Washington, D.C.  20549

FORM 10-Q

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 ý  No o

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

Yes ý  No o

As of November 10, 2003, the number of shares of common stock outstanding of the registrant was 16,056,442 shares.

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARY

Table of Contents

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PART I.     FINANCIAL INFORMATION

Forward-Looking Statements

Central Pacific Financial Corp. (the “Company”) may from time to time make written or oral forward-looking statements, including statements contained in the Company’s filings with the Securities and Exchange Commission (including this Quarterly Report on Form 10-Q), in its reports to shareholders and in other Company communications, including communications related to the proposed merger between the Company and CB Bancshares, Inc. (“CBBI”) and statements related to the benefits thereof, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include, among others, (i) statements about the benefits of a merger between the Company and CBBI, including future financial and operating results, cost savings and accretion to reported and cash earnings that may be realized from such merger; (ii) statements with respect to the Company’s plans, objectives, expectations and intentions and other statements that are not historical facts; and (iii) other statements identified by words such as “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “targets”, “projects” and other similar expressions.  These statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties.  Actual results may differ from those set forth in the forward-looking statements.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:  (1) the business of the Company and CBBI may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; (2) expected revenue synergies and cost savings from the merger may not be fully realized or realized within the expected time frame; (3) revenues following the merger may be lower than expected; (4) deposit attrition, operating costs, customer loss and business disruption, including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers, may be greater than expected following the merger; (5) the regulatory approvals required for the merger may not be obtained on the proposed terms; (6) the failure of the Company’s and CBBI’s shareholders to approve the merger; (7) competitive pressures among depository and other financial institutions may increase significantly and may have an effect on pricing, spending, third-party relationships and revenues; (8) the strength of the United States economy in general and the strength

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of the Hawaii economy may be different than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on the combined company’s loan portfolio and allowance for loan losses; (9) changes in the U.S. legal and regulatory framework; and (10) adverse conditions in the stock market, the public debt market and other capital markets (including changes in interest rate conditions) and the impact of such conditions on the combined company’s activities.

Additional factors that could cause the Company results to differ materially from those described in the forward-looking statements can be found in the Company’s reports (such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K, as amended, for the year ended December 31, 2002, and available at the SEC’s Internet site (http://www.sec.gov). All subsequent written and oral forward-looking statements concerning the proposed transaction or other matters attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.  The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statement is made.

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Item 1. Financial Statements

CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to consolidated financial statements.

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CENTRAL PACIFIC FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

September 30, 2003 and 2002

1.                                       Basis of Presentation

The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 2002. However, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of Management, necessary for a fair statement of results for the interim periods.

The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year.

2.                                       Comprehensive Income (Loss)

Components of other comprehensive income (loss), net of taxes, is presented below:

3.                                       Segment Information

The Company has two reportable segments: financial services and treasury.  The segments reported are consistent with internal functional reporting lines.  They are managed separately because each unit has different target markets, technological requirements, marketing strategies and specialized skills.  The financial services segment includes retail branch offices, corporate lending, construction and real estate development lending, residential mortgage lending, trust services and international banking services.  A full range of deposit and loan products, and various other banking services are offered.  The treasury segment is responsible for managing the Company’s investment securities portfolio and wholesale funding activities.

The all others category includes Central Business Club of Honolulu and activities such as mortgage servicing, electronic

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banking, investment services and management of bank owned properties.

The accounting policies of the segments are consistent with the Company’s accounting policies that are described in note 1 to the consolidated financial statements in the Annual Report on Form 10-K, as amended, for the year ended December 31, 2002 filed with the SEC.  The majority of the Company’s net income is derived from net interest income.  Accordingly, Management focuses primarily on net interest income, rather than gross interest income and expense amounts, in evaluating segment profitability. Intersegment net interest income (expense) is allocated to each segment based on the amount of net investable funds provided (used) by that segment at a rate equal to the Bank’s average rate on interest-sensitive assets and liabilities. All administrative and overhead expenses are allocated to the segments at cost. Cash, investment securities, loans and their related balances are allocated to the segment responsible for acquisition and maintenance of those assets.  Segment assets also include all premises and equipment used directly in segment operations.

Segment profits and assets are provided in the following table for the periods indicated.

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4.               Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.”  This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities.  It explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity.  It requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved.   This interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.  It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The interpretation applies to public enterprises as of the beginning of the applicable interim or annual period, and it applies to nonpublic enterprises as of the end of the applicable annual period.  The application of Interpretation No. 46 did not have a material impact on the Company’s consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates.  In addition, paragraphs 7(a) and 23(a), which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. The application of SFAS No. 143 did not have a material impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for

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how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities.  The application of SFAS No. 150 did not have a material impact on the Company’s consolidated financial statements.

5.               Stock Compensation Plans

The Company has elected to apply the provisions of APB No. 25, and provide the pro forma disclosure provisions of SFAS No. 148.

The following table presents pro forma disclosures of the impact that the 2003, 2002, 2000, 1999 and 1997 option grants would have had on net income and earnings per share had the grants been measured using the fair value of accounting prescribed by SFAS No. 148.

6.               Trust Preferred Securities

In March 2003, the Company created a wholly-owned statutory business trust, CPB Capital Trust I (the “Trust”).  At September 30, 2003, the Trust had outstanding trust preferred securities (the “Securities”) which totaled $15.0 million. The Securities bear an interest rate of three-month LIBOR plus 3.25%, and mature on April 7, 2033. The principal assets of the Trust are $15.5

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million of the Company’s subordinated debentures with an identical interest rate and maturity as the Securities.  The Trust has issued $0.5 million of common stock to the Company.

The Securities, the assets of the Trust, and the common securities issued by the Trust are redeemable in whole or in part on any January 7, April 7, July 7, or October 7 on or after April 7, 2008, or at any time in whole but not in part at any time within 90 days following the occurrence of certain events.  The obligations of the Company with respect to the issuance of the Securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the Securities.  Subject to certain exceptions and limitations, the Company may elect from time to time to defer subordinated debenture interest payments, which could result in a deferral of distribution payments on the related Securities.

The Securities are reported on the consolidated balance sheet as long-term debt, and the related dividend payments are reported as interest on long-term debt on the income statement.  For the nine months ended September 30, 2003, interest expense totaled $349,000.

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Item 2.             Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.  Some of the Company’s accounting policies require judgment regarding valuation of assets and liabilities and/or interpretation of specific accounting guidance.  The following are the Company’s critical accounting policies.

Allowance for Loan Losses (“Allowance”) -   The provision for loan losses (“Provision”) is determined by Management’s ongoing evaluation of the loan portfolio and assessment of the Allowance to cover inherent losses.  The Company’s methodology for determining the adequacy of the Allowance and the Provision takes into account many factors, including the level and trend of nonperforming and potential problem loans, net charge-off experience, current repayment by borrowers, fair value of collateral securing specific loans and general economic factors in Hawaii.  The Allowance consists of two components: allocated and unallocated.  To calculate the allocated component, the Company combines specific reserves required for individual loans (including impaired loans), reserves required for pooled graded loans and loan concentrations, and reserves required for homogeneous loans (e.g., consumer loans, residential mortgage loans).    The Company uses a loan grading system whereby loans are segregated by risk.  Certain graded commercial and commercial real estate loans are analyzed on an individual basis.  Other graded loans are analyzed on an aggregate basis based upon migration analysis (i.e., movements between loan grades) and risks inherent in loan concentrations in specific industries or categories.   The determination of an allocated reserve for homogeneous loans is done at an aggregate level based upon various factors including historical loss experience, delinquencies, and economic conditions.  The unallocated component of the allowance incorporates the Company’s judgmental determination of the risks inherent in the loan portfolio, economic uncertainties, and imprecision in the estimation model.

The Company, considering current information and events regarding a borrower’s ability to repay its obligations, treats a loan as impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  When a loan is considered to be

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impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, if the loan is considered to be collateral dependent, based on the fair value of the collateral.  Impairment losses are included in the Allowance through a charge to the Provision.

Overview of Material Events

On March 17, 2003, the Company presented to senior management of CB Bancshares, Inc. (“CBBI”), an offer to combine the Company and CBBI by means of a public offer to acquire at least a majority and up to 100% of the outstanding CBBI common stock for 1.7233 shares of the Company’s common stock plus $19.09 in cash for each share of CBBI common stock (as adjusted for the 10% stock dividend paid to CBBI shareholders on June 27, 2003) (the “Merger Consideration”), to be followed by a merger of the two companies in which all remaining CBBI common stock would receive the Merger Consideration.  On April 16, 2003, the Company publicly announced the proposed business combination. On May 4, 2003, CBBI announced that its board of directors rejected the Company’s offer.

On May 9, 2003, the Company rescinded, revoked and withdrew its original offer and presented a new offer to CBBI that provided for a per share consideration of 1.6005 shares of the Company’s common stock and $22.27 in cash for each share of CBBI common stock outstanding (as adjusted for the 10% stock dividend paid to CBBI shareholders on June 27, 2003).  On May 12, 2003, CBBI announced that its board of directors rejected the Company’s new offer.

The Company has filed applications with the Board of Governors of the Federal Reserve System and the Hawaii Commissioner of Financial Institutions for approval to acquire control of a majority of the outstanding shares of CBBI common stock.  On October 21, 2003, the Company’s application with the Hawaii Commissioner of Financial Institutions was deemed complete and accepted for filing.  Both applications are still pending.

The CBBI board of directors has taken a number of actions to resist the proposed business combination.  The Company plans to continue to pursue a business combination with CBBI because the Company believes such a combination will benefit its shareholders and CBBI’s shareholders, as well as customers and employees of both companies and the State of Hawaii.

The consummation of the proposed business combination is

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subject to numerous conditions including, without limitation, receipt of required regulatory approvals, receipt of required approval of the shareholders of the Company, receipt of either approval of the Company’s acquisition of CBBI common stock by CBBI shareholders or approval or exemption of the Company’s acquisition by CBBI’s board of directors under the Hawaii Control Share Acquisitions statute (or inapplicability or invalidity of that statute), effectiveness of the registration statement, CBBI’s 1989 Rights Agreement not having been triggered before August 4, 2003, and inapplicability of CBBI’s 2003 Rights Agreement to the transaction.

Further information relating to the Company’s proposed business combination with CBBI can be found in the registration statement on Form S-4, File No. 333-104783, filed by the Company with the Securities and Exchange Commission on April 28, 2003, and amendments thereto filed on May 5, 2003, May 9, 2003, July 17, 2003, September 5, 2003 and September 19, 2003, respectively (the “Registration Statement”).

CBBI and the Company have taken legal action against each other involving matters related to the proposed business combination, as described more fully in the Registration Statement.  Since the filing of the most recent amendment to the Registration Statement, CBBI and the Company have taken the actions described below.

The motions the Company filed on August 18, 2003, a motion for judgment on the pleadings with respect to CBBI’s counterclaim and a motion to dismiss CBBI’s July 21, 2003 complaint, were heard by the Honorable Victoria S. Marks on September 29, 2003 and were granted in part and denied in part.  With respect to the Company’s motion to dismiss CBBI’s July 21, 2003 complaint, Judge Marks agreed that CBBI’s complaint was duplicative of CBBI’s counterclaim to our earlier-filed complaint and dismissed the action.  With respect to the Company’s motion for judgment on the pleadings, Judge Marks denied the motion.  The parties are presently in discovery on that action.

As of September 30, 2003, the Company capitalized merger-related costs totaling $8.8 million.  This amount is reflected as a component of other assets on the consolidated balance sheet. In the event that the proposed merger does not occur, all capitalized costs will be expensed. For the nine months ended September 30, 2003, merger-related expenses total $1.3 million, and are reflected as a component of other operating expense on the consolidated statement of income.

Financial Summary

For the third quarter of 2003, the Company reported net income

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of $8.3 million or $0.51 per diluted share, up 4.9% and 6.3%, respectively, from the same period last year.  For the first nine months of 2003, net income was $24.8 million or $1.52 per diluted share, an increase of 7.5% and 7.0%, respectively, from the same period last year.  Strong loan and core deposit growth contributed to this increase.

The following table presents annualized returns on average assets and average stockholders’ equity and basic and diluted earnings per share for the periods indicated.

Material Trends

Hawaii’s economy continued to show signs of improvement in 2003. The state’s unemployment rate was 4.3% in September 2003, compared to 4.1% in September 2002.(1)  Despite the slight increase over the prior year, the state’s unemployment rate has remained consistently below the national unemployment rate. For 2003, the state unemployment rate is forecasted to be 3.8%.(2)  On the national level, the unemployment rate was 5.8% in September 2003, compared to 5.4% in September 2002.(3) The number of construction jobs in Hawaii are up 7.6% through the second quarter of 2003(4), consistent with the forecasted 10% growth in construction industry employment.(5)  Total state personal income is forecasted to grow by 3.6% in 2003.(6)  The housing market, supported by low mortgage interest rates, continues to show strong growth. Residential home sales in Hawaii for the first nine months of 2003 were $2.6 billion, an increase of 37.7% over the same period last year.(7)  The median sales price for single family homes and condominiums increased over the same period last year by 9.7% and

(1)          Hawaii State Department of Labor and Industrial Relations.

(2)          University of Hawaii Economic Research Organization.

(3)          Hawaii State Department of Labor and Industrial Relations.

(4)          Ibid.

(5)          University of Hawaii Economic Research Organization.

(6)          Ibid.

(7)          Honolulu Board of Realtors.

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13.6%, respectively.(8)  For the first nine months of 2003, hotel occupancy and average daily room rates increased 2.4% and 2.2%, respectively, over last year.(9)  Domestic visitor arrivals increased 3.2% for the first nine months of 2003 compared to the same period last year.(10)  In addition, the total amount of domestic visitor days and average length of stay in Hawaii increased 7.1% and 3.8% through September 2003, respectively, over last year.(11)  Offsetting the positive visitor trends is the continued decrease in the international tourism market, particularly in the Japanese market. For the nine months ended September 30, 2003, total Japanese visitor arrivals were down 13.4%, compared with the same period last year.(12)  Japanese visitor arrivals, which decreased by 4.3% in 2002, are expected to decrease by 18.6% in 2003.(13)  Contributing to this decline are the weak Japanese economy and concerns about the continuing war in Iraq.

In September 2003, the Japanese yen reached its highest level in three years at 111 yen to the dollar.  Also, in September 2003, international visitor arrivals decreased 2.6% from August 2003, representing the smallest monthly decrease since March 2003.  These events may have an impact on Hawaii’s economy through the end of the year.

The results of operations of the Company in 2003 may be directly impacted by the ability of Hawaii’s economy to sustain positive growth. Loan demand, deposit growth, provision for loan losses, noninterest income, and noninterest expense will be affected by economic conditions through the end of the year.

Results of Operations

Net Interest Income

A comparison of net interest income for the three and nine months ended September 30, 2003 and 2002 is set forth below on a taxable equivalent basis using an assumed income tax rate of 35%.

Net interest income, when expressed as a percentage of average interest earning assets, is referred to as “net interest margin.”

(8)          Ibid.

(9)          Hawaii State Department of Business, Economic Development and Tourism.

(10)    Ibid.

(11)    Ibid.

(12)    Ibid.

(13)    University of Hawaii Economic Research Organization.

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Interest income, including loan fees, on a taxable equivalent basis decreased by $2.2 million or 7.1% in the third quarter of 2003 and $5.6 million or 6.1% in the first nine months of 2003 compared to the same periods last year.  These decreases were primarily due to lower interest rates, accelerated amortization on investment securities due to prepayments on mortgage-backed securities, and accelerated asset repricings, offset by higher average interest earning assets.  In addition, during the third quarter of 2003, a $1.3 million loan prepayment penalty was received. The yield on interest earning assets was 5.84% for the third quarter of 2003 and 5.96% for the first nine months of 2003, compared to 6.81% and 6.86%, respectively, for the same periods in 2002. Average interest earning assets were $1.950 billion for the third quarter and $1.898 for the first nine months of 2003, compared to $1.799 billion for the third quarter of 2002 and $1.756 billion for the first nine months of 2002.

Interest expense decreased $2.5 million or 34.8% in the third quarter of 2003 and $7.6 million or 33.1% for the nine months ended September 30, 2003, compared to the same periods in 2002, primarily due to lower interest rates offset by higher average interest-bearing liabilities. The average rate on interest-bearing liabilities was 1.17% for the third quarter of 2003 and 1.33% for the first nine months of 2003, compared to 1.90% and 2.09%, respectively, for the comparable periods in 2002.  Average interest-bearing liabilities totaled $1.569 billion in the third quarter of 2003 and $1.535 billion for the first nine months of 2003, compared to $1.486 billion and $1.460 billion for the same periods last year.

Net interest income on a taxable equivalent basis increased by $0.3 million or 1.1% for the third quarter of 2003 and $2.0 million or 3.0% for first nine months of 2003 compared to the same periods last year. The net interest margin was 4.89% for the third quarter of 2003 and 4.88% for the first nine months of 2003 compared to 5.24% and 5.13%, respectively, for the same periods in 2002. In the current interest rate environment, net interest margin is expected to decline due to repricing of the loan and investment securities portfolios.

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Provision for Loan Losses

A discussion of the Company’s accounting policy regarding the allowance for loan losses is contained in the Critical Accounting Policies section of this report.

The following table sets forth certain information with respect to the Company’s allowance for loan losses as of the dates and for the periods indicated.

The provision for loan losses was $500,000 for the third quarter of 2003, a 66.7% increase from the third quarter of 2002.

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This increase was attributed to strong loan growth and an increase in net charge-offs, primarily consisting of an $882,000 commercial mortgage loan charge-off.

For the first nine months of 2003, the provision for loan losses was $700,000, representing a 22.2% decrease from the same period last year. Other than the $882,000 charge-off mentioned previously, there were no other significant charge-offs during the year.  Year-to-date recoveries totaled $1.6 million, and consisted primarily of a $1.0 million recovery on a commercial mortgage loan in the first quarter.

Net loan charge-offs, when expressed as an annualized percentage of average total loans, were 0.32% for the third quarter of 2003 and 0.01% for first nine months of 2003, compared to 0.01% and 0.03% for the same periods last year.

The allowance for loan losses, expressed as a percentage of total loans, was 1.73% at September 30, 2003, compared to 1.94% at September 30, 2002 and 1.88% at year-end 2002.  Considering the relatively low level of net loan charge-offs, nonaccrual loans and delinquent loans, Management believes that the allowance for loan losses is adequate to cover the credit risks inherent in the loan portfolio.  Deterioration of Hawaii’s economy could adversely affect borrowers’ ability to repay, collateral values and, consequently, the level of nonperforming loans and provision for loan losses.

Nonperforming Assets

The following table sets forth nonperforming assets and accruing loans delinquent for 90 days or more at the dates indicated.

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