<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission File Number 0-15508
HAWAII NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
HAWAII 99-0250218
(State of incorporation) (IRS Employer Identification No.)
45 NORTH KING STREET, HONOLULU, HAWAII 96817
(Address of principal executive offices) (Zip Code)
(808) 528-7711
(Registrant's telephone number, including area code)
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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest date is:
Common Stock, $1 Par Value; outstanding at September 30, 1996 - 711,000 shares
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1996,
December 31, 1995 and September 30, 1995 (Unaudited)........... 3
Consolidated Statements of Income - Three and nine months
ended September 30, 1996 and 1995 (Unaudited).................. 4
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1996 and 1995 (Unaudited).................. 5
Notes to Consolidated Financial Statements (Unaudited)............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................... 14
SIGNATURES ................................................................... 14
EXHIBIT INDEX................................................................. 15
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1996, DECEMBER 31, 1995 AND SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
------------ ----------- ------------
1996 1995 1995
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 16,612 $ 18,908 $ 19,952
Federal funds sold 17,750 13,750 5,000
Investment securities
Held-to-maturity (fair value of $48,921, 48,981 45,993 44,924
$46,165 and $44,937, respectively)
Available-for-sale 1,493 1,497 1,497
Loans and leases 202,444 213,094 214,388
Less allowance for possible loan
and lease losses (note 2) 3,564 3,096 3,628
-------- -------- --------
198,880 209,998 210,760
Premises and equipment 3,970 4,189 4,260
Other assets 4,733 5,255 5,071
-------- -------- --------
Total assets $292,419 $299,590 $291,464
======== ======== ========
LIABILITIES:
Deposits -
Demand $ 84,994 $ 95,647 $ 88,966
Savings 112,642 113,737 111,914
Time 64,667 59,521 61,071
-------- -------- --------
Total deposits 262,303 268,905 261,951
Short-term borrowings 1,000 903 943
Other liabilities 1,586 2,589 1,689
-------- -------- --------
Total liabilities 264,889 272,397 264,583
SHAREHOLDERS' EQUITY (NOTE 3):
Common stock, par value $1 per share;
Authorized - 10,000,000 shares
Issued and outstanding - 711,000 shares 711 711 711
Capital in excess of par value 12,148 12,148 12,148
Retained earnings 14,671 14,334 14,022
-------- -------- --------
Total shareholders' equity 27,530 27,193 26,881
-------- -------- --------
Total liabilities and shareholders' equity $292,419 $299,590 $291,464
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 4
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 4,505 $ 4,888 $ 13,988 $ 14,802
Interest on direct financing leases 23 29 79 92
Interest on Federal funds sold 281 162 656 340
Interest on investment securities-
Taxable 723 588 2,019 1,699
Exempt from Federal income tax -- 19 38 57
-------- -------- -------- --------
Total interest income 5,532 5,686 16,780 16,990
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits 1,745 1,815 5,209 5,122
Federal funds purchased -- -- -- 23
Short-term borrowings 11 13 31 122
-------- -------- -------- --------
Total interest expense 1,756 1,828 5,240 5,267
-------- -------- -------- --------
Net interest income 3,776 3,858 11,540 11,723
Provision for Loan and Lease Losses (note 2) 180 150 630 450
-------- -------- -------- --------
Net interest income after provision for
loan and lease losses 3,596 3,708 10,910 11,273
-------- -------- -------- --------
OTHER INCOME:
Service charges on deposit accounts 277 284 825 807
Other service charges, collection and
exchange charges, commissions and fees 480 450 1,419 1,377
Gain on investment securities held-to-maturity 25 -- 25
Gain on investment securities available-for-sale -- 19 -- 19
-------- -------- -------- --------
782 753 2,269 2,203
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 2,061 2,046 6,198 6,012
Occupancy expense of bank premises 1,087 1,067 3,246 3,123
Other operating expenses 995 995 3,030 3,176
-------- -------- -------- --------
4,143 4,108 12,474 12,311
-------- -------- -------- --------
Income before income taxes 235 353 705 1,165
Income Tax Provision 93 131 261 433
-------- -------- -------- --------
Net Income $ 142 $ 222 $ 444 $ 732
======== ======== ======== ========
PER SHARE DATA:
Net income $ 0.20 $ 0.31 $ 0.62 $ 1.03
Cash dividend $ 0.00 $ 0.00 $ 0.15 $ 0.15
Average shares outstanding 711,000 711,000 711,000 711,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 5
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees received $ 16,638 $ 16,636
Interest paid (5,203) (5,119)
Service charges, collection and exchange charges, commission and fees received 2,243 2,184
Cash paid to suppliers and employees (11,095) (11,686)
Income taxes paid (179) (581)
-------- --------
Net cash provided by operating activities 2,404 1,434
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities held-to-maturity 24,039 16,012
Purchase of investment securities held-to-maturity (26,998) (16,005)
Proceeds from sale of investment securities available-for-sale -- 2,122
Purchase of investment securities available-for-sale -- (2,111)
Net decrease in loans and leases made to customers 5,438 3,005
Proceeds from sale of loans 5,319 --
Capital expenditures (196) (379)
Proceeds from sale of equipment 3 154
Purchase of other real estate (193) (225)
-------- --------
Net cash provided by investing activities 7,412 2,573
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits and savings accounts (13,249) (7,897)
Net increase in time deposits 5,146 8,876
Proceeds from FHLB of Seattle borrowing -- 4,000
Repayment of FHLB of Seattle borrowing -- (4,000)
Net increase (decrease) in short-term borrowings 97 (57)
Net decrease in federal funds purchased -- (480)
Dividends paid (107) (107)
-------- --------
Net cash provided by (used in) financing activities (8,113) 335
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,703 4,342
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,659 20,610
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,362 $ 24,952
======== ========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 444 $ 732
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation on bank premises and equipment 412 354
Provision for loan and lease losses 630 450
Amortization of deferred loan fees (269) (222)
Gain on investment securities available-for-sale -- (19)
Gain on investment securities held-to-maturity (25) --
Changes in -
Interest receivable 126 (132)
Interest payable 37 148
Taxes payable 82 (148)
Other assets 589 166
Other liabilities 378 105
-------- --------
Net cash provided by operating activities $ 2,404 $ 1,434
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to real estate acquired through foreclosure $ 175 --
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 6
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 1996,
are not necessarily indicative of the results anticipated for the year ending
December 31, 1996. For additional information, refer to the consolidated
financial statements and footnotes thereto included in Hawaii National
Bancshares, Inc.'s annual report on Form 10-K for the year ended December 31,
1995.
2. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
(in thousands) 1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, beginning of period $3,053 $3,562 $3,096 $3,421
Provision charged to operations 180 150 630 450
Loans and leases charged-off (225) (100) (842) (276)
Recoveries on loans and leases
previously charged-off 556 16 680 33
------ ------ ------ ------
Net recoveries (charge-offs) 331 (84) (162) (243)
------ ------ ------ ------
Balance, end of period $3,564 $3,628 $3,564 $3,628
====== ====== ====== ======
</TABLE>
The following table presents information on the recorded investment in impaired
loans for the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
(IN THOUSANDS) 1996 1995 1995
------------ ----------- ------------
<S> <C> <C> <C>
Impaired loans for which there is a related allowance $1,868 $1,451 $1,984
Impaired loans for which there is no related allowance 1,602 4,633 4,529
------ ------ ------
Total recorded investment $3,470 $6,084 $6,513
====== ====== ======
</TABLE>
The average recorded investment in impaired loans for the three and nine months
ended September 30, 1996 was $3,678,000 and $4,146,000, respectively, compared
to $2,160,000 and $1,708,000 for the same periods in 1995. Interest income on
impaired loans is recognized in accordance with the Company's nonaccrual loan
policy. There was no interest income recognized on impaired loans in any of the
previously mentioned periods.
3. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- -----------------------
(IN THOUSANDS) 1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $27,388 $26,647 $27,193 $26,244
Net income 142 222 444 732
Cash dividends -- -- (107) (107)
Adjustment to capital in excess of par value -- 12 -- 12
------- ------- ------- -------
Balance, end of period $27,530 $26,881 $27,530 $26,881
======= ======= ======= =======
</TABLE>
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<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
Hawaii National Bancshares, Inc. ("Company") is a bank holding company
whose wholly-owned subsidiary is Hawaii National Bank ("HNB" or the "Bank"), a
national banking association. The Company derives substantially all of its
income from the operations of the Bank and the Bank's assets constitute the
majority of the Company's assets. Therefore, the discussion that follows relates
mainly to the activities of the Bank.
LOCAL ECONOMY
While tourism, Hawaii's largest industry, has generally improved, the
State's overall economy continues to struggle burdened by a weak construction
industry and a decline in government expenditures. Hawaii continued to lose jobs
in September, continuing a 4-year trend. The State's unemployment rate for the
month was 5.6%, topping the national rate of 5.0%. Foreclosure and bankruptcy
filings for the year-to-date were up 44% and 65%, respectively, over last year's
comparable period. Real estate activity was mixed and prices experienced a
slight decline. Compared to the same period in 1995, sales of existing
single-family homes on Oahu increased 6.8% through the first three-quarters of
1996, while condominium sales declined 12.3%. The median price for a
single-family home on Oahu in September was 3.2% below the September 1995
median. The condominium median price in September was down 3.8% from the same
month a year earlier.
RECENT FEDERAL LEGISLATION
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was
signed into law which resolved a number of key issues related to the Bank
Insurance Fund ("BIF"), Savings Association Insurance Fund ("SAIF") and
Financing Corporation ("FICO") bonds. Among other things, the new law: 1)
imposed a special one-time assessment on SAIF-insured institutions (i.e.,
thrifts and Oakar and Sasser banks) to recapitalize the SAIF; 2) required
BIF-institutions to share in repaying the FICO bonds which were issued in the
late 1980's when a number of thrifts failed; 3) prohibited deposit shifting from
SAIF to BIF for 3 years; and 4) required Congress to eliminate the separate
thrift charter before merging the SAIF and BIF into the new Deposit Insurance
Fund. The one-time charge for SAIF members to recapitalize their fund is
currently estimated to be 65.7 cents per $100 of SAIF deposits. Certain Oakar
and Sasser banks will receive a 20% discount. Beginning January 1, 1997,
SAIF-insured institutions will pay an estimated 6.4 cents for every $100 of SAIF
deposits for the next 3 years and BIF-insured institutions will pay an estimated
1.3 cents for every $100 of BIF deposits. After January 1, 2000, the FICO
assessment will be spread evenly among all SAIF and BIF deposits at an estimated
rate of 2.4 cents per $100 of deposits.
-7-
<PAGE> 8
HIGHLIGHTS
The Company reported net income of $142,000, or $0.20 per share, for
the three months ended September 30, 1996, compared to $222,000, or $0.31 per
share, for the same period last year. Year-to-date earnings were $444,000, or
$0.62 per share, compared to $732,000 or $1.03 per share, for the first nine
months of 1995. The decline for the quarter and year-to-date was primarily due
to a decrease in net interest income and an increase in the provision for loan
and lease losses, partly offset by a reduction in Federal Deposit Insurance
Corporation ("FDIC") insurance premiums.
Noncurrent loans and leases declined to $3,753,000 at September 30,
1996, 43% below the level reported at year-end 1995. During the quarter, a
nonaccrual loan was repaid generating net proceeds of $545,000 which were
credited to the allowance for loan and lease losses as a recovery of an amount
previously charged-off in 1995. The collection of this loan reduced net
charge-offs for the year-to-date to $162,000, compared to $243,000 for the same
period last year.
At September 30, 1996, total assets were $292,419,000, a decrease of
$7,171,000 from December 31, 1995. Loans and leases declined by $10,650,000 and
total deposits were lower by $6,602,000, compared to year-end 1995.
Shareholders' equity grew to $27,530,000 at September 30, 1996. Book value per
share rose from $38.25 at December 31, 1995 to $38.72 at September 30, 1996.
Leverage and risk-based capital ratios continued to exceed regulatory
requirements by a substantial margin.
The Bank is in the process of applying to the Comptroller of the
Currency to establish a branch facility in Pearl City, a residential and
business community located in West Oahu. Expanding into this region will provide
the Bank with an opportunity to increase its loans and deposits. The opening of
the new branch is expected to take place in the second quarter of 1997.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three and nine months ended September 30,
1996 decreased $82,000 or 2.1% and $183,000 or 1.6%, respectively, from the
comparable period in 1995. The lower results were primarily due to a decrease in
interest income, partly offset by a reduction in interest expense. Net interest
margin for the quarter was 5.48%, compared to 5.65% for the same quarter last
year. For the year-to-date, net interest margin was 5.67%, a decrease from the
5.83% reported for the same period in 1995.
Interest income for the three and nine months ended September 30, 1996
decreased $154,000 or 2.7% and $210,000 or 1.2%, respectively, compared to the
same periods last year. The decline was due to weak loan demand, lower market
interest rates and an increase in nonaccrual loans and leases. The average yield
on interest-earning assets for the quarter and year-to-date was 8.03% and 8.25%,
respectively, compared to 8.33% and 8.45% for the same periods in 1995.
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<PAGE> 9
Interest expense for the three and nine months ended September 30, 1996
decreased $72,000 or 3.9% and $27,000 or 0.51%, respectively, versus the same
periods a year earlier. The reduction for the quarter was primarily due to a
lower average cost of deposits. The improvement for the nine months through
September 30, 1996 was largely due to the absence of federal funds purchased and
a decline in short-term borrowings. The average cost of funds for the quarter
and year-to-date was 3.36% and 3.39%, respectively, compared to 3.50% and 3.43%
for the same periods in 1995.
Other Income and Expenses
Other income for the three and nine months ended September 30, 1996
increased $29,000 or 3.9% and $66,000 or 3.0%, respectively, compared to the
same periods in the prior year. The improved results were attributable to two
factors: 1) higher revenue from other service charges, collection and exchange
charges, commissions and fees, and 2) a gain on an investment security which was
called by the issuer.
Other expenses consist of salaries and employee benefits, occupancy
expense and other operating expenses. For the three and nine months ended
September 30, 1996, other expenses increased $35,000 or 0.9% and $163,000 or
1.3%, respectively, compared to the same periods last year.
Salaries and employee benefits for the three and nine months ended
September 30, 1996 increased $15,000 or 0.7% and $186,000 or 3.1%, respectively,
over the same periods a year earlier. The growth in this category reflected
normal merit and inflationary adjustments which were adopted to keep the Bank's
salary and benefit packages competitive.
Occupancy expenses for the three and nine months ended September 30,
1996 rose $20,000 or 1.9% and $123,000 or 3.9%, respectively, from the
comparable period in 1995. The increase was primarily attributable to the
opening of two new branches on Maui which were previously operated by the former
Bank USA, N.A.
Other operating expenses for the three and nine months ended September
30, 1996 were unchanged and lower by $146,000 or 4.6%, respectively, compared to
same periods ago. During the year, the Bank benefited from a reduction in FDIC
insurance premiums. Effective January 1, 1996, the premiums that banks pay for
deposit insurance were lowered from a range of 23 cents to 31 cents per $100 of
deposits to a wider range of zero cents to 27 cents. The actual rate assessed
each bank continued to be contingent upon its capital adequacy and risk
classification. Also included in other operating expenses are data processing
fees paid to Computer Systems International, Ltd. ("CSI"), a company formed to
provide computer services to financial institutions including the Bank. An
affiliate of a director and the Bank each own a 50% interest in this bank
service corporation. Data processing fees paid to CSI amounted to $537,155 and
$511,116 for the first nine months of 1996 and 1995, respectively.
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<PAGE> 10
Income Taxes
The Company's effective income tax rate for the three and nine months
ended September 30, 1996 was 39.6% and 37.0%, respectively, compared to 37.1%
and 37.2% for the same periods last year. The higher rate for the third quarter
of 1996 was attributable to a decrease in tax-exempt interest from investment
securities.
FINANCIAL CONDITION
Deposits
At September 30, 1996, total deposits were $262,303,000, compared to
$268,905,000 at December 31, 1995, and $261,951,000 at September 30, 1995.
Noninterest-bearing demand deposits ended the quarter $7,802,000 below the
balance reported at year-end 1995. The decline was primarily due to an outflow
of escrow funds in the first quarter. Interest-bearing demand deposits at
quarter-end were $2,851,000 lower, compared to December 31, 1995. Time deposits
increased $5,146,000 over year-end 1995 levels, offsetting a decline in savings
deposits of $1,095,000. During the first nine months of 1996, customers
continued to shift their funds from savings to time deposits to take advantage
of higher rates. The average rate paid on savings and time deposits for this
period was 2.94% and 4.90%, respectively.
The following table presents the distribution of the Bank's deposit
accounts for the dates indicated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
September 30, 1996 December 31, 1995 September 30, 1995
-------------------------- ------------------------- --------------------------
Balance % Balance % Balance %
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 58,529,000 22.3% $ 66,331,000 24.7% $ 61,147,000 23.3%
Interest-bearing demand 26,465,000 10.1 29,316,000 10.9 27,819,000 10.6
Savings 112,642,000 42.9 113,737,000 42.3 111,914,000 42.8
Time 64,667,000 24.7 59,521,000 22.1 61,071,000 23.3
------------ ----- ------------ ----- ------------ -----
Total deposits $262,303,000 100.0% $268,905,000 100.0% $261,951,000 100.0%
============ ===== ============ ===== ============ =====
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in time deposits are certificates of deposits ("CD") purchased
by the State of Hawaii, its counties and other government agencies.
Historically, these CDs have been a stable source of funds for the Bank and are
considered to be core deposits. At September 30, 1996, December 31, 1995, and
September 30, 1995, public time deposits totaled $31,321,000, $30,197,000, and
$29,934,000, respectively, representing 11.9%, 11.2%, and 11.4% of the Bank's
total deposits.
Investment Securities
Investment securities consist principally of short and intermediate
term debt instruments issued by the U.S. Treasury, other U.S. government
agencies, and State and local government units. The Bank is also a stockholder
in the Federal Reserve Bank and the Federal Home Loan Bank of Seattle. The Bank
has no derivative securities, such as collateralized mortgage obligations or
stripped mortgage-backed securities.
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<PAGE> 11
At September 30, 1996, the book and fair value of the held-to-maturity
portfolio was $48,981,000 and $48,921,000, respectively. As of the same date,
the book and fair value of the available-for-sale portfolio was $1,493,000. The
Bank had no trading securities as of September 30, 1996. During the first nine
months of 1996, there were no sales or transfers of investment securities
between the held-to-maturity, available-for-sale or trading categories.
Loan Portfolio and Loan Concentrations
At September 30, 1996, loans and leases were $202,444,000, a decrease
of $10,650,000 or 5.0% from year-end 1995 and $11,944,000 or 5.6% from September
30, 1995. The decline was primarily centered in the real estate and commercial
and industrial loan portfolios where payoffs and sales exceeded originations.
Loan demand remained weak due to Hawaii's slow economic recovery. The Bank had
no significant concentrations of credit with any individual party; however, its
lending was concentrated on the island of Oahu.
The following table presents the composition of the Bank's loan and
lease portfolio at the dates indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
September 30, 1996 December 31, 1995 September 30, 1995
----------------------- ----------------------- -----------------------
Balance % Balance % Balance %
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
Family residential $103,366,000 51.1% $106,200,000 49.9% $106,433,000 49.6%
Construction 2,818,000 1.4 4,558,000 2.1 4,846,000 2.3
Commercial property 24,505,000 12.1 27,647,000 13.0 28,198,000 13.2
------------ ----- ------------ ----- ------------ -----
Total 130,689,000 64.6 138,405,000 65.0 139,477,000 65.1
Commercial & industrial 63,094,000 31.2 66,021,000 31.0 66,107,000 30.8
Consumer 7,513,000 3.7 7,255,000 3.4 7,141,000 3.3
All other loans 272,000 0.1 248,000 0.1 543,000 0.3
Direct financing leases 876,000 0.4 1,165,000 0.5 1,120,000 0.5
------------ ----- ------------ ----- ------------ -----
Total $202,444,000 100.0% $213,094,000 100.0% $214,388,000 100.0%
============ ===== ============ ===== ============ =====
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Loan Portfolio Risk Elements and Other Real Estate Owned
Noncurrent loans and leases consist of loans and leases that are past
due for 90 days or more and still accruing interest and loans and leases on
nonaccrual status. Most of the credits in this category are collateralized by
real estate. At September 30, 1996, noncurrent loans and leases decreased to
$3,753,000, representing 1.9% of loans and leases outstanding, compared to
$6,620,000 or 3.1% at December 31, 1995 and $7,171,000 or 3.3% at September 30,
1995. The improvement was attributable to the sale at par of a 99.996%
participation in a nonaccrual loan with an unpaid principal balance of
$2,673,000 in the first quarter. The loan was repaid on July 2, 1996. There were
no restructured loans or leases at quarter-end.
Other real estate owned ("OREO"), which is included in other assets,
increased from $1,162,000 at December 31, 1995 to $1,355,000 at September 30,
1996. The OREO portfolio consisted of a commercial property, a single-family
residence and two residential condominiums at quarter-end. The commercial
property generates a positive cash flow. The single-family residence was sold
for $150,000 under an agreement of sale. The two condominiums are in the
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<PAGE> 12
process of being prepared for sale or rent. At September 30, 1996, the market
values of the properties in OREO, less estimated selling costs, exceeded their
respective carrying values. There was no activity in the reserve for the
quarter.
The following table presents information on noncurrent loans and leases
and OREO for the dates indicated:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
September 30 December 31 September 30
1996 1995 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Noncurrent
Past due 90 days or more $ 119,000 $ 414,000 $ 597,000
Nonaccrual 3,634,000 6,206,000 6,574,000
---------- ---------- ----------
Total $3,753,000 $6,620,000 $7,171,000
========== ========== ==========
OREO $1,355,000 $1,162,000 $1,163,000
========== ========== ==========
Note: Impaired loans are included in nonaccrual loans and leases.
- -----------------------------------------------------------------------------------
</TABLE>
Provision and Allowance for Loan and Lease Losses
During the three and nine months ended September 30, 1996, the Bank
provided $180,000 and $630,000, respectively, for possible loan and lease
losses, compared to $150,000 and $450,000 for the three and nine months ended
September 30, 1995.
Gross charge-offs for the quarter were $225,000, bringing year-to-date
charge-offs to $842,000. Of the losses this year, more than half were
attributable to one loan. Comparatively, for all of 1995, gross charge-offs were
$1,104,000. In July 1996, a nonaccrual loan was repaid generating net proceeds
of $545,000 which were credited to the allowance for loan and lease losses as a
recovery of an amount previously charged-off in 1995. The collection of this
loan resulted in net recoveries of $331,000 for the quarter and net charge-offs
of $162,000 for the year-to-date. Net charge-offs for the comparable periods in
1995 were $84,000 and $243,000, respectively. The annualized ratio of net
charge-offs to average loans and leases for the year-to-date was 0.10%, compared
to 0.15% for the same period last year.
At September 30, 1996, the allowance for loan and lease losses stood at
$3,564,000, compared to $3,096,000 at December 31, 1995 and $3,628,000 at
September 30, 1995. The ratio of the allowance to total loans and leases was
1.8%, 1.5% and 1.7% at September 30, 1996, December 31, 1995 and September 30,
1995, respectively. While the reserve measured 0.95 times noncurrent loans and
leases at quarter-end, in the opinion of management, it remained at a sufficient
level to absorb potential losses. As noted earlier, most of the credits in the
noncurrent category are collateralized by real estate.
Liquidity
The Bank has adequate liquidity to accommodate fluctuations in deposit
levels, fund operations, provide for customer credit needs and meet obligations
and commitments on a timely basis. The Bank has no brokered deposits. It has
generally been a net seller of federal funds.
-12-
<PAGE> 13
An additional source of liquidity is provided through a line of credit with the
Federal Home Loan Bank of Seattle ("FHLB") which enables the Bank to borrow up
to 10% of its total assets. Included in this facility is a cash management
agreement line of 5%. During the first nine months of 1996, there were no FHLB
borrowings or federal funds purchased.
Net cash provided by operating activities for the nine months ended
September 30, 1996 was $2,404,000. Net cash provided by investing activities was
$7,412,000, largely due to sales and a net decrease in loans and leases. Net
cash used in financing activities was $8,113,000, due primarily to a net outflow
in demand and savings deposits, partly offset by a net increase in time
deposits.
Shareholders' Equity and Capital Resources
Shareholders' equity totaled $27,530,000 at September 30, 1996, an
increase of $337,000 or 1.2% from December 31, 1995 and $649,000 or 2.4% from
September 30, 1995. The growth in equity was achieved through retention of
earnings after payment of cash dividends of $106,650 in the first quarter of
1996. Book value per share increased from $37.81 at September 30, 1995 to $38.25
at December 31, 1995 and to $38.72 at September 30, 1996.
In order to be considered well-capitalized by the bank regulatory
agencies, an institution must have at minimum a 5.0% leverage ratio, a Tier 1
risk-based capital ratio of 6.0% and a total capital ratio of 10.0%. The
Company's leverage ratio was 9.38% at September 30, 1996, 9.21% at December 31,
1995, and 9.22% at September 30, 1995. At September 30, 1996, the Company's Tier
1 and total capital ratios were 14.06% and 15.32%, respectively, compared to
13.10% and 14.36% at December 31, 1995, and 12.95% and 14.21% at September 30,
1995.
EFFECT OF NEW ACCOUNTING STANDARD
Effective January 1, 1996, the Company adopted Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights," which amends
Statement 65 "Accounting for Certain Mortgage Banking Activities" and requires
that mortgage banking enterprises recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. This
Statement applies to transactions in which a mortgage banking enterprise sells
or securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights. The
adoption of this Statement did not have a material impact on the consolidated
financial statements of the Company.
-13-
<PAGE> 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
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.
HAWAII NATIONAL BANCSHARES, INC.
(Registrant)
Date November 8, 1996 By /s/Warren K.K. Luke
-----------------------------
Warren K.K. Luke
President
Date November 8, 1996 By /s/Ernest T. Murata
-----------------------------
Ernest T. Murata
Vice President, Treasurer,
Assistant Secretary and
Chief Financial Officer
-14-
<PAGE> 15
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
-15-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 16,612
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,493
<INVESTMENTS-CARRYING> 48,981
<INVESTMENTS-MARKET> 48,921
<LOANS> 202,444
<ALLOWANCE> 3,564
<TOTAL-ASSETS> 292,419
<DEPOSITS> 262,303
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 1,586
<LONG-TERM> 0
0
0
<COMMON> 711
<OTHER-SE> 26,819
<TOTAL-LIABILITIES-AND-EQUITY> 292,419
<INTEREST-LOAN> 13,988
<INTEREST-INVEST> 2,057
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,780
<INTEREST-DEPOSIT> 5,209
<INTEREST-EXPENSE> 5,240
<INTEREST-INCOME-NET> 11,540
<LOAN-LOSSES> 630
<SECURITIES-GAINS> 25
<EXPENSE-OTHER> 12,474
<INCOME-PRETAX> 705
<INCOME-PRE-EXTRAORDINARY> 444
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 444
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
<YIELD-ACTUAL> 5.67
<LOANS-NON> 3,634
<LOANS-PAST> 119
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,096
<CHARGE-OFFS> 842
<RECOVERIES> 680
<ALLOWANCE-CLOSE> 3,564
<ALLOWANCE-DOMESTIC> 3,564
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1000
</TABLE>
