As filed with the Securities and Exchange Commission on March 29, 1996 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Mark One [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1995 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from ________ to ________. Commission file number 0-10777 CPB INC. (Exact name of registrant as specified in its charter) Hawaii 99-0212597 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 220 South King Street, Honolulu, Hawaii 96813 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (808) 544-0500
Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X] As of February 29, 1996, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $123,358,455. Number of shares of common stock of the registrant outstanding as of February 29, 1996: 5,263,222 shares The following documents are incorporated by reference herein: Part of Form 10-K Into Which Document Incorporated Incorporated - ------------------------------------- --------------- 1995 Annual Report Parts II and IV Definitive Proxy Statement for the Annual Meeting of Shareholders which will be filed within 120 days of the fiscal year ended December 31, 1995 Part III
PART I. ITEM 1. BUSINESS Organization CPB Inc. (the "Company") is a Hawaii corporation organized on February 1, 1982 pursuant to a Plan of Reorganization and Agreement of Merger as a bank holding company and is subject to the Bank Holding Company Act of 1956, as amended. The Company's principal business is to serve as a holding company for its sole subsidiary, Central Pacific Bank (the "Bank"). The Bank was incorporated in its present form in the State of Hawaii on March 16, 1982 in connection with the holding company reorganization, and its predecessor entity was incorporated in the State of Hawaii on January 15, 1954. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to applicable limits. The Bank is not a member of the Federal Reserve System. Based on total consolidated assets at December 31, 1995, the Company was the fourth largest bank holding company in Hawaii. The Bank owns 100% of the outstanding stock of CPB Properties, Inc. ("CPB Properties"), a company which is the managing partner and 50% owner of CKSS Associates ("CKSS"), a Hawaii limited partnership. CKSS owns Central Pacific Plaza, in which the Company's and Bank's headquarters and main office are located. CKSS also developed the Kaimuki Plaza, in which one of the Bank's branch offices is located. In addition, CPB Properties owns the properties on which one of the Bank's branch offices and the Bank's operations center are located, as well as the property underlying the Kaimuki Plaza. See "ITEM 2. PROPERTIES." The principal office of the Company is located at 220 South King Street, Honolulu, Hawaii 96813, and its telephone number is (808) 544-0500. Banking Services The Bank is a full-service commercial bank which currently has 24 banking offices located throughout the State of Hawaii. Its administrative and main office is located in Honolulu, and there are 17 other branches on the island of Oahu. In addition, the Bank maintains one branch on the island of Maui, two branches on the island of Kauai and three branches on the island of Hawaii. In 1995, the Bank opened three in-store branches, two in Daiei Stores on the island of Oahu and one in Sure Save Supermarket in Hilo, on the island of Hawaii. Through its network of banking offices, the Bank emphasizes personalized services and offers a full range of banking services to small- and medium-sized businesses, professionals and individuals in Hawaii. 3
The Bank offers a variety of deposit instruments. These include personal and business checking and savings accounts, including interest-bearing negotiable order of withdrawal ("NOW") accounts, money market accounts and time certificates of deposit. The Bank engages in a broad range of lending activities including the granting of commercial, consumer and real estate loans, with particular emphasis on loans with short- to medium-term maturities and adjustable interest rates. The Bank offers inventory and accounts receivable financing, furniture, fixture and equipment financing, short-term operating loans, and commercial real estate and construction loans. Consumer loans include home equity lines of credit, loans for automobiles, home improvement and debt consolidation, personal and professional lines of credit and other installment and term loans for other personal needs. The Bank also provides specialized services designed to attract and service the needs of commercial customers and account holders. These services include cash management services, merchant windows, travelers' checks, safe deposit boxes, international banking services, night depository facilities and wire transfer services. The Bank's Trust Division, which was established in 1993, offers asset management and custody services for a variety of accounts including revocable and irrevocable trusts, agency accounts, guardianships of property, charitable remainder trusts and probates. The Bank offers VISA and MasterCard credit card services to its customers. Credit card transactions are cleared through Bancard Association of Hawaii, Inc. ("BAHI"), a Hawaii corporation, jointly owned by the Bank and two other Hawaii banks. BAHI does not operate at a profit or provide the Bank with a source of income, and the Bank's investment in, and payment of operating expenses to, BAHI is not a material amount. The Bank also offers CHECK CARD, a debit card service, to its customers. The Bank is a member of the Plus ATM Network. The related capital investment was not a material amount. The Bank also offers an Infoline service, providing telephonic account information, bill payment and funds transfer services. Market Area and Competition The Bank competes in the financial services industry mainly targeting the retail and small to midsized businesses. The 4
market is highly competitive with 6 commercial banks, 6 savings and loans and numerous credit unions and finance companies operating in the State of Hawaii. The two largest banks in the state are pursuing aggressive strategies to increase market share and to deliver new services. Bancorp Hawaii, Inc. had over $13.2 billion in total assets at year end 1995. Based on call report data filed with the FDIC, Bank of Hawaii, the subsidiary bank, maintains approximately 43% of the deposits held by banks in the State of Hawaii. First Hawaiian, Inc. is the second largest bank holding company with over $7.5 billion in assets at year end 1995. Based on call report data filed with the FDIC, First Hawaiian Bank, the subsidiary bank, has approximately a 38% share of the deposit market. Based on call report data filed with the FDIC, the Bank is the third largest bank with market share of approximately 10%. At $1.4 billion in assets, the Bank is building its position in the marketplace as a community bank which is large enough to provide a wide range of banking services and small enough to provide personalized service. The two large banks tend to lead the market with respect to new products and pricing. The Bank competes by offering proven products with superior service levels at competitive prices. The Bank has a distribution network of 24 branches and has a strong capital base to enable expansion opportunities in its quest to better serve its targeted market of retail customers and small to medium-sized businesses. With recent consolidation in the financial industry, competition has intensified. The larger institutions are very focused in the business banking and personal banking areas, while leveraging their large branch and electronic banking networks to attract retail customers. The Bank faces substantial competition for deposits and loans throughout its market areas. Competition for deposits comes primarily from other commercial banks, savings institutions, credit unions, money market funds and other investment alternatives. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. Competition for loans comes primarily from other commercial banks, savings institutions, mortgage banking firms, credit unions and other financial intermediaries. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services. The Bank faces competition for deposits and loans throughout its market areas not only from local institutions but also from out-of-state financial intermediaries which have opened loan production offices or which solicit deposits in its market areas. Many of the financial intermediaries operating in the Bank's market areas offer certain services, such as investment and international banking services, 5
which the Bank does not offer directly. Additionally, banks with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the needs of larger customers. See "ITEM 1. BUSINESS - Effect of Governmental Policies and Recent Legislation." Effect of Governmental Policies and Recent Legislation Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Bank on its deposits and its other borrowings and the interest rate received by the Bank on loans extended to its customers and securities held in the Bank's portfolio comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Bank. Accordingly, the earnings and growth of the Company are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment. The commercial banking business is not only affected by general economic conditions but also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Federal Reserve Board. The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, in the Hawaii state legislature and before various bank regulatory and other professional agencies. The Financial Services Modernization Act recently proposed in the House of Representatives would generally permit banks to expand activities further into the areas of securities and insurance, and would reduce the regulatory and paperwork burden that currently affects banks. Additionally, the proposed legislation would force the conversion of savings and 6
loan holding companies into bank holding companies, although unitary savings and loan holding companies authorized to engage in activities as of January 1, 1995 would be exempted. Similar legislation has also been proposed in the Senate. In addition, legislation was recently introduced in Congress that would merge the deposit insurance funds applicable to commercial banks and savings associations and impose a one-time assessment on savings associations to recapitalize the deposit insurance fund applicable to savings associations. The likelihood of any major legislative changes and the impact such changes might have on the Company are impossible to predict. See "ITEM 1. BUSINESS - Supervision and Regulation." Supervision and Regulation Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain laws which relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations. The Company The Company, as a registered bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may conduct examinations of the Company and its subsidiaries. The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the BHCA and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, the Company is required by the Federal Reserve Board to maintain certain 7
levels of capital. See "ITEM 1. BUSINESS - Supervision and Regulation - Capital Standards." The Company is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company. The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company, subject to the prior approval of the Federal Reserve Board, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making any such determination, the Federal Reserve Board is required to consider whether the performance of such activities by the Company or an affiliate can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between activities commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. This doctrine has become known as the "source of strength" doctrine. Although the United States Court of Appeals for the Fifth Circuit found the Federal Reserve Board's source of strength doctrine invalid in 1990, stating that the Federal 8
Reserve Board had no authority to assert the doctrine under the BHCA, the decision, which is not binding on federal courts outside the Fifth Circuit, was recently reversed by the United States Supreme Court on procedural grounds. The validity of the source of strength doctrine is likely to continue to be the subject of litigation until definitively resolved by the courts or by Congress. The Bank The Bank, as a Hawaii state-chartered bank, is subject to primary supervision, periodic examination and regulation by the Hawaii Commissioner of Financial Institutions ("Commissioner") and the FDIC. If, as a result of an examination of a bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of the bank's operations are unsatisfactory or that the bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the bank, to assess civil monetary penalties, to remove officers and directors and ultimately to terminate a bank's deposit insurance, which for a Hawaii state-chartered bank would result in a revocation of the bank's charter. The Commissioner has many of the same remedial powers. The Bank has never been the subject of any such actions by the FDIC or the Commissioner. The deposits of the Bank are insured by the FDIC in the manner and to the extent provided by law. For this protection, the Bank pays a semiannual statutory assessment. See "ITEM 1. BUSINESS - Supervision and Regulation - Premiums for Deposit Insurance." Although the Bank is not a member of the Federal Reserve System, it is nevertheless subject to certain regulations of the Federal Reserve Board. Various requirements and restrictions under the laws of the State of Hawaii and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices and capital requirements. Further, the Bank is required to maintain certain levels of capital. See "ITEM 1. BUSINESS - Supervision and Regulation - Capital Standards." 9
Restrictions on Transfers of Funds to the Company by the Bank The Company is a legal entity separate and distinct from the Bank and its subsidiary. There are statutory and regulatory limitations on the amount of dividends which may be paid to the Company by the Bank. Hawaii law provides that a state-chartered bank may not declare or pay any dividend in an amount greater than its undivided profits then on hand, deducting therefrom all losses; all debts, unless the same are well secured, in which interest for a period of one year is unpaid and debts upon which final judgment has been recovered but has been for more than one year unsatisfied and on which interest for a period of one year is unpaid, unless the same are well secured; all assets which a banking examiner may have required to be charged off; and all expenses, interest, taxes, and depreciation. The FDIC also has authority to prohibit the Bank from engaging in activities that, in the FDIC's opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay. See "ITEM 1. BUSINESS - Supervision and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms" and "- 10
Capital Standards" for a discussion of these additional restrictions on capital distributions. At present, substantially all of the Company's revenues, including funds available for the payment of dividends and other operating expenses, are, and will continue to be, primarily dividends paid by the Bank. At December 31, 1995, the Bank had $82.7 million in retained earnings available for the payment of cash dividends. The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of or investments in stock or other securities thereof, the taking of such securities as collateral for loans and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliate is limited to 10% of the Bank's capital and surplus (as defined by federal regulations) and such secured loans and investments are limited, in the aggregate, to 20% of the Bank's capital and surplus (as defined by federal regulations). Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "ITEM 1. BUSINESS - Supervision and Regulation - Prompt Corrective Action and Other Enforcement Mechanisms." Capital Standards The Federal Reserve Board and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off-balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets. The regulators measure risk-adjusted assets, which includes off-balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts 11
of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, noncumulative perpetual preferred stock (cumulative perpetual preferred stock for bank holding companies) and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, long term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or 4% to 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. In August 1995, the federal banking agencies adopted final regulations specifying that the agencies will include in their evaluations of a bank's capital adequacy an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. The final regulations, however, do not include a measurement framework for assessing the level of a bank's exposure to interest rate risk, which is the subject of a proposed policy statement issued by the federal banking agencies concurrently with the final regulations. The proposal would measure interest rate risk in relation to the effect of a 200 basis point change in market interest rates on the economic value of a bank. Banks with high levels of measured exposure or weak management systems generally will be required to hold additional capital for interest rate risk. The specific amount of capital that may be needed would be determined on a case-by-case basis by the examiner and the appropriate federal banking agency. Because this proposal has only recently been issued, the Bank currently is unable to predict the impact of the proposal on the Bank if the policy statement is adopted as proposed. In January 1995, the federal banking agencies issued a final rule relating to capital standards and the risks arising from the concentration of credit and nontraditional 12
activities. Institutions which have significant amounts of their assets concentrated in high risk loans or nontraditional banking activities and who fail to adequately manage these risks, will be required to set aside capital in excess of the regulatory minimums. The federal banking agencies have not imposed any quantitative assessment for determining when these risks are significant, but have identified these issues as important factors they will review in assessing an individual bank's capital adequacy. In December 1993, the federal banking agencies issued an interagency policy statement on the allowance for loan and lease losses which, among other things, establishes certain benchmark ratios of loan loss reserves to classified assets. The benchmark set forth by such policy statement is the sum of (a) assets classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of assets classified substandard; and (d) estimated credit losses on other assets over the upcoming 12 months. 13
Federally supervised banks and savings associations are currently required to report deferred tax assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." See "ITEM 1. BUSINESS - - Supervision and Regulation - Accounting Changes." The federal banking agencies recently issued final rules effective April 1, 1995, which limit the amount of deferred tax assets that are allowable in computing an institution's regulatory capital. The standard has been in effect on an interim basis since March 1993. Deferred tax assets that can be realized for taxes paid in prior carryback years and from future reversals of existing taxable temporary differences are generally not limited. Deferred tax assets that can only be realized through future taxable earnings are limited for regulatory capital purposes to the lesser of (i) the amount that can be realized within one year of the quarter-end report date, or (ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess of this limit would be excluded from Tier 1 Capital and total assets and regulatory capital calculations. See Notes 1 and 18 to the Company's Consolidated Financial Statements in the 1995 Annual Report to Shareholders which is incorporated herein by reference. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the Bank to grow and could restrict the amount of profits, if any, available for the payment of dividends. The following table presents the amounts of regulatory capital and the capital ratios for the Company and the Bank, compared to its minimum regulatory capital requirements as of December 31, 1995. 14
The Company December 31, 1995 Actual Minimum ----------------- Capital Amount Ratio Requirement ------ ----- ----------- (Dollars in thousands) Leverage capital $131,795 9.61% 3.00% Tier 1 risk-based 131,795 12.35 4.00 capital Total risk-based capital 145,219 13.61 8.00 The Bank December 31, 1995 Actual Minimum ----------------- Capital Amount Ratio Requirement ------ ----- ----------- (Dollars in thousands) Leverage capital $122,538 8.99% 3.00% Tier 1 risk-based 122,538 11.05 4.00 capital Total risk-based capital 136,474 12.31 8.00 Prompt Corrective Action and Other Enforcement Mechanisms Federal law requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. In September 1992, the federal banking agencies issued uniform final regulations implementing the prompt corrective action provisions of federal law. An insured depository institution generally will be classified in the following categories based on capital measures indicated below: "Well capitalized" "Adequately capitalized" Total risk-based capital of 10%; Total risk-based capital Tier 1 risk-based capital of 6%; and of 8%; Leverage ratio of 5%. Tier 1 risk-based capital of 4%; and Leverage ratio
of 4%. "Undercapitalized" "Significantly Total risk-based capital less than undercapitalized" 8%; Tier 1 risk-based capital less Total risk-based capital than 4%; or Leverage ratio less than less than 6%; or Tier 1 4%. (3% if the institution receives risk-based capital less the highest rating from its primary than 3%; or Leverage regulator) ratio less than 3%. "Critically undercapitalized" Tangible equity to total assets less than 2%. 15
An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat an institution as "critically undercapitalized" unless its capital ratio actually warrants such treatment. The law prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. If an insured depository institution is undercapitalized, it will be closely monitored by the appropriate federal banking agency, subject to asset growth restrictions and required to obtain prior regulatory approval for acquisitions, branching and engaging in new lines of business. Any undercapitalized depository institution must submit an acceptable capital restoration plan to the appropriate federal banking agency 45 days after becoming undercapitalized. The appropriate federal banking agency cannot accept a capital plan unless, among other things, it determines that the plan (i) specifies the steps the institution will take to become adequately capitalized, (ii) is based on realistic assumptions and (iii) is likely to succeed in restoring the depository institution's capital. In addition, each company controlling an undercapitalized depository institution must guarantee that the institution will comply with the capital plan until the depository institution has been adequately capitalized on an average basis during each of four consecutive calendar quarters and must otherwise provide adequate assurances of performance. The aggregate liability of such guarantee is limited to the lesser of (a) an amount equal to 5% of the depository institution's total assets at the time the institution became undercapitalized or (b) the amount which is necessary to bring the institution into compliance with all capital standards applicable to such institution as of the time the institution fails to comply with its capital restoration plan. Finally, the appropriate federal banking agency may impose any of the additional restrictions or sanctions that it may impose on significantly undercapitalized institutions if it determines that such action will further the purpose of the prompt corrective action provisions. An insured depository institution that is significantly undercapitalized, or is undercapitalized and fails to submit, or in a material respect to implement, an acceptable capital restoration plan, is subject to additional restrictions and 16
sanctions. These include, among other things: (i) a forced sale of voting shares to raise capital or, if grounds exist for appointment of a receiver or conservator, a forced merger; (ii) restrictions on transactions with affiliates; (iii) further limitations on interest rates paid on deposits; (iv) further restrictions on growth or required shrinkage; (v) modification or termination of specified activities; (vi) replacement of directors or senior executive officers; (vii) prohibitions on the receipt of deposits from correspondent institutions; (viii) restrictions on capital distributions by the holding companies of such institutions; (ix) required divestiture of subsidiaries by the institution; or (x) other restrictions as determined by the appropriate federal banking agency. Although the appropriate federal banking agency has discretion to determine which of the foregoing restrictions or sanctions it will seek to impose, it is required to force a sale of voting shares or merger, impose restrictions on affiliate transactions and impose restrictions on rates paid on deposits unless it determines that such actions would not further the purpose of the prompt corrective action provisions. In addition, without the prior written approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to its senior executive officers or provide compensation to any of them at a rate that exceeds such officer's average rate of base compensation during the 12 calendar months preceding the month in which the institution became undercapitalized. Further restrictions and sanctions are required to be imposed on insured depository institutions that are critically undercapitalized. For example, a critically undercapitalized institution generally would be prohibited from engaging in any material transaction other than in the ordinary course of business without prior regulatory approval and could not, with certain exceptions, make any payment of principal or interest on its subordinated debt beginning 60 days after becoming critically undercapitalized. Most importantly, however, except under limited circumstances, the appropriate federal banking agency, not later than 90 days after an insured depository institution becomes critically undercapitalized, is required to appoint a conservator or receiver for the institution. The board of directors of an insured depository institution would not be liable to the institution's shareholders or creditors for consenting in good faith to the appointment of a receiver or conservator or to an acquisition or merger as required by the regulator. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the 17
imposition of a conservator or receiver, the issuance of a cease and desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Safety and Soundness Standards In July 1995, the federal banking agencies adopted final guidelines establishing standards for safety and soundness, as required by FDICIA. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Guidelines for asset quality and earnings standards will be adopted in the future. The guidelines establish the safety and soundness standards that the agencies will use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action. In December 1992, the federal banking agencies issued final regulations prescribing uniform guidelines for real estate lending. The regulations, which became effective on March 19, 1993, require insured depository institutions to adopt written policies establishing standards, consistent with such guidelines, for extensions of credit secured by real estate. The policies must address loan portfolio management, underwriting standards and loan to value limits that do not exceed the supervisory limits prescribed by the regulations. Appraisals for "real estate related financial transactions" must be conducted by either state certified or state licensed appraisers for transactions in excess of certain amounts. State certified appraisers are required for all transactions with a transaction value of $1,000,000 or more; for all nonresidential transactions valued at $250,000 or more; and for "complex" 1-4 family residential properties of $250,000 or more. A state licensed appraiser is required for all other appraisals. However, appraisals performed in connection with "federally related transactions" must now comply with the agencies' appraisal standards. Federally related transactions include the sale, lease, purchase, investment in, or exchange of, real property or interests in real property, the financing or 18
refinancing of real property, and the use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities. 19
Premiums for Deposit Insurance Federal law has established several mechanisms to increase funds to protect deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. The result of these provisions is that the assessment rate on deposits of BIF members could increase in the future. The FDIC also has authority to impose special assessments against insured deposits. The FDIC implemented a final risk-based assessment system, as required by FDICIA, effective January 1, 1994, under which an institution's premium assessment is based on the probability that the deposit insurance fund will incur a loss with respect to the institution, the likely amount of any such loss, and the revenue needs of the deposit insurance fund. As long as BIF's reserve ratio is less than a specified "designated reserve ratio," 1.25%, the total amount raised from BIF members by the risk-based assessment system may not be less than the amount that would be raised if the assessment rate for all BIF members were .023% of deposits. On August 8, 1995, the FDIC announced that the designated reserve ratio had been achieved and, accordingly, issued final regulations adopting an assessment rate schedule for BIF members of 4 to 31 basis points effective on June 1, 1995. On November 14, 1995, the FDIC further reduced deposit insurance premiums to a range of 0 to 27 basis points effective for the semi-annual period beginning January 1, 1996. Under the risk-based assessment system, a BIF member institution such as the Bank is categorized into one of three capital categories (well capitalized, adequately capitalized, and undercapitalized) and one of three categories based on supervisory evaluations by its primary federal regulator (in the Bank's case, the FDIC). The three supervisory categories are: financially sound with only a few minor weaknesses (Group A), demonstrates weaknesses that could result in significant deterioration (Group B), and poses a substantial probability of loss (Group C). The capital ratios used by the FDIC to define well-capitalized, adequately capitalized and undercapitalized are the same in the FDIC's prompt corrective action regulations. The BIF assessment rates are summarized below; assessment figures are expressed in terms of cents per $100 in deposits. 20
Assessment Rates Effective Through the First Half of 1995 Group A Group B Group C -------- -------- ------- Well Capitalized............................ 23 26 29 Adequately Capitalized...................... 26 29 30 Undercapitalized............................ 29 30 31 <TABLE> <CAPTION> Assessment Rates Effective through the Second Half of 1995 Group A Group B Group C -------- -------- -------- <S> <C> <C> <C> Well Capitalized............................ 4 7 21 Adequately Capitalized...................... 7 14 28 Undercapitalized............................ 14 28 31 </TABLE> <TABLE> <CAPTION> Assessment Rates Effective January 1, 1996 Group A Group B Group C -------- ------- ------- <S> <C> <C> <C> Well Capitalized............................ 0 3 17 Adequately Capitalized...................... 3<F1> 10 24 Undercapitalized............................ 10 24 27 <FN> <F1> Subject to a statutory minimum assessment of $1,000 per semi-annual period (which also applies to all other assessment risk classifications). </FN> </TABLE> A number of proposals have recently been introduced in Congress to address the disparity in bank and thrift deposit insurance premiums. On September 19, 1995, legislation was introduced and referred to the House Banking Committee that would, among other things: (i) impose a requirement on all SAIF member institutions to fully recapitalize the SAIF by paying a one-time special assessment of approximately 85 basis points on all assessable deposits as of March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread the responsibility for FICO interest payments across all FDIC-insured institutions on a pro-rata basis, subject to certain exceptions; (iii) require that deposit insurance premium assessment rates applicable to SAIF member institutions be no less than deposit insurance premium assessment rates applicable to BIF member institutions; (iv) provide for a merger of the BIF and the SAIF as of January 1, 1998; (v) require savings associations to convert to state or national bank charters by January 1, 1998; (vi) 21
require savings associations to divest any activities not permissible for commercial banks within five years; (vii) eliminate the bad-debt reserve deduction for savings associations, although savings associations would not be required to recapture into income their accumulated bad-debt reserves; (viii) provide for the conversion of savings and loan holding companies into bank holding companies as of January 1, 1998, although unitary savings and loan holding companies authorized to engage in activities as of September 13, 1995 would have such authority grandfathered (subject to certain limitations); and (ix) abolish the OTS and transfer the OTS' regulatory authority to the other federal banking agencies. The legislation would also provide that any savings association that would become undercapitalized under the prompt corrective action regulations as a result of the special deposit premium assessment could be exempted from payment of the assessment, provided that the institution would continue to be subject to the payment of semiannual assessments under the current rate schedule following the recapitalization of the SAIF. The legislation was considered and passed by the House Banking Committee's Subcommittee on Financial Institutions on September 27, 1995, and has not yet been acted on by the full House Banking Committee. On September 20, 1995, similar legislation was introduced in the Senate, although the Senate bill does not include a comprehensive approach for merging the savings association and commercial bank charters. The Senate bill remains pending before the Senate Banking Committee. The future of both these bills is linked with that of pending budget reconciliation legislation since some of the major features of the bills are included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill, which was passed by both the House and Senate on November 17, 1995 and vetoed by the President on December 6, 1995, would: (i) recapitalize the SAIF through a special assessment of between 70 and 80 basis points on deposits held by institutions as of March 31, 1995; (ii) provide an exemption to this rule for weak institutions, and a 20% reduction in the SAIF-assessable deposits of so-called "Oakar banks;" (iii) expand the assessment base for FICO payments to include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1, 1998, only if no insured depository institution is a savings association on that date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi) prohibit the FDIC from setting semiannual assessments in excess of the amount needed to maintain the reserve ratio of any fund at the designated reserve ratio. The bill does not include a provision to merge the charters of savings associations and commercial banks. In light of ongoing debate over the content and fate of the budget bill, the different proposals currently under consideration and the uncertainty of the Congressional budget and legislative 22
processes in general, management cannot predict whether any or all of the proposed legislation will be passed, or in what form. Accordingly, the effect of any such legislation on the Bank cannot be determined. 23
Interstate Banking and Branching In September 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate Act, beginning one year after the date of enactment, a bank holding company that is adequately capitalized and managed may obtain approval under the BHCA to acquire an existing bank located in another state without regard to state law. A bank holding company would not be permitted to make such an acquisition if, upon consummation, it would control (a) more than 10% of the total amount of deposits of insured depository institutions in the United States or (b) 30% or more of the deposits in the state in which the bank is located. A state may limit the percentage of total deposits that may be held in that state by any one bank or bank holding company if application of such limitation does not discriminate against out-of-state banks. An out-of-state bank holding company may not acquire a state bank in existence for less than a minimum length of time that may be prescribed by state law except that a state may not impose more than a five year existence requirement. The Interstate Act also permits, beginning June 1, 1997, mergers of insured banks located in different states and conversion of the branches of the acquired bank into branches of the resulting bank. Each state may permit such combinations earlier than June 1, 1997, and may adopt legislation to prohibit interstate mergers after that date in that state or in other states by that state's banks. The same concentration limits discussed in the preceding paragraph apply. The Interstate Act also permits a national or state bank to establish branches in a state other than its home state if permitted by the laws of that state, subject to the same requirements and conditions as for a merger transaction. In April 1995, the Hawaii legislature enacted legislation to make necessary changes to Hawaii law to harmonize it with the interstate banking legislation passed by Congress. Currently, Hawaii law permits limited reciprocal banking between Hawaii and Guam, American Samoa, the Federated States of Micronesia, the Republic of Palau, the Commonwealth of the Northern Marianas and the Republic of the Marshall Islands. In January 1996, legislation was introduced to permit interstate branching under the Interstate Act. The Company cannot predict whether such legislation will be enacted by the Hawaii legislature. The Interstate Act is likely to increase competition in the Company's market areas especially from larger financial institutions and their holding companies. It is difficult to assess the impact such likely increased competition will have on the Company's operations. 24
Community Reinvestment Act and Fair Lending Developments The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. The FDIC has rated the Bank "Satisfactory" in complying with its CRA obligations. In May 1995, the federal banking agencies issued final regulations which change the manner in which they measure a bank's compliance with its CRA obligations. The final regulations adopt a performance-based evaluation system which bases CRA ratings on an institution's actual lending service and investment performance rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural requirements. In March 1994, the Federal Interagency Task Force on Fair Lending issued a policy statement on discrimination in lending. The policy statement describes the three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment and evidence of disparate impact. Accounting Changes In February 1992, the Financial Accounting Standards Board ("FASB") issued SFAS No. 109, "Accounting for Income Taxes," which superseded SFAS No. 96 of the same title. SFAS No. 109, which became effective for fiscal years beginning after December 31, 1992, employs an asset and liability approach in accounting for income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements and as measured by the provisions of enacted tax laws. Adoption by the Company of SFAS No. 109 did not have a material impact on the Company's results of operations. In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," which is effective for fiscal years ending after December 15, 1992 (December 15, 1995 in the case of entities with less than $150 million in total assets). SFAS No. 107 requires financial intermediaries to disclose, either in the body of their financial statements or in the accompanying notes, the "fair value" of financial instruments 25
for which it is "practicable to estimate that value." SFAS No. 107 defines "fair value" as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Quoted market prices, if available, are deemed the best evidence of the fair value of such instruments. Most deposit and loan instruments issued by financial intermediaries are subject to SFAS No. 107, and its effect will be to require financial statement disclosure of the fair value of most of the assets and liabilities of financial intermediaries such as the Company and the Bank. The disclosure required by SFAS No. 107 at December 31, 1995 and 1994 is presented in Note 23 to the Company's Consolidated Financial Statements. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." Management is unable to predict what effect, if any, such disclosure requirements could have on the market price of the common stock of the Company or its ability to raise funds in the financial markets. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," which was subsequently amended by SFAS No. 118 in October 1994. SFAS No. 114 prescribes the recognition criterion for loan impairment and the measurement methods for certain impaired loans and loans whose terms are modified in troubled debt restructurings. SFAS No. 114 states that a loan is impaired when it is probable that a creditor will be unable to collect all principal and interest amounts due according to the contracted terms of the loan agreement. A creditor is required to measure impairment by discounting expected future cash flows at the loan's effective interest rate, or by reference to an observable market price, or by the fair value of the collateral if the loan is collateral dependent or if foreclosure is probable. SFAS No. 114 also clarifies the existing accounting for in-substance foreclosures by stating that a collateral-dependent real estate loan would be reported as real estate owned only if the lender had taken possession of collateral. SFAS No. 118 amended SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. To accomplish that, it eliminated the provisions in SFAS No. 114 that described how a creditor should report income on an impaired loan. SFAS No. 118 did not change the provisions in SFAS No. 114 that require a creditor to measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. SFAS No. 118 amends the disclosure requirements in SFAS No. 114 to require information about the recorded investments in certain impaired loans and about how a creditor recognizes interest income related to those impaired loans. SFAS No. 114 is effective for financial statements issued for fiscal years beginning after December 15, 1994. Although earlier 26
application is encouraged, it is not required. SFAS No. 118 is effective concurrent with the effective date of SFAS No. 114. The Company adopted SFAS No. 114 and 118 as of January 1, 1995. The effects of the new accounting pronouncements were not material. In May 1993, the FASB issued SFAS No. 115 "Accounting For Certain Investments in Debt and Equity Securities" addressing the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments would be classified in three categories and accounted for as follows: (i) debt and equity securities that the entity has the positive intent and ability to hold to maturity would be classified as "held to maturity" and reported at amortized cost; (ii) debt and equity securities that are held for current resale would be classified as trading securities and reported at fair value, with unrealized gains and losses included in operations; and (iii) debt and equity securities not classified as either securities held to maturity or trading securities would be classified as securities available for sale, and reported at fair value, with unrealized gains and losses excluded from operations and reported as a separate component of shareholders' equity. The statement is effective for financial statements for calendar year 1994, but may be applied to an earlier fiscal year for which annual financial statements have not been issued. The Company adopted SFAS No. 115 as of January 1, 1994. The effects of adoption of SFAS No. 115 are set forth in Note 1 to the Company's Consolidated Financial Statements. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." In October 1994, the FASB issued SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments." SFAS No. 119 amends SFAS No. 105, "Disclosures of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," and SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No. 119 requires the disclosure of comparable information for options and other similar financial instruments that previously were not within the scope of SFAS No. 105. SFAS No. 119 defines a "derivative" financial instrument as a future, forward, swap, option contract or other financial instrument with similar characteristics. The Bank does not use futures, forwards, swaps or option contracts either for trading or for any other purposes, with the exception of a limited amount of foreign exchange forward contracts used to satisfy customer and operational needs. Foreign exchange forward contracts outstanding at December 31, 1995 and 1994 were not material. In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121, effective for fiscal years beginning after December 15, 1995, establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The application of SFAS No. 121, effective from January 1, 1996, is not expected to have a material impact to the consolidated financial statements of the Company. In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65." SFAS No. 122, effective on a prospective basis for fiscal years beginning after December 15, 1995, requires mortgage banking enterprises and other entities (i.e., commercial banks and thrift institutions that conduct operations that are substantially similar to the primary operations of a mortgage banking enterprise) to recognize as separate assets the rights to service mortgage loans for others. SFAS No. 122 also requires the assessment of capitalized mortgage servicing rights for impairment to be based on the current fair value of those rights. The application of SFAS No. 122, effective from January 1, 1996, is not expected to have a material impact to the consolidated financial statements of the Company. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123, effective for fiscal years beginning after December 15, 1995, establishes a fair value based method of accounting for stock-based compensation, but does not require an entity to adopt the new method for purposes of preparing its basic financial statements. For entities not adopting the new method, SFAS No. 123 requires that they disclose in their footnotes pro forma net income and earnings per share information as if the fair value based method had been adopted. The Company plans to comply with the disclosure requirements of SFAS No. 123 in its consolidated financial statements for 1996. Certain amounts in the consolidated financial statements and notes thereto for the previous two years have been reclassified to conform with the current year's presentation. Such reclassifications had no effect on the Company's results of operations. 27
Employees At January 31, 1996, the Company employed 596 persons, 587 on a full-time basis and 9 on a part-time basis. Management of the Company believes that it has favorable employee relations. The Company is not a party to any collective bargaining agreement. 28
Selected Statistical Information The following tables and data set forth, for the respective periods shown, selected statistical information relating to the Company and the Bank. These tables should be read in conjunction with the information contained in "ITEM 6. SELECTED FINANCIAL DATA," "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." Loan Portfolio Total loans declined slightly to $990.4 million at the end of 1995, compared with $992.0 million at the end of 1994 and $945.8 million at the end of 1993. Increases in loan volumes were recorded in the real estate-mortgage-residential and -commercial loan categories. The Bank emphasizes residential and commercial mortgage loans, business loans to middle-market companies and professionals and consumer installment loans. Its marketing strategy for generating new loans includes a business calling program which requires officers at all levels to make client development visits to local businesses each month. In addition, the Bank uses television, radio, print and direct mail marketing. A significant portion of the Bank's loan portfolio is secured by real estate. Management believes that the Bank's underwriting guidelines, including collateral requirements, provide the Bank with protection against losses on delinquent loans. However, due to the slowdown in the Hawaiian economy, delinquencies and charge-offs during 1994 increased over the previous year. Continued recessionary conditions in Hawaii may further negatively impact the Bank's real estate collateral and adversely impact the level of nonperforming loans and provision for loan losses in the future. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Provision and Allowance for Loan Losses," "-- Nonperforming Assets" and "-- Financial Condition." At December 31, 1995, the Bank did not have any concentration of loans in any industry classified under the Standard Industrial Code which exceeded 10% of the Bank's total loans. The following table sets forth information regarding outstanding loans by categories as of the dates indicated. 29
Table I. Loans By Categories December 31, ----------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (Dollars in thousands) Commercial, financial and agricultural $165,292 $211,257 $237,861 $232,544 $200,612 Real estate -- construction 47,853 52,811 41,572 49,024 48,483 Real estate -- mortgage -- residential 341,229 332,073 317,357 309,867 286,353 Real estate -- mortgage -- commercial 368,772 328,979 280,385 229,136 204,941 Installment 67,210 66,848 68,593 80,994 95,277 --------- --------- --------- --------- --------- Total loans 990,356 991,968 945,768 901,565 835,666 Allowance for loan losses 20,156 18,296 17,131 15,378 13,849 --------- --------- --------- --------- --------- Net loans $970,200 $973,672 $928,637 $886,187 $821,817 ========= ========= ========= ========= ========= 30
Commercial, Financial and Agricultural. Loans in this category include loans primarily to small and middle market businesses and professionals located in Hawaii. The Bank's agricultural loans at December 31, 1995 totaled $8,300. Real Estate - Construction. Real estate - construction loans decreased to $47.9 million at the end of 1995, from $52.8 million at the end of 1994 and $41.6 million at the end of 1993. The majority of the construction loans provided by the Bank in this category were used for residential development projects. Real Estate - Mortgage. The Bank emphasizes making residential mortgage loans for owner-occupied primary residences and does not actively seek to make loans for vacation condominiums or homes. The Bank has also limited growth of residential mortgages for the higher-priced homes because of higher volatility in their values. In order to limit such growth and provide for adequate collateral, the Bank requires higher than normal equity to loan ratios for loans secured by such homes. The major components of the Bank's portfolio of commercial, industrial and other mortgage loans at December 31, 1995 included $108.6 million for stores and offices, $51.5 million for warehouses and industrial buildings, $36.7 million for apartment buildings with 5 or more units and $5.8 million for hotels. Mortgage loans held for sale at December 31, 1995 totalled $7.9 million. 31
The following table sets forth certain information with respect to the composition of the Bank's Real Estate - Mortgage loan portfolio as of the dates indicated. <TABLE> Table II. Mortgage Loan Portfolio Composition <CAPTION> December 31, 1995 1994 1993 1992 1991 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Residential: 1-4 units $335,345 47.2% $328,282 49.7% $309,458 51.8% $300,710 55.8% $276,050 56.2% 5 or more units 5,884 0.8 3,791 0.6 7,899 1.3 9,157 1.7 10,303 2.1 Commercial, industrial and other 368,772 52.0 328,979 49.7 280,385 46.9 229,136 42.5 204,941 41.7 -------- ------ -------- ------ --------- ------ -------- ------ -------- ------ Total $710,001 100.0% $661,052 100.0% $597,742 100.0% $539,003 100.0% $491,294 100.0% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== </TABLE> 32
Installment Loans. The following table sets forth the primary components of the Bank's Installment loan portfolio as of the dates indicated. Table III. Installment Loan Portfolio Composition <TABLE> <CAPTION> December 31, 1995 1994 1993 1992 1991 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Automobile $ 26,368 39.2% $ 27,786 41.6% $ 26,357 38.4% $ 32,717 40.4% $ 38,919 40.8% Credit cards and related plans 22,151 33.0 19,612 29.3 19,626 28.6 20,393 25.2 20,678 21.7 Other 18,691 27.8 19,450 29.1 22,610 33.0 27,884 34.4 35,680 37.5 -------- ----- -------- ------ -------- ------ -------- ------ -------- ------ Total $ 67,210 100.0 $ 66,848 100.0% $ 68,593 100.0% $ 80,994 100.0% $ 95,277 100.0% ======== ===== ======== ====== ======== ====== ======== ====== ======== ====== </TABLE> 33
Maturities and Sensitivities of Loans to Changes in Interest Rates The following table sets forth the maturity distribution of the Bank's loan portfolio at December 31, 1995. The table excludes real estate loans (other than construction loans) and installment loans. Table IV. Maturity Distribution of Commercial and Construction Loans Maturing --------------------------------- Over One One Year Through Over or Less Five Years Five Years Total -------- ---------- ---------- --------- (Dollars in thousands) Commercial, financial and agricultural $70,502 $44,197 $50,593 $165,292 Real estate -- construction 28,222 14,477 5,154 47,853 ------- ------- ------- -------- Total $98,724 $58,674 $55,747 $213,145 ======= ======= ======= ======== 34
The following table sets forth the sensitivity of the amounts due after one year to changes in interest rates. Table V. Maturity Distribution of Fixed and Variable Rate Loans Maturing ----------------------- Over One Through Over Five Years Five Years Total ---------- ---------- ---------- (Dollars in thousands) With fixed interest rates $22,900 $23,116 $ 46,016 With variable interest rates 35,774 32,631 68,405 ------- ------- -------- Total $58,674 $55,747 $114,421 ======= ======= ======== Allowance for Loan Losses The allowance for loan losses is maintained at a level considered adequate to provide for potential losses on loans and other extensions of credit, including off-balance sheet credit exposures. The adequacy of the allowance for loan losses is based upon management's evaluation of the quality, character and inherent risks in the loan portfolio, current and projected economic conditions, and past loan loss experience. During 1995, $3.3 million was provided for loan losses compared to $3.3 million in 1994 and $3.2 million in 1993. In 1995, the Bank experienced a net charge-off of $1.4 million, compared with net charge-offs of $2.1 million and $1.4 million in 1994 and 1993, respectively. The allowance for loan losses at December 31, 1995 was $20.2 million, compared to $18.3 million at December 31, 1994 and $17.1 million at December 31, 1993. The ratio of allowance for loan losses to total loans was 2.04%, 1.84% and 1.81% at December 31, 1995, 1994 and 1993, respectively. Management believes that the allowance for loan losses at December 31, 1995 was adequate to absorb known and inherent risks in the portfolio. However, no assurance can be given that economic conditions which may adversely affect the Bank's service areas or other circumstances, such as material and sustained declines in real estate values, will not result in increased losses in the Bank's loan portfolio. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -- Provision and Allowance for Loan Losses" and "-- Nonperforming Assets." 35
The following table sets forth certain information with respect to the Bank's allowance for loan losses as of the dates or for the periods indicated. Table VI. Allowance for Loan Losses Year Ended December 31, 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (Dollars in thousands) Average amount of loans outstanding $1,004,094 $947,433 $911,611 $865,316 $771,870 Allowance for loan losses: Balance at beginning of year $ 18,296 $ 17,131 $ 15,378 $ 13,849 $ 11,687 ---------- -------- -------- -------- -------- Charge-offs: Commercial, financial and agricultural 146 129 225 257 17 Real Estate -- construction -- -- -- -- -- Real Estate -- mortgage -- residential 192 538 543 570 -- Real Estate -- mortgage -- commercial 943 1,360 254 -- -- Installment 540 492 620 537 375 ---------- ------ ------ ------ -------- TOTAL 1,821 2,519 1,642 1,364 392 ---------- ------ ------ ------ -------- Recoveries: Commercial, financial and agricultural 192 160 12 74 2 Real Estate -- construction -- -- -- -- -- Real Estate -- mortgage -- residential 48 32 3 -- -- Real Estate -- mortgage -- commercial -- -- -- -- -- Installment 141 192 180 119 152 ---------- ------ -------- -------- -------- TOTAL 381 384 195 193 154 36
Net loans charged off (recovered) 1,440 2,135 1,447 1,171 238 ---------- ------- -------- -------- -------- Provision charged to operations 3,300 3,300 3,200 2,700 2,400 ---------- ------- -------- -------- -------- Balance at end of year $20,156 $18,296 $17,131 $15,378 $13,849 ========== ======= ======== ======== ======== Ratios: Allowance for loan losses to loans outstand- ing at end of period 2.04% 1.84% 1.81% 1.71% 1.66% Net loans charged off (recovered) during period to average loans outstanding during period .14% .23% .16% .14% .03% Over the five-year period ended December 31, 1995, the allocation of the allowance for loan losses for the largest loan category, commercial real estate mortgage loans, increased steadily to correspond with increases in the total volume of loans and the level of loan losses in these categories. The Bank's practice is to make specific allocations to specific loans and unspecified allocations to each loan category based on Management's risk assessment. The following table sets forth the allocation of the allowance for loan losses by loan category as of the dates indicated. 37
Table VII. Allocation of Allowance for Loan Losses <TABLE> <CAPTION> 1995 1994 1993 1992 1991 Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans in each in each in each in each in each Allowance category Allowance category Allowance category Allowance category Allowance category for loan to total for loan to total for loan to total for loan to total for loan to total losses loans losses loans losses loans losses loans losses loans ---------- --------- --------- -------- --------- -------- --------- -------- --------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial, financial and agricultural $ 4,100 16.7% $ 5,100 21.3% $ 6,100 25.2% $ 5,200 25.8% $ 3,100 24.0% Real estate -- construction 200 4.9 500 5.3 500 4.4 100 5.4 100 5.8 Real estate - mortgage -- residential 1,800 34.4 3,000 33.5 3,800 33.6 500 34.4 500 34.3 Real estate - mortgage -- commercial 7,800 37.2 5,500 33.2 5,300 29.5 3,800 25.4 2,400 24.5 Installment 600 6.8 400 6.7 600 7.3 1,200 9.0 900 11.4 Unallocated 5,656 N/A 3,796 N/A 831 N/A 4,578 N/A 6,849 N/A ------- ------- ------- -------- ------- ------- ------- ------ ------- ------ TOTAL $20,156 100.0% $18,296 100.0% $17,131 100.0% $15,378 100.0% $13,849 100.0% ======= ======= ======= ======= ======= ======= ======= ====== ======= ====== </TABLE> 38
Investment Portfolio The following table sets forth the amounts and the distribution of investment securities held as of the dates indicated. Table VIII. Distribution of Investment Securities <TABLE> <CAPTION> December 31, --------------------------------------------------------------------- 1995 1994 1993 ------------------------ ---------------------------- ------------- Held-to- Available Held-to- Available- Maturity for Sale Maturity for Sale (at Amor- (at Estimated (at Amor- (at Estimated tized Cost) Fair Value) tized Cost) Fair Value) ----------- ------------- ----------- -------------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> U.S. Treasury and other U.S. Government agencies $123,073 $129,699 $146,216 $66,949 $209,938 States and political subdivisions 11,620 2,836 13,885 -- 21,334 Other 2,000 14,399 1,997 14,741 19,396 -------- -------- -------- ------- -------- Total investment securities $136,693 $146,934 $162,098 $81,690 $250,668 ======== ======== ======== ======= ======== </TABLE> 39
The Bank did not hold investments of any nonfederal issuer in amounts exceeding 10% of stockholders' equity at December 31, 1995. Except for loans disclosed in "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Nonperforming Assets," the Bank did not have any other nonperforming or potentially problem interest-bearing assets at December 31, 1995. Maturity Distribution of Investment Portfolio The following table sets forth the maturity distribution of the investment portfolio at December 31, 1995. Table IX. Maturity Distribution of Investment Portfolio Weighted Portfolio Type and Maturity Grouping Book Average Value Yield<F1> -------- ------------ (Dollars in thousands) Held-to-Maturity Portfolio U.S. Treasury and other U.S. Government agencies: Within one year $ 32,400 4.731% After one but within five years 80,100 5.724 After five but within ten years 10,573 6.870 After ten years -- -- -------- Total U.S. Treasury and other U.S. Government agencies 123,073 5.561 -------- States and political subdivisions: Within one year 2,499 6.859 After one but within five years 7,754 6.017 After five but within ten years 1,367 6.508 After ten years -- -- -------- Total states and political subdivisions 11,620 6.256 -------- Other: Within one year 2,000 4.447 After one but within five years -- -- After five but within ten years -- -- After ten years -- -- -------- Total other 2,000 4.447 -------- Total held-to-maturity portfolio $136,693 5.604 ======== 40
Available-for-Sale Portfolio U.S. Treasury and other U.S. Government agencies: Within one year $ 28,143 6.321% After one but within five years 38,053 5.532 After five but within ten years 9,868 5.251 After ten years 53,635 6.014 Total U.S. Treasury and other U.S. Government agencies 129,699 5.881 -------- States and political subdivisions: Within one year -- -- After one but within five years 2,836 6.151 After five but within ten years -- -- After ten years -- -- Total states and political subdivisions 2,836 6.151 -------- Other: Within one year -- -- After one but within five years -- -- After five but within ten years -- -- After ten years 14,399 7.268 -------- Total other 14,399 7.268 Total available-for-sale portfolio $146,934 6.022 ======== Total investment securities $283,627 ======== <F1> Weighted average yield is computed on an annual basis and yields on tax-exempt obligations are computed on a taxable-equivalent basis using an assumed tax rate of 35%. Deposits The Bank competes for deposits in Hawaii principally by providing quality customer service at its branch offices. The Bank, over the years, has developed a relatively large and stable base of core deposits which consists of noninterest-bearing demand, interest-bearing demand and savings deposits and time deposits under $100,000. The Bank does not purchase brokered deposits. Total deposits at December 31, 1995, 1994 and 1993 were $1,138.3 million, $1,081.9 million and $1,078.3 million, respectively. Deposits increased in 1995 by 5.2% compared with the 0.3% growth recorded for 1994. Interest-bearing deposits, excluding time deposits of $100,000 and 41
greater, decreased by 1.2% in 1995 and 0.6% in 1994. Noninterest-bearing deposits increased by 4.7% in 1995 and decreased by 9.7% in 1994. The Bank's ratio of core deposits to total deposits was 77.1% at December 31, 1995, 81.2% at December 31, 1994 and 83.5% at December 31, 1993. Time deposits of $100,000 and greater increased by 28.1% to $260.3 million in 1995 over the $203.2 million in 1994 which increased by 14.1% over the $178.1 million in 1993. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Financial Condition." The following table sets forth information regarding the average deposits and the average rates paid for certain deposit categories for each of the periods indicated. Average balances are computed using daily average balances. 42
Table X. Average Balances and Average Rates on Deposits Year ended December 31, --------------------------------------------------------- 1995 1994 1993 ------------------ ----------------- ------------------ Average Average Average Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid ---------- ------- -------- ------- --------- ------- Noninterest-bearing demand deposits $ 152,002 --% $ 152,941 --% $152,643 --% Interest-bearing demand deposits 98,303 1.36 104,847 1.36 100,577 1.58 Savings and money market deposits 414,988 3.12 459,282 2.45 448,921 2.74 Time deposits 437,789 5.16 347,906 3.69 335,127 3.79 ---------- ----------- ---------- TOTAL $1,103,082 3.34 $1,064,976 2.40 $1,037,268 2.56 ========== =========== ========== 43
The remaining maturities of the certificates of deposit in denominations of $100,000 or greater are set forth in the following table. XI. Remaining Maturities of Large Certificates of Deposit December 31, 1995 (Dollars in thousands) Three months or less $109,212 Over three through six months 79,000 Over six through twelve months 60,850 Over twelve months 11,192 -------- Total $260,254 ======== ITEM 2. PROPERTIES The executive offices of the Company and the Bank are located at 220 South King Street, Honolulu, Hawaii 96813. All Bank properties, except for the properties in which the Hilo and Moiliili branches and the operations center are situated, are occupied under leases which expire on various dates through 2019, and, in most instances, include options to renew. For the year ended December 31, 1995, net rent expense under these leases aggregated $4.7 million. For additional information relating to lease rental expense and commitments, see Note 16 to the Company's Consolidated Financial Statements in the 1995 Annual Report which is incorporated herein by reference. CPB Properties is a general partner and the managing partner with a 50% interest in CKSS. Other partners in CKSS are Kajima Development Corporation, a general partner, Sumitomo Corporation and Sumitomo Corporation of America, limited partners. CKSS was formed to develop, construct and lease a 22-story office building complex in the downtown financial district of Honolulu at the corner of King and Alakea Streets, which now serves as the Company's and the Bank's headquarters. The building contains 201,865 square feet of rentable space of which approximately 64,000 square feet are occupied by the Company. CKSS carried the building complex on its books at a net book value of $39.5 million as of December 31, 1995. To finance the building, CKSS entered into loan agreements with The Sumitomo Bank, Limited ("Sumitomo") and the Bank, whereby Sumitomo agreed to lend $20.0 million and the Bank agreed to lend $4.0 million to CKSS. Both loans are secured by real estate and are due on November 18, 1996. As of December 31, 1995, the Bank had advanced pursuant to this loan agreement the sum of $500,000. As of the same date, Sumitomo had advanced pursuant to its loan agreement the sum of $10.7 million. The 44
investment in CKSS is carried on the books of the Company under the equity method of accounting. See Notes 1 and 7 to the Company's Consolidated Financial Statements in the 1995 Annual Report which is incorporated herein by reference. In October 1992, CPB Properties, as lessor, entered into a lease agreement with CKSS for certain real property located in Kaimuki, Hawaii, effective from January 1, 1993 to December 31, 2047. Under the terms of the lease, CKSS would develop a 4-story office building (the "Kaimuki Plaza"). On April 30, 1993, CKSS and the Bank entered into a building loan agreement to borrow up to $12.2 million at .75% above LIBOR to finance the Kaimuki Plaza. At December 31, 1995, the Bank had advanced $11.3 million pursuant to this loan agreement. The weighted average interest rate on all loans related to the Company's headquarters and Kaimuki Plaza at December 31, 1995 was 6.636%. In November 1994, the Bank entered a 25-year lease agreement with CKSS to lease office space in the Kaimuki Plaza for its Kaimuki Branch. The lease is effective from November 1, 1994 through October 31, 2019. The Bank holds title to the land and building in which the Hilo branch office is situated. CPB Properties holds title to a portion of the land and the building in which the Moiliili branch office is situated. CPB Properties also holds title to the land on which the operations center is located. There are no encumbrances with respect to these properties. ITEM 3. LEGAL PROCEEDINGS The Company is a party to ordinary routine litigation incidental to its business, none of which is considered likely to have a materially adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the Company's shareholders for a vote during the fourth quarter of 1995. ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth, as of February 29, 1996, the executive officers of the Company, their positions, principal occupation during the past five years and ages. Each officer is appointed by the Board of Directors of the Company and serves at their pleasure. 45
Principal Occupation Name and Position During Past Five Years Age Joichi Saito President and Chief Operating 60 Chairman of the Officer, Central Pacific Bank Board and Chief (1989 - 1995) Executive Officer Naoaki Shibuya Executive Vice President of Bank 54 President (1993-1995); Executive Vice President of The Sumitomo Bank of California (1989-1993) Austin Y. Imamura Executive Vice President 49 Vice President and and Secretary, Central Pacific Secretary Bank (1991 - Present); Senior Vice President and Secretary, Central Pacific Bank (1991); Senior Vice President, Central Pacific Bank (1987 - 1991) Neal K. Kanda Executive Vice President and 47 Vice President and Controller, Central Pacific Bank Treasurer (1993 - Present); Senior Vice President and Controller, Central Pacific Bank (1990 - 1993); Vice President and Controller, Central Pacific Bank (1989 - 1990) PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS For information concerning the market for the Company's common stock and related shareholder matters, see "Common Stock Price Range and Dividends" contained in the 1995 Annual Report, which is incorporated herein by reference, and "ITEM 1. BUSINESS -- Supervision and Regulation -- Restrictions on Transfers of Funds to the Company by the Bank." 46
ITEM 6. SELECTED FINANCIAL DATA For selected financial data concerning the Company, see "Selected Consolidated Financial Data" contained in the 1995 Annual Report, which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For Management's discussion and analysis of financial condition and results of operations, see, "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the 1995 Annual Report, which is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For financial statements of the Company, see the 1995 Annual Report, which is incorporated herein by reference, and the "Independent Auditors' Report" thereon. See "ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K" below for financial statements filed as a part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except as hereinafter noted, the information concerning directors and executive officers of the Company is incorporated by reference from the section entitled "Election of Directors" of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. For information concerning executive officers of the Company, see "ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT." ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from the section entitled "Compensation of Directors and Executive Officers" of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the sections entitled "Principal Shareholders," and "Election of Directors" of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated by reference from the section entitled "Certain Transactions" of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules (1) The following financial statements included in the registrant's 1995 Annual Report to Shareholders are incorporated herein by reference. Page number references are to page numbers in the 1995 Annual Report. Page CPB Inc. and Subsidiary: Independent Auditors' Report 37 Consolidated Balance Sheets at December 31, 1995 and 1994 17 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 18 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 19 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 20 Notes to Consolidated Financial Statements 21 (2) All schedules are omitted because they are not applicable, not material or because the information is included in the financial statements or the notes thereto. 48
(b) Reports on Form 8-K The Company filed no reports on Form 8-K during the last quarter of 1995. (c) Exhibits See Index to Exhibits included in this Annual Report on Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 18, 1996. CPB INC. (Registrant) By /s/ Joichi Saito JOICHI SAITO Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date /s/ Joichi Saito Chairman of the Board March 18, 1996 Joichi Saito Chief Executive Officer (Principal Executive Officer), Director /s/ Neal K. Kanda Vice President, March 18, 1996 Neal K. Kanda Treasurer (Principal Financial Officer, Principal Accounting Officer) 49
/s/ Paul Devens Director March 18, 1996 Paul Devens _____________________ Director March __, 1996 Alice F. Guild /s/ Dennis I. Hirota Director March 18, 1996 Dennis I. Hirota, Ph.D. /s/ Stanley Hong Director March 18, 1996 Stanley Hong ______________________ Director March __, 1996 Kensuke Hotta /s/ Daniel M. Nagamine Director March 18, 1996 Daniel M. Nagamine /s/ Yoshiharu Satoh Director March 18, 1996 Yoshiharu Satoh /s/ Naoaki Shibuya Director March 18, 1996 Naoaki Shibuya 50
INDEX TO EXHIBITS Exhibit No. Document 3.1 Articles of Incorporation of CPB Inc., as amended<F1> 3.2 Amended Bylaws of CPB Inc.<F2> 10.3 Limited Partnership Agreement of CKSS Associates Limited Partnership dated July 10, 1981 and among CPB Properties, Inc., Kajima Hawaii Corporation, Sumitomo Corporation and Sumitomo Corporation of America<F3> 10.9 CPB Inc. 1986 Stock Option Plan, as amended<F4> 10.10 Lease dated February 1, 1983 by and between CKSS Associates and Central Pacific Bank, as amended by First Amendment of Lease between CKSS Associates and Central Pacific Bank dated March 3, 1984, as amended by Second Amendment of Lease between CKSS Associates and Central Pacific Bank dated April 3, 1987, as amended by Third Amendment of Lease between CKSS Associates and Central Pacific Bank dated September 24, 1992.<F2> 10.11 Share Purchase Agreement dated as of November 20, 1986 by and among The Sumitomo Bank, Limited and CPB Inc.<F2> 10.16 Split Dollar Life Insurance Plan<F5> 10.17.1 Loan Agreement dated as of November 8, 1991 by and between American Trust Co. of Hawaii, Inc., as Trustee and The Sumitomo Bank, Limited, Los Angeles Branch<F5> 10.17.2 $2,000,000 Promissory Note dated November 8, 1991<F5> 10.17.3 Collateral Agreement dated as of November 8, 1991 by and among The Sumitomo Bank, Limited, Central Pacific Bank and CPB Inc.<F5> 10.17.4 Annual Contributions Agreement dated as of November 8, 1991 by and between American Trust Co. of Hawaii, Inc. and Central Pacific Bank<F5> 10.17.5 Guaranty Agreement dated as of November 8, 1991 by and between The Sumitomo Bank, Limited, Los Angeles Branch and CPB Inc.<F5> 51
10.17.6 Stock Purchase Agreement by and between American Trust Co. of Hawaii, Inc. and CPB Inc.<F5> 10.18 Common Stock Purchase Warrants issued November 13, 1991 to The Sumitomo Bank, Limited<F5> 10.19 Central Pacific Bank and Subsidiaries 1995 Annual Executive Incentive Plan<F6> 10.20 Central Pacific Bank Supplemental Executive Retirement Plan<F8> 13 Annual Report to Shareholders for the year ended December 31, 1995 (parts not incorporated by reference are furnished for informational purposes and are not filed herewith) 21 Subsidiaries of CPB Inc.<F7> 23 Accountants' Consent 27 Financial Data Schedule 99 Proxy Statement for Annual Meeting of Shareholders to be held on April 23, 1996 <F1> Filed as Exhibit 3.1 to registrant's Registration Statement on Form S-2 (Registration No. 33-27575) filed with the Securities and Exchange Commission on March 17, 1989, which are incorporated herein by this reference. <F2> Filed as Exhibits 3.2, 10.10, 10.16 and 10.18 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, filed with the Securities and Exchange Commission on March 17, 1994. <F3> Filed as Exhibit 10.7 to registrant's Registration Statement on Form S-14 (Registration No. 2-76608), filed with the Securities and Exchange Commission on March 23, 1982, which are incorporated herein by this reference. <F4> Filed as Exhibit 28.1 to registrant's Registration Statement on Form S-8 (Registration No. 33-11462), filed with the Securities and Exchange Commission on January 22, 1987, which is incorporated herein by this reference. <F5> Filed as Exhibits 10.16, 10.17.1, 10.17.2, 10.17.3, 10.17.4, 10.17.5, 10.17.6 and 10.18, respectively, to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, filed with the 52
Securities and Exchange Commission on March 27, 1992. <F6> Filed as Exhibit 10.19 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, filed with the Securities and Exchange Commission on March 30, 1993. <F7> Filed as Exhibit 21 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, filed with the Securities Exchange Commission on March 30, 1994. <F8> To be filed by amendment. 53