UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2004


o		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 þ				No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


		Yes þ				No o

The number of shares outstanding of each of the registrant’s classes of common stock as of July 31, 2004 was:


Class		Outstanding

Common Stock, $1.00 Par Value		4,437,694 shares

TABLE OF CONTENTS


	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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


	June 30,			December 31,			June 30,
(in thousands)	2004			2003			2003
Assets
Cash and due from banks	$	53,794		$	46,566		$	63,456
Interest-bearing deposits in other banks		1,118			1,343			1,285
Federal funds sold		6,170			400			415
Investment securities:
Held-to-maturity		101,154			134,163			167,459
Available-for-sale		235,224			302,646			189,043
Restricted		32,205			31,576			30,778
Loans held for sale		8,001			56,039			118,916
Loans, net		1,371,256			1,257,582			1,056,109
Premises and equipment		16,341			16,867			16,203
Other real estate owned		84			173			804
Accrued interest receivable and other assets		58,144			56,306			54,361

Total assets		1,883,491		$	1,903,661			1,698,829

Liabilities and stockholders’ equity
Deposits:
Noninterest-bearing	$	245,260		$	217,148		$	212,649
Interest-bearing		1,126,532			988,577			968,919

Total Deposits		1,371,792			1,205,725			1,181,568

Short-term borrowings		55,400			305,400			31,900
Accrued expenses and other liabilities		25,351			26,217			23,226
Long-term debt		244,380			194,389			299,398
Minority interest in consolidated subsidiary		2,720			2,720			2,720

Total liabilities		1,699,643			1,734,451			1,538,812

Stockholders’ equity:
Common stock		4,434			4,337			4,310
Additional paid-in capital		105,755			103,050			102,326
Retained earnings		75,007			56,542			47,241
Unreleased shares to employee stock ownership plan		(1,245	)		(1,323	)		(1,406	)
Accumulated other comprehensive income, net of tax		(103	)		6,604			7,546

Total stockholders’ equity		183,848			169,210			160,017

Total liabilities and stockholders’ equity	$	1,883,491		$	1,903,661		$	1,698,829

See accompanying notes to the consolidated financial statements.

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


	Quarter ended June 30,					Six months ended June 30,
(in thousands, except per share data)	2004		2003			2004		2003
Interest income:
Interest and fees on loans	$	22,002	$	21,277		$	44,315	$	41,961
Interest and dividends on investment securities:
Taxable interest income		3,325		3,199			7,109		6,384
Nontaxable interest income		359		384			745		774
Dividends		318		398			632		894
Other interest income		6		41			12		219

Total interest income		26,010		25,299			52,813		50,232

Interest expense:
Deposits		2,876		2,919			5,587		6,402
Short-term borrowings		293		78			835		121
Long-term debt		2,370		3,088			4,663		6,193

Total interest expense		5,539		6,085			11,085		12,716

Net interest income		20,471		19,214			41,728		37,516
Provision for credit losses		500		550			1,000		4,880

Net interest income after provision for credit losses		19,971		18,664			40,728		32,636

Noninterest income:
Service charges on deposit accounts		1,160		1,131			2,252		2,242
Other service charges and fees		1,861		1,786			3,495		3,479
Net realized gains (losses) on sales on securities		2,822		(45	)		5,175		207
Net gains on sales of loans		585		849			1,651		1,731
Item processing fee		494		501			973		926
Other		7,403		2,242			8,224		3,390

Total noninterest income		14,325		6,464			21,770		11,975

Noninterest expense:
Salaries and employee benefits		7,718		7,389			15,693		14,563
Net occupancy expense		1,809		1,658			3,532		3,287
Equipment expense		469		584			1,042		1,193
Merger proposal expenses		1,933		4,222			2,281		4,222
Other		4,414		4,864			8,337		9,094

Total noninterest expense		16,343		18,717			30,885		32,359

Income before income taxes		17,953		6,411			31,613		12,252
Income tax expense		6,132		2,051			9,990		3,920

Net income	$	11,821	$	4,360		$	21,623	$	8,332

Per share data:
Basic	$	2.71	$	1.02		$	4.98	$	1.95
Diluted	$	2.63	$	0.99		$	4.84	$	1.91

See accompanying notes to the consolidated financial statements.

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


	Six months ended June 30,
(in thousands)	2004			2003
Cash flows from operating activities:
Net income	$	21,623		$	8,332
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses		1,000			4,880
Net realized gains on sale of loans, investment and mortgage-backed securities		(6,826	)		(1,938	)
Depreciation and amortization		2,511			2,443
Decrease in accrued interest receivable		604			445
Increase (decrease) in accrued interest payable		54			(293	)
Loans originated for sale		(112,410	)		(231,992	)
Sale of loans held for sale		112,800			83,552
Increase in other assets		(2,442	)		(2,398	)
Increase in income taxes payable		5,458			925
Decrease in other liabilities		(1,948	)		(5,344	)
Other		(3,356	)		(1,224	)

Net cash provided by (used in) operating activities		17,068			(142,612	)

Cash flows from investing activities:
Net decrease (increase) in deposits in other banks		225			(71	)
Net decrease (increase) in federal funds sold		(5,770	)		20,110
Purchase of held-to-maturity securities		—			(153,718	)
Proceeds from maturities of held-to-maturity investment		32,064			97,400
securities Purchase of available-for-sale securities		—			(959	)
Proceeds from sales of available-for-sale securities		45,572			133,718
Proceeds from maturities of available-for-sale securities		51,571			36,934
Net increase in loans		(101,804	)		(23,739	)
Capital expenditures		(600	)		(926	)
Proceeds from sales of foreclosed assets		3,162			2,741

Net cash provided by investing activities		24,420			111,490

Cash flows from financing activities:
Net increase (decrease) in deposits		166,067			18,341
Net increase (decrease) in short-term borrowings		(250,000	)		21,500
Proceeds from long-term debt		70,000			—
Principal payments on long-term debt		(20,008	)		(20,009	)
Cash dividends paid		(3,158	)		(901	)
Options exercised		2,669			607
Cash in lieu payments on stock dividend		—			(97	)
Stock repurchase		—			(12	)
Unreleased ESOP shares		170			80

Net cash provided by (used in) financing activities		(34,260	)		19,509

Increase (decrease) in cash and due from banks		7,228			(11,613	)
Cash and due from banks at beginning of period		46,566			75,069

Cash and due from banks at end of period	$	53,794		$	63,456

Supplemental schedule of non-cash investing activities:
Interest paid on deposits and other borrowings	$	11,030		$	13,008
Income taxes paid	$	4,532		$	4,600
Securitization of mortgage loans into mortgage-backed securities classified as available-for-sale	$	36,124		$	129,166
Reclassification of loans from available-for-sale to held-to-maturity	$	13,176		$	—
Loan converted into other real estate owned	$	308		$	960

See accompanying notes to the consolidated financial statements.

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


								Unreleased
								Shares to
								Employee			Accumulated
			Additional					Stock			Other
	Common		Paid-In		Retained			Ownership			Comprehensive
(in thousands, except per share data)	Stock		Capital		Earnings			Plan			Income			Total
Balance at January 1, 2004		4,337	$	103,050	$	56,542		$	(1,323	)	$	6,604		$	169,210
Comprehensive income
Net income		—		—		21,623			—			—			21,623
Other comprehensive income, net of tax Unrealized losses on securities, net of reclassification adjustment		—		—		—			—			(6,707	)		(6,707	)
Comprehensive income subtotal		—		—		21,623			—			(6,707	)		14,916

Cash dividends ($0.72 per share)		—		—		(3,158	)		—			—			(3,158	)

Options exercised		97		2,572		—			—			—			2,669
Directors’ compensation		—		41		—			—			—			41
ESOP shares		—		92		—			78			—			170

Balance at June 30, 2004		4,434		105,755		75,007			(1,245	)		(103	)		183,848


									Unreleased
									Shares to
									Employee			Accumulated
			Additional						Stock			Other
	Common		Paid-In			Retained			Ownership			Comprehensive
(in thousands, except per share data)	Stock		Capital			Earnings			Plan			Income		Total
Balance at January 1, 2003		3,898	$	78,311		$	63,679		$	(1,486	)	$	6,607	$	151,009
Comprehensive income
Net income		—		—			8,332			—			—		8,332
Other comprehensive income, net of tax Unrealized gains on securities, net of reclassification adjustment		—		—			—			—			939		939

Comprehensive income subtotal		—		—			8,332			—			939		9,271

Cash dividends ($0.23 per share)		—		—			(901	)		—			—		(901	)
Options exercised		21		586			—			—			—		607
Stock dividend		391		23,381			(23,869	)		—			—		(97	)
Repurchased, cancelled and retired shares		—		(12	)		—			—			—		(12	)
ESOP shares		—		60			—			80			—		140

Balance at June 30, 2003		4,310	$	102,326		$	47,241		$	(1,406	)	$	7,546	$	160,017

See accompanying notes to the consolidated financial statements.

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

NOTE A — Summary of Significant Accounting Policies

CONSOLIDATION

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2003.

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 2003 have been reclassified to conform to the 2004 presentation. Such reclassifications had no effect on the consolidated net income as previously reported.

NEW ACCOUNTING PRINCIPLES

Financial Accounting Standard Board (“FASB”) Interpretation No. 46. In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities (VIEs) as defined. The Interpretation applies immediately to variable interests in VIEs created or obtained after January 31, 2003. For variable interests in VIEs that an enterprise acquired before February 1, 2003, the Interpretation is applicable in the first fiscal year or interim period beginning after June 15, 2003. In December 2003, the FASB revised Interpretation No. 46, which replaced its original interpretation issued in January 2003, and among other things, revised certain effective dates. At June 30, 2004, the Company had no variable interests in a variable interest entity requiring consolidation or disclosure in accordance with the Interpretation.

Emerging Issues Task Force (“EITF”) 03-01. In March 2004, the FASB ratified EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF Issue No. 03-01 requires the use of fair values calculated for cost method investments in connection with SFAS No. 107, “Disclosures about Fair Value Instruments,” or other activities, to be used to determine whether an investment is impaired. The impairment would be applied prospectively to all current and future investments, within the scope of EITF Issue No. 03-01, effective in reporting periods beginning after June 15, 2004. The Company’s adoption of EITF Issue No. 03-01 (effective July 1, 2004) is not expected to have a significant effect on the Company’s financial condition and results of operations. EITF Issue No. 03-01 further specifies disclosures an investor should provide about unrealized losses that have not been recognized as other-than-temporary impairments for cost method investments. These disclosure requirements are effective for annual periods for fiscal years ending after June 15, 2004.

EITF Issue No. 03-16. In March 2004, the EITF reached a consensus regarding Issue No. 03-16, “Accounting for Investments in Limited Liability Companies.” EITF 03-16 requires investments in limited liability companies that have separate ownership accounts for each investor to be accounted for similar to a limited partnership investment under Statement of

Position No. 78-9, “Accounting for Investments in Real Estate Ventures.” EITF 03-16 is effective for the first period beginning after June 15, 2004, and will be applied as a change in accounting principle with a cumulative effect reflected in the income statement. EITF 03-16 will not have a material affect on the Company’s financial condition and results of operations.

NOTE B — Loans

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


	June 30,		December 31,		June 30,
(in thousands)	2004		2003		2003
Commercial and financial	$	257,709	$	245,875	$	228,420
Real estate:
Construction		147,283		98,237		69,888
Commercial		492,305		403,946		262,583
Residential		341,829		367,685		374,140
Installment and consumer		171,556		180,064		159,382

Gross loans		1,410,682		1,295,807		1,094,413
Less:
Unearned discount		2,687		2,453		1,938
Net deferred loan fees		8,177		7,282		4,942
Allowance for credit losses		28,562		28,490		31,424

Loans, net	$	1,371,256	$	1,257,582	$	1,056,109

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 as described in Note A.

The Company’s business segments are defined as Retail Banking, Wholesale Banking, Treasury and All Other. Retail Banking is made up of retail deposits, mortgage banking and consumer lending activities. Wholesale Banking consists of wholesale deposits, commercial real estate lending, corporate lending and the specialized lending functions of the Bank. The Treasury segment is responsible for managing the Company’s investment securities portfolio and borrowing. The All Other segment consists of the administrative support of the Bank, transactions of the parent company, CB Bancshares, Inc., and subsidiaries of the Company and the Bank.

Retail banking net interest income is made up of interest income from revolving real estate, residential real estate and consumer loans, partially offset by the interest expense on retail deposits. Wholesale banking net interest income is made up of interest income from commercial, real estate construction, and commercial real estate loans, partially offset by the interest expense on wholesale deposits. Treasury net interest income is derived from the interest income on investment securities the Bank has in its possession, partially offset by the interest expense on short- and long-term borrowings.

Intersegment net interest income is allocated based on the net funding needs of each segment and applying an interest credit or charge based on an internal cost of capital.

Other operating income (expense) is the noninterest income and expense designated to Retail Banking, Wholesale Banking, Treasury, and All Other.

Administrative overhead allocates the noninterest income/(expense) from the All Other non-banking function segment to the other three segments, Retail Banking, Wholesale Banking and Treasury.

Assets are composed of cash, investments, loans, and fixed and other assets. Loan balances and any corresponding allowance for credit losses are allocated based on loan product types. Fixed assets are allocated by location and function within the Company.

The Company continues to enhance its segment reporting process methodologies. These methodologies assign certain balance sheet and income statement items to the responsible operating segment. This process is dynamic and, unlike financial accounting, there is no comprehensive, authoritative guidance for management accounting equivalent to generally accepted accounting principles. Intersegment income and expense are valued at prices comparable to those for unaffiliated companies.

(in thousands)

Retail

Wholesale

Treasury

All Other

Total

Six months ended June 30, 2004

Net interest income

15,109

23,646

3,001

(28

)

41,728

Intersegment net interest income (expense)

447

(3,223

)

2,776

—

Provision for credit losses

214

786

—

1,000

Other operating expense

(2,759

)

(4,661

)

4,473

(6,168

)

(9,115

)

Administrative and overhead

expense allocation

(844

)

(823

)

(92

)

1,759

Income tax expense (benefit)

3,656

4,408

3,164

(1,238

)

9,990

Net income (loss)

8,083

9,745

6,994

(3,199

)

21,623

Total assets

549,674

843,932

432,356

57,529

1,883,491


(in thousands)	Retail			Wholesale			Treasury			All Other			Total
Six months ended June 30, 2003
Net interest income	$	19,298		$	16,294		$	1,956		$	(32	)	$	37,516
Intersegment net interest income (expense)		236			(1,216	)		980			—			—
Provision for credit losses		532			4,348			—			—			4,880
Other operating expense		(2,533	)		(6,130	)		(989	)		(10,732	)		(20,384	)
Administrative and overhead expense allocation		(2,609	)		(2,062	)		(284	)		4,955			—
Income tax expense (benefit)		4,479			820			537			(1,916	)		3,920
Net income (loss)		9,381			1,718			1,126			(3,893	)		8,332
Total assets		675,475			511,969			455,640			55,745			1,698,829

NOTE D — Earnings Per Share Calculation

Quarter ended June 30,

2004

2003

Per

(in thousands, except number of shares

Income

Shares

Share

Income

Shares

Share

and per share data)

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount

Basic:

Net income

11,821

4,367,699

2.71

4,360

4,268,277

1.02

Effect of dilutive securities -

Stock incentive plan options

—

125,141

0.08

—

113,883

0.03

Diluted:

Net income and assumed conversions

11,821

4,492,840

2.63

4,360

4,382,160

0.99

Six months ended June 30,

2004

2003

Per

(in thousands, except number of shares

Income

Shares

Share

Income

Shares

Share

and per share data)

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount

Basic:

Net income

21,623

4,339,164

4.98

8,332

4,260,131

1.95

Effect of dilutive securities -

Stock incentive plan options

—

126,731

0.14

—

105,883

0.04

Diluted:

Net income and assumed conversions

21,623

4,465,895

4.84

8,332

4,366,014

1.91

Earnings per share calculations have been retroactively restated to reflect the impact of the 10% stock dividend issued in June 2003.

NOTE E — Stock-Based Compensation

The Company has elected to apply the provisions of Accounting Principles Board No. 25 and provide the pro forma disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148.

The following table presents the pro forma effect on net income and earnings per share if the Company valued its stock based compensation under the fair value of accounting prescribed by SFAS No. 148:


	Six months ended
	June 30,
(in thousands, except per share data)	2004			2003
Net income:
As reported	$	21,623		$	8,332
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(257	)		(115	)

Proforma	$	21,366		$	8,217

Earnings per share:
Basic — as reported	$	4.98		$	1.95
Basic — pro forma	$	4.92		$	1.93
Diluted — as reported	$	4.84		$	1.91
Diluted — pro forma	$	4.78		$	1.88

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 contains 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. The merger proposal and costs related thereto could also have a material effect on future operating results — see further discussion in “Merger Proposal.” 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 on-going basis, the Company evaluates its estimates, including those related to its investments, loans and allowance for loan 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 used in the preparation of its consolidated financial statements require significant judgments and estimates.

Allowance for Credit Losses. The Company’s allowance for credit losses (the “Allowance”) represents management’s estimate of probable losses inherent in the loan portfolio. The Allowance 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 economic conditions that may impact the 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 consists of allocated and unallocated allowances. The allocated allowance relates to specific allowances for individual loans, pooled graded loans, and homogeneous loans (consumer loans and residential mortgage loans). The Company has established and adopted a loan grading system in which loans are segregated by risk. Certain graded commercial and commercial real estate loans are analyzed on an individual basis based on performance and collateral. The allocated allowance also includes a percentage factor for pooled graded and homogenous pools of loans taking into account the Bank’s historical losses as well as the present condition, expected performance of each pool and risks inherent in loan concentrations in certain industries or categories.

To mitigate imprecision in the estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated allowance is more judgmental and takes into consideration the risks inherent in the loan portfolio, estimation errors, and economic trends or uncertainties that are not necessarily captured in determining allocated allowances.

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 impairment charges. 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 the collateralized loan and bond obligations 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. As of June 30, 2004, approximately $20.5 million of these investments were carried on the books of the Company.

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 subjective evaluation and assessment 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 valuation allowance 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 valuation allowance would be charged to income in the period such determination was made.

NET INCOME

Consolidated net income for the quarter ended June 30, 2004, totaled $11.8 million, an increase of $7.5 million, or 171.1%, over the same quarter last year. Consolidated net income for the six months ended June 30, 2004, totaled $21.6 million, an increase of $13.3 million, or 159.5%, over the same period in 2003. Diluted earnings per share for the second quarter of 2004 was $2.63 as compared to $0.99 for the same period in 2003, an increase of $1.64, or 165.7%. For the six months ended June 30, 2004, diluted earnings per share was $4.84, an increase of $2.93, or 153.4%, over the same period in 2003. The increase in consolidated net income for the quarter ended June 30, 2004, over the corresponding period in 2003, was primarily due to an increase in net interest income, gains on the sale of securities, other income and a decrease in merger proposal expenses. The increase in consolidated net income for the six months ended June 30, 2004, over the corresponding period in 2003, was primarily due to an increase in net interest income, gains on the sale of securities, other income and a decrease in the provision for credit losses and merger proposal expenses.

The Company’s annualized return on average total assets for the six months ended June 30, 2004 was 2.33% as compared to 1.01% for the same period last year. The Company’s annualized return on average stockholders’ equity was 24.57% for the six months ended June 30, 2004, as compared to 10.83% for the same period last year.

Hawaii’s economy for the first half of 2004 showed improvement. During this time, there was some slowing in the recent growth in the construction industry due to a strike by concrete workers. For the first five months of 2004, total visitor arrivals were up 17.0% compared with the same period in 2003, with domestic arrivals reaching a new record for the month of May. Residential building permits issued increased 59.7% for the first five months of 2004 compared to

the same period in 2003. Residential home sales on Oahu for the first five months of 2004 totaled $1.7 billion, an increase of 10.2% over the same period last year. The median sales price for single-family homes and condominiums increased over the same period last year by 21.9% and 17.5%, respectively. The state’s seasonally adjusted unemployment rate was 3.1% and 4.4% in June 2004 and June 2003, respectively.

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, was $20.7 million for the quarter ended June 30, 2004, an increase of $1.2 million, or 6.4%, over the same period in 2003. The increase for the quarter ended June 30, 2004 was due to a $188.9 million increase in the average balance of interest earning assets and a $134.9 million rise in the average balance of interest-bearing liabilities, partially offset by a 22 basis point decrease in the net interest margin (to 4.66%).

Net interest income, on a taxable equivalent basis, was $42.1 million for the six months ended June 30, 2004, an increase of $4.2 million, or 11.1%, over the same period in 2003. The increase for the six months ended June 30, 2004 was due to a $193.0 million increase in the average balance of interest-earning assets and a $144.7 million rise in the average balance of interest-bearing liabilities, partially offset by a 6 basis point decrease in the net interest margin (to 4.76%).

A comparison of net interest income for the quarter and six months ended June 30, 2004 and 2003 is set forth below on a taxable equivalent basis:

Quarter Ended June 30,

Six Months Ended June 30,

2004

2003

2004

2003

Interest

Average

Income/

Yield/

Average

Income/

Yield/

Average

Income/

Yield/

Average

Income/

Yield/

(in thousands of dollars)

Balance

Expense

Rate

Balance

Expense

Rate

Balance

Expense

Rate

Balance

Expense

Rate

ASSETS

Earning assets:

Interest-bearing deposits in Other banks

1,233

0.98

7,144

1.85

1,180

1.19

8,637

1.87

Federal funds sold and Securities purchased under Agreement to resell

1,099

1.10

2,664

1.20

1,033

0.97

22,493

139

1.25

Taxable investment Securities

363,907

3,643

4.03

377,218

3,597

3.82

386,207

7,741

4.03

358,796

7,278

4.09

Nontaxable investment securities

30,703

552

7.23

30,643

591

7.74

30,695

1,146

7.51

30,766

1,191

7.81

Loans ⁽¹⁾

1,387,038

22,002

6.38

1,177,394

21,277

7.25

1,359,524

44,315

6.56

1,164,927

41,961

7.26

Total earning assets

1,783,980

26,203

5.91

1,595,063

25,506

6.41

1,778,639

53,214

6.02

1,585,619

50,649

6.44

Nonearning assets:

Cash and due from banks

45,417

42,497

48,230

42,526

Premises and equipment-net

16,605

16,385

16,739

16,486

Other assets

55,432

57,497

54,419

54,603

Less allowance for loan losses

(28,719

)

(31,184

)

(28,798

)

(30,247

)

Total assets

1,872,715

1,680,258

1,869,229

1,668,987

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities:

Savings deposits

620,056

855

0.55

535,927

765

0.57

592,478

1,495

0.51

530,012

1,695

0.64

Time deposits

481,115

2,021

1.69

439,268

2,154

1.97

480,997

4,092

1.71

446,118

4,707

2.13

Short-term borrowings

100,772

293

1.17

22,961

1.36

144,456

835

1.16

16,351

121

1.49

Long-term debt

246,982

2,370

3.86

315,735

3,088

3.92

238,138

4,663

3.94

318,852

6,193

3.92

Total interest-bearing

Deposits and liabilities

1,448,925

5,539

1.54

1,313,891

6,085

1.86

1,456,069

11,085

1.53

1,311,333

12,716

1.96

Noninterest-bearing liabilities:

Demand deposits

220,051

183,951

213,094

177,794

Other liabilities

23,313

24,843

23,062

24,676

Total liabilities

1,692,289

1,522,685

1,692,225

1,513,803

Stockholders’ equity

180,426

157,573

177,004

155,184

Total liabilities and Stockholders’ equity

1,872,715

1,680,258

1,869,229

1,668,987

Net interest income and margin on total earning assets

20,664

4.66

19,421

4.88

42,129

4.76

37,933

4.82

Taxable equivalent adjustment

(193

)

(207

)

(401

)

(417

)

Net interest income

20,471

19,214

41,728

37,516

⁽¹⁾

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

NONPERFORMING ASSETS

A summary of nonperforming assets at June 30, 2004, December 31, 2003 and June 30, 2003 follows:


	June 30,			December 31,			June 30,
(in thousands of dollars)	2004			2003			2003
Nonperforming assets:
Nonperforming loans:
Commercial	$	2,230		$	3,264		$	3,212
Real estate:
Commercial		330			708			3,202
Residential		1,610			1,756			3,734

Total real estate loans		1,940			2,464			6,936

Consumer		—			—			181

Total nonperforming loans		4,170			5,728			10,329
Other real estate owned		84			173			804

Total nonperforming assets	$	4,254		$	5,901		$	11,133

Past due loans:
Real estate	$	—		$	213		$	—
Consumer		546			728			510

Total past due loans ⁽¹⁾	$	546		$	941		$	510

Total restructured real estate-residential loans ⁽²⁾	$	—		$	1,413		$	2,644

Nonperforming assets to total loans and other real estate owned (end of period):
Excluding 90 days past due accruing loans		0.30	%		0.44	%		0.92	%
Including 90 days past due accruing loans		0.34	%		0.51	%		0.97	%
Nonperforming assets to total assets (end of period):
Excluding 90 days past due accruing loans		0.23	%		0.31	%		0.66	%
Including 90 days past due accruing loans		0.25	%		0.36	%		0.69	%

⁽¹⁾

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

⁽²⁾

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

Nonperforming loans at June 30, 2004 totaled $4.2 million, a decrease of $6.2 million, or 59.6%, as compared to June 30, 2003. Other real estate owned was $84,000 at June 30, 2004, a decrease of $720,000, or 89.6%, from June 30, 2003. The decrease in nonperforming loans and other real estate owned reflects management’s continuing efforts to improve asset quality and the improvement in the Hawaii real estate market and economic environment.

There were no restructured loans at June 30, 2004, compared to $2.6 million at June 30, 2003.

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

PROVISION AND ALLOWANCE FOR CREDIT LOSSES

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

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


	Six months ended June 30,
(in thousands of dollars)	2004			2003
Loans outstanding (end of period) ⁽¹⁾	$	1,407,819		$	1,206,449

Average loans outstanding ⁽¹⁾	$	1,359,524		$	1,164,927

Balance at beginning of period	$	28,490		$	27,123
Loans charged off:
Commercial		406			1,253
Real estate:
Commercial		—			473
Residential		7			163
Consumer		2,789			2,480

Total loans charged off		3,202			4,369

Recoveries on loans charged off:
Commercial		657			1,766
Real estate:
Commercial		360			347
Residential		184			567
Consumer		1,073			1,110

Total recoveries on loans previously charged off		2,274			3,790

Net charge-offs		(928	)		(579	)

Provision charged to expense		1,000			4,880

Balance at end of period	$	28,562		$	31,424

Net loans charged off to average loans		0.14%	⁽²⁾		0.10	% ⁽²⁾
Net loans charged off to allowance for credit losses		6.53%	⁽²⁾		3.72	% ⁽²⁾
Allowance for credit losses to total loans (end of period)		2.03	%		2.60	%
Allowance for credit losses to nonperforming loans (end of period):
Excluding 90 days past due accruing loans		6.85x			3.04x
Including 90 days past due accruing loans		6.06x			2.90x

		⁽¹⁾ Includes loans held for sale.

		⁽²⁾ Annualized.

The provision for credit losses was $500,000 and $1.0 million for the second quarter and six months ended June 30, 2004, respectively, a decrease of $50,000, or 9.1%, and $3.9 million, or 79.5%, respectively, compared to the same periods in 2003. The Company’s lower provision for the six months ended June 30, 2004, as compared to the same period in 2003, reflects the improvement in asset quality (nonperforming assets declined to $4.3 million at June 30, 2004 from $11.1 million at June 30, 2003).

The Allowance at June 30, 2004 was $28.6 million and represented 2.03% of total loans. The corresponding ratios at December 31, 2003 and June 30, 2003 were 2.12% and 2.60%, respectively.

The Allowance increased to 6.85 times nonperforming loans (excluding 90 days past due accruing loans) at June 30, 2004 from 3.04 times at June 30, 2003 as a result of the decrease in nonperforming loans.

In management’s judgment, the Allowance was adequate to absorb potential losses currently inherent in the loan portfolio at June 30, 2004. 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 was $14.3 million and $21.8 million for the second quarter and six months ended June 30, 2004, respectively, an increase of $7.9 million, or 121.6%, and $9.8 million, or 81.8%, respectively, over the same periods in 2003.

The increase for the second quarter ended June 30, 2004 was due primarily to: 1) a $2.9 million increase in net realized gains on the sale of securities ($2.5 million that resulted from the early pay-off of asset-backed securities); 2) litigation settlement of $4.0 million; and 3) a $2.7 million gain on sale of other real estate owned.

NONINTEREST EXPENSE

Noninterest expense totaled $16.3 million and $30.9 million for the second quarter and six months ended June 30, 2004, respectively, a decrease of $2.4 million, or 12.7%, and $1.5 million, or 4.6%, respectively, compared to the same periods in 2003. The decrease for second quarter and six months ended June 30, 2004 was primarily due to a reduction in merger proposal expenses (costs include attorney, investment bankers and advertising expenses — see discussion on “Merger Proposal.”), which decreased by $2.3 million and $1.9 million, respectively.

INCOME TAXES

The Company’s effective income tax rate for the first six months of 2004 was 31.6% as compared to 32.0% for the same period in 2003, and is below the statutory rate primarily due to utilization of state investment 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 $17.1 million in the six months ended June 30, 2004, compared to using $142.6 million in the same period during 2003. The primary source of cash flow from operations was proceeds of $112.8 million from the sale of loans held for sale in the six months ended June 30, 2004, as compared to $83.6 million during the same period in 2003. This was offset by funding loans originated for sale, which totaled $112.4 million and $232.0 million in the six months ended June 30, 2004 and 2003, respectively.

The Company’s most liquid assets are cash, interest-bearing deposits, Federal funds sold, investment securities available for sale and loans held for sale. The levels of these assets are dependent on the Company’s operating, financing, lending and investing activities during any given period. At June 30, 2004, cash, interest bearing deposits, Federal funds sold, available for sale investment and mortgage/asset-backed securities and loans held for sale totaled $304.3 million, a decrease of 18.4% from $373.1 million at June 30, 2003.

Investing activities provided cash flow of $24.4 million in the six months ended June 30, 2004, compared to $111.5 million during the same period in 2003. The primary sources of cash from investing activities in the six months ended June 30, 2004 were proceeds from sales and maturities of available-for-sale securities of $97.1 million, which compares to $170.6 million during the same period in 2003.

Financing activities used cash of $34.3 million in the six months ended June 30, 2004, compared to providing $19.5 million during the same period in 2003. The primary use of cash flows from financing activities during the six months ended June 30, 2004 were the net decrease in short-term borrowings of $250.0 million, which compares to a $21.5 million increase during the same period in 2003. The reduction in short-term borrowings was funded primarily by the $166.1 million increase in deposits.

At June 30, 2004, as compared to June 30, 2003, the Company had $1.9 billion in assets, up 10.9%; $1.4 billion in loans, up 16.7%; and $1.4 billion in deposits, up 16.1%.

The Company and the Bank are subject to capital standards promulgated by the Federal banking agencies and the Hawaii Division of Financial Institutions. Quantitative measures established by regulation to ensure capital adequacy required the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table at June 30, 2004 and 2003) of Tier 1 and Total capital to risk-weighted assets, and of Tier 1 capital to average assets.

REGULATORY CAPITAL

To Be Well-

Capitalized

Under Prompt

For Capital

Corrective Action

Actual

Adequacy Purposes

Provisions

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of June 30, 2004

Tier 1 capital (to risk-weighted assets):

Consolidated

186,671

11.50

64,933

4.00

N/A

Bank

175,081

10.80

64,824

4.00

97,236

6.00

Total capital (to risk weighted assets):

Consolidated

207,096

12.76

129,867

8.00

N/A

Bank

195,472

12.06

129,647

8.00

162,059

10.00

Tier 1 capital (to average assets):

Consolidated

186,671

9.97

74,909

4.00

N/A

Bank

175,081

9.37

74,756

4.00

93,445

5.00


											To Be Well-
											Capitalized
											Under Prompt
						For Capital					Corrective Action
	Actual						Adequacy Purposes					Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2003
Tier 1 capital (to risk-weighted assets):
Consolidated	$	155,191		12.24	%	$	50,717		4.00	%		N/A
Bank		148,761		11.75			50,630		4.00		$	75,945		6.00	%
Total capital (to risk weighted assets):
Consolidated	$	171,280		13.51	%	$	101,434		8.00	%		N/A
Bank		164,823		13.02			101,259		8.00		$	126,574		10.00	%
Tier 1 capital (to average assets):
Consolidated	$	155,191		9.24	%	$	67,210		4.00	%		N/A
Bank		148,761		8.90			66,884		4.00		$	83,604		5.00	%

MERGER PROPOSAL

On April 23, 2004, the Parent Company announced that it had entered into a definitive merger agreement, pursuant to which it would merge with Central Pacific Financial Corp. (“CPF”). CPF has assets in excess of $2.4 billion (at June 30, 2004), and is a bank holding company headquartered in Honolulu, Hawaii. The merger, which is subject to regulatory and shareholder approval, is expected to be completed in the third quarter of 2004.

A special meeting of the shareholders of the Parent Company is scheduled to be held on September 13, 2004 to vote on the approval of the merger agreement. A special meeting of the shareholders of CPF is also scheduled to be held on September 13, 2004 to vote on, among other things, the approval of the merger agreement.

Under the terms of the merger agreement, CPF and the Parent Company have dismissed with prejudice all lawsuits filed by one party against the other related to the merger since May 2003.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company disclosed both quantitative and qualitative analyses of market risks in its 2003 Form 10-K. No significant changes have occurred during the six months ended June 30, 2004.

Item 4. Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of June 30, 2004. Based upon that evaluation, these officers have concluded that, as of June 30, 2004, the Company maintained effective disclosure controls and procedures. There have not been changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter to which this Quarterly Report on Form 10-Q relates that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

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

At the Annual Meeting of Stockholders held on April 29, 2004, the stockholders voted on and elected three directors for a term of three years expiring in 2007, or until their successors are elected:


Name	For		Withheld
Tomio Fuchu		3,386,181		609,365
Duane K. Kurisu		3,385,566		609,980
Mike K. Sayama		3,386,300		609,246

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


2.1		Agreement and Plan of Merger, dated as of April 22, 2004, by and between Central Pacific Financial Corp. and CB Bancshares, Inc. (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K of CB Bancshares, Inc., filed April 27, 2004 (file no. 000-12396))
31.1		Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

On April 12, 2004 the Company filed a Current Report on Form 8-K under “Item 12. Disclosure of Operations and Financial Condition.”

On April 27, 2004 the Company filed a Current Report on Form 8-K under “Item 5. Other Events and Regulation FD Disclosures.”

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	CB BANCSHARES, INC. (Registrant)
Date August 6, 2004	By /s/ Dean K. Hirata
	Dean K. Hirata
	Senior Vice President and Chief Financial Officer (Principal financial officer)

EXHIBIT INDEX


2.1		Agreement and Plan of Merger, dated as of April 22, 2004, by and between Central Pacific Financial Corp. and CB Bancshares, Inc. (incorporated by reference to Exhibit 99.2 to the Current Report on Form 8-K of CB Bancshares, Inc., filed April 27, 2004 (file no. 000-12396))
31.1		Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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CB BANCSHARES INC/HI 10-Q