UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-12396
CB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0197163
(State of Incorporation) (IRS Employer Identification No.)
201 Merchant Street Honolulu, Hawaii 96813
(Address of principal executive offices)
(808) 546-2411
(Registrant's Telephone Number)
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 [ ]
The number of shares outstanding of registrant's common stock at July 31, 1996
was 3,551,228 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(in thousands, except shares and per share data)
- -------------------------------------------------------------------------------
June 30, December 31, June 30,
1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 68,300 $ 75,119 $ 45,445
Federal Funds Sold and securities
purchased 7,005 0 4,850
Investment securities:
Held-to-maturity 8,060 9,244 215,029
Available for sale 144,101 231,495 45,975
Trading 78 96 342
Loans held for sale 5,141 14,350 -
Gross loans 1,106,949 1,121,186 1,121,066
Less allowance for loan losses (15,498) (14,576) (14,429)
Net Loans 1,091,451 1,106,610 1,106,637
Premises and equipment 16,009 16,960 17,438
Other assets 47,923 36,362 40,412
Goodwill 10,852 11,277 11,711
- -------------------------------------------------------------------------------
Total assets $1,398,920 $1,501,513 $1,487,839
===============================================================================
LIABILITIES AND STOCKHOLDERS EQUITY
Deposits
Non-interest bearing $ 119,139 $ 137,287 $ 119,545
Interest bearing 833,250 874,196 872,822
- -------------------------------------------------------------------------------
Total deposits 952,389 1,011,483 992,367
Short-term borrowings 211,589 239,360 265,051
Other liabilities 25,306 32,793 36,652
Long-term debt 95,481 101,371 80,170
- -------------------------------------------------------------------------------
Total liabilities 1,284,765 1,385,007 1,374,240
Contingencies (Note B)
Stockholders' equity
$1 par value, 50,000,000 shares
authorized, Issued and
outstanding - 3,551,228 shares 3,551 3,551 3,551
Additional paid-in capital 65,080 65,080 65,080
Retained earnings 45,891 46,279 44,942
Unrealized valuation adjustment (367) 1,596 26
Total stockholders' equity 114,155 116,506 113,599
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,398,920 $1,501,513 $1,487,839
===============================================================================
</TABLE>
2
<PAGE>
<TABLE>
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED STATEMENT OF INCOME
<CAPTION>
(in thousands, except per share data) Quarter ended Six months ended
- ------------------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $24,515 $23,435 $48,331 $46,665
Interest and dividends on investment securities
Taxable 2,373 4,096 5,344 8,119
Non taxable 31 70 85 140
Dividends 450 169 871 331
Other interest income 428 386 935 504
- -------------------------------------------------------------------------------------------------------------
Total interest income 27,797 28,156 55,566 55,759
Interest Expense
Deposits 8,602 9,143 17,640 16,958
Short-term borrowings 2,961 2,894 6,077 7,025
Long-term debt 1,685 2,826 3,522 4,542
- -------------------------------------------------------------------------------------------------------------
Total interest expense 13,248 14,863 27,239 28,525
- -------------------------------------------------------------------------------------------------------------
Net interest income 14,549 13,293 28,327 27,234
Provision for loan losses 1,280 120 1,590 240
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 13,269 13,173 26,737 26,994
Other income
Service charges and fees 1,052 2,111 2,747 4,183
Other 1,391 111 2,656 223
- -------------------------------------------------------------------------------------------------------------
Total other income 2,443 2,222 5,403 4,406
Other expenses
Salaries and employee benefits 5,297 5,177 13,987 10,251
Net occupancy and equipment expense 2,234 2,471 4,612 4,890
Other 5,952 4,489 10,361 9,265
- -------------------------------------------------------------------------------------------------------------
Total other expenses 13,483 12,137 28,960 24,406
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 2,229 3,258 3,180 6,994
Provision for income taxes 883 1,230 1,260 2,630
- -------------------------------------------------------------------------------------------------------------
Net income $1,346 $2,028 $ 1,920 $ 4,364
=============================================================================================================
Per common share:
Net income $ 0.38 $ 0.57 $ 0.54 $ 1.23
=============================================================================================================
</TABLE>
3
<PAGE>
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
(in thousands, except per share data) Six months ended June 30,
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,920 $4,364
Net adjustments to reconcile net income to
cash (used in) provided by operating activities (18,533) 12,758
- -------------------------------------------------------------------------------
Net cash (used in) provided by operating
activities (16,613) 17,122
Cash flows from investing activities:
Net increase in federal funds sold and
securities under resale agreements (7,005) (4,845)
Purchase of investment securities (61,267) (9,111)
Proceeds from maturities/ sales of
investment securities 149,845 10,100
Net decrease (increase) in loans 23,446 (45,642)
Capital expenditures (162) (1,010)
- -------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 104,857 (50,508)
Cash flows from financing activities:
Net (decrease) increase in deposits (59,094) 68,923
Net (decrease) in short-term borrowings (27,771) (9,852)
Decrease in long-term debt (5,890) (26,680)
Cash dividends paid (2,308) (2,308)
- -------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (95,063) 30,083
DECREASE IN CASH (6,819) (3,303)
- -------------------------------------------------------------------------------
Cash and due from banks at beginning of period 75,119 48,748
- -------------------------------------------------------------------------------
Cash and due from banks at end of period $68,300 $45,445
===============================================================================
</TABLE>
4
<PAGE>
CB BANCSHARES, INC. AND SUBSIDIARIES
Note to consolidated Financial Statements
June 30,, 1996
NOTE A - BASIS FOR PRESENTATION
The unaudited financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all information and footnotes
necessary for a fair presentation of the financial condition, results of
operations, and cash flows of CB Bancshares, Inc., and subsidiaries, in
conformity with generally accepted accounting principles.
The financial statements reflect all adjustments of a normal and recurring
nature which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods.
NOTE B - CONTINGENCIES
On January 30, 1996, a lawsuit was filed in the Circuit Court of the First
Circuit, State of Hawaii, by Hamamoto Corporation and Shinsuke Hamamoto
("Plaintiffs") against International Savings and Loan Association, Limited
("ISL"), ISL Services, Inc., DRI Realty, Inc., Richard C Lim, as an officer
and director of ISL (the foregoing defendants are referred to herein as the
"ISL defendants"), as well as CB Bancshares, Inc. (The "Company") and other
entities and individuals. The lawsuit is an action by Plaintiffs, as
purchasers of the International Savings Building at 1111 Bishop Street in
Honolulu, Hawaii, for rescission, special, general and punitive damages.
Plaintiffs seek rescission of a $7.45 million sale, made in May 1988, based on
allegations that various parties negligently or intentionally misrepresented
and/or fraudulently failed to disclose unsuccessful negotiations for a new
ground lease with the fee simple landowner (the "Landowner")and the alleged
unreasonableness of demands by the fee simple owner. Plaintiffs also allege
failure to disclose land appraisals concerning the property and presence of
toxic asbestos in the cooling system, pipes, walls and ceiling tiles of the
building. On March 1, 1996, the Company and the ISL Defendants filed an Answer
to Plaintiffs' Complaint denying any liability in connection with the matters
alleged in Plaintiffs' Complaint, and a Counterclaim against Plaintiffs
alleging breach of contract, abuse of process and related claims. While the
Company and the ISL Defendants believe they have meritorious defenses in this
action, due to the uncertainties inherent in the early stages of litigation, no
assurances can be given as to the ultimate outcome of the lawsuit at this time.
The consent of the Landowner given in 1988 to the assignment by ISL of the
underlying ground lease to Plaintiffs did not release ISL from ground lease
obligations upon default by the assignee, and thus ISL may also have liability
in the underlying ground lease to the Landowner in the event Plaintiffs default
in lease payments to the Landowner, an event which has been threatened by
Plaintiffs but has not yet occurred as of the date of this Filing.
Accordingly, no provision for any loss or recovery that may result upon
resolution of the lawsuit and the underlying ground lease obligations has been
made in the Company's Consolidated Financial Statements.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
NET INCOME
Consolidated net income for the quarter ended June 30, 1996, totaled $1.35
million, or $0.38 per share, as compared to $2.03 million, or $0.57 per share
for the same quarter last year. Consolidated net income for the six
months ended June 30, 1996 totaled $1.92 million, or $0.54 per share, as
compared to $4.36 million, or $1.23 per share for the same period year.
The decrease in net earnings for the six months ended June 30, 1996 was due
primarily to the accrual of expenses related to the Voluntary Separation
Program ("VSP"), which the Company announced in January 1996, amounting to
$3.3 million ($2.0 million after tax) - See further discussion in the section
titled "Other Expenses". Excluding the $2.0 million after tax effect of the
VSP, the Company's net earnings for the first half of 1996 would have been
approximately $3.9 million .
The Company's annualized return on average assets (ROA) for the six months
ended June 30, 1996 was 0.27%, as compared to 0.59% for the same period last
year. The Company's annualized return on average stockholder's equity (ROE)
was 3.33% for the six months ended June 30, 1996, as compared to 7.76% for
the same period last year. Excluding the aforementioned $2.0 million effect of
the VSP discussed above, ROA and ROE would have been 0.54% and 6.73%,
respectively.
NET INTEREST INCOME
A comparison of net interest income for the six months ended June 30, 1996
and 1995 is set forth below on a taxable basis:
<TABLE>
<CAPTION>
Six months ended June 30,
1996 1995
(dollars in thousands)
<S> <C> <C>
Interest income $55,623 $55,831
Interest Expense 27,239 28,525
------- -------
Net interest income $28,384 $27,306
======= =======
Net interest margin 4.23% 4.01%
======= =======
</TABLE>
Interest income for the six months ended June 30, 1996 decreased by $.21
million to $55.62 million from the $55.83 million during the same period in
1995. Interest expense decreased by $1.28 million to $27.24 million for the
six months ended June 30, 1996.
6
<PAGE>
The weighted average yield on interest-earning assets was 8.29% for the six
months ended June 30, 1996 compared to 8.19% for the respective 1995 period.
The weighted average cost of interest-bearing liabilities decreased to 4.70%
for the six month periods ended June 30, 1996, as compared to 4.86% for the
respective 1995 period. As a result of the foregoing, the Company's net
interest margin increased by 22 basis points to 4.23% for the six months ended
June 30, 1996.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at June 30, 1996 was $15.5 million, and
represented 1.43% of total loans. The ratio at December 31, 1995 and June 30,
1995, was 1.29% and 1.31%, respectively. The increase in the provision for
loan losses, which amounted to $1.59 million for the six months ended June 30,
1996, was made in consideration of the increase in non-performing loans - see
further discussion below.
Changes in the allowances for loan losses were as follows:
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
1996 1995 1996 1995
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $14,528 $14,423 $14,576 $14,326
Provision charged to expense 1,280 120 1,590 240
Net recoveries(charge-offs) (310) (114) (668) (137)
-------- -------- ------- --------
Balance at end of period $ 15,498 $14,429 $15,498 $14,429
</TABLE>
NON-PERFORMING ASSETS
A summary of non-performing assets follows:
<TABLE>
<CAPTION>
6/30/96 12/31/95 6/30/95
----------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Loan accounted for on a
non-accrual basis $15,397 $14,338 $9,911
Loan contractually past due
ninety days or more as to
interest or principal payments 6,676 3,113 6,903
----------------------------------
Total non-performing loans 22,073 17,451 16,814
Other Real Estate Owned 745 1,715 2,206
----------------------------------
Total non-performing assets $22,818 $19,166 $19,020
===================================
</TABLE>
7
<PAGE>
The increase in non-accrual loans at June 30, 1996 was due primarily to an
increase in ISL's delinquent mortgages, which increased to $11.4 million at
June 30, 1996 from $6.4 million at June 30, 1995. ISL's delinquent loans
consists primarily of loans on 1-4 family residential property. The increase
in ISL's non-accrual loans is a reflection of the continued weakness in the
Hawaii economy and real estate market. In consideration of the above factors,
$1.28 million provision for loan losses was provided for during the second
quarter of 1996.
OTHER OPERATING INCOME
Other operating income totaled $5.40 million for the six month period ended
June 30, 1996, which compares to $4.41 million for the comparable period in
1995.
OTHER OPERATING EXPENSES
Other operating expenses totaled $28.96 million for the six months ended
June 30, 1996, an increase of $4.56 million over the same period in 1995. The
increase in other operating expenses was due primarily to the accrual of $3.29
million of voluntary separation expenses included in salary and benefit
expenses recorded in the first quarter of 1996.
On January 31, 1996, the Company announced a major initiative to further
improve operating efficiency and decrease expenses by offering a Voluntary
Separation Program ("VSP") to all employees. The program offered all eligible
employees the opportunity of electing to terminate their employment. During
the first and second quarter of fiscal 1996 97 employees executed binding
voluntary separation agreements. The VSP acceptance period is now closed.
During the first quarter of 1996, the Company accrued VSP expenses of $3.29
million for estimated separation payments (in addition to the $.5 million
previously accrued for certain officer benefits). As of June 30, 1996, 78
employees have left the Company under the VSP for which related termination
benefits paid amounted to $2.79 million. The balance of termination payments
are expected to be paid in the third quarter of 1996. Of the total 97
employees currently expected to be separated in accordance with the VSP,
approximately 51 positions are currently expected to be refilled and the
remaining positions are expected to be eliminated. The positions not replaced
are currently anticipated to result in an estimated annual savings of $2
million in salaries and employee benefits.
The above discussion of projected annual savings from the VSP are forward
looking statements, and as such, the actual results could differ materially
from those projected in such statements. While management of the Company
believes the projected savings described above are reasonable based on current
information, some assumptions may not materialize and unanticipated events and
circumstances may occur, causing actual results to differ from the projections
described above. Factors which could cause the actual results to differ from
those described above include: unanticipated legal actions taken by employees
(or third parties) in response to the Company's program; material and
unforeseen changes in the Company's current operational needs; material changes
in the Hawaii economy impacting the Company's current operational needs; or
other unanticipated external developments materially impacting the Company's
operational and financial performance
8
<PAGE>
RECENT REGULATORY DEVELOPMENTS
Deposit Insurance. Effective January 1996, deposit insurance premiums for most
banks insured by the Bank Insurance Fund (BIF), such as City Bank, dropped to
zero. However deposit insurance premiums for savings associations insured by
the Savings Association Insurance Fund (SAIF), such as International Savings,
remained unchanged at 23 to 31 cents per $100 of domestic deposits. On May 14,
1996, the Board of Directors of the FDIC voted to continue the BIF and SAIF
premiums at the current level through the end of 1996. This disparity in
deposit insurance premiums is the direct result of the over-capitalization of
the BIF and the serious under-capitalization of the SAIF. This raises the
obvious issues relating to the competitiveness of institutions subject to the
SAIF premiums, as well as the possibility that SAIF-insured institutions could
convert or otherwise move their deposits to the BIF-insured institutions.
Legislation which called for the recapitalization of SAIF through a one-time
assessment of 80-85 cents per $100 in deposits at SAIF-insured institutions was
vetoed by the President in December, 1995, as part of the Budget Reconciliation
Act. While similar legislation is still being considered in budget
negotiations, such an assessment would be a significant cost to the Association
(estimated cost of $3 million ) if such legislation is enacted. Other proposed
changes in this area include adding approximately 2.5 cents per $100 of
domestic deposits to the deposit insurance costs of BIF insured banks in order
to make FICO bond payments which stem from bonds issued in 1987 to recapitalize
the thrift insurance fund. A number of alternative plans, which variously
include contributions by the Federal Reserve or other resources, have been
proposed to aid in the full capitalization of SAIF, which proposals currently
call for the eventual merger of SAIF and BIF. All of the various aspects of
the proposed legislation could have significant effects on the Company, the
Bank and Association.
THRIFT BAD DEBT RESERVE REPEAL
9
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended
June 30, 1996.
ITEM REPORTED DATE FILED
------------------------------- --------------
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.
CB BANCSHARES, INC. AND SUBSIDIARIES
August 14, 1996 By /s/ James M. Morita
James M. Morita, Chairman of the
Board and Chief Executive Officer
/s/ Daniel Motohiro
Daniel Motohiro, Treasurer
and Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 68,300
<INT-BEARING-DEPOSITS> 853,250
<FED-FUNDS-SOLD> 7,005
<TRADING-ASSETS> 78
<INVESTMENTS-HELD-FOR-SALE> 144,101
<INVESTMENTS-CARRYING> 8,060
<INVESTMENTS-MARKET> 8,250
<LOANS> 1,112,090
<ALLOWANCE> 15,498
<TOTAL-ASSETS> 1,398,920
<DEPOSITS> 952,389
<SHORT-TERM> 211,589
<LIABILITIES-OTHER> 25,306
<LONG-TERM> 95,481
<COMMON> 3,551
0
0
<OTHER-SE> 110,604
<TOTAL-LIABILITIES-AND-EQUITY> 1,398,920
<INTEREST-LOAN> 49,196
<INTEREST-INVEST> 6,300
<INTEREST-OTHER> 935
<INTEREST-TOTAL> 55,566
<INTEREST-DEPOSIT> 17,640
<INTEREST-EXPENSE> 27,239
<INTEREST-INCOME-NET> 28,327
<LOAN-LOSSES> 1,590
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 28,960
<INCOME-PRETAX> 3,180
<INCOME-PRE-EXTRAORDINARY> 3,180
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,920
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 8.49
<LOANS-NON> 15,295
<LOANS-PAST> 4,495
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,576
<CHARGE-OFFS> 882
<RECOVERIES> 214
<ALLOWANCE-CLOSE> 15,498
<ALLOWANCE-DOMESTIC> 13,513
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,985
</TABLE>
