SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

OR

 

 

Commission file number 0-10777

 

CPB INC.

(Exact name of registrant as specified in its charter)

 

 

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 9, 2002: 7,970,829 shares

 

 

PART I.   FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

	The financial statements listed below are filed as a part hereof.
	Consolidated Balance Sheets (Unaudited) - June 30, 2002 and 2001, and December 31, 2001
	Consolidated Statements of Income (Unaudited) - Three and six months ended June 30, 2002 and 2001
	Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Unaudited) - Six months ended June 30, 2002 and 2001
	Consolidated Statements of Cash Flows (Unaudited) - Six months ended June 30, 2002 and 2001
	Notes to Consolidated Financial Statements (Unaudited) - June 30, 2002 and 2001

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

For the second quarter of 2002, CPB Inc. (the “Company”) reported net income of $7.7 million, an increase of 32.9% over the $5.8 million reported in the second quarter of 2001.  For the first half of 2002, net income totaled $15.2 million, an increase of 37.0% over the $11.1 million reported at the same period last year.  This increase was primarily driven by an increase in net interest income, and a reduction in provision for loan losses.

 

Total assets as of June 30, 2002 were $1.935 billion, an increase of 7.7% over the $1.797 billion reported a year ago, and 5.4% over the $1.836 billion reported at year-end 2001. Total loans were $1.276 billion, an increase of $20.5 million or 1.6% over the same period last year, and $7.2 million or 0.6% over year-end 2001. Total deposits of $1.558 billion increased by $151.6 million or 10.8% from a year ago, and $106.7 million or 7.4% from year-end 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.

 

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		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Annualized return on average assets		1.62		%	1.30		%	1.63		%	1.25		%
Annualized return on average stockholders’ equity		19.41		%	15.86		%	19.64		%	15.23		%
Basic earnings per share		$	0.96		$	0.70		$	1.91		$	1.33
Diluted earnings per share		$	0.94		$	0.69		$	1.87		$	1.31

 

Hawaii’s economy continued to show slight signs of improvement in 2002. The state’s unemployment rate, which peaked in November 2001 at 5.6% following the events of September 11, 2001, was 4.5% in June 2002.(1) The unemployment rate was 4.9% a year ago.(2)  For 2002, the state unemployment rate is forecasted to be 4.5%.(3) On the national level, the unemployment rate was 6.0% in June 2002, compared to 4.7% a year ago.(4)

 

For the first six months of 2002, hotel occupancy rates averaged 69%, an improvement over the 57% reported during the fourth quarter of 2001.(5)  Year-to-date visitor arrivals through June 2002 were 8.8% below 2001 levels, but continued the gradual upward trend in arrivals subsequent to September 2001.(6)  In 2002, visitor arrivals are forecasted to grow by 3%.(7)  Japanese visitor arrivals, which decreased by 19% in 2001, are expected to grow by 0.2% in 2002.(8)

 

Residential home sales for the first six months of 2002 were $1.1 billion, an increase of 20.4% over the same period last year.(9)  The median sales price for single family homes and condominiums increased over the same period last year by 8.2% and 13.7%, respectively. (10)

 

The results of operations of the Company in 2002 may be

 

(1)   Hawaii State Department of Labor and Industrial Relations.

(2)   Ibid.

(3)   University of Hawaii Economic Research Organization.

(4)   Hawaii State Department of Labor and Industrial Relations.

(5)   Hawaii State Department of Business, Economic Development & Tourism.

(6)   Ibid.

(7)   University of Hawaii Economic Research Organization.

(8)   Ibid.

(9)   Honolulu Board of Realtors.

(10) Ibid.

 

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directly impacted by the ability of the Hawaii economy to sustain positive growth.  Loan demand, deposit growth, provision for loan losses, noninterest income, and noninterest expense will be affected by economic conditions through the end of the year.

 

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, 2001.

 

Results of Operations

 

Net Interest Income

 

A comparison of net interest income for the three and six months ended June 30, 2002 and 2001 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.”

 

		Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)		2002			2001			2002			2001
Interest income		$	30,109		$	33,097		$	59,752		$	67,670
Interest expense		7,895			13,864			15,830			29,208
Net interest income		$	22,214		$	19,233		$	43,922		$	38,462
Net interest margin		5.06		%	4.60		%	5.07		%	4.60		%

 

Interest income decreased by $3.0 million or 9.0% in the second quarter of 2002 and $7.9 million or 11.7% in the first half of 2002 compared to the same periods last year.  Average interest earning assets were $1.756 billion for the second quarter, a 5.0% increase over the same period last year.  The yield on interest earning assets was 6.63% for the second quarter of 2002 and 6.89% for the six months ended June 30, 2002,

 

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compared to 7.70% and 8.09% for the same periods in 2001.

 

Interest and fees on loans decreased by $2.9 million or 10.9% in the second quarter of 2002 and $7.6 million or 13.9% for the first half of 2002 compared to the same periods last year.  Income from loans was impacted by lower rates resulting from U.S. monetary policy offset by higher average balances.

 

Interest expense for the second quarter of 2002 decreased $6.0 million or 43.1% and for the first six months of 2002 decreased $13.4 million or 45.8% compared to the same periods in 2001, primarily due to lower interest rates offset by higher average interest-bearing liabilities.  Average interest-bearing liabilities totaled $1.465 billion in the second quarter of 2002, increasing by $67.4 million or 4.8% from the same period last year.  The average rate on interest-bearing liabilities was 2.16% for the second quarter of 2002 and 2.19% for the first half of 2002, compared to 3.97% and 4.17% for the comparable periods in 2001.

 

The resultant net interest income increased by $3.0 million or 15.5% for the second quarter of 2002 and $5.5 million or 14.2% for the first half of 2002 compared to the same periods in 2001.  The net interest margin increased to 5.06% for the second quarter of 2002 from 4.60% in the second quarter of 2001.  On a year-to-date basis, net interest margin grew to 5.07% compared to 4.60% from the same period in 2001.  Interest rate decreases in 2001 have favorably impacted net interest income and net interest margin.  However, strong competition for both loans and core deposits is expected to continue, and may create additional pressure on net interest margin.

 

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

 

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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.

 

		Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)		2002			2001			2002			2001
Allowance for loan losses:
Balance at beginning of period		$	24,719		$	23,254		$	24,564		$	22,612
Provision for loan losses		300			900			600			1,650
Loan charge-offs:
Real estate:
Mortgage-commercial		—			200			—			200
Mortgage-residential		45			27			110			441
Commercial, financial and agricultural		—			—			—			—
Consumer		156			136			289			229
Other		1			1			2			1
Total loan charge-offs		202			364			401			871
Recoveries:
Real estate:
Mortgage-commercial		—			242			1			244
Mortgage-residential		19			26			45			74
Commercial, financial and agricultural		10			—			11			318
Consumer		22			32			48			63
Other		—			—			—			—
Total recoveries		51			300			105			699
Net loan charge-offs		151			64			296			172
Balance at end of period		$	24,868		$	24,090		$	24,868		$	24,090
Annualized ratio of net loan charge-offs to average loans		0.05		%	0.02		%	0.05		%	0.03		%

 

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The provision for loan losses of $300,000 for the second quarter of 2002 and $600,000 for the first half of 2002 represented decreases of 66.7% and 63.6%, respectively, over the same periods in 2001.  This decrease was driven by an improvement in asset quality.  Net loan charge-offs, when expressed as an annualized percentage of average total loans, were 0.05% for both the second quarter of 2002 and the first half of 2002.  For 2001, the net loan charge-off ratio was 0.02% for the second quarter, and 0.03% for the first six months.

 

The allowance for loan losses expressed as a percentage of total loans was 1.95% at June 30, 2002, compared to 1.92% at June 30, 2001 and 1.94% at year-end 2001.  Considering the relatively low level of net loan charge-offs, nonaccrual loans and delinquent loans, Management believes that the allowance for loan losses is adequate to cover the credit risks inherent in the loan portfolio.  Deterioration of Hawaii’s economy 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.

 

(Dollars in thousands)		June 30, 2002			December 31, 2001			June 30, 2001
Nonaccrual loans:
Real estate:
Mortgage-commercial		$	2,572		$	1,471		$	3,577
Mortgage-residential		126			585			1,358
Commercial, financial and agricultural		451			363			153
Consumer		—			2			—
Other		—			—			—
Total nonaccrual loans		3,149			2,421			5,088
Other real estate		84			812			990
Total nonperforming assets		3,233			3,233			6,078
Loans delinquent for 90 days or more:
Real estate:
Mortgage-commercial		—			163			—
Mortgage-residential		—			133			656
Commercial, financial and agricultural		1			122			90
Consumer		12			25			23
Other		6			—			—
Total loans delinquent for 90 days or more		19			443			769
Restructured loans still accruing interest:
Real estate:
Mortgage-commercial		—			—			445
Total restructured loans still accruing interest		—			—			445
Total nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest		$	3,252		$	3,676		$	7,292
Total nonperforming assets as a percentage of loans and other real estate		0.25		%	0.25		%	0.48		%
Total nonperforming assets and loans delinquent for 90 days or more as a percentage of loans and other real estate		0.25		%	0.29		%	0.54		%
Total nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest as a percentage of loans and other real estate		0.25		%	0.29		%	0.58		%

 

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Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $3.3 million at June 30, 2002, a decrease of $4.0 million from a year ago and $0.4 million from year-end 2001.  Nonaccrual loans totaled $3.1 million at June 30, 2002, a decrease of $1.9 million from a year ago and an increase of $0.7 million from year-end 2001.  Nonaccrual commercial mortgage loans totaled $2.6 million, compared to $3.6 million from a year ago and $1.5 million at year-end 2001.  This fluctuation was primarily attributed to two loan charge-offs totaling $3.4 million and the addition of two loans totaling $2.6 million during the past year.  Nonaccrual residential mortgage loans totaled $0.1 million at June 30, 2002, a decrease of 90.7% from the same period last year and 78.5% from year-end 2001.  This decrease was primarily attributed to

 

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transfers to other real estate totaling $1.0 million.  Loans delinquent for 90 days or more and still accruing interest totaled $19,000 at June 30, 2002, a decrease from $769,000 reported at the same period last year, and $443,000 at year-end 2001.  Impaired loans, representing three loans, totaled $2.9 million at June 30, 2002, compared to seven loans totaling $7.4 million at the same period last year and four loans totaling $1.5 million at year-end 2001.

 

Management continues to closely monitor loan delinquencies, and work with borrowers to resolve loan problems.  Deterioration of Hawaii’s economy may impact loan quality, and may result in increases in delinquencies, nonperforming assets, and restructured loans.

 

Other Operating Income

 

For the second quarter of 2002, total other operating income was $3.4 million, a decrease of 2.0% over the same period last year.  Excluding the impact of securities transactions, total other operating income was $3.2 million, an increase of 4.8% from the second quarter of 2001.  On a year-to-date basis excluding securities transactions, other operating income totaled $6.7 million, an increase of 1.8% over the same period last year.

 

Second quarter service charges on deposit accounts and other fees increased by $0.2 million over the second quarter of 2001.  Year-to-date service charges and other fees increased by 17.1% over the same period last year and totaled $4.5 million.  This increase was primarily attributed to fee enhancement initiatives that were implemented in 2001.  Offsetting this increase was a reduction in rental income from CKSS Associates, a limited partnership.  The acquisition of the remaining 50% interest in the partnership in June 2001 resulted in rental income being netted in occupancy expense.  Also included in other operating income in 2001 was a $601,000 gain on the sale of $54 million in residential mortgage loans.

 

Other Operating Expense

 

Total other operating expense was $13.2 million for the second quarter of 2002, an increase of 6.1% over the same period last year.  Salaries and benefits totaled $7.7 million, an increase of 16.9% over the same quarter last year.  This increase was driven by increased incentive bonuses, the acquisition of new employees to strengthen the Company’s sales team and to expand trust and private banking services, and executive management transition costs.  Occupancy expense decreased by $0.5 million from the same period last year.  As mentioned earlier, the acquisition of CKSS Associates in 2001 resulted in rental income being netted in occupancy expense.  Other operating expense increased by 3.5% primarily due to an $0.3 million increase in minority interest

 

9

 

expense.  This expense was related to the issuance of $10.0 million in preferred stock securities through the Company’s real estate investment trust in the third quarter of 2001.

 

Through June 30, 2002, other operating expense was $26.2 million, a 0.8% increase over the same period last year.  Salaries and benefits increased by 13.9% over the same period last year.  Occupancy expenses decreased by 37.4% as the result of the CKSS acquisition.  Included in other operating expense in 2001 is an expense of $642,000 relating to an early payoff of Federal Home Loan Bank borrowings.

 

Income Taxes

 

The effective tax rate for the second quarter and first six months of 2002 was 34.37% and 35.53%, respectively.  For 2001, the comparable rates were 35.84% and 35.76%.

 

In 1998, the Company completed a corporate reorganization that was intended to reduce the Company’s overall effective tax rate.  The Company believes that the associated tax benefits are realizable.  However, the state of Hawaii has indicated that it may challenge the tax treatment of this reorganization.  Estimated state franchise tax benefits that have not yet been recognized amounted to approximately $6.5 million as of June 30, 2002.

 

Financial Condition

 

Total assets at June 30, 2002 were $1.935 billion, an increase of $137.9 million or 7.7% from June 30, 2001.  Compared to year-end 2001, total assets were up $99.4 million or 5.4%.  Net loans grew 1.6% to $1.251 billion from a year ago and 0.6% from year-end 2001.  Investment securities totaled $454.7 million, compared to $355.4 million a year ago and $391.9 million at year-end 2001.  Total deposits at June 30, 2002 were $1.558 billion, an increase of $151.6 million or 10.8% over June 30, 2001.  Compared to year-end 2001, total deposits grew by $106.7 million or 7.4%.  Core deposits (noninterest-bearing demand, interest-bearing demand and savings deposits, and time deposits under $100,000) at June 30, 2002 were $1.197 billion, an increase from $1.005 billion a year ago and $1.082 billion at year-end 2001.  Deposit growth was partly due to the launch of new deposit products in 2001.  Competition for deposits remains strong, and will continue to challenge the Company’s ability to gather low-cost retail funds.

 

Capital Resources

 

Stockholders’ equity was $161.9 million at June 30, 2002, an increase of $15.1 million or 10.3% from a year ago, and an increase of $14.8 million or 10.1% from year-end 2001.  When expressed as a percentage of total assets, stockholders’ equity increased to 8.37% at June 30, 2002, from 8.16% a year ago and 8.23% at year-end 2001.  Book value per share at June 30, 2002 was

 

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 $20.22, compared to $17.83 at June 30, 2001 and $18.54 at year-end 2001.

 

Repurchases of the Company’s common stock during the first six months of 2002 totaled 21,200 shares for a total consideration of $739,000.  The Company is currently in the sixth segment of its repurchase program that began in 1998.

 

On June 17, 2002, the board of directors declared a second quarter cash dividend of $0.20 per share, a 25.0% increase over the dividend declared in the second quarter of 2001 and 11.1% over the previous quarter’s dividend.  Dividends declared in the second quarter of 2002 totaled $1,601,000, compared with $1,316,000 in the same quarter last year.

 

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.

 

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		Actual					Minimum required for capital adequacy purposes					Excess
(Dollars in thousands)		Amount			Ratio		Amount			Ratio		Amount			Ratio
At June 30, 2002:
Leverage capital		$	165,909		8.80	%	$	75,409		4.00	%	$	90,500		4.80	%
Tier 1 risk-based capital		165,909			11.18		59,351			4.00		106,558			7.18
Total risk-based capital		184,234			12.44		118,702			8.00		65,532			4.44
At December 31, 2001:
Leverage capital		$	152,970		8.43	%	$	72,626		4.00	%	$	80,344		4.43	%
Tier 1 risk-based capital		152,970			10.12		60,462			4.00		92,508			6.12
Total risk-based capital		171,935			11.37		120,925			8.00		51,010			3.37

 

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.

 

		Actual					Minimum required to be well capitalized					Excess
(Dollars in thousands)		Amount			Ratio		Amount			Ratio		Amount			Ratio
At June 30, 2002:
Leverage capital		$	162,257		8.62	%	$	94,147		5.00	%	$	68,110		3.62	%
Tier 1 risk-based capital		162,257			10.94		88,961			6.00		73,296			4.94
Total risk-based capital		180,869			12.20		148,269			10.00		32,600			2.20
At December 31, 2001:
Leverage capital		$	149,912		8.22	%	$	91,168		5.00	%	$	58,744		3.22	%
Tier 1 risk-based capital		149,912			9.91		90,760			6.00		59,152			3.91
Total risk-based capital		168,890			11.17		151,266			10.00		17,624			1.17

 

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Asset/Liability Management and Liquidity

 

The Company’s asset/liability management and liquidity are discussed in the 2001 Annual Report to Shareholders.  No significant changes have occurred during the three and six months ended June 30, 2002.

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

The Company discussed the nature and extent of market risk exposure in the 2001 Annual Report to Shareholders.  No significant changes have occurred during the three and six months ended June 30, 2002.

 

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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

 

Exhibit 99.1 — Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 99.2 — Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)   Reports on Form 8-K

 

The Company filed no reports on Form 8-K during the second quarter of 2002.

 

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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 12, 2002	/s/ Clint Arnoldus
			Clint Arnoldus
			Chairman of the Board, President and Chief Executive Officer
Date:		August 12, 2002	/s/ Neal K. Kanda
			Neal K. Kanda
			Vice President, Secretary and Treasurer (Principal Financial and Accounting Officer)

 

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CPB INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in thousands, except per share data)		June 30, 2002			December 31, 2001			June 30, 2001
ASSETS
Cash and due from banks		$	58,703		$	39,820		$	42,659
Interest-bearing deposits in other banks		54,431			29,277			26,751
Federal funds sold		—			13,500			25,000
Investment securities:
Held to maturity, at cost (fair value of $66,524 at June 30, 2002, $71,142 at December 31, 2001, and $80,295 at June 30, 2001)		64,561			69,859			78,810
Available for sale, at fair value		390,104			322,088			276,554
Total investment securities		454,665			391,947			355,364
Loans		1,275,873			1,268,657			1,255,402
Less allowance for loan losses		24,868			24,564			24,090
Net loans		1,251,005			1,244,093			1,231,312
Premises and equipment		59,387			60,635			61,489
Accrued interest receivable		9,306			9,000			9,579
Investment in unconsolidated subsidiaries		2,102			1,284			1,376
Due from customers on acceptances		6			—			13
Other real estate		84			812			990
Other assets		45,364			45,273			42,573
Total assets		$	1,935,053		$	1,835,641		$	1,797,106
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing deposits		$	252,106		238,663			$	213,450
Interest-bearing deposits		1,305,503			1,212,262			1,192,549
Total deposits		1,557,609			1,450,925			1,405,999
Short-term borrowings		13,404			13,893			4,000
Long-tem debt		155,870			175,572			199,727
Bank acceptances outstanding		6			—			13
Minority interest		10,064			10,064			64
Other liabilities		36,229			38,117			40,570
Total liabilities		1,773,182			1,688,571			1,650,373
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 8,007,369 shares at June 30, 2002, 7,933,242 shares at December 31, 2001, and 8,227,568 at June 30, 2001		8,147			6,678			6,269
Surplus		45,848			45,848			45,848
Retained earnings		106,044			94,581			89,951
Deferred stock awards		(30		)	(34		)	—
Accumulated other comprehensive income (loss)		1,862			(3		)	4,665
Total stockholders’ equity		161,871			147,070			146,733
Total liabilities and stockholders’ equity		$	1,935,053		$	1,835,641		$	1,797,106

 

See accompanying notes to consolidated financial statements.

 

F-1

 

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except per share data)		2002			2001			2002			2001
Interest income:
Interest and fees on loans		$	23,376		$	26,349		$	46,624		$	54,275
Interest and dividends on investment securities:
Taxable interest		5,131			4,834			10,031			10,039
Tax-exempt interest		725			610			1,441			1,199
Dividends		309			354			496			678
Interest on deposits in other banks		120			564			280			771
Interest on Federal funds sold and securities purchased under agreements to resell		57			57			103			62
Total interest income		29,718			32,768			58,975			67,024
Interest expense:
Interest on deposits		6,175			11,000			12,401			22,514
Interest on short-term borrowings		62			138			129			570
Interest on long-term debt		1,658			2,726			3,300			6,124
Total interest expense		7,895			13,864			15,830			29,208
Net interest income		21,823			18,904			43,145			37,816
Provision for loan losses		300			900			600			1,650
Net interest income after provision for loan losses		21,523			18,004			42,545			36,166
Other operating income:
Income from fiduciary activities		268			269			614			570
Service charges on deposit accounts		1,063			941			2,147			1,798
Other service charges and fees		1,126			1,042			2,311			2,007
Equity in earnings of unconsolidated subsidiaries		—			94			—			217
Fees on foreign exchange		129			112			255			226
Investment securities gains		220			437			640			617
Other		593			575			1,326			1,716
Total other operating income		3,399			3,470			7,293			7,151
Other operating expense:
Salaries and employee benefits		7,668			6,559			15,333			13,461
Net occupancy		862			1,375			1,848			2,951
Equipment		685			662			1,369			1,371
Other		4,014			3,878			7,691			8,253
Total other operating expense		13,229			12,474			26,241			26,036
Income before income taxes		11,693			9,000			23,597			17,281
Income taxes		4,019			3,226			8,383			6,179
Net income		$	7,674		$	5,774		$	15,214		$	11,102
Per share data:
Basic earnings per share		$	0.96		$	0.70		$	1.91		$	1.33
Diluted earnings per share		0.94			0.69			1.87			1.31
Cash dividends declared		0.20			0.16			0.38			0.32
Basic weighted average shares outstanding		7,968			8,227			7,951			8,332
Diluted weighted average shares outstanding		8,156			8,391			8,129			8,483

 

See accompanying notes to consolidated financial statements.

 

F-2

 

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

 

(Dollars in thousands, except per share data)		Common Stock			Surplus			Retained Earnings			Deferred Stock Awards			Other Comprehensive Income(Loss)			Total
Six months ended June 30, 2002:
Balance at December 31, 2001		$	6,678		$	45,848		$	94,581		$	(34	)	$	(3	)	$	147,070
Net Income		—			—			15,214			—			—			15,214
Net change in unrealized gain (loss) on investment securities, net of taxes of $1,240		—			—			—			—			1,865			1,865
Comprehensive income																	17,079
Cash dividends declared ($0.38 per share)		—			—			(3,031		)	—			—			(3,031		)
95,327 shares of common stock issued		1,488			—			—			—			—			1,488
21,200 shares of common stock repurchased		(19		)	—			(720		)	—			—			(739		)
Vested stock awards		—			—			—			4			—			4
Balance at June 30, 2002		$	8,147		$	45,848		$	106,044		$	(30	)	$	1,862		$	161,871
Disclosure of reclassification amount:
Unrealized holding gain on investment securities during period, net of taxes of $1,199		$	—		$	—		$	—		$	—		$	1,803		$	1,803
Less reclassification adjustment for losses included in net income, net of taxes of $(41)		—			—			—			—			(62		)	(62		)
Net Change in unrealized gain (loss) on investment securities		$	—		$	—		$	—		$	—		$	1,865		$	1,865
Six months ended June 30, 2001:
Balance at December 31, 2000		$	6,172		$	45,848		$	88,232		$	—		$	3,060		$	143,312
Net Income		—			—			11,102			—			—			11,102
Net change in unrealized gain (loss) on investment securities, net of taxes of $1,068		—			—			—			—			1,605			1,605
Comprehensive income																	12,707
Cash dividends declared ($0.32 per share)		—			—			(2,632		)	—			—			(2,632		)
18,100 shares of common stock issued		286			—			—			—			—			286
255,000 shares of common stock repurchased		(189		)	—			(6,751		)	—			—			(6,940		)
Balance at June 30, 2001		$	6,269		$	45,848		$	89,951		$	—		$	4,665		$	146,733
Disclosure of reclassification amount:
Unrealized holding loss on investment securities during period, net of taxes of $1,037		$	—		$	—		$	—		$	—		$	1,558		$	1,558
Less reclassification adjustment for losses included in net income, net of taxes of $(31)		—			—			—			—			(47		)	(47		)
Net Change in unrealized gain (loss) on investment securities		$	—		$	—		$	—		$	—		$	1,605		$	1,605

 

See accompanying notes to consolidated financial statements.

 

F-3

 

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended June 30,
(Dollars in thousands)		2002		2001
Cash flows from operating activities:
Net income		15,214		11,102
Adjustments to reconcilie net income to net cash provided by operating activities:
Provision for loan losses		600		1,650
Provision for depreciation & amortization		2,104		1,378
Amortization of deferred stock awards		4		—
Net amortization (accretion) of investment securities		39		(305	)
Net gain on investment securities		(640	)	(506	)
Federal Home Loan Bank dividends received		(378	)	(674	)
Net gain on sale of loans		(344	)	(718	)
Proceeds from sales of loans held for sale		22,327		69,499
Originations & purchases of loans held for sale		(23,846	)	(68,989	)
Deferred income tax benefit		(1,238	)	(925	)
Equity in earnings of unconsolidated subsidiaries		—		(217	)
Net decrease in other assets		1,264		560
Net increase (decrease) in other liabilities		(2,061	)	7,969
Net Cash Provided by Operating Activities		13,045		19,824
Cash flows from investing activities:
Proceeds from maturities of & calls on investment securities held to maturity		5,228		7,302
Proceeds from sales of investment securities available for sale		13,542		34,294
Proceeds from maturities of & calls on investment securities available for sale		44,936		18,875
Purchases of investment securities available for sale		(122,341	)	(27,057	)
Net increase in interest-bearing deposits in other banks		(25,154	)	(15,245	)
Net decrease (increase) in Fed Funds Sold		13,500		(10,000	)
Net principal repayments (loan originations)		(6,488	)	34,232
Purchases of premises & equipment		(856	)	(420	)
Distributions from unconsolidated subsidiaries		—		125
Contributions to unconsolidated subsidiaries		(913	)	(81	)
Acquisition of remaining interest in CKSS		—		(31,043	)
Net Cash Provided (Used) by Investing Activities		(78,546	)	10,982
Cash flows from financing activities:
Net increase in deposits		106,684		42,933
Repayments of long-term debt		(19,702	)	(21,243	)
Net decrease in short-term borrowings		(489	)	(52,720	)
Cash dividends paid		(2,858	)	(2,670	)
Proceeds from sale of common stock		1,488		286
Repurchases of common stock		(739	)	(6,940	)
Net Cash Provided (Used) by Financing Activities		84,384		(40,354	)
Net increase (decrease) in cash & cash equivalents		18,883		(9,548	)
Cash and cash equivalents:
At beginning of period		39,820		52,207
At end of period		58,703		42,659
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		16,666		29,521
Cash paid during the period for income taxes		9,191		—
Supplemental disclosure of noncash investing & financing activities:
Reclassification of loans to other real estate		839		1,592

 

See accompanying notes to consolidated financial statements.

 

F-4

 

CPB INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2002 and 2001

 

1.             Basis of Presentation

 

The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 2001.  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, 2002 are not necessarily indicative of the results to be expected for the full year.

 

2.             Comprehensive Income

 

Components of other comprehensive income (loss), net of taxes, is presented below:

 

		June 30,
(Dollars in thousands)		2002			2001
Unrealized holding gains (losses) on available-for-sale investment securities		$	5,883		$	4,665
Pension liability adjustments		(4,021		)	—
Balance at end of period		$	1,862		$	4,665

 

F-5

 

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 2001 Annual Report to Stockholders.  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-6

 

(Dollars in thousands)		Retail Branch		Commercial Finance		Treasury		All Others		Total
Three months ended June 30, 2002:
Net interest income (expense)		(1,539	)	17,545		3,795		2,022		21,823
Intersegment net interest income (expense)		8,696		(7,096	)	(596	)	(1,004	)	—
Provision for loan losses		199		26		—		75		300
Other operating income		1,045		314		366		1,674		3,399
Other operating expense		3,500		619		481		8,629		13,229
Administrative and overhead expense allocation		4,159		1,638		311		(6,108	)	—
Income tax expense (benefit)		123		2,928		952		16		4,019
Net income (loss)		221		5,552		1,821		80		7,674
Three months ended June 30, 2001:
Net interest income (expense)		(4,677	)	17,876		2,344		3,361		18,904
Intersegment net interest income (expense)		9,912		(8,439	)	45		(1,518	)	—
Provision for loan losses		280		159		—		461		900
Other operating income		1,766		210		646		848		3,470
Other operating expense		3,528		651		189		8,106		12,474
Administrative and overhead expense expense allocation		3,865		1,511		189		(5,565	)	—
Income tax expense (benefit)		(237	)	2,635		955		(127	)	3,226
Net income (loss)		(435	)	4,691		1,702		(184	)	5,774
At June 30, 2002:
Investment securities		—		—		454,665		—		454,665
Loans		171,188		1,006,034		—		98,651		1,275,873
Other		17,010		20,444		108,892		58,169		204,515
Total Assets		188,198		1,026,478		563,557		156,820		1,935,053
At December 31, 2001
Investment securities		—		—		391,947		—		391,947
Loans		153,528		1,006,074		—		109,055		1,268,657
Other		18,407		21,112		72,321		63,197		175,037
Total Assets		171,935		1,027,186		464,268		172,252		1,835,641

 

F-7

 

4.             Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 did not 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 did not have a material impact on the Company’s consolidated financial statements.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.”  SFAS No. 143 provides accounting and reporting guidance on obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002.  The application of SFAS No. 143 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business (as previously defined in that opinion).  It also amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary.  The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years.  The application of SFAS No. 144 did not have a material impact on the Company’s consolidated financial statements.

 

F-8

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”  SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect.  As a result, the criteria for APB Opinion No. 30 will now be used to classify those gains and losses.  SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded.  SFAS No. 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980.  Because the transition has been completed, SFAS No. 44 is no longer necessary.  SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions.  SFAS No. 145 also makes technical corrections to existing pronouncements.  The application of SFAS No. 145 did not have a material impact on the Company’s consolidated financial statements.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities.  It nullifies the Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.”  SFAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework.  It also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities.  The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002.  The application of SFAS No. 146 is not expected to have a material impact on the Company’s consolidated financial statements.

 

F-9