SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2001

OR

For the transition period from __________ to _________

Commission file number 0-10777

CPB INC.

(Exact name of registrant as specified in its charter)

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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, No Par Value;

Outstanding at November 9, 2001: 7,912,036 shares

PART I.   FINANCIAL INFORMATION

Overview

CPB Inc. (the "Company") posted third quarter 2001 net income of $8.722 million, an increase of 76.5% over the $4.943 million reported in the third quarter of 2000.  Included in the results for the third quarter was the recognition of a $2.242 million tax credit relating to the issuance of preferred stock in the real estate investment trust of the Company.  Excluding this adjustment, third quarter earnings totaled $6.480 million, an increase of 31.1% over the same quarter last year.  Increases in net interest income and fee income, as well as a decrease in the provision for loan losses drove this overall increase.

Net income for the first nine months of 2001 was $19.824 million, an increase of 38.4% over the $14.319 million earned in 2000.  Excluding the tax credit mentioned previously, year-to-date net income was $17.582 million, a 22.8% increase over the $14.319 million reported last year.

Total assets as of September 30, 2001 were $1.83 billion, an increase of $13.1 million or 0.7% over year-end 2000.  Net loans of $1.25 billion decreased by $15.3 million or 1.2%, primarily due to the sale of $54 million in residential mortgage loans during the first quarter of 2001.  Total deposits of $1.42 billion increased by $57.9 million or 4.2% from year-end 2000.

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

Excluding the impact of the $2.242 million tax credit recorded in the third quarter of 2001, the annualized ratios and earnings per share were as follows:

The initial effects of the terrorist attacks on September 11, 2001, especially in the travel and tourism sectors, have had a significant impact on Hawaii’s economy. State economists have estimated that Hawaii could lose up to 10% of total visitor arrivals through the end of 2001, $0.5 billion to $1.3 billion in gross state product, and up to 24,000 jobs.  In September, total domestic and international visitor arrivals were down 28.0% and 43.5%, respectively, compared to the same period last year.  On a year-to-date basis, domestic arrivals were down 4.3% and international arrivals were down 6.6% compared to 2000.  Hotel occupancy rates have fallen from 74% reported in June to approximately 60% in October. More than 16,000 workers in Hawaii have filed for unemployment benefits in the weeks following the September 11^th events. The statewide unemployment rate for September was 4.5%, compared to 4.2% for the same period last year.  However, this rate does not fully reflect the effects of the September 11^th events.

On the national level, the unemployment rate increased to 5.4% in October, compared to 4.9% in September, and reflected the highest unemployment level since December 1996.

The results of operations of the Company for the remainder of the year may be directly impacted by the ability of the Hawaii economy to rebound from the effects of the September 11^th events. 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.

Certain matters discussed in this report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements relate to, among other things, net interest income, net interest margin, the levels of nonperforming loans, loan losses and the allowance for loan losses, noninterest income and noninterest expense.  Important factors that could cause the results to differ from those discussed in this report include, but are not limited to, changes in market interest rates, general business conditions in the state of Hawaii, the real estate market in Hawaii, competitive conditions among financial institutions, regulatory changes in the financial services industry, and other risks detailed in the Company's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the year ended December 31, 2000.

Results of Operations

Net Interest Income

A comparison of net interest income for the three and nine months ended September 30, 2001 and 2000 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."

        Interest income decreased by $0.8 million or 2.3% in the third quarter of 2001.  This decrease was primarily the result of three Federal Reserve Board interest rate decreases during the quarter. For the first nine months of 2001, interest income increased by $6.6 million or 7.1% compared to the same period in 2000, primarily attributable to an increase in average loan volume. Average interest earning assets were $1.660 billion for the third quarter, a 3.6% increase over the same period last year.  On a year-to-date basis, average interest-bearing assets were $1.668 billion, a 7.5% increase over the $1.552 billion reported for the same period last year.  The yield on interest earning assets was 7.75% for the third quarter of 2001, a decrease from 8.22% for the same period in 2000.  The yield on interest earning assets was 7.98% for the first nine months of 2001, a decrease from 8.01% for the first nine months of 2000.

        For the quarter ended September 30, 2001, interest and fees on loans decreased by $1.0 million or 3.7% from the same period last year.  On a year-to-date basis, interest and fees on loans increased $4.4 million or 5.9% over the same period last year. Interest and dividends on investment securities decreased by $101,000 or 1.8% from the same quarter last year, and increased $1.1 million or 7.0% on a year-to-date basis.  Income from both loans and investment securities were impacted by lower rates resulting from U.S. monetary policy offset by higher average balances.  Interest on federal funds sold totaled $222,000 for the quarter, compared to $1,000 for the same quarter last year. For the first nine months of 2001, interest on federal funds sold was $284,000, compared to $8,000 for the same period last year.  The significant variances from prior periods were primarily the result of higher average balances.

        Interest expense for the third quarter and first nine months of 2001 decreased $2.4 million or 16.6%, and increased $1.9 million or 4.8%, respectively, compared to the same periods in 2000 primarily due to lower interest rates offset by higher average interest-bearing liabilities. Average interest-bearing liabilities totaled $1,403.0 million in the third quarter of 2001 and $1,401.2 million in the first nine months of 2001, increasing by $60.6 million or 4.5%, and $108.7 million or 8.4%, respectively, due to increases in time deposits and long-term debt. The average rate on interest-bearing liabilities for the third quarter of 2001 decreased to 3.46% from 4.34% in the third quarter of 2000, due to the decline in market interest rates in 2001.  The average rate for the first nine months of 2001 decreased to 3.93% from 4.07% in 2000.  As discussed earlier, this year-to-date decrease was due primarily to declining interest rates.

        The resultant net interest income for the third quarter and first nine months of 2001 increased by $1.7 million or 9.0%, and $4.7 million or 8.7%, respectively, over the same periods in 2000. The net interest margin increased to 4.82% for the third quarter and 4.68% for the first nine months of 2001 from 4.59% and 4.62%, respectively, in 2000.  Recent interest rate decreases have favorably impacted net interest income and net interest margin.  However, strong competition for both loans and core deposits is expected to continue, and may create additional pressure on net interest margin.

Provision for Loan Losses

Provision for loan losses is determined by Management's ongoing evaluation of the loan portfolio and assessment of the ability of the allowance for loan losses to cover inherent losses.  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 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 for loan losses through a charge to the provision for loan losses. For smaller-balance homogeneous loans, primarily residential real estate and consumer loans, the allowance for loan losses is based upon Management's evaluation of the quality, character and risks inherent in the loan portfolio, current and projected economic conditions, and historical loan loss experience.  The allowance is increased by provisions charged to operating expense and reduced by loan charge-offs, net of recoveries.

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 of $1,050,000 for the third quarter and $2,700,000 for the first nine months of 2001 decreased by 30.0% and 22.9%, respectively, from the amounts provided in the same periods in 2000.  For the third quarter, net loan recoveries of $216,000 in 2001 and net loan charge-offs of $1,233,000 in 2000, when expressed as an annualized percentage of average total loans, were (0.07)% and 0.40%, respectively.  There were no significant loan charge-offs during the third quarter. Loan recoveries during the third quarter included one residential real estate loan totaling $406,000.

        Following the events of September 11^th, Management identified certain borrowers in the travel and tourism sectors who may be impacted by the downturn in Hawaii’s economy.  As of September 30, 2001, the total credit exposure to these borrowers was approximately $99 million.  These loans will be closely monitored for deterioration in quality.

        The allowance for loan losses expressed as a percentage of total loans was 1.98% at September 30, 2001, increasing from 1.75% at December 31, 2000.  This increase was due to anticipated losses relating to the downturn in the economy. Considering the relatively low level of net loan charge-offs and decrease in total nonaccrual and delinquent loans during the year, Management believes that the allowance for loan losses is adequate to cover the credit risks inherent in the loan portfolio.  Continued 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.

Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $6.7 million at September 30, 2001, a decrease of $5.6 million or 45.5% from year-end 2000.  Nonaccrual loans totaled $5.5 million at September 30, 2001, a decrease of 46.3% from year-end 2000. Nonaccrual commercial mortgage loans totaled $3.5 million, a decrease of $2.5 million from year-end 2000 due to a $1.5 million loan payoff and a $0.5 million charge-off.  Nonaccrual residential mortgage loans totaled $0.5 million at September 30, 2001, a decrease of 73.8% from year-end 2000.  This decrease was primarily attributed to a loan payoff of $1.0 million and a transfer of a $0.5 million loan to other real estate. Loans delinquent for 90 days or more and still accruing interest totaled $0.7 million at September 30, 2001, a 52.0% decrease from year-end 2000, primarily due to a commercial loan that has since been brought current.  Impaired loans, representing six loans, totaled $6.4 million at September 30, 2001, a decrease from the thirteen loans totaling $11.3 million at year-end 2000.

Management continues to closely monitor loan delinquencies, and work with borrowers to resolve loan problems.  As of September 30, 2001, there was no significant impact on nonperforming assets due to the September 11^th events.  Continued deterioration of Hawaii’s economy may impact loan quality, and may result in increases in delinquencies, nonperforming assets, and restructured loans.

Other Operating Income

For the third quarter of 2001, total other operating income was $3.3 million, an increase of 19.2% over the same period last year.  Excluding the impact of securities transactions, total other operating income was $3.1 million, an increase of 8.7% over the third quarter of 2000.  This increase was primarily due to a $329,000 or 19.2% increase in service charges on deposit accounts and other service charges.

On a year-to-date basis, other operating income, excluding securities gains and losses, totaled $9.6 million for 2001, decreasing by 10.2% from $10.7 million for the same period last year.  This decrease was primarily attributed to the $1.9 million non-recurring gain on the sale of the merchant portfolio in the first quarter of last year. Additionally, loan sales generated $700,000 in gains in 2001.

Other Operating Expense

Total other operating expense was $11.8 million for the third quarter of 2001, an increase of 1.1% over the same period last year.  Salaries and benefits totaled $6.8 million, an increase of 8.6% over the same quarter last year.  This increase was primarily due to increased employee benefits expense in 2001. Offsetting this increase was a $587,000 reduction in occupancy expense from the same period last year.  This reduction was primarily the result of the acquisition of the remaining interest in CKSS partnership during the second quarter.  Rental income from the partnership, which was being recorded in other operating income prior to the acquisition, is now a component of occupancy expense.

On a year-to-date basis, total other operating expense was $37.9 million, an increase of 1.8% over the same period last year.  Salaries and benefits totaled $20.2 million for the first nine months of 2001, an increase of 9.2% over the same period last year.  This increase was primarily due to increases in incentive accruals in 2001 and the reversal of restructuring charges in the second quarter of 2000 due to revised estimates of severance payments in connection with staff downsizing.   In the first quarter of 2001, an expense of $642,000 was recorded due to an early payoff of $20 million in borrowings from the Federal Home Loan Bank of Seattle. In the first quarter of 2000, expenses of $358,000 related to merchant servicing fees and $480,000 related to early termination of a servicing agreement for the sold merchant services portfolio were recognized.

Income Taxes

The effective tax rates for the third quarter and first nine months of 2001 were 14.11% and 27.74%, respectively.  Excluding the impact of the tax credit mentioned earlier, the effective tax rates were 36.19% and 35.92%, respectively.  For 2000, the comparable rates were 35.50% and 35.34%.

Financial Condition

Total assets at September 30, 2001 were $1.83 billion, an increase of $13.1 million or 0.7% from year-end 2000.  In the second quarter of 2001, the Company acquired the remaining interest in CKSS Associates, a partnership in which the Company already held a 50% partnership interest, for $18.5 million in cash.  This transaction accounted for the majority of the increase noted in premises and equipment from year-end.  Also occurring in 2001 was the sale of $54 million in residential mortgage loans.  These loans were sold to adjust the Company’s interest rate profile and to enhance liquidity.  Proceeds from the sale were used to reduce short-term borrowings by $40 million and long-term debt by $20 million.  The early payoff of long-term debt generated a prepayment penalty of $642,000, which is included in other expense. The debt prepayment was part of the Company’s strategy to increase the repricing of its liabilities in the declining interest rate environment. Net loans totaled $1.25 billion as of September 30, 2001, a decrease from $1.27 billion reported at year-end 2000. Investment securities totaled $374.2 million, a decrease of $10.4 million or 2.7%.  Total deposits at September 30, 2001 were $1.42 billion, an increase of $57.9 million or 4.2%.  Core deposits (noninterest-bearing demand, interest-bearing demand and savings deposits, and time deposits under $100,000) at September 30, 2001 were $1,017.4 million, an increase from $1,005.4 million at June 30, 2001.  Competition for deposits remains strong, and will continue to challenge the bank's ability to gather low-cost retail funds.

Capital Resources

Stockholders' equity was $149.49 million at September 30, 2001, an increase of $6.2 million or 4.3% from December 31, 2000. When expressed as a percentage of total assets, stockholders' equity increased to 8.17% at September 30, 2001, from 7.89% at year-end 2000. Book value per share at September 30, 2001 was $18.62, compared to $16.93 at year-end 2000.

Repurchases of the Company’s common stock during the first nine months of 2001 totaled $13.4 million, and offset increases due to earnings accumulation and unrealized gains on the available for sale investment securities portfolio.  In the first nine months of 2001, the Company repurchased 466,750 shares of its common stock, and is currently in the sixth segment of its repurchase program which began in 1998.

During the third quarter of 2001, the Company issued $10.0 million in preferred stock securities through its real estate investment trust. These securities qualify as minority interest, and are included in Tier 1 capital.

On September 17, 2001, the board of directors declared a third quarter cash dividend of $0.17 per share, a 13.3% increase over the dividend declared in the third quarter of 2000.  Dividends declared in the third quarter of 2001 totaled $1,365,000, compared with $1,314,000 in the third quarter of 2000.

The Company's objective with respect to capital resources is to maintain a level of capital that will support sustained asset growth and anticipated risks.  Furthermore, the Company seeks to ensure that regulatory guidelines and industry standards for well-capitalized institutions are met.

Regulations on capital adequacy guidelines adopted by the Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation (the "FDIC") are as follows.  An institution is required to maintain a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.  In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio.  For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%.  In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

The following table sets forth the Company’s capital ratios and capital adequacy requirements applicable to the Company as of the dates indicated.

In addition, FDIC-insured institutions such as the Bank must maintain leverage, Tier 1 and total risk-based capital ratios of at least 5%, 6% and 10%, respectively, to be considered "well capitalized" under the prompt corrective action provisions of the FDIC Improvement Act of 1991.

The following table sets forth the Bank’s capital ratios and capital requirements to be considered "well capitalized" as of the dates indicated.

Asset/Liability Management and Liquidity

The Company's asset/liability management and liquidity are discussed in the 2000 Annual Report to Shareholders.  No significant changes have occurred during the three and nine months ended September 30, 2001.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company discussed the nature and extent of market risk exposure in the 2000 Annual Report to Shareholders.  No significant changes have occurred during the three and nine months ended September 30, 2001.

PART II.  OTHER INFORMATION

Items 1 to 5.

Items 1 to 5 are omitted pursuant to instructions to Part II.

Item 6.    Exhibits and Reports on Form 8-K

(a)    Exhibits

None

(b)   Reports on Form 8-K

The Company filed no reports on Form 8-K during 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.

CPB INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to consolidated financial statements.

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)