UNITED STATES
                        SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT 1934 [FEE REQUIRED]
    For the fiscal year ended December 31, 1998
                                     OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                        Commission File Number 0-12396

                             CB BANCSHARES, INC.
            (Exact name of registrant as specified in its charter)

                 Hawaii                             99-0197163
        (State of Incorporation)       (IRS Employer Identification No.)

                 201 Merchant   Street   Honolulu,   Hawaii  96813
                    (Address of principal executive offices)

(Registrant's Telephone Number) (808) 546-2411

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
     Common Stock, Par value $1.00 per share

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

As of January 31, 1999,  registrant had outstanding  3,552,228  shares of common
stock.  The  aggregate  market  value  of  registrant's  Common  Stock  held  by
non-affiliates  based on the closing price on January 31, 1999 was approximately
$104,244,000.

                      DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy  Statement for the annual  meeting of  shareholders  to be
held on April 29, 1999 are incorporated by reference into Part III and IV.



<PAGE>
ITEM 1. BUSINESS

CB BANCSHARES, INC.
CB Bancshares,  Inc. (the "Company") is a bank holding  company  incorporated in
the State of Hawaii in 1980.  As a bank  holding  company,  the  Company has the
flexibility to directly or indirectly engage in certain bank-related  activities
other than  banking,  subject to  regulation  by the Board of  Governors  of the
Federal Reserve System. The Company is also registered with the Office of Thrift
Supervision (the "OTS") as a savings and loan holding  company.  The Company has
four  wholly-owned  subsidiaries,  City  Bank,  International  Savings  and Loan
Association,  Limited (which the Company  acquired in April 1994),  City Finance
and Mortgage,  Inc. and O.R.E.,  Inc. which are discussed  below.  City Bank and
International  Savings and Loan Association,  Limited, are the Company's primary
operating segments - see Note U of Notes to the Company's Consolidated Financial
Statements  for segment  information.  At  December  31,  1998,  the Company had
consolidated total assets of $1,428.44 million,  and total stockholders'  equity
of $132.37 million.

CITY BANK


City Bank (the "Bank") is a state-chartered bank organized under the laws of the
State of  Hawaii("Hawaii")  in 1959. The Bank is insured by the Federal  Deposit
Insurance  Corporation  (the  "FDIC"),  and  provides  full  commercial  banking
services through eleven branches on the island of Oahu, one branch on the island
of  Hawaii,  and one  branch  on the  island  of Maui.  These  services  include
receiving demand, savings and time deposits; making commercial,  real estate and
consumer loans;  financing  international  trade activities;  issuing letters of
credit; handling domestic and foreign collections; selling travelers' checks and
bank money orders; and renting safe deposit boxes.


The Bank is subject to regular  examinations  by the Federal  Deposit  Insurance
Corporation  and the Division of Financial  Institutions  of the  Department  of
Commerce and Consumer Affairs, State of Hawaii.

Citibank Properties,  Inc., a wholly-owned subsidiary of the Bank, was organized
to hold title to bank-facilities realty.

At December 31, 1998, the Bank had total assets of $788.91 million.

INTERNATIONAL SAVINGS AND LOAN ASSOCIATION, LIMITED

International  Savings and Loan  Association,  Limited (the  "Association")  was
chartered by the Territory of Hawaii in 1925.  The  Association  is insured with
funds administered by the FDIC and conducts its business through ten branches on
the island of Oahu and one on the island of Maui.

The Association's  principal  business consists of attracting  deposits from the
general  public and  utilizing  advances  from the  Federal  Home Loan Bank (the
"FHLB") and other borrowings to fund its real estate lending  activities,  which
consist primarily of lending on one-to-four family residential properties.

The  Association  has  four  wholly-owned   subsidiaries,   ISL  Services,  Inc.
(inactive),  DRI Assurance,  Inc.  (inactive),  ISL Capital  Corporation and ISL
Financial Corp. ISL Capital  Corporation engages in mortgage banking activities.
ISL  Financial  Corp.  is a special  purpose  subsidiary  which has issued  debt
obligations  collateralized  by  mortgaged-backed  securities  provided  by  the
Association.

At December 31, 1998, the Association had total assets of $639.44 million.

CITY FINANCE AND MORTGAGE, INC.

City Finance and Mortgage,  Inc.  (inactive),  a wholly-owned  subsidiary of the
Company, is in the process of being liquidated.

O.R.E., INC.

O.R.E.,  Inc., a wholly-owned  subsidiary of the Company,  was organized for the
primary purpose of engaging in the disposition of real and/or personal  property
that are  encumbered by loans of the Bank. To date,  no  transactions  have been
consummated and the company is inactive.

REGULATION AND COMPETITION

The earnings and growth of the Company and its  subsidiaries are affected by the
changes in the  monetary  and fiscal  policies  of the United  States of America
("U.S."), as well as by the general,  local, national and international economic
conditions.  The overall  growth of loans and  investments,  deposit  levels and
interest rates are directly  influenced by the monetary  policies of the Federal
Reserve System. Since these changes are generally unpredictable, it is difficult
to ascertain the impact of such future  changes on the operations of the Company
and its subsidiaries.

The banking business is highly competitive. The Bank and the Association compete
for deposits and loans with five other  commercial  banks and two other  savings
associations  located in  Hawaii.  In  addition  to other  commercial  banks and
savings associations,  the Bank and the Association compete for savings and time
deposits and certain types of loans with other financial  institutions,  such as
consumer finance companies,  credit unions, merchandise retailers, and a variety
of financial  services and  advisory  companies.  They also compete for mortgage
loans with insurance and mortgage companies.

The  economy  of  Hawaii  is  supported  principally  by  tourism,  governmental
expenditures  (primarily for the military),  agriculture  and  manufacturing.  A
small island  economy like that of Hawaii,  which depends  mostly on imports for
consumption,   is  greatly  influenced  by  the  changes  in  external  economic
conditions. A key to Hawaii's economic performance is the health of the U.S. and
Japanese economies,  and to a lesser extent, the economies of Canada, Europe and
other Asian nations. After rapid expansion in the late 1980s, the Hawaii economy
began to stumble in the early 1990s with the onset of the national recession and
Gulf War and  their  related  negative  impact  on the  tourist  industry.  This
condition was  exacerbated  by Hurricane  Iniki in 1992 and the recession of the
Japanese economy.  During the same period,  Hawaii construction  activity slowed
and  foreign  investment  in  Hawaii   (particularly  by  Japanese  real  estate
investors) sharply declined.

The economic  growth in the State of California,  which was expected to grow 5.2
percent in 1998 after growing 5.0 percent in 1997,  is having a positive  effect
on tourism.  Visitor arrivals  contracted slightly in the first eleven months of
1998 due to an  improvement in westbound  arrivals (3.8 percent).  This increase
was not able to offset the 10.4 percent decrease in eastbound  arrivals.  At the
same time, Japan and the rest of Asia's influence has caused potential growth in
the  islands  to stall from  nearly  zero to  negative  growth in  visitors  and
investments.

Military  spending  remains a stable and important  source of revenue in Hawaii.
Although  the U.S.  mainland has  experienced  reductions  in defense  spending,
Hawaii has experienced only a limited reduction due to its strategic location in
the Pacific.

The Hawaii real estate  market sales  activity  strengthened  in 1998,  although
median  resale  prices  continues  to decline.  Resale  volume of single  family
residences up 24.8 percent on the island of Oahu,  18.5 percent on the island of
Maui,  21.2  percent  on the island of Hawaii,  and 55.3  percent on Kauai.  The
statewide median home resale price dropped 0.3 percent to $240,718 from $241,462
in 1997. Similarly, condominium resales rose 26.8 percent to 4,405 from 3,475 in
1997, but the median price for  condominium  fell 3.6 percent to $139,554,  down
from  $144,729 in 1997.  The Hawaii real estate  sales  volume  improved  due to
declining  mortgage  rates and a view that the Hawaiian  economy and home prices
had bottomed.  The combination of lower rates and home prices helped to overcome
the  affordability  issue which has been a major obstacle for the average Hawaii
homebuyer.

Hawaii's  Real  Gross  State  Product,  which grew by 2.0  percent  in 1998,  is
expected to grow at 1.2 percent in 1999. The declining  trend in jobs leveled in
1998 and is expected to improve in 1999 and beyond.

REGULATORY CONSIDERATIONS

The following discussion sets forth certain elements of the regulatory framework
applicable  to the  Company,  the Bank and the  Association.  Federal  and state
regulation of financial institutions is intended primarily for the protection of
depositors  rather than  shareholders of those entities.  To the extent that the
following  discussion  describes statutory or regulatory  provisions,  it is not
intended to be complete  and is  qualified  in its  entirety by reference to the
particular statutory or regulatory provisions,  and any case law or interpretive
letters  concerning such provisions.  In addition,  there are other statutes and
regulations  that apply to and  regulate  the  operation  of the Company and its
subsidiaries.  Any change in applicable law or regulation may have a material or
possibly  adverse  effect  on  the  business  of  the  Company,  the  Bank,  the
Association or other subsidiaries of the Company.

Bank  Holding  Company.  The  Company  is a  bank  holding  company  subject  to
supervision  and  regulation  by the Board of Governors  of the Federal  Reserve
System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956,
as amended (the "BHCA"). As a bank holding company, the Company's activities and
those of its banking and non-banking subsidiaries are limited to the business of
banking and activities  closely  related or incidental to banking and to certain
expressly  permitted  nonbanking  activities.  In addition,  the Company may not
acquire  directly or  indirectly  more than 5% of any class of the voting shares
of, or  substantially  all of the assets of, a bank or any other company without
the prior approval of the Federal Reserve Board.

The  statute  has been  eliminated,  effective  September  29,  1995,  which had
prohibited the acquisition of more than 5% of the stock of the Company by a bank
holding company whose operations are principally conducted in a state other than
Hawaii,  and the  acquisition by the Company of more than 5% of the stock of any
bank located in a state other than Hawaii  unless the statutory law of the state
in  which  such  bank  is  located  specifically  authorized  such  acquisition.
Accordingly,  at the present time and subject to certain limits, the BHCA allows
adequately  capitalized and adequately managed bank holding companies to acquire
control of banks in any state.

Savings  and  Loan  Holding  Company.  As a  result  of its  acquisition  of the
Association,  the  Company is subject to OTS  regulations  as a savings and loan
holding  company  within the meaning of the Home  Owners Loan Act (the  "HOLA").
Among other  things,  the HOLA  prohibits a savings  and loan  holding  company,
directly or  indirectly,  from:  (1)  acquiring  control (as defined) of another
insured institution (or holding company thereof) without prior OTS approval, (2)
acquiring  voting  shares of another  insured  institution  (or holding  company
thereof) which is not a subsidiary, subject to certain exceptions, (3) acquiring
through merger, consolidation or purchase of assets, another savings institution
(whether or not it is insured by the  Savings  Association  Insurance  Fund (the
"SAIF")) or holding company thereof or acquiring all, or  substantially  all, of
the assets of such  institution (or holding company  thereof)  without prior OTS
approval.

On  October  16,  1996,  the  Company  entered  into an  informal  agreement,  a
Memorandum of  Understanding  (the "MOU"),  with the Federal Reserve Bank of San
Francisco  (the "FRB"),  with respect to issues  raised in an  inspection of the
Company as of June 30, 1996 by the FRB,  OTS and Hawaii  Division  of  Financial
Institutions.

Under the terms of the MOU, the Company must first obtain  concurrence  from the
FRB on matters concerning the payment of cash dividends,  incurring debt, or the
redemption of its stock.  The agreement  also  addresses a number of issues that
require  FRB  concurrence  including  an  increase  in  director  and  executive
compensation,   entering  into  agreements  to  acquire  or  divest  businesses,
management and organizational  structure,  liquidity and capital needs, interest
rate risk, audit, record keeping and compliance control systems.

In September 1997, the Bank also entered into an MOU with the FDIC. This MOU was
terminated  by the FDIC in March 1999,  based on the adoption of a resolution by
the Bank's Board of Directors. This resolution,  approved by the Bank's Board of
Directors in February 1999,  requires,  among other things, that the Bank obtain
approval from the FDIC for the payment of cash dividends,  and to reduce certain
classified  assets to  specified  levels  within  time  frames  set forth in the
resolution.

Dividend Restrictions.  The principal source of the Company's cash flow has been
dividend payments received from the Bank and the Association.  Dividends paid to
the Company by the Bank and the Association in 1998 totaled $0.82 million. Under
the laws of Hawaii,  payment of  dividends by the Bank and the  Association,  is
subject to certain  restrictions,  and  payments of dividends by the Company are
likewise subject to certain restrictions. Under the MOU, as discussed above, the
Company is  restricted  from the  payment of cash  dividends  without  the prior
approval of the FRB.

The Company  reduced its  quarterly  dividend in the first  quarter of 1997 from
$0.325 per share to $0.05 per share.  The  quarterly  dividend was  subsequently
increased  to $0.06 per share in the second  quarter of 1998.  The Company  will
continue to evaluate the dividend on a quarterly basis. In addition,  applicable
regulatory  authorities  are  authorized  to prohibit  banks,  thrifts and their
holding  companies from paying  dividends  which would  constitute an unsafe and
unsound  banking  practice.  The FRB has indicated that it would generally be an
unsafe and unsound  banking  practice for banks to pay  dividends  except out of
current operating earnings. Furthermore, an insured depository institution, such
as the Bank or the  Association,  cannot  make a capital  distribution  (broadly
defined  to  include,  among  other  things,  dividends,  redemptions  and other
repurchases  of  stock),  or pay  management  fees to its  holding  company,  if
thereafter the depository institution would be undercapitalized.

OTS   regulations   impose  uniform   limitations  on  the  ability  of  savings
associations  to engage in various  distributions  of capital such as dividends,
stock repurchases and cash-out mergers.  Such regulations utilize a three-tiered
approach which permits  various levels of  distributions  based primarily upon a
savings  association's  capital level.  As of December 31, 1998, the Association
was classified as a first-tier association under the guidelines discussed below.

In the first tier, a savings  association  that has capital  equal to or greater
than its fully phased-in capital requirement (both before and after the proposed
capital  distribution)  and that has not been  notified by the OTS that it is in
need of more than normal  supervision,  may make (without  application)  capital
distributions during a calendar year up to 100% of its net income to date during
the  calendar  year plus the amount that would  reduce by  one-half  its surplus
capital  ratio at the  beginning of the calendar  year, or 75% of its net income
over the most recent  four-quarter  period.  Capital  distributions in excess of
such amount require advance approval from the OTS.

In the second tier, a savings association with either (i) capital equal to or in
excess of its minimum capital  requirement but below its fully phased-in capital
requirement (both before and after the proposed capital  distribution),  or (ii)
capital in excess of its fully phased-in  capital  requirement  (both before and
after the proposed capital  distribution) but which has been notified by the OTS
that it shall be treated as a tier 2  association  because it is in need of more
than normal supervision, may make (without application) capital distributions of
up to 75% of its net income during the previous  four quarters  depending on how
close the association is to meeting its fully phased-in capital requirement.

In the third tier,  a savings  association  with  either (i)  capital  below its
minimum  capital  requirement  (either  before  or after  the  proposed  capital
distribution),  or (ii) capital in excess of either its fully phased-in  capital
requirement or minimum  capital  requirement  but which has been notified by the
OTS that it shall be  treated as a tier 3  association  because it is in need of
more than normal  supervision,  may not make any capital  distributions  without
prior approval from the OTS.

Capital  Standards.  The Company  and the Bank are subject to capital  standards
promulgated by the Federal  Reserve Board,  the FDIC, and the Hawaii Division of
Financial  Institutions.  At the end of 1998, the minimum ratio of total capital
to  risk-weighted  assets,  provided for in the  guidelines  adopted by the FRB,
including certain off-balance-sheet items such as standby letters of credit, was
8%. At least half of the total  capital  is to be  comprised  of common  equity,
retained  earnings,  non-cumulative  perpetual  preferred  stock,  and a limited
amount of cumulative perpetual preferred stock less goodwill ("Tier 1 Capital").
The  remainder  may  consist of a limited  amount of  subordinated  debt,  other
preferred stock, certain other instruments, and a limited amount of reserves for
loan losses ("Tier 2 Capital").  The FDIC's  risk-based  capital  guidelines for
state  non-member  banks of the Federal Reserve System are generally  similar to
those established by the FRB for bank holding companies.

The FRB and FDIC also have  adopted  minimum  leverage  ratios for bank  holding
companies and banks  requiring bank  organizations  to maintain a Leverage Ratio
(defined as Tier 1 Capital  divided by average total assets less goodwill) of at
least 4% of total assets. The Leverage Ratio is the minimum  requirement for the
most highly rated banking  organizations,  and other banking  organizations  are
expected to maintain an additional  cushion of at least 100 to 200 basis points,
taking  into  account  the level  and  nature of risk,  to be  allocated  to the
specific banking organizations by the primary regulator.

FRB guidelines  also provide that banking  organizations  experiencing  internal
growth or making  acquisitions  will be  expected  to  maintain  strong  capital
positions   substantially  above  the  minimum   supervisory   levels,   without
significant reliance on intangible assets. Furthermore,  the guidelines indicate
that the FRB will  continue to consider a  "tangible  Tier 1 leverage  ratio" in
evaluating  proposals  for  expansion or new  activities.  The  tangible  Tier 1
leverage  ratio is the ratio of a banking  organization's  Tier 1 Capital,  less
intangibles, to total assets, less intangibles.

The OTS has  established  minimum  capital  standards  applicable to all savings
associations.  The OTS also is  authorized  to impose  capital  requirements  in
excess of these standards on individual  associations  on a case-by-case  basis.
The capital  regulations create three capital  requirements:  a tangible capital
requirement,  a leverage or core capital  requirement,  and a risk-based capital
requirement. These three capital standards are discussed below.

Each savings  association must currently  maintain  tangible capital equal to at
least 1.5% of its  adjusted  total  assets.  Tangible  capital  includes  common
shareholders'  equity (including  retained earnings),  non-cumulative  perpetual
preferred  stock and  related  surplus,  and  minority  interests  in the equity
accounts of fully consolidated subsidiaries.

Each savings  association must currently maintain core capital equal to at least
3% of its adjusted  total assets.  Core capital  includes  common  shareholders'
equity (including retained earnings),  non-cumulative  perpetual preferred stock
and  related  surplus,  minority  interests  in the  equity  accounts  of  fully
consolidated subsidiaries and qualifying supervisory goodwill (i.e., supervisory
goodwill existing on April 12, 1989) amortized on a straight line basis over the
shorter of 20 years or the remaining  period for amortization in effect on April
12, 1989.

The OTS risk-based capital standard  presently requires savings  associations to
maintain a minimum ratio of total capital to  risk-weighted  assets of 8%. Total
capital  consists of core capital,  defined above,  and  supplementary  capital.
Supplementary  capital  consists  of  certain  capital  instruments  that do not
qualify as core capital, and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only in an amount equal to the amount of
core capital.  In determining the required amount of risk-based  capital,  total
assets,  including  certain  off-balance-sheet  items,  are multiplied by a risk
weight  based on the risks  inherent  in the type of  assets.  The risk  weights
assigned by the OTS for  principal  categories of assets are (I) 0% for cash and
securities  issued by the federal  government or  unconditionally  backed by the
full faith and credit of the federal government;  (ii) 20% for securities (other
than equity  securities)  issued by federal  government  sponsored  agencies and
mortgage-backed  securities  issued by, or fully  guaranteed as to principal and
interest  by, the FNMA or the  FHLMC,  except for those  classes  with  residual
characteristics or stripped mortgage-related securities; (iii) 50% for prudently
underwritten  permanent  one-to-four  family first lien mortgage  loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination  unless insured to such ratio by an insurer  approved by the FNMA or
the FHLMC; and (iv) 100% for all other loans and investments, including consumer
loans,  commercial loans, and one-to-four  family residential real estate loans,
more than 90 days delinquent,  and all repossessed assets or assets more than 90
days past due.

Under the OTS regulations,  an institution with a greater than "normal" level of
interest  rate risk will be subject to a  deduction  of its  interest  rate risk
component  from total capital for purposes of  calculating  risk-based  capital.
Such an institution will be required to maintain  additional capital in order to
comply with the risk-based  capital  requirement.  An institution with a greater
than "normal"  interest rate risk is defined as an institution that would suffer
a loss of net portfolio value exceeding 2% of the estimated  market value of its
assets in the event of a 200 basis  point  increase or  decrease  (with  certain
minor  exceptions) in interest  rates.  The interest rate risk component will be
calculated,  on a quarterly  basis,  as one-half  of the  difference  between an
institution's measured interest rate risk and 2%, multiplied by the market value
of its assets. The director of the OTS, or his or her designee, is authorized to
waive or defer an  institution's  interest rate risk component on a case-by-case
basis.  The rule is subject to a  two-quarter  "lag" time between the  reporting
date of the data used to calculate an  institution's  interest rate risk and the
effective date of each quarter's  interest rate risk component.  The Association
is currently in regulatory capital compliance.

Failure to meet capital  guidelines could subject a bank or savings  association
to a variety of  enforcement  remedies,  including  the  termination  of deposit
insurance by the FDIC, and to certain restrictions on its business.  At December
31, 1998, the Company,  the Bank and the Association exceeded applicable capital
requirements.  The  consolidated  capital  position  of the  Company at December
31,1998 was as follows:

                                Company ratio         Minimum required ratio
      Risk-based Capital:
          Tier 1 capital ratio      13.54%                      4%
          Total  capital ratio      14.80%                      8%
          Leverage ratio             7.90%                      4%

Qualified   Thrift  Lender  Test.  All  savings   associations,   including  the
Association,  are  required to meet a qualified  thrift  lender  ("QTL") test to
avoid  certain  restrictions  on their  operations.  Under the  Federal  Deposit
Insurance  Corporation   Improvements  Act  of  1991  ("FDICIA"),  a  depository
institution  must have at least 65% of its portfolio  assets  (which  consist of
total  assets  less   intangibles,   properties  used  to  conduct  the  savings
association's  business and liquid  assets not exceeding 20% of total assets) in
qualified  thrift  investments  on a monthly  average  basis in nine of every 12
months.  Loans and  mortgage-based  securities  secured by domestic  residential
housing,  as well as certain  obligations  of the FDIC and certain other related
entities,  may be included  in  qualifying  thrift  investments  without  limit.
Certain  other   housing-related  and  non-residential  real  estate  loans  and
investments,  including loans to develop churches,  nursing homes, hospitals and
schools,   and  consumer  loans  and  investments  in  subsidiaries  engaged  in
house-related  activities  may also be included.  Qualifying  assets for the QTL
test include,  among other things,  investments related to domestic  residential
real  estate or  manufactured  housing,  the book value of  property  used by an
association  or  its  subsidiaries  for  the  conduct  of its  business,  50% of
residential  mortgage  loans  that  the  Association  sold  within  90  days  of
origination,  shares of stock  issued by any FHLB and shares of stock  issued by
FHLMC  or  FNMA.  The  Association  was in  compliance  with  the QTL test as of
December 31, 1998.

Company  Support  of the  Bank and the  Association.  A  depository  institution
insured by the FDIC can be held liable for any loss  incurred by, or  reasonably
expected to be incurred by, the FDIC after August 9, 1989,  in  connection  with
(i) the default of a commonly controlled  FDIC-insured depository institution or
(ii) any assistance provided by the FDIC to a commonly  controlled  FDIC-insured
depository institution "in danger of default". "Default" is defined generally as
the  appointment  of a  conservator  or  receiver  and "in danger of default" is
defined  generally as the  existence  of certain  conditions  indicating  that a
"default" is likely to occur in the absence of regulatory assistance.

Under FRB  regulations,  a bank holding company is required to serve as a source
of financial and managerial strength to its subsidiary banks and may not conduct
its  operations  in an unsafe or unsound  manner.  In addition,  it is the FRB's
policy that in serving as a source of strength to its  subsidiary  banks, a bank
holding  company  should  stand  ready to use  available  resources  to  provide
adequate  capital  funds to its  subsidiary  banks  during  periods of financial
stress  or  adversity  and  should   maintain  the  financial   flexibility  and
capital-raising  capacity  to obtain  additional  resources  for  assisting  its
subsidiary  banks. A bank holding  company's  failure to meet its obligations to
serve  as a source  of  strength  to its  subsidiary  banks  will  generally  be
considered  by  the  FRB to be an  unsafe  and  unsound  banking  practice  or a
violation of the FRB  regulations  or both.  Any capital loans by a bank holding
company to any of its  subsidiary  banks are  subordinate in right of payment to
deposits and to certain other  indebtedness of such subsidiary  bank.  Moreover,
Congress  has passed  legislation  pursuant  to which  depositors  are granted a
preference over all other unsecured  creditors in the event of the insolvency of
a bank or thrift.

Affiliate  Transactions.  Sections  23A and 23B of the  Federal  Reserve Act (i)
limit the extent to which a financial institution or its subsidiaries may engage
in "covered  transactions" with an affiliate,  to an amount equal to 10% of such
institution's   capital  and  surplus  and  an  aggregate   limit  on  all  such
transactions  with all  affiliates to an amount equal to 20% of such capital and
surplus and (ii) require that all  transactions  with an affiliate,  be on terms
substantially  the  same,  or at  least  as  favorable  to  the  institution  or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans,  purchase of assets,  issuance of a guarantee  and
other similar types of transactions.

In addition to the restrictions  that apply to member banks pursuant to Sections
23A and 23B, three other restrictions apply to savings  institutions,  including
those  that  are  part  of  a  holding  company  organization.   First,  savings
institutions may not make any loan or extension of credit to an affiliate unless
that  affiliate  is engaged  only in  activities  permissible  for bank  holding
companies.  Second, savings institutions may not purchase or invest in affiliate
securities  except those of a  subsidiary.  Finally,  the Director of the OTS is
granted  authority to impose more stringent  restrictions  for reasons of safety
and soundness.

Safety and Soundness. The FDICIA requires each federal banking regulatory agency
to prescribe,  by regulation,  standards for all insured depository institutions
and depository  institution holding companies relating to (i) internal controls,
information  systems and audit systems;  (ii) loan  documentation;  (iii) credit
underwriting;   (iv)  interest  rate  risk  exposure;  (v)  asset  growth;  (vi)
compensation, fees and benefits; and (vii) such other operational and managerial
standards as the agency determines to be appropriate. The compensation standards
would prohibit employment contracts, compensation or benefit arrangements, stock
option plans, fee arrangements or other  compensatory  arrangements that provide
excessive  compensation,  fees or benefits  or could lead to material  financial
loss. In addition,  each federal  banking  regulatory  agency must  prescribe by
regulation  standards  specifying  (i) a maximum ratio of  classified  assets to
capital;  (ii) minimum  earnings  sufficient to absorb losses without  impairing
capital  (iii) to the extent  feasible,  a minimum ratio of market value to book
value for publicly  traded  shares of  depository  institutions  and  depository
institution  holding companies;  and (iv) such other standards relating to asset
quality,  earnings and  valuation as the agency  determines  to be  appropriate.
Insured  depository  institutions  are also  required to have written  plans and
reports relating to such  institutions'  efforts to achieve Year 2000 readiness.
If an insured depository  institution or its holding company fail to meet any of
the standards promulgated by regulations,  then such company will be required to
submit a plan to its  federal  regulator  specifying  the  steps it will take to
correct  the  deficiency.  The  federal  banking  agencies  have  uniform  rules
concerning these standards.

Prompt Corrective Action.  Under FDICIA, each federal banking agency is required
to take prompt corrective  action to resolve the problems of insured  depository
institutions that do not meet minimum capital ratios.  The extent of an agency's
power to take prompt  corrective  action  depends upon whether an institution is
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized."

The federal  banking  agencies have adopted  regulations to implement the prompt
corrective  action provisions of FDICIA.  Under the regulations,  an institution
shall be deemed to be (i) "well  capitalized" if it has total risk-based capital
of 10% or more, has a Tier 1 risk-based  capital ratio of 6% or more, has a Tier
1 leverage  capital ratio of 5% or more and is not subject to any order or final
capital  directive to meet and maintain a specific capital level for any capital
measure,  (ii)  "adequately  capitalized" if it has a total  risk-based  capital
ratio of 8% or more, a Tier 1 risk-based  capital ratio of 4% or more and a Tier
1 leverage capital ratio of 4% or more (3% under certain circumstances) and does
not meet the definition of "well  capitalized," (iii)  "undercapitalized"  if it
has a total  risk-based  capital ratio that is less than 8%, a Tier 1 risk-based
capital  ratio that is less than 4% or a Tier 1 leverage  capital  ratio that is
less   than  4%  (3%   under   certain   circumstances),   (iv)   "significantly
undercapitalized"  if it has a total risk-based  capital ratio that is less than
6%, a Tier 1 risk-based  capital ratio that is less than 3% or a Tier 1 leverage
capital ratio that is less than 3%, and (v) "critically  undercapitalized" if it
has a ratio of tangible equity to total assets that is equal to or less than 2%.

FDICIA  authorizes the appropriate  federal banking agency,  after notice and an
opportunity for a hearing, to treat a well capitalized,  adequately  capitalized
or  undercapitalized  insured  depository  institution  as  if it  had  a  lower
capital-based  classification  if it is in an unsafe  or  unsound  condition  or
engaging  in an unsafe or unsound  practice.  Thus,  an  adequately  capitalized
institution  can  be  subjected  to  the   restrictions   on   under-capitalized
institutions.

An  undercapitalized  institution  is required to submit an  acceptable  capital
restoration  plan to its  appropriate  federal  banking  agency.  The plan  must
specify  (i)  the  steps  the  institution   will  take  to  become   adequately
capitalized,  (ii) the capital  levels to be attained  each year,  (iii) how the
institution will comply with any regulatory sanctions then in effect against the
institution and (iv) the types and levels of activities in which the institution
will engage. An undercapitalized  institution is also generally  prohibited from
increasing its average total assets and is generally  prohibited from making any
acquisitions,  establishing  any new  branches  or  engaging  in any new line of
business except in accordance with an accepted capital  restoration plan or with
the approval of the FDIC.

The  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994 (the
"IBBEA")  amended the Bank  Holding  Company Act of 1956 (the  "BHCA") to create
certain  interstate  banking and branching  opportunities.  The IBBEA  generally
applies only to traditional savings banks and commercial banks. Under the IBBEA,
commencing September 29, 1995, a bank holding company may acquire a bank located
in any state,  provided that the acquisition does not result in the bank holding
company  controlling  more  than  10%  of the  deposits  in  insured  depository
institutions in the United States,  or 30% of deposits in the state in which the
bank to be  acquired  is  located  (unless  the  state  waives  the 30%  deposit
limitation).  The IBBEA permits  individual states to restrict the ability of an
out-of-state  bank holding  company or bank to acquire an in-state bank that has
been  in  existence   for  less  than  five  years  and  to  establish  a  state
concentration limit of less than 30% if such reduced limit does not discriminate
against out-of-state bank holding companies or banks.

Effective June 1, 1997, the IBBEA authorizes an "adequately  capitalized"  bank,
with the  approval of the  appropriate  federal  banking  agency,  to merge with
another  adequately  capitalized  bank in any  state  that has not  opted out of
interstate  branching.  Such a bank may operate the target's offices as branches
if  certain  conditions  are  satisfied.  The same  national  and state  deposit
concentration limits and applicable state  minimum-existence  restrictions which
apply to interstate  acquisitions  (as discussed above) also apply to interstate
mergers. The applicant also must comply with any  non-discriminatory  host state
filing and notice  requirements  and  demonstrate  a record of  compliance  with
applicable  federal and state  community  reinvestment  laws.  Hawaii enacted an
interstate  branching and bank mergers law which  expressly  permits  interstate
branching under Sections 102 and 103 of the IBBEA.

Under the IBBEA,  the resulting  bank in an  interstate  merger may establish or
acquire  additional  branches at any  location in a state where any of the banks
involved in the merger could have  established or acquired a branch. A bank also
may acquire one or more branches of an out-of-state  bank without  acquiring the
target  out-of-state  bank if the law of the target's  home state permits such a
transaction. In addition, the IBBEA permits a bank to establish a de novo branch
in  another  state if the host  state  statutorily  permits  de novo  interstate
branching.

Hawaii  law  authorizes  out-of-state  banks to  engage  in  "interstate  merger
transactions"   (mergers  and  consolidations  with  and  purchases  of  all  or
substantially  all of the assets and branches of) with Hawaii  banks,  following
which any such  out-of-state bank may operate the branches of the Hawaii bank it
has  acquired.  The Hawaii bank must have been in  continuous  operation  for at
least five  years  prior to such an  acquisition,  unless it is subject to or in
danger of becoming subject to certain types of supervisory  action. This statute
does not permit  out-of-state  banks to acquire  branches of Hawaii  banks other
than through an "interstate  merger  transaction"  (except in the case of a bank
that is  subject  to or in  danger  of  becoming  subject  to  certain  types of
supervisory  action) nor to open  branches in Hawaii on a de novo basis.  Hawaii
law imposes no state deposit caps or concentration  limits.  It also permits the
State Commissioner of Financial  Institutions to waive, on a case-by-case basis,
federal statewide concentration limits, in accordance with standards that do not
discriminate against out-of-state banks.

The IBBEA also permits a bank  subsidiary  of a bank  holding  company to act as
agent for other  depository  institutions  owned by the same holding company for
purposes of receiving  deposits,  renewing time  deposits,  closing or servicing
loans and receiving loan payments.  Under the IBBEA, a savings  association  may
perform  similar  agency  services for  affiliated  banks to the extent that the
savings  association  was affiliated  with a bank on July 1, 1994, and satisfies
certain additional requirements.

Deposit  Insurance.  Effective January 1996, deposit insurance premiums for most
banks insured by the Bank Insurance Fund ("BIF")  dropped to zero, but those for
savings  associations  insured by the SAIF remained  unchanged at 23 to 31 cents
per $100 of  domestic  deposits.  This  disparity  is the  direct  result of the
over-capitalization  of the BIF and the  serious  under-capitalization  of SAIF.
This disparity in deposit  insurance  premiums raises obvious issues relating to
the competitiveness of institutions subject to the SAIF premiums, as well as the
possibility that SAIF-insured institutions could convert or otherwise move their
deposits to BIF-insured institutions.

On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act") was
signed into law to recapitalize the SAIF,  which generally  insures the deposits
of savings associations.

The Funds Act for the three year period beginning in 1997, subjects  BIF-insured
deposits (such as those of the Bank) to a Financing Corporation ("FICO") premium
assessment on domestic deposits at one-fifth of the premium rate  (approximately
1.2 cents) imposed on SAIF-insured deposits  (approximately 6.0 cents). Deposits
held by the Association are SAIF-insured deposits.

BIF-insured  institutions  in the lowest risk  category  will continue to pay no
premiums,  and other  institutions  will be assessed  based on a range of rates,
with  those in the  highest  risk  category  paying 27 cents  for every  $100 of
BIF-insured  deposits.  Rates in the SAIF assessment schedule,  range from 0 for
institutions  in the lowest risk  category to 27 cents for  institutions  in the
highest risk category.

Banking  regulators  are  empowered  under  the Funds  Act to  prohibit  insured
institutions  and their holding  companies from  facilitating or encouraging the
shifting of deposits  from the SAIF to BIF in order to avoid  higher  assessment
rates.  Accordingly,  the FDIC promulgated  regulations that impose entrance and
exit fees on depository  institutions  attempting to transfer  insured  deposits
from  the SAIF to the BIF or from  the BIF to the  SAIF as  contemplated  by the
Funds Act.

Other Regulatory  Considerations.  The Bank and the Association are also subject
to a wide  array of other  state and  federal  laws and  regulations,  including
without limitation, usury laws, the Equal Credit Opportunity Act, the Electronic
Funds Transfer requirements,  the Truth-in-Lending Act, the Truth-in-Savings Act
and the Real Estate Settlement Procedures Act.

NUMBER OF EMPLOYEES

As of December 31, 1998 the Company and its  subsidiaries  employed 536 persons;
499 on a full-time  basis and 37 on a part-time  basis.  Neither the Company nor
any of its subsidiaries is a party to any collective bargaining agreements.

FOREIGN OPERATIONS

Not applicable.

STATISTICAL DISCLOSURES

The  following  tables and data set forth,  for the  respective  periods  shown,
selected  statistical  information relating to the Company and its subsidiaries.
These tables should be read in  conjunction  with the  information  contained in
ITEM 6. "Selected Financial Data," ITEM 7. "Management's Discussion and Analysis
of  Financial  Condition  and  Results of  Operations,"  and ITEM 8.  "Financial
Statements and Supplementary Data."


<PAGE>
INVESTMENT PORTFOLIO

The  following  table  sets forth the  amortized  cost and the  distribution  by
category of investment securities at December 31 for the years indicated:

 December 31,
  (in thousands of dollars)        1998      1997      1996
                                 ----------------------------
Held-to-maturity
----------------
State and political subdivisions     -          101       102
Mortgage-backed securities           -       88,296    97,729
                                 ----------------------------
                                 $   -     $ 88,397   $97,831
                                 ============================
Available-for-sale
------------------
U.S. Treasury                    $ 11,900  $ 49,104  $ 51,997
 and other U.S. government
 agencies and corporations
State and political subdivisions    9,581     4,923     3,219
Mortgage-backed securities        118,908    64,306    81,490
                                 ----------------------------
                                 $140,389  $118,333  $136,706
                                 ============================
Restricted securities
---------------------
  (See Note A3 of Notes to the
   Company's Consolidated
   Financial Statements          $ 29,481  $ 27,348  $ 25,100
                                  ===========================

The  following  table sets forth the  maturities  of  investment  securities  at
December 31, 1998, the weighted average yields of such securities (calculated on
the basis of the cost and effective  yields weighted for the scheduled  maturity
of each security):
<TABLE>
<S>                            <C>             <C>              <C>              <C>
Maturing                         Within            After 1          After 5          After
                                 1 year         under 5 years    under 10 years     10 years
(in thousands of dollars)      Amount  Yield    Amount  Yield    Amount  Yield    Amount  Yield
                              -----------------------------------------------------------------
Available-for-sale
------------------
U.S. Treasury
 and other U.S. government
 agencies and corporations    $ 11,900  6.33%  $   -      -  %  $   -      -  %  $   -     -   %
State and political
 subdivisions                      725  6.37      1,003  6.29      3,382  4.87      4,471  7.27
Mortgage-backed securities       5,378  9.24     12,006  6.71     18,113  7.55     83,411  6.21
                              --------         --------         --------         --------
                              $ 18,003  7.20%  $ 13,009  6.68%  $ 21,495  7.13%  $ 87,882  6.26%
                              ==================================================================
</TABLE>

A table setting forth information regarding investments in securities, including
estimated fair value and carrying value of such securities is included in Note B
of Notes to the Company's Consolidated Financial Statements.

<PAGE>
LOAN PORTFOLIO

Total loans at December 31, 1998 decreased to $984.46 million,  a $70.29 million
or 6.66%  decrease  over the  previous  year.  The  reduction in total loans was
primarily due to decreases in real estate loans. A comparative  breakdown of the
portfolio during the last five years is presented below:

The amount of loans outstanding at December 31 for the years indicated are shown
in the following table categorized as to types of loans:

<TABLE>
<S>                             <C>          <C>         <C>         <C>          <C>
December 31,
(in thousands of dollars)           1998         1997        1996        1995         1994
                                ------------------------------------------------------------
Commercial and financial        $  191,128   $  186,418  $  170,228  $  168,497   $  167,460
Real estate - construction          25,453       41,069      28,699      18,408       24,448
Real estate - mortgage             682,313      747,897     753,676     851,242      797,997
Installment and consumer            85,562       79,363      84,456      90,378       91,738
                                ------------------------------------------------------------
                                $  984,456   $1,054,747  $1,037,059  $1,128,525   $1,081,643
                                ============================================================
</TABLE>

Commercial  and  financial.  Loans  outstanding  in this  category  increased to
$191.12 million, an increase of $4.71 million or 2.52% from year-end 1997. Loans
in this category are primarily  loans to small and  medium-sized  businesses and
professionals doing business in Hawaii. The average loan balance was $154,000 at
year end  1998.  These  loans  have  been made  primarily  on a  secured  basis.
Typically,  real estate serves as  collateral as well as equipment,  receivables
and personal assets as deemed  necessary.  The Company has made a limited number
of unsecured loans in this category.

Real  estate -  mortgage.  Real  estate - mortgage  loans  decreased  to $682.31
million at year-end  1998, a decrease of $65.58  million or 8.77% from  year-end
1997. During 1998, the Company securitized $90.85 million of mortgage loans into
mortgage-based  securities.  The Company also sold $12.89  million in delinquent
loans - see further discussion in "Other Income" of Management's  Discussion and
Analysis of Financial  Condition.  The average size of loans in this category at
December 31, 1998 was approximately  $135,000. In 1998, the Company has not made
any loans to finance homes in excess of $1 million.


MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

The  following  table shows the amount of loans  (excluding  categories of "real
estate-mortgage" and "installment and consumer")  outstanding as of December 31,
1998, which, based on remaining  scheduled  repayments of principal,  are due in
the periods indicated:

December 31, 1998                           Maturing
                                 Within      After 1      After
(in thousands of dollars)        1 year  Within 5 years  5 years      Total
                               ---------------------------------------------
Commercial and financial       $153,714     $ 20,435     $ 16,979   $191,128
Real estate-construction         13,345        8,332        3,776     25,453
                               ---------------------------------------------
                               $167,059     $ 28,767     $ 20,755   $216,581
                               =============================================

The following  table sets forth the  sensitivity  of the above amounts due after
one year:

December 31, 1998
                                        Fixed     Variable
(in thousands of dollars)               Rate        Rate       Total
                                      ------------------------------
Due after 1 but within 5 years        $ 11,213   $ 17,554   $ 28,767
Due after 5 years                       15,291      5,464     20,755
                                      ------------------------------
                                      $ 26,504   $ 23,018   $ 49,522
                                      ==============================


<PAGE>
RISK ELEMENTS IN LENDING ACTIVITIES

The following  table presents  information  concerning  the aggregate  amount of
non-performing  assets.  Non-performing  assets  are  comprised  of:  (a) assets
accounted  for on a non-accrual  basis;  and (b) assets  contractually  past due
ninety days or more as to interest or  principal  payments  (but not included in
the non-accrual  assets in (a) above.  There are no potential  problem loans not
already disclosed in item (a) or (b) above.


                                                 December 31,
(in thousands of dollars)          1998      1997    1996      1995     1994
                                 --------------------------------------------
Loans accounted for on a non-accrual basis:
     Commercial & financial      $ 4,106  $ 2,996  $ 4,321   $ 2,538  $ 1,484
     Real estate                  12,505   21,480   19,064    11,800    5,882
                                ---------------------------------------------
                                 $16,611  $24,476  $23,385   $14,338  $ 7,366
Loans contractually past
  due 90 days or more as
  to principal or interest         2,832    3,913    2,379    3,113     5,946
                                 --------------------------------------------
      Total non-performing loans  19,443   28,389   25,764   17,451    13,312
Other real estate owned - net of
  valuation allowance              8,583    3,686    1,844    1,715     2,122
                                 --------------------------------------------
Total non performing assets      $28,026  $32,075  $27,608  $19,166   $15,434
                                 ============================================
Restructured loans
  Real estate                    $11,149  $ 2,917     -        -         -
                                 ============================================

Ratio of non-performing loans
  to period end total loans        1.97%    2.69%    2.48%    1.54%    1.23%

Ratio of non-performing assets
  to period end total assets       1.96%    2.23%    1.98%    1.27%    1.07%

Non-accrual  loans declined to $16.61 million at December 31, 1998 a decrease of
$7.87 million, or 32.15%, from the $24.48 million at year end 1997. During 1998,
the Company sold $12.89  million in  delinquent  loans  (including  $6.8 million
non-accrual).  This  sale  resulted  in a loss of  $2.36  million  -see  further
discussion  in  "Other  Income"  of  Management's  Discussion  and  Analysis  of
Financial Condition and Operating Results. Interest income which would have been
accrued in 1998 on non-accrual  loans (had these loans been current) amounted to
approximately $1.72 million, which compares to the $0.30 million interest income
recorded on these loans during 1998.

At  December  31,  1998,  OREO (net of  valuation  allowance)  amounted to $8.58
million,  an increase of $4.90  million,  or 132.85%,  from the prior year.  The
increase in the 1998 OREO  balance and  provision  for OREO losses  reflects the
continued  weakness in the Hawaii  economy  and  related  decline in real estate
values.  The  Company  has also  been more  aggressive  in its  delinquent  loan
collection efforts resulting in a higher level of foreclosures and related OREO.

Restructured loans increased to $11.15 million at December 31, 1998, an increase
of  $8.23  million  from  the  prior  year  end.  The  increase  was  due to the
restructuring of mortgage loans to a group of investors in a condominium project
located  on the  island of Maui.  These  mortgage  loans  are to 139  individual
investors.  The average loan amount is  approximately  $83,000 and is secured by
the individual condominum units.

It is the Company's policy to discontinue  accrual of interest on loans when, in
management's  opinion,  the borrower may be unable to make  scheduled  payments.
Whenever  the payment of interest or principal is 90 days past due, or sooner in
certain situations determined by management of the Company,  interest accrual is
normally  discontinued.  Previously accrued but uncollected interest is reversed
and income recorded.


<PAGE>
SUMMARY OF CREDIT LOSS EXPERIENCE

The  following  table  summarizes  changes in the  allowance  for credit  losses
arising from loans  charged-off and recoveries on loans  previously  charged-off
according to loan  categories  and  additions to the  allowance  which have been
charged to expense:

                                       Years ended December 31,
(in thousands of dollars)        1998    1997    1996    1995    1994
                               ----------------------------------------
Balance at
  beginning of year            $16,365 $15,431 $14,576 $14,326  $ 9,816
Allowance of the Association
  at acquisition date               -       -       -       -     3,128
Charge offs:
Commercial and financial           533   2,489     537      87      602

Real estate -  mortgage          5,854   2,315     495     563      300
Installment and consumer           737   1,121     873     602      694
                               ----------------------------------------
     Total charge-offs           7,124   5,925   1,905   1,252    1,596
Recoveries:                    ----------------------------------------
Commercial and financial           107     233      30      92      609
Real estate -  mortgage            534      26      74     142       14
Installment and consumer           453     350     246     288      391
                               ----------------------------------------
     Total recoveries            1,094     609     350     522    1,014
                               ----------------------------------------
Net loans charged-off            6,030   5,316   1,555     730      582
Provision charged to expense     7,436   6,250   2,410     980    1,964
                               ----------------------------------------
Balance at end of year         $17,771 $16,365 $15,431 $14,576  $14,326
                               ========================================



                                       Years ended December 31,
                                 1998    1997    1996    1995    1994
                               ---------------------------------------
Net charge-offs to
  average loans outstanding        0.57%  0.50%  0.14%   0.07%   0.07%

Allowance for credit
  losses to year-end loans         1.81%  1.55%  1.49%   1.29%   1.32%

Allowance for credit
  losses to year-end
  non-performing loans            91.40% 57.65% 59.89%  83.53% 107.62%


The amount of the allowance  for credit losses is based on periodic  evaluations
by management.  In these  evaluations,  management  considers  numerous  factors
including,  but not limited to,  current  economic  conditions,  loan  portfolio
composition, loan loss experience and management's estimate of potential losses.
These  various  analyses  lead to a  determination  of the amount  needed in the
allowance for credit loan losses. To the extent the existing  allowance is below
the amount so  determined,  a provision is made that will bring the allowance to
such amount.  Thus, the provision for credit losses may fluctuate and may not be
comparable from year to year.

The  allowance  for credit  losses as a percentage  of year-end  total loans was
1.81% at December 31, 1998, compared to 1.55% and 1.49% at December 31, 1997 and
1996,  respectively.  On the other hand,  the  allowance  for credit losses as a
percentage of non-performing  loans was 91.40% at December 31, 1998, an increase
from the 57.65% and 59.89% at the end of 1997 and 1996, respectively.

<PAGE>

The allowance for credit losses has been  allocated by the Company's  management
according  to the amount  deemed to be  reasonably  necessary to provide for the
possibility  of loan losses being  incurred  within the following  categories of
loans at the dates indicated:

<TABLE>
<S>            <C>             <C>             <C>             <C>             <C>
                                                 December 31,
(in thousands        1998            1997            1996            1995           1994
 of dollars)      Amt.  %(1)      Amt.  %(1)      Amt.  %(1)      Amt.  %(1)     Amt.  %(1)
               -----------------------------------------------------------------------------
Commercial &
 financial     $ 4,539 19.41%  $ 3,718 17.67%  $ 4,808 16.42%  $ 5,039 14.91%  $ 3,649 15.47%

Real estate -
 Construction      -    2.59%       -   3.89%      -    2.77%      184  1.62%      378  2.20%

Real estate -
 Mortgage        9,519 69.31%   10,744 70.91%    7,021 72.67%    5,053 75.46%    4,097 73.79%

Installment and
  consumer       1,264  8.69%      476  7.53%    1,412  8.14%    1,510  8.01%    1,563  8.49%

Unallocated      2,449   n/a     1,427   n/a     2,190   n/a     2,790   n/a     4,639   n/a
               -----------------------------------------------------------------------------
     Total     $17,771   100%  $16,365   100%  $15,431   100%  $14,576   100%  $14,326   100%
               =============================================================================
</TABLE>
(1) Represents percentage of loans in each category to total loans.

<PAGE>
DEPOSITS

The Company  competes for deposits in Hawaii  principally  by providing  quality
customer service at its branch offices.

The Company has a network of twenty-four  branch offices which seek to provide a
stable core deposit base.  The newest  branch office in Kapolei,  Oahu opened in
December 1993. The deposit base provided by these branches  consists of interest
and non-interest bearing demand and savings accounts,  money market certificates
and time  certificates  of deposit.  The Company does not offer or have brokered
deposits.

The average  daily  amount of deposits  and the average rate paid on each of the
following deposit categories is summarized below for the years indicated:

                                         Years Ended December 31,
                                 1998             1997              1996
                                Average          Average           Average
                             Balance  Rate     Balance  Rate     Balance  Rate
                             --------------------------------------------------
Non-interest bearing
  demand deposits         $  107,401  0.00%   $104,361  0.00%   $109,878  0.00%
Interest bearing
  demand deposits            141,391  2.69%    166,632  2.61%    166,118  2.50%
Savings                      208,007  2.69%    175,831  2.61%    181,900  2.50%
Time deposits                581,952  5.25%    508,379  5.32%    500,491  5.28%
                          ----------          --------          --------
     Total                $1,038,751  4.29%   $955,203  3.73%   $958,387  3.67%
                          =====================================================


The  remaining  maturities  of time  deposits  in  amounts of  $100,000  or more
outstanding at December 31, 1998 is summarized below:

(in thousands of dollars)

3 months or less                           $111,031
Over 3 months through 6 months               73,057
Over 6 months through 12 months              35,977
Over 12 months                               10,058
                                          ---------
     Total                                 $230,123
                                          =========


<PAGE>
SHORT-TERM BORROWINGS

The following table sets forth outstanding balances of short-term  borrowings at
year-end :

 December 31,
(in thousands of dollars)                   1998        1997        1996
                                          --------------------------------
Advances from the FHLB                    $ 56,450    $136,700    $198,810
Federal treasury tax and loan                  476         512         571
Federal funds purchased and
  securities sold under
  repurchase agreements                       -           -          9,300
                                          --------------------------------
     Total                                $ 56,926    $137,212    $208,681
                                          ================================

Average interest rates and average and maximum balances for short-term borrowing
categories  were as follows,  for  categories  of  borrowings  where the average
outstanding  balance for the period was 30% or more of  stockholders'  equity at
year-end:

 December 31,
(in thousands of dollars)                   1998        1997        1996
                                          --------------------------------
Advances from the FHLB:
Average interest rate at year-end             5.37%       5.63%       5.55%
Maximum outstanding at any month-end      $134,447    $232,651    $226,515
Average outstanding                        109,653     184,430     199,870
Average interest rate for the period          5.62%       6.16%       5.87%

Federal  funds  purchased  generally  mature  on the day  following  the date of
purchase.  Securities  sold  under  agreements  to  repurchase  were  treated as
financings and the  obligations to repurchase the securities sold were reflected
as a liability  with the dollar  amount of securities  underlying  the agreement
remaining in the asset accounts.

Advances from the FHLB were made under credit line agreements  totaling  $453.93
million,  of which $264.47 million was undrawn at December 1998. See Notes H and
I of Notes to the Company's Consolidated Financial Statements.


<PAGE>
ITEM 2.  PROPERTIES

The  operations  of the Bank and  Association  are  transacted  through its main
banking offices and twenty-three  branches. The Company's facilities are located
on leased premises,  and  expenditures by the Company for interior  improvements
are  capitalized.  The leases for these premises  expire on various dates though
the year 2010.  Lease terms generally  provide for additional  payments for real
property taxes, insurance and maintenance.  See Note F of Notes to the Company's
Consolidated  Financial Statements.  On March 21, 1989, a limited partnership of
which  Citibank  Properties,  Inc.,  the  Bank's  only  subsidiary  owned  a 25%
interest,  sold its office building where the administrative and banking offices
of the Bank are currently  located to an unrelated  third party in a transaction
similar to a  sale-leaseback  transaction.  See Note L of Notes to the Company's
Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

The Company has prevailed in a case filed in 1996 by Plaintiffs,  the purchasers
of the  International  Savings  Building (the "ISL  Building").  The  plaintiffs
sought   recission   of  the  sale  of  the  ISL   Building   based  on  alleged
misrepresentations  and  non-disclosure  regarding ground lease negotiations and
land  appraisals  concerning  the  property.  Further,  the  plaintiffs  alleged
unreasonable  demands by the  fee-simple  owner.  In October  1998,  the Company
received  a jury  verdict  in its  favor  finding  no  defendants  liable on the
Plaintiff's   claims  and  finding  the   Plaintiff   liable  on  the  Company's
counterclaims.  In December  1998, the trial court judge awarded the Company its
requested reimbursement of attorneys' fees. The Plaintiff has subsequently filed
a motion for  reconsideration,  which has not yet been decided.  The Company has
not recorded any recovery  amounts  related to this judgement as collectibity is
uncertain.

The Company is a defendant  in other  various  legal  proceedings  arising  from
normal business activities. In the opinion of management,  after reviewing these
proceedings with counsel, the aggregate liability,  if any, resulting from these
proceedings  would  not have a  material  effect on the  Company's  consolidated
financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS

No matter was submitted  during the fourth quarter of 1998 to a vote of security
holders through the solicitation of proxies or otherwise.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

The Company's  common stock is traded on the NASDAQ National Market System under
the symbol "CBBI". At March 1, 1999, the Company had approximately  4,000 common
shareholders of record.

The following table sets forth quarterly  market price and dividend  information
on the Company's common stock over the preceding two years:

1998                                    High     Low    Dividends
                                     ----------------------------
First quarter                          $43.00   $35.25   $0.050
Second quarter                          43.00    35.25    0.060
Third quarter                           40.00    30.75    0.060
Fourth quarter                          34.00    30.00    0.060


1997

First quarter                          $39.50   $28.00   $0.375
Second quarter                          35.50    29.50    0.050
Third quarter                           45.00    34.75    0.050
Fourth quarter                          45.00    40.50    0.050


<PAGE>
Under the MOU agreement with the FRB, the Company is restricted from the payment
of cash dividends  without prior approval of the FRB. In March 1997, the Company
announced  a  reduction  in the  first  quarter  dividend  to $0.05  per  share.
Beginning in the second quarter of 1998, the quarterly dividend was increased to
$0.06 per share. The Company will continue to evaluate the dividend  payments on
a quarterly basis.

<TABLE>
<S>                                 <C>         <C>         <C>         <C>         <C>
ITEM 6. SELECTED FINANCIAL DATA

(in thousands of dollars,
 except per share data)                  1998        1997        1996        1995     1994 (1)
                                    ----------------------------------------------------------
Income Statement Data:
  Interest income                   $  112,060  $  112,529  $  111,247  $  111,716  $   89,350
  Interest expense                      53,898      53,859      53,477      57,686      34,445
  Net interest income                   58,162      58,670      57,770      54,030      54,905
  Provision for credit losses            7,436       6,250       2,410         980       1,964
  Net income                             8,369       7,218       7,059       8,013      11,071
End of Year Balance Sheet Data:
  Total assets                       1,428,438   1,435,226   1,397,169   1,501,513   1,439,511
  Total loan portfolio                 984,456   1,054,747   1,037,059   1,128,525   1,081,643
  Total deposits                     1,084,610   1,008,728     951,910   1,011,483     923,444
  Long-term debt                       133,004     141,048      94,825     101,371     106,850
  Stockholders' equity                 132,372     125,065     119,411     116,506     111,165
Per Share Data:
  Net income (basis)                      2.36        2.03        1.99        2.26        3.32
  Net income (diluted)                    2.35        2.03        1.99        2.26        3.32
  Cash dividends declared                 0.23        0.53        0.98        1.30        1.30
Outstanding Shares:
  Average during year                3,551,891   3,551,228   3,551,228   3,551,228   3,335,869
Selected Ratios
  Return on average total assets          0.59%       0.52%       0.50%       0.54%       0.95%
  Return on average
    stockholder's equity                  6.49%       5.90%       5.99%       7.05%      10.92%
  Average stockholders'
    equity to average total assets        9.05%       8.75%       8.34%       7.69%       8.67%
</TABLE>
(1) Results include the Association from the April 4, 1994 date of acquisition.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The  following  discussion  is  intended to  facilitate  the  understanding  and
assessment of significant  changes in trends related to the financial  condition
of the Company and the results of its operations.  The  Management's  Discussion
and Analysis of Financial  Condition and Results of Operations should be read in
conjunction  with the Selected  Consolidated  Financial  Data and the  Company's
Consolidated  Financial Statements and related notes thereto appearing elsewhere
in this Annual Report.

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  contains  statements  relating  to  future  results  of the  Company
(including  certain   projections  and  business  trends)  that  are  considered
"forward-looking  statements."  Actual results may differ  materially from those
projected  as a result of certain  risks and  uncertainties  including,  but not
limited  to,  changes  in  political  and  economic  conditions,  interest  rate
fluctuations,  competitive  product and pricing  pressures  within the Company's
market,  equity and bond market fluctuations,  personal and corporate customers'
bankruptcies,  inflation,  acquisitions and integrations of acquired businesses,
and risks relating to Year 2000 issues. Accordingly,  historical performance may
not be a reliable indicator of future earnings.


Results of Operations
Consolidated  net income for 1998 was $8.37 million,  an increase of 15.95% over
the $7.22  million  in 1997,  and an  18.56%  increase  from the  $7.06  million
reported in 1996.  Basic  earnings  per share was $2.36 in 1998,  as compared to
$2.03 in 1997 and $1.99 in 1996. The Company's  return on average  stockholders'
equity was 6.49% in 1998, 5.90% in 1997 and 5.99% in 1996. The return on average
total  assets for 1998 was 0.59%,  as  compared  to 0.52% for 1997 and 0.50% for
1996. The net interest margin (on a taxable equivalent basis) was 4.35% in 1998,
compared to 4.40% and 4.36% in 1997 and 1996, respectively.


Net Interest Income
Net interest  income is the largest single  component of the Company's  earnings
and represents  the difference  between  interest  income  received on loans and
other earning assets and interest  expense paid on deposits and borrowings.  Net
interest income,  on a taxable  equivalent  basis, was $58.46 million in 1998, a
decrease of $0.40 million,  or 0.68%,  from 1997. During 1998, the Company's net
interest margin declined to 4.35%, compared to 4.40% for 1997.

As summarized on Table 2, the $0.40 million  decrease in net interest income for
1998  consisted of a $0.36 million  decrease in interest  income  coupled with a
$0.04 million increase in interest expense.

The  average  yield on  interest-earning  assets in 1998  declined  by six basis
points to 8.36%,  which offset the $4.76 million increase in the average balance
of  interest-earning  assets.  The $0.36 million decrease in interest income was
primarily due to the $21.62 million  decrease in the average  balance of taxable
investment securities.

Interest costs on  interest-bearing  deposits and  liabilities  were  relatively
stable with an increase of only $0.04 million in 1998.  The 1998 increase in the
average balance of  interest-bearing  deposits and liabilities of $16.94 million
was  partially  offset by the seven basis point  decrease in the average cost of
funds to 4.62%.The following table sets forth the condensed consolidated average
balance sheets, an analysis of interest  income/expense  and average  yield/rate
for each major  category of earning  assets and  interest-bearing  deposits  and
liabilities for the years indicated on a taxable  equivalent  basis. The taxable
equivalent  adjustment  is made for  items  exempt  from  federal  income  taxes
(assuming a 35% tax rate) to make them  comparable with taxable items before any
income taxes are applied.

<TABLE>
TABLE 1: DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES

<S>                   <C>         <C>       <C>   <C>        <C>       <C>   <C>         <C>       <C>
                                   1998                       1997                        1996
(in thousands           Average            Yield/   Average           Yield/   Average            Yield/
 of dollars)            Balance   Interest  Rate    Balance  Interest  Rate    Balance   Interest  Rate
                        --------------------------------------------------------------------------------
ASSETS
Interest-earning assets:
  Interest-bearing
   deposits in other
   banks              $    8,539  $    525  6.15% $   19,387 $  1,176  6.07%  $     -    $  -        - %
  Federal funds sold
   and securities
   purchased under
   agreements to
   resell                 34,489     1,766  5.12       3,908      213  5.45        6,333      437  6.90
  Taxable investment
   securities            228,321    15,843  6.94     249,938   17,908  7.16      208,881   13,776  6.60
  Non-taxable investment
   securities              8,634       668  7.74       3,611      318  8.81        3,526      474 13.44
  Loans (2)            1,063,541    93,558  8.80   1,061,925   93,104  8.77    1,111,661   96,825  8.71
                       -------------------         ------------------          ------------------
Total interest-earning
   assets              1,343,524   112,360  8.36   1,338,769  112,719  8.42    1,330,401  111,512  8.38
                      ---------------------------------------------------------------------------------
Non-interest earning
   assets:
  Cash and due from
   banks                  31,590                      24,964                      35,698
  Premises and
   equipment              20,114                      11,182                      10,761
  Other assets            46,606                      41,050                      50,345
  Less allowance for
   credit losses         (17,041)                    (16,246)                    (15,008)
                      ----------                  ----------                  ----------
    Total assets      $1,424,793                  $1,399,719                  $1,412,197
                      ==========                  ==========                  ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-bearing liabilities:
  Savings deposits    $  349,398  $  9,393  2.69% $  342,463 $  8,941  2.61%  $  348,018 $  8,692  2.50%
  Time deposits          581,952    30,547  5.25     508,379   27,025  5.32      500,491   26,450  5.28
  Short-term borrowings  109,653     6,158  5.62     184,430   11,364  6.16      199,870   11,725  5.87
  Long-term debt         124,625     7,800  6.26     113,414    6,529  5.76      104,025    6,610  6.35
                       -------------------         ------------------          ------------------
Total interest-bearing
  deposits and
  liabilities          1,165,628    53,898  4.62   1,148,686   53,859  4.69    1,152,404   53,477  4.64
                      ---------------------------------------------------------------------------------
Non-interest-bearing
  liabilities:
  Demand deposits        107,401                     104,361                     109,878
  Other liabilities       22,875                      24,253                      32,072
                      ----------                  ----------                  ----------
Total liabilities      1,295,904                   1,277,300                   1,294,354
Stockholders' equity     128,889                     122,419                     117,843
                      ----------                  ----------                  ----------
Total liabilities and
  stockholders'
  equity              $1,424,793                  $1,399,719                  $1,412,197
                      ==========                  ==========                  ==========

Net interest income
  and margin on total
  earning assets                    58,462  4.35%              58,860  4.40%               58,035  4.36%
  Taxable equivalent
   adjustment                         (300)                      (190)                       (265)
                                  --------                   --------                    -------- 
Net interest income               $ 58,162                   $ 58,670                    $ 57,770
                                  ========                   ========                    ========
</TABLE>
<TABLE>
<S>                               <C>        <C>        <C>        <C>        <C>        <C>

TABLE 2: INTEREST DIFFERENTIAL

                                       1998 Compared to 1997           1997 Compared to 1996
                                        Increase (Decrease)             Increase (Decrease)
                                        due to Change in:(1)            due to Change in: (1)
(in thousands of dollars)          Volume      Rate    Net Change   Volume     Rate     Net Change
                                  ----------------------------------------------------------------

Interest-earning assets:
  Interest-bearing deposits
   in other banks .............   $  (667)   $    16    $  (651)   $   588    $   588    $ 1,176
  Federal funds sold and
    securities purchased under
    agreements to resell ......     1,567        (14)     1,553       (145)       (79)      (224)
  Taxable investment securities    (1,513)      (552)    (2,065)     2,870      1,262      4,132
  Non-taxable investment
   securities .................       393        (43)       350         11       (167)      (156)
  Loans (2) ...................       142        312        454     (4,357)       636     (3,721)
                                  ---------------------------------------------------------------
Total interest-earning assets .       (78)      (281)      (359)    (1,033)     2,240      1,207

Interest-bearing liabilities:
  Savings deposits ............       183        269        452       (140)       389        249
  Time deposits ...............     3,866       (344)     3,522        419        156        575
  Short-term borrowings .......    (4,273)      (933)    (5,206)      (933)       572       (361)
  Long-term debt ..............       675        596      1,271        569       (650)       (81)
                                  ---------------------------------------------------------------
Total interest-bearing
  deposits and liabilities ....       451       (412)        39        (85)       467        382
                                  ---------------------------------------------------------------
Net interest income (taxable
  equivalent basis) ...........   $  (529)   $   131    $  (398)   $  (948)   $ 1,773    $   825
                                  ===============================================================
</TABLE>
(1) The change in  interest  due to both rate and volume has been  allocated  to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.

(2) Yields and amounts  earned  include loan fees.  Non-accrual  loans have been
included in interest-earning assets for purposes of these computations.


Provision and Allowance for Credit Losses
The amount of the allowance  for credit losses is based on periodic  evaluations
by management.  In these  evaluations,  management  considers  numerous  factors
including,  but not limited to,  current  economic  conditions,  loan  portfolio
composition, loan loss experience and management's estimate of potential losses.
These  various  analyses  lead to a  determination  of the amount  needed in the
allowance for credit losses.  To the extent the existing  allowance is below the
amount so determined,  a provision is made that will bring the allowance to such
an amount.  Thus,  the  provision for credit losses may fluctuate and may not be
comparable from year to year.

Provision  for credit  losses was $7.44  million in 1998,  an  increase of $1.19
million,  or 18.98%,  from  1997.  The  Company's  allowance  for credit  losses
increased to $17.77  million at December 31, 1998,  from $16.37  million in 1997
and $15.43  million in 1996.  The allowance for credit losses as a percentage of
period-end  total loans was 1.81% at December  31,  1998,  compared to 1.55% and
1.49% at 1997 and 1996.

Allowance  for credit losses as a percentage  of the  period-end  non-performing
loans was 91.40% at December 31, 1998,  which compares to 57.65% at December 31,
1997.  Total  non-performing  loans at  December  31,  1998  amounted  to $19.44
million,  a decrease of $8.95  million,  or 31.53%,  from the $28.39  million at
December 31, 1997.  During 1998,  the Company sold $12.89  million in delinquent
loans, including $6.8 million of non-performing loans at a loss of $2.36 million
- see related discussion in "Other Income".

The net investment in loans that are considered to be impaired was $2.36 million
at December  31, 1998,  a decrease of $4.02  million  from the $6.38  million at
December  31,  1997.  The  decrease  in  impaired  loans  was due  primarily  to
settlement  of loans  through  acquisition  of the  real  estate  collateral  or
principal repayments.  Additional  information on impaired loans is presented in
Notes A4 and D of Notes to the Company's Consolidated Financial Statements.


Other Income
In 1998,  total other income was $9.40  million as compared to $7.11  million in
1997 and $8.12 million in 1996.  The $2.29 million  increase in other income was
due primarily to gains on the sale of securities.  During 1998, the Company sold
$150.73 million of securities at a net gain of $4.10 million,  which compares to
gains of $0.18  million and $1.40 million in 1997 and 1996,  respectively  - see
Note B of Notes to the Company's Consolidated Financial Statements.

Other income was $0.92 million for 1998, a decrease of $1.92 million, or 67.57%,
from 1997.  Other income  includes a loss of $2.36 million on the sale of $12.89
million of delinquent real estate loans made to enhance the asset quality of the
Company's loan portfolio.  The other income decline in 1997 compared to 1996 was
primarily  attributable  to the $1.22 million  decline in net realized  gains on
sales of  available  for sale  securities.  The  Company  sold its  credit  card
portfolio in 1996  resulting  in the loss of  commissions  and fees  relating to
these  discontinued  operations.  Other  income  also  includes a $0.45  million
amortization  of  gain.  See  Note  L of  Notes  to the  Company's  Consolidated
Financial Statements.

The following table sets forth information by category of other operating income
for the Company for the years indicated:

(in thousands of dollars)                       1998        1997        1996
                                              --------------------------------
Net realized gains on sales of securities     $  4,104    $    177    $  1,401
Other service charges and fees                   2,630       2,460       2,660
Service charges on deposits                      1,740       1,632       1,716
Net trading account losses                        -           -             (5)
Other                                              922       2,843       2,343
                                              --------------------------------
  Total                                       $  9,396    $  7,112    $  8,115
                                              ================================


Other Expenses
The  following  table sets forth  information  by  category  of other  operating
expenses of the Company for the years indicated:

(in thousands of dollars)                       1998        1997        1996
                                              --------------------------------
Salaries and employee benefits                $ 18,338    $ 19,652    $ 20,647
Net occupancy expense                            8,277       8,325       7,678
Equipment expense                                3,803       3,176       2,957
Legal and professional fees                      3,085       4,748       4,467
Advertising and promotion                        1,631       2,273       1,917
Provision for other real estate owned losses     1,407         248          71
Deposit insurance premiums                         595         406       3,282
Voluntary separation benefits                     -           -          3,162
Other                                            9,152       8,729       7,604
                                              --------------------------------
  Total                                       $ 46,288    $ 47,557    $ 51,785
                                              ================================

Total operating expenses as a
   percent of average assets                      3.25%       3.40%       3.67%


Other operating  expenses  decreased by $1.27 million in 1998 to $46.29 million,
compared to $47.56 million in 1997 and $51.79 in 1996.  The Company's  operating
expense ratio (total operating expense as a percentage of average assets), which
is a commonly  used  indicator  of operating  efficiency,  decreased by 15 basis
points in 1998 to 3.25%, compared to 3.40% in 1997 and 3.67% in 1996.

The primary  reasons for the decrease in other  expenses  were the $1.31 million
reduction in salaries and employment benefits plus the $1.66 million decrease in
legal and  professional  fees,  which  offset  the  $1.16  million  increase  in
provision for other real estate owned losses ("OREO").

Salaries and employment benefits declined by $1.31 million, or 6.67%, in 1998 to
$18.34 million,  compared to $19.65 million and $20.65 million in 1997 and 1996,
respectively.  The  reduction in salaries and  employee  benefits  over the last
three  years  reflect  management's  continuing  efforts  to  improve  operating
efficiency and reduce overhead costs.

On January 31, 1996, the Company  announced a voluntary  separation plan for all
employees.  The program  offered  all  eligible  employees  the  opportunity  of
electing to terminate their employment.  Ninety-seven  employees participated in
the program and voluntary separation benefits of $3.16 million were expensed and
paid.

Legal and professional fees dropped by $1.66 million, or 24.41%, in 1998 due, in
part, to management's close monitoring of such expenses and reduction in the use
of consultants and other external  resources.  Legal and  professional  fees are
anticipated  to increase in 1999 as a result of external  resources  utilized in
connection with the Company's Year 2000 efforts see "Year 2000" discussion.

Provision  for OREO losses  totaled $1.41 million for 1998, an increase of $1.16
million  from the $0.25  million in 1997.  At December  31,  1998,  OREO (net of
valuation allowance) amounted to $8.58 million, an increase of $4.90 million, or
132.85%,  from the  prior  year.  The  increase  in the 1998  OREO  balance  and
provision for OREO losses reflects the continued  weakness in the Hawaii economy
and  related  decline in real  estate  values.  The  Company  has also been more
aggressive in its delinquent loan collection efforts resulting in a higher level
of foreclosures and related OREO.

Net occupancy expense was $8.28 million in 1998, which compares to $8.33 million
and $7.68 million in 1997 and 1996, respectively.  The increase in net occupancy
expense in 1997 was primarily  attributable to the increased  occupancy costs of
the Association from the  reacquisition  through  assignment of its ground lease
obligation  of  vacated  premises.   See  Note  O  of  Notes  to  the  Company's
Consolidated Financial Statements.

Deposit insurance premiums amounted to $0.60 million in 1998,  compared to $0.41
million and $3.28 million in 1997 and 1996, respectively.

In 1997, deposit insurance premiums decreased by $2.88 million to $0.41 million.
A special  assessment on the Association's  deposit base as of March 31, 1995 of
$2.38 million was recorded in 1996. The assessment was the result of legislation
passed  by  the  United  States   Congress  to  strengthen  the  insurance  fund
administered by the Savings Association Insurance Fund.


Income Taxes
Total  income tax expense of the Company was $5.47  million,  $4.76  million and
$4.63 million in 1998,  1997 and 1996,  respectively.  The  Company's  effective
income tax rate for the years 1998, 1997 and 1996 was 39.50%, 39.70% and 39.60%,
respectively. Note K of Notes to the Company's Consolidated Financial Statements
presents a  reconciliation  of the Company's  effective and statutory income tax
rates.


Liquidity Management
The primary  objective of liquidity  management is to maintain a balance between
sources  and uses of funds in order that the cash flow needs of the  Company are
met in the most  economical  and  expedient  manner.  The  liquidity  needs of a
financial  institution  require the  availability of cash to meet the withdrawal
demands of  depositors  and the credit  commitments  of  borrowers.  In order to
optimize  liquidity,  management  monitors and forecasts the various sources and
uses of funds in an effort to continually meet the financial requirements of the
Company and the financial needs of its customer base.

To ensure  liquidity on a short-term  basis,  the Company's  primary sources are
cash or cash  equivalents,  loan  repayments,  proceeds  from the sale of assets
available for sale,  increases in deposits,  proceeds  from maturing  securities
and, when  necessary,  federal  funds  purchased  and credit  arrangements  with
correspondent banks and the FHLB.  Maturities of investment  securities are also
structured  to cover  large  commitments  and  seasonal  fluctuations  in credit
arrangements.

The consolidated  statements of cash flows identify three major sources and uses
of cash as operating,  investing and financing  activities.  As presented in the
consolidated  statements of cash flows, the Company's operating  activities used
$56.98  million in 1998, an increase of $52.97 million from the $4.01 million in
1997.  The  primary  use of cash  flows from  operations  in 1998 was the $73.31
million net increase in loans held for sale, which amounted to $99.60 million at
December 31, 1998.

Investing  activities provided cash flow of $86.81 million in 1998 compared to a
net use of $20.60  million  during 1997,  and an increase in cash flow of $61.47
million in 1996. The primary  source of cash flow from  investing  activities in
1998 was from  the  proceeds  on sales  of  securities  which  totalled  $154.83
million, an increase of $141.97 million from the prior year.

Financing  activities  used cash flow of $13.33  million  in 1998,  compared  to
providing  $29.63  million  during 1997, and a reduction in cash flow of $101.63
million in 1996.  During  1998,  an $80.29  million net  decrease in  short-term
borrowings and $66.18  million in principal  payments on long-term debt were the
primary use of cash flows from financing activities.

As of December 31, 1998, the Bank and  Association  had available  unused credit
lines of $264.47  million from the FHLB and committed  available lines of credit
from other  sources.  At any time,  the Company has  outstanding  commitments to
extend  credit.  See  Notes H, I and N of Notes  to the  Company's  Consolidated
Financial Statements.

Capital Resources
The Company has a strong  capital base with a Tier I capital  ratio of 13.54% at
December 31, 1998. This is well above the minimum regulatory  guideline of 4.00%
for Tier I capital.  Bank  holding  companies  are also  required to comply with
risk-based  capital  guidelines as  established  by the Federal  Reserve  Board.
Risk-based capital ratios are calculated with reference to risk-weighted  assets
that include both on and off-balance  sheet  exposures.  A company's  risk-based
capital ratio is calculated by dividing its qualifying capital (the numerator of
the ratio) by its risk-weighted  assets (the denominator).  The minimum required
qualifying  Total  Capital  ratio is 8%. As of December 31, 1998,  the Company's
total capital to risk-adjusted assets ratio was 14.80%.

Year 2000
The "Year 2000" problem is a significant  issue facing  financial  institutions.
Because computers  frequently use only two digits to recognize years (instead of
four  digits),  many  computer  systems,  as well as  equipment  using  embedded
computer  chips,  may be unable to distinguish the year 2000. This could produce
erroneous  results or systems  may fail in the year 2000 when the two digit year
becomes "00".

In 1997,  the Company  established  a Year 2000  committee  comprised  of senior
managers from each major  operational unit. The Year 2000 committee has prepared
a  comprehensive  program to address this problem and ensure that the  Company's
computer systems will function properly in the years 2000 and thereafter.

The Company's Year 2000 effort is divided in phases for  awareness,  assessment,
renovation,  validation,  and implementation.  The Company has already completed
the  awareness  and  assessment  phase of its Year 2000  program and has already
undertaken renovation and validation of its critical systems. As of August 1998,
both  the  Bank  and  the  Association  completed  the  conversion  of all  core
operations  to the  FiServ  Comprehensive  Banking  System,  a major step in the
Company's Year 2000 compliance effort.

Initial  validation  testing of  critical  systems  throughout  the  Company was
substantially completed by the end of 1998.

The Company expects to  successfully  complete its Year 2000 program in a timely
and  effective  manner.  Even though the  Company's  efforts  should  adequately
address year 2000 issues, there can be no assurance that unforeseen difficulties
will not arise.  The Company may be impacted by the Year 2000 compliance  issues
of governmental agencies,  businesses and other entities who provide data to, or
receive data from, the Company, and by entities, such as borrowers,  vendors and
customers, whose financial condition or operational capability is significant to
the Company. The Company's Year 2000 program also includes the identification of
third party service  providers,  customers and other external parties upon which
the Company  relies,  or with whom it must  interface  its  critical  systems or
applications. The Company is also subject to credit risk to the extent borrowers
fail to adequately  address their Year 2000 issues.  While the Company continues
to discuss these matters with, obtain written  certifications from and test such
external parties' Year 2000 compliance  efforts,  there is no assurance that the
failure of these  parties to resolve  their Year 2000  issues  would not have an
adverse impact on the Company.

To address this external  risk,  contingency  plans are also being  developed to
ensure  that the  Company  is  prepared  to handle  the most  reasonably  likely
worst-case  scenarios,  including the inability of customers,  vendors and other
third parties to adequately  address the Year 2000  problem.  Contingency  plans
include identifying  triggering events for the plan, assessing  mission-critical
systems  failures on core business  processes,  developing  business  resumption
alternatives,  and testing the  effectiveness  and viability of these plans. The
development and testing of these contingency plans are scheduled to be completed
by June 1999.

The Company has expended,  and will continue to expend, the resources  necessary
to address this issue in a timely manner.  Through December 31, 1998, cumulative
incremental  expenditures  of less than $0.1 million have been incurred out of a
total projected $0.5 million. The incremental expenditures exclude internal cost
and the  approximately  $2.50  million cost incurred in converting to the FiServ
Comprehensive  Banking  System.  The Company does not separately  track internal
costs related to the internal  allocation of personal and other costs related to
the Year 2000  project.  Most of these  incremental  expenditures  relate to the
acquisition and  implementation  of new and enhanced  systems and/or  equipment,
which will be  capitalized  and amortized  over their  respective  useful lives.
Expenses related to the Company's  internal  resources and Year 2000 remediation
costs are being expensed as incurred.  Future  expenditures are expected to take
place over the next year,  funded by operating cash flows,  and are not expected
to have a material  impact on the  Company's  financial  condition or results of
operations. No assurance, however, can be given at this time that all aspects of
the Company's  operations  will be Year 2000 ready or that the Year 2000 problem
will not have an adverse impact on the Company's future earnings.

The foregoing year 2000 discussion contains "forward-looking"  statements.  Such
statements,  including  without  limitation,  anticipated costs and the dates by
which the  Company  expects to  substantially  complete  the  various  Year 2000
phases, are based on management's best current  estimates.  These estimates were
derived  utilizing  numerous  assumptions  about future  events,  including  the
continued availability of certain resources, representations received from third
party service  providers and other factors.  However,  there can be no guarantee
that  these  estimates  will  be  achieved,  and  actual  results  could  differ
materially  from those  anticipated.  Specific  factors  that  might  cause such
material  differences  include,  but are not  limited  to:  results of year 2000
testing;  adequate  resolution  of year 2000  issues by  governmental  agencies,
businesses  or other  third  parties  that  are  service  providers,  suppliers,
borrowers or customers of the Company;  unanticipated  system costs; the need to
replace hardware;  the adequacy of and ability to implement  contingency  plans;
and similar uncertainties.  The forward-looking statements made in the foregoing
year 2000  discussion  speak  only as of the date on which such  statements  are
made,  and the Company  undertakes no  obligation to update any  forward-looking
statement  to  reflect  events or  circumstances  after  the date on which  such
statement is made or to reflect the occurrence of unanticipated events.

Effects Of Inflation
The financial statements and related data presented herein have been prepared in
accordance  with  generally  accepted  accounting  principles  which require the
measurement of financial  position and operating  results in terms of historical
dollars without  considering  changes in the relative  purchasing power of money
over time due to inflation.  Virtually all of the assets and  liabilities of the
Company are monetary in nature.  As a result,  interest rate changes have a more
significant  impact on the  Company's  performance  than the  effects of general
levels of inflation.


Recent Regulatory Developments
In 1996, the Company entered into a Memorandum of Understanding (the "MOU") with
the Federal  Reserve Bank of San Francisco  (the "FRB").  Under the terms of the
MOU,  the Company is  required  to receive the  approval of the FRB prior to the
payment of dividends, redemption of stock and incurring debt. In September 1997,
the Bank also entered into an MOU with the Federal Deposit Insurance Corporation
(the "FDIC").  This MOU was  terminated by the FDIC in March 1999,  based on the
adoption of a resolution  by the Bank's  Board of  Directors.  This  resolution,
approved by the Bank's  Board of  Directors in February  1999,  requires,  among
other  things,  that City Bank obtain  approval from the FDIC for the payment of
cash  dividends,  and to reduce certain  classified  assets to specified  levels
within time frames set forth in the internal agreement.


Recent Accounting Developments
In October 1998,  the Company  adopted the  provisions of Statement of Financial
Accounting   Standards  ("SFAS")  No.  134,   "Accounting  for   Mortgage-Backed
Securities  Retained after the Securitization of Mortgage Loans Held for Sale by
a  Mortgage  Banking   Enterprise."   SFAS  No.  134  requires  that  after  the
securitization  of mortgage  loans held for sale, an entity  engaged in mortgage
banking activities  classify the resulting  mortgage-backed  securities or other
retained  interests  based  on its  ability  and  intent  to sell or hold  those
investments. The adoption of this standard did not have a material effect on the
Company's consolidated financial statements.

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
"Accounting  for Derivative  Instruments and Hedging  Activities."  SFAS No. 133
requires entities to recognize all derivatives in their financial  statements as
either assets or liabilities measured at fair value. The effective date for SFAS
No. 133 is the first fiscal  quarter for fiscal years  beginning  after June 15,
1999. The adoption of this standard is not expected to have a material effect on
the Company's consolidated financial statements.


QUARTERLY RESULTS OF OPERATIONS (Unaudited)
Earnings for the fourth quarter of 1998 were $2.13 million ($0.60 per share), an
increase  of 61.55%  from the $1.32  million  ($0.37 per share)  during the same
quarter in 1997.  The increase in earnings  was  primarily  attributable  to the
decrease in other expenses. See further discussion under "Other Expenses."

The following  table  summarizes the Company's  quarterly  results for the years
1998 and 1997;
<TABLE>
<S>                                    <C>        <C>        <C>        <C>        <C>

                                                              Quarter
(in thousands of dollars,
   except per share data)               First      Second     Third      Fourth     Total
                                       ----------------------------------------------------
1998:
Total interest income                  $28,487    $28,612    $29,101    $25,860    $112,060
Total interest expense                  13,936     13,794     13,320     12,848      53,898
                                       ----------------------------------------------------
  Net interest income                   14,551     14,818     15,781     13,012      58,162
Provision for credit losses              1,300      1,525      2,986      1,625       7,436
Other income                             1,695      2,221      3,921      1,559       9,396
Other expenses                          11,668     12,020     12,922      9,678      46,288
                                       ----------------------------------------------------
  Income before income taxes             3,278      3,494      3,794      3,268      13,834
Income tax expense                       1,326      1,357      1,640      1,142       5,465
                                       ----------------------------------------------------
  Net income                           $ 1,952    $ 2,137    $ 2,154    $ 2,126    $  8,369
                                       ====================================================

Per common share: Net income (basic)     $0.55      $0.60      $0.61      $0.60       $2.36


1997:
Total interest income                  $27,656    $28,069    $28,182    $28,622    $112,529
Total interest expense                  12,923     13,430     13,665     13,841      53,859
                                       ----------------------------------------------------
  Net interest income                   14,733     14,639     14,517     14,781      58,670
Provision for credit losses              1,050      1,500      1,517      2,183       6,250
Other income                             1,442      1,598      1,867      2,205       7,112
Other expenses                          12,057     11,322     11,563     12,615      47,557
                                       ----------------------------------------------------
  Income before income taxes             3,068      3,415      3,304      2,188      11,975
Income tax expense                       1,218      1,465      1,202        872       4,757
                                       ----------------------------------------------------
  Net income                           $ 1,850    $ 1,950    $ 2,102    $ 1,316    $  7,218
                                       ====================================================

Per common share: Net income (basic)     $0.52      $0.55      $0.59      $0.37       $2.03
</TABLE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market Risk - Other Than Trading Activities
Market risk is the risk of loss in a financial  instrument  arising from adverse
changes in market rates/prices such as interest rates, foreign currency exchange
rates,  commodity  prices and equity prices.  The Company's  primary market risk
exposure is interest rate risk.  The ongoing  monitoring  and management of this
risk is an  important  component  of the  Company's  asset/liability  management
process which is governed by policies established by its Board of Directors that
are  reviewed  and  approved   annually.   The  Board  of  Directors   delegates
responsibility for carrying out the  asset/liability  management policies to the
Asset/Liability  Committee ("ALCO"). In this capacity,  ALCO develops guidelines
and  strategies  impacting  the  Company's  asset/liability  management  related
activities  based upon  estimated  market risk  sensitivity,  policy  limits and
overall market interest rate levels and trends.

The  Company's  management  has placed an  increased  emphasis on interest  rate
sensitivity management. Interest-earning assets and interest-bearing liabilities
are those which have yields or rates which are subject to change within a future
time period due to either the maturity of the  instrument or changes in the rate
environment.  Gap refers to the difference between the rate-sensitive assets and
rate-sensitive  liabilities.  When the  amount  of  rate-sensitive  assets is in
excess of  rate-sensitive  liabilities,  a "positive"  gap exists,  and when the
opposite occurs, a "negative" gap exists.  Generally, when rate-sensitive assets
exceed  rate-sensitive  liabilities,  the net interest  margin is expected to be
positively  impacted during periods of increasing  interest rates and negatively
impacted  during  periods of decreasing  interest  rates.  Interest rate shifts,
resulting   from   movements   in   the   economic   environment,    can   cause
interest-sensitive  assets and  liabilities to reprice within  relatively  short
time frames.  As a result,  major  fluctuations  in net interest  income and net
earnings  could  occur  due to  imbalances  between  rate-sensitive  assets  and
liabilities. Asset/liability management seeks to protect earnings by maintaining
an appropriate  balance  between  interest-earning  assets and  interest-bearing
liabilities in order to minimize fluctuations in the net interest margin and net
earnings in periods of volatile interest rates.

The table below page sets forth information concerning interest rate sensitivity
of the Company's  consolidated  assets and  liabilities as of December 31, 1998.
Assets and liabilities are classified by the earliest possible repricing date or
maturity,  whichever  comes  first.  In the case of  amortizing  assets (such as
mortgage loans,  for example)  maturities are reflected in terms of the expected
principal repayment streams,  based upon scheduled  amortization and anticipated
prepayments.  Prepayments  are estimated using current market  expectations  for
assets with  interest  rates at similar  levels to the  Company's.  It should be
noted that while the Company's  investment  portfolio is classified according to
repricing or maturity,  all of the  portfolio is available  for sale.  This will
provide the Company with the  flexibility  to  restructure  the  portfolio if it
wishes to in the face of a changing  interest  rate  environment.  Further  note
should  be  taken  of the  short-term  classification  of most of the  Company's
savings deposits. In fact, although technically immediately repriceable, most of
these deposits are considered to be relatively  insensitive to changes in market
interest rates.
<TABLE>
<S>                          <C>        <C>        <C>        <C>        <C>        <C>        <C>

                                0-90       91-180     181-365     1-5      Over 5   Non-rate
(in thousands of dollars)       days        days       days      years     years    sensitive    Total
                             --------------------------------------------------------------------------
Assets:
  Investment securities and
   interest-bearing deposits
   in other banks            $ 24,282   $  8,753   $ 24,748   $ 59,250   $ 44,730   $ 29,482   $191,245
  Federal funds sold           47,752       -          -          -          -          -        47,752
  Commercial loans            133,688     15,543      4,483     20,435     16,979       -       191,128
  Real estate loans            96,542     80,832    163,445    241,661    125,286       -       707,766
  Consumer loans               54,635      4,675      4,887     20,480        885       -        85,562
  Other assets                   -          -          -          -          -       204,985    204,985
                             --------------------------------------------------------------------------
Total assets                 $356,899   $109,803   $197,563   $341,826   $187,880   $234,467 $1,428,438
                             ==========================================================================
Liabilities and stockholders' equity:
  Non-interest bearing
        deposits             $   -      $   -      $   -      $   -      $   -      $119,649   $119,649
  Time and savings deposits   388,806    180,814     93,337     75,738    226,266       -       964,961
  Short-term borrowing         16,770      8,402     31,754       -          -          -        56,926
  Long-term borrowing          10,000       -        39,755     83,087        162       -       133,004
  Other liabilities              -          -          -          -          -        21,526     21,526
  Stockholders' equity           -          -          -          -          -       132,372    132,372
                             --------------------------------------------------------------------------
Total liabilities and
  stockholders' equity       $415,576   $189,216   $164,846   $158,825   $226,428   $273,547 $1,428,438
                             ==========================================================================
Interest rate
  sensitivity gap            $(58,677)  $(79,413)  $ 32,717   $183,001   $(38,548)  $(39,080)  $   -

Cumulative interest rate
  sensitivity gap            $(58,677) $(138,090) $(105,373)  $ 77,628   $ 39,080   $   -      $   -
</TABLE>

The Company's  policy is to closely match its level of  interest-earning  assets
and  interest-bearing  liabilities within a limited range,  thereby reducing its
exposure to  interest  rate  fluctuations.  In  connection  with these asset and
liability  management  objectives,  various  actions have been taken,  including
changes in the composition of assets and  liabilities,  and the use of financial
instruments.

When  appropriate,  ALCO  may  utilize  off-balance  sheet  instruments  such as
interest rate floors, caps and swaps to hedge its interest rate risk position. A
Board of  Directors  approved  hedging  policy  statement  governs  use of these
instruments.

The  financial  instruments  used and  their  notional  amounts  outstanding  at
year-end were as follows:

                                                       December 31,
(in thousands of dollars)                      1998        1997        1996
                                             --------------------------------
Interest rate swaps:
  Pay-fixed swaps-notional amount               -        $10,000     $25,000
  Average receive rate                          -           5.88%       5.50%
  Average pay rate                              -           6.25%       6.52%


Under interest rate swaps, the Company agrees with other parties to exchange, at
specified  intervals,  the  difference  between  fixed  rate and  floating  rate
interest  amounts  calculated by reference to the agreed  notional  amount.  The
Company paid the fixed rate and received the floating rate under the majority of
its swaps outstanding at December 31, 1997 and 1996.

Interest  rate  contracts  are primarily  used to convert  certain  deposits and
long-term  debt to  floating  interest  rates or to  convert  certain  groups of
customer  loans and  other  interest  earning  assets  to fixed  rates.  Certain
interest  rate swaps  specifically  match the  amounts  and terms of  particular
liabilities.

Interest rate options, which primarily consists of caps and floors, are interest
rate  protection  instruments  that  involve the payment  from the seller to the
buyer of an interest  rate  differential  in exchange  for a premium paid by the
buyer.  This  differential  represents the difference  between current  interest
rates and an agreed upon rate applied to a notional  amount.  Interest rate caps
limit the cap  holder's  risk  associated  with an increase  in interest  rates.
Interest rate floors limit the risk associated with a decline in interest rates.

Interest rate options at December 31, 1998 and 1997 consisted of the following:

                                          1998                     1997
                                  Notional  Estimated     Notional  Estimated
(in thousands of dollars)          Amount   Fair Value     Amount   Fair Value
                                  --------------------------------------------
Caps                              $  5,000    $  -        $  5,000    $ 5,066
Floors                              10,000        144         -         -
                                  --------------------------------------------
  Total interest rate options     $ 15,000    $   144     $  5,000    $ 5,066
                                  ============================================

Interest Rate Risk
Interest rate risk  represents the  sensitivity of earnings to changes in market
interest rates. As interest rates change the interest income and expense streams
associated  with  the  Company's  financial   instruments  also  change  thereby
impacting net interest  income ("NII"),  the primary  component of the Company's
earnings.  ALCO utilizes the results of a detailed and dynamic  simulation model
to quantify the  estimated  exposure of NII to sustained  interest rate changes.
While ALCO routinely  monitors simulated NII sensitivity over a rolling two-year
horizon,  it also utilizes  additional  tools to monitor  potential  longer-term
interest rate risk.

The  simulation  model  captures  the impact of changing  interest  rates on the
interest income received and interest expense paid on all assets and liabilities
reflected  on the  Company's  balance  sheet  as well as for off  balance  sheet
derivative financial instruments.  This sensitivity analysis is compared to ALCO
policy  limits which specify a maximum  tolerance  level for NII exposure over a
one year horizon, assuming no balance sheet growth, given both a 200 basis point
("bp")  upward and  downward  shift in interest  rates.  A parallel and pro rata
shift in rates over a 12-month  period is assumed.  The  following  reflects the
Company's NII sensitivity analysis as of December 31, 1998.

                                                  Estimated
                       Rate Change             NII Sensitivity
                       ---------------------------------------
                         +200bp                    (1.16)%
                         -200bp                    (2.29)%


The preceding  sensitivity  analysis  does not represent a Company  forecast and
should not be relied upon as being  indicative  of expected  operating  results.
These hypothetical estimates are based upon numerous assumptions including:  the
nature  and  timing  of  interest  rate  levels  including  yield  curve  shape,
prepayments on loans and securities,  deposit decay rates,  pricing decisions on
loans and deposits,  reinvestment/replacement  of asset and liability cashflows,
and others.  While  assumptions  are developed  based upon current  economic and
local  market  conditions,  the  Company  cannot make any  assurances  as to the
predictive  nature of these  assumptions  including how customer  preferences or
competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity  analysis,
actual  results will also differ due to:  prepayment/refinancing  levels  likely
deviating from those assumed, the varying impact of interest rate change caps or
floors on adjustable rate assets,  the potential effect of changing debt service
levels on customers with adjustable rate loans,  depositor early withdrawals and
product preference changes, and other internal/external variables.  Furthermore,
the  sensitivity  analysis  does not  reflect  actions  that ALCO  might take in
responding to or anticipating changes in interest rates.

See Note M of Notes  to the  Company's  Consolidated  Financial  Statements  for
further discussion and disclosure of financial instruments.



<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

CB BANCSHARES, INC. AND SUBSIDIARIES

December 31, 1998, 1997 and 1996


C O N T E N T S





REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


CONSOLIDATED FINANCIAL STATEMENTS

  CONSOLIDATED BALANCE SHEETS
  CONSOLIDATED STATEMENTS OF INCOME
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
  CONSOLIDATED STATEMENTS OF CASH FLOWS

  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<PAGE>


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CB Bancshares, Inc. and Subsidiaries


Board of Directors and Stockholders
CB Bancshares, Inc.


We have audited the accompanying  consolidated  balance sheets of CB Bancshares,
Inc. (a Hawaii  corporation)  and Subsidiaries as of December 31, 1998 and 1997,
and the related  consolidated  statements of income,  stockholders'  equity, and
cash flows for each of the three years in the period  ended  December  31, 1998.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the consolidated  financial  position of CB Bancshares,
Inc. and  Subsidiaries  as of December 31, 1998 and 1997,  and the  consolidated
results of their  operations and their  consolidated  cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted accounting principles.



Grant Thornton LLP

Honolulu, Hawaii
February 12, 1999
   (except for Note Q2,
   as to which the date is March 5, 1999)


<PAGE>

CONSOLIDATED BALANCE SHEETS
CB Bancshares, Inc. and Subsidiaries

<TABLE>
<S>                                                         <C>               <C>
--------------------------------------------------------------------------------------------
                                                                        December 31,
                                                              ------------------------------
(in thousands, except number of shares and per share data)        1998               1997
--------------------------------------------------------------------------------------------

 ASSETS

 Cash and due from banks (note A2)                          $      61,658     $      45,150
 Interest-bearing deposits in other banks (note I)                 20,000            30,000
 Federal funds sold                                                47,752             4,705
 Investment securities (notes B, H and I):
     Held-to-maturity (market value of $92,440 in 1997)                 -            88,397
     Available-for-sale                                           141,764           120,320
     Restricted investment securities                              29,481            27,348
 Loans held for sale                                               99,602            26,293
 Loans, net (notes C, D, I and N)                                 961,924         1,032,940
 Premises and equipment, net (note F)                              20,916            19,312
 Other assets (notes E, J and P4)                                  45,341            40,761
-------------------------------------------------------------------------------------------

           TOTAL ASSETS                                     $   1,428,438     $   1,435,226
============================================================================================

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Deposits (notes C and G):

     Non-interest bearing                                   $     119,649     $     110,577
     Interest bearing                                             964,961           898,151
                                                            -------------     -------------
        Total deposits                                          1,084,610         1,008,728

 Short-term borrowings (note H)                                    56,926           137,212
 Other liabilities (notes K and L)                                 21,526            23,173
 Long-term debt (note I)                                          133,004           141,048
--------------------------------------------------------------------------------------------
        Total liabilities                                       1,296,066         1,310,161
--------------------------------------------------------------------------------------------

 Commitments and contingencies (notes C, F and O) 
 Stockholders' equity (notes P5 and Q):
     Preferred stock $1 par value
        Authorized and unissued 25,000,000 shares                    -                 -
     Common stock $1 par value
        Authorized 50,000,000 shares;
        issued and outstanding 3,552,228
        and 3,551,228 shares, respectively                          3,552             3,551
     Additional paid-in capital                                    65,108            65,080
     Accumulated other comprehensive income, net of tax               928             1,201
     Retained earnings                                             62,784            55,233
--------------------------------------------------------------------------------------------
        Total stockholders' equity                                132,372           125,065
--------------------------------------------------------------------------------------------
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                 $   1,428,438     $   1,435,226
============================================================================================
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
CB Bancshares, Inc. and Subsidiaries

<TABLE>
<S>                                                <C>              <C>            <C>
----------------------------------------------------------------------------------------------
                                                             Years ended December 31,
                                                     -----------------------------------------
(in thousands, except number of 
    shares and per share data)                         1998           1997              1996
----------------------------------------------------------------------------------------------

 Interest income:
     Interest and fees on loans                    $   93,491       $  93,025      $   96,825
     Interest and dividends on investment securities:
        Taxable interest income                        13,708          15,907          10,501
        Nontaxable interest income                        435             207             209
        Dividends                                       2,135           2,001           1,874
     Other interest income                              2,291           1,389           1,838
----------------------------------------------------------------------------------------------
           Total interest income                      112,060         112,529         111,247
----------------------------------------------------------------------------------------------
 Interest expense:
     Deposits (note G)                                 39,940          35,966          35,142
     Short-term borrowings                              6,158          11,364          11,725
     Long-term debt                                     7,800           6,529           6,610
----------------------------------------------------------------------------------------------
           Total interest expense                      53,898          53,859          53,477
----------------------------------------------------------------------------------------------
           Net interest income                         58,162          58,670          57,770
 Provision for credit losses (note D)                   7,436           6,250           2,410
----------------------------------------------------------------------------------------------
           Net interest income
              after provision for credit losses        50,726          52,420          55,360
----------------------------------------------------------------------------------------------
 Other income:
     Service charges on deposit accounts                1,740           1,632           1,716
     Other service charges and fees                     2,630           2,460           2,660
     Net trading account losses                             -               -             (5)
     Net realized gains on sales of securities
        (notes B and R)                                 4,104             177           1,401
     Other (notes C, L and N)                             922           2,843           2,343
----------------------------------------------------------------------------------------------
           Total other income                           9,396           7,112           8,115
----------------------------------------------------------------------------------------------
 Other expenses:
     Salaries and employee benefits (note P)           18,338          19,652          20,647
     Net occupancy expense (note F)                     8,277           8,325           7,678
     Equipment expense                                  3,803           3,176           2,957
     Other (notes E, J, P and Q)                       15,870          16,404          20,503
----------------------------------------------------------------------------------------------
           Total other expenses                        46,288          47,557          51,785
----------------------------------------------------------------------------------------------
           Income before income taxes                  13,834          11,975          11,690
 Income tax expense (note K)                            5,465           4,757           4,631
==============================================================================================
           NET INCOME                              $    8,369       $   7,218      $    7,059
==============================================================================================
 Per share data (note Q3):
     Basic                                              $2.36           $2.03           $1.99
     Diluted                                            $2.35           $2.03           $1.99
==============================================================================================
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

<PAGE>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CB Bancshares, Inc. and Subsidiaries

<TABLE>
<S>                                 <C>           <C>          <C>         <C>       <C>
-----------------------------------------------------------------------------------------------
                                            Years ended December 31, 1998, 1997 and 1996
                                       --------------------------------------------------------
                                                             Accumulated
                                                                Other                Additional
 (in thousands of dollars, except per             Retained  Comprehensive   Common    Paid-In
    share data)                          Total    Earnings     Income        Stock    Capital
------------------------------------------------------------------------------------------------


 Balance at January 1, 1996         $    116,506  $  46,279    $ 1,596     $  3,551  $  65,080
 Comprehensive income:
      Net income - 1996                    7,059      7,059          -            -          -
      Other comprehensive income, net of tax
         Unrealized gains on securities, 
            net of reclassification 
            adjustment (note R)             (694)         -       (694)           -          -
                                       ----------
        Comprehensive income subtotal      6,365
                                       ----------
 Cash dividends:
     $0.975 per share                     (3,460)    (3,460)         -            -          -
-----------------------------------------------------------------------------------------------

 Balance at December 31, 1996            119,411     49,878        902        3,551     65,080
 Comprehensive income:
      Net income - 1997                    7,218      7,218          -            -          -
      Other comprehensive income, net of tax
         Unrealized gains on securities, 
            net of reclassification 
            adjustment (note R)              299          -        299            -          -
                                       ----------
       Comprehensive income subtotal       7,517
                                       ----------
 Cash dividends:
      $0.525 per share                    (1,863)    (1,863)         -            -          -
-----------------------------------------------------------------------------------------------

 Balance at December 31, 1997            125,065     55,233      1,201        3,551     65,080
 Comprehensive income:
      Net income - 1998                    8,369      8,369          -            -          -
      Other comprehensive income, net of tax
         Unrealized gains on securities, 
            net of reclassification 
            adjustment (note R)             (273)         -       (273)           -          -
                                       ----------
       Comprehensive income subtotal       8,096
                                       ----------
 Options exercised (note P5)                  29          -          -            1         28
 Cash dividends:
      $0.230 per share                      (818)      (818)         -            -          -
===============================================================================================

 Balance at December 31, 1998       $    132,372  $  62,784    $   928     $  3,552  $  65,108
===============================================================================================
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.

<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS
CB Bancshares, Inc. and Subsidiaries

<TABLE>
<S>                                                      <C>          <C>         <C>
---------------------------------------------------------------------------------------------
                                                              Years ended December 31,
                                                         ------------------------------------
 (in thousands of dollars)                                   1998        1997         1996
---------------------------------------------------------------------------------------------

 Cash flows from operating activities:
     Net income                                          $    8,369   $   7,218   $    7,059
     Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
        Provision for credit losses                           7,436       6,250        2,410
        Loss on disposition of premises and equipment           103         805          280
        Depreciation and amortization                         2,763       2,466        2,273
        Deferred income taxes                                (1,429)        416        1,799
        Decrease (increase) in interest receivable              561        (133)         804
        Increase (decrease) in interest payable                (247)      1,022       (1,405)
        Net decrease in trading securities                        -           -           96
        Increase in restricted investment securities         (2,133)     (2,248)      (1,874)
        Net decrease (increase) in loans held for sale      (73,309)    (20,664)       8,721
        Decrease (increase) in other assets                  (1,295)       (491)       6,470
        Increase (decrease) in income taxes payable             105       1,246       (4,008)
        Increase (decrease) in other liabilities                106      (2,220)      (5,513)
        Other                                                 1,992       2,322         (437)
---------------------------------------------------------------------------------------------
            Net cash provided by (used in) operating                                 
              activities                                    (56,978)     (4,011)      16,675
---------------------------------------------------------------------------------------------
 Cash flows from investing activities:
     Net (increase) decrease in interest-bearing deposits                            
       in other banks                                        10,000     (13,500)      (5,000)
     Net increase in federal funds sold                     (43,047)     (4,700)           -
     Proceeds from sales of held-to-maturity securities      73,222           -            -
     Proceeds from maturities of held-to-maturity securities 20,703       9,437        2,704
     Purchases of held-to-maturity securities                     -           -       (9,962)
     Proceeds from sales of available-for-sale securities    81,605      12,862       87,049
     Proceeds from maturities of available-for-sale
       securities                                            29,233      22,640       78,009
     Purchase of available-for-sale securities              (44,064)    (17,634)     (94,733)
     Net increase in loans                                  (51,683)    (27,751)     (20,344)
     Proceeds from sale of loans                             10,257           -       25,373
     Proceeds from sale of premises and equipment                23         467           32
     Capital expenditures                                    (4,493)     (4,823)      (3,852)
     Proceeds from sale of foreclosed assets                  5,058       2,400        2,191
---------------------------------------------------------------------------------------------
            Net cash provided by (used in) investing                                 
              activities                                     86,814     (20,602)      61,467
---------------------------------------------------------------------------------------------
Subtotal carried forward                                     29,836     (24,613)      78,142
---------------------------------------------------------------------------------------------


<PAGE>



CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 CB Bancshares, Inc. and Subsidiaries


---------------------------------------------------------------------------------------------
                                                              Years ended December 31,
                                                        -------------------------------------
 (in thousands of dollars)                                   1998        1997         1996
---------------------------------------------------------------------------------------------

Subtotal brought forward                                     29,836     (24,613)      78,142
---------------------------------------------------------------------------------------------
 Cash flows from financing activities:

     Net increase (decrease) in time deposits                44,128      62,187      (28,771)

     Net increase (decrease) in other deposits               31,754      (5,369)     (30,802)
     Net decrease in short-term borrowings                  (80,286)    (71,469)     (30,679)

     Proceeds from long-term debt                            58,000      89,672       45,335
     Principal payments on long-term debt                   (66,176)    (43,696)     (52,098)

     Cash dividends paid                                       (777)     (1,694)      (4,614)

     Stock options exercised                                     29           -            -
---------------------------------------------------------------------------------------------
            Net cash provided by (used in) financing                                         
       activities                                           (13,328)     29,631     (101,629)
---------------------------------------------------------------------------------------------

             Increase (decrease) in cash                     16,508       5,018      (23,487)

 Cash and due from banks at beginning of year                45,150      40,132       63,619
=============================================================================================

 Cash and due from banks at end of year                  $   61,658   $  45,150   $   40,132
=============================================================================================

 Supplemental disclosures of cash flow information:
     Interest paid on deposits and other borrowings      $   54,145   $  52,837   $   54,882
     Income taxes paid                                        6,854       3,711        6,538
</TABLE>
 Supplemental schedule of non-cash investing activity:
     During 1998, the Company  securitized $76,153 and $14,693 of mortgage loans
         into mortgage-backed  securities classified as  available-for-sale  and
         held-to-maturity,  respectively. During 1996, $81,329 of mortgage loans
         were   securitized  into   mortgage-backed   securities  classified  as
         held-to-maturity.
     During 1998, the Company transferred $12,859 of securities classified as
         held-to-maturity to available-for-sale.

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


<PAGE>


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CB Bancshares,  Inc. and Subsidiaries (the "Company") provide financial services
to domestic markets and grant commercial,  financial,  real estate,  installment
and consumer  loans to customers  throughout  the State of Hawaii.  Although the
Company has a diversified loan portfolio,  a substantial portion of its debtors'
ability to honor their contracts is primarily dependent upon the economy and the
real estate market in the State of Hawaii.

The Company's consolidated financial statements have been prepared in accordance
with  generally  accepted  accounting   principles  and  conform  to  prevailing
practices  within  the  banking  and  thrift  industries.   Preparing  financial
statements in conformity with generally accepted accounting  principles requires
management to make estimates and assumptions that affect the amounts reported in
the  financial  statements  and the  accompanying  notes and the  disclosure  of
contingent  assets and  liabilities.  Actual  results  could  differ  from those
estimates.  Also, certain  reclassifications  have been made to the consolidated
financial  statements  and  accompanying  notes  for the  previous  two years to
conform to the current year's presentation.  Such reclassifications did not have
a material effect on the consolidated financial statements.

The significant accounting and reporting policies of the Company are as follows:

1.  Principles of Consolidation
    The consolidated financial statements include the accounts of CB Bancshares,
    Inc. (the "Parent Company") and its wholly-owned subsidiaries: City Bank and
    its  wholly-owned  subsidiary (the "Bank");  International  Savings and Loan
    Association,  Limited and its wholly-owned subsidiaries (the "Association");
    City Finance and Mortgage,  Inc.; and O.R.E., Inc. Significant  intercompany
    transactions and balances have been eliminated in consolidation.

2.  Cash and Cash Equivalents
    For purposes of the  consolidated  statements  of cash flows,  cash and cash
    equivalents  are defined as those  amounts  included  in the  balance  sheet
    caption, "Cash and due from banks".  Included in cash are amounts restricted
    for the Federal Reserve requirement of $8,365,000 and $4,887,000 in 1998 and
    1997, respectively.

3.  Investment Securities
    Investment securities are classified into the following categories:

        Trading  securities are securities that are bought and held  principally
        for resale in the near term.  Trading  securities  are  reported at fair
        value with unrealized gains and losses included in other income.

        Held-to-maturity  securities are securities the Company has the positive
        intent and ability to hold to maturity.  Held-to-maturity securities are
        reported at  amortized  cost with  premiums  and  discounts  included in
        interest income over the period to maturity, using the interest method.

        Available-for-sale  securities  are  securities not classified as either
        trading or held-to-maturity.  Securities available-for-sale are reported
        at fair value with unrealized gains and losses,  net of tax, included as
        other comprehensive income in stockholders'  equity. Gains and losses on
        sale are determined using the specific identification method.

    For individual held-to-maturity and available-for-sale securities,  declines
    in fair value below cost for other than temporary market  conditions,  would
    result in  write-downs  of the carrying  value to the current fair value and
    the realized losses included in earnings.

    As a member of the  Federal  Home Loan Bank (the  "FHLB"),  the  Company  is
    required to maintain a minimum  investment  in the FHLB stock.  The stock is
    recorded as a restricted investment security at par.

4.  Loans
    Mortgage loans  originated and intended for sale in the secondary market are
    carried at the lower of cost or estimated market value in the aggregate. Net
    unrealized  losses are  recognized  in a valuation  allowance  by charges to
    income.

    Loans the  Company  has the intent and  ability to hold until  maturity  are
    reported at the outstanding principal balance, adjusted for any charge offs,
    the  allowance for credit  losses,  any deferred fees or costs on originated
    loans, and unamortized premiums or discounts on purchased loans.

    Loan origination fees and costs are deferred and recognized as an adjustment
    of  the  yield.   Loan  commitment  fees  received  are  deferred  as  other
    liabilities until the loan is advanced and are then recognized over the loan
    term as an adjustment of the yield.  At expiration,  unused  commitment fees
    are recognized as fees and commission  revenue.  Guarantee fees received are
    recognized as fee revenue over the related terms.

    The allowance for credit  losses is  periodically  evaluated for adequacy by
    management.  Factors  considered include the Company's loan loss experience,
    known and inherent  risks in the  portfolio,  current  economic  conditions,
    adverse  situations  that  may  affect  the  borrower's  ability  to  repay,
    regulatory policies,  and the estimated value of underlying  collateral,  if
    any. The  allowance  for credit  losses is increased by provision for credit
    losses and decreased by charge-offs (net of recoveries).

    Loans are impaired  when,  based on current  information  and events,  it is
    probable  that  principal  or interest  will not be  collected  at scheduled
    maturity or will be unreasonably delayed. Impaired loans are measured at the
    present  value of  expected  future  cash  flows  discounted  at the  loan's
    effective interest rate or the fair value of the collateral,  if the loan is
    collateral  dependent.  Large groups of smaller balance  homogeneous  loans,
    such  as  residential   mortgages  and  consumer   installment   loans,  are
    collectively evaluated for impairment, except for loans restructured under a
    troubled debt restructuring.

    Interest  accrual on impaired loans is  discontinued  when, in  management's
    opinion,  the  borrower  may be  unable  to make  scheduled  payments.  When
    interest  accrual is  discontinued,  any  outstanding  accrued  interest  is
    reversed and  subsequently,  interest  income is  recognized as payments are
    received.

5.  Loan Servicing
    The cost of mortgage  servicing rights ("MSR") is amortized in proportion to
    the  estimated  net  servicing  revenues  over the period of the  underlying
    mortgages.  Impairment  of MSR is  assessed  based on fair  value,  which is
    estimated  using  discounted  cash flows based on a current market  interest
    rate.  For purposes of measuring  impairment,  the MSR are stratified on the
    following  predominant risk  characteristics  of the underlying  loans; loan
    type, interest rate, origination date and geographic location. Impairment is
    recognized to the extent that the MSR for a stratum exceed its fair value.

6.  Other Real Estate Owned
    Other  real  estate  owned  properties  acquired  through,  or in  lieu  of,
    foreclosure  proceedings  are  recorded  at the  fair  value  on the date of
    foreclosure  establishing a new cost basis.  After  foreclosure,  management
    performs periodic  valuations and the properties are carried at the lower of
    cost or fair value,  less estimated  costs to sell.  Revenues,  expenses and
    provisions  to  the  valuation  allowance  are  included  in  operations  as
    incurred.

7.  Premises and Equipment
    Premises and equipment are stated at cost less accumulated  depreciation and
    amortization.  Depreciation  and  amortization  are computed  using both the
    straight-line and accelerated methods over the estimated useful lives of the
    assets or the applicable facility leases, whichever is shorter. The range of
    estimated  useful  lives  are 3 to  45  years  for  premises  and  leasehold
    improvements and 3 to 20 years for equipment.

8.  Goodwill
    Goodwill  represents the excess of the purchase price over the fair value of
    the net assets acquired and is currently  amortized on a straight-line basis
    over 15 years.  It is Company policy that  management  periodically  reviews
    goodwill  to  determine  if it has been  permanently  impaired  by events or
    conditions  that might affect the  underlying  business.  Such reviews would
    include an analysis  of current  results  and the  projection  of future net
    income on an undiscounted basis.

9.  Income Taxes
    The  Company  files  consolidated  income  tax  returns.  The  Bank  and the
    Association  pay to or receive from the Parent  Company the amount of income
    taxes they would have paid or received  had they filed  separate  income tax
    returns.

    Deferred tax assets and  liabilities  are recorded based on the expected tax
    effect of future taxable income or deductions  resulting from differences in
    the financial statement and tax bases of assets and liabilities. Changes are
    adjusted through the provision for income taxes.

10. Risk Management Instruments
    As part of its risk  management  activities,  the Company uses interest rate
    swaps,  caps and  floors to modify  the  interest  rate  characteristics  of
    certain assets and liabilities. Amounts receivable or payable under interest
    rate swap, cap and floor  agreements  are  recognized as interest  income or
    expense under the accrual method unless the  instrument  qualifies for hedge
    accounting.  Gains and losses on other  interest rate  derivative  financial
    instruments  that do not qualify as hedges are recognized as other income or
    expense.  Unrealized gains and losses on the swaps are not recognized in the
    balance sheet.

    Gains and losses on hedges of existing  assets or liabilities  from interest
    rate options and forward  contracts are included in the carrying  amounts of
    those assets or liabilities and are ultimately  recognized in income as part
    of those carrying amounts.  The derivative  contracts are designed as hedges
    when acquired.  They are expected to be effective  economic  hedges and have
    high correlation with the items being hedged at inception and throughout the
    hedge  period.  Movements  in the  item  being  hedged  and  in the  hedging
    instruments  are  monitored  throughout  the  period  of the  hedge for high
    correlation.

    Gains  and  losses  related  to  qualifying  hedges of firm  commitments  or
    anticipated  transactions  also are deferred and are recognized in income or
    as adjustments of carrying amounts when the hedged transaction occurs. Gains
    and   losses  on  early   terminations   of   contracts   that   modify  the
    characteristics  of  designated  assets  or  liabilities  are  deferred  and
    amortized as an adjustment to the yield of the related assets or liabilities
    over their remaining lives.

11. Transfers of Financial Assets
    Transfers of financial assets are accounted for as sales,  when control over
    the assets has been surrendered.  Control over transferred  assets is deemed
    to be surrendered  when (1) assets have been isolated from the Company,  (2)
    the transferee  obtains the right (free of conditions that constrain it from
    taking  advantage  of that  right)  to pledge or  exchange  the  transferred
    assets,  and (3) the Company  does not maintain  effective  control over the
    transferred  assets  through an  agreement to  repurchase  them before their
    maturity.

12. Stock-Based Compensation
    The  Company  uses the  intrinsic  value  method  prescribed  in  Accounting
    Principles  Board ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to
    Employees"   and  related   interpretations   to  account  for   stock-based
    compensation.  Accordingly,  the  compensation  cost for  stock  options  is
    measured as the excess,  if any, of the quoted market price of the Company's
    stock at the date of the  grant  over the  amount  an  employee  must pay to
    acquire the stock. The compensation  cost for stock  appreciation  rights is
    recorded annually based on the quoted market price of the Company's stock at
    the end of the period.  The  required  disclosures  are included in Note P5,
    "Stock Compensation Plan".

13. Earnings Per Share
    Basic earnings per common share are based on the weighted-average  number of
    common shares outstanding for the period.  Diluted earnings per common share
    are based on the assumption that all potentially  dilutive common shares and
    dilutive stock options were converted at the beginning of the year.

14. New Accounting Principles
    In October  1998,  the  Company  adopted  the  provisions  of  Statement  of
    Financial   Accounting   Standards   ("SFAS")  No.  134,   "Accounting   for
    Mortgage-Backed  Securities  Retained after the  Securitization  of Mortgage
    Loans Held for Sale by a Mortgage Banking Enterprise". SFAS No. 134 requires
    that after the  securitization  of mortgage  loans held for sale,  an entity
    engaged   in   mortgage   banking   activities    classify   the   resulting
    mortgage-backed  securities or other retained interests based on its ability
    and intent to sell or hold those investments.  The adoption of this standard
    did not have a  material  effect  on the  Company's  consolidated  financial
    statements.

    In June 1998, the Financial  Accounting Standards Board issued SFAS No. 133,
    "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
    requires entities to recognize all derivatives in their financial statements
    as either assets or liabilities  measured at fair value.  The effective date
    for SFAS No. 133 is the first  fiscal  quarter  for fiscal  years  beginning
    after June 15, 1999. The adoption of this standard is not expected to have a
    material effect on the Company's consolidated financial statements.
<PAGE>

NOTE B - INVESTMENT SECURITIES
The  amortized  cost and  estimated  fair  values  of the  Company's  investment
portfolio at December 31, 1998 and 1997 were as follows:
<TABLE>
<S>                                   <C>          <C>          <C>         <C>
--------------------------------------------------------------------------------------
                                                     Gross       Gross
                                      Amortized    Unrealized  Unrealized   Estimated
(in thousands of dollars)               Cost         Gains       Losses     Fair Value
--------------------------------------------------------------------------------------
               1998:
Available-for-sale securities:
  U.S. Treasury and other
     U.S. Government agencies
     and corporations                 $  11,900    $      66    $      -    $  11,966
  States and political subdivisions       9,581          285         147        9,719
  Mortgage-backed securities            118,908        1,558         387      120,079
--------------------------------------------------------------------------------------
     Total available-for-sale         $ 140,389    $   1,909    $    534    $ 141,764
======================================================================================


--------------------------------------------------------------------------------------
                                                     Gross       Gross
                                      Amortized    Unrealized  Unrealized   Estimated
(in thousands of dollars)               Cost         Gains       Losses     Fair Value
--------------------------------------------------------------------------------------

               1997:
Held-to-maturity securities:
  States and political subdivisions   $     101    $       3    $      -    $     104
  Mortgage-backed securities             88,296        4,081          41       92,336
--------------------------------------------------------------------------------------
     Total held-to-maturity           $  88,397    $   4,084    $     41    $  92,440
======================================================================================
Available-for-sale securities:
  U.S. Treasury and other
     U.S. Government agencies
      and corporations                $  49,104    $     347    $     28    $  49,423
  States and political subdivisions       4,923          175           -        5,098
  Mortgage-backed securities             64,306        1,552          59       65,799
--------------------------------------------------------------------------------------
     Total available-for-sale         $ 118,333    $   2,074    $     87    $ 120,320
======================================================================================
</TABLE>
Securities with an aggregate carrying value of $85,519,000 and $100,002,000,  at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
and for other purposes required by law.

The  following   presents  the  amortized  cost  and  estimated  fair  value  of
available-for-sale  investment  securities  at December 31, 1998 by  contractual
maturity.  Expected  maturity  will differ  from  contractual  maturity  because
borrowers may have the right to call or prepay  obligations with or without call
or prepayment penalties.  The stated maturity of mortgage-backed  securities are
presented in total since the principal  cash flows of these  securities  are not
received at a single maturity date.

      ---------------------------------------------------------------------
                                                Amortized       Estimated
      (in thousands of dollars)                   Cost          Fair Value
      ---------------------------------------------------------------------
      Due in one year or less                  $    12,625    $     12,697
      Due after one year through five years          1,003           1,074
      Due after five years through ten years         3,382           3,523
      Due after ten years                            4,471           4,391
      ---------------------------------------------------------------------
                                                    21,481          21,685
      Mortgage-backed securities                   118,908         120,079
      ---------------------------------------------------------------------
           Totals                              $   140,389    $    141,764
      =====================================================================

In 1998,  held-to-maturity  securities of  $69,510,000  were sold,  resulting in
gross  realized gains of  $3,712,000.  Due to the sales of the  held-to-maturity
securities  during  1998,  the Company  transferred  $12,859,000  of  securities
classified as held to maturity to available for sale. The related net unrealized
gain  from  this   reclassification  was  $232,000.   There  were  no  sales  of
held-to-maturity  securities in 1997 and 1996. Proceeds from sales of securities
available-for-sale  during 1998, 1997, and 1996 were  $81,605,000,  $12,862,000,
and $87,049,000,  respectively.  These sales resulted in gross realized gains of
$502,000,  $268,000,  and  $1,664,000  and gross  realized  losses of  $110,000,
$91,000,  and  $263,000,  respectively.  Income tax  expense  recognized  on net
securities  gain were  $1,642,000,  $71,000 and $560,000 in 1998, 1997 and 1996,
respectively.


NOTE C - LOANS
The loan portfolio consisted for the following at December 31, 1998 and 1997:

    ---------------------------------------------------------------------
    (in thousands of dollars)                1998                1997
    ---------------------------------------------------------------------
    Commercial and financial            $     191,128     $      186,418
    Real estate:
         Construction                          25,453             41,069
         Commercial                           150,690            129,603
         Residential                          531,623            618,294
    Installment and consumer                   85,562             79,363
    ---------------------------------------------------------------------
              Gross loans                     984,456          1,054,747
    Less:
         Unearned discount                          5                  5
         Net deferred loan fees                 4,756              5,437
         Allowance for credit losses           17,771             16,365
    ---------------------------------------------------------------------
             Loans, net                 $     961,924     $    1,032,940
    =====================================================================

In 1998,  certain delinquent loans were sold to improve the asset quality of the
Company's  loan  portfolio.  Proceeds from the sale totaled  $10,257,000  with a
resulting loss of $2,636,000.

Mortgage  loans  serviced  for  others  are  not  included  in the  accompanying
consolidated  balance sheets.  The unpaid principal  balances of mortgage loans,
including mortgage-backed  securities serviced for others, were $466,462,000 and
$399,497,000  at December  31,  1998 and 1997,  respectively.  Custodial  escrow
balances  maintained with the foregoing loan  servicing,  and included in demand
deposits,  were  $2,703,000  and  $2,893,000  at  December  31,  1998 and  1997,
respectively.

In the normal  course of  business,  the Company  makes  loans to its  executive
officers and  directors  and to companies and  individuals  affiliated  with its
executive  officers and directors.  Such loans and loan commitments were made at
the Company's  normal  credit terms,  including  interest  rates and  collateral
requirements,  and do not represent more than a normal risk of  collection.  The
following  is the  activity  of loans to such  parties  in 1998.  Other  changes
include the net change in loans to parties not considered related for the entire
year.

                     -------------------------------------------------
                     (in thousands of dollars)
                     -------------------------------------------------
                     Balance at beginning of year           $   5,796
                          New loans                             1,844
                          Repayments                           (1,460)
                          Other changes                           349
                     -------------------------------------------------
                     Balance at end of year                 $   6,529
                     =================================================


NOTE D - ALLOWANCE FOR CREDIT LOSSES
The changes in the allowance for credit losses for the years  indicated  were as
follows:

    ----------------------------------------------------------------------------
    (in thousands of dollars)                   1998        1997         1996
    ----------------------------------------------------------------------------
    Balance at beginning of year            $   16,365   $  15,431    $  14,576
         Provisions charged to expense           7,436       6,250        2,410
         Recoveries                              1,094         609          350
         Charge-offs                           (7,124)      (5,925)      (1,905)
    ----------------------------------------------------------------------------
    Balance at end of year                  $   17,771   $  16,365    $  15,431
    ============================================================================

Information  related to loans  considered to be impaired for the years indicated
were as follows:

   ----------------------------------------------------------------------------
   (in thousands of dollars)                     1998        1997         1996
   ----------------------------------------------------------------------------
   Recorded investment                                                         
      in impaired loans                     $    2,798   $   8,483    $  10,787
   Total allowance on impaired loans               429       2,101        2,129
   Average recorded investment                                                 
      in impaired loans during the year          8,474      10,544        5,574
   Interest income on impaired loans                                           
      using cash basis of income recognition       422         131          109
   ----------------------------------------------------------------------------


Note E - other real estate owned
The carrying value of foreclosed real estate, net of the following allowance for
losses,  were  $8,583,000,  $3,686,000 and $1,844,000 at December 31, 1998, 1997
and 1996,  respectively.  Activity  in the  allowance  for  losses on other real
estate owned were as follows:

      --------------------------------------------------------------------------
      (in thousands of dollars)                   1998        1997       1996
      --------------------------------------------------------------------------
      Balance at beginning of year              $    188     $     -     $    -
           Provisions charged to expense           1,407         248         71
           Charge-offs, net of recoveries           (493)        (60)       (71)
      --------------------------------------------------------------------------
      Balance at end of year                    $  1,102     $   188     $    -
      ==========================================================================


NOTE F - PREMISES AND EQUIPMENT
The  Company's  premises  and  equipment  at December  31, 1998 and 1997 were as
follows:

          ----------------------------------------------------------------
          (in thousands of dollars)                  1998          1997
          ----------------------------------------------------------------
          Premises                               $   21,493     $  20,684
          Equipment                                  22,236        18,962
          ----------------------------------------------------------------
                                                     43,729        39,646
          Less accumulated depreciation
             and amortization                        22,813        20,334
          ----------------------------------------------------------------
          Net carrying value                     $   20,916     $  19,312
          ================================================================

Depreciation and amortization charged to operations for the years ended December
31, 1998, 1997 and 1996 were as follows:

  ------------------------------------------------------------------------------
  (in thousands of dollars)                     1998         1997         1996
  ------------------------------------------------------------------------------
  Net occupancy expenses                     $     746   $      715    $     389
  Equipment expenses                             2,017        1,751        1,884
  ------------------------------------------------------------------------------
      Total depreciation and amortization    $   2,763   $    2,466    $   2,273
  ==============================================================================

The Company leases certain  properties and equipment under leases that expire on
various dates through 2010.  Certain leases provide for  renegotiations at fixed
intervals and require payment of real estate taxes,  maintenance,  insurance and
certain other operating  expenses.  Rent charged against  operations,  including
equipment rental, were as follows:

    ----------------------------------------------------------------------------
    (in thousands of dollars)                   1998         1997         1996
    ----------------------------------------------------------------------------
    Rental expense                           $  6,071     $  6,989     $  7,236
    Sublease income                               643        1,380          853
    ----------------------------------------------------------------------------
         Total rent                          $  5,428     $  5,609     $  6,383
    ============================================================================

The following are future minimum rental commitments for long-term non-cancelable
operating   leases  as  of  December  31,  1998.   Future  rentals   subject  to
renegotiations are computed at the latest annual rents.

                     ----------------------------------
                     (in thousands of dollars)
                     ----------------------------------
                     1999                   $    5,267
                     2000                        4,838
                     2001                        3,938
                     2002                        3,436
                     2003                        3,321
                     Later years                30,333
                     ----------------------------------
                          Total             $   51,133
                     ==================================


NOTE G - DEPOSITS
Deposits consisted of the following at December 31, 1998 and 1997:

      -------------------------------------------------------------------
      (in thousands of dollars)                 1998              1997
      -------------------------------------------------------------------
      Non-interest bearing deposits        $     119,649     $   110,577
      Interest bearing deposits:
           Savings, money market & NOW           366,610         343,928
           Time deposits of $100 or more         230,123         211,314
           Time deposits less than $100          368,228         342,909
      -------------------------------------------------------------------
              Total interest bearing
                deposits                         964,961         898,151 
      ===================================================================
              Total deposits               $   1,084,610     $ 1,008,728
      ====================================================================

Interest  expense on deposits for the years ended  December  31, 1998,  1997 and
1996 were as follows:

      -------------------------------------------------------------------------
      (in thousands of dollars)              1998          1997         1996
      -------------------------------------------------------------------------
      Savings, money market & NOW        $    9,393    $    8,940    $   8,692
      Time deposits of $100 or more          11,184         9,400        9,578
      Time deposits less than $100           19,363        17,626       16,872
      -------------------------------------------------------------------------
           Total interest expense        $   39,940    $   35,966    $  35,142
      =========================================================================

At December 31, 1998, the scheduled maturities of time deposits were as follows:

                     ------------------------------------
                     (in thousands of dollars)
                     ------------------------------------
                     1999                   $    530,282
                     2000                         50,677
                     2001                         11,851
                     2002                          2,893
                     2003                          2,648
                     ------------------------------------
                          Total             $    598,351
                     ====================================


NOTE H - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1998 and 1997 consisted of the following:

      -------------------------------------------------------------------------
      (in thousands of dollars)                        1998            1997
      -------------------------------------------------------------------------
      Advances from the FHLB                       $    56,450     $   136,700
      Federal treasury tax and loan note                   476             512
      -------------------------------------------------------------------------
           Total short-term borrowings             $    56,926     $   137,212
      =========================================================================




<PAGE>


NOTE I - LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consisted of the following:

      ------------------------------------------------------------------
      (in thousands of dollars)                   1998           1997
      ------------------------------------------------------------------
      Advances from the FHLB                  $   133,004    $   140,040
      Collateralized mortgage obligations               -          1,008
      ------------------------------------------------------------------
           Total long-term debt               $   133,004    $   141,048
      ==================================================================

The advances  from the FHLB bear  interest at rates ranging from 4.53% to 8.22%.
Interest  is  payable  monthly  over  the  term of  each  advance.  Pursuant  to
collateral   agreements  with  the  FHLB,  short  and  long-term   advances  are
collateralized by a blanket pledge of certain securities with carrying values of
$43,478,000  and  $99,180,000,  loans  of  $579,105,000  and  $585,413,000,  and
interest-bearing  deposits in other banks of $20,000,000 and $30,000,000 in 1998
and  1997,  respectively,  and all stock in the FHLB.  FHLB  advances  are under
credit  line  agreements  of  $453,931,000  and  $456,371,000  in 1998 and 1997,
respectively.  Aggregate  maturities  of long-term  advances from the FHLB as of
December 31, 1998 were as follows:

                     ------------------------------------
                     (in thousands of dollars)
                     ------------------------------------
                     1999                   $     49,755
                     2000                         38,105
                     2001                         41,982
                     2002                              -
                     2003                          3,000
                     Later years                     162
                     ------------------------------------
                          Total             $    133,004
                     ====================================


NOTE J - OTHER EXPENSES
Other  expenses for the years ended  December  31,  1998,  1997 and 1996 were as
follows:

   -----------------------------------------------------------------------------
   (in thousands of dollars)                   1998         1997         1996
   -----------------------------------------------------------------------------
   Legal and professional fees              $   3,085    $   4,748    $   4,467
   Advertising and promotion                    1,631        2,273        1,917
   Provision for other real estate owned        1,407          248           71
   Deposit insurance premium                      595          406        3,282
   Voluntary separation benefits                    -            -        3,162
   Other                                        9,152        8,729        7,604
   -----------------------------------------------------------------------------
        Total other expenses                $  15,870    $  16,404    $  20,503
   =============================================================================




<PAGE>


NOTE K - INCOME TAXES
The components of income tax expense for the years ended December 31, 1998, 1997
and 1996 were as follows:

          --------------------------------------------------------------------
          (in thousands of dollars)           1998         1997         1996
          --------------------------------------------------------------------
          Current:
               Federal                     $   5,658    $  3,949     $  2,434
               State                           1,236         392          398
          --------------------------------------------------------------------
                    Total current              6,894       4,341        2,832 
          --------------------------------------------------------------------

          Deferred:
               Federal                        (1,135)        232        1,459
               State                            (294)        184          340
          --------------------------------------------------------------------
                    Total deferred            (1,429)        416        1,799
          --------------------------------------------------------------------
          Total income taxes expense       $   5,465    $  4,757     $  4,631
          ====================================================================

The tax effects of temporary  differences that give rise to significant portions
of deferred tax assets and deferred tax  liabilities as of December 31, 1998 and
1997 were as follows:

             -----------------------------------------------------------------
             (in thousands of dollars)                  1998           1997
             -----------------------------------------------------------------
             Deferred tax assets:
                  Allowance for credit losses        $    5,684     $    4,953
                  Hawaii state franchise taxes              535            317
                  Gain on sale of building                1,704          1,872
                  Deferred compensation                   1,211          1,437
                  Other                                   1,704          1,602
             ------------------------------------------------------------------
                       Total deferred tax assets         10,838         10,181 
             ------------------------------------------------------------------

             Deferred tax liabilities:                                        
                  FHLB stock dividends                    6,720          5,871
                  Deferred loan fees                      2,545          3,844
                  Net unrealized gain on 
                       available-for-sale securities        458            786
                  Unrealized losses on loans                  -            143
                  Other                                   1,630          1,712
             ------------------------------------------------------------------
                       Total deferred tax liabilities    11,353         12,356
             ------------------------------------------------------------------
             Net deferred tax liabilities            $      515     $    2,175
             =================================================================



<PAGE>


Reconciliation of the federal  statutory rate to the Company's  effective income
tax rate for the years ended December 31, 1998, 1997 and 1996 was as follows:

       -----------------------------------------------------------------------
                                          1998          1997          1996
       -----------------------------------------------------------------------
       Federal statutory rate             35.0%         35.0%          35.0%
       Tax exempt interest                (3.0)         (2.7)          (3.2)
       Hawaii state franchise taxes,                                          
            net of federal tax benefit     4.6           4.6            4.6   
       Amortization of goodwill            2.2           2.5            2.6
       Other                               0.7           0.3            0.6
       -----------------------------------------------------------------------
            Effective income tax rate     39.5%         39.7%          39.6%
       =======================================================================

The  Small  Business  Job  Protection  Act of  1996  (the  "Job  Act")  contains
provisions  that  require the  Association  to account for bad debts in the same
manner as banks for income tax reporting purposes.  Accordingly, the Association
changed its tax method for allowable bad debt  deduction from the reserve method
to the specific charge-off method. Consequently, the bad debt deduction based on
a percentage of taxable income or the experience method is no longer allowed for
years beginning after December 31, 1996.

During 1996,  legislation  was passed  requiring the Association to recapture as
taxable income approximately $565,000 of its bad debt reserves, which represents
additions  to the reserve  after June 30,  1988.  The  Association  has provided
deferred  taxes for the amount and will recapture its bad debt reserves over six
years.  Recapture may be deferred up to two years if certain residential lending
requirements are met during tax years beginning before January 1, 1998.

Income  taxes  have been  provided  for the  temporary  difference  between  the
allowance for losses and the increase in the bad debt reserve maintained for tax
purposes since the June 30, 1988 base year.  Consequently,  the  Association has
not provided  deferred  taxes on the balance of its tax bad debt  reserves as of
the  June  30,  1988  base  year.  Included  in  the  retained  earnings  of the
Association  at  December  31, 1998 is an amount of  approximately  $10,001,000,
which  represents the accumulation of bad debt deductions for which no provision
for federal income taxes has been made.  These amounts may be restored to income
if the Association or successor institution liquidates, redeems shares or pays a
dividend in excess of tax basis  earnings and  profits.  If the  Association  is
required  to restore any of these  amounts to income,  a tax  liability  will be
imposed for these amounts at the then current income tax rates.




<PAGE>


NOTE L - DEFERRED GAIN
Previously,  Citibank Properties,  Inc. (a wholly owned subsidiary of City Bank)
entered  into  a  limited  partnership  agreement  as  a  limited  partner.  The
partnership  acquired the ground leases of certain real property,  constructed a
commercial building on the property and sold the leasehold estate and commercial
building to an unrelated third party (the  "Purchaser").  Prior to the sale, the
Bank had entered into a 20-year office lease  agreement with the partnership for
the ground floor,  mezzanine  and first four floors of the building.  The Bank's
lease was assigned to the Purchaser and has not been affected by the sale of the
building.

The  Company  recognized  a  deferred  gain in a  manner  similar  to that for a
sale-leaseback  transaction.  The  deferred  gain is  being  amortized  over the
remaining lease term, resulting in annual gains of $447,000.  As of December 31,
1998, the unamortized deferred gain was $4,544,000.


NOTE M - RISK MANAGEMENT ACTIVITIES
The Company's  principal objective in holding or issuing derivatives and certain
other financial instruments for purposes other than trading is the management of
interest rate and mortgage  banking  activities risks arising out of non-trading
assets and  liabilities.  The  operations  of the Company are subject to risk of
interest rate fluctuations to the extent that interest-earning assets (including
investment  securities) and  interest-bearing  liabilities  mature or reprice at
different times or in differing amounts. Risk management activities are aimed at
optimizing  net  interest  income,  given  levels of interest  rate and mortgage
banking activities risks consistent with the Company's business strategies.

Asset-liability  risk management  activities are conducted in the context of the
Company's  asset  sensitivity to interest rate changes.  This asset  sensitivity
arises  due  to   interest-earning   assets   repricing  more   frequently  than
interest-bearing  liabilities.  This means that if interest rates are declining,
margins will narrow as assets  reprice  downward more quickly than  liabilities.
The converse applies when rates are rising.

To achieve its risk  management  objective,  the Company uses a  combination  of
derivative  financial  instruments,  particularly  interest  rate  swaps,  caps,
floors,  options  and  forward  contracts.  The nature and the  significance  of
notional and credit  exposure  amounts,  credit risk and market risk factors are
described below:

The notional  amounts of derivatives do not represent  amounts  exchanged by the
parties and, thus, are not a measure of the Company's  exposure  through its use
of  derivatives.  The amounts  exchanged  are  determined  by  reference  to the
notional amounts and the other terms of the derivatives.

The Company is exposed to  credit-related  losses in the event of nonperformance
by   counterparties   to   financial   instruments   but  does  not  expect  any
counterparties  to fail to meet their  obligations.  Where  appropriate,  master
netting  agreements are arranged or collateral is obtained in the form of rights
to  securities.  The Company  deals only with highly rated  counterparties.  The
current  credit  exposure of  derivatives  is  represented  by the fair value of
contracts  with a  positive  fair  value at the  reporting  date.  Gross  credit
exposure amounts disregard the value of collateral.

Under interest rate swaps, the Company agrees with other parties to exchange, at
specified  intervals,  the  difference  between  fixed  rate and  floating  rate
interest  amounts  calculated  by reference  to an agreed  notional  amount.  At
December  31,  1998  there were no  interest  rate  swaps  outstanding.  For the
majority of its swaps  outstanding  at December  31, 1997 and 1996,  the Company
paid the fixed rate and  received  the floating  rate.  The  notional  principal
amounts of interest  rate swaps  outstanding  at December 31, 1997 and 1996 were
$10,000,000  and  $25,000,000,   respectively.  The  estimated  fair  values  of
outstanding  interest rate swaps were  $(17,000) and  $(127,000) at December 31,
1997 and 1996, respectively.

Interest rate options, which primarily consists of caps and floors, are interest
rate  protection  instruments  that  involve the payment  from the seller to the
buyer of an interest  rate  differential  in exchange  for a premium paid by the
buyer.  This  differential  represents the difference  between current  interest
rates and an agreed upon rate applied to a notional  amount.  Interest rate caps
limit the cap  holder's  risk  associated  with an increase  in interest  rates.
Interest rate floors limit the risk associated with a decline in interest rates.

Interest rate options at December 31, 1998 and 1997 consisted of the following:

--------------------------------------------------------------------------------
                                        1998                      1997
                               -----------------------   -----------------------
                               Notional    Estimated     Notional    Estimated
(in thousands of dollars)       Amount     Fair Value     Amount     Fair Value
--------------------------------------------------------------------------------
Caps                          $   5,000      $     -     $ 5,000      $  5,066
Floors                           10,000          144           -             -
--------------------------------------------------------------------------------
     Total interest rate                                                        
       options                $  15,000      $   144     $ 5,000      $  5,066  
================================================================================

Interest rate  contracts are primarily  used to convert  certain  deposits or to
convert  certain  groups of customer loans to fixed or floating  rates.  Certain
interest  rate swaps  specifically  match the  amounts  and terms of  particular
liabilities.

The following  table indicates the types of swaps used, as of December 31, their
aggregate  notional  amounts,  and their  weighted-average  interest rates,  and
includes the matched swaps. Average variable rates are based on rates implied in
the yield curve at the  reporting  date.  Those rates may change  significantly,
affecting future cash flows.

    ----------------------------------------------------------------------------
    (in thousands of dollars)                 1998         1997         1996
    ----------------------------------------------------------------------------
    Pay fixed swaps - notional amounts          -          $10,000      $25,000
         Average receive rate                   -            5.88%        5.50%
         Average pay rate                       -            6.25%        6.52%
    ============================================================================

Certain assets have indefinite maturities or interest rate sensitivities and are
not  readily  matched  with  specific  liabilities.  Those  assets are funded by
liability  pools  based  on  the  assets'  estimated  maturities  and  repricing
characteristics.  For  example,  floating  rate loans are  funded by  short-term
liability  pools that reprice  frequently,  while fixed rate loans are funded by
longer-term liability pools that reprice less frequently.

As  part  of  the  Company's  asset-liability  management,  various  assets  and
liabilities,   such  as  investment  securities  financed  by  borrowings,   are
effectively  modified by  derivatives  to lock in spreads and reduce the risk of
losses in value due to interest  rate  changes.  The  deferred  gains and losses
arising through those  instruments  are included in the carrying  amounts of the
related  assets and  liabilities,  and are  recognized  in income as part of the
revenue or expense arising from those assets and liabilities.

Interest rate options written and purchased and forward  exchange  contracts are
used in hedging the risks  associated  with  commitments  to sell  securities in
connection with mortgage  banking  activities.  The hedging gains and losses are
explicitly deferred on a net basis in the consolidated  balance sheets as either
other assets or other liabilities. The deferred gains and losses are included in
the  carrying  amounts of the  securities  until they are sold,  which  normally
occurs within one year of entering into the commitment.

Interest  rate  options  written  and  purchased  - Interest  rate  options  are
contracts  that allow the holder of the option to  purchase  or sell a financial
instrument at a specified  price and within a specified  period of time from the
seller or "writer" of the option. As a writer of options, the Company receives a
premium at the outset  and then bears the risk of an  unfavorable  change in the
price of the  financial  instrument  underlying  the option.  As a purchaser  of
options,  the  Company  pays a premium and may then  exercise  the option if the
price  movement of the  underlying  financial  instrument  is  favorable  to the
Company.  At December 31, 1998, there were outstanding  purchased  interest rate
options with a notional principal amount of $15,000,000 and estimated fair value
of $77,000.

Forward  contracts  are  commitments  to  either  purchase  or sell a  financial
instrument  at a future  date for a  specified  price  and are  settled  through
delivery  of the  underlying  financial  instrument.  The credit risk of forward
contracts arises from the possible  inability of the  counterparties to meet the
terms of their  contracts  and  from  movements  in the  securities  values  and
interest rates.


NOTE N - CREDIT-RELATED INSTRUMENTS
At any time, the Company has a significant number of outstanding  commitments to
extend credit.  These  commitments take the form of approved lines of credit and
loans  with  terms  of up to one  year.  The  Company  also  provides  financial
guarantees  and letters of credit to guarantee the  performance  of customers to
third  parties.  These  agreements  generally  extend  for up to one  year.  The
contractual  amounts  of  these  credit-related  instruments  are set out in the
following  table by category of  instrument.  Because many of those  instruments
expire  without being advanced in whole or in part, the amounts do not represent
future cash flow requirements.


      ------------------------------------------------------------
      (in thousands of dollars)              1998          1997
      ------------------------------------------------------------
      Loan commitments                    $  172,555    $  165,153
      Guarantees and letters of credit         5,516         6,828
      ------------------------------------------------------------
           Totals                         $  178,071    $  171,981
      ============================================================

These credit-related  financial  instruments have off-balance sheet risk because
only  origination  fees and accruals for probable  losses are  recognized in the
consolidated  balance  sheets  until the  commitments  are  fulfilled or expire.
Credit risk  represents  the  accounting  loss that would be  recognized  at the
reporting date if counterparties failed completely to perform as contracted. The
credit risk  amounts are equal to the  contractual  amounts,  assuming  that the
amounts are fully  advanced and that the  collateral or other  security is of no
value.

The Company's policy is to require suitable collateral to be provided by certain
customers prior to the  disbursement of approved  loans.  For retail loans,  the
Company  usually  retains  a  security  interest  in the  property  or  products
financed,  which  provides  repossession  rights in the event of  default by the
customer.  Guarantees  and letters of credit  also are subject to strict  credit
assessments  before being provided.  Those agreements specify monetary limits to
the Company's  obligations.  Collateral for commercial  loans,  guarantees,  and
letters  of  credit  is  usually  in the  form of  cash,  inventory,  marketable
securities,  or other  property.  In 1996,  the  Company  sold its  credit  card
portfolio to an unrelated third party resulting in a gain of $623,000.


NOTE O - COMMITMENTS AND CONTINGENCIES
The Company has prevailed in a case filed in 1996 by Plaintiffs,  the purchasers
of the  International  Savings  Building (the "ISL  Building").  The  plaintiffs
sought   rescission   of  the  sale  of  the  ISL  Building   based  on  alleged
misrepresentations  and  non-disclosure  regarding ground lease negotiations and
land  appraisals  concerning  the  property.  Further,  the  plaintiffs  alleged
unreasonable  demands by the  fee-simple  owner.  In October  1998,  the Company
received  a jury  verdict  in its  favor  finding  no  defendants  liable on the
Plaintiff's   claims  and  finding  the   Plaintiff   liable  on  the  Company's
counterclaims. In December 1998, the trial court judge awarded the Company their
requested reimbursement of attorneys' fees. The Plaintiff has subsequently filed
a motion for  reconsideration,  which has not yet been decided.  The Company has
not  recorded  any  recovery  amounts  related to this  judgement as our counsel
anticipates an appeal will be filed.

The Company is a defendant  in various  legal  proceedings  arising  from normal
business activities. While the results of these proceedings can not be predicted
with certainty,  management believes,  based on advice of counsel, the aggregate
liability,  if any,  resulting from these  proceedings would not have a material
effect  on  the  Company's   consolidated   financial  position  or  results  of
operations.




<PAGE>


NOTE P - EMPLOYEE BENEFIT PLANS and VOLUNTARY SEPARATION PROGRAM
1.  Employee Stock Ownership Plan
    The Company has an Employee  Stock  Ownership  Plan for all employees of the
    Company who satisfy length of service  requirements.  Trust assets under the
    plan are invested primarily in the shares of stock of the Company.  Employer
    contributions  are to be paid in cash,  shares of stock or other property as
    determined by the Board of Directors;  provided, however,  contributions may
    not be made in  amounts  which  cannot  be  allocated  to any  participant's
    account by reason of statutory limitations. No participant shall be required
    or permitted to make  contributions  to the plan or trust.  Contributions to
    the plan were $350,000 for 1998.  There were no contributions to the plan in
    1997 and 1996.

2.  Profit Sharing Retirement Savings Plan
    The Company has an Employee Profit Sharing  Retirement  Savings Plan for all
    employees who satisfy length of service requirements. Eligible employees may
    contribute  up to 15% of their  compensation,  limited  to the total  amount
    deductible  under  applicable  provisions  of the Internal  Revenue Code, of
    which 20% of the amount contributed will be matched by the Company, provided
    that the  matching  contribution  shall not  exceed 2% of the  participant's
    compensation. In addition, the Company will contribute an amount equal to 2%
    of the compensation of all participants,  and additional  amounts determined
    by the Board of Directors at their discretion. Contributions to the plan for
    1998, 1997 and 1996 were $173,000, $407,000 and $408,000, respectively.

3.  Voluntary Separation Program
    During  1996,  the  Company  offered a Voluntary  Separation  Program to all
    employees to reduce the work force.  Ninety-seven  employees participated in
    the program and voluntary  separation  benefits of $3,162,000  were expensed
    and paid.

4.  Deferred Compensation
    The Company has deferred compensation agreements with several key management
    employees,  all of whom are officers.  Under the agreements,  the Company is
    obligated to provide for each such employee or his  beneficiaries,  during a
    period of ten years after the employee's death,  disability,  or retirement,
    annual  benefits  ranging from $25,000 to $250,000.  The  estimated  present
    value of future  benefits to be paid is being  accrued  over the period from
    the effective date of the agreements until the full eligibility dates of the
    participants.  The  expense  incurred  for  this  plan for the  years  ended
    December  31,  1998,  1997 and  1996  amounted  to  $234,000,  $641,000  and
    $444,000,  respectively.  The Company is the  beneficiary  of life insurance
    policies,  with an aggregate cash surrender value of $10,807,000 at December
    31, 1998,  that were purchased as a method of partially  financing  benefits
    under this plan.

    During  1996,   the  Company   terminated   the  majority  of  the  deferred
    compensation agreements. The employees with deferred compensation agreements
    who participated in the Voluntary Separation Program were credited with five
    years of additional  service and all employees  with  terminated  agreements
    received  a  lump-sum  payment  equal to the  present  value  of the  future
    benefit.

5.  Stock Compensation Plan
    On September 16, 1994, the Board of Directors  adopted a Stock  Compensation
    Plan (the "SCP") and the  stockholders  approved it on January 26, 1995.  On
    April 30, 1998, the  stockholders  approved the increase of shares of common
    stock reserved under the SCP to 400,000  shares.  Such shares may be granted
    to employees,  including  officers and other key employees,  of the Company.
    The  purpose of the SCP is to enhance the ability of the Company to attract,
    retain and reward key employees  and to encourage a sense of  proprietorship
    and to stimulate the interests of those  employees in the financial  success
    of the Company.  The SCP is administered by the Compensation  Committee (the
    "Committee")  of the Board of  Directors.  The SCP provides for the award of
    incentive  stock options,  performance  stock options,  non-qualified  stock
    options, stock grants and stock appreciation rights ("SARs").

    During 1995 and 1994, the option grants were  performance  and index options
    with a term of ten years.  During  1997,  the  Company  amended the terms of
    these options.  The amendment provides that the performance  options granted
    shall become  exercisable  in full on the later of the first  anniversary of
    the grant date or the effective  date of the  amendment.  The amendment also
    fixes the exercise  price of the index  options  granted in 1995 and 1994 at
    $31.29 and $37.22, respectively.

    On January 2, 1998 and  December 15, 1997,  the Company  granted  additional
    stock  options of 12,500 and 72,500,  respectively.  The exercise  prices of
    these  options  are $42.50 and $43.00 per share,  respectively.  The options
    become  exercisable on the first anniversary of the grant date and terminate
    ten years after the grant date.

    The original  exercise  price of each option  equals the market price of the
    Company's stock on the date of grant. Accordingly,  no compensation cost has
    been  recognized  for the  plan.  Had  compensation  cost for the plan  been
    determined  using the fair value based method,  the Company's net income and
    net income per share would have been the pro forma amounts below:

     -----------------------------------------------------------------------
                                     1998            1997            1996
     -----------------------------------------------------------------------
     Pro forma:
          Net income              $7,491,000      $7,032,000      $6,969,000
          Earnings per share:
               Basic                $2.11           $1.98           $1.96
               Diluted              $2.10           $1.98           $1.96
     =======================================================================

    During the initial phase-in period in 1996, the effects of applying the fair
    value  based  method are not likely to be  representative  of the effects on
    reported net income for future years because options vest over several years
    and additional awards may be made each year.

    The fair value of each option  grant is estimated on the date of grant using
    the  Black-Scholes  options-pricing  model. For grants in 1998 and 1997, the
    following weighted-average assumptions were used; expected dividend of 0.51%
    and 0.41%, expected volatility of 32.91% and 33.89%, risk-free interest rate
    of 5.62% and  5.78%,  and  expected  life of 6.0 years  and 5.7  years.  The
    weighted-average  fair value of options  granted  during  1998 and 1997 were
    $17.26 and $17.05, respectively.

    Transactions involving stock options are summarized as follows:

     --------------------------------------------------------------------------
                                          Stock Options       Weighted-Average
               Description                 Outstanding         Exercise Price
     --------------------------------------------------------------------------
     Balance at December 31, 1995            101,250               $31.43
          Forfeited                          (12,300)              $31.75
     --------------------------------------------------------------------------
     Balance at December 31, 1996             88,950               $32.05
          Granted                             72,500               $43.00
          Forfeited                          (26,750)              $32.72
     --------------------------------------------------------------------------
     Balance at December 31, 1997            134,700               $38.59
          Granted                             12,500               $42.50
          Forfeited                           (8,250)              $33.92
          Exercised                           (1,000)              $29.00
     --------------------------------------------------------------------------
     Balance at December 31, 1998            137,950               $38.85
     ==========================================================================

    As of December 31,  1998,  stock  options  outstanding  had exercise  prices
    between $29.00 and $43.00 and a weighted-average  remaining contractual life
    of  8.0  years  and  125,450   stock   options  were   exercisable   with  a
    weighted-average  exercise price of $38.49.  As of December 31, 1997,  stock
    options  outstanding  had exercise  prices  between  $29.00 and $43.00 and a
    weighted-average  remaining  contractual  life of 8.8 years and 62,200 stock
    options were exercisable with a weighted-average exercise price of $32.56.

    Under the SCP, the  Committee  may grant a specified  number of shares to an
    employee  subject to terms and conditions  prescribed by the Committee.  And
    the Committee has the authority to grant any participant  SARs and the right
    to receive a payment,  in cash or common  stock,  equal to the excess of the
    fair  market  value of a specified  number of shares of common  stock on the
    date such right is exercised over the fair market value on the date of grant
    of such right. A SAR may not be exercised prior to the first  anniversary of
    the date of grant or more than ten years after the date of grant.  No shares
    of stock or SARs were granted during 1998, 1997 and 1996.

    Upon the occurrence of a  reorganization  event,  as defined in the SCP, the
    Committee may in its  discretion  provide that the options  granted shall be
    terminated  unless  exercised  within  30 days of  notice  and  advance  the
    exercise dates of any, or all, outstanding options.




<PAGE>


NOTE Q - STOCKHOLDERS' EQUITY
1.  Regulatory Matters
    The  Company  is subject to various  capital  requirements  administered  by
    federal regulatory  agencies.  Failure to meet minimum capital  requirements
    can initiate  certain  mandatory  and possibly  additional  discretionary  -
    actions by  regulators  that,  if  undertaken  could have a direct  material
    effect  on  the  Company's  financial  statements.  Under  capital  adequacy
    guidelines and the regulatory  framework for prompt corrective  action,  the
    Company must meet  specific  capital  guidelines  that involve  quantitative
    measures of the Company's assets,  liabilities and certain off-balance sheet
    items as calculated under  regulatory  accounting  practices.  The Company's
    capital amounts and classification are also subject to qualitative judgments
    by the regulators about components, risk weightings and other factors.

    Quantitative  measures  established by regulation to ensure capital adequacy
    require the Company to maintain minimum amounts and ratios of Total and Tier
    1 capital  (as  defined  in the  regulations)  to  risk-weighted  assets (as
    defined) and Tier I capital (as defined) to average assets (as defined). The
    following table presents the actual and required  regulatory capital amounts
    and ratios of the Company as of December 31, 1998 and 1997.  No amounts were
    deducted from the  Association's  capital for interest rate risk in 1998 and
    1997.  Management  believes that the Company,  the Bank and the  Association
    meet all  capital  adequacy  requirements  to which  they are  subject as of
    December 31, 1998.
<TABLE>
      <S>                           <C>        <C>         <C>        <C>         <C>        <C>
      ----------------------------------------------------------------------------------------------
                                                              For Capital            To Be Well
                                         Actual            Adequacy Purposes         Capitalized
                                    -----------------      -----------------      ------------------
      (in thousands of dollars)      Amount    Ratio        Amount    Ratio        Amount    Ratio
      ----------------------------------------------------------------------------------------------
      December 31, 1998:
      Total capital (to risk weighted assets):
           Consolidated             $133,836   14.80%      $ 72,327    8.00%           N/A          
           Bank                       75,002   12.12%        49,514    8.00%      $ 61,893   10.00%
           Association                57,782   18.82%        24,557    8.00%        30,697   10.00%
      Tier 1 capital (to risk weighted assets):
           Consolidated              122,455   13.54%        36,163    4.00%           N/A          
           Bank                       67,227   10.86%        24,754    4.00%        37,136    6.00%
           Association                54,664   17.81%         9,209    3.00%        18,418    6.00%
      Tier 1 capital (to average assets):
           Consolidated              122,455    7.90%        62,034    4.00%           N/A          
           Bank                       67,227    8.70%        30,926    4.00%        38,658    5.00%
           Association                54,664    8.51%        25,684    4.00%        32,105    5.00%
      Tangible capital (to adjusted total assets):
           Association                54,664    8.51%         9,632    1.50%           N/A          
      ----------------------------------------------------------------------------------------------

      ----------------------------------------------------------------------------------------------
                                                              For Capital            To Be Well
                                         Actual            Adequacy Purposes         Capitalized
                                    -----------------      -----------------      -----------------
      (in thousands of dollars)      Amount    Ratio        Amount    Ratio        Amount    Ratio
      ----------------------------------------------------------------------------------------------
      December 31, 1997:
      Total capital (to risk weighted assets):
           Consolidated             $125,325   13.99%      $ 71,669    8.00%           N/A          
           Bank                       69,181   11.57%        47,831    8.00%      $ 59,788   10.00%
           Association                53,957   16.00%        26,977    8.00%        33,722   10.00%
      Tier 1 capital (to risk weighted assets):
           Consolidated              114,065   12.73%        35,835    4.00%           N/A          
           Bank                       61,687   10.32%        23,915    4.00%        35,873    6.00%
           Association                51,178   15.18%        10,117    3.00%        20,233    6.00%
      Tier 1 capital (to average assets):
           Consolidated              114,065    7.46%        61,154    4.00%           N/A          
           Bank                       61,687    8.14%        30,318    4.00%        37,897    5.00%
           Association                51,178    7.76%        26,373    4.00%        32,966    5.00%
      Tangible capital (to adjusted total assets):
           Association                51,178    7.76%         9,890    1.50%           N/A          
      ==============================================================================================
</TABLE>
    The  most  recent   notification  from  the  federal   regulatory   agencies
    categorized the Company as "well capitalized" under the regulatory framework
    for prompt corrective action. To be capitalized as "well  capitalized",  the
    Company must maintain minimum Tier 1 and Total risk-based capital ratios and
    Tier 1 leverage ratios as set forth in the table above. To be categorized as
    adequately capitalized,  the Company must maintain minimum total risk-based,
    Tier I risk-based,  and Tier I leverage ratios as set forth in the table. As
    of  December  31,  1998,  there  are no  conditions  or  events  since  that
    notification  that  management  believes have changed the Company's  capital
    category.

    The United States  Congress  passed  legislation to strengthen the insurance
    fund  administered  by the  Savings  Association  Insurance  Fund  through a
    special  assessment on the Association's  deposit base as of March 31, 1995.
    The special assessment totaled $2,383,000 during the year ended December 31,
    1996.


2.  Regulatory Agreements
    During 1996,  the Company  entered into a Memorandum of  Understanding  (the
    "MOU") with the Federal Reserve Bank of San Francisco (the "FRB"). Under the
    terms of the MOU, the Company must first obtain  concurrence from the FRB on
    matters  concerning  payment  of  cash  dividends,  incurring  debt,  or the
    redemption  of its stock.  The agreement  also  addresses a number of issues
    that require FRB concurrence including an increase in director and executive
    compensation,  entering  into  agreements  to acquire or divest  businesses,
    management  and  organizational  structure,  liquidity  and  capital  needs,
    interest rate risk, audit, record keeping and compliance control systems.

    In September 1997, the Bank also entered into a MOU with the Federal Deposit
    Insurance  Corporation (the "FDIC").  This MOU was terminated by the FDIC in
    March 1999,  based on the  adoption of a  resolution  by the Bank's Board of
    Directors.  This  resolution,  approved by the Bank's  Board of Directors in
    February  1999,   requires,   among  other  things,  that  the  Bank  obtain
    concurrence  from the FDIC for payment of cash  dividends,  and requires the
    Bank to reduce  certain  classified  assets to specified  levels within time
    frames set forth in the informal agreement.

3.  Earnings Per Share
    Effective  January 1, 1997, the Company adopted SFAS No. 128,  "Earnings per
    Share",  which  specifies  the  computation,  presentation,  and  disclosure
    requirements   for  earnings  per  share.   The  table  below  presents  the
    information  used to compute basic and diluted earnings per common share for
    the years ended December 31, 1998, 1997 and 1996:
<TABLE>
 <S>                                               <C>           <C>            <C>
 ------------------------------------------------------------------------------------------
                                                     1998          1997           1996
 ------------------------------------------------------------------------------------------
 Numerator:                                                                    
      Net income                                   $8,369,000    $7,218,000     $7,059,000
 ==========================================================================================
 Denominator:                                                                  
      Weighted average shares outstanding           3,551,891     3,551,228      3,551,228
      Effect of dilutive securities-stock                                                  
        options                                         7,014         7,859              -
 ------------------------------------------------------------------------------------------
        Adjusted weighted average shares                                                   
         outstanding, assuming dilution             3,558,905     3,559,087      3,551,228
 ==========================================================================================
 Earnings per share - basic                          $2.36         $2.03          $1.99
 Earnings per share - assuming dilution              $2.35         $2.03          $1.99
 ==========================================================================================
</TABLE>
    The  following  options  were not  included  in the  computation  of diluted
    earnings per share because the options'  exercise price was greater than the
    average market price of the common shares. At December 31, 1998, outstanding
    options  to  purchase  96,625  shares  at a range of $37.22  to  $43.00.  At
    December 31, 1997,  outstanding options to purchase 72,500 shares at $43.00.
    For the year ended December 31, 1996, there were no options.



<PAGE>


NOTE R - COMPREHENSIVE INCOME
The tax effects  allocated to each component of other  comprehensive  income for
the years ended December 31, 1998, 1997, and 1996 were as follows:

 ------------------------------------------------------------------------------
                                             Before        Tax         Net of
                                              Tax       (Expense)        Tax
 (in thousands of dollars)                   Amount     or Benefit     Amount
 ------------------------------------------------------------------------------
                  1998:
 Unrealized gains (losses) on securities:
      Unrealized holding losses
           arising during the year           $  (209)   $      171    $    (38)
      Less:  reclassification adjustment
           for gains realized in net income      392          (157)        235 
 ------------------------------------------------------------------------------
 Other comprehensive income                  $  (601)   $      328    $   (273)
 ==============================================================================
                  1997:
 Unrealized gains on securities:
      Unrealized holding gains
           arising during the year           $    671   $     (266)   $    405
      Less:  reclassification adjustment
           for gains realized in net income       177          (71)        106 
 ------------------------------------------------------------------------------
 Other comprehensive income                  $    494   $     (195)   $    299
 ==============================================================================
                  1996:
 Unrealized gains (losses) on securities:
      Unrealized holding gains
           arising during the year           $    230   $      (83)   $    147
      Less:  reclassification adjustment
           for gains realized in net income     1,401         (560)        841 
 ------------------------------------------------------------------------------
 Other comprehensive income                  $ (1,171)   $     477    $   (694)
 ==============================================================================


NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial  instruments is determined by the Company
using available  market  information and  appropriate  valuation  methodologies.
However,  the Company used considerable  judgment in interpreting market data to
develop the estimates of fair value.  In addition,  significant  estimations and
present  value   calculations   were  used  for  purposes  of  the   disclosure.
Accordingly,  the  estimates  presented  are not  necessarily  indicative of the
amounts the  Company  could  realize in a current  market  exchange.  The use of
different market  assumptions and estimations  methodologies may have a material
effect on the estimated fair value amounts.  In estimating the fair value of its
financial instruments, the Company used the following methods and assumptions:

    Cash and due from banks, and  interest-bearing  deposits in other banks: The
    carrying amounts approximate fair values.

    Investment securities (including  mortgage-backed  securities):  Fair values
    for  securities  are based on quoted market  prices,  if  available.  If not
    available, quoted market prices of comparable instruments are used except in
    the case of certain  options  and swaps that  utilize  pricing  models.  For
    restricted  investment  securities,  the carrying  amount  approximate  fair
    value.

    Loans:  For  variable  rate  loans  that  reprice  frequently  and entail no
    significant change in credit risk, fair values are based on carrying values.
    For certain  mortgage loans (e.g.,  one-to-four  family  residential),  fair
    values  are  based  on  quoted  market  prices  of  similar  loans  sold  in
    conjunction with  securitization  transactions,  adjusted for differences in
    loan  characteristics.  For other loans,  fair values are estimated based on
    discounted  cash flow analyses using interest  rates  currently  offered for
    loans with  similar  terms to  borrowers  of  similar  credit  quality.  The
    carrying amount of accrued interest approximates its fair value.

    Deposits:  The estimated fair values of deposits with no stated  maturities,
    which includes demand  deposits,  checking  accounts,  passbook  savings and
    certain types of money market  accounts,  is equal to the amount  payable on
    demand.  The estimated fair values of fixed  maturity  deposits is estimated
    using a discounted cash flow calculation with rates currently offered by the
    Company for deposits of similar remaining  maturity.  The carrying amount of
    accrued interest payable approximates its fair value.

    Short-term  borrowings:  The carrying  amounts of federal  funds  purchased,
    borrowings  under  repurchase  agreements,  advances from the FHLB and other
    short-term borrowings approximate their fair values.

    Long-term debt (other than  deposits):  The fair values are estimated  using
    discounted  cash flow  analyses  using  the  Company's  current  incremental
    borrowing rates for similar types of borrowing arrangements.

    Off-balance sheet financial instruments:  Fair values for letters of credit,
    guarantees,  and lending  commitments are based on fees currently charged to
    enter  into  similar  agreements,  considering  the  remaining  terms of the
    agreements and the counterparties' credit standing.

    Derivative  financial  instruments:  Fair  values for swaps,  caps,  floors,
    forwards,  and options are based upon current  settlement  values (financial
    forwards),  if available.  If there are no relevant comparables,  on pricing
    models or  formulas  using  current  assumptions  (interest  rate  swaps and
    options).


The  following  table  provides a summary of the carrying and fair values of the
Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
      <S>                                     <C>         <C>           <C>          <C>
      --------------------------------------------------------------------------------------------
                                                        1998                       1997
                                               ------------------------  -------------------------
                                                             Estimated                  Estimated
                                                  Carrying   Fair           Carrying    Fair
      (in thousands of dollars)                    Value       Value         Value        Value
      --------------------------------------------------------------------------------------------
      Financial assets:
         Cash and due from banks              $    61,658 $     61,658  $     45,150 $     45,150
         Interest-bearing deposits in other
         banks                                     20,000       20,000        30,000       30,000
         Federal funds sold                        47,752       47,752         4,705        4,705
         Investment securities                    141,764      141,764       208,717      212,760
         Restricted investment securities          29,481       29,481        27,348       27,348
         Loans                                    961,924    1,014,427     1,032,940    1,040,008
      Financial liabilities:
         Deposits                              (1,084,610)  (1,086,734)   (1,008,728)  (1,008,425)
         Short-term borrowings                    (56,926)     (56,926)     (137,212)    (137,212)
         Long-term debt                          (133,004)    (121,631)     (141,048)    (128,098)
      Off-balance sheet financial instruments:
         Derivative financial instruments:                                                         
              In a net payable position                 -            -       (10,000)         (17)
              Interest rate cap                     5,000            -         5,000            5
              Interest rate floor                  10,000          144             -            -
              Interest rate options                15,000           77             -            -
         Loan commitments                         172,555        1,213       165,153          438
         Guarantees and letters of credit           5,516           53         6,828           76
      ============================================================================================
</TABLE>


<PAGE>


NOTE T - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
Condensed financial statements of CB Bancshares, Inc. (Parent only) follows:
<TABLE>
      <S>                                                   <C>              <C>
                                   CONDENSED BALANCE SHEETS
      -----------------------------------------------------------------------------------
                                                                     December 31,
      (in thousands, except number                          -----------------------------
        of shares and per share data)                            1998             1997
      -----------------------------------------------------------------------------------
      ASSETS
      Cash on deposit with the
           Bank and Association                             $       658      $     1,467
      Investment in subsidiaries:                                              
           Bank                                                  67,936           62,591
           Association                                           63,610           60,667
           Other                                                    423              423
      Premises and equipment, net                                   205              596
      Other assets                                                  513              513
      -----------------------------------------------------------------------------------
                Total assets                                $   133,345      $   126,257
      ===================================================================================

      LIABILITIES AND STOCKHOLDERS' EQUITY                                               
      Advances from the Bank, net                           $         7      $         7
      Dividends payable                                             210              169
      Other liabilities                                             756            1,016
      -----------------------------------------------------------------------------------
                Total liabilities                                   973            1,192
      -----------------------------------------------------------------------------------

      Stockholders' equity:                                                              
         Preferred stock $1 par value                                                    
              Authorized and unissued                                          
              25,000,000 shares                                       -                -
         Common stock $1 par value                                                       
              Authorized 50,000,000 shares;                                    
              issued and outstanding, 3,552,228                                
              and 3,551,228 shares, respectively                  3,552            3,551
           Additional paid-in capital                            65,108           65,080
           Accumulated other comprehensive                                     
               income, net of tax                                   928            1,201
           Retained earnings                                     62,784           55,233
      -----------------------------------------------------------------------------------
                Total stockholders' equity                      132,372          125,065
      -----------------------------------------------------------------------------------
                Total liabilities and stockholders' equity  $   133,345      $   126,257
      ===================================================================================
</TABLE>



<PAGE>


NOTE T - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
                   (continued)
<TABLE>
      <S>                                             <C>              <C>            <C>
                                  CONDENSED STATEMENTS OF INCOME
      -------------------------------------------------------------------------------------------
                                                                Years Ended December 31,
                                                        -----------------------------------------
      (in thousands of dollars)                           1998            1997            1996
      -------------------------------------------------------------------------------------------
      Income:
           Dividends from subsidiaries:
                Bank                                  $      500       $   1,400      $    6,262
                Association                                  250           1,179           4,600
           Other interest income                              25             165             462
      -------------------------------------------------------------------------------------------
                Total income                                 775           2,744          11,324
                Total expenses                             1,406           3,850           8,302
      -------------------------------------------------------------------------------------------
                Operating (loss) profit                     (631)         (1,106)          3,022
      -------------------------------------------------------------------------------------------

      Equity in undistributed income of subsidiaries:                                            
                Bank                                       5,830           3,364           1,010
                Association                                2,744           3,404             100
                Other                                          -              (2)            (19)
      -------------------------------------------------------------------------------------------
                                                           8,574           6,766           1,091
      -------------------------------------------------------------------------------------------
           Income before income taxes                      7,943           5,660           4,113
      Income tax benefit                                     426           1,558           2,946
      -------------------------------------------------------------------------------------------
           NET INCOME                                 $    8,369       $   7,218      $    7,059
      ===========================================================================================
</TABLE>


<PAGE>


NOTE T - FINANCIAL STATEMENTS OF CB BANCSHARES, INC. (PARENT COMPANY)
             (continued)
<TABLE>
      <S>                                                <C>             <C>             <C>
                        CONDENSED STATEMENTS OF CASH FLOW
      ---------------------------------------------------------------------------------------------
                                                                  Years Ended December 31,
                                                           ----------------------------------------
      (in thousands of dollars)                              1998            1997           1996
      ---------------------------------------------------------------------------------------------
      Cash flows from operating activities:
           Net income                                    $    8,369      $    7,218      $   7,059
           Adjustments to reconcile net income to
             net cash provided by (used in)
             operating  activities:
                Equity in undistributed
                  income of subsidiaries                     (8,572)         (6,766)        (1,091)
                Decrease (increase) in dividend
                  receivable from the Bank                        -           1,500           (800)
                Decrease (increase) in other assets               -              (1)         2,227
                Increase (decrease) in other liabilities       (249)         (2,730)         2,862
      ---------------------------------------------------------------------------------------------
      Net cash provided by (used in) operating
      activities                                               (452)           (779)        10,257
      ---------------------------------------------------------------------------------------------

      Cash flows from investing activities:
           Net capital expenditures                             391             303           (899)
      ----------------------------------------------------------------------------------------------
      Net cash provided by (used in) investing
      activities                                                391             303           (899)
      ----------------------------------------------------------------------------------------------

      Cash flows from financing activities:
           Cash dividends                                      (777)         (1,694)        (4,614)
           Stock options exercised                               29               -              -
           Net decrease in short-term borrowings                  -               -         (3,000)
           Decrease in advances from the Bank, net                -               -           (231)
      ----------------------------------------------------------------------------------------------
      Net cash used in financing activities                    (748)         (1,694)        (7,845)
      ----------------------------------------------------------------------------------------------

           Increase (decrease) in cash                         (809)         (2,170)         1,513
      Cash at beginning of year                               1,467           3,637          2,124
      -----------------------------------------------------------------------------------------------
      Cash at end of year                                $      658      $    1,467      $   3,637
      ==============================================================================================
</TABLE>


<PAGE>


 NOTE U - SEGMENT INFORMATION
The Company adopted SFAS No. 131,  "Disclosures  about Segments of an Enterprise
and Related  Information" in 1998. The Company's business segments are organized
around  services,  products  provided  and  regulatory  environments.   The  two
operating  segments  are a bank and a  savings  institution.  The  segment  data
presented below was prepared on the same basis of accounting as the consolidated
financial statements as described in Note A. Intersegment income and expense are
valued at prices comparable to those for unaffiliated companies.
<TABLE>
<S>                              <C>          <C>          <C>          <C>           <C>
--------------------------------------------------------------------------------------------------
                                                             Parent
                                                             Company
(in thousands of dollars)           Bank      Association   and Other  Eliminations   Consolidated
--------------------------------------------------------------------------------------------------
1998:
Interest income                  $   59,907   $   52,401   $      775   $   (1,023)   $   112,060
Interest expense                     25,544       28,371            8          (25)        53,898
Depreciation and amortization         1,874          889            -             -         2,763
Income before income taxes            9,970        5,244        7,943       (9,323)        13,834
Income tax expense (benefit)          3,640        2,251         (426)            -         5,465
Total assets                        788,913      639,442      133,513     (133,430)     1,428,438
Capital expenditures                  1,877        2,616            -             -         4,493
==================================================================================================
1997:
Interest income                  $   59,093   $   53,755   $    2,601   $   (2,920)   $   112,529
Interest expense                     25,630       28,182           47             -        53,859
Depreciation and amortization         1,849          617            -             -         2,466
Income before income taxes            7,474        8,189        5,657       (9,345)        11,975
Income tax expense (benefit)          2,710        3,606       (1,559)            -         4,757
Total assets                        769,293      663,433      126,426     (123,926)     1,435,226
Capital expenditures                  2,841        1,982            -             -         4,823
==================================================================================================
1996:
Interest income                  $   58,351   $   53,251   $   10,906   $  (11,261)   $   111,247
Interest expense                     24,942       28,282          290          (37)        53,477
Depreciation and amortization         1,870          403            -             -         2,273
Income before income taxes           11,401        8,159        4,084      (11,954)        11,690
Income tax expense (benefit)          4,130        3,458       (2,957)            -         4,631
Total assets                        762,074      634,066      123,336     (122,307)     1,397,169
Capital expenditures                  2,074          879          899             -         3,852
==================================================================================================
</TABLE>
Expenses of the Company are fully  allocated  to each  segment.  Parent  Company
expenses are not  allocated to the  segments.  Significant  elimination  amounts
reflect  the  following:  (a)  dividends  received  by the Parent  Company;  (b)
interest income on loans held by the Bank and serviced by the  Association;  (c)
rental income and expense for rent charged by the Bank to the  Association;  and
(d)  checking  accounts of the Parent  Company and the  Association  held by the
Bank.


ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


PART III

Certain information required by Part III is omitted from this Report in that the
Registrant  will fill a definitive  proxy  statement  pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein  by  reference.   Only  those  sections  of  the  Proxy  Statement  which
specifically address the items set forth herein are incorporated by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  concerning  the Company's  directors  and  executive  officers
required  by this Item is  incorporated  by  reference  to the  Company's  Proxy
Statement.

The  information  regarding  compliance  with Section 16 of the  Securities  and
Exchange  Act of 1934 is to be set  forth in the Proxy  Statement  and is hereby
incorporated by reference.

ITEM 11.  EXECUTIVE COMPENSATION

The  information  required  by this item is  incorporated  by  reference  to the
Company's Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required  by this item is  incorporated  by  reference  to the
Company's Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required  by this item is  incorporated  by  reference  to the
Company's Proxy Statement.


<PAGE>
PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)   FINANCIAL STATEMENTS AND SCHEDULES
The  following  consolidated  financial  statements  of the  Registrant  and its
subsidiaries are included in Item 8:

Report of Independent Certified Public Accountants

Consolidated Balance Sheets - December 31, 1998 and 1997

Consolidated  Statements of Income - For years ended December 31, 1998, 1997 and
1996

Consolidated  Statements  of Changes in  Stockholders'  Equity - For years ended
December 31, 1998, 1997 and 1996

Consolidated  Statement of Cash Flows - For years ended December 31, 1998,  1997
and 1996

Notes to the Consolidated Financial Statements

(b)      EXHIBITS

The following exhibits are filed as a part of, or incorporated by reference into
this Report:

Exhibit No.       Description


 3.1              Articles   of   Incorporation   of    CB   Bancshares,   Inc.,
                  incorporated   by   reference  to  Exhibit  3.1 filed with the
                  Registrant's    Registration     Statement    on   Form   S-4,
                  Registration No. 33-72340.

 3.2              By-laws of CB Bancshares,  Inc.,  incorporated by reference to
                  Exhibits 3.2 and 3.3 filed with the Registrant's  Registration
                  Statement on Form S-4, Registration
                  No. 33-72340.

 4.0              No instrument which defines the rights of holders of long-term
                  debt,  of  the   registrant   and  all  of  its   consolidated
                  subsidiaries,  is filed herewith  pursuant to Regulation  S-K,
                  Item  601(b)(4)(iii)(A).  Pursuant  to  this  regulation,  the
                  registrant  hereby  agrees  to  furnish  a copy  of  any  such
                  instrument to the SEC upon request.

 4.1              Rights  Agreement  dated  as of March  16,  1989,  between  CB
                  Bancshares,  Inc. and City Bank, Rights Agent, incorporated by
                  reference to Form 8-A, filed on April 24, 1989 (File No.
                  0-12396).

 4.2              Amendment  to  Rights  Agreement  made  as of June  21,  1989,
                  incorporated  by reference  to Form 8 Amendment  No. 1 to Form
                  8-A, filed on July 11, 1989 (File No. 0-12396).

 4.3              Amendment No. 2 to Rights Agreement entered into as of
                  August 15, 1990, incorporated by reference to Form 8
                  Amendment No. 2 to Form 8-A, filed on August 28, 1990
                  (File No. 0-12396).

 4.4              Amendment No. 3 to Rights Agreement entered into as of
                  February 17, 1993, incorporated by reference to Exhibit 4.4
                  to Form 8-A/A, Amendment No. 3, filed on March 25, 1999.

 4.5              Amendment No. 4 to Rights Agreement entered into as of
                  March 25, 1999, incorporated by reference to Exhibit 4.5 to
                  Form 8-A/A, Amendment No.3, filed on March 25, 1999.

10.1              Stock Compensation Plan,  incorporated by reference to Exhibit
                  A and B to the  Registrant's  Proxy  Statement for the January
                  25, 1995 Special Meeting of Shareholders, filed on
                  December 9, 1995. *

10.2              Form of Stock Option Agreement incorporated by reference to
                  Exhibit 10.6 of Form 10-K  filed on  April 1, 1996. *

10.3              Employment agreement between CB Bancshares, Inc. and Ronald
                  M. Migita, dated May 31,1995, is incorporated by reference to
                  Exhibit 10 to Registrant's Form 10-Q filed on
                  August 14, 1995. *

10.4              Form of Change in Control Agreement is incorporated by
                  reference to Exhibit 99.2 of Form 8-K filed on
                  April 18, 1996.

21                Subsidiaries  of the Registrant  incorporated  by reference to
                  Exhibit  21 filed  with the  Registrant's  Form 10-K  filed on
                  March 31, 1998.

27.1              Financial Data Schedule (Fiscal year ended December 31, 1998)

*  Management contract or compensatory plan or arrangement.

All other schedules are omitted  because they are not applicable,  not material,
or because the  information is included in the financial  statement or the notes
thereto.

(c)   REPORTS OF FORM 8-K

The company has filed no reports on form 8-K for the quarter ended  December 31,
1998.


<PAGE>
SIGNATURES

Pursuant to the  Requirement of Section 13 or 15(d) of the  Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date:  March 30, 1999                      CB BANCSHARES, INC.


                                          /s/ Ronald K. Migita
                                          ------------------------------------
                                          Ronald K. Migita, President and
                                          Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the date indicated.

Date:  March 30, 1999






-----------------------------------          ----------------------------------
Donald J. Andres, Director                   Tomio Fuchu, Director


/s/  James H. Kamo                           /s/  Larry K. Matsuo
-----------------------------------          ----------------------------------
James H. Kamo, Chairman of the               Larry K. Matsuo, Director
Board & Secretary


/s/  Ronald K. Migita                        /s/  Caryn S. Morita
-----------------------------------          ----------------------------------
Ronald K. Migita, President, Chief           Caryn S. Morita, Senior Vice
Executive Officer & Director                 President & Director


/s/  Hiroshi Sakai
-----------------------------------          ----------------------------------
Hiroshi Sakai, Director                      Yoshiki Takada, Director


/s/  Lionel Y. Tokioka
-----------------------------------          ----------------------------------
Lionel Y. Tokioka, Director                  H. Clifton Whiteman, Director


/s/  Daniel Motohiro                         /s/  Dwight L. Yoshimura
-----------------------------------          ----------------------------------
Daniel Motohiro, Senior Vice                 Dwight L. Yoshimura, Director
President, Treasurer & Chief
Financial Officer (Principal
Financial Officer)


<PAGE>
EXHIBIT INDEX

Exhibit                         Description


 3.1              Articles   of   Incorporation   of    CB   Bancshares,   Inc.,
                  incorporated   by   reference  to  Exhibit  3.1 filed with the
                  Registrant's    Registration     Statement    on   Form   S-4,
                  Registration No. 33-72340.

 3.2              By-laws of CB Bancshares,  Inc.,  incorporated by reference to
                  Exhibits 3.2 and 3.3 filed with the Registrant's  Registration
                  Statement on Form S-4, Registration
                  No. 33-72340.

 4.0              No instrument which defines the rights of holders of long-term
                  debt,  of  the   registrant   and  all  of  its   consolidated
                  subsidiaries,  is filed herewith  pursuant to Regulation  S-K,
                  Item  601(b)(4)(iii)(A).  Pursuant  to  this  regulation,  the
                  registrant  hereby  agrees  to  furnish  a copy  of  any  such
                  instrument to the SEC upon request.

 4.1              Rights  Agreement  dated  as of March  16,  1989,  between  CB
                  Bancshares,  Inc. and City Bank, Rights Agent, incorporated by
                  reference to Form 8-A, filed on April 24, 1989 (File No.
                  0-12396).

 4.2              Amendment  to  Rights  Agreement  made  as of June  21,  1989,
                  incorporated  by reference  to Form 8 Amendment  No. 1 to Form
                  8-A, filed on July 11, 1989 (File No. 0-12396).

 4.3              Amendment No. 2 to Rights Agreement entered into as of
                  August 15, 1990, incorporated by reference to Form 8
                  Amendment No. 2 to Form 8-A, filed on August 28, 1990
                  (File No. 0-12396).

 4.4              Amendment No. 3 to Rights Agreement entered into as of
                  February 17, 1993, incorporated by reference to Exhibit 4.4
                  to Form 8-A/A, Amendment No. 3, filed on March 25, 1999.

 4.5              Amendment No. 4 to Rights Agreement entered into as of
                  March 25, 1999, incorporated by reference to Exhibit 4.5 to
                  Form 8-A/A, Amendment No.3, filed on March 25, 1999.

10.1              Stock Compensation Plan,  incorporated by reference to Exhibit
                  A and B to the  Registrant's  Proxy  Statement for the January
                  25, 1995 Special Meeting of Shareholders, filed on
                  December 9, 1995. *

10.2              Form of Stock Option Agreement incorporated by reference to
                  Exhibit 10.6 of Form 10-K  filed on  April 1, 1996. *

10.3              Employment agreement between CB Bancshares, Inc. and Ronald
                  M. Migita, dated May 31,1995, is incorporated by reference to
                  Exhibit 10 to Registrant's Form 10-Q filed on
                  August 14, 1995. *

10.4              Form of Change in Control Agreement is incorporated by
                  reference to Exhibit 99.2 of Form 8-K filed on
                  April 18, 1996.

21                Subsidiaries  of the Registrant  incorporated  by reference to
                  Exhibit  21 filed  with the  Registrant's  Form 10-K  filed on
                  March 31, 1998.

27.1              Financial Data Schedule (Fiscal year ended December 31, 1998)

*  Management contract or compensatory plan or arrangement.