CB BANCSHARES INC/HI - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
		EXCHANGE ACT OF 1934

Commission File Number 0-12396

CB BANCSHARES, INC.
(Exact name of registrant as specified in its charter)


Hawaii (State of Incorporation)		99-0197163 (IRS Employer Identification No.)

201 Merchant Street Honolulu, Hawaii 96813
(Address of principal executive offices)

(808) 535-2500
(Registrant’s Telephone Number)

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 [ ]

The number of shares outstanding of each of the registrant’s classes of common stock as of July 31, 2002 was:


Class		Outstanding

Common Stock, $1.00 Par Value		3,998,156 shares

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 99.1
EXHIBIT 99.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES


		June 30,			December 31,			June 30,
(in thousands of dollars)		2002			2001			2001

Assets
Cash and due from banks		$	43,447		$	22,395		$	23,894
Interest-bearing deposits in other banks			1,110			1,017			1,010
Federal funds sold			815			10,655			2,515
Investment securities:
	Held-to-maturity		73,396			26,000			—
	Available-for-sale		231,167			203,563			247,900
	Restricted		33,377			32,406			33,524
Loans held for sale			38,023			50,661			54,854
Net loans			1,062,594			1,172,817			1,228,522
Premises and equipment			17,072			17,633			18,566
Other real estate owned			3,216			4,674			3,068
Accrued interest receivable and other assets			52,194			44,219			43,690

Total assets		$	1,556,411		$	1,586,040		$	1,657,543

Liabilities and stockholders’ equity
Deposits:
	Noninterest-bearing	$	157,745		$	160,570		$	137,317
	Interest-bearing		977,982			977,865			1,036,836

Total deposits			1,135,727			1,138,435			1,174,153

Short-term borrowings			9,150			76,100			91,400
Accrued expenses and other liabilities			24,583			20,599			16,228
Long-term debt			234,415			214,424			244,381
Minority interest in consolidated subsidiary			2,720			2,720			2,720

Total liabilities			1,406,595			1,452,278			1,528,882

Stockholders’ equity:
	Common stock		3,998			3,506			3,509
	Additional paid-in capital		82,149			65,427			65,558
	Retained earnings		58,220			65,714			66,276
	Unreleased shares to employee stock ownership plan		(1,756	)		(1,839	)		—
	Accumulated other comprehensive income (loss), net of tax		7,205			954			(6,682	)

Total stockholders’ equity			149,816			133,762			128,661

Total liabilities and stockholders’ equity		$	1,556,411		$	1,586,040		$	1,657,543

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES


				Quarter ended June 30,					Six months ended June 30,

(in thousands of dollars, except per share data)				2002			2001		2002			2001

Interest income:
	Interest and fees on loans			$	22,541		$	27,576	$	46,406		$	55,715
	Interest and dividends on investment securities:
		Taxable interest income			3,282			4,158		6,164			9,194
		Nontaxable interest income			389			388		777			776
		Dividends			493			576		973			1,096
	Other interest income				15			85		34			263

			Total interest income		26,720			32,783		54,354			67,044

Interest expense:
		Deposits			4,634			11,283		9,753			24,369
		Short-term borrowings			172			800		483			3,042
		Long-term debt			2,876			3,531		5,641			6,662

			Total interest expense		7,682			15,614		15,877			34,073

			Net interest income		19,038			17,169		38,477			32,971
Provision for credit losses					4,102			2,271		8,970			5,021

			Net interest income after provision for credit losses		14,936			14,898		29,507			27,950

Noninterest income:
		Service charges on deposit accounts			1,069			940		2,097			1,774
		Other service charges and fees			1,618			1,259		3,174			2,404
		Net realized gains (losses) on sales of securities			(68	)		229		(104	)		616
		Net gains on sales of loans			208			250		719			412
		Other			933			571		1,833			1,287

			Total noninterest income		3,760			3,249		7,719			6,493

Noninterest expense:
		Salaries and employee benefits			6,501			5,997		13,070			11,994
		Net occupancy expense			1,568			1,608		3,140			3,200
		Equipment expense			765			804		1,560			1,620
		Other			4,487			4,759		8,899			8,603

			Total noninterest expense		13,321			13,168		26,669			25,417

			Income before income taxes		5,375			4,979		10,557			9,026
Income tax expense					1,754			1,839		3,400			3,085

			Net income	$	3,621		$	3,140	$	7,157		$	5,941

Per share data:
		Basic		$	0.93		$	0.82	$	1.86		$	1.54
		Diluted		$	0.92		$	0.81	$	1.83		$	1.53

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES


													Unreleased
													Shares to
													Employee			Accumulated
							Additional						Stock			Other
				Common			Paid-In			Retained			Ownership			Comprehensive
(in thousands, except per share data)				Stock			Capital			Earnings			Plan			Income			Total

Balance at January 1, 2002				$	3,506		$	65,427		$	65,714		$	(1,839	)	$	954		$	133,762
Comprehensive income
	Net income				—			—			7,157			—			—			7,157
	Other comprehensive income, net of tax
		Unrealized gains on securities, net of reclassification adjustment			—			—			—			—			6,251			6,251

			Comprehensive income subtotal		—			—			7,157			—			6,251			13,408

Cash dividends ($0.22 per share)					—			—			(783	)		—			—			(783	)
Options exercised					154			4,153			—			—			—			4,307
Stock dividend					362			13,448			(13,868	)		—			—			(58	)
Cancelled and retired shares					(24	)		(879	)		—			—			—			(903	)
ESOP shares					—			—			—			83			—			83

Balance at June 30, 2002				$	3,998		$	82,149		$	58,220		$	(1,756	)	$	7,205		$	149,816


													Unreleased
													Shares to
													Employee			Accumulated
							Additional						Stock			Other
				Common			Paid-In			Retained			Ownership			Comprehensive
(in thousands, except per share data)				Stock			Capital			Earnings			Plan			Income			Total

Balance at January 1, 2001				$	3,189		$	54,594		$	72,284		$	—		$	(6,905	)	$	123,162
Comprehensive income
	Net income				—			—			5,941			—			—			5,941
	Other comprehensive income, net of tax
		Unrealized gains on securities, net of reclassification adjustment			—			—			—			—			223			223

			Comprehensive income subtotal		—			—			5,941			—			223			6,164

Cash dividends ($0.21 per share)					—			—			(670	)		—			—			(670	)
Options exercised					4			119			—			—			—			123
Stock dividend					318			10,907			(11,279	)		—			—			(54	)
Cancelled and retired shares					(2	)		(62	)		—			—			—			(64	)

Balance at June 30, 2001				$	3,509		$	65,558		$	66,276		$	—		$	(6,682	)	$	128,661

See accompanying notes to the consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES



				Six months ended June 30,

(in thousands of dollars)				2002			2001

Cash flows from operating activities:
		Net income		$	7,157		$	5,941
		Adjustments to reconcile net income to net cash provided by (used in) operating activities:
			Provision for credit losses		8,970			5,021
			Net realized (gains) losses on sale of securities		104			(616	)
			Depreciation and amortization		1,677			1,474
			Deferred income taxes		222			120
			Decrease in accrued interest receivable		248			832
			Decrease in accrued interest payable		(308	)		(3,031	)
			Loans originated for sale		(86,989	)		(84,682	)
			Sale of loans held for sale		98,908			63,936
			Increase in other assets		(8,223	)		(686	)
			Increase (decrease) in income taxes payable		1,364			(1,102	)
			Decrease in other liabilities		(1,069	)		(656	)
			Other		896			(148	)

Net cash provided by (used in) operating activities					22,957			(13,597	)

Cash flows from investing activities:
			Net decrease (increase) in interest-bearing deposits in other banks		(93	)		48
			Net decrease (increase) in federal funds sold		9,840			(1,905	)
			Purchase of available-for-sale securities		(68,199	)		(50	)
			Proceeds from sales of available-for-sale securities		29,000			33,815
			Proceeds from maturities of available-for-sale securities		21,382			17,273
			Purchase of FHLB Stock		(971	)		(1,094	)
			Purchase of held-to-maturity securities		(47,532	)		—
			Net loan originations over principal repayments		99,826			12,781
			Capital expenditures		(845	)		(1,959	)
			Proceeds from sales of foreclosed assets		2,708			4,170

Net cash provided by investing activities					45,116			63,079

Cash flows from financing activities:
			Net decrease in deposits		(2,708	)		(44,333	)
			Net decrease in short-term borrowings		(66,950	)		(79,300	)
			Proceeds from long-term debt		40,000			95,000
			Principal payments on long-term debt		(20,009	)		(32,182	)
			Net decrease in minority interest in consolidated subsidiary		—			(4,280	)
			Cash dividends paid		(783	)		(670	)
			Stock options exercised		4,307			123
			Cash in lieu payments on stock dividend		(58	)		(54	)
	Unreleased ESOP shares				83			—
	Stock repurchase				(903	)		(64	)

Net cash used in financing activities					(47,021	)		(65,760	)

Increase (decrease) in cash and due from banks					21,052			(16,278	)
Cash and due from banks at beginning of period					22,395			40,172

Cash and due from banks at end of period				$	43,447		$	23,894

Supplemental schedule of non-cash investing activities:
	Interest paid on deposits and other borrowings			$	16,185		$	37,103
	Income taxes paid			$	2,000		$	4,752

See accompanying notes to the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
CB BANCSHARES, INC. AND SUBSIDIARIES

NOTE A — Summary of Significant Accounting Policies

CONSOLIDATION

The consolidated financial statements include the accounts of CB Bancshares, Inc. (the “Parent Company”) and its wholly-owned subsidiaries (the “Company”): City Bank and its wholly-owned subsidiaries (the “Bank”); Datatronix Financial Services, Inc.; and O.R.E., Inc. Significant intercompany transactions and balances have been eliminated in consolidation. The Bank owns 50% of Pacific Access Mortgage, LLC, a mortgage brokerage company. The investment is accounted for using the equity method. The consolidated financial statements include all adjustments of a normal and recurring nature, which are, in the opinion of management, necessary for a fair presentation of the financial results for the interim periods.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2001.

Results of operations for interim periods are not necessarily indicative of results for the full year.

RECLASSIFICATIONS

Certain amounts in the consolidated financial statements for 2001 have been reclassified to conform with the 2002 presentation. Such reclassifications had no effect on the consolidated net income as previously reported.

NOTE B — Loans

The loan portfolio consisted of the following at the dates indicated:


			June 30,		December 31,		June 30,
(in thousands of dollars)			2002		2001		2001

Commercial and financial			$	210,058	$	229,824	$	246,730
Real estate:
	Construction			45,306		52,750		28,650
	Commercial			186,158		190,328		194,872
	Residential			513,901		588,525		659,279
Installment and consumer				137,851		135,901		122,266

		Gross loans		1,093,274		1,197,328		1,251,797
Less:
	Unearned discount			848		108		4
	Net deferred loan fees			4,438		4,939		5,457
	Allowance for credit losses			25,394		19,464		17,814

		Loans, net	$	1,062,594	$	1,172,817	$	1,228,522

NOTE C — Segment Information

The Company’s business segments are organized around services and products provided. The segment data presented below was prepared on the same basis of accounting as the consolidated financial statements described in Note A. Intersegment income and expense are valued at prices comparable to those for unaffiliated companies.


(in thousands)	Retail			Wholesale			Treasury			All Other			Total

Six months ended June 30, 2002
Net interest income	$	22,117		$	14,590		$	1,824		$	(54	)	$	38,477
Intersegment net interest income (expense)		175			(2,072	)		1,897			—			—
Provision for credit losses		1,160			7,810			—			—			8,970
Noninterest income (expense)		(4,374	)		(5,752	)		(981	)		(7,843	)		(18,950	)
Administrative and overhead expense allocation		(3,664	)		(2,554	)		(444	)		6,662			—
Income tax expense (benefit)		4,134			(1,136	)		725			(323	)		3,400
Net income (loss)		8,960			(2,462	)		1,571			(912	)		7,157
Total assets		702,864			415,973			385,980			51,594			1,556,411


(in thousands)	Retail			Wholesale			Treasury			All Other			Total

Six months ended June 30, 2001
Net interest income	$	16,532		$	14,809		$	1,625		$	5		$	32,971
Intersegment net interest income (expense)		361			(1,698	)		1,337			—			—
Provision for credit losses		1,084			3,937			—			—			5,021
Noninterest income (expense)		(5,236	)		(5,029	)		(672	)		(7,987	)		(18,924	)
Administrative and overhead expense allocation		(3,535	)		(2,799	)		(605	)		6,939			—
Income tax expense (benefit)		2,384			456			571			(326	)		3,085
Net income (loss)		4,654			890			1,114			(717	)		5,941
Total assets		839,357			462,475			313,539			42,172			1,657,543

NOTE D — Earnings Per Share Calculation

Quarter ended June 30,

2002

2001

Shares

Per

Per

Income

(Denom-

Share

Income

(Denom-

(in thousands, except number of shares and per share data)

(Numerator)

inator)

Amount

(Numerator)

inator)

Amount

Basic:

Net income

3,621

3,875,236

0.93

3,140

3,810,890

0.82

Effect of dilutive securities -

Stock incentive plan options

—

40,050

0.01

—

42,625

0.01

Diluted:

Net income and assumed conversions

3,621

3,915,286

0.92

3,140

3,853,515

0.81

Six months ended June 30,

2002

2001

Shares

Per

Per

Income

(Denom-

Share

Income

(Denom-

(in thousands, except number of shares and per share data)

(Numerator)

inator)

Amount

(Numerator)

inator)

Amount

Basic:

Net income

7,157

3,841,037

1.86

5,941

3,868,214

1.54

Effect of dilutive securities -

Stock incentive plan options

—

69,183

0.03

—

27,359

0.01

Diluted:

Net income and assumed conversions

7,157

3,910,220

1.83

5,941

3,895,573

1.53

Earnings per share calculations have been restated to reflect the impact of the 10% stock dividends issued in June 2002 and 2001.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations contain statements relating to future results of the Company (including certain projections and business trends) that are considered “forward-looking statements.” Actual results may differ materially from those projected as a result of certain risks and uncertainties including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within the Company’s market, equity and bond market fluctuations, personal and corporate customers’ bankruptcies and financial condition, inflation and results of litigation. Accordingly, historical performance, as well as reasonably applied projections and assumptions, may not be a reliable indicator of future earnings due to risks and uncertainties.

As circumstances, conditions or events change that affect the Company’s assumptions and projections on which any of the statements are based, the Company disclaims any obligation to issue any update or revision to any forward-looking statement contained herein.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to its investments, loans and allowance for credit losses, intangible assets, income taxes, contingencies, and litigation. The Company bases its estimates on current market conditions, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies require significant judgments and estimates used in the preparation of its consolidated financial statements.

Allowance for Credit Losses. The allowance for credit losses is periodically evaluated for adequacy by management. Factors considered include the Company’s loan loss experience, known and inherent risks in the portfolio, current economic conditions, known adverse situations that may affect the borrower’s ability to repay, regulatory policies, and the estimated value of underlying collateral. The evaluation of the adequacy of the allowance is based on the above factors along with prevailing and anticipated economic conditions that may impact borrowers’ ability to repay loans. Determination of the allowance is in part objective and in part a subjective judgment by management given the information it currently has in its possession. Adverse changes in any of these factors or the discovery of new adverse information could result in higher charge-offs and loan loss provisions.

Impairment of Investments. The realization of the Company’s investment in certain mortgage/asset-backed securities and collateralized loan and bond obligations is dependent on the credit quality of the underlying borrowers and yields demanded by the marketplace. Increases

in market interest rates and deteriorating credit quality of the underlying borrowers because of adverse conditions may result in additional losses. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. Since several of these investments do not have a liquid trading market, management’s estimate of value is based upon estimates of future returns that may or may not actually be realized. Accordingly, under different assumptions, the value could be adversely affected.

Deferred Tax Assets. The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. This requires an objective as well as a subjective judgment by management. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

NET INCOME

Consolidated net income for the quarter ended June 30, 2002, totaled $3.6 million, an increase of $481,000, or 15.3%, over the same quarter last year. Consolidated net income for the six months ended June 30, 2002, totaled $7.2 million, an increase of $1.2 million, or 20.5%, over the same period in 2001. Diluted earnings per share for the second quarter of 2002 was $0.92 as compared to $0.81 for the same period in 2001, an increase of $0.11, or 13.6%. For the six months ended June 30, 2002, diluted earnings per share was $1.83, an increase of $0.30, or 19.6%, over the same period in 2001. The increase in consolidated net income for the quarter and six months ended June 30, 2002, over the corresponding periods in 2001, was primarily due to an increase in net interest income and noninterest income, partially offset by increases in the provision for credit losses and noninterest expense.

The Company’s annualized return on average total assets for the six months ended June 30, 2002 was 0.93% as compared to 0.70% for the same period last year. The Company’s annualized return on average stockholders’ equity was 10.31% for the six months ended June 30, 2002, as compared to 9.46% for the same period last year.

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, was $19.2 million for the quarter ended June 30, 2002, an increase of $1.9 million, or 10.8%, over the same period in 2001. The increase in net interest income was primarily due to a $172.4 million decrease in average interest-bearing liabilities and an 88 basis point increase in the net interest margin. For the quarter ended June 30, 2002, the Company’s net interest margin was 5.23%, as compared to 4.35% for the same period in 2001.

Net interest income, on a taxable equivalent basis, was $38.9 million for the six months ended June 30, 2002, an increase of $5.5 million, or 16.5%, over the same period in 2001. The increase was primarily due to a $184.9 million, or 12.9%, decrease in average interest-bearing liabilities and a 116 basis point increase in the net interest margin. For the six months ended June 30, 2002, the Company’s net interest margin was 5.31%, as compared to 4.15% for the same period in 2001.

A comparison of net interest income for the quarter and six months ended June 30, 2002 and 2001 is set forth below on a taxable equivalent basis:


				Quarter Ended June 30,

				2002									2001

							Interest									Interest
				Average			Income/			Yield/			Average			Income/			Yield/
(in thousands of dollars)				Balance			Expense			Rate			Balance			Expense			Rate

ASSETS
Earning assets:
	Interest-bearing deposits in Other banks			$	1,048		$	7			2.68	%	$	1,043		$	12			4.61	%
	Federal funds sold and Securities purchased under Agreement to resell				2,085			8			1.54			6,714			75			4.48
	Taxable investment Securities				292,833			3,775			5.17			260,823			4,732			7.28
	Nontaxable investment securities				30,966			598			7.75			30,916			597			7.75
	Loans¹				1,149,507			22,541			7.87			1,304,479			27,576			8.48

		Total earning assets			1,476,439			26,929			7.32			1,603,975			32,992			8.25

Nonearning assets:
	Cash and due from banks				33,315									29,649
	Premises and equipment-net				17,158									18,685
	Other assets				48,930									51,443
	Less allowance for loan losses				(23,522	)								(17,076	)

		Total assets		$	1,552,320								$	1,686,676

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
	Savings deposits			$	463,344		$	1,467			1.27	%	$	404,436		$	2,375			2.36	%
	Time deposits				506,391			3,167			2.51			689,931			8,908			5.18
	Short-term borrowings				22,934			172			3.01			63,714			800			5.04
	Long-term debt				242,071			2,876			4.77			249,078			3,531			5.69

		Total interest-bearing
			Deposits and liabilities		1,234,740			7,682			2.50			1,407,159			15,614			4.45

Noninterest-bearing liabilities:
	Demand deposits				151,033									128,114
	Other liabilities				21,471									23,790

		Total liabilities			1,407,244									1,559,063
Stockholders’ equity					145,076									127,613

		Total liabilities and Stockholders’ equity		$	1,552,320								$	1,686,676

		Net interest income and margin on total earning assets						19,247			5.23	%					17,378			4.35	%

Taxable equivalent adjustment								(209	)								(209	)

		Net interest income					$	19,038								$	17,169

[Additional columns below]

[Continued from above table, first column(s) repeated]

Six Months Ended June 30,

2002 2001

Interest Interest

Average Income/ Yield/ Average Income/ Yield/

(in thousands of dollars) Balance Expense Rate Balance Expense Rate

ASSETS

Earning assets:

Interest-bearing deposits in Other banks
$ 1,043 $ 14 2.71 % $ 1,060 $ 30 5.71 %

Federal funds sold and Securities purchased under Agreement to resell
2,405 20 1.68 9,258 235 5.12

Taxable investment Securities
265,977 7,137 5.41 277,849 10,288 7.47

Nontaxable investment securities
30,960 1,195 7.78 30,910 1,194 7.79

Loans¹
1,178,062 46,406 7.94 1,303,354 55,718 8.62

Total earning assets
1,478,447 54,772 7.47 1,622,431 67,465 8.39

Nonearning assets:

Cash and due from banks
33,102 30,219

Premises and equipment-net
17,314 18,432

Other assets
46,704 49,590

Less allowance for loan losses
(22,212 ) (17,401 )

Total assets
$ 1,553,355 $ 1,703,271

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:

Savings deposits
$ 460,290 $ 3,091 1.35 % $ 391,747 $ 4,960 2.55 %

Time deposits
516,098 6,662 2.60 712,812 19,409 5.49

Short-term borrowings
29,653 483 3.28 98,620 3,042 6.22

Long-term debt
238,400 5,641 4.77 226,139 6,662 5.94

Total interest-bearing
Deposits and liabilities
1,244,441 15,877 2.57 1,429,318 34,073 4.81

Noninterest-bearing liabilities:

Demand deposits
148,328 123,268

Other liabilities
20,595 24,097

Total liabilities
1,413,364 1,576,683

Stockholders’ equity
139,991 126,588

Total liabilities and Stockholders’ equity
$ 1,553,355 $ 1,703,271

Net interest income and margin on total earning assets
38,895 5.31 % 33,392 4.15 %

Taxable equivalent adjustment
(418 ) (421 )

Net interest income
$ 38,477 $ 32,971

(1)

Yields and amounts earned include loan fees. Nonaccrual loans have been included in earning assets for purposes of these computations.

NONPERFORMING ASSETS

A summary of nonperforming assets at June 30, 2002, December 31, 2001 and June 30, 2001 follows:


					June 30,			December 31,			June 30,
(in thousands of dollars)					2002			2001			2001

Nonperforming assets:
		Nonperforming loans:
			Commercial		$	4,889		$	7,034		$	8,130
			Real estate:
				Commercial		4,708			2,438			2,220
				Residential		5,760			6,174			6,923

				Total real estate loans		10,468			8,612			9,143
			Consumer			144			148			93

				Total nonperforming loans		15,501			15,794			17,366

	Other real estate owned					3,216			4,674			3,068

				Total nonperforming assets	$	18,717		$	20,468		$	20,434

Past due loans:
			Commercial		$	329		$	—		$	1,373
			Real estate			1,867			2,190			2,442
			Consumer			3,082			1,464			616

				Total past due loans(1)	$	5,278		$	3,654		$	4,431

Restructured:
			Commercial		$	2,177		$	2,214		$	4,778
			Real estate:
				Residential		7,255			8,629			9,664

				Total restructured loans(2)	$	9,432		$	10,843		$	14,442

Nonperforming assets to total loans And other real estate owned (end of period):
			Excluding 90 days past due accruing loans			1.66	%		1.64	%		1.57	%
			Including 90 days past due accruing loans			2.12	%		1.93	%		1.91	%
Nonperforming assets to total assets (end of period):
			Excluding 90 days past due accruing loans			1.20	%		1.29	%		1.23	%
			Including 90 days past due accruing loans			1.54	%		1.52	%		1.50	%

(1)		Represents loans which are past due 90 days or more as to principal and/or interest, are still accruing interest and are in the process of collection.




(2)		Represents loans which have been restructured, are current and still accruing interest.

Nonperforming loans at June 30, 2002 totaled $15.5 million, a decrease of $1.9 million, or 10.7%, as compared to June 30, 2001. The decrease in nonperforming loans was primarily due to a $3.2 million decrease in the commercial loan category, partially offset by a $1.3 million increase in total real estate loans.

Other real estate owned was $3.2 million at June 30, 2002, an increase of $148,000, or 4.8%, from June 30, 2001.

Restructured loans were $9.4 million at June 30, 2002, a decrease of $5.0 million, or 34.7%, from June 30, 2001. The decrease was primarily due to the chargeoff of certain commercial loans and reclassification of residential real estate loans to nonperforming loans.

The Company’s future levels of nonperforming loans will be reflective of Hawaii’s economy and the financial condition of its customers.

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

The provision for credit losses is based upon management’s judgment as to the adequacy of the allowance for credit losses (the “Allowance”) to absorb future losses. The Company uses a systematic methodology to determine the adequacy of the Allowance and related provision for credit losses to be reported for financial statement purposes. The determination of the adequacy of the Allowance is ultimately one of management’s judgment, which includes consideration of many factors, including, among other things, the amount of problem and potential problem loans, net charge-off experience, changes in the composition of the loan portfolio by type and geographic location of loans and in overall loan risk profile and quality, general economic factors and the fair value of collateral.

The following table sets forth the activity in the allowance for credit losses for the periods indicated:


			Six months ended June 30,

(in thousands of dollars)			2002			2001

Loans outstanding (end of period)⁽²⁾			$	1,126,011		$	1,301,190

Average loans outstanding⁽²⁾			$	1,178,062		$	1,303,354

Balance at beginning of period			$	19,464		$	17,447

Loans charged off:
	Commercial			2,575			3,290
	Real estate
		Commercial		—			—
		Residential		478			1,061
	Consumer			1,111			767

		Total loans charged off		4,164			5,118

Recoveries on loans charged off:
	Commercial			243			45
	Real estate:
		Commercial		350			—
		Residential		90			239
	Consumer			441			180

		Total recoveries on loans previously charged off		1,124			464

		Net charge-offs		(3,040	)		(4,654	)

Provision charged to expense				8,970			5,021

Balance at end of period			$	25,394		$	17,814

Net loans charged off to average loans				0.52%	⁽¹⁾		0.72	%⁽¹⁾
Net loans charged off to allowance for credit losses				24.14%	⁽¹⁾		52.68	%⁽¹⁾
Allowance for credit losses to total loans (end of period)				2.26	%		1.37	%
Allowance for credit losses to nonperforming loans (end of period):
		Excluding 90 days past due accruing loans		1.64x			1.03x
		Including 90 days past due accruing loans		1.22x			0.82x

		⁽¹⁾ Annualized.




		⁽²⁾ Includes loans held for sale.

The provision for credit losses was $4.1 million for the second quarter of 2002, an increase of $1.8 million, or 80.6%, over the same quarter last year. For the six months ended June 30, 2002, the provision for loan losses was $9.0 million, an increase of $3.9 million, or 78.6%, over the same period last year. The increase in the provision for credit losses in 2002 was primarily due to the Company’s quarterly review of specific credits and the resulting impact of the continuing economic uncertainty, both locally and nationally.

The Allowance at June 30, 2002 was $25.4 million and represented 2.26% of total loans. The corresponding ratios at December 31, 2001 and June 30, 2001 were 1.57% and 1.37%, respectively.

Net charge-offs were $3.0 million for the first six months of 2002, a decrease of $1.6 million, or 34.7%, over the same period in 2001. The decrease was primarily due to lower charge-offs in the commercial loan categories, which decreased $715,000. The decrease in the commercial loan category was primarily due to the charge-off of three commercial loans totaling $3.0 million during the first quarter of 2001. Such amounts were previously provided for in the Allowance.

The Allowance increased to 1.64 times nonperforming loans (excluding 90 days past due accruing loans) at June 30, 2002 from 1.03 times at June 30, 2001 as a result of the decrease in nonperforming loans and the decrease in net charge-offs for the six months ended June 30, 2002.

In management’s judgment, the Allowance was adequate to absorb potential losses currently inherent in the loan portfolio at June 30, 2002. However, changes in prevailing economic conditions in the Company’s markets or in the financial condition of its customers could result in changes in the level of nonperforming assets and charge-offs in the future and, accordingly, changes in the Allowance.

NONINTEREST INCOME

Noninterest income totaled $3.8 million for the quarter ended June 30, 2002, an increase of $511,000, or 15.7%, over the comparable period in 2001. For the six months ended June 30, 2002, noninterest income was $7.7 million, an increase of $1.2 million, or 18.9%, over the comparable period in 2001.

Service charges on deposit accounts increased $129,000 and $323,000, or 13.7% and 18.2%, respectively, for the second quarter and six months ended June 30, 2002 over the comparable periods in 2001. These increases resulted from a $93.6 million, or 18.2%, increase in the average balance of transaction accounts.

Other service charges and fees increased $359,000 and $770,000, or 28.5% and 32.0%, respectively, for the second quarter and six months ended June 30, 2002 over the comparable periods in 2001. These increases were primarily due to fee income on investment services recorded during the six months ended June 30, 2002.

Net realized loss on sales of securities was $104,000 for the six months ended June 30, 2002 compared to net realized gains of $616,000 in the same period in 2001. The net gain in 2001 was

due to sales of $33.2 million of available-for-sale securities sold in the lower interest rate environment.

NONINTEREST EXPENSE

Noninterest expense totaled $13.3 million for the quarter ended June 30, 2002, an increase of $153,000, or 1.16%, from the comparable period in 2001. For the six months ended June 30, 2002, noninterest expense was $26.7 million, an increase of $1.3 million, or 4.9%, from the comparable period in 2001. The efficiency ratio (exclusive of intangibles) improved from 63.7% for the six months ended June 30, 2001 to 57.2% for the six months ended June 30, 2002.

Salaries and employee benefits increased $504,000, or 8.4%, and $1.1 million, or 9.0%, for the second quarter and six months ended June 30, 2002, respectively, from the comparable periods in 2001. The increases were primarily due to higher incentive-based compensation.

INCOME TAXES

The Company’s effective income tax rate (exclusive of the tax equivalent adjustment) for the quarter and six months ended June 30, 2002 was 32.6% and 32.2%, respectively, as compared to 36.9% and 34.2% for the same periods in 2001. The decline in the effective tax rate in 2002 was primarily due to an increase in taxable-exempt income and tax credits.

LIQUIDITY AND CAPITAL RESOURCES

The consolidated statements of cash flows identify three major sources and uses of cash as operating, investing and financing activities.

The Company’s operating activities provided $23.0 million for the six months ended June 30, 2002, which compares to $13.6 million used by operating activities in the same period last year. The primary source of cash flows from operations in 2002 was the sale of $98.9 million of loans held for sale, which was partially offset by the origination of $87.0 million of loans held for sale. During the six months ended June 30, 2001, the Company originated $84.6 million of loans held for sale and sold $63.9 million of loans held for sale.

Investing activities provided cash flow of $45.1 million for the six months ended June 30, 2002, compared to providing $63.1 million during the same period last year. The primary sources of cash from investing activities for the six months ended June 30, 2002 were the $21.4 million maturities of securities and the $99.8 million net decrease in loans, partially offset by the purchase of $68.1 million of investment securities. The primary source of cash for investing activities for the six months ended June 30, 2001 was the proceeds of $51.1 million from the sale of investment securities.

Financing activities used cash flow of $47.0 million for the six months ended June 30, 2002, compared to using $65.8 million during the same period last year. During the six months ended June 30, 2002, the Company had a net decrease of $67.0 million of short-term advances, partially offset by the $20.0 million net increase in long-term debt.

At June 30, 2002, as compared to June 30, 2001, the Company had $1.6 billion in assets, down 6.1%; $1.1 billion in loans, down 13.5%; and $1.1 billion in deposits, down 3.3%. During this current low interest rate environment, the Company has continued to reduce its interest rate

exposure by reducing its exposure to fixed-rate, long-term assets (i.e. real estate residential loans) and replacing short-term time deposits with longer-term deposits and borrowings.

The Company and the Bank are subject to capital standards promulgated by the Federal banking agencies and the Hawaii Division of Financial Institutions. Quantitative measures established by regulation to ensure capital adequacy required the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table at June 30, 2002 and 2001) of Tier 1 and Total capital to risk-weighted assets, and of Tier 1 capital to average assets.


													To Be Well-
													Capitalized
													Under Prompt
								For Capital					Corrective Action
			Actual					Adequacy Purposes					Provisions

(dollars in thousands)			Amount		Ratio			Amount		Ratio			Amount		Ratio


As of June 30, 2002

Tier 1 Capital to
	Risk-Weighted Assets:
		Consolidated	$	145,331		12.17	%	$	47,769		4.00	%		N/A
		Bank		136,339		11.42			47,754		4.00		$	71,631		6.00	%
Total Capital to
	Risk-Weighted Assets:
		Consolidated	$	160,421		13.43	%	$	95,538		8.00	%		N/A
		Bank		151,424		12.68			95,508		8.00		$	119,385		10.00	%
Tier 1 Capital to
	Average Assets:
		Consolidated	$	145,331		9.36	%	$	62,093		4.00	%		N/A
		Bank		136,339		8.80			61,974		4.00		$	77,467		5.00	%

As of June 30, 2001

Tier 1 Capital to
	Risk-Weighted Assets:
		Consolidated	$	138,063		11.40	%	$	48,451		4.00	%		N/A
		Bank		133,258		11.02			48,372		4.00		$	72,558		6.00	%
Total Capital to
	Risk-Weighted Assets:
		Consolidated	$	153,275		12.65	%	$	96,902		8.00	%		N/A
		Bank		148,446		12.28			96,744		8.00		$	120,930		10.00	%
Tier 1 Capital to
	Average Assets:
		Consolidated	$	138,063		8.19	%	$	67,467		4.00	%		N/A
		Bank		133,258		7.62			69,982		4.00		$	87,477		5.00	%

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company disclosed both quantitative and qualitative analyses of market risks in its 2001 Form 10-K. No significant changes have occurred during the six months ended June 30, 2002.

PART II — OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Stockholders held on April 25, 2002, the stockholders voted on the election of four directors for a term of three years expiring in 2005, or until their successors are elected:


Name	Shares Voted For		Shares Withheld

Colbert M. Matsumoto		2,571,264		240,793
Yoshiki Takada		2,742,792		69,265
Lionel Y. Tokioka		2,694,830		117,227
Maurice H. Yamasato		2,743,036		69,021

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


10.1		Supplemental Executive Retirement Agreement for Ronald K. Migita
10.2		Supplemental Executive Retirement Agreement for Richard C. Lim
10.3		Supplemental Executive Retirement Agreement for Dean K. Hirata
10.4		Supplemental Executive Retirement Agreement for Warren K. Kunimoto
10.5		Supplemental Executive Retirement Agreement for Jasen H. Takei
99.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
99.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

(b) Reports on Form 8-K

No reports on Form 8-K were filed in the second quarter of 2002.

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.


		CB BANCSHARES, INC.
		(Registrant)
Date	August 13, 2002	By /s/ Ronald K. Migita

		Ronald K. Migita President and Chief Executive Officer
Date	August 13, 2002	By /s/ Dean K. Hirata

		Dean K. Hirata Senior Vice President and Chief Financial Officer (principal financial officer)

EXHIBIT INDEX


10.1		Supplemental Executive Retirement Agreement for Ronald K. Migita
10.2		Supplemental Executive Retirement Agreement for Richard C. Lim
10.3		Supplemental Executive Retirement Agreement for Dean K. Hirata
10.4		Supplemental Executive Retirement Agreement for Warren K. Kunimoto
10.5		Supplemental Executive Retirement Agreement for Jasen H. Takei
99.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
99.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

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