<PAGE> 1
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, 2000
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) 535-2500
(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, 2000 was:
Class Outstanding
----------- -----------
Common Stock, $1.00 Par Value 3,198,733 shares
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(in thousands) 2000 1999 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 35,104 $ 66,918 $ 51,161
Interest-bearing deposits in other banks 279 76 20,063
Federal funds sold 475 5,700 800
Investment and mortgage-backed securities:
Available-for-sale 298,674 316,498 285,591
FHLB Stock 31,915 31,727 31,167
Loans held for sale 5,863 7,805 9,805
Loans:
Loans 1,266,615 1,144,926 1,108,758
Less allowance for credit losses 17,707 17,942 17,941
-------------------------------------------------------------------------------------------------------
Net loans 1,248,908 1,126,984 1,090,817
-------------------------------------------------------------------------------------------------------
Premises and equipment 18,579 18,008 19,661
Other real estate owned 4,731 6,385 6,035
Accrued interest receivable and other assets 43,679 39,448 49,776
-------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,688,207 $ 1,619,549 $ 1,564,876
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 113,131 $ 120,544 $ 108,491
Interest-bearing 1,056,140 985,601 988,691
-------------------------------------------------------------------------------------------------------
Total deposits 1,169,271 1,106,145 1,097,182
-------------------------------------------------------------------------------------------------------
Short-term borrowings 193,700 154,884 86,840
Accrued expenses and other liabilities 18,393 18,689 18,043
Long-term debt 181,688 225,140 235,283
Minority interest in consolidated subsidiary 7,000 -- --
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,570,052 1,504,858 1,437,348
-------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock -- -- --
Common stock 3,199 3,255 3,360
Additional paid-in capital 54,852 56,219 59,237
Retained earnings 69,579 62,159 68,740
Accumulated other comprehensive loss,
net of tax (9,475) (6,942) (3,809)
-------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 118,155 114,691 127,528
-------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,688,207 $ 1,619,549 $ 1,564,876
=======================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(in thousands, except per share data) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 28,707 $ 22,986 $ 80,144 $ 66,789
Interest and dividends on investment and
mortgage-backed securities:
Taxable interest income 4,693 4,591 15,018 10,927
Nontaxable interest income 395 283 1,168 714
Dividends 533 540 1,588 1,688
Other interest income 56 296 418 1,181
------------------------------------------------------------------------------------------------------
Total interest income 34,384 28,696 98,336 81,299
------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 12,384 9,344 33,981 27,570
FHLB advances and other short-term
borrowings 3,411 903 8,101 1,795
Long-term debt 3,058 3,505 9,872 8,414
------------------------------------------------------------------------------------------------------
Total interest expense 18,853 13,752 51,954 37,779
------------------------------------------------------------------------------------------------------
Net interest income 15,531 14,944 46,382 43,520
Provision for credit losses 1,525 1,333 5,306 3,598
------------------------------------------------------------------------------------------------------
Net interest income after provision for
credit losses 14,006 13,624 41,076 39,922
------------------------------------------------------------------------------------------------------
NONINTEREST INCOME:
Service charges on deposit accounts 720 533 2,060 1,459
Other service charges and fees 1,100 1,034 3,276 2,950
Net realized gains (losses) on sales
of securities 1 72 (421) (32)
Net gains on sales of loans 124 359 388 2,413
Other 833 316 2,041 1,118
------------------------------------------------------------------------------------------------------
Total noninterest income 2,778 2,314 7,344 7,908
------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 5,811 5,116 16,009 15,583
Net occupancy expense 1,653 1,951 5,371 6,018
Equipment expense 807 769 2,207 2,409
Other 3,976 4,026 11,954 12,930
------------------------------------------------------------------------------------------------------
Total noninterest expense 12,247 11,862 35,541 36,940
------------------------------------------------------------------------------------------------------
Income before income taxes 4,537 4,063 12,879 10,890
Income tax expense 1,548 1,583 4,686 4,235
------------------------------------------------------------------------------------------------------
NET INCOME $ 2,989 $ 2,480 $ 8,193 $ 6,655
======================================================================================================
PER SHARE DATA:
BASIC $ 0.93 $ 0.72 $ 2.54 $ 1.89
DILUTED $ 0.93 $ 0.72 $ 2.54 $ 1.89
======================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
(in thousands) 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,193 $ 6,655
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 5,306 3,598
Net loss on sale of investment and
mortgage-backed securities 421 32
Net gain on sale of foreclosed assets (257) --
Loss on sale of fixed assets 87 --
Depreciation and amortization 2,004 1,827
Deferred income taxes 2,112 791
Increase in accrued interest receivable (1,560) (3,020)
Decrease in accrued interest payable (323) (83)
Loans originated for sale (39,574) (126,908)
Sale of loans held for sale 41,516 131,478
Increase in other assets (2,671) (10,636)
Increase (decrease) in income taxes payable (822) 42
Increase (decrease) in other liabilities (377) 2,198
Other 498 (740)
-----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,553 5,234
-----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in interest-bearing deposits in other banks (203) (63)
Net decrease in federal funds sold 5,225 46,952
Purchase of available-for-sale securities (5,643) (187,281)
Proceeds from sales of available-for-sale securities 7,656 35,995
Proceeds from maturities of available-for-sale securities 11,805 58,752
Net increase in FHLB Stock (188) (1,686)
Net increase in loans (132,268) (111,028)
Proceeds from sales of premises and equipment 244 --
Capital expenditures (2,906) (572)
Proceeds from sales of foreclosed assets 6,616 8,308
-----------------------------------------------------------------------------------------------------
Net cash used in investing activities (109,662) (150,623)
-----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in deposits 63,126 12,572
Net increase in short-term borrowings 38,816 58,914
Proceeds from long-term debt 10,000 164,570
Principal payments on long-term debt (53,452) (94,402)
Net increase in minority interest in consolidated subsidiary 7,000 --
Cash dividends paid (772) (699)
Stock repurchases (1,423) (6,063)
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 63,295 134,892
-----------------------------------------------------------------------------------------------------
Decrease in cash and due from banks (31,814) (10,497)
Cash and due from banks at beginning of period 66,918 61,658
-----------------------------------------------------------------------------------------------------
Cash and due from banks at end of period $ 35,104 $ 51,161
=====================================================================================================
Supplemental schedule of non-cash investing activities:
Securitization of loans into mortgage-backed securities $ -- $ 58,965
Transfer of loans into other real estate owned 5,038 4,800
Transfer of loans classified as held-for-sale to
held-for-investment -- 48,626
=====================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Accu-
mulated
Other
Compre-
Additional hensive
Common Paid-In Retained Income
(in thousands, except per share data) Stock Capital Earnings (Loss) Total
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 $ 3,255 $ 56,219 $ 62,159 $ (6,942) $ 114,691
COMPREHENSIVE INCOME (LOSS):
NET INCOME -- -- 8,193 -- 8,193
UNREALIZED VALUATION ADJUSTMENT -- -- -- (2,533) (2,533)
-----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME
(LOSS) -- -- 8,193 (2,533) 5,660
-----------------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS ($0.24 PER SHARE) -- -- (773) -- (773)
REPURCHASED, CANCELLED AND RETIRED
SHARES (56) (1,367) -- -- (1,423)
-----------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000 $ 3,199 $ 54,852 $ 69,579 $ (9,475) $ 118,155
=======================================================================================================================
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)
-----------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) -- -- 6,655 (4,737) 1,918
-----------------------------------------------------------------------------------------------------------------------
Cash dividends ($0.20 per share) -- -- (699) -- (699)
Repurchased, cancelled and retired
shares (192) (5,871) -- -- (6,063)
-----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $ 3,360 $ 59,237 $ 68,740 $ (3,809) $ 127,528
=======================================================================================================================
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE> 6
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 (the "Company"):
City Bank and its wholly-owned subsidiaries (the "Bank"); Datatronix Financial
Services, Inc.; and O.R.E., Inc. Significant intercompany transactions and
balances have been eliminated in consolidation. The Bank owns 50% of Pacific
Access Mortgage, LLC, a mortgage brokerage company. The investment is accounted
for using the equity method. Effective July 1, 2000, International Savings &
Loan Association (the "Association") was merged with and into the Bank. 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, 1999.
Results of operations for interim periods are not necessarily indicative of
results for the full year.
NEW ACCOUNTING PRINCIPLES
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, An Interpretation of APB Opinion No. 25" (the
"Interpretation") was issued in March 2000. This Interpretation clarifies the
application of Accounting Principles Board Opinion ("APBO") No. 25 for certain
issues and does not address any issues related to the application of the fair
value method in Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Among other issues, the Interpretation clarifies
(a) the definition of an employee for purposes of applying APBO No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of a previously
fixed stock option award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
The Interpretation was effective July 1, 2000, but certain conclusions in the
Interpretation covered specific events that occurred after either December 15,
1998, or January 12, 2000. To the extent that the Interpretation covered events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying the
Interpretation were recognized on a prospective basis from July 1, 2000. The
Company adopted the provisions of the Interpretation on July 1, 2000. There was
no material impact to the Company's results of operations resulting from the
adoption of the Interpretation.
6
<PAGE> 7
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for 1999 have been
reclassified to conform with the 2000 presentation. Such reclassifications had
no effect on the consolidated net income as previously reported.
7
<PAGE> 8
NOTE B - LOANS
THE LOAN PORTFOLIO CONSISTED OF THE FOLLOWING AT THE DATES INDICATED:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(in thousands) 2000 1999 1999
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial $ 232,105 $ 224,660 $ 212,088
Real estate:
Construction 22,695 15,096 9,441
Commercial 195,414 196,810 191,964
Residential 713,892 621,200 654,623
Installment and consumer 107,699 91,647 44,982
-------------------------------------------------------------------------------
Gross loans 1,271,805 1,149,413 1,113,098
Less:
Unearned discount 4 4 5
Net deferred loan fees 5,186 4,483 4,335
Allowance for credit losses 17,707 17,942 17,941
-------------------------------------------------------------------------------
Loans, net $1,248,908 $1,126,984 $1,090,817
===============================================================================
</TABLE>
NOTE C - SEGMENT INFORMATION
The Company's business segments are organized around services and products
provided. 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.
8
<PAGE> 9
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
(in thousands) Retail Wholesale Treasury All Other Total
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000
NET INTEREST INCOME $ 21,293 $ 24,872 $ 212 $ 5 $ 46,382
INTERSEGMENT NET INTEREST
INCOME (EXPENSE) 1,944 (7,893) 5,949 -- --
PROVISION FOR CREDIT LOSSES 1,742 3,564 -- -- 5,306
OTHER OPERATING INCOME
(EXPENSE) (7,133) (5,781) (1,844) (13,439) (28,197)
ADMINISTRATIVE AND OVERHEAD
EXPENSE ALLOCATION (6,844) (3,735) (1,081) 11,660 --
INCOME TAX EXPENSE (BENEFIT) 2,744 1,423 1,181 (662) 4,686
NET INCOME (LOSS) 4,774 2,476 2,055 (1,112) 8,193
TOTAL ASSETS 833,572 441,535 368,515 44,585 1,688,207
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Nine months ended September 30, 1999
Net interest income $ 19,965 $ 19,374 $ 4,162 $ 19 $ 43,520
Intersegment net interest
income (expense) 3,596 (5,374) 1,778 -- --
Provision for credit losses 982 2,593 -- 23 3,598
Other operating income
(expense) (6,898) (6,638) (1,945) (13,551) (29,032)
Administrative and overhead
expense allocation (6,483) (4,184) (1,192) 11,859 --
Income tax expense (benefit) 3,621 230 1,104 (720) 4,235
Net income (loss) 5,577 355 1,699 (976) 6,655
Total assets 711,109 409,991 390,613 53,163 1,564,876
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE D - EARNINGS PER SHARE CALCULATION
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
QUARTER ENDED SEPTEMBER 30,
2000 1999
---------------------------------------------------------------------------------------------------------------
SHARES PER Shares Per
(in thousands, except number INCOME (DENOM- SHARE Income (Denom- Share
of shares and per share data) (NUMERATOR) INATOR) AMOUNT (Numerator) inator) Amount
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income $ 2,989 3,198,733 $ 0.93 $ 2,480 3,457,806 $ 0.72
Effect of dilutive securities -
Stock incentive plan options -- -- -- -- 381 --
Diluted:
Net income and
assumed conversions $ 2,989 3,198,733 $ 0.93 $ 2,480 3,458,187 $ 0.72
===============================================================================================================
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---------------------------------------------------------------------------------------------------------------
SHARES PER Shares Per
(in thousands, except number INCOME (DENOM- SHARE Income (Denom- Share
of shares and per share data) (NUMERATOR) INATOR) AMOUNT (Numerator) inator) Amount
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic:
Net income $ 8,193 3,225,126 $ 2.54 $ 6,655 3,514,449 $ 1.89
Effect of dilutive securities -
Stock incentive plan options -- -- -- -- 381 --
Diluted:
Net income and
assumed conversions $ 8,193 3,225,126 $ 2.54 $ 6,655 3,514,830 $ 1.89
===============================================================================================================
</TABLE>
At September 30, 2000 there were no securities that could potentially dilute
basic earnings per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contain 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'
bankruptcies and financial condition, inflation and results of litigation.
Accordingly, historical performance, as well as reasonably applied projections
and assumptions, may not be a reliable indicator of future earnings due to 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.
NET INCOME
Consolidated net income for the quarter ended September 30, 2000, totaled $3.0
million, an increase of $509,000, or 20.5%, over the same quarter last year.
Consolidated net income for the nine months ended September 30, 2000, totaled
$8.2 million, an increase of $1.5 million, or 23.1%, over the same period last
year. Basic and diluted earnings per share for the third quarter of 2000 were
$0.93 as compared to $0.72 for the same period in 1999, an increase of $0.21, or
29.2%. For the nine months ended September 30, 2000, basic and diluted earnings
per share were $2.54, an increase of $0.65, or 34.4% over the same period last
year. The increase in consolidated net income for the third quarter and the
first nine months of 2000, over the corresponding periods in 1999, was primarily
due to an increase in the outstanding loans, an interest recovery of $1.3
million on a certain nonperforming commercial loan, and a reduction in goodwill
amortization in the amount of $213,000 per quarter following the write-off of
goodwill
10
<PAGE> 11
recorded in the fourth quarter of 1999. These increases were offset by a
decrease in the net interest margin, an increase in the provision for credit
losses and a decrease in gains on sales of loans.
The Company's annualized return on average total assets for the nine months
ended September 30, 2000 was 0.66% as compared to 0.61% for the same period last
year. The Company's annualized return on average stockholders' equity was 9.36%
for the nine months ended September 30, 2000, as compared to 6.80% for the same
period last year.
NET INTEREST INCOME
Net interest income, on a taxable equivalent basis, was $47.0 million for the
nine months ended September 30, 2000, an increase of $3.1 million, or 7.1% over
the same period in 1999. The increase was primarily due to an increase in
outstanding loans of $157.9 million, or 14.2% and an interest recovery of
$480,000 and $800,000 on a certain nonperforming commercial loan in the first
and third quarter of 2000, respectively, partially offset by a decrease in the
net interest margin. For the nine months ended September 30, 2000, the Company's
net interest margin was 4.01%, a decrease of 30 basis points (1% equals 100
basis points) from the same period in 1999. The decrease in the net interest
margin for the first nine months of 2000 over the same period in 1999 was
primarily due to the 73 basis point increase in the cost of funds, partially
offset by a 42 basis point increase in the yield on average earning assets. The
increase in the yield on average earning assets and the rate paid on funding
sources was primarily due to the rising interest rate environment experienced
between September 30, 1999 and September 30, 2000. Specifically, the Bank's
prime interest rate increased by 125 basis points from 8.25% at September 30,
1999 to 9.50% at September 30, 2000.
For the third quarter of 2000, net interest income, on a taxable equivalent
basis, was $15.8 million, an increase of $649,000, or 4.3%. The increase in net
interest income for the third quarter of 2000 over the same period in 1999 was
primarily due to a $174.4 million, or 12.2% increase in average earning assets
and the 58 basis point increase on yields on those assets, partially offset by a
$160.8 million, or 12.7%, increase in average interest-bearing liabilities and
the 95 basis point increase in the related rate. For the quarter ended September
30, 2000, the Company's net interest margin was 3.91%, a decrease of 29 basis
points from the same period in 1999. The decrease in the net interest margin was
primarily attributable to an 87 basis point increase in the cost of funds,
partially offset by a 58 basis point increase in the yield on average earning
assets for the third quarter of 2000 compared to the same period in 1999.
11
<PAGE> 12
A comparison of net interest income for the quarter and nine months ended
September 30, 2000 and 1999 is set forth below on a taxable equivalent basis:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Interest-bearing deposits in
other banks $ 954 $ 21 8.76% $ 20,975 $ 250 4.73%
Federal funds sold and
securities purchased under
agreement to resell 2,498 35 5.57 3,379 46 5.40
Taxable investment and
mortgage-backed securities 305,063 5,226 6.82 297,202 5,131 6.85
Nontaxable investment
securities 31,422 608 7.70 26,004 435 6.64
Loans(1) 1,261,723 28,716 9.05 1,079,674 22,994 8.45
---------------------------- ----------------------------
Total earning assets 1,601,660 34,606 8.60 1,427,234 28,856 8.02
---------------------------- ----------------------------
Nonearning assets:
Cash and due from banks 33,001 41,861
Premises and equipment 18,532 13,315
Other assets 45,852 66,146
Less allowance for credit
losses (18,952) (18,347)
----------- -----------
Total assets $ 1,680,093 $ 1,530,209
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $ 367,647 $ 2,595 2.81% $ 363,435 $ 2,205 2.41%
Time deposits 677,649 9,789 5.75 612,037 7,139 4.63
Short-term borrowings 201,408 3,411 6.74 67,744 903 5.29
Long-term debt 184,862 3,058 6.58 227,537 3,505 6.11
---------------------------- ----------------------------
Total interest-bearing
deposits and liabilities 1,431,566 18,853 5.24 1,270,753 13,752 4.29
---------------------------- ----------------------------
Noninterest-bearing liabilities:
Demand deposits 113,309 117,920
Other liabilities 17,499 12,639
----------- -----------
Total liabilities 1,562,374 1,401,312
Stockholders' equity 117,719 128,897
----------- -----------
Total liabilities and
stockholders' equity $ 1,680,093 $ 1,530,209
=========== ===========
Net interest income and
margin on total earning
assets 15,753 3.91% 15,104 4.20%
====== ======
Taxable equivalent adjustment (222) (160)
----------- -----------
Net interest income $ 15,531 $ 14,944
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
2000 1999
---------------------------------------- ----------------------------------------
INTEREST Interest
AVERAGE INCOME/ YIELD/ Average Income/ Yield/
(dollars in thousands) BALANCE EXPENSE RATE Balance Expense Rate
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Interest-bearing deposits in
other banks $ 408 $ 25 8.18% $ 26,381 $ 929 4.71%
Federal funds sold and
securities purchased under
agreement to resell 8,676 393 6.05 6,468 251 5.19
Taxable investment and
mortgage-backed securities 309,018 16,606 7.18 251,407 12,615 6.71
Nontaxable investment
securities 30,963 1,797 7.75 19,100 1,098 7.69
Loans(1) 1,218,631 80,159 8.79 1,060,668 66,807 8.42
---------------------------- ----------------------------
Total earning assets 1,567,696 98,980 8.43 1,364,024 81,700 8.01
---------------------------- ----------------------------
Nonearning assets:
Cash and due from banks 36,075 43,116
Premises and equipment 18,152 13,586
Other assets 49,205 60,414
Less allowance for credit
losses (18,606) (18,237)
----------- -----------
Total assets $ 1,652,522 $ 1,462,903
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $ 367,281 $ 7,391 2.69% $ 366,691 $ 6,680 2.44%
Time deposits 659,433 26,590 5.39 593,813 20,890 4.70
Short-term borrowings 167,538 8,101 6.46 46,866 1,795 5.12
Long-term debt 209,911 9,872 6.28 191,935 8,414 5.86
---------------------------- ----------------------------
Total interest-bearing
deposits and liabilities 1,404,163 51,954 4.94 1,199,305 37,779 4.21
---------------------------- ----------------------------
Noninterest-bearing liabilities:
Demand deposits 113,467 118,079
Other liabilities 18,018 14,733
----------- -----------
Total liabilities 1,535,648 1,332,117
Stockholders' equity 116,874 130,786
----------- -----------
Total liabilities and
stockholders' equity $ 1,652,522 $ 1,462,903
=========== ===========
Net interest income and
margin on total earning
assets 47,026 4.01% 43,921 4.31%
====== ======
Taxable equivalent adjustment (644) (401)
----------- -----------
Net interest income $ 46,382 $ 43,520
=========== ===========
</TABLE>
(1) Yields and amounts earned include loan fees. Nonaccrual loans have been
included in earning assets for purposes of these computations.
12
<PAGE> 13
NONPERFORMING ASSETS
A summary of nonperforming assets at September 30, 2000, December 31, 1999 and
September 30, 1999 follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
SEPTEMBER 30, December 31, September 30,
(dollars in thousands) 2000 1999 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming assets:
Nonperforming loans:
Commercial $ 6,356 $ 1,831 $ 2,577
Real estate:
Commercial 2,446 518 760
Residential 7,974 8,992 9,397
-------------------------------------------------------------------------------------------------
Total real estate loans 10,420 9,510 10,157
Consumer 30 441 482
-------------------------------------------------------------------------------------------------
Total nonperforming loans 16,806 11,782 13,216
-------------------------------------------------------------------------------------------------
Other real estate owned 4,731 6,385 6,035
-------------------------------------------------------------------------------------------------
Total nonperforming assets $ 21,537 $ 18,167 $ 19,251
=================================================================================================
Past due loans:
Commercial $ 178 $ 96 $ 291
Real estate 740 3,481 2,487
Consumer 1,139 592 639
-------------------------------------------------------------------------------------------------
Total past due loans (1) $ 2,057 $ 4,169 $ 3,417
=================================================================================================
Restructured:
Commercial $ 4,161 $ 4,440 $ --
Real estate:
Commercial -- 1,231 6,986
Residential 11,699 11,280 11,495
-------------------------------------------------------------------------------------------------
Total restructured loans (2) $ 15,860 $ 16,951 $ 18,481
=================================================================================================
Nonperforming assets to total loans
and other real estate owned (end of period):
Excluding 90 days past due accruing loans 1.69% 1.57% 1.73%
Including 90 days past due accruing loans 1.86% 1.93% 2.03%
Nonperforming assets to total assets (end of period):
Excluding 90 days past due accruing loans 1.28% 1.12% 1.23%
Including 90 days past due accruing loans 1.40% 1.38% 1.45%
</TABLE>
(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.
13
<PAGE> 14
Nonperforming loans at September 30, 2000 totaled $16.8 million, an increase of
$3.6 million or 27.2%, over September 30, 1999. The increase in nonperforming
loans was primarily due to a commercial loan of $3.7 million. The Company's
future levels of nonperforming loans and related charge-offs are highly
dependent on the continuing recovery of Hawaii's economy.
Other real estate owned was $4.7 million at September 30, 2000 a decrease of
$1.3 million, or 21.6%, from September 30, 1999. The decrease in other real
estate owned was consistent with the decrease in nonperforming residential real
estate loans and the increase in real estate sales activity in Hawaii.
Restructured loans were $15.9 million at September 30, 2000, a decrease of $2.6
million, or 14.2%, from September 30, 1999. The decrease was primarily due to
the restructuring of a certain commercial real estate loan to a market interest
rate in the second quarter of 2000.
At September 30, 2000, 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.
14
<PAGE> 15
The following table sets forth the activity in the allowance for credit losses
for the periods indicated:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
(dollars in thousands) 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Loans outstanding (end of period) $ 1,266,615 $ 1,108,758
========================================================================================
Average loans outstanding $ 1,218,631 $ 1,060,668
========================================================================================
Balance at beginning of period $ 17,942 $ 17,771
----------------------------------------------------------------------------------------
Loans charged off:
Commercial 1,687 381
Real estate
Commercial 855 497
Residential 2,459 2,381
Consumer 1,192 640
----------------------------------------------------------------------------------------
Total loans charged off 6,193 3,899
----------------------------------------------------------------------------------------
Recoveries on loans charged off:
Commercial 87 63
Real estate:
Commercial 15 82
Residential 344 189
Consumer 206 137
----------------------------------------------------------------------------------------
Total recoveries on loans
previously charged off 652 471
----------------------------------------------------------------------------------------
Net charge-offs (5,541) (3,428)
----------------------------------------------------------------------------------------
Provision charged to expense 5,306 3,598
----------------------------------------------------------------------------------------
Balance at end of period $ 17,707 $ 17,941
========================================================================================
Net loans charged off to average loans 0.61%(1) 0.43%(1)
Net loans charged off to allowance
for credit losses 41.80%(1) 25.54%(1)
Allowance for credit losses to total
loans (end of period) 1.40% 1.62%
Allowance for credit losses to nonperforming
loans (end of period):
Excluding 90 days past due
accruing loans 1.05x 1.36x
Including 90 days past due
accruing loans 0.94x 1.08x
</TABLE>
(1) Annualized
15
<PAGE> 16
The provision for credit losses was $1.5 million for the third quarter of 2000,
an increase of $192,000, or 14.4%, over the same quarter last year. For the nine
months ended September 30, 2000, the provision for credit losses was $5.3
million, an increase of $1.7 million, or 47.5% over the same period last year.
The increase in the provision for credit losses was consistent with the increase
in the loan portfolio of 14.2% and the $2.1 million increase in the net
charge-offs from the nine months ended September 30, 1999 to the nine months
ended September 30, 2000.
The Allowance at September 30, 2000 was $17.7 million and represented 1.40% of
total loans. The corresponding ratios at December 31, 1999 and September 30,
1999 were 1.56% and 1.62%, respectively.
Net charge-offs were $5.5 million for the first nine months of 2000, an increase
of $2.1 million, or 61.6%, over the same period in 1999. The increase was
primarily due to higher charge-offs in the commercial and consumer loan
categories. The increase in the commercial loan category was primarily due to a
partial charge-off of a commercial loan of $1.1 million as a result of the
Shared National Credit review during the third quarter of 2000. Such amount was
previously provided for in the Allowance.
The Allowance decreased to 1.05 times nonperforming loans (excluding 90 days
past due accruing loans) at September 30, 2000 from 1.36 times at September 30,
1999 as a result of the increase in nonperforming loans.
In management's judgment, the Allowance was adequate to absorb potential losses
currently inherent in the loan portfolio at September 30, 2000. 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.
NONINTEREST INCOME
Noninterest income totaled $2.8 million for the third quarter of 2000, an
increase of $477,000, or 20.7%, over the third quarter of 1999. For the nine
months ended September 30, 2000, noninterest income was $7.3 million, a decrease
of $564,000, or 7.1%, from the $7.9 million for the same period in 1999.
Service charges on deposit accounts increased $187,000 and $601,000, or 35.1%
and 41.2%, for the third quarter and first nine months of 2000, respectively,
over the same periods in 1999. These increases resulted from an increase in
deposit accounts.
Other service charges and fees increased $66,000 and $326,000, or 6.4% and
11.1%, for the third quarter and first nine months of 2000, respectively, over
the same periods in 1999. These increases were primarily due to higher ATM fee
income recorded during the nine months ended September 30, 2000.
Net realized losses on sales of securities was $421,000 for the nine months
ended September 30, 2000, as compared to net realized losses of $32,000 in the
same period in 1999. The increase was primarily due to a realized loss of
$394,000 related to the sale of $5.0 million of mortgage-backed securities. The
sale was made to reposition the securities portfolio into higher-yielding
securities.
16
<PAGE> 17
Net gains on sales of loans decreased $235,000 and $2.0 million, or 65.5% and
83.9%, for the third quarter and first nine months of 2000, respectively, from
the same periods in 1999. The decrease in net gains on sales of loans resulted
from the decrease in loan sale activity as a result of the rising interest rate
environment.
Other noninterest income increased $530,000 and $923,000, or 174.9% and 82.6%,
for the third quarter and first nine months of 2000, respectively, over the same
periods in 1999. The increase for the nine months ended September 30, 2000 over
the same period in 1999 was primarily due to a gain of $408,000 on the sale of
certain real estate owned properties in the first nine months of 2000 and
$499,000 of income earned on bank owned life insurance on certain officers in
the first nine months of 2000, offset by option fees of $236,000 recorded in the
first quarter of 1999.
NONINTEREST EXPENSE
Noninterest expense totaled $12.2 million for the third quarter of 2000, an
increase of $385,000, or 3.2%, from the same period in 1999. For the nine months
ended September 30, 2000, noninterest expense was $35.5 million, a decrease of
$1.4 million, or 3.8%, as compared to the same period in 1999. The decrease in
noninterest expense in most categories in the first nine months of 2000 reflects
management's efforts to streamline as well as increase the productivity and
efficiency of the Company's operations. As a result of the decrease in
noninterest expense, the efficiency ratio (exclusive of the amortization of
goodwill and other intangibles) improved from 70.3% for the nine months ended
September 30, 1999 to 65.3% for the nine months ended September 30, 2000.
Salaries and employee benefits increased $695,000 and $426,000, or 13.6% and
2.7%, for the third quarter and the first nine months ended September 30, 2000,
respectively from the same periods in 1999. The increases were primarily due to
certain nonrecurring items: 1) additional benefits of $130,000 related to the
Company's Employee Stock Ownership Plan; 2) lower deferred costs related to loan
origination activities of $160,000; 3) additional bonus and incentive expenses
of $70,000; and 4) additional accrual of employee benefit expenses as a result
of the Merger of $60,000.
Net occupancy expense decreased $298,000 and $647,000, or 15.3% and 10.8%, for
the third quarter ended and the first nine months ended September 30, 2000,
respectively, from the same period in 1999. These decreases were primarily due
to a reduction in the net expenses related to rental property and decreases in
lease rents for various branch locations.
Equipment expense increased $38,000 and decreased $202,000, or 4.9% and 8.4%,
for the third quarter and the first nine months of 2000, respectively, from the
same period in 1999. The decrease for the nine months ended September 30, 2000
compared to the same period in 1999 was primarily due to a $300,000 refund of
certain software lease payments received in the first quarter of 2000.
Other noninterest expense decreased $50,000 and $976,000, or 1.2% and 7.5%, for
the third quarter and first nine months of 2000, respectively, from the same
periods in 1999. These decreases were primarily due to a reduction in goodwill
amortization resulting from the write-off of goodwill recorded in the fourth
quarter of 1999.
17
<PAGE> 18
INCOME TAXES
The Company's effective income tax rates (exclusive of the tax equivalent
adjustment) for the first nine months of 2000 was 36.4% as compared to 38.9% for
the same period in 1999. The decline in the effective tax rate was primarily due
to: 1) the elimination of goodwill amortization in 2000 due to the write-off in
December 1999 and 2) the change in tax status of one of the Bank's subsidiaries.
Citibank Properties, Inc. ("CB Properties"), a wholly-owned subsidiary of the
Bank, has elected to be taxed as a real estate investment trust ("REIT") which,
because dividend distributions made by a REIT are generally tax deductible, will
allow CB Properties to reduce its taxable income. See further discussion
regarding the REIT under the "LIQUIDITY AND CAPITAL RESOURCES" section below.
MERGER OF THE BANK AND THE ASSOCIATION
In December 1999, the Boards of Directors of the Company, the Bank and the
Association approved the Agreement and Plan of Merger by and between the Bank
and the Association (the "Merger"). The Association and the Bank merged on July
1, 2000, with the Bank being the surviving corporation. The Bank, by operation
of law, now possesses all of the rights, privileges, immunities and franchises
of the Association and is responsible and liable for all liabilities and
obligations of the Association, which ceased to exist as a separate legal
entity. In connection with the Merger, all Association branches became Bank
branches. Two Association branches, which were already housed in the same
location with Bank branches, were merged into the respective Bank branch. With
the merger, all Association loan and deposit accounts became Bank accounts. The
loan and deposit accounts of these two branches were transferred to the
respective Bank branches.
LIQUIDITY AND CAPITAL RESOURCES
On July 18, 2000, CB Properties, issued 120 shares of Series A Preferred Stock,
10,000 preferred shares of Series B Preferred Stock, and 55,000 shares of Series
C Preferred Stock at $1,000 per share in exchange for approximately $150 million
in participation interests in mortgage loans and mortgage-related securities
less the assumption of $85 million in advances made from the Federal Home Loan
Bank (the "FHLB") to the Bank. On August 21, 2000, the Bank sold 7,000 shares of
Series B Preferred Stock to third party investors. This transaction was recorded
as minority interest for financial statement purposes and classified as Tier 1
capital for regulatory purposes pursuant to guidelines set forth by the Federal
Deposit Insurance Corporation. CB Properties' business objective is to acquire,
hold, finance and manage qualifying REIT assets.
During the first nine months of 2000, the Company increased its deposits to fund
its asset growth. At September 30, 2000, deposits totaled $1.2 billion, an
increase of $63.1 million, or 5.7% over December 31, 1999. The increase in
deposits was used to fund the growth in investments and loans, which increased
by an aggregate of $102.1 million during the nine months ended September 30,
2000.
In the first nine months of 1999, the Company originated $126.9 million of loans
for sale and subsequently sold them as compared to $39.6 million in the first
nine months of 2000. In the current year, the Company has continued to originate
similar volumes of loans, but due to the rising interest rate environment the
Company has maintained a larger proportion of the originated
18
<PAGE> 19
loans in its portfolio. The originations were funded through an increase in
deposits and short-term borrowings.
At September 30, 2000, short-term borrowings and long-term debt were $193.7
million and $181.7 million, respectively, such balances reflect an increase of
$38.8 million, or 25.1%, and a decrease of $43.5 million, or 19.3%,
respectively, as compared to December 31, 1999. As a result of the merger of the
Bank and the Association, borrowing capacity at FHLB increased by $79 million.
The increase was due to the excess collateral, primarily residential mortgages,
held by the Association prior to the merger. The FHLB approved a credit line of
35% of total assets for the merged institution. Prior to the merger, the Bank
and the Association had approved credit lines of 20% and 40% of total assets,
respectively. At September 30, 2000, the Bank has drawn down $373.5 million of
the $593.0 million borrowing capacity at the FHLB.
The Company and the Bank are subject to capital standards promulgated by the
Federal banking agencies and the Hawaii Division of Financial Institutions.
Prior to the merger, the Association was subject to the minimum capital
standards established by the Office of Thrift Supervision for all savings
associations. Quantitative measures established by regulation to ensure capital
adequacy required the Company, the Bank, and the Association (prior to the
merger) to maintain minimum amounts and ratios (set forth in the following table
at September 30, 2000 and 1999) of Tier 1 and Total capital to risk-weighted
assets, and of Tier 1 capital to average assets. The September 30, 1999 ratios
for the Bank do not include the operations of the Association.
19
<PAGE> 20
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
TO BE WELL-
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
-----------------------------------------------------------------------------------------------------
(dollars in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 2000
TIER 1 CAPITAL TO
RISK-WEIGHTED
ASSETS:
CONSOLIDATED $134,630 12.11% $ 44,483 4.00% N/A
BANK 132,634 11.47 46,260 4.00 $ 69,390 6.00%
TOTAL CAPITAL TO
RISK-WEIGHTED
ASSETS:
CONSOLIDATED $148,608 13.36% $ 88,967 8.00% N/A
BANK 147,131 12.72 92,521 8.00 $115,651 10.00%
TIER 1 CAPITAL TO
AVERAGE ASSETS:
CONSOLIDATED $134,630 8.01% $ 67,204 4.00% N/A
BANK 132,634 7.97 66,536 4.00 $ 83,170 5.00%
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
</TABLE>
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company disclosed both quantitative and qualitative analyses of market risks
in its 1999 Form 10-K. No significant changes have occurred during the nine
months ended September 30, 2000.
21
<PAGE> 22
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 in the third quarter of 2000.
22
<PAGE> 23
1
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 14, 2000 By /s/ Dean K. Hirata
------------------------ ---------------------------------
Dean K. Hirata
Senior Vice President and
Chief Financial Officer
(principal financial officer)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial data schedule
</TABLE>
24