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, 1997 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, $1.25 Stated Value; Outstanding at June 30, 1997: 5,275,494 shares
PART I - FINANCIAL INFORMATION Item 1. Financial Statements The financial statements listed below are filed as a part hereof. Page Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 F-1 Consolidated Statements of Income - Three and six months ended June 30, 1997 and 1996 F-2 Consolidated Statements of Cash Flows - Six months ended June 30, 1997 and 1996 F-3 Notes to Consolidated Financial Statements F-4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview CPB Inc. (the "Company") posted second quarter 1997 net income of $3.680 million, increasing by 2.9% over the $3.577 million earned in the second quarter of 1996, with increased net interest income offsetting a $300,000 increase in the provision for loan losses. Net income for the first six months of 1997 was $7.271 million, increasing by 2.0% over the $7.131 million earned in the same period in 1996. A reduction in salaries and benefits contributed to this increase. As of June 30, 1997, total assets of $1,450.2 million increased by $47.0 million or 3.3%, net loans of $1,033.7 million increased by $11.2 million or 1.1% and total deposits of $1,163.3 million increased by $39.7 million or 3.5% compared with year-end 1996. 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 Six Months Ended June 30, June 30, 1997 1996 1997 1996 Annualized return on average assets 1.04% 1.06% 1.03% 1.05% Annualized return on average stockholders' equity 10.16% 10.56% 10.11% 10.57% Earnings per share $0.70 $0.68 $1.38 $1.36 Hawaii's economy remains in a slump, with little likelihood of recovery in the near future. Bankruptcies and foreclosures are at record levels, a product of the prolonged economic downturn. 1
Chapter 7 liquidations during the first half of 1997 increased by 54% over the same period in 1996, while Chapter 13 filings increased by more than 85% over last year's record levels. Reflecting some improvement in the economy, the unemployment rate improved slightly to 6.6% in June 1997, from 6.9% a year earlier, although still higher than the June 1997 national average of 5.2%. The visitor industry has sustained the economy in recent years; however, visitor counts during the first six months of 1997 declined by 0.6% from 1996 levels. Tourism from Japan has dropped off in recent months, due in part to the strengthening of the U.S. dollar relative to the Japanese yen, but improvement in national economic conditions is expected to result in increases in westbound tourism (from the mainland U.S.). The development of the Hawaii Convention Center, targeted for completion in the fourth quarter of 1997, is expected to provide a further stimulus for future growth in the visitor industry. Likewise, the real estate market continues to suffer from the economic downturn. Existing single-family home sales during the first half of 1997 declined by more than 5%, with average sales prices declining nearly 10%, compared to the first half of 1996. Meanwhile, the commercial real estate market has stabilized, although at a level significantly lower than the peaks of the late 1980's. Examples of such are a luxury hotel in Maui which recently sold at slightly more than 50% of its original 1990 purchase price, and the pending sale of a lot in Waikiki at an anticipated sales price of $6.8 million, 60% of its 1988 purchase price. Such economic conditions have had, and will likely continue to have, an adverse effect on our Company. Indicative of this economic environment, Central Pacific Bank (the "Bank"), a wholly-owned subsidiary of the Company, has experienced an increase in residential mortgage and consumer loan losses as further discussed in "Provision for Loan Losses." While the Hawaii economy is expected to grow modestly in 1997, future trends in bankruptcy and foreclosure filings, employment, tourism and the real estate market could affect the Company's loan demand, deposit growth, provision for loan losses, noninterest income and noninterest expense. Accordingly, the results of operations of the Company for the second half of 1997 will depend in part on the speed, strength and duration of any economic recovery in the State of Hawaii. Results of Operations Net Interest Income A comparison of net interest income for the three and six months ended June 30, 1997 and 1996 is set forth below on a taxable equivalent basis using an assumed income tax rate of 35%. 2
Net interest income, when expressed as a percentage of average interest earning assets, is referred to as "net interest margin." Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (Dollars in thousands) Interest income $27,351 $25,886 $53,870 $52,314 Interest expense 10,967 10,154 21,651 20,743 Net interest income $16,384 $15,732 $32,219 $31,571 Net interest margin 4.86% 4.93% 4.80% 4.93% Interest income increased by $1.5 million or 5.7% and by $1.6 million or 3.0% in the second quarter and first half of 1997, respectively, as compared to the same periods in 1996 due to the higher level of earning assets held in 1997. Average interest earning assets of $1,349.6 million and $1,341.4 million for the second quarter and first half of 1997, respectively, increased by $73.1 million or 5.7% and $61.7 million or 4.8%, respectively, over the same periods in 1996. The yield on interest earning assets of 8.11% for the second quarter of 1997 was unchanged from the yield in 1996. The yield on interest earning assets for the six months ended June 30, 1997 of 8.03% declined from 8.18% for the same periods in 1996. Interest and fees on loans increased by $1.0 million or 4.7% and $1.1 million or 2.5% in the second quarter and first half of 1997, respectively, compared to the same periods in 1996. Increases in average loan balances resulted in increased interest income, offsetting declines in loan fees of $251,000 and $695,000, respectively. Interest on deposits in other banks also increased by $543,000 and $1.2 million, respectively, due to an increase in short-term investable funds held during the current year. Interest expense for the three and six months ended June 30, 1997 increased by $813,000 or 8.0% and $908,000 or 4.4%, respectively, as compared to the same periods in 1996, due to increases in average interest-bearing liabilities, which increased by 5.4% to $1,104.9 million and by 4.3% to $1,099.2 million, respectively. The average rate on interest-bearing liabilities for the second quarter of 1997 of 3.97% increased from 3.88% in 1996, while the average rate for the first half of 1997 as compared to the same period in 1996 was unchanged at 3.94%. The resulting net interest income for the second quarter and first half of 1997 increased by $652,000 or 4.1% and by $648,000 or 2.1%, respectively, over the same periods in 1996, while net interest margin declined to 4.86% from 4.93% in the second quarter and to 4.80% from 4.93% in the first half of the year. 3
Strong competition for both loans and deposits and the uncertainty in the direction of market interest rates provide the Company with the challenge of maintaining net interest margin at its current level for the remainder of 1997. 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 the borrowers' ability to repay their 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 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 or for the periods indicated. Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (Dollars in thousands) Allowance for loan losses: Balance at beginning of period $19,775 $20,500 $19,436 $20,156 Provision for loan losses 750 450 1,500 900 Loan charge-offs: Commercial, financial and agricultural 581 30 614 34 Real estate: Mortgage-commercial 268 - 268 - Mortgage-residential 46 231 200 231 Construction - - - - Consumer: Credit card and related plans 199 145 337 240 4
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (Dollars in thousands) Other consumer 212 69 364 125 Other - - 2 - Total loan charge-offs 1,306 475 1,785 630 Recoveries: Commercial, financial and agricultural 5 18 9 20 Real estate: Mortgage-commercial - - - - Mortgage-residential 1 29 20 29 Construction - 8 - 19 Consumer: Credit card and related plans 17 33 50 49 Other consumer 33 19 45 39 Other - - - - Total recoveries 56 107 124 156 Net loan charge-offs 1,250 368 1,661 474 Balance at end of period $19,275 $20,582 $19,275 $20,582 Annualized ratio of net loan charge-offs to average loans 0.48% 0.15% 0.32% 0.10% The provision for loan losses of $750,000 and $1,500,000 for the second quarter and first half of 1997, respectively, increased by 66.7% compared to the same periods in 1996. Net loan charge-offs of $1,250,000 and $1,661,000, when expressed as an annualized percentage of average total loans, was 0.48% and 0.32%, respectively. Loan charge-offs during the second quarter of 1997 included $564,000 on a commercial loan and $268,000 on a commercial mortgage loan. Approximately 74% of all other loans charged off during the first half of 1997 were consumer loans. Management believes the current level of provision for loan losses is indicative of Hawaii's stagnant economic environment over the last several years. Notwithstanding the increase in net charge-offs in the first half of 1997 compared to the same period in 1996, the Company's net charge-offs remained relatively low as a percentage of total loans. Substantially all commercial and real estate loan charge-offs were specifically provided for in the allowance for loan losses. Accordingly, no significant increase in the provision for loans losses is anticipated. The allowance for loan losses expressed as a percentage of total loans was 1.83% at June 30, 1997, declining slightly from the 1.87% at December 31, 1996. Management believes that the 5
allowance for loan losses at June 30, 1997 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. June 30, December 31, June 30, 1997 1996 1996 (Dollars in thousands) Nonaccrual loans: Commercial, financial and agricultural $ 269 $ 2,175 $ 851 Real estate: Mortgage-commercial 7,443 8,863 10,177 Mortgage-residential 1,063 2,462 2,352 Construction - - - Consumer: Credit card and related plans 70 - - Other consumer 81 - - Other - - - Total nonaccrual loans 8,926 13,500 13,380 Other real estate 3,708 1,235 2,157 Total nonperforming assets 12,634 14,735 15,537 Loans delinquent for 90 days or more: Commercial, financial and agricultural 1,230 1,038 4,082 Real estate: Mortgage-commercial 7,485 341 840 Mortgage-residential 6,256 4,366 6,802 Construction - - - Consumer: Credit card and related plans 105 104 98 Other consumer 324 455 449 Other 2 9 - Total loans delinquent for 90 days or more 15,402 6,313 12,271 6
June 30, December 31, June 30, 1997 1996 1996 (Dollars in thousands) Restructured loans still accruing interest: Commercial, financial and agricultural 231 1,723 - Real estate: Mortgage-commercial 2,571 11,095 - Mortgage-residential - - - Construction - - - Consumer: Credit card and related plans - - - Other consumer - - - Other - - - Total restructured loans still accruing interest 2,802 12,818 - Total nonperforming assets, loans delin- quent for 90 days or more and restructured loans still accruing interest $30,838 $33,866 $27,808 Total nonperforming assets as a percentage of total loans and other real estate 1.20% 1.41% 1.52% Total nonperforming assets and loans delinquent for 90 days or more as a percentage of total loans and other real estate 2.65% 2.02% 2.72% Total nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest as a percentage of total loans and other real estate 2.92% 3.25% 2.72% Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $30.8 million at June 30, 1997, decreasing by $3.0 million or 8.9% from year- end 1996. 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 7
property in the State of Hawaii. Nonaccrual loans of $8.9 million were comprised primarily of two large commercial mortgage loans and several residential mortgage loans. Other real estate of $3.7 million at June 30, 1997 included a $1.3 million condominium unit, a $1.5 million residence and several other residential properties. Loans delinquent for 90 days or more and still accruing interest totaled $15.4 million at June 30, 1997, increasing by $9.1 million or 144.0% from year-end 1996. Increases in delinquencies were attributable primarily to three commercial mortgage loans and a residential mortgage loan: a $2.7 million loan secured by an office building located on the island of Maui; a $2.4 million mortgage on a commercial complex on the island of Oahu; a $1.8 million loan secured by various commercial and residential properties; and a $900,000 loan secured by residential property on Oahu. Impaired loans at June 30, 1997 amounted to $14.1 million and included all nonaccrual and restructured loans greater than $500,000 as well as the $2.7 million and $1.8 million delinquent loans discussed above. The allowance for loan losses allocated to impaired loans amounted to $2.6 million at June 30, 1997. Management continues to closely monitor loan delinquencies and work with borrowers to resolve loan problems; however, further decline in general economic conditions may result in future increases in nonperforming assets, delinquencies, net charge- offs, provision for loan losses and noninterest expense. Other Operating Income Total other operating income in the second quarter of 1997 of $2,577,000 decreased by $101,000 or 3.8% from the second quarter of 1996 due primarily to $190,000 in interest received on income tax refunds in the second quarter of 1996. Total other operating income for the first half of 1997 of $5,204,000 decreased by $51,000 or 1.0% from the first half of 1996. Increases in service charges on deposits, partnership income and gains from sales of other real estate combined to offset the impact of the $190,000 in interest on income tax refunds discussed above. Other Operating Expense Total other operating expense of $12,044,000 for the second quarter of 1997 increased by $73,000 or 0.6% from the same period in 1996. This increase was attributed to an increase in net occupancy expense of $68,000 or 4.3% resulting from a combination of lower rental income and increased maintenance expense for the University Square building, owned by CPB Properties, Inc., a wholly-owned subsidiary of the Bank. Total other operating expense of $23,779,000 for the first half of 1997 decreased by $220,000 or 0.9% from the first half of 1996. Salaries and employee benefits of $12,763,000 decreased by $225,000 or 1.7% due primarily to a $452,000 reduction in pension 8
expense resulting from a revision to the pension plan which became effective during the third quarter of 1996, offset by increases in incentive compensation expense and general salary levels. Income Taxes The effective tax rates for the second quarter and first half of 1997 were 39.02% and 39.14%, respectively, compared with the previous year's rates of 39.76% and 39.69%, respectively. The decrease in tax rates for 1997 resulted from an increase in tax- exempt investments and loans held during 1997. Financial Condition Total assets at June 30, 1997 of $1,450.2 million increased by $47.0 million or 3.3% from December 31, 1996. Investment securities of $273.4 million increased by $32.9 million or 13.7%, and net loans of $1,033.7 million increased by $11.2 million or 1.1%. This asset growth was funded primarily through an increase in deposits. Total deposits at June 30, 1997 of $1,163.3 million increased by $39.7 million or 3.5% over year-end 1996. Noninterest-bearing deposits of $171.2 million increased by $3.1 million or 1.8%, and interest-bearing deposits of $992.1 million increased by $36.6 million or 3.8%. Core deposits (noninterest-bearing demand, interest-bearing demand and savings deposits, and time deposits under $100,000) at June 30, 1997 of $873.7 million increased by $14.4 million or 1.7% during the first half of 1997, while time deposits of $100,000 or more of $289.6 million increased by $25.2 million or 9.6%. The increase in core deposits included increases of $8.1 million in business checking accounts and $3.4 million in business money market accounts. The increase in deposits experienced during the year is attributable, in part, to an aggressive business development campaign launched in 1997 and a renewed focus on sales-oriented deposit-gathering efforts which was aided by the 1996 restructuring of the Bank's branch network. 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 $145.9 million at June 30, 1997 increased by $5.0 million or 3.6% from December 31, 1996. When expressed as a percentage of total assets, stockholders' equity was relatively stable at 10.06% and 10.04% at June 30, 1997 and December 31, 1996, respectively. On June 16, 1997, the Board of Directors declared a second quarter cash dividend of $0.24 per share, bringing total dividends declared to $0.48 per share for the first half of 1997, consistent with the dividends declared during the same period in 1996. Dividends declared in the first half of 1997 totaled $2,532,000 compared with $2,527,000 in the first half of 1996. The Company's objective with respect to 9
capital resources is to maintain a level of capital that will support sustained asset growth and anticipated credit risks and 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 June 30, 1997: Tier I risk-based capital ratio 4.00% 12.01% 8.01% Total risk-based capital ratio 8.00% 13.26% 5.26% Leverage capital ratio 4.00% 10.29% 6.29% At December 31, 1996: Tier I risk-based capital ratio 4.00% 12.10% 8.10% Total risk-based capital ratio 8.00% 13.35% 5.35% Leverage capital ratio 4.00% 10.28% 6.28% 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. 10
Required Actual Excess At June 30, 1997: Tier I risk-based capital ratio 6.00% 11.20% 5.20% Total risk-based capital ratio 10.00% 12.45% 2.45% Leverage capital ratio 5.00% 9.60% 4.60% At December 31, 1996: Tier I risk-based capital ratio 6.00% 11.27% 5.27% Total risk-based capital ratio 10.00% 12.53% 2.53% Leverage capital ratio 5.00% 9.60% 4.60% Asset-Liability Management and Liquidity The Company's asset-liability management policy and liquidity position are discussed in the 1996 Annual Report to Shareholders. No significant changes in either have occurred during the six months ended June 30, 1997. 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 None (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the second quarter of 1997. 11
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 11, 1997 /s/ Joichi Saito Joichi Saito Chairman of the Board and Chief Executive Officer Date: August 11, 1997 /s/ Neal Kanda Neal Kanda Vice President and Treasurer (Principal Financial and Accounting Officer) 12
CPB INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> June 30, December 31, (Dollars in thousands, except per share data) 1997 1996 <S> <C> <C> ASSETS Cash and due from banks $ 45,734 $ 55,534 Interest-bearing deposits in other banks 36,265 26,297 Investment securities: Held to maturity, at cost (fair value of $142,199 at June 30, 1997 and $109,288 at December 31, 1996) 142,380 109,244 Available for sale, at fair value 130,986 131,214 Total investment securities 273,366 240,458 Loans 1,052,991 1,041,976 Less allowance for loan losses 19,275 19,436 Net loans 1,033,716 1,022,540 Premises and equipment 25,219 25,072 Accrued interest receivable 9,981 8,674 Investment in partnership 6,955 6,902 Due from customers on acceptances 2 1,162 Other assets 18,915 16,526 Total assets $1,450,153 $1,403,165 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing deposits $ 171,203 $ 168,170 Interest-bearing deposits 992,068 955,444 Total deposits 1,163,271 1,123,614 Short-term borrowings 6,929 5,427 Long-term debt 117,906 115,840 Bank acceptances outstanding 2 1,162 Other liabilities 16,126 16,240 Total liabilities 1,304,234 1,262,283
Stockholders' equity: Preferred stock, no par value, authorized 1,000,000 shares, none issued - - Common stock, no par value, stated value $1.25 per share; authorized 25,000,000 shares; issued and outstanding 5,275,494 shares at June 30, 1997 and 5,268,874 shares at December 31, 1996 6,594 6,586 Surplus 45,608 45,481 Retained earnings 94,144 89,405 Unrealized loss on investment securities, net of taxes (427) (590) Total stockholders' equity 145,919 140,882 Total liabilities and stockholders' equity $1,450,153 $1,403,165 Book value per share $27.66 $26.74 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-1
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended (Dollars in thousands, June 30, June 30, except per share data) 1997 1996 1997 1996 <S> <C> <C> <C> <C> Interest income: Interest and fees on loans $22,665 $21,651 $44,869 $43,785 Interest and dividends on investment securities: Taxable interest 3,535 3,801 6,850 7,722 Tax-exempt interest 118 36 153 80 Dividends 284 273 551 531 Interest on deposits in other banks 617 74 1,250 91 Interest on Federal funds sold - - - 1 Total interest income 27,219 25,835 53,673 52,210 Interest expense: Interest on deposits 9,131 8,618 18,024 17,775 Interest on short-term borrowings 68 118 135 324 Interest on long-term debt 1,768 1,418 3,492 2,644 Total interest expense 10,967 10,154 21,651 20,743 Net interest income 16,252 15,681 32,022 31,467 Provision for loan losses 750 450 1,500 900 Net interest income after provision for loan losses 15,502 15,231 30,522 30,567 Other operating income: Service charges on deposit accounts 742 701 1,432 1,373 Other service charges and fees 1,326 1,354 2,709 2,761 Partnership income 134 101 261 216 Fees on foreign exchange 205 197 387 468 Investment securities gains - (6) - (6) Other 170 331 415 443
Total other operating income 2,577 2,678 5,204 5,255 Other operating expense: Salaries and employee benefits 6,395 6,399 12,763 12,988 Net occupancy 1,664 1,596 3,248 3,204 Equipment 643 681 1,327 1,357 Other 3,342 3,295 6,441 6,450 Total other operating expense 12,044 11,971 23,779 23,999 Income before income taxes 6,035 5,938 11,947 11,823 Income taxes 2,355 2,361 4,676 4,692 Net income $ 3,680 $ 3,577 $ 7,271 $ 7,131 Per common share: Net income $ 0.70 $ 0.68 $ 1.38 $ 1.36 Cash dividends declared $ 0.24 $ 0.24 $ 0.48 $ 0.48 Weighted average shares outstanding (in thousands) 5,274 5,264 5,272 5,262 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-2
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, (Dollars in thousands) 1997 1996 <S> <C> <C> Cash flows from operating activities: Net income $ 7,271 $ 7,131 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,500 900 Provision for depreciation and amortization 1,362 1,359 Net amortization and accretion of investment securities 209 567 Net loss on investment securities - 6 Federal Home Loan Bank stock dividends received (551) (531) Net change in loans held for sale 2,812 (981) Deferred income tax expense (benefit) 371 (158) Partnership income (261) (216) (Increase) decrease in accrued interest receivable and other assets (1,492) 2,803 (Decrease) increase in accrued interest payable and other liabilities (205) 838 Net cash provided by operating activities 11,016 11,718 Cash flows from investing activities: Proceeds from maturities of and calls on investment securities held to maturity 19,556 22,383 Purchases of investment securities held to maturity (52,860) - Proceeds from sales of investment securities available for sale - 17,807 Proceeds from maturities and calls on investment securities available for sale 34,509 12,605 Purchases of investment securities available for sale (33,497) (33,091) Net (increase) decrease in interest- bearing deposits in other banks (9,968) 6,956 Net loan originations (18,086) (28,607) Proceeds from disposal of premises and equipment - 15 Purchases of premises and equipment (1,512) (1,095) Distributions from partnership 208 -
Net cash used in investing activities (61,650) (3,027) Cash flows from financing activities: Net increase (decrease) in deposits 39,657 (28,384) Proceeds from long-term debt 21,000 25,000 Repayments of long-term debt (18,934) (15,409) Net increase in short-term borrowings 1,502 9,137 Cash dividends paid (2,526) (2,523) Proceeds from sale of common stock 135 143 Net cash provided by (used in) financing activities 40,834 (12,036) Net decrease in cash and cash equivalents (9,800) (3,345) Cash and cash equivalents: At beginning of period 55,534 50,274 At end of period $45,734 $46,929 Supplemental disclosure of cash flow information: Cash paid during the period for interest $21,774 $21,448 Cash paid during the period for income taxes $ 4,400 $ 990 Supplemental disclosure of noncash investing and financing activities: Transfer of loans to other real estate $ 2,598 $ 350 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-3
CPB INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Basis of Presentation The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 1996. 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, 1997 are not necessarily indicative of the results to be expected for the full year. Accounting Pronouncements In June 1996, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control, distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 127 defers the effective date of certain provisions of SFAS No. 125 to transactions occurring after December 31, 1997. In January 1997, the Company implemented those provisions of SFAS No. 125 which were not subject to deferral by SFAS No. 127. However, servicing assets were deemed immaterial, and accordingly, no disclosures will be made, as permitted by SFAS No. 125. Further, the Company does not expect the future application of SFAS No. 125 to the transactions covered under SFAS No. 127 to have a material impact on the Company's consolidated financial statements. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information about Capital Structure." SFAS No. 128 simplifies the calculation of earnings per share and revises related disclosure requirements. SFAS No. 129 consolidates existing guidance relating to an entity's capital structure. SFAS No. 128 is effective for interim periods and fiscal years ending after December 15, 1997. Earlier application is not permitted. SFAS No. 129 is effective for financial statements for periods ending after December 15, 1997. The impact of these statements on the Company's consolidated financial statements is not expected to be material. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 130 requires that changes in comprehensive income be reported in a financial statement. Comprehensive income is defined as all changes in equity, including net income, except those resulting from investments by and distributions to owners. SFAS No. 131 requires public companies to 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. SFAS No. 130 and 131 are effective for fiscal years beginning after December 15, 1997, although SFAS No. 131 need not be applied to interim periods in the initial year of implementation. Reclassification of financial statements for prior periods will be required for comparative purposes. As these statements relate solely to disclosure requirements, their implementation will not have an affect on the Company's financial condition or results of operations. F-4