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 March 31, 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 April 30, 1999 was:
Class Outstanding
----------------------------- ----------------
Common Stock, $1.00 Par Value 3,552,228 shares
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
March 31, December 31, March 31,
1999 1998 1998
------------------ -------------------- ------------------
(in thousands)
Assets
<S> <C> <C> <C>
Cash and due from banks $ 50,260 $ 61,658 $ 50,130
Interest-bearing deposits in other banks 20,000 20,000 10,000
Federal funds sold 810 47,752 61,629
Investment securities:
Held-to-maturity - - 83,712
Available-for-sale 221,840 141,764 109,631
Restricted investment securities 30,076 29,481 27,871
Loans held for sale 83,585 99,602 53,816
Loans:
Loans 958,617 979,695 1,026,427
Less allowance for credit losses 18,350 17,771 17,239
------------------ -------------------- ------------------
Net loans 940,267 961,924 1,009,188
------------------ -------------------- ------------------
Premises and equipment 20,501 20,916 19,918
Other assets 46,467 45,341 40,394
================== ==================== ==================
Total assets $ 1,413,806 $ 1,428,438 $ 1,466,289
================== ==================== ==================
Liabilities and stockholders' equity
Deposits:
Noninterest-bearing $ 108,218 $ 119,649 $ 103,369
Interest-bearing 946,839 964,961 920,530
------------------ -------------------- ------------------
Total deposits 1,055,057 1,084,610 1,023,899
------------------ -------------------- ------------------
Short-term borrowings 68,101 56,926 77,019
Other liabilities 21,008 18,443 17,383
Long-term debt 135,664 136,087 221,196
------------------ -------------------- ------------------
Total liabilities 1,279,830 1,296,066 1,339,497
------------------ -------------------- ------------------
Stockholders' equity:
Preferred stock - - -
Common stock 3,552 3,552 3,551
Additional paid-in capital 65,108 65,108 65,080
Retained earnings 64,547 62,784 57,007
Accumulated other comprehensive income 769 928 1,154
------------------ -------------------- ------------------
Total stockholders' equity 133,976 132,372 126,792
------------------ -------------------- ------------------
Total liabilities and stockholders' equity $ 1,413,806 $ 1,428,438 $ 1,466,289
================== ==================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
Three months ended March 31,
------------------------------
1999 1998
---- ----
(in thousands, except number of shares and per
share data)
Interest income:
<S> <C> <C>
Interest and fees on loans $ 22,681 $ 23,352
Interest and dividends on investment securities:
Taxable interest income 2,387 3,655
Nontaxable interest income 184 88
Dividends 595 523
Other interest income 578 869
--------------------- ---------------------
Total interest income 26,425 28,487
--------------------- ---------------------
Interest expense:
Deposits 9,294 9,718
Short-term borrowings 746 2,174
Long-term debt 1,979 2,044
--------------------- ---------------------
Total interest expense 12,019 13,936
--------------------- ---------------------
Net interest income 14,406 14,551
Provision for credit losses 1,175 1,300
--------------------- ---------------------
Net interest income after provision for credit losses 13,231 13,251
--------------------- ---------------------
Noninterest income:
Service charges on deposit accounts 396 457
Other service charges and fees 829 638
Net realized gains on sales of securities 49 -
Net gains on sales of loans 1,088 121
Other 295 479
--------------------- ---------------------
Total noninterest income 2,656 1,695
--------------------- ---------------------
Noninterest expense:
Salaries and employee benefits 5,344 4,601
Occupancy expense 2,048 2,168
Equipment expense 815 866
Other 4,409 4,033
--------------------- ---------------------
Total noninterest expense 12,616 11,668
--------------------- ---------------------
Income before income taxes 3,271 3,278
Income tax expense 1,295 1,326
===================== =====================
Net income $ 1,976 $ 1,952
===================== =====================
Per share data:
Basic earnings $0.56 $0.55
===================== =====================
Diluted earnings $0.56 $0.55
===================== =====================
Cash dividends $0.06 $0.05
===================== =====================
Average shares outstanding 3,552,228 3,551,228
===================== =====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
Three months ended March 31,
----------------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Cash and due from banks at beginning of period $ 61,658 $ 45,150
-------------------- --------------------
Cash flows from operating activities:
Net income 1,976 1,952
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for credit losses 1,175 1,300
Gain on disposition of premises and equipment - (109)
Depreciation and amortization 678 542
Deferred income taxes 1,135 28
Increase in interest receivable (549) (101)
Increase in interest payable 441 569
Increase in restricted investment securities (595) (523)
Net increase in loans held for sale (8,140) (27,915)
Increase in other assets (1,347) (273)
Decrease in income taxes payable (877) (438)
Increase (decrease) in other liabilities 1,995 (3,005)
Other 921 375
-------------------- --------------------
Net cash provided by (used in) operating activities (3,187) (27,598)
-------------------- --------------------
Cash flows from investing activities:
Net decrease in interest-bearing deposits in other banks - 20,000
Net decrease (increase) in federal funds sold 46,942 (56,924)
Purchase of held-to-maturity securities - (61,400)
Proceeds from maturities of held-to-maturity securities - 66,477
Purchase of available-for-sale securities (58,488) (11,460)
Proceeds from sales of available-for-sale securities 6,216 17,044
Proceeds from maturities of available-for-sale securities 14,294 5,060
Net (decrease) increase in loans (313) 21,968
Proceeds from sales of premises and equipment - 581
Capital expenditures (263) (1,620)
Proceeds from sales of foreclosed assets 2,443 817
-------------------- --------------------
Net cash provided by (used in) investing activities 10,831 543
-------------------- --------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (29,553) 15,171
Net increase (decrease) in short-term borrowings 11,175 (60,193)
Proceeds from long-term debt 10,000 77,057
Principal payments on long-term debt (10,451) -
Cash dividends paid (213) -
-------------------- --------------------
Net cash provided by (used in) financing activities (19,042) 32,035
-------------------- --------------------
Cash and due from banks at end of period $ 50,260 $ 50,130
==================== ====================
Supplemental schedule of non-cash investing activities:
Securitizations of mortgage loans into mortgage-backed
securities $ 18,444 $ -
==================== ====================
Securitizations of loans held for sale into mortgage-backed
securities $ 23,981 $ 392
==================== ====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
Accu-
mulated
Other
Additional Compre-
Common Paid-In Retained hensive
Stock Capital Earnings Income Total
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 3,552 $ 65,108 $ 62,784 $ 928 $132,372
Comprehensive income:
Net income - - 1,976 - 1,976
Unrealized valuation adjustment - - - (159) (159)
-------- -------- -------- -------- --------
Comprehensive income - - 1,976 (159) 1,817
-------- -------- -------- -------- --------
Cash dividends ($0.06 per share) - - (213) - (213)
-------- -------- -------- -------- --------
Balance at March 31, 1999 $ 3,552 $ 65,108 $ 64,547 $ 769 $133,976
======== ======== ======== ======== ========
Balance at December 31, 1997 $ 3,551 $ 65,080 $ 55,233 $ 1,201 $125,065
Comprehensive income:
Net income - - 1,952 - 1,952
Unrealized valuation adjustment - - - (47) (47)
-------- -------- -------- -------- --------
Comprehensive income - - 1,952 (47) 1,905
-------- -------- -------- -------- --------
Cash dividends ($0.05 per share) - - (178) - (178)
-------- -------- -------- -------- --------
Balance at March 31, 1998 $ 3,551 $ 65,080 $ 57,007 $ 1,154 $126,792
======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<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") 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.
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 - Segment Information
CB Bancshares, Inc. and Subsidiaries (the "Company") adopted Statement of
Financial Accounting Standards 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>
- -----------------------------------------------------------------------------------------------------------------------------
Parent Company
Bank Association and Other Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
Three months ended March 31, 1999
<S> <C> <C> <C> <C> <C>
Interest income $ 14,706 $ 11,719 $ 2 $ (2) $ 26,425
Interest expense 5,827 6,194 - (2) 12,019
Income before income taxes 2,184 1,493 1,814 (2,220) 3,271
Income tax expense (benefit) 838 619 (162) - 1,295
Total assets 780,649 633,168 135,025 (135,036) 1,413,806
- -----------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1998
Interest income $ 14,884 $ 13,598 $ 5 $ - $ 28,487
Interest expense 6,594 7,342 - - 13,936
Income before income taxes 1,897 1,785 1,892 (2,296) 3,278
Income tax expense (benefit) 782 727 (183) - 1,326
Total assets 805,492 660,455 128,272 (127,930) 1,466,289
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE C - Earnings Per Share Calculation
<TABLE>
Three months ended March 31,
----------------------------
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:
<S> <C> <C> <C> <C> <C> <C>
Net income $1,976 3,552,228 $0.56 $1,952 3,551,228 $0.55
Effect of dilutive
securities -
Stock incentive
plan options - - - - 14,491 -
--------- --------- ------ --------- --------- ------
Diluted:
Net income and
assumed conversions $1,976 3,552,228 $0.56 $1,952 3,565,719 $0.55
========= ========= ====== ========= ========= ======
</TABLE>
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 is based, the Company
disclaims any obligation to issue any update or revision to any forward-looking
statement contained herein.
NET INCOME
Consolidated net income for the quarter ended March 31, 1999, totaled $1.98
million, an increase of $24,000 or 1.2% over the $1.95 million for the same
quarter last year. Basic and diluted earnings per share for the first quarter of
1999 were $0.56 per share as compared to $0.55 per share for the same quarter in
1998.
The Company's annualized return on average total assets for the quarter ended
March 31, 1999 was 0.57%, a slight increase over 0.54% for the same quarter last
year. The Company's annualized return on average stockholders' equity decreased
5.3% to 5.93% for the quarter ended March 31, 1999, as compared to 6.26% for the
same quarter last year.
<PAGE>
NET INTEREST INCOME
Net interest income is the largest single component of the Company's earnings
and represents the difference between interest income received on loans and
other earning assets and interest expense paid on deposits and borrowings. Net
interest income, on a taxable equivalent basis, was $14.5 million for the first
quarter of 1999, a decrease of $108,000, or 0.7%, from the same period in 1998.
The decrease in net interest income was primarily due to a decrease in average
earning assets of $54.0 million, or 3.9%, offset by a $48.7 million, or 4.1%,
decrease in average interest-bearing deposits and liabilities.
For the first quarter of 1999, the Company's net interest margin was 4.46%, an
increase of 14 basis points (1% equals 100 basis points) over the same period in
1998. The increase in the net interest margin was primarily attributable to a 48
basis point decrease in the cost of funds, partially offset by a 28 basis point
decrease in the yield on average earning assets for the first three 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 March 31, 1998 and March
31, 1999. Specifically, the prime interest rate dropped 75 basis points from
8.50% at March 31, 1998 to 7.75% at March 31, 1999. Additionally, due to the
persisting economic stagnation in Hawaii and the continued intense competition
in the banking industry, there was minimal new loan growth in the past year. As
most of the loans in the portfolio were originated during higher interest rate
environments, the unfavorable change in the yield on the Company's loan
portfolio was not as significant as the decrease in the prime rate and resulting
decrease in the cost of funds. In an effort to compensate for the sluggish loan
volume and to maintain or increase the net interest margin, the Company reduced
its cost of funds by a greater amount than the decrease experienced in the yield
of its interest-bearing assets.
Federal funds sold decreased $60.8 million, or 98.7%, between March 31, 1998 and
March 31, 1999. The lack of growth in loan volume, due to the current
competitive lending market, resulted in a lower requirement of liquid sources of
cash to fund new loans. Thus, the Company shifted funds from more liquid,
lower-yielding federal funds sold to higher-yielding investment securities at
March 31, 1999.
A comparison of net interest income for the three months ended March 31, 1999
and 1998 is set forth below on a taxable equivalent basis:
Three months ended March 31,
----------------------------
1999 1998
---------------- ----------------
(in thousands)
Interest income $ 26,529 $ 28,555
Interest expense 12,018 13,936
-------- --------
Net interest income and margin on
earning assets 14,511 4.46% 14,619 4.32%
===== =====
Taxable equivalent adjustment 105 68
-------- --------
Net interest income $ 14,406 $ 14,551
======== ========
<PAGE>
NONPERFORMING ASSETS
A summary of nonperforming assets at March 31, 1999, December 31, 1998 and March
31, 1998 follows:
March 31, December 31, March 31,
1999 1998 1998
-------- -------- --------
(dollars in thousands)
Nonperforming loans:
Nonaccrual:
Commercial $ 1,185 $ 1,291 $ 1,095
Real estate:
Commercial 933 933 3,491
Residential 11,966 10,232 21,357
-------- -------- --------
Total real estate loans 12,899 11,165 24,848
Consumer 181 77 178
-------- -------- --------
Total nonaccrual loans 14,265 12,533 26,121
-------- -------- --------
Restructured:
Real estate:
Commercial - - 1,284
Residential 570 571 3,494
-------- -------- --------
Total restructured loans 570 571 4,778
-------- -------- --------
Total nonperforming loans 14,835 13,104 30,899
Other real estate owned 8,101 8,583 3,158
-------- -------- --------
Total nonperforming assets $ 22,936 $ 21,687 $ 34,057
======== ======== ========
Past due loans:
Commercial $ 2,020 $ 2,433 $ 446
Residential real estate 2,190 3,602 1,813
Consumer 820 544 646
-------- -------- --------
Total past due loans (1) $ 5,030 $ 6,579 $ 2,905
======== ======== ========
Restructured:
Real estate:
Commercial $ 1,284 $ 1,284 $ -
Residential 11,167 11,108 308
-------- -------- --------
Total restructured loans (2) $ 12,451 $ 12,392 $ 308
======== ======== ========
Nonperforming assets to total loans
and other real estate owned (end of period):
Excluding 90 days past due accruing loans 2.37% 2.19% 3.31%
Including 90 days past due accruing loans 2.89% 2.86% 3.59%
Nonperforming assets to total assets
(end of period):
Excluding 90 days past due accruing loans 1.62% 1.52% 2.32%
Including 90 days past due accruing loans 1.98% 1.98% 2.52%
(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.
<PAGE>
Nonperforming loans at March 31, 1999 totaled $14.8 million, a decrease of $16.1
million, or 52.0%, from March 31, 1998. The decrease was primarily due to the:
(1) sale of $12.9 million in delinquent loans, including $6.8 million of
nonaccrual loans; (2) paydown of $2.4 million of certain commercial nonaccrual
loans; and (3) transfer of approximately $3 million of residential real estate
restructured loans to other real estate owned.
Other real estate owned increased $4.9 million, or 156.5%, to $8.1 million at
March 31, 1999, from March 31, 1998. The increase in other real estate owned
reflects the continued weakness in the Hawaii economy, and the related decline
in real estate values and resulting foreclosures. Additionally, the Company has
been more aggressive in its delinquent loan collection efforts, resulting in a
higher level of foreclosures and related other real estate owned balances.
Restructured loans, still accruing interest, increased $12.1 million from March
31, 1998 to $12.5 million at March 31, 1999. The increase was primarily due to
the restructuring of approximately $11 million in mortgage loans to a group of
investors in a condominium project located on the island of Maui. Since
restructuring, such loans have remained current and continue to accrue interest.
At March 31, 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.
<PAGE>
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 location of loans and in overall loan risk profile and
quality, general economic factors and the fair value of collateral.
The following table sets forth the activity in the allowance for credit losses
for the periods indicated:
Three Months Ended March 31,
-----------------------------
1999 1998
----------- -----------
(dollars in thousands)
Loans outstanding (end of period) $ 958,617 $ 1,026,427
=========== ===========
Average loans outstanding $ 1,075,809 $ 1,079,098
=========== ===========
Balance at beginning of period $ 17,771 $ 16,365
----------- -----------
Loans charged off:
Commercial - 3
Residential real estate 604 524
Consumer 127 155
----------- -----------
Total loans charged off 731 682
----------- -----------
Recoveries on loans charged off:
Commerial 1 45
Real estate:
Commercial 1 -
Residential 102 6
Consumer 31 205
----------- -----------
Total recoveries on loans
previously charged off 135 256
----------- -----------
Net charge-offs (596) (426)
Provision charged to expense 1,175 1,300
----------- -----------
Balance at end of period $ 18,350 $ 17,239
=========== ===========
Net loans charged off to average loans 0.22% 0.16%
Net loans charged off to allowance
for credit losses 13.17% 10.02%
Allowance for credit losses to total
loans (end of period) 1.91% 1.68%
Allowance for credit losses to
nonperforming loans (end of period):
Excluding 90 days past due
accruing loans 1.24x 0.56x
Including 90 days past due
accruing loans 0.92x 0.51x
(1) Annualized
<PAGE>
The provision for credit losses was $1.2 million for the first three months of
1999, a decrease of $125,000, or 9.6%, from the same period in 1998. The
Allowance at March 31, 1999 was $18.4 million and represented 1.91% of total
loans. The corresponding ratios at December 31, 1998 and March 31, 1998 were
1.81% and 1.68%, respectively.
Net charge-offs were $596,000 for the first three months of 1999, an increase of
$170,000, or 39.9%, compared to the same period in 1998. The increase was
primarily due to a decrease in consumer loan recoveries.
The Allowance increased to 1.24 times nonperforming loans (excluding 90 days
past due accruing loans) at March 31, 1999 from .56 times at March 31, 1998 as a
result of a 52.0% decrease in nonperforming loans.
In management's judgment, the Allowance was adequate to absorb potential losses
currently inherent in the loan portfolio at March 31, 1999. However, changes in
prevailing economic conditions in the Company's markets could result in changes
in the level of nonperforming assets and charge-offs in the future and,
accordingly, changes in the Allowance.
NONINTEREST INCOME
Noninterest income totaled $2.7 million for the three months ended March 31,
1999, a $961,000, or 56.7%; increase over the $1.7 million for the comparable
period in 1998.
Other service charges and fees increased $191,000, or 29.9%, for the first three
months of 1999, over the same period in 1998. This increase was primarily due to
$236,000 of gains recognized on the expiration of call options related to
mortgage-backed securities.
Net gains on sales of loans increased $967,000 for the first three months of
1999 over the same period in 1998. The increase was primarily due to the
recognition of mortgage service release premiums in connection with the sale of
approximately $42 million of mortgage loans during the first quarter of 1999.
NONINTEREST EXPENSE
Noninterest expense totaled $12.6 million for the three months ended March 31,
1999, an increase of $948,000, or 8.1%, over the same period in 1998.
Total salaries and employee benefits expense increased $743,000, or 16.1%, for
the first three months of 1999, compared to the same period in 1998. The
increase was primarily due to a $556,000 increase in commissions paid to loan
officers and brokers which resulted due to increased loan originations in the
Company's mortgage banking business. Origination activity has increased due to
the lower interest rate environment and declining real estate values. Such loans
were securitized and sold, and thus, did not increase the Company's loan
portfolio.
Occupancy expense decreased $120,000, or 5.5%, in the first quarter of 1999
compared to the same period in 1998. This decrease was the result of lower
depreciation expense.
Equipment expense decreased $51,000, or 5.9%, for the first three months of
1999, as compared to the first quarter of 1998. This decrease was primarily due
to reduced repairs and maintenance costs.
Other noninterest expense increased $376,000 for the first quarter of 1999, an
increase of 9.3% over the same period in 1998. This increase was the result of
higher legal and professional fees in connection with foreclosures and increased
provisions in the valuation of certain other real estate owned property.
CAPITAL RESOURCES
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 ("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 March 31, 1999 and 1998) of Tier 1 and
Total capital to risk-weighted assets, and of Tier 1 capital to average assets.
<PAGE>
<TABLE>
To Be Well-
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
(dollars in thousands)
As of March 31, 1999
- --------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 Capital to
Risk-Weighted Assets:
CB Bancshares, Inc. $ 124,384 13.40% $ 37,133 4.00%
City Bank 68,223 11.01 24,775 4.00 $ 37,162 6.00%
International Savings & Loan 55,768 18.78 11,875 4.00 17,813 6.00
Total Capital to
Risk-Weighted Assets:
CB Bancshares, Inc. $ 136,102 14.66% $ 74,266 8.00%
City Bank 76,013 12.27 49,549 8.00 $ 61,937 10.00%
International Savings & Loan 58,947 19.85 23,751 8.00 29,689 10.00
Tier 1 Capital to
Average Assets:
CB Bancshares, Inc. $ 124,384 8.81% $ 56,492 4.00%
City Bank 68,223 8.66 31,211 4.00 $ 39,013 5.00%
International Savings & Loan 55,768 8.91 25,025 4.00 31,281 5.00
As of March 31, 1998
- --------------------
Tier 1 Capital to
Risk-Weighted Assets:
CB Bancshares, Inc. $ 116,269 12.89% $ 36,070 4.00%
City Bank 62,688 10.50 23,875 4.00 $ 35,812 6.00%
International Savings & Loan 52,509 15.32 13,709 4.00 20,564 6.00
Total Capital to
Risk-Weighted Assets:
CB Bancshares, Inc. $ 127,615 14.15% $ 72,140 8.00%
City Bank 70,177 11.76 47,750 8.00 $ 59,687 10.00%
International Savings & Loan 55,262 16.12 27,419 8.00 34,274 10.00
Tier 1 Capital to
Average Assets:
CB Bancshares, Inc. $ 116,269 7.39% $ 62,955 4.00%
City Bank 62,688 7.93 31,623 4.00 $ 39,529 5.00%
International Savings & Loan 52,509 8.04 25,715 4.00 32,643 5.00
</TABLE>
<PAGE>
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
managers 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 already completed the awareness and assessment phase of its Year
2000 program and has already undertaken renovation and validation of its
"critical" systems. "Critical" systems is defined as the hardware and software
applications that are essential to the continuance of the main business
activities of the Company. Initial validation testing of critical systems
throughout the Company was substantially completed by the end of 1998.
The Company expects to successfully complete its Year 2000 program in a timely
and effective manner.
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, contingency plans are also being 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. The
development and testing of these contingency plans are scheduled to be completed
by June 1999.
<PAGE>
Budget
The Company has expended, and will continue to expend, the resources necessary
to address the Year 2000 issue in a timely manner. Through March 31, 1999,
cumulative incremental expenditures of less than $100,000 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
throughout 1999, 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 disclaimers on page 7
relating to such forward-looking statements.
RECENT REGULATORY DEVELOPMENTS
In 1996, the Company entered into a Memorandum of Understanding (the "MOU") with
the Federal Reserve Bank of San Francisco (the "FRB"). Under the terms of the
MOU, the Company was required to receive the approval of the FRB prior to the
payment of dividends, redemption of stock and incurrence of debt. This MOU was
terminated by the FRB in April 1999.
In September 1997, the Bank also entered into an MOU with the Federal Deposit
Insurance Corporation (the "FDIC"). This MOU was terminated by the FDIC in March
1999, based on the adoption of a resolution by the Bank's Board of Directors.
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 three
months ended March 31, 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
No reports on Form 8-K were filed during the quarter ended
March 31, 1999.
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 May 13, 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 50,260
<INT-BEARING-DEPOSITS> 20,000
<FED-FUNDS-SOLD> 810
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 251,916
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 958,617
<ALLOWANCE> 18,350
<TOTAL-ASSETS> 1,413,806
<DEPOSITS> 1,055,057
<SHORT-TERM> 68,101
<LIABILITIES-OTHER> 21,008
<LONG-TERM> 135,664
0
0
<COMMON> 3,552
<OTHER-SE> 130,424
<TOTAL-LIABILITIES-AND-EQUITY> 1,413,806
<INTEREST-LOAN> 22,681
<INTEREST-INVEST> 3,166
<INTEREST-OTHER> 578
<INTEREST-TOTAL> 26,425
<INTEREST-DEPOSIT> 9,294
<INTEREST-EXPENSE> 12,019
<INTEREST-INCOME-NET> 14,406
<LOAN-LOSSES> 1,175
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 12,616
<INCOME-PRETAX> 3,271
<INCOME-PRE-EXTRAORDINARY> 1,976
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,976
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<YIELD-ACTUAL> 8.16
<LOANS-NON> 14,265
<LOANS-PAST> 5,030
<LOANS-TROUBLED> 13,021
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 17,771
<CHARGE-OFFS> 731
<RECOVERIES> 135
<ALLOWANCE-CLOSE> 18,350
<ALLOWANCE-DOMESTIC> 13,871
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,479
</TABLE>
