UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
o 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)
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 ý No o
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, No Par Value;Outstanding at August 6, 2001: 8,234,988 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The financial statements listed below are filed as a part hereof.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
CPB Inc. (the "Company") posted second quarter 2001 net income of $5.774 million, increasing by 20.5% over the $4.790 million earned in the second quarter of 2000. Net income for the first half of 2001 of $11.102 million increased by 18.4% over the $9.376 million earned in 2000. The increase in net income was mainly attributed to an increase in net interest income. As of June 30, 2001, total assets of $1.80 billion decreased by $19.8 million or 1.1% from year-end 2000. Net loans of $1.23 billion decreased by $37.3 million or 2.9% due to the sale of $54 million in residential mortgage loans during the first quarter of 2001. Total deposits of $1.41 billion increased by $42.9 million or 3.1% during the first half of 2001.
The following table presents annualized returns on average assets and average stockholders' equity and basic and diluted earnings per share for the periods indicated.
Hawaii's economy continued to show slight improvement over last year. The statewide unemployment rate for the first five months of 2001 averaged 4.3%, a decrease from the 4.5% reported during the same period last year. Through May 2001, statewide job growth was 2.3%.
Partially offsetting this improvement was a decrease in hotel occupancy rates in June 2001 to 74%, compared to 80% for the same period last year. This decrease was primarily driven by economic conditions on the U. S. mainland and in Japan. Domestic visitor arrivals for the first half of 2001 decreased by 1.2% from the same period last year, while foreign visitor arrivals were down by 2.1%.
Dollar volume of residential real estate sales in the state of Hawaii for the first six months of 2001 totaled $952.6 million, an increase of 4.3% over the same period last year.
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 2001, 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 2001 may be directly impacted by the ability of the Hawaii economy to sustain the positive trends experienced during the last several years.
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, 2000.
Results of Operations
Net Interest Income
A comparison of net interest income for the three and six months ended June 30, 2001 and 2000 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."
Interest income increased by $2.0 million or 6.5% in the second quarter of 2001 and by $7.4 or 12.2% in the first half of 2001 compared to the same periods in 2000, due primarily to an increase in average volumes. Average interest earning assets of $1,671.9 million for the second quarter and first half of 2001 increased by $129.2 million or 8.4% and $145.4 million or 9.5%, respectively, due primarily to increases in loans. Yield on interest earning assets of 7.92% for the second quarter of 2001 decreased from 8.06% for the same period in 2000 due to the decline in market interest rates during the first half of 2001. The yield on interest earning assets of 8.09% for the first half of 2001 increased from 7.90% for the first half of 2000 due to net interest recoveries in 2001 of $668,000 on nonaccrual and charged-off loans compared to net interest reversals in 2000 of $457,000.
Interest and fees on loans increased by $1.2 million or 4.9% and $5.4 million or 11.1% in the second quarter and first half of 2001, respectively, compared to the same periods in 2000 due to increases in average loan balances and the interest recoveries previously discussed. Interest and dividends on investment securities increased by $225,000 or 4.0% and $1.2 million or 11.6% mainly due to average balance increases. Interest on interest-bearing deposits in other banks also increased by $522,000 and $630,000, respectively, due to increases in average balances.
Interest expense for the second quarter and first half of 2001 increased by $944,000 or 7.3% and $4.3 million or 17.3%, respectively, compared to the same periods in 2001 due to higher average interest-bearing liabilities and the higher proportion of balances in relatively higher-rate certificates of deposit and long-term debt. Average interest-bearing liabilities totaled $1,397.3 million in the second quarter of 2001 and $1,400.3 million in the first half of 2001, increasing by $117.5 million or 9.2% and $133.0 million or 10.5%, respectively, due to increases in large certificates of deposit and in long-term debt. The average rate on interest-bearing liabilities for the second quarter of 2001 decreased to 3.97% from 4.04% in the second quarter of 2000, due in part to the decline in market interest rates in 2001. The average rate for the first half of 2001 increased to 4.17% from 3.93% in 2000. As discussed earlier, this increase was due primarily to the change in the composition of the interest-bearing liabilities during the period.
The resultant net interest income for the second quarter and first half of 2001 increased by $1.1 million or 6.0% and $3.0 million or 8.6%, respectively, over the same periods in 2000. Net interest margin declined to 4.60% for the second quarter and first half of 2001 from 4.71% and 4.64%, respectively, in 2000. Strong competition for both loans and 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.
The provision for loan losses of $900,000 for the second quarter and $1.7 million for the first half of 2001 decreased by 10.0% and 17.5%, respectively, from the amounts accrued in the same periods in 2000. For the second quarter, net loan charge-offs of $64,000 in 2001 and $496,000 in 2000, when expressed as an annualized percentage of average total loans, were 0.02% and 0.17%, respectively. Loan charge-offs during the second quarter of 2001 were comprised primarily of two commercial real estate loans and various consumer loans. Loan recoveries during the second quarter consisted primarily of one commercial real estate loan.
The allowance for loan losses expressed as a percentage of total loans was 1.92% at June 30, 2001, increasing from 1.75% at December 31, 2000. The increase in this ratio was due to the sale of $54 million in residential mortgage loans. Considering the relatively low level of 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 could 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 and accruing loans delinquent for 90 days or more at the dates indicated.
Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $7.3 million at June 30, 2001, a decrease of $5.0 million or 40.8% from year-end 2000. Nonaccrual loans totaled $5.1 million at June 30, 2001, a decrease of 40.3% from year-end 2000, and included a $3.0 million commercial loan and a $0.9 million loan secured by multi-family residential property. Nonaccrual commercial mortgage loans totaled $153,000 at June 30, 2001, a decrease of $2.1 million from year-end 2000. The majority of this decrease was due to loan payoffs of $1.5 million. Loans delinquent for 90 days or more and still accruing interest totaled $769,000 at June 30, 2001, a 49.6% decrease from year-end 2000, and consisted primarily of residential mortgage loans. Impaired loans, representing seven loans at June 30, 2001, totaled $7.4 million and at year-end 2000 totaled $11.3 million.
Management continues to closely monitor loan delinquencies and work with borrowers to resolve loan problems; however, any worsening of current economic conditions in the state of Hawaii may result in future increases in nonperforming assets, delinquencies, net loan charge-offs, provision for loan losses and noninterest expense.
Other Operating Income
Total other operating income totaled $3.5 million for the second quarter of 2001, an increase of 28.8% over the same period last year. This increase was primarily driven by investment securities gains and losses. Excluding the impact of the securities transactions, total other operating income was comparable to the second quarter of 2000. On a year-to-date basis, other operating income excluding securities gains and losses totaled $6.5 million for 2001, compared to $7.9 million for the same period last year. This decrease was primarily attributed to the $1.9 million gain on the sale of the merchant portfolio in the first quarter of last year. Additionally, loan sales generated $700,000 million in gains in 2001.
Other Operating Expense
Total other operating expense was $12.5 million for the second quarter of 2001, an increase of 2.9% over the same period last year. This increase was primarily attributed to an increase in salaries and benefits of $811,000 or 14.1% over last year’s second quarter. In the second quarter of 2000, restructuring charges totaling $600,000 million were reversed. On a year-to-date basis, total other operating expense was $26.0 million, an increase of 2.1% over the same period last year. Salaries and benefits totaled $13.5 million for the first six months of 2001, an increase of 9.5% over the same period last year. This increase was primarily due to increases in incentive accruals in 2001 and the reversal of restructuring charges in 2000. In the first quarter of 2001, an expense of $642,000 was recorded due to an early payoff of $20 million in borrowings from the Federal Home Loan Bank of Seattle. In the first quarter of 2000, expenses of $358,000 related to merchant servicing fees and $480,000 related to early termination of a servicing agreement for the sold merchant services portfolio were recognized.
Income Taxes
The effective tax rates for the second quarter and first six months of 2001 were 35.84% and 35.76%, respectively. For 2000, the comparable rates were 35.24% and 35.26%.
Financial Condition
Total assets at June 30, 2001 was $1.80 billion, a decrease of $19.8 million or 1.1% from year-end 2000. In the second quarter of 2001, the Company acquired the remaining interest in CKSS Associates, a partnership in which the Company already held a 50% partnership interest. This transaction accounted for the majority of the increase noted in premises and equipment as of June 30, 2001. Also occurring in 2001 was the sale of $54 million in residential mortgage loans. These loans were sold to adjust the Company’s interest rate profile and to enhance liquidity. Proceeds from the sale were used to reduce short-term borrowings by $40 million and long-term debt by $20 million. As mentioned earlier, early payoff of long-term debt generated an interest penalty of $642,000, which is included in other expense. The debt prepayment was part of the Company’s strategy to increase the repricing of its liabilities in the declining interest rate environment. Net loans totaled $1.23 billion as of June 30, 2001, a decrease from $1.27 billion reported at year-end 2000. Investment securities totaled $355.36 million, a decrease of $29.3 million or 7.6%. Total deposits at June 30, 2001 were $1.41 billion, an increase of $42.9 million or 3.1%. Core deposits (noninterest-bearing demand, interest-bearing demand and savings deposits, and time deposits under $100,000) at June 30, 2001 were $1.0 billion, an increase from $976 million at March 31, 2001. Competition for deposits remains strong, and will continue to challenge the bank's ability to gather low-cost retail funds.
Capital Resources
Stockholders' equity was $146.7 million at June 30, 2001, an increase of $3.4 million or 2.4% from December 31, 2000. When expressed as a percentage of total assets, stockholders' equity increased to 8.16% at June 30, 2001, from 7.89% at year-end 2000. Book value per share at June 30, 2001 was $17.83, compared to $16.93 at year-end 2000.
Stock repurchases totaling $6.9 million offset increases due to earnings accumulation and unrealized gains on the available for sale investment securities portfolio. In the first six months of 2001, the Company repurchased 255,000 shares of common stock. The Company is currently in the fifth segment of its repurchase program, which began in 1998.
On June 18, 2001, the board of directors declared a second quarter cash dividend of $0.16 per share, a 6.7% increase over the dividend declared in the second quarter of 2000. Dividends declared in the second quarter of 2001 totaled $1,316,000, compared with $1,318,000 in the second quarter of 2000.
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.
The following table sets forth the Company’s capital ratios and capital adequacy requirements applicable to the Company as of the dates indicated.
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 Bank’s capital ratios and capital requirements to be considered "well capitalized" as of the dates indicated.
Asset/Liability Management and Liquidity
The Company's asset/liability management and liquidity are discussed in the 2000 Annual Report to Shareholders. No significant changes have occurred during the three and six months ended June 30, 2001.
Item 3. Quantitative and Qualitative Disclosures About MarketRisk
The Company discussed the nature and extent of market risk exposure in the 2000 Annual Report to Shareholders. No significant changes have occurred during the three and six months ended June 30, 2001.
PART II. OTHER INFORMATION
Items 1 to 5.
Items 1 to 5 are omitted pursuant to instructions to Part II.
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. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
CPB INC. AND SUBSIDIARYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)June 30, 2001 and 2000
1. Basis of Presentation
The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 2000. 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, 2001 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 and six months ended June 30, 2001 and 2000 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:
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, and indirect lending activities.
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 2000 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.
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, did not have a material impact on the Company's consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 supersedes and replaces SFAS No. 125 of the same name and provides accounting and reporting guidance for transfers and servicing of financial assets and extinguishments of liabilities. The provisions of SFAS No. 140 are to be applied prospectively to transactions occurring after March 31, 2001. The application of SFAS No. 140 is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, and provides accounting and reporting guidance on business combinations initiated after June 30, 2001. The application of SFAS No. 141 is not expected to have a material impact on the Company’s consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 supersedes APB Opinion No. 17, Intangible Assets, and provides accounting and reporting guidance on intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination). The provisions of SFAS No. 142 are to be applied starting with fiscal years beginning after December 15, 2001. The application of SFAS No. 142 is not expected to have a material impact on the Company’s consolidated financial statements.