Edgar Filing: CB BANCSHARES INC/HI

CB BancShares, Inc. - Form 10-Q for March 31, 2002

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 March 31, 2002

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

Commission File Number 0-12396

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


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes [X]		No [ ]

The number of shares outstanding of each of the registrant’s classes of common stock as of April 30, 2002 was:


Class		Outstanding

Common Stock, $1.00 Par Value		3,510,721 shares

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS (Unaudited)
		CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
		CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS) (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
PART II — OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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


		March 31,			December 31,			March 31,
(in thousands)		2002			2001			2001

Assets
Cash and due from banks		$	25,585		$	22,395		$	35,696
Interest-bearing deposits in other banks			1,028			1,017			1,010
Federal funds sold			—			10,655			21,560
Investment and mortgage-backed securities:
	Held-to-maturity		48,781			26,000			—
	Available-for-sale		212,481			203,563			280,963
	FHLB Stock		32,885			32,406			32,949
Loans held for sale			33,556			50,661			49,716
Net loans			1,122,082			1,172,817			1,239,265
Premises and equipment			17,133			17,633			18,576
Other real estate owned			3,898			4,674			2,758
Accrued interest receivable and other assets			44,271			44,219			46,018

Total assets		$	1,541,700		$	1,586,040		$	1,728,511

Liabilities and stockholders’ equity
Deposits:
	Noninterest-bearing	$	151,061		$	160,570		$	128,697
	Interest-bearing		957,779			977,865			1,126,921

Total deposits			1,108,840			1,138,435			1,255,618

Short-term borrowings			40,300			76,100			75,700
Accrued expenses and other liabilities			19,483			20,599			18,066
Long-term debt			234,420			214,424			244,439
Minority interest in consolidated subsidiary			2,720			2,720			7,000

Total liabilities			1,405,763			1,452,278			1,600,823

Stockholders’ equity:
	Preferred stock		—			—			—
	Common stock		3,489			3,506			3,190
	Additional paid-in capital		64,871			65,427			54,621
	Retained earnings		68,866			65,714			74,766
	Unreleased shares to employee stock ownership plan		(1,799	)		(1,839	)		—
	Accumulated other comprehensive income (loss), net of tax		510			954			(4,889	)

Total stockholders’ equity			135,937			133,762			127,688

Total liabilities and stockholders’ equity		$	1,541,700		$	1,586,040		$	1,728,511

See accompanying notes to the consolidated financial statements.

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


			Three months ended
			March 31,

(in thousands, except per share data)			2002			2001

Interest income:
	Interest and fees on loans		$	23,865		$	28,139
	Interest and dividends on investment and mortgage-backed securities:
		Taxable interest income		2,882			5,036
		Nontaxable interest income		388			388
		Dividends		480			520
	Other interest income			19			178

		Total interest income		27,634			34,261

Interest expense:
	Deposits			5,119			13,086
	FHLB advances and other short-term borrowings			311			2,242
	Long-term debt			2,765			3,131

		Total interest expense		8,195			18,459

		Net interest income		19,439			15,802
Provision for credit losses				4,868			2,750

		Net interest income after provision for credit losses		14,571			13,052

Noninterest income:
	Service charges on deposit accounts			1,028			834
	Other service charges and fees			1,556			1,145
	Net realized gains (losses) on sales of securities			(36	)		387
	Net gains on sales of loans			511			162
	Other			900			716

		Total noninterest income		3,959			3,244

Noninterest expense:
	Salaries and employee benefits			6,569			5,997
	Net occupancy expense			1,572			1,592
	Equipment expense			795			816
	Other			4,412			3,844

		Total noninterest expense		13,348			12,249

		Income before income taxes		5,182			4,047
Income tax expense				1,646			1,246

		Net income	$	3,536		$	2,801

Per share data:
	Basic		$	1.03		$	0.80
	Diluted		$	1.01		$	0.80

See accompanying notes to the consolidated financial statements.

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


			Three months ended
			March 31,

(in thousands)			2002			2001

Cash flows from operating activities:
	Net income		$	3,536		$	2,801
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Provision for credit losses		4,868			2,750
		Net (gain) loss on sale of investment and mortgage-backed securities		36			(387	)
		Depreciation and amortization		933			950
		Decrease (increase) in accrued interest receivable		(14	)		86
		Decrease in accrued interest payable		(72	)		(1,933	)
		Loans originated for sale		(46,721	)		(42,298	)
		Sale of loans held for sale		63,315			25,502
		Increase in other assets		(38	)		(2,297	)
		(Increase) decrease in income taxes payable		1,600			(86	)
		Decrease in other liabilities		(2,360	)		(2,123	)
		Other		345			(34	)

Net cash provided by (used in) operating activities				25,428			(17,069	)

Cash flows from investing activities:
	Net decrease (increase) in deposits in other banks			(11	)		48
	Net decrease (increase) in federal funds sold			10,655			(20,950	)
	Purchase of held-to-maturity investment securities			(22,856	)		—
	Purchase of available-for-sale securities			(42,100	)		(50	)
	Proceeds from sales of available-for-sale securities			22,964			15,108
	Proceeds from maturities of available-for-sale securities			9,370			5,941
	Increase in FHLB Stock			(479	)		(519	)
	Net decrease in loans			45,300			8,324
	Capital expenditures			(274	)		(1,179	)
	Proceeds from sales of foreclosed assets			1,509			1,538

Net cash provided by investing activities				24,078			8,261

Cash flows from financing activities:
	Net increase (decrease) in deposits			(29,595	)		36,747
	Net decrease in short-term borrowings			(35,800	)		(95,000	)
	Proceeds from long-term debt			20,000			75,000
	Principal payments on long-term debt			(4	)		(12,125	)
	Cash dividends paid			(384	)		(318	)
	Options exercised			103			28
	Stock repurchase			(676	)		—
	Unreleased ESOP shares			40			—

Net cash provided by (used in) financing activities				(46,316	)		4,332

Increase (decrease) in cash and due from banks				3,190			(4,476	)
Cash and due from banks at beginning of period				22,395			40,172

Cash and due from banks at end of period			$	25,585		$	35,696

Supplemental schedule of non-cash investing activities:
	Interest paid on deposits and other borrowings		$	8,267		$	20,391
	Income taxes paid			—			1,450

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


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

Three months ended March 31, 2002:
Balance at January 1, 2002			$	3,506		$	65,427		$	65,714		$	(1,839	)	$	954		$	133,762
Comprehensive income:
	Net income			—			—			3,536			—			—			3,536
	Other comprehensive income, net of tax
		Unrealized losses on securities, net of reclassification adjustment		—			—			—			—			(444	)		(444	)

		Total comprehensive income		—			—			3,536			—			(444	)		3,092

Cash dividends ($0.11 per share)				—			—			(384	)		—			—			(384	)
Options exercised				4			99			—			—			—			103
Repurchased, cancelled and retired shares				(21	)		(655	)		—			—			—			(676	)
ESOP shares				—			—			—			40			—			40

Balance at March 31, 2002			$	3,489		$	64,871		$	68,866		$	(1,799	)	$	510		$	135,937

Three months ended March 31, 2001:
Balance at January 1, 2001			$	3,189		$	54,594		$	72,284		$	—		$	(6,905	)	$	123,162
Comprehensive income:
	Net income			—			—			2,801			—			—			2,801
	Other comprehensive income, net of tax
		Unrealized gains on securities, net of reclassification adjustment		—			—			—			—			2,016			2,016

		Total comprehensive income		—			—			2,801			—			2,016			4,817

Cash dividends ($0.10 per share)				—			—			(319	)		—			—			(319	)
Options exercised				1			27			—			—			—			28

Balance at March 31, 2001			$	3,190		$	54,621		$	74,766		$	—		$	(4,889	)	$	127,688

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 generally accepted accounting principles. 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:


				March 31,		December 31,		March 31,
(in thousands)				2002		2001		2001

Commercial and financial				$	218,665	$	229,824	$	239,464
Real estate:
	Construction				57,161		52,750		32,796
	Commercial				183,225		190,328		192,761
	Residential				549,964		588,525		679,849
Installment and consumer					139,438		135,901		116,592

			Gross loans		1,148,453		1,197,328		1,261,462
Less:
	Unearned discount				238		108		4
	Net deferred loan fees				4,016		4,939		5,724
	Allowance for credit losses				22,117		19,464		16,469

		Loans, net		$	1,122,082	$	1,172,817	$	1,239,265

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

Three months ended March 31, 2002
Net interest income	$	11,328		$	7,451		$	693		$	(33	)	$	19,439
Intersegment net interest income (expense)		123			(1,478	)		1,355			—			—
Provision for credit losses		815			4,053			—			—			4,868
Other operating income (expense)		(2,184	)		(2,595	)		(587	)		(4,023	)		(9,389	)
Administrative and overhead expense allocation		(1,916	)		(1,292	)		(215	)		3,423			—
Income tax expense (benefit)		2,039			(614	)		389			(168	)		1,646
Net income (loss)		4,497			(1,353	)		857			(465	)		3,536
Total assets		734,331			440,022			323,230			44,117			1,541,700

Three months ended March 31, 2001
Net interest income	$	7,370		$	7,683		$	747		$	2		$	15,802
Intersegment net interest income (expense)		588			(1,836	)		1,248			—			—
Provision for credit losses		752			1,998			—			—			2,750
Other operating income (expense)		(2,635	)		(2,196	)		130			(4,304	)		(9,005	)
Administrative and overhead expense allocation		(2,014	)		(1,425	)		(330	)		3,769			—
Income tax expense (benefit)		812			73			570			(209	)		1,246
Net income (loss)		1,745			155			1,225			(324	)		2,801
Total assets		856,486			454,864			380,646			36,515			1,728,511

NOTE D — Earnings Per Share Calculation


		Three months ended March 31,

		2002						2001

(in thousands, except number of shares and per share data)		Income (Numerator)		Shares (Denominator)		Per Share Amount		Income (Numerator)		Shares (Denominator)		Per Share Amount

Basic:
	Net income	$	3,536		3,444,776	$	1.03	$	2,801		3,506,696	$	0.80
Effect of dilutive securities — Stock incentive plan options			—		61,566		—		—		5,604		—
Diluted:
	Net income and assumed conversions	$	3,536		3,506,342	$	1.01	$	2,801		3,512,300	$	0.80

2001 per share calculations have been restated to reflect the impact of the 10% stock dividend issued in June 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 generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to its investments, loans and allowance for credit losses, intangible assets, income taxes, contingencies, and litigation. The Company bases its estimates on current

market conditions, historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies require significant judgments and estimates used in the preparation of its consolidated financial statements.

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

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

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

NET INCOME

Consolidated net income for the quarter ended March 31, 2002, totaled $3.5 million, an increase of $735,000, or 26.2%, over the same quarter last year. Diluted earnings per share

for the first quarter of 2002 was $1.01 as compared to $0.80 for the same period in 2001, an increase of $0.21, or 26.3%.

The Company’s annualized return on average total assets for the three months ended March 31, 2002 was 0.92% as compared to 0.66% for the same period last year. The Company’s annualized return on average stockholders’ equity was 10.78% for the three months ended March 31, 2002, as compared to 9.05% for the same period last year.

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, was $19.6 million for the three months ended March 31, 2002, an increase of $3.6 million, or 22.7%, over the same period in 2001. The increase was primarily due to an increase in the net interest margin. For the quarter ended March 31, 2002, the Company’s net interest margin was 5.38%, an increase of 142 basis points (1% equals 100 basis points) from the same period in 2001. In 2001, the Company was liability-sensitive (i.e., liabilities repricing faster than assets). Additionally, the yield curve steepened with short-term rates falling more than intermediate and long-term rates. As a result, the Company’s cost of funds decreased more than the yield on earning assets, which resulted in a 142 basis point increase in the net interest margin.

A comparison of net interest income for the three months ended March 31, 2002 and 2001 is set forth below on a taxable equivalent basis:


			Three Months Ended March 31,

			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		$	1,038		$	7			2.73	%	$	1,077		$	18			6.78	%
	Federal funds sold and securities purchased under agreement to resell			2,729			12			1.78			11,830			160			5.49
	Taxable investment and mortgage-backed securities			238,823			3,362			5.71			295,064			5,556			7.64
	Nontaxable investment securities			30,954			597			7.82			30,904			597			7.83
	Loans¹			1,208,698			23,865			8.01			1,302,216			28,142			8.76

		Total earning assets		1,482,242			27,843			7.62			1,641,091			34,473			8.52

Nonearning assets:
	Cash and due from banks			31,041									30,795
	Premises and equipment			17,472									18,176
	Other assets			51,449									47,716
	Less allowance for credit losses			(20,887	)								(17,730	)

		Total assets	$	1,561,317								$	1,720,048

Interest-bearing liabilities:
	Savings deposits		$	457,202		$	1,624			1.44	%	$	378,917		$	2,585			2.77	%
	Time deposits			525,913			3,495			2.70			735,947			10,501			5.79
	Short-term borrowings			36,447			311			3.46			133,914			2,242			6.79
	Long-term debt			234,688			2,765			4.78			202,945			3,131			6.26

		Total interest-bearing deposits and liabilities		1,254,250			8,195			2.65			1,451,723			18,459			5.16

Noninterest-bearing liabilities:
	Demand deposits			147,440									118,368
	Other liabilities			26,624									24,405

		Total liabilities		1,428,314									1,594,496
Stockholders’ equity				133,003									125,552

		Total liabilities and stockholders’ equity	$	1,561,317								$	1,720,048

		Net interest income and margin on total earning assets					19,648			5.38	%					16,014			3.96	%

Taxable equivalent adjustment							(209	)								(212	)

		Net interest income				$	19,439								$	15,802

(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 March 31, 2002, December 31, 2001 and March 31, 2001 follows:


					March 31,			December 31,			March 31,
(dollars in thousands)					2002			2001			2001

Nonperforming assets:
	Nonperforming loans:
			Commercial		$	5,341		$	7,034		$	9,199
			Real estate:
				Commercial		3,719			2,438			2,269
				Residential		6,121			6,174			5,916

				Total real estate loans		9,840			8,612			8,185
	Consumer					150			148			—

				Total nonperforming loans		15,331			15,794			17,384

	Other real estate owned					3,898			4,674			2,758

				Total nonperforming assets	$	19,229		$	20,468		$	20,142

Past due loans:
	Commercial				$	1,467		$	—		$	1,951
	Real estate					2,440			2,190			2,636
	Consumer					2,393			1,464			851

				Total past due loans(1)	$	6,300		$	3,654		$	5,438

Restructured:
	Commercial				$	2,214		$	2,214		$	1,978
	Real estate —
		residential				8,188			8,629			10,352

				Total restructured loans(2)	$	10,402		$	10,843		$	12,330

Nonperforming assets to total loans and other real estate owned (end of period):
	Excluding 90 days past due accruing loans					1.63	%		1.64	%		1.54	%
	Including 90 days past due accruing loans					2.16	%		1.93	%		1.96	%
Nonperforming assets to total assets (end of period):
	Excluding 90 days past due accruing loans					1.25	%		1.29	%		1.17	%
	Including 90 days past due accruing loans					1.66	%		1.52	%		1.48	%

(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 March 31, 2002 totaled $15.3 million, a decrease of $2.1 million, or 11.8%, over March 31, 2001. The decrease in nonperforming loans was primarily due to a decrease in the commercial category.

Nonperforming commercial loans were $5.3 million at March 31, 2002, a decrease of $3.9 million over March 31, 2001. The decrease was due to 1) loans totaling $2.6 million that were charged-off in the third and fourth quarters of 2001; and 2) a $1.3 million loan to a real estate developer, secured by undeveloped land, that was foreclosed on in the second quarter of 2001.

Other real estate owned was $3.9 million at March 31, 2002, an increase of $1.1 million, or 41.3%, from March 31, 2001. The increase in other real estate owned was primarily due to a $1.0 million residential property foreclosed on in the fourth quarter of 2001.

Restructured loans were $10.4 million at March 31, 2002, a decrease of $1.9 million, or 15.6%, from March 31, 2001. The decrease was primarily due to the reclassification of certain residential real estate loans to nonperforming loans and past due loans.

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

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

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

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

Three months ended March 31,

(dollars in thousands)

2002

2001

Loans outstanding (end of period)

1,177,755

1,305,450

Average loans outstanding

1,208,698

1,302,216

Balance at beginning of period

19,464

17,447

Loans charged-off:

Commercial

2,100

3,035

Real estate

Commercial

—

Residential

207

467

Consumer

516

474

Total loans charged-off

2,823

3,976

Recoveries on loans charged-off:

Commercial

Real estate:

Commercial

350

—

Residential

143

Consumer

178

Total recoveries on loans previously charged-off

608

248

Net charge-offs

(2,215

)

(3,728

)

Provision charged to expense

4,868

2,750

Balance at end of period

22,117

16,469

Net loans charged-off to average loans

0.74%

⁽¹⁾

1.16

%⁽¹⁾

Net loans charged-off to allowance for credit losses

40.62%

⁽¹⁾

91.80

%⁽¹⁾

Allowance for credit losses to total loans (end of period)

1.88

1.26

Allowance for credit losses to nonperforming loans (end of period):

Excluding 90 days past due accruing loans

1.44x

0.95x

Including 90 days past due accruing loans

1.02x

0.72x

⁽¹⁾

Annualized.

The provision for credit losses was $4.9 million for the first quarter of 2002, an increase of $2.1 million, or 77.0%, over the same quarter last year. The increase in the provision was related to: 1) the continued economic uncertainty, both locally and nationally, since the events of September 11, 2001 and the increased probability that losses not specifically identified may be inherent in the Company’s loan portfolio; and 2) an increase in classified assets.

The Allowance at March 31, 2002 was $22.1 million and represented 1.88% of total loans. The corresponding ratios at December 31, 2001 and March 31, 2001 were 1.57% and 1.26%, respectively.

Net charge-offs were $2.2 million for the first three months of 2002, a decrease of $1.5 million, or 40.6%, over the same period in 2001. The decrease was primarily due to a reduction in commercial loan charge-offs.

The Allowance increased to 1.44 times nonperforming loans (excluding 90 days past due accruing loans) at March 31, 2002 from 0.95 times at March 31, 2001 as a result of the increase in the Allowance and decrease in nonperforming loans.

In management’s judgment, the Allowance was adequate to absorb potential losses currently inherent in the loan portfolio at March 31, 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 $4.0 million for the first quarter of 2002, an increase of $715,000, or 22.0%, over the first quarter of 2001.

Service charges on deposit accounts increased $194,000, or 23.3%, for the first quarter of 2002 over the same period in 2001. These increases resulted from an increase in deposit accounts.

Other service charges and fees increased $411,000, or 35.9%, for the first three months of 2002 over the same period in 2001. These increases were primarily due to fee income on investment services recorded during the three months ended March 31, 2002.

Net realized losses on sales of securities was $36,000 for the three months ended March 31, 2002 compared to net realized gains of $387,000 in the same period in 2001.

Net gains on sales of loans increased $349,000, or 215.4%, for the first quarter of 2002 from the same period in 2001.

Other income increased $184,000, or 25.7%, for the first quarter of 2002 due primarily to higher gains on the sale of OREO and income from item-processing operations.

NONINTEREST EXPENSE

Noninterest expense totaled $13.3 million for the first quarter of 2002, an increase of $1.1 million, or 9.0%, from the same period in 2001. The efficiency ratio (exclusive of amortization of purchase accounting premiums on loan and servicing portfolios) improved from 63.5% for the three months ended March 31, 2001 to 56.4% for the three months ended March 31, 2002.

Salaries and employee benefits increased $572,000, or 9.5%, for the first quarter ended March 31, 2002 from the same period in 2001. The increases were primarily due to higher incentive-based compensation paid to commercial loan and investment services personnel.

Other noninterest expense increased $568,000, or 14.8%, for the first three months of 2002 from the same period in 2001 due primarily to higher professional fees and marketing expenses.

INCOME TAXES

The Company’s effective income tax rate (exclusive of the tax equivalent adjustment) for the first three months of 2002 was 31.8% as compared to 30.8% for the same period in 2001.

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 $25.4 million in the first quarter of 2002, compared to using $17.1 million in the same period last year. The primary source of cash flows from operations in 2002 was the sale of $63.3 million of loans held for sale, which was partially offset by the origination of $46.7 million of loans held for sale. During the first quarter of 2001, the Company originated $42.3 million of loans held for sale and sold $25.5 million of loans held for sale.

Investing activities provided cash flow of $24.1 million in the first quarter of 2002, compared to providing $8.3 million during the same period last year. The primary source of cash from investing activities in the first quarter of 2002 was the net decrease in loans of $45.3 million. The net decrease in loans was due primarily to a reduction in the Bank’s residential real estate portfolio, which declined by $38.6 million during the first quarter of 2002 due to an increase in prepayments.

Financing activities used cash flow of $46.3 million in the first quarter of 2002, compared to providing $4.3 million during the same period last year. The primary use of cash from financing activities in the first quarter of 2002 was the $29.6 million net decrease in deposits and $35.8 million net decrease in short-term 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 March 31, 2002 and 2001) of Tier 1 and Total capital to risk-weighted assets, and of Tier 1 capital to average assets.


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

(dollars in thousands)		Amount		Ratio				Amount		Ratio			Amount			Ratio

As of March 31, 2002
Tier 1 Capital to Risk-Weighted Assets:
	Consolidated	$	138,147		11.67	%		$	47,334		4.00	%			N/A
	Bank		133,912		11.31				47,342		4.00			$	71,013		6.00	%
Total Capital to Risk-Weighted Assets:
	Consolidated	$	153,064		12.93	%		$	94,669		8.00	%			N/A
	Bank		148,832		12.57				94,684		8.00			$	118,356		10.00	%
Tier 1 Capital to Average Assets:
	Consolidated	$	138,147		8.85	%		$	62,453		4.00	%			N/A
	Bank		133,912		8.59				62,327		4.00			$	77,908		5.00	%
As of March 31, 2001
Tier 1 Capital to Risk-Weighted Assets:
	Consolidated	$	139,578		11.52	%		$	48,447		4.00	%			N/A
	Bank		136,363		11.28				48,376		4.00			$	72,564		6.00	%
Total Capital to Risk-Weighted Assets:
	Consolidated	$	154,767		12.78	%		$	96,894		8.00	%			N/A
	Bank		151,530		12.53				96,752		8.00			$	120,940		10.00	%
Tier 1 Capital to Average Assets:
	Consolidated	$	139,578		8.11	%		$	68,802		4.00	%			N/A
	Bank		136,363		7.61				71,671		4.00			$	89,589		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 three months ended March 31, 2002.

PART II — OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

No reports on Form 8-K were filed in the first 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	May 10, 2002	By	/s/ Dean K. Hirata Dean K. Hirata Senior Vice President and Chief Financial Officer (principal financial officer)

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