FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 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: 0-12396
CB BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Hawaii 99-0197163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Merchant Street
Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip code)
808-546-2411
(Registrant's telephone number including area code)
Not applicable
(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 ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock 3,552,228
<PAGE>
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)
- ------------------------------------------------------------------------------
September 30, December 31, September 30,
1998 1997 1997
- ------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 69,584 $ 75,150 $ 40,941
Federal Funds Sold and securities
purchased 5 4,705 6,505
Held-to-maturity 66,152 88,397 91,526
Available for sale 117,189 120,320 115,150
Trading - - -
Restricted investment securities 28,946 27,348 26,772
Loans held for sale 62,973 26,293 19,242
Gross loans 1,005,818 1,049,305 1,047,171
Less allowance for loan losses (18,032) (16,365) (17,789)
Net Loans 987,786 1,032,940 1,029,382
Premises and equipment 20,306 19,312 19,189
Other assets 34,698 31,186 28,500
Goodwill 8,937 9,575 9,788
- ------------------------------------------------------------------------------
Total assets $1,396,576 $1,435,226 $1,386,995
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 104,851 $ 110,577 $ 99,889
Interest bearing 941,890 898,151 862,890
- ------------------------------------------------------------------------------
Total deposits 1,046,741 1,008,728 962,779
Short-term borrowings 40,769 137,212 126,585
Other liabilities 21,429 23,173 22,414
Long-term debt 156,573 141,048 151,376
- ------------------------------------------------------------------------------
Total liabilities 1,265,512 1,310,161 1,263,154
Stockholders' equity
$1 par value, 50,000,000 shares
authorized, Issued and
outstanding - 3,552,228 shares 3,552 3,551 3,551
Additional paid-in capital 65,119 65,080 65,080
Retained earnings 61,235 55,233 54,055
Accumulated other comprehensive
income, net of taxes 1,158 1,201 1,155
Total stockholders' equity 131,064 125,065 123,841
- ------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $1,396,576 $1,435,226 $1,386,995
==============================================================================
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
Quarter ended Nine Months ended
- ------------------------------------------------------------------------------
Sept.30, Sept.30, Sept.30, Sept.30,
1998 1997 1998 1997
- -------------------------------------------------------------------------------
Interest income
Interest and fees on loans $24,589 $23,474 $71,712 $69,312
Interest and dividends on investment securities
Taxable 3,512 3,912 10,727 12,083
Non-taxable 108 47 289 150
Dividends 537 513 1,599 1,424
Other interest income 355 236 1,873 938
- -------------------------------------------------------------------------------
Total interest income 29,101 28,182 86,200 83,907
Interest Expense
Deposits 10,107 9,201 29,872 26,440
Short-term borrowings 1,182 1,632 4,873 8,174
Long-term debt 2,031 2,832 6,305 5,404
- ------------------------------------------------------------------------------
Total interest expense 13,320 13,665 41,050 40,018
- ------------------------------------------------------------------------------
Net interest income 15,781 14,517 45,150 43,889
Provision for loan losses 2,986 1,517 5,811 4,067
- ------------------------------------------------------------------------------
Net interest income after provision
for loan losses 12,795 13,000 39,339 39,822
Other income
Service charges and fees 1,100 973 3,222 3,064
Other 2,821 894 4,615 2,017
- ------------------------------------------------------------------------------
Total other income 3,921 1,867 7,837 5,081
Other expenses
Salaries and benefits 4,257 4,659 13,058 13,492
Net occupancy and
equipment expense 3,419 2,833 9,934 8,364
Other 5,246 4,071 13,618 13,260
- -------------------------------------------------------------------------------
Total other expenses 12,922 11,563 36,610 35,116
- -------------------------------------------------------------------------------
Income before taxes 3,794 3,304 10,566 9,787
Provision for income taxes 1,640 1,202 4,323 3,885
- -------------------------------------------------------------------------------
Net income 2,154 2,102 6,243 5,902
Other comprehensive income, net of taxes:
Unrealized holding gains (losses)
on securities 1,168 389 945 326
Less: Reclassification adjustment for gains
included in net income (1,000) (113) (1,000) (113)
- -------------------------------------------------------------------------------
Comprehensive Income $2,322 $2,378 $6,188 $6,115
===============================================================================
Per common share:
Basic Earnings Per Share $ 0.61 $ 0.59 $ 1.76 $ 1.66
Diluted Earnings Per Share $ 0.52 $ 0.56 $ 1.67 $ 1.66
===============================================================================
<PAGE>
CB BANCSHARES, INC. AND SUBSIDIARIES (unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands) Nine Months ended September 30,
- ------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,243 $ 5,902
Net adjustments to reconcile net income to
cash used in operating activities (39,097) (10,732)
- ------------------------------------------------------------------------------
Net cash used in operating activities (32,854) (4,830)
Cash flows from investing activities:
Net increase in federal funds sold and
securities under agreements to resell 4,700 (6,505)
Purchases of held-to-maturity investment
Securities (97,318) (51,862)
Proceeds from maturities of held-to-maturity
securities 119,563 58,167
Purchases of available-for-sale securities (36,820) (8,309)
Proceeds from sales of available-for-sale
securities 25,193 12,864
Proceeds from maturities of
available-for-sale securities 14,871 18,672
Net (increase) decrease in loans 43,487 (15,617)
Purchases of premises and equipment (3,821) (3,733)
Proceeds from sale of premises and equipment 539 1,825
- ------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 70,394 5,502
Cash flows from financing activities:
Net increase (decrease) in deposits 38,013 10,869
Net decrease in short-term borrowings (96,443) (82,096)
Proceeds from long-term debt 33,000 89,672
Principal payments on long-term debt (17,475) (33,121)
Proceeds from sale of common stock 40 -
Cash dividends paid (241) (1,687)
- ------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (43,106) (16,363)
DECREASE IN CASH (5,566) (15,691)
- ------------------------------------------------------------------------------
Cash and due from banks at beginning of period 75,150 56,632
- ------------------------------------------------------------------------------
Cash and due from banks at end of period $69,584 $40,941
==============================================================================
<PAGE>
CB BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 nine months
ended September 30, 1998 and 1997 were comprised solely of unrealized 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 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 conditions,
results of operations or liquidity.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Post-retirement 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 Post-retirement Benefits Other Than Pensions." SFAS
No. 132, effective for fiscal years beginning after December 15, 1997,
standardizes the disclosure requirements for pensions and other post-retirement
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.
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. The Company and Association were
successful in defeating all of the plantiff's claims and received a jury verdict
in our favor on counterclaims.
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 Operation
NET INCOME
Consolidated net income for the quarter ended September 30, 1998, totaled $2.15
million, or $0.61 per share, up from $2.10 million, or $0.59 per share for the
same quarter last year. Consolidated net income for the nine months ended
September 30, 1998 totaled $6.24 million, or $1.76 per share, was also up from
$5.90 million, or $1.66 per share for the same period last year.
The increase in net earnings for the nine months ended September 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 third quarter
and nine months ended September 30, 1998 improved to 0.62% and 0.58%,
respectively, as compared to 0.60% and 0.57% for the respective 1997 periods.
The Company's annualized return on average stockholder's equity (ROE) for the
third quarter and nine months ended September 30, 1998 was 6.63% and 6.49%,
respectively, a slight decrease compared to the 6.84% and 6.50% for the
respective 1997 periods.
NET INTEREST INCOME
A comparison of net interest income for the nine months ended September 30, 1998
and 1997 is set forth below on a taxable equivalent basis:
Nine months ended September 30,
1998 1997
(dollars in thousands)
Interest income $87,017 $84,056
Interest Expense 41,050 40,018
------- -------
Net interest income $45,967 $44,038
======= =======
Net interest margin 4.53% 4.47%
======= =======
For the nine months ended September 30, 1998, interest income increased by $2.96
million, from the $84.06 million reported for the same period in 1997. Interest
expense increased by $1.03 million to $41.05 million over the same period last
year. The net result was an increase net interest income for 1998 of $1.93
million as compared to the same nine month period in 1997.
As earnings increased proportionately to the increase in the asset base, the
weighted average yield on interest-earning assets remained unchanged at 8.54%.
The weighted average cost of interest-bearing liabilities decreased to 4.27%,
compared to the 4.76% for the respective 1997 period. This was due to declining
funding costs, while being able to maintain asset yields. As a result of the
foregoing, the Company's net interest margin increased by 6 basis points to
4.53% for the nine months ended September 30, 1998.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 1998 was $18.03 million, and
represented 1.79% of total loans. The ratio was stronger than reported at
December 31, 1997 and September 30, 1997 (1.55% and 1.70%, 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 $5.81 million for the nine months
ended September 30, 1998 - see further discussion below.
Changes in the allowances for loan losses were as follows:
Quarter ended Nine Months ended
September 30, September 30,
1998 1997 1998 1997
(dollars in thousands)
Balance at beginning of period $17,742 $16,967 $16,365 $15,431
Provision charged to expense 2,986 1,517 5,811 4,067
Net recoveries(charge-offs) (2,696) (695) (4,144) (1,709)
------- -------- ------- -------
Balance at end of period $ 18,032 $17,789 $18,032 $17,789
NON-PERFORMING ASSETS
A summary of non-performing assets follows:
9/30/98 12/31/97 9/30/97
--------------------------------
(dollars in thousands)
Loan accounted for on a
non-accrual basis $20,986 $24,476 $25,708
Loan contractually past due
ninety days or more as to
interest or principal payments 3,170 3,913 2,259
--------------------------------
Total non-performing loans 24,156 28,389 27,967
Other Real Estate Owned 8,178 3,686 2,369
--------------------------------
Total non-performing assets $32,334 $32,075 $30,336
==================================
Non-performing assets at September 30, 1998 totaled $32.33 million, increasing
by $0.26 million from December 31, 1997, and by $2.00 million from September 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 $1.74 million over
the comparable nine month period in 1997.
OTHER OPERATING INCOME
Other operating income totaled $7.84 million for the nine month period ended
September 30, 1998, a strong improvement over the $5.08 million for the
comparable period in 1997. This was primarily due to gains from securities
sales.
OTHER OPERATING EXPENSES
Other operating expenses totaled $36.61 million for the nine months ended
September 30, 1998, a nominal increase over the $35.12 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. The Company has already completed the awareness and assessment
phase of its Year 2000 program, and has already undertaken renovation and
testing of its critical systems. As of August 1998, both City Bank and
International Savings and Loan completed the conversion of all core operations
to the FiServ Comprehensive Banking System, a major step in the Company's Year
2000 compliance effort.
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.
To address this external risk, contingency plans are also being developed to
ensure that the Company is prepared to handle the most reasonably likely
worst-case scenarios, including the inability of customers, vendors and other
third parties to adequately address the Year 2000 problem. The development and
testing of these contingency plans are scheduled to be completed by June 1999.
The Company has expended, and will continue to expend the resources necessary to
address this issue in a timely manner. To date, expenditures have totaled less
than $100,000, out of a projected $500,000. Most of these expenditures relate to
the acquisition and implementation of new and enhanced systems and/or equipment,
which will be capitalized and amortized over their respective useful lives.
Expenses related to the Company's internal resources and Year 2000 remediation
costs are being expensed as incurred. Future expenditures are expected to take
place over the next two years and are not expected to have a material impact on
the Company's results of operations. No assurance, however, can be given at this
time that all aspects of the Company's operations will be Year 2000 ready or
that the Year 2000 problem will not have an adverse impact on the Company's
future earnings.
Item 3. Changes in Information About Market Risk
Part II. Other Information
Item 1. Legal Proceedings
See Note D to the consolidated Financial Statements included herein.
Item 2. Changes in Securities
No disclosure required.
Item 3. Defaults Upon Senior Securities
No disclosure required.
Item 4. Submission of Matters to a Vote of Security Holders
No disclosure required.
Item 5. Other Information
No disclosure required.
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September 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.
12/2 /98 By: /s/ Daniel Motohiro
Date Daniel Motohiro
Treasurer and Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000316312
<NAME> CB BANCSHARES, INC.
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 66,584
<INT-BEARING-DEPOSITS> 3,000
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<INVESTMENTS-CARRYING> 95,098
<INVESTMENTS-MARKET> 96,251
<LOANS> 1,005,818
<ALLOWANCE> 18,032
<TOTAL-ASSETS> 1,396,576
<DEPOSITS> 1,046,741
<SHORT-TERM> 40,769
<LIABILITIES-OTHER> 21,430
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