. The
Bank has developed and begun to implement its customer relationship management
program which it believes will significantly enhance this effort.
The Bank also plans to further develop its electronic banking force by
continuing to develop internet banking capability for both business and retail
customers. In 1999, the Bank launched its "iCityBanker" product to its business
customers and in October 2000, launched the same to its retail customers.
iCityBanker was the first internet-based delivery system in the State of Hawaii,
which enables customers to access their accounts, transfer funds and pay bills
using a standard Web browser. In the near future, the Bank plans to provide
additional functionality, which include wire transfer, electronic data
interchange, mortgage lending and E-commerce capability.
INTERNATIONAL SAVINGS AND LOAN ASSOCIATION, LIMITED
The Association was chartered by the Territory of Hawaii in 1925. The
Association's principal business consisted of attracting deposits from the
general public and utilizing advances from the FHLB and other borrowings to fund
its real estate lending activities, which consisted primarily of lending to
one-to-four family residential properties. As mentioned previously, on July 1,
2000, the Association was merged with and into the Bank. With the merger, all
Association loan and deposit accounts became Bank accounts. At June 30, 2000,
the Association had total assets of $796.7 million.
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DATATRONIX FINANCIAL SERVICES, INC.
Datatronix Financial Services, Inc., a wholly-owned subsidiary, was incorporated
in the State of Hawaii in June 2000 and opened for business on July 1, 2000.
Datatronix offers outsourcing services such as check processing to banks,
thrifts, credit unions and other financial institutions in the State of Hawaii.
As of December 31, 2000, the Bank was its sole customer; however, several local
institutions have shown interest in contracting with Datatronix for services.
O.R.E., INC.
O.R.E., Inc., a wholly-owned subsidiary of the Company, was organized for the
primary purpose of engaging in the disposition of real and/or personal property
that are encumbered by loans of the Bank. To date, no transactions have been
consummated and the company is inactive.
FHLB BORROWINGS
A primary source of funds for the Company is advances from the FHLB. The Bank
has credit line agreements allowing for both short- and long-term advances. The
current agreements provide for the Bank to borrow up to 35% of total qualified
assets, provided that adequate mortgage loans are available to be pledged as
security. At December 31, 2000, the Company had $170.3 million in short-term
advances from the FHLB ranging in maturity from January 2001 to April 2001 and
rates from 6.48% to 6.80% and $180.2 million in long-term debt from the FHLB
ranging in maturity from January 2001 to September 2014 and rates from 5.30% to
8.22%. Advances are priced at the date of advance as either fixed or
LIBOR-based. The credit line agreements have normal FHLB default provisions
which, among other matters, accelerate the maturity date if there are material
adverse changes to the financial condition of the Bank and/or if repayment
ability becomes impaired. As of December 31, 2000, these borrowings were
collateralized by $71.0 million of securities, $736.6 million in loans and all
stock in the FHLB. See the Liquidity section of Management's Discussion and
Analysis as well as Notes J and K of Notes to the Company's Consolidated
Financial Statements for further information.
COMPETITION AND ECONOMIC ENVIRONMENT
The earnings and growth of the Company and its subsidiaries are affected by the
changes in the monetary and fiscal policies of the United States (the "U.S."),
as well as by general, local, national and international economic conditions.
The overall growth of loans and investments, deposit levels and interest rates
are directly influenced by the monetary policies of the Federal Reserve System.
Since these changes are generally unpredictable, it is difficult to ascertain
the impact of such future changes on the operations of the Company and its
subsidiaries.
The banking business is highly competitive. The Bank competes for deposits and
loans with five other commercial banks and two other savings associations
located in Hawaii. In addition to other commercial banks and savings
associations, the Bank competes for savings and time deposits and certain types
of loans with other financial institutions, such as consumer finance companies,
credit unions, merchandise retailers, and a variety of financial services and
advisory companies. The Bank also competes for mortgage loans with insurance and
mortgage companies.
The economy of Hawaii is supported principally by tourism, governmental
expenditures (primarily for the military), construction, and agriculture. The
government has made certain strides in attempting to broaden the state's
economic base in the areas of diversified agriculture, biotechnology,
information technology and film. A small island economy like that of Hawaii,
which significantly depends on imports for consumption, is greatly influenced by
the changes in external economic conditions. A key to the economic performance
of the state is the health of the U.S. and Japan economies and, to a lesser
extent, the economies of Canada, Europe and other Asian nations. After rapid
expansion in the late 1980's, the Hawaii economy began to stumble in the early
1990s with the onset of the national recession and Gulf War and their related
negative impact on the tourism industry. This condition was exacerbated by
Hurricane Iniki in 1992 and the recession of the Japan economy which caused
previously inflated real estate values to collapse. During the same period,
Hawaii construction activity slowed and foreign investment in Hawaii
(particularly by Japanese real estate investors) sharply declined. Most
recently, the state began to benefit from the trickle effects of the U.S.
mainland's economic boom and thus, in 2000, the Hawaii State Department of
Business, Economic Development and Tourism reports that visitor arrivals,
visitor expenditures, consumer price index, personal income, jobs, and the gross
state product will have increased by 4.2%, 9.2%, 2.1%, 5.0%, 2.0%, and 4.8%,
respectively over 1999. The year 2000 was excellent for the Hawaii tourism
industry with a record 7 million visitors to the islands, or 3.5% above 1999. As
compared to 1999, room charges increased 5%, occupancy rates increased to 76%
from 72% and overall hotel revenues increased by 11.8% to $2.7 billion.
The U.S. Department of Commerce Bureau of Economic Analysis reports that the
U.S. mainland experienced increases in the gross domestic product of 5% in 2000
and 4.2% in 1999 over the year prior. Fourth quarter 2000 gross domestic product
grew only 1.4% compared to 5.6% in the second quarter of 2000. Consumer spending
increases slowed as well to 2.9% in the fourth quarter compared to 4.5% in the
third quarter.
REGULATORY CONSIDERATIONS
The following discussion sets forth certain elements of the regulatory framework
applicable to the Company. Federal and state regulation of financial
institutions is intended primarily for the protection of depositors rather than
shareholders of those entities. To the extent that the following discussion
describes statutory or regulatory provisions, it is not intended to be complete
and is qualified in its entirety by reference to the particular statutory or
regulatory provisions, and any case law or interpretive letters concerning such
provisions. In addition, there are other statutes and regulations that apply to
and regulate the operation of the Company and its subsidiaries. Any change in
applicable laws, or regulations, may have a material or possibly adverse effect
on the business of the Company or other subsidiaries of the Company.
BANK HOLDING COMPANY. The Company is a bank holding company subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). As a bank holding company, the Company's activities and
those of its banking and non-banking subsidiaries are limited to the business of
banking and activities closely related or incidental to banking and to certain
expressly permitted nonbanking activities. In addition, the Company may not
acquire directly or indirectly more than 5% of any class of the voting shares
of, or substantially all of the assets of, a bank or any other company without
the prior approval of the Federal Reserve Board.
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THE BANK. The Bank is organized under the laws of the State of Hawaii and is
subject to significant regulation by the FDIC and the Division of Financial
Institutions of the Department of Commerce and Consumer Affairs, State of
Hawaii. The Bank is also subject to significant federal and state regulation
which materially affects its operations.
THE COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act (the "CRA")
requires lenders to identify the communities served by the Company's offices and
to identify the types of credit the institution is prepared to extend within
such communities. Under the CRA regulations of the FDIC and the other federal
banking agencies, an institution's performance in making loans and investments
and maintaining branches and providing services in low- and moderate-income
areas within the communities that it serves is evaluated. In connection with its
assessment of CRA performance, the FDIC assigns a rating of "outstanding,"
"satisfactory," "needs to improve," or "substantial noncompliance."
THE FEDERAL HOME LOAN BANKS. Under the Federal Home Loan Bank Act, as amended,
the ongoing stock investment requirement is equal to 0.3% of total assets, 1% of
residential mortgages and mortgage-backed securities, or 5% of advances divided
by the institution's Qualifying Assets Ratio (QAR), whichever is higher. The
institution's QAR will determine a ratio of stock to borrowings (the higher the
QAR, the lower the stock to borrowings requirement). The stock is recorded as a
restricted investment security at par. Furthermore, FHLB advances must be
collateralized with certain types of assets. Accordingly, the Company has
pledged certain loans to the FHLB as collateral for its advances.
DIVIDEND RESTRICTIONS. The principal source of the Company's cash flow has been
dividend payments received from the Bank and the Association. Dividends paid to
the Company by the Bank and the Association in 2000 totaled $5.1 million. Under
the laws of Hawaii, payment of dividends by the Bank is subject to certain
restrictions, and payment of dividends by the Company is likewise subject to
certain restrictions.
The Company increased its quarterly dividend in the second quarter of 1998 from
$0.05 per share to $0.06 per share and increased to $0.07 per share in the
second quarter of 1999. The quarterly dividend was subsequently increased to
$0.10 per share in the third quarter of 2000. The Company will continue to
evaluate the dividend on a quarterly basis. In addition, applicable regulatory
authorities are authorized to prohibit banks, thrifts and their holding
companies from paying dividends which would constitute an unsafe and unsound
banking practice. The Federal Reserve Board (the "FRB") has indicated that it
would generally be an unsafe and unsound banking practice for banks to pay
dividends except out of current operating earnings. Furthermore, an insured
depository institution, such as the Bank, cannot make a capital distribution
(broadly defined to include, among other things, dividends, redemptions and
other repurchases of stock), or pay management fees to its holding company if,
thereafter, the depository institution would be undercapitalized.
CAPITAL STANDARDS. The Company and the Bank are subject to capital standards
promulgated by the FRB, the FDIC, and the Hawaii Division of Financial
Institutions. At the end of 2000, the minimum ratio of total capital to
risk-weighted assets, provided for in the guidelines adopted by the FRB,
including certain off-balance-sheet items such as standby letters of credit, was
8%. At least half of the total capital is to be comprised of common equity,
retained earnings, non-cumulative perpetual preferred stock, and a limited
amount of cumulative perpetual preferred stock less goodwill ("Tier 1 Capital").
The remainder may consist of a limited amount of subordinated debt, other
preferred stock, certain other instruments, and a limited amount of reserves for
loan losses ("Tier 2 Capital"). The FDIC's risk-based capital guidelines for
state non-member banks of the Federal Reserve System are generally similar to
those established by the FRB for bank holding companies.
The FRB and FDIC also have adopted minimum leverage ratios for bank holding
companies and banks requiring bank organizations to maintain a Leverage Ratio
(defined as Tier 1 Capital divided by average total assets less goodwill) of at
least 4% of total assets. The Leverage Ratio is the minimum requirement for the
most highly rated banking organizations, and other banking organizations are
expected to maintain an additional cushion of at least 100 to 200 basis points
(1% equals 100 basis points), taking into account the level and nature of risk,
to be allocated to the specific banking organizations by the primary regulator.
FRB guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the guidelines indicate
that the FRB will continue to consider a "tangible Tier 1 leverage ratio" in
evaluating proposals for expansion or new activities. The tangible Tier 1
leverage ratio is the ratio of a banking organization's Tier 1 Capital, less
intangibles, to total assets, less intangibles.
Failure to meet capital guidelines could subject a bank or savings association
to a variety of enforcement remedies, including the termination of deposit
insurance by the FDIC, and to certain restrictions on its business. At December
31, 2000, the Company and the Bank exceeded applicable capital requirements. The
consolidated capital position of the Company at December 31, 2000 was as
follows:
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Company ratio Minimum required ratio
------------------ -----------------------
Risk-based Capital:
Tier 1 capital ratio 12.04% 4.00%
Total capital ratio 13.29% 8.00%
Leverage ratio 8.01% 4.00%
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COMPANY SUPPORT OF THE BANK. A depository institution insured by the FDIC can be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC after August 9, 1989, in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided
by the FDIC to a commonly controlled FDIC-insured depository institution "in
danger of default". "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a "default" is likely to occur
in the absence of regulatory assistance.
Under FRB 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 FRB'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 FRB to be an unsafe and unsound banking practice or a
violation of the FRB regulations or both. Any capital loans by a bank holding
company to any of its subsidiary banks are subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary bank. Moreover,
Congress has passed legislation pursuant to which depositors are granted a
preference over all other unsecured creditors in the event of the insolvency of
a bank or thrift.
AFFILIATE TRANSACTIONS. Sections 23A and 23B of the Federal Reserve Act (i)
limit the extent to which a financial institution or its subsidiaries may engage
in "covered transactions" with an affiliate, to an amount equal to 10% of such
institution's capital and surplus and an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital and
surplus and (ii) require that all transactions with an affiliate be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.
SAFETY AND SOUNDNESS. The Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") requires each federal banking regulatory agency to prescribe,
by regulation, standards for all insured depository institutions and depository
institution holding companies relating to (i) internal controls, information
systems and audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) compensation, fees and
benefits; and (vii) such other operational and managerial standards as the
agency determines to be appropriate. The compensation standards would prohibit
employment contracts, compensation or benefit arrangements, stock option plans,
fee arrangements or other compensatory arrangements that provide excessive
compensation, fees or benefits or could lead to material financial loss. In
addition, each federal banking regulatory agency must prescribe by regulation
standards specifying (i) a maximum ratio of classified assets to capital; (ii)
minimum earnings sufficient to absorb losses without impairing capital (iii) to
the extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions and depository institution holding
companies; and (iv) such other standards relating to asset quality, earnings and
valuation as the agency determines to be appropriate. If an insured depository
institution or its holding company fail to meet any of the standards promulgated
by regulations, then such company will be required to submit a plan to its
federal regulator specifying the steps it will take to correct the deficiency.
The federal banking agencies have uniform rules concerning these standards.
PROMPT CORRECTIVE ACTION. Under FDICIA, each federal banking agency is required
to take prompt corrective action to resolve the problems of insured depository
institutions that do not meet minimum capital ratios. The extent of an agency's
power to take prompt corrective action depends upon whether an institution is
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized."
The federal banking agencies have adopted regulations to implement the prompt
corrective action provisions of FDICIA. Under the regulations, an institution
shall be deemed to be (i) "well capitalized" if it has total risk-based capital
of 10% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a Tier
1 leverage capital ratio of 5% or more and is not subject to any order or final
capital directive to meet and maintain a specific capital level for any capital
measure, (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a Tier
1 leverage capital ratio of 4% or more (3% under certain circumstances) and does
not meet the definition of "well capitalized," (iii) "undercapitalized" if it
has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based
capital ratio of 4% or more or a Tier 1 leverage capital ratio that is less than
4% (3% under certain circumstances), (iv) "significantly undercapitalized" if it
has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based
capital ratio that is less than 3% or a Tier 1 leverage capital ratio that is
less than 3%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2%.
FDICIA authorizes the appropriate federal banking agency, after notice and an
opportunity for a hearing, to treat a well capitalized, adequately capitalized
or undercapitalized insured depository institution as if it had a lower
capital-based classification if it is in an unsafe or unsound condition or
engaging in an unsafe or unsound practice. Thus, an adequately capitalized
institution can be subjected to the restrictions of under-capitalized
institutions.
An undercapitalized institution is required to submit an acceptable capital
restoration plan to its appropriate federal banking agency. The plan must
specify (i) the steps the institution will take to become adequately
capitalized, (ii) the capital levels to be attained each year, (iii) how the
institution will comply with any regulatory sanctions then in effect against the
institution and (iv) the types and levels of activities in which the institution
will engage. An undercapitalized institution is also generally prohibited from
increasing its average total assets and is generally prohibited from making any
acquisitions, establishing any new branches or engaging in any new line of
business except in accordance with an accepted capital restoration plan or with
the approval of the FDIC.
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The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"IBBEA") amended the BHCA to create certain interstate banking and branching
opportunities. The IBBEA generally applies only to traditional savings banks and
commercial banks. Under the IBBEA, a bank holding company may acquire a bank
located in any state, provided that the acquisition does not result in the bank
holding company controlling more than 10% of the deposits in insured depository
institutions in the United States, or 30% of deposits in insured institutions in
the state in which the bank to be acquired is located (unless the state waives
the 30% deposit limitation). The IBBEA permits individual states to restrict the
ability of an out-of-state bank holding company or bank to acquire an in-state
bank that has been in existence for less than five years and to establish a
state concentration limit of less than 30% if such reduced limit does not
discriminate against out-of-state bank holding companies or banks.
The IBBEA authorizes an "adequately capitalized" bank, with the approval of the
appropriate federal banking agency, to merge with another adequately capitalized
bank in any state that has not opted out of interstate branching. Such a bank
may operate the target's offices as branches if certain conditions are
satisfied. The same national and state deposit concentration limits and
applicable state minimum-existence restrictions which apply to interstate
acquisitions (as discussed above) also apply to interstate mergers. The
applicant also must comply with any non-discriminatory host state filing and
notice requirements and demonstrate a record of compliance with applicable
federal and state community reinvestment laws. Hawaii enacted an interstate
branching and bank mergers law which expressly permits interstate branching
under Sections 102 and 103 of the IBBEA.
Under the IBBEA, the resulting bank in an interstate merger may establish or
acquire additional branches at any location in a state where any of the banks
involved in the merger could have established or acquired a branch. A bank also
may acquire one or more branches of an out-of-state bank without acquiring the
target out-of-state bank if the law of the target's home state permits such a
transaction. In addition, the IBBEA permits a bank to establish a de novo branch
in another state if the host state statutorily permits de novo interstate
branching.
Hawaii law authorizes out-of-state banks to engage in "interstate merger
transactions" (mergers and consolidations with and purchases of all or
substantially all of the assets and branches of) with Hawaii banks, following
which any such out-of-state bank may operate the branches of the Hawaii bank it
has acquired. The Hawaii bank must have been in continuous operation for at
least five years prior to such an acquisition, unless it is subject to or in
danger of becoming subject to certain types of supervisory action. This statute
does not permit out-of-state banks to acquire branches of Hawaii banks other
than through an "interstate merger transaction" (except in the case of a bank
that is subject to or in danger of becoming subject to certain types of
supervisory action) nor to open branches in Hawaii on a de novo basis. Hawaii
law imposes no state deposit caps or concentration limits. It also permits the
State Commissioner of Financial Institutions to waive, on a case-by-case basis,
federal statewide concentration limits, in accordance with standards that do not
discriminate against out-of-state banks.
The IBBEA also permits a bank subsidiary of a bank holding company to act as
agent for other depository institutions owned by the same holding company for
purposes of receiving deposits, renewing time deposits, closing or servicing
loans and receiving loan payments.
GRAMM-LEACH-BLILEY ACT. The Gramm-Leach-Bliley Act (the "GLB Act") revised and
expanded the existing BHCA and certain sections of the 1933 Glass-Steagall Act
to permit a holding company system to engage in a full range of financial
activities, including but not limited to, banking, insurance, securities,
merchant banking and other activities incidental to financial services. The GLB
Act permits the scope of financial and incidental activities to evolve with
technology and competition. It also provides expanded financial affiliation
opportunities for existing bank holding companies ("BHC") and allows all
financial holding companies to control a full-service insured bank. These
expanded permissible activities are allowable for a BHC if it becomes a
financial holding company ("FHC"). In order to become a FHC, a BHC must file a
declaration with the FRB electing to engage in activities under the new BHCA
Section 4(k) and certifying that it is eligible to do so because all of its
insured depository institution subsidiaries are well-capitalized and
well-managed. An institution is "well-capitalized" if it meets the primary
regulator's definition for that status under the Federal Deposit Insurance Act
for prompt corrective action purposes. Additionally, the FRB must determine that
each depository institution controlled by a FHC has a satisfactory or better
rating under the CRA in order for a company to become a FHC or for a FHC to
engage in new financial activities or acquire, directly or indirectly, a company
engaged in any activity under subsection (k) or (n). The FRB will be the overall
regulatory agency and, along with the Department of Treasury, will have joint
oversight to determine new financial activities of FHC companies.
It is anticipated that this change in legislation will serve to provide
consumers added convenience and savings as FHCs will be able to provide
"one-stop" shops for financial services. It also provides for added privacy for
consumers as policies on collecting, using and protecting personal financial
information must be disclosed in writing to customers and customers will have
the option to block information sharing with unaffiliated third parties, such as
telemarketing companies.
DEPOSITORY INSURANCE. Effective April 1, 2000, the FDIC adopted certain
revisions to its regulation governing deposit insurance assessments. The changes
were intended to enhance the existing system by allowing institutions with
improving capital positions to benefit from the improvement by lower assessments
at a faster pace, while requiring those whose capital is falling to pay higher
assessments sooner.
OTHER REGULATORY CONSIDERATIONS. The Bank is also subject to a wide array of
other state and federal laws and regulations, including, without limitation,
usury laws, the Equal Credit Opportunity Act, the Electronic Funds Transfer
requirements, the Truth-in-Lending Act, the Truth-in-Savings Act and the Real
Estate Settlement Procedures Act.
NUMBER OF EMPLOYEES
As of December 31, 2000, the Company and its subsidiaries employed 499 persons;
448 on a full-time basis and 51 on a part-time basis. Neither the Company nor
any of its subsidiaries is a party to any collective bargaining agreements.
7
8
STATISTICAL DISCLOSURES
Guide 3 of the "Guides for the Preparation and Filing of Reports" under the
Exchange Act of 1934 sets forth certain statistical disclosures to be included
in the "Description of Business" section of bank holding company filings with
the Securities and Exchange Commission (the "SEC").
The statistical information required is presented in the index shown below and
as part of Items 6 or 7 of this Form 10-K for the fiscal year ended December 31,
2000. The tables and information contained therein have been prepared by the
Company and have not been audited or reported upon by the Company's independent
accountants.
Disclosure Requirements Page
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and
Interest Differential -
A. Average balance sheets 13
B. Analysis of net interest earnings 14
C. Dollar amount of change in interest income and interest expense 14
II. Investment Portfolio -
A. Book value of investment securities 19
B. Investment securities by maturities and weighted average yields 19
III. Loan Portfolio -
A. Types of loans 17
B. Maturities and sensitivities of loans to changes in interest rates 17
C. Risk elements
1. Nonaccrual, past due and restructured loans 18
2. Potential problem loans 18
IV. Summary of Loan Loss Experience -
A. Analysis of loss experience 15
B. Breakdown of the allowance for loan losses 15
V. Deposits -
A. Average amount and average rate paid on deposits 19
B. Maturity distribution of domestic time certificates of deposits of $100,000 or more 19
VI. Return on Equity and Assets 10
VII. Short-Term Borrowings and Long-Term Debt 20
8
9
ITEM 2. PROPERTIES
The operations of the Bank are transacted through its main banking office and 20
branches. The Company's facilities are located on leased premises, and
expenditures by the Company for interior improvements are capitalized. The
leases for these premises expire on various dates though the year 2017. Lease
terms generally provide for additional payments for real property taxes,
insurance and maintenance. See Note H of Notes to the Company's Consolidated
Financial Statements. On March 21, 1989, a limited partnership of which Citibank
Properties, Inc., one of the Bank's subsidiaries, owned a 25% interest, sold its
office building where the Bank's administrative offices and main branch are
currently located to an unrelated third party in a transaction similar to a
sale-leaseback transaction. See Note O of Notes to the Company's Consolidated
Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various legal proceedings arising from normal
business activities. In the opinion of management, after reviewing these
proceedings with counsel, the aggregate liability, if any, resulting from these
proceedings would not have a material effect on the Company's consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2000 to a vote of security
holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "CBBI". At March 1, 2001, the Company had approximately 4,000 common
shareholders of record.
The following table sets forth quarterly market price and dividend information
on the Company's common stock over the preceding two years:
------------------ -------------------- ------------------
HIGH LOW DIVIDENDS
------------------ -------------------- ------------------
2000
FIRST QUARTER $29.10 $23.34 $0.07
SECOND QUARTER 25.33 22.60 0.07
THIRD QUARTER 28.26 24.53 0.10
FOURTH QUARTER 28.39 24.90 0.10
1999
First quarter $32.00 $25.00 $0.06
Second quarter 33.25 26.25 0.07
Third quarter 32.50 28.75 0.07
Fourth quarter 31.00 28.00 0.07
The Company's ability to pay dividends is limited by certain restrictions
generally imposed on Hawaii corporations. In general, dividends may be paid only
out of a Hawaii corporation's surplus, as defined in the Hawaii Revised
Statutes, or net profits for the fiscal year in which the dividend is declared
and/or the preceding fiscal year. The Company may pay dividends out of funds
legally available at such times as the Board of Directors determine that
dividend payments are appropriate.
9
10
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
----------- ----------- ----------- ----------- -----------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Income Statement Data:
Interest income $ 132,472 $ 111,233 $ 112,060 $ 112,529 $ 111,247
Interest expense 71,478 52,717 53,811 53,859 53,477
----------- ----------- ----------- ----------- -----------
Net interest income 60,994 58,516 58,249 58,670 57,770
Provision for credit losses 7,539 4,975 7,436 6,250 2,410
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for credit losses 53,455 53,541 50,813 52,420 55,360
Noninterest income 10,024 10,328 9,789 7,112 8,115
Noninterest expense 46,679 58,336 46,768 47,557 51,785
----------- ----------- ----------- ----------- -----------
Income before income taxes 16,800 5,533 13,834 11,975 11,690
Provision for income taxes 5,582 5,227 5,465 4,757 4,631
----------- ----------- ----------- ----------- -----------
Net income $ 11,218 $ 306 $ 8,369 $ 7,218 $ 7,059
=========== =========== =========== =========== ===========
Operating earnings(1) $ 11,218 $ 9,111 $ 8,369 $ 7,218 $ 7,059
=========== =========== =========== =========== ===========
Operating cash earnings(1),(2) $ 11,815 $ 9,963 $ 9,066 $ 8,328 $ 10,944
=========== =========== =========== =========== ===========
Cash dividends $ 1,093 $ 931 $ 818 $ 1,863 $ 3,462
=========== =========== =========== =========== ===========
End of Year Balance Sheet Data:
Total assets $ 1,721,400 $ 1,619,549 $ 1,428,438 $ 1,435,226 $ 1,397,169
Total earning assets 1,593,375 1,511,219 1,323,055 1,347,105 1,320,318
Total loans 1,272,938 1,149,413 984,456 1,054,747 1,037,059
Total deposits 1,218,261 1,106,145 1,084,610 1,008,728 951,910
Long-term debt 181,563 225,140 171,087 141,048 94,825
Stockholders' equity 123,162 114,691 132,372 125,065 119,411
Average Balances:
Total assets $ 1,667,243 $ 1,491,947 $ 1,424,793 $ 1,399,719 $ 1,412,197
Total earning assets 1,583,704 1,391,681 1,343,524 1,338,769 1,330,401
Total loans 1,236,305 1,077,769 1,063,541 1,061,925 1,111,661
Total deposits 1,154,075 1,082,642 1,038,751 955,203 958,387
Long-term debt 205,877 205,098 168,934 113,414 104,025
Stockholders' equity 118,132 127,567 128,889 122,419 117,843
Common Stock Data:
Per share (diluted):
Net income $ 3.48 $ 0.09 $ 2.35 $ 2.03 $ 1.99
Operating earnings(1) 3.48 2.63 2.35 2.03 1.99
Operating cash earnings(1),(2) 3.67 2.88 2.55 2.35 3.08
Cash dividends declared 0.34 0.27 0.23 0.98 0.98
Book value (at December 31) 38.63 35.23 37.27 35.22 33.63
Market price (close at December 31) 25.94 29.44 30.94 43.75 29.00
Average shares outstanding 3,218,985 3,465,361 3,558,905 3,551,228 3,551,228
Selected Ratios:
Return on average:
Total assets 0.67% 0.02% 0.59% 0.52% 0.50%
Total tangible assets(3) 0.71 0.68 0.64 0.60 0.78
Stockholders' equity 9.50 0.24 6.49 5.90 5.99
Tangible stockholders' equity(3) 10.14 8.60 7.69 7.55 10.52
Dividend payout ratio(4) 9.74 10.27 9.79 25.86 48.99
Average stockholders'
equity to average total assets 7.09 8.55 9.05 8.75 8.34
Year ended December 31:
Net interest margin
(taxable equivalent basis) 3.91 4.25 4.36 4.40 4.36
Net loans charged off to average loans 0.65 0.45 0.57 0.50 0.14
Noninterest expense to average assets(1) 2.80 3.28 3.28 3.40 3.67
At December 31:
Risk-based capital ratios:
Tier I 12.04 11.95 13.54 12.73 12.64
Total 13.29 13.21 14.80 13.99 13.90
Tier I leverage ratio 8.01 7.69 8.65 7.46 7.17
Allowance for credit losses to total loans 1.37 1.56 1.81 1.55 1.49
Nonperforming assets to total loans 1.46 1.57 2.20 2.66 2.40
Nonperforming assets to total assets 1.08 1.12 1.53 1.96 1.79
Allowance for credit losses
to nonperforming loans 115.35 152.28 133.95 66.86 66.78
=========== =========== =========== =========== ===========
(1) EXCLUDES AFTER-TAX RESTRUCTURING AND MERGER-RELATED CHARGES OF $932,000 AND
WRITE-OFF OF GOODWILL OF $7,873,000 INCURRED IN 1999.
(2) EXCLUDES AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS.
(3) DEFINED AS OPERATING CASH EARNINGS AS A PERCENTAGE OF AVERAGE STOCKHOLDERS'
EQUITY MINUS AVERAGE GOODWILL AND OTHER INTANGIBLE ASSETS.
(4) DEFINED AS CASH DIVIDENDS DECLARED AS A PERCENTAGE OF OPERATING EARNINGS.
10
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains statements relating to future results of the Company
(including certain projections and business trends) that are considered
"forward-looking statements." Actual results may differ materially from those
projected as a result of certain risks and uncertainties including, but not
limited to, changes in political and economic conditions, interest rate
fluctuations, competitive product and pricing pressures within the Company's
market, equity and bond market fluctuations, personal and corporate customers'
bankruptcies and financial condition, inflation and results of litigation.
Accordingly, historical performance, as well as reasonably applied projections
and assumptions, may not be a reliable indicator of future earnings due to risks
and uncertainties.
As circumstances, conditions or events change that affect the Company's
assumptions and projections on which any of the statements are based, the
Company disclaims any obligation to issue any update or revision to any
forward-looking statement contained herein.
RESULTS OF OPERATIONS
Consolidated net income for 2000 was $11.2 million, an increase of $10.9 million
from the $306,000 in 1999. Diluted earnings per share was $3.48 in 2000, as
compared to $0.09 in 1999.
In December 1999, the Company approved the Merger of its two principal
subsidiaries, the Bank and the Association. The Bank and the Association merged
on July 1, 2000, with the Bank being the surviving corporation. In connection
with the Merger, the Company recorded restructuring and merger-related charges
of $1.6 million ($0.9 million on after-tax basis) in the fourth quarter of 1999.
Additionally, in the fourth quarter of 1999, the Company changed its method of
evaluating the recoverability of goodwill from an undiscounted cash flow to a
discounted cash flow basis. See Note B - "Change in Accounting for Goodwill" of
Notes to the Company's Consolidated Financial Statements for further discussion.
As a result of this change in accounting method, the Company recorded a
write-off of goodwill of $7.9 million in the fourth quarter of 1999.
Operating earnings (defined as consolidated net income excluding after-tax
restructuring and merger-related charges and write-off of goodwill) was $11.2
million in 2000, an increase of 23.1%, or $2.1 million, over $9.1 million in
1999. Diluted operating earnings per share was $3.48 in 2000, an increase of
32.3%, over last year.
Despite the growth in the loan portfolio in 2000, the rise in interest rates and
the slower growth in deposits served to negatively impact the net interest
margin. Despite the decrease in the net interest margin, net interest income
increased by $2.5 million, or 4.2%, over 1999.
Noninterest income decreased from $10.3 million in 1999 to $10.0 million in
2000, a decrease of 2.9%. The decrease was primarily due to lower gains on sales
of loans of $2.2 million, partially offset by increases in service charges on
deposit accounts of $840,000, increased earnings on bank owned life insurance of
$606,000 and a $378,000 gain on sales of foreclosed assets.
Noninterest expense decreased from $58.3 million in 1999 to $46.7 million in
2000, a decrease of 20.0%. The decrease reflected certain restructuring and
merger-related charges of $1.6 million (after tax, $0.9 million) and write-off
of goodwill of $7.9 million (before and after-tax) which were recorded in 1999.
The decrease was also a result of a $1.0 million decrease in net occupancy
expense which resulted from downsizing certain branches and renegotiating
leases.
The Company's efficiency ratio (calculated as noninterest expense minus
amortization of goodwill and other intangible assets and nonrecurring charges as
a percentage of total operating revenue) was 64.9%, 69.8% and 67.7% in 2000,
1999 and 1998, respectively.
The provision for credit losses was $7.5 million, $5.0 million and $7.4 million
in 2000, 1999 and 1998, respectively. Net charge-offs to average loans and
leases were 0.65%, 0.45% and 0.57% for 2000, 1999 and 1998, respectively. The
allowance for credit losses was $17.4 million, or 1.37% of total loans and
leases, at December 31, 2000, compared with $17.9 million, or 1.56%, at December
31, 1999. Nonperforming assets totaled 1.08%, 1.12% and 1.53% of total assets as
of December 31, 2000, 1999 and 1998, respectively. The improvements in the
nonperforming assets ratio was primarily due to the Company's continued efforts
to improve asset quality.
At December 31, 2000, the Company's ratios of Tier 1 Capital to risk-weighted
assets and Total Capital to risk-weighted assets were 12.04% and 13.29%,
respectively, compared with 11.95% and 13.21%, respectively, at December 31,
1999. These ratios were in excess of the "well-capitalized" ratios of 6.00% and
10.00%, respectively, specified by the Federal Reserve Board.
Consolidated net income for 1999 decreased $8.1 million below 1998 primarily due
to the one-time charges described above. Operating earnings were $9.1 million in
1999, an increase of 8.9% over the $8.4 million in 1998. Diluted operating
earnings per share for 1999 was $2.63 compared to $2.35 in 1998. The increase in
operating earnings was primarily due to: (i) $3.2 million, or 713.9%, increase
in net gains on sales of loans, (ii) $2.5 million, or 33.1%, decrease in
provisions for credit losses, and (iii) $1.3 million, or 51.3%, increase in
other service charges and fees. These increases were partially offset by (i)
$4.1 million decrease in net realized gains on sales of securities and (ii) $2.1
million increase in salaries and employee benefits.
11
12
NET INTEREST INCOME
Net interest income is the largest single component of the Company's earnings
and represents the difference between interest income received on loans and
other earning assets and interest expense paid on deposits and borrowings. Net
interest income, on a taxable equivalent basis, was $61.8 million in 2000, an
increase of $2.8 million, or 4.7%, from 1999. During 2000, the Company's net
interest margin declined to 3.91%, compared to 4.25% for 1999.
As summarized on Table 2, the $2.8 million increase in net interest income for
2000 consisted of a $21.5 million increase in interest income offset by a $18.8
million increase in interest expense.
The average yield on earning assets in 2000 increased by 39 basis points to
8.42% and the average balance of earning assets increased by $192.0 million. The
$21.5 million increase in interest income was primarily due to the $158.5
million increase in the average balance of loans.
Interest costs on interest-bearing deposits and liabilities increased to $71.5
million in 2000. The average balance of interest-bearing deposits and
liabilities increased by $185.1 million and the average cost of funds increased
by 76 basis points to 5.04%. The following table sets forth the condensed
consolidated average balance sheets, an analysis of interest income/expense and
average yield/rate for each major category of earning assets and
interest-bearing deposits and liabilities for the years indicated on a taxable
equivalent basis. The taxable equivalent adjustment is made for items exempt
from federal income taxes (assuming a 35% tax rate) to make them comparable with
taxable items before any income taxes are applied.
Net interest income, on a taxable equivalent basis, was $59.1 million in 1999,
an increase of $0.5 million, or 0.9%, from 1998. During 1999, the Company's net
interest margin declined to 4.25%, compared to 4.36% for 1998. This decrease was
due to a 33 basis point decrease in the yield on average earning assets,
partially offset by a 34 basis point decrease in the rate paid for sources of
funds used for average earning assets.
Average earning assets increased $48.2 million, or 3.6%, in 1999 over 1998.
Average interest-bearing deposits and liabilities increased $67.0 million, or
5.8%, in 1999 over 1998.
12
13
TABLE 1: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES
----------- ----------- ----------- ----------- ----------- -----------
2000 1999 1998
INTEREST Interest Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Earning assets:
Interest-bearing
deposits in other
banks $ 393 $ 28 7.12% $ 23,004 $ 1,093 4.75%
Federal funds sold
and securities
purchased under
agreement to resell 7,959 497 6.24 5,908 309 5.23
Taxable investment
and mortgage-
backed securities 308,011 21,701 7.05 264,783 18,272 6.90
Nontaxable
investment
securities 31,036 2,386 7.69 20,217 1,592 7.87
Loans(1) 1,236,305 108,713 8.79 1,077,769 90,547 8.40
-------------------------- --------------------------
Total earning assets 1,583,704 133,325 8.42 1,391,681 111,813 8.03
-------------------------- --------------------------
Nonearning assets:
Cash and due from
banks 34,826 44,624
Premises and
equipment 18,077 13,338
Other assets 48,884 60,448
Less allowance for
credit losses (18,248) (18,144)
----------- -----------
Total assets $ 1,667,243 $ 1,491,947
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $ 367,793 $ 10,063 2.74% $ 364,366 $ 8,927 2.45%
Time deposits 672,234 37,041 5.51 599,920 28,645 4.77
Short-term 171,006 11,370 6.65 62,390 3,282 5.26
borrowings
Long-term debt 205,877 13,004 6.32 205,098 11,863 5.78
-------------------------- --------------------------
Total interest-bearing
deposits and
liabilities 1,416,910 71,478 5.04 1,231,774 52,717 4.28
-------------------------- --------------------------
Noninterest-bearing
liabilities:
Demand deposits 114,048 118,356
Other liabilities 18,153 14,250
----------- -----------
Total liabilities 1,549,111 1,364,380
Stockholders' equity 118,132 127,567
----------- -----------
Total liabilities and
stockholders' equity $ 1,667,243 $ 1,491,947
=========== ===========
Net interest income
and margin on
total earning
assets 61,847 3.91% 59,096 4.25%
Taxable equivalent
adjustment (853) (580)
-------------------------- -----------
Net interest income $ 60,994 $ 58,516
========================== ===========
----------- ----------- -----------
Average Income/ Yield/
(dollars in thousands) Balance Expense Rate
----------- ----------- -----------
ASSETS
Earning assets:
Interest-bearing
deposits in other
banks $ 8,539 $ 525 6.15%
Federal funds sold
and securities
purchased under
agreement to resell 34,489 1,766 5.12
Taxable investment
and mortgage-
backed securities 228,321 15,843 6.94
Nontaxable
investment
securities 8,634 668 7.74
Loans(1) 1,063,541 93,558 8.80
--------------------------
Total earning assets 1,343,524 112,360 8.36
--------------------------
Nonearning assets:
Cash and due from
banks 31,590
Premises and
equipment 20,114
Other assets 46,606
Less allowance for
credit losses (17,041)
-----------
Total assets $ 1,424,793
===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $ 349,398 $ 9,393 2.69%
Time deposits 581,952 30,547 5.25
Short-term 64,472 3,536 5.48
borrowings
Long-term debt 168,934 10,335 6.12
--------------------------
Total interest-bearing
deposits and
liabilities 1,164,756 53,811 4.62
--------------------------
Noninterest-bearing
liabilities:
Demand deposits 107,401
Other liabilities 23,747
-----------
Total liabilities 1,295,904
Stockholders' equity 128,889
-----------
Total liabilities and
stockholders' equity $ 1,424,793
===========
Net interest income
and margin on
total earning
assets 58,549 4.36%
Taxable equivalent
adjustment (300)
-----------
Net interest income $ 58,249
===========
(1) YIELDS AND AMOUNTS EARNED INCLUDE LOAN FEES. NONACCRUAL LOANS HAVE BEEN
INCLUDED IN EARNING ASSETS FOR PURPOSES OF THESE COMPUTATIONS.
13
14
TABLE 2: INTEREST DIFFERENTIAL
---------------------------------------------------------------------------
2000 COMPARED TO 1999 1999 Compared to 1998
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN: (1) due to Change in: (1)
--------------------------- -----------------------------------------------
(in thousands) VOLUME RATE NET CHANGE Volume Rate Net Change
---------- ---------- ---------- ---------- ---------- ----------
Earning assets:
Interest-bearing deposits in other $ (1,074) $ 9 $ (1,065) $ 889 $ (321) $ 568
banks
Federal funds sold and securities
purchased under agreements to
resell 107 81 188 (1,463) 6 (1,457)
Taxable investment and
mortgage-backed securities 2,983 446 3,429 2,530 (101) 2,429
Nontaxable investment securities 852 (58) 794 896 28 924
Loans (2) 13,318 4,848 18,166 1,251 (4,262) (3,011)
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets 16,186 5,326 21,512 4,103 (4,650) (547)
Interest-bearing liabilities:
Savings deposits 84 1,052 1,136 402 (869) (467)
Time deposits 3,453 4,943 8,396 943 (2,844) (1,901)
Short-term borrowings 5,714 2,374 8,088 (114) (140) (254)
Long-term debt 45 1,096 1,141 2,213 (685) 1,528
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
deposits and liabilities 9,296 9,465 18,761 3,444 (4,538) (1,094)
---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in net interest
income (taxable equivalent basis) $ 6,890 $ (4,139) $ 2,751 $ 659 $ (112) $ 547
========== ========== ========== ========== ========== ==========
------------------
(1) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
(2) Yields and amounts earned include loan fees. Nonaccrual loans have been
included in earning assets for purposes of these computations.
NONINTEREST INCOME
In 2000, total noninterest income was $10.0 million as compared to $10.3 million
in 1999 and $9.8 million in 1998. The $304,000 decrease in noninterest income
was due to various items. Net gains on sales of loans decreased from $2.7
million in 1999 to $537,000 in 2000. Net realized gains on sales of securities
decreased from a net loss of $32,000 in 1999 to a net loss of $421,000 in 2000.
The decrease was partially offset by an $840,000 increase in service charges on
deposit accounts, as a result of the Company's concerted effort to increase fee
income related to deposit and credit products. Other noninterest income
increased $1.4 million, or 88.0%, due to an increase in net gains on sales of
Other Real Estate Owned ("OREO") property.
Total noninterest income increased $539,000, or 5.5%, from 1998 to 1999. Net
realized gains on sales of loans increased from a loss of $447,000 in 1998 to a
gain of $2.7 million in 1999. Other service charges and fees increased by $1.3
million from 1998 to 1999. Such increases were offset by a decrease from a net
realized gain on sale of securities of $4.1 million in 1998 to a net loss of
$32,000.
The following table sets forth information by category of noninterest income for
the years indicated:
-------- -------- --------
(in thousand) 2000 1999 1998
-------- -------- --------
Service charges on deposits $ 2,900 $ 2,060 $ 1,740
Other service charges and fees 4,044 3,979 2,630
Net realized gains (losses) on sales of securities (421) (32) 4,104
Net gains (losses) on sales of loans 537 2,744 (447)
Earnings on bank owned life insurance 1,383 777 604
Other 1,581 800 1,158
-------- -------- --------
Total $ 10,024 $ 10,328 $ 9,789
======== ======== ========
14
15
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The following table summarizes changes in the allowance for credit losses for
the years indicated:
------- ------- ------- ------- -------
(dollars in thousands) 2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Balance at beginning of year $17,942 $17,771 $16,365 $15,431 $14,576
Charge-offs:
Commercial and financial 3,138 442 533 2,489 537
Real estate - mortgage 4,378 4,085 5,854 2,315 495
Installment and consumer 1,490 896 737 1,121 873
------- ------- ------- ------- -------
Total charge-offs 9,006 5,423 7,124 5,925 $ 1,905
------- ------- ------- ------- -------
Recoveries:
Commercial and financial 170 94 107 233 30
Real estate - mortgage 537 314 534 26 74
Installment and consumer 265 211 453 350 246
------- ------- ------- ------- -------
Total recoveries 972 619 1,094 609 350
------- ------- ------- ------- -------
Net loans charged-off 8,034 4,804 6,030 5,316 1,555
Provision for credit losses 7,539 4,975 7,436 6,250 2,410
------- ------- ------- ------- -------
Balance at end of year $17,447 $17,942 $17,771 $16,365 $15,431
======= ======= ======= ======= =======
Net charge-offs to average loans 0.65% 0.45% 0.57% 0.50% 0.14%
outstanding
Allowance for credit losses to year-end 1.37% 1.56% 1.81% 1.55% 1.49%
loans
Allowance for credit losses to year-end
nonperforming loans 115.35% 152.28% 133.95% 66.86% 66.78%
The provision for credit losses is based upon periodic evaluations by management
as to the adequacy of the allowance for credit losses. In these evaluations,
management considers numerous factors including, but not limited to, current
economic conditions, loan portfolio composition, loan loss experience and
management's estimate of potential losses. These various analyses lead to a
determination of the amount needed in the allowance for credit losses. To the
extent the existing allowance is below the amount so determined, a provision is
made that will bring the allowance to such amount. Thus, the provision for
credit losses may fluctuate and may not be comparable from year to year.
The allowance for credit losses has been allocated by the Company's management
according to the amount deemed to be reasonably necessary to provide for the
possibility of loan losses being incurred within the following categories of
loans at December 31 for the years indicated:
--------------------------------------------------------------------------------------------------------------
(dollars in 2000 1999 1998 1997 1996
thousands) AMT. %(1) Amt. %(1) Amt. %(1) Amt. %(1) Amt. %(1)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Commercial
& Financial $10,303 19.40% $ 7,359 19.55% $ 4,539 19.41% $ 3,718 17.67% $ 4,808 16.42%
Real estate -
Construction -- 2.06 -- 1.31 -- 2.59 -- 3.89 -- 2.77
Real estate -
Mortgage 4,755 69.54 7,680 71.17 9,519 69.31 10,744 70.91 7,021 72.67
Installment
& Consumer 483 9.00 1,432 7.97 1,264 8.69 476 7.53 1,412 8.14
Unallocated 1,906 N/A 1,471 n/a 2,449 n/a 1,427 n/a 2,190 n/a
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $17,447 100.00% $17,942 100.00% $17,771 100.00% $16,365 100.00% $15,431 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Represents percentage of loans in each category to total loans.
Provision for credit losses was $7.5 million in 2000, an increase of $2.6
million, or 51.5%, from 1999. The increase in the provision was consistent with
the increase in nonperforming loans as discussed below. The Company's allowance
for credit losses decreased to $17.4 million at December 31, 2000, from $17.9
million at December 31, 1999 and $17.8 million at December 31, 1998. The
allowance for credit losses as a percentage of total loans was 1.37% at December
31, 2000, compared to 1.56% and 1.81% at December 31, 1999 and 1998,
respectively.
Allowance for credit losses as a percentage of nonperforming loans decreased to
115.35% at December 31, 2000 from 152.28% at December 31, 1999 due to the $3.3
million increase in nonperforming loans. Such increase was due to a certain
commercial loan of $3.7 million placed on nonaccrual status in 2000. Total
nonperforming loans at December 31, 2000 amounted to $15.1 million, an increase
of $3.3 million, or 28.4%, from the $11.8 million at December 31, 1999. During
1998, the Company sold $12.9 million in delinquent loans, including $6.8 million
of nonperforming loans, at a loss of $2.4 million. The net investment in loans
that are
15
16
considered to be impaired was $25.2 million at December 31, 2000, an increase of
$5.2 million from the $20.0 million at December 31, 1999. The increase in
impaired loans was due primarily to a commercial loan of $3.7 million placed on
nonaccrual status in 2000. Additional information on impaired loans is presented
in Note F of Notes to the Company's Consolidated Financial Statements.
NONINTEREST EXPENSE
The following table sets forth information by category of noninterest expense
for the years indicated:
------- ------- -------
(dollars in thousands) 2000 1999 1998
------- ------- -------
Salaries and employee benefits $20,832 $20,427 $18,338
Net occupancy expense 7,000 8,022 9,024
Equipment expense 3,070 3,441 3,803
Legal and professional fees 4,043 3,224 3,085
Advertising and promotion 2,436 2,181 1,631
Stationery and supplies 1,002 1,347 1,157
Provision for other real estate owned losses 243 927 1,407
Deposit insurance premiums 512 652 595
Restructuring and merger-related charges and
write-off of goodwill -- 9,424 --
Other 7,541 8,691 7,728
------- ------- -------
Total $46,679 $58,336 $46,768
======= ======= =======
Total noninterest expense, excluding
restructuring and merger-related charges and
write-off of goodwill as a percentage of
average assets 2.80% 3.28% 3.28%
======= ======= =======
Noninterest expense, excluding restructuring and merger-related charges and
write-off of goodwill, decreased $2.2 million, or 4.6%, in 2000, as compared to
1999. The Company's operating expense ratio, which is a commonly used indicator
of operating efficiency, decreased to 2.8% in 2000, as compared to 3.3% in 1999.
Salaries and employment benefits increased by $405,000, or 2.0%, in 2000 to
$20.8 million, compared to $20.4 million in 1999. The increase in salaries and
employee benefits over 1999 was due to higher commissions related to mortgage
loans in 2000 and the reversal of certain benefits amounting to $0.4 million
upon the death of a key employee in 1998.
Net occupancy expense was $7.0 million in 2000, which compares to $8.0 million
in 1999. The decrease in net occupancy expense in 2000 was primarily
attributable to the decreased net expenses of the Company's leased facilities.
Down-sized branches and renegotiated lease agreements resulted in decreased rent
expense.
Equipment expense decreased by $371,000, or 10.8%, in 2000 primarily due to a
$300,000 refund of certain-software lease payments received in the first quarter
of 2000.
Legal and professional fees increased by $819,000, or 25.4%, in 2000 primarily
due to an increase in attorneys' fees and fees related to certain management
consulting projects.
Provision for OREO losses totaled $243,000 for 2000, a decrease of $684,000 from
the $927,000 in 1999. At December 31, 2000, OREO (net of valuation allowance)
amounted to $3.5 million, a decrease of $2.9 million, or 45.8%, from December
31, 1999. The decrease in the 2000 OREO balance and provision for OREO losses
reflected the Company's continued efforts to improve asset quality and the
improvement in the Hawaii real estate market.
Deposit insurance premiums amounted to $512,000 in 2000, compared to $652,000 in
1999, reflecting a decrease in the assessment rate.
Total noninterest expense, excluding restructuring and merger-related charges
and write-off of goodwill, increased $2.1 million, or 4.6%, from 1998 to 1999.
The primary reason for the increase in noninterest expense was the $2.1 million
increase in salaries and employment benefits, which was offset by the $1.0
million decrease in net occupancy expense.
INCOME TAXES
Total income tax expense of the Company was $5.6 million, $5.2 million and $5.5
million in 2000, 1999 and 1998, respectively. The corresponding effective income
tax rate was 33.2%, 94.5% and 39.5%, respectively. The decline in the effective
tax rate was primarily due to: (1) the elimination of goodwill amortization in
2000 due to the write-off in December 1999 and (2) the utilization of capital
losses. The primary reason for the increase in the effective tax rate from 1998
to 1999 was the write-off of goodwill which is not deductible for tax purposes.
Note N of Notes to the Company's Consolidated Financial Statements presents a
reconciliation of the Company's effective and statutory income tax rates.
16
17
LOAN PORTFOLIO
Total loans at December 31, 2000 increased to $1,273 million, a $123.5 million,
or 10.7%, increase over the previous year-end. The increase in total loans was
primarily due to increases in all loan types.
The amount of loans outstanding at December 31 for the years indicated are shown
in the following table categorized as to types of loans:
---------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
Commercial and financial $ 246,877 $ 224,660 $ 191,128 $ 186,418 $ 170,228
Real estate - construction 26,237 15,096 25,453 41,069 28,699
Real estate - mortgage 885,262 818,010 682,313 747,897 753,676
Installment and consumer 114,562 91,647 85,562 79,363 84,456
---------------------------------------------------------------------------------------------------------------------
$ 1,272,938 $ 1,149,413 $ 984,456 $ 1,054,747 $ 1,037,059
=====================================================================================================================
COMMERCIAL AND FINANCIAL. Loans outstanding in this category increased to $246.9
million, an increase of $22.2 million, or 9.9%, over year-end 1999. Loans in
this category are primarily loans to small- and medium-sized businesses and
professionals doing business in Hawaii. These loans have been made primarily on
a collateralized basis. Typically, real estate serves as collateral as well as
equipment, receivables and personal assets as deemed necessary.
REAL ESTATE - MORTGAGE. Real estate - mortgage loans increased to $885.3 million
at December 31, 2000, an increase of $67.3 million, or 8.2%, over year-end 1999.
This occurrence was a reflection of the rising interest rate environment
experienced since the second half of 1999. The average size of loans in this
category at December 31, 2000 was $172,000.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the contractual maturities of the Company's loan
portfolio by category (excluding "real estate-mortgage" and "installment and
consumer") at December 31, 2000. Demand loans are included as due within one
year:
--------------------------------------------------------------------------------------------------
After 1 but
(in thousands) Within 1 year Within 5 years After 5 years Total
--------------------------------------------------------------------------------------------------
Commercial and financial $124,688 $ 84,549 $ 37,640 $246,877
Real estate - construction 24,649 1,588 -- 26,237
--------------------------------------------------------------------------------------------------
$149,337 $ 86,137 $ 37,640 $273,114
==================================================================================================
The following table sets forth the interest rate sensitivity of the above
amounts due after one year at December 31, 2000:
--------------------------------------------------------------------------------
(in thousands) Fixed Rate Variable Rate Total
--------------------------------------------------------------------------------
After 1 but within 5 years $ 65,119 $ 21,018 $ 86,137
After 5 years 37,640 -- 37,640
--------------------------------------------------------------------------------
$102,759 $ 21,018 $123,777
================================================================================
17
18
RISK ELEMENTS IN LENDING ACTIVITIES
Nonperforming assets and past due and restructured loans at December 31 are
reflected below for the years indicated:
--------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------
Nonperforming loans:
Commercial $ 6,268 $ 1,831 $ 1,291 $ 1,207 $ 2,843
Real estate:
Commercial 3,030 518 933 2,997 3,312
Residential 5,827 8,992 10,803 20,010 16,796
--------------------------------------------------------------------------------------------------------------
Total real estate loans 8,857 9,510 11,736 23,007 20,108
--------------------------------------------------------------------------------------------------------------
Consumer -- 441 240 261 157
--------------------------------------------------------------------------------------------------------------
Total nonperforming loans 15,125 11,782 13,267 24,475 23,108
Other real estate owned 3,458 6,385 8,583 3,686 1,844
--------------------------------------------------------------------------------------------------------------
Total nonperforming assets $18,583 $18,167 $21,850 $28,161 $24,952
==============================================================================================================
Past due loans:
Commercial $ 975 $ 96 $ 2,433 $ 15 $ 381
Real estate 473 3,481 3,602 3,569 1,474
Consumer 1,256 592 381 490 524
--------------------------------------------------------------------------------------------------------------
Total past due loans (1) $ 2,704 $ 4,169 $ 6,416 $ 4,074 $ 2,379
==============================================================================================================
Restructured loans:
Commercial $ 4,153 $ 4,440 $ -- $ -- $ 276
Real estate:
Commercial -- 1,231 1,284 -- 226
Residential 11,730 11,280 11,108 424 --
--------------------------------------------------------------------------------------------------------------
Total restructured loans (2) $15,883 $16,951 $12,392 $ 424 $ 502
==============================================================================================================
Nonperforming assets to total loans
and other real estate owned (end of
year):
Excluding 90 days past due
accruing loans 1.46% 1.57% 2.20% 2.66% 2.40%
Including 90 days past due
accruing loans 1.67% 1.93% 2.85% 3.05% 2.63%
Nonperforming assets to total assets
(end of year):
Excluding 90 days past due
accruing loans 1.08% 1.12% 1.53% 1.96% 1.79%
Including 90 days past due
accruing loans 1.24% 1.38% 1.98% 2.25% 1.96%
(1) Represents loans which are past due 90 days or more as to principal
and/or interest, are still accruing interest and are in the process of
collection.
(2) Represents loans which have been restructured, are current and still
accruing interest.
Nonperforming loans increased to $15.1 million at December 31, 2000 an increase
of $3.3 million, or 28.4%, from the $11.8 million at year-end 1999. The increase
in nonperforming loans was primarily due to a certain commercial loan of $3.7
million placed on nonaccrual status in 2000.
At December 31, 2000, OREO (net of valuation allowance) amounted to $3.5
million, a decrease of $2.9 million, or 45.8%, from the prior year-end. The
decrease in OREO was consistent with the decrease in nonperforming real estate
loans and the increase in real estate sales activity in Hawaii.
Past due loans which are still accruing interest decreased $1.5 million, or
35.1%, to $2.7 million at December 31, 2000. The decrease reflects the Company's
proactive collection efforts which resulted in the removal of a $1.5 million
credit from this category in 2000. Substantially all loans in this category are
both well-collateralized and in the process of collection.
Restructured loans decreased $1.1 million, or 6.3%, as compared to 1999 due to
the restructuring of a certain commercial loan to a market interest rate in
2000.
At December 31, 2000, the Company was not aware of any significant potential
problem loans (not otherwise classified as nonperforming or past due) where
possible credit problems of the borrower caused management to have serious
concerns as to the ability of such borrower to comply with the present loan
repayment terms.
18
19
DEPOSITS
The Company competes for deposits in Hawaii principally by providing quality
customer service at its branch offices.
The Company has a network of 21 branch offices which seek to provide a stable
core deposit base. A new branch in Kihei, Maui, opened in the second quarter of
2000. The deposit base provided by these branches consists of interest and
noninterest-bearing demand and savings accounts, money market certificates and
time certificates of deposit. The Company had brokered deposits of $10.0 million
at December 31, 2000.
The average daily amount of deposits and the average rate paid on such deposit
categories is summarized below:
---------------------------------------------------------------------------------------------------------------------
2000 1999 1998
(dollars in thousands) AMOUNT RATE Amount Rate Amount Rate
---------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 114,048 --% $ 118,356 --% $ 107,401 --%
Interest-bearing demand deposits 209,507 3.11 198,379 2.55 141,391 2.69
Savings 158,286 2.25 165,987 2.33 208,007 2.69
Time deposits 672,234 5.51 599,920 4.77 581,952 5.25
---------------------------------------------------- ---------- ----------
Total $1,154,075 4.08% $1,082,642 3.47% $1,038,751 4.29%
=====================================================================================================================
The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 2000 is summarized below:
-----------------------------------------------------------------
(in thousands)
-----------------------------------------------------------------
3 months or less $ 99,264
Over 3 months through 6 months 147,464
Over 6 months through 12 months 31,336
Over 12 months 15,895
-----------------------------------------------------------------
Total $293,959
=================================================================
INVESTMENT AND MORTGAGE-BACKED SECURITIES PORTFOLIO
The following table sets forth the book value and the distribution by category
of investment securities at December 31 for the years indicated:
----------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies and corporations $ 16,068 $ 15,795 $ 11,966
State and political subdivisions 33,100 30,353 9,719
Mortgage-backed securities 248,921 270,350 120,079
----------------------------------------------------------------------------------------------------------
Total $298,089 $316,498 $141,764
==========================================================================================================
FHLB STOCK $ 32,430 $ 31,727 $ 29,481
==========================================================================================================
The following table sets forth the maturities of available-for-sale investment
securities at December 31, 2000 and the weighted average yields of such
securities (calculated on the basis of the cost and effective yields weighted
for the scheduled maturity of each security):
-------------------------------------------------------------------------------------------------------------------------------
After 1 but After 5 but
Within 1 year within 5 years within 10 years After 10 years
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and other U.S.
government agencies and
corporations $ 10,992 5.63% $ 5,016 6.39% $ -- --% $ -- --%
State and political
subdivisions -- -- -- -- 2,245 6.26 30,617 5.01
Mortgage-backed securities 5,469 6.90 2,923 7.58 12,852 6.52 239,312 7.20
-------------------------------------------------------------------------------------------------------------------------------
$ 16,461 5.84% $ 7,939 6.48% $ 15,097 6.42% $269,929 6.00%
===============================================================================================================================
A table setting forth information regarding investment and mortgage-backed
securities, including estimated fair value and carrying value of such securities
is included in Note D of Notes to the Company's Consolidated Financial
Statements.
19
20
SHORT-TERM BORROWINGS AND LONG TERM DEBT
Federal funds purchased generally mature on the day following the date of
purchase. Securities sold under agreements to repurchase were treated as
financings and the obligations to repurchase the securities sold were reflected
as a liability with the dollar amount of securities underlying the agreement
remaining in the asset accounts.
Advances from the FHLB were made under a credit line agreement totaling $578.0
million, of which $227.5 million was undrawn at December 31, 2000. See Notes J
and K of Notes to the Company's Consolidated Financial Statements.
At December 31, 2000, there was one long-term FHLB advance totaling $3.0
million, callable on July 10, 2003.
LIQUIDITY MANAGEMENT
The primary objective of liquidity management is to maintain a balance between
sources and uses of funds in order that the cash flow needs of the Company are
met in the most economical and expedient manner. The liquidity needs of a
financial institution require the availability of cash to meet the withdrawal
demands of depositors and the credit commitments of borrowers. In order to
optimize liquidity, management monitors and forecasts the various sources and
uses of funds in an effort to continually meet the financial requirements of the
Company and the financial needs of its customer base.
To ensure liquidity on a short-term basis, the Company's primary sources are
cash or cash equivalents, loan repayments, proceeds from the sale of assets
available for sale, increases in deposits, proceeds from maturing securities
and, when necessary, federal funds purchased, brokered deposits and credit
arrangements with correspondent banks and the FHLB. Maturities of investment
securities are also structured to cover large commitments and seasonal
fluctuations in credit arrangements. At December 31, 2000, there was $227.5
million of undrawn advances under the credit line agreement with the FHLB. There
are 13 advances totalling $151.3 million that are maturing in the first quarter
of 2001 which the Company intends to renew as necessary. The Company's ability
to continue to draw upon and avoid an acceleration of the maturity dates is
dependent upon the Company's continued adequate financial position and
fulfillment of collateral requirements.
The consolidated statements of cash flows identify three major sources and uses
of cash as operating, investing and financing activities. The Company's
operating activities provided $18.1 million in 2000, a decrease of $10.0 million
from the $28.1 million provided in 1999. The primary source of cash flows from
operations in 2000 was the sale of $59.0 million of loans held for sale, which
amounted to $33.7 million at December 31, 2000.
Due to the Company's increase in deposits in 2000 as well as the decrease in
liquidity needs due to the Year 2000 date change at the end of 1999, the
Company's use of FHLB advances decreased in the current year. At December 31,
2000, the Company had $350.5 million (21.9% of total liabilities) in advances
outstanding from the FHLB compared to $377.8 million (25.1% of total
liabilities) at December 31, 1999. The maximum amount of advances that the
Company had outstanding at any month-end was $399.2 million. As of December 31,
2000, the Bank had available unused credit lines of $227.5 million from the
FHLB. During 2001, $170.3 million of short-term and $117.0 million of long-term
borrowings from the FHLB mature.
The Company's most liquid assets are cash, interest bearing deposits, Federal
funds sold and investment securities available for sale. The levels of these
assets are dependent on the Company's operating, financing, lending and
investment activities during any given period. At December 31, 2000, cash,
interest bearing deposits, Federal funds sold and available for sale investment
and mortgage-backed securities totaled $339.9 million, a decrease of 12.7% from
$389.2 million at December 31, 1999.
Investing activities provided (used) cash flow of $(133.0) million in 2000,
$(221.3) million during 1999, and $158.8 million in 1998. The primary use of
cash for investing activities in 2000 was the net increase in loans of $161.4
million.
Financing activities provided (used) cash flow of $88.6 million in 2000, $198.4
million during 1999, and $(10.1) million in 1998. During 2000, a $97.6 million
net increase in time deposits was the primary source of cash flows from
financing activities.
At any time, the Company has outstanding commitments to extend credit. See Note
P of Notes to the Company's Consolidated Financial Statements.
See Note P of Notes to the Company's Consolidated Financial Statements for
further discussion and disclosure of risk management activities.
CAPITAL RESOURCES
During 2000, Citibank Properties, Inc. ("CB Properties"), a wholly-owned
subsidiary of the Bank, elected to be taxed as a real estate investment trust
("REIT"). On July 18, 2000, CB Properties issued 120 shares of Series A
Preferred Stock, 10,000 shares of Series B Preferred Stock, and 55,000 shares of
Series C Preferred Stock at $1,000 per share in exchange for approximately $150
million in participation interests in mortgage loans and mortgage-related
securities less the assumption of $85 million in advances made from the FHLB to
the Bank. On August 21, 2000, the Bank sold 7,000 shares of Series B Preferred
Stock to third party investors. This transaction was recorded as minority
interest for financial statement purposes and classified as Tier 1 capital for
regulatory purposes pursuant to guidelines set forth by the FDIC. CB Properties'
business objective is to acquire, hold, finance and manage qualifying REIT
assets.
The Company has a strong capital base with a Tier I capital ratio of 12.04% at
December 31, 2000. This is well above the minimum regulatory guideline of 4.00%
for Tier I capital. Bank holding companies are also required to comply with
risk-based capital guidelines as established by the FRB. Risk-based capital
ratios are calculated with reference to risk-weighted assets that include both
on and off-balance sheet exposures. A company's risk-based capital ratio is
calculated by dividing its qualifying capital (the numerator of the
20
21
ratio) by its risk-weighted assets (the denominator). The minimum required
qualifying Total Capital ratio is 8%. As of December 31, 2000, the Company's
total capital to risk-adjusted assets ratio was 13.29%.
During the second quarter of 1999, the Company announced that its Board of
Directors had authorized a stock repurchase program to repurchase up to 10%, or
approximately 360,000 shares, of its 3.6 million shares of common stock
outstanding. As of December 31, 2000, 353,495 shares had been repurchased at
prices ranging from $23.688 to $33.625 per share, at a total cost of $10.6
million.
EFFECTS OF INFLATION
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Virtually all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rate changes have a more
significant impact on the Company's performance than the effects of general
levels of inflation.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Operating earnings for the fourth quarter of 2000 were $3.0 million, or $0.94
per diluted share, a 20.0% increase over operating earnings of $2.5 million, or
$0.74 per diluted share for the same quarter in 1999. Operating cash earnings
for the fourth quarter of 2000 were $3.2 million, or $0.99 per diluted share, a
16.7% increase over the same quarter in 1999.
As previously mentioned, during the fourth quarter of 1999, the Company recorded
a non-cash after-tax charge of $7.9 million ($2.38 per share) related to its
change in method for evaluating the recoverability of goodwill, from an
undiscounted cash flow to a discounted cash flow basis. In addition, the Company
recorded an after-tax charge of $0.9 million ($0.28 per share) related to the
merger of its two principal subsidiaries, the Bank and the Association.
Inclusive of these two charges, there was a net loss for the fourth quarter of
1999 of $6.3 million, or $1.80 per diluted share.
The following table summarizes the Company's quarterly results for the years
2000 and 1999:
---------------------------------------------------------------------------------------------------------
(in thousands, except per Quarter
share data) First Second Third Fourth Total
---------------------------------------------------------------------------------------------------------
2000:
TOTAL INTEREST INCOME $ 31,205 $ 32,746 $ 34,385 $ 34,136 $132,472
TOTAL INTEREST EXPENSE 15,948 17,153 18,853 19,524 71,478
---------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 15,257 15,593 15,532 14,612 60,994
PROVISION FOR CREDIT LOSSES 1,906 1,875 1,525 2,233 7,539
NONINTEREST INCOME 1,714 2,752 2,665 2,893 10,024
NONINTEREST EXPENSE 11,168 12,025 12,135 11,351 46,679
---------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,897 4,445 4,537 3,921 16,800
INCOME TAX EXPENSE 1,463 1,675 1,548 896 5,582
---------------------------------------------------------------------------------------------------------
NET INCOME $ 2,434 $ 2,770 $ 2,989 $ 3,025 $ 11,218
=========================================================================================================
BASIC EARNINGS PER SHARE $ 0.75 $ 0.86 $ 0.93 $ 0.95 $ 3.49
DILUTED EARNINGS PER SHARE $ 0.75 $ 0.86 $ 0.93 $ 0.94 $ 3.48
1999:
Total interest income $ 26,138 $ 26,452 $ 28,709 $ 29,934 $111,233
Total interest expense 12,018 12,009 13,752 14,938 52,717
---------------------------------------------------------------------------------------------------------
Net interest income 14,120 14,443 14,957 14,996 58,516
Provision for credit losses 1,175 1,090 1,333 1,377 4,975
Noninterest income 2,944 2,663 2,301 2,420 10,328
Noninterest expense 12,618 12,460 11,862 21,396 58,336
---------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes 3,271 3,556 4,063 (5,357) 5,533
Income tax expense 1,295 1,357 1,583 992 5,227
---------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,976 $ 2,199 $ 2,480 $ (6,349) $ 306
=========================================================================================================
Basic earnings (loss) per share $ 0.56 $ 0.62 $ 0.71 $ (1.80) $ 0.09
Diluted earnings (loss) per share $ 0.56 $ 0.62 $ 0.71 $ (1.80) $ 0.09
21
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates, commodity prices and equity prices. The Company's primary market risk
exposure is interest rate risk. The ongoing monitoring and management of this
risk is an important component of the Company's asset/liability management
process which is governed by policies established by its Board of Directors that
are reviewed and approved annually. The Board of Directors delegates
responsibility for carrying out the asset/liability management policies to the
Asset/Liability Committee ("ALCO"). In this capacity, ALCO develops guidelines
and strategies impacting the Company's asset/liability management related
activities based upon estimated market risk sensitivity, policy limits and
overall market interest rate levels and trends.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest-rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-bearing assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of falling interest
rates, the net earnings of an institution with a positive gap theoretically may
be adversely affected due to its interest-earning assets repricing to a greater
extent than its interest-bearing liabilities. Conversely, during a period of
rising interest rates, theoretically, the net earnings of an institution with a
positive gap position may increase as it is able to invest in higher yielding
interest-earning assets at a more rapid rate than its interest-bearing
liabilities reprice.
The Company also measures and monitors its sensitivity to interest rates using
net interest income simulations on a quarterly basis. Any identified exposure is
managed primarily through the use of derivative instruments that have been
designated and have qualified as either cash flow hedging instruments such as
swaps, caps and floors or fair value hedging instruments such as options.
Additionally, the Company extends or shortens the duration of the investment and
mortgage-backed securities portfolio, retail certificates of deposit and FHLB
advances. The Company currently does not engage in the use of trading
activities, high-risk derivatives and synthetic instruments in controlling its
interest rate risk. Such uses are permitted at the recommendation of ALCO with
the approval of the Board of Directors.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2000, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amounts of
assets and liabilities shown which reprice or mature during a particular period
were determined in accordance with the earlier of term to repricing or the
contractual terms of the asset or liability. Since all interest rates and yields
do not adjust at the same velocity or magnitude, and since volatility is subject
to change, the gap is only a general indicator of interest rate sensitivity.
----------------------------------------------------------------------------------------------------------------------------------
0-90 91-180 181-365 1-5 Over 5 Non-rate
(in thousands) Days days days Years years sensitive Total
----------------------------------------------------------------------------------------------------------------------------------
Assets:
Investment and mortgage-
backed securities and
interest-bearing deposits
in other banks $ 53,528 $ 13,719 $ 24,382 $ 112,603 $ 127,345 $ -- $ 331,577
Federal funds sold 610 -- -- -- -- -- 610
Commercial loans 186,392 2,293 8,100 31,255 6,705 -- 234,745
Real estate loans 84,546 77,005 133,434 408,966 231,548 -- 935,499
Consumer loans 58,260 4,151 7,473 40,973 2,810 -- 113,667
Other assets -- -- -- -- -- 105,302 105,302
----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 383,336 $ 97,168 $ 173,389 $ 593,797 $ 368,408 $ 105,302 $1,721,400
==================================================================================================================================
Liabilities and stockholders'
equity:
Noninterest-bearing deposits $ -- $ -- $ -- $ -- $ -- $ 128,742 $ 128,742
Time and savings deposits 314,673 380,404 107,840 46,920 239,682 -- 1,089,519
Short-term borrowings 139,700 31,000 -- -- -- -- 170,700
Long-term debt 12,000 20,000 85,000 55,000 9,563 -- 181,563
Other liabilities -- -- -- -- -- 27,714 27,714
Stockholders' equity -- -- -- -- -- 123,162 123,162
----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 466,373 $ 431,404 $ 192,840 $ 101,920 $ 249,245 $ 279,618 $1,721,400
==================================================================================================================================
Interest rate sensitivity gap $ (83,037) $ (334,236) $ (19,451) $ 491,877 $ 119,163 $ (174,316) $ --
Cumulative interest rate
sensitivity gap $ (83,037) $ (417,273) $ (436,724) $ 55,153 $ 174,316 $ -- $ --
22
23
The Company's policy is to match its level of interest-earning assets and
interest-bearing liabilities within a limited range, thereby reducing its
exposure to interest rate fluctuations. In connection with these asset and
liability management objectives, various actions have been taken, including
changes in the composition of assets and liabilities, and the use of financial
instruments.
When appropriate, ALCO may utilize off-balance sheet instruments such as
interest rate floors, caps and swaps to hedge its interest rate risk position. A
Board of Directors approved hedging policy statement governs the use of these
instruments.
The financial instruments used and their notional amounts outstanding at
December 31 for the years indicated were as follows:
----------------------------------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Interest rate swaps:
Pay-floating swaps-notional amount $ 15,000 $ -- $ --
Average receive rate 7.29% --% --%
Average pay rate 6.67% --% --%
----------------------------------------------------------------------------------------------------------
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to the agreed notional amount. The
Company received the fixed rate and paid the floating rate for all of its swaps
outstanding at December 31, 2000.
Interest rate contracts are primarily used to convert certain deposits and
long-term debt to floating interest rates or to convert certain groups of
customer loans and other interest earning assets to fixed rates. Certain
interest rate swaps specifically match the amounts and terms of particular
liabilities.
Interest rate options, which primarily consist of caps and floors, are interest
rate protection instruments that involve the payment from the seller to the
buyer of an interest rate differential in exchange for a premium paid by the
buyer. This differential represents the difference between current interest
rates and an agreed upon rate applied to a notional amount. Interest rate caps
limit the cap holder's risk associated with an increase in interest rates.
Interest rate floors limit the risk associated with a decline in interest rates.
INTEREST RATE RISK
Interest rate options at December 31, 2000 and 1999 consisted of the following:
----------------------------------------------------------------------------------------------------------
2000 1999
NOTIONAL ESTIMATED FAIR Notional Estimated Fair
(in thousands) AMOUNT VALUE Amount Value
----------------------------------------------------------------------------------------------------------
Caps $50,000 $ 30 $ -- $ --
Floors -- -- 10,000 (1)
----------------------------------------------------------------------------------------------------------
Total interest rate options $50,000 $ 30 $10,000 $ (1)
----------------------------------------------------------------------------------------------------------
Interest rate risk represents the sensitivity of earnings to changes in market
interest rates. As interest rates change, the interest income and expense
streams associated with the Company's financial instruments also change thereby
impacting net interest income ("NII"), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling two-year
horizon, it also utilizes additional tools to monitor potential longer-term
interest rate risk.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and liabilities
reflected on the Company's balance sheet as well as for off-balance sheet
derivative financial instruments. This sensitivity analysis is compared to ALCO
policy limits which specify a maximum tolerance level for NII exposure over a
one-year horizon, assuming no balance sheet growth, given both a 200 basis point
("bp") upward and downward shift in interest rates. A parallel and pro rata
shift in rates over a 12-month period is assumed. The following reflects the
Company's NII sensitivity analysis as of December 31, 2000.
Rate Change Estimated NII Sensitivity
---------------------------- ------------------------------
+200bp (5.50)%
-200bp 2.40 %
23
24
Loan growth from December 31, 1999 to 2000 of $123.5 million, or 10.7%, has been
predominantly longer-term fixed rate or prime-based loans while funding has been
mainly a combination of short-term time certificates of deposit and FHLB
advances. These changes have made the balance sheet more liability sensitive and
more negatively exposed to continued upward movement in interest rates. As a
result, the Company has been and will continue efforts to extend terms of time
certificates of deposits and use of putable FHLB advances to extend funding
terms.
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cashflows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make any assurances as to the
predictive nature of these assumptions including how customer preferences or
competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity analysis,
actual results will also differ due to: prepayment/refinancing levels likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets, the potential effect of changing debt service
levels on customers with adjustable rate loans, depositor early withdrawals and
product preference changes, and other internal/external variables. Furthermore,
the sensitivity analysis does not reflect actions that ALCO might take in
responding to or anticipating changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CB BANCSHARES, INC. AND SUBSIDIARIES
December 31, 2000, 1999 and 1998
CONTENTS PAGE
INDEPENDENT AUDITORS' REPORTS 25
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 26
CONSOLIDATED STATEMENTS OF INCOME 27
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS) 28
CONSOLIDATED STATEMENTS OF CASH FLOWS 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30-46
24
25
INDEPENDENT AUDITORS' REPORT
CB Bancshares, Inc. and Subsidiaries
The Board of Directors and Stockholders
CB Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of CB Bancshares,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity and
comprehensive income (loss), and cash flows for the years then ended. 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 auditing standards generally accepted
in the United States of America. 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 CB Bancshares, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note B to the consolidated financial statements, the Company
changed its method for assessing recoverability of goodwill in 1999.
/s/ KPMG LLP
KPMG LLP
Honolulu, Hawaii
January 18, 2001
INDEPENDENT AUDITORS' REPORT
CB Bancshares, Inc. and Subsidiaries
Board of Directors and Stockholders
CB Bancshares, Inc.
We have audited the accompanying consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows of CB Bancshares,
Inc. (a Hawaii corporation) and Subsidiaries for the year ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and their
consolidated cash flows of CB Bancshares, Inc. and Subsidiaries for the year
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ GRANT THORNTON LLP
Grant Thornton LLP
Honolulu, Hawaii
February 12, 1999
25
26
CONSOLIDATED BALANCE SHEETS
CB Bancshares, Inc. and Subsidiaries
--------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
(in thousands, except number of shares and per share data) 2000 1999
--------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks (note A) $ 40,172 $ 66,918
Interest-bearing deposits in other banks (note K) 1,058 76
Federal funds sold 610 5,700
Investment and mortgage-backed securities (notes D, J and K):
Available-for-sale 298,089 316,498
FHLB stock 32,430 31,727
Loans held for sale 33,696 7,805
Loans, net (notes E, F, J and K) 1,250,215 1,126,984
Premises and equipment, net (note H) 18,081 18,008
Other real estate owned and other repossessed property (note G) 3,458 6,385
Accrued interest receivable and other assets (notes N and S) 43,591 39,448
--------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,721,400 $ 1,619,549
==========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (note I):
Noninterest-bearing $ 128,742 $ 120,544
Interest-bearing 1,089,519 985,601
--------------------------------------------------------------------------------------------------------------------------
Total deposits 1,218,261 1,106,145
--------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (note J) 170,700 154,884
Accrued expenses and other liabilities (notes N and O) 20,714 18,689
Long-term debt (note K) 181,563 225,140
Minority interest in consolidated subsidiary (note L) 7,000 --
--------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,598,238 1,504,858
--------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (notes H, K, P, Q, R and S) Stockholders' equity
(notes S and T):
Preferred stock $1 par value -
Authorized and unissued 25,000,000 shares -- --
Common stock $1 par value -
Authorized 50,000,000 shares; issued and outstanding
3,188,534 shares in 2000 and 3,255,282 shares in 1999 3,189 3,255
Additional paid-in capital 54,594 56,219
Retained earnings 72,284 62,159
Accumulated other comprehensive income (loss), net of tax (6,905) (6,942)
--------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 123,162 114,691
--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,721,400 $ 1,619,549
==========================================================================================================================
See accompanying notes to the consolidated financial statements.
26
27
CONSOLIDATED STATEMENTS OF INCOME
CB Bancshares, Inc. and Subsidiaries
----------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
(in thousands, except per share data) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 108,695 $ 90,524 $ 93,491
Interest and dividends on investment and
mortgage-backed securities:
Taxable interest income 19,597 16,023 13,708
Nontaxable interest income 1,551 1,035 435
Dividends 2,104 2,249 2,135
Other interest income 525 1,402 2,291
----------------------------------------------------------------------------------------------------------------
Total interest income 132,472 111,233 112,060
----------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits (note I) 47,104 37,572 39,940
FHLB advances and other short-term borrowings 11,370 3,282 3,536
Long-term debt 13,004 11,863 10,335
----------------------------------------------------------------------------------------------------------------
Total interest expense 71,478 52,717 53,811
----------------------------------------------------------------------------------------------------------------
Net interest income 60,994 58,516 58,249
Provision for credit losses (note F) 7,539 4,975 7,436
----------------------------------------------------------------------------------------------------------------
Net interest income after provision for
credit losses 53,455 53,541 50,813
----------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 2,900 2,060 1,740
Other service charges and fees 4,044 3,979 2,630
Net realized gains (losses) on sales of securities
(notes D and U) (421) (32) 4,104
Net gains (losses) on sales of loans 537 2,744 (447)
Other 2,964 1,577 1,762
----------------------------------------------------------------------------------------------------------------
Total noninterest income 10,024 10,328 9,789
----------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits (note S) 20,832 20,427 18,338
Net occupancy expense (note H) 7,000 8,022 9,024
Equipment expense (note H) 3,070 3,441 3,803
Other (note M) 15,777 26,446 15,603
----------------------------------------------------------------------------------------------------------------
Total noninterest expense 46,679 58,336 46,768
----------------------------------------------------------------------------------------------------------------
Income before income taxes 16,800 5,533 13,834
Income tax expense (note N) 5,582 5,227 5,465
================================================================================================================
NET INCOME $ 11,218 $ 306 $ 8,369
================================================================================================================
Per share data (note T):
Basic $ 3.49 $ 0.09 $ 2.36
Diluted $ 3.48 $ 0.09 $ 2.35
================================================================================================================
See accompanying notes to the consolidated financial statements.
27
28
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
CB Bancshares, Inc. and Subsidiaries
----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE
(IN THOUSANDS, EXCEPT PER SHARE DATA) SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000:
BALANCE AT JANUARY 1, 2000 3,255 $ 3,255 $ 56,219 $ 62,159 $ (6,942) $ 114,691
COMPREHENSIVE INCOME
NET INCOME -- -- -- 11,218 -- 11,218
OTHER COMPREHENSIVE INCOME,
NET OF TAX
UNREALIZED GAINS ON SECURITIES,
NET OF RECLASSIFICATION
ADJUSTMENT -- -- -- -- 37 37
----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME -- -- -- 11,218 37 11,255
----------------------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS:
$0.34 PER SHARE -- -- -- (1,093) -- (1,093)
CANCELLED AND RETIRED SHARES (66) (66) (1,625) -- -- (1,691)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 3,189 $ 3,189 $ 54,594 $ 72,284 $ (6,905) $ 123,162
==================================================================================================================================
Year ended December 31, 1999:
Balance at January 1, 1999 3,552 $ 3,552 $ 65,108 $ 62,784 $ 928 $ 132,372
Comprehensive income:
Net income -- -- -- 306 -- 306
Other comprehensive income (loss),
net of tax
Unrealized losses on securities,
net of reclassification
adjustment -- -- -- -- (7,870) (7,870)
----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- -- 306 (7,870) (7,564)
----------------------------------------------------------------------------------------------------------------------------------
Cash dividends:
$0.27 per share -- -- -- (931) -- (931)
Cancelled and retired shares (297) (297) (8,889) -- -- (9,186)
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 3,255 $ 3,255 $ 56,219 $ 62,159 $ (6,942) $ 114,691
==================================================================================================================================
Year ended December 31, 1998:
Balance at January 1, 1998 3,551 $ 3,551 $ 65,080 $ 55,233 $ 1,201 $ 125,065
Comprehensive income:
Net income -- -- -- 8,369 -- 8,369
Other comprehensive income (loss),
net of tax
Unrealized losses on securities,
net of reclassification
adjustment -- -- -- -- (273) (273)
----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- -- 8,369 (273) 8,096
----------------------------------------------------------------------------------------------------------------------------------
Options exercised 1 1 28 -- -- 29
Cash dividends:
$0.23 per share -- -- -- (818) -- (818)
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 3,552 $ 3,552 $ 65,108 $ 62,784 $ 928 $ 132,372
==================================================================================================================================
See accompanying notes to the consolidated financial statements.
28
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
CB Bancshares, Inc. and Subsidiaries
------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
(in thousands) 2000 1999 1998
------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 11,218 $ 306 $ 8,369
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for credit losses 7,539 4,975 7,436
Loss on disposition of premises and equipment 77 -- 103
(Gain) loss on sale of foreclosed assets (378) -- (392)
Net loss on sale of investment and
mortgage-backed securities 421 32 --
Depreciation and amortization 2,906 4,492 3,460
Deferred income taxes 2,526 1,409 (1,429)
Decrease (increase) in accrued interest receivable (923) (2,203) 561
Increase (decrease) in accrued interest payable 29 822 (3,330)
Loans originated for sale (60,965) (144,342) (288,460)
Sale of loans held for sale 59,039 148,323 141,072
Decrease (increase) in other assets (3,240) 1,743 (1,295)
Increase in income taxes payable 74 908 105
Increase (decrease) in other liabilities (654) 2,553 106
Write-off of goodwill -- 7,873 --
Restructuring and merger-related charges -- 1,551 --
Other 381 (329) 1,555
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 18,050 28,113 (132,139)
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits
in other banks (982) 19,924 10,000
Net decrease (increase) in federal funds sold 5,090 42,052 (43,047)
Proceeds from sales of held-to-maturity securities -- -- 73,222
Proceeds from maturities of held-to-maturity securities -- -- 20,703
Proceeds from sales of available-for-sale securities 7,227 32,883 81,605
Proceeds from maturities of available-for-sale securities 16,268 42,581 29,233
Purchase of available-for-sale securities (5,649) (205,303) (44,064)
Proceeds from sale of FHLB stock 1,400 -- --
Purchase of FHLB stock (2,103) (2,246) (2,133)
Net loan originations over principal payments (161,415) (150,222) 22,396
Proceeds from sales of loans -- -- 10,257
Proceeds from sales of premises and equipment 471 -- 23
Capital expenditures (3,330) (1,233) (4,493)
Proceeds from sales of foreclosed assets 9,652 10,282 5,058
Purchase of bank owned life insurance -- (10,000) --
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (133,371) (221,282) 158,760
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in time deposits 97,602 31,073 44,128
Net increase (decrease) in other deposits 14,514 (9,538) 31,754
Net increase (decrease) in short-term borrowings 15,816 132,958 (115,286)
Proceeds from long-term debt -- 150,000 58,000
Principal payments on long-term debt (43,577) (95,947) (27,961)
Net increase in minority interest in consolidated
subsidiary 7,000 -- --
Cash dividends paid (1,093) (931) (777)
Stock repurchase (1,691) (9,186) --
Stock options exercised -- -- 29
------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 88,571 198,429 (10,113)
------------------------------------------------------------------------------------------------------------
Increase in cash and due from banks (26,750) 5,260 16,508
Cash and due from banks at beginning of year 66,918 61,658 45,150
============================================================================================================
Cash and due from banks at end of year $ 40,168 $ 66,918 $ 61,658
============================================================================================================
Supplemental disclosures of cash flow information:
Interest paid on deposits and other borrowings $ 71,449 $ 51,895 $ 57,141
Income taxes paid 3,399 3,213 6,854
Supplemental schedule of non-cash operating and investing activity:
The Company converted $6,680, $9,038 and $11,355 of loans into other real
estate owned and repossessed personal property in 2000, 1999 and 1998,
respectively.
During 2000, the Company transferred $23,965 of loans classified as
held-for-investment to held-for-sale.
During 1999, the Company transferred $47,142 of loans classified as
held-for-sale to held-for-investment.
During 1999, the Company securitized $58,965 of mortgage loans into
mortgage-backed securities classified as available-for-sale. In 1998, the
Company securitized $76,153 and $14,693 of mortgage loans into
mortgage-backed securities classified as available-for-sale and
held-to-maturity, respectively.
During 1998, the Company transferred $12,859 of securities classified as
held-to-maturity to available-for-sale.
See accompanying notes to the consolidated financial statements.
29
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CB BANCSHARES, INC. AND SUBSIDIARIES
NOTE A - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CB Bancshares, Inc. and Subsidiaries (the "Company") provide financial services
to domestic markets and grant commercial, financial, real estate, installment
and consumer loans to customers throughout the State of Hawaii. Although the
Company has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is primarily dependent upon the economy and the
real estate market in the State of Hawaii.
The significant accounting policies of the Company are as follows:
PRINCIPLES OF CONSOLIDATION AND PRESENTATION. The consolidated financial
statements include the accounts of CB Bancshares, Inc. (the "Parent Company")
and its wholly-owned subsidiaries: City Bank and its wholly-owned subsidiaries
(the "Bank"); International Savings and Loan Association, Limited and its
wholly-owned subsidiaries (the "Association") up to June 30, 2000; Datatronix
Financial Services, Inc. ("Datatronix") and O.R.E., Inc. Significant
intercompany transactions and balances have been eliminated in consolidation.
The Company's consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and conform to prevailing
practices within the banking industry. Preparing financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes and the disclosure of contingent assets
and liabilities. Actual results could differ from those estimates. Also, certain
reclassifications have been made to the consolidated financial statements and
accompanying notes for the previous two years to conform to the current year's
presentation. Such reclassifications did not have a material effect on the
consolidated financial statements.
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS. The credit risk of a financial
instrument is the possibility that a loss may result from the failure of another
party to perform in accordance with the terms of the contract. The most
significant credit risk associated with the Company's financial instruments is
concentrated in its loans receivable. The Company has established a system for
monitoring the level of credit risk in its loan portfolio.
Concentrations of credit risk would exist for groups of borrowers when they have
similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. The ability of the Company's borrowers to repay their commitments is
contingent on several factors, including the economic conditions in the
borrowers' geographic area and the individual financial condition of the
borrowers. The Company generally requires collateral or other security to
support borrower commitments on loans receivable. This collateral may take
several forms. Generally, on the Company's mortgage loans, the collateral will
be the underlying mortgaged property. The Company's lending activities are
primarily concentrated in the State of Hawaii.
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure. The Company does not
currently engage in trading activities. The Company is subject to interest rate
risk to the degree that its interest-earning assets reprice on a different
frequency or schedule than its interest-bearing liabilities. The Company closely
monitors the pricing sensitivity of its financial instruments.
CASH AND CASH EQUIVALENTS. For purposes of the consolidated statements of cash
flows, cash and cash equivalents are defined as those amounts included in the
balance sheet caption, "Cash and due from banks". Included in cash are amounts
restricted for the Federal Reserve requirement of $6,151,000 and $4,099,000 in
2000 and 1999, respectively.
INVESTMENT AND MORTGAGE-BACKED SECURITIES. Investment and mortgage-backed
securities are classified into the following categories:
Held-to-maturity securities are securities the Company has the positive intent
and ability to hold to maturity. Held-to-maturity securities are reported at
amortized cost with premiums and discounts included in interest income over the
period to maturity, using the interest method.
Available-for-sale securities are securities not classified as either trading or
held-to-maturity. Securities available-for-sale are reported at fair value with
unrealized gains and losses, net of tax, included as other comprehensive income
in stockholders' equity. Gains and losses on sales are determined using the
specific identification method.
For individual held-to-maturity and available-for-sale securities, declines in
fair value below cost for other than temporary market conditions would result in
write-downs of the carrying value to the current fair value and the realized
losses included in earnings.
As a member of the Federal Home Loan Bank of Seattle (the "FHLB"), the Company
is required to maintain a minimum investment in the capital stock of the FHLB in
an amount at least equal to the greater of 1% of the aggregate principal amount
of its unpaid residential loans, residential purchase contracts and similar
obligations at the end of each calendar year, assuming for such purposes that at
least 30% of its assets were residential mortgage loans, or 5% of its advances
from the FHLB. The stock is recorded as a restricted investment security at par.
30
31
LOANS HELD TO MATURITY. Interest income on loans receivable is accrued as it is
earned. Loans the Company has the intent and ability to hold until maturity are
reported at the outstanding principal balance, adjusted for any charge-offs, the
allowance for credit losses, any deferred fees or costs on originated loans, and
unamortized premiums or discounts on purchased loans.
Loan origination fees and costs are deferred and recognized as an adjustment of
the yield. Accretion of discounts and deferred loan fees is discontinued when
loans are placed on nonaccrual status. Loan commitment fees received are
deferred as other liabilities until the loan is advanced and are then recognized
over the loan term as an adjustment of the yield. At expiration, unused
commitment fees are recognized as fees and commission revenue. Guarantee fees
received are recognized as fee revenue over the related terms.
The allowance for credit losses is periodically evaluated for adequacy by
management. Factors considered include the Company's loan loss experience, known
and inherent risks in the portfolio, current economic conditions, adverse
situations that may affect the borrower's ability to repay, regulatory policies,
and the estimated value of underlying collateral, if any. The allowance for
credit losses is increased by provision for credit losses and decreased by
charge-offs (net of recoveries).
Loans are impaired when, based on current information and events, it is probable
that principal or interest will not be collected at scheduled maturity or will
be unreasonably delayed. Impaired loans are measured at the present value of
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral, if the loan is collateral dependent. Large
groups of smaller balance homogeneous loans, such as residential mortgages and
consumer installment loans, are collectively evaluated for impairment, except
for loans restructured under a troubled debt restructuring.
Interest accrual on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to make scheduled payments. When interest
accrual is discontinued, any outstanding accrued interest is reversed and
subsequently, interest income is recognized as payments are received.
The Company generally places loans on nonaccrual status that are 90 days past
due as to principal or interest unless well-collateralized and in the process of
collection, or when management believes that collection of principal or interest
has become doubtful, or when a loan is first classified as impaired. When loans
are placed on nonaccrual status, previously accrued and uncollected interest is
reversed against interest income of the current period. Cash interest payments
received on nonaccrual loans are applied as a reduction of principal balance
when doubt exists as to the ultimate collection of the principal; otherwise,
such payments are recorded as income.
Nonaccrual loans are generally returned to accrual status when they become both
current as to principal and interest or become both well collateralized and in
the process of collection.
LOANS HELD FOR SALE. The Company sells loans and participations in loans with
yield rates to the investors based upon current market rates. Gain or loss on
the sale of loans is recognized to the extent that the selling prices differ
from the carrying value of the loans sold based on the estimated relative fair
values of the assets sold and any retained interests. Residential mortgage loans
originated for sale are classified as loans held for sale and are accounted for
at the lower of aggregate cost or fair value.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS. A transfer of financial assets is
accounted for as a sale when control is surrendered over the assets transferred.
Servicing rights and other retained interests in the assets sold are recorded by
allocating the previous recorded investment between the asset sold and the
interest retained based on their relative fair values, if practicable to
determine, at the date of transfer.
For the years presented, servicing assets and the related amortization were not
material.
GOODWILL. Effective December 24, 1999, the Company's accounting policy for
assessing recoverability of goodwill is as follows:
Goodwill is amortized on a straight-line basis over its estimated useful life,
principally over a fifteen year period. It is the Company's policy to review
goodwill for impairment whenever events or changes in circumstances indicate
that its investment in the underlying assets/businesses which gave rise to such
goodwill may not be recoverable. The Company evaluates the recoverability of
goodwill by estimating the future discounted cash flows of the businesses to
which the goodwill relates. When estimated future discounted cash flows are less
than the carrying value of the net assets (tangible and identifiable intangible)
and related goodwill, impairment losses of goodwill are charged to operations.
Impairment losses, limited to the carrying value of goodwill, represent the
excess of the sum of the carrying value of the net assets (tangible and
identifiable intangible) and goodwill over the discounted cash flows of the
business being evaluated. In determining the estimated future cash flows, the
Company considers current and projected future levels of income as well as
business trends, prospects and market and economic conditions. Prior to December
24, 1999, the assessment of recoverability and measurement of impairment of
goodwill was based on undiscounted cash flows.
PREMISES AND EQUIPMENT. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed using both the straight-line and accelerated methods over the estimated
useful lives of the assets or the applicable facility leases, whichever is
shorter. The range of estimated useful lives is 3 to 45 years for premises and
leasehold improvements and 3 to 20 years for equipment.
OTHER REAL ESTATE OWNED. Other real estate owned properties acquired through, or
in lieu of, foreclosure proceedings are recorded at the fair value on the date
of foreclosure establishing a new cost basis. Losses arising at the time of
acquisition of such properties are charged against the allowance for credit
losses. After foreclosure, management performs periodic valuations and the
properties are carried at the lower of cost or fair value, less estimated costs
to sell. Revenues, expenses and provisions to the valuation allowance are
included in operations as incurred.
31
32
INCOME TAXES. The Company files consolidated income tax returns. The Bank and
Datatronix pay to the Parent Company the amount of income taxes they would have
paid had they filed separate income tax returns.
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
STOCK-BASED COMPENSATION. The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
EARNINGS PER SHARE. Basic earnings per common share are based on the
weighted-average number of common shares outstanding for the year. Diluted
earnings per common share are based on the assumption that all potentially
dilutive common shares and dilutive stock options were converted at the
beginning of the year.
NEW ACCOUNTING PRINCIPLES. In June 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 requires entities to recognize all derivatives
in their financial statements as either assets or liabilities measured at fair
value. The effective date for SFAS No. 133, as amended, was fiscal years
beginning after June 15, 2000, or January 1, 2001 for the Company. The Company
implemented the standard as of January 1, 2001 and it did not have a material
effect on the Company's financial statements.
Prior to adoption, as part of its risk management activities, the Company used
interest rate swaps, caps and floors to modify the interest rate characteristics
of certain assets and liabilities. Amounts payable or receivable under the
instrument were recognized as interest income or expense under the accrual
method as long as the instrument qualified for hedge accounting. The gains and
losses on those derivative financial instruments that did not qualify as hedges
were recognized as other income or expense. Unrealized gains or losses on the
swaps were not recognized in the consolidated financial statements.
Since adoption, all derivative instruments used have been designated and qualify
as either cash flow hedging instruments such as swaps, caps and floors or fair
value hedging instruments such as options. The cash flow derivative instruments
hedge the variability of the forecasted cash flow attributable to interest rate
risk and are accounted for by recording the value of the derivative instrument
on the balance sheet as either an asset or liability with a corresponding offset
recorded in other comprehensive income within stockholders' equity, net of tax.
Amounts will be reclassified from other comprehensive income to the income
statement in the period the hedge cash flow occurs. Derivative gains and losses
not considered effective in hedging the change in expected cash flows of the
hedged item are recognized immediately in the income statement.
Due to the implementation of SFAS 133, the Company recorded an after-tax
transition amount associated with establishing fair values of the derivative
instruments and hedged items on the balance sheet as an increase of $335,000 to
other comprehensive income.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" was replaced by SFAS No. 140 (retaining the same
title) in September 2000. While it retained most of the provisions of SFAS No.
125, it revised the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. However, certain
disclosure requirements are effective for fiscal years ending after December 25,
2000. The adoption of this standard is not expected to have a material effect on
the Company's financial statements.
NOTE B - CHANGE IN ACCOUNTING FOR GOODWILL
In December 1999, the Company elected to change its method for assessing
recoverability of goodwill from one based on undiscounted cash flows to one
based on discounted cash flows. The Company determined that using a discounted
cash flow methodology was a preferable policy. The rate used in determining
discounted cash flows was a rate corresponding to the Company's cost of capital.
The Company believes that fair value (i.e., discounted cash flows) is preferable
because it is consistent with the basis used for investment decisions
(acquisitions and capital projects) and takes into account the specific and
detailed operating plans and strategies of the related business segment. This
change represents a change in accounting principle which is indistinguishable
from a change in estimate. Accordingly, the effect of the change was recorded in
the fourth quarter of 1999. For the years ended December 31, 1999 and 1998,
amortization of goodwill was $851,000.
As a result of the change to a discounted cash flow methodology, the Company
recorded a non-cash write-off of goodwill of $7.9 million ($2.38 per share) in
1999. This charge represented the amount required to write down the carrying
value of the goodwill to the Company's estimate, as of December 24, 1999, of the
estimated future discounted cash flows using the methodology described in Note
A.
32
33
NOTE C - RESTRUCTURING AND MERGER-RELATED CHARGES
In the fourth quarter of 1999, the Company announced plans to merge its two
principal subsidiaries, the Bank and the Association (the "Merger"). On July 1,
2000, the Association was merged with and into the Bank.
In connection with the Merger, the Company recorded $1.6 million ($0.9 million
and $0.28 per share, after taxes) of restructuring and merger-related charges
primarily comprised of write-offs of improvements associated with excess leased
commercial property in 1999.
NOTE D - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of the Company's investment
portfolio at December 31, 2000 and 1999 were as follows:
--------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
(in thousands) COST GAINS LOSSES VALUE
--------------------------------------------------------------------------------------------
2000:
AVAILABLE-FOR-SALE SECURITIES:
U.S. TREASURY AND OTHER U.S.
GOVERNMENT AGENCIES AND
CORPORATIONS $ 16,008 $ 88 $ 28 $ 16,068
STATES AND POLITICAL SUBDIVISIONS 32,862 661 423 33,100
MORTGAGE-BACKED SECURITIES 260,556 1,167 12,802 248,921
--------------------------------------------------------------------------------------------
TOTAL AVAILABLE-FOR-SALE $309,426 $ 1,916 $ 13,253 $298,089
============================================================================================
1999:
Available-for-sale securities:
U.S. Treasury and other U.S.
government agencies and
corporations $ 15,993 $ -- $ 198 $ 15,795
States and political subdivisions 32,322 10 1,979 30,353
Mortgage-backed securities 280,115 1,197 10,962 270,350
--------------------------------------------------------------------------------------------
Total available-for-sale $328,430 $ 1,207 $ 13,139 $316,498
============================================================================================
Securities with an aggregate carrying value of $168,381,000 and $97,282,000, at
December 31, 2000 and 1999, respectively, were pledged to collateralize public
deposits and for other purposes required by law.
The following presents the amortized cost and estimated fair value of
available-for-sale investment securities at December 31, 2000 by contractual
maturity. Expected maturity will differ from contractual maturity because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. The stated maturity of mortgage-backed securities are
presented in total since the principal cash flows of these securities are not
received at a single maturity date.
----------------------------------------------------------------------------------------------
AMORTIZED ESTIMATED
(in thousands) COST FAIR VALUE
----------------------------------------------------------------------------------------------
DUE IN ONE YEAR OR LESS $ 10,992 $ 10,965
DUE AFTER ONE YEAR THROUGH FIVE YEARS 5,016 5,103
DUE AFTER FIVE YEARS THROUGH TEN YEARS 2,245 2,289
DUE AFTER TEN YEARS 30,617 30,811
----------------------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES 260,556 248,921
----------------------------------------------------------------------------------------------
TOTAL $309,426 $298,089
==============================================================================================
In 1998, held-to-maturity securities of $69,510,000 were sold due to a change in
investment strategy, resulting in gross realized gains of $3,712,000. Due to the
sales of the held-to-maturity securities during 1998, the Company transferred
$12,859,000 of securities classified as held-to-maturity to available-for-sale.
The related net unrealized gain from this reclassification was $232,000.
Proceeds from sales of securities available-for-sale during 2000, 1999, and 1998
were $7,227,000, $32,883,000 and $81,605,000, respectively. These sales resulted
in gross realized gains of $0, $267,000 and $502,000 and gross realized losses
of $421,000, $299,000, and $110,000, respectively. Income tax benefit recognized
on net securities losses were $164,000 and $13,000 in 2000 and 1999,
respectively. Income tax expense recognized on net securities gains was $157,000
in 1998.
33
34
NOTE E - LOANS
The loan portfolio consisted of the following at December 31, 2000 and 1999:
---------------------------------------------------------------------------
(in thousands) 2000 1999
---------------------------------------------------------------------------
Commercial and financial $ 246,877 $ 224,660
Real estate:
Construction 26,237 15,096
Commercial 192,194 196,810
Residential 693,068 621,200
Installment and consumer 114,562 91,647
---------------------------------------------------------------------------
Gross Loans 1,272,938 1,149,413
Less:
Unearned discount 4 4
Net deferred loan fees 5,272 4,483
Allowance for credit losses 17,447 17,942
---------------------------------------------------------------------------
Loans, net $1,250,215 $1,126,984
===========================================================================
Substantially all of the Company's real estate loans are collateralized by
properties located in the State of Hawaii.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans,
including mortgage-backed securities serviced for others, were $427,254,000 and
$461,305,000 at December 31, 2000 and 1999, respectively. Custodial escrow
balances maintained with the foregoing loan servicing, and included in demand
deposits, were $2,508,000 and $2,696,000 at December 31, 2000 and 1999,
respectively.
In the normal course of business, the Company makes loans to its executive
officers and directors and to companies and individuals affiliated with its
executive officers and directors. Such loans and loan commitments were made at
the Company's normal credit terms, including interest rates and collateral
requirements, and do not represent more than a normal risk of collection. The
following is the activity of loans to such parties in 2000:
---------------------------------------------------------------------------
(in thousands)
---------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 7,116
NEW LOANS 13,137
REPAYMENTS (10,251)
---------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 10,002
===========================================================================
NOTE F - ALLOWANCE FOR CREDIT LOSSES
The changes in the allowance for credit losses for the years indicated were as
follows:
-------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
-------------------------------------------------------------------------------------
Balance at beginning of year $ 17,942 $ 17,771 $ 16,365
Provision charged to expense 7,539 4,975 7,436
Recoveries 972 619 1,094
Charge-offs (9,006) (5,423) (7,124)
-------------------------------------------------------------------------------------
Balance at end of year $ 17,447 $ 17,942 $ 17,771
=====================================================================================
Information related to loans considered to be impaired for the years indicated
were as follows:
-------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
-------------------------------------------------------------------------------------------
Recorded investment in impaired loans $25,180 $20,038 $15,187
Impaired loans with related allowance
for credit losses calculated under
SFAS No. 114 21,349 8,224 7,996
Total allowance for credit losses on
impaired loans 3,636 2,262 989
Average recorded investment in impaired
loans during the year 23,369 19,147 10,741
Interest income on impaired loans using
cash basis of income recognition 1,758 1,499 1,420
-------------------------------------------------------------------------------------------
34
35
NOTE G - OTHER REAL ESTATE OWNED
The carrying value of foreclosed real estate, net of the following allowance for
losses, were $3,458,000, $6,385,000 and $8,583,000 at December 31, 2000, 1999
and 1998, respectively. Activity in the allowance for losses on other real
estate owned was as follows:
-----------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------
Balance at beginning of year $ 940 $ 1,102 $ 188
Provision charged to expense 243 927 1,407
Charge-offs, net of recoveries (966) (1,089) (493)
-----------------------------------------------------------------------------------------------
Balance at end of year $ 217 $ 940 $ 1,102
===============================================================================================
NOTE H - PREMISES AND EQUIPMENT
The Company's premises and equipment at December 31, 2000 and 1999 were as
follows:
--------------------------------------------------------------------------
(in thousands) 2000 1999
--------------------------------------------------------------------------
Premises $21,749 $21,299
Equipment 24,259 23,105
--------------------------------------------------------------------------
Total cost 46,008 44,404
Less accumulated depreciation and amortization 27,927 26,396
--------------------------------------------------------------------------
Net carrying value $18,081 $18,008
==========================================================================
Depreciation and amortization charged to operations for the years ended December
31, 2000, 1999 and 1998 were as follows:
-----------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------
Net occupancy expense $ 898 $ 816 $ 746
Equipment expense 1,894 2,057 2,017
-----------------------------------------------------------------------------------------------
Total depreciation and amortization $2,792 $2,873 $2,763
===============================================================================================
The Company leases certain properties and equipment under leases that expire on
various dates through 2017. Certain leases provide for renegotiations at fixed
intervals and require payment of real estate taxes, maintenance, insurance and
certain other operating expenses. Rent charged against operations, including
equipment rental, were as follows:
-----------------------------------------------------
(in thousands) 2000 1999 1998
-----------------------------------------------------
Rental expense $6,093 $6,223 $6,071
Sublease income 1,261 799 643
-----------------------------------------------------
Total rent $4,832 $5,424 $5,428
=====================================================
The following are future minimum rental commitments for long-term noncancelable
operating leases as of December 31, 2000. Future rentals subject to
renegotiations are computed at the latest annual rents.
--------------------------------------------------
OPERATING LEASES
(in thousands)
--------------------------------------------------
2001 $ 3,548
2002 3,174
2003 3,081
2004 3,335
2005 3,322
THEREAFTER 12,885
--------------------------------------------------
TOTAL $ 29,345
==================================================
35
36
NOTE I - DEPOSITS
Deposits consisted of the following at December 31, 2000 and 1999:
-------------------------------------------------------------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------
Noninterest-bearing deposits $ 128,742 $ 120,544
Interest-bearing deposits:
Demand deposits 184,127 190,363
Savings 178,366 165,814
Time deposits of $100 or more 293,959 231,598
Time deposits less than $100 433,067 397,826
-------------------------------------------------------------------------------
Total interest-bearing deposits 1,089,519 985,601
-------------------------------------------------------------------------------
Total deposits $1,218,261 $1,106,145
===============================================================================
Interest expense on deposits for the years ended December 31, 2000, 1999 and
1998 were as follows:
--------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
--------------------------------------------------------------------------------------------------
Demand deposits $ 5,693 $ 5,058 $ 6,146
Savings 4,370 3,869 3,247
Time deposits of $100 or more 14,329 11,392 11,184
Time deposits less than $100 22,712 17,253 19,363
--------------------------------------------------------------------------------------------------
Total interest expense $47,104 $37,572 $39,940
==================================================================================================
At December 31, 2000, the scheduled maturities of time deposits were as follows:
------------------------------------------------------
(in thousands)
------------------------------------------------------
2001 $ 673,949
2002 38,849
2003 5,237
2004 4,476
2005 4,515
------------------------------------------------------
TOTAL $ 727,026
======================================================
NOTE J - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 2000 and 1999 consisted of the following:
-------------------------------------------------------------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------
Advances from the FHLB $170,300 $154,375
Federal treasury tax and loan note 400 509
-------------------------------------------------------------------------------
Total short-term borrowings $170,700 $154,884
===============================================================================
Average interest rates and average and maximum balances for short-term borrowing
categories were as follows for categories of borrowings where the average
outstanding balance for the year was 30% or more of stockholders' equity at
December 31 for the years indicated:
-------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------
Advances from the FHLB:
Average interest rate at year-end 6.62% 5.70% 5.37%
Maximum outstanding at any month-end $ 219,000 $154,375 $ 134,447
Average outstanding 167,765 44,829 60,978
Average interest rate for the year 6.46% 5.22% 5.52%
Federal funds purchased:
Average interest rate at year-end -% -% 4.84%
Maximum outstanding at any month-end -- 51,880 12,700
Average outstanding 1,165 16,893 2,871
Average interest rate for the year 6.51% 5.45% 5.47%
-------------------------------------------------------------------------------------------------------------
36
37
NOTE K - LONG-TERM DEBT
Long-term debt at December 31, 2000 and 1999 consisted of the following:
-----------------------------------------------------------------------------
(in thousands) 2000 1999
-----------------------------------------------------------------------------
Advances from the FHLB $180,242 $223,409
Collateralized mortgage obligation 1,321 1,731
-----------------------------------------------------------------------------
Total long-term debt $181,563 $225,140
=============================================================================
The advances from the FHLB bear interest at rates ranging from 5.30% to 8.22%.
Interest is payable monthly over the term of each advance. Pursuant to
collateral agreements with the FHLB, short and long-term advances are
collateralized by a blanket pledge of certain securities with carrying values of
$70,998,000 and $29,800,000, loans of $735,665,000 and $620,282,000,
interest-bearing deposits in other banks ($nil in 2000 and 1999), and all stock
in the FHLB in 2000 and 1999, respectively. FHLB advances are under credit line
agreements of $578,085,000 and $471,881,000 in 2000 and 1999, respectively.
Aggregate maturities of long-term advances from the FHLB as of December 31, 2000
were as follows:
-------------------------------------------------
(in thousands)
-------------------------------------------------
2001 $ 117,000
2002 35,000
2003 10,000
2004 10,000
2005 -
THEREAFTER 8,242
-------------------------------------------------
TOTAL $ 180,242
=================================================
NOTE L - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
During 2000, Citibank Properties, Inc. ("CB Properties"), a wholly-owned
subsidiary of the Bank, elected to be taxed as a real estate investment trust
("REIT"). On July 18, 2000, CB Properties issued 120 shares of Series A
Preferred Stock, 10,000 shares of Series B Preferred Stock, and 55,000 shares of
Series C Preferred Stock at $1,000 per share in exchange for approximately $150
million in participation interests in mortgage loans and mortgage-related
securities less the assumption of $85 million in advances made from the FHLB to
the Bank. On August 21, 2000, the Bank sold 7,000 shares of Series B Preferred
Stock to third party investors. This transaction was recorded as minority
interest for financial statement purposes and classified as Tier 1 capital for
regulatory purposes pursuant to guidelines set forth by the FDIC. CB Properties'
business objective is to acquire, hold, finance and manage qualifying REIT
assets.
NOTE M - OTHER NONINTEREST EXPENSE
Other noninterest expense for the years ended December 31, 2000, 1999 and 1998
were as follows:
------------------------------------------------------------------------------------------------
(in thousands) 2000 1999(1) 1998
------------------------------------------------------------------------------------------------
Legal and professional fees $ 4,043 $ 3,224 $ 3,085
Advertising and promotion 2,436 2,181 1,631
Stationery and supplies 1,002 1,347 1,157
Provision for other real estate owned losses 243 927 1,407
Deposit insurance premiums 512 652 595
Other 7,541 8,691 7,728
------------------------------------------------------------------------------------------------
Total other noninterest expense $15,777 $17,022 $15,603
================================================================================================
(1) 1999 figures are exclusive of restructuring and merger-related charges and
write-off of goodwill.
NOTE N - INCOME TAXES
The components of income tax expense for the years ended December 31, 2000, 1999
and 1998 were as follows:
------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998
------------------------------------------------------------------------------------------------
Current:
Federal $ 2,506 $ 3,345 $ 5,658
State 550 473 1,236
------------------------------------------------------------------------------------------------
Total current 3,056 3,818 6,894
------------------------------------------------------------------------------------------------
Deferred:
Federal 2,071 1,234 (1,135)
State 455 175 (294)
------------------------------------------------------------------------------------------------
Total deferred 2,526 1,409 (1,429)
------------------------------------------------------------------------------------------------
Total income tax expense $ 5,582 $ 5,227 $ 5,465
================================================================================================
37
38
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities as of December 31, 2000 and
1999 were as follows:
-----------------------------------------------------------------------------------------
(in thousands) 2000 1999
-----------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for credit losses $ 6,970 $ 4,880
Hawaii state franchise taxes -- 59
Gain on sale of building 1,781 1,637
Deferred compensation 985 1,149
Net unrealized losses on available-for-sale securities 4,529 4,262
Capital loss carryforward 2,679 --
Other 1,319 1,948
-----------------------------------------------------------------------------------------
Gross deferred tax assets 18,263 13,935
Less: valuation allowance (2,397) --
-----------------------------------------------------------------------------------------
Total deferred tax assets 15,866 13,935
-----------------------------------------------------------------------------------------
Deferred tax liabilities:
FHLB stock dividends 8,143 7,649
Deferred loan fees 3,292 1,639
Hawaii state franchise taxes 227 --
Other 2,923 816
-----------------------------------------------------------------------------------------
Total deferred tax liabilities 14,585 10,104
-----------------------------------------------------------------------------------------
Net deferred tax assets $ 1,281 $ 3,831
=========================================================================================
The net change in the total valuation allowance for the years ended December 31,
2000 and 1999 was an increase of $2,397,000 and nil, respectively. 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 and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences net of the
existing valuation allowance at December 31, 2000.
Reconciliation of the federal statutory rate to the Company's effective income
tax rate for the years ended December 31, 2000, 1999 and 1998 was as follows:
------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
Tax exempt interest (0.3) (2.3) (3.0)
Hawaii state franchise taxes, net of federal tax
benefit 4.9 11.3 4.6
Amortization and write-off of goodwill -- 55.2 2.2
Tax exempt earnings on bank owned life insurance (2.6) (4.1) (1.2)
Capital loss utilized (3.0) -- --
Other (0.8) (0.6) 1.9
------------------------------------------------------------------------------------------------------
Effective income tax rate 33.2% 94.5% 39.5%
======================================================================================================
During 1997, legislation was passed requiring the Association to recapture as
taxable income $565,000 of its bad debt reserves, which represents additions to
the reserve after June 30, 1988. The Association has provided deferred taxes for
the amount and will recapture its bad debt reserves over six years. Recapture
may be deferred up to two years if certain residential lending requirements are
met during tax years beginning before January 1, 1998.
NOTE O - DEFERRED GAIN
Previously, CB Properties entered into a limited partnership agreement as a
limited partner. The partnership acquired the ground leases of certain real
property, constructed a commercial building on the property and sold the
leasehold estate and commercial building to an unrelated third party (the
"Purchaser"). Prior to the sale, the Bank entered into a 20-year office lease
agreement with the partnership for the ground floor, mezzanine and first four
floors of the building. The Bank's lease was assigned to the Purchaser and has
not been affected by the sale of the building.
The Company recognized a deferred gain in a manner similar to that for a
sale-leaseback transaction. The deferred gain is being amortized over the
remaining lease term, resulting in annual gains of $447,000. As of December 31,
2000, the unamortized deferred gain was $3,650,000.
38
39
\
NOTE P - RISK MANAGEMENT ACTIVITIES
Refer to Note A - "New Accounting Principles," for the Company's current
accounting treatment of derivative financial investments.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed rate and floating rate
interest amounts calculated by reference to an agreed upon notional amount. At
December 31, 2000, there were three interest rate swaps outstanding with a
notional principal amount totaling $15,000,000. The Company paid the floating
rate and received the fixed rate. The estimated fair values of the outstanding
interest rate swaps were $263,728 at December 31, 2000. There were no interest
rate swaps outstanding at December 31, 1999 and 1998.
Interest rate options at December 31, 2000 and 1999 consisted of the following:
----------------------------------------------------------------------------------------------------------------------
2000 1999
ESTIMATED FAIR Estimated Fair
(in thousands) NOTIONAL AMOUNT VALUE Notional Amount Value
----------------------------------------------------------------------------------------------------------------------
Caps $50,000 $ 30 $ -- $ --
Floors -- -- 10,000 (1)
----------------------------------------------------------------------------------------------------------------------
Total interest rate options $50,000 $ 30 $10,000 $ (1)
======================================================================================================================
Interest rate contracts are primarily used to convert certain deposits or to
convert certain groups of customer loans to fixed or floating rates. Certain
interest rate swaps specifically match the amounts and terms of particular
liabilities.
The following table indicates the types of swaps used, as of December 31, their
aggregate notional amounts and weighted-average interest rates, and includes the
matched swaps. Average variable rates are based on rates implied in the yield
curve at the reporting date. Those rates may change significantly, affecting
future cash flows.
--------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Pay floating swaps - notional amounts $ 15,000 $-- $--
Average receive rate 7.29% -- --
Average pay rate 6.67% -- --
================================================================================
Interest rate options written and purchased are contracts that allow the holder
of the option to purchase or sell a financial instrument at a specified price
and within a specified period of time from the seller or "writer" of the option.
As a writer of options, the Company receives a premium at the outset and then
bears the risk of an unfavorable change in the price of the financial instrument
underlying the option. At December 31, 2000, there were outstanding written
option contracts with a notional principal amount of $10,000,000 and an
estimated fair value of $42,188. As a purchaser of options, the Company pays a
premium and may then exercise the option if the price movement of the underlying
financial instrument is favorable to the Company. At December 31, 1999, there
were outstanding purchased interest rate options with a notional principal
amount of $3,000,000 and estimated fair value of $16,000.
39
40
NOTE Q - CREDIT-RELATED INSTRUMENTS
At any time, the Company has a significant number of outstanding commitments to
extend credit. These commitments take the form of approved lines of credit and
loans with terms of up to one year. The Company also provides financial
guarantees and letters of credit to guarantee the performance of customers to
third parties. These agreements generally extend for up to one year. The
contractual amounts of these credit-related instruments are set out in the
following table by category of instrument. Because many of those instruments
expire without being advanced in whole or in part, the amounts do not represent
future cash flow requirements.
----------------------------------------------------------------------------
(in thousands) 2000 1999
----------------------------------------------------------------------------
Loan commitments $187,638 $176,836
Guarantees and letters of credit 5,015 6,461
----------------------------------------------------------------------------
Totals $192,653 $183,297
============================================================================
These credit-related financial instruments have off-balance sheet risk because
only origination fees and accruals for probable losses are recognized in the
consolidated financial statements until the commitments are fulfilled or expire.
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted. The
credit risk amounts are equal to the contractual amounts, assuming that the
amounts are fully advanced and that the collateral or other security is of no
value.
The Company's policy is to require suitable collateral to be provided by certain
customers prior to the disbursement of approved loans. For retail loans, the
Company usually retains a security interest in the property or products
financed, which provides repossession rights in the event of default by the
customer. Guarantees and letters of credit also are subject to strict credit
assessments before being provided. Those agreements specify monetary limits to
the Company's obligations. Collateral for commercial loans, guarantees, and
letters of credit is usually in the form of cash, inventory, marketable
securities, or other property.
NOTE R - COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various legal proceedings arising from normal
business activities. While the results of these proceedings can not be predicted
with certainty, management believes, based on advice of counsel, the aggregate
liability, if any, resulting from these proceedings would not have a material
effect on the Company's consolidated financial position or results of
operations.
NOTE S - EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN. The Company has an Employee Stock Ownership Plan
(the "ESOP") for all employees of the Company who satisfy length of service
requirements. Trust assets under the plan are invested primarily in shares of
stock of the Company. Employer contributions are to be paid in cash, shares of
stock or other property as determined by the Board of Directors; provided,
however, contributions may not be made in amounts which cannot be allocated to
any participant's account by reason of statutory limitations. No participant
shall be required or permitted to make contributions to the plan or trust.
Contributions to the plan were $350,000 for 2000, $240,000 in 1999 and $350,000
in 1998. At December 31, 2000, there were 202,149 shares allocated to the Plan.
There were no committed-to-be-released or suspense shares held by the ESOP.
PROFIT SHARING RETIREMENT SAVINGS PLAN. The Company has an Employee Profit
Sharing Retirement Savings Plan for all employees who satisfy length of service
requirements. Eligible employees may contribute up to 15% of their compensation,
limited to the total amount deductible under applicable provisions of the
Internal Revenue Code, of which 20% of the amount contributed will be matched by
the Company, provided that the matching contribution shall not exceed 2% of the
participant's compensation. In addition, the Company will contribute an amount
equal to 2% of the compensation of eligible participants, and additional amounts
determined by the Board of Directors at their discretion. Effective January 1,
2000, the Company contributed an amount equal to 3% of the compensation of
eligible participants. Contributions to the plan for 2000, 1999 and 1998 were
$361,000, $462,000 and $173,000, respectively.
DEFERRED COMPENSATION. The Company has deferred compensation agreements with
several key management employees, all of whom are officers. Under the
agreements, the Company is obligated to provide for each such employee or his
beneficiaries, during a period of ten years after the employee's death,
disability, or retirement, annual benefits ranging from $25,000 to $250,000. The
estimated present value of future benefits to be paid is being accrued over the
period from the effective date of the agreements until the full eligibility
dates of the participants. The expense incurred for this plan for the years
ended December 31, 2000, 1999 and 1998 amounted to $197,000, $216,000 and
$234,000, respectively. The Company is the beneficiary of life insurance
policies, with an aggregate cash surrender value of $11,906,000 at December 31,
2000, that were purchased as a method of partially financing benefits under this
plan.
STOCK COMPENSATION PLANS. On September 16, 1994, the Board of Directors adopted
a Stock Compensation Plan (the "SCP") which the stockholders approved on January
26, 1995. On April 30, 1998, the stockholders approved the increase of shares of
common stock reserved under the SCP to 400,000 shares. Such shares may be
granted to employees, including officers and other key employees, of the
Company. The purpose of the SCP is to enhance the ability of the Company to
attract, retain and reward key employees and to encourage a sense of
proprietorship and to stimulate the interests of those employees in the
financial success of the Company. The SCP is administered by the Compensation
Committee (the "Committee") of the Board of Directors. The SCP provides for the
award of incentive stock options, performance stock options, non-qualified stock
options, stock grants and stock appreciation rights ("SARs").
During 1995 and 1994, the SCP option grants were performance and index options
with a term of ten years. During 1997, the Company amended the terms of these
options. The amendment provides that the performance options granted shall
become
40
41
exercisable in full on the later of the first anniversary of the grant date or
the effective date of the amendment. The amendment also fixes the exercise price
of the index options granted in 1995 and 1994 at $31.29 and $37.22,
respectively.
On July 17, 2000, January 26, 2000, January 19, 1999, January 2, 1998 and
December 15, 1997, the Company granted additional SCP stock options of 500,
74,000, 49,000, 12,500, and 72,500 shares, respectively. The exercise prices of
these options are $25.00, $28.50, $30.50, $42.50, and $43.00 per share,
respectively. The options become exercisable on the first anniversary of the
grant date and terminate ten years after the grant date.
The Company adopted the Directors Stock Option Plan ("DSOP") which the
stockholders approved on April 29, 1999. Under the DSOP, each director of the
Company, the Bank or the Association who is not an employee, receives an annual
grant of options to acquire restricted stock at a price equal to the fair market
value of the Company's common stock at the date of the grant. A director who is
not an employee of the Company, the Bank or the Association receives an annual
option for 1,000 shares (not to exceed an annual option for 1,000 restricted
shares to any one director). Under the DSOP, the stock option grants are
exercisable from the date of the grant for a ten-year period. On April 27, 2000
and April 29, 1999, the Company granted stock options of 16,000 and 17,000
respectively. The exercise prices of these options are $24.50 and $27.25 per
share, respectively.
The original exercise price of each option equals the market price of the
Company's stock on the date of grant. Accordingly, no compensation cost has been
recognized for the plan. Had compensation cost for the plan been determined
using the fair value based method, the Company's net income and net income per
share would have been the pro forma amounts below:
----------------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 11,218,000 $ 306,000 $ 8,369,000
Pro forma 10,179,000 (106,000) 7,498,000
Pro forma earnings per share:
Basic $ 3.16 $ (0.03) $ 2.11
Diluted $ 3.16 $ (0.03) $ 2.10
======================================================================================================================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model. For grants in 2000, 1999 and 1998, the
following weighted-average assumptions were used; expected dividend of 1.40%,
0.61% and 0.51%, expected volatility of 39.71%, 32.15% and 32.91%, risk-free
interest rate of 5.00%, 6.36% and 5.62%, and expected life of 6.0 years, 6.0
years and 6.0 years. The weighted-average fair value of options granted during
2000, 1999 and 1998 was $12.65, $13.37 and $17.26, respectively.
Transactions involving stock options are summarized as follows:
-------------------------------------------------------------------------------------------------
Stock Options Weighted-Average
Description Outstanding Exercise Price
-------------------------------------------------------------------------------------------------
Balance at December 31, 1997 134,700 $ 38.59
Granted 12,500 $ 42.50
Forfeited (8,250) $ 33.92
Exercised (1,000) $ 29.00
-------------------------------------------------------------------------------------------------
Balance at December 31, 1998 137,950 $ 38.85
Granted 66,000 $ 29.66
Forfeited (9,500) $ 38.03
-------------------------------------------------------------------------------------------------
Balance at December 31, 1999 194,450 $ 35.80
GRANTED 90,500 $ 27.78
FORFEITED (26,500) $ 25.91
-------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 258,450 $ 33.02
=================================================================================================
As of December 31, 2000 and 1999, stock options outstanding had exercise prices
between $24.50 and $43.00 and $27.25 and $43.00, respectively. At December 31,
2000, the weighted-average remaining contractual life was 7.6 years and 186,950
stock options were exercisable with a weighted-average exercise price of $34.74.
As of December 31, 1999, the weighted-average remaining contractual life was 7.2
years and 145,950 stock options were exercisable with a weighted-average
exercise price of $37.56.
Under the SCP, the Committee may grant a specified number of shares to an
employee subject to terms and conditions prescribed by the Committee. The
Committee also has the authority to grant any participant SARs and the right to
receive a payment, in cash or common stock, equal to the excess of the fair
market value of a specified number of shares of common stock on the date such
right is exercised over the fair market value on the date of grant of such
right. An SAR may not be exercised prior to the first anniversary of the date of
grant or more than ten years after the date of grant. No shares of stock or SARs
were granted during 2000, 1999 and 1998.
41
42
Upon the occurrence of a reorganization event, as defined in the SCP, the
Committee may, in its discretion, provide that the options granted shall be
terminated unless exercised within 30 days of notice and advance the exercise
dates of any, or all, outstanding options.
NOTE T - STOCKHOLDERS' EQUITY
REGULATORY MATTERS. The Company is subject to various capital requirements
administered by federal regulatory agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined) and
Tier I capital (as defined) to average assets (as defined). The following table
presents the actual and required regulatory capital amounts and ratios of the
Company as of December 31, 2000 and 1999. No amounts were deducted from the
Association's capital for interest rate risk in 1999. Management believes that
the Company and the Bank meet all capital adequacy requirements to which they
are subject as of December 31, 2000.
----------------------------------------------------------------------------------------------------------------------------
FOR CAPITAL ADEQUACY
(in thousands of dollars) ACTUAL PURPOSES TO BE WELL CAPITALIZED
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2000:
TIER 1 CAPITAL (TO RISK WEIGHTED
ASSETS):
CONSOLIDATED $137,067 12.04% $ 45,555 4.00% $ N/A N/A%
BANK 134,498 11.37 47,304 4.00 70,956 6.00
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
CONSOLIDATED 151,379 13.29 91,109 8.00 N/A N/A
BANK 149,313 12.63 94,608 8.00 118,261 10.00
TIER 1 CAPITAL (TO AVERAGE ASSETS):
CONSOLIDATED 137,067 8.01 68,443 4.00 N/A N/A
BANK 134,498 7.82 68,794 4.00 85,992 5.00
December 31, 1999: Tier 1 capital
(to risk weighted assets):
Consolidated $121,344 11.95% $ 40,601 4.00% $ n/a n/a%
Bank 71,051 10.12 28,095 4.00 42,143 6.00
Association 49,198 13.06 15,070 4.00 22,606 6.00
Total capital (to risk weighted assets):
Consolidated 134,124 13.21 81,202 8.00 n/a n/a
Bank 79,875 11.37 56,190 8.00 70,238 10.00
Association 51,804 13.75 30,141 8.00 37,676 10.00
Tier 1 capital (to average assets):
Consolidated 121,344 7.69 63,114 4.00 n/a n/a
Bank 71,051 8.17 34,806 4.00 43,508 5.00
Association 49,198 6.92 28,433 4.00 35,541 5.00
Tangible capital (to adjusted total assets):
Association 49,198 6.60 11,179 1.50 n/a n/a
========================================================================================================================
The most recent notification from the federal regulatory agencies categorized
the Company as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized", the Company must
maintain minimum Tier 1 and Total risk-based capital ratios and Tier 1 leverage
ratios as set forth in the table above. To be categorized as adequately
capitalized, the Company must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. As of December
31, 2000, there are no conditions or events since that notification that
management believes have changed the Company's capital category.
42
43
EARNINGS PER SHARE. The table below presents the information used to compute
basic and diluted earnings per common share for the years ended December 31,
2000, 1999 and 1998:
----------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------------
Numerator:
Net income $11,218,000 $ 306,000 $ 8,369,000
================================================================================================================
Denominator:
Weighted average shares outstanding 3,218,324 3,463,971 3,551,891
Effect of dilutive securities-stock options 661 1,390 7,014
----------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares
outstanding, assuming dilution 3,218,985 3,465,361 3,558,905
================================================================================================================
Earnings per share - basic $ 3.49 $ 0.09 $ 2.36
Earnings per share - assuming dilution $ 3.48 $ 0.09 $ 2.35
================================================================================================================
The following options were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares. At December 31, 2000, there were outstanding
options to purchase 226,450 shares at a range of $28.50 to $43.00. At December
31, 1999, there were outstanding options to purchase 164,600 shares at a range
of $30.50 to $43.00. At December 31, 1998, there were outstanding options to
purchase 96,625 shares at a range of $37.22 to $43.00.
NOTE U - OTHER COMPREHENSIVE INCOME (LOSS)
The schedule below presents the reclassification amount to adjust for gains and
losses on securities included in net income, including the amount of income
taxes allocated, and also included in other comprehensive income as unrealized
gains (losses) in the year in which they arose:
------------------------------------------------------------------------------------------------------------------------
BEFORE TAX AMOUNT TAX (EXPENSE) NET OF TAX AMOUNT
(in thousands) BENEFIT
------------------------------------------------------------------------------------------------------------------------
2000:
UNREALIZED GAINS ON SECURITIES:
UNREALIZED HOLDING LOSSES ARISING DURING THE YEAR $ (360) $ 140 $ (220)
LESS: RECLASSIFICATION ADJUSTMENT FOR LOSSES REALIZED
IN NET INCOME (421) 164 (257)
------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS) $ 61 $ (24) $ 37
========================================================================================================================
1999:
Unrealized losses on securities:
Unrealized holding losses arising during the year $(13,302) $ 5,413 $ (7,889)
Less: reclassification adjustment for losses
realized in net income (32) 13 (19)
------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $(13,270) $ 5,400 $ (7,870)
========================================================================================================================
1998:
Unrealized losses on securities:
Unrealized holding losses arising during the year $ (209) $ 171 $ (38)
Less: reclassification adjustment for gains realized
in net income 392 (157) 235
------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $ (601) $ 328 $ (273)
========================================================================================================================
NOTE V - FAIR VALUE OF FINANCIAL INSTRUMENTS
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 Company's entire holdings of a particular financial
instrument. Because a limited or no market exists for a significant portion of
the Company'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 anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include premises and equipment,
goodwill, core deposit intangibles, and deferred income taxes. 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 any of the estimates.
43
44
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND DUE FROM BANKS, AND INTEREST-BEARING DEPOSITS IN OTHER BANKS: The
carrying amounts approximate fair values.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES): Fair values
for securities are based on quoted market prices, if available. If not
available, quoted market prices of comparable instruments are used except in
the case of certain options and swaps that utilize pricing models. For
restricted investment securities, the carrying amount approximates fair
value.
LOANS: For variable rate loans that reprice frequently and entail no
significant change in credit risk, fair values are based on carrying values.
For certain mortgage loans (e.g., one-to-four family residential), fair
values are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. For other loans, fair values are estimated based on
discounted cash flow analyses using interest rates currently offered for
loans with similar terms to borrowers of similar credit quality. The
carrying amount of accrued interest approximates its fair value.
DEPOSITS: The estimated fair values of deposits with no stated maturities,
which includes demand deposits, checking accounts, passbook savings and
certain types of money market accounts, is equal to the amount payable on
demand. The estimated fair values of fixed maturity deposits is estimated
using a discounted cash flow calculation with rates currently offered by the
Company for deposits of similar remaining maturity. The carrying amount of
accrued interest payable approximates its fair value.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, advances from the FHLB and other
short-term borrowings approximate their fair values.
LONG-TERM DEBT (OTHER THAN DEPOSITS): The fair values are estimated using
discounted cash flow analyses using the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: Fair values for letters of credit,
guarantees, and lending commitments are based on fees currently charged to
enter into similar agreements, considering the remaining terms of the
agreements and the counterparties' credit standing.
DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for swaps, caps, floors,
forwards, and options are based upon current settlement values (financial
forwards), if available. If there are no relevant comparables, fair values
are based on pricing models or formulas using current assumptions interest
rate swaps and options.
The following table provides a summary of the carrying and fair values of the
Company's financial instruments at December 31, 2000 and 1999:
-------------------------------------------------------------------------------------------------------------------------
2000 1999
CARRYING OR ESTIMATED FAIR Carrying or Estimated Fair
(in thousands) NOTIONAL VALUE VALUE Notional Value Value
-------------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and due from banks $ 40,172 $ 40,172 $ 66,918 $ 66,918
Interest-bearing deposits in other Banks 1,058 1,058 76 76
Federal funds sold 610 610 5,700 5,700
Investment securities 298,089 298,089 316,498 316,498
FHLB stock 32,430 32,430 31,727 31,727
Loans 1,283,911 1,284,470 1,134,789 1,135,192
Financial liabilities:
Deposits 1,218,261 1,225,442 1,106,145 1,107,183
Short-term borrowings 170,700 171,193 154,884 154,250
Long-term debt 181,563 180,952 225,140 224,212
Off-balance sheet financial
Instruments:
Derivative financial instruments:
In a net payable position -- -- -- --
Interest rate cap 50,000 30 -- --
Interest rate floor -- -- 10,000 (1)
Interest rate swaps 15,000 263 -- --
Interest rate options 10,000 42 3,000 16
Loan commitments 187,638 48 176,836 168
Guarantees and letters of credit 5,015 57 6,461 60
-------------------------------------------------------------------------------------------------------------------------
44
45
NOTE W - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY) Condensed
financial statements of CB Bancshares, Inc. (Parent company only) follows:
CONDENSED BALANCE SHEETS
------------------------------------------------------------------------------------------
(in thousands, except number of shares and per share data) DECEMBER 31,
2000 1999
------------------------------------------------------------------------------------------
ASSETS
Cash on deposit with the Bank and Association $ 322 $ 617
Investment in subsidiaries:
Bank 120,593 68,487
Association -- 44,817
Other 452 274
Premises and equipment 158 176
Other assets 1,745 520
------------------------------------------------------------------------------------------
TOTAL ASSETS $ 123,270 $ 114,891
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 108 $ 200
------------------------------------------------------------------------------------------
Total liabilities 108 200
------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock $1 par value-
Authorized and unissued 25,000,000 shares -- --
Common stock $1 par value-
Authorized 50,000,000 shares; issued and outstanding,
3,188,534 and 3,255,282 shares, respectively 3,189 3,255
Additional paid-in capital 54,594 56,219
Retained earnings 72,284 62,159
Accumulated other comprehensive income (loss),
net of tax (6,905) (6,942)
------------------------------------------------------------------------------------------
Total stockholders' equity 123,162 114,691
------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 123,270 $ 114,891
==========================================================================================
CONDENSED STATEMENTS OF INCOME
--------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
(in thousands) 2000 1999 1998
--------------------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries:
Bank $ 4,000 $ 2,600 $ 500
Association 1,400 9,439 250
Citibank Properties 8 -- --
Other interest income 10 9 25
Other income 9 -- --
--------------------------------------------------------------------------------------------------
Total income 5,427 12,048 775
Total expenses 2,353 2,314 1,406
--------------------------------------------------------------------------------------------------
Operating profit (loss) 3,074 9,734 (631)
--------------------------------------------------------------------------------------------------
Equity in undistributed income (loss) of Subsidiaries:
Bank 6,688 3,824 5,830
Association 561 (14,208) 2,744
Other 50 -- --
--------------------------------------------------------------------------------------------------
7,299 (10,384) 8,574
--------------------------------------------------------------------------------------------------
Income (loss) before income taxes 10,373 (650) 7,943
Income tax benefit 845 956 426
--------------------------------------------------------------------------------------------------
NET INCOME $ 11,218 $ 306 $ 8,369
==================================================================================================
45
46
CONDENSED STATEMENTS OF CASH FLOW
--------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
(in thousands) 2000 1999 1998
--------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 11,218 $ 306 $ 8,369
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Deficiency (excess) of equity in earnings
of subsidiaries over dividends received (7,430) 10,384 (8,574)
Decrease (increase) in other assets (1,207) 171 --
Decrease in other liabilities (92) (785) (247)
--------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,489 10,076 (452)
--------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment -- -- 391
--------------------------------------------------------------------------------------------------
Net cash provided by investing activities -- -- 391
--------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends (1,093) (931) (777)
Stock options exercised -- -- 29
Stock repurchase (1,691) (9,186) --
--------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,784) (10,117) (748)
--------------------------------------------------------------------------------------------------
Decrease in cash (295) (41) (809)
Cash at beginning of year 617 658 1,467
--------------------------------------------------------------------------------------------------
Cash at end of year $ 322 $ 617 $ 658
==================================================================================================
NOTE X - SEGMENT INFORMATION
The Company's business segments are organized around services and products
provided. The segment data presented below was prepared on the same basis of
accounting as the consolidated financial statements as described in Note A.
Intersegment income and expense are valued at prices comparable to those for
unaffiliated companies.
----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) RETAIL WHOLESALE TREASURY ALL OTHER TOTAL
----------------------------------------------------------------------------------------------------------------------
2000:
NET INTEREST INCOME $ 28,359 $ 28,889 $ 702 $ 3,044 $ 60,994
INTERSEGMENT NET INTEREST INCOME (EXPENSE) 1,638 (7,371) 5,733 -- --
PROVISION FOR CREDIT LOSSES 1,736 5,803 -- -- 7,539
OTHER OPERATING INCOME (EXPENSE) (9,227) (7,980) (2,021) (17,427) (36,655)
ADMINISTRATIVE AND OVERHEAD EXPENSE ALLOCATION (8,131) (5,651) (1,308) 15,090 --
INCOME TAX EXPENSE (BENEFIT) 4,354 832 1,241 (845) 5,582
NET INCOME (LOSS) 6,549 1,252 1,865 1,552 11,218
TOTAL ASSETS 833,604 357,193 334,804 195,799 1,721,400
======================================================================================================================
Prior to the Merger of the Bank and the Association on July 1, 2000, the
Company's segments were organized around significant subsidiaries as opposed to
products and services as a combined entity. As a result, comparative segment
data for 1999 is not readily available or practicable to provide.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
47
PART III
Certain information required by Part III is omitted from this Report in that the
Registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference. Only those sections of the Proxy Statement which
specifically address the items set forth herein are incorporated by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers
required by this Item is incorporated by reference to the Company's Proxy
Statement.
The information regarding compliance with Section 16 of the Securities and
Exchange Act of 1934 is to be set forth in the Proxy Statement and is hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the Registrant and its
subsidiaries are included in Item 8:
Independent Auditors' Reports
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Income - For years ended December 31, 2000, 1999 and
1998
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income (Loss) - For years ended December 31, 2000, 1999 and 1998
Consolidated Statement of Cash Flows - For years ended December 31, 2000, 1999
and 1998
Notes to the Consolidated Financial Statements
(b) EXHIBITS
The following exhibits are filed as a part of, or incorporated by reference into
this Report:
Exhibit No. Description
3.1 Articles of Incorporation of CB Bancshares, Inc., incorporated by
reference to Exhibit 3.1 filed with the Registrant's Registration
Statement on Form S-4, Registration No. 33-72340.
3.2 By-laws of CB Bancshares, Inc., incorporated by reference to
Exhibits 3.2 and 3.3 filed with the Registrant's Registration
Statement on Form S-4, Registration No. 33-72340.
4.0 No instrument which defines the rights of holders of long-term
debt, of the registrant and all of its consolidated subsidiaries,
is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the registrant
hereby agrees to furnish a copy of any such instrument to the SEC
upon request.
4.1 Rights Agreement dated as of March 16, 1989, between CB
Bancshares, Inc. and City Bank, Rights Agent, incorporated by
reference to Form 8-A, filed on April 24, 1989 (File No. 0-12396).
4.2 Amendment to Rights Agreement made as of June 21, 1989,
incorporated by reference to Form 8 Amendment No. 1 to Form 8-A,
filed on July 11, 1989 (File No. 0-12396).
4.3 Amendment No. 2 to Rights Agreement entered into as of August 15,
1990, incorporated by reference to Form 8 Amendment No. 2 to Form
8-A, filed on August 28, 1990 (File No. 0-12396).
47
48
4.4 Amendment No. 3 to Rights Agreement entered into as of February
17, 1993, incorporated by reference to Exhibit 4.4 to Form 8-A/A,
Amendment No. 3, filed on March 25, 1999.
4.5 Amendment No. 4 to Rights Agreement entered into as of March 25,
1999, incorporated by reference to Exhibit 4.5 to Form 8-A/A,
Amendment No. 3, filed on March 25, 1999.
10.1 Stock Compensation Plan, incorporated by reference to Exhibit A
and B to the Registrant's Proxy Statement for the January 25, 1995
Special Meeting of Shareholders, filed on December 9, 1995. *
10.2 Form of Stock Option Agreement incorporated by reference to
Exhibit 10.6 of Form 10-K filed on April 1, 1996. *
10.3 Employment agreement between CB Bancshares, Inc. and Ronald M.
Migita, dated May 31,1995, is incorporated by reference to Exhibit
10 to Registrant's Form 10-Q filed on August 14, 1995. *
10.4 Form of Change in Control Agreement is incorporated by reference
to Exhibit 99.2 of Form 8-K filed on April 18, 1996.
10.5 Agreement and Plan of Merger dated as of December 22, 1999, by and
between City Bank and International Savings and Loan Association,
Limited.
10.6 Advances, Security and Deposit Agreement dated as of May 20, 1999
by and between City Bank, including its successors, and the
Federal Home Loan Bank of Seattle.
10.7 Director Stock Option Plan, incorporated by reference to Exhibit 4
files with the Registrant's Registration Statement on Form S-8,
Registration No. 333-81279, filed on June 22, 1999. *
10.8 Directors Deferred Compensation Plan effective April 29, 1999,
incorporated by reference to Exhibit 10.9 to the Registrant's
Form 10-K filed on March 15, 2000. *
10.9 Stock Purchase Agreement dated August 21, 2000, by and between
City Bank and Island Insurance Co., Ltd.
10.10 Stock Purchase Agreement dated August 21, 2000, by and between
City Bank and the Trustees of the Hawaii Electricians Health and
Welfare Fund.
10.11 Stock Purchase Agreement dated August 21, 2000, by and between
City Bank and the Trustees of the Hawaii Electricians Pension
Fund.
16 Letter re: change in certifying accountant, incorporated by
reference to Exhibit 16 to Registrant's Form 10-K filed on March
15, 2000.
18 Letter re: change in accounting principles, incorporated by
reference to Exhibit 17 to Registrant's Form 10-K filed on March
15, 2000.
21 Subsidiaries of the Registrant.
23 Consent of experts and counsel.
* Management contract or compensatory plan or arrangement.
All other schedules are omitted because they are not applicable, not material,
or because the information is included in the financial statement or the notes
thereto.
(c) REPORTS ON FORM 8-K
The Company has filed no reports on form 8-K for the quarter ended December 31,
2000.
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SIGNATURES
Pursuant to the Requirement 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.
Date: March 15, 2001 CB BANCSHARES, INC.
/s/ Ronald K. Migita
--------------------------------------
Ronald K. Migita, President 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 and
in the capacities and on the date indicated.
Date: March 15, 2001
/s/ Donald J. Andres /s/ Tomio Fuchu
------------------------------------ --------------------------------------
Donald J. Andres, Director Tomio Fuchu, Vice Chairman
/s/ Colbert M. Matsumoto /s/ Larry K. Matsuo
------------------------------------ --------------------------------------
Colbert M. Matsumoto, Director Larry K. Matsuo, Director
/s/ Ronald K. Migita /s/ Caryn S. Morita
------------------------------------ --------------------------------------
Ronald K. Migita, President, Chief Caryn S. Morita, Director
Executive Officer and Director
/s/ Hiroshi Sakai /s/ Calvin K. Y. Say
------------------------------------ --------------------------------------
Hiroshi Sakai, Director Calvin K. Y. Say, Director
/s/ Yoshiki Takada /s/ Lionel Y. Tokioka
------------------------------------ --------------------------------------
Yoshiki Takada, Director Lionel Y. Tokioka, Chairman of the
Board
/s/ Dwight L. Yoshimura /s/ James H. Kamo
------------------------------------ --------------------------------------
Dwight L. Yoshimura, Director James H. Kamo, Secretary
/s/ Dean K. Hirata
------------------------------------
Dean K. Hirata, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Incorporation of CB Bancshares, Inc., incorporated by
reference to Exhibit 3.1 filed with the Registrant's Registration
Statement on Form S-4, Registration No. 33-72340.
3.2 By-laws of CB Bancshares, Inc., incorporated by reference to
Exhibits 3.2 and 3.3 filed with the Registrant's Registration
Statement on Form S-4, Registration No. 33-72340.
4.0 No instrument which defines the rights of holders of long-term
debt, of the registrant and all of its consolidated subsidiaries,
is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the registrant
hereby agrees to furnish a copy of any such instrument to the SEC
upon request.
4.1 Rights Agreement dated as of March 16, 1989, between CB
Bancshares, Inc. and City Bank, Rights Agent, incorporated by
reference to Form 8-A, filed on April 24, 1989 (File No. 0-12396).
4.2 Amendment to Rights Agreement made as of June 21, 1989,
incorporated by reference to Form 8 Amendment No. 1 to Form 8-A,
filed on July 11, 1989 (File No. 0-12396).
4.3 Amendment No. 2 to Rights Agreement entered into as of August 15,
1990, incorporated by reference to Form 8 Amendment No. 2 to Form
8-A, filed on August 28, 1990 (File No. 0-12396).
4.4 Amendment No. 3 to Rights Agreement entered into as of February
17, 1993, incorporated by reference to Exhibit 4.4 to Form 8-A/A,
Amendment No. 3, filed on March 25, 1999.
4.5 Amendment No. 4 to Rights Agreement entered into as of March 25,
1999, incorporated by reference to Exhibit 4.5 to Form 8-A/A,
Amendment No. 3, filed on March 25, 1999.
10.1 Stock Compensation Plan, incorporated by reference to Exhibit A
and B to the Registrant's Proxy Statement for the January 25, 1995
Special Meeting of Shareholders, filed on December 9, 1995. *
10.2 Form of Stock Option Agreement incorporated by reference to
Exhibit 10.6 of Form 10-K filed on April 1, 1996. *
10.3 Employment agreement between CB Bancshares, Inc. and Ronald M.
Migita, dated May 31,1995, is incorporated by reference to Exhibit
10 to Registrant's Form 10-Q filed on August 14, 1995. *
10.4 Form of Change in Control Agreement is incorporated by reference
to Exhibit 99.2 of Form 8-K filed on April 18, 1996.
10.5 Agreement and Plan of Merger dated as of December 22, 1999, by and
between City Bank and International Savings and Loan Association,
Limited.
10.6 Advances, Security and Deposit Agreement dated as of May 20, 1999
by and between City Bank, including its successors, and the
Federal Home Loan Bank of Seattle.
10.7 Director Stock Option Plan, incorporated by reference to Exhibit 4
files with the Registrant's Registration Statement on Form S-8,
Registration No. 333-81279, filed on June 22, 1999. *
10.8 Directors Deferred Compensation Plan effective April 29, 1999,
incorporated by reference to Exhibit 10.9 to the Registrant's
Form 10-K filed on March 15, 2000. *
10.9 Stock Purchase Agreement dated August 21, 2000, by and between
City Bank and Island Insurance Co., Ltd.
10.10 Stock Purchase Agreement dated August 21, 2000, by and between
City Bank and the Trustees of the Hawaii Electricians Health and
Welfare Fund.
10.11 Stock Purchase Agreement dated August 21, 2000, by and between
City Bank and the Trustees of the Hawaii Electricians Pension
Fund.
16 Letter re: change in certifying accountant, incorporated by
reference to Exhibit 16 to Registrant's Form 10-K filed on March
15, 2000.
18 Letter re: change in accounting principles, incorporated by
reference to Exhibit 17 to Registrant's Form 10-K filed on March
15, 2000.
21 Subsidiaries of the Registrant.
23 Consent of experts and counsel.
* Management contract or compensatory plan or arrangement.
50