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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

OR

     
[    ]
 
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

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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


Table of Contents

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.

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Table of Contents

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.

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Table of Contents

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.

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Table of Contents

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.

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Table of Contents

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  
 
   
     
     
 

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Table of Contents

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  
 
   
     
     
     
     
 

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Table of Contents

NOTE D — Earnings Per Share Calculation

                                                                        
      Quarter ended June 30,
     
      2002   2001
     
 
              Shares   Per           Shares   Per
      Income   (Denom-   Share   Income   (Denom-   Share
(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           Shares   Per
      Income   (Denom-   Share   Income   (Denom-   Share
(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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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Table of Contents

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

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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

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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.

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                                        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 %

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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.

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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.

         
        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)

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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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