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 June 30, 1999
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 August 9, 1999: 9,681,394 shares
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements listed below are filed as a part
hereof.
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 F-1
Consolidated Statements of Income and Comprehensive
Income - Three and six months ended June 30, 1999
and 1998 F-3
Consolidated Statements of Cash Flows - Six months
ended June 30, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
CPB Inc. (the "Company") posted second quarter 1999 net income
of $3.975 million, increasing by 5.3% over the $3.775 million
earned in the second quarter of 1998. Net income for the first
half of 1999 was $7.654 million, increasing by 3.4% over the
$7.403 million earned in the same period in 1998. The increase
in net income was mainly due to increases in net interest income.
As of June 30, 1999, total assets of $1,576.7 million increased
by $15.8 million or 1.0%, and net loans of $1,164.4 million
increased by $78.5 million or 7.2%, while total deposits of
$1,257.6 million decreased by $11.5 million or 0.9% compared with
year-end 1998.
The following table presents annualized return on average
assets, annualized return on average stockholders' equity and
basic and diluted earnings per share for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Annualized return on
average assets 1.02% 0.99% 0.98% 0.98%
Annualized return on
average stockholders'
equity 10.57% 9.58% 10.19% 9.50%
Basic earnings per share $0.41 $0.36 $0.79 $0.70
Diluted earnings per share $0.41 $0.35 $0.78 $0.69
</TABLE>
1
<PAGE>
Hawaii's economy has experienced little growth in the past
eight years but is beginning to show signs of improvement. The
statewide unemployment rate in June 1999 dropped to 6.2%, from
7.0% in June 1998. The unemployment rate on the island of Oahu
was 5.3%, closer to the national rate of 4.5%. Bankruptcy
filings have slowed significantly, increasing by only 2.7% for
the first half of 1999 over the first half of 1998, which
compares with increases of 30% in 1998 and 44% in 1997. In
addition, real estate foreclosures for the first half of 1999
declined by 18.7% from the same period in 1998.
Similarly, the visitor industry has seen a slight rebound
after a downturn in 1998. Year-to-date visitor arrivals through
June 1999 increased by 0.6% over 1998 levels, reflecting 5.4%
increase in westbound visitors (primarily from the mainland U.S.)
which offset a 7.7% decrease in eastbound visitors (including
Japan and other Asian countries). As the economic situation
stabilizes in Asia, and with continued strength in the mainland
U.S. economy, local economists forecast a mild rebound for the
visitor industry during 1999 and into the year 2000.
Local real estate sales activity continues to improve, with
total dollar-volume of residential real estate sales on the
island of Oahu in the first half of 1999 increasing by 19.1% over
the first half of 1998, following a 17.7% increase in 1998 over
1997. The combination of low interest rates and relatively
attractive sales prices has contributed to the increased sales
activity. However, in spite of the increase in sales activity,
average real estate values have not increased.
Hawaii's economic environment has had, and will likely
continue to have, a direct effect on our Company's performance.
Indicative of the prolonged economic stagnation, Central Pacific
Bank (the "Bank"), a wholly-owned subsidiary of the Company, has
experienced an increase in residential mortgage loan losses as
further discussed in "Provision for Loan Losses." While the
Hawaii economy is expected to grow modestly in the near future,
actual results in tourism, employment 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 remainder of
1999 may be directly impacted by the ability of the Hawaii
economy to sustain the positive trends experienced in recent
months.
The "Year 2000" problem remains a primary focus of the
organization. The Company has completed testing of all mission-
critical systems and vendors, including interfaces with third
parties, with no major problems identified. The Company's
efforts are currently focused on customer awareness and
preparedness. Programs have been implemented to educate our
customers on potential problems and to assess their compliance
status to ensure minimal risk of business disruption and economic
2
<PAGE>
loss. Customers representing approximately 2% of loans
outstanding and 3% of deposits have been assessed to have a high
risk of noncompliance, and accordingly, programs have been
implemented to closely monitor 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. Contingency
plans, which include outsourcing alternatives, manual processing,
suspension of non-critical functions and the securing of
additional sources of short-term liquidity, have been updated 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. 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
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 other Year 2000 compliance costs are being expensed as
incurred. To date, equipment and software expenditures totaled
more than $3.5 million out of a projected $4.0 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.
Certain matters discussed in this report on Form 10-Q may
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-
looking statements relate to, among other things, Year 2000
compliance, net interest income, net interest margin, the levels
of nonperforming loans, loan losses and the allowance for loan
losses. Important factors that could cause the results to differ
from those discussed in this report include, but are not limited
to, general business conditions in the state of Hawaii, the real
estate market in Hawaii, competitive conditions among financial
institutions, regulatory changes in the financial services
industry, the ability of other entities to become Year 2000
compliant and other risks detailed in the Company's reports filed
with the Securities and Exchange Commission, including the Annual
Report on Form 10-K for the year ended December 31, 1998.
Results of Operations
Net Interest Income
A comparison of net interest income for the three and six
months ended June 30, 1999 and 1998 is set forth below on a
taxable equivalent basis using an assumed income tax rate of 35%.
3
<PAGE>
Net interest income, when expressed as a percentage of average
interest earning assets, is referred to as "net interest margin."
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(Dollars in thousands)
<S> <C> <C> <C> <C>
Interest income $27,963 $28,573 $56,021 $56,680
Interest expense 10,690 11,954 21,450 23,608
Net interest income $17,273 $16,619 $34,571 $33,072
Net interest margin 4.68% 4.62% 4.70% 4.64%
</TABLE>
Interest income declined by $610,000 or 2.1% and by $659,000
or 1.2% in the second quarter and first half of 1999,
respectively, as compared to the same periods in 1998, due
primarily to a reduction in the general level of interest rates
during the past year. Average interest earning assets of
$1,474.8 million and $1,470.7 million for the second quarter and
first half of 1999, respectively, increased by $37.1 million or
2.6% and $46.1 million or 3.2%, due primarily to increases in
loans. The yield on interest earning assets of 7.58% for the
second quarter of 1999 decreased from 7.95%, and yield of 7.62%
for the first half of 1999 decreased from 7.96% compared to the
same periods in 1998.
Interest and fees on loans increased by $286,000 or 1.3% and
$537,000 or 1.2% in the second quarter and first half of 1999,
respectively, due to the increase in average loan balances.
Interest and dividends on investment securities decreased by
$770,000 or 14.9% and $785,000 or 7.6%, respectively, due to
declines in average balances. Similarly, interest on deposits in
other banks declined by $179,000 or 65.8% and $530,000 or 81.7%,
respectively, due to a reduction in short-term investable funds
compared to the prior year.
Interest expense for the three and six months ended June 30,
1999 decreased by $1.3 million or 10.6% and $2.2 million or 9.1%,
respectively, as compared to the same periods in 1998, due to the
lower level of market interest rates. Average interest-bearing
liabilities totaled $1,219.6 million in the second quarter of
1999 and $1,215.3 million in the first half of 1999, increasing
by $34.8 million or 2.9% and $39.2 million or 3.3%, respectively.
The average rate on interest-bearing liabilities for the second
quarter of 1999 of 3.51% declined from 4.04% in 1998, and the
average rate for the first half of 1999 of 3.53% declined from
4.01% in 1998.
The resultant net interest income for the second quarter and
first half of 1999 increased by $654,000 or 3.9% and by $1.5
million or 4.5%, respectively, over the same periods in 1998.
4
<PAGE>
Net interest margin also improved to 4.68% from 4.62% in the
second quarter and to 4.70% from 4.64% in the first half. Strong
competition for both loans and deposits, particularly core
deposits, is expected to continue and may create additional
pressure on net 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allowance for loan losses:
Balance at beginning
of period $20,337 $19,646 $20,066 $19,164
Provision for loan
losses 700 1,125 2,200 2,100
Loan charge-offs:
Real estate:
Mortgage-commercial 29 671 729 671
Mortgage-residential 204 45 750 256
Construction - - - -
Commercial, financial
and agricultural 150 354 150 373
5
<PAGE>
Consumer:
Credit card and
related plans 23 239 28 445
Other consumer 71 364 167 483
Other 3 1 4 2
Total loan charge-offs 480 1,674 1,828 2,230
Recoveries:
Real estate:
Mortgage-commercial 12 - 39 1
Mortgage-residential 102 - 105 28
Construction - - - -
Commercial, financial
and agricultural 7 6 37 10
Consumer:
Credit card and
related plans 35 41 69 53
Other consumer 22 23 47 41
Other - 1 - 1
Total recoveries 178 71 297 134
Net loan charge-offs 302 1,603 1,531 2,096
Balance at end of period $20,735 $19,168 $20,735 $19,168
Annualized ratio of net
loan charge-offs to
average loans 0.10% 0.59% 0.27% 0.39%
</TABLE>
The provision for loan losses of $700,000 for the second
quarter of 1999 decreased by 37.8% compared to the second quarter
of 1998, while the provision for loan losses of $2.2 million for
the first half of 1999 increased by 4.8% over the same period in
1998. Net loan charge-offs of $302,000 and $1.5 million for the
three and six months ended June 30, 1999, when expressed as an
annualized percentage of average total loans, was 0.10% and
0.27%, respectively. Loan charge-offs during the second quarter
of 1999 included a $150,000 commercial loan and several
residential real estate loans.
The allowance for loan losses expressed as a percentage of
total loans was 1.75% at June 30, 1999, declining slightly from
1.81% at December 31, 1998. Considering the decline in net loan
charge-offs and decreases in nonaccrual and delinquent loans
during the year, Management believes that the allowance for loan
losses was adequate to cover the credit risks inherent in the
loan portfolio. However, any deterioration in economic
conditions in the state of Hawaii could adversely affect
borrowers' ability to repay, collateral values and, consequently,
the level of nonperforming loans and provision for loan losses.
6
<PAGE>
Nonperforming Assets
The following table sets forth nonperforming assets and
accruing loans delinquent for 90 days or more at the dates
indicated.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans:
Real estate:
Mortgage-commercial $ 4,076 $ 6,830 $12,957
Mortgage-residential 4,451 5,037 4,719
Construction - - -
Commercial, financial
and agricultural 1,955 1,065 1,892
Consumer - - 85
Other - - -
Total nonaccrual loans 10,482 12,932 19,653
Other real estate 509 1,155 1,034
Total nonperforming
assets 10,991 14,087 20,687
Loans delinquent for 90
days or more:
Real estate:
Mortgage-commercial 929 315 1,916
Mortgage-residential 1,966 4,206 4,262
Construction - - -
Commercial, financial
and agricultural 150 706 153
Consumer 59 168 422
Other - - -
Total loans delinquent
for 90 days or more 3,104 5,395 6,753
Total nonperforming
assets and loans
delinquent for 90 days
or more $14,095 $19,482 $27,440
Total nonperforming assets
as a percentage of
loans and other real
estate 0.93% 1.27% 1.92%
Total nonperforming assets
and loans delinquent for
90 days or more as a
percentage of loans
and other real estate 1.19% 1.76% 2.55%
</TABLE>
7
<PAGE>
Nonperforming assets and loans delinquent for 90 days or more
totaled $14.1 million at June 30, 1999, a decrease of $5.4
million or 27.7% from year-end 1998. 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 $10.5 million included a $1.6 million loan
secured by multi-family residential property and a $1.2 million
loan secured by commercial real estate located on the island of
Oahu. Nonaccrual loans at June 30, 1999 also included a number
of commercial mortgages and residential mortgages on properties
located throughout the state. Loans delinquent for 90 days or
more and still accruing interest totaled $3.1 million at June 30,
1999, a 42.5% decrease from year-end 1998 levels. Impaired loans
at June 30, 1999 totaled $9.9 million and included all nonaccrual
and restructured loans greater than $500,000. The allowance for
loan losses allocated to impaired loans amounted to $2.4 million
at June 30, 1999. By comparison, impaired loans at year-end 1998
totaled $12.3 million with an allocated allowance for loan losses
of $3.0 million.
Management continues to closely monitor loan delinquencies and
work with borrowers to resolve loan problems; however, any
worsening of current economic conditions 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 $3.2 million for the second
quarter and $6.5 million for the first half of 1999 increased by
$58,000 or 1.9% and $511,000 or 8.5%, respectively, over the same
periods in 1998. In the second quarter of 1999, increases in
service charges on deposits and other service charges and fees
combined to offset the impact of gains on sales of other real
estate recognized in the second quarter of 1998. Gains on sales
of investment securities of $219,000 and increases in service
charges on deposits and other service charges and fees
contributed to the increase in other operating income for the
first half of 1999 compared to 1998.
Other Operating Expense
Total other operating expense of $13.4 million for the second
quarter of 1999 and $26.4 million for the first half of 1999
increased by $612,000 or 4.8% and $1.2 million or 4.8% over the
same periods in 1998. The increase was primarily attributed to
accruals for potential losses on an international debit card
fraud scheme and the expected closure of one of the bank's branch
offices. Outsourcing expenses related to the servicing of
merchant accounts also contributed to the increase in other
operating expense.
8
<PAGE>
Income Taxes
The effective tax rate for the second quarter and first half
of 1999 was 34.62% and 35.38%, respectively, compared with the
previous year's rates of 32.47% and 34.17%, respectively. The
tax rates for 1998 reflected the recognition of expected tax
benefits, which were subsequently reversed, related to the
formation of a real estate investment trust in the first quarter
of 1998. While the Company believes that the associated tax
benefits are realizable, the state of Hawaii has indicated that
it may challenge the tax treatment. As of June 30, 1999, the
cumulative estimated tax benefits not yet recognized amounted to
$1.6 million.
Financial Condition
Total assets at June 30, 1999 of $1.58 billion increased by
$15.8 million or 1.0% over year-end 1998. Net loans of $1.16
billion increased by $78.5 million or 7.2%, funded primarily by a
decrease in investment securities of $55.1 million or 15.7%.
Total deposits at June 30, 1999 of $1.26 billion decreased by
$11.5 million or 0.9% from year-end 1998. Noninterest-bearing
deposits of $175.4 million decreased by $11.5 million or 6.1%,
while interest-bearing deposits of $1.08 billion was unchanged
from year-end 1998. Core deposits (noninterest-bearing demand,
interest-bearing demand and savings deposits, and time deposits
under $100,000) at June 30, 1999 of $914.8 million decreased by
$10.1 million or 1.1% during the first half of 1999, and time
deposits of $100,000 and over of $342.8 million decreased by $1.4
million or 0.4%. The decrease in core deposits included
decreases of $10.6 million in business checking accounts and
$10.1 million in business money market deposits, offset by an
increase in time deposits under $100,000. 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 $149.1 million at June 30, 1999
increased by $1.1 million or 0.7% over December 31, 1998. When
expressed as a percentage of total assets, stockholders' equity
decreased slightly to 9.46% at June 30, 1999, compared to 9.49%
at year-end 1998. On June 14, 1999, the board of directors
declared a second quarter cash dividend of $0.14 per share, a
7.7% increase over the dividend declared in the second quarter of
1998. Dividends declared in the second quarter of 1999 totaled
$1,358,000 compared with $1,380,000 in the second quarter of
1998, a 1.6% decrease resulting from the reduction in outstanding
shares due to the stock repurchase program which commenced in
1998.
As of June 30, 1999, a total of 949,648 shares out of an
approved 1.1 million shares have been repurchased and retired
9
<PAGE>
under the Company's stock repurchase program at a weighted
average price of $17.45. The remaining repurchases will be
conducted in the open market and are dependent upon market
conditions. The stock repurchase program has resulted in a
slight decrease in capital and capital ratios and a corresponding
increase in equity-based performance measures.
The Company's objective with respect to capital resources is
to maintain a level of capital that will support sustained asset
growth and anticipated 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-adjusted assets of 8% and a minimum ratio
of Tier 1 capital to risk-adjusted assets of 4%. In addition to
the risk-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1
capital to total assets, referred to as the leverage ratio. For
a banking organization rated in the highest of the five
categories used by regulators to rate banking organizations, the
minimum leverage ratio of Tier 1 capital to total assets must be
3%. In addition to these uniform risk-based capital guidelines
and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
The following table sets forth the capital requirements
applicable to the Company and the Company's capital ratios as of
the dates indicated.
<TABLE>
<CAPTION>
Actual Required Excess
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
At June 30, 1999:
Leverage capital
ratio $150,467 9.64% $62,417 4.00% $88,050 5.64%
Tier 1 risk-based
capital ratio 150,467 11.79 51,068 4.00 99,399 7.79
Total risk-based
capital ratio 166,485 13.04 102,136 8.00 64,349 5.04
At December 31, 1998:
Leverage capital
ratio $147,338 9.71% $60,722 4.00% $86,616 5.71%
Tier 1 risk-based
capital ratio 147,338 12.10 48,698 4.00 98,640 8.10
Total risk-based
capital ratio 162,616 13.36 97,395 8.00 65,221 5.36
</TABLE>
In addition, FDIC-insured institutions such as the Bank must
maintain leverage, Tier 1 and total risk-based capital ratios of
10
<PAGE>
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.
<TABLE>
<CAPTION>
Actual Required Excess
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
At June 30, 1999:
Leverage capital
ratio $142,324 9.13% $77,919 5.00% $64,405 4.13%
Tier 1 risk-based
capital ratio 142,324 11.16 76,487 6.00 65,837 5.16
Total risk-based
capital ratio 158,318 12.42 127,478 10.00 30,840 2.42
At December 31, 1998:
Leverage capital
ratio $137,233 9.05% $75,795 5.00% $61,438 4.05%
Tier 1 risk-based
capital ratio 137,233 11.28 72,992 6.00 64,241 5.28
Total risk-based
capital ratio 152,500 12.54 121,653 10.00 30,847 2.54
</TABLE>
Asset/Liability Management and Liquidity
The Company's asset/liability management policy and liquidity
are discussed in the 1998 Annual Report to Shareholders. No
significant changes have occurred during the six months ended
June 30, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
The Company discussed the nature and extent of market risk
exposure in the 1998 Annual Report to Shareholders. No
significant changes have occurred during the six months ended
June 30, 1999.
11
<PAGE>
PART II. OTHER INFORMATION
Items 1 to 5.
Items 1 to 5 are omitted pursuant to instructions to Part II.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Financial Data Schedule as of and for the six
months ended June 30, 1999, 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 second quarter of 1999.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CPB INC.
(Registrant)
Date: August 10, 1999 /s/ Joichi Saito
Joichi Saito
Chairman of the Board and
Chief Executive Officer
Date: August 10, 1999 /s/ Neal K. Kanda
Neal K. Kanda
Vice President and Treasurer
(Principal Financial and
Accounting Officer)
13
<PAGE>
CPB INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands, except per share data) 1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 47,972 $ 42,735
Interest-bearing deposits in other banks 69 10,469
Investment securities:
Held to maturity, at cost (fair value of $106,921 at
June 30, 1999 and $123,226 at December 31, 1998) 107,414 120,476
Available for sale, at fair value 188,955 230,960
Total investment securities 296,369 351,436
Loans 1,185,122 1,105,912
Less allowance for loan losses 20,735 20,066
Net loans 1,164,387 1,085,846
Premises and equipment 25,811 26,833
Accrued interest receivable 9,156 9,122
Investment in unconsolidated subsidiaries 8,096 7,990
Due from customers on acceptances 12 32
Other real estate 509 1,155
Other assets 24,270 25,267
Total assets $1,576,651 $1,560,885
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits $ 175,420 $ 186,892
Interest-bearing deposits 1,082,167 1,082,231
Total deposits 1,257,587 1,269,123
F-1
<PAGE>
Short-term borrowings 37,949 2,014
Long-term debt 114,584 118,289
Bank acceptances outstanding 12 32
Other liabilities 17,385 23,361
Total liabilities 1,427,517 1,412,819
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 9,697,954 shares at June 30,
1999, and 9,797,596 shares at December 31, 1998 6,728 6,637
Surplus 45,848 45,848
Retained earnings 98,011 94,954
Accumulated other comprehensive income, net of taxes (1,453) 627
Total stockholders' equity 149,134 148,066
Total liabilities and stockholders' equity $1,576,651 $1,560,885
Book value per share $15.38 $15.11
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-2
<PAGE>
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
Three Months Ended Six Months Ended
(Dollars in thousands, June 30, June 30,
except per share data) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $23,151 $22,865 $45,750 $45,213
Interest and dividends on
investment securities:
Taxable interest 3,645 4,522 7,989 9,058
Tax-exempt interest 431 328 850 621
Dividends 321 317 680 625
Interest on deposits in other banks 93 272 119 649
Interest on Federal funds sold and
securities purchased under
agreements to resell 20 2 31 2
Total interest income 27,661 28,306 55,419 56,168
Interest expense:
Interest on deposits 8,974 9,742 17,831 19,314
Interest on short-term borrowings 165 217 445 398
Interest on long-term debt 1,551 1,995 3,174 3,896
Total interest expense 10,690 11,954 21,450 23,608
Net interest income 16,971 16,352 33,969 32,560
Provision for loan losses 700 1,125 2,200 2,100
Net interest income after
provision for loan losses 16,271 15,227 31,769 30,460
Other operating income:
Income from fiduciary activities 186 157 363 300
Service charges on deposit accounts 800 727 1,614 1,458
Other service charges and fees 1,690 1,581 3,310 3,168
F-3
<PAGE>
Equity in earnings of
unconsolidated subsidiaries 111 87 207 190
Fees on foreign exchange 134 153 304 310
Investment securities gains 16 - 219 -
Other 246 420 502 582
Total other operating income 3,183 3,125 6,519 6,008
Other operating expense:
Salaries and employee benefits 6,768 6,465 13,319 13,128
Net occupancy 1,556 1,590 3,082 3,182
Equipment 669 709 1,399 1,425
Other 4,381 3,998 8,643 7,488
Total other operating expense 13,374 12,762 26,443 25,223
Income before income taxes 6,080 5,590 11,845 11,245
Income taxes 2,105 1,815 4,191 3,842
Net income $ 3,975 $ 3,775 $ 7,654 $7,403
Other comprehensive income (loss),
net of taxes:
Unrealized holding (losses) gains
on securities:
Unrealized holding (losses) gains
during period, net of taxes of
$(1,008,000), $(31,000),
$(1,303,000) and $(8,000),
respectively (1,514) (48) (1,958) (13)
Less: reclassification adjustment
for gains included in net income,
net of taxes of $(18,000) and
$81,000, respectively (27) - 122 -
Net unrealized holding (losses)
gains (1,487) (48) (2,080) (13)
Comprehensive income $ 2,488 $ 3,727 $ 5,574 $ 7,390
F-4
<PAGE>
Per share data:
Basic earnings per share $ 0.41 $ 0.36 $ 0.79 $ 0.70
Diluted earnings per share 0.41 0.35 0.78 0.69
Cash dividends declared 0.14 0.13 0.27 0.26
Weighted average shares outstanding
(in thousands) 9,702 10,611 9,740 10,599
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-5
<PAGE>
CPB INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(Dollars in thousands) 1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,654 $ 7,403
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Provision for loan losses 2,200 2,100
Provision for depreciation and
amortization 1,441 1,505
Net amortization and accretion of
investment securities 149 81
Net gain on investment securities (219) -
Federal Home Loan Bank stock
dividends received (653) (625)
Net loss on sale of loans 78 149
Proceeds from sales of loans held
for sale 22,535 29,316
Originations and purchases of loans
held for sale (57,716) (38,248)
Deferred income tax expense 3,728 460
Equity in earnings of unconsolidated
subsidiaries (207) (190)
Net decrease in other assets 540 2,752
Net decrease in other liabilities (6,532) (576)
Net cash (used in) provided by
operating activities (27,002) 4,127
Cash flows from investing activities:
Proceeds from maturities of and calls on
investment securities held to maturity 14,108 28,306
Purchases of investment securities
held to maturity (1,088) (20,746)
Proceeds from sales of investment
securities available for sale 23,017 -
Proceeds from maturities of and calls
on investment securities available
for sale 40,481 16,276
Purchases of investment securities
available for sale (24,192) (31,454)
Net decrease in interest-bearing
deposits in other banks 10,400 14,307
Net loan originations (46,392) (28,384)
Purchases of premises and equipment (419) (1,434)
Distributions from unconsolidated
subsidiaries 174 220
F-6
<PAGE>
Investments in unconsolidated
subsidiaries (122) (50)
Net cash provided by (used in)
investing activities 15,967 (22,959)
Cash flows from financing activities:
Net (decrease) increase in deposits (11,536) 12,660
Proceeds from long-term debt 22,550 20,000
Repayments of long-term debt (26,255) (11,207)
Net increase (decrease) in short-term
borrowings 35,935 (1,505)
Cash dividends paid (2,543) (2,754)
Proceeds from sale of common stock 168 392
Repurchases of common stock (2,047) -
Net cash provided by financing
activities 16,272 17,586
Net increase (decrease) in cash
and cash equivalents 5,237 (1,246)
Cash and cash equivalents:
At beginning of period 42,735 50,695
At end of period $ 47,972 $ 49,449
Supplemental disclosure of cash flow
information:
Cash paid during the period
for interest $ 21,252 $ 23,799
Cash paid during the period
for income taxes $ 7,200 $ 1,400
Supplemental disclosure of noncash
investing and financing activities:
Transfer of loans to other real estate $ 754 $ 324
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
F-7
<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, 1998.
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 six months ended
June 30, 1999 are not necessarily indicative of the results to be
expected for the full year.
2. Comprehensive Income
Components of other comprehensive income for the three and six
months ended June 30, 1999 and 1998 were comprised solely of
unrealized holding gains (losses) on available-for-sale
investment securities. Accumulated other comprehensive income,
net of taxes, is presented below as of the dates indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Balance at beginning of period $ 34 $129 $ 627 $ 94
Current-period change (1,487) (48) (2,080) (13)
Balance at end of period $(1,453) $ 81 $(1,453) $ 81
</TABLE>
3. Segment Information
The Company has three reportable segments: retail branches,
commercial finance and treasury. The segments reported are
consistent with internal functional reporting lines. They are
managed separately because each unit has different target
markets, technological requirements, marketing strategies and
specialized skills. The retail branch segment includes all
retail branch offices. Products and services offered include a
full range of deposit and loan products, safe deposit boxes and
various other bank services. The commercial finance segment
focuses on lending to corporate customers, residential mortgage
lending, construction and real estate development lending and
international banking services. The treasury segment is
responsible for managing the Company's investment securities
portfolio and wholesale funding activities.
The accounting policies of the segments are consistent with
the Company's accounting policies which are described in note 1
to the consolidated financial statements in the 1998 Annual
Report to Shareholders. The majority of the Company's net income
F-8
<PAGE>
is derived from net interest income. Accordingly, Management
focuses primarily on net interest income (expense), rather than
gross interest income and expense amounts, in evaluating segment
profitability. Intersegment net interest income (expense) is
allocated to each segment based on the amount of net investable
funds provided (used) by that segment at a rate equal to the
Bank's average rate on interest-sensitive assets and liabilities.
All administrative and overhead expenses are allocated to the
segments at cost. Cash, investment securities, loans and their
related balances are allocated to the segment responsible for
acquisition and maintenance of those assets. Segment assets also
include all premises and equipment used directly in segment
operations.
Segment profits and assets are provided in the following table
for the periods indicated.
F-9
<PAGE>
<TABLE>
<CAPTION>
Retail Commercial All
(Dollars in thousands) Branch Finance Treasury Others Total
<S> <C> <C> <C> <C> <C>
Three months ended June 30, 1999:
Net interest income (expense) $ (2,234) $ 16,908 $ 1,666 $ 631 $ 16,971
Intersegment net interest
income (expense) 11,228 (11,176) 231 (283) -
Provision for loan losses 127 562 - 11 700
Other income 1,185 123 28 1,847 3,183
Other expense 3,917 895 87 8,475 13,374
Administrative and overhead
expense allocation 4,555 948 83 (5,586) -
Income tax expense 555 1,165 611 (226) 2,105
Net income $ 1,025 $ 2,285 $ 1,144 $ (479) $ 3,975
Three months ended June 30, 1998:
Net interest income (expense) $ (2,368) $ 15,352 $ 1,964 $ 1,404 $ 16,352
Intersegment net interest
income (expense) 11,329 (10,879) 182 (632) -
Provision for loan losses 515 389 - 221 1,125
Other income 983 43 3 2,096 3,125
Other expense 3,999 912 91 7,760 12,762
Administrative and overhead
expense allocation 3,814 1,101 50 (4,965) -
Income tax expense 621 809 769 (384) 1,815
Net income $ 995 $ 1,305 $ 1,239 $ 236 $ 3,775
Six months ended June 30, 1999:
Net interest income (expense) $ (4,165) $ 33,050 $ 3,746 $ 1,338 $ 33,969
Intersegment net interest
income (expense) 22,160 (21,852) 251 (559) -
Provision for loan losses 219 1,910 - 71 2,200
Other income 2,347 202 250 3,720 6,519
Other expense 7,934 1,652 158 16,699 26,443
Administrative and overhead
expense allocation 8,696 1,735 139 (10,570) -
Income tax expense 1,244 2,111 1,409 (573) 4,191
Net income $ 2,249 $ 3,992 $ 2,541 $ (1,128) $ 7,654
F-10
Six months ended June 30, 1998:
Net interest income (expense) $ (4,656) $ 30,076 $ 4,286 $ 2,854 $ 32,560
Intersegment net interest
income (expense) 22,677 (21,260) (113) (1,304) -
Provision for loan losses 711 887 - 502 2,100
Other income 1,992 163 6 3,847 6,008
Other expense 7,909 2,265 148 14,901 25,223
Administrative and overhead
expense allocation 7,277 1,962 96 (9,335) -
Income tax expense 1,566 1,461 1,385 (570) 3,842
Net income $ 2,550 $ 2,404 $ 2,550 $ (101) $ 7,403
At June 30, 1999:
Investment securities $ - $ - $296,369 $ - $ 296,369
Loans 281,811 884,575 - 18,736 1,185,122
Other 22,284 21,473 30,353 21,050 95,160
Total assets $304,095 $906,048 $326,722 $ 39,786 $1,576,651
At December 31, 1998:
Investment securities $ - $ - $351,436 $ - $ 351,436
Loans 286,221 799,745 - 19,946 1,105,912
Other 23,291 20,279 34,741 25,226 103,537
Total assets $309,512 $820,024 $386,177 $ 45,172 $1,560,885
</TABLE>
F-11
<PAGE>
4. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("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. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of SFAS Statement No. 133," which deferred the
effective date of SFAS No. 133. SFAS No. 133, as amended, is now
effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Earlier application is permitted only as of the
beginning of a fiscal quarter. The application of SFAS No. 133,
as amended, effective from January 1, 2001, is not expected to
have a material impact on the Company's consolidated financial
statements.
In February 1999, the FASB issued SFAS No. 135, "Rescission of
FASB Statement No. 75 and Technical Corrections." SFAS No. 135,
effective for fiscal years ending after February 15, 1999,
rescinds SFAS No. 75, "Deferral of the Effective Date of Certain
Accounting Requirements for Pension Plans of State and Local
Governmental Units," and amends SFAS No. 35, "Accounting and
Reporting by Defined Benefit Pension Plans," to exclude from its
scope plans that are sponsored by and provide benefits for
employees of state and local governmental units. SFAS No. 135
also amends other existing authoritative guidance to make various
technical corrections, clarify meanings, or describe
applicability under changed conditions. As the rescission of
SFAS No. 75 and amendment of SFAS No. 35 relate solely to
governmental entities, and as the technical corrections do not
significantly change existing authoritative guidance, the
application of SFAS No. 135 is not expected to have a material
impact on the Company's consolidated financial statements.
F-12
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000701347
<NAME> CPB INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 47,972
<INT-BEARING-DEPOSITS> 69
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 188,955
<INVESTMENTS-CARRYING> 107,414
<INVESTMENTS-MARKET> 106,921
<LOANS> 1,185,122
<ALLOWANCE> 20,735
<TOTAL-ASSETS> 1,576,651
<DEPOSITS> 1,257,587
<SHORT-TERM> 37,949
<LIABILITIES-OTHER> 17,385
<LONG-TERM> 114,584
0
0
<COMMON> 6,728
<OTHER-SE> 142,406
<TOTAL-LIABILITIES-AND-EQUITY> 1,576,651
<INTEREST-LOAN> 45,750
<INTEREST-INVEST> 9,519
<INTEREST-OTHER> 150
<INTEREST-TOTAL> 55,419
<INTEREST-DEPOSIT> 17,831
<INTEREST-EXPENSE> 21,450
<INTEREST-INCOME-NET> 33,969
<LOAN-LOSSES> 2,200
<SECURITIES-GAINS> 219
<EXPENSE-OTHER> 26,443
<INCOME-PRETAX> 11,845
<INCOME-PRE-EXTRAORDINARY> 7,654
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,654
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 4.70
<LOANS-NON> 10,482
<LOANS-PAST> 3,104
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 20,066
<CHARGE-OFFS> 1,828
<RECOVERIES> 297
<ALLOWANCE-CLOSE> 20,735
<ALLOWANCE-DOMESTIC> 12,025
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 8,710
</TABLE>
