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 June 30, 1998
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 August 11, 1998: 10,273,507 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements listed below are filed as a part
hereof.
Page
Consolidated Balance Sheets - June 30, 1998 and
December 31, 1997 F-1
Consolidated Statements of Income and Comprehensive
Income - Three and six months ended June 30,
1998 and 1997 F-3
Consolidated Statements of Cash Flows - Six months
ended June 30, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
CPB Inc. (the "Company") posted second quarter 1998 net income
of $3.775 million, increasing by 2.6% over the $3.680 million
earned in the second quarter of 1997. Net income for the first
half of 1998 was $7.403 million, increasing by 1.8% over the
$7.271 million earned in the same period in 1997. The increase
in net income was mainly due to an increase in other operating
income and income tax benefits derived from the establishment of
a captive real estate investment trust in the first quarter of
1998, offset by increases in the provision for loan losses and
other operating expenses. As of June 30, 1998, total assets of
$1.52 billion increased by $24.4 million or 1.6%, net loans of
$1.06 billion increased by $34.7 million or 3.4%, and total
deposits of $1.21 billion increased by $12.7 million or 1.1%
compared with year-end 1997. On October 8, 1997, the Company's
board of directors (the "Board") approved a two-for-one stock
split effective November 14, 1997, on common stock outstanding as
of October 20, 1997. All financial information presented in this
report has been adjusted for the two-for-one stock split.
The following table presents annualized return on average
assets, annualized return on average stockholders' equity and
earnings per share for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
Annualized return on
average assets 0.99% 1.04% 0.98% 1.03%
1
Annualized return on average
stockholders' equity 9.58% 10.16% 9.50% 10.11%
Basic earnings per share $0.36 $0.35 $0.70 $0.69
Diluted earnings per share $0.35 $0.35 $0.69 $0.69
Hawaii's economy has experienced little growth in the past
seven years and shows little signs of significant improvement in
the near future. Bankruptcy filings continued to rise during the
first half of 1998, up 31% over the first half of 1997, although
the rate of increase has slowed from the 44% increase in
bankruptcies between 1996 and 1997. Further increases in
bankruptcies are expected as Hawaii's unemployment rate in June
1998 increased for the third consecutive month to 6.6%.
The visitor industry, which has sustained the economy in
recent years, has weakened in the first half of 1998. Visitor
arrivals for the first half of 1998 declined by 1% compared to
the first half of 1997, and hotel occupancy rates in June 1998
dropped by 5% from June 1997. While tourism from the U.S.
mainland has increased, the economic crisis in Asia is projected
to have a continued adverse impact on tourism in the near future.
On a positive note, the local real estate market has improved
slightly, with residential real estate sales volume on Oahu
increasing by 35% and average sales prices stabilizing compared
to the first half of 1997.
Such economic conditions have had, and will likely continue to
have, an adverse effect on our Company's future performance.
Indicative of this economic environment, Central Pacific Bank
(the "Bank"), a wholly-owned subsidiary of the Company, has
experienced an increase in real estate and consumer loan losses
as further discussed in "Provision for Loan Losses." While the
Hawaii economy is expected to grow modestly in the second half of
1998, future trends in bankruptcy and foreclosure filings,
employment, tourism and the real estate market could affect loan
demand, deposit growth, provision for loan losses, noninterest
income and noninterest expense. Accordingly, the results of
operations of the Company for the rest of 1998 may be adversely
impacted by a lack of improvement in the economic climate in
Hawaii.
The "Year 2000" remains a primary focus of the organization.
In July 1998, the Bank converted its core computer processing
systems to an AS/400-based integrated banking system, a major
step in the Bank's Year 2000 compliance effort. The Company is
currently testing critical systems to determine whether these
applications are capable of operating in the Year 2000
environment and expects to complete this phase of the Year 2000
project by the end of 1998. Efforts are also being made to
modify or replace other noncompliant software, systems and
equipment before the year 1999. Programs have been implemented to
2
educate our customers on the potential problems and to assess
their compliance status to ensure minimal risk of business
disruption and economic loss. Contingency plans are being
reviewed to ensure that the Company is prepared to handle the
most reasonably likely worst-case scenario, including the
inability of customers, vendors and other third parties to
adequately address the Year 2000 problem. The Company has
expended, and will continue to expend, substantial resources to
address this issue on a timely basis. Equipment and software
expenditures related to the acquisition and implementation of new
and enhanced systems and equipment are being capitalized and
amortized over their respective useful lives. Expenditures
related to the Company's internal resources and Year 2000
remediation costs are being expensed as incurred. To date,
equipment and software expenditures totaled approximately $3
million out of a projected $4 million. Future expenditures are
not expected to have a material impact on the Company's results
of operations; however, no assurance can be given at this time
that all aspects of the Company's operations will be Year 2000-
compliant nor that the Year 2000 problem will not have an adverse
impact on the Company's future earnings.
Results of Operations
Net Interest Income
A comparison of net interest income for the three and six
months ended June 30, 1998 and 1997 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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(Dollars in thousands)
Interest income $28,573 $27,351 $56,680 $53,870
Interest expense 11,954 10,967 23,608 21,651
Net interest income $16,619 $16,384 $33,072 $32,219
Net interest margin 4.62% 4.86% 4.64% 4.80%
Net interest income was adversely impacted by the reversal of
interest income on loans placed on nonaccrual status during the
first half of 1998. Such reversals totaled $253,000 for the
second quarter and $606,000 for the first half of 1998. Despite
these adjustments, interest income increased by $1.2 million or
4.5% and by $2.8 million or 5.2% in the second quarter and first
half of 1998, respectively, as compared to the same periods in
1997, due to the higher level of earning assets held in 1998.
Average interest earning assets of $1,437.7 million and $1,424.6
million for the second quarter and first half of 1998,
respectively, increased by $88.1 million or 6.5% and $83.3
3
million or 6.2%, respectively, over the same periods in 1997, due
primarily to increases in investment securities and loans. The
yield on interest earning assets of 7.95% for the second quarter
of 1998 decreased from 8.11%, and the yield of 7.96% for the
first half of 1998 decreased from 8.03% compared to same periods
in 1997.
Interest and fees on loans increased by $200,000 or 0.9% and
$344,000 or 0.8% in the second quarter and first half of 1998,
respectively, due to the increase in average loan balances.
Interest and dividends on investment securities increased by $1.2
million or 31.2% and $2.8 million or 36.4% due also to an
increase in average balances. Interest on deposits in other
banks decreased by $345,000 and $601,000, respectively, due to a
reduction in short-term investable funds held during the current
year.
Interest expense for the three and six months ended June 30,
1998 increased by $987,000 or 9.0% and $2.0 million or 9.0%,
respectively, as compared to the same periods in 1997, due to
increases in average interest-bearing liabilities of $80.0
million or 7.2% and $76.9 million or 7.0%, respectively. The
average rate on interest-bearing liabilities for the second
quarter of 1998 of 4.04% increased from 3.97% in 1997, while the
average rate for the first half of 1998 as compared to the same
period in 1997 increased to 4.01% from 3.94%. The increase in
average rates was attributable to the increased ratio of higher-
costing long-term debt and time deposits of $100,000 and over.
The resulting net interest income for the second quarter and
first half of 1998 increased by $235,000 or 1.4% and $853,000 or
2.6%, respectively, over the same periods in 1997. Net interest
margin decreased to 4.62% from 4.86% in the second quarter and to
4.64% from 4.80% in the first half of 1998 compared to the same
periods in 1997. Strong competition for both loans and deposits,
particularly core deposits, and the increased reliance on higher-
cost funds are expected to further compress interest margins 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 considered 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 or, if the loan is considered to
be collateral dependent, based on the fair value of the
collateral. Impairment losses are included in the allowance for
4
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.
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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of
period $19,646 $19,775 $19,164 $19,436
Provision for loan losses 1,125 750 2,100 1,500
Loan charge-offs:
Commercial, financial
and agricultural 354 581 373 614
Real estate:
Mortgage-commercial 671 268 671 268
Mortgage-residential 45 46 256 200
Construction - - - -
Consumer:
Credit card and
related plans 239 199 445 337
Other consumer 364 212 483 364
Other 1 - 2 2
Total loan charge-offs $ 1,674 $ 1,306 $ 2,230 $ 1,785
Recoveries:
Commercial, financial
and agricultural $ 6 $ 5 $ 10 $ 9
Real estate:
Mortgage-commercial - - 1 -
Mortgage-residential - 1 28 20
Construction - - - -
Consumer:
Credit card and
related plans 41 17 53 50
Other consumer 23 33 41 45
Other 1 - 1 -
Total recoveries 71 56 134 124
Net loan charge-offs 1,603 1,250 2,096 1,661
5
Balance at end of period $19,168 $19,275 $19,168 $19,275
Annualized ratio of net
loan charge-offs to
average loans 0.59% 0.48% 0.39% 0.32%
The provision for loan losses of $1.1 million and $2.1 million
for the second quarter and first half of 1998 increased by 50.0%
and 40.0%, respectively, compared to the same periods in 1997,
reflecting the higher level of loan losses recognized during
1998. Net loan charge-offs of $1.6 million and $2.1 million,
when expressed as an annualized percentage of average total
loans, was 0.59% and 0.39%, respectively. Loan charge-offs
during the second quarter of 1998 included $500,000 of loans to a
real estate developer, several commercial loans and numerous low-
balance consumer loans. Management believes the current level of
provision for loan losses reflects Hawaii's stagnant economic
environment over the last several years.
The allowance for loan losses expressed as a percentage of
total loans was 1.78% at June 30, 1998, declining slightly from
1.84% at December 31, 1997. Based in part on the reduction in
loans delinquent for 90 days or more, Management believes that
the allowance for loan losses at June 30, 1998 was adequate to
cover the credit risks inherent in the loan portfolio. However,
continuation of current economic conditions in the state of
Hawaii may 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, accruing
loans delinquent for 90 days or more and restructured loans still
accruing interest at the dates indicated.
June 30, December 31, June 30,
1998 1997 1997
(Dollars in thousands)
Nonaccrual loans:
Real estate:
Mortgage-commercial $12,957 $13,979 $ 7,443
Mortgage-residential 4,719 1,081 1,063
Construction - - -
Commercial, financial
and agricultural 1,892 1,312 269
Consumer:
Credit card and
related plans - - 70
Other consumer 85 41 81
Other - - -
Total nonaccrual loans 19,653 16,413 8,926
6
Other real estate 1,034 3,677 3,708
Total nonperforming
assets 20,687 20,090 12,634
Loans delinquent for 90
days or more:
Real estate:
Mortgage-commercial 1,916 311 7,485
Mortgage-residential 4,262 10,112 6,256
Construction - - -
Commercial, financial
and agricultural 153 1,302 1,230
Consumer:
Credit card and
related plans 91 168 105
Other consumer 331 340 324
Other - - 2
Total loans delinquent
for 90 days or more 6,753 12,233 15,402
Restructured loans still
accruing interest:
Commercial, financial
and agricultural - - 231
Real estate:
Mortgage-commercial - 2,727 2,571
Mortgage-residential - - -
Construction - - -
Consumer:
Credit card and
related plans - - -
Other consumer - - -
Other - - -
Total restructured
loans still accruing
interest - 2,727 2,802
Total nonperforming
assets, loans delin-
quent for 90 days or
more and restructured
loans still accruing
interest $27,440 $35,050 $30,838
Total nonperforming assets
as a percentage of
loans and other real
estate 1.92% 1.92% 1.20%
Total nonperforming assets
and loans delinquent for
90 days or more as a
percentage of loans
and other real estate 2.55% 3.09% 2.65%
7
Total nonperforming assets,
loans delinquent for 90
days or more and
restructured loans still
accruing interest as a
percentage of loans
and other real estate 2.55% 3.36% 2.92%
Nonperforming assets, loans delinquent for 90 days or more and
restructured loans still accruing interest totaled $27.4 million
at June 30, 1998, decreasing by $3.4 million or 11.0% from year-
end 1997. 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 in the state of Hawaii. Nonaccrual loans of $19.7
million included several large commercial and commercial mortgage
loans. Loans to a hotel interest on the island of Oahu totaling
$5.3 million were partially secured by a first mortgage on the
hotel property. Two loans totaling $3.8 million were secured by
commercial real estate located on the island of Maui, and loans
totaling $3.3 million made to a real estate developer were
secured by various properties on the island of Oahu. Nonaccrual
loans at June 30, 1998 also included a number of residential
mortgages on properties located in various parts of the state.
Other real estate of $1.0 million at June 30, 1998 consisted
mainly of a condominium unit in Honolulu. Loans delinquent for
90 days or more and still accruing interest totaled $6.8 million
at June 30, 1998, a decrease of $5.5 million or 44.8% from year-
end 1997. Since December 31, 1997, $3.4 million have been
transferred to nonaccrual status, and another $3.4 million in
residential mortgages related to a condominium financing project
were brought current. Impaired loans at June 30, 1998 totaled
$24.0 million and included all nonaccrual loans greater than
$500,000 and several commercial and commercial mortgage loans.
The allowance for loan losses allocated to impaired loans totaled
$3.9 million at June 30, 1998.
Management continues to closely monitor loan delinquencies and
work with borrowers to resolve loan problems; however, a
continuation of the current economic environment in the state of
Hawaii may result in 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 $3.1 million for the second
quarter and $6.0 million for the first half of 1998 increased by
$482,000 or 18.2% and by $804,000 or 15.4%, respectively, over
the same periods in 1997. Service charges on deposits increased
by $97,000 or 13.1% and by $242,000 or 16.9%, respectively, due
primarily to a focus on the collection of commercial deposit
account fees and an increase in automated teller machine fees.
Other service charges and fees increased by $143,000 or 10.8% and
8
by $243,000 or 9.0%, respectively, due mainly to increases in
credit card and merchant servicing fees. In August 1998, the
Bank agreed in principle to sell its $19 million portfolio of
credit card receivables. The sale, which is anticipated to occur
in the third quarter of 1998, is expected to result in a gain on
sale of approximately $4 million. However, the sale will also
result in a reduction in future interest income and net operating
income related to the credit card receivables. Other operating
income in the second quarter and first half of 1998 also included
$233,000 in net gains from sales of other real estate.
Other Operating Expense
Total other operating expense of $12.8 million for the second
quarter of 1998 increased by $652,000 or 5.4% over the same
period in 1997. This increase was attributed to increases in
credit card operating expenses and legal and other professional
fees. Increases in computer software, charitable contributions
and promotional expenses also contributed to the increase in
other operating expense.
Total other operating expense of $25.2 million for the first
half of 1998 increased by $1.4 million or 6.1% over the same
period in 1997. In addition to the above-mentioned expenses,
salaries and benefits, equipment and employee training costs
increased due, in part, to expenses incurred in conjunction with
the Bank's conversion of it's core processing systems which was
completed in July 1998.
Income Taxes
The effective tax rate for the second quarter and first half
of 1998 was 32.47% and 34.17%, respectively, compared with the
previous year's rates of 39.02% and 39.14%, respectively. The
decrease in tax rates for 1998 resulted from an increase in tax-
exempt investments and loans held during 1998, as well as tax
advantages derived from the formation of a real estate investment
trust in the first quarter of 1998.
Financial Condition
Total assets at June 30, 1998 of $1.52 billion increased by
$24.4 million or 1.6% over year-end 1997 due to an increase in
net loans by $34.7 million or 3.4% to $1.06 billion. This loan
growth was funded primarily through an increase in deposits and a
reduction in interest-bearing deposits in other banks.
Total deposits at June 30, 1998 of $1.21 billion increased by
$12.7 million or 1.1% over year-end 1997. Noninterest-bearing
deposits of $172.5 million increased by $4.0 million or 2.4%, and
interest-bearing deposits of $1.03 billion increased by $8.7
million or 0.8%. Core deposits (noninterest-bearing demand,
interest-bearing demand and savings deposits, and time deposits
under $100,000) at June 30, 1998 of $870.2 million decreased by
$5.8 million or 0.7% during the first half of 1998, while time
9
deposits of $100,000 and over of $335.6 million increased by
$18.4 million or 5.8%. The decrease in core deposits reflected
declines of $6.0 million in business savings accounts and
checking accounts and $4.9 million in personal savings accounts,
partially offset by increases in business and personal money
market accounts. Local 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 $156.8 million at June 30, 1998
increased by $5.0 million or 3.3% over December 31, 1997.
Stockholders' equity as a percentage of total assets increased to
10.30% at June 30, 1998, compared to 10.14% at year-end 1997. On
June 15, 1998, the Board declared a second quarter cash dividend
of $0.13 per share, bringing total dividends declared to $0.26
per share for the first half of 1998, an 8.3% increase over the
dividends declared during the same period in 1997. Dividends
declared in the first half of 1998 totaled $2.8 million compared
with $2.5 million in the first half of 1997.
On April 21, 1998, the Board authorized a stock repurchase
program to repurchase up to 5%, or approximately 530,000 shares,
of the 10.6 million shares of the Company's common stock
outstanding. The stock repurchase program is being conducted in
the open market and is dependent upon market conditions. Stock
repurchases commenced during the third quarter of 1998, and the
Company has repurchased approximately 343,000 shares to date at a
weighted average price of $18.27. The stock repurchase program
will result in a slight decrease in capital and capital ratios
and a corresponding increase in equity-based performance measures
in future periods.
The Company's objective with respect to capital resources is
to maintain a level of capital that will support sustained asset
growth and anticipated credit risks. Furthermore, the Company
seeks to ensure that regulatory guidelines and industry standards
are met. 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-weighted assets of 8%, of which at least 4%
must consist of Tier I capital, essentially common stockholders'
equity (before unrealized loss on investment securities) less
intangible assets. The FRB and the FDIC have also adopted a
minimum leverage ratio of Tier I capital to total assets of 3%.
The leverage ratio requirement establishes the minimum level for
banks that have a uniform composite ("CAMELS") rating of 1, and
all other institutions and institutions experiencing or
anticipating significant growth are expected to maintain capital
levels at least 100 to 200 basis points above the minimum level.
Furthermore, higher leverage and risk-based capital ratios are
10
required to be considered well capitalized or adequately
capitalized under the prompt corrective action provisions of the
FDIC Improvement Act of 1991.
The following table sets forth the capital requirements
applicable to the Company and the Company's capital ratios as of
the dates indicated.
Required Actual Excess
At June 30, 1998:
Tier I risk-based
capital ratio 4.00% 12.51% 8.51%
Total risk-based
capital ratio 8.00% 13.77% 5.77%
Leverage capital ratio 4.00% 10.31% 6.31%
At December 31, 1997:
Tier I risk-based
capital ratio 4.00% 12.45% 8.45%
Total risk-based
capital ratio 8.00% 13.71% 5.71%
Leverage capital ratio 4.00% 10.41% 6.41%
In addition, FDIC-insured institutions such as the Bank must
maintain leverage, Tier I and total risk-based capital ratios of
at least 5%, 6% and 10%, respectively, to be considered "well
capitalized" under the prompt corrective action provisions of the
FDIC Improvement Act of 1991.
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.
Required Actual Excess
At June 30, 1998:
Tier I risk-based
capital ratio 6.00% 11.37% 5.37%
Total risk-based
capital ratio 10.00% 12.62% 2.62%
Leverage capital ratio 5.00% 9.38% 4.38%
At December 31, 1997:
Tier I risk-based
capital ratio 6.00% 11.63% 5.63%
Total risk-based
capital ratio 10.00% 12.88% 2.88%
Leverage capital ratio 5.00% 9.72% 4.72%
11
Asset/Liability Management and Liquidity
The Company's asset/liability management policy and liquidity
position are discussed in its 1997 Annual Report to Shareholders.
No significant changes have occurred during the six months ended
June 30, 1998.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The Company discussed the nature and extent of market risk
exposure in its 1997 Annual Report to Shareholders. No
significant changes have occurred during the six months ended
June 30, 1998.
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 six
months ended June 30, 1998, 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 second quarter of 1998.
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: August 12, 1998 /s/ Joichi Saito
Joichi Saito
Chairman of the Board and
Chief Executive Officer
Date: August 12, 1998 /s/ Neal Kanda
Neal Kanda
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
13
CPB INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
(Dollars in thousands, except per share data) 1998 1997
ASSETS
Cash and due from banks $ 49,449 $ 50,695
Interest-bearing deposits in other banks 19,881 34,188
Investment securities:
Held to maturity, at cost (fair value of $146,093
at June 30, 1998 and $153,494 at December 31, 1997) 145,093 152,688
Available for sale, at fair value 183,759 168,023
Total investment securities 328,852 320,711
Loans 1,075,770 1,041,023
Less allowance for loan losses 19,168 19,164
Net loans 1,056,602 1,021,859
Premises and equipment 26,605 26,676
Accrued interest receivable 9,362 9,404
Investment in unconsolidated subsidiaries 7,289 7,269
Due from customers on acceptances 38 59
Other real estate owned 1,034 3,677
Other assets 22,436 22,563
Total assets $1,521,548 $1,497,101
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 172,489 $ 168,505
Interest-bearing deposits 1,033,329 1,024,653
Total deposits 1,205,818 1,193,158
Short-term borrowings 4,743 6,248
Long-term debt 136,498 127,705
F-1
Bank acceptances outstanding 38 59
Other liabilities 17,686 18,189
Total liabilities 1,364,783 1,345,359
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 10,616,744 shares at June 30,
1998, and 10,579,184 shares at December 31, 1997 7,004 6,612
Surplus 45,848 45,848
Retained earnings 103,832 99,188
Unrealized gain on investment securities,
net of taxes 81 94
Total stockholders' equity 156,765 151,742
Total liabilities and stockholders' equity $1,521,548 $1,497,101
Book value per share $14.77 $14.34
<FN>
See accompanying notes to consolidated financial statements.
</FN>
F-2
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
(Dollars in thousands, June 30, June 30,
except per share data) 1998 1997 1998 1997
Interest income:
Interest and fees on loans $22,865 $22,665 $45,213 $44,869
Interest and dividends on
investment securities:
Taxable interest 4,522 3,535 9,058 6,850
Tax-exempt interest 328 118 621 153
Dividends 317 284 625 551
Interest on deposits in other banks 272 617 649 1,250
Interest on Federal funds sold 2 - 2 -
Total interest income 28,306 27,219 56,168 53,673
Interest expense:
Interest on deposits 9,742 9,131 19,314 18,024
Interest on short-term borrowings 157 68 338 135
Interest on long-term debt 2,055 1,768 3,956 3,492
Total interest expense 11,954 10,967 23,608 21,651
Net interest income 16,352 16,252 32,560 32,022
Provision for loan losses 1,125 750 2,100 1,500
Net interest income after
provision for loan losses 15,227 15,502 30,460 30,522
Other operating income:
Service charges on deposit accounts 839 742 1,674 1,432
Other service charges and fees 1,469 1,326 2,952 2,709
Trust income 157 98 300 189
F-3
Equity in earnings of
unconsolidated subsidiaries 87 134 190 261
Fees on foreign exchange 153 205 310 387
Other 420 138 582 226
Total other operating income 3,125 2,643 6,008 5,204
Other operating expense:
Salaries and employee benefits 6,465 6,395 13,128 12,763
Net occupancy 1,590 1,664 3,182 3,248
Equipment 709 643 1,425 1,327
Other 3,998 3,408 7,488 6,441
Total other operating expense 12,762 12,110 25,223 23,779
Income before income taxes 5,590 6,035 11,245 11,947
Income taxes 1,815 2,355 3,842 4,676
Net income $ 3,775 $ 3,680 $ 7,403 $ 7,271
Per common share:
Net income - basic $ 0.36 $ 0.35 $ 0.70 $ 0.69
Net income - diluted 0.35 0.35 0.69 0.69
Cash dividends declared $ 0.13 $ 0.12 $ 0.26 $ 0.24
Weighted average shares outstanding
(in thousands) 10,611 10,547 10,599 10,544
<FN>
See accompanying notes to consolidated financial statements.
</FN>
F-4
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
(Dollars in thousands) 1998 1997
Cash flows from operating activities:
Net income $ 7,403 $ 7,271
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 2,100 1,500
Provision for depreciation and
amortization 1,505 1,362
Net amortization and accretion of
investment securities 81 209
Federal Home Loan Bank stock
dividends received (625) (551)
Net change in loans held for sale (8,783) 2,812
Deferred income tax expense 460 371
Equity in earnings of unconsolidated
subsidiaries (190) (261)
(Increase) decrease in accrued interest
receivable, other real estate
owned and other assets 2,752 (1,492)
Decrease in accrued interest payable
and other liabilities (576) (205)
Net cash provided by operating
activities 4,127 11,016
Cash flows from investing activities:
Proceeds from maturities of and
calls on investment securities
held to maturity 28,306 19,556
Purchases of investment securities
held to maturity (20,746) (52,860)
Proceeds from maturities and calls
on investment securities available
for sale 16,276 34,509
Purchases of investment securities
available for sale (31,454) (33,497)
Net decrease (increase) in interest-
bearing deposits in other banks 14,307 (9,968)
Net loan originations (28,384) (18,086)
Proceeds from disposal of premises
and equipment 15 -
Purchases of premises and equipment (1,449) (1,512)
Distributions from unconsolidated
subsidiaries 220 208
F-5
Investment in unconsolidated
subsidiaries (50) -
Net cash used in investing
activities (22,959) (61,650)
Cash flows from financing activities:
Net increase in deposits 12,660 39,657
Proceeds from long-term debt 20,000 21,000
Repayments of long-term debt (11,207) (18,934)
Net increase (decrease)in short-term
borrowings (1,505) 1,502
Cash dividends paid (2,754) (2,526)
Proceeds from sale of common stock 392 135
Net cash provided by
financing activities 17,586 40,834
Net decrease in cash and cash
equivalents (1,246) (9,800)
Cash and cash equivalents:
At beginning of period 50,695 55,534
At end of period $49,449 $45,734
Supplemental disclosure of cash flow
information:
Cash paid during the period
for interest $23,799 $21,774
Cash paid during the period
for income taxes $ 900 $ 4,400
Supplemental disclosure of noncash
investing and financing activities:
Transfer of loans to other real estate $ 324 $ 2,598
See accompanying notes to consolidated financial statements.
F-6
CPB INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial information included herein is unaudited, except
for the consolidated balance sheet at December 31, 1997.
However, such information reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair statement of results for the
interim periods.
The results of operations for the three and six months ended
June 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
2. Comprehensive Income
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No.
130, effective for fiscal years beginning after December 15,
1997, establishes standards for reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. Comprehensive income is defined as
all changes in equity, including net income, except those
resulting from investment by and distributions to owners.
Components of other comprehensive income for the three and six
months ended June 30, 1998 and 1997 were comprised solely of
unrealized holding gains (losses) on available-for-sale
investment securities. There were no sales of investment
securities during those periods. Income tax expense (benefit)
allocated to components of other comprehensive income were
($31,000) and ($8,000) for the three and six months ended June
30, 1998, respectively, and $361,000 and $108,000 for the three
and six months ended June 30, 1997, respectively. Accumulated
other comprehensive income is presented below as of the dates
indicated:
June 30,
(Dollars in thousands) 1998 1997
Balance at beginning of year $ 94 $(590)
Current-period change (13) 163
Balance at end of period $ 81 $(427)
3. Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
F-7
is effective for fiscal years beginning after December 15, 1997,
although it need not be applied to interim periods in the initial
year of implementation. SFAS No. 131 establishes standards for
the way public companies report selected quarterly information
about business segments, including information on products and
services, geographic areas and major customers, based on a
management approach to reporting. Reclassification of financial
statements for prior periods will be required for comparative
purposes. As this statement relates solely to disclosure
requirements, its implementation will not have an effect on the
Company's financial condition, results of operations or
liquidity.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," an
amendment of SFAS No. 87, "Employers' Accounting for Pensions,
No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
SFAS No. 132, effective for fiscal years beginning after December
15, 1997, standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no
longer useful as they were when SFAS Nos. 87, 88 and 106 were
issued. The application of SFAS No. 132 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. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15,
1999. Earlier application is permitted only as of the beginning
of a fiscal quarter. The application of SFAS No. 133 is not
expected to have a material impact on the Company's consolidated
financial statements.
F-8