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, 2000 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, 2000: 8,926,184 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 (Unaudited)- March 31, 2000 and December 31, 1999 F-1 Consolidated Statements of Income (Unaudited) - Three months ended March 31, 2000 and 1999 F-3 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Unaudited) - Three months ended March 31, 2000 and 1999 F-5 Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2000 and 1999 F-7 Notes to Consolidated Financial Statements (Unaudited) - March 31, 2000 F-9 </TABLE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview CPB Inc. (the "Company") posted first quarter 2000 net income of $4.586 million, increasing by 24.7% over the $3.679 million earned in the first quarter of 1999. The increase in net income was attributed to a net gain of $1.4 million related to the sale of the merchant servicing portfolio and a $0.5 million decrease in provision for loan losses. As of March 31, 2000, total assets of $1,625.9 million decreased by $20.6 million or 1.3% compared with year-end 1999. Net loans of $1,161.7 million increased by $12.0 million or 1.0%, while total deposits of $1,305.5 million was unchanged. The following table presents annualized returns on average assets and average stockholders' equity and basic and diluted earnings per share for the periods indicated. <TABLE> <CAPTION> Three Months Ended March 31, 2000 1999 <S> <C> <C> Annualized return on average assets 1.14% 0.95% Annualized return on average stockholders' equity 12.55% 9.81% Basic earnings per share $0.50 $0.38 Diluted earnings per share $0.49 $0.37 </TABLE> 1
After eight years of little or no growth, Hawaii's economy has shown signs of improvement in 2000. Despite a slow start attributed to Year 2000 concerns, the visitor industry has seen a slight rebound. First quarter hotel occupancy rates increased by 3.6%, and average daily room rates increased by 5.8% compared to the same period in 1999. As the economic situation improves in Asia, and with continued strength in the mainland U.S. economy, local economists forecast similar results for the remainder of the year. Similarly, the statewide unemployment rate in March 2000 fell to 4.4%, from 5.7% a year ago. Most significantly, the unemployment rate on the island of Oahu of 3.9% was lower than the national average of 4.3%. Bankruptcy filings have also slowed significantly, declining by 14% from the first quarter of 1999. The first quarter of 2000 represented the fourth straight quarter in which bankruptcy filings dropped from prior year levels. Local real estate sales activity also continues to improve, with total dollar-volume of residential real estate sales on the island of Oahu in the first quarter 2000 increasing by 28.2% over the same period in 1999. After reaching a low point in 1996, residential resales have increased steadily in each of the past three years. Hawaii's economic environment has had, and will likely continue to have, a direct effect on our Company's performance. 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 2000 may be directly impacted by the ability of the Hawaii economy to sustain the positive trends experienced in recent months. Certain matters discussed in this report 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, net interest income, net interest margin, the levels of nonperforming loans, loan losses and the allowance for loan losses, noninterest income and noninterest expense. Important factors that could cause the results to differ from those discussed in this report include, but are not limited to, changes in market interest rates, 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, 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, 1999. 2
Results of Operations Net Interest Income A comparison of net interest income for the three months ended March 31, 2000 and 1999 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." <TABLE> <CAPTION> Three Months Ended March 31, (Dollars in thousands) 2000 1999 <S> <C> <C> Interest income $29,278 $27,991 Interest expense 11,974 10,760 Net interest income $17,304 $17,231 Net interest margin 4.58% 4.70% </TABLE> Interest income increased by $1.3 million or 4.6% in the first quarter of 2000 as compared to the same period in 1999, due to a combination of increases in average interest-earning assets and market interest rates during the period. Average interest earning assets of $1,510.4 million for the first quarter of 2000 increased by $43.7 million or 3.0%, due primarily to increases in loan balances. The yield on interest earning assets of 7.75% for the first quarter of 2000 increased from 7.63% compared to the same period in 1999 due primarily to the increase in market interest rates in 1999 and 2000. Interest and fees on loans increased by $1.2 million or 5.1% in the first quarter of 2000 due to increases in average loan balances and average yields. Interest and dividends on investment securities was virtually unchanged, decreasing by 0.4%, while interest on deposits in other banks increased by $73,000 or 280.8% due to an increase in short-term deposits compared to the prior year. Interest expense for the three months ended March 31, 2000 increased by $1.2 million or 11.3% as compared to the same periods in 1999 due to an increase in average interest-bearing liabilities and the higher level of market interest rates. Average interest-bearing liabilities totaled $1,254.9 million in the first quarter of 2000, increasing by $43.9 million or 3.6%, with substantially all growth occurring in certificates of deposit. The average rate on interest-bearing liabilities for the first quarter of 2000 increased to 3.82% from 3.55% in 1999. The resultant net interest income for the first quarter of 2000 increased by $73,000 or 0.4% over the same period in 1999. However, net interest margin declined to 4.58% from 4.70% in the 3
first quarter of 2000 compared to 1999 due to the higher rate of increase in funding costs relative to asset yields. Strong competition for both loans and deposits, particularly core deposits, is expected to continue and may create additional pressure on net interest margin 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 March 31, (Dollars in thousands) 2000 1999 <S> <C> <C> Allowance for loan losses: Balance at beginning of period $20,768 $20,066 Provision for loan losses 1,000 1,500 Loan charge-offs: Real estate: Mortgage-commercial - 700 Mortgage-residential 350 546 Commercial, financial and agricultural 18 - Consumer: Credit card and related plans 39 5 4
Other consumer 44 96 Other 12 1 Total loan charge-offs 463 1,348 Recoveries: Real estate: Mortgage-commercial 513 27 Mortgage-residential 6 3 Commercial, financial and agricultural 12 30 Consumer: Credit card and related plans 28 34 Other consumer 22 25 Total recoveries 581 119 Net loan (recoveries) charge-offs (118) 1,229 Balance at end of period $21,886 $20,337 Annualized ratio of net loan (recoveries) charge- offs to average loans (0.04%) 0.44% </TABLE> The provision for loan losses of $1.0 million for the first quarter of 2000 decreased by 33.3% compared to the same period in 1999. Net loan (recoveries) charge-offs of ($118,000) and $1.2 million for the three months ended March 31, 2000 and 1999, when expressed as an annualized percentage of average total loans, was (0.04%) and 0.44%, respectively. Loan charge-offs during the first quarter of 2000 were comprised primarily of several residential real estate loans. Loan recoveries included $355,000 and $148,000 recovered on two commercial mortgage loans charged off in prior years. The allowance for loan losses expressed as a percentage of total loans was 1.85% at March 31, 2000, increasing slightly over the 1.77% at December 31, 1999. Considering the decline in net loan charge-offs and decrease in total 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 or continued material increases in interest rates could adversely affect borrowers' ability to repay, collateral values and, consequently, the level of nonperforming loans and provision for loan losses. 5
Nonperforming Assets The following table sets forth nonperforming assets and accruing loans delinquent for 90 days or more at the dates indicated. <TABLE> <CAPTION> March 31, December 31, March 31, (Dollars in thousands) 2000 1999 1999 <S> <C> <C> <C> Nonaccrual loans: Real estate: Mortgage-commercial $ 3,106 $ 2,981 $ 4,214 Mortgage-residential 5,783 5,124 5,403 Commercial, financial and agricultural 1,624 1,590 1,893 Total nonaccrual loans 10,513 9,695 11,510 Other real estate 476 1,366 304 Total nonperforming assets 10,989 11,061 11,814 Loans delinquent for 90 days or more: Real estate: Mortgage-commercial 12 1,749 312 Mortgage-residential 902 1,636 4,234 Commercial, financial and agricultural 395 128 215 Consumer 43 92 183 Total loans delinquent for 90 days or more 1,352 3,605 4,944 Restructured loans still accruing interest: Real estate: Mortgage-commercial 494 500 - Total restructured loans still accruing interest 494 500 - Total nonperforming assets, loans delin- quent for 90 days or more and restructured loans still accruing interest $12,835 $15,166 $16,758 Total nonperforming assets as a percentage of loans and other real estate 0.93% 0.94% 1.03% 6
Total nonperforming assets and loans delinquent for 90 days or more as a percentage of loans and other real estate 1.04% 1.25% 1.45% Total nonperforming assets, loans delinquent for 90 days or more and restruc- tured loans still accruing interest as a percentage of loans and other real estate 1.08% 1.29% 1.45% </TABLE> Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $12.8 million at March 31, 2000, a decrease of $2.3 million or 15.4% from year- end 1999. 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 all of which are located in the state of Hawaii. Nonaccrual loans at March 31, 2000 of $10.5 million included a $1.1 million loan secured by multi-family residential property and a $1.1 million loan secured by commercial real estate, all located on the island of Oahu. Nonaccrual loans also included a number of other commercial mortgages and residential mortgages on properties located throughout the state. Loans delinquent for 90 days or more and still accruing interest totaled $1.4 million at March 31, 2000, a 62.5% decrease from year-end 1999 levels. Impaired loans at March 31, 2000 totaled $7.5 million and included all nonaccrual loans greater than $500,000. The allowance for loan losses allocated to impaired loans amounted to $2.3 million at March 31, 2000. Impaired loans at year-end 1999 totaled $6.1 million with an allocated allowance for loan losses of $2.5 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 or continued material increases in interest rates 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 $4.5 million for the first quarter of 2000 increased by $1.2 million or 36.9% over the same period in 1999 due to the sale of the Bank's merchant servicing portfolio in the first quarter of 2000. The merchant portfolio sale resulted in a $1.9 million gain, offset by a $424,000 reduction in servicing fees. Investment securities losses of $360,000 were also recognized in the first quarter of 2000, compared with gains of $203,000 in 1999. Excluding the impact of these items, total other operating income increased by $352,000 7
or 13.2% in the first quarter of 2000 compared to the same period in 1999. Other Operating Expense Total other operating expense of $13.4 million for the first quarter of 2000 increased by $380,000 or 2.9% over the same period in 1999. The increase was primarily attributed to a $480,000 charge related to the termination of the contract with Bank's merchant servicer due to the sale of the merchant servicing portfolio and $500,000 accrued for consulting services. The sale of the merchant servicing portfolio is expected to result in a decrease of approximately $3.6 million in annual operating income and a comparable decrease in annual operating expenses in future periods. Income Taxes The effective tax rate for the first quarter of 2000 was 35.29%, compared with the previous year's rate of 36.18%. Financial Condition Total assets at March 31, 2000 of $1.63 billion decreased by $20.6 million or 1.3% from year-end 1999 due to temporary increases in cash and short-term borrowings at year-end for Year 2000 contingencies. Net loans of $1.16 billion increased by $12.0 million or 1.0%, and investment securities of $337.9 million increased by $16.2 million or 5.0%, funded by an increase in long-term debt. Total deposits at March 31, 2000 of $1.31 billion was unchanged from year-end 1999. Noninterest-bearing deposits of $194.9 million decreased by $9.9 million or 4.9%, while interest-bearing deposits of $1.11 billion increased by $9.8 million or 0.9% compared to year-end 1999. Core deposits (noninterest-bearing demand, interest-bearing demand and savings deposits, and time deposits under $100,000) at March 31, 2000 of $944.1 million decreased by $14.6 million or 1.5% during the first three months of 2000, while time deposits of $100,000 and over of $361.4 million increased by $14.5 million or 4.2%. 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 $145.5 million at March 31, 2000 increased by $1.4 million or 1.0% from December 31, 1999. When expressed as a percentage of total assets, stockholders' equity increased to 8.95% at March 31, 2000, from 8.75% at year-end 1999. Book value per share at March 31, 2000 was $15.77, compared to $15.51 at year-end 1999. On March 13, 2000, the board of directors declared a first quarter cash dividend of $0.15 per share, a 15.4% increase over the dividend declared in the first quarter of 1999. Dividends 8
declared in the first quarter of 2000 totaled $1,383,000 compared with $1,269,000 in the first quarter of 1999, a 9.0% increase. On March 13, 2000, the board of directors authorized a fourth stock repurchase program that provides for the repurchase of up to five percent or approximately 435,000 shares of common stock outstanding. In conjunction with the stock repurchase program, the Company repurchased 262,163 shares of its common stock from The Sumitomo Bank, Limited ("Sumitomo") effective as of May 4, 2000. This transaction reduced Sumitomo's holdings in CPB Inc. to 711,750 shares or 7.97% of total common stock outstanding, from 10.60% held prior to the transaction. As of May 4, 2000, a total of 1,733,011 shares have been repurchased and retired under the Company's stock repurchase program at a weighted average price of $20.52. Any remaining repurchases are dependent upon market conditions. The effect of stock repurchases to date has been a decrease in capital and capital ratios and an 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 for well-capitalized institutions 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. 9
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 (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio <S> <C> <C> <C> <C> <C> <C> At March 31, 2000: Leverage capital ratio $148,156 9.19% $64,47 4.00% $83,686 5.19% Tier 1 risk-based capital ratio 148,156 11.23 52,771 4.00 95,385 7.23 Total risk-based capital ratio 164,714 12.49 105,543 8.00 59,171 4.49 At December 31, 1999: Leverage capital ratio $146,703 9.00% $65,198 4.00% $81,505 5.00% Tier 1 risk-based capital ratio 146,703 11.24 52,199 4.00 94,504 7.24 Total risk-based capital ratio 163,070 12.50 104,397 8.00 58,673 4.50 In addition, FDIC-insured institutions such as the Bank must maintain leverage, Tier 1 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. </TABLE> <TABLE> <CAPTION> Actual Required Excess (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio <S> <C> <C> <C> <C> <C> <C> At March 31, 2000: Leverage capital ratio $139,588 8.67% $80,470 5.00% $59,118 3.67% Tier 1 risk-based capital ratio 139,588 10.60 78,993 6.00 60,595 4.60 Total risk-based capital ratio 156,112 11.86 131,656 10.00 24,456 1.86 At December 31, 1999: Leverage capital ratio $136,345 8.38% $81,397 5.00% $54,948 3.38% Tier 1 risk-based capital ratio 136,345 10.47 78,140 6.00 58,205 4.47 Total risk-based capital ratio 152,680 11.72 130,234 10.00 22,446 1.72 </TABLE> 10
Asset/Liability Management and Liquidity The Company's asset/liability management policy and liquidity are discussed in the 1999 Annual Report to Shareholders. No significant changes have occurred during the three months ended March 31, 2000. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company discussed the nature and extent of market risk exposure in the 1999 Annual Report to Shareholders. No significant changes have occurred during the three months ended March 31, 2000. 11
PART II. OTHER INFORMATION Items 1 to 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 25, 2000 for the purpose of considering and voting upon the following matters: 1. Election of three persons to serve on the Board of Directors for a term of three years and to serve until their successors are elected and qualified; 2. Approval of an amendment to the Restated Articles of Incorporation to clarify the authority of the Board of Directors to provide for the issuance of shares of preferred stock previously authorized by the shareholders of the Company in one or more series and fix the rights, preferences and privileges of each series of preferred stock of the Company; 3. Ratification of the appointment of KPMG LLP as the Company's independent accountants for the fiscal year ending December 31, 2000; and 4. 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 7,369,831 shares, or 79.7% of eligible shares, were represented at the Meeting. <TABLE> <CAPTION> Votes Cast Against or Abstentions Name For Withheld or Nonvotes <S> <C> <C> <C> Paul Devens 6,884,237 485,594 None Clayton K. Honbo 6,880,890 488,941 None Stanley W. Hong 6,880,197 489,634 None </TABLE> 12
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> Alice F. Guild 2002 Dennis I. Hirota, Ph.D. 2001 Kensuke Hotta 2001 Daniel M. Nagamine 2002 Joichi Saito 2001 Naoaki Shibuya 2002 </TABLE> The amendment to the Restated Articles of Incorporation was not approved, with a total of 5,037,784 votes cast for, 1,409,691 votes against, and 922,356 abstentions or nonvotes. The affirmative vote of two-thirds of the common stock having voting power was required for approval. The ratification of the appointment of KPMG LLP as independent accountants for the fiscal year ending December 31, 2000 was approved with a total of 7,280,055 votes cast for, 18,142 votes against, and 71,634 abstentions or nonvotes. There were no other matters brought before the Meeting that 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, 2000, 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 2000. 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, 2000 /s/ Joichi Saito Joichi Saito Chairman of the Board and Chief Executive Officer Date: May 12, 2000 /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) 2000 1999 <S> <C> <C> ASSETS Cash and due from banks $ 46,548 $ 83,425 Interest-bearing deposits in other banks 871 9,828 Investment securities: Held to maturity, at cost (fair value of $96,192 at March 31, 2000 and $99,808 at December 31, 1999) 98,325 101,567 Available for sale, at fair value 239,562 220,103 Total investment securities 337,887 321,670 Loans 1,183,575 1,170,476 Less allowance for loan losses 21,886 20,768 Net loans 1,161,689 1,149,708 Premises and equipment 24,623 24,774 Accrued interest receivable 9,304 9,606 Investment in unconsolidated subsidiaries 8,562 8,451 Due from customers on acceptances 24 12 Other real estate 476 1,366 Other assets 35,873 37,651 Total assets $1,625,857 $1,646,491 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Noninterest-bearing deposits $ 194,905 $ 204,850 Interest-bearing deposits 1,110,619 1,100,804 Total deposits 1,305,524 1,305,654 F-1
Short-term borrowings 36,856 79,000 Long-term debt 117,621 98,279 Bank acceptances outstanding 24 12 Other liabilities 20,378 19,467 Total liabilities 1,480,403 1,502,412 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 9,220,707 shares at March 31, 2000, and 9,288,457 shares at December 31, 1999 6,512 6,540 Surplus 45,848 45,848 Retained earnings 95,911 94,436 Accumulated other comprehensive loss, net of taxes (2,817) (2,745) Total stockholders' equity 145,454 144,079 Total liabilities and stockholders' equity $1,625,857 $1,646,491 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-2
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, (In thousands, except per share data) 2000 1999 <S> <C> <C> Interest income: Interest and fees on loans $23,755 $22,599 Interest and dividends on investment securities: Taxable interest 4,210 4,344 Tax-exempt interest 591 419 Dividends 302 359 Interest on deposits in other banks 99 26 Interest on Federal funds sold and securities purchased under agreements to resell 2 11 Total interest income 28,959 27,758 Interest expense: Interest on deposits 9,720 8,857 Interest on short-term borrowings 681 280 Interest on long-term debt 1,573 1,623 Total interest expense 11,974 10,760 Net interest income 16,985 16,998 Provision for loan losses 1,000 1,500 Net interest income after provision for loan losses 15,985 15,498 Other operating income: Income from fiduciary activities 236 177 Service charges on deposit accounts 781 814 F-3
Other service charges and fees 1,232 1,620 Equity in earnings of unconsolidated subsidiaries 142 96 Fees on foreign exchange 153 170 Investment securities (losses) gains (360) 203 Gain on sale of merchant servicing portfolio 1,850 - Other 472 211 Total other operating income 4,506 3,291 Other operating expense: Salaries and employee benefits 6,549 6,551 Net occupancy 1,591 1,526 Equipment 667 730 Other 4,597 4,217 Total other operating expense 13,404 13,024 Income before income taxes 7,087 5,765 Income taxes 2,501 2,086 Net income $ 4,586 $ 3,679 Per share data: Basic earnings per share $ 0.50 $ 0.38 Diluted earnings per share 0.49 0.37 Cash dividends declared 0.15 0.13 Basic weighted average shares outstanding 9,260 9,778 Diluted weighted average shares outstanding 9,409 9,822 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-4
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited) <TABLE> <CAPTION> Accumulated other (Dollars in thousands, Common Retained comprehensive except per share data) stock Surplus earnings income(loss) Total <S> <C> <C> <C> <C> <C> Three months ended March 31, 2000: Balance at December 31, 1999 $6,540 $45,848 $94,436 $(2,745) $144,079 Net income - - 4,586 - 4,586 Net change in unrealized gain(loss) on investment securities, net of taxes of $(47) - - - (72) (72) Comprehensive income 4,514 Cash dividends declared ($0.15 per share) - - (1,383) - (1,383) 1,550 shares of common stock issued 21 - - - 21 69,300 shares of common stock repurchased (49) - (1,728) - (1,777) Balance at March 31, 2000 $6,512 $45,848 $95,911 $(2,817) $145,454 Disclosure of reclassification amount: Unrealized holding gain(loss) on investment securities during period, net of taxes of $76 - - - 115 115 Less: reclassification adjustment for gains included in net income, net of taxes of $124 - - - 187 187 Net change in unrealized gain(loss) on investment securities - - - $ (72) $ (72) F-5
Three months ended March 31, 1999: Balance at December 31, 1998 $6,637 $45,848 $94,954 $ 627 $148,066 Net income - - 3,679 - 3,679 Net change in unrealized gain(loss) on investment securities, net of taxes of $(395) - - - (593) (593) Comprehensive income 3,086 Cash dividends declared ($0.13 per share) - - (1,269) - (1,269) 5,640 shares of common stock issued 74 - - - 74 41,000 shares of common stock repurchased (28) - (689) - (717) Balance at March 31, 1999 $6,683 $45,848 $96,675 $ 34 $149,240 Disclosure of reclassification amount: Unrealized holding gain(loss) on investment securities during period, net of taxes of $(528) - - - (794) (794) Less: reclassification adjustment for losses included in net income, net of taxes of $(133) - - - (201) (201) Net change in unrealized gain(loss) on investment securities - - - $ (593) $ (593) <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-6
CPB INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Three Months Ended March 31, (Dollars in thousands) 2000 1999 <S> <C> <C> Cash flows from operating activities: Net income $ 4,586 $ 3,679 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,000 1,500 Provision for depreciation and amortization 686 724 Net amortization and accretion of investment securities 25 49 Net loss (gain) on investment securities 360 (203) Federal Home Loan Bank stock dividends received (302) (332) Origination of loans held for sale (2,182) (10,721) Net loss on sale of loans 29 44 Proceeds from sales of loans held for sale 2,153 10,677 Deferred income tax expense 106 2,054 Equity in earnings of unconsolidated subsidiaries (142) (96) Net decrease (increase) in other assets 3,844 (244) Net increase (decrease) in other liabilities 750 (5,861) Net cash provided by operating activities 10,913 1,270 Cash flows from investing activities: Proceeds from maturities of and calls on investment securities held to maturity 3,215 2,498 Purchases of investment securities held to maturity - (1,088) Proceeds from sales of investment securities available for sale 9,649 15,102 Proceeds from maturities of and calls on investment securities available for sale 8,542 25,829 Purchases of investment securities available for sale (37,825) (8,453) Net decrease in interest-bearing deposits in other banks 8,957 10,414 Net loan originations over principal repayments (13,805) (47,561) Purchases of premises and equipment (535) (302) F-7
Investments in unconsolidated subsidiaries - (86) Net cash used in investing activities (21,802) (3,647) Cash flows from financing activities: Net decrease in deposits (130) (6,420) Proceeds from long-term debt 20,000 19,250 Repayments of long-term debt (658) (15,608) Net (decrease) increase in short-term borrowings (42,144) 17,572 Cash dividends paid (1,300) (1,274) Proceeds from sale of common stock 21 74 Repurchases of common stock (1,777) (717) Net cash (used in) provided by financing activities (25,988) 12,877 Net increase (decrease) in cash and cash equivalents (36,877) 10,500 Cash and cash equivalents: At beginning of period 83,425 42,735 At end of period $46,548 $53,235 Supplemental disclosure of cash flow information: Cash paid during the period for interest $10,569 $10,223 Cash paid during the period for income taxes $ - $ 7,200 Supplemental disclosure of noncash investing and financing activities: Transfer of loans to other real estate $ 824 $ 323 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE> F-8
CPB INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2000 and 1999 1. Basis of Presentation The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 1999. 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, 2000 are not necessarily indicative of the results to be expected for the full year. 2. Comprehensive Income Components of other comprehensive income (loss) for the three months ended March 31, 2000 and 1999 were comprised solely of unrealized holding gains (losses) on available-for-sale investment securities. Accumulated other comprehensive income (loss), net of taxes, is presented below as of the dates indicated: <TABLE> <CAPTION> Three months ended March 31, (Dollars in thousands) 2000 1999 <S> <C> <C> Balance at beginning of period $(2,745) $627 Current-period change (72) (593) Balance at end of period $(2,817) $ 34 </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. Other activities include trust, mortgage servicing, indirect lending activities. F-9
The accounting policies of the segments are consistent with the Company's accounting policies that are described in note 1 to the consolidated financial statements in the 1999 Annual Report to Shareholders. The majority of the Company's net income 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-10
<TABLE> <CAPTION> Retail Commercial All (Dollars in thousands) Branch Finance Treasury Others Total <S> <C> <C> <C> <C> <C> Three months ended March 31, 2000: Net interest income (expense) $ (2,583) $ 17,324 $ 1,614 $ 630 $ 16,985 Intersegment net interest income (expense) 11,941 (12,010) 329 (260) - Provision for loan losses 381 615 - 4 1,000 Other operating income (expense) 1,070 189 (314) 3,588 4,506 Other operating expense 3,664 1,326 119 8,295 13,404 Administrative and overhead expense allocation 4,229 1,057 93 (5,378) - Income tax expense 721 877 487 416 2,501 Net income $ 1,433 $ 1,628 $ 903 $ 621 $ 4,586 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 operating income 1,162 34 222 1,873 3,291 Other operating expense 4,017 712 71 8,224 13,024 Administrative and overhead expense allocation 4,141 787 56 (4,984) - Income tax expense (benefit) 689 946 798 (347) 2,086 Net income (loss) $ 1,224 $ 1,707 $ 1,397 $ (649) $ 3,679 At March 31, 2000: Investment securities $ - $ - $337,887 $ - $ 337,887 Loans 286,727 877,893 - 18,955 1,183,575 Other 21,185 22,588 34,499 26,123 104,395 Total assets $307,912 $900,481 $372,386 $45,078 $1,625,857 At December 31, 1999: Investment securities $ - $ - $321,670 $ - $ 321,670 Loans 290,183 861,449 - 18,844 1,170,476 Other 30,091 23,257 46,567 54,430 154,345 Total assets $320,274 $884,706 $368,237 $73,274 $1,646,491 F-11
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 March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation," an interpretation of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Interpretation No. 44 clarifies the application of Opinion 25 for certain issues, including (a) the definition of "employee" for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan quailifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. The application of Interpretation No. 44, effective July 1, 2000, is not expected to have a material impact on the Company's consolidated financial statements. F-12 </TABLE>