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 March 31, 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 May 10, 1999: 9,690,776 shares
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 - March 31, 1999 and December 31, 1998 F-1 Consolidated Statements of Income and Comprehensive Income - Three months ended March 31, 1999 and 1998 F-3 Consolidated Statements of Cash Flows - Three months ended March 31, 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 first quarter 1999 net income of $3.679 million, increasing by 1.4% over the $3.628 million earned in the first quarter of 1998. The increase in net income was mainly due to increases in net interest income and other operating income, offset by increases in the provision for loan losses and other operating expenses. As of March 31, 1999, total assets of $1,571.4 million increased by $10.5 million or 0.7%, and net loans of $1,131.6 million increased by $45.7 million or 4.2%, while total deposits of $1,262.7 million decreased by $6.4 million or 0.5% 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 March 31, 1999 1998 <S> <C> <C> Annualized return on average assets 0.95% 0.97% Annualized return on average stockholders' equity 9.81% 9.43% Basic earnings per share $0.38 $0.34 Diluted earnings per share $0.37 $0.34 </TABLE> 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 March 1999 dropped to 5.7%, from 6.1% in March 1998 and 5.8% in February 1999. The unemployment 1
rate on the island of Oahu was 4.9%, closer to the national rate of 4.2%. In 1998, Hawaii's largest industry, tourism, suffered from the Asian financial crisis and increased competition from other vacation destinations. However, recent activity indicates a slight improvement. Year-to-date visitor arrivals through February were comparable to 1998 levels, reflecting a 6.6% increase in westbound visitors (primarily from the mainland U.S.) which offset a 10.0% decrease in eastbound visitors (including Japan and other Asian countries). Similarly, hotel occupancy rates have stabilized in the first quarter of 1999, after 23 consecutive months of decline. Hotels on the islands of Maui and Kauai posted strong increases in March 1999 occupancy rates compared to March 1998, while the statewide occupancy rate was virtually unchanged from the previous year. 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 Oahu in the first quarter of 1999 increasing by 9.5% over the first quarter of 1998, following a 17.7% increase in 1998 over 1997. The combination of low interest rates and relatively stable real estate prices has contributed to the increased sales activity. 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 commercial and 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 success 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. No major problems were identified during this testing phase, and any remediation and retesting is expected to be completed in the first half of 1999. The Company's efforts are now focused on customer awareness and preparedness and contingency planning. 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 loss. Customers representing approximately 2% of 2
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 approximately $3.5 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. 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 months ended March 31, 1999 and 1998 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." 3
<TABLE> <CAPTION> Three Months Ended March 31, 1999 1998 (Dollars in thousands) <S> <C> <C> Interest income $28,058 $28,107 Interest expense 10,760 11,654 Net interest income $17,298 $16,453 Net interest margin 4.72% 4.66% </TABLE> Net interest margin was impacted by the recovery of more than $200,000 in interest income on nonaccrual loans during the first quarter of 1999, compared with reversal of more than $350,000 in interest income on nonaccrual loans in the first quarter of 1998. Interest income was virtually unchanged in the first quarter of 1999 compared to the same period in 1998. Average interest earning assets of $1,466.6 million increased by $55.3 million or 3.9%, reflecting a $70.3 million increase in average loans and a $9.0 million decrease in average investment securities. The yield on interest earning assets of 7.65% for the first quarter of 1999 decreased from the 7.97% yield for the first quarter of 1998 due primarily to a reduction in the general level of interest rates during the past year. Interest and fees on loans increased by $251,000 or 1.1% in the first three months of 1999 when compared with the first quarter of 1998. Excluding the $550,000 net benefit from interest on nonaccrual loans, the decline in interest and fees on loans was attributed to the reduction in loan yields due to the decline in market interest rates. Interest and dividends on investment securities was virtually unchanged, while interest on deposits in other banks declined by $351,000 due to a reduction in short-term investable funds compared to the prior year. Interest expense for the three months of 1999 decreased by $894,000 or 7.7% as compared to the same period in 1998. Average interest-bearing liabilities of $1,211.0 million increased by $43.7 million or 3.7% during the period, including a $30.9 million increase in money-market deposits and a $20.6 million increase in time deposits of $100,000 or more. The average rate on interest-bearing liabilities declined to 3.55% in the first quarter of 1999 from 3.99% in the first quarter of 1998 due primarily to the decline in market interest rates. The resultant net interest income for the first quarter of 1999 of $17.3 million increased by $845,000 or 5.1%, and net interest margin improved to 4.72% from 4.66%. However, excluding the impact of the nonaccrual interest adjustments, net interest margin declined by ten basis points. 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. 4
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 March 31, 1999 1998 (Dollars in thousands) <S> <C> <C> Allowance for loan losses: Balance at beginning of period $20,066 $19,164 Provision for loan losses 1,500 975 Loan charge-offs: Real estate: Mortgage-commercial 700 - Mortgage-residential 546 211 Construction - - Commercial, financial and agricultural - 19 Consumer: Credit card and related plans 5 206 Other consumer 96 119 Other 1 1 Total loan charge-offs 1,348 556 Recoveries: Real estate: Mortgage-commercial 27 1 Mortgage-residential 3 28 5
Construction - - Commercial, financial and agricultural 30 4 Consumer: Credit card and related plans 34 12 Other consumer 25 18 Other - - Total recoveries 119 63 Net loan charge-offs 1,229 493 Balance at end of period $20,337 $19,646 Annualized ratio of net loan charge-offs to average loans 0.44% 0.19% </TABLE> The provision for loan losses of $1.5 million for the first quarter of 1999 increased by 53.8% over the same period in 1998, reflecting the higher level of loan losses experienced during the past year. Net loan charge-offs of $1.2 million and $493,000, when expressed as an annualized percentage of average total loans, was 0.44% and 0.19%, respectively. Loan charge-offs during the first quarter of 1999 included a $700,000 charge-off on a hotel-related commercial loan and several residential real estate loans. Consumer loan charge-offs decreased to 7% of total charge-offs during the first three months of 1999, compared to 58% in the first quarter of 1998, due primarily to the sale of the credit card portfolio in the third quarter of 1998. The allowance for loan losses expressed as a percentage of total loans was 1.77% at March 31, 1999, declining slightly from 1.81% at December 31, 1998. Considering the decline 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, 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. <TABLE> <CAPTION> March 31, December 31, March 31, 1999 1998 1998 (Dollars in thousands) <S> <C> <C> <C> Nonaccrual loans: Real estate: Mortgage-commercial $ 4,214 $ 6,830 $13,706 Mortgage-residential 5,403 5,037 1,352 Construction - - - 6
Commercial, financial and agricultural 1,893 1,065 2,367 Consumer - - 41 Other - - - Total nonaccrual loans 11,510 12,932 17,466 Other real estate 304 1,155 3,430 Total nonperforming assets 11,814 14,087 20,896 Loans delinquent for 90 days or more: Real estate: Mortgage-commercial 312 315 1,354 Mortgage-residential 4,234 4,206 9,992 Construction - - - Commercial, financial and agricultural 215 706 147 Consumer 183 168 722 Other - - - Total loans delinquent for 90 days or more 4,944 5,395 12,215 Restructured loans still accruing interest: Real estate: Mortgage-commercial - - 2,727 Mortgage-residential - - - Construction - - - Commercial, financial and agricultural - - - Consumer - - - Other - - - Total restructured loans still accruing interest - - 2,727 Total nonperforming assets, loans delin- quent for 90 days or more and restructured loans still accruing interest $16,758 $19,482 $35,838 Total nonperforming assets as a percentage of loans and other real estate 1.03% 1.27% 1.93% Total nonperforming assets and loans delinquent for 90 days or more as a percentage of loans 7
and other real estate 1.45% 1.76% 3.05% 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 1.45% 1.76% 3.31% </TABLE> Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $16.8 million at March 31, 1999, a decrease of $2.7 million or 14.0% 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 $11.5 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 Oahu. Nonaccrual loans at March 31, 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 $4.9 million at March 31, 1999, a slight decrease from year-end 1998 levels. Impaired loans at March 31, 1999 totaled $9.2 million and included all nonaccrual and restructured loans greater than $500,000. The allowance for loan losses allocated to impaired loans amounted to $2.0 million at March 31, 1999. Management continues to closely monitor loan delinquencies and work with borrowers to resolve loan problems; however, continuation of the 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 for the first quarter of 1999 of $3.3 million increased by $453,000 or 15.7% over the first quarter of 1998. A gain on sale of investment securities of $203,000 and increased earnings on corporate-owned life insurance policies contributed to the increase in other operating income. Other Operating Expense Total other operating expense of $13.1 million for the first quarter of 1999 increased by $608,000 or 4.9% over the same period in 1998. This increase was primarily attributed to a $350,000 accrual for potential losses on an international debit card fraud scheme and outsourcing expenses related to the servicing of merchant accounts. Management expects to recover a portion of the debit card loss during the second quarter of 1999 and has installed additional manual and technological controls to minimize the risk of future losses of this nature. 8
Income Taxes The effective tax rate for the first quarter of 1999 was 36.18%, compared with the previous year's rate of 35.84%. The tax rate 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 March 31, 1999, the cumulative estimated tax benefits not yet recognized amounted to $1.4 million. Financial Condition Total assets at March 31, 1999 of $1.57 billion increased by $10.5 million or 0.7% over year-end 1998. Net loans of $1.13 billion increased by $45.7 million or 4.2%, funded by a decrease in investments securities of $34.4 million or 9.8%. Total deposits at March 31, 1999 of $1.26 billion decreased by $6.4 million or 0.5% from year-end 1998. Noninterest-bearing deposits of $180.7 million decreased by $6.2 million or 3.3%, 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 March 31, 1999 of $922.2 million decreased slightly by $2.8 million or 0.3% during the first quarter of 1999, and time deposits of $100,000 and over of $340.5 million decreased by $3.6 million or 1.1%. The decrease in core deposits included decreases of $4.6 million in business checking accounts and $4.4 million in business money market deposits, offset by a $5.6 million increase in personal savings 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 $149.2 million at March 31, 1999 increased by $1.2 million or 0.8% over December 31, 1998. When expressed as a percentage of total assets, stockholders' equity increased slightly to 9.50% at March 31, 1999, compared to 9.49% at year-end 1998. On March 15, 1999, the board of directors declared a first quarter cash dividend of $0.13 per share, consistent with the dividend declared in the first quarter of 1998. Dividends declared in the first quarter of 1999 totaled $1,269,000 compared with $1,379,000 in the first quarter of 1998, an 8.0% decrease resulting from the reduction in outstanding shares due to the stock repurchase program which commenced in 1998. As of March 31, 1999, a total of 877,988 out of an approved 1.1 million shares have been repurchased under the Company's stock repurchase program at a weighted average price of $17.36. 9
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 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-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 by 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 March 31, 1999: Leverage capital ratio $149,095 9.59% $62,156 4.00% $86,939 5.59% Tier I risk-based capital ratio 149,095 11.83 50,423 4.00 98,672 7.83 Total risk-based capital ratio 164,909 13.08 100,847 8.00 64,062 5.08 At December 31, 1998: Leverage capital ratio $147,338 9.71% $60,722 4.00% $86,616 5.71% Tier I 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 I and total risk-based capital ratios of at least 5%, 6% and 10%, respectively, to be considered "well 10
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 March 31, 1999: Leverage capital ratio $139,661 9.00% $77,589 5.00% $62,072 4.00% Tier I risk-based capital ratio 139,661 11.09 75,563 6.00 64,098 5.09 Total risk-based capital ratio 155,460 12.34 125,939 10.00 29,521 2.34 At December 31, 1998: Leverage capital ratio $137,233 9.05% $75,795 5.00% $61,438 4.05% Tier I 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 three months ended March 31, 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 three months ended March 31, 1999. 11
PART II. OTHER INFORMATION Items 1 to 3 and Item 5. Items 1 to 3 and Item 5 are omitted pursuant to instructions to Part II. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders (the "Meeting") of the Company was held on April 27, 1999, for the purpose of considering and voting upon the following matters: 1. Election of three persons to the Board of Directors for a term of three years and to serve until their successors are elected and qualified; 2. Ratification of the appointment of KPMG LLP as the Company's independent accountants for the fiscal year ending December 31, 1999; and 3. Transaction of such other business as may properly come before the Meeting and at any and all adjournments thereof. The following table presents the names of directors elected at the Meeting, as well as the number of votes cast for, votes cast against or withheld, and abstentions or nonvotes for each of the directors nominated. A total of 7,758,137 shares, or 79.4% of eligible shares, were represented at the Meeting. <TABLE> <CAPTION> Votes Cast Against or Abstentions Name For Withheld or Nonvotes <S> <C> <C> <C> Alice F. Guild 7,583,428 174,709 None Daniel M. Nagamine 7,570,220 187,917 None Naoaki Shibuya 7,598,232 159,905 None </TABLE> In addition to the above directors, the following directors will continue to serve on the Board of Directors until the expiration of their respective terms as indicated. <TABLE> <CAPTION> Expiration Name of Term <S> <C> Paul Devens 2000 Dennis I. Hirota, Ph.D. 2001 Stanley W. Hong 2000 Kensuke Hotta 2001 Joichi Saito 2001 Clayton K. Honbo 2000 </TABLE> 12
The ratification of the appointment of KPMG LLP as independent accountants for the fiscal year ending December 31, 1999 was approved with a total of 7,671,359 votes cast for, 35,790 votes against or withheld and 50,988 abstentions or nonvotes. There were no other matters brought before the Meeting which required a vote by shareholders. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The Financial Data Schedule as of and for the three months ended March 31, 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 first quarter of 1999. 13
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: May 12, 1999 /s/ Joichi Saito Joichi Saito Chairman of the Board and Chief Executive Officer Date: May 12, 1999 /s/ Neal K. Kanda Neal K. Kanda Vice President and Treasurer (Principal Financial and Accounting Officer) 14
CPB INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> March 31, December 31, (Dollars in thousands, except per share data) 1999 1998 <S> <C> <C> ASSETS Cash and due from banks $ 53,235 $ 42,735 Interest-bearing deposits in other banks 55 10,469 Investment securities: Held to maturity, at cost (fair value of $120,651 at March 31, 1999 and $123,226 at December 31, 1998) 119,045 120,476 Available for sale, at fair value 198,001 230,960 Total investment securities 317,046 351,436 Loans 1,151,921 1,105,912 Less allowance for loan losses 20,337 20,066 Net loans 1,131,584 1,085,846 Premises and equipment 26,411 26,833 Accrued interest receivable 9,398 9,122 Investment in unconsolidated subsidiaries 8,147 7,990 Due from customers on acceptances 56 32 Other real estate 304 1,155 Other assets 25,114 25,267 Total assets $1,571,350 $1,560,885 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing deposits $ 180,737 $ 186,892 Interest-bearing deposits 1,081,966 1,082,231 Total deposits 1,262,703 1,269,123 F-1
Short-term borrowings 19,586 2,014 Long-term debt 121,931 118,289 Bank acceptances outstanding 56 32 Other liabilities 17,834 23,361 Total liabilities 1,422,110 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 9,762,236 shares at March 31, 1999, and 9,797,596 shares at December 31, 1998 6,683 6,637 Surplus 45,848 45,848 Retained earnings 96,675 94,954 Accumulated other comprehensive income, net of taxes 34 627 Total stockholders' equity 149,240 148,066 Total liabilities and stockholders' equity $1,571,350 $1,560,885 Book value per share $15.29 $15.11 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-2
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended (Dollars in thousands, March 31, except per share data) 1999 1998 <S> <C> <C> Interest income: Interest and fees on loans $22,599 $22,348 Interest and dividends on investment securities: Taxable interest 4,344 4,536 Tax-exempt interest 419 293 Dividends 359 308 Interest on deposits in other banks 26 377 Interest on Federal funds sold and securities purchased under agreements to resell 11 - Total interest income 27,758 27,862 Interest expense: Interest on deposits 8,857 9,572 Interest on short-term borrowings 280 181 Interest on long-term debt 1,623 1,901 Total interest expense 10,760 11,654 Net interest income 16,998 16,208 Provision for loan losses 1,500 975 Net interest income after provision for loan losses 15,498 15,233 Other operating income: Income from fiduciary activities 177 143 Service charges on deposit accounts 814 731 Other service charges and fees 1,620 1,587 F-3
Equity in earnings of unconsolidated subsidiaries 96 103 Fees on foreign exchange 170 157 Investment securities gains 203 - Other 256 162 Total other operating income 3,336 2,883 Other operating expense: Salaries and employee benefits 6,551 6,663 Net occupancy 1,526 1,592 Equipment 730 716 Other 4,262 3,490 Total other operating expense 13,069 12,461 Income before income taxes 5,765 5,655 Income taxes 2,086 2,027 Net income $ 3,679 $ 3,628 Other comprehensive income, before tax: Unrealized holding (losses) gains on securities: Unrealized holding (losses) gains during period, net of taxes of $(395,000) and $23,000 in 1999 and 1998, respectively (593) 35 Less: reclassification adjustment for gains included in net income, net of taxes of $81,000 in 1999 122 - Net unrealized holding (losses) gains (715) 35 Comprehensive income $ 2,964 $ 3,663 F-4
Per share data: Basic earnings per share $ 0.38 $ 0.34 Diluted earnings per share 0.37 0.34 Cash dividends declared 0.13 0.13 Weighted average shares outstanding (in thousands) 9,778 10,586 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-5
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, (Dollars in thousands) 1999 1998 <S> <C> <C> Cash flows from operating activities: Net income $ 3,679 $ 3,628 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Provision for loan losses 1,500 975 Provision for depreciation and amortization 724 771 Net amortization and accretion of investment securities 49 39 Net gain on investment securities (203) - Federal Home Loan Bank stock dividends received (332) (308) Net loss on sale of loans 44 25 Net increase in loans held for sale (20,220) (3,779) Deferred income tax expense 2,054 201 Equity in earnings of unconsolidated subsidiaries (96) (103) Net increase other assets (244) (194) Net decrease in other liabilities (5,861) (481) Net cash (used in) provided by operating activities (18,906) 774 Cash flows from investing activities: Proceeds from maturities of and calls on investment securities held to maturity 2,498 14,220 Purchases of investment securities held to maturity (1,088) (19,142) Proceeds from sales of investment securities available for sale 15,102 - Proceeds from maturities of and calls on investment securities available for sale 25,829 9,701 Purchases of investment securities available for sale (8,453) (13,289) Net decrease in interest-bearing deposits in other banks 10,414 14,269 Net loan originations (27,385) (36,919) Purchases of premises and equipment (302) (515) Investment in unconsolidated subsidiaries (86) (50) Net cash provided by (used in) investing activities 16,529 (31,725) F-6
Cash flows from financing activities: Net (decrease) increase in deposits (6,420) 7,145 Proceeds from long-term debt 19,250 10,000 Repayments of long-term debt (15,608) (603) Net increase in short-term borrowings 17,572 8,535 Cash dividends paid (1,274) (1,375) Proceeds from sale of common stock 74 290 Repurchases of common stock (717) - Net cash provided by financing activities 12,877 23,992 Net increase (decrease) in cash and cash equivalents 10,500 (6,959) Cash and cash equivalents: At beginning of period 42,735 50,695 At end of period $ 53,235 $ 43,736 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 10,223 $ 11,162 Cash paid during the period for income taxes $ 7,200 $ 450 Supplemental disclosure of noncash investing and financing activities: Transfer of loans to other real estate $ 323 $ 324 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-7
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 months ended March 31, 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 months ended March 31, 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> March 31, (Dollars in thousands) 1999 1998 <S> <C> <C> Balance at beginning of period $627 $ 94 Current-period change (593) 35 Balance at end of period $ 34 $129 </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 is derived from net interest income. Accordingly, Management F-8
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
<TABLE> <CAPTION> Retail Commercial All (Dollars in thousands) Branch Finance Treasury Others Total <S> <C> <C> <C> <C> <C> Three months ended March 31, 1999: Net interest income (expense) $ (1,931) $ 16,142 $ 2,080 $ 707 $ 16,998 Intersegment net interest income (expense) 10,932 (10,676) 20 (276) - Provision for loan losses 92 1,348 - 60 1,500 Other income 1,162 79 222 1,873 3,336 Other expense 4,017 757 71 8,224 13,069 Administrative and overhead expense allocation 4,141 787 56 (4,984) - Income tax expense 689 946 798 (347) 2,086 Net income $ 1,224 $ 1,707 $ 1,397 $ (649) $ 3,679 At March 31, 1999: Investment securities $ - $ - $317,046 $ - $ 317,046 Loans 282,151 850,476 - 19,294 1,151,921 Other 23,485 20,675 35,780 22,443 102,383 Total assets $305,636 $871,151 $352,826 $41,737 $1,571,350 Three months ended March 31, 1998: Net interest income (expense) $ (2,288) $ 14,724 $ 2,322 $ 1,450 $ 16,208 Intersegment net interest income (expense) 11,348 (10,381) (295) (672) - Provision for loan losses 196 498 - 281 975 Other income 1,009 120 3 1,751 2,883 Other expense 3,910 1,353 57 7,141 12,461 Administrative and overhead expense allocation 3,463 861 46 (4,370) - Income tax expense 945 652 616 (186) 2,027 Net income $ 1,555 $ 1,099 $ 1,311 $ (337) $ 3,628 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-10
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. 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, effective from January 1, 2000, 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-11