SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

OR

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 August 9, 2002: 7,970,829 shares

PART I.   FINANCIAL INFORMATION

Item 1.    Financial Statements

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

Overview

For the second quarter of 2002, CPB Inc. (the “Company”) reported net income of $7.7 million, an increase of 32.9% over the $5.8 million reported in the second quarter of 2001.  For the first half of 2002, net income totaled $15.2 million, an increase of 37.0% over the $11.1 million reported at the same period last year.  This increase was primarily driven by an increase in net interest income, and a reduction in provision for loan losses.

Total assets as of June 30, 2002 were $1.935 billion, an increase of 7.7% over the $1.797 billion reported a year ago, and 5.4% over the $1.836 billion reported at year-end 2001. Total loans were $1.276 billion, an increase of $20.5 million or 1.6% over the same period last year, and $7.2 million or 0.6% over year-end 2001. Total deposits of $1.558 billion increased by $151.6 million or 10.8% from a year ago, and $106.7 million or 7.4% from year-end 2001.

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

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Hawaii’s economy continued to show slight signs of improvement in 2002. The state’s unemployment rate, which peaked in November 2001 at 5.6% following the events of September 11, 2001, was 4.5% in June 2002.(1) The unemployment rate was 4.9% a year ago.(2)  For 2002, the state unemployment rate is forecasted to be 4.5%.(3) On the national level, the unemployment rate was 6.0% in June 2002, compared to 4.7% a year ago.(4)

For the first six months of 2002, hotel occupancy rates averaged 69%, an improvement over the 57% reported during the fourth quarter of 2001.(5)  Year-to-date visitor arrivals through June 2002 were 8.8% below 2001 levels, but continued the gradual upward trend in arrivals subsequent to September 2001.(6)  In 2002, visitor arrivals are forecasted to grow by 3%.(7)  Japanese visitor arrivals, which decreased by 19% in 2001, are expected to grow by 0.2% in 2002.(8)

Residential home sales for the first six months of 2002 were $1.1 billion, an increase of 20.4% over the same period last year.(9)  The median sales price for single family homes and condominiums increased over the same period last year by 8.2% and 13.7%, respectively. (10)

The results of operations of the Company in 2002 may be

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

(2)   Ibid.

(3)   University of Hawaii Economic Research Organization.

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

(5)   Hawaii State Department of Business, Economic Development & Tourism.

(6)   Ibid.

(7)   University of Hawaii Economic Research Organization.

(8)   Ibid.

(9)   Honolulu Board of Realtors.

(10) Ibid.

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directly impacted by the ability of the Hawaii 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.

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, 2001.

Results of Operations

Net Interest Income

A comparison of net interest income for the three and six months ended June 30, 2002 and 2001 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 $3.0 million or 9.0% in the second quarter of 2002 and $7.9 million or 11.7% in the first half of 2002 compared to the same periods last year.  Average interest earning assets were $1.756 billion for the second quarter, a 5.0% increase over the same period last year.  The yield on interest earning assets was 6.63% for the second quarter of 2002 and 6.89% for the six months ended June 30, 2002,

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compared to 7.70% and 8.09% for the same periods in 2001.

Interest and fees on loans decreased by $2.9 million or 10.9% in the second quarter of 2002 and $7.6 million or 13.9% for the first half of 2002 compared to the same periods last year.  Income from loans was impacted by lower rates resulting from U.S. monetary policy offset by higher average balances.

Interest expense for the second quarter of 2002 decreased $6.0 million or 43.1% and for the first six months of 2002 decreased $13.4 million or 45.8% compared to the same periods in 2001, primarily due to lower interest rates offset by higher average interest-bearing liabilities.  Average interest-bearing liabilities totaled $1.465 billion in the second quarter of 2002, increasing by $67.4 million or 4.8% from the same period last year.  The average rate on interest-bearing liabilities was 2.16% for the second quarter of 2002 and 2.19% for the first half of 2002, compared to 3.97% and 4.17% for the comparable periods in 2001.

The resultant net interest income increased by $3.0 million or 15.5% for the second quarter of 2002 and $5.5 million or 14.2% for the first half of 2002 compared to the same periods in 2001.  The net interest margin increased to 5.06% for the second quarter of 2002 from 4.60% in the second quarter of 2001.  On a year-to-date basis, net interest margin grew to 5.07% compared to 4.60% from the same period in 2001.  Interest rate decreases in 2001 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

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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.

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The provision for loan losses of $300,000 for the second quarter of 2002 and $600,000 for the first half of 2002 represented decreases of 66.7% and 63.6%, respectively, over the same periods in 2001.  This decrease was driven by an improvement in asset quality.  Net loan charge-offs, when expressed as an annualized percentage of average total loans, were 0.05% for both the second quarter of 2002 and the first half of 2002.  For 2001, the net loan charge-off ratio was 0.02% for the second quarter, and 0.03% for the first six months.

The allowance for loan losses expressed as a percentage of total loans was 1.95% at June 30, 2002, compared to 1.92% at June 30, 2001 and 1.94% at year-end 2001.  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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Nonperforming assets, loans delinquent for 90 days or more and restructured loans still accruing interest totaled $3.3 million at June 30, 2002, a decrease of $4.0 million from a year ago and $0.4 million from year-end 2001.  Nonaccrual loans totaled $3.1 million at June 30, 2002, a decrease of $1.9 million from a year ago and an increase of $0.7 million from year-end 2001.  Nonaccrual commercial mortgage loans totaled $2.6 million, compared to $3.6 million from a year ago and $1.5 million at year-end 2001.  This fluctuation was primarily attributed to two loan charge-offs totaling $3.4 million and the addition of two loans totaling $2.6 million during the past year.  Nonaccrual residential mortgage loans totaled $0.1 million at June 30, 2002, a decrease of 90.7% from the same period last year and 78.5% from year-end 2001.  This decrease was primarily attributed to

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transfers to other real estate totaling $1.0 million.  Loans delinquent for 90 days or more and still accruing interest totaled $19,000 at June 30, 2002, a decrease from $769,000 reported at the same period last year, and $443,000 at year-end 2001.  Impaired loans, representing three loans, totaled $2.9 million at June 30, 2002, compared to seven loans totaling $7.4 million at the same period last year and four loans totaling $1.5 million at year-end 2001.

Management continues to closely monitor loan delinquencies, and work with borrowers to resolve loan problems.  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 second quarter of 2002, total other operating income was $3.4 million, a decrease of 2.0% over the same period last year.  Excluding the impact of securities transactions, total other operating income was $3.2 million, an increase of 4.8% from the second quarter of 2001.  On a year-to-date basis excluding securities transactions, other operating income totaled $6.7 million, an increase of 1.8% over the same period last year.

Second quarter service charges on deposit accounts and other fees increased by $0.2 million over the second quarter of 2001.  Year-to-date service charges and other fees increased by 17.1% over the same period last year and totaled $4.5 million.  This increase was primarily attributed to fee enhancement initiatives that were implemented in 2001.  Offsetting this increase was a reduction in rental income from CKSS Associates, a limited partnership.  The acquisition of the remaining 50% interest in the partnership in June 2001 resulted in rental income being netted in occupancy expense.  Also included in other operating income in 2001 was a $601,000 gain on the sale of $54 million in residential mortgage loans.

Other Operating Expense

Total other operating expense was $13.2 million for the second quarter of 2002, an increase of 6.1% over the same period last year.  Salaries and benefits totaled $7.7 million, an increase of 16.9% over the same quarter last year.  This increase was driven by increased incentive bonuses, the acquisition of new employees to strengthen the Company’s sales team and to expand trust and private banking services, and executive management transition costs.  Occupancy expense decreased by $0.5 million from the same period last year.  As mentioned earlier, the acquisition of CKSS Associates in 2001 resulted in rental income being netted in occupancy expense.  Other operating expense increased by 3.5% primarily due to an $0.3 million increase in minority interest

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expense.  This expense was related to the issuance of $10.0 million in preferred stock securities through the Company’s real estate investment trust in the third quarter of 2001.

Through June 30, 2002, other operating expense was $26.2 million, a 0.8% increase over the same period last year.  Salaries and benefits increased by 13.9% over the same period last year.  Occupancy expenses decreased by 37.4% as the result of the CKSS acquisition.  Included in other operating expense in 2001 is an expense of $642,000 relating to an early payoff of Federal Home Loan Bank borrowings.

Income Taxes

The effective tax rate for the second quarter and first six months of 2002 was 34.37% and 35.53%, respectively.  For 2001, the comparable rates were 35.84% and 35.76%.

In 1998, the Company completed a corporate reorganization that was intended to reduce the Company’s overall effective tax rate.  The Company believes that the associated tax benefits are realizable.  However, the state of Hawaii has indicated that it may challenge the tax treatment of this reorganization.  Estimated state franchise tax benefits that have not yet been recognized amounted to approximately $6.5 million as of June 30, 2002.

Financial Condition

Total assets at June 30, 2002 were $1.935 billion, an increase of $137.9 million or 7.7% from June 30, 2001.  Compared to year-end 2001, total assets were up $99.4 million or 5.4%.  Net loans grew 1.6% to $1.251 billion from a year ago and 0.6% from year-end 2001.  Investment securities totaled $454.7 million, compared to $355.4 million a year ago and $391.9 million at year-end 2001.  Total deposits at June 30, 2002 were $1.558 billion, an increase of $151.6 million or 10.8% over June 30, 2001.  Compared to year-end 2001, total deposits grew by $106.7 million or 7.4%.  Core deposits (noninterest-bearing demand, interest-bearing demand and savings deposits, and time deposits under $100,000) at June 30, 2002 were $1.197 billion, an increase from $1.005 billion a year ago and $1.082 billion at year-end 2001.  Deposit growth was partly due to the launch of new deposit products in 2001.  Competition for deposits remains strong, and will continue to challenge the Company’s ability to gather low-cost retail funds.

Capital Resources

Stockholders’ equity was $161.9 million at June 30, 2002, an increase of $15.1 million or 10.3% from a year ago, and an increase of $14.8 million or 10.1% from year-end 2001.  When expressed as a percentage of total assets, stockholders’ equity increased to 8.37% at June 30, 2002, from 8.16% a year ago and 8.23% at year-end 2001.  Book value per share at June 30, 2002 was

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 $20.22, compared to $17.83 at June 30, 2001 and $18.54 at year-end 2001.

Repurchases of the Company’s common stock during the first six months of 2002 totaled 21,200 shares for a total consideration of $739,000.  The Company is currently in the sixth segment of its repurchase program that began in 1998.

On June 17, 2002, the board of directors declared a second quarter cash dividend of $0.20 per share, a 25.0% increase over the dividend declared in the second quarter of 2001 and 11.1% over the previous quarter’s dividend.  Dividends declared in the second quarter of 2002 totaled $1,601,000, compared with $1,316,000 in the same quarter last year.

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.

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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.

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Asset/Liability Management and Liquidity

The Company’s asset/liability management and liquidity are discussed in the 2001 Annual Report to Shareholders.  No significant changes have occurred during the three and six months ended June 30, 2002.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Company discussed the nature and extent of market risk exposure in the 2001 Annual Report to Shareholders.  No significant changes have occurred during the three and six months ended June 30, 2002.

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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

Exhibit 99.1 — Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 99.2 — Certification 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

The Company filed no reports on Form 8-K during the second quarter of 2002.

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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.

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CPB INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

See accompanying notes to consolidated financial statements.

F-1

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

F-2

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

F-3

CPB INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to consolidated financial statements.

F-4

CPB INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2002 and 2001

1.             Basis of Presentation

The financial information included herein is unaudited, except for the consolidated balance sheet at December 31, 2001.  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 six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year.

2.             Comprehensive Income

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

F-5

3.             Segment Information

The Company has three reportable segments: retail branches, commercial finance 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 retail branch segment includes all retail branch offices.  Products and services offered include a full range of deposit and loan products, safe deposit boxes and various other bank services.  The commercial finance segment focuses on lending to corporate customers, residential mortgage lending, construction and real estate development lending and international banking services.  The treasury segment is responsible for managing the Company’s investment securities portfolio and wholesale funding activities.  Other activities include trust, mortgage servicing, and indirect lending activities.

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 2001 Annual Report to Stockholders.  The majority of the Company’s net income is derived from net interest income.  Accordingly, Management focuses primarily on net interest income (expense), 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.

F-6