Edgar Filing: CB BANCSHARES INC/HI

CB Bancshares, Inc., Form 10-Q

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, 2001

[ ] 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 31, 2001 was:


Class		Outstanding

Common Stock, $1.00 Par Value		3,505,632 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


		September 30,			December 31,			September 30,
(in thousands)		2001			2000			2000

Assets
Cash and due from banks		$	35,144		$	40,172		$	35,104
Interest-bearing deposits in other banks			1,013			1,058			279
Federal funds sold			12,380			610			475
Investment and mortgage-backed securities:
	Held-to-maturity		20,940			—			—
	Available-for-sale		225,095			298,089			298,674
	FHLB Stock		34,116			32,430			31,915
Loans held-for-sale			63,645			33,696			5,863
Net loans			1,212,927			1,250,215			1,248,908
Premises and equipment			18,251			18,081			18,571
Other real estate owned			3,598			3,458			4,731
Accrued interest receivable and other assets			44,006			43,591			43,660

Total assets		$	1,671,115		$	1,721,400		$	1,688,180

Liabilities and stockholders’ equity
Deposits:
	Noninterest-bearing	$	143,931		$	128,742		$	113,131
	Interest-bearing		1,022,465			1,089,519			1,056,140

Total deposits			1,166,396			1,218,261			1,169,271

Short-term borrowings			101,600			170,700			193,700
Accrued expenses and other liabilities			18,384			20,714			18,366
Long-term debt			250,454			181,563			181,688
Minority interest in consolidated subsidiary			2,720			7,000			7,000

Total liabilities			1,539,554			1,598,238			1,570,025

Stockholders’ equity:
	Preferred stock		—			—			—
	Common stock		3,506			3,189			3,199
	Additional paid-in capital		65,418			54,594			54,852
	Retained earnings		65,214			72,284			69,579
	Accumulated other comprehensive loss, net of tax		(2,577	)		(6,905	)		(9,475	)

Total stockholders’ equity			131,561			123,162			118,155

Total liabilities and stockholders’ equity		$	1,671,115		$	1,721,400		$	1,688,180

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)			2001			2000		2001			2000

Interest income:
	Interest and fees on loans		$	27,202		$	28,708	$	82,917		$	80,144
	Interest and dividends on investment and mortgage-backed securities:
		Taxable interest income		3,579			4,693		12,773			15,018
		Nontaxable interest income		388			395		1,164			1,168
		Dividends		592			533		1,688			1,588
	Other interest income			134			56		397			418

		Total interest income		31,895			34,385		98,939			98,336

Interest expense:
	Deposits			8,502			12,384		32,871			33,981
	FHLB advances and other short-term borrowings			1,160			3,411		4,202			8,101
	Long-term debt			3,222			3,058		9,884			9,872

		Total interest expense		12,884			18,853		46,957			51,954

		Net interest income		19,011			15,532		51,982			46,382
Provision for credit losses				3,650			1,525		8,671			5,306

		Net interest income after provision for credit losses		15,361			14,007		43,311			41,076

Noninterest income:
	Service charges on deposit accounts			969			720		2,743			2,060
	Other service charges and fees			1,159			969		3,551			2,990
	Net realized gains (losses) on sales of securities			72			1		688			(421	)
	Net gains on sales of loans			740			124		1,152			388
	Impairment of asset backed securities			(6,619	)		—		(6,619	)		—
	Other			613			853		1,680			1,900

		Total noninterest income		(3,066	)		2,667		3,195			6,917

Noninterest expense:
	Salaries and employee benefits			5,772			5,735		17,534			15,649
	Net occupancy expense			1,704			1,648		4,904			5,360
	Equipment expense			788			805		2,408			2,205
	Other			5,156			3,949		13,759			11,900

		Total noninterest expense		13,420			12,137		38,605			35,114

		Income (loss) before income taxes		(1,125	)		4,537		7,901			12,879
Income tax expense (benefit)				(449	)		1,548		2,636			4,686

		Net income (loss)	$	(676	)	$	2,989	$	5,265		$	8,193

Per share data:
	Basic		$	(0.19	)	$	0.85	$	1.50		$	2.31
	Diluted		$	(0.19	)	$	0.85	$	1.48		$	2.31

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)					2001			2000

	Cash flows from operating activities:
			Net income		$	5,265		$	8,193
			Adjustments to reconcile net income to net cash provided by (used in) operating activities:
				Provision for credit losses		8,671			5,306
				Net realized (gains) loss on sale of securities		(688	)		421
				Depreciation and amortization		2,238			2,004
				Deferred income taxes		(3,001	)		2,112
				Decrease (increase) in accrued interest receivable		312			(1,560	)
				Increase (decrease) in accrued interest payable		(2,814	)		(323	)
				Loans originated for sale		(132,778	)		(39,574	)
				Sale of loans held for sale		103,981			41,516
				Impairment of asset backed securities		6,619			—
				Decrease (increase) in other assets		(707	)		(2,671	)
				Increase (decrease) in income taxes payable		198			(822	)
				Increase (decrease) in other liabilities		44			(377	)
				Other		115			328

	Net cash provided by (used in) operating activities					(12,545	)		14,553

	Cash flows from investing activities:
			Net decrease (increase) in interest-bearing deposits in other banks			45			(203	)
			Net decrease (increase) in federal funds sold			(11,770	)		5,225
			Purchases of investment securities held-to-maturity			(20,963	)		—
			Purchase of available-for-sale securities			(50	)		(5,643	)
			Proceeds from sales of available-for-sale securities			40,902			7,656
			Proceeds from maturities of available-for-sale securities			32,606			11,805
			Net increase in FHLB Stock			(1,686	)		(188	)
			Net decrease (increase) in loans			23,651			(132,268	)
			Capital expenditures			(2,408	)		(2,662	)
			Proceeds from sales of foreclosed assets			4,738			6,616

	Net cash provided by (used in) investing activities					65,065			(109,662	)

	Cash flows from financing activities:
			Net increase (decrease) in deposits			(51,865	)		63,127
			Net increase (decrease) in short-term borrowings			(69,100	)		38,816
			Proceeds from long-term debt			146,200			10,000
			Principal payments on long-term debt			(77,309	)		(53,452	)
			Net increase (decrease) in minority interest in consolidated subsidiary			(4,280	)		7,000
			Cash dividends paid			(1,056	)		(773	)
			Stock options exercised			189			—
			Cash in lieu payments on stock dividend			(54	)		—
			Stock repurchases			(273	)		(1,423	)

	Net cash provided by (used in) financing activities					(57,548	)		63,295

	Decrease in cash and due from banks					(5,028	)		(31,814	)
	Cash and due from banks at beginning of period					40,172			66,918

	Cash and due from banks at end of period				$	35,144		$	35,104

Supplemental schedule of non-cash investing activities:
		Interest paid on deposits and other borrowings			$	49,771		$	52,276
		Transfer of loans into other real estate owned				4,966			5,038
		Income taxes paid				5,124			3,399

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


												Accumulated Other
												Comprehensive
						Additional Paid-In						Income
(in thousands, except per share data)			Common Stock			Capital			Retained Earnings			(Loss)			Total

Balance at December 31, 2000			$	3,189		$	54,594		$	72,284		$	(6,905	)	$	123,162
Comprehensive income (loss):
	Net income			—			—			5,265			—			5,265
	Other comprehensive income, net of tax Unrealized valuation adjustment			—			—			—			4,328			4,328

		Total comprehensive income		—			—			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	)
Repurchased, cancelled and retired shares				(8	)		(265	)		—			—			(273	)

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

Balance at December 31, 1999			$	3,255		$	56,219		$	62,159		$	(6,942	)	$	114,691
Comprehensive income (loss):
	Net income			—			—			8,193			—			8,193
	Other comprehensive income, net of tax Unrealized valuation adjustment			—			—			—			(2,533	)		(2,533	)

		Total comprehensive income (loss)		—			—			8,193			(2,533	)		5,660

Cash dividends ($0.24 per share)				—			—			(773	)		—			(773	)
Repurchased, cancelled and retired shares				(56	)		(1,367	)		—			—			(1,423	)

Balance at September 30, 2000			$	3,199		$	54,852		$	69,579		$	(9,475	)	$	118,155

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. Effective July 1, 2000, International Savings & Loan Association (the “Association”) was merged with and into the Bank (the “Merger”). 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, 2000.

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

NEW ACCOUNTING PRINCIPLES

Emerging Issues Task Force Issue No. 99-20

Effective as of April 1, 2001, the Company adopted Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). EITF 99-20 states that interest income earned on retained or purchased beneficial interests in certain securitized financial assets should be recognized over the life of the investment based on an anticipated yield determined by periodically estimating cash flows. Interest income should be revised prospectively for changes in cash flows. Additionally, impairment should be recognized if the fair value of the beneficial interest as determined under EITF 99-20 has declined below its carrying amount and the decline is other than temporary. Because the book values of certain of the Company’s asset backed securities were more than the fair values of those securities as determined under EITF 99-20 on September 30, 2001, the Company recognized a $6.6 million noncash charge (after tax charge of $4.0 million) in the Consolidated Statements of Income for the quarter and nine months ended September 30, 2001. This charge relates to three collateralized loan obligations in the aggregate principal amount of $ 22.1 million, as adjusted, which principal amounts are guaranteed by an agency of the French government.

Statement of Financial Accounting Standards No. 133

In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires entities to recognize all derivatives in their financial statements

as either assets or liabilities measured at fair value. The effective date for SFAS No. 133, as amended, was fiscal years beginning after June 15, 2000, or January 1, 2001 for the Company. The Company implemented the standard as of January 1, 2001.

The Company uses interest rate swaps, caps and floors to modify the interest rate characteristics of certain assets and liabilities. Interest rate swaps are primarily used to convert certain fixed rate deposits to floating interest rates. Since adoption of SFAS 133, as amended, these interest rate swaps have been designated and qualify as fair value hedging instruments.

On January 1, 2001, the Company recorded the cumulative effect of adopting SFAS 133, as amended, in its identified fair value hedges. A transition adjustment of $263,000 associated with establishing fair values of the derivative instruments and hedged items on the balance sheet was recorded. No adjustments were required to net earnings in connection with adopting SFAS 133, as amended.

During the first three quarters of 2001, no amounts were recognized in earnings in connection with the ineffective portion of fair value hedges, no amounts were excluded from the measure of effectiveness, and there were no transactions that no longer qualified as a fair value hedge. During the first three quarters of 2001, the Company has not had any cash flow hedges.

Derivatives not designated as hedges primarily consist of options and instruments containing option features that behave based on limits (“caps”, “floors”, or “collars”). These instruments are used to hedge risks associated with interest rate movements. Although these instruments are effective as hedges from an economic perspective, they do not qualify for hedge accounting under SFAS No. 133, as amended.

EARNINGS RELEASE

The above referenced impairment charge was not reflected in the preliminary earnings for the third quarter and nine months ended September 30, 2001 which were announced in the Company’s press release of October 17, 2001. Such charge was included as an unrealized loss in Accumulated other comprehensive loss, net of tax, in the preliminary Consolidated Balance Sheet as of September 30, 2001. The impairment charge was taken after facts concerning such securities became known to management after that date. There was no impact to the Company's book value as of September 30, 2001 as a result of the impairment charge.

RECLASSIFICATIONS

Certain amounts in the consolidated financial statements for 2000 have been reclassified to conform with the 2001 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)			2001		2000		2000

Commercial			$	238,812	$	246,877	$	232,105
Real estate:
	Construction			47,135		26,237		22,695
	Commercial			191,856		192,194		195,414
	Residential			628,129		693,068		713,892
Installment and consumer				131,554		114,562		107,699

		Gross loans		1,237,486		1,272,938		1,271,805
Less:
	Unearned discount			3		4		4
	Net deferred loan fees			5,834		5,272		5,186
	Allowance for credit losses			18,722		17,447		17,707

		Loans, net	$	1,212,927	$	1,250,215	$	1,248,908

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, 2001
Net interest income	$	27,086		$	22,961		$	1,937		$	(2	)	$	51,982
Intersegment 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			35,219			1,671,115

Nine months ended September 30, 2000
Net interest income	$	21,293		$	24,872		$	212		$	5		$	46,382
Intersegments net interest income (expense)		1,944			(7,893	)		5,949			—			—
Provision for credit losses		1,742			3,564			—			—			5,306
Other operating income (expense)		(7,753	)		(6,294	)		(2,012	)		(12,138	)		(28,197	)
Administrative and overhead expense allocation		(6,082	)		(3,318	)		(961	)		10,361			—
Income tax expense (benefit)		2,796			1,388			1,164			(662	)		4,686
Net income (loss)		4,864			2,415			2,024			(1,110	)		8,193
Total assets		833,572			441,535			368,515			44,558			1,688,180

NOTE D — Earnings Per Share Calculation


		Quarter ended September 30,

		2001								2000

(in thousands, except number of shares and per share data)		Income (Numerator)			Shares (Denominator)		Per Share Amount			Income (Numerator)		Shares (Denominator)⁽¹⁾		Per Share Amount

Basic:
	Net income (loss)	$	(676	)		3,507,082	$	(0.19	)	$	2,989		3,516,362	$	0.85
Effect of dilutive securities - Stock incentive plan options			—			—		—			—		705		—
Diluted:
	Net income (loss) and assumed conversions	$	(676	)		3,507,082	$	(0.19	)	$	2,989		3,517,067	$	0.85


		Nine months ended September 30,

		2001							2000

(in thousands, except number of shares and per share data)		Income (Numerator)		Shares (Denominator)		Per Share Amount⁽¹⁾			Income (Numerator)		Shares (Denominator )⁽¹⁾		Per Share Amount

Basic:
	Net income	$	5,265		3,506,718	$	1.50		$	8,193		3,542,755	$	2.31
Effect of dilutive securities - Stock incentive plan options			—		43,799		(0.02	)		—		500		—
Diluted:
	Net income and assumed conversions	$	5,265		3,550,517	$	1.48		$	8,193		3,543,255	$	2.31

⁽¹⁾

Average shares outstanding retroactively adjusted for the 317,629 common shares issued in connection with the 10% stock dividend distributed to shareholders of record on June 15, 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.

NET INCOME

Operating earnings (defined as consolidated net income excluding after-tax impairment on asset backed securities) for the quarter ended September 30, 2001, totaled $3.3 million, an increase of $306,000, or 10.2%, over the same quarter last year. Operating earnings for the nine months ended September 30, 2001, totaled $9.2 million, an increase of $1.0 million, or 12.7%, over the same period in 2000. Diluted operating earnings per share for the third quarter of 2001 was $0.91 as compared to $0.85 for the same period in 2000, an increase of $0.06, or 7.1%. For the nine months ended September 30, 2001, diluted operating earnings per share was $2.60, an increase of $0.29, or 12.6%, over the same period in 2000. On the same basis, the Company’s annualized return on average total assets for the nine months ended September 30, 2001 was 0.73% as compared to 0.66% for the same period last year. The Company’s annualized return on average stockholders’ equity was 9.66% for the nine months ended September 30, 2001, as compared to 9.36% for the same period last year. The increase in operating earnings for the quarter and nine months ended September 30, 2001, over the corresponding periods in 2000, 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.

For the quarter ended September 30, 2001, the Company had a consolidated net loss of $676,000, which compares to consolidated net income of $3.0 million for the same quarter last year. Consolidated net income for the nine months ended September 30, 2001, totaled $5.3 million, a decrease of $2.9 million, or 35.7%, over the same period in 2000. The decrease in consolidated net income for the quarter and nine months ended September 30, 2001 compared to the corresponding periods in 2000, was due primarily to the after-tax charge of $4.0 million related to the impairment on asset backed securities (see further discussion in Note A of Notes to Consolidated Financial Statements).

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, was $19.2 million for the quarter ended September 30, 2001, an increase of $3.5 million, or 22.0%, over the same period in 2000. The

increase in net interest income was primarily due to a $41.1 million, or 2.9%, decrease in interest-bearing liabilities and an 85 basis point increase in the net interest margin. For the quarter ended September 30, 2001, the Company’s net interest margin was 4.76%, as compared to 3.91% for the same period in 2000.

Net interest income, on a taxable equivalent basis, was $52.6 million for the nine months ended September 30, 2001, an increase of $5.6 million, or 11.9%, over the same period in 2000. The increase was primarily due to a $47.3 million, or 3.0%, increase in interest earning assets, partially offset by a $12.1 million, or 0.9%, increase in average interest-bearing liabilities. For the nine months ended September 30, 2001, the Company’s net interest margin was 4.36%, an increase of 35 basis points from the same period in 2000.

A comparison of net interest income for the quarter and nine months ended September 30, 2001 and 2000 is set forth below on a taxable equivalent basis:


			Quarter Ended September 30,																		Nine Months Ended September 30,

			2001									2000									2001									2000

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

ASSETS
Earning assets:
	Interest-bearing deposits in other banks		$	977		$	12			4.87	%	$	954		$	21			8.76	%	$	1,032		$	42			5.44	%	$	408		$	25			8.18	%
	Federal funds sold and securities purchased under agreement to resell			14,003			120			3.40			2,498			35			5.57			10,857			355			4.37			8,676			393			6.05
	Taxable investment and mortgage-backed securities			250,196			4,173			6.62			305,063			5,226			6.82			268,530			14,461			7.20			309,018			16,606			7.18
	Nontaxable investment securities			30,928			597			7.66			31,422			608			7.70			30,916			1,791			7.75			30,963			1,797			7.75
	Loans¹			1,304,396			27,202			8.27			1,261,723			28,716			9.05			1,303,705			82,920			8.50			1,218,631			80,159			8.79

		Total earning assets		1,600,500			32,104			7.96			1,601,660			34,606			8.60			1,615,040			99,569			8.24			1,567,696			98,980			8.43

Nonearning assets:
	Cash and due from banks			26,893									33,001									29,098									36,075
	Premises and equipment			18,453									18,532									18,439									18,152
	Other assets			51,887									45,852									50,364									49,205
	Less allowance for credit losses			(19,027	)								(18,952	)								(17,949	)								(18,606	)

		Total assets	$	1,678,706								$	1,680,093								$	1,694,992								$	1,652,522

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
	Savings deposits		$	425,816		$	2,192			2.04	%	$	367,647		$	2,595			2.81	%	$	403,228		$	7,152			2.37	%	$	367,281		$	7,391			2.69	%
	Time deposits			612,820			6,310			4.09			677,649			9,789			5.75			679,115			25,719			5.06			659,433			26,590			5.39
	Short-term borrowings			105,926			1,160			4.34			201,408			3,411			6.74			101,082			4,202			5.56			167,538			8,101			6.46
	Long-term debt			245,872			3,222			5.20			184,862			3,058			6.58			232,789			9,884			5.68			209,911			9,872			6.28

		Total interest-bearing deposits and liabilities		1,390,434			12,884			3.68			1,431,566			18,853			5.24			1,416,214			46,957			4.43			1,404,163			51,954			4.94

Noninterest-bearing liabilities:
	Demand deposits			133,817									113,309									126,823									113,467
	Other liabilities			24,176									17,499									24,123									18,018

		Total liabilities		1,548,427									1,562,374									1,567,160									1,535,648
Stockholders’ equity				130,279									117,719									127,832									116,874

		Total liabilities and stockholders’ equity	$	1,678,706								$	1,680,093								$	1,694,992								$	1,652.522

		Net interest income and margin on total earning assets					19,220			4.76	%					15,753			3.91	%					52,612			4.36	%					47,026			4.01	%

Taxable equivalent adjustment							(209	)								(221	)								(630	)								(644	)

		Net interest income				$	19,011								$	15,532								$	51,982								$	46,382

(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, 2001, December 31, 2000 and September 30, 2000 follows:


					September 30,			December 31,			September 30,
(dollars in thousands)					2001			2000			2000

Nonperforming assets:
		Nonperforming loans:
			Commercial		$	8,269		$	6,268		$	6,356
			Real estate:
				Commercial		2,502			3,030			2,446
				Residential		6,180			5,827			7,974

				Total real estate loans		8,682			8,857			10,420
			Consumer			—			—			30

				Total nonaccrual loans		16,951			15,125			16,806

	Other real estate owned					3,598			3,458			4,731

				Total nonperforming assets	$	20,549		$	18,583		$	21,537

Past due loans:
			Commercial		$	—		$	975		$	178
			Real estate			2,378			473			740
			Consumer			954			1,256			1,139

				Total past due loans (1)	$	3,332		$	2,704		$	2,057

Restructured:
			Commercial		$	4,760		$	4,153		$	4,161
			Real estate:
				Commercial		—			—			—
				Residential		9,428			11,730			11,699

				Total restructured loans (2)	$	14,188		$	15,883		$	15,860

Nonperforming assets to total loans and other real estate owned (end of period):
			Excluding 90 days past due accruing loans			1.58	%		1.42	%		1.69	%
			Including 90 days past due accruing loans			1.84	%		1.63	%		1.85	%
Nonperforming assets to total assets (end of period):
			Excluding 90 days past due accruing loans			1.23	%		1.08	%		1.28	%
			Including 90 days past due accruing loans			1.43	%		1.24	%		1.40	%

(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, 2001 totaled $17.0 million, an increase of $145,000, or 0.9%, as compared to September 30, 2000. The increase in nonperforming loans was primarily due to a $1.9 million increase in the commercial category, partially offset by a $1.8 million reduction in the residential real estate loan category.

The increase in nonperforming commercial loans at September 30, 2001 was primarily due to a $1.9 million loan to a building supplier that was placed on nonaccrual in the first quarter of 2001.

Other real estate owned was $3.6 million at September 30, 2001, a decrease of $1.1 million, or 23.9%, from September 30, 2000. The decrease in other real estate owned was consistent with the increase in real estate sales activity in Hawaii.

Restructured loans were $14.2 million at September 30, 2001, a decrease of $1.7 million, or 10.5%, from September 30, 2000. The decrease was primarily due to the reclassification of certain residential real estate loans to nonperforming loans.

At September 30, 2001, the Company was not aware of any significant potential problem loans (not otherwise classified as nonperforming, past due, or restructured in the above table) where possible credit problems of the borrower caused management to have serious concerns as to the ability of such borrower to comply with the present scheduled repayment terms. 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:

Nine months ended September 30,

(dollars in thousands)

2001

2000

Loans outstanding (end of period)⁽¹⁾

1,295,294

1,272,478

Average loans outstanding⁽¹⁾

1,303,705

1,218,631

Balance at beginning of period

17,447

17,942

Loans charged off:

Commercial

5,445

1,687

Real estate:

Commercial

—

855

Residential

1,618

2,459

Consumer

1,009

1,192

Total loans charged off

8,072

6,193

Recoveries on loans charged off:

Commercial

Real estate:

Commercial

—

Residential

334

344

Consumer

245

206

Total recoveries on loans previously charged off

676

652

Net charge-offs

(7,396

)

(5,541

)

Provision charged to expense

8,671

5,306

Balance at end of period

18,722

17,707

Net loans charged off to average loans

0.76 %

⁽²⁾

0.61%

⁽²⁾

Net loans charged off to allowance for credit losses

52.81 %

⁽²⁾

41.80%

⁽²⁾

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

1.45

1.39

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

Excluding 90 days past due accruing loans

1.10 x

1.05x

Including 90 days past due accruing loans

0.92 x

0.94x

(1)		Includes loans held for sale.




(2)		Annualized.

The provision for credit losses was $3.7 million for the third quarter of 2001, an increase of $2.1 million, or 139.3%, over the same quarter last year. For the nine months ended September 30, 2001, the provision for loan losses was $8.7 million, an increase of $3.4 million, or 63.4%, over the same period last year. Management has been taking proactive steps to increase the provision for credit losses in anticipation of a slowing Hawaii economy, which was further exacerbated by the September 11, 2001 terrorist attack.

The Allowance at September 30, 2001 was $18.7 million and represented 1.45% of total loans. The corresponding ratios at December 31, 2000 and September 30, 2000 were 1.34% and 1.39%, respectively.

Net charge-offs were $7.4 million for the first nine months of 2001, an increase of $1.9 million, or 33.5%, over the same period in 2000. The increase was primarily due to higher charge-offs in the commercial loan categories, which increased $3.8 million, partially offset by an $855,000 and $841,000 decrease in commercial and residential real estate loan charge-offs, respectively. The increase 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 1.10 times nonperforming loans (excluding 90 days past due accruing loans) at September 30, 2001 from 1.05 times at September 30, 2000 as a result of the increase in net charge-offs for the nine months ended September 30, 2001.

In management’s judgment, the Allowance was adequate to absorb potential losses currently inherent in the loan portfolio at September 30, 2001. However, changes in prevailing economic conditions (including the effect of the September 11, 2001 terrorist attack) 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, 2001, the Company had a total noninterest loss of $3.1 million, compared to total noninterest income of $2.7 million for the same period in 2000. For the nine months ended September 30, 2001, noninterest income was $3.2 million, a decrease of $3.7 million, or 53.8%, over the comparable period in 2000. The decrease was due to a $6.6 million impairment of asset backed securities discussed below.

Service charges on deposit accounts increased $249,000 and $683,000, or 34.6% and 33.2%, respectively, for the third quarter and nine months ended September 30, 2001 over the comparable periods in 2000. These increases resulted from a $69.0 million, or 6.1%, increase in the average balance of deposit accounts.

Other service charges and fees increased $190,000 and $561,000, or 19.6% and 18.8%, respectively, for the third quarter and nine months ended September 30, 2001 over the comparable periods in 2000. These increases were primarily due to higher ATM fee income recorded during the nine months ended September 30, 2001.

Net realized gains on sales of securities was $688,000 for the nine months ended September 30, 2001 compared to net realized losses of $421,000 in the same period in 2000. The net gains in 2001 were due to sales of $40.2 million of available-for-sale securities sold in the lower rate environment.

During the quarter ended September 30, 2001, the Company recorded an impairment on asset backed securities of $6.6 million as determined under EITF 99-20 (see Note A of Notes to Consolidated Financial Statements).

NONINTEREST EXPENSE

Noninterest expense totaled $13.4 million for the quarter ended September 30, 2001, an increase of $1.3 million, or 10.6%, from the comparable period in 2000. For the nine months ended September 30, 2001, noninterest expense was $38.6 million, an increase of $3.5 million, or 9.9%, from the comparable period in 2000. The efficiency ratio (exclusive of amortization of intangibles) improved from 65.0% for the nine months ended September 30, 2000 to 61.8% for the nine months ended September 30, 2001.

Salaries and employee benefits increased $37,000, or 0.6%, and $1.9 million, or 12.0%, for the third quarter and nine months ended September 30, 2001, respectively, from the comparable periods in 2000. The increases were primarily due to higher incentive-based compensation.

Net occupancy expense decreased $456,000, or 8.5%, for the nine months ended September 30, 2001 from the comparable period in 2000. The decrease was primarily due to decreases in lease rents for various branch locations due to renegotiated lease agreements and consolidation of branches.

Equipment expense increased $203,000, or 9.2%, for the first three quarters of 2001 from the same period in 2000. The lower equipment expense in the prior year was primarily due to a $300,000 refund of certain software lease payments received in the first quarter of 2000.

Other noninterest expense increased $1.2 million, or 30.6%, and $1.9 million, or 15.6%, for the third quarter and nine months ended September 30, 2001, respectively, from the comparable periods in 2000. The increase was due primarily to certain nonrecurring operational losses.

INCOME TAXES

The Company’s effective income tax rate (exclusive of the tax equivalent adjustment) for the first nine months of 2001 was 33.4% as compared to 36.4% for the same period in 2000. The decline in the Company's effective tax rate for 2001 was due primarily to the utilization of net operating losses.

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 used $12.5 million for the nine months ended September 30, 2001, which compares to $14.6 million provided by operating activities in the same period last year. The primary use of cash flows from operations in 2001 was the origination of $132.8 million of loans held for sale, which was partially offset by the sale of $104.0 million of loans held for sale.

During the nine months ended September 30, 2000, the Company originated $39.6 million of loans held for sale and sold $41.5 million of loans held for sale.

Investing activities provided cash flow of $65.1 million for the nine months ended September 30, 2001, compared to using $109.7 million during the same period last year. The primary sources of cash from investing activities for the nine months ended September 30, 2001 were the proceeds from the sale and maturities of securities of $40.9 million and $32.6 million, respectively, and the $23.7 million net decrease in loans. The primary use of cash for investing activities for the nine months ended September 30, 2000 was the net increase in loans of $132.3 million.

Financing activities used cash flow of $57.5 million for the nine months ended September 30, 2001, compared to providing $63.3 million during the same period last year. During the nine months ended September 30, 2001, the Company had a net decrease 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. The primary source of cash from financing activities for the nine months ended September 20, 2000 were net increases of $63.1 million and $38.8 million in deposits and short-term borrowings, respectively, partially offset by $53.5 million in principal payments on long-term debt.

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, 2001 and 2000) 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, 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	%
As of September 30, 2000
Tier 1 Capital to Risk-Weighted Assets:
	Consolidated	$	134,630		12.11	%	$	44,483		4.00	%		N/A
	Bank		132,634		11.47			46,260		4.00		$	69,390		6.00	%
Total Capital to Risk-Weighted Assets:
	Consolidated	$	148,608		13.36	%	$	88,967		8.00	%		N/A
	Bank		147,131		12.72			92,521		8.00		$	115,651		10.00	%
Tier 1 Capital to Average Assets:
	Consolidated	$	134,630		8.01	%	$	67,204		4.00	%		N/A
	Bank		132,634		7.97			66,536		4.00		$	83,170		5.00	%

RECENT DEVELOPMENTS

The long-term effects of the tragedy of September 11, and the events following it, are uncertain at this time. Since September 11, the tourism industry, which is the largest component of the business economy in Hawaii, has been significantly impacted and hotel occupancies throughout Hawaii are substantially below historical levels. Domestic and international airline flights to Hawaii have been cut, resulting in a 25% reduction in the number of October 2001 visitor arrivals (compared to the same period in 2000). It is anticipated that this downturn will adversely impact the businesses in that sector and those that do business with them. Because substantially all of the Bank’s loans are to borrowers in Hawaii, a downturn in the Hawaii economy could adversely impact its borrowers and the credit quality of its loan portfolio, resulting in increased levels of loss provisioning. It is unclear what the duration or magnitude of these impacts will be at this time.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company disclosed both quantitative and qualitative analyses of market risks in its 2000 Form 10-K. No significant changes have occurred during the nine months ended September 30, 2001.

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 third quarter of 2001.

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 13, 2001		By /s/ Dean K. Hirata
		Dean K. Hirata Senior Vice President and Chief Financial Officer (principal financial officer)

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