UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-10777
CPB INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0212597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 South King Street, Honolulu, Hawaii 96813
(Address of principal executive offices) (Zip Code)
(808)544-0500
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Common Stock, No Par Value;
Outstanding at November 11, 1998: 9,972,796 shares
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements listed below are filed as a part
hereof.
Page
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 F-1
Consolidated Statements of Income and Comprehensive
Income - Three and nine months ended September 30,
1998 and 1997 F-3
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
CPB Inc. (the "Company") posted third quarter 1998 net income
of $3.890 million, increasing by 1.8% over the $3.823 million
earned in the third quarter of 1997. Net income for the first
nine months of 1998 was $11.293 million, increasing by 1.8% over
the $11.094 million earned in the same period in 1997. The
increase in net income was mainly due to a $4.5 million gain on
the sale of credit card loans included in other income in the
third quarter of 1998, offset by increases in the provision for
loan losses and other operating expenses. As of September 30,
1998, total assets of $1.52 billion increased by $20.4 million or
1.4%, net loans of $1.04 billion increased by $19.2 million or
1.9%, and total deposits of $1.19 billion decreased by $2.0
million or 0.2% compared with year-end 1997. On October 8, 1997,
the Company's board of directors (the "Board") approved a two-
for-one stock split effective November 14, 1997, on common stock
outstanding as of October 20, 1997. All financial information
presented in this report has been adjusted for the two-for-one
stock split.
The following table presents annualized return on average
assets, annualized return on average stockholders' equity and
earnings per share for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
Annualized return on
average assets 1.04% 1.06% 1.00% 1.04%
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Annualized return on average
stockholders' equity 10.16% 10.30% 9.72% 10.17%
Basic earnings per share $0.38 $0.36 $1.08 $1.05
Diluted earnings per share $0.38 $0.36 $1.07 $1.05
Hawaii's economy has experienced little growth in the past
seven years and shows little signs of significant improvement in
the near future. Bankruptcy filings continued to rise during the
first nine months of 1998, up 38% over the same period in 1997.
Substantially all bankruptcy filings were Chapter 7 liquidations
filed by individuals. Further increases in bankruptcies are
anticipated based on Hawaii's high unemployment rate which has
remained in the five- to seven-percent range for the past four
years.
The visitor industry, which has sustained the economy in
recent years, has weakened in the nine months of 1998. Hotel
occupancy rates in August 1998, normally a strong month for
tourism, dropped to a 15-year low of 75.8%. The economic
problems in Asia, particularly in Japan, have had a significant
impact on the visitor industry, although tourism from Europe and
the U.S. mainland has increased by more than 6% over last year.
Bolstered by declining prices and attractive interest rates,
local real estate market activity has improved slightly, with
residential real estate sales volume on Oahu increasing by 24% in
the first nine months of 1998 compared to the same period last
year. Commercial real estate activity has also increased in
recent months, although sales prices have dropped significantly,
in some instances falling by 50-75% from the levels of recent
years.
Such economic conditions have had, and will likely continue to
have, an adverse effect on our Company's future performance.
Indicative of this economic environment, Central Pacific Bank
(the "Bank"), a wholly-owned subsidiary of the Company, has
experienced an increase in real estate and consumer loan losses
as further discussed in "Provision for Loan Losses." While the
Hawaii economy is expected to grow modestly in the near future,
the trends in bankruptcy and foreclosure filings, employment,
tourism and the real estate market could affect loan demand,
deposit growth, provision for loan losses, noninterest income and
noninterest expense. Accordingly, the results of operations of
the Company for the rest of 1998 and 1999 may be adversely
impacted by a lack of improvement in the economic climate in
Hawaii.
The "Year 2000" problem remains a primary focus of the
organization. In July 1998, the Bank converted its core computer
processing systems to an AS/400-based integrated banking system,
a major step in the Bank's Year 2000 compliance effort. The
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Company is currently testing this and other mission-critical
systems to determine whether these applications are capable of
operating in the Year 2000 environment and expects to complete
this phase of the Year 2000 project by the first quarter of 1999.
Efforts are also being made to modify or replace other
noncompliant software, systems and equipment by the first half of
1999. Programs have been implemented to educate our customers on
the potential problems and to assess their compliance status to
ensure minimal risk of business disruption and economic loss.
Contingency plans, which include outsourcing alternatives, manual
processing, suspension of non-critical functions and the securing
of additional sources of short-term liquidity, are being reviewed
to ensure that the Company is prepared to handle the most likely
worst-case scenario, including the inability of customers,
vendors and other third parties to adequately address the Year
2000 problem. Borrowers representing approximately 2% of loans
outstanding have been assessed to have a high risk of
noncompliance, and accordingly, programs have been implemented to
work with these borrowers to improve their compliance efforts.
Further, Year 2000 compliance has been incorporated into the
underwriting standards for new loans and renewal requests, and a
Year 2000 risk factor has been incorporated into the assessment
of the adequacy of the allowance for loan losses. The Company
has expended, and will continue to expend, substantial resources
to address this issue on a timely basis. Equipment and software
expenditures related to the acquisition and implementation of new
and enhanced systems and equipment are being capitalized and
amortized over their respective useful lives. Expenditures
related to the Company's internal resources and Year 2000
remediation costs are being expensed as incurred. To date,
equipment and software expenditures totaled approximately $3
million out of a projected $4 million. Future expenditures are
not expected to have a material impact on the Company's results
of operations; however, no assurance can be given at this time
that all aspects of the Company's operations will be Year 2000-
compliant nor that the Year 2000 problem will not have an adverse
impact on the Company's future earnings.
Results of Operations
Net Interest Income
A comparison of net interest income for the three and nine
months ended September 30, 1998 and 1997 is set forth below on a
taxable equivalent basis using an assumed income tax rate of 35%.
Net interest income, when expressed as a percentage of average
interest earning assets, is referred to as "net interest margin."
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Dollars in thousands)
Interest income $28,418 $28,732 $85,098 $82,602
Interest expense 11,759 11,436 35,367 33,087
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Net interest income $16,659 $17,296 $49,731 $49,515
Net interest margin 4.70% 5.07% 4.66% 4.89%
Net interest income was adversely impacted by the reversal of
interest income on loans placed on nonaccrual status during the
first nine months of 1998. Such reversals totaled $155,000 for
the third quarter and $762,000 for the first nine months of 1998.
Further, during the third quarter of 1997, the Bank recognized
$720,000 in interest income on the payoff of a nonaccrual loan.
As a result, interest income decreased by $314,000 or 1.1% in the
third quarter of 1998 compared to the same quarter in 1997.
Despite the factors discussed above, interest income for the nine
months ended September 30, 1998 increased by $2.5 million or 3.0%
due to the higher level of earning assets held in 1998. Average
interest earning assets of $1,417.6 million and $1,422.2 million
for the third quarter and first nine months of 1998,
respectively, increased by $53.1 million or 3.9% and $73.1
million or 5.4%, respectively, over the same periods in 1997, due
primarily to an increase in investment securities. The yield on
interest earning assets of 8.02% for the third quarter of 1998
decreased from 8.42%, and the yield of 7.98% for the first nine
months of 1998 decreased from 8.16% compared to same periods in
1997. The impact of the 1998 interest reversals and 1997
nonaccrual interest recognition accounts for 0.25% and 0.14%,
respectively, of the decline in yields.
Interest and fees on loans decreased by $677,000 or 2.9% and
$333,000 or 0.5% in the third quarter and first nine months of
1998, respectively. Interest and dividends on investment
securities increased by $683,000 or 15.6% and $3.4 million or
28.7% due to an increase in average balances. Interest on
deposits in other banks decreased by $364,000 and $965,000,
respectively, due to a reduction in short-term investable funds
held during the current year.
Interest expense for the three and nine months ended September
30, 1998 increased by $323,000 or 2.8% and $2.3 million or 6.9%,
respectively, as compared to the same periods in 1997, due to
increases in average interest-bearing liabilities of $35.5
million or 3.1% and $62.9 million or 5.7%, respectively. The
average rate on interest-bearing liabilities for the third
quarter of 1998 decreased to 4.05% from 4.06% in 1997 due to a
decrease in market interest rates, while the average rate for the
first nine months of 1998 as compared to the same period in 1997
increased slightly to 4.03% from 3.98%.
The resulting net interest income decreased by $637,000 or
3.7% for the third quarter of 1998, while net interest income for
the first nine months of 1998 increased by $216,000 or 0.4%,
compared to the same periods in 1997. Net interest margin of
4.70% and 4.66% for the three and nine months ended September 30,
1998, respectively, decreased from 5.07% and 4.89% in 1997.
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Strong competition for both loans and deposits, particularly core
deposits, and the increased reliance on higher-cost funds are
expected to further compress interest margins in the future.
Provision for Loan Losses
Provision for loan losses is determined by Management's
ongoing evaluation of the loan portfolio and assessment of the
ability of the allowance for loan losses to cover inherent
losses. The Company, considering current information and events
regarding a borrower's ability to repay its obligations, treats a
loan as impaired when it is probable that the Company will be
unable to collect all amounts due according to the contractual
terms of the loan agreement. When a loan is considered to be
impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate or, if the loan is considered to
be collateral dependent, based on the fair value of the
collateral. Impairment losses are included in the allowance for
loan losses through a charge to the provision for loan losses.
For smaller-balance homogeneous loans (primarily residential real
estate and consumer loans), the allowance for loan losses is
based upon Management's evaluation of the quality, character and
risks inherent in the loan portfolio, current and projected
economic conditions, and historical loan loss experience. The
allowance is increased by provisions charged to operating expense
and reduced by loan charge-offs, net of recoveries.
The following table sets forth certain information with
respect to the Company's allowance for loan losses as of the
dates and for the periods indicated.
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(Dollars in thousands)
Allowance for loan losses:
Balance at beginning of
period $19,168 $19,275 $19,164 $19,436
Provision for loan losses 3,300 1,250 5,400 2,750
Loan charge-offs:
Commercial, financial
and agricultural 573 450 946 1,064
Real estate:
Mortgage-commercial 941 599 1,612 867
Mortgage-residential 813 167 1,069 367
Construction - - - -
Consumer:
Credit card and
related plans 160 163 605 500
Other consumer 131 116 614 480
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Other - 1 2 3
Total loan charge-offs $ 2,618 $ 1,496 $ 4,848 $ 3,281
Recoveries:
Commercial, financial
and agricultural $ 2 $ 21 $ 12 $ 30
Real estate:
Mortgage-commercial 299 - 300 -
Mortgage-residential 3 2 31 22
Construction - - - -
Consumer:
Credit card and
related plans 17 18 70 68
Other consumer 26 33 67 78
Other - - 1 -
Total recoveries 347 74 481 198
Net loan charge-offs 2,271 1,422 4,367 3,083
Balance at end of period $20,197 $19,103 $20,197 $19,103
Annualized ratio of net
loan charge-offs to
average loans 0.85% 0.54% 0.54% 0.39%
The provision for loan losses of $3.3 million and $5.4 million
for the third quarter and first nine months of 1998 increased by
164.0% and 96.4%, respectively, compared to the same periods in
1997, reflecting the higher level of loan losses recognized
during 1998. Net loan charge-offs of $2.3 million and $4.4
million, when expressed as an annualized percentage of average
total loans, were 0.85% and 0.54%, respectively. Loan charge-
offs during the third quarter of 1998 included $940,000 on a
commercial loan and a commercial mortgage loan to a hotel owner,
$400,000 on a loan secured by vacant land on the island of Kauai,
and $400,000 on a mortgage loan secured by commercial property on
the island of Oahu.
The allowance for loan losses expressed as a percentage of
total loans was 1.90% at September 30, 1998, an increase over the
1.84% at December 31, 1997. Considering the reduction in total
nonaccrual and delinquent loans during 1998, Management believes
that the allowance for loan losses at September 30, 1998 was
adequate to cover the credit risks inherent in the loan
portfolio. However, continuation of current economic conditions
in the state of Hawaii may adversely affect borrowers' ability to
repay, collateral values and, consequently, the level of
nonperforming loans and provision for loan losses.
Nonperforming Assets
The following table sets forth nonperforming assets, accruing
loans delinquent for 90 days or more and restructured loans still
accruing interest at the dates indicated.
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September 30, December 31, September 30,
1998 1997 1997
(Dollars in thousands)
Nonaccrual loans:
Commercial, financial
and agricultural $ 1,225 $ 1,312 $ 1,192
Real estate:
Mortgage-commercial 9,604 13,979 8,394
Mortgage-residential 6,880 1,081 1,448
Construction - - -
Consumer:
Credit card and
related plans - - -
Other consumer - 41 81
Other - - -
Total nonaccrual loans 17,709 16,413 11,115
Other real estate 1,155 3,677 3,865
Total nonperforming
assets 18,864 20,090 14,980
Loans delinquent for 90
days or more:
Commercial, financial
and agricultural 494 1,302 1,248
Real estate:
Mortgage-commercial 83 311 2,491
Mortgage-residential 4,075 10,112 5,795
Construction - - -
Consumer:
Credit card and
related plans 106 168 94
Other consumer 203 340 414
Other - - -
Total loans delinquent
for 90 days or more 4,961 12,233 10,042
Restructured loans still
accruing interest:
Commercial, financial
and agricultural - - 125
Real estate:
Mortgage-commercial - 2,727 2,571
Mortgage-residential - - -
Construction - - -
Consumer:
Credit card and
related plans - - -
Other consumer - - -
Other - - -
Total restructured
loans still accruing
interest - 2,727 2,696
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Total nonperforming
assets, loans delin-
quent for 90 days or
more and restructured
loans still accruing
interest $23,825 $35,050 $27,718
Total nonperforming assets
as a percentage of
loans and other real
estate 1.78% 1.92% 1.43%
Total nonperforming assets
and loans delinquent for
90 days or more as a
percentage of loans
and other real estate 2.24% 3.09% 2.39%
Total nonperforming assets,
loans delinquent for 90
days or more and
restructured loans still
accruing interest as a
percentage of loans
and other real estate 2.24% 3.36% 2.65%
Nonperforming assets, loans delinquent for 90 days or more and
restructured loans still accruing interest totaled $23.8 million
at September 30, 1998, decreasing by $11.2 million or 32.0% from
year-end 1997. Nonaccrual loans, loans delinquent for 90 days or
more and restructured loans still accruing interest were
comprised primarily of loans secured by commercial or residential
real property in the state of Hawaii. Nonaccrual loans of $17.7
million included several large commercial and commercial mortgage
loans. Loans to a hotel interest on the island of Oahu totaling
$4.3 million were partially secured by a first mortgage on the
hotel property. A $2.5 million loan, of which $2.1 million was
repaid in October 1998, was secured by commercial real estate
located on the island of Maui, and loans totaling $4.7 million to
two borrowers were secured by various properties on the island of
Oahu. Nonaccrual loans at September 30, 1998 also included a
number of residential mortgages on properties located in various
parts of the state. Other real estate of $1.2 million at
September 30, 1998 consisted of a condominium unit in Honolulu
and undeveloped land on the island of Kauai. Loans delinquent
for 90 days or more and still accruing interest totaled $5.0
million at September 30, 1998, a decrease of $7.3 million or
59.4% from year-end 1997. Since December 31, 1997, $4.1 million
have been transferred to nonaccrual status, and another $2.2
million in residential mortgages related to a condominium
financing project were brought current. Impaired loans at
September 30, 1998 totaled $16.7 million and included all
nonaccrual loans greater than $500,000 and several commercial and
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commercial mortgage loans. The allowance for loan losses
allocated to impaired loans totaled $3.7 million at September 30,
1998.
Management continues to closely monitor loan delinquencies and
work with borrowers to resolve loan problems; however, a
continuation of the current economic environment in the state of
Hawaii may result in future increases in nonperforming assets,
delinquencies, net loan charge-offs, provision for loan losses
and noninterest expense.
Other Operating Income
Total other operating income of $7.3 million for the third
quarter and $13.3 million for the first nine months of 1998
increased by $4.6 million or 167.0% and by $5.4 million or 67.7%,
respectively, over the same periods in 1997. Service charges on
deposits increased by $116,000 or 16.6% and by $309,000 or 15.8%,
respectively, due primarily to a focus on the collection of
commercial deposit account fees. Other service charges and fees
increased by $99,000 or 6.4% and by $391,000 or 8.8%,
respectively, due mainly to increases in credit card and merchant
servicing fees. In September 1998, the Bank sold $18 million of
credit card receivables resulting in a $4.5 million gain which is
included in other income. The sale is expected to result in a
reduction in future interest income and net operating income
related to the credit card receivables.
Other Operating Expense
Total other operating expense of $13.6 million for the third
quarter of 1998 and $38.8 million for the first nine months of
1998 increased by $1.2 million or 9.5% and by $2.6 million or
7.2%, respectively, over the same periods in 1997. Salaries and
employee benefits increased by $481,000 and $846,000,
respectively, due in part to an increase in overtime expense
incurred in conjunction with the Bank's conversion of its
computer processing system. Increases in computer software,
education and training expenses, supplies and various other
expenses were also incurred in connection with the system
conversion and sale of the credit card portfolio. Write-downs of
other real estate of $200,000 in the third quarter and $502,000
for the first nine months of 1998 also contributed to the
increase in other operating expenses.
Income Taxes
The effective tax rate for the third quarter and first nine
months of 1998 was 43.08% and 37.54%, respectively, compared with
the previous year's rates of 37.95% and 38.73%, respectively.
During the third quarter of 1998, the Bank recognized
approximately $340,000 in income taxes related to second quarter
earnings due to uncertainties as to the tax benefits of the
Bank's captive real estate investment trust. The decrease in tax
rates for the nine months ended September 30, 1998 resulted from
an increase in tax-exempt investments and loans held during 1998.
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Financial Condition
Total assets at September 30, 1998 of $1.52 billion increased
by $20.4 million or 1.4% over year-end 1997 due to a $19.2
million or 1.9% increase in net loans to $1.06 billion and a
$38.8 million or 12.1% increase in investment securities. This
asset growth was funded primarily through a $34.1 million
reduction in interest-bearing deposits in other banks and a $24.9
million increase in short-term borrowings.
Total deposits at September 30, 1998 of $1.19 billion
decreased by $2.0 million or 0.2% from year-end 1997.
Noninterest-bearing deposits of $168.7 million was virtually
unchanged during that period, while interest-bearing deposits
decreased by $2.2 million. Core deposits (noninterest-bearing
demand, interest-bearing demand and savings deposits, and time
deposits under $100,000) at September 30, 1998 of $865.8 million
decreased by $10.1 million or 1.2% during the first nine months
of 1998, while time deposits of $100,000 and over of $325.4
million increased by $8.1 million or 2.6%. The decrease in core
deposits reflected declines in savings account balances which
were partially offset by increases in money market accounts.
Local competition for deposits remains strong and will continue
to challenge the Bank's ability to gather low-cost retail funds.
Capital Resources
Stockholders' equity of $149.6 million at September 30, 1998
decreased by $2.1 million or 1.4% from December 31, 1997, and
stockholders' equity as a percentage of total assets decreased to
9.86% from 10.14% at year-end 1997. On September 14, 1998, the
Board declared a third quarter cash dividend of $0.13 per share,
bringing total dividends declared to $0.39 per share for the
first nine months of 1998, an 8.3% increase over the dividend
rate during the same period in 1997. Dividends declared in the
first nine months of 1998 totaled $4.1 million compared with $3.8
million in the first nine months of 1997.
On August 26, 1998, the Board adopted a Shareholder Rights
Plan (the "Plan") which entitles holders of common stock to
receive one right for each share of common stock outstanding as
of September 16, 1998. The rights are exercisable only upon the
occurrence of specific events and will expire on August 26, 2008.
The Plan was designed to ensure that shareholders receive fair
and equal treatment in the event of unsolicited or coercive
attempts to acquire the Company. The Plan was also intended to
guard against unfair tender offers and other abusive takeover
tactics. Management knows of no planned or threatened offers to
acquire the Company at this time; however, in the current mergers
and acquisitions environment, the Plan was deemed a prudent step
in protecting the value of shareholders' investments.
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On April 21, 1998, the Board authorized a stock repurchase
program to repurchase up to 5%, or approximately 530,000 shares,
of the 10.6 million shares of the Company's common stock
outstanding. On September 14, 1998, the Board approved the
repurchase of an additional 5% of common stock outstanding. The
stock repurchase program is being conducted in the open market
and is dependent upon market conditions. Stock repurchases
commenced during the third quarter of 1998, and the Company has
repurchased approximately 655,000 shares to date at a weighted
average price of $17.47. The stock repurchase program will
result in a slight decrease in capital and capital ratios and a
corresponding increase in equity-based performance measures in
future periods.
The Company's objective with respect to capital resources is
to maintain a level of capital that will support sustained asset
growth and anticipated credit risks. Furthermore, the Company
seeks to ensure that regulatory guidelines and industry standards
are met. Regulations on capital adequacy guidelines adopted by
the Federal Reserve Board (the "FRB") and the Federal Deposit
Insurance Corporation (the "FDIC") are as follows. An
institution is required to maintain a minimum ratio of qualifying
total capital to risk-weighted assets of 8%, of which at least 4%
must consist of Tier I capital, essentially common stockholders'
equity (before unrealized loss on investment securities) less
intangible assets. The FRB and the FDIC have also adopted a
minimum leverage ratio of Tier I capital to total assets of 3%.
The leverage ratio requirement establishes the minimum level for
banks that have a uniform composite ("CAMELS") rating of 1, and
all other institutions and institutions experiencing or
anticipating significant growth are expected to maintain capital
levels at least 100 to 200 basis points above the minimum level.
Furthermore, higher leverage and risk-based capital ratios are
required to be considered well capitalized or adequately
capitalized under the prompt corrective action provisions of the
FDIC Improvement Act of 1991.
The following table sets forth the capital requirements
applicable to the Company and the Company's capital ratios as of
the dates indicated.
Required Actual Excess
At September 30, 1998:
Tier I risk-based
capital ratio 4.00% 12.54% 8.54%
Total risk-based
capital ratio 8.00% 13.80% 5.80%
Leverage capital ratio 4.00% 9.92% 5.92%
At December 31, 1997:
Tier I risk-based
capital ratio 4.00% 12.45% 8.45%
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Total risk-based
capital ratio 8.00% 13.71% 5.71%
Leverage capital ratio 4.00% 10.41% 6.41%
In addition, FDIC-insured institutions such as the Bank must
maintain leverage, Tier I and total risk-based capital ratios of
at least 5%, 6% and 10%, respectively, to be considered "well
capitalized" under the prompt corrective action provisions of the
FDIC Improvement Act of 1991.
The following table sets forth the capital requirements for
the Bank to be considered "well capitalized" and the Bank's
capital ratios as of the dates indicated.
Required Actual Excess
At September 30, 1998:
Tier I risk-based
capital ratio 6.00% 12.22% 6.22%
Total risk-based
capital ratio 10.00% 13.48% 3.48%
Leverage capital ratio 5.00% 9.67% 4.67%
At December 31, 1997:
Tier I risk-based
capital ratio 6.00% 11.63% 5.63%
Total risk-based
capital ratio 10.00% 12.88% 2.88%
Leverage capital ratio 5.00% 9.72% 4.72%
Asset/Liability Management and Liquidity
The Company's asset/liability management policy and liquidity
position are discussed in its 1997 Annual Report to Shareholders.
No significant changes have occurred during the nine months ended
September 30, 1998.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The Company discussed the nature and extent of market risk
exposure in its 1997 Annual Report to Shareholders. No
significant changes have occurred during the nine months ended
September 30, 1998.
PART II. OTHER INFORMATION
Items 1 to 5.
Items 1 to 5 are omitted pursuant to instructions to Part II.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Financial Data Schedule as of and for the nine
months ended September 30, 1998, is filed as
Exhibit 27 to this report on Form 10-Q.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during
the third quarter of 1998.
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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.
CPB INC.
(Registrant)
Date: November 12, 1998 /s/ Joichi Saito
Joichi Saito
Chairman of the Board and
Chief Executive Officer
Date: November 12, 1998 /s/ Neal Kanda
Neal Kanda
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
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CPB INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands, except per share data) 1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 48,362 $ 50,695
Interest-bearing deposits in other banks 114 34,188
Investment securities:
Held to maturity, at cost (fair value of $125,995 at
September 30, 1998 and $153,494 at December 31, 1997) 122,258 152,688
Available for sale, at fair value 237,262 168,023
Total investment securities 359,520 320,711
Loans 1,061,283 1,041,023
Less allowance for loan losses 20,197 19,164
Net loans 1,041,086 1,021,859
Premises and equipment 26,871 26,676
Accrued interest receivable 9,620 9,404
Investment in unconsolidated subsidiaries 7,294 7,269
Due from customers on acceptances 90 59
Other real estate owned 1,155 3,677
Other assets 23,360 22,563
Total assets $1,517,472 $1,497,101
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 168,669 $ 168,505
Interest-bearing deposits 1,022,503 1,024,653
Total deposits 1,191,172 1,193,158
Short-term borrowings 31,188 6,248
Long-term debt 120,894 127,705
F-1
<PAGE>
Bank acceptances outstanding 90 59
Other liabilities 24,480 18,189
Total liabilities 1,367,824 1,345,359
Stockholders' equity:
Preferred stock, no par value, authorized 1,000,000
shares, none issued - -
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding 10,016,696 shares at September 30,
1998, and 10,579,184 shares at December 31, 1997 6,740 6,612
Surplus 45,848 45,848
Retained earnings 96,098 99,188
Unrealized gain on investment securities,
net of taxes 962 94
Total stockholders' equity 149,648 151,742
Total liabilities and stockholders' equity $1,517,472 $1,497,101
Book value per share $14.94 $14.34
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-2
<PAGE>
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in thousands, September 30, September 30,
except per share data) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $22,894 $23,571 $68,107 $68,440
Interest and dividends on
investment securities:
Taxable interest 4,398 3,831 13,456 10,681
Tax-exempt interest 357 246 978 399
Dividends 317 312 942 863
Interest on deposits in other banks 170 534 819 1,784
Interest on Federal funds sold 1 3 3 3
Total interest income 28,137 28,497 84,305 82,170
Interest expense:
Interest on deposits 9,774 9,572 29,088 27,596
Interest on short-term borrowings 51 80 445 215
Interest on long-term debt 1,934 1,784 5,834 5,276
Total interest expense 11,759 11,436 35,367 33,087
Net interest income 16,378 17,061 48,938 49,083
Provision for loan losses 3,300 1,250 5,400 2,750
Net interest income after
provision for loan losses 13,078 15,811 43,538 46,333
Other operating income:
Service charges on deposit accounts 814 698 2,270 1,961
Other service charges and fees 1,641 1,542 4,811 4,420
Trust income 170 121 470 310
F-3
<PAGE>
Equity in earnings of
unconsolidated subsidiaries 80 107 270 368
Fees on foreign exchange 135 169 445 556
Other 4,479 104 5,061 330
Total other operating income 7,319 2,741 13,327 7,945
Other operating expense:
Salaries and employee benefits 6,896 6,415 20,024 19,178
Net occupancy 1,586 1,613 4,768 4,861
Equipment 730 666 2,155 1,993
Other 4,351 3,697 11,839 10,138
Total other operating expense 13,563 12,391 38,786 36,170
Income before income taxes 6,834 6,161 18,079 18,108
Income taxes 2,944 2,338 6,786 7,014
Net income $ 3,890 $ 3,823 $11,293 $11,094
Other comprehensive income, net of tax:
Unrealized holding gains
on securities 881 416 868 579
Comprehensive income $ 4,771 $ 4,239 $12,161 $11,673
Per common share:
Net income - basic $ 0.38 $ 0.36 $ 1.08 $ 1.05
Net income - diluted 0.38 0.36 1.07 1.05
Cash dividends declared $ 0.13 $ 0.12 $ 0.39 $ 0.36
Weighted average shares outstanding
(in thousands) 10,320 10,554 10,505 10,547
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-4
<PAGE>
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
(Dollars in thousands) 1998 1997
Cash flows from operating activities:
Net income $11,293 $11,094
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 5,400 2,750
Provision for depreciation and
amortization 2,240 2,041
Net amortization and accretion of
investment securities 212 269
Federal Home Loan Bank stock
dividends received (942) (863)
Net (gain) loss on sale of loans (4,295) 43
Net change in loans held for sale (5,201) 3,800
Deferred income tax expense (1,472) 1,065
Equity in earnings of unconsolidated
subsidiaries (270) (368)
(Increase) decrease in accrued interest
receivable, other real estate
owned and other assets 2,777 (8,878)
Increase in accrued interest payable
and other liabilities 6,489 930
Net cash provided by operating
activities 16,231 11,883
Cash flows from investing activities:
Proceeds from maturities of and
calls on investment securities
held to maturity 55,648 30,993
Purchases of investment securities
held to maturity (25,274) (66,505)
Proceeds from maturities and calls
on investment securities available
for sale 21,360 37,358
Purchases of investment securities
available for sale (88,367) (46,321)
Net decrease in interest-bearing
deposits in other banks 34,074 2,733
Net loan originations (15,630) (11,979)
Proceeds from disposal of premises
and equipment 44 3
Purchases of premises and equipment (2,479) (1,901)
Distributions from unconsolidated
subsidiaries 295 265
F-5
<PAGE>
Investment in unconsolidated
subsidiaries (50) (150)
Net cash used in investing
activities (20,379) (55,504)
Cash flows from financing activities:
Net increase (decrease) in deposits (1,986) 17,288
Proceeds from long-term debt 46,500 34,000
Repayments of long-term debt (53,311) (21,643)
Net increase in short-term
borrowings 24,940 1,073
Cash dividends paid (4,134) (3,797)
Proceeds from sale of common stock 534 339
Repurchases of common stock (10,728) -
Net cash provided by
financing activities 1,815 27,260
Net decrease in cash and cash
equivalents (2,333) (16,361)
Cash and cash equivalents:
At beginning of period 50,695 55,534
At end of period $48,362 $39,173
Supplemental disclosure of cash flow
information:
Cash paid during the period
for interest $32,155 $32,497
Cash paid during the period
for income taxes $ 1,350 $ 7,700
Supplemental disclosure of noncash
investing and financing activities:
Transfer of loans to other real estate $ 499 $ 3,209
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CPB INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial information included herein is unaudited, except
for the consolidated balance sheet at December 31, 1997.
However, such information reflects all adjustments (consisting
solely of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair statement of results for the
interim periods.
The results of operations for the three and nine months ended
September 30, 1998 are not necessarily indicative of the results
to be expected for the full year.
2. Comprehensive Income
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No.
130, effective for fiscal years beginning after December 15,
1997, establishes standards for reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. Comprehensive income is defined as
all changes in equity, including net income, except those
resulting from investment by and distributions to owners.
Components of other comprehensive income for the three and
nine months ended September 30, 1998 and 1997 were comprised
solely of unrealized holding gains (losses) on available-for-sale
investment securities. There were no sales of investment
securities during those periods. Income tax expense (benefit)
allocated to components of other comprehensive income were
$586,000 and $578,000 for the three and nine months ended
September 30, 1998, respectively, and $277,000 and $385,000 for
the three and nine months ended September 30, 1997, respectively.
Accumulated other comprehensive income is presented below as of
the dates indicated:
September 30,
(Dollars in thousands) 1998 1997
Balance at beginning of year $ 94 $(590)
Current-period change 868 579
Balance at end of period $ 962 $ (11)
3. Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
F-7
<PAGE>
is effective for fiscal years beginning after December 15, 1997,
although it need not be applied to interim periods in the initial
year of implementation. SFAS No. 131 establishes standards for
the way public companies report selected quarterly information
about business segments, including information on products and
services, geographic areas and major customers, based on a
management approach to reporting. Reclassification of financial
statements for prior periods will be required for comparative
purposes. As this statement relates solely to disclosure
requirements, its implementation will not have an effect on the
Company's consolidated financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," an
amendment of SFAS No. 87, "Employers' Accounting for Pensions,
No. 88, "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans," and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
SFAS No. 132, effective for fiscal years beginning after December
15, 1997, standardizes the disclosure requirements for pensions
and other postretirement benefits, requires additional
information on changes in the benefit obligations and fair values
of plan assets to facilitate financial analysis and eliminates
certain disclosures that are no longer considered useful. As
this statement relates solely to disclosure requirements, its
implementation will not have a material impact on the Company's
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15,
1999. Earlier application is permitted only as of the beginning
of a fiscal quarter. The application of SFAS No. 133 is not
expected to have a material impact on the Company's consolidated
financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,"
an amendment of SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities." SFAS No. 135, effective for the first
fiscal quarter beginning after December 15, 1998, requires that
after the securitization of mortgage loans held for sale, the
resulting mortgage-backed securities or other retained interests
be classified in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," based on the
entity's ability and intent to sell or hold those investments.
The implementation of SFAS No. 135 is not expected to have a
material impact on the Company's consolidated financial
statements.
F-8
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000701347
<NAME> CPB INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 48,362
<INT-BEARING-DEPOSITS> 114
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 237,262
<INVESTMENTS-CARRYING> 122,258
<INVESTMENTS-MARKET> 125,995
<LOANS> 1,061,283
<ALLOWANCE> 20,197
<TOTAL-ASSETS> 1,517,472
<DEPOSITS> 1,191,172
<SHORT-TERM> 31,188
<LIABILITIES-OTHER> 24,480
<LONG-TERM> 120,894
0
0
<COMMON> 6,740
<OTHER-SE> 142,908
<TOTAL-LIABILITIES-AND-EQUITY> 1,517,472
<INTEREST-LOAN> 68,107
<INTEREST-INVEST> 15,376
<INTEREST-OTHER> 822
<INTEREST-TOTAL> 84,305
<INTEREST-DEPOSIT> 29,088
<INTEREST-EXPENSE> 35,367
<INTEREST-INCOME-NET> 48,938
<LOAN-LOSSES> 5,400
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 38,786
<INCOME-PRETAX> 18,079
<INCOME-PRE-EXTRAORDINARY> 11,293
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,293
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 4.66
<LOANS-NON> 17,709
<LOANS-PAST> 4,961
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,164
<CHARGE-OFFS> 4,848
<RECOVERIES> 481
<ALLOWANCE-CLOSE> 20,197
<ALLOWANCE-DOMESTIC> 14,422
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,775
</TABLE>
