<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 March 31, 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 April 30, 1998 - 711,000 shares
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1998,
December 31, 1997 and March 31, 1997 (Unaudited)..........3
Consolidated Statements of Income - Three months
ended March 31, 1998 and 1997 (Unaudited).................4
Consolidated Statements of Cash Flows - Three months
ended March 31, 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
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................15
SIGNATURES.......................................................................15
EXHIBIT INDEX....................................................................16
</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)
MARCH 31, 1998, DECEMBER 31, 1997 AND MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31 MARCH 31
1998 1997 1997
-------- ----------- --------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 16,593 $ 22,629 $ 18,561
Federal funds sold 4,750 -- 20,250
-------- -------- --------
Cash and cash equivalents 21,343 22,629 38,811
Investment securities-
Held-to-maturity (fair value of $44,525,
$47,540 and $48,550 as of March 31, 1998,
December 31, 1997 and March 31, 1997,
respectively 44,484 47,481 48,931
Available-for-sale 1,760 1,760 1,760
Loans and leases, net of allowance for
possible loan and lease losses of $3,301,
$3,198, and $3,198 as of March 31, 1998,
December 31, 1997 and March 31, 1997,
respectively (Note 2) 219,331 215,820 202,505
Premises and equipment 3,667 3,539 3,774
Other assets 7,052 7,457 4,534
-------- -------- --------
Total assets $297,637 $298,686 $300,315
======== ======== ========
LIABILITIES:
Deposits -
Demand $ 89,764 $ 97,370 $ 90,347
Savings 85,512 91,167 112,268
Time 73,689 70,183 67,465
-------- -------- --------
Total deposits 248,965 258,720 270,080
Federal funds purchased -- 4,000 --
Short-term borrowings 17,981 5,000 1,000
Other liabilities 2,466 2,624 1,386
-------- -------- --------
Total liabilities 269,412 270,344 272,466
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 15,366 15,483 14,990
-------- -------- --------
Total shareholders' equity 28,225 28,342 27,849
-------- -------- --------
Total liabilities and shareholders' equity $297,637 $298,686 $300,315
======== ======== ========
</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 MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,019 $ 4,597
Interest on direct financing leases 30 23
Interest on Federal funds sold 16 234
Interest on investment securities 707 731
--------- ---------
Total interest income 5,772 5,585
--------- ---------
INTEREST EXPENSE:
Deposits 1,566 1,647
Federal funds purchased 6 --
Short-term borrowings 197 10
--------- ---------
Total interest expense 1,769 1,657
--------- ---------
Net interest income 4,003 3,928
PROVISION FOR LOAN AND LEASE LOSSES (Note 2) 270 180
--------- ---------
Net interest income after provision
for loan and lease losses 3,733 3,748
--------- ---------
OTHER INCOME:
Service charges on deposit accounts 272 272
Other service charges, collection and
exchange charges, commissions and fees 600 483
--------- ---------
872 755
--------- ---------
OTHER EXPENSES:
Salaries and employee benefits 2,423 2,151
Occupancy expense of bank premises 1,217 1,102
Other operating expenses 974 992
--------- ---------
4,614 4,245
--------- ---------
Income (loss) before income taxes (9) 258
INCOME TAX PROVISION 1 100
--------- ---------
Net income (loss) $ (10) $ 158
========= =========
PER SHARE DATA:
Earnings (basic and diluted) $ (0.01) $ 0.22
Cash dividend $ 0.15 $ 0.15
Average shares outstanding 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 THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees received $ 5,637 $ 5,402
Interest paid (1,683) (1,665)
Service charges, collection and exchange charges, commission and fees received 872 755
Cash paid to suppliers and employees (4,243) (3,269)
Income taxes paid -- (18)
-------- --------
Net cash provided by operating activities 583 1,205
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities held-to-maturity 10,993 4,003
Purchase of investment securities held-to-maturity (7,996) (5,004)
Purchase of investment securities available-for-sale -- (273)
Net decrease (increase) in loans and leases made to customers (4,229) 1,566
Proceeds from sale of loans 500 --
Capital expenditures (256) (19)
-------- --------
Net cash provided by (used in) investing activities (988) 273
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts (13,261) 2,971
Net increase in time deposits 3,506 1,036
Net decrease in federal funds purchased (4,000) --
Net increase in short-term borrowings 12,981 156
Dividends paid (107) (107)
-------- --------
Net cash provided by (used in) financing activities (881) 4,056
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,286) 5,534
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,629 33,277
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,343 $ 38,811
======== ========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) ($ 10) $ 158
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation on bank premises and equipment 128 144
Provision for loan and lease losses 270 180
Amortization of deferred loan fees (51) (55)
Changes in -
Interest receivable (84) (128)
Interest payable 86 (8)
Taxes payable 1 82
Other assets 489 829
Other liabilities (246) 3
-------- --------
Net cash provided by operating activities $ 583 $ 1,205
======== ========
</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 three months ended March 31, 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
MARCH 31
-------------------------
(IN THOUSANDS) 1998 1997
- -------------- ------- -------
<S> <C> <C>
Balance, beginning of period $ 3,198 $ 3,067
Provision charged to operations 270 180
Loans and leases charged-off (178) (60)
Recoveries on loans and leases
previously charged-off 11 11
------- -------
Net charge-offs (167) (49)
------- -------
Balance, end of period $ 3,301 $ 3,198
======= =======
</TABLE>
The following table presents information on the recorded investment in Impaired
loans for the dates indicated:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31 MARCH 31
(IN THOUSANDS) 1998 1997 1997
- -------------- ------ ------ ------
<S> <C> <C> <C>
Impaired loans for which there is a related allowance $1,604 $1,528 $1,858
Impaired loans for which there is no related allowance 2,243 2,265 1,465
------ ------ ------
Total recorded investment $3,847 $3,793 $3,323
====== ====== ======
</TABLE>
The average recorded investment in impaired loans was $3,677,000 for the three
months ended March 31, 1998, $3,584,000 for the year ended December 31, 1997 and
$3,042,000 for the three months ended March 31, 1997. Interest income on
impaired loans is recognized in accordance with the Company's nonaccrual loan
policy. There was no income recognized on impaired loans in any or the
previously mentioned periods.
3. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------
(IN THOUSANDS) 1998 1997
- -------------- -------- --------
<S> <C> <C>
Balance, beginning of period $ 28,342 $ 27,798
Net income (loss) (10) 158
Cash dividends (107) (107)
-------- --------
Balance, end of period $ 28,225 $ 27,849
======== ========
</TABLE>
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<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
In this report, the Company has included certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This statement is for the express purpose of availing the Company of
the protections of such safe harbor with respect to all "forward looking
statements." The Company has used "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 interest rate trends, the general economic climate in the state
of Hawaii and the nation as a whole, loan delinquency rates, 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.
LOCAL ECONOMY
The economic outlook for the State of Hawaii remains negative and the
direction is likely to continue before improving. The State's bond issues have
been placed on a watch-list by one of the two main bond-rating agencies in the
country. Due to the economic problems in Asia, there has been a sharp decline in
eastbound tourists to Hawaii, resulting in lower revenues for local merchants
and restaurants. Bankruptcy and foreclosure filings through March 1998 continued
to set new records, increasing 28.4% and 30.0%, respectively, over the same
period in 1997. In recent months, some of Hawaii's largest employers, including
the military, State and local government, have announced unprecedented layoffs.
It is expected that these job losses will further adversely impact the economic
conditions in the State. The real estate area continues to experience depressed
property values.
HIGHLIGHTS
The Company reported a net loss of $10,000, or $0.01 per share, for the
three months ended March 31, 1998. While revenue grew, an increase in the
provision for loan and lease losses combined with higher overhead costs,
adversely affected the results of operations. In the first quarter of 1997, net
income was $158,000, or $0.22 per share.
At March 31, 1998, total assets stood at $297,637,000, compared to
$298,686,000 at December 31, 1997. Loans and leases ended the first quarter of
1998 at $222,632,000, an increase of $3,614,000 from year-end 1997. Deposits
declined $9,755,000 to $248,965,000 at
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<PAGE> 8
March 31, 1998 due to a large anticipated savings withdrawal from a customer's
account for a planned investment. Leverage and risk-based capital ratios
continued to exceed regulatory requirements by a substantial margin.
Noncurrent loans and leases declined to $3,954,000 at March 31, 1998,
representing 1.8% of total loans and leases, compared to $4,206,000 or 1.9% at
December 31, 1997. Net charge-offs increased to $167,000 for the first quarter
of 1998, compared to $49,000 for the same period last year.
In March 1998, the Bank opened its first "in-store branch" in the
Moanalua Ethnic Village on Oahu. The new office will provide the Bank with an
opportunity to expand its loan and deposit base. Based on past experience,
initially, new branches adversely impact earnings until the volume of business
grows to cover overhead expenses.
Looking forward, the Company anticipates that its second quarter
earnings will be lower than the comparable period in 1997. Besides the support
required for the new branch, funding costs may be higher. During the second
quarter, the Bank expects to provide approximately $270,000 for possible loan
and lease losses, an increase from the $180,000 provided for the same period a
year ago. Subsequent to March 31, 1998, a periodic re-evaluation of a commercial
property in other real estate owned indicated a lower value. Accordingly, the
Bank will be reducing the carrying value of the asset by approximately $77,000,
which will directly impact current earnings next quarter. The Bank is currently
in the process of re-appraising other properties acquired through foreclosure
sale. Given the downward trend in real estate values, there is a possibility
that additional writedowns may be required in the future. (See "Loan Portfolio
Risk Elements and Other Real Estate Owned.")
The Year 2000 project remains a high priority. The Company is currently
on target with respect to internal and regulatory timetables. A conversion to a
new computer system, which is Year 2000 compliant, is planned in June 1998. The
cost of the new system is approximately $1,400,000, which will be capitalized
and depreciated over its useful life. Testing of mission-critical hardware and
software is expected to be well underway by December 31, 1998. (For additional
information on the Year 2000 project, please refer to the Company's annual
report on Form 10-K for the year ended December 31, 1997).
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three months ended March 31, 1998 increased
$75,000 or 1.9% from the respective period in 1997. The improvement was
attributable to an increase in interest income which offset an increase in
interest expense. During the quarter, the average yield on interest-earning
assets rose more than the average cost of interest-bearing liabilities. The
average net interest margin for the first quarters of 1998 and 1997 was 5.99%
and 5.84%, respectively.
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<PAGE> 9
Interest income for the three months ended March 31, 1998 increased
$187,000 or 3.3% from the comparable period in 1997. The improved results were
attributable to an increase in interest and fees on loans, which offset lower
interest income on federal funds sold and investment securities. The average
yield on interest-earning assets for the first quarter of 1998 was 8.64%,
compared to 8.30% for the same period in 1997. The increase was due to generally
higher market interest rates and a shift from lower-yielding federal funds sold
into higher-yielding loans and leases.
Interest expense for the three months ended March 31, 1998 increased
$112,000 or 6.8%, versus the same period a year earlier. The increase was
primarily due to an increase in interest expense on federal funds purchased and
short-term borrowings, partly offset by a decrease in interest expense on
deposits. The average rate paid on interest-bearing deposits and liabilities for
the quarter was 3.54%, compared to 3.26% for the same period in 1997. The
increase was due to a higher level of federal funds purchased and short-term
borrowings which have a higher cost than deposits.
Other Income and Expenses
Other income for the three months ended March 31, 1998 increased
$117,000, or 15.5%, compared to the same quarter in the prior year. The increase
was due to higher revenue from credit card transactions and other miscellaneous
fees.
Other expenses consist primarily of salaries and employee benefits,
occupancy expense and other operating expenses. For the three months ended March
31, 1998, other expenses increased $369,000 or 8.7%, compared to the same period
last year.
Salaries and employee benefits for the first quarter of 1998 increased
$272,000 or 12.6%, over the same period a year earlier. The growth in this
category reflected several factors including: 1) an increase in staff resulting
from the opening of a new branch in Pearl City, Oahu, and the merger of a data
processing provider, Computer Systems International, Ltd. ("CSI") into the Bank;
2) rising costs for health benefits; 3) higher pension expense; and 4) normal
merit and inflationary adjustments which were adopted to keep the Bank's salary
and benefit packages competitive.
Occupancy expenses for the three months ended March 31, 1998 rose
$115,000 or 10.4% from the comparable period in 1997. The increase was primarily
due to the addition of the new Pearl City branch and the assumption of CSI's
office lease.
Other operating expenses for the first quarter of 1998 decreased $18,000
or 1.8%, compared to same period a year ago. The decline was mainly due to the
merger of the CSI's operations into the Bank, partly offset by higher costs for
legal and professional fees, office supplies and interchange fees on credit card
charges. Data processing fees paid to CSI for the first quarter of 1997 amounted
to $189,097. While the merger of CSI into the Bank has eliminated these fees,
these expenses have been reallocated to other areas. It is anticipated that the
Bank will realize cost efficiencies in the future as a result of these actions.
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<PAGE> 10
Income Taxes
The Company's federal and state income tax provision for the first
quarter of 1998 was $1,000, compared to $100,000 for the same quarter a year
ago. The effective income tax rates for these periods were (10.0%) and 38.8%,
respectively. The lower effective tax rate for the first quarter of 1998 was
based upon the Company's lower projected income for the year, compared to 1997,
as well as the utilization of tax benefits arising from the acquisition and
liquidation of CSI. This rate will be adjusted in subsequent periods should
expectations regarding the Company's annual earnings change.
FINANCIAL CONDITION
Deposits
At March 31, 1998, total deposits were $248,965,000, a decrease of
$9,755,000 or 3.8%, compared to $258,720,000 at December 31, 1997. The decline
was primarily due to an anticipated withdrawal of $15,500,000 from a customer's
savings account for a planned investment. Noninterest-bearing demand deposits
ended the quarter at $7,263,000 below the balance reported at year-end 1997.
Interest-bearing demand deposits at quarter-end were virtually unchanged from
December 31, 1997. Time deposits increased by $3,506,000 over year-end 1997
levels, partly offsetting a decline in savings deposits of $5,655,000.
The following table presents the distribution of the Bank's deposit
accounts for the dates indicated.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997 March 31, 1997
- ----------------------------------------------------------------------------------------------------------
Balance % Balance % Balance %
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 62,200,000 25.0% $ 69,463,000 26.9% $ 62,383,000 23.1%
Interest-bearing demand 27,564,000 11.1 27,907,000 10.8 27,964,000 10.3
Savings 85,512,000 34.3 91,167,000 35.2 112,268,000 41.6
Time 73,689,000 29.6 70,183,000 27.1 67,465,000 25.0
------------ ----- ------------ ----- ------------ -----
Total deposits $248,965,000 100.0% $258,720,000 100.0% $270,080,000 100.0%
============ ===== ============ ===== ============ =====
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Since March 31, 1997, time deposits, as a percentage of total deposits,
have grown from 25.0% to 29.6% as of March 31, 1998. Meanwhile, over the same
period, savings deposits have declined from 41.6% to 34.3%. This change in the
deposit mix has increased deposit costs for the Bank. The average rates paid on
savings and time deposits for the first quarter of 1998 were 2.68% and 4.94%,
respectively.
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<PAGE> 11
Included in time deposits are certificates of deposits ("CDs") 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 March 31, 1998, December 31, 1997, and March
31, 1997, public time deposits totaled $32,798,000, $32,001,000, and
$32,453,000, respectively, representing 13.2%, 12.4%, and 12.0% 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 structured notes, zero coupon bonds,
collateralized mortgage obligations or stripped mortgage-backed securities.
At March 31, 1998, the book and fair value of the held-to-maturity
portfolio was $44,484,000 and $44,525,000, 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 March 31, 1998. During the first quarter 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 March 31, 1998, loans and leases were $222,632,000, an increase of
$3,614,000 or 1.7% from $219,018,000 at year-end 1997. During the quarter,
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>
March 31, 1998 December 31, 1997 March 31, 1997
- ----------------------------------------------------------------------------------------------------------
Balance % Balance % Balance %
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
Family residential $108,408,000 48.7% $107,181,000 48.9% $104,618,000 50.9%
Construction 2,124,000 1.0 2,617,000 1.2 2,880,000 1.4
Commercial property 29,918,000 13.4 28,892,000 13.2 26,509,000 12.9
------------ ----- ------------ ----- ------------ -----
Total 140,450,000 63.1 138,690,000 63.3 134,007,000 65.2
Commercial, industrial
and agricultural 72,732,000 32.7 70,956,000 32.4 63,069,000 30.7
Consumer 7,817,000 3.5 7,613,000 3.5 7,280,000 3.5
All other loans 252,000 0.1 452,000 0.2 437,000 0.2
Direct financing leases 1,381,000 0.6 1,307,000 0.6 910,000 0.4
------------ ----- ------------ ----- ------------ -----
Total $222,632,000 100.0% $219,018,000 100.0% $205,703,000 100.0%
============ ===== ============ ===== ============ =====
- ----------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 12
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. At March 31, 1998, noncurrent loans and leases declined to
$3,954,000, representing 1.8% of loans and leases outstanding, compared to
$4,206,000, or 1.9%, at December 31, 1997, and $4,053,000, or 2.0%, at March 31,
1997. Sixty-eight percent of the dollar amount in this category is
collateralized by real estate. The Bank had no restructured loans or leases as
of March 31, 1998, December 31, 1997 or March 31, 1997.
Other real estate owned ("OREO"), which is included in other assets, is
generally composed 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 assets, net of estimated disposal costs, is charged against
the allowance for loan and lease losses at the time of transfer. After a
property has been transferred to OREO, 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. At March 31,
1998, OREO was $1,668,000, unchanged from December 31, 1997. The portfolio
consisted of a commercial property, a single-family residence and two
residential condominiums. Subsequent to quarter-end, a periodic re-evaluation of
the commercial property indicated a lower value. Accordingly, the Bank will be
reducing the carrying value of the asset with a charge to other expenses of
approximately $77,000, which will directly impact current earnings next quarter.
The Bank is currently in the process of re-appraising the other properties.
Given the downward trend in real estate values, there is a possibility that
additional writedowns may be required in the future.
The following table presents information on noncurrent loans and leases and
OREO for the dates indicated:
<TABLE>
<CAPTION>
March 31 December 31 March 31
1998 1997 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Noncurrent
Past due 90 days or more $ 44,000 $ 424,000 $ 595,000
Nonaccrual 3,910,000 3,782,000 3,458,000
---------- ---------- ----------
Total $3,954,000 $4,206,000 $4,053,000
========== ========== ==========
OREO $1,668,000 $1,668,000 $1,219,000
========== ========== ==========
Note:Impaired loans are included in nonaccrual loans and leases.
- -------------------------------------------------------------------------------
</TABLE>
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<PAGE> 13
Provision and Allowance for Loan and Lease Losses
During the three months ended March 31, 1998, the Bank provided $270,000
for possible loan losses, compared to $180,000 for the three months ended March
31, 1997. The increase was prompted by prospects of increased fall-out from the
Asian financial crisis on the local business community and the recent growth in
the Bank's loan and lease portfolio. The provision for the second quarter of
1998 is expected to be approximately $270,000. The appropriateness of
maintaining the provision at this level will be re-evaluated at least quarterly.
Gross charge-offs increased to $178,000 for the three months ended March
31, 1998, compared to $60,000 for the same period in 1997. Nearly three-quarters
of the losses in the current period were attributable to 3 commercial loans.
Recoveries totaled $11,000 for both the first quarter of 1998 and 1997. Net
charge-offs for the first three months of 1998 were $167,000, substantially
above the $49,000 reported for the same period in 1997. The annualized ratio of
net charge-offs to average loans and leases for the first quarter of 1998 was
0.30%, compared to 0.10% for the same period a year earlier.
At March 31, 1998, the allowance for loan and lease losses stood at
$3,301,000, compared to $3,198,000 at December 31, 1997 and March 31, 1997. The
ratio of the allowance to total loans and leases outstanding was 1.48%, 1.46%
and 1.55% at March 31, 1998, December 31, 1997 and March 31, 1997, respectively.
While the reserve represented 83.5% 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, approximately two-thirds of the
dollar amount in the noncurrent category is 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. 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. 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 March 31, 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 15.0% of total assets, including a cash management agreement
line of 5.0%. As of quarter-end, $12,000,000 was outstanding under this
facility, which was subsequently paid off in April. 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 March 31, 1998, advances under this program amounted to
$5,300,000.
For the first three months of 1998, net cash provided by operating
activities was $583,000, compared to $1,205,000 for the same period in 1997.
Loan and lease originations, net of principal payments, accounted for a
significant portion of the net cash used in investing
-13-
<PAGE> 14
activities of $988,000 for the three months ended March 31, 1998. Comparatively,
in the first quarter of 1997, net cash provided by investing activities was
$273,000 due to a net decrease in loans and leases. Financing activities used
net cash of $881,000 through the end of March 1998. During the quarter, a large
anticipated savings outflow was partly offset by an advance from the Federal
Home Loan Bank. (See "Deposits.") In the first quarter of 1997, net cash
provided by financing activities was $4,056,000 due to an increase in deposits.
Shareholders' Equity and Capital Resources
Shareholders' equity totaled $28,225,000 at March 31, 1998, compared to
$28,342,000 at December 31, 1997 and $27,849,000 at March 31, 1997. During the
first quarter of 1998 and 1997, the Bank paid cash dividends on its common stock
of $106,650. Book value per share was $39.70 at March 31, 1998, $39.86 at
December 31, 1997 and $39.17 at March 31, 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 9.61% at March 31, 1998, 9.88% at December 31,
1997, and 9.51% at March 31, 1997. At March 31, 1998, the Company's Tier 1 and
total capital ratios were 13.26% and 14.52%, respectively, compared to 13.52%
and 14.78% at December 31, 1997, and 14.10% and 15.35% at March 31, 1997.
Effect of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which is effective for fiscal 1998. Statement No. 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Statement 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. Since the Company
has no items of other comprehensive income and does not have separate operating
segments, 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 Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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.
-14-
<PAGE> 15
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 May 8, 1998 By /s/Warren K.K. Luke
--------------------- ------------------------------------
Warren K.K. Luke
President
Date May 8, 1998 By /s/Ernest T. Murata
--------------------- ------------------------------------
Ernest T. Murata
Vice President, Treasurer,
Assistant Secretary and
Chief Financial Officer
-15-
<PAGE> 16
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
-16-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,593
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,750
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,760
<INVESTMENTS-CARRYING> 44,484
<INVESTMENTS-MARKET> 44,525
<LOANS> 222,632
<ALLOWANCE> 3,301
<TOTAL-ASSETS> 297,637
<DEPOSITS> 248,965
<SHORT-TERM> 17,981
<LIABILITIES-OTHER> 2,466
<LONG-TERM> 0
0
0
<COMMON> 711
<OTHER-SE> 27,514
<TOTAL-LIABILITIES-AND-EQUITY> 297,637
<INTEREST-LOAN> 5,019
<INTEREST-INVEST> 707
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,772
<INTEREST-DEPOSIT> 1,566
<INTEREST-EXPENSE> 1,769
<INTEREST-INCOME-NET> 4,003
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,614
<INCOME-PRETAX> (9)
<INCOME-PRE-EXTRAORDINARY> (10)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
<YIELD-ACTUAL> 5.99
<LOANS-NON> 3,910
<LOANS-PAST> 44
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,198
<CHARGE-OFFS> 178
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 3,301
<ALLOWANCE-DOMESTIC> 3,301
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 534
</TABLE>
