Edgar Filing: CB BANCSHARES INC/HI

CB Bancshares, Inc. - Form 10-Q (9/30/02)

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 September 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		99-0197163
(State of Incorporation)		(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 October 30, 2002 was:


Class		Outstanding

Common Stock, $1.00 Par Value		3,874,921 shares

TABLE OF CONTENTS


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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS (Unaudited)

CB BANCSHARES, INC. AND SUBSIDIARIES


		September 30,			December 31,			September 30,
(in thousands)		2002			2001			2001

Assets
Cash and due from banks		$	34,959		$	22,395		$	35,144
Interest-bearing deposits in other banks			1,040			1,017			1,013
Federal funds sold			750			10,655			12,380
Investment and mortgage-backed securities:
	Held-to-maturity		111,806			26,000			20,940
	Available-for-sale		242,314			203,563			225,095
	FHLB Stock		29,388			32,406			34,116
Loans held-for-sale			47,792			50,661			63,645
Net loans			1,048,214			1,172,817			1,212,927
Premises and equipment			17,155			17,633			18,251
Other real estate owned			1,431			4,674			3,598
Accrued interest receivable and other assets			53,346			44,219			44,303

Total assets		$	1,588,195		$	1,586,040		$	1,671,412

Liabilities and stockholders’ equity
Deposits:
	Noninterest-bearing	$	164,153		$	160,570		$	144,228
	Interest-bearing		969,145			977,865			1,022,465

Total deposits			1,133,298			1,138,435			1,166,693

Short-term borrowings			45,400			76,100			101,600
Accrued expenses and other liabilities			26,623			20,599			18,384
Long-term debt			229,411			214,424			250,454
Minority interest in consolidated subsidiary			2,720			2,720			2,720

Total liabilities			1,437,452			1,452,278			1,539,851

Stockholders’ equity:
	Preferred stock		—			—			—
	Common stock		3,975			3,506			3,506
	Additional paid-in capital		81,261			65,427			65,418
	Retained earnings		60,503			65,714			65,214
	Unreleased shares to employee stock ownership plan		(1,712	)		(1,839	)		—
	Accumulated other comprehensive income (loss), net of tax		6,716			954			(2,577	)

Total stockholders’ equity			150,743			133,762			131,561

Total liabilities and stockholders’ equity		$	1,588,195		$	1,586,040		$	1,671,412

See accompanying notes to the consolidated financial statements.

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


										Nine months ended
				Quarter ended September 30,						September 30,

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

Interest income:
	Interest and fees on loans			$	21,967		$	27,202		$	68,373		$	82,917
	Interest and dividends on investment and mortgage-backed securities:
		Taxable interest income			3,556			3,579			9,720			12,773
		Nontaxable interest income			390			388			1,167			1,164
		Dividends			499			592			1,472			1,688
	Other interest income				68			134			102			397

			Total interest income		26,480			31,895			80,834			98,939

Interest expense:
	Deposits				4,356			8,502			14,109			32,871
	FHLB advances and other short-term borrowings				68			1,160			551			4,202
	Long-term debt				2,833			3,222			8,474			9,884

			Total interest expense		7,257			12,884			23,134			46,957

			Net interest income		19,223			19,011			57,700			51,982
Provision for credit losses					3,989			3,650			12,959			8,671

			Net interest income after provision for credit losses		15,234			15,361			44,741			43,311

Noninterest income:
	Service charges on deposit accounts				1,093			969			3,190			2,743
	Other service charges and fees				1,895			1,166			5,069			3,570
	Net realized losses on sales of securities				(1,515	)		(628	)		(1,619	)		(312	)
	Net gains on sales of loans				696			739			1,415			1,151
	Impairment of asset-backed securities				(1,399	)		(6,619	)		(1,399	)		(6,619	)
	Other				819			751			2,652			2,038

			Total noninterest income		1,589			(3,622	)		9,308			2,571

Noninterest expense:
	Salaries and employee benefits				6,501			5,916			19,571			17,910
	Net occupancy expense				1,627			1,704			4,767			4,904
	Equipment expense				625			788			2,185			2,408
	Other				4,092			4,456			12,991			12,759

			Total noninterest expense		12,845			12,864			39,514			37,981

			Income (loss) before income taxes		3,978			(1,125	)		14,535			7,901
Income taxes					1,257			(449	)		4,657			2,636

			Net income (loss)	$	2,721		$	(676	)	$	9,878		$	5,265

Per share data:
	Basic			$	0.70		$	(0.18	)	$	2.55		$	1.36
	Diluted			$	0.69		$	(0.18	)	$	2.51		$	1.35

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

Accumulated

Employee

Other

Additional

Stock

Compre-

Common

Paid-In

Retained

Ownership

hensive

(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

—

9,878

—

9,878

Other comprehensive income, net of tax

Unrealized gains on securities, net of reclassification adjustment

—

5,762

Comprehensive income subtotal

—

9,878

—

5,762

15,640

Cash dividends ($0.33 per share)

—

(1,221

)

—

(1,221

)

Options exercised

159

4,296

—

4,455

Stock dividend

362

13,448

(13,868

)

—

(58

)

Cancelled and retired shares

(52

)

(1,910

)

—

(1,962

)

ESOP shares

—

127

—

127

Balance at September 30, 2002

3,975

81,261

60,503

(1,712

)

6,716

150,743


												Unreleased
												Shares to		Accumulated
												Employee		Other
						Additional						Stock		Compre-
			Common			Paid-In			Retained			Ownership		hensive
(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			—			—			5,265			—		—			5,265
	Other comprehensive income, net of tax
		Unrealized gains on securities, net of reclassification adjustment		—			—			—			—		4,328			4,328

		Comprehensive income subtotal		—			—			5,265			—		4,328			9,593

Cash dividends ($0.32 per share)				—			—			(1,056	)		—		—			(1,056	)
Options exercised				7			182			—			—		—			189
Stock dividend				318			10,907			(11,279	)		—		—			(54	)
Cancelled and retired shares				(8	)		(265	)		—			—		—			(273	)

Balance at September 30, 2001				3,506		$	65,418		$	65,214		$	—	$	(2,577	)	$	131,561

See accompanying notes to the consolidated financial statements.

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


					Nine months ended
					September 30,

(in thousands)					2002			2001

	Cash flows from operating activities:
			Net income		$	9,878		$	5,265
			Adjustments to reconcile net income to net cash provided by (used in) operating activities:
				Provision for credit losses		12,959			8,671
				Net realized (gain) loss on sale of securities		1,619			312
				Depreciation and amortization		2,724			2,238
				Decrease in accrued interest receivable		310			312
				Decrease in accrued interest payable		(249	)		(2,814	)
				Loans originated for sale		(143,032	)		(132,778	)
				Sale of loans held for sale		147,316			103,981
				Impairment of asset backed securities		1,399			6,619
				Increase in other assets		(9,437	)		(707	)
				Increase (decrease) in other liabilities		3,263			(2,759	)
				Other		(1,247	)		(261	)

	Net cash provided by (used in) operating activities					25,503			(12,545	)

	Cash flows from investing activities:
			Net decrease (increase) in interest-bearing deposits in other banks			(23	)		45
			Net decrease (increase) in federal funds sold			9,905			(11,770	)
			Purchases of held-to-maturity securities			(106,354	)		(20,963	)
			Repayments on held-to-maturity securities			20,420			—
			Purchase of available-for-sale securities			(105,918	)		(50	)
			Proceeds from sales of available-for-sale securities			42,381			40,902
			Proceeds from maturities of available-for-sale securities			30,257			32,606
			Net decrease (increase) in FHLB Stock			3,018			(1,686	)
			Net decrease in loans			109,605			23,651
			Capital expenditures			(1,835	)		(2,408	)
			Proceeds from sales of foreclosed assets			5,114			4,738

	Net cash provided by investing activities					6,570			65,065

	Cash flows from financing activities:
			Net decrease in deposits			(5,137	)		(51,865	)
			Net decrease in short-term borrowings			(30,700	)		(69,100	)
			Proceeds from long-term debt			40,000			146,200
			Principal payments on long-term debt			(25,013	)		(77,309	)
			Net decrease in minority interest in consolidated subsidiary			—			(4,280	)
			Cash dividends paid			(1,221	)		(1,056	)
			Stock options exercised			4,455			189
			Cash in lieu of payments on stock dividend			(58	)		(54	)
			Stock repurchases			(1,962	)		(273	)
			Unreleased ESOP shares			127			—

	Net cash used in financing activities					(19,509	)		(57,548	)
	Increase (decrease) in cash and due from banks					12,564			(5,028	)
	Cash and due from banks at beginning of period					22,395			40,172

	Cash and due from banks at end of period				$	34,959		$	35,144

Supplemental schedule of non-cash investing activities:
		Interest paid on deposits and other borrowings			$	23,384		$	49,771

		Income taxes paid				3,400			5,124

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. and its wholly-owned subsidiaries (the “Company”), which include 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 consolidated 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:


			September 30,		December 31,		September 30,
(in thousands)			2002		2001		2001

Commercial			$	218,030	$	229,824	$	238,812
Real estate:
	Construction			45,653		52,750		47,135
	Commercial			187,090		190,328		191,856
	Residential			488,175		588,525		628,129
Installment and consumer				141,173		135,901		131,554

		Gross loans		1,080,121		1,197,328		1,237,486
Less:
	Unearned discount			1,051		108		3
	Net deferred loan fees			4,182		4,939		5,834
	Allowance for credit losses			26,674		19,464		18,722

		Loans, net	$	1,048,214	$	1,172,817	$	1,212,927

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

Nine months ended September 30, 2002
Net interest income	$	32,214		$	22,112		$	3,437		$	(63	)	$	57,700
Intersegment net interest income (expense)		461			(2,447	)		1,986			—			—
Provision for credit losses		1,588			11,371			—			—			12,959
Other operating income (expense)		(6,536	)		(8,486	)		(3,804	)		(11,380	)		(30,206	)
Administrative and overhead expense allocation		(5,280	)		(3,858	)		(568	)		9,706			—
Income tax expense (benefit)		6,118			(1,286	)		334			(509	)		4,657
Net income (loss)		13,153			(2,764	)		717			(1,228	)		9,878
Total assets		697,590			415,816			423,606			51,183			1,588,195

Nine months ended September 30, 2001
Net interest income	$	27,086		$	22,961		$	1,937		$	(2	)	$	51,982
Intersegments net interest income (expense)		864			(5,404	)		4,540			—			—
Provision for credit losses		1,770			6,901			—			—			8,671
Other operating income (expense)		(7,401	)		(7,307	)		(8,305	)		(12,397	)		(35,410	)
Administrative and overhead expense allocation		(6,043	)		(4,124	)		(702	)		10,869			—
Income tax expense (benefit)		4,555			(277	)		(1,186	)		(456	)		2,636
Net income (loss)		8,181			(498	)		(1,344	)		(1,074	)		5,265
Total assets		834,221			462,232			339,443			35,516			1,671,412

NOTE D — Earnings Per Share Calculation


		Quarter ended September 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 (loss)	$	2,721		3,912,287	$	0.70		$	(676	)		3,857,790	$	(0.18	)
Effect of dilutive securities - Stock incentive plan options			—		22,639		(0.01	)		—			—		—
Diluted:
	Net income (loss) and assumed conversions	$	2,721		3,934,926	$	0.69		$	(676	)		3,857,790	$	(0.18	)

Nine months ended September 30,

2002

2001

Shares

Per

Per

Income

(Denom-

Share

Income

(Denom-

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

(Numerator)

inator)⁽¹⁾

Amount

(Numerator)

inator)⁽¹⁾

Amount

Basic:

Net income

9,878

3,872,677

2.55

5,265

3,868,400

1.36

Effect of dilutive securities - Stock incentive plan options

—

64,834

(0.04

)

—

36,063

(0.01

)

Diluted:

Net income and assumed conversions

9,878

3,937,511

2.51

5,265

3,904,463

1.35

⁽¹⁾

Average shares outstanding retroactively adjusted for shares issued in connection with the stock dividends distributed to shareholders 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 evaluated quarterly 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. The allowance for credit losses is an estimate and there is no guarantee that credit losses will not be greater or less than the amount of the allowance.

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 operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments or may require 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. Due to the uncertainty of future cash flows of certain securities, as of September 30, 2002, Management has determined that the decline in fair values (as calculated using a discounted cash flow analysis) is other than temporary. Accordingly, the Company recognized a $1.4 million and $6.6 million noncash impairment charge (estimated after tax effect of $1.0 million and $4.0 million, respectively) in the Consolidated Statements of Income for the quarter ended September 30, 2002 and 2001, respectively. These charges relate to three asset-backed securities totaling $19.7 million and $22.1 million, as adjusted, at September 30, 2002 and 2001, respectively.

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

For the quarter ended September 30, 2002, the Company had consolidated net income of $2.7 million, which compares to a consolidated net loss of $676,000 for the same quarter last year. Consolidated net income for the nine months ended September 30, 2002, totaled $9.9 million, an increase of $4.6 million, or 87.6%, over the same period in 2001. The increase in consolidated net income for the quarter and nine months ended September 30, 2002 compared to the corresponding periods in 2001, was due primarily to the $4.0 million after tax effect of the impairment charge on asset-backed securities recorded in the third quarter of 2001 (see further discussion above in “Critical Accounting Policies and Estimates”). Diluted earnings per share for the third quarter of 2002 was $0.69, as compared to a loss per diluted share of $0.18 for the same period in 2001. For the nine months ended September 30, 2002, diluted earnings per share was $2.51, an increase of $1.16, or 85.9%, over the same period in 2001. The Company’s annualized return on average total assets for the nine months ended September 30, 2002 was 0.85% as compared to 0.42% for the same period last year. The Company’s annualized return on average stockholders’ equity was 9.26% for the nine months ended September 30, 2002, as compared to 5.51% for the same period last year.

Operating earnings (defined as consolidated net income excluding the after-tax effect of the impairment charge on asset-backed securities of $1.0 million in 2002 and $4.0 million in 2001) for

the quarter ended September 30, 2002, totaled $3.7 million, an increase of $377,000, or 11.4%, over the same quarter last year. Operating earnings for the nine months ended September 30, 2002, totaled $10.8 million, an increase of $1.6 million, or 17.2%, over the same period in 2001. Diluted operating earnings per share for the third quarter of 2002 was $0.92, an increase of $0.07, or 8.2%, as compared to the same period in 2001. For the nine months ended September 30, 2002, diluted operating earnings per share was $2.75, an increase of $0.38, or 16.0%, over the same period in 2001. On the same basis, the Company’s annualized return on average total assets for the nine months ended September 30, 2002 was 0.93% as compared to 0.73% for the same period last year. The Company’s annualized return on average stockholders’ equity was 10.16% for the nine months ended September 30, 2002, as compared to 9.66% for the same period last year. The increase in operating earnings for the nine months ended September 30, 2002, over the corresponding period 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.

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, was $19.4 million for the quarter ended September 30, 2002, an increase of $213,000, or 1.1%, over the same period in 2001. The increase in net interest income was primarily due to a $163.7 million decrease in interest-bearing liabilities and a 43 basis point increase in the net interest margin, partially offset by a $115.5 million decrease in interest-earning assets. For the quarter ended September 30, 2002, the Company’s net interest margin was 5.19%, as compared to 4.76% for the same period in 2001.

Net interest income, on a taxable equivalent basis, was $58.3 million for the nine months ended September 30, 2002, an increase of $5.7 million, or 10.9%, over the same period in 2001. The increase was primarily due to a $177.7 million decrease in interest-bearing liabilities, partially offset by a $134.4 million decrease in average interest-earning assets, and a 91 basis point increase in the net interest margin. For the nine months ended September 30, 2002, the Company’s net interest margin was 5.27%, as compared to 4.36% for the same period in 2001.

12A comparison of net interest income for the quarter and nine months ended September 30, 2002 and 2001 is set forth below on a taxable equivalent basis:


			Quarter Ended September 30,

			2002										2001

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

ASSETS
Earning assets:
	Interest-bearing deposits in other banks			$	1,052		$	6			2.26	%	$	977		$	12			4.87	%
	Federal funds sold and securities purchased under agreement to resell				14,598			62			1.69			14,003			120			3.40
	Taxable investment and mortgage-backed securities				320,636			4,055			5.02			250,196			4,173			6.62
	Nontaxable investment securities				30,981			600			7.68			30,928			597			7.66
	Loans(1)				1,117,768			21,967			7.80			1,304,396			27,202			8.27

		Total earning assets			1,485,035			26,690			7.13			1,600,500			32,104			7.96

Nonearning assets:
	Cash and due from banks				36,010									26,893
	Premises and equipment				17,373									18,453
	Other assets				48,986									51,887
	Less allowance for credit losses				(25,666	)								(19,027	)

		Total assets		$	1,561,738								$	1,678,706

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
	Savings deposits			$	478,795		$	1,149			.95	%	$	425,816		$	2,192			2.04	%
	Time deposits				502,985			3,207			2.53			612,820			6,310			4.09
	Short-term borrowings				10,442			68			2.58			105,926			1,160			4.34
	Long-term debt				234,513			2,833			4.79			245,872			3,222			5.20

		Total interest-bearing deposits and liabilities			1,226,735			7,257			2.35			1,390,434			12,884			3.68

Noninterest-bearing liabilities:
	Demand deposits				161,571									133,817
	Other liabilities				25,803									24,176

		Total liabilities			1,414,109									1,548,427
Stockholders’ equity					147,629									130,279

		Total liabilities and stockholders’ equity		$	1,561,738								$	1,678,706

		Net interest income and margin on total earning assets						19,433			5.19	%					19,220			4.76	%

Taxable equivalent adjustment								(210	)								(209	)

		Net interest income					$	19,223								$	19,011

[Additional columns below]

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


			Nine Months Ended September 30,

			2002									2001

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

ASSETS
Earning assets:
	Interest-bearing deposits in other banks		$	1,046		$	20			2.56	%	$	1,032		$	42			5.44	%
	Federal funds sold and securities purchased under agreement to resell			6,514			82			1.68			10,857			358			4.37
	Taxable investment and mortgage-backed securities			284,397			11,192			5.26			268,530			14,461			7.20
	Nontaxable investment securities			30,967			1,795			7.75			30,916			1,791			7.75
	Loans(1)			1,157,743			68,373			7.90			1,303,705			82,917			8.50

		Total earning assets		1,480,667			81,462			7.36			1,615,040			99,569			8.24

Nonearning assets:
	Cash and due from banks			34,082									29,098
	Premises and equipment			17,334									18,439
	Other assets			47,473									50,364
	Less allowance for credit losses			(23,376	)								(17,949	)

		Total assets	$	1,556,180								$	1,694,992

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
	Savings deposits		$	466,526		$	4,240			1.22	%	$	403,228		$	7,152			5.44	%
	Time deposits			511,679			9,869			2.58			679,115			25,719			5.06
	Short-term borrowings			23,179			551			3.18			101,082			4,202			5.56
	Long-term debt			237,090			8,474			4.78			232,789			9,884			5.68

		Total interest-bearing deposits and liabilities		1,238,474			23,134			2.50			1,416,214			46,957			4.43

Noninterest-bearing liabilities:
	Demand deposits			152,791									126,823
	Other liabilities			22,350									24,123

		Total liabilities		1,413,615									1,567,160
Stockholders’ equity				142,565									127,832

		Total liabilities and stockholders’ equity	$	1,556,180								$	1,694,992

		Net interest income and margin on total earning assets					58,328			5.27	%					52,612			4.36	%

Taxable equivalent adjustment							(628	)								(630	)

		Net interest income				$	57,700								$	51,982

(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 September 30, 2002, December 31, 2001 and September 30, 2001 follows:


					September 30,			December 31,			September 30,
(dollars in thousands)					2002			2001			2001

Nonperforming assets:
		Nonperforming loans:
			Commercial		$	6,311		$	7,034		$	8,269
			Real estate:
				Commercial		3,410			2,438			2,502
				Residential		4,920			6,174			6,180

				Total real estate loans		8,330			8,612			8,682
			Consumer			654			148			—

				Total nonperforming loans		15,295			15,794			16,951

	Other real estate owned					1,431			4,674			3,598

				Total nonperforming assets	$	16,726		$	20,468		$	20,549

Past due loans:
			Real estate		$	1,402		$	2,190		$	2,378
			Consumer			1,813			1,464			954

				Total past due loans (1)	$	3,215		$	3,654		$	3,332

Restructured:
			Commercial		$	2,168		$	2,214		$	4,760
			Real estate:
				Residential		5,434			8,629			9,428

				Total restructured loans (2)	$	7,602		$	10,843		$	14,188

Nonperforming assets to total loans and other real estate owned (end of period):
			Excluding 90 days past due accruing loans			1.49	%		1.64	%		1.58	%
			Including 90 days past due accruing loans			1.77	%		1.93	%		1.84	%
Nonperforming assets to total assets (end of period):
			Excluding 90 days past due accruing loans			1.05	%		1.29	%		1.23	%
			Including 90 days past due accruing loans			1.26	%		1.52	%		1.43	%

(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 September 30, 2002 totaled $15.3 million, a decrease of $1.7 million, or 9.8%, as compared to September 30, 2001. The decrease in nonperforming loans was primarily due to a $2.0 million decrease in the commercial category, partially offset by a $654,000 increase in the consumer loan category. The decrease in nonperforming commercial loans (from September 30, 2001) was due primarily to the charge-off of these loans totaling $1.9 million during the fourth quarter of 2001.

Other real estate owned was $1.4 million at September 30, 2002, a decrease of $2.2 million, or 60.2%, from September 30, 2001. The decrease in other real estate owned was consistent with the decrease in non-performing residential real estate loans and the increase in real estate sales activity in Hawaii.

Restructured loans were $7.6 million at September 30, 2002, a decrease of $6.6 million, or 46.4%, from September 30, 2001. The decrease was primarily due to the charge-off of certain commercial loans and reclassification of certain residential real estate loans to nonperforming loans.

The Bank has potential problem loans (not reported with nonperforming or restructured loans) to a borrower in the transportation industry, with aggregate credit facilities outstanding of $3.8 million at September 30, 2002. While the loan is currently performing and is collateralized by various equipment, the borrower's deterioration in financial condition may impact the borrower's ability to continue servicing its debt under the existing loan terms. Management has analyzed this potential problem loan in determining the adequacy of the allowance for credit losses at September 30, 2002.

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 Allowance is an estimate and there is no guarantee that credit losses will not be greater or less than the Allowance.

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


			Nine months ended September 30,

(dollars in thousands)			2002			2001

Loans outstanding (end of period)⁽¹⁾			$	1,122,680		$	1,295,294

Average loans outstanding⁽¹⁾			$	1,157,743		$	1,303,705

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

Loans charged off:
	Commercial			4,607			5,445
	Real estate:
	Residential			633			1,618
	Consumer			2,283			1,009

		Total loans charged off		7,523			8,072

Recoveries on loans charged off:
	Commercial			396			97
	Real estate:
		Commercial		361			—
		Residential		362			334
	Consumer			655			245

		Total recoveries on loans previously charged off		1,774			676

		Net charge-offs		(5,749	)		(7,396	)

Provision charged to expense				12,959			8,671

Balance at end of period			$	26,674		$	18,722

Net loans charged off to average loans				0.66%	⁽²⁾		0.76	% ⁽²⁾
Net loans charged off to allowance for credit losses				28.82%	⁽²⁾		52.81	% ⁽²⁾
Allowance for credit losses to total
	loans (end of period)			2.38	%		1.45	%
Allowance for credit losses to nonperforming loans (end of period):
		Excluding 90 days past due accruing loans		1.74x			1.10x
		Including 90 days past due accruing loans		1.44x			0.92x

(1)		Includes loans held for sale.




(2)		Annualized.

The provision for credit losses was $4.0 million for the third quarter of 2002, an increase of $339,000, or 9.3%, over the same quarter last year. For the nine months ended September 30, 2002, the provision for loan losses was $13.0 million, an increase of $4.3 million, or 49.5%, 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, net charge-off levels (net charge-offs of $4.2 million during the fourth quarter of 2001), and the resulting impact of the continuing economic uncertainty, both locally and nationally.

The Allowance at September 30, 2002 was $26.7 million and represented 2.38% of total loans. The corresponding ratios at December 31, 2001 and September 30, 2001 were 1.57% and 1.45%, respectively.

Net charge-offs were $5.7 million for the first nine months of 2002, a decrease of $1.6 million, or 22.3%, over the same period in 2001.

The Allowance increased to 1.74 times nonperforming loans (excluding 90 days past due accruing loans) at September 30, 2002, from 1.10 times at September 30, 2001, as a result of the decrease in nonperforming loans and increase in Allowance.

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

NONINTEREST INCOME

For the quarter ended September 30, 2002, the Company had total noninterest income of $1.6 million, compared to a loss of $3.6 million for the same period in 2001. For the nine months ended September 30, 2002, noninterest income was $9.3 million, an increase of $6.7 million, or 262.0%, over the comparable period in 2001. The increase was primarily due to a $6.6 million impairment charge on asset-backed securities recorded in the quarter ended September 30, 2001, partially offset by a similar charge of $1.4 million recorded in the quarter ended September 30, 2002 as discussed below.

Service charges on deposit accounts increased $124,000 and $447,000, or 12.8% and 16.3%, respectively, for the third quarter and nine months ended September 30, 2002 over the comparable periods in 2001. These increases resulted from an $89.3 million, or 16.8%, increase in the average balance of transaction accounts.

Other service charges and fees increased $729,000 and $1.5 million, or 62.5% and 42.0%, respectively, for the third quarter and nine months ended September 30, 2002 over the comparable periods in 2001. These increases were primarily due to fee income on investment services.

During the quarters ended September 30, 2002 and 2001, the Company recorded an impairment charge on asset-backed securities of $1.4 million and $6.6 million, respectively (see “Critical Accounting Policies and Estimates” for additional discussion).

NONINTEREST EXPENSE

Noninterest expense totaled $12.8 million for the quarter ended September 30, 2002, a decrease of $19,000, or 0.1%, from the comparable period in 2001. For the nine months ended September 30, 2002, noninterest expense was $39.5 million, an increase of $1.5 million, or 4.0%, from the comparable period in 2001. The efficiency ratio (exclusive of impairment charges of $1.4 million in 2002 and $6.6 million in 2001 and the amortization of identifiable intangibles of $367,000 in 2002 and $448,000 in 2001) improved from 61.4% for the nine months ended September 30, 2001 to 57.2% for the nine months ended September 30, 2002.

Salaries and employee benefits increased $585,000, or 9.9%, and $1.7 million, or 9.3%, for the third quarter and nine months ended September 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 first nine months of 2002 was 32.0% as compared to 33.4% for the same period in 2001. The decline in the Company’s effective tax rate for 2002 was due primarily 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 $25.5 million for the nine months ended September 30, 2002, which compares to $12.5 million used by operating activities in the same period last year. The primary source of cash flows from operations in 2002 was the proceeds of $147.3 million of loans held for sale, which was partially offset by the origination of $143.0 million of loans held for sale. During the nine months ended September 30, 2001, the Company originated $132.8 million of loans held for sale and sold $104.0 million of loans held for sale.

Investing activities provided cash flow of $6.6 million for the nine months ended September 30, 2002, compared to $65.1 million during the same period last year. The primary sources of cash from investing activities for the nine months ended September 30, 2002 were the $109.6 million net decrease in loans, and proceeds from the sale and maturities of available-for-sale securities of $42.4 million and $30.3 million, respectively. These sources of cash were offset by the purchases of held-to-maturity and available-for-sale securities of $106.4 and $105.9 million, respectively. The primary source of cash from investing activities for the nine months ended September 30, 2001 were proceeds from the sale and maturities of available-for-sale securities of $40.9 million and $32.6 million, respectively.

Financing activities used cash flow of $19.5 million for the nine months ended September 30, 2002, compared to $57.5 million during the same period last year. During the nine months ended September 30, 2002, the Company had a net decrease of $30.7 million in short-term borrowings, which was partially funded by the $15.0 million net increase in long-term debt. The primary use of

cash for financing activities for the nine months ended September 20, 2001 were the net decreases of $51.9 million and $69.1 million in deposits and short-term borrowings, respectively, which was partially funded by the $68.9 million net increase in long-term debt.

At September 30, 2002, as compared to September 30, 2001, the Company had $1.6 billion in assets, down 5.0%; $1.1 billion in loans, down 13.3%; and $1.1 billion in deposits, down 2.9%. During this current low interest rate environment, the Company has continued to reduce its interest rate exposure by: (1) partially replacing residential loans that have prepaid with shorter term commercial loans and investment securities; and (2) replacing short-term time deposits and borrowings that have matured 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 September 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 September 30, 2002
	Tier 1 Capital to Risk-Weighted Assets:
	Consolidated	$	146,747		12.61	%	$	46,547		4.00	%		N/A
	Bank		137,840		11.86			46,482		4.00		$	69,722		6.00	%
Total Capital to Risk-Weighted Assets:
	Consolidated	$	161,461		13.88	%	$	93,094		8.00	%		N/A
	Bank		152,546		13.13			92,963		8.00		$	116,204		10.00	%
Tier 1 Capital to Average Assets:
	Consolidated	$	146,747		9.40	%	$	62,470		4.00	%		N/A
	Bank		137,840		8.84			62,359		4.00		$	77,949		5.00	%
As of September 30, 2001
	Tier 1 Capital to Risk-Weighted Assets:
	Consolidated	$	136,858		11.12	%	$	49,214		4.00	%		N/A
	Bank		131,473		10.69			49,198		4.00		$	73,796		6.00	%
	Total Capital to Risk-Weighted Assets:
	Consolidated	$	152,313		12.38	%	$	98,428		8.00	%		N/A
	Bank		146,923		11.95			98,395		8.00		$	122,994		10.00	%
	Tier 1 Capital to Average Assets:
	Consolidated	$	136,858		8.15	%	$	67,148		4.00	%		N/A
	Bank		131,473		7.79			67,535		4.00		$	84,419		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 nine months ended September 30, 2002.

Item 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of a date (the “Evaluation Date”) within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission.

Subsequent to the Evaluation Date, there were no significant changes in the Company’s internal controls or, to management’s knowledge, in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


10.1		CB Bancshares, Inc. Executive Compensation Agreement for Ronald K. Migita
99.1		Certification of Ronald K. Migita
99.2		Certificate of Dean K. Hirata

(b) Reports on Form 8-K

No reports on Form 8-K were filed in the third 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 November 12, 2002	By	/s/ Ronald K. Migita

		Ronald K. Migita President and Chief Executive Officer


Date November 12, 2002	By	/s/ Dean K. Hirata

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

CERTIFICATIONS

I, RONALD K. MIGITA, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CB Bancshares, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

		a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

		c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

		a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: November 12, 2002		/s/ RONALD K. MIGITA

		Ronald K. Migita President and Chief Executive Officer

CERTIFICATIONS

I, DEAN K. HIRATA, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CB Bancshares, Inc.;

		a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

		b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

		c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

		a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

		b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date: November 12, 2002		/s/ DEAN K. HIRATA

		Dean K. Hirata Senior Vice President and Chief Financial Officer

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