<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 June 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 July 31, 1998 - 711,000 shares
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998,
December 31, 1997 and June 30, 1997 (Unaudited).........................................3
Consolidated Statements of Operations - Three and six months
ended June 30, 1998 and 1997 (Unaudited)................................................4
Consolidated Statements of Cash Flows - Six months
ended June 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...................................15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..........................................16
Item 6. Exhibits and Reports on Form 8-K.............................................................16
SIGNATURES.................................................................................................16
EXHIBIT INDEX..............................................................................................17
</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)
JUNE 30, 1998, DECEMBER 31, 1997 AND JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
1998 1997 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 18,626 $ 22,629 $ 17,491
Federal funds sold 2,500 -- 20,250
-------- -------- --------
Cash and cash equivalents 21,126 22,629 37,741
Investments held in trust - trading securities 112 -- --
Investment securities
Held-to-maturity (fair value of $44,530, 44,487 47,481 46,982
$47,540 and $46,981 as of June 30, 1998,
December 31, 1997 and June 30, 1997,
respectively)
Available-for-sale 1,760 1,760 1,760
Loans and leases, net of allowance for 217,865 215,820 202,379
possible loan and lease losses of $3,346, $3,198 and $3,210
as of June 30, 1998, December 31, 1997 and June 30, 1997,
respectively (Note 2)
Premises and equipment 3,613 3,539 3,755
Other assets 7,825 7,457 5,392
-------- -------- --------
Total assets $296,788 $298,686 $298,009
======== ======== ========
LIABILITIES:
Deposits -
Demand $ 92,521 $ 97,370 $ 90,052
Savings 90,224 91,167 107,823
Time 77,240 70,183 69,497
-------- -------- --------
Total deposits 259,985 258,720 267,372
Federal funds purchased -- 4,000 --
Short-term borrowings 6,300 5,000 1,000
Other liabilities 2,565 2,624 1,750
-------- -------- --------
Total liabilities 268,850 270,344 270,122
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 15,079 15,483 15,028
-------- -------- --------
Total shareholders' equity 27,938 28,342 27,887
-------- -------- --------
Total liabilities and shareholders' equity $296,788 $298,686 $298,009
======== ======== ========
</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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,053 $ 4,669 $ 10,071 $ 9,266
Interest on direct financing leases 27 21 58 43
Interest on Federal funds sold 15 250 31 485
Interest on investment securities 701 749 1,408 1,476
--------- --------- --------- ---------
Total interest income 5,796 5,689 11,568 11,270
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 1,655 1,680 3,220 3,326
Federal funds purchased 7 -- 14 --
Short-term borrowings 94 12 291 23
--------- --------- --------- ---------
Total interest expense 1,756 1,692 3,525 3,349
--------- --------- --------- ---------
Net interest income 4,040 3,997 8,043 7,921
PROVISION FOR LOAN AND LEASE LOSSES (Note 2) 270 180 540 360
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 3,770 3,817 7,503 7,561
--------- --------- --------- ---------
OTHER INCOME:
Service charges on deposit accounts 262 271 534 543
Other service charges, collection and
exchange charges, commissions and fees 560 462 1,160 946
--------- --------- --------- ---------
822 733 1,694 1,489
--------- --------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 2,482 2,167 4,905 4,319
Occupancy expense of bank premises 1,219 1,124 2,436 2,225
Other operating expenses 1,416 1,196 2,389 2,184
--------- --------- --------- ---------
5,117 4,487 9,730 8,728
--------- --------- --------- ---------
Income (loss) before income taxes (525) 63 (533) 322
INCOME TAX PROVISION (BENEFIT) (237) 25 (236) 125
--------- --------- --------- ---------
Net income (loss) $ (288) $ 38 $ (297) $ 197
========= ========= ========= =========
PER SHARE DATA:
Earnings (basic and diluted) $ (0.41) $ 0.05 $ (0.42) $ 0.28
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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees received $ 11,269 $ 10,945
Interest paid (3,484) (3,464)
Service charges, collection and exchange charges, commission and fees received 1,562 1,489
Cash paid to suppliers and employees (9,440) (7,237)
Income tax refund (paid) 67 (282)
Cash paid for trading securities (112) --
-------- --------
Net cash provided by (used in) operating activities (138) 1,451
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities held-to-maturity 16,993 10,954
Purchase of investment securities held-to-maturity (13,999) (10,006)
Purchase of investment securities available-for-sale -- (273)
Net decrease (increase) in loans and leases made to customers (4,983) 1,060
Proceeds from sale of loans 2,500 500
Capital expenditures (334) (143)
Purchase of other real estate owned -- (425)
-------- --------
Net cash provided by investing activities 177 1,667
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits and savings accounts (5,792) (1,771)
Net increase in time deposits 7,057 3,068
Net decrease in federal funds purchased (4,000) --
Net increase in short-term borrowings 1,300 156
Dividends paid (107) (107)
-------- --------
Net cash provided by (used in) financing activities (1,542) 1,346
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,503) 4,464
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,629 33,277
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,126 $ 37,741
======== ========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (297) $ 197
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation on bank premises and equipment 260 288
Provision for loan and lease losses 540 360
Amortization of deferred loan fees (101) (103)
Write-down of other real estate owned 335 135
Amortization of goodwill (132) --
Changes in -
Investments held in trust - trading securities (112) --
Interest receivable (198) (222)
Interest payable 41 (114)
Taxes payable (4) (157)
Other assets (506) 355
Other liabilities 36 712
-------- --------
Net cash provided by (used in) operating activities $ (138) $ 1,451
======== ========
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 six months ended June 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
(IN THOUSANDS) 1998 1997 1998 1997
- -------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 3,301 $ 3,198 $ 3,198 $ 3,067
Provision charged to operations 270 180 540 360
Loans and leases charged-off (233) (225) (411) (285)
Recoveries on loans and leases
previously charged-off 8 57 19 68
------- ------- ------- -------
Net charge-offs (225) (168) (392) (217)
------- ------- ------- -------
Balance, end of period $ 3,346 $ 3,210 $ 3,346 $ 3,210
======= ======= ======= =======
</TABLE>
The following table presents information on the recorded investment in impaired
loans for the dates indicated:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
(IN THOUSANDS) 1998 1997 1997
- -------------- ------ ------ ------
<S> <C> <C> <C>
Impaired loans for which there is a related allowance $1,786 $1,528 $1,132
Impaired loans for which there is no related allowance 1,876 2,265 2,608
------ ------ ------
Total recorded investment $3,662 $3,793 $3,740
====== ====== ======
</TABLE>
The average recorded investment in impaired loans for the three and six months
ended June 30, 1998 was $3,754,000 and $3,716,000, respectively, compared to
$3,417,000 and $3,014,000 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
(IN THOUSANDS) 1998 1997 1998 1997
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 28,226 $ 27,849 $ 28,342 $ 27,797
Net income (loss) (288) 38 (297) 197
Cash dividends -- -- (107) (107)
-------- -------- -------- --------
Balance, end of period $ 27,938 $ 27,887 $ 27,938 $ 27,887
======== ======== ======== ========
</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.
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, Year 2000 issues, 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
As Hawaii settles into its eighth year of an economic slump, the
outlook for the State continues to be negative. The well-publicized problems in
Japan in particular, and Asia as a whole, have led to a sharp decline in
eastbound tourists, resulting in lower revenues for local hotels, merchants and
restaurants. The State's unemployment rate for the month of June was 6.6%,
nearly 2% points higher than national average. Bankruptcy filings through June
30, 1998 continued to set new records, increasing 32.5%, over the same period in
1997. Meanwhile, foreclosure filings through the first six months of 1998 were
up 25%, compared to the same period a year earlier. 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 16%, while comparable rates
for outlying areas, including the neighbor islands, is considerably higher. The
median price of a single-family home on Oahu in June 1998 was $309,500, slightly
below the June 1997 median of $311,300. As of the same date, the median price
for an Oahu condominium was $133,000, down 19.4% from $165,000 in the previous
June.
HIGHLIGHTS
The Company reported a net loss of $288,000 or $0.41 per share for the
second quarter of 1998, resulting in a year-to-date loss of $297,000 or $0.42
per share. In the second quarter of 1997, net income was $38,000 or $0.05 per
share. Net income for the first half of 1997 was $197,000 or $0.28 per share.
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<PAGE> 8
Many factors affected the Company's performance in the second quarter
and the first six months of 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 six months ended June 30, 1998, the Bank provided
$270,000 and $540,000, respectively, for possible loan and lease losses, a 50%
increase from the $180,000 and $360,000 provided for the same periods a year
ago. Net charge-offs increased to $225,000 for the quarter, bringing the total
for the year-to-date to $392,000. Net charge-offs for the comparable periods in
1997 were $168,000 and $217,000, respectively. At June 30, 1998, noncurrent
loans and leases totaled $3,924,000, compared to $4,206,000 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 costs 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 June 30, 1998 and December 31, 1997, OREO totaled $1,334,000 and
$1,668,000, respectively. Subsequent to quarter-end, the Bank sold one of the
properties reducing the OREO portfolio to approximately $976,000.
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 June 30, 1998, total assets were $296,788,000, compared to
$298,686,000 at December 31, 1997. Loans and leases ended the quarter at
$221,211,000, slightly above the $219,018,00 reported at year-end 1997. Deposits
totaled $259,985,000 at June 30, 1998, versus $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 third quarter results
will be substantially lower than the comparable period in 1997. The two new
branches will continue to put pressure on earnings until the volume of business
grows to cover overhead costs. In addition, funding costs may be higher due to
heightened competition for deposits and the increased reliance placed on the
wholesale markets. During the third quarter, the provision for loan and lease
losses is expected to be approximately $270,000, an increase of $90,000 or 50%
from the same period a year ago as the fall-out from the Asian financial crisis
continues.
The Year 2000 project remains a high priority for HNB. The Bank is
currently on target with respect to its internal and regulatory timetables. 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
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<PAGE> 9
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 August 31, 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 to successfully complete renovation, testing
and implementation of their systems could have a material adverse effect on
HNB's operations. (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.)
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three and six months ended June 30, 1998
increased $43,000 or 1.1% and $122,000 or 1.5%, respectively, from the
comparable periods in 1997. The improvement for the quarter and year-to-date was
attributable to an increase in interest income which exceeded an increase in
interest expense. During the second quarter and first half of 1998, the average
yield on interest-earning assets rose more than the average cost of funds. The
average net interest margin improved to 6.02% for the second quarter of 1998
from 5.84% reported for the second quarter of 1997. Net interest margin for the
year-to-date increased to 6.00% from 5.84% for the same period last year.
Interest income for the three and six months ended June 30, 1998
increased $107,000 or 1.9% and $298,000 or 2.6% from the same periods in 1997.
The improved results for both periods were attributable to an increase in
interest and fees on loans and leases, which offset lower interest income on
federal funds sold and investment securities. During the quarter and
year-to-date period, the Bank benefited from a shift from lower-yielding federal
funds and investment securities into higher-yielding loans and leases. The
average yield on interest-earning assets rose to 8.63% for the second quarter of
1998 from 8.31% for the comparable quarter a year ago. For the first half of
1998 and 1997, the average yield was 8.62% and 8.31%, respectively.
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<PAGE> 10
Interest expense for the three and six months ended June 30, 1998
increased $64,000 or 3.8% and $176,000 or 5.3% from the comparable periods in
1997. The increase for quarter and year-to-date was due to an increase in
interest expense on 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 3.49%, compared to 3.31% for the same period
in 1997. The year-to-date average cost of funds for 1998 and 1997 was 3.51% and
3.28%, respectively. The increase in average rates was due to a higher level of
time deposits and short-term borrowings, which represent a more expensive source
of funds than interest-bearing demand or savings deposits. The average rates
paid on time deposits and short-term borrowings for the first half of 1998 were
4.91% and 5.84%, respectively, compared to 1.57% and 2.67% for interest-bearing
demand and savings deposits, respectively.
Other Income and Expenses
Other income for the three months and six months ended June 30, 1998
increased $89,000 or 12.1% and $205,000 or 13.8%, respectively, compared to the
same periods a year ago. The increase 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 six months ended June
30, 1998, other expenses increased $630,000 or 14.0% and $1,002,000 or 11.5%,
respectively, compared to the same periods last year.
Salaries and employee benefits for the three and six months ended June
30, 1998 increased $315,000 or 14.5% and $586,000 or 13.6%, respectively, over
the same periods 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 in May 1997 and another in Moanalua in April 1998, 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 and six months ended June 30, 1998
rose $95,000 or 8.5% and $211,000 or 9.5%, respectively, from the comparable
period in 1997. The increase was primarily due to the addition of the two new
branches and the assumption of CSI's office lease.
Other operating expenses for the three and six months ended June 30,
1998 increased $220,000 or 18.4% and $205,000 or 9.4%, respectively, compared to
the same periods a year ago. The increase 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 second quarter and first six months of 1997, data processing fees paid to
CSI were $189,308 and $378,395, respectively. While the merger of CSI's
operations 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 by bringing the data processing function in-house.
-10-
<PAGE> 11
Income Taxes
The Company had a federal and state income tax benefit for the three
and six months ended June 30, 1998 of $237,000 and $236,000, respectively,
compared to an income tax provision of $25,000 and $125,000 for the same periods
in 1997. The effective income tax rates for the year-to-date periods were
(44.3%) for 1998 and 38.8% 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 subsequent periods should expectations
regarding the Company's projected loss change.
FINANCIAL CONDITION
Deposits
At June 30, 1998, total deposits were $259,985,000, compared to
$258,720,000 at December 31, 1997 and $267,372,000 at June 30, 1997.
Noninterest-bearing demand deposits ended the quarter $5,345,000 below the
balance reported at year-end 1997. The decrease was primarily due to lower
balances in bankruptcy and escrow fund accounts. Interest-bearing demand
deposits at quarter-end remained comparable to December 31, 1997 balances. Time
deposits increased $7,057,000 over year-end 1997 levels, offsetting a decline in
savings deposits of $943,000. 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 June 30, 1998, December
31, 1997, and June 30, 1997, public time deposits totaled $35,466,000,
$32,001,000, and $32,548,000, respectively, representing 13.6%, 12.4%, and 12.2%
of the Bank's total deposits.
The following table presents the distribution of the Bank's deposit
accounts for the dates indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
June 30, 1998 December 31, 1997 June 30, 1997
------------------------- ------------------------- -------------------------
Balance % Balance % Balance %
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 64,118,000 24.7% $ 69,463,000 26.9% $ 61,943,000 23.2%
Interest-bearing demand 28,403,000 10.9 27,907,000 10.8 28,109,000 10.5
Savings 90,224,000 34.7 91,167,000 35.2 107,823,000 40.3
Time 77,240,000 29.7 70,183,000 27.1 69,497,000 26.0
------------ ----- ------------ ----- ------------ -----
Total deposits $259,985,000 100.0% $258,720,000 100.0% $267,372,000 100.0%
============ ===== ============ ===== ============ =====
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-11-
<PAGE> 12
Investment Securities
Investment securities consist principally of money market mutual funds,
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 June 30, 1998, the book and fair value of the held-to-maturity
portfolio was $44,487,000 and $44,530,000, 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 $112,000 at June 30, 1998. These
securities have been designated to satisfy certain of the Bank's retirement plan
obligations. During the first half 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 June 30, 1998, loans and leases were $221,211,000, compared to
$219,018,000 at December 31, 1997 and $205,589,000 at June 30, 1997. During the
first six months of 1998, 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. Since June 30, 1997, real estate loans have declined from 64.7% of the
portfolio to 62.4% at June 30, 1998, while commercial, industrial and
agricultural loans have increased from 31.0% to 33.1%. The following table
presents the composition of the Bank's loan and lease portfolio at the dates
indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
June 30, 1998 December 31, 1997 June 30, 1997
------------------------- ------------------------- -------------------------
Balance % Balance % Balance %
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate
Family residential $105,791,000 47.9% $107,181,000 48.9% $104,618,000 50.9%
Construction 1,774,000 0.8 2,617,000 1.2 1,404,000 0.7
Commercial property 30,390,000 13.7 28,892,000 13.2 26,992,000 13.1
------------ ----- ------------ ----- ------------ -----
Total 137,955,000 62.4 138,690,000 63.3 133,014,000 64.7
Commercial, industrial
and agricultural 73,193,000 33.1 70,956,000 32.4 63,616,000 31.0
Consumer 8,632,000 3.9 7,613,000 3.5 7,464,000 3.6
All other loans 284,000 0.1 452,000 0.2 600,000 0.3
Direct financing leases 1,147,000 0.5 1,307,000 0.6 895,000 0.4
------------ ----- ------------ ----- ------------ -----
Total $221,211,000 100.0% $219,018,000 100.0% $205,589,000 100.0%
============ ===== ============ ===== ============ =====
- -----------------------------------------------------------------------------------------------------------------------------
</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 June 30, 1998, noncurrent loans and leases amounted to
$3,924,000, representing 1.8% of loans and leases outstanding, compared to
-12-
<PAGE> 13
$4,206,000 or 1.9% at December 31, 1997 and $3,999,000 or 1.9% at June 30, 1997.
The Bank had no restructured loans or leases at June 30, 1998, December 31, 1997
or June 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 write-downs 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 costs 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
June 30, 1998, December 31, 1997 and June 30, 1997, OREO totaled $1,334,000,
$1,668,000 and $1,506,000, respectively. Subsequent to quarter-end, one of the
properties, a single-family home with a carrying value of $358,000, was sold
leaving two commercial properties and a residential condominium remaining in the
portfolio.
The following table presents information on noncurrent loans and leases
and OREO for the dates indicated:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
June 30 December 31 June 30
1998 1997 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noncurrent
Past due 90 days or more $ 249,000 $ 424,000 $ 115,000
Nonaccrual 3,675,000 3,782,000 3,884,000
---------- ---------- ----------
Total $3,924,000 $4,206,000 $3,999,000
========== ========== ==========
OREO $1,334,000 $1,668,000 $1,506,000
========== ========== ==========
- ---------------------------------------------------------------------------------------
</TABLE>
Provision and Allowance for Loan and Lease Losses
During the three and six months ended June 30, 1998, the Bank provided
$270,000 and $540,000, respectively, for possible loan and lease losses,
compared to $180,000 and $360,000 for the three and six months ended June 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. The provision for
the third quarter of 1998 is expected to be approximately $270,000.
Net charge-offs for the quarter and year-to-date were $225,000 and
$392,000, respectively, compared to $168,000 and $217,000 for the same periods
in 1997. Most of the Bank's losses in the first half of 1998 and 1997 were
attributable to a few commercial credits.
-13-
<PAGE> 14
The annualized ratio of net charge-offs to average loans and leases for the
year-to-date was 0.35%, compared to 0.21% for the same period last year.
At June 30, 1998, the allowance for loan and lease losses stood at
$3,346,000, compared to $3,198,000 at December 31, 1997 and $3,210,000 at June
30, 1997. The ratio of the allowance to total loans and leases outstanding was
1.51%, 1.46% and 1.56% at June 30, 1998, December 31, 1997 and June 30, 1997,
respectively. While the reserve represented 85.3% 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.
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 June 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 June 30, 1998, advances under
this program amounted to $5,300,000.
For the first six months of 1998, net cash used in operating activities
was $138,000. Comparatively, in the first half of 1997, operating activities
provided net cash of $1,451,000. Net cash provided by investing activities was
$177,000 for the six months ended June 30, 1998, with proceeds from loan sales
and maturing investment securities, offsetting an increase in loans and leases.
In the comparable period in 1997, net cash provided by investing activities was
$1,667,000 due to a decline in investment securities and loans and leases.
Financing activities used net cash of $1,542,000 through the end of June 1998.
During the six months, increases in time deposits and short-term borrowings were
used to finance an outflow of demand and savings deposits and payoff federal
funds purchased. In the first half of 1997, net cash provided by financing
activities was $1,346,000 due to an increase in time deposits, partly offset by
a decrease in demand and savings deposits.
Shareholders' Equity and Capital Resources
Shareholders' equity totaled $27,938,000 at June 30, 1998, $28,342,000
at December 31, 1997 and $27,887,000 at June 30, 1997. During the first quarter
of 1998 and 1997, the Company paid cash dividends on its common stock of
$106,650. Book value per share was $39.29 at June 30, 1998, $39.86 at December
31, 1997 and $39.22 at June 30, 1997.
-14-
<PAGE> 15
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 9.56% at June 30, 1998, 9.88% at December 31, 1997,
and 9.47% at June 30, 1997. At June 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 14.25% and 15.51% at June 30, 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.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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 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.
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 June 30, 1998, there were no material changes to
report.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on April 21, 1998, the
shareholders voted on the election of five persons to serve as
directors for the ensuing year. The table below sets forth the names
of the directors elected at the meeting, as well as the number of
votes cast for, against or withheld, for each of the directors
nominated. There were no abstentions or unvoted shares.
<TABLE>
<CAPTION>
Votes
------------------------
Against or
Name For Withheld
---- ------- ----------
<S> <C> <C>
K.J. Luke 645,564 173
Warren K.K. Luke 645,564 173
Gordon J. Mau 645,564 173
Tan Tek Lum 645,564 173
Arthur S.K. Fong 645,564 173
</TABLE>
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 August 10, 1998 By /s/ Warren K.K. Luke
------------------------- ----------------------------
Warren K.K. Luke
President
Date August 10, 1998 By /s/ Ernest T. Murata
------------------------- ---------------------------
Ernest T. Murata
Vice President, Treasurer,
Assistant Secretary and
Chief Financial Officer
-16-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,626
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,760
<INVESTMENTS-CARRYING> 44,487
<INVESTMENTS-MARKET> 44,530
<LOANS> 221,211
<ALLOWANCE> 3,346
<TOTAL-ASSETS> 296,788
<DEPOSITS> 259,985
<SHORT-TERM> 6,300
<LIABILITIES-OTHER> 2,565
<LONG-TERM> 0
0
0
<COMMON> 711
<OTHER-SE> 27,227
<TOTAL-LIABILITIES-AND-EQUITY> 296,788
<INTEREST-LOAN> 10,071
<INTEREST-INVEST> 1,408
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,568
<INTEREST-DEPOSIT> 3,220
<INTEREST-EXPENSE> 3,525
<INTEREST-INCOME-NET> 8,043
<LOAN-LOSSES> 540
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,730
<INCOME-PRETAX> (533)
<INCOME-PRE-EXTRAORDINARY> (297)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (297)
<EPS-PRIMARY> (.42)
<EPS-DILUTED> (.42)
<YIELD-ACTUAL> 6.00
<LOANS-NON> 3,675
<LOANS-PAST> 249
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,198
<CHARGE-OFFS> 411
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 3,346
<ALLOWANCE-DOMESTIC> 3,346
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 579
</TABLE>
