16
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 September 30, 1999
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) 546-2500
(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 each of the registrant's classes of common
stock as of October 31, 1999 was:
Class Outstanding
Common Stock, $1.00 Par Value 3,552,228 shares
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
(in thousands of dollars) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 51,161 $ 61,658 $ 35,826
Interest-bearing deposits in other banks 20,063 20,000 3,093
Federal funds sold 800 47,752 30,670
Investment securities:
Held-to-maturity - - 66,152
Available-for-sale 285,591 141,764 117,189
Restricted investment securities 31,167 29,481 28,946
Loans held for sale 9,805 99,602 62,973
Loans:
Loans 1,108,758 979,695 1,005,818
Less allowance for credit losses 17,941 17,771 18,032
- -------------------------------------------------------------------------------------------------------------------------------
Net loans 1,090,817 961,924 987,786
- -------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 19,661 20,916 20,306
Other assets 55,811 45,341 43,635
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,564,876 $1,428,438 $1,396,576
===============================================================================================================================
Liabilities and stockholders' equity
Deposits:
Noninterest-bearing $ 108,491 $ 119,649 $ 104,851
Interest-bearing 988,691 964,961 941,890
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,097,182 1,084,610 1,046,741
- -------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings 86,840 27,926 40,769
Other liabilities 18,043 18,443 18,706
Long-term debt 235,283 165,087 159,659
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,437,348 1,296,066 1,265,875
- -------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock - - -
Common stock 3,552 3,552 3,552
Additional paid-in capital 65,108 65,108 65,108
Retained earnings 68,740 62,784 60,872
Accumulated other comprehensive
income (loss), net of tax (3,809 ) 1,169
928
Treasury stock (6,063 ) - -
- -------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 127,528 132,372 130,701
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,564,876 $1,428,438 $1,396,576
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended September 30, Nine months ended September 30,
(in thousands of dollars, except per share data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 23,382 $ 24,260 $ 67,724 $ 71,383
Interest and dividends on investment securities:
Taxable interest income 4,591 3,512 10,927 10,727
Nontaxable interest income 283 108 714 289
Dividends 540 537 1,688 1,599
Other interest income 203 355 1,181 1,873
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 28,999 28,772 82,234 85,871
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 9,344 10,107 27,570 29,872
Short-term borrowings 903 706 1,795 2,910
Long-term debt 3,505 2,507 8,414 8,268
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,752 13,320 37,779 41,050
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 15,247 15,452 44,455 44,821
Provision for credit losses 1,333 2,986 3,598 5,811
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 13,914 12,466 40,857 39,010
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 533 420 1,459 1,304
Other service charges and fees 744 680 2,251 1,918
Net realized gains (losses) on sales of securities 72 1,181 (32) 1,181
Net gains on sales of loans 359 1,257 2,413 2,092
Other 303 383 882 1,342
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,011 3,921 6,973 7,837
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 5,116 4,328 15,583 14,175
Net occupancy expense 1,951 2,479 6,018 7,091
Equipment expense 769 940 2,409 2,843
Other 4,026 4,846 12,930 12,172
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 11,862 12,593 36,940 36,281
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,063 3,794 10,890 10,566
Income tax expense 1,583 1,640 4,235 4,323
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,480 $ 2,154 $ 6,655 $ 6,243
====================================================================================================================================
Per share data:
Basic $ 0.72 $ 0.61 $ 1.89 $ 1.76
Diluted $ 0.72 $ 0.60 $ 1.89 $ 1.75
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<S> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(in thousands of dollars) 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at beginning of period $ 61,658 $ 45,150
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income 6,655 6,243
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for credit losses 3,598 5,811
Gain on disposition of premises and equipment - 103
Depreciation and amortization 1,827 1,811
Increase in interest receivable (3,020) (227)
Increase (decrease) in interest payable (83) 157
Net decrease (increase) in loans held for sale 34,900 (91,359)
Decrease (increase) in other assets (10,636) 1,082
Increase (decrease) in other liabilities 1,753 (712)
Other (2,555) (601)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 32,439 (77,692)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits in other banks
banks (63) 26,907
Net decrease (increase) in federal funds sold 46,952 (25,965)
Proceeds from sales of held-to-maturity securities - 24,049
Proceeds from maturities of held-to-maturity securities - 14,292
Purchase of available-for-sale securities (189,392) (52,420)
Proceeds from sales of available-for-sale securities 35,995 36,132
Proceeds from maturities of available-for-sale securities 58,752 59,497
Increase in restricted investment securities (1,686) (1,598)
Net decrease (increase) in loans (136,122) 31,259
Proceeds from sales of premises and equipment - 23
Capital expenditures (572) (2,931)
Proceeds from sales of foreclosed assets 8,308 2,608
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (177,828) 111,853
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 12,572 38,013
Net increase (decrease) in short-term borrowings 58,914 (76,470)
Proceeds from long-term debt 164,570 118,500
Principal payments on long-term debt (94,402) (122,953)
Stock options exercised - 29
Cash dividends paid (699) (604)
Purchase of treasury stock, net (6,063) -
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 134,892 (43,485)
Cash and due from banks at end of period $ 51,161 $ 35,826
===============================================================================================================================
Supplemental schedule of non-cash investing activities:
Securitizations of loans into mortgage-backed
securities $ 54,897 $ 54,679
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Accu-
mulated
Other
Compre
(in thousands of dollars, Additional hensive
except per share data) Common Stock Paid-In Retained Income Treasury
Capital Earnings (Loss) Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 3,552 $65,108 $ 62,784 $ 928 $ - $ 132,372
Comprehensive income (loss):
Net income - - 6,655 - - 6,655
Unrealized valuation adjustment - - - (4,737) - (4,737)
- -
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - 6,655 (4,737) - 1,918
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends ($0.20 per share) - - (699) - - (699)
Treasury Stock - - - - (6,063) (6,063)
====================================================================================================================================
Balance at September 30, 1999 $ 3,552 $65,108 $ 68,740 $ (3,809) $ (6,063) $ 127,528
====================================================================================================================================
Balance at December 31, 1997 $ 3,551 $65,080 $ 55,233 $ 1,201 $ - $ 125,065
Comprehensive income (loss):
Net income - - 6,243 - - 6,243
Unrealized valuation adjustment - - - (32) - (32)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) - - 6,243 (32) - 6,211
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercised 1 28 - - - 29
Cash dividends ($0.17 per share) - - (604) - - (604)
====================================================================================================================================
Balance at September 30, 1998 $ 3,552 $65,108 $ 60,872 $ 1,169 $ - $ 130,701
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
NOTE A - Summary of Significant Accounting Policies
CONSOLIDATION
The consolidated financial statements include the accounts of CB Bancshares,
Inc. (the "Parent Company" or "Company") and its wholly-owned subsidiaries: City
Bank and its wholly-owned subsidiaries (the "Bank"); International Savings and
Loan Association, Limited and its wholly-owned subsidiaries (the "Association");
City Finance and Mortgage, Inc.; and O.R.E., Inc. Significant intercompany
transactions and balances have been eliminated in consolidation. The
consolidated financial statements include all adjustments of a normal and
recurring nature which are, in the opinion of management, necessary for a fair
presentation of the financial results for the interim periods.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and, therefore, do not include
all information and footnotes normally included in financial statements prepared
in conformity with generally accepted accounting principles. Accordingly, these
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31,
1998.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for 1998 have been
reclassified to conform with the 1999 presentation. Such reclassifications had
no effect on the consolidated net income as previously reported.
NOTE B - Loans
The loan portfolio consisted of the following:
<TABLE>
<S> <C> <C> <C>
---------------------------------------------- --------------------- ---------------------- ----------------------
September 30 December 31, September 30
(in thousands of dollars) 1999 1998 1998
---------------------------------------------- --------------------- ---------------------- ----------------------
Commercial $ 212,088 $ 191,128 $ 182,388
Real estate:
Construction 9,441 25,453 24,003
Commercial 191,964 150,690 148,606
Residential 654,623 531,623 620,081
Installment and consumer 44,982 85,562 34,647
---------------------------------------------- --------------------- ---------------------- ----------------------
Gross loans 1,113,098 984,456 1,009,725
Less:
Unearned discount 5 5 16
Net deferred loan fees 4,335 4,756 3,891
Allowance for credit losses 17,941 17,771 18,032
---------------------------------------------- --------------------- ---------------------- ----------------------
Loans, net $1,090,817 $ 961,924 $ 987,786
============================================== ===================== ====================== ======================
</TABLE>
<PAGE>
NOTE C - Segment Information
CB Bancshares, Inc. and Subsidiaries (the "Company") adopted Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information" in 1998. The Company's business segments
are organized around services, products provided and regulatory environments.
The two operating segments are a bank and a savings institution. The segment
data presented below was prepared on the same basis of accounting as the
consolidated financial statements described in Note A. Intersegment income and
expense are valued at prices comparable to those for unaffiliated companies.
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Parent Company
(in thousands) Bank Association and Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1999
Interest income $ 16,172 $ 12,827 $ 2 $ (2) $ 28,999
Interest expense 6,729 7,025 - (2) 13,752
Noninterest income 1,040 973 - (2) 2,011
Income before income taxes 3,250 1,501 2,197 (2,885) 4,063
Income tax expense (benefit) 1,237 629 (283) - 1,583
Total assets 854,440 710,360 127,914 (127,838) 1,564,876
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended September 30, 1998
Interest income $ 15,008 $ 13,764 $ 5 $ (5) $ 28,772
Interest expense 6,268 7,058 - (6) 13,320
Noninterest income 1,203 2,736 - (18) 3,921
Income before income taxes 2,143 2,212 2,049 (2,610) 3,794
Income tax expense (benefit) 826 919 (105) - 1,640
Total assets 750,994 645,403 132,263 (132,084) 1,396,576
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Parent Company
(in thousands) Bank Association and Other Eliminations Consolidated
- ---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999
Interest income $ 45,849 $ 36,385 $ 7 $ (7) $ 82,234
Interest expense 18,468 19,318 - (7) 37,779
Noninterest income 2,960 4,054 - (41) 6,973
Income before income taxes 8,364 4,233 5,935 (7,642) 10,890
Income tax expense (benefit) 3,188 1,767 (720) - 4,235
Total assets 854,440 710,360 127,914 (127,838) 1,564,876
- ---------------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1998
Interest income $ 44,907 $ 40,964 $ 20 $ (20) $ 85,871
Interest expense 19,324 21,732 8 (14) 41,050
Noninterest income 3,451 4,439 - (53) 7,837
Income before income taxes 6,075 6,039 5,725 (7,273) 10,566
Income tax expense (benefit) 2,284 2,557 (518) - 4,323
Total assets 750,994 645,403 132,263 (132,084) 1,396,576
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE D - Earnings Per Share Calculation
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Quarter ended September 30,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Shares Per Shares Per Share
Income (Denom- Share Income (Denom- Amount
(Numerator) inator) Amount (Numerator) inator)
(in thousands, except number of shares and per share data)
- ------------------------------------------------------------------------------------------------------------------------------
Basic:
Net income $2,480 3,457,806 $0.72 $2,154 3,552,228 $ 0.61
Effect of dilutive
securities -
Stock incentive
plan options - 381 - - 12,756 (0.01)
- ------------------------------------------------------------------------------------------------------------------------------
Diluted:
Net income and
assumed conversions $2,480 3,458,187 $0.72 $2,154 3,564,984 $ 0.60
==============================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Shares Per Shares Per
Income (Denom- Share Income (Denom- Share
(Numerator) inator) Amount (Numerator) inator) Amount
(in thousands, except number of shares and per share data)
- -----------------------------------------------------------------------------------------------------------------------------
Basic:
Net income $6,655 3,514,939 $1.89 $6,243 3,551,777 $ 1.76
Effect of dilutive
securities -
Stock incentive
plan options - 381 - - 12,756 -
- -----------------------------------------------------------------------------------------------------------------------------
Diluted:
Net income and
assumed conversions $6,655 3,515,320 $1.89 $6,243 3,564,533 $ 1.75
=============================================================================================================================
</TABLE>
NOTE E - New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. In June 1999, the provisions of SFAS No. 133
were amended by SFAS No. 137 to be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company will adopt SFAS No. 133, as
amended, on January 1, 2001, but has not yet determined the impact, if any.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion contains statements relating to future results of the Company
(including certain projections and business trends) that are considered
"forward-looking statements." Actual results may differ materially from those
projected as a result of certain risks and uncertainties including, but not
limited to, changes in political and economic conditions, interest rate
fluctuations, competitive product and pricing pressures within the Company's
market, equity and bond market fluctuations, personal and corporate customers'
financial performance, inflation, results of litigation, and unforeseen costs
and risks relating to Year 2000 issues. Accordingly, historical performance as
well as reasonably applied projections and assumptions may not be a reliable
indicator of future earnings due to such risks and uncertainties.
As circumstances, conditions or events change that affect the Company's
assumptions and projections on which any of the statements are based, the
Company disclaims any obligation to issue any update or revision to any
forward-looking statement contained herein.
<PAGE>
NET INCOME
Consolidated net income for the quarter ended September 30, 1999, totaled $2.48
million, an increase of $326,000, or 15.1%, over $2.15 million for the same
quarter last year. Basic and diluted earnings per share for the third quarter of
1999 were $0.72 as compared to $0.61 and $0.60, respectively, for the third
quarter in 1998. The increase in consolidated net income for the third quarter
of 1999, over the same period in 1998, was primarily due to a decrease in the
provision for credit losses (reflecting the reduction in nonperforming loans)
and a decrease in most categories of noninterest expense, partially offset by a
decrease in net gains on sales of loans and investment securities.
Consolidated net income for the nine months ended September 30, 1999, totaled
$6.66 million, an increase of $412,000, or 6.6%, over $6.24 million for the same
period last year. . For the nine months ended September 30, 1999, basic and
diluted earnings were $1.89 per share as compared to $1.76 and $1.75,
respectively, for the same period last year. The increase in consolidated net
income for the nine months ended September 30, 1999, over the same period in
1998, was primarily due to a decrease in the provision for credit losses,
partially offset by a decrease in net gains on the sales of loans and
investments and an increase in total noninterest
expense.
The Company's annualized return on average total assets for the nine months
ended September 30, 1999 was 0.61% as compared to 0.58% for the same period last
year. The Company's annualized return on average stockholders' equity was 6.80%
for the nine months ended September 30, 1999, as compared to 6.49% for the same
period last year.
NET INTEREST INCOME
Net interest income, on a taxable equivalent basis, was $44.9 million for the
first nine months of 1999, a decrease of $292,000, or 0.6%, from the same period
in 1998. The decrease in net interest income was primarily due to a decrease in
average earning assets of $6.2 million, or 0.4%, partially offset by a $26.6
million, or 2.3%, decrease in average interest-bearing liabilities. For the nine
months ended September 30, 1999, the Company's net interest margin was 4.40%, a
decrease of 8 basis points (1% equals 100 basis points) from the same period in
1998. The decrease in the net interest margin was primarily attributable to a 38
basis point decrease in the yield on average earning assets, partially offset by
a 47 basis point decrease in the cost of funds, for the first nine months of
1999 compared to the same period in 1998. The decrease in the yield on average
earning assets and the rate paid on funding sources was primarily due to the
declining interest rate environment experienced between September 30, 1998 and
September 30, 1999. Specifically, the prime interest rate dropped 50 basis
points from 8.50% at September 30, 1998 to 8.00% at September 30, 1999.
<PAGE>
<TABLE>
A comparison of net interest income for the nine months ended September 30, 1999
and 1998 is set forth below on a taxable equivalent basis:
<S> <C> <C>
--------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(dollars in thousands) 1999 1998
--------------------------------------------------------------------------------------------------------------
Interest income $ 82,635 $ 86,198
Interest expense 37,779 41,050
--------------------------------------------------------------------------------------------------------------
Net interest income
and margin on
earning assets 44,856 4.40% 45,148 4.48%
Taxable equivalent adjustment 401 327
==============================================================================================================
Net interest income $ 44,455 $ 44,821
==============================================================================================================
</TABLE>
<PAGE>
<TABLE>
NONPERFORMING ASSETS
A summary of nonperforming assets at September 30, 1999, December 31, 1998 and
September 30, 1998 follows:
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
September 30, December 31, September 30,
(dollars in thousands) 1999 1998 1998
- ----------------------------------------------------------------------------------------------------------------------------
Nonperforming assets:
Nonaccrual loans:
Commercial $ 2,577 $ 1,291 $ 509
Real estate:
Commercial 760 933 883
Residential 9,397 10,803 19,214
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate loans 10,157 11,736 20,097
Consumer 482 77 208
- ----------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 13,216 13,104 20,814
Other real estate owned 6,035 8,583 8,178
- ----------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 19,251 $ 21,687 $ 28,992
============================================================================================================================
Past due loans:
Commercial $ 291 $ 2,433 $ 602
Real estate 2,487 3,602 2,218
Consumer 639 544 521
- ----------------------------------------------------------------------------------------------------------------------------
Total past due loans (1) $ 3,417 $ 6,579 $ 3,341
============================================================================================================================
Restructured:
Real estate:
Commercial $ 6,986 $ 1,284 $ 1,284
Residential 11,495 11,108 2,724
============================================================================================================================
Total restructured loans (2) $ 18,481 $ 12,392 $ 4,008
============================================================================================================================
Nonperforming assets to total loans
and other real estate owned (end of period):
Excluding 90 days past due accruing loans 1.73% 2.19% 2.86%
Including 90 days past due accruing loans 2.03% 2.86% 3.19%
Nonperforming assets to total assets
(end of period):
Excluding 90 days past due accruing loans 1.23% 1.52% 2.08%
Including 90 days past due accruing loans 1.45% 1.98% 2.32%
(1) Represents loans which are past due 90 days or more as to principal and/or interest, are still accruing interest
and are in the process of collection.
(2) Represents loans which have been restructured, are current and still accruing interest.
</TABLE>
<PAGE>
Nonperforming loans at September 30, 1999 totaled $13.2 million, a decrease of
$7.6 million, or 36.5%, from September 30, 1998. The decrease was primarily due
to the sale of $6.8 million of nonaccrual loans in the fourth quarter of 1998.
Other real estate owned decreased $2.1 million, or 26.2%, from September 30,
1998 to $6.0 million at September 30, 1999. The decrease in other real estate
owned reflects an increase in real estate sales activity and a reduction in
nonperforming loans.
Restructured loans, still accruing interest, increased $14.5 million from
September 30, 1998 to $18.5 million at September 30, 1999. The increase was
primarily due to the restructuring of: (1) $11.2 million in mortgage loans to a
group of investors in a condominium project located on the island of Maui during
the fourth quarter of 1998; and (2) $5.7 million in commercial loans,
collateralized by real estate, in the third quarter of 1999.
At September 30, 1999, the Company was not aware of any significant potential
problem loans (not otherwise classified as nonperforming, past due, or
restructured in the above table) where possible credit problems of the borrower
caused management to have serious concerns as to the ability of such borrower to
comply with the present scheduled repayment terms.
PROVISION AND ALLOWANCE FOR CREDIT LOSSES
The provision for credit losses is based upon management's judgment as to the
adequacy of the allowance for credit losses (the "Allowance") to absorb future
losses. The Company uses a systematic methodology to determine the adequacy of
the Allowance and related provision for credit losses to be reported for
financial statement purposes. The determination of the adequacy of the Allowance
is ultimately one of management judgment, which includes consideration of many
factors, including, among other things, the amount of problem and potential
problem loans, net charge-off experience, changes in the composition of the loan
portfolio by type and geographic location of loans and in overall loan risk
profile and quality, general economic factors and the fair value of
collateral.
<PAGE>
<TABLE>
The following table sets forth the activity in the allowance for credit losses
for the periods indicated:
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30,
(dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Loans outstanding (end of period) $ 1,108,758 $ 1,005,818
===========================================================================================================================
Average loans outstanding $ 1,060,668 $ 1,074,312
===========================================================================================================================
Balance at beginning of period $ 17,771 $ 16,365
- ---------------------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial 381 566
Commercial real estate 497 664
Residential real estate 2,381 3,302
Consumer 640 504
- ---------------------------------------------------------------------------------------------------------------------------
Total loans charged off 3,899 5,036
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries on loans charged off:
Commercial 63 86
Real estate:
Commercial 82 -
Residential 189 396
Consumer 137 410
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries on loans
previously charged off 471 892
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs (3,428) (4,144)
Provision charged to expense 3,598 5,811
===========================================================================================================================
Balance at end of period $ 17,941 $ 18,032
===========================================================================================================================
Net loans charged off to average loans .43% (1) .51% (1)
Net loans charged off to allowance
for credit losses 25.54% (1) 30.73% (1)
Allowance for credit losses to total
loans (end of period) 1.62% 1.79%
Allowance for credit losses to nonperforming
loans (end of period):
Excluding 90 days past due
accruing loans 1.36x .87x
Including 90 days past due
accruing loans 1.08x .75x
(1) Annualized.
</TABLE>
The provision for credit losses was $1.3 million for the third quarter of 1999,
a decrease of $1.7 million, or 55.4%, compared to the same quarter last year.
For the first nine months of 1999, the provision for credit losses was $3.6
million, a decrease of $2.2 million, or 38.1%, from the same period in 1998. The
decrease in the provision for credit losses for the third quarter and first nine
months of 1999 reflects the reduction in nonperforming loans for the
corresponding periods - see section on "Nonperforming Assets."
The Allowance at September 30, 1999 was $17.9 million and represented 1.62% of
total loans. The corresponding ratios at December 31, 1998 and September 30,
1998 were 1.81% and 1.79%, respectively.
Net charge-offs were $3.4 million for the first nine months of 1999, a decrease
of $716,000, or 17.3%, compared to the same period in 1998. The decrease was
primarily due to a reduction in residential real estate loan charge-offs in
1999.
The Allowance increased to 1.36 times nonperforming loans (excluding 90 days
past due accruing loans) at September 30, 1999 from 0.87 times at September 30,
1998 as a result of the decrease in nonperforming loans.
In management's judgment, the Allowance was adequate to absorb potential losses
currently inherent in the loan portfolio at September 30, 1999. However, changes
in prevailing economic conditions in the Company's markets or those of its
customers could result in changes in the level of nonperforming assets and
charge-offs in the future and, accordingly, changes in the Allowance.
<PAGE>
NONINTEREST INCOME
Noninterest income totaled $2.0 million for the third quarter of 1999, a
decrease of $1.9 million, or 48.7%, from the third quarter of 1998. For the nine
months ended September 30, 1999, noninterest income was $7.0 million, a decrease
of $864,000, or 11.0%, from the same period in 1998.
Net realized gains on the sale of securities decreased $1.1 million and $1.2
million for the third quarter and first nine months of 1999, respectively, from
the comparable periods in 1998. During the first nine months in 1998, the
Company sold $60.2 million of investment securities at a net gain of $1.2
million.
Net gains on sales of loans decreased $898,000, or 71.4%, and increased
$321,000, or 15.3%, for the third quarter and first nine months of 1999,
respectively, as compared to the same periods in 1998. The decrease in net gains
on the sale of loans during the third quarter of 1999 was due to a lower level
of loan sale activities and related gains thereon. The level of net gains on
sale of loans is expected to decline in the fourth quarter of 1999.
<PAGE>
NONINTEREST EXPENSE
Noninterest expense totaled $11.9 million for the third quarter of 1999, a
decrease of $731,000, or 5.8%, from the same period in 1998. For the nine months
ended September 30, 1999, noninterest expense totaled $36.9 million, an increase
of $659,000, or 1.8%, over the same period in 1998.
Total salaries and employee benefits expense increased $788,000, or 18.2%, and
$1,408,000, or 9.9%, for the third quarter and first nine months of 1999,
respectively, over the same periods last year. The increase was primarily
related to higher commissions paid to loan officers and brokers due to increased
loan originations in the Company's mortgage banking business. Origination
activity has increased due to an increase in real estate sales activity in 1999.
Occupancy expense decreased $528,000, or 21.3%, and $1.1 million, or 15.1%, in
the third quarter and first nine months of 1999, respectively, compared to the
same periods in 1998. This decrease was primarily attributable to a reduction in
occupancy costs of
the Association.
Equipment expense decreased $171,000, or 18.2%, and $434,000, or 15.3%, for the
third quarter and first nine months of 1999, respectively, as compared to the
same periods in 1998. The decrease was primarily due to reduced repairs and
maintenance costs.
Other noninterest expense decreased $820,000, or 16.9%, for the third quarter of
1999 compared to the same period in 1998. The decrease was the result of: (1)
higher legal and professional fees incurred in 1998; and (2) lower deposit
insurance expense in 1999. For the first nine months of 1999, other noninterest
expense increased $758,000, or 6.2%, over the same period last year. The
increase was the result of: (1) higher legal and professional fees; and (2)
higher advertising and promotional expenditures.
POTENTIAL CHANGE IN ACCOUNTING METHOD
The Company is currently evaluating whether to change its method of accounting
for evaluating the recoverability of intangibles, specifically goodwill arising
out of the acquisition of the Association, from an undiscounted cash flow method
to a discounted cash flow method. If this change in method is adopted, the
Company would record a non-cash charge against earnings of approximately $8
million in the period which such change is made. It is anticipated that the
Board of Directors will take this matter under consideration before the end of
this year.
POTENTIAL MERGER OF THE BANK AND THE ASSOCIATION
The Company is currently evaluating whether to merge the Bank and the
Association to create a single financial institution. Some of the significant
factors which are being considered include economies of scale which might be
achieved, the ability to continue to provide a high level of service to
customers of the Bank and the Association, and the potential for future growth
given the current economic and regulatory environment. Such merger would be
subject to regulatory approval. It is anticipated that within the next six
months, the Board of Directors will formally decide whether to take such action.
In the event the Board of Directors decides to proceed with the merger, certain
restructuring and other nonrecurring costs would be charged to earnings.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1999, the Company has increased the use of
borrowings to fund its asset growth. At September 30, 1999, short-term
borrowings and long-term debt were at $86.8 million and $235.3 million,
respectively, an increase of $58.9 million, or 211.0%, and $70.2 million, or
42.5%, respectively, over December 31, 1998. The Company has utilized these
borrowings to fund the growth in investments and loans, which increased by an
aggregate of $184.8 million during the nine months ended September 30, 1999.
In May 1999, the Company announced plans to repurchase up to 10% of common stock
outstanding over a one-year period. As of September 30, 1999, the Company
repurchased 192,000 shares, or 5.4%, of the Company's outstanding common stock
at an aggregate cost of $6.1 million.
At September 30, 1999, the Company had an unrealized valuation loss of $3.8
million on available-for-sale securities. Available-for-sale securities are
reported at fair value with unrealized gains or losses, net of tax, included as
other comprehensive income in stockholders' equity. For the nine months ended
September 30, 1999, an unrealized valuation adjustment of $4.7 million was
recorded, reflecting the decline in the fair value of securities
available-for-sale. The reduction in fair values of securities
available-for-sale, was primarily attributable to the increase in interest rates
during the third quarter of 1999.
The Company and the Bank are subject to capital standards promulgated by the
Federal banking agencies and the Hawaii Division of Financial Institutions. The
Association is subject to the minimum capital standards established by the
Office of Thrift Supervision (the "OTS") for all savings associations.
Quantitative measures established by regulation to ensure capital adequacy
require the Company, the Bank, and the Association to maintain minimum amounts
and ratios (set forth in the following table at September 30, 1999 and 1998) of
Tier 1 and Total capital to risk-weighted assets, and of Tier 1 capital to
average assets.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
To Be Well-
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------------
As of September 30, 1999
Tier 1 Capital to
Risk-Weighted
Assets:
Consolidated $ 122,949 12.51 % $ 39,318 4.00 % N/A
Bank 70,553 10.46 26,978 4.00 $40,467 6.00 %
Association 51,121 14.83 13,786 4.00 20,679 6.00
Total Capital to
Risk-Weighted
Assets:
Consolidated $ 135,333 13.77 % $ 78,636 8.00 % N/A
Bank 79,026 11.72 53,956 8.00 $67,445 10.00 %
Association 53,654 15.57 27,572 8.00 34,465 10.00
Tier 1 Capital to
Average Assets:
Consolidated $ 122,949 8.45 % $ 58,193 4.00 % N/A
Bank 70,553 8.24 34,269 4.00 $42,836 5.00 %
Association 51,121 7.86 26,012 4.00 32,515 5.00
As of September 30, 1998
Tier 1 Capital to
Risk-Weighted
Assets:
Consolidated $ 120,722 13.60 % $ 35,513 4.00 % N/A
Bank 65,238 11.10 23,516 4.00 $35,274 6.00 %
Association 55,356 17.00 13,023 4.00 19,534 6.00
Total Capital to
Risk-Weighted
Assets:
Consolidated $ 131,905 14.86 % $ 71,025 8.00 % N/A
Bank 72,626 12.35 47,032 8.00 $58,796 10.00 %
Association 58,369 17.93 26,046 8.00 32,557 10.00
Tier 1 Capital to
Average Assets:
Consolidated $ 120,722 7.92 % $ 60,988 4.00 % N/A
Bank 65,238 8.70 29,992 4.00 $37,489 5.00 %
Association 55,356 8.51 26,032 4.00 32,540 5.00
</TABLE>
YEAR 2000
Background
Because computers frequently use only two digits to recognize years (instead of
four digits), many computer systems, as well as equipment using embedded
computer chips, may be unable to distinguish the year 2000. If not fixed,
software, computer systems and computer-related equipment may create erroneous
results or system failure in the year 2000 when the two-digit year becomes "00".
In 1997, the Company established a Year 2000 committee comprised of senior
management from each major operational unit. The Year 2000 committee has
prepared a comprehensive program to address this problem and to ensure that the
Company's computer systems will function properly in the twenty-first century.
The Company's Year 2000 effort was divided in phases for awareness, assessment,
renovation, validation, and implementation.
Status of Year 2000 Program
The Company has completed the awareness and assessment phase of its Year 2000
program and the renovation and validation of its critical systems. Critical
systems are defined as the hardware and software applications that are essential
to the continuance of the main business activities of the Company. The Company
expects to successfully complete its Year 2000 program in a timely and effective
manner.
<PAGE>
External Factors
Although the Company's efforts may adequately address our internal Year 2000
concerns, there can be no assurance that unforeseen difficulties will not arise.
Additionally, the Company may be impacted by the Year 2000 compliance issues of
governmental agencies, businesses and other entities who provide data to, or
receive data from the Company, customers and vendors whose operational
functionality is significant to the Company. The Company is also subject to
credit risk to the extent borrowers fail to adequately address their Year 2000
issues.
As a result, 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. While the Company continues to discuss these matters with, obtain
written certifications from and evaluate such external parties' Year 2000
compliance efforts, there is no assurance that the failure of these parties to
resolve their Year 2000 issues will not have an adverse and/or material impact
on the Company.
To address this external risk, business resumption contingency plans were
developed to ensure that the Company is prepared to manage worst-case scenarios.
Contingency plans include identifying triggering events for the plan, assessing
critical system failures on core business processes, developing business
resumption alternatives and testing the effectiveness and viability of these
plans. As of September 30, 1999, the Company's business resumption contingency
plans have been completed, validated and approved by management and the Board of
Directors.
Event planning is a proactive and detailed process that covers monitoring
specific operations prior to and during the century date change, detecting
problems and resolving issues related to implementing contingency plans and
communicating with appropriate bank officials and customers. Currently, the
Company has an event management process in place to monitor, assess and report
on operations status with respect to Year 2000 issues. Such issues include
operations, liquidity and customer behavior.
Budget
The Company has expended, and will continue to expend, the resources necessary
to address the Year 2000 issue in a timely manner. Through September 30, 1999,
cumulative incremental expenditures of $200,000 have been incurred out of a
total projected $500,000. The incremental expenditures exclude the cost incurred
in 1998 of $2.5 million to convert to the FiServ Comprehensive Banking System as
well as the cost of internal human resources expended for this effort. The
incremental expenditures consist primarily of the acquisition and the
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 direct Year 2000 remediation costs are
being expensed as incurred. The remaining budget is expected to be expended over
the next two quarters, funded by operating cash flows. No assurance can be
given, however, that all aspects of the Company's operations will be Year 2000
compliant or that the Year 2000 problem will not have an adverse impact on the
Company's future earnings.
The above Year 2000 discussion contains forward-looking statements. Such
statements, including without limitation, anticipated costs and the dates by
which the Company expects to substantially complete the various phases of the
remediation plan, are based on management's best current estimates. As a result,
the Year 2000 discussion should be read considering the forward-looking
disclaimers on page 9.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company disclosed both quantitative and qualitative analyses of market risks
in its 1998 Form 10-K. No significant changes have occurred during the nine
months ended September 30, 1999.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial data schedule
(b) Reports on Form 8-K
Form 8-K, dated August 30, 1999, in which CB Bancshares, Inc. announced
a change in Registrant's Certifying Accountant
<PAGE>
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.
(Registrant)
Date November 10, 1999 By /s/ Dean K. Hirata
Dean K. Hirata
Senior Vice President and
Chief Financial Officer
(principal financial officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27 Financial data schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000316312
<NAME> CB BANCSHARES, INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 51,161
<INT-BEARING-DEPOSITS> 20,063
<FED-FUNDS-SOLD> 800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 285,591
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,108,758
<ALLOWANCE> 17,941
<TOTAL-ASSETS> 1,564,876
<DEPOSITS> 1,097,182
<SHORT-TERM> 86,840
<LIABILITIES-OTHER> 18,043
<LONG-TERM> 235,283
0
0
<COMMON> 3,552
<OTHER-SE> 123,976
<TOTAL-LIABILITIES-AND-EQUITY> 1,564,876
<INTEREST-LOAN> 67,724
<INTEREST-INVEST> 13,329
<INTEREST-OTHER> 1,181
<INTEREST-TOTAL> 82,234
<INTEREST-DEPOSIT> 27,570
<INTEREST-EXPENSE> 37,779
<INTEREST-INCOME-NET> 44,455
<LOAN-LOSSES> 3,598
<SECURITIES-GAINS> (32)
<EXPENSE-OTHER> 36,940
<INCOME-PRETAX> 10,890
<INCOME-PRE-EXTRAORDINARY> 6,655
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,655
<EPS-BASIC> 1.89
<EPS-DILUTED> 1.89
<YIELD-ACTUAL> 4.40
<LOANS-NON> 13,216
<LOANS-PAST> 3,417
<LOANS-TROUBLED> 18,481
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,771
<CHARGE-OFFS> 3,899
<RECOVERIES> 471
<ALLOWANCE-CLOSE> 17,941
<ALLOWANCE-DOMESTIC> 13,967
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,974
</TABLE>
