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, 1998
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, 1998
was 3,552,228 shares
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)
- ------------------------------------------------------------------------------
June 30, December 31, June 30,
1998 1997 1997
- ------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 54,974 $ 75,150 $ 42,490
Federal Funds Sold and securities
purchased 6,905 4,705 4,405
Held-to-maturity 78,830 88,397 93,156
Available for sale 124,155 120,320 122,337
Trading - - -
Restricted investment securities 28,409 27,348 26,259
Loans held for sale 39,784 26,293 16,684
Gross loans 1,018,714 1,049,305 1,052,868
Less allowance for loan losses (17,742) (16,365) (16,967)
Net Loans 1,000,972 1,032,940 1,035,901
Premises and equipment 20,208 19,312 19,471
Other assets 33,737 31,186 40,727
Goodwill 9,149 9,575 10,001
- ------------------------------------------------------------------------------
Total assets $1,397,123 $1,435,226 $1,411,431
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 103,755 $ 110,577 $ 105,408
Interest bearing 928,330 898,151 850,431
- ------------------------------------------------------------------------------
Total deposits 1,032,085 1,008,728 955,839
Short-term borrowings 56,443 137,212 181,227
Other liabilities 20,574 23,173 21,111
Long-term debt 159,227 141,048 131,653
- ------------------------------------------------------------------------------
Total liabilities 1,268,329 1,310,161 1,289,830
Stockholders' equity
$1 par value, 50,000,000 shares
authorized, Issued and
outstanding - 3,551,228 shares 3,552 3,551 3,551
Additional paid-in capital 65,119 65,080 65,080
Retained earnings 59,145 55,233 52,131
Unrealized valuation adjustment 978 1,201 839
Total stockholders' equity 128,794 125,065 121,601
- ------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,397,123 $1,435,226 $1,411,431
==============================================================================
2
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
Quarter ended Six months ended
- ------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------
Interest income
Interest and fees on loans $23,771 $23,273 $47,123 $45,838
Interest and dividends
on investment securities
Taxable 3,560 4,023 7,215 8,171
Non-taxable 93 52 181 103
Dividends 539 467 1,062 911
Other interest income 649 254 1,518 702
- ------------------------------------------------------------------------------
Total interest income 28,612 28,069 57,099 55,725
Interest Expense
Deposits 10,047 8,729 19,765 17,239
Short-term borrowings 1,517 3,470 3,691 6,542
Long-term debt 2,230 1,231 4,274 2,572
- ------------------------------------------------------------------------------
Total interest expense 13,794 13,430 27,73 26,353
- ------------------------------------------------------------------------------
Net interest income 14,818 14,639 29,369 29,372
Provision for loan losses 1,525 1,500 2,825 2,550
- ------------------------------------------------------------------------------
Net interest income after
provision for loan losses 13,293 13,139 26,544 26,822
Other income
Service charges and fees 1,027 1,047 2,122 2,091
Other 1,194 725 1,794 1,123
- ------------------------------------------------------------------------------
Total other income 2,221 1,772 3,916 3,214
Other expenses
Salaries and employee benefits 4,200 4,012 8,801 8,833
Net occupancy and
equipment expense 3,481 2,860 6,515 5,531
Other 4,339 4,624 8,372 9,189
- ------------------------------------------------------------------------------
Total other expenses 12,020 11,496 23,688 23,553
- ------------------------------------------------------------------------------
Income before income taxes 3,494 3,415 6,772 6,483
Provision for income taxes 1,357 1,465 2,683 2,683
- ------------------------------------------------------------------------------
Net income $ 2,137 $ 1,950 $ 4,089 $ 3,800
Other comprehensive income, net of taxes:
Unrealized holding gains(losses)
on securities (152) 665 (199) 49
Less: Reclassification Adjustment
For Gains Included in Net Income (24) (112) (24) (112)
- ------------------------------------------------------------------------------
Comprehensive Income $ 1,961 $ 2,503 $ 3,866 $ 3,737
==============================================================================
Per common share:
Basic Earnings Per Share $ 0.60 $ 0.55 $ 1.15 $ 1.07
Diluted Earnings Per Share $ 0.50 $ 0.55 $ 1.05 $ 1.07
==============================================================================
3
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands) Six Months ended June 30,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,089 $ 3,800
Net adjustments to reconcile net income to
cash used in operating activities (16,887) (22,286)
- ------------------------------------------------------------------------------
Net cash used in operating activities (12,798) (18,486)
Cash flows from investing activities:
Net decrease in federal funds sold and
securities under agreements to resell (2,200) (4,405)
Purchases of held-to-maturity investment
Securities (66,653) -
Proceeds from maturities of held-to-maturity
securities 76,220 4,675
Purchases of available-for-sale securities (26,859) (7,332)
Proceeds from sales of available-for-sale
securities 17,044 12,864
Proceeds from maturities of
available-for-sale securities 6,013 10,508
Net (increase) decrease in loans 30,591 (21,314)
Purchases of premises and equipment (2,697) (3,202)
Proceeds from sale of premises and equipment 533 756
- ------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 31,992 (7,450)
Cash flows from financing activities:
Net increase (decrease) in deposits 23,357 3,929
Net decrease in short-term borrowings (80,769) (27,454)
Proceeds from long-term debt 77,058 119,650
Principal payments on long-term debt (58,879) (82,822)
Proceeds from sale of common stock 40 -
Cash dividends paid (177) (1,509)
- ------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (39,370) 11,794
DECREASE IN CASH (20,176) (14,142)
- ------------------------------------------------------------------------------
Cash and due from banks at beginning of period 75,150 56,632
- ------------------------------------------------------------------------------
Cash and due from banks at end of period $54,974 $42,490
==============================================================================
4
CB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
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 - 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 as all changes in equity, including net
income, except for those resulting from investment by and distributions to
owners.
Components of other comprehensive income for the three months and six months
ended June 30, 1998 and 1997 were comprised solely of unrealized holding gains
(losses) on available-for-sale investment securities.
NOTE C - ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. In the initial year of
implementation, it does not apply to interim periods. 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. Since this statement relates to disclosure requirements,
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' Disclosure about
Pensions and Other Postretirement Benefits," and 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. The application of SFAS No. 132 is not expected to have a
material impact on the Company's consolidated financial statements.
5
NOTE D - COMMITMENTS AND CONTINGENCIES
On January 30, 1996, a lawsuit was filed against the Association, its
subsidiaries, one of its officers as well as the Company and other entities
and individuals. The lawsuit is an action by the plaintiffs, as purchasers of
the International Savings Building (ISL Building) at 1111 Bishop Street in
Honolulu, Hawaii, for recission, special, general and punitive damages. The
plaintiffs seek recission of sale of the ISL Building to them (made in May
1988 for $7,450,000), 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
and the alleged unreasonableness of demands by the fee-simple owner. The
plaintiffs also allege failure to disclose land appraisals concerning the
property and the presence of toxic asbestos in the cooling system, pipes,
walls and ceiling tiles of the building, and intentional or negligent
infliction of emotional distress in connection with the vacation of the ISL
Building by the Association as a substantial tenant of the building. The
Company and the Association defendants have answered plaintiffs' complaint
denying any liability in connection with plaintiffs' allegations.
The Association, which previously leased approximately 56% of the building,
terminated its lease in March 1997. Prior to the Association terminating its
sublease, the plaintiffs became delinquent in their lease rent to the fee
owner and in their real property tax payments despite having collected
sublease rents and real property tax assessments in advance from the
Association and other tenants. The consent of the landowner given in 1988 to
the assignment by the Association of the underlying ground lease to plaintiffs
did not release the Association from ground lease obligations upon default by
the assignee, and thus the Association had a liability to the landowner for
the underlying ground lease ($65,333 per month) in connection with any default
by plaintiffs in lease payments to the landowner, even though the Association
no longer occupied such leased space. The monthly rental payments of $65,333
required by the ground lease were substantially in excess of current rental
market values, which restricted the ability of the Association to mitigate
potential losses.
The landowner subsequently sued the Association and the plaintiff. The action
was never served on the Association and was settled and dismissed after the
filing of a motion for the appointment of a receiver. Effective June 1, 1997,
the plaintiffs reassigned the lease and legal title of the ISL Building to the
Association pursuant to an agreement among the landowner, the Association and
the plaintiff. As a result, the Association currently controls the operation
of the 1111 Bishop Street Building. However, the agreement did not release the
Association from obligations under the lease or terminate the litigation
between the Association and the plaintiff. The agreement also established a
$5,000,000 cap on the amount of damages the Association can recover from the
plaintiff with respect to the assignment. The ground lease rent is fixed until
2002, at which time the rent will be renegotiated for two subsequent ten-year
periods. The ground lease term expires in 2021. In no event would the
negotiated lease rent for any period be less than $30,000 per year. While the
Company and the Association defendants believe they have meritorious defenses
in this action, due to the uncertainties inherent in the early stages of
litigation, no assurance can be given as to the ultimate outcome of the
lawsuit at this time. Accordingly, no provision for any loss or recovery that
may result upon resolution of the lawsuit has been made in the Company's
consolidated financial statements.
6
The Company is a defendant in other various legal proceedings arising from
normal business activities. In the opinion of management, after reviewing
these proceedings with counsel, the aggregate liability, if any, resulting
from these proceedings would not have a material effect on the Company's
financial position or results of operations.
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, 1998, totaled
$2.14 million, or $0.60 per share, up from $1.95 million, or $0.55 per share
for the same quarter last year. Consolidated net income for the six months
ended June 30, 1998 totaled $4.09 million, or $1.15 per share, was also up
from $3.8 million, or $1.07 per share for the same period last year.
The increase in net earnings for the six months ended June 30, 1998 was due
primarily to modest improvements in service charges and fees, and various
other sources of non-interest income.
The Company's annualized return on average assets (ROA) for the second
quarter and six months ended June 30, 1998 improved to 0.60% and 0.57%,
respectively, as compared to 0.56% and 0.55% for the respective 1997 periods.
The Company's annualized return on average stockholder's equity (ROE) for the
second quarter and six months ended June 30, 1998 was 6.68% and 6.46%,
respectively, also an improvement over the 6.50% and 6.40% for the respective
1997 periods.
NET INTEREST INCOME
A comparison of net interest income for the six months ended June 30, 1998 and
1997 is set forth below on a taxable basis:
Six months ended June30,
1998 1997
(dollars in thousands)
Interest income $57,233 $55,833
Interest Expense 27,730 26,353
------- -------
Net interest income $29,503 $29,480
======= =======
Net interest margin 4.27% 4.52%
======= =======
For the six months ended June 30, 1998, interest income increased by $1.4
million, from the $55.83 million reported for the same period in 1997.
Similarly, interest expense increased by $1.4 million to $27.73 million over
the same period last year. The net result of similar increases in interest
income and interest expense left very little change in net interest income for
1998, as compared to the same six-month period in 1997.
7
However, relatively unchanged earnings on a larger asset base led to a 27
basis point decline in the weighted average yield on interest-earning assets.
Compared to 8.56% for the respective 1997 period, the average yield on
interest earning assets declined to 8.29%. The weighted average cost of
interest-bearing liabilities was little changed at 4.66%, compared to the
4.69% for the respective 1997 period. As a result of the foregoing, the
Company's net interest margin declined by 25 basis points to 4.27% for the six
months ended June 30, 1998.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at June 30, 1998 was $17.74 million, and
represented 1.74% of total loans. The ratio was much stronger than reported
at December 31, 1997 and June 30, 1997 (1.55% and 1.61%, respectively). The
increase in the reserve ratio reflects management's continuing assessment of
loss experience, problem credits, changes in collateral values, and current,
as well as anticipated economic conditions. The increase in non-performing
assets from December 31, 1997, the continued weakness in the Hawaiian real
estate market, and continued concerns over the State's economic recovery have
led to an increase in the provision for loan losses to $2.83 million for the
six months ended June 30, 1998 - see further discussion below.
Changes in the allowances for loan losses were as follows:
Quarter ended Six Months ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
Balance at beginning of period $17,239 $16,094 $16,365 $15,431
Provision charged to expense 1,525 1,500 2,825 2,550
Net recoveries(charge-offs) (1,022) (627) (1,448) (1,014)
-------- -------- ------- -------
Balance at end of period $ 17,742 $16,967 $17,742 $16,967
NON-PERFORMING ASSETS
A summary of non-performing assets follows:
6/30/98 12/31/97 6/30/97
--------------------------------
(dollars in thousands)
Loan accounted for on a
non-accrual basis $24,020 $24,476 $21,557
Loan contractually past due
ninety days or more as to
interest or principal payments 2,881 3,913 2,510
--------------------------------
Total non-performing loans 26,901 28,389 24,067
Other Real Estate Owned 6,073 3,686 2,230
--------------------------------
Total non-performing assets $32,974 $32,075 26,297
==================================
8
Non-performing assets at June 30, 1998 totaled $32.97 million, increasing by
$0.9 million from December 31, 1997, and by $6.7 million from June 30, 1997.
The increases from previous periods were primarily due to increases in non-
accruing real estate (1-4 family type) loans. In consideration of this, the
provision for loan losses for 1998 reflects an increase of $275,000 over the
comparable six month period in 1997.
OTHER OPERATING INCOME
Other operating income totaled $3.92 million for the six month period ended
June 30, 1998, a slight improvement over the $3.21 million for the comparable
period in 1997.
OTHER OPERATING EXPENSES
Other operating expenses totaled $23.69 million for the six months ended
June 30, 1998, a slight increase over the $23.55 million for the same period in
1997.
YEAR 2000
The "Year 2000" problem relates to the fact that many computer software
programs store years as only two digits, assuming that all years are in the
twentieth century. Accordingly, the year 2000 may produce erroneous results or
systems may fail when the two-digit year becomes "00".
In 1997, the Company initiated a comprehensive program to address this problem
and ensure that its computer systems will function properly in the years 2000
and thereafter. Total internal and external costs for this program are
estimated to be $500,000 over a two year period, and are not anticipated to
materially impact the Company's results of operations.
The Company has completed the awareness and assessment phase of its Year 2000
program, and has already undertaken renovation and testing of its critical
systems. In April 1998, City Bank completed a conversion of its core
processing operations to the FiServ Comprehensive Banking System. In August
1998, International Savings and Loan is scheduled to complete the conversion of
its core operations to the same system. The FiServ Comprehensive Banking
System is widely used in the financial services industry and FiServ has given
certain assurances that its system will be year 2000 ready.
Testing of all critical individual systems throughout the Company is scheduled
to be substantially completed by the end of 1998, with integration testing to
occur in late 1998 through 1999.
Even though the Company's efforts should adequately address year 2000 issues,
there can be no assurance that unforeseen difficulties will not arise. The
Company's Year 2000 program also includes the identification of third party
service providers, customers and other external parties upon which the Company
relies, or with whom it must interface its critical systems or applications.
The Company's program also includes an assessment of these external parties'
compliance efforts with year 2000 issues. However, there is no assurance that
the failure of such external parties to resolve its year 2000 issues would not
have an adverse impact on the Company.
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note D to the consolidated Financial Statements included herein.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on April 30, 1998, the
following members were elected to the Board of Directors to serve as Class III
directors until the 2001 annual meeting of shareholders and until their
successors are elected:
Shares Voted For Shares Withheld
---------------- ----------------
Tomio Fuchu 2,513,132 92,950
Larry K. Matsuo 2,163,683 442,399
Hiroshi Sakai 2,161,251 444,831
Also elected was Grant Thornton LLP as independent auditor for the ensuing
year:
For: 2,477,211
Against: 120,569
Abstain: 8,302
Also approved was an amendment to the Company's Stock Option Plan, as described
in the proxy statement:
For: 2,050,840
Against: 460,932
Abstain: 38,127
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1998
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, 1998 By /s/ Daniel Motohiro
Daniel Motohiro, Treasurer
and Principal Financial
Officer
10
Confidential US Comb 05/15/96 1
Initials
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