<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, 1998
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 October 31, 1998 - 711,000 shares
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998,
December 31, 1997 and September 30, 1997 (Unaudited)................3
Consolidated Statements of Operations - Three and nine months
ended September 30, 1998 and 1997 (Unaudited).......................4
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1997 (Unaudited).......................5
Notes to Consolidated Financial Statements (Unaudited)..................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................................17
SIGNATURES ................................................................................17
EXHIBIT INDEX .............................................................................18
</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, 1998, DECEMBER 31, 1997 AND SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 20,649 $ 22,629 $ 15,781
Federal funds sold 4,000 -- 6,750
-------- -------- --------
Cash and cash equivalents 24,649 22,629 22,531
Investments held in trust - trading securities 114 -- --
Investment securities-
Held-to-maturity (fair value of $45,643, 45,489 47,481 46,486
$47,540 and $46,562 as of September 30, 1998,
December 31, 1997 and September 30, 1997,
respectively)
Available-for-sale 1,760 1,760 1,760
Loans and leases, net of allowance for 215,915 215,820 202,165
possible loan and lease losses of $3,359, $3,198 and
$3,305 as of September 30, 1998, December 31, 1997 and
September 30, 1997, respectively (Note 2)
Premises and equipment 4,738 3,539 3,653
Other assets 7,175 7,457 6,399
-------- -------- --------
Total assets $299,840 $298,686 $282,994
======== ======== ========
LIABILITIES:
Deposits -
Demand $ 90,951 $ 97,370 $ 88,471
Savings 91,408 91,167 93,315
Time 80,671 70,183 69,100
-------- -------- --------
Total deposits 263,030 258,720 250,886
Federal funds purchased -- 4,000 --
Short-term borrowings 5,797 5,000 1,000
Other liabilities 3,087 2,624 3,099
-------- -------- --------
Total liabilities 271,914 270,344 254,985
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 15,067 15,483 15,150
-------- -------- --------
Total shareholders' equity 27,926 28,342 28,009
-------- -------- --------
Total liabilities and shareholders' equity $299,840 $298,686 $282,994
======== ======== ========
</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 OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,014 $ 4,755 $ 15,084 $ 14,021
Interest on direct financing leases 26 21 84 64
Interest on Federal funds sold 111 144 143 629
Interest on investment securities 706 742 2,114 2,219
--------- --------- --------- ---------
Total interest income 5,857 5,662 17,425 16,933
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 1,723 1,634 4,944 4,961
Federal funds purchased 2 -- 15 --
Short-term borrowings 85 12 376 35
--------- --------- --------- ---------
Total interest expense 1,810 1,646 5,335 4,996
--------- --------- --------- ---------
Net interest income 4,047 4,016 12,090 11,937
PROVISION FOR LOAN AND LEASE LOSSES (Note 2) 270 180 810 540
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 3,777 3,836 11,280 11,397
--------- --------- --------- ---------
OTHER INCOME:
Service charges on deposit accounts 279 274 813 817
Other service charges, collection and
exchange charges, commissions and fees 578 604 1,738 1,550
Gain on investment securities held-to-maturity -- 2 -- 2
--------- --------- --------- ---------
857 880 2,551 2,369
--------- --------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 2,479 2,252 7,385 6,570
Occupancy expense of bank premises 1,225 1,228 3,661 3,453
Other operating expenses 1,061 1,052 3,450 3,237
--------- --------- --------- ---------
4,765 4,532 14,496 13,260
--------- --------- --------- ---------
Income (loss) before income taxes (131) 184 (665) 506
INCOME TAX PROVISION (BENEFIT) (120) 63 (356) 188
--------- --------- --------- ---------
Net income (loss) $ (11) $ 121 $ (309) $ 318
========= ========= ========= =========
PER SHARE DATA:
Earnings (basic and diluted) $ (0.02) $ 0.17 $ (0.43) $ 0.45
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, 1998 AND 1997
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees received $ 17,195 $ 16,656
Interest paid (5,153) (4,906)
Service charges, collection and exchange charges, commission and fees received 2,353 2,369
Cash paid to suppliers and employees (13,317) (11,836)
Income tax refund (paid) 64 (295)
Cash paid for trading securities (114) --
-------- --------
Net cash provided by operating activities 1,028 1,988
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities held-to-maturity 27,993 19,957
Purchase of investment securities held-to-maturity (26,001) (18,511)
Purchase of investment securities available-for-sale -- (273)
Net decrease (increase) in loans and leases made to customers (8,218) (1,506)
Proceeds from sale of loans 7,500 3,164
Capital expenditures (1,639) (188)
Proceeds from sale of other real estate 358 188
Purchase of other real estate owned -- (425)
-------- --------
Net cash provided by (used in) investing activities (7) 2,406
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits and savings accounts (6,179) (17,860)
Net increase in time deposits 10,488 2,671
Net decrease in federal funds purchased (4,000) --
Net increase in short-term borrowings 797 156
Dividends paid (107) (107)
-------- --------
Net cash provided by (used in) financing activities 999 (15,140)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,020 (10,746)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,629 33,277
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,649 $ 22,531
======== ========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ (309) $ 318
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation on bank premises and equipment 440 435
Provision for loan and lease losses 810 540
Amortization of deferred loan fees (186) (167)
Write-down of other real estate owned 335 135
Amortization of goodwill (198) --
Gain on investment securities held-to-maturity -- 2
Changes in -
Investments held in trust - trading securities (114) --
Interest receivable (44) (110)
Interest payable 182 90
Taxes payable (7) (107)
Other assets (366) (952)
Other liabilities 485 1,808
-------- --------
Net cash provided by operating activities $ 1,028 $ 1,992
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to real estate acquired through foreclosure $ -- $ 425
======== ========
</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
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, 1998
are not necessarily indicative of the results anticipated for the year ended
December 31, 1998. 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,
1997.
2. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
(IN THOUSANDS) 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 3,346 $ 3,210 $ 3,198 $ 3,067
Provision charged to operations 270 180 810 540
Loans and leases charged-off (278) (93) (689) (378)
Recoveries on loans and leases
previously charged-off 21 8 40 76
------- ------- ------- -------
Net charge-offs (257) (85) (649) (302)
------- ------- ------- -------
Balance, end of period $ 3,359 $ 3,305 $ 3,359 $ 3,305
======= ======= ======= =======
</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) 1998 1997 1997
------------ ----------- ------------
<S> <C> <C> <C>
Impaired loans for which there is a related allowance $1,862 $1,528 $2,189
Impaired loans for which there is no related allowance 1,760 2,265 1,522
------ ------ ------
Total recorded investment $3,622 $3,793 $3,711
====== ====== ======
</TABLE>
The average recorded investment in impaired loans for the three and nine months
ended September 30, 1998 was $3,701,000 and $3,711,000, respectively, compared
to $3,721,000 and $3,396,000 for the same periods in 1997. 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) 1998 1997 1998 1997
- ---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 27,937 $ 27,888 $ 28,342 $ 27,798
Net income (loss) (11) 121 (309) 318
Cash dividends -- -- (107) (107)
-------- -------- -------- --------
Balance, end of period $ 27,926 $ 28,009 $ 27,926 $ 28,009
======== ======== ======== ========
</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.
FORWARD LOOKING STATEMENTS
In this report, the Company has included certain "forward looking
statements" to describe future plans and strategies, including expectations of
the Company's future financial results. Management's ability to predict results
or the effect of future plans and strategy is inherently uncertain. Factors that
could affect results include, but are not limited to: interest rate trends, the
general economic climate in the state of Hawaii, the nation and the world, loan
delinquency rates, the local real estate market and changes in federal and state
regulation. These factors should be considered in evaluating the "forward
looking statements" and undue reliance should not be placed on such statements.
Additionally, "forward looking statements" contained in the Company's discussion
of its Year 2000 readiness are subject to factors including: the Bank's success
in identifying systems and programs that are not Year 2000 compliant, the
possibility that system modifications will not operate as intended, and the
uncertainty associated with the impact of the century date change on the Bank's
customers, vendors and third-party providers.
LOCAL ECONOMY
The Asian financial crisis is having a significant adverse impact on
Hawaii's economy and there are growing indications that conditions within the
State may deteriorate further before improving. Hotel occupancy has been
declining for the past 17 consecutive months. In September, Hawaii's hotels
posted their worst showing since 1993, while Oahu, a popular destination for
Asian tourists, experienced its lowest hotel occupancy in 15 years. The State's
unemployment rate for September was 6.2%, nearly 2% points higher than national
average. Bankruptcy filings for the first nine months of 1998 continued to set
new records, increasing 33% over the same period in 1997. In the real estate
area, property values remained under pressure, especially in the commercial
sector where corporate downsizings, failures, and migrations to other states
have taken their toll. The average vacancy rate for office buildings in downtown
Honolulu, the capital of Hawaii, is approximately 14%, while comparable rates
for outlying areas, including the neighbor islands, are considerably higher. The
median price of a single-family home on Oahu in September 1998 was $277,000, a
decrease of 10.6% from the September 1997 median of $310,000. As of the same
date, the median price for an Oahu condominium was $125,000, down 21.5% from
$159,300 in the previous September.
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<PAGE> 8
HIGHLIGHTS
The Company reported a net loss of $11,000 or $0.02 per share for the
third quarter of 1998, resulting in a year-to-date loss of $309,000 or $0.43 per
share. In the third quarter of 1997, net income was $121,000 or $0.17 per share.
Net income for the first nine months of 1997 was $318,000 or $0.45 per share.
Many factors affected the Company's performance through September 30,
1998. While revenue continued to grow, an increase in the provision for loan and
lease losses, combined with write-downs in other real estate owned ("OREO") and
significantly higher overhead costs related to an expansion in the branch
network, adversely impacted the results of operations.
During the three and nine months ended September 30, 1998, the Bank
provided $270,000 and $810,000, respectively, for possible loan and lease
losses, a 50% increase from the $180,000 and $540,000 provided for the same
periods a year ago. Net charge-offs increased to $257,000 for the quarter,
bringing the total for the year-to-date to $649,000. Net charge-offs for the
comparable periods in 1997 were $85,000 and $302,000, respectively. At September
30, 1998, noncurrent loans and leases totaled $3,838,000 or 1.8% of loans and
leases, compared to $4,206,000 or 1.9% at year-end 1997.
During the second quarter of 1998, a periodic re-evaluation of
certain properties in OREO indicated lower values. Accordingly, the Bank reduced
the carrying values for those assets with a charge to other operating expenses
of $335,000. In the second quarter of 1997, a similar write-down of $135,000 was
recorded. At September 30, 1998 and December 31, 1997, OREO totaled $976,000 or
0.33% of total assets and $1,668,000 or 0.56%, respectively.
In accordance with its long-range plan, HNB has been expanding into
areas on Oahu where the demographics are favorable. In May 1997, the Bank opened
the Pearl City branch in the Times Square Shopping Center. This was followed by
the establishment of the Bank's first "in-store branch" in the Moanalua Ethnic
Village in April 1998.
At September 30, 1998, total assets were $299,840,000, compared to
$298,686,000 at December 31, 1997. Loans and leases ended the quarter at
$219,274,000, little changed from the balance reported at year-end 1997.
Deposits increased to $263,030,000 at September 30, 1998 from $258,720,000 at
December 31, 1997. Leverage and risk-based capital ratios continued to exceed
regulatory requirements by a substantial margin.
Looking forward, the Company anticipates that its fourth quarter
results may be substantially lower than the comparable period in 1997. The
recent decline in market interest rates has lowered the Bank's asset yields,
which will put pressure on its net interest margin. The Bank's two new branches
will also continue to adversely impact earnings until the volume of business
grows to cover overhead costs. In view of the current economic environment in
Hawaii, the Bank is carefully monitoring the quality of its loan and lease
portfolio and the adequacy of its loan loss reserve. Based on these reviews, it
is anticipated that the provision for loan and lease losses could be enhanced
significantly above the $180,000 provided in the fourth quarter of 1997. (See
"Forward Looking Statements")
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<PAGE> 9
The Year 2000 project remains a high priority for HNB. The Bank is
currently on target to complete this undertaking prior to the June 30, 1999
regulatory milestone. It has completed the awareness phase by defining the Year
2000 problem, gaining executive management and Board of Director support, and
establishing a Year 2000 project team. It has also completed the assessment
phase by inventorying both its information technology ("IT") systems and non-IT
systems, (e.g., automated teller machines ("ATMs"), elevators and vaults) and
identifying third parties with which it has a material relationship. The Bank is
currently nearing the end of the renovation phase, which includes replacing or
repairing all applicable IT and non-IT systems. In June 1998, the Bank converted
to a new computer system, which is Year 2000 compliant, as part of its normal
upgrade process to improve efficiency and better serve its customers. The cost
of the new system was approximately $1,650,000, which was capitalized and is
being depreciated over a 5-year period. By November 30, 1998, renovations to the
Bank's ATMs and item processing system are scheduled to be completed. The
projected cost of these remediations, as well as other expenditures for the Year
2000 project, are not anticipated to be material to capital. Testing of
mission-critical systems is expected to be well underway by December 31, 1998
and to be completed by March 31, 1999.
The Bank has developed contingency plans for its mission-critical
systems, which include timelines and trigger dates for activation. There are
also disaster recovery plans in place in case there are telecommunication or
power failures at critical dates in the future. As part of the validation
process, a qualified, independent party will review both the Bank's contingency
and testing plans.
While the Bank has implemented programs to monitor the progress of
its significant vendors, service providers and corporate customers, no assurance
can be given that these third parties will be ready for the Year 2000. The
failure of any of these business partners or customers to successfully complete
renovation, testing and implementation of their systems could have a material
adverse effect on the results of operations, liquidity and capital resources. In
order to mitigate these potential external risks arising from the Year 2000, the
Bank has incorporated liquidity issues into its contingency funding plan, such
as planning for increased customer cash needs at the century date change. The
Bank has also included Year 2000 readiness into its risk grading procedures for
loan customers, which will be taken into account when analyzing the adequacy of
the allowance for loan and lease losses in the future. (For additional
information on the Year 2000, please refer to page 36 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. See also "Forward
Looking Statements")
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three and nine months ended September 30,
1998 increased $31,000 or 0.8% and $153,000 or 1.3%, respectively, from the
comparable periods in 1997. The improvement for the quarter and year-to-date was
primarily due to higher interest and fees on loans and leases, partly offset by
lower interest on federal funds sold and investments securities and higher
funding costs.
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<PAGE> 10
The average net interest margin declined to 5.83% for the third
quarter of 1998 from 6.02% reported for the third quarter of 1997. During the
quarter, average asset yields began to decline following the trend in market
interest rates. Meanwhile, the average cost of funds increased reflecting a
shift from lower-costing savings into higher-costing time deposits and an
advance from the Federal Home Loan Bank. (see "Deposits" and "Liquidity") Net
interest margin for the year-to-date increased to 5.94% from 5.90% for the same
period last year. The higher margin was due to higher average asset yields,
partly offset by an increase in the average cost of funds.
The average yield on interest-earning assets declined to 8.43% for
the third quarter of 1998 from 8.48% for the comparable quarter a year ago. For
the first nine months of 1998 and 1997, the average yield was 8.56% and 8.36%,
respectively. The average cost of funds for the quarter rose to 3.48% from 3.34%
for the same period in 1997. The year-to-date average cost of funds for 1998 and
1997 was 3.50% and 3.30%, respectively.
Other Income and Expenses
Other income for the three and nine months ended September 30, 1998
decreased $23,000 or 2.6% and increased $182,000 or 7.7%, compared to the same
periods in 1997. The increase for the year-to-date was primarily due to higher
revenue from credit card transactions and other miscellaneous fees.
Other expenses consist of salaries and employee benefits, occupancy
expense and other operating expenses. For the three and nine months ended
September 30, 1998, other expenses increased $233,000 or 5.1% and $1,236,000 or
9.3%, respectively, compared to the same periods last year.
Salaries and employee benefits for the three and nine months ended
September 30, 1998 increased $227,000 or 10.1% and $815,000 or 12.4%,
respectively, over the same periods a year earlier. The growth in this category
reflected several factors including: 1) an increase in staff due to the opening
of the Pearl City and the Moanalua branches and the merger of a data processing
provider, Computer Systems International, Ltd. ("CSI") into the Bank; 2) higher
pension expense; and 3) 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,
1998 decreased $3,000 or 0.24% and increased $208,000 or 6.0%, respectively,
from the comparable period in 1997. The increase for the year-to-date was
attributable to the addition of two new branches and the assumption of CSI's
office lease.
Other operating expenses for the three and nine months ended
September 30, 1998 increased $9,000 or 0.9% and $213,000 or 6.6%, respectively,
compared to same periods a year ago. The increase for the year-to-date was
primarily due to higher legal costs relating to problem loan collections and
OREO write-downs of approximately $335,000, partly offset by the absence of data
processing fees paid to CSI. In the third quarter and first nine months of 1997,
data processing fees paid to CSI were $192,253 and $570,648, respectively. While
the merger of CSI's operations into the Bank has eliminated these fees, these
expenses have been reallocated to
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<PAGE> 11
other areas. It is anticipated that the Bank will realize cost efficiencies in
the future by bringing the data processing function in-house.
Income Taxes
The Company had a federal and state income tax benefit for the three
and nine months ended September 30, 1998 of $120,000 and $356,000, respectively,
compared to an income tax provision of $63,000 and $188,000 for the same periods
in 1997. The effective income tax rates for the year-to-date periods were
(53.5%) for 1998 and 37.2% for 1997. The income tax benefits for the interim
periods in 1998 were due to the Company's projected loss for the year as well as
the utilization of tax benefits arising from the acquisition and liquidation of
CSI. This rate will be adjusted in the fourth quarter should expectations
regarding the Company's projected loss change.
FINANCIAL CONDITION
Deposits
At September 30, 1998, total deposits increased to $263,030,000,
compared to $258,720,000 at December 31, 1997 and $250,886,000 at September 30,
1997. The growth in the Bank's deposit base from year-end 1997 was primarily due
to an increase in time deposits, partly offset by a decrease in demand deposits.
Since December 31, 1997, savings deposits have declined from 35.2% of total
deposits to 34.7% at September 30, 1998, while time deposits have increased from
27.1% to 30.7%. This shift in the deposit mix represents a trend which has
increased the cost of funds for the Bank. The average rate paid on savings and
time deposits for the year-to-date was 2.72% and 4.87%, respectively. (see "Net
Interest Income").
The following table presents the distribution of the Bank's deposit
accounts for the dates indicated.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
---------------------- ---------------------- ----------------------
Balance % Balance % Balance %
------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 65,421,000 24.9% $ 69,463,000 26.9% $ 62,107,000 24.8%
Interest-bearing demand 25,530,000 9.7 27,907,000 10.8 26,364,000 10.5
Savings 91,408,000 34.7 91,167,000 35.2 93,315,000 37.2
Time 80,671,000 30.7 70,183,000 27.1 69,100,000 27.5
------------ ----- ------------ ----- ------------ -----
Total deposits $263,030,000 100.0% $258,720,000 100.0% $250,886,000 100.0%
============ ===== ============ ===== ============ =====
</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, 1998, December 31, 1997, and
September 30, 1997, public time deposits totaled $35,426,000, $32,001,000, and
$33,119,000, respectively, representing 13.5%, 12.4%, and 13.2%, respectively,
of the Bank's total deposits.
-11-
<PAGE> 12
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 financial or mortgage
derivatives.
At September 30, 1998, the book and fair value of the
held-to-maturity portfolio was $45,489,000 and $45,643,000, respectively. As of
the same date, the book and fair value of the available-for-sale portfolio was
$1,760,000. Trading securities held in trust amounted to $114,000 at September
30, 1998. These securities have been designated to satisfy certain of the Bank's
retirement plan obligations. During the first nine months of 1998, 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, 1998, loans and leases were $219,274,000, compared
to $219,018,000 at December 31, 1997 and $205,470,000 at September 30, 1997.
During the first nine months of 1998, the Bank sold $7,500,000 in loan
participations, compared to $3,164,000 for the same period in 1997. Since
September 30, 1997, commercial, industrial and agricultural loans have grown
from 30.6% of the portfolio to 32.7% at September 30, 1998, while real estate
loans have declined from 65.1% to 62.7%. The Bank has no significant
concentrations of credit with any individual party; however, its lending is
concentrated on the island of Oahu. There are no loans to any hedge funds.
The following table presents the composition of the Bank's loan and
lease portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
------------------------ -------------------------------- -------------------------
Balance % Balance % Balance %
------------ -------- ------------ --------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Real estate
Family residential $104,430,000 47.6% $107,181,000 48.9% $104,855,000 51.0%
Construction 1,663,000 0.8 2,617,000 1.2 2,047,000 1.0
Commercial property 31,271,000 14.3 28,892,000 13.2 26,908,000 13.1
------------ -------- ------------ --------------- ------------ --------
Total 137,364,000 62.7 138,690,000 63.3 133,810,000 65.1
Commercial, industrial
and agricultural 71,766,000 32.7 70,956,000 32.4 62,876,000 30.6
Consumer 8,639,000 3.9 7,613,000 3.5 7,415,000 3.6
All other loans 206,000 0.1 452,000 0.2 348,000 0.2
Direct financing leases 1,299,000 0.6 1,307,000 0.6 1,021,000 0.5
------------ -------- ------------ --------------- ------------ --------
Total $219,274,000 100.0% $219,018,000 100.0% $205,470,000 100.0%
============ ======== ============ =============== ============ ========
</TABLE>
-12-
<PAGE> 13
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, 1998, noncurrent loans and leases decreased to
$3,838,000, representing 1.8% of loans and leases outstanding, compared to
$4,206,000 or 1.9% at December 31, 1997 and $4,356,000 or 2.1% at September 30,
1997. The Bank had no restructured loans or leases at September 30, 1998,
December 31, 1997 or September 30, 1997.
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.
During the second quarter of 1998, a periodic re-evaluation of
certain OREO properties indicated lower values due to a weak local economy.
Accordingly, the Bank reduced its carrying values for those assets with a charge
to other expenses of $335,000 that directly impacted current earnings.
Comparatively, in the second quarter in 1997, the OREO balance was written down
by $135,000. At September 30, 1998, December 31, 1997 and September 30, 1997,
OREO totaled $976,000, $1,668,000 and $1,318,000, respectively, representing
0.33%, 0.56% and 0.47% of total assets, respectively. The portfolio consisted at
quarter-end of two commercial properties 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
1998 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
Noncurrent
Past due 90 days or more $ 122,000 $ 424,000 $ 617,000
Nonaccrual 3,716,000 3,782,000 3,739,000
---------- ---------- ----------
Total $3,838,000 $4,206,000 $4,356,000
========== ========== ==========
OREO $ 976,000 $1,668,000 $1,318,000
========== ========== ==========
</TABLE>
-13-
<PAGE> 14
Provision and Allowance for Loan and Lease Losses
During the three and nine months ended September 30, 1998, the Bank
provided $270,000 and $810,000, respectively, for possible loan and lease
losses, compared to $180,000 and $540,000 for the three and nine months ended
September 30, 1997. The increase was due to higher charge-offs and prospects of
increased fall-out from the Asian financial crisis on the local economy.
Net charge-offs for the quarter and year-to-date were $257,000 and
$649,000, respectively, compared to $85,000 and $302,000 for the same periods in
1998. Most of the Bank's losses through September 30, 1998 and 1997 were
attributable to a few commercial credits. The annualized ratio of net
charge-offs to average loans and leases for the year-to-date was 0.39%, compared
to 0.20% for the same period last year.
At September 30, 1998, the allowance for loan and lease losses stood
at $3,359,000, compared to $3,198,000 at December 31, 1997 and $3,305,000 at
September 30, 1997. The ratio of the allowance to total loans and leases
outstanding was 1.53%, 1.46% and 1.61% at September 30, 1998, December 31, 1997
and September 30, 1997, respectively. While the reserve represented
approximately 88% 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. Given the negative direction in Hawaii's economy, it is
anticipated that the provision for loan and lease losses for the fourth quarter
could be significantly above the $180,000 that was provided in the fourth
quarter in 1997. (see "Forward Looking Statements" and "Local Economy')
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. While deposits have traditionally
been the principal source of funds for HNB, the wholesale markets are
anticipated to play a greater role in the future, which may raise the cost of
funds for the Bank. (see "Net Interest Income") The Bank has a diverse funding
base, which includes federal funds lines with other banks, the discount
facilities of the Federal Reserve, and advances from the Federal Home Loan Bank
("FHLB"). The Bank's federal funds lines were undrawn at September 30, 1998. As
of the same date, there were no borrowings from the Federal Reserve. The Bank's
line of credit with the FHLB is equal to 15% of total assets, including a cash
management agreement line of 5%. In addition, under the FHLB's Community
Investment Program ("CIP"), the Bank can borrow up to $10,000,000 per year to
finance affordable housing projects and commercial loans at rates 10 to 20 basis
points below posted FHLB rates for comparable maturities. Advances under the CIP
program are not counted under the Bank's committed line. At September 30, 1998,
advances under this program amounted to $5,300,000.
For the first nine months of 1998, net cash provided by operating
activities was $1,028,000, compared to $1,988,000 for the same period in 1997.
Net cash used in investing activities was $7,000 with loan originations and
purchases of investment securities nearly offsetting proceeds from loan sales
and maturing investment securities. Comparatively, in the
-14-
<PAGE> 15
first nine months of 1997, net cash provided by investing activities was
$2,406,000. Financing activities provided net cash of $999,000 through the end
of September 1998. During the nine months, a net increase in time deposits
financed a net decrease in demand and savings deposits and federal fund
purchased. Net cash used in financing activities for the comparable period in
1997 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 $27,926,000 at September 30, 1998,
$28,342,000 at December 31, 1997 and $28,009,000 at September 30, 1997. During
the first quarter of 1998 and 1997, the Company paid cash dividends of $106,650
on its common stock. Book value per share was $39.28 at September 30, 1998,
$39.86 at December 31, 1997 and $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 9.32% at September 30, 1998, 9.88% at December 31,
1997, and 9.81% at September 30, 1997. At September 30, 1998, the Company's Tier
1 and total capital ratios were 13.06% and 14.31%, respectively, compared to
13.52% and 14.78% at December 31, 1997, and 14.28% and 15.54% at September 30,
1997.
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS" or the "Statement")
No. 130 "Reporting Comprehensive Income" and No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. SFAS No. 131 requires that information be provided
about the different types of business activities in which an enterprise engages
and the different economic environment in which it operates. The adoption of
these Statements is not expected to have a material impact on the consolidated
financial statements of the Company.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits," which is
effective for fiscal year 1998. The Statement revises and standardizes the
employers' disclosures about pension and other postretirement benefit plans, but
does not change the measurement or recognition of those plans. The Company will
implement this Statement in fiscal 1998, which will require modification of the
Company's pension plan disclosure.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires the recognition of all derivative instruments as
-15-
<PAGE> 16
either assets or liabilities in the statement of financial position and
measurement of those derivative instruments at fair value. The adoption of this
standard is not expected to have a material impact on the Company's consolidated
financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," which is effective for the
first quarter beginning after December 15, 1998. This Statement amends SFAS No.
65, "Accounting for Certain Mortgage-Backed Securities," to require that after
an entity that is engaged in mortgage-banking activities has securitized
mortgage loans that are held for sale, it must classify the resulting
mortgage-backed securities or other retained interests based on its ability and
intent to sell or hold those investments. Since the Company has no securitized
mortgage loans held for sale, the adoption of this Statement is not expected to
have a material impact on the consolidated financial statements of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is in the form of interest rate
risk. The manner in which this exposure is managed and an estimate of the
potential impact on net interest income assuming a 1-year horizon was disclosed
on page 43 in Hawaii National Bancshares, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1997. As of September 30, 1998, there were no
material changes to report.
-16-
<PAGE> 17
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 9, 1998 By /s/ Warren K.K. Luke
---------------------- -----------------------------
Warren K.K. Luke
President
Date November 9, 1998 By /s/ Ernest T. Murata
---------------------- --------------------------------
Ernest T. Murata
Vice President, Treasurer,
Assistant Secretary and
Chief Financial Officer
-17-
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
-18-
<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, 1998
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 20,649
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,760
<INVESTMENTS-CARRYING> 45,489
<INVESTMENTS-MARKET> 45,643
<LOANS> 219,274
<ALLOWANCE> 3,359
<TOTAL-ASSETS> 299,840
<DEPOSITS> 263,030
<SHORT-TERM> 5,797
<LIABILITIES-OTHER> 3,087
<LONG-TERM> 0
0
0
<COMMON> 711
<OTHER-SE> 27,215
<TOTAL-LIABILITIES-AND-EQUITY> 299,840
<INTEREST-LOAN> 15,084
<INTEREST-INVEST> 2,114
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 17,425
<INTEREST-DEPOSIT> 4,944
<INTEREST-EXPENSE> 5,335
<INTEREST-INCOME-NET> 12,090
<LOAN-LOSSES> 810
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,496
<INCOME-PRETAX> (665)
<INCOME-PRE-EXTRAORDINARY> (309)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (309)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
<YIELD-ACTUAL> 5.94
<LOANS-NON> 3,716
<LOANS-PAST> 122
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,198
<CHARGE-OFFS> 689
<RECOVERIES> 40
<ALLOWANCE-CLOSE> 3,359
<ALLOWANCE-DOMESTIC> 3,359
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 411
</TABLE>
