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, 1999
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, 1999: 9,381,787 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements listed below are filed as a part hereof.
Page
Consolidated Balance Sheets - September 30, 1999 and
December 31, 1998 F-1
Consolidated Statements of Income and Comprehensive
Income - Three and nine months ended September 30,
1999 and 1998 F-3
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
CPB Inc. (the "Company") posted third quarter 1999 net income of $4.297
million, increasing by 10.5% over the $3.890 million earned in the third
quarter of 1998. Net income for the first nine months of 1999 was $11.951
million, increasing by 5.8% over the $11.293 million earned in the same
period in 1998. The increase in net income was attributed to increased net
interest income and decreases in provision for loan losses and income taxes.
A $1.6 million restructuring charge recorded in the third quarter of 1999 and
a $4.3 million gain on sale of loans recognized in the third quarter of 1998
both offset the 1999 net income increase. As of September 30, 1999, total
assets of $1,594.6 million increased by $33.7 million or 2.2%, and net loans
of $1,135.6 million increased by $49.7 million or 4.6%, while total deposits
of $1,259.6 million decreased by $9.5 million or 0.7% compared with year-end
1998.
The following table presents annualized return on average assets,
annualized return on average stockholders' equity and basic and diluted
earnings per share for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Annualized return on
average assets 1.07% 1.04% 1.01% 1.00%
Annualized return on
average stockholders'
equity 11.37% 10.16% 10.58% 9.72%
Basic earnings per share $0.44 $0.38 $1.23 $1.08
Diluted earnings per share $0.44 $0.38 $1.22 $1.07
1
Hawaii's economy has experienced little growth in the past eight years
but is beginning to show signs of improvement. The visitor industry has seen
a slight rebound after a downturn in 1998. Year-to-date visitor arrivals
through September 1999 increased by 1.4% over 1998 levels, reflecting a 6.0%
increase in westbound visitors (primarily from the mainland U.S.) which
offset a 6.3% decrease in eastbound visitors (including Japan and other Asian
countries). As the economic situation stabilizes in Asia, and with continued
strength in the mainland U.S. economy, local economists forecast a mild
rebound for the visitor industry during 1999 and into the year 2000.
Similarly, the statewide unemployment rate in September 1999 improved to
5.5%, from 6.5% in September 1998. The unemployment rate on the island of
Oahu was 4.8%, closer to the national rate of 4.1%.
Local real estate sales activity continues to improve, with total
dollar-volume of residential real estate sales on the island of Oahu in the
first nine months of 1999 increasing by 21.1% over the same period in 1998,
following a 17.7% increase in 1998 over 1997. The combination of low interest
rates and lower sales prices have contributed to the increased sales activity.
However, in spite of the increase in sales activity, average real estate values
have not increased.
Hawaii's economic environment has had, and will likely continue to have,
a direct effect on the performance of the Company and Central Pacific Bank
(the "Bank"), its wholly-owned subsidiary. While the Hawaii economy is
expected to grow modestly in the near future, trends 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 results of operations of the Company for the remainder of
1999 may be directly impacted by the ability of the Hawaii economy to sustain
the positive trends experienced in recent months.
The "Year 2000" compliance effort remains a primary focus of the
organization. The Company has completed testing of all mission-critical systems
and vendors, including interfaces with third parties, with no major problems
identified. The Company's efforts are currently focused on customer awareness
and preparedness and testing of contingency plans. Programs have been
implemented to educate our customers on potential problems and to assess their
compliance status to ensure minimal risk of business disruption and economic
loss. Customers representing approximately 2% of loans outstanding and 3% of
deposits have been assessed to have a high risk of noncompliance, and
accordingly, programs have been implemented to closely monitor
2
their compliance efforts. Further, Year 2000 compliance has been incorporated
into the underwriting standards for new loans and renewal requests, and a
Year 2000 risk factor has been incorporated into the assessment of the
adequacy of the allowance for loan losses. Contingency plans, which include
outsourcing alternatives, manual processing, suspension of non-critical
functions and the securing of additional sources of short-term liquidity,
have been updated and tested to ensure that the Company is prepared to handle
the most 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 substantial resources to address this issue on a
timely basis. Equipment and software expenditures related to the
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 other Year 2000 compliance
costs are being expensed as incurred. To date, the Company has expended
substantially all of its projected $4.0 million equipment and software
remediation costs. 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.
Certain matters discussed in this report on Form 10-Q 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, Year 2000 compliance, 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 the results to differ from those discussed in this report
include, but are not limited to, 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, the ability of other entities to become Year 2000 compliant, the
ability of the Company to achieve projected benefits related to its strategic
plan within the specified timeframes 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, 1998.
Results of Operations
Net Interest Income
A comparison of net interest income for the three and nine months ended
September 30, 1999 and 1998 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."
3
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(Dollars in thousands)
Interest income $29,325 $28,418 $85,346 $85,098
Interest expense 11,296 11,759 32,746 35,367
Net interest income $18,029 $16,659 $52,600 $49,731
Net interest margin 4.74% 4.70% 4.71% 4.66%
Interest income increased by $907,000 or 3.2% and by $248,000 or 0.3% in
the third quarter and first nine months of 1999, respectively, as compared to
the same periods in 1998, due primarily to an increase in average
interest-earning assets and increases in loan fees in 1999. Average interest
earning assets of $1,522.5 million and $1,488.2 million for the third quarter
and first nine months of 1999, respectively, increased by $104.9 million or
7.4% and $65.9 million or 4.6%, due primarily to increases in loan balances.
The yield on interest earning assets of 7.70% for the third quarter of 1999
decreased from 8.02%, and yield of 7.65% for the first nine months of 1999
decreased from 7.98% compared to the same periods in 1998 due primarily to
the lower level of market interest rates in 1999.
Interest and fees on loans increased by $950,000 or 4.1% and $1.5
million or 2.2% in the third quarter and first nine months of 1999,
respectively, due to increases in loan fees and average loan balances.
Interest and dividends on investment securities decreased by $578,000 or
11.4% and $1.4 million or 8.9%, respectively, due to declines in average
balances. Interest on deposits in other banks increased by $477,000 or 280.6%
in the third quarter due to an increase in short-term deposits compared to
the prior year.
Interest expense for the three and nine months ended September 30, 1999
decreased by $463,000 or 3.9% and $2.6 million or 7.4%, respectively, as
compared to the same periods in 1998, due to the lower level of market
interest rates. Average interest-bearing liabilities totaled $1,252.6 million
in the third quarter of 1999 and $1,227.9 million in the first nine of 1999,
increasing by $91.6 million or 7.9% and $56.9 million or 4.9%, respectively.
The average rate on interest-bearing liabilities for the third quarter of
1999 of 3.61% declined from 4.05% in 1998, and the average rate for the first
nine months of 1999 of 3.56% declined from 4.03% in 1998.
The resultant net interest income for the third quarter and first nine
months of 1999 increased by $1.4 million or 8.2% and by $2.9 million or 5.8%,
respectively, over the same periods in 1998. Net interest margin also
improved to 4.74% from 4.70% in the third quarter and to 4.71% from 4.66% in
the first nine
4
months of 1999 compared to 1998. Strong competition for both loans and
deposits, particularly core deposits, is expected to continue and may create
additional pressure on net 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 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning
of period $20,735 $19,168 $20,066 $19,164
Provision for loan
losses 800 3,300 3,000 5,400
Loan charge-offs:
Real estate:
Mortgage-commercial 367 941 1,096 1,612
Mortgage-residential 150 813 900 1,069
Construction - - - -
Commercial, financial
and agricultural 69 573 219 946
5
Consumer:
Credit card and
related plans 1 160 29 605
Other consumer 38 131 205 614
Other 1 - 5 2
Total loan charge-offs 626 2,618 2,454 4,848
Recoveries:
Real estate:
Mortgage-commercial 53 299 92 300
Mortgage-residential 37 3 142 31
Construction - - - -
Commercial, financial
and agricultural 2 2 39 12
Consumer:
Credit card and
related plans 25 17 94 70
Other consumer 34 26 81 67
Other - - - 1
Total recoveries 151 347 448 481
Net loan charge-offs 475 2,271 2,006 4,367
Balance at end of period $21,060 $20,197 $21,060 $20,197
Annualized ratio of net
loan charge-offs to
average loans 0.16% 0.85% 0.23% 0.54%
The provision for loan losses of $800,000 for the third quarter of 1999
and $3.0 million for the first nine months of 1999 decreased by 75.8% and
44.4%, respectively, compared to the same periods in 1998. Net loan
charge-offs of $475,000 and $2.0 million for the three and nine months ended
September 30, 1999, when expressed as an annualized percentage of average
total loans, was 0.16% and 0.23%, respectively, decreasing from 0.85% and
0.54%, respectively, in 1998. Loan charge-offs during the third quarter of
1999 included a $242,000 commercial real estate loan and several smaller
commercial and residential real estate loans.
The allowance for loan losses expressed as a percentage of total loans
was 1.82% at September 30, 1999, increasing slightly over the 1.81% at
December 31, 1998. Considering the decline in net loan charge-offs and
decreases in nonaccrual and delinquent loans during the year, Management
believes that the allowance for loan losses was adequate to cover the credit
risks inherent in the loan portfolio. However, any deterioration in economic
conditions in the state of Hawaii could adversely affect borrowers' ability
to repay, collateral values and, consequently, the level of nonperforming
loans and provision for loan losses.
6
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,
1999 1998 1998
(Dollars in thousands)
Nonaccrual loans:
Real estate:
Mortgage-commercial $ 4,884 $ 6,830 $ 9,604
Mortgage-residential 4,673 5,037 6,880
Construction - - -
Commercial, financial
and agricultural 1,731 1,065 1,225
Consumer - - -
Other - - -
Total nonaccrual loans 11,288 12,932 17,709
Other real estate 1,592 1,155 1,155
Total nonperforming
assets 12,880 14,087 18,864
Loans delinquent for 90
days or more:
Real estate:
Mortgage-commercial 756 315 83
Mortgage-residential 1,294 4,206 4,075
Construction - - -
Commercial, financial
and agricultural 494 706 494
Consumer 40 168 309
Other - - -
Total loans delinquent
for 90 days or more 2,584 5,395 4,961
Total nonperforming
assets and loans
delinquent for 90 days
or more $15,464 $19,482 $23,825
Total nonperforming assets
as a percentage of
loans and other real
estate 1.11% 1.27% 1.78%
Total nonperforming assets
and loans delinquent for
90 days or more as a
percentage of loans
and other real estate 1.34% 1.76% 2.24%
7
Nonperforming assets and loans delinquent for 90 days or more totaled
$15.5 million at September 30, 1999, a decrease of $4.0 million or 20.6% from
year-end 1998. Nonaccrual loans and loans delinquent for 90 days or more were
comprised primarily of loans secured by commercial or residential real
property in the state of Hawaii. There were no restructured loans still
accruing interest at those dates. Nonaccrual loans of $11.3 million included
a $1.5 million loan secured by multi-family residential property, and two
loans of $1.6 million and $1.2 million secured by commercial real estate.
Nonaccrual loans at September 30, 1999 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 $2.6 million at September 30, 1999, a 52.1% decrease from
year-end 1998 levels. Impaired loans at September 30, 1999 totaled $9.5
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, 1999. By comparison, impaired loans at year-end 1998
totaled $12.3 million with an allocated allowance for loan losses of $3.0
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 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 $3.4 million for the third quarter and
$9.8 million for the first nine months of 1999 decreased by $4.1 million or
54.8% and $3.5 million or 26.4%, respectively, from the same periods in 1998
due to a $4.5 million gain recognized on the sale of the Bank's credit card
portfolio in the third quarter of 1998. Excluding the impact of this one-time
gain, total other operating income increased by $389,000 or 13.0% in the
third quarter and $958,000 or 10.8% in the first nine months of 1999 compared
to the same periods in 1998. Increases in all major components of other
operating income were achieved in 1999 due to various revenue-enhancing
initiatives undertaken throughout the past year.
Other Operating Expense
Total other operating expense of $14.0 million for the third quarter of
1999 and $40.4 million for the first nine months of 1999 increased by
$317,000 or 2.3% and $1.6 million or 4.1% over the same periods in 1998. The
increase was primarily attributed to a $1.6 million restructuring charge
recognized in the third quarter of 1999 related to a planned 10% reduction in
staffing in conjunction with the implementation of the Bank's three-year
strategic plan. The initial staff reduction plans include 68 positions in
retail banking and 8 positions in loan operations.
8
Other expense in the third quarter of 1999 decreased by $776,000 or 17.3% due
primarily to software, training, supplies and various other expenses incurred
in connection with a major computer system conversion completed in the third
quarter of 1998.
Income Taxes
The effective tax rate for the third quarter and first nine months of
1999 was 31.18% and 33.93%, respectively, compared with the previous year's
rates of 43.08% and 37.54%, respectively. The tax rates for 1998 reflected
the recognition in the first half and subsequent reversal in the third
quarter of expected tax benefits related to the formation of a real estate
investment trust in the first quarter of 1998. While the Company believes
that the associated tax benefits are realizable, the state of Hawaii has
indicated that it may challenge the tax treatment. As of September 30, 1999,
the cumulative estimated tax benefits not yet recognized amounted to $1.9
million.
Financial Condition
Total assets at September 30, 1999 of $1.59 billion increased by $33.7
million or 2.2% over year-end 1998. Net loans of $1.14 billion increased by
$49.7 million or 4.6%, funded primarily by a decrease in investment
securities of $46.9 million or 13.3%.
Total deposits at September 30, 1999 of $1.26 billion decreased by $9.5
million or 0.7% from year-end 1998. Noninterest-bearing deposits of $170.2
million decreased by $16.7 million or 8.9%, while interest-bearing deposits
of $1.09 billion increased by $7.2 million or 0.7% over year-end 1998. Core
deposits (noninterest-bearing demand, interest-bearing demand and savings
deposits, and time deposits under $100,000) at September 30, 1999 of $924.1
million decreased by $860,000 or 0.1% during the first nine months of 1999,
and time deposits of $100,000 and over of $335.5 million decreased by $8.6
million or 2.5%. 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 $145.0 million at September 30, 1999 decreased
by $3.1 million or 2.1% from December 31, 1998. When expressed as a
percentage of total assets, stockholders' equity declined to 9.09% at
September 30, 1999, from 9.49% at year-end 1998. On October 15, 1999, the
board of directors declared a third quarter cash dividend of $0.14 per share,
a 7.7% increase over the dividend declared in the third quarter of 1998.
Dividends declared in the third quarter of 1999 totaled $1,313,000 compared
with $1,302,000 in the third quarter of 1998, a 0.8% increase.
On September 13, 1999, the board of directors authorized a third stock
repurchase program which provides for the repurchase
9
of up to five percent or approximately 485,000 shares of common stock
outstanding. In conjunction with the stock repurchase program, the Company
repurchased 300,000 shares of its common stock from The Sumitomo Bank,
Limited ("Sumitomo") during the third quarter of 1999. This transaction
reduced Sumitomo's holdings in CPB Inc. to 973,913 shares or 10.38% of total
common stock outstanding, from 13.16% held prior to the transaction. As of
September 30, 1999, a total of 1,271,148 shares out of the total approved 1.6
million shares have been repurchased and retired under the Company's stock
repurchase programs at a weighted average price of $18.82. The remaining
repurchases will be conducted in the open market or in privately negotiated
transactions, if at all, and are dependent upon market conditions. The stock
repurchase program has resulted in a slight decrease in capital and capital
ratios and a corresponding increase in equity-based performance measures.
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 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-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 the 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
Amount Ratio Amount Ratio Amount Ratio
At September 30, 1999:
Leverage capital
ratio $146,175 9.08% $64,367 4.00% $81,808 5.08%
Tier 1 risk-based
capital ratio 146,175 11.49 50,935 4.00 95,240 7.49
Total risk-based
capital ratio 162,145 12.74 101,871 8.00 60,274 4.74
10
At December 31, 1998:
Leverage capital
ratio $147,338 9.71% $60,722 4.00% $86,616 5.71%
Tier 1 risk-based
capital ratio 147,338 12.10 48,698 4.00 98,640 8.10
Total risk-based
capital ratio 162,616 13.36 97,395 8.00 65,221 5.36
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.
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
Amount Ratio Amount Ratio Amount Ratio
At September 30, 1999:
Leverage capital
ratio $133,266 8.29% $80,356 5.00% $52,910 3.29%
Tier 1 risk-based
capital ratio 133,266 10.49 76,292 6.00 56,974 4.49
Total risk-based
capital ratio 149,214 11.74 127,154 10.00 22,060 1.74
At December 31, 1998:
Leverage capital
ratio $137,233 9.05% $75,795 5.00% $61,438 4.05%
Tier 1 risk-based
capital ratio 137,233 11.28 72,992 6.00 64,241 5.28
Total risk-based
capital ratio 152,500 12.54 121,653 10.00 30,847 2.54
Asset/Liability Management and Liquidity
The Company's asset/liability management policy and liquidity are
discussed in the 1998 Annual Report to Shareholders. No significant changes
have occurred during the nine months ended September 30, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company discussed the nature and extent of market risk exposure in
the 1998 Annual Report to Shareholders. No significant changes have occurred
during the nine months ended September 30, 1999.
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, 1999, 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 1999.
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 12, 1999 /s/ Joichi Saito
Joichi Saito
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1999 /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) 1999 1998
ASSETS
Cash and due from banks $ 48,872 $ 42,735
Interest-bearing deposits in other banks 25,608 10,469
Investment securities:
Held to maturity, at cost (fair value of $105,003 at
September 30, 1999 and $123,226 at December 31, 1998) 105,886 120,476
Available for sale, at fair value 198,670 230,960
Total investment securities 304,556 351,436
Loans 1,156,650 1,105,912
Less allowance for loan losses 21,060 20,066
Net loans 1,135,590 1,085,846
Premises and equipment 25,237 26,833
Accrued interest receivable 9,414 9,122
Investment in unconsolidated subsidiaries 8,470 7,990
Due from customers on acceptances 12 32
Other real estate 1,592 1,155
Other assets 35,212 25,267
Total assets $ 1,594,563 $ 1,560,885
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 170,242 $ 186,892
Interest-bearing deposits 1,089,389 1,082,231
Total deposits 1,259,631 1,269,123
F-1
Short-term borrowings 53,363 2,014
Long-term debt 113,933 118,289
Bank acceptances outstanding 12 32
Other liabilities 22,629 23,361
Total liabilities 1,449,568 1,412,819
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 9,381,787 shares at September 30,
1999, and 9,797,596 shares at December 31, 1998 6,580 6,637
Surplus 45,848 45,848
Retained earnings 93,869 94,954
Accumulated other comprehensive income (loss), net of taxes (1,302) 627
Total stockholders' equity 144,995 148,066
Total liabilities and stockholders' equity $ 1,594,563 $ 1,560,885
Book value per share $ 15.45 $ 15.11
See accompanying notes to consolidated financial statements.
F-2
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
(Dollars in thousands, September 30, September 30,
except per share data) 1999 1998 1999 1998
Interest income:
Interest and fees on loans $23,844 $22,894 $69,594 $68,107
Interest and dividends on
investment securities:
Taxable interest 3,683 4,398 11,672 13,456
Tax-exempt interest 482 357 1,332 978
Dividends 329 317 1,009 942
Interest on deposits in other banks 647 170 766 819
Interest on Federal funds sold and
securities purchased under
agreements to resell 1 1 32 3
Total interest income 28,986 28,137 84,405 84,305
Interest expense:
Interest on deposits 9,004 9,774 26,835 29,088
Interest on short-term borrowings 676 107 1,121 505
Interest on long-term debt 1,616 1,878 4,790 5,774
Total interest expense 11,296 11,759 32,746 35,367
Net interest income 17,690 16,378 51,659 48,938
Provision for loan losses 800 3,300 3,000 5,400
Net interest income after
provision for loan losses 16,890 13,078 48,659 43,538
Other operating income:
Income from fiduciary activities 211 170 574 470
Service charges on deposit accounts 818 754 2,432 2,210
Other service charges and fees 1,751 1,701 5,061 4,871
F-3
Equity in earnings of
unconsolidated subsidiaries 173 80 380 270
Fees on foreign exchange 153 135 457 445
Investment securities gains - - 219 -
Gain (loss) on sale of loans (50) 4,443 (128) 4,295
Other 318 176 806 756
Total other operating income 3,374 7,459 9,801 13,317
Other operating expense:
Salaries and employee benefits 8,111 6,896 21,430 20,024
Net occupancy 1,533 1,586 4,615 4,768
Equipment 661 730 2,060 2,155
Other 3,715 4,491 12,266 11,829
Total other operating expense 14,020 13,703 40,371 38,776
Income before income taxes 6,244 6,834 18,089 18,079
Income taxes 1,947 2,944 6,138 6,786
Net income $ 4,297 $ 3,890 $11,951 $11,293
Other comprehensive income (loss),
net of taxes:
Unrealized holding (losses) gains
on securities:
Unrealized holding (losses) gains
during period, net of taxes of
$100,000, $586,000,
$(1,203,000) and $578,000,
respectively 151 881 (1,807) 868
Less: reclassification adjustment
for gains included in net income,
net of taxes of $81,000 - - 122 -
Net unrealized holding (losses)
gains 151 881 (1,929) 868
Comprehensive income $ 4,448 $ 4,771 $10,022 $12,161
F-4
Per share data:
Basic earnings per share $ 0.44 $ 0.38 $ 1.23 $ 1.08
Diluted earnings per share 0.44 0.38 1.22 1.07
Cash dividends declared 0.14 0.13 0.41 0.39
Weighted average shares outstanding
(in thousands) 9,673 10,320 9,717 10,505
See accompanying notes to consolidated financial statements.
F-5
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
(Dollars in thousands) 1999 1998
Cash flows from operating activities:
Net income $11,951 $11,293
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Provision for loan losses 3,000 5,400
Provision for depreciation and
amortization 2,151 2,240
Net amortization and accretion of
investment securities 238 212
Net gain on investment securities (219) -
Federal Home Loan Bank stock
dividends received (982) (942)
Net loss (gain) on sale of loans 128 (4,295)
Proceeds from sales of loans held
for sale 26,894 50,915
Originations and purchases of loans
held for sale (63,783) (56,116)
Deferred income tax expense 2,887 (1,472)
Equity in earnings of unconsolidated
subsidiaries (380) (270)
Net (increase) decrease in other assets (9,599) 2,777
Net (decrease) increase in other
liabilities (1,129) 6,489
Net cash (used in) provided by
operating activities (28,843) 16,231
Cash flows from investing activities:
Proceeds from maturities of and calls on
investment securities held to maturity 15,601 55,648
Purchases of investment securities
held to maturity (1,088) (25,274)
Proceeds from sales of investment
securities available for sale 23,017 -
Proceeds from maturities of and calls
on investment securities available
for sale 58,847 21,360
Purchases of investment securities
available for sale (51,747) (88,367)
Net (increase) decrease in interest-
bearing deposits in other banks (15,139) 34,074
Net loan originations (18,227) (15,630)
Purchases of premises and equipment (555) (2,435)
Distributions from unconsolidated
subsidiaries 275 295
F-6
Investments in unconsolidated
subsidiaries (451) (50)
Net cash provided by (used in)
investing activities 10,533 (20,379)
Cash flows from financing activities:
Net decrease in deposits (9,492) (1,986)
Proceeds from long-term debt 22,550 20,000
Repayments of long-term debt (26,906) (26,811)
Net increase in short-term borrowings 51,349 24,940
Cash dividends paid (3,901) (4,134)
Proceeds from sale of common stock 244 534
Repurchases of common stock (9,397) (10,728)
Net cash provided by financing
activities 24,447 1,815
Net increase (decrease) in cash
and cash equivalents 6,137 (2,333)
Cash and cash equivalents:
At beginning of period 42,735 50,695
At end of period $ 48,872 $ 48,362
Supplemental disclosure of cash flow
information:
Cash paid during the period
for interest $ 31,877 $ 32,155
Cash paid during the period
for income taxes $ 7,200 $ 1,850
Supplemental disclosure of noncash investing and financing activities:
Transfer of loans to other real estate $ 2,244 $ 499
See accompanying notes to consolidated financial statements.
F-7
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, 1998. 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 nine months ended September 30,
1999 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, 1999 and 1998 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) 1999 1998 1999 1998
Balance at beginning of period $(1,453) $ 81 $ 627 $ 94
Current-period change 151 881 (1,929) 868
Balance at end of period $(1,302) $962 $(1,302) $962
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.
The accounting policies of the segments are consistent with the Company's
accounting policies which are described in note 1 to the consolidated financial
statements in the 1998 Annual Report to Shareholders. The majority of the
Company's net income
F-8
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-9
Retail Commercial All
(Dollars in thousands) Branch Finance Treasury Others Total
Three months ended September 30, 1999:
Net interest income (expense) $ (2,235) $ 17,577 $ 1,709 $ 639 $ 17,690
Intersegment net interest
income (expense) 11,294 (11,493) 461 (262) -
Provision for loan losses 80 698 - 22 800
Other income 1,164 114 11 2,085 3,374
Other expense 3,938 862 89 9,131 14,020
Administrative and overhead
expense allocation 5,144 1,110 97 (6,351) -
Income tax expense 326 1,056 635 (70) 1,947
Net income $ 735 $ 2,472 $ 1,360 $ (270) $ 4,297
Three months ended September 30, 1998:
Net interest income (expense) $ (2,418) $ 15,499 $ 1,990 $ 1,307 $ 16,378
Intersegment net interest
income (expense) 11,298 (10,657) (81) (560) -
Provision for loan losses 351 2,505 - 444 3,300
Other income 1,145 83 13 6,218 7,459
Other expense 4,146 853 69 8,635 13,703
Administrative and overhead
expense allocation 4,669 816 66 (5,551) -
Income tax expense 369 323 768 1,484 2,944
Net income $ 490 $ 428 $ 1,019 $ 1,953 $ 3,890
Nine months ended September 30, 1999:
Net interest income (expense) $ (6,400) $ 50,627 $ 5,455 $ 1,977 $ 51,659
Intersegment net interest
income (expense) 33,454 (33,345) 712 (821) -
Provision for loan losses 299 2,608 - 93 3,000
Other income 3,511 316 261 5,713 9,801
Other expense 11,872 2,514 247 25,738 40,371
Administrative and overhead
expense allocation 13,840 2,845 236 (16,921) -
Income tax expense 1,570 3,167 2,044 (643) 6,138
Net income $ 2,984 $ 6,464 $ 3,901 $ (1,398) $ 11,951
F-10
Nine months ended September 30, 1998:
Net interest income (expense) $ (7,074) $ 45,575 $ 6,276 $ 4,161 $ 48,938
Intersegment net interest
income (expense) 33,975 (31,917) (194) (1,864) -
Provision for loan losses 1,062 3,392 - 946 5,400
Other income 3,137 246 19 9,915 13,317
Other expense 12,055 3,118 217 23,386 38,776
Administrative and overhead
expense allocation 11,946 2,778 162 (14,886) -
Income tax expense 1,935 1,784 2,153 914 6,786
Net income $ 3,040 $ 2,832 $ 3,569 $ 1,852 $ 11,293
At September 30, 1999:
Investment securities $ - $ - $304,556 $ - $ 304,556
Loans 287,418 850,523 - 18,709 1,156,650
Other 22,048 22,800 54,382 34,127 133,357
Total assets $309,466 $873,323 $358,938 $52,836 $1,594,563
At December 31, 1998:
Investment securities $ - $ - $351,436 $ - $ 351,436
Loans 286,221 799,745 - 19,946 1,105,912
Other 23,291 20,279 34,741 25,226 103,537
Total assets $309,512 $820,024 $386,177 $ 45,172 $1,560,885
F-11
4. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. SFAS No. 133, as amended,
is now effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Earlier application is permitted only as of the beginning of a
fiscal quarter. 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.
In February 1999, the FASB issued SFAS No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections." SFAS No. 135, effective for
fiscal years ending after February 15, 1999, rescinds SFAS No. 75, "Deferral
of the Effective Date of Certain Accounting Requirements for Pension Plans of
State and Local Governmental Units," and amends SFAS No. 35, "Accounting and
Reporting by Defined Benefit Pension Plans," to exclude from its scope plans
that are sponsored by and provide benefits for employees of state and local
governmental units. SFAS No. 135 also amends other existing authoritative
guidance to make various technical corrections, clarify meanings, or describe
applicability under changed conditions. As the rescission of SFAS No. 75 and
amendment of SFAS No. 35 relate solely to governmental entities, and as the
technical corrections do not significantly change existing authoritative
guidance, the application of SFAS No. 135 is not expected to have a material
impact on the Company's consolidated financial statements.
F-12