UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-10777
CPB INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0212597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 South King Street, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
(808)544-0500
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, No Par Value;
Outstanding at November 10, 2000: 8,711,612 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements listed below are filed elsewhere
herein and are hereby incorporated by this reference.
Page
Consolidated Balance Sheets - September 30, 2000
(Unaudited) and December 31, 1999 F-1
Consolidated Statements of Income - Three and nine
months ended September 30, 2000 and 1999 (Unaudited) F-3
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income - Nine months ended
September 30, 2000 and 1999 (Unaudited) F-5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 2000 and 1999 (Unaudited) F-7
Notes to Consolidated Financial Statements -
September 30, 2000 (Unaudited) F-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
CPB Inc. (the "Company") posted net income of $4.94 million in
the third quarter of 2000, an increase of 15.0% over the $4.30
million earned in the third quarter of 1999. Net income for the
first nine months of 2000 was $14.32 million, an increase of
19.8% over the $11.95 million earned in the same period in 1999.
The increase in net income for the third quarter is attributable
to a $1.6 million restructuring charge recognized in the third
quarter of 1999. Excluding the impact of the restructuring
charge, third quarter net income declined by $290,000 or 5.5% due
to a $700,000 increase in provision for loan losses. For the
nine months ended September 30, 2000, a $1.3 million increase in
net interest income and a net gain of $1.4 million recognized on
the sale of the merchant servicing portfolio were offset by a
decrease of $1.9 million in other service charges, related to the
sale of the merchant servicing portfolio, and a $0.9 million
decrease in investment securities gains. As of September 30,
2000, total assets of $1,757.4 million increased by $110.9
million or 6.7% compared with year-end 1999. Net loans of
$1,259.6 million increased by $109.9 million, or 9.6%, total
deposits of $1,355.8 million increased by $50.2 million, or 3.8%,
and long-term debt increased by $43.3 million, or 44.1%.
1
The following table presents annualized returns on average
assets and average stockholders' equity and basic and diluted
earnings per share for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Annualized return on
average assets 1.17% 1.07% 1.16% 1.01%
Annualized return on
average stockholders'
equity 13.90% 11.37% 13.30% 10.58%
Basic earnings per share $0.56 $0.44 $1.59 $1.23
Diluted earnings per share $0.55 $0.44 $1.56 $1.22
Hawaii's economy continues to show signs of improvement in
2000. Aided by strength in the national economy, the tourism
industry has experienced nine consecutive months of year-over-
year increases in hotel occupancy rates. While the trend is
expected to continue, local economists caution that U.S. stock
market volatility, Federal Reserve monetary policy and political
unrest in the Middle East could adversely affect future tourism
activity. Also indicative of the improvement in the local
economy, the statewide unemployment rate in September 2000
dropped to 4.5%, from 5.4% a year ago. Local real estate
activity also continues to improve, with total dollar-volume of
residential real estate sales on the island of Oahu in the first
nine months of 2000 increasing by 22.5% over the same period in
1999. Both average sales prices and volume of sales increased
during the period.
Although the Hawaii economy is expected to grow modestly in
the near future, actual results in tourism, employment and the
real estate market could affect loan demand, deposit growth,
provision for loan losses, noninterest income and noninterest
expense. Accordingly, the ability of the Hawaii economy to
sustain the positive trends experienced in recent months may
directly impact the results of operations of the Company for the
remainder of 2000.
Forward-Looking Statements
Certain matters discussed in this report may constitute
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements relate to, among other things, net interest income,
net interest margin, the levels of nonperforming loans, loan
losses and the allowance for loan losses, noninterest income and
noninterest expense. Important factors that could cause results
to differ from those discussed in this report include, but are
2
not limited to: changes in market interest rates; general
business conditions in the state of Hawaii; the real estate
market in Hawaii; competitive conditions among financial
institutions; regulatory changes in the financial services
industry; and other risks detailed in the Company's reports filed
with the Securities and Exchange Commission, including the Annual
Report on Form 10-K for the year ended December 31, 1999.
Results of Operations
Net Interest Income
A comparison of net interest income for the three and nine
months ended September 30, 2000 and 1999 is set forth below on a
taxable equivalent basis using an assumed income tax rate of 35%.
Net interest income, when expressed as a percentage of average
interest earning assets, is referred to as "net interest margin."
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2000 1999 2000 1999
Interest income $32,968 $29,250 $93,333 $85,140
Interest expense 14,552 11,296 39,446 32,746
Net interest income $18,416 $17,954 $53,887 $52,394
Net interest margin 4.60% 4.72% 4.63% 4.69%
Interest income increased by $3.7 million, or 12.7%, and $8.2
million, or 9.6%, in the third quarter and first nine months of
2000, respectively, as compared to the same periods in 1999, due
to a combination of increases in average interest-earning assets
and market interest rates during the period. Average interest
earning assets of $1,602.4 million for the third quarter of 2000
and $1,552.0 million for the first nine months of 2000 increased
by $79.9 million, or 5.2%, and by $63.8 million, or 4.3%,
respectively, primarily due to increases in loan and investment
securities balances. The yield on interest-earning assets of
8.23% for the third quarter of 2000 and 8.02% for the first nine
months of 2000 increased from 7.68% and 7.63%, respectively,
compared to the same periods in 1999 primarily due to the
increase in market interest rates in 1999 and 2000.
Interest and fees on loans increased by $3.0 million, or
12.5%, in the third quarter of 2000 and $6.1 million, or 8.8%, in
the first nine months of 2000 due to increases in average loan
balances and average yields. Interest and dividends on
investment securities increased, in the aggregate, by $1.2
million or 26.7% and by $2.4 million or 16.8% in the third
quarter and first nine months of 2000, respectively. Interest on
deposits in other banks decreased by $520,000 or 80.4% and by
3
$498,000 or 65.0% during the same periods due to a decline in
deposit balances.
Interest expense for the three and nine months ended September
30, 2000 increased by $3.3 million, or 28.8%, and by $6.7
million, or 20.5%, respectively, as compared to the same periods
in 1999 due to an increase in average interest-bearing
liabilities and the higher level of market interest rates.
Average interest-bearing liabilities totaled $1,342.4 million in
the third quarter of 2000 and $1,292.6 million for the first nine
months of 2000, an increase of $89.8 million, or 7.2%, and $64.7
million, or 5.3%, respectively, over the corresponding periods in
1999. Substantially all growth occurred in certificates of
deposit and other borrowings. The average rate on interest-
bearing liabilities for the third quarter of 2000 increased to
4.34% from 3.61% for the same period in 1999, and the average
rate for the first nine months of 2000 increased to 4.07% from
3.56% for the same period in 1999.
The resultant net interest income for the third quarter and
first nine months of 2000 increased by $402,000 or 2.6% and $1.3
million or 2.8%, respectively, compared to the same periods in
1999. Net interest margin decreased to 4.60% and 4.63% in the
third quarter and first nine months of 2000, respectively, from
4.72% and 4.69%, respectively, in same periods in 1999. Strong
competition for both loans and deposits, particularly core
deposits, is expected to continue and is expected to create
additional pressure on net interest margin in the future.
Provision for Loan Losses
Provision for loan losses is determined by management's
ongoing evaluation of the loan portfolio and assessment of the
ability of the allowance for loan losses to cover inherent
losses. The Company, considering current information and events
regarding a borrower's ability to repay its obligations, treats a
loan as impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual
terms of the loan agreement. When a loan is determined to be
impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate. If the loan is considered to be
collateral-dependent, the amount of impairment is based on the
fair value of the collateral. Impairment losses are included in
the allowance for loan losses through a charge to the provision
for loan losses. For smaller-balance homogeneous loans
(primarily residential real estate and consumer loans), the
allowance for loan losses is based upon management's evaluation
of the quality, character and risks inherent in the loan
portfolio, current and projected economic conditions, and
historical loan loss experience. The allowance is increased by
provisions charged to operating expense and reduced by loan
charge-offs, net of recoveries.
4
The following table sets forth certain information with
respect to the Company's allowance for loan losses as of the
dates and for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2000 1999 2000 1999
Allowance for loan losses:
Balance at beginning
of period $22,390 $20,735 $20,768 $20,066
Provision for loan
losses 1,500 800 3,500 3,000
Loan charge-offs:
Real estate:
Mortgage-commercial 1,101 367 1,101 1,096
Mortgage-residen 102 150 870 900
Commercial, financial
and agricultural 111 69 230 219
Consumer 17 39 233 234
Other 2 1 14 5
Total loan charge-offs 1,333 626 2,448 2,454
Recoveries:
Real estate:
Mortgage-commercial 2 53 515 92
Mortgage-residential 42 37 94 142
Commercial, financial
and agricultural 3 2 75 39
Consumer 53 59 153 175
Total recoveries 100 151 837 448
Net loan charge-offs 1,233 475 1,611 2,006
Balance at end of period $22,657 $21,060 $22,657 $21,060
Annualized ratio of net
loan charge-offs to
average loans 0.40% 0.16% 0.18% 0.23%
The provision for loan losses of $1.5 million for the third
quarter of 2000 increased by 87.5% compared to the third quarter
of 1999, while the provision for loan losses of $3.5 million for
the first nine months of 2000 increased by 16.7% compared to the
same period in 1999. Net loan charge-offs of $1.2 million and
$1.6 million for the three and nine months ended September 30,
2000, when expressed as an annualized percentage of average total
loans, were 0.40% and 0.18%, respectively. Loan charge-offs
during the third quarter of 2000 were comprised primarily of a
partial write-down of $1.1 million recorded on a commercial
mortgage participation loan.
5
The allowance for loan losses expressed as a percentage of
total loans was 1.77% at September 30, 2000, consistent with the
level at December 31, 1999. Considering the increase in net loan
charge-offs during the third quarter of 2000 and the decrease in
total nonaccrual and delinquent loans during the year, management
believes that the allowance for loan losses is adequate to cover
the credit risks inherent in the loan portfolio. However, any
deterioration in economic conditions in the state of Hawaii or
continued material increases in interest rates could adversely
affect borrowers' ability to repay, collateral values and,
consequently, the level of nonperforming loans and provision for
loan losses.
Nonperforming Assets
The following table sets forth nonperforming assets and
accruing loans delinquent for 90 days or more at the dates
indicated.
September 30, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
Nonaccrual loans:
Real estate:
Mortgage-commercial $ 6,007 $ 2,981 $ 4,884
Mortgage-residential 2,643 5,124 4,673
Commercial, financial
and agricultural 998 1,590 1,731
Total nonaccrual loans 9,648 9,695 11,288
Other real estate 1,382 1,366 1,592
Total nonperforming
assets 11,030 11,061 12,880
Loans delinquent for 90 days or
more still accruing interest:
Real estate:
Mortgage-commercial 1,774 1,749 756
Mortgage-residential 401 1,636 1,294
Commercial, financial
and agricultural 222 128 494
Consumer 6 92 40
Total loans delinquent
for 90 days or more
still accruing interest 2,403 3,605 2,584
Restructured loans still
accruing interest:
Real estate:
Mortgage-commercial 475 500 -
Total restructured
loans still accruing
interest 475 500 -
6
Total nonperforming
assets, loans delin-
quent for 90 days or
more and restructured
loans still accruing
interest $13,908 $15,166 $15,464
Total nonperforming assets
as a percentage of
loans and other real
estate 0.86% 0.94% 1.11%
Total nonperforming assets
and loans delinquent for
90 days or more still
accruing interest as a
percentage of loans
and other real estate 1.05% 1.25% 1.34%
Total nonperforming assets,
loans delinquent for 90
days or more and restruc-
tured loans still accruing
interest as a percentage
of loans and other real
estate 1.08% 1.29% 1.34%
Nonperforming assets, loans delinquent for 90 days or more and
restructured loans still accruing interest totaled $13.9 million
at September 30, 2000, a decrease of $1.3 million or 8.3% from
year-end 1999. Nonaccrual loans, loans delinquent for 90 days or
more and restructured loans still accruing interest were
comprised primarily of loans secured by commercial or residential
real property all of which are located in the state of Hawaii.
Nonaccrual loans at September 30, 2000 of $9.6 million included a
$3.1 million commercial mortgage, a $1.0 million loan secured by
multi-family residential property and a $1.1 million loan secured
by commercial real estate, all located on the island of Oahu.
Nonaccrual loans also included a number of other commercial
mortgages and residential mortgages on properties located
throughout the state. Loans delinquent for 90 days or more and
still accruing interest totaled $2.4 million at September 30,
2000, a 33.3% decrease from year-end 1999 levels. Impaired loans
at September 30, 2000 totaled $8.8 million and included all
nonaccrual loans greater than $500,000. The allowance for loan
losses allocated to impaired loans amounted to $2.5 million at
September 30, 2000. Impaired loans at year-end 1999 totaled $6.1
million with an allocated allowance for loan losses of $2.5
million.
Management continues to closely monitor loan delinquencies and
work with borrowers to resolve loan problems; however, any
worsening of current economic conditions in the state of Hawaii
or continued material increases in interest rates may result in
7
future increases in nonperforming assets, delinquencies, net loan
charge-offs, provision for loan losses and noninterest expense.
Other Operating Income
Total other operating income of $2.8 million for the third
quarter of 2000 decreased by $649,000, or 19.0%, compared to the
third quarter of 1999. The decline is attributable to a decrease
in other service charges and fees resulting from the sale in the
first quarter of 2000 of the bank's merchant servicing portfolio.
Total other operating income of $10.0 million for the first nine
months of 2000 increased by $30,000 or 0.3% over the same period
in 1999 as a result of the merchant portfolio sale, which
generated a $1.9 million gain, offset by a $2.0 million reduction
in servicing fees. Investment securities losses of $683,000 were
recognized in the first nine months of 2000, compared with gains
of $219,000 in 1999. Excluding the impact of these items, total
other operating income increased by $1.1 million or 15.1% in the
first nine months of 2000 compared to the same period in 1999.
The sale of the merchant servicing portfolio is expected to
result in a decrease of approximately $3.6 million in annual
operating income and a comparable decrease in annual operating
expenses in future periods.
Other Operating Expense
Total other operating expense of $11.7 million for the third
quarter of 2000 and $37.2 million for the first nine months of
2000 decreased by $2.4 million, or 16.8%, and $3.3 million or
8.1%, respectively, when compared to the same periods in 1999.
The decrease in expenses is attributable primarily to a $1.6
million restructuring charge recorded in the third quarter of
1999 related to a reorganization and staff reduction. During the
second quarter of 2000, $600,000 of the restructuring charge was
reversed due to revised estimates of severance payments in
connection with staff downsizing occurring throughout 2000. Of
the original 76 positions being eliminated, approximately one-
third of the employees impacted were retained to fill new
positions and vacancies created by attrition. As of September
30, 2000, 35 employees have been terminated, and severance and
retention payments totaling $717,000 were made. The remaining
terminations are expected to be completed by the first half of
2001.
Income Taxes
The effective tax rate for the third quarter and first nine
months of 2000 was 35.50% and 35.34%, respectively, compared with
the previous year's rate of 31.18% and 33.93%. Accrual
adjustments recorded in the third quarter of 1999 caused the
lower effective tax rates in 1999.
8
Financial Condition
Total assets at September 30, 2000 of $1.76 billion increased
by $110.9 million or 6.7% over year-end 1999 due to increases in
loans and investment securities which offset a decline in cash
and due from banks. Net loans of $1.26 billion increased by
$109.9 million or 9.6%, and investment securities of $372.0
million increased by $50.3 million or 15.6%. Cash and due from
banks decreased by $43.2 million or 51.7% due to an increase in
cash held at year-end 1999 for Year 2000 contingencies. Total
deposits at September 30, 2000 of $1.36 billion increased by
$50.2 million or 3.8%, short-term borrowings increased by $13.7
million, and long-term debt increased by $43.3 million.
Noninterest-bearing deposits of $192.2 million decreased by $12.6
million or 6.2%, while interest-bearing deposits of $1.16 million
increased by $62.8 million, or 5.7%, compared to year-end 1999.
Core deposits (noninterest-bearing demand, interest-bearing
demand and savings deposits, and time deposits under $100,000) at
September 30, 2000 of $950.2 million decreased by $8.6 million,
or 0.9%, during the first nine months of 2000, while time
deposits of $100,000 and over of $405.7 million increased by
$58.7 million, or 16.9%. Competition for deposits remains strong
and will continue to challenge the bank's ability to gather low-
cost retail funds.
Capital Resources
Stockholders' equity of $143.3 million at September 30, 2000
decreased by $769,000 or 0.5% from December 31, 1999. When
expressed as a percentage of total assets, stockholders' equity
declined to 8.15% at September 30, 2000, from 8.75% at year-end
1999. Book value per share at September 30, 2000 was $16.35,
compared to $15.51 at year-end 1999.
On September 11, 2000, the board of directors declared a third
quarter cash dividend of $0.15 per share, a 7.1% increase over
the dividend declared in the third quarter of 1999. Dividends
declared in the third quarter of 2000 totaled $1,314,000 compared
with $1,313,000 in the third quarter of 1999, a 0.1% decrease.
On October 11, 2000, the board of directors authorized a fifth
stock repurchase program that provides for the repurchase of up
to 6.9 percent, or approximately 600,000 shares, of the Company's
outstanding common stock. As of November 10, 2000, a total of
1,949,083 shares have been repurchased and retired under the
Company's stock repurchase program at a weighted average purchase
price of $20.86. The Company is authorized to repurchase
approximately 654,000 additional shares under its current
repurchase programs. Any remaining repurchases will depend on
market conditions. The effect of stock repurchases to date has
been a decrease in capital and capital ratios and an increase in
equity-based performance measures.
9
The Company's objective with respect to capital resources is
to maintain a level of capital that will support sustained asset
growth and anticipated risks. Furthermore, the Company seeks to
ensure that regulatory guidelines and industry standards for
well-capitalized institutions are met. As discussed below, the
Company and the Bank both qualify as being "well-capitalized."
Regulations on capital adequacy guidelines adopted by the
Federal Reserve Board (the "FRB") and the Federal Deposit
Insurance Corporation (the "FDIC") are as follows. An
institution is required to maintain a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio
of Tier 1 capital to risk-adjusted assets of 4%. In addition to
the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1
capital to total assets, referred to as the leverage ratio. For
a banking organization rated in the highest of the five
categories used by regulators to rate banking organizations, the
minimum leverage ratio of Tier 1 capital to total assets must be
3%. In addition to these uniform risk-based capital guidelines
and leverage ratios that apply across the industry, the
regulators have discretion to set individual minimum capital
requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
The following table sets forth the capital requirements
applicable to the Company and the Company's capital ratios as of
the dates indicated.
Actual Required Excess
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
At September 30, 2000:
Leverage capital
ratio $144,314 8.51% $67,848 4.00% $76,466 4.51%
Tier 1 risk-based
capital ratio 144,314 10.14 56,917 4.00 87,397 6.14
Total risk-based
capital ratio 162,161 11.40 113,835 8.00 48,326 3.40
At December 31, 1999:
Leverage capital
ratio $146,703 9.00% $65,198 4.00% $81,505 5.00%
Tier 1 risk-based
capital ratio 146,703 11.24 52,199 4.00 94,504 7.24
Total risk-based
capital ratio 163,070 12.50 104,397 8.00 58,673 4.50
In addition, FDIC-insured institutions such as the Bank must
maintain leverage, Tier 1 and total risk-based capital ratios of
at least 5%, 6% and 10%, respectively, to be considered "well
capitalized" under the prompt corrective action provisions of the
FDIC Improvement Act of 1991.
10
The following table sets forth the capital requirements for
the Bank to be considered "well capitalized" and the Bank's
capital ratios as of the dates indicated.
Actual Required Excess
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
At September 30, 2000:
Leverage capital
ratio $137,790 8.13% $84,692 5.00% $53,098 3.13%
Tier 1 risk-based
capital ratio 137,790 9.70 85,271 6.00 52,519 3.70
Total risk-based
capital ratio 155,615 10.95 142,118 10.00 13,497 0.95
At December 31, 1999:
Leverage capital
ratio $136,345 8.38% $81,397 5.00% $54,948 3.38%
Tier 1 risk-based
capital ratio 136,345 10.47 78,140 6.00 58,205 4.47
Total risk-based
capital ratio 152,680 11.72 130,234 10.00 22,446 1.72
Asset/Liability Management and Liquidity
The Company's asset/liability management policy and liquidity
are discussed in the 1999 Annual Report to Shareholders. No
significant changes have occurred during the three and nine
months ended September 30, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The Company discussed the nature and extent of market risk
exposure in the 1999 Annual Report to Shareholders. No
significant changes have occurred during the three and nine
months ended September 30, 2000.
11
PART II. OTHER INFORMATION
Items 1 to 5.
Items 1 to 5 are omitted pursuant to instructions to Part II.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Financial Data Schedule as of and for the nine
months ended September 30, 2000, is filed as Exhibit
27 to this report on Form 10-Q.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the
third quarter of 2000.
12
SIGNATURES
Pursuant to the requirements 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.
CPB INC.
(Registrant)
Date: November 13, 2000 /s/ Naoaki Shibuya
Naoaki Shibuya
President
Date: November 13, 2000 /s/ Neal K. Kanda
Neal K. Kanda
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
13
CPB INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
(Dollars in thousands, except per share data) 2000 1999
ASSETS
Cash and due from banks $ 40,255 $ 83,425
Interest-bearing deposits in other banks 4,192 9,828
Investment securities:
Held to maturity, at cost (fair value of $91,956 at
September 30, 2000 and $91,808 at December 31, 1999) 92,767 101,567
Available for sale, at fair value 279,241 220,103
Total investment securities 372,008 321,670
Loans 1,282,251 1,170,476
Less allowance for loan losses 22,657 20,768
Net loans 1,259,594 1,149,708
Premises and equipment 23,767 24,774
Accrued interest receivable 10,293 9,606
Investment in unconsolidated subsidiaries 8,465 8,451
Due from customers on acceptances 12 12
Other real estate 1,382 1,366
Other assets 37,452 37,651
Total assets $1,757,420 $1,646,491
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 192,234 $ 204,850
Interest-bearing deposits 1,163,615 1,100,804
Total deposits 1,355,849 1,305,654
F-1
Short-term borrowings 92,730 79,000
Long-term debt 141,587 98,279
Bank acceptances outstanding 12 12
Other liabilities 23,932 19,467
Total liabilities 1,614,110 1,502,412
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000
shares, none issued - -
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 8,762,920 shares at September 30,
2000, and 9,288,457 shares at December 31, 1999 6,251 6,540
Surplus 45,848 45,848
Retained earnings 92,250 94,436
Accumulated other comprehensive loss, net of taxes (1,039) (2,745)
Total stockholders' equity 143,310 144,079
Total liabilities and stockholders' equity $1,757,420 $1,646,491
See accompanying notes to consolidated financial statements.
F-2
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three MonthsEnded Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2000 1999 2000 1999
Interest income:
Interest and fees on loans $26,822 $23,844 $75,714 $69,594
Interest and dividends on
investment securities:
Taxable interest 4,779 3,683 13,573 11,672
Tax-exempt interest 600 482 1,805 1,332
Dividends 315 329 992 1,009
Interest on deposits in other banks 127 647 268 766
Interest on Federal funds sold and
securities purchased under
agreements to resell 1 1 8 32
Total interest income 32,644 28,986 92,360 84,405
Interest expense:
Interest on deposits 11,381 9,004 31,283 26,835
Interest on short-term borrowings 911 676 2,356 1,121
Interest on long-term debt 2,260 1,616 5,807 4,790
Total interest expense 14,552 11,296 39,446 32,746
Net interest income 18,092 17,690 52,914 51,659
Provision for loan losses 1,500 800 3,500 3,000
Net interest income after
provision for loan losses 16,592 16,890 49,414 48,659
Other operating income:
Income from fiduciary activities 275 211 773 574
Service charges on deposit accounts 770 818 2,304 2,432
F-3
Other service charges and fees 943 1,751 3,160 5,061
Equity in earnings of
unconsolidated subsidiaries 155 173 457 380
Fees on foreign exchange 104 153 385 457
Investment securities (losses) gains (16) - (683) 219
Gain on sale of merchant servicing
portfolio - - 1,850 -
Other 544 318 1,713 806
Total other operating income 2,775 3,424 9,959 9,929
Other operating expense:
Salaries and employee benefits 6,221 8,111 18,518 21,430
Net occupancy 1,594 1,533 4,765 4,615
Equipment 674 661 2,051 2,060
Other 3,215 3,765 11,893 12,394
Total other operating expense 11,704 14,070 37,227 40,499
Income before income taxes 7,663 6,244 22,146 18,089
Income taxes 2,720 1,947 7,827 6,138
Net income $ 4,943 $4,297 $14,319 $11,951
Per share data:
Basic earnings per share $ 0.56 $ 0.44 $ 1.59 $ 1.23
Diluted earnings per share 0.55 0.44 1.56 1.22
Cash dividends declared 0.15 0.14 0.45 0.41
Weighted average shares outstanding:
Basic 8,777 9,673 9,019 9,717
Diluted 8,927 9,747 9,166 9,814
See accompanying notes to consolidated financial statements.
F-4
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(Unaudited)
Accumulated
other
(Dollars in thousands, Common Retained comprehensive
except per share data) stock Surplus earnings income(loss) Total
Nine months ended September 30, 2000:
Balance at December 31, 1999 $6,540 $45,848 $94,436 $(2,745) $144,079
Net income - - 14,319 - 14,319
Net change in unrealized gain(loss)
on investment securities, net of
taxes of $1,137 - - - 1,706 1,706
Comprehensive income 16,025
Cash dividends declared ($0.45 per share) - - (4,015) - (4,015)
5,690 shares of common stock issued 88 - - - 88
531,227 shares of common stock
repurchased (377) - (12,490) - (12,867)
Balance at September 30, 2000 $6,251 $45,848 $92,250 $(1,039) $143,310
Disclosure of reclassification amount:
Unrealized holding gain(loss) on
investment securities during period,
net of taxes of $1,355 - - - 2,035 2,035
Less: reclassification adjustment for
gains included in net income, net
of taxes of $218 - - - 329 329
Net change in unrealized gain(loss)
on investment securities - - - $ 1,706 $ 1,706
F-5
Nine months ended September 30, 1999:
Balance at December 31, 1998 $6,637 $45,848 $94,954 $ 627 $148,066
Net income - - 11,951 - 11,951
Net change in unrealized gain(loss)
on investment securities, net of
taxes of $(1,284) - - - (1,929) (1,929)
Comprehensive income 10,022
Cash dividends declared ($0.41 per share) - - (3,940) - (3,940)
18,351 shares of common stock issued 244 - - - 244
434,160 shares of common stock
repurchased (301) - (9,096) - (9,397)
Balance at September 30, 1999 $6,580 $45,848 $93,869 $(1,302) $144,995
Disclosure of reclassification amount:
Unrealized holding gain(loss) on
investment securities during period,
net of taxes of $(1,417) - - - (2,130) (2,130)
Less: reclassification adjustment for
losses included in net income, net
of taxes of $(133) - - - (201) (201)
Net change in unrealized gain(loss)
on investment securities - - - $(1,929) $ (1,929)
See accompanying notes to consolidated financial statements.
F-6
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
(Dollars in thousands) 2000 1999
Cash flows from operating activities:
Net income $ 14,319 $ 11,950
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 3,500 3,000
Provision for depreciation and
amortization 2,043 2,151
Net (accretion) amortization of
investment securities (8) 238
Net loss (gain) on investment securities 683 (219)
Federal Home Loan Bank stock
dividends received (925) (982)
Origination of loans held for sale (4,970) (4,376)
Net loss on sale of loans 46 128
Proceeds from sales of loans held
for sale 7,363 26,894
Deferred income tax (benefit) expense (3,043) 2,887
Equity in earnings of unconsolidated
subsidiaries (457) (380)
Net decrease (increase) in other assets 3,934 (9,599)
Net increase (decrease) in other
liabilities 4,686 (1,129)
Net cash provided by operating
activities 27,177 30,563
Cash flows from investing activities:
Proceeds from maturities of and calls on
investment securities held to maturity 8,718 15,601
Purchases of investment securities
held to maturity - (1,088)
Proceeds from sales of investment
securities available for sale 30,592 23,017
Proceeds from maturities of and calls
on investment securities available
for sale 19,774 58,847
Purchases of investment securities
available for sale (106,335) (51,747)
Net decrease (increase) in interest-
Bearing deposits in other banks 5,636 (15,139)
Net loan originations over principal
repayments (118,497) (77,633)
Purchases of premises and equipment (1,036) (555)
F-7
Distributions from unconsolidated
subsidiaries 375 275
Investments in unconsolidated
subsidiaries (27) (451)
Net cash used in investing
activities (160,800) (48,873)
Cash flows from financing activities:
Net increase (decrease) in deposits 50,195 (9,492)
Proceeds from long-term debt 65,000 22,550
Repayments of long-term debt (21,692) (26,906)
Net increase in short-term borrowings 13,730 51,349
Cash dividends paid (4,001) (3,901)
Proceeds from sale of common stock 88 244
Repurchases of common stock (12,867) (9,397)
Net cash provided by financing
activities 90,453 24,447
Net (decrease) increase in cash
and cash equivalents (43,170) 6,137
Cash and cash equivalents:
At beginning of period 83,425 42,735
At end of period $40,255 $48,872
Supplemental disclosure of cash flow
information:
Cash paid during the period
for interest $36,718 $31,877
Cash paid during the period
for income taxes $ 5,798 $ 7,200
Supplemental disclosure of noncash
investing and financing activities:
Transfer of loans to other real estate $ 2,672 $ 2,244
See accompanying notes to consolidated financial statements.
F-8
CPB INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2000 and 1999
1. Basis of Presentation
The financial information included herein is unaudited, except
for the consolidated balance sheet at December 31, 1999.
However, such information reflects all adjustments (consisting
solely of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair statement of results for the
interim periods.
The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results
to be expected for the full year.
2. Comprehensive Income
Components of other comprehensive income (loss) for the three
and nine months ended September 30, 2000 and 1999 were comprised
solely of unrealized holding gains (losses) on available-for-sale
investment securities. Accumulated other comprehensive income
(loss), net of taxes, is presented below as of the dates
indicated:
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 2000 1999 2000 1999
Balance at beginning of period $(2,754) $(1,453) $(2,745) $ 627
Current-period change 1,715 151 1,706 (1,929)
Balance at end of period $(1,039) $(1,302) $(1,039) $(1,302)
3. Segment Information
The Company has three reportable segments: retail branches,
commercial finance and treasury. The segments reported are
consistent with internal functional reporting lines. They are
managed separately because each unit has different target
markets, technological requirements, marketing strategies and
specialized skills. The retail branch segment includes all
retail branch offices. Products and services offered include a
full range of deposit and loan products, safe deposit boxes and
various other bank services. The commercial finance segment
focuses on lending to corporate customers, residential mortgage
lending, construction and real estate development lending and
international banking services. The treasury segment is
responsible for managing the Company's investment securities
portfolio and wholesale funding activities. Other activities
F-9
include trust, mortgage servicing and indirect lending
activities.
The accounting policies of the segments are consistent with
the Company's accounting policies that are described in Note 1 to
the Consolidated Financial Statements in the 1999 Annual Report
to Shareholders. The majority of the Company's net income is
derived from net interest income. Accordingly, management
focuses primarily on net interest income (expense), rather than
gross interest income and expense amounts, in evaluating segment
profitability. Intersegment net interest income (expense) is
allocated to each segment based on the amount of net investable
funds provided (used) by that segment at a rate equal to the
Bank's average rate on interest-sensitive assets and liabilities.
All administrative and overhead expenses are allocated to the
segments at cost. Cash, investment securities, loans and their
related balances are allocated to the segment responsible for
acquisition and maintenance of those assets. Segment assets also
include all premises and equipment used directly in segment
operations.
Segment profits and assets are provided in the following table
for the periods indicated.
F-10
Retail Commercial All
(Dollars in thousands) Branch Finance Treasury Others Total
Three months ended September 30, 2000:
Net interest income (expense) $ (3,151) $ 16,240 $ 1,203 $ 3,800 $ 18,092
Intersegment net interest
income (expense) 9,648 (7,698) 676 (2,626) -
Provision for loan losses 121 1,207 - 172 1,500
Other operating income (expense) 926 148 (1) 1,702 2,775
Other operating expense 3,649 544 119 7,392 11,704
Administrative and overhead
expense allocation 3,333 1,187 79 (4,599) -
Income tax expense (benefit) 113 2,031 593 (17) 2,720
Net income $ 207 $ 3,721 $ 1,087 $ (72) $ 4,943
Three months ended September 30, 1999:
Net interest income (expense) $ (2,235) $ 14,517 $ 1,709 $ 3,699 $ 17,690
Intersegment net interest
income (expense) 11,294 (9,342) 461 (2,413) -
Provision for loan losses 80 543 - 177 800
Other operating income 1,164 22 11 2,227 3,424
Other operating expense 3,938 561 89 9,482 14,070
Administrative and overhead
expense allocation 5,144 840 97 (6,081) -
Income tax expense 326 973 635 13 1,947
Net income (loss) $ 735 $ 2,280 $ 1,360 $ (78) $ 4,297
Nine months ended September 30, 2000:
Net interest income (expense) $ (8,554) $ 45,578 $ 4,249 $ 11,639 $ 52,914
Intersegment net interest
income (expense) 33,352 (27,283) 1,532 (7,601) -
Provision for loan losses 786 1,665 - 1,049 3,500
Other operating income (expense) 2,963 321 (639) 7,314 9,959
Other operating expense 11,147 2,143 317 23,620 37,227
Administrative and overhead
expense allocation 11,495 2,929 250 (14,674) -
Income tax expense 1,492 4,150 1,608 577 7,827
Net income $ 2,843 $ 7,729 $ 2,967 $ 780 $ 14,319
F-11
Nine months ended September 30, 1999:
Net interest income (expense) $ (6,400) $ 42,153 $ 5,455 $ 10,451 $ 51,659
Intersegment net interest
income (expense) 33,454 (27,465) 712 (6,701) -
Provision for loan losses 299 1,608 - 1,093 3,000
Other operating income 3,511 24 261 6,133 9,929
Other operating expense 11,873 1,618 246 26,762 40,499
Administrative and overhead
expense allocation 13,840 2,298 237 (16,375) -
Income tax expense (benefit) 1,569 3,030 2,044 (505) 6,138
Net income (loss) $ 2,984 $ 6,158 $ 3,901 $ (1,092) $ 11,951
At September 30, 2000:
Investment securities $ - $ - $372,008 $ - $ 372,008
Loans 168,837 930,435 - 182,979 1,282,251
Other 18,285 20,526 45,052 19,298 103,161
Total assets $187,122 $950,961 $417,060 $202,277 $1,757,420
At December 31, 1999:
Investment securities $ - $ - $321,670 $ - $ 321,670
Loans 290,183 861,449 - 18,844 1,170,476
Other 30,091 23,257 46,567 54,430 154,345
Total assets $320,274 $884,706 $368,237 $ 73,274 $1,646,491
F-12
4. Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No.
140 supersedes and replaces SFAS No. 125 of the same name and
provides accounting and reporting guidance for transfers and
servicing of financial assets and extinguishments of liabilities.
Most of the provisions of SFAS No. 140 are to be applied
prospectively to transactions occurring after March 31, 2001,
although certain disclosure provisions will apply for fiscal
years ending after December 15, 2000. The application of SFAS
No. 140 is not expected to have a material impact on the
Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, an Amendment of SFAS Statement No. 133," which
deferred the effective date of SFAS No. 133. In June 2000, the
FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," an amendment of FASB
Statement No. 133." SFAS No. 138 amends the accounting and
reporting standards of SFAS No. 133 for certain derivative
instruments and certain hedging activities. SFAS No. 133, as
amended, is now effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The application of SFAS No. 133,
as amended, effective from January 1, 2001, is not expected to
have a material impact on the Company's consolidated financial
statements.
FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, An Interpretation of
APB Opinion No. 25," was issued in March 2000. This
interpretation clarifies the application of Accounting Principals
Board (APB) Opinion No. 25 (Opinion 25) for certain issues and
does not address any issues related to the application of the
fair value method in SFAS No. 123. Among other issues, the
Interpretation clarifies (a) the definition of an employee for
purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a
previously fixed stock option award, and (d) the accounting for
an exchange of stock compensation awards in a business
combination. The Company adopted the provisions of
the Interpretation on July 1, 2000. There was no material impact
to the Company's results of operations resulting from the
adoption of the Interpretation.
F-13