<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, 1997
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, 1997 - 711,000 shares
-1-
<PAGE> 2
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997,
December 31, 1996 and September 30, 1996 (Unaudited)......... 3
Consolidated Statements of Income - Three and nine months
ended September 30, 1997 and 1996 (Unaudited)................ 4
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1997 and 1996 (Unaudited)................ 5
Notes to Consolidated Financial Statements (Unaudited).......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................16
SIGNATURES....................................................................16
EXHIBIT INDEX.................................................................17
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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, 1997, DECEMBER 31, 1996 AND SEPTEMBER 30, 1996 (DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1997 1996 1996
------------ ----------- -----------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 15,781 $ 17,277 $ 16,612
Federal funds sold 6,750 16,000 17,750
Investment securities
Held-to-maturity (fair value of $46,562, 46,486 47,930 48,981
$48,007 and $48,921, respectively)
Available-for-sale 1,760 1,487 1,493
Loans and leases 205,470 207,262 202,444
Less allowance for possible loan
and lease losses (Note 2) 3,305 3,067 3,564
-------- -------- --------
202,165 204,195 198,880
Premises and equipment 3,653 3,900 3,970
Other assets 6,399 5,236 4,733
-------- -------- --------
Total assets $282,994 $296,025 $292,419
======== ======== ========
LIABILITIES:
Deposits -
Demand $ 88,471 $ 88,133 $ 84,994
Savings 93,315 110,032 112,642
Time 69,100 66,429 64,667
-------- -------- --------
Total deposits 250,886 264,594 262,303
Short-term borrowings 1,000 844 1,000
Other liabilities 3,099 2,790 1,586
-------- -------- --------
Total liabilities 254,985 268,228 264,889
SHAREHOLDERS' EQUIT(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 15,150 14,938 14,671
-------- -------- --------
Total shareholders' equity 28,009 27,797 27,530
-------- -------- --------
Total liabilities and shareholders'
equity $282,994 $296,025 $292,419
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
1997 1996 1997 1996
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 4,755 $ 4,505 $ 14,021 $ 13,988
Interest on direct financing leases 21 23 64 79
Interest on Federal funds sold 144 281 629 656
Interest on investment securities-
Taxable 742 723 2,219 2,019
Exempt from Federal income tax -- -- -- 38
-------- -------- -------- --------
Total interest income 5,662 5,532 16,933 16,780
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits 1,634 1,745 4,961 5,209
Short-term borrowings 12 11 35 31
-------- -------- -------- --------
Total interest expense 1,646 1,756 4,996 5,240
-------- -------- -------- --------
Net interest income 4,016 3,776 11,937 11,540
PROVISION FOR LOAN AND LEASE LOSSE(Note 2) 180 180 540 630
-------- -------- -------- --------
Net interest income after provision
for loan and lease losses 3,836 3,596 11,397 10,910
-------- -------- -------- --------
OTHER INCOME:
Service charges on deposit accounts 274 277 817 825
Other service charges, collection and
exchange charges, commissions and
fees 604 480 1,550 1,419
Gain on investment securities
held-to-maturity 2 25 2 25
-------- -------- -------- --------
880 782 2,369 2,269
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee benefits 2,252 2,061 6,570 6,198
Occupancy expense of bank premises 1,228 1,087 3,453 3,246
Other operating expenses 1,052 995 3,237 3,030
-------- -------- -------- --------
4,532 4,143 13,260 12,474
-------- -------- -------- --------
Income before income taxes 184 235 506 705
INCOME TAX PROVISION 63 93 188 261
-------- -------- -------- --------
Net income $ 121 $ 142 $ 318 $ 444
======== ======== ======== ========
PER SHARE DATA:
Net income $ 0.17 $ 0.20 $ 0.45 $ 0.62
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.
<PAGE> 5
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees received $16,656 $16,638
Interest paid (4,906) (5,203)
Service charges, collection and exchange charges,
commission and fees received 2,369 2,243
Cash paid to suppliers and employees (11,836) (11,095)
Income taxes paid (295) (179)
--------- ---------
Net cash provided by operating activities 1,988 2,404
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities held-to-maturity 19,957 24,039
Purchase of investment securities held-to-maturity (18,511) (26,998)
Purchase of investment securities available-for-sale (273) --
Net decrease (increase) in loans and leases made to customers (1,506) 5,438
Proceeds from sale of loans 3,164 5,319
Capital expenditures (188) (196)
Proceeds from sale of equipment -- 3
Purchase of other real estate owned (425) (193)
Proceeds from sale of other real estate 188 --
--------- ---------
Net cash provided by investing activities 2,406 7,412
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits and savings accounts (17,861) (13,250)
Net increase in time deposits 2,671 5,146
Net increase in short-term borrowings 156 97
Dividends paid (106) (106)
--------- ---------
Net cash used in financing activities (15,140) (8,113)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,746) 1,703
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,277 32,659
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $22,531 $34,362
========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income $318 $444
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation on bank premises and equipment 435 412
Provision for loan and lease losses 540 630
Amortization of deferred loan fees (167) (269)
Gain on investment securities held-to-maturity (2) (25)
Changes in -
Interest receivable (110) 126
Interest payable 90 37
Taxes payable (107) 82
Other assets (817) 589
Other liabilities 1,808 378
--------- ---------
Net cash provided by operating activities $1,988 $2,404
========= =========
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.
<PAGE> 6
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
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 consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, the Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation.
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, 1997
are not necessarily indicative of the results anticipated for the year ended
December 31, 1997. 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,
1996.
2. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- -----------------------------
(IN THOUSANDS) 1997 1996 1997 1996
--------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, beginning of period $3,210 $3,053 $3,067 $3,096
Provision charged to operations 180 180 540 630
Loans and leases charged-off (93) (225) (378) (842)
Recoveries on loans and leases
previously charged-off 8 556 76 680
--------- ------------- ------------ -------------
Net charge-offs (85) 331 (302) (162)
--------- ------------- ------------ -------------
Balance, end of period $3,305 $3,564 $3,305 $3,564
========= ============= ============ =============
</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) 1997 1996 1996
------------- ------------ -------------
<S> <C> <C> <C>
Impaired loans for which there
is a related allowance $2,189 $1,424 $1,868
Impaired loans for which there is
no related allowance 1,522 1,650 1,602
------------- ------------ -------------
Total recorded investment $3,711 $3,074 $3,470
============= ============ =============
</TABLE>
The average recorded investment in impaired loans for the three and nine months
ended September 30, 1997 was $3,721,000 and $3,396,000, respectively, compared
to $3,678,000 and $4,146,000 for the same periods in 1996. 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) 1997 1996 1997 1996
- -------------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 27,888 $ 27,388 $ 27,797 $ 27,192
Net income 121 142 318 444
Cash dividends -- -- (106) (106)
-------- -------- -------- --------
Balance, end of period $ 28,009 $ 27,530 $ 28,009 $ 27,530
======== ======== ======== ========
</TABLE>
<PAGE> 7
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. MERGER
On August 31, 1997, HNB's data processing provider, Computer Systems
International, Ltd., ("CSI") repurchased into treasury stock, the shares owned
by an affiliate of a director, effectively increasing the Bank's ownership in
CSI from 50% to 100%. The results of CSI's operations are included in the
Consolidated Statements of Income and Expense from that date when the company
became a wholly-owned subsidiary. On September 30, 1997, CSI was merged into the
Bank, which resulted in additional assets and liabilities of approximately
$1,400,000.
<PAGE> 8
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
According to Dun & Bradstreet Corp., business failures in Hawaii climbed
29% in the first half of 1997, compared to 13% nationwide. The State's
unemployment rate was 6.1% for September 1997, well above the national average
of 4.7%. Visitor arrivals were down 0.4% for the first nine months of 1997,
compared to the same period last year. In addition, there is concern that Asia's
economic problems might have an adverse impact on the eastbound tourist market
and prompt the increasingly price-conscious Japanese to spend less during their
stay. For the month of September, sales of previously-owned single-family homes
and condominiums on Oahu increased 39% and 35%, respectively, over September
1996 levels. The median price for a single-family home on Oahu in September was
$310,300, down 2.0% from September 1996. The median price for a condominium in
September was $159,300, 7.9% lower than the same month the year before. Although
comparable statistics are not available for commercial real estate, this market
has experienced lower activity and lower prices, particularly in the outlying
areas, due to corporate downsizings, failures and migrations to other states.
HIGHLIGHTS
The Company reported net income of $121,000, or $0.17 per share, for the
three months ended September 30, 1997, compared to $142,000, or $0.20 per share,
for the same period last year. The decrease was primarily due to higher costs
associated with the opening of a new branch in Pearl City, Oahu in May 1997.
Year-to-date earnings were $318,000, or $0.45 per share, compared to $444,000 or
$0.62 per share, for the first nine months of 1996. The lower results were
primarily due to reductions in the carrying costs of certain properties in other
real estate owned in the second quarter as a result of declines in market
values. These adjustments approximated $135,000 and were recognized through
charges to other operating expenses, which directly impacted current earnings.
Total assets decreased from $296,025,000 at December 31, 1996 to
$282,994,000 at September 30, 1997. The decline was primarily due to a large
deposit withdrawal related to a customer's real estate investment, which
prompted a reduction in federal funds sold. (see Deposits). Loans and leases
ended the quarter at $205,470,000, slightly below the $207,262,00 reported at
year-end 1996. Deposits decreased from $264,594,000 at December 31, 1996 to
$250,886,000 at September 30, 1997. Leverage and risk-based capital ratios
continued to exceed regulatory requirements by a substantial margin.
-8-
<PAGE> 9
Net charge-offs for the quarter were $85,000, bringing the total for the
year-to-date to $302,000. Comparatively, for all of 1996, net charge-offs were
$839,000. Noncurrent loans and leases increased to $4,356,000 at September 30,
1997 from $3,392,000 at year-end 1996. Most of the credits in this category are
collateralized by real estate.
On August 31, 1997, HNB's data processing provider, Computer Systems
International, Ltd., ("CSI") repurchased into treasury stock, the shares owned
by an affiliate of a director, effectively increasing the Bank's ownership in
CSI from 50% to 100%. The results of CSI's operations are included in the
Consolidated Statements of Income and Expense from that date when the company
became a wholly-owned subsidiary. On September 30, 1997, CSI was merged into the
Bank. The merger gives the Bank absolute control over its computer systems, an
important strategic consideration in preparing for the Year 2000, and promotes
greater operating efficiencies.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three and nine months ended September 30,
1997 increased $240,000 or 6.4% and $397,000 or 3.4%, respectively, from the
comparable periods in 1996. The improvement for the quarter was primarily due to
higher interest and fees on loans and lower interest expense on deposits. The
increase for the year-to-date was mainly due to higher interest income on
investment securities and a reduction in interest expense on deposits.
The average net interest margin improved to 6.02% for the third quarter
of 1997 from 5.48% reported for the third quarter of 1996. The increase was
principally due to higher average asset yields, which resulted from a general
increase in market interest rates. Net interest margin for the year-to-date
increased to 5.90% from 5.67% for the same period last year. The higher margin
was due to both a higher average asset yield and a lower average cost of funds.
The average yield on interest-earning assets rose to 8.48% for the third
quarter of 1997 from 8.03% for the comparable quarter a year ago. For the first
nine months of 1997 and 1996, the average yield was 8.36% and 8.25%,
respectively. The average cost of funds for the quarter declined to 3.34% from
3.36% for the same period in 1996. The year-to-date average cost of funds for
1997 and 1996 was 3.30% and 3.39%, respectively.
Other Income and Expenses
Other income for the three and nine months ended September 30, 1997
increased $98,000 or 12.5% and $100,000 or 4.4%, compared to the same periods in
1996. The increase was primarily due to data processing revenues of $106,000
received through CSI in September due to the merger.
-9-
<PAGE> 10
Other expenses consist of salaries and employee benefits, occupancy
expense and other operating expenses. For the three and nine months ended
September 30, 1997, other expenses increased $389,000 or 9.4% and $786,000 or
6.3%, respectively, compared to the same periods last year. The increase for the
quarter was mainly due to the inclusion of CSI's operating expenses for the
month of September. The increase for the year-to-date was attributable to
write-downs in the carrying values of certain properties in other real estate
owned in the second quarter.
Salaries and employee benefits for the three and nine months ended
September 30, 1997 increased $191,000 or 9.3% and $372,000 or 6.0%,
respectively, over the same periods a year earlier. The increase for the quarter
was attributable to CSI's personnel costs for September. The year-to-date
increase reflected the addition of CSI's employees as well as 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,
1997 rose $141,000 or 13.0% and $207,000 or 6.4%, respectively, from the
comparable period in 1996. The increase for the quarter was attributable to the
CSI's office rent for September. Contributing to the year-to-date increase were
higher repair costs, taxes and depreciation charges.
Other operating expenses for the three and nine months ended September
30, 1997 increased $57,000 or 5.7% and $207,000 or 6.8%, respectively, compared
to same periods a year ago. The increase for the quarter was largely due to
higher legal and professional fees. The increase for the year-to-date was
primarily due to writedowns approximating $135,000 of certain properties in
other real estate owned as a result of declines in market value. (see Loan
Portfolio Risk Elements and Other Real Estate Owned). Also included in other
operating expenses are data processing fees paid to CSI, which amounted to
$570,648 and $537,155 for the first nine months of 1997 and 1996, respectively.
The merger of CSI into the Bank will eliminate these fees in the future, but
costs will be reallocated to salaries and employee benefits and occupancy
expenses.
The Bank is currently conducting an assessment of various systems to
ensure the Bank will be prepared for the Year 2000 and the turn of the century.
The review in progress covers vendors and service providers as well as other
systems that use embedded microchips, such as automated teller machines,
elevators and vaults. As a means of improving efficiency and to better serve its
customers, the Bank continuously upgrades its information processing systems.
Accordingly, as part of this program, a conversion to new computer hardware and
software, which is Year 2000 compliant, is planned in mid 1998. According to a
preliminary study, the projected cost for the new system is expected to range
from $1,400,000 to $1,800,000.
Income Taxes
The Company's effective income tax rate for the three and nine months
ended September 30, 1997 was 34.2% and 37.2%, respectively, compared to 39.6%
and 37.0% for the same periods last year. The lower tax rate for the quarter
reflected the utilization of tax benefits arising from the CSI merger.
-10-
<PAGE> 11
FINANCIAL CONDITION
Deposits
At September 30, 1997, total deposits were $250,886,000, a decrease from
$264,594,000 at December 31, 1996 and $262,303,000 at September 30, 1996. The
decline was primarily due to a customer's withdrawal of $15,500,000 from a
savings account in the third quarter for a real estate investment, which was
anticipated by the Bank. As short-term interest rates remained low, 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 the
year-to-date was 2.74% and 4.85%, respectively.
The following table presents the distribution of the Bank's deposit
accounts for the dates indicated.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 September 30, 1996
---------------------- ---------------------- -----------------------
Balance % Balance % Balance %
------------ ---- ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 62,107,000 24.8% $ 59,989,000 22.7% $ 58,529,000 22.3%
Interest-bearing demand 26,364,000 10.5 28,144,000 10.6 26,465,000 10.1
Savings 93,315,000 37.2 110,032,000 41.6 112,642,000 42.9
Time 69,100,000 27.5 66,429,000 25.1 64,667,000 24.7
------------ ----- ------------ ------ ------------ -----
Total deposits $250,886,000 100.0% $264,594,000 100.0% $262,303,000 100.0%
============ ===== ============ ===== ============ =====
</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, 1997, December 31, 1996, and
September 30, 1996, public time deposits totaled $33,119,000, $32,192,000, and
$31,321,000, respectively, representing 13.2%, 12.2%, and 11.9% 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 and other U.S. government agencies.
The Bank is also a stockholder in the Federal Reserve Bank and the Federal Home
Loan Bank of Seattle. The Bank has no zero coupon bonds, collateralized mortgage
obligations or stripped mortgage-backed securities.
At September 30, 1997, the book and fair value of the held-to-maturity
portfolio was $46,486,000 and $46,562,000, respectively. As of the same date,
the book and fair value of the available-for-sale portfolio was $1,760,000. The
Bank had no trading securities as of September 30, 1997. During the first nine
months of 1997, there were no sales or transfers of investment securities
between the held-to-maturity, available-for-sale or trading categories.
-11-
<PAGE> 12
Loan Portfolio and Loan Concentrations
At September 30, 1997, loans and leases were $205,470,000, compared to
$207,262,000 at December 31, 1996 and $202,444,000 at September 30, 1996. During
the first nine months of 1997, growth in the portfolio continued to be
constrained by a weak local economy. 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, 1997 December 31, 1996 September 30, 1996
--------------------- -------------------- ---------------------
Balance % Balance % Balance %
------------- ----- ------------ ---- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Real estate
Family residential $104,855,000 51.0% $104,791,000 50.5% $103,366,000 51.1%
Construction 2,047,000 1.0 2,572,000 1.2 2,818,000 1.4
Commercial property 26,908,000 13.1 25,851,000 12.5 24,505,000 12.1
------------ ----- ------------ ---- ------------ -----
Total 133,810,000 65.1 133,214,000 64.2 130,689,000 64.6
Commercial, industrial
and agricultural 62,876,000 30.6 64,804,000 31.3 63,094,000 31.2
Consumer 7,415,000 3.6 7,674,000 3.7 7,513,000 3.7
All other loans 348,000 0.2 557,000 0.3 272,000 0.1
Direct financing leases 1,021,000 0.5 1,013,000 0.5 876,000 0.4
------------ ----- ------------ ---- ------------ -----
Total $205,470,000 100.0% $207,262,000 100.0% $202,444,000 100.0%
============ ===== ============ ===== ============ =====
</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, 1997, noncurrent loans and leases increased to
$4,356,000, representing 2.1% of loans and leases outstanding, compared to
$3,392,000 or 1.6% at December 31, 1996 and $3,753,000 or 1.9% at September 30,
1996. The Bank had no restructured loans or leases at September 30, 1997,
December 31, 1996 or September 30, 1996.
Other real estate owned ("OREO"), which is included in other assets, is
generally comprised of properties acquired through foreclosure proceedings in
settlement of debts previously contracted. These assets are recorded at the
lower of cost or fair market value based on current appraisals less estimated
selling costs. Any excess of the carrying amount of the loan over the fair
market value of the asset, net of estimated disposal costs, is charged against
the allowance for loan and lease losses at the time of transfer. Subsequent to
transfer, any losses on disposition or writedowns as a result of declines in the
market value of specific properties are recorded as a charge to other expenses,
which reduces current earnings.
-12-
<PAGE> 13
During the second quarter of 1997, a periodic re-evaluation of certain
OREO properties indicated lower values due to a sluggish real estate market.
Accordingly, the Bank reduced its carrying costs for those assets with a charge
to other expenses of approximately $135,000 that directly impacted current
earnings. At September 30, 1997, December 31, 1996 and September 30, 1996, OREO
totaled $1,318,000, $1,219,000 and $1,355,000, respectively. The portfolio
consisted at quarter-end of a commercial property, a single-family residence and
a residential condominium.
The following table presents information on noncurrent loans and leases
and OREO for the dates indicated:
<TABLE>
<CAPTION>
September 30 December 31 September 30
1997 1996 1996
------------ ----------- ------------
<S> <C> <C> <C>
Noncurrent
Past due 90 days or more $ 617,000 $ 212,000 $ 119,000
Nonaccrual 3,739,000 3,180,000 3,634,000
---------- ---------- ----------
Total $4,356,000 $3,392,000 $3,753,000
========== ========== ==========
OREO $1,318,000 $1,219,000 $1,355,000
========== ========== ==========
</TABLE>
Provision and Allowance for Loan and Lease Losses
During the three and nine months ended September 30, 1997, the Bank
provided $180,000 and $540,000, respectively, for possible loan and lease
losses, compared to $180,000 and $630,000 for the three and nine months ended
September 30, 1996.
Net charge-offs for the quarter and year-to-date were $85,000 and
$302,000, respectively. Comparatively, for all of 1996, net charge-offs were
$839,000. Most of the Bank's losses through September 30, 1997 and for 1996 were
attributable to a few credits. The annualized ratio of net charge-offs to
average loans and leases for the year-to-date was 0.20%, compared to 0.10% for
the same period last year, and 0.40% for the full year 1996.
At September 30, 1997, the allowance for loan and lease losses stood at
$3,305,000, compared to $3,067,000 at December 31, 1996 and $3,564,000 at
September 30, 1996. The ratio of the allowance to total loans and leases
outstanding was 1.61%, 1.48% and 1.76% at September 30, 1997, December 31, 1996
and September 30, 1996, respectively. While the reserve represented 75.9% of
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.
-13-
<PAGE> 14
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. 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%. There were
no borrowings from the FHLB at September 30, 1997, December 31, 1996 or
September 30, 1996.
For the first nine months of 1997, net cash provided by operating
activities was $1,988,000. Net cash provided by investing activities was
$2,406,000, due largely to loan sales and maturing investment securities. Net
cash used in financing activities was $15,140,000, consisting primarily of a
large savings withdrawal, which was related to a customer's real estate
investment, partly offset by a net increase in time deposits.
Shareholders' Equity and Capital Resources
Shareholders' equity totaled $28,009,000 at September 30, 1997,
$27,797,000 at December 31, 1996 and $27,530,000 at September 30, 1996. The
growth in equity was achieved through retention in earnings after payment of
cash dividends of $106,650 in the first quarter of 1997 and 1996. Book value per
share rose from $38.72 at September 30, 1996 to $39.10 at December 31, 1996 and
to $39.39 at September 30, 1997.
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 9.81% at September 30, 1997, 9.45% at December 31,
1996, and 9.38% at September 30, 1996. At September 30, 1997, the Company's Tier
1 and total capital ratios were 14.28% and 15.54%, respectively, compared to
13.96% and 15.22% at December 31, 1996, and 14.06% and 15.32% at September 30,
1996.
EFFECT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per
Share," which is effective for financial statements issued for periods ending
after December 31, 1997, including interim periods. Earlier application is not
permitted. This Statement requires disclosing basic and diluted earnings per
share for all the years presented in the income statement. The adoption of this
Statement is not anticipated to have a material impact on the consolidated
financial statements of the Company.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which is effective for
fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. Since the Company has no items of other
comprehensive income, the adoption of this Statement is not expected to have a
material impact on the consolidated financial statements of the Company.
-14-
<PAGE> 15
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This Statement requires that
public business enterprises report certain information about operating segments
in complete sets of financial statements of the Company and in condensed
financial statements of interim periods issued to shareholders. Since the
Company does not have separate operating segments, the adoption of this
Statement is not expected to have a material impact on the consolidated
financial statements of the Company.
-15-
<PAGE> 16
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 7, 1997 By /s/ WARREN K.K. LUKE
----------------- --------------------------------
Warren K.K. Luke
President
Date November 7, 1997 By /s/ ERNEST T. MURATA
---------------- ------------------------------
Ernest T. Murata
Vice President, Treasurer,
Assistant Secretary and
Chief Financial Officer
-16-
<PAGE> 17
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
-17-
<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, 1997,
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,781
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,760
<INVESTMENTS-CARRYING> 46,486
<INVESTMENTS-MARKET> 46,562
<LOANS> 205,470
<ALLOWANCE> 3,305
<TOTAL-ASSETS> 282,994
<DEPOSITS> 250,886
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 3,099
<LONG-TERM> 0
0
0
<COMMON> 711
<OTHER-SE> 27,298
<TOTAL-LIABILITIES-AND-EQUITY> 282,994
<INTEREST-LOAN> 14,021
<INTEREST-INVEST> 2,219
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,933
<INTEREST-DEPOSIT> 4,961
<INTEREST-EXPENSE> 4,996
<INTEREST-INCOME-NET> 11,937
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 13,260
<INCOME-PRETAX> 506
<INCOME-PRE-EXTRAORDINARY> 318
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 318
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
<YIELD-ACTUAL> 5.90
<LOANS-NON> 3,739
<LOANS-PAST> 617
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,067
<CHARGE-OFFS> 378
<RECOVERIES> 76
<ALLOWANCE-CLOSE> 3,305
<ALLOWANCE-DOMESTIC> 3,305
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 740
</TABLE>
