<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13D OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange on
Title of Each Class on Which Registered
-------------------- ------------------------
None Not Applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1.00 Par Value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 28, 1999 was $3,510,789.
The number of shares outstanding of each of the registrant's classes of
common stock as of February 28, 1999 was:
Title of Class Number of Shares Outstanding
- -------------------------- ----------------------------
Common Stock, $1 Par Value 711,000 shares
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Hawaii National Bancshares, Inc. ("Bancshares"), whose principal office
is maintained at 45 North King Street, Honolulu, Hawaii, is a Hawaii
corporation. Bancshares is a bank holding company whose wholly owned subsidiary
is Hawaii National Bank ("HNB" or the "Bank"), a national banking association.
The main office of the Bank is also located at 45 North King Street,
Honolulu, Hawaii. While the Bank's customer base covers the entire State of
Hawaii, the principal market areas are the county of Honolulu on the island of
Oahu, which currently is served by eleven of the Bank's branches; the county of
Hawaii, which is served by a branch in Hilo; and the county of Maui, which is
served by branches in Kahului and Kihei. The area of the county of Hawaii served
by the Bank's Hilo branch includes the area from the ocean to Haihai to Komohana
and Waianuenue. The area of the county of Maui served by the Bank's Kahului and
Kihei branches is located in the Wailuku, Kahului and Kihei corridor. (See ITEM
2. Properties).
The principal components of Hawaii's economy are the tourism industry,
government expenditures, agriculture, construction, manufacturing, retailing,
wholesaling, and service businesses.
HNB offers a full range of banking services to businesses as well as
individuals. These include personal and business checking accounts; savings
accounts; time deposits; automated teller equipment; commercial loans -
collateralized and uncollateralized; consumer loans for such things as
automobiles, household appliances, home improvements, and college aid; real
estate collateralized loans; bank credit cards; direct lease financing; foreign
exchange; commercial letters of credit; collections and discounts; safe deposit
boxes; travelers checks; money orders; cashier's checks; sale of United States
Savings Bonds; and night depository. The Bank does not have a trust department
and, therefore, does not perform any trust functions.
Many of the banking services described above are dependent upon the
ability of computers and other equipment to properly recognize the century date
change. The uncertainties surrounding this milestone are commonly known as "Year
2000 Issues." The Bank is taking the appropriate steps to prepare for this event
date and has implemented programs to monitor the progress of its business
partners. For more information about the Year 2000, the Bank's state of
readiness, the costs and challenges involved, and the Bank's contingency plans,
see the discussion under the heading "Year 2000" in the "Management's Discussion
and Analysis of Financial Conditions and Results of Operations."
HNB's ability to extend its existing branch banking network is subject
to approval by the Office of the Comptroller of the Currency ("OCC") in
compliance with applicable Hawaii law. Currently, Hawaii law generally permits a
bank chartered in Hawaii to branch anywhere inside or outside of the state of
Hawaii. Under current federal interstate banking laws, Hawaii also
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permits interstate bank mergers, subject to certain restrictions. For a more
detailed discussion of these interstate banking laws, see the discussion under
the heading "Supervision and Regulation - Hawaii National Bank - Interstate
Banking and Branching."
COMPETITION
The banking business in Hawaii is highly competitive. There are five
other commercial banks doing general banking business and two savings and loan
associations doing business in Hawaii. The Bank actively competes for business
with other banks, savings and loan associations, credit unions, and individual
loan companies within its market areas. In varying degrees, the Bank also faces
competition from other types of financially oriented institutions which are
either lenders of money or credit, or accept savings or other deposits.
Insurance companies, investment management service firms and other business
firms, and individuals actively compete with the Bank's mortgage loan services.
In addition, foreign (non-Hawaii) banks currently conduct banking activities,
also performed by banks in Hawaii, except for retail deposit-taking.
As of December 31, 1998, HNB, with $275,901,000 in deposits,
$223,847,000 in loans, and $312,034,000 in total assets, ranked fifth among the
six commercial banks in Hawaii in all of the above measures.
EMPLOYEES
On December 31, 1998, HNB had 225 full-time employees and 9 part-time
employees. HNB considers its relations with its employees to be good.
SUPERVISION AND REGULATION
Introduction
The following generally refers to certain statutes and regulations
affecting the banking industry. These references provide brief summaries only
and are not intended to be complete. They are qualified in their entirety by the
referenced statutes and regulations. In addition, some statutes and regulations
may exist which apply to and regulate the banking industry, but are not
referenced below.
Bancshares is a bank holding company due to its ownership of HNB. The
Bank Holding Company Act of 1956, as amended ("BHCA") subjects Bancshares and
HNB to supervision and examination by the Federal Reserve Bank ("FRB"), and
Bancshares files annual reports of operations with the FRB.
Bank Holding Company Regulation
In general, the BHCA limits bank holding company business to owning or
controlling banks and engaging in other banking-related activities. Bank holding
companies must obtain the FRB's approval before they: (1) acquire direct or
indirect ownership or control of any voting
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shares of any bank that results in total ownership or control, directly or
indirectly, of more than 5% of the voting shares of such bank; (2) merge or
consolidate with another bank holding company; or (3) acquire substantially all
of the assets of any additional banks. Subject to certain state laws, such as
age and contingency laws, a bank holding company that is adequately capitalized
and adequately managed may acquire the assets of both in-state and out-of-state
banks.
Control of Nonbanks. With certain exceptions, the BHCA prohibits bank
holding companies from acquiring direct or indirect ownership or control of
voting shares in any company that is not a bank or a bank holding company unless
the FRB determines that the activities of such company are incidental or closely
related to the business of banking. If a bank holding company is
well-capitalized and meets certain criteria specified by the FRB, it may engage
de novo in certain permissible nonbanking activities without prior FRB approval.
Control Transactions. The Change in Bank Control Act of 1978, as
amended, requires a person (or group of persons acting in concert) acquiring
"control" of a bank holding company to provide the FRB with 60 days' prior
written notice of the proposed acquisition. Following receipt of this notice,
the FRB has 60 days within which to issue a notice disapproving the proposed
acquisition, but the FRB may extend this time period for up to another 30 days.
An acquisition may be completed before expiration of the disapproval period if
the FRB issues written notice of its intent not to disapprove the transaction.
In addition, any "company" must obtain the FRB's approval before acquiring 25%
(5% if the "company" is a bank holding company) or more of the outstanding
shares or otherwise obtaining control over Bancshares.
Transactions with Affiliates
Bancshares and HNB are deemed affiliates within the meaning of the
Federal Reserve Act, and transactions between affiliates are subject to certain
restrictions. Accordingly, Bancshares and HNB must comply with Sections 23A and
23B of the Federal Reserve Act. Generally, Sections 23A and 23B: (1) limit the
extent to which a financial institution or its subsidiaries may engage in
"covered transactions" with an affiliate, as defined, and (2) require all
transactions with an affiliate, whether or not "covered transactions," to be on
terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar types of transactions.
Regulation of Management
Federal law (1) sets forth the circumstances under which officers or
directors of a financial institution may be removed by the institution's federal
supervisory agency; (2) places restraints on lending by an institution to its
executive officers, directors, principal stockholders, and their related
interests; and (3) prohibits management personnel from serving as a director or
in other management positions with another financial institution which has
assets exceeding a specified amount or which has an office within a specified
geographic area.
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Tie-In Arrangements
Bancshares and HNB cannot engage in certain tie-in arrangements in
connection with any extension of credit, sale or lease of property or furnishing
of services. For example, with certain exceptions, neither Bancshares nor HNB
may condition an extension of credit on either (1) a requirement that the
customer obtain additional services provided by it or (2) an agreement by the
customer to refrain from obtaining other services from a competitor.
The FRB has adopted significant amendments to its anti-tying rules that:
(1) removed FRB-imposed anti-tying restrictions on bank holding companies and
their non-bank subsidiaries; (2) allow banks greater flexibility to package
products with their affiliates; and (3) establish a safe harbor from the tying
restrictions for certain foreign transactions. These amendments were designed to
enhance competition in banking and nonbanking products and to allow banks and
their affiliates to provide more efficient, lower cost service to their
customers. However, the impact of the amendments on Bancshares and HNB is
unclear at this time.
State Law Restrictions
As a Hawaii business corporation, Bancshares may be subject to certain
limitations and restrictions as provided under applicable Hawaii corporate law.
In addition, although HNB is a national bank and therefore primarily regulated
by the OCC, Hawaii banking law may restrict certain activities of HNB.
HAWAII NATIONAL BANK
General
HNB, as a national banking association, is subject to primary regulation
and examination by the OCC. It is also subject to regulation by the FRB and, to
a more limited extent by the Federal Deposit Insurance Corporation ("FDIC"). The
federal laws that apply to HNB regulate, among other things, the scope of its
business, its investments, its reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
loans. The laws and regulations governing HNB generally have been promulgated to
protect depositors and not to protect stockholders of the Bank or its holding
company.
CRA. The Community Reinvestment Act (the "CRA") requires that, in
connection with examinations of financial institutions within their
jurisdiction, the FRB, OCC and FDIC (collectively, the "federal banking
agencies") evaluate the record of the financial institutions in meeting the
credit needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility.
Insider Credit Transactions. Banks are also subject to certain
restrictions imposed by the Federal Reserve Act on extensions of credit to
executive officers, directors, principal shareholders, or any related interests
of such persons. Extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, and follow credit
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underwriting procedures that are not less stringent than those prevailing at the
time for comparable transactions with persons not covered above and who are not
employees; and (ii) must not involve more than the normal risk of repayment or
present other unfavorable features. Banks are also subject to certain lending
limits and restrictions on overdrafts to such persons. A violation of these
restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or
other person participating in the conduct of the affairs of that bank, the
imposition of a cease and desist order, and other regulatory sanctions.
FDICIA. Under the Federal Deposit Insurance Corporation Improvement Act
of 1991 (the "FDICIA"), each federal banking agency has prescribed, by
regulation, noncapital safety and soundness standards for institutions under its
authority. These standards cover internal controls, information systems, and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, such other operational
and managerial standards as the agency determines to be appropriate, and
standards for asset quality, earnings and stock valuation. An institution which
fails to meet these standards must develop a plan acceptable to the agency,
specifying the steps that the institution will take to meet the standards.
Failure to submit or implement such a plan may subject the institution to
regulatory sanctions. Management of Bancshares believes that HNB meets all such
standards, and therefore, does not believe that these regulatory standards
materially affect Bancshares' business operations.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") permits nationwide interstate banking and branching under
certain circumstances. This legislation generally authorizes interstate
branching and relaxes federal law restrictions on interstate banking. Currently,
bank holding companies may purchase banks in any state, and states may not
prohibit such purchases. Additionally, banks are permitted to merge with banks
in other states as long as the home state of neither merging bank has "opted
out." The Interstate Act requires regulators to consult with community
organizations before permitting an interstate institution to close a branch in a
low-income area.
Under recent FDIC regulations, banks are prohibited from using their
interstate branches primarily for deposit production. The FDIC has accordingly
implemented a loan-to-deposit ratio screen to ensure compliance with this
prohibition.
With regard to interstate bank mergers, Hawaii has "opted in" to the
Interstate Act which allows in-state banks to merge with out-of-state banks
subject to certain aging requirements. Hawaii law generally authorizes the
acquisition of an in-state bank by an out-of-state bank through merger with a
Hawaii financial institution that has been in existence for at least 5 years
prior to the acquisition. With regard to interstate bank branching, out-of-state
banks that do not already operate a branch in Hawaii may not establish de novo
branches in Hawaii or establish and operate a branch by acquiring a branch in
Hawaii.
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Deposit Insurance
The deposits of HNB are currently insured to a maximum of $100,000 per
depositor through the Bank Insurance Fund ("BIF") administered by the FDIC. All
insured banks are required to pay semi-annual deposit insurance premium
assessments to the FDIC.
The FDICIA included provisions to reform the federal deposit insurance
system, including the implementation of risk-based deposit insurance premiums.
The FDICIA also permits the FDIC to make special assessments on insured
depository institutions in amounts determined by the FDIC to be necessary to
give it adequate assessment income to repay amounts borrowed from the U.S.
Treasury and other sources, or for any other purpose the FDIC deems necessary.
The FDIC has implemented a risk-based insurance premium system under which banks
are assessed insurance premiums based on how much risk they present to the BIF.
Banks with higher levels of capital and a low degree of supervisory concern are
assessed lower premiums than banks with lower levels of capital or a higher
degree of supervisory concern.
Dividends
The principal source of Bancshares's cash revenues is dividends received
from HNB. The payment of dividends is subject to government regulation, in that
regulatory authorities may prohibit banks and bank holding companies from paying
dividends which would constitute an unsafe or unsound banking practice. In
addition, a bank may not pay cash dividends if that payment could reduce the
amount of its capital below that necessary to meet minimum applicable regulatory
capital requirements. Other than the laws and regulations noted above, which
apply to all banks and bank holding companies, neither Bancshares nor HNB is
currently subject to any regulatory restrictions on its dividends.
Capital Adequacy
Federal bank regulatory agencies use capital adequacy guidelines in the
examination and regulation of bank holding companies and banks. If capital falls
below minimum guideline levels, the holding company or bank may be denied
approval to acquire or establish additional banks or nonbank businesses or to
open new facilities.
The federal banking agencies use risk-based capital guidelines for banks
and bank holding companies. These are designed to make such capital requirements
more sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize
disincentives for holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance sheet items. The guidelines are minimums, and the Federal
Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimum. The current guidelines
require all bank holding companies and federally-regulated banks to maintain a
minimum risk-based total capital ratio equal to 8%, of which at least 4% must be
Tier I capital. Tier I capital for bank holding companies includes common
shareholders' equity, certain qualifying perpetual
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preferred stock and minority interests in equity accounts of consolidated
subsidiaries, less intangibles except as described above.
The Federal Reserve also employs a leverage ratio, which is Tier I
capital as a percentage of total assets less intangibles, to be used as a
supplement to risk-based guidelines. The principal objective of the leverage
ratio is to constrain the maximum degree to which a bank holding company may
leverage its equity capital base. The Federal Reserve requires a minimum
leverage ratio of 3%. However, for all but the most highly rated bank holding
companies and for bank holding companies seeking to expand, the Federal Reserve
expects an additional cushion of at least 1% to 2%.
FDICIA created a statutory framework of supervisory actions indexed to
the capital level of the individual institution. Under regulations adopted by
the federal banking agencies, an institution is assigned to one of five capital
categories depending on its total risk-based capital ratio, Tier I risk-based
capital ratio, and leverage ratio, together with certain subjective factors.
Institutions which are deemed to be "undercapitalized" depending on the category
to which they are assigned are subject to certain mandatory supervisory
corrective actions. Bancshares does not believe that these regulations have any
material effect on their operations.
Effects of Government Monetary Policy
The earnings and growth of Bancshares are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government, particularly the Federal Reserve. The Federal Reserve can and does
implement national monetary policy for such purposes as curbing inflation and
combating recession, but its open market operations in U.S. government
securities, control of the discount rate applicable to borrowings from the
Federal Reserve, and establishment of reserve requirements against certain
deposits, influence the growth of bank loans, investments and deposits, and also
affect interest rates charged on loans or paid on deposits. The nature and
impact of future changes in monetary policies and their impact on Bancshares and
HNB cannot be predicted with certainty.
Changes in Banking Laws and Regulations
The laws and regulations that affect banks and bank holding companies
are currently undergoing significant changes. In 1998, legislation was proposed
in the United States Congress which contained proposals to alter the structure,
regulation, and competitive relationships of the nation's financial
institutions. Although the legislation was not passed in the 1998 general
session of Congress, similar legislation may be proposed in the coming years
and, if enacted into law, such bills could have the effect of increasing or
decreasing the cost of doing business, limiting or expanding permissible
activities (including activities in the insurance and securities fields), or
affecting the competitive balance among banks, savings associations, and other
financial institutions. Some of these bills may reduce the extent of federal
deposit insurance, broaden the powers or the geographical range of operations of
bank holding companies, alter the extent to which banks could engage in
securities activities, and change the structure and
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jurisdiction of various financial institution regulatory agencies. Whether or in
what form such legislation may be adopted, or the extent to which the business
of Bancshares or HNB might be affected thereby, cannot be predicted with
certainty.
Statistical Disclosures
Guide 3 of the "Guides for the Preparation and Filing of Reports and
Registration Statements" under the Securities Exchange Act of 1934 sets forth
certain statistical disclosures in the "Description of Business" section of bank
holding company filings. The statistical information requested is presented in
the following tables. The tables and information contained therein have been
prepared by Hawaii National Bancshares, Inc. and have not been audited or
reported upon by Bancshares' independent certified public accountants.
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I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL
The following table shows the condensed consolidated average balance sheets, an
analysis of interest income/expense and the average yield/rate for each major
category of interest-bearing assets and interest-bearing liabilities at December
31 for the year indicated.
Hawaii National Bancshares, Inc. & Subsidiary
Table I-A and I-B
Condensed Consolidated Average Balance Sheets, Interest Income and Expense,
and Yields and Rates
(in thousands)
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -------------------------------------
ASSETS INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to resell $ 5,277 $ 281 5.32% $ 12,529 $ 683 5.45%
Investment securities-
Held-to-maturity 45,026 2,657 5.90% 47,996 2,841 5.92%
Available-for-sale 1,760 129 7.33% 1,724 120 6.96%
Trading securities 85 -- -- -- -- --
-------- -------- ----------- -------- -------- -----------
Total investment securities 46,871 2,786 5.94% 49,720 2,961 5.96%
-------- -------- ----------- -------- -------- -----------
Loans and leases-
Domestic 221,975 19,990 9.01% 206,780 18,910 9.14%
Foreign -- -- -- -- -- --
-------- -------- ----------- -------- -------- -----------
Total loans and leases 221,975 19,990 9.01% 206,780 18,910 9.14%
-------- -------- ----------- -------- -------- -----------
Other 401 21 5.24% 402 21 5.22%
-------- -------- ----------- -------- -------- -----------
Total interest-earning assets 274,524 $ 23,078 8.41% 269,431 $ 22,575 8.38%
Cash and due from banks 18,316 ======== =========== 15,291 ======== ===========
Premises and equipment 4,184 3,740
Other assets 2,915 1,742
-------- --------
Total assets $299,939 $290,204
======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------
ASSETS INTEREST
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-------- -------- -----------
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold and securities
purchased under agreement to resell $ 17,005 $ 907 5.33%
Investment securities-
Held-to-maturity 46,878 2,683 5.72%
Available-for-sale 1,495 107 7.16%
Trading securities -- -- --
-------- -------- -----------
Total investment securities 48,373 2,790 5.77%
-------- -------- -----------
Loans and leases-
Domestic 207,289 18,658 9.00%
Foreign -- -- --
-------- -------- -----------
Total loans and leases 207,289 18,658 9.00%
-------- -------- -----------
Other 402 21 5.22%
-------- -------- -----------
Total interest-earning assets 273,069 $ 22,376 8.19%
Cash and due from banks 15,261 ======== ===========
Premises and equipment 4,050
Other assets 1,310
--------
Total assets $293,690
========
</TABLE>
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LIABILITIES AND
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ----------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- -------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits and liabilities:
Deposits -
Interest-bearing demand $ 27,358 $ 423 1.55% $ 27,246 $ 430 1.58%
Savings 91,507 2,369 2.59% 102,803 2,800 2.72%
Time 77,481 3,769 4.86% 69,343 3,386 4.88%
Foreign -- -- -- -- -- --
-------- -------- ----------- -------- -------- -----------
Total interest-bearing deposits 196,346 6,561 3.34% 199,392 6,616 3.32%
-------- -------- ----------- -------- -------- -----------
Federal funds purchased 271 15 5.54% 172 9 5.23%
Short-term borrowings-
Domestic 8,345 459 5.50% 864 46 5.32%
Long-term debt-
Domestic -- -- -- -- -- --
-------- -------- ----------- -------- -------- -----------
Total interest-bearing deposits
and liabilities 204,962 7,035 3.43% 200,428 6,671 3.33%
-------- ----------- -------- -----------
Noninterest-bearing demand deposits 64,234 59,294
Other liabilities 2,669 2,694
-------- -------- --------
Total liabilities 271,865 262,416
Shareholders' equity 28,074 27,788
-------- -------- --------
Total liabilities and
shareholders' equity $299,939 $290,204
======== ========
Net interest income and
margin on earnings assets $ 16,043 5.84% $ 15,904 5.90%
======== =========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------
INTEREST
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
-------- -------- -----------
<S> <C> <C> <C>
Interest-bearing deposits and liabilities:
Deposits -
Interest-bearing demand $ 27,248 $ 488 1.79%
Savings 114,833 3,365 2.93%
Time 63,647 3,110 4.89%
Foreign -- -- --
-------- -------- -----------
Total interest-bearing deposits 205,728 6,963 3.38%
-------- -------- -----------
Federal funds purchased 38 2 5.26%
Short-term borrowings-
Domestic 751 39 5.19%
Long-term debt-
Domestic -- -- --
-------- -------- -----------
Total interest-bearing deposits
and liabilities 206,517 7,004 3.39%
-------- -------- -----------
Noninterest-bearing demand deposits 57,539
Other liabilities 2,530
--------
Total liabilities 266,586
Shareholders' equity 27,104
--------
Total liabilities and
shareholders' equity $293,690
========
Net interest income and
margin on earnings assets $ 15,372 5.63%
======== ===========
</TABLE>
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The following table sets forth the dollar amount of changes in interest income
and expense and the changes in dollar amounts attributable to (a) changes in
volume (change in volume times old rates), (b) changes in rate (change in rate
times new volume), and (c) changes in rate/volume (change in rate times change
in volume). In this table, the dollar change in rate/volume is prorated to
volume and rate proportionally. Nonaccruing loans and leases have been included
in computation of average loans and leases.
Hawaii National Bancshares, Inc. & Subsidiary
Table I-C
Analysis of Change in Interest Earned and Paid
Due to Changes in Volume and Rates
1998-1997 and 1997-1996
(in thousands)
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to: Increase (Decrease) Due to:
----------------------------------- -----------------------------------
Net Net
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earned on:
Federal funds sold and securities
purchased under agreement to resell $ (395) $ (7) $ (402) $ (239) $ 15 $ (224)
Investment securities-
Held-to-maturity (176) (8) (184) 64 94 158
Available-for-sale 3 6 9 16 (3) 13
Trading securities -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total investment securities (173) (2) (175) 80 91 171
------- ------- ------- ------- ------- -------
Loans and leases-
Domestic 1,390 (310) 1,080 (46) 298 252
Foreign -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total loans and leases 1,390 (310) 1,080 (46) 298 252
------- ------- ------- ------- ------- -------
Other -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 822 $ (319) $ 503 $ (205) $ 404 $ 199
======= ======= ======= ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to: Increase (Decrease) Due to:
-------------------------------- ---------------------------------
Net Net
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Paid on:
Deposits-
Interest-bearing demand $ 2 $ (9) $ (7) $ -- $ (58) $ (58)
Savings (308) (123) (431) (353) (212) (565)
Time 397 (14) 383 278 (2) 276
Foreign -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total interest-bearing deposits 91 (146) (55) (75) (272) (347)
----- ----- ----- ----- ----- -----
Federal funds purchased 5 1 6 7 -- 7
Short-term borrowings-
Domestic 398 15 413 6 1 7
Long-term debt-
Domestic -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total interest-bearing deposits
and interest-bearing liabilities 494 (130) 364 (62) (271) (333)
----- ----- ----- ----- ----- -----
Increase (decrease)
in net interest income $ 328 $(189) $ 139 $(143) $ 675 $ 532
===== ===== ===== ===== ===== =====
</TABLE>
13
<PAGE> 14
II. INVESTMENT SECURITIES PORTFOLIO
The following table presents the carrying value of the portfolio of investment
securities at December 31 of each of the past three years.
Hawaii National Bancshares, Inc. & Subsidiary
Table II-A
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Securities held-to-maturity:
U.S. Treasury and Other U.S. Government Agencies $44,980 $ 47,481 $47,930
======= ======== =======
Securities available-for-sale:
Equity Securities $ 1,760 $ 1,760 $ 1,487
======= ======== =======
Trading securities $ 115 $ -- $ --
======= ======== =======
</TABLE>
Note: See Notes 1 and 2 of the Notes to the Consolidated Financial Statements.
The following table presents the maturities of investment securities excluding
securities which have no stated maturity at December 31, 1998, and the weighted
average yields.
Hawaii National Bancshares, Inc. & Subsidiary
Table II-B
(in thousands)
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and Other U.S.
Government Agencies $11,988 5.86% $32,992 5.55% -- -- -- -- $44,980 5.64%
======= ==== ======= ==== ==== ==== ==== ==== ======= ====
</TABLE>
At December 31, 1998, the Company had no investment securities with aggregate
carrying values exceeding 10% of shareholders' equity.
Hawaii National Bancshares, Inc. & Subsidiary
Table II-C
(in thousands)
<TABLE>
<CAPTION>
Security Carrying Market
Issuer Rating Value Value
------ -------- -------- -----
<S> <C> <C> <C> <C>
- - - -
</TABLE>
14
<PAGE> 15
III. LOAN AND LEASE PORTFOLIO
The following table presents the outstanding domestic loans and leases at
December 31 of each of the five years indicated.
Hawaii National Bancshares, Inc. & Subsidiary
Table III-A
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real Estate -
Residential and commercial $133,932 $136,072 $130,642 $133,847 $138,264
Construction 1,044 2,617 2,572 4,558 3,108
Loans to U.S. banks -- -- -- -- --
Commercial, industrial and agricultural 78,087 70,956 64,805 66,021 67,484
Consumer* 9,210 7,613 7,674 7,255 7,076
All other loans 355 453 557 248 241
Lease financing 1,219 1,307 1,013 1,165 1,241
-------- -------- -------- -------- --------
Total Loans and Leases $223,847 $219,018 $207,263 $213,094 $217,414
======== ======== ======== ======== ========
</TABLE>
Note: *Loans to individuals for household, family and other personal
expenditures.
15
<PAGE> 16
The following table presents maturity and interest rate sensitivity data for all
loans and leases, except real estate - residential and commercial, consumer
loans,all other loans, and lease financing, at December 31, 1998.
Hawaii National Bancshares, Inc. & Subsidiary
Table III-B
Loan and Lease Maturity and
Interest Rate Sensitivity Data
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
After One After
One Year Year through Five
or Less Five Years Years Total
-------- ------------ -------- --------
<S> <C> <C> <C> <C>
Commercial, industrial and agricultural $ 41,131 $ 29,124 $ 7,832 $ 78,087
Real estate - construction 1,044 -- -- 1,044
Foreign -- -- -- --
-------- -------- -------- --------
$ 42,175 $ 29,124 $ 7,832 79,131
Real estate - residential and commercial 133,932
Consumer 9,210
All other loans 355
Lease financing 1,219
--------
Total loans and leases $223,847
========
Loans with fixed or predetermined
interest rates $ 4,198 $ 3,860 $ 3,386 $ 11,444
Loan with floating or adjustable
interest rates 37,977 25,264 4,446 67,687
-------- -------- -------- --------
$ 42,175 $ 29,124 $ 7,832 $ 79,131
</TABLE>
16
<PAGE> 17
Risk Elements (See Management's Discussion and Analysis)
The following table presents information related to loans and leases accounted
for on a nonaccrual basis, accruing loans and leases which are contractually
past due ninety days or more as to principal and/or interest payments, and
restructured loans and leases at December 31 for the years indicated.
Hawaii National Bancshares, Inc. & Subsidiary
Table III-C(1)
Nonaccrual, Past Due, and Restructured Loans and Leases
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases
Domestic
Real estate $3,043 $2,478 $1,972 $5,142 $ 771
Commercial, industrial and agricultural 656 1,304 1,208 1,064 555
Consumer 7 -- -- -- --
All other loans -- -- -- -- --
Lease financing -- -- -- -- --
Foreign -- -- -- -- --
------ ------ ------ ------ ------
Total $3,706 $3,782 $3,180 $6,206 $1,326
====== ====== ====== ====== ======
Loans and leases past due 90 days or more
Domestic
Real estate $ 259 $ -- $ 134 $ 393 $ 841
Commercial, industrial and agricultural 134 399 56 -- 1,365
Consumer 12 25 22 21 35
All other loans -- -- -- -- --
Lease financing -- -- -- -- --
Foreign -- -- -- -- --
------ ------ ------ ------ ------
Total $ 405 $ 424 $ 212 $ 414 $2,241
====== ====== ====== ====== ======
Restructured loans and leases
Domestic
Real estate $ -- $ -- $ -- $ -- $ --
Commercial, industrial and agricultural -- -- -- -- --
Consumer -- -- -- -- --
All other loans -- -- -- -- --
Lease financing -- -- -- -- --
Foreign -- -- -- -- --
------ ------ ------ ------ ------
Total $ -- $ -- $ -- $ -- $ --
====== ====== ====== ====== ======
</TABLE>
17
<PAGE> 18
The following table presents information related to loans and leases on a
nonaccrual basis for the year ended December 31, 1998.
Hawaii National Bancshares, Inc. & Subsidiary
Table III-C(2)
Nonaccrual Loan and Lease Information
Year Ended December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Domestic Foreign Total
------------- ------------- -------------
<S> <C> <C> <C>
Interest income which would have
been recorded if loans and
leases had been current $ 529 $ -- $ 529
============= ============= =============
Interest income recorded during
this period $ -- $ -- $ --
============= ============= =============
</TABLE>
Note: See Notes 1 and 5 of the Notes to the Consolidated Financial Statements
and Table III-C(1).
Hawaii National Bancshares, Inc. & Subsidiary
Impaired Loans
December 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Present value of
expected future Fair value of
cash flows loan's collateral Total
---------------- ----------------- -----------
<S> <C> <C> <C>
Real estate $ 362 $ 2,620 $ 2,982
Commercial, industrial and agricultural 46 575 621
----------- ----------- -----------
Total Impaired Loans $ 408 $ 3,195 $ 3,603
=========== =========== ===========
</TABLE>
18
<PAGE> 19
IV. SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE
The following table presents the Company's loan and lease loss experience at
December 31 for the years indicated.
Hawaii National Bancshares, Inc. & Subsidiary
Table IV-A
Year Ended
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding $ 221,975 $ 206,780 $ 207,289 $ 215,492 $ 213,729
=========== =========== =========== =========== ===========
Loan and lease loss reserve summary-
Balance at beginning of year $ 3,198 $ 3,067 $ 3,096 $ 3,422 $ 3,129
----------- ----------- ----------- ----------- -----------
Loans and leases charged off:
Real estate 138 146 194 112 81
Commercial, industrial and agricultural 868 487 1,266 837 350
Consumer 134 136 71 155 69
All other loans -- -- -- -- --
Lease financing -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total loans and leases charged off 1,140 769 1,531 1,104 500
----------- ----------- ----------- ----------- -----------
Recoveries on loans and leases charged off:
Real estate 3 11 -- -- 1
Commercial, industrial and agricultural 39 158 651 62 9
Consumer 11 11 41 16 18
All other loans -- -- -- -- --
Lease financing -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total recoveries on loans
and leases charged off 53 180 692 78 28
----------- ----------- ----------- ----------- -----------
Net charge-offs 1,087 589 839 1,026 472
Provision charged to expense 1,185 720 810 700 765
----------- ----------- ----------- ----------- -----------
Balance at end of year $ 3,296 $ 3,198 $ 3,067 $ 3,096 $ 3,422
=========== =========== =========== =========== ===========
Ratio of net charge-offs
to average loans and leases outstanding 0.49% 0.28% 0.40% 0.48% 0.22%
=========== =========== =========== =========== ===========
</TABLE>
19
<PAGE> 20
The Company has allocated portions of the allowance for loan and lease losses
according to the amounts deemed to be reasonably necessary to provide for
|probable losses being incurred within the various loan and lease categories.
The following table presents the allocation of the reserve amounts to the
related outstanding loan and lease balances at December 31 for the years
indicated. In 1994, the Company adopted a new reserve allocation method which
took into account differences in risk classifications. In 1995, the reserve
methodology was refined further to analyze each credit for loss potential which
was over $50,000 and had been placed on nonaccrual.
Hawaii National Bancshares, Inc. & Subsidiary
Table IV-B
Allocation of the Reserve for Loan and Lease Losses
to Outstanding Loans and Leases
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- -----------------------
Percent Percent Percent
Loans/Leases Loans/Leases Loans/Leases
in Each in Each in Each
Category Category Category
Reserve to Total Reserve to Total Reserve to Total
Amount Loans/Leases Amount Loans/Leases Amount Loans/Leases
-------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, industrial
and agricultural $1,630 35% $1,576 32% $1,373 31%
Real estate
-construction 1 -- 1 1% 3 1%
Real estate
-residential
and commercial 759 60% 654 62% 657 63%
Consumer 504 4% 493 4% 469 4%
All other loans 7 -- 9 -- 11 --
Lease financing 7 1% 10 1% 9 1%
Foreign -- -- -- -- -- --
Loans to U.S. Banks
under repurchase
agreement -- -- -- -- -- --
General reserve 388 N/A 455 N/A 545 N/A
------ ------ ------ ------ ------ ------
Consolidated $3,296 100% $3,198 100% $3,067 100%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1995 1994
------------------------ -----------------------
Percent Percent
Loans/Leases Loans/Leases
in Each in Each
Category Category
Reserve to Total Reserve to Total
Amount Loans/Leases Amount Loans/Leases
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Commercial, industrial
and agricultural $1,365 31% $1,713 31%
Real estate
-construction 245 2% 276 1%
Real estate
-residential
and commercial 560 63% 579 64%
Consumer 347 3% 346 3%
All other loans -- -- -- --
Lease financing 14 1% 13 1%
Foreign -- -- -- --
Loans to U.S. Banks
under repurchase
agreement -- -- -- --
General reserve 565 N/A 495 N/A
------ ------ ------ ------
Consolidated $3,096 100% $3,422 100%
====== ====== ====== ======
</TABLE>
20
<PAGE> 21
The following table sets forth by major category the ratio of net loans and
leases charged-off to total average loans and leases outstanding for the years
indicated.
Hawaii National Bancshares, Inc. & Subsidiary
Table IV-C
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Real estate 0.06% 0.06% 0.09% 0.05% 0.04%
Commercial, industrial and agricultural 0.37% 0.16% 0.30% 0.36% 0.16%
Consumer 0.06% 0.06% 0.01% 0.07% 0.02%
All other loans 0.00% 0.00% 0.00% 0.00% 0.00%
Leasing 0.00% 0.00% 0.00% 0.00% 0.00%
------- ------- ------- ------- -------
Total 0.49% 0.28% 0.40% 0.48% 0.22%
======= ======= ======= ======= =======
</TABLE>
21
<PAGE> 22
V. DEPOSITS
The following table presents the average amount and average rate paid on
deposits for the years indicated.
Hawaii National Bancshares, Inc. & Subsidiary
Table V-A
Average Deposits by Type
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 64,234 -- $ 59,294 -- $ 57,539 --
Interest-bearing demand 27,358 1.55% 27,246 1.58% 27,248 1.79%
Savings 91,507 2.59% 102,803 2.72% 114,833 2.93%
Time 77,481 4.86% 69,343 4.88% 63,647 4.89%
Foreign -- -- -- -- -- --
-------- -------- --------
Total $260,580 $258,686 $263,267
======== ======== ========
</TABLE>
The following table presents the maturity distribution of domestic time
certificates of deposit issued in amounts of $100,000 or more at December 31 for
the years indicated.
Hawaii National Bancshares, Inc. & Subsidiary
Table V-B
Maturity Distribution of Domestic Time Certificates
of Deposit of $100,000 or More
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
3 months or less $33,666 $28,622 $26,525
Over 3 months through 6 months 17,817 17,544 17,122
Over 6 months through 12 months 6,118 2,666 4,154
Over 12 months 665 221 144
------- ------- -------
$58,266 $49,053 $47,945
======= ======= =======
</TABLE>
Note: At December 31, 1998, 1997, and 1996, public time deposits totaled
$35,415,000; $32,001,000; and $32,192,000, respectively.
22
<PAGE> 23
VI. RETURN ON EQUITY AND ASSETS
The following table presents for the years indicated:
1. Return on average assets (net income divided by average total assets);
2. Return on average equity (net income divided by average shareholders'
equity);
3. Dividend payout ratio (dividends per share divided by net income per
share);
4. Average equity to average assets ratio (average shareholders' equity
divided by average total assets).
Hawaii National Bancshares, Inc. & Subsidiary
Table VI
Operating, Dividend, and Capital Ratios
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
1. Return on average assets -0.12% 0.22% 0.24%
2. Return on average equity -1.23% 2.34% 2.62%
3. Dividend payout ratio NM 16.30% 15.00%
4. Average equity to average assets ratio 9.36% 9.58% 9.23%
</TABLE>
NM = Not Meaningful
23
<PAGE> 24
ITEM 2. PROPERTIES
Bancshares maintains its office at the same location in Honolulu as the
Bank's main office.
The Bank's premises are leased for varying periods to 2024 with renewal
options ranging from 3 to 20 years. Rent expense was $2,572,000 in 1998;
$2,493,000 in 1997 and $2,366,000 in 1996, net of sublease income of $49,000 in
1998, $56,000 in 1997 and $59,000 in 1996. Premise leases extend for varying
periods up to 26 years and provide for periodic renegotiation of rents based
upon a percentage of the appraised value of the leased property. At December 31,
1998, the aggregate minimum rental commitments under all non-cancelable leases
were as follows: 1999 - $2,452,000; 2000 - $2,333,000; 2001 - $2,266,000; 2002 -
$1,911,000; 2003 - $1,335,000; and thereafter to 2024 - $21,638,000 (aggregate
$31,935,000). Additional information is provided in Note 9 of the Notes to the
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Bank is party to legal actions from time to time as part of its
normal course of business. Management, after consulting with counsel on these
matters, believes the outcome of these cases will not have a materially adverse
effect upon Bancshares' or the Bank's financial position, results of operations
or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders in the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDERS MATTERS.
MARKET INFORMATION
Bancshares' common stock is not actively traded and is not listed on any
exchange. Management is not aware of any broker/dealer who formally makes a
market in its common stock. However, based upon quotations obtained from Dow
Jones Telerate and actual transactions known to Bancshares, the price of
Bancshares' common stock during 1998 has ranged between $38.00 to $46.20 and
during 1997 from $34.00 to $38.00. Bancshares' book value per share at
December 31, 1998 and 1997 was $38.38 and $39.86, respectively. Neither the
book value nor its trading price may be indicative of the value of Bancshares'
common stock.
NUMBER OF EQUITY HOLDERS
As of February 28, 1999, there were 1,224 common shareholders of record.
Bancshares' transfer agent is HNB.
24
<PAGE> 25
DIVIDENDS
Bancshares paid cash dividends of $0.15 per share of common stock on
February 14, 1997 and on February 17, 1998. In view of HNB's performance in 1998
and management's strategy to grow the Bank, Bancshares does not anticipate
paying a dividend in the foreseeable future. Instead, Bancshares intends to
retain earnings to finance future growth and build a strong capital base.
Bancshares will periodically review its dividend policy and may declare
dividends in the future if such payments are deemed appropriate and in
compliance with applicable law and regulations. Cash dividends are subject to
determination and declaration by Bancshares' Board of Directors which considers
a number of factors, including the growth anticipated by the Bank, the profits
being generated, liquidity and capital requirements, applicable governmental
regulations and policies, and other relevant factors. (See "Business Objectives
and Strategies" in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Restrictions on Retained Earnings" in Note 10 of
the Notes to Consolidated Financial Statements.)
ITEM 6. SELECTED FINANCIAL DATA
A summary of operations and selected financial data for the five years
ended December 31 is presented as follows:
25
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
HAWAII NATIONAL BANCSHARES, INC.
& SUBSIDIARY
SUMMARY OF OPERATIONS AND OTHER SELECTED FINANCIAL DATA
for the five years ended December 31
(in thousands except for per share data)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 23,078 $ 22,575 $ 22,376 $ 22,640 $ 20,179
Interest expense 7,035 6,671 7,004 7,105 5,300
--------- --------- --------- --------- ---------
Net interest income 16,043 15,904 15,372 15,535 14,879
Provision for loan and lease losses 1,185 720 810 700 765
--------- --------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 14,858 15,184 14,562 14,835 14,114
Other income 2,465 2,734 2,445 2,336 2,348
Other expenses 18,037 16,909 15,865 15,507 15,085
--------- --------- --------- --------- ---------
Income (loss) before income taxes (714) 1,009 1,142 1,664 1,377
Income tax provision (benefit) (368) 358 431 620 505
--------- --------- --------- --------- ---------
Net income (loss) $ (346) $ 651 $ 711 $ 1,044 $ 872
========= ========= ========= ========= =========
Earnings (loss) per common share (basic and diluted) $ (0.49) $ 0.92 $ 1.00 $ 1.47 $ 1.23
========= ========= ========= ========= =========
Cash dividends per share $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.15
========= ========= ========= ========= =========
OTHER SELECTED FINANCIAL DATA:
Total assets $ 312,034 $ 298,687 $ 296,025 $ 299,590 $ 290,256
Investment securities $ 46,855 $ 49,241 $ 49,417 $ 47,490 $ 46,419
Loans and leases, net of allowance for
loan and leases losses $ 220,551 $ 215,821 $ 204,195 $ 209,998 $ 213,993
Deposits $ 275,901 $ 258,721 $ 264,594 $ 268,906 $ 260,973
Shareholders' equity $ 27,289 $ 28,342 $ 27,797 $ 27,193 $ 26,243
Book value per share $ 38.38 $ 39.86 $ 39.10 $ 38.25 $ 36.91
</TABLE>
26
<PAGE> 27
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS
In reviewing this discussion, reference should be made to the
accompanying table of analysis of operations, the financial statements, and
selected financial data presented elsewhere in this report.
Hawaii National Bancshares, Inc. & Subsidiary
Analysis of Results of Operations
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31 1998 vs 1997 1997 vs 1996
------------------------------- --------------------- ----------------------
Percent Percent
Increase of Increase of
1998 1997 1996 (Decrease) Change (Decrease) Change
-------- -------- -------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans
and leases $ 19,990 $ 18,910 $ 18,658 $ 1,080 5.7% $ 252 1.4%
Interest on federal funds sold 281 683 907 (402) -58.9% (224) -24.7%
Interest on investment securities 2,786 2,961 2,790 (175) -5.9% 171 6.1%
Other 21 21 21 -- --% -- --%
-------- -------- -------- -------- ------ -------- ------
Total interest income 23,078 22,575 22,376 503 2.2% 199 0.9%
-------- -------- -------- -------- ------ -------- ------
Interest Expense:
Deposits 6,561 6,616 6,963 (55) -0.8% (347) -5.0%
Federal funds purchased 15 9 2 6 66.7% 7 350.0%
Interest on short-term borrowings 459 46 39 413 897.8% 7 17.9%
-------- -------- -------- -------- ------ -------- ------
Total interest expense 7,035 6,671 7,004 364 5.5% (333) -4.8%
Net interest income 16,043 15,904 15,372 139 0.9% 532 3.5%
Provision for loan and lease losses 1,185 720 810 465 64.6% (90) -11.1%
-------- -------- -------- -------- ------ -------- ------
Net interest income after provision
for loan and lease losses 14,858 15,184 14,562 (326) -2.1% 622 4.3%
-------- -------- -------- -------- ------ -------- ------
Other Income:
Service charges on deposit accounts 1,104 1,097 1,110 7 0.6% (13) -1.2%
Other service charges, collection and exchange
charges, commissions and fees 1,358 1,635 1,320 (277) -16.9% 315 23.9%
Gain on investment securities 3 2 15 1 50.0% (13) -86.7%
-------- -------- -------- -------- ------ -------- ------
2,465 2,734 2,445 (269) -9.8% 289 11.8%
-------- -------- -------- -------- ------ -------- ------
Other Expenses:
Salaries and employee benefits 9,445 8,765 8,132 680 7.8% 633 7.8%
Occupancy expense of bank premises 3,842 3,689 3,511 153 4.1% 178 5.1%
Equipment expense 1,040 982 853 58 5.9% 129 15.1%
Computer services -- 571 729 (571) -100.0% (158) -21.7%
Other operating expenses 3,710 2,902 2,640 808 27.8% 262 9.9%
-------- -------- -------- -------- ------ -------- ------
18,037 16,909 15,865 1,128 6.7% 1,044 6.6%
-------- -------- -------- -------- ------ -------- ------
Income (loss) before income taxes (714) 1,009 1,142 (1,723) -170.8% (133) -11.6%
Income Tax Provision (Benefit) (368) 358 431 (726) -202.8% (73) -16.9%
-------- -------- -------- -------- ------ -------- ------
Net income (loss) $ (346) $ 651 $ 711 $ (997) -153.1% $ (60) -8.4%
======== ======== ======== ======== ====== ======== ======
</TABLE>
27
<PAGE> 28
Hawaii National Bancshares, Inc. ("Bancshares") is a bank holding
company whose wholly owned subsidiary is Hawaii National Bank ("HNB" or the
"Bank"), a national banking association. Bancshares derives substantially all of
its income from the operations of the Bank and the Bank's assets constitute the
majority of Bancshares' assets. Therefore, the discussion that follows relates
mainly to the activities of the Bank.
FORWARD-LOOKING STATEMENTS
This report and other filings and communications made by Bancshares and
HNB (collectively, the "Company") may contain, from time to time, certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Among other things, these forward-looking
statements may be contained in periodic filings made to the Securities and
Exchange Commission ("SEC"), press releases, and oral statements made by
executive officers of the Company. By their very nature, forward-looking
statements, such as forecasts or projections of future performance or statements
of management's plans and objectives, are subject to various risks and
uncertainties that could cause actual results to differ materially from those
indicated. These include, but are not limited to: general economic conditions;
the interest rate environment; the local real estate market; Year 2000 issues;
trends in credit quality, liquidity and capital resources; increased competition
from bank and nonbank institutions; governmental regulation; changes in consumer
and business behavior; developments in technology; and other risk factors. When
relying on forward-looking statements, investors and others should carefully
consider these and other uncertainties, whether or not the statements are
described as forward-looking. Unless explicitly stated otherwise,
forward-looking statements made by the Company are intended to apply only at the
time they are made. The Company undertakes no obligation to publicly revise or
update these forward-looking statements to reflect subsequent events.
LOCAL ECONOMY
In 1998, Hawaii continued to struggle through a prolonged economic
slowdown which began in 1990. The gross state product is estimated to have grown
by 1.5% in 1998, little changed from the prior year, and substantially below the
robust 3.9% estimated for the nation. Tourism is Hawaii's largest industry
generating about one-quarter of the gross state product and employing an
estimated 25% of the State's workforce. One-third of the State's annual tourists
are from Asia, of which the Japanese represent the largest segment. In 1998, the
number of Japanese visitors to Hawaii dropped by 6.3%, which resulted in a loss
of about $100 million in tourist spending. In addition, visitor arrivals from
other Asia-Pacific countries plunged more than 23%. The declines in the
eastbound markets were due to the well publicized economic problems plaguing
that region combined with sharply weaker currencies, and increased competition
from other destinations. During the year, the trend in corporate downsizings,
failures, and migrations to other states continued, boosting the State's
unemployment rate in December nearly 1.5% above the national rate. Bankruptcies
and foreclosures continued to mount in 1998, surpassing the records set in 1997
by 30% and 15%, respectively. While home resales increased sharply during the
year, prices continued to slide. The median price for a single-family home on
Oahu in 1998 was 3% lower compared to 1997, while the condominium
28
<PAGE> 29
median was 10% below the prior year. In the commercial real estate area,
relatively high vacancy rates continued to depress property values in 1998.
In 1999, Hawaii will be entering its ninth year of an economic slump,
which ranks as one of the longest for any U.S. regional economy since World War
II. With its dependence on tourism and its close ties to Asia, little
improvement is anticipated in the coming year.
BUSINESS OBJECTIVES AND STRATEGIES
As part of its long-range planning, the Company has implemented several
initiatives in the last few years with the objectives of increasing the Bank's
franchise value and positioning it to compete more effectively in the rapidly
changing financial services industry. In order to accomplish these objectives,
the strategy is to grow the Bank to take advantage of economies of scale and to
invest in new technology to improve efficiency. While embarking on this course
has put pressure on short-term earnings, the Company believes that having a
long-term horizon is far more important, especially in this environment where
the lines between banks and nonbank institutions are becoming increasingly
blurred.
The cornerstone of a community bank is its branch system. While other
financial institutions have been closing offices, the Bank has expanded into
areas where the demographics for small business and future population growth
appear favorable. Since 1995, the Bank has opened four new branches bringing the
total number of branches in the Bank's network to eleven on Oahu, two on Maui
and one on the Big Island. The new facilities will provide the Bank with an
opportunity to expand its loan and deposit base; however, based on past
experience, new offices initially have a negative impact on earnings, until the
volume of business grows to cover overhead expenses.
In order to compete effectively in today's market, the Company
recognizes that the Bank must become a lower-cost provider. The Company's
strategy is to leverage technology to gain operating efficiencies and drive down
costs. In keeping with its long-term plan, the operations of Computer Systems
International, Ltd., ("CSI") an affiliated data processing provider, were merged
into the Bank in October 1997. While the effect of bringing this function
in-house has increased overhead costs in the short-run, the anticipated
efficiencies that will accrue over time should enable the Bank to reduce costs
in other areas without compromising customer service. In 1998, the Bank
successfully completed an upgrade to a new core processing system that will
enable it to offer a number of new electronic banking products to its customers,
including PC banking. It also linked its departments and branches together with
local area networks and wide area networks.
There is no assurance that the Company will be able to achieve its
objectives, nor is it possible to predict whether future changes in regulatory,
economic and competitive changes will cause the Company to revise its
operating strategy. The operating results of the Company are expected to
remain dependent upon general economic conditions and other external factors
for the foreseeable future.
29
<PAGE> 30
OVERVIEW
The Company reported a net loss of $345,844 or $0.49 per share in 1998.
In 1997, the Company earned $651,175 or $0.92 per share. Net income was $711,223
or $1.00 per share in 1996.
Many factors affected the Company's performance in 1998 and 1997. The
execution of certain strategic initiatives, such as expanding the branch
network, merging a data processing provider into the Bank and upgrading the
computer system, increased overhead costs for the Bank. This, combined with
substantially higher loan loss provisions and increased writedowns in other real
estate owned ("OREO"), resulted in a net loss for 1998 and lower profits in
1997.
In 1998, the Bank established its first "in-store branch" in the
Moanalua Ethnic Village. The same year, it migrated to a new core processing
system and networked its branches and departments. In 1997, the Bank opened the
Pearl City Branch and formed a new Information Systems Department to handle the
data processing function, which had previously been outsourced.
During 1998, provisions for loan and lease losses increased by $465,000
over 1997. Net charge-offs rose to $1,087,168 in 1998, compared to $589,619 a
year earlier. Loans and leases past due for 90 days or more and those on
nonaccrual ended 1998 at $4,111,000, little changed from the $4,206,000 reported
as of the same date in 1997. As real estate prices continued to slide in 1998,
the Bank reduced the carrying values for certain properties in OREO by $334,000.
In the prior year, a similar write-down of $138,000 was recorded. At December
31, 1998 and 1997, OREO totaled $976,000 or 0.31% of total assets and $1,668,000
or 0.56%, respectively.
At December 31, 1998, total assets stood at $312,033,544, a 4.5%
increase from $298,686,778 at December 31, 1997. Loans and leases grew 2.2% to a
record $223,846,506 and deposits increased 6.6% to $275,901,399 at December 31,
1998. At year-end 1998, the benefit obligation of the Company's pension plan
exceeded the fair value of plan assets. As a result, an additional minimum
pension liability adjustment of $600,000, net of tax of $380,000, was reported
in other comprehensive loss as a reduction to shareholders' equity. At December
31, 1998, shareholders' equity totaled $27,289,319, compared to $28,341,819 at
December 31, 1997. Leverage and risk-based capital ratios continued to exceed
regulatory capital requirements by a substantial margin at December 31, 1998 and
1997.
OUTLOOK FOR 1999
Looking ahead to 1999, the Company anticipates that its operating
results may continue to be adversely impacted by Hawaii's prolonged economic
slowdown. As a community bank, the Bank's market area is concentrated in Hawaii
and management believes the Bank's activities should remain in the State. Many
of the Bank's customers are family enterprises and closely-held businesses which
have been hit hard by the weak local economy. During the first quarter of 1999,
the Bank anticipates increasing its provision for loan and lease losses by an
additional
30
<PAGE> 31
$30,000 over the first quarter of 1998. The appropriateness of continuing such
an increase will be re-evaluated at least quarterly. Furthermore, until the
local real estate market stabilizes, the Bank's earnings remain vulnerable to
additional OREO writedowns.
RESULTS OF OPERATIONS
Net Interest Income
HNB derives the majority of its earnings from net interest income, the
difference between what the Bank earns on interest-earning assets such as loans
and leases, federal funds sold and investment securities and what it pays on
interest-bearing liabilities such as interest-bearing deposits, federal funds
purchased and short-term borrowings. Net interest income is affected mainly by
changes in the volume and the mix of interest-earning assets and
interest-bearing liabilities and in the yields earned and the rates paid based
on those assets and liabilities.
Net interest income was $16,042,773 in 1998, $15,903,944 in 1997 and
$15,372,384 in 1996. The nominal increase in 1998 was primarily due to an
increase in interest income on loans and leases, partly offset by higher
interest expense on short-term borrowings. In 1997, an improvement in net
interest margin resulted in a 3.5% increase in net interest income. Net interest
margin was 5.84%, 5.90% and 5.63% for 1998, 1997 and 1996, respectively.
Total interest income increased 2.2% in 1998 to $23,078,274 versus
$22,574,669 in 1997 and $22,376,745 in 1996. The higher interest revenue
reported in 1998 was primarily due to a higher average balance of loans and
leases. The average yield on interest-earning assets increased slightly from
8.38% in 1997 to 8.41% in 1998. The increase in interest income in 1997 was
largely due to a 19 basis point increase in average asset yields. Interest
income foregone on nonaccrual loans and leases amounted to $529,000, $441,000
and $464,000 in 1998, 1997 and 1996, respectively.
Total interest expense increased to $7,035,501 in 1998, compared to
$6,670,725 and $7,004,361 in 1997 and 1996, respectively. The 5.5% increase in
1998 was attributable to a higher average balance of short-term borrowings.
While deposits remained the primary source of funds in 1998, the wholesale
markets began to play a greater role. Compared to 1997, the average balance of
short-term borrowings was $7,481,000 higher in 1998. The average rate paid on
interest-bearing deposits and liabilities was 3.43% and 3.33% for 1998 and 1997,
respectively. The decline in interest expense of 4.8% in 1997 was primarily due
to lower average rates paid on deposits.
Other Income
In addition to interest income, the Bank has various sources of other
income which include service charges on deposit accounts; other service charges,
collection and exchange charges, commissions and fees; and gains on investment
securities. Other income totaled $2,465,468 in 1998, $2,734,128 in 1997, and
$2,445,479 in 1996. The lower revenue in 1998 was attributable to data
processing fees of $350,000 paid to HNB by another financial institution
31
<PAGE> 32
in the prior year. The contract with this institution ended in December 1997.
The gains on investment securities in 1998, 1997 and 1996 were premiums paid to
the Bank for securities which were called.
Other Expenses
Other expenses consist of salaries and employee benefits, occupancy
expense of bank premises, equipment expense, computer services and other
operating expenses. For 1998, 1997 and 1996, other expenses were $18,037,085,
$16,908,897 and $15,865,640, respectively. This represents an increase of
$1,128,188 or 6.7% in 1998 and $1,043,257 or 6.6% in 1997.
The largest component of other expenses is salaries and employee
benefits, which increased $679,865 or 7.8% in 1998 and $632,848 or 7.8% in 1997.
The growth in this category reflected several factors including: (1) an increase
in the average number of staff due to the merger of CSI and the opening of the
new branches in Pearl City and Moanalua; (2) higher overtime costs associated
with the upgrade to the Bank's computer system in 1998; and (3) rising costs for
employee benefits.
Occupancy expense of bank premises rose $152,409 or 4.1% in 1998 versus
an increase of $177,908 or 5.1% in the previous year. The increases in both
years were attributable to the expansion in the branch network and the
assumption of CSI's office rent.
Equipment expense increased $58,493 or 5.9% in 1998 and $129,162 or
15.1% a year earlier. The increase in 1998 resulted largely from higher
depreciation charges. The increase in 1997 was primarily due to repairs for
furniture, fixtures and equipment.
In prior years, HNB obtained computer services from CSI, a bank service
corporation formed to provide data processing services to financial
institutions, including the Bank, which owned 50% of CSI. On August 31, 1997,
CSI became wholly owned by the Bank when CSI purchased the other 50% interest
from an affiliate of a director. Effective October 1, 1997, CSI's operations
were merged into the Bank and CSI was liquidated. Charges for data processing
services provided by CSI were $571,000 in 1997 and $729,000 in 1996. While these
fees were eliminated in 1998, the costs were reallocated to other areas. It is
anticipated that the Bank will realize cost efficiencies in the future by having
brought the data processing function in-house.
Other operating expenses rose $808,090 or 27.8% in 1998 and $261,768 or
9.9% in 1997. Included in this category are writedowns to OREO which amounted to
$334,000 in 1998 and $138,000 in 1997. (see "Risk Elements and Other Real Estate
Owned"). Besides OREO writedowns, higher legal and professional fees for problem
loan collections and consultants and enhancements to the Bank's computer system
accounted for much of the increase in other operating expenses in 1998. Prior to
August 31, 1997, Bank's investment in CSI was accounted for under the equity
method. The Bank's equity in losses of CSI was $59,000 in 1996, which was
included in other operating expenses. At December 31, 1996, the Bank's
investment in CSI was reduced to zero.
32
<PAGE> 33
Income Taxes
The Company had a federal and state income tax benefit of $368,000 in
1998, compared to an income tax provision of $358,000 in 1997 and $431,000 in
1996. The effective tax rates for those years were (51.5%), 35.5%, and 37.7%,
respectively. The effective tax rate of (51.5%) for 1998 was due to the net loss
and amortization of goodwill.
Year 2000
The Year 2000 is a serious issue which will affect virtually every
organization, including the Bank. The difficulty stems from the inability of
most computer programs to distinguish the year 1900 from the year 2000. The
challenge is especially critical to financial institutions since many processes,
such as interest accruals and payments, are date-sensitive. Nor is the problem
limited to just computer systems. The coming millenium will affect potentially
every system that has an embedded microchip, such as automated teller machines,
elevators and vaults, as well as the Bank's business partners.
The Bank has made preparing for the Year 2000 one of its top corporate
priorities. To oversee this project, the Bank established a Year 2000 Committee,
which consists of representatives from the major functional areas of the Bank.
The Bank's project plan follows the five phase management process recommended by
the Federal Financial Institutions Examination Council ("FFIEC"), consisting of:
awareness, assessment, renovation, validation and implementation.
The awareness phase consists of defining the Year 2000 problem and
gaining executive management and Board of Director support. The assessment phase
includes inventorying all hardware, software, networks, automated teller
machines and equipment which contains an embedded microchip, as well as
identifying material third parties with whom the Bank does business. The
renovation stage involves repairing, replacing and upgrading systems which are
not Year 2000 compliant. The validation step consists of testing these systems
and includes an independent third party review. In the implementation phase, the
systems are certified as Year 2000 compliant and accepted by the application
users.
Consistent with the FFIEC's guidance, the Bank's overall strategy has
been to prioritize systems based on risk and schedule project milestones and
allocate resources accordingly. As of the date of this report, the Bank has
completed the awareness, assessment, renovation and validation phases for all
mission-critical information technology ("IT") and non-IT systems and material
customers and vendors. A mission-critical system is one that is vital to the
successful continuance of a core business activity such as lending or
deposit-taking. IT systems include mainframe, PC, item processing and teller
hardware and software. Examples of non-IT systems are elevators, vaults and
security monitoring equipment. The Bank is currently on target to complete the
final phase, implementation, well in advance of the FFIEC's June 30, 1999
completion date.
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<PAGE> 34
The total projected cost for the Year 2000 project is $1,500,000, which
has generally been funded through normal operating cash flows. This amount
includes costs for hardware and software purchases, external consultants,
training and customer awareness programs. The Bank does not separately track
direct payroll and benefit costs for internal IT and non-IT employees involved
in the Year 2000 project. As of year-end 1998, $1,475,000 of the estimated Year
2000 project costs has already been expended, which generally related to a
normal upgrade of the Bank's computer system. During the year, the Bank expensed
$90,000 for training costs. The balance of $1,385,000 was capitalized and is
being depreciated over the system's estimated useful life. The remaining future
costs for the Year 2000 project are expected to be expensed when incurred.
While no one knows for certain what will happen when the century rolls
over, management believes the most reasonably likely worst case scenario could
be a temporary disruption in customer services. Accordingly, the Bank has
developed contingency plans for its core business processes, which include
timelines and trigger dates for activation. In the case of a limited application
or system problem, the Bank could process off-line for several days. In the case
of a localized power failure, the Bank has back-up recovery sites on the
mainland where it could process its work. As part of the validation process, a
qualified, independent party has reviewed the Bank's contingency plans.
Throughout the remainder of the year, the Bank will be conducting training
exercises for its employees to prepare them for the turn of the century.
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 risks, the Bank has incorporated Year 2000 issues into
its contingency funding plan and is planning for increases in customer cash
needs. 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.
Many of the disclosures provided above on the Year 2000 are
forward-looking statements or assumptions relating to forward-looking
statements. Included in this category are estimates of future costs, project
milestones, and potential problems that might occur at critical dates in the
future. Management's ability to predict results or the effect of future plans
and objectives is inherently uncertain. Factors that could cause actual results
to differ materially from those anticipated include 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, unexpected
costs, and the uncertainty associated with the impact of the century date change
on the Bank's customers, vendors and third-party providers, and the economy
generally.
34
<PAGE> 35
FINANCIAL CONDITION
Investment Security Portfolio
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 ("FHLB"). The Bank has no zero coupon bonds, collateralized
mortgage obligations or stripped mortgage-backed securities.
At December 31, 1998, the book and fair values of investment securities
held-to-maturity were $44,980,045 and $45,108,000, respectively, compared to
$47,481,373 and $47,540,000 at December 31, 1997. There were no sales from the
held-to-maturity portfolio in 1998 or 1997. At December 31, 1998 and 1997, the
book and fair value of investment securities available-for-sale was $1,760,103.
Trading securities amounted to $115,227 at year-end 1998, and have been
designated to satisfy certain of the Bank's retirement plan obligations. During
1998 and 1997, there were no transfers between the held-to-maturity,
available-for-sale and trading categories.
Loan and Lease Portfolio
At December 31, 1998, total loans and leases stood at $223,846,506,
marking a new milestone for the Bank, and representing an increase of $4,828,158
or 2.2% from the level reported at December 31, 1997. The growth in the
portfolio was primarily due to an increase in commercial property and
commercial, industrial and agricultural loans. The Bank had no foreign loans in
its portfolio at December 31, 1998 or 1997.
Real estate loans decreased to $134,976,067 at year-end 1998, $3,713,168
below the level at year-end 1997. The decline was centered in family residential
and construction loans, partly offset by an increase in commercial property
loans. Commercial, industrial and agricultural loans ended 1998 at $78,086,477,
an increase of $7,129,983 from December 31, 1997. Consumer loans, which consist
of loans to individuals for household, family and other personal expenditures,
were $9,210,138 at year-end 1998, an increase of $1,597,524 from the level
reported for the same date a year earlier. At December 31, 1998, direct
financing leases and other loans totaled $1,219,220 and $354,604, respectively,
compared to $1,307,313 and $452,692 at December 31, 1997.
Loan Concentrations
The Bank has no significant concentrations of credit risk with any
individual party; however, the Bank's lending is concentrated on the island of
Oahu. As a result, the risk inherent in the portfolio is closely tied to
economic conditions in Hawaii and the local real estate market.
At December 31, 1998, real estate loans totaled $134,976,067, accounting
for 60.3% of the loan and lease portfolio. Included in this category are family
residential, construction and commercial property loans which at year-end 1998
amounted to $101,662,454; $1,044,165; and $32,269,448, respectively. While low
mortgage rates combined with lower prices have made
35
<PAGE> 36
housing in Hawaii more affordable than it has been in years, residential real
estate values, in general, are expected to remain soft until confidence levels
in the local economy improve. In the commercial area, lease rents are expected
to remain under pressure due to relatively high vacancies. Accordingly,
commercial property values could continue to erode in 1999.
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 that
have ceased to accrue interest ("nonaccrual loans and leases"). At December 31,
1998, noncurrent loans and leases were $4,111,000, representing 1.8% of loans
and leases outstanding, compared to $4,206,000, or 1.9%, at December 31, 1997.
Of these amounts, approximately 10% was past due for 90 days or more and the
balance was on nonaccrual. Most of the credits in the noncurrent category are
collateralized by real estate. When a loan reaches this stage, the Bank's
practice is to obtain a current evaluation or appraisal of the collateral. There
were no restructured loans or leases as of December 31, 1998 or 1997.
Generally, at the time a loan is placed on nonaccrual, it is considered
impaired. In evaluating loans for impairment or placement on nonaccrual, the
Bank applies its normal loan review procedures. Among other things, this
analysis includes reviewing: (1) the loan's payment history as compared to the
contractual terms of the note or credit agreement; (2) the financial condition
of the borrower, including an assessment of the prospects for repayment of the
loan; (3) a reevaluation or reappraisal of the underlying collateral; (4) the
loan's current risk rating; and (5) the credit file and loan documents. Loans
with an insignificant delay or shortfall in the amount of payments are not
considered impaired. Examples of insignificant delays or shortfalls may include,
depending upon the specific facts and circumstances, those that are associated
with a temporary stoppage in operations due to equipment failure or a natural
disaster, or due to tight cash flows during the off-peak season of a business.
Recurring shortfalls or delays in payments and/or extended delinquency periods
may provide evidence that a delay or shortfall is significant. In these
circumstances, the loan is reviewed for impairment. Loans collectively evaluated
for impairment by the Bank include smaller balance commercial loans, real estate
loans and consumer loans which are not included in total impaired loans. The
Bank considers a loan to have a "small balance" when the outstanding principal
balance is $50,000 or less. For information on the Bank's accounting policies
for nonaccrual and impaired loans, including income recognition and charge-offs,
and the required financial statement disclosures, please refer to Notes 1 and 5
to the Consolidated Financial Statements.
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. 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 1998, a periodic re-evaluation of certain OREO
properties indicated lower values due to a weak local economy which has
depressed real
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<PAGE> 37
estate prices statewide. Accordingly, the Bank reduced its carrying values for
those assets with a charge to other expenses of $334,000 that directly impacted
current earnings. Comparatively, in 1997, the OREO balance was written down by
$138,000. At December 31, 1998, OREO totaled $976,000 or 0.31% of total assets,
compared to $1,668,000, or 0.56% of total assets, at December 31, 1997. The
portfolio consisted at year-end of two commercial properties on the island of
Hawaii and a residential condominium on Oahu.
The following table presents information on noncurrent loans and leases,
restructured loans and leases and OREO at December 31 for the years indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Noncurrent loans and leases
Past due 90 days or more $ 405,000 $ 424,000 $ 212,000 $ 414,000 $2,241,000
Nonaccrual 3,706,000 3,782,000 3,180,000 6,206,000 1,326,000
---------- ---------- ---------- ---------- ----------
Total $4,111,000 $4,206,000 $3,392,000 $6,620,000 $3,567,000
========== ========== ========== ========== ==========
Restructured loans and leases $ -- $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------
OREO $ 976,000 $1,668,000 $1,219,000 $1,162,000 $ 938,000
========== ========== ========== ========== ==========
</TABLE>
Note: Impaired loans are included in nonaccrual loans and leases.
Potential Problem Loans
The Bank has an internal grading and review system for the purpose of
identifying risk and controlling potential problem credits, and to provide
essential information to determine the adequacy of the allowance for loan and
lease losses. Loans and leases are risk graded on an ongoing basis by the
responsible lending officer. This grade is subsequently confirmed by an
independent Loan Review Department, which publishes a monthly report listing the
credits graded, their potential weaknesses and the reasons for the assigned
grades. These reports are reviewed by management and a committee of the Board of
Directors and a response to any comments by the Loan Reviewer is required from
the lending officer.
In 1998, the Bank began risk grading new credits as well as existing
ones for Year 2000 readiness. The results of these assessments will be
incorporated into future evaluations of the allowance for loan and lease losses.
Provision and Allowance for Loan and Lease Losses
The provision for loan and lease losses is based upon management's
evaluation as to the adequacy of the allowance for loan and leases losses
("allowance" or "reserve") to absorb estimated credit losses inherent in the
portfolio. In appraising the adequacy of the allowance, management follows a
systematic and consistent procedure to maintain it at a level to cover losses
that are probable and estimable as of the date of the evaluation.
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<PAGE> 38
The analytical process for reviewing and documenting the adequacy of the
allowance begins with an individual examination of impaired loans that exceed a
certain threshold. Each nonaccrual loan that is over $50,000 is removed from the
portfolio and a specific allocation, if appropriate, is made based on existing
facts, conditions, and collateral values. After providing an allocation for
specifically identified loans, the remainder of the portfolio is then stratified
by risk grade. When this process has been completed, a loss factor is applied to
each of the totals for the 3 highest risk classifications to determine the
respective allocation. In developing the loss rates for these 3 risk groups, the
Bank takes into account various factors, including guidelines issued by the
federal banking agencies and the results of a migration analysis for a
population of adversely graded loans. The last step in the allowance process
consists of analyzing and providing for loans which are currently performing
and not adversely graded. These credits are segmented into loan pools which
correspond to the same categories used for financial and regulatory reporting
purposes. The amounts allocated for these general loan categories are based
upon the Bank's historical loss experience, adjusted for current trends and
conditions. Factors considered in refining these loss rates include: the
level of, and trends in, delinquencies and nonaccruals, changes in
the nature and volume of the portfolio, concentrations of credit, and current
and prospective economic conditions.
During 1998, the Bank provided $1,185,000 for loan and lease losses,
compared to $720,000 and $810,000 in 1997 and 1996, respectively. The
substantial provisions taken in 1998 and 1996 were primarily due to the higher
losses incurred during those years. Gross charge-offs for 1998, 1997 and 1996
were $1,139,709, $769,141 and $1,531,106, respectively. Of these losses, 53% was
attributable to five commercials loans in 1998, 49% was attributable to three
commercial loans in 1997, and 63% to two commercial loans in 1996. Recoveries
totaled $52,541 in 1998, $179,522 in 1997, and $692,107 in 1996. In 1996, a
nonaccrual loan was repaid, generating net proceeds of $545,000 which were
credited to the allowance for loan and lease losses as a recovery of an amount
previously charged off in 1995. Net charge offs increased to $1,087,168 in 1998,
compared to $589,619 in 1997 and $838,999 in 1996. The ratio of net charge offs
to average loans and leases for those years were 0.49%, 0.28%, and 0.40%
respectively.
At December 31, 1998, the allowance for loan and lease losses stood at
$3,295,647, representing 1.47% of total loans and leases outstanding, compared
to $3,197,815 or 1.46%, at year-end 1997. As of the same date, the reserve
provided coverage of 80.2% of noncurrent loans and leases versus 76.0% at
December 31, 1997. The majority of the credits in the noncurrent category are
collateralized by real estate. Given the negative outlook for Hawaii's economy,
the Bank anticipates increasing the provision for loan and lease losses in the
first quarter of 1999 by an additional $30,000 over the first quarter of 1998.
The appropriateness of continuing such an increase will be re-evaluated at least
quarterly.
Deposits
Deposits traditionally have been the principal source of HNB's funds for
use in lending, meeting liquidity requirements and making investments. The
maintenance of a stable and low cost deposit base is, therefore, an important
factor in the Bank's asset and liability management plan and essential to the
achievement of its profit goals. The Bank's strategy for attracting new
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<PAGE> 39
deposits and retaining its current base focuses on achieving customer
satisfaction and building long-term relationships. The Bank offers a variety of
deposit products which are marketed to residents of Hawaii. No deposits are
placed by or through a broker. At December 31, 1998, total deposits were
$275,901,399, representing an increase of $17,180,594 or 6.6% from total
deposits of $258,720,805 at December 31, 1997.
The following table presents the distribution of the Bank's deposit
accounts at December 31 for the years indicated.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 72,495,436 26.3% $ 69,463,341 26.9% $ 59,989,127 22.7%
Interest-bearing demand 28,144,040 10.2 27,907,474 10.8 28,144,031 10.6
Savings 94,006,430 34.1 91,167,206 35.2 110,032,161 41.6
Time 81,255,493 29.4 70,182,784 27.1 66,429,061 25.1
------------ ----- ------------ ----- ------------ -----
Total deposits $275,901,399 100.0% $258,720,805 100.0% $264,594,380 100.0%
============ ===== ============ ===== ============ =====
</TABLE>
Noninterest-bearing demand deposits ended 1998 at $3,032,095 above the
balance reported at year-end 1997. The growth in these deposits are important to
the Bank because they represent an interest-free source of funds which enhances
net interest margin. Interest-bearing demand deposits at year-end 1998 were
essentially unchanged, compared to the same date in 1997. In recent years, as
consumers have grown more knowledgeable about financial matters, they have
tended to use these accounts primarily for current transaction purposes.
Generally, excess funds not needed in the immediate future are transferred to
higher yielding deposit accounts or invested in other financial instruments.
Savings deposits increased by $2,839,224 and time deposits grew by $11,072,709
over year-end 1997 levels. During 1998, customers continued to shift their funds
from savings to time deposits to take advantage of higher rates. The average
rates paid on savings and time deposits during the year were 2.59% and 4.86%,
respectively. Since December 31, 1996, time deposits, as a percentage of total
deposits, have grown from 25.1% to 29.4% at December 31, 1998. Meanwhile, over
the same period, savings deposits have declined from 41.6% to 34.1%. In the
absence of other mitigating factors, this change in the deposit mix raises the
cost of deposits to the Bank. 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 December 31, 1998, 1997
and 1996, public time deposits totaled $35,415,000, $32,001,000, and
$32,192,000, respectively, representing 12.8%, 12.4% and 12.2% of the Bank's
total deposits.
Liquidity Management
The objective of liquidity management is to provide sufficient cash
flows at a reasonable cost to accommodate fluctuations in deposit levels, fund
operations, provide for customers' credit needs, and meet obligations and
commitments on a timely basis. The Bank relies on both assets and liabilities to
satisfy its liquidity requirements.
39
<PAGE> 40
The principal sources of asset-based liquidity for the Bank are cash and
cash equivalents. At December 31, 1998, these resources totaled $32,400,184 or
10.4% of total assets, compared to $22,628,962 or 7.6% at December 31, 1997. The
improvement was attributable to an increase in federal funds sold. In order to
generate additional liquidity and reduce interest rate risk, the Bank's current
strategy is to sell its fixed-rate mortgage loan originations in the secondary
market to government instrumentalities like the Federal Home Loan Mortgage
Company and the Federal National Mortgage Association.
On the liability side of the balance sheet, deposits historically have
been the primary source of liquidity for HNB. The Bank places a high priority on
attracting and retaining a stable base of core deposits and, thus, does not
actively solicit large time certificates of deposits or deposits from outside of
the Bank's market area. Furthermore, no deposits are sold or placed through
brokers. The State of Hawaii, City and County of Honolulu, and other public
agencies are important providers of funds.
In recent years, one of the most important consumer trends has been the
migration of household financial assets out of deposits and into direct
investment vehicles, such as mutual funds. As a result, federal funds purchased
and FHLB advances are anticipated to become a more significant source of funds
for the Bank in the future. While borrowings are a reliable source of funds from
a liquidity standpoint, they have a higher cost than deposits which puts
downward pressure on 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 FHLB. The line of credit with the
FHLB is equal to 15% of total assets, including a cash management agreement line
of 5%. In addition, the Bank can utilize the FHLB's Community Investment Program
("CIP") 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; however,
there is a $10,000,000 per year cap on new advances, which is subject to waiver
by the FHLB. The Bank had one advance outstanding under this program for
$5,300,000 at December 31, 1998, which matures in April 1999. Comparatively, at
year-end 1997, drawings under federal funds lines and advances from the FHLB
aggregated $8,000,000.
Operating activities provided net cash of $887,787 in 1998, $304,769 in
1997 and $2,214,134 in 1996. The increase in 1998 was primarily due to higher
interest and fees received, partly offset by increased outlays to suppliers and
employees. Net cash used in investing activities declined to $4,706,343 in 1998
from $13,128,310 in 1997 due to higher proceeds from loan sales and maturing
investment securities held-to-maturity, partly offset by higher capital
expenditures arising largely from the upgrade of the computer system.
Comparatively, in 1996, lower loan originations, net of principal repayments,
and higher proceeds from loan sales contributed significantly to the net cash
provided by investing activities of $2,880,677. Financing activities provided
net cash of $13,589,778 in 1998 due primarily to a net increase in deposits,
partly offset by a net decrease in federal funds purchased. In 1997, a large
savings withdrawal, which was anticipated by the Bank and related to a
customer's real estate investment, reduced net cash provided by financing
activities to $2,175,803. Net cash used in financing activities was $4,476,820
in 1996 due primarily to a net decrease in deposits.
40
<PAGE> 41
Market Risk
The information contained in this section contains certain
forward-looking statements with regards to quantitative and qualitative
disclosures required to comply with the SEC's rule relating to market risk.
These disclosures involve a number of assumptions about hypothetical changes in
interest rates, anticipated behavior by other parties in response to those
hypothetical changes in interest rates, and various other estimates and factors,
which could cause actual results to differ materially from those projected.
As a financial institution, HNB's core business includes making loans,
purchasing investments and accepting deposits. These activities leave the Bank's
net interest income exposed to movements in interest rates. This category of
market risk is called interest rate risk.
The Bank has an Asset and Liability Management Committee, which is
responsible for managing the Bank's interest rate risk exposure. The objective
of the Committee is to reduce the vulnerability of net interest income, the
major source of the Bank's earnings, to interest rate fluctuations. This is
accomplished by striving to match maturity and repricing dates of assets and
liabilities. Substantially all of the Bank's financial instruments (i.e.,
investment securities, loans and leases, deposits, borrowings, etc.) are entered
into for purposes other than trading. No derivative financial instruments such
as futures, options or interest rate swaps are used for hedging or speculative
purposes.
The Bank uses a simulation model to measure the projected increase or
decrease in net interest income that may result from possible changes in
interest rates. The model covers all of the Bank's financial instruments and
allows the Bank to analyze the effects of embedded options by varying the
interest rate scenarios, prepayment rates on loans, runoff rates for deposits,
and other variables.
Most financial instruments, including those applicable to HNB, are
generally priced, directly or indirectly, in relation to the U.S. Treasury yield
curve which, by definition, represents the risk-free rate. If U.S. Treasury
rates declined instantaneously by 10% at December 31, 1998, and remained at
those levels, the Bank's net interest income for the year would decrease by
0.34% from the base or flat-rate scenario, while a 10% increase in U.S. Treasury
rates would result in a 1.14% rise in net interest income from the base case.
Comparatively, as of the identical date in 1997, a 10% decline in U.S. Treasury
rates would have resulted in a 0.06% decrease in net interest income, while an
increase of the same magnitude would have resulted in a 0.70% increase in net
interest income.
The results of these projections are highly dependent upon two key
assumptions: loan prepayment rates and the rate-sensitivity of nonmaturity
deposits, such as interest-bearing demand and savings accounts. The prepayment
assumptions for these analyses were obtained from Bloomberg, the FHLB and the
Office of Thrift Supervision. The repricing assumptions for nonmaturity deposits
were based upon the Bank's historical experience and consistent with industry
trends. Other key assumptions include: (1) the Bank maintains its present size;
(2) all maturing assets and liabilities are reinvested back into the same
instruments with the same maturities; (3) spread relations remain constant; and
(4) there are no changes in management's
41
<PAGE> 42
strategy. Finally, in interpreting these results, it is important to note that
they exclude, among other things, the effects of competition, which have, and
will continue to have, a significant impact on the Bank's net interest income.
Pension Plan
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. Pension benefits are based upon specified
percentages of employee compensation accumulated during each year of service.
Net periodic pension cost for 1998, 1997 and 1996 was $359,928, $293,650 and
$263,472, respectively.
The calculation of the amount that the Company must contribute to its
pension plan is actuarially determined. The amount depends on the ages of the
employees, their life expectancy, their expected retirement age, the income
expected to be earned by the pension fund and many other factors. The Company's
policy is to contribute annually an amount not less than the minimum required by
the Employee Retirement Income Security Act of 1974 plus additional amounts
which may be approved by the Company. The assets of the pension fund are managed
by a trustee in accordance with investment guidelines established by the
Company's Pension Committee. Investments generally consist of marketable
securities such as U.S. Treasury obligations, certificates of deposit and money
market funds.
At December 31, 1998, the benefit obligation for services rendered was
$6,658,629, which exceeded the fair value of plan assets of $4,963,867 by
$1,694,762. In order to record the resulting liability, an intangible asset of
$241,619 was recognized and an additional minimum pension liability adjustment
of $600,000, net of tax of $380,000, was reported in other comprehensive loss as
a reduction to shareholders' equity. The weighted average discount rate
assumption was 6.50%, 7%, and 7.25% for 1998, 1997 and 1996. The expected rate
of return on plan assets was 7.50% and the assumed rate of increase in future
compensation levels was 5% for all 3 years.
Shareholders' Equity and Capital Resources
Management believes that a strong capital position serves three basic
purposes: (1) it inspires public confidence; (2) provides a safety cushion
against unforeseen operating losses; and (3) establishes a solid foundation for
future growth.
At December 31, 1998 and 1997, shareholders' equity totaled $27,289,319
and $28,341,813, respectively. The decline in equity reflected the 1998 net loss
and an additional minimum pension liability adjustment of $600,000. During the
first quarter of 1998 and 1997, the Company paid cash dividends of $106,650 on
its common stock. The Company does not anticipate paying a dividend in 1999.
Book value per share was $38.38 at December 31, 1998, $39.86 at December 31,
1997 and $39.10 at December 31, 1996.
42
<PAGE> 43
The Company is subject to risk-based capital guidelines which are used
by bank regulatory agencies to evaluate capital adequacy. Under this system,
assets and off-balance sheet items are assigned to one of four risk-weight
categories to calculate a risk-weighted asset base. The rules require a minimum
Tier 1 capital ratio of 4.0% of risk-weighted assets and a minimum total capital
ratio of 8.0% of risk-weighted assets. Tier 1 capital generally consists of
common shareholders' equity less goodwill, while total capital includes in
addition to Tier 1 capital, the allowance for loan and lease losses, subject to
certain limitations, and subordinated debt. In addition to the risk-based
capital ratios, the banking regulators have established a minimum leverage ratio
of Tier 1 capital to average quarterly total assets of 3.0%. 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%. At December 31, 1998, the Company's Tier 1
and total capital ratios were 12.4% and 13.7%, respectively, compared to 13.5%
and 14.8% at December 31, 1997. At year-end 1998 and 1997, the Company's
leverage ratio was 9.0% and 9.9%, respectively.
In evaluating the Company's capital position, management considers the
present and anticipated needs of Bancshares and HNB, current and projected
market conditions, interest rate risk exposure, bank regulatory requirements,
and other relevant factors. Management believes that capital continues to be
adequate to meet the present needs of both Bancshares and HNB. In planning for
the future, management conducts periodic evaluations as to the overall adequacy
of capital, and the need and desirability of raising capital is reviewed. The
current strategy is to generate capital through retention of earnings. Should
asset growth exceed earnings retention, several alternatives for raising capital
are available. Bancshares could sell additional stock, as it did in 1991 with a
$2,950,000 private placement, or issue new debt and downstream the proceeds as
capital to the Bank. Bancshares may also borrow up to 30% of its capital without
prior approval of the Federal Reserve System. Based on year-end 1998 figures,
this would amount to $8,186,796.
Effects of New Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," in fiscal 1998. The effect of this
SFAS, which established standards for reporting and display of comprehensive
income and its components in the financial statements, are reflected in the
Company's Statement of Changes in Shareholders' Equity.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which was effective for fiscal 1998. SFAS No. 131 required that
information be provided about the different types of business activities in
which an enterprise engages and the different economic environments in which it
operates. This SFAS did not affect the Company's disclosures as the Company does
not have separate operating segments, as defined in the SFAS, nor does it
operate in multiple geographic locations. Information about the Company's
revenues are presented in the Statement of Operations.
43
<PAGE> 44
The Company also adopted SFAS No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits," in fiscal 1998 which revised and
standardized the pension plan disclosure, but did not change the measurement of
pension expense.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal years
beginning after June 15, 1999. The SFAS 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 SFAS 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 upon its ability
and intent to sell or hold those investments. Since the Company has not
securitized mortgage loans held for sale, the adoption of this SFAS is not
expected to have a material impact on the consolidated financial statements of
the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The required information for this section is contained in the section on
"Market Risk" in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, notes, and supplementary data
thereto called for by this item and the report of independent certified public
accountants are provided in item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
<PAGE> 45
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
<TABLE>
<CAPTION>
Shares of
Bancshares'
Name and Age of Nominee, Year First Common Stock
Principal Occupation Elected Beneficially Percent
During Past Five Years Director of Owned of
and Family Relationship Bancshares as of 1/31/99 Class
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
K. J. Luke, 84, 1986 37,201(1) 5.2%
Chairman of the Board of Bancshares;
Chief Executive Officer of Bancshares
until December 1998; Chairman of
the Board of HNB; Father of
Warren K. K. Luke.
Warren K. K. Luke, 54, 1986 291,286(2) 41.0%
Chief Executive Officer of Bancshares
since December 1998; President and
Director of Bancshares; Vice Chairman,
President and Chief Executive
Officer of HNB; Son of K. J. Luke.
Gordon J. Mau, 52, 1990 66,184(3) 9.3%
Secretary and Director of
Bancshares; Assistant Secretary
and Director of HNB; Attorney-
at-Law; Brother-in-law of Warren
K. K. Luke.
Tan Tek Lum, 63, 1993 52,580(4) 7.4%
Director, Executive Vice
President and Assistant
Secretary, Lum Yip Kee, Ltd.
(Real Estate Investments);
Brother-in-law of Carolyn
Luke, wife of Warren K. K. Luke.
Arthur S. K. Fong, 74, 1993 318(5) *
Partner, Fong & Fong, Attorneys
at Law
</TABLE>
*Indicates less than 1% ownership
45
<PAGE> 46
(1) Includes 368 shares held by Mr. Luke's wife, Beatrice S. Y. Luke, as trustee
of the Beatrice Lum Luke Trust dated 5/26/83, over which Mr. Luke exercises no
voting or investment power. Also includes ownership of: (a) 5 shares owned by
K.J.L., Inc. by virtue of Mr. Luke's ownership of 40.57% of that company's total
voting stock; and (b) 35,520 shares owned by K.J.L. Associates by virtue of Mr.
Luke's status as a general partner, over which Mr.
Luke shares voting and investment power.
(2) Includes 13,089 shares owned by Mr. Luke's wife, Carolyn Luke, over which
Mr. Luke exercises no voting or investment power; 33,889 shares owned by two of
Mr. and Mrs. Luke's children who reside with them; 63,791 shares held by Mr.
Luke as trustee for his nephews and nieces, over which he exercises sole voting
and investment power; and 98,025 shares held by Mr. Luke as trustee for his
sisters, over which he shares voting and investment power. Also includes
ownership of: (a) 5 shares owned by K.J.L., Inc. by virtue of Mr. Luke's status
as a principal shareholder, director and executive officer; and (b) 35,520
shares owned by K.J.L. Associates by virtue of Mr. Luke's status as a principal
shareholder, director and executive officer of K.J.L., Inc., the corporate
general partner.
(3) Includes 28,058 shares held by Mrs. Mau as trustee of the Sharlene Kam Sun
Luke Mau Trust dated 12/13/93, over which Mr. Mau exercises no voting or
investment power; 3,235 shares held by Mr. and Mrs. Mau, as trustees for one of
their children, over which Mr. Mau shares voting and investment power; 1,020
shares held in trust for one of Mr. and Mrs. Mau's children, of which Mr. Mau
has sole voting and investment power over 381 shares, and Mrs. Mau has sole
voting and investment power over 639 shares; and 19,670 shares owned by one of
Mr. and Mrs. Mau's children who is economically dependent upon them.
(4) Includes 47,820 shares held by Mr. Lum as trustee of separate trusts
established for the benefit of Warren K. K. Luke, Loretta H. W. Yajima, Sharlene
K. S. Mau and Janice M. T. Loo, over which Mr. Lum shares voting and investment
power; and 4,560 shares held by Mr. Lum as trustee for separate trusts
established for the benefit of the children of Warren K. K. Luke, over which Mr.
Lum shares voting and investment power.
(5) Includes 224 shares owned jointly by Mr. Fong and his wife, Victoria C.
Fong, over which Mr. Fong shares voting and investment power.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of January 31, 1999 with
respect to named executive officers who are not directors.
46
<PAGE> 47
NAMED EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Shares of Bancshares' % of Class
Common Stock Beneficially
Name and Age Position Beneficially Owned Owned
- ------------------------- ----------------------------- ------------------------- --------------
<S> <C> <C> <C>
Ernest T. Murata, 65 Vice President, Treasurer, 400 *
Assistant Secretary and
Chief Financial Officer of
Bancshares; Senior
Executive Vice President,
Cashier, Secretary and
Chief Financial Officer of
HNB
Denis C.H. Kam, 63 Executive Vice President 2 *
and Senior Loan
Administrator of HNB; prior
to 1997, served as Senior
Vice President in various
administrative and
managerial capacities at
Bank of Hawaii
All directors and executive officers
as a group (7 persons) 459,030 64.6%
</TABLE>
* Denotes ownership of less than 1%
COMPLIANCE WITH SECTION 16(a) FILING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended,
("Section 16(a)") requires that all executive officers and directors of
Bancshares and HNB and all persons who beneficially own more than 10% of
Bancshares' common stock file reports with the SEC with respect to beneficial
ownership of Bancshares' securities. Bancshares has adopted procedures to assist
its directors and executive officers in complying with the Section 16(a)
filings.
Based solely upon Bancshares' review of the copies of the filings which
it received with respect to the fiscal year ended December 31, 1998, or written
representations from certain reporting persons, Bancshares believes that all
reporting persons made all filings required by Section 16(a) on a timely basis.
47
<PAGE> 48
ITEM 11: EXECUTIVE COMPENSATION
OVERVIEW
The following information regarding executive compensation is provided
consistent with the SEC's disclosure requirements. These requirements are
intended to provide shareholders with a clear and concise view of the
compensation paid to executive officers and directors, and an understanding of
the directors' reasoning in making compensation decisions.
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid or accrued by HNB
during the years ended December 31, 1998, 1997 and 1996 for the chief executive
officer and each other executive officer whose aggregate cash compensation
exceeded $100,000.
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Name and Other Annual
Principal Position Year Salary (1) Bonus Compensation (2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
K. J. Luke 1998 $124,685 $ -- $ --
Chairman of the Board of 1997 $156,393 $ 1,529 $ --
Bancshares; Chief Executive 1996 $156,726 $ 1,525 $ --
Officer of Bancshares until
December 1998; Chairman
of the Board of HNB.
Warren K. K. Luke 1998 $243,941 $ -- $ 3,300
Chief Executive Officer of 1997 $232,727 $ 2,283 $ 3,300
Bancshares since December 1996 $232,881 $ 2,276 $ 3,300
1998; President and Director
of Bancshares; Vice Chairman,
President and Chief Executive
Officer of HNB.
Ernest T. Murata 1998 $183,352 (3) $ -- $ 7,540
Vice President, Treasurer, 1997 $170,787 (3) $ 1,615 $ 7,540
Assistant Secretary and Chief 1996 $169,507 (3) $ 1,538 $ 6,018
Financial Officer of Bancshares;
Senior Executive Vice President,
Cashier, Secretary and Chief
Financial Officer of HNB.
Denis C.H. Kam 1998 $104,500 $ -- $ --
Executive Vice President and 1997 $ 83,333 $ 833 $ --
Senior Loan Administrator of
HNB since March 1997.
</TABLE>
48
<PAGE> 49
Notes:
(1) Includes directors and committee fees for 1998, 1997 and 1996 of $2,450,
$3,450 and $4,200 for K.J. Luke, respectively, and $4,450, $4,450 and $4,200,
respectively, for Warren K. K. Luke.
(2) Other annual compensation consists of personal use of automobiles and direct
reimbursements. All of the amounts listed for Warren K. K. Luke in the table
above are for direct reimbursements. For Ernest T. Murata, personal use of
automobiles was $5,052, $5,052 and $4,032 for 1998, 1997 and 1996, respectively.
During the same years, direct reimbursements paid to him were $2,488, $2,488 and
$1,986, respectively.
(3) Includes an adjustment in vacation benefits in 1998, 1997 and 1996 of
$14,039, $9,316 and $15,410, respectively, for Ernest T. Murata.
Bancshares and HNB have not granted any options or other forms of
long-term incentive awards and, consequently, no such options or awards are
outstanding.
PENSION PLAN
HNB has a noncontributory pension plan. As of December 31, 1998, HNB's
Employees' Retirement Plan had 254 participating employees in the Plan. The Plan
is funded annually. HNB's policy is to fund pension costs using an actuarial
basis, which includes past service and current cost. As such, it cannot
determine the actual contributions allocated to each of the above-listed
individuals. Under this Plan, employees are required to complete one full year
of service before being eligible to be a member of the Plan. In order to be
fully vested, a participant must complete five years of service with HNB.
Benefits become effective upon an employee's retirement at the normal retirement
age of 65 years. The Plan also offers employees various options with respect to
the manner of receiving retirement benefits. Under specific circumstances,
employees who have attained certain ages and lengths of service may retire early
at reduced benefits. In 1998 HNB's contribution to the Retirement Plan
represented 7.85% of the total remuneration paid to the Plan's participants.
ESTIMATED ANNUAL PENSION
PAYABLE AT AGE 65
<TABLE>
<CAPTION>
Years of Service with HNB
-------------------------
Average
Salary Per Year 10 15 20 25 30
- --------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$300,000 $ 29,238 $ 47,858 $ 68,246 $ 88,635 $109,023
250,000 29,238 47,858 68,246 88,635 109,023
200,000 26,550 42,303 59,555 76,808 94,060
150,000 22,500 34,253 47,130 60,008 72,885
100,000 15,000 22,753 31,255 39,758 48,260
</TABLE>
49
<PAGE> 50
The above table shows the estimated annual retirement benefit payable on
a straight-life annuity basis to participating employees, including the named
executive officers, for the average annual salary and years of service
classification indicated. The benefits indicated in the table are not subject to
Social Security deductions or other offset amounts. Under the Plan, covered
compensation consists solely of salary and excludes overtime and bonuses. Please
refer to the "Summary Compensation Table" for a 3-year history of the salaries
paid or accrued by HNB for Messrs. K. J. Luke, Warren K. K. Luke and Ernest T.
Murata.
As of December 31, 1998, the credited years of service under the Plan
for Messrs. Warren K. K. Luke and Ernest T. Murata were 26 and 36 years,
respectively. K. J. Luke, who has 38 years of credited service, is presently
receiving annual payments of $24,204 under the Plan.
HNB has established a nonqualified and unfunded supplemental executive
retirement plan ("SERP"). The SERP is intended to supplement payments due to
participants upon retirement under HNB's existing pension plan. The SERP
provides for a payment of up to 70% of the participant's average earnings over a
specified three year period. This amount is reduced by amounts payable to the
participant under HNB's pension plan and social security benefits. The amount
may be further reduced in the event of early retirement prior to age 68.
Presently, Mr. Ernest T. Murata is the only participant in the SERP.
COMPENSATION COMMITTEE REPORT
The Compensation Committee administers the compensation program for
executive officers of Bancshares and HNB. The objective of the program is to
attract and retain qualified executives and to reward them for their
achievements and contributions to Bancshares and HNB.
The Committee believes that the optimal compensation plan should
motivate executives to look ahead to the future, as opposed to focusing on
short-term performance. In keeping with this philosophy, HNB's compensation
packages encourage teamwork, qualitative contributions, and long range planning.
While bonuses are linked to achievements, base compensation is structured to
provide executive officers with salaries that are competitive with those paid by
other banks in Hawaii, taking into account differences in asset size, financial
condition, and other relevant factors. Since Bancshares' stock is inactively
traded and the company's strategy is to generate capital through retention of
earnings, return on shareholders' equity and the current year's results are not
significant factors in establishing salaries or bonuses; however, they are
considered.
K.J. Luke is the Chairman of the Board of Bancshares, its Chief
Executive Officer until December 1998 and the founder and Chairman of the Board
of HNB. He has guided HNB for 38 years, from its beginnings as a one-bank office
on King and Smith Streets to the present day, as a full service bank with 14
branch locations. His wisdom and knowledge of banks and banking is invaluable.
Warren K. K. Luke is the Chief Executive Officer (since December 1998),
President and Director of Bancshares and Vice Chairman of the Board, President
and Chief Executive Officer of HNB. He manages the day-to-day operations of
Bancshares and
50
<PAGE> 51
HNB and leads both companies in strategic planning. Warren K. K. Luke has
significantly enhanced HNB's visibility in the community through his
participation in numerous civic, nonprofit, and professional activities, on both
a local and national level.
In determining Messrs. K. J. Luke's and Warren K. K. Luke's base
compensation for 1998, the Committee considered the above factors. It also
utilized a survey of salaries paid to CEOs of banks in Hawaii with assets
ranging between $770 million and $12.5 billion. The salaries paid to Messrs. K.
J. Luke and Warren K. K. Luke in 1998 were consistent with HNB's ranking in the
survey in terms of asset size. Except for HNB, none of the banks included in
this study were represented in the Unlisted Independent Bank Proxy used in the
performance graph to compare cumulative total return.
No incentive-driven compensation, such as stock options, stock
appreciation rights, restricted stock awards, or other types of payments were
awarded in 1998.
Compensation Committee
Arthur S. K. Fong, Chairman
Lawrence Kunihisa
Tan Tek Lum
PERFORMANCE GRAPH
Bancshares' common stock is not actively traded and is not listed on any
exchange. While a comparison with a broad market index composed of actively
traded stocks may not be meaningful, the SEC requires that such information be
provided to shareholders. Set forth below is a line graph comparing the yearly
percentage change in the cumulative total shareholder return on Bancshares'
common stock against the cumulative total return of the NASDAQ Index, and an
index of unlisted independent western banks for a period of five years
commencing on December 31, 1993 and ending on December 31, 1998.
Comparison of Five Year Cumulative Total Return*
Among Hawaii National Bancshares, Inc., NASDAQ Index
and an index of Unlisted Independent Banks
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bancshares 100.00 141.63 141.83 156.84 175.38 203.87
- --------------------------------------------------------------------------------------------
NASDAQ Index 100.00 97.75 138.26 170.01 208.58 293.21
- --------------------------------------------------------------------------------------------
Unlisted Independent Bank Proxy 100.00 97.86 122.05 165.08 282.88 298.36
- --------------------------------------------------------------------------------------------
</TABLE>
*Assumes $100.00 invested on December 31, 1993 in Bancshares' stock, NASDAQ
Market Index and an Unlisted Independent Bank Proxy originally compiled by
Montgomery Securities and consisting of TriCo Bancshares, Exchange Bank,
Mid-State Bank, Santa Barbara Bancorp, and Hawaii National Bancshares, Inc.
Total return assumes reinvestment of dividends.
51
<PAGE> 52
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is a subcommittee of the Executive Committee
of the Board of Directors. The Committee consists of three independent, outside
directors: Messrs. Arthur S. K. Fong, Lawrence Kunihisa, and Tan Tek Lum. None
of these individuals is or has been employed as an officer of Bancshares or HNB.
Tan Tek Lum is the brother-in-law of Carolyn Luke, the wife of Warren K. K.
Luke. While K. J. Luke and Warren K. K. Luke are members of the Executive
Committee, they are not members of the Compensation Committee. Neither of these
individuals are involved in matters relating to their own or each others'
compensation.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
In accordance with applicable SEC rules, the following table sets forth
those persons who owned beneficially, directly or indirectly, more than five
percent of the issued and outstanding shares of Bancshares' stock as of January
31, 1999. Such rules require not only the disclosure of shares over which an
individual holds sole voting and investment power, but also shares over which
such individual shares voting and investment power. As a consequence, and as
indicated in the footnotes below, in many instances this results in duplication
in the numbers and percentages reported in the table. In the aggregate, members
of the Luke family and their affiliates beneficially owned approximately 88% of
the issued and outstanding shares of Bancshares' stock as of January 31, 1999.
Bancshares knows of no other persons who, as of January 31, 1999, owned
beneficially, directly or indirectly, more than five percent of Bancshares'
outstanding voting securities and knows of no voting trust, pledge, or other
similar agreement affecting any of Bancshares' outstanding voting securities.
<TABLE>
<CAPTION>
% of
Relationship Class
with Banc- Record Beneficially Beneficially
Name shares or HNB Ownership Owned Owned
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
K. J. Luke Chief Executive 1,308 37,201(1) 5.2%
Officer until
December 1998
and Chairman of
the Board of
Bancshares;
Chairman of the
Board of HNB
</TABLE>
52
<PAGE> 53
<TABLE>
<S> <C> <C> <C> <C>
Warren K. K. Luke Chief Executive 46,967 291,286(2) 41.0%
Officer since
December 1998
and President and
Director of
Bancshares;
Vice Chairman,
President and
Chief Executive
Officer of HNB
Loretta H. W. Principal 30,792 88,210(3) 12.4%
Yajima Shareholder,
daughter of K. J.
Luke and sister
of Warren K. K.
Luke
Gordon J. Mau Secretary and 14,201 66,184(4) 9.3%
Director of
Bancshares;
Assistant
Secretary and
Director of HNB
Sharlene K. S. Principal 28,058 98,859(5) 13.9%
Mau Shareholder,
daughter of K. J.
Luke and sister
of Warren K. K.
Luke
Janice M. T. Loo Principal 48,292 81,401(6) 11.4%
Shareholder,
daughter of K. J.
Luke and sister
of Warren K. K.
Luke
Jeanette Lum Principal
Chun Shareholder 118(7) 183,198(7) 25.8%
Herbert Y. H. Principal 994(8) 48,814(8) 6.9%
Chinn Shareholder
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C> <C> <C> <C>
Tan Tek Lum Principal 200 52,580(9) 7.4%
Shareholder and
Director of
Bancshares and HNB
</TABLE>
(1) Includes 368 shares held by Mr. Luke's wife, Beatrice S. Y. Luke, as trustee
of the Beatrice Lum Luke Trust dated 5/26/83, over which Mr. Luke exercises no
voting or investment power. Also includes ownership of: (a) 5 shares owned by K.
J. L., Inc. by virtue of Mr. Luke's ownership of 40.57% of that company's total
voting stock, and (b) 35,520 shares owned by K. J. L. Associates by virtue of
Mr. Luke's status as a general partner, over which Mr. Luke shares voting and
investment power.
(2) Includes 13,089 shares owned by Mr. Luke's wife, Carolyn Luke, over which
Mr. Luke exercises no voting or investment power; 33,889 shares owned by two of
Mr. and Mrs. Luke's children who reside with them; 63,791 shares held by Mr.
Luke as trustee for his nephews and nieces, over which he exercises sole voting
and investment power; and 98,025 shares held by Mr. Luke as trustee for his
sisters, over which he shares voting and investment power. Also includes
ownership of: (a) 5 shares owned by K. J. L., Inc. by virtue of Mr. Luke's
status as a principal shareholder, director and executive officer; and (b)
35,520 shares owned by K. J. L. Associates by virtue of Mr. Luke's status as a
principal shareholder, director and executive officer of K. J. L., Inc., the
corporate general partner.
(3) Includes 15,854 shares owned by Mrs. Yajima's husband, Tyler Yajima, over
which Mrs. Yajima exercises no voting or investment power; 8,455 shares held by
Mrs. Yajima as trustee for her children, over which Mr. Yajima shares voting and
investment power; and 32,675 shares held in trust for her sister, Sharlene K.S.
Mau, over which Mrs. Yajima shares voting and investment power.
(4) Includes 28,058 shares held by Mrs. Mau as trustee of the Sharlene Kam Sun
Luke Mau Trust dated 12/31/93, over which Mr. Mau exercises no voting or
investment power; 3,235 shares held by Mr. and Mrs. Mau, as trustees for their
children, over which Mr. Mau shares voting and investment power; 1,020 shares
held in trust for one of Mr. and Mrs. Mau's children, of which Mr. Mau has sole
voting and investment power over 381 shares, and Mrs. Mau has sole voting and
investment power over 639 shares; and 19,670 shares owned by one of Mr. and Mrs.
Mau's children who is economically dependent upon them.
(5) Includes 14,201 shares held by Mrs. Mau's husband, Gordon J. Mau, as trustee
of the Gordon J. Mau Trust dated 12/12/89, over which Mrs. Mau exercises no
voting or investment power; 3,235 shares held by Mr. and Mrs. Mau, as trustees
for their children, over which Mrs. Mau shares voting and investment power;
1,020 shares held in trust for one of Mr. and Mrs. Mau's children, of which Mrs.
Mau has sole voting and investment power over 639 shares, and Mr. Mau has sole
voting and investment power over 381 shares; 19,670 shares owned by one of Mr.
and Mrs. Mau's children who is economically dependent upon them; and 32,675
shares held in trust for her sister, Janice M. T. Loo, over which Mrs. Mau
shares voting and investment power.
54
<PAGE> 55
(6) Includes 32,675 shares held in trust for her sister, Loretta H.W. Yajima,
over which Mrs. Loo shares voting and investment power.
(7) Includes 47,820 shares and 130,700 shares held by Mrs. Chun as trustee of
two separate trusts established for the benefit of Warren K. K. Luke, Loretta H.
W. Yajima, Sharlene K. S. Mau and Janice M. T. Loo, over which Mrs. Chun shares
voting and investment power; and 4,560 shares held by Mrs. Chun as trustee of
separate trusts established for the benefit of the children of Warren K. K.
Luke, over which Mrs. Chun shares voting and investment power.
(8) Includes 994 shares held jointly by Mr. Chinn with his wife; and 47,820
shares held by Mr. Chinn as trustee of separate trusts established for the
benefit of Warren K. K. Luke, Loretta H. W. Yajima, Sharlene K. S. Mau and
Janice M. T. Loo, over which Mr. Chinn shares voting and investment power.
(9) Includes 47,820 shares held by Mr. Lum as trustee of separate trusts
established for the benefit of Warren K. K. Luke, Loretta H. W. Yajima, Sharlene
K. S. Mau and Janice M. T. Loo, over which Mr. Lum shares voting and investment
power; and 4,560 shares held by Mr. Lum as trustee for separate trusts
established for the benefit of the children of Warren K. K. Luke, over which Mr.
Lum shares voting and investment power.
SECURITY OWNERSHIP OF MANAGEMENT
For information regarding ownership with respect to named executive
officers who are not directors, see ITEM 10 of this Annual Report on Form 10K.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATED TRANSACTIONS
During 1998, directors, executive officers, principal shareholders and
many of their associates (i.e. certain relatives and corporations and other
entities in which such persons have a significant interest) of Bancshares and
HNB were customers of HNB. It is anticipated that such directors, officers,
principal shareholders and their associates will continue to be customers of HNB
in the future. All transactions between HNB and directors, executive officers,
principal shareholders and their associates were made in the ordinary course of
business on substantially the same terms, including interest rates, collateral
and repayment terms on extensions of credit, as those prevailing at the same
time for comparable transactions with other persons. In the opinion of
management, such transactions do not involve more than the normal risk of
collectibility or present other unfavorable features.
HNB leases its office space for its headquarters building at King and
Smith Streets from K. J. L. Associates, an affiliate of directors K. J. Luke and
Warren K. K. Luke. The lease has a term until December 31, 2024 with an option
to renew for fifteen years and requires fixed annual rents of $1,025,445 from
January 1, 1998 until December 31, 2000; and rent thereafter is to be fixed for
each of the succeeding 3-year periods (including the option period) by agreement
or, failing agreement, by arbitration.
55
<PAGE> 56
During 1998, HNB leased office, printing, supply and storage space for
its Airport Branch and general operations from Industrial Investors, Inc., an
affiliate of director Warren K. K. Luke. There were two leases, one for the
Airport Branch and adjacent printing and supply department for HNB and a second
for storage space for HNB. The first lease called for the payment of fixed
annual rents of $147,508 from January 1, 1998 until December 31, 2002; and rent
thereafter to be fixed for the succeeding 10-year period by agreement, or
failing agreement by arbitration. The second lease called for fixed annual rents
of $60,480 from January 1, 1998 until December 31, 2002. Effective February 1,
1998, in recognition of HNB's need for less storage space, HNB canceled its
existing lease and entered into a new lease with Industrial Investors, Inc.,
reducing the amount of storage space. The new lease, which also will continue
until December 31, 2002, will require fixed annual rents of $27,360 (reduced
from $60,480).
All of the lease and sublease payments described above are in addition
to insurance, taxes, maintenance, and utility payments. In addition, any rent
which is arbitrated shall in no event be less than the rent for the period
immediately preceding.
The Boards of Directors of Bancshares and HNB believe that the lease
terms discussed above are as favorable to HNB as those which could have been
obtainable in transactions with persons or companies not affiliated with
Bancshares or HNB.
HNB utilizes the firm of Loyalty Insurance Agency, Ltd. in placing HNB's
insurance, which includes a variety of standard HNB insurance, such as,
fidelity, liability, fire, etc. Mr. Warren K. K. Luke, a director and officer of
Bancshares and HNB, is also a director of Loyalty Insurance Agency, Ltd. and a
director and principal shareholder of its parent company, Loyalty Enterprises,
Ltd. The Board of Directors of HNB believes that the selection of surety
companies and the pricing of the premiums are as favorable as would be
obtainable with other insurance firms. During 1998, HNB paid an aggregate
premium of $291,455 to such firm. HNB plans to continue to utilize the agency
during 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Hawaii National Bancshares, Inc. and Subsidiary:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the
years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996
56
<PAGE> 57
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
(2) Supplementary Financial Statement Schedules
Schedules to the consolidated financial statements
required by Article 9 of Regulation S-X are not required
under the related instructions or are inapplicable, and
therefore have been omitted.
(3) Exhibits
See index to exhibits to this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth
quarter of 1998.
57
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors
Hawaii National Bancshares, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Hawaii
National Bancshares, Inc. and Subsidiary at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Honolulu, Hawaii
January 21, 1999
58
<PAGE> 59
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS:
Cash and due from banks $ 16,400,184 $ 22,628,962
Federal funds sold 16,000,000 --
------------- -------------
Cash and cash equivalents 32,400,184 22,628,962
Investment securities (Notes 1 and 2) -
Held-to-maturity (fair value of $45,108,000
in 1998 and $47,540,000 in 1997) 44,980,045 47,481,373
Available-for-sale 1,760,103 1,760,103
Trading 115,227 --
Loans and leases, net of allowance for loan and
lease losses of $3,295,647 in 1998 and
$3,197,815 in 1997 (Notes 4 and 5) 220,550,859 215,820,533
Premises and equipment (Note 6) 4,905,672 3,539,379
Other assets 7,321,454 7,456,428
------------- -------------
Total assets $ 312,033,544 $ 298,686,778
============= =============
LIABILITIES:
Deposits (Note 7) -
Noninterest-bearing demand $ 72,495,436 $ 69,463,341
Interest-bearing demand 28,144,040 27,907,474
Savings 94,006,430 91,167,206
Time 81,255,493 70,182,784
------------- -------------
Total deposits 275,901,399 258,720,805
Federal funds purchased -- 4,000,000
Short-term borrowings (Note 8) 5,515,835 5,000,000
Other liabilities 3,326,991 2,624,160
------------- -------------
Total liabilities 284,744,225 270,344,965
------------- -------------
Commitments (Notes 9 and 14)
SHAREHOLDERS' EQUITY (Note 10):
Common stock, par value $1 per share;
Authorized - 10,000,000 shares
Issued and outstanding - 711,000 shares
in 1998 and 1997 711,000 711,000
Capital in excess of par value 12,147,676 12,147,676
Retained earnings 15,030,643 15,483,137
Accumulated other comprehensive loss (600,000) --
------------- -------------
Total shareholders' equity 27,289,319 28,341,813
------------- -------------
Total liabilities and shareholders' equity $ 312,033,544 $ 298,686,778
============= =============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
59
<PAGE> 60
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 19,880,282 $ 18,816,427 $ 18,556,817
Interest on investment securities 2,786,149 2,961,101 2,790,445
Interest on Federal funds sold 280,788 682,988 906,607
Interest on direct financing leases 110,179 93,084 101,754
Other 20,876 21,069 21,122
------------ ------------ ------------
Total interest income 23,078,274 22,574,669 22,376,745
------------ ------------ ------------
INTEREST EXPENSE:
Deposits 6,560,773 6,616,100 6,963,425
Federal funds purchased 15,206 9,517 1,739
Short-term borrowings 459,522 45,108 39,197
------------ ------------ ------------
Total interest expense 7,035,501 6,670,725 7,004,361
------------ ------------ ------------
Net interest income 16,042,773 15,903,944 15,372,384
PROVISION FOR LOAN AND LEASE LOSSES (Note 5) 1,185,000 720,000 810,000
------------ ------------ ------------
Net interest income after provision for
loan and lease losses 14,857,773 15,183,944 14,562,384
------------ ------------ ------------
OTHER INCOME:
Service charges on deposit accounts 1,104,723 1,097,175 1,109,880
Other service charges, collection and exchange
charges, commissions and fees 1,357,785 1,634,983 1,320,599
Gain on investment securities 2,960 1,970 15,000
------------ ------------ ------------
2,465,468 2,734,128 2,445,479
------------ ------------ ------------
OTHER EXPENSES:
Salaries and employee benefits 9,445,150 8,765,285 8,132,437
Occupancy expense of bank premises 3,841,331 3,688,922 3,511,014
Equipment expense 1,040,329 981,836 852,674
Computer services (Note 3) -- 570,669 729,098
Other operating expenses (Note 13) 3,710,275 2,902,185 2,640,417
------------ ------------ ------------
18,037,085 16,908,897 15,865,640
------------ ------------ ------------
Income (loss) before income taxes (713,844) 1,009,175 1,142,223
INCOME TAX PROVISION (BENEFIT) (Note 11) (368,000) 358,000 431,000
------------ ------------ ------------
Net income (loss) $ (345,844) $ 651,175 $ 711,223
============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE (basic and diluted) $ (0.49) $ 0.92 $ 1.00
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
60
<PAGE> 61
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF COMPREHENSIVE RETAINED
STOCK PAR VALUE LOSS EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 711,000 $ 12,147,676 $ -- $ 14,334,039 $ 27,192,715
Cash dividends paid ($.15 per
share) -- -- -- (106,650) (106,650)
Net income for the year -- -- -- 711,223 711,223
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 711,000 12,147,676 -- 14,938,612 27,797,288
Cash dividends paid ($.15 per
share) -- -- -- (106,650) (106,650)
Net income for the year -- -- -- 651,175 651,175
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 711,000 12,147,676 -- 15,483,137 28,341,813
Cash dividends paid ($.15 per
share -- -- -- (106,650) (106,650)
Comprehensive loss:
Net loss for the year -- -- -- (345,844) (345,844)
Minimum pension liability
adjustment, net of tax -- -- (600,000) -- (600,000)
------------ ------------ ------------ ------------ ------------
Comprehensive loss -- -- (600,000) (345,844) (945,844)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 $ 711,000 $ 12,147,676 $ (600,000) $ 15,030,643 $ 27,289,319
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
61
<PAGE> 62
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees received $ 23,737,404 $ 22,517,632 $ 22,409,739
Interest paid (6,733,174) (6,737,675) (6,986,316)
Service charges, collection and exchange charges,
commission and fees received 2,462,509 2,732,159 2,430,479
Cash paid to suppliers and employees (18,524,915) (17,888,614) (15,233,320)
Income tax refund (paid) 61,190 (318,733) (406,448)
Cash paid for trading securities (115,227) -- --
------------ ------------ ------------
Net cash provided by operating activities 887,787 304,769 2,214,134
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities
held-to-maturity 36,496,380 28,958,535 36,998,815
Purchase of investment securities held-to-maturity (33,992,092) (28,508,028) (38,910,664)
Purchase of investment securities available-for-sale -- (273,100) --
Net increase in loans and leases made
to customers (15,450,622) (16,678,877) (56,551)
Proceeds from sale of loans 9,500,000 4,247,230 5,319,000
Capital expenditures (1,618,009) (211,827) (309,438)
Proceeds from sale of other real estate owned 358,000 188,500 --
Proceeds from sale of equipment -- -- 33,899
Purchase of other real estate owned -- (850,743) (194,384)
------------ ------------ ------------
Net cash provided by (used in) investing
activities (4,706,343) (13,128,310) 2,880,677
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and
savings accounts 6,107,885 (9,627,297) (11,219,123)
Net increase in time deposits 11,072,708 3,753,724 6,907,718
Net increase (decrease) in federal funds purchased (4,000,000) 4,000,000 (58,765)
Proceeds from short-term borrowings 515,835 4,156,026 --
Dividends paid (106,650) (106,650) (106,650)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 13,589,778 2,175,803 (4,476,820)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,771,222 (10,647,738) 617,991
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,628,962 33,276,700 32,658,709
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,400,184 $ 22,628,962 $ 33,276,700
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
62
<PAGE> 63
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ (345,844) $ 651,175 $ 711,223
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation on bank premises and
equipment 666,464 589,936 564,460
Provision for loan and lease losses 1,185,000 720,000 810,000
Amortization of deferred loan fees (139,569) (228,066) (317,073)
Loan fees 174,865 289,596 184,196
Deferred income taxes (301,000) 58,000 85,000
Writedown of other real estate owned 333,750 137,884 --
Amortization of goodwill (264,000) (88,000) --
Reduction of investment in Computer
Systems International, Ltd. -- -- 59,000
Gain on investment securities (2,960) (1,970) (15,000)
Changes in -
Trading securities (115,227) -- --
Interest receivable 623,834 (118,566) 165,871
Interest payable 302,328 (66,950) 18,045
Other assets (1,219,360) (1,569,764) (148,941)
Other liabilities (10,494) (68,506) 97,353
Total adjustments 1,233,631 (346,406) 1,502,911
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 887,787 $ 304,769 $ 2,214,134
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfer from loans to real estate acquired
through foreclosure $ -- $ 775,000 $ 175,330
=========== =========== ===========
Loan issued for sale of other real estate owned $ -- $ -- $ 137,282
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
63
<PAGE> 64
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hawaii National Bancshares, Inc. was incorporated on September 29, 1986
under the laws of the State of Hawaii for the purpose of becoming a bank
holding company for Hawaii National Bank. Hawaii National Bank operates
fourteen branches in the State of Hawaii and offers a full range of banking
services to businesses as well as individuals. The Bank's primary source of
revenue is providing loans to customers.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
The accounting and reporting policies of Hawaii National Bancshares, Inc.
and Subsidiary ("Company") conform with generally accepted accounting
principles and practices within the banking industry. The following is a
summary of the significant accounting and reporting policies:
CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
Hawaii National Bancshares, Inc. ("Parent") and its wholly-owned subsidiary,
Hawaii National Bank ("Bank"). All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.
Federal regulatory requirements provide for maintenance of average cash
reserves. Such reserve requirements are computed on a bi-weekly basis and
amounted to $586,000 at December 31, 1998.
INVESTMENT SECURITIES
Investment securities consist principally of debt instruments issued by the
U.S. Treasury and other U.S. government agencies and shares held by the
Company in capital stock of the Federal Home Loan Bank of Seattle ("FHLB")
and the Federal Reserve Bank ("FRB"). The investments in the FHLB and FRB
are required to be maintained by the Company, are
64
<PAGE> 65
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
carried at cost and can only be sold back at par value to the FHLB, FRB or
to another member institution.
Investment securities are classified in one of three categories and are
accounted for as follows: 1) investment securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; 2) investment securities
that are bought and held principally for the purpose of selling them in the
near term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings; and 3) investment
securities not classified as either held-to-maturity securities or trading
securities are classified as available-for-sale and reported at fair value,
with unrealized gains and losses, if any, excluded from earnings and
reported in a separate component of shareholders' equity.
Gains and losses realized on the disposition of investment securities are
determined using the specific identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance charged to
income.
LOANS AND LEASES
Loans are carried at face value less undisbursed funds, unearned income and
payments received. Loan origination fees net of direct costs of origination
are deferred and accounted for as an adjustment of the yield. Commitment
fees are deferred and amortized over the commitment term.
Commercial equipment leases are classified as direct financing leases.
Income is recognized over the life of the lease based upon a level rate of
return on the net investment in the lease.
65
<PAGE> 66
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual
terms of the loan agreement. The measurement of impaired loans is generally
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the collateral if the
loan is collateral-dependent.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses ("allowance") is maintained at a
level which, in management's judgment, is adequate to absorb losses in the
Company's loan and lease portfolio. Estimates of loan and lease losses
involve judgment and assumptions as to various factors which, in
management's judgment, deserve current recognition in estimating such losses
and in determining the adequacy of the allowance. Principal factors
considered by management include historical loss experience, value and
adequacy of collateral, level of nonperforming loans and leases, loan
concentrations, growth and composition of the portfolio, review of monthly
delinquency reports, results of examinations of individual loans and leases
and/or evaluation of the overall portfolio by senior credit personnel,
internal auditors, and regulatory agencies, trend of interest rates and
general economic conditions.
The allowance is established through charges to earnings in the form of a
provision for loan and lease losses. Increases and decreases in the
allowance due to changes in the measurement of impaired loans are included
in the provision. Loans continue to be classified as impaired unless they
are brought fully current and the collection of scheduled interest and
principal is considered probable. Loans collectively evaluated for
impairment include smaller balance commercial loans, real estate loans and
consumer loans $50,000 or less which are not included in the total impaired
loans.
Losses on loans and leases are charged to the allowance when collectibility
becomes doubtful and the underlying collateral, if any, is inadequate to
liquidate the outstanding debt. Generally, when a commercial loan is on
nonaccrual status for more than 120 days, it is charged off unless it is
well collateralized. When a real estate loan is placed on nonaccrual status,
the underlying collateral is reevaluated or reappraised. If the loan balance
exceeds the value of the collateral, the under-collateralized portion of the
loan is charged off. Loans to individuals for household, family and other
personal expenditures ("consumer loans") are generally charged off when they
are delinquent for more than 90 days unless a recent record of regular full
payments for the last two months is evident. Direct financing leases are
charged off when they are delinquent for more than 90 days.
66
<PAGE> 67
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Recoveries on loans and leases previously charged off are added to the
allowance.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS
Loans and leases, including impaired loans, are generally classified as
nonaccrual if they are past due as to maturity or payment of principal or
interest for over 90 days, unless such loans and leases are
well-collateralized and in the process of collection. If a loan or a portion
of a loan is classified as doubtful or is partially charged off, the loan is
classified as nonaccrual. Loans that are on a current payment status or past
due less than 90 days may also be classified as nonaccrual if repayment in
full of principal and/or interest is in doubt. Loans may be returned to
accrual status when all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower in accordance with the contractual terms of
interest and principal.
When a loan is placed on nonaccrual status, unpaid interest accrued in the
current year is reversed against current earnings, and interest accrued in
the prior years is charged against the allowance for loan and lease losses.
Subsequent collections of interest and principal are generally applied as a
reduction to principal outstanding. When the future collectibility of the
recorded loan balance is expected, interest income is recognized on a cash
basis. If a nonaccrual loan had been partially charged off, recognition of
interest on a cash basis is limited to that which would have been recognized
on the recorded loan balance at the contractual interest rate. Cash interest
receipts in excess of that amount are recorded as recoveries to the
allowance until prior charge-offs have been fully recovered.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the shorter of
lease terms or estimated economic lives of 5-35 years for buildings and
improvements and 3-25 years for furniture and equipment.
Expenditures for maintenance, repairs and minor renewals are charged to
expense; expenditures for betterments are capitalized. Property retired or
otherwise disposed of is removed from the appropriate asset and related
accumulated depreciation accounts. Gains and losses on sale of assets are
reflected in current earnings.
67
<PAGE> 68
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED
Assets acquired for debts previously contracted are recorded at fair market
value less estimated disposal costs. Any excess of the carrying amount of
the loan over the fair market value of the asset is charged against the
allowance for loan losses at the time of transfer. Subsequent to transfer,
any losses on disposition or writedowns as a result of declines in market
value of specific properties are charged against current earnings. Real
estate acquired through foreclosure sale, deed-in-lieu of foreclosure, and
bank property for which banking use is no longer contemplated are classified
as other real estate owned and is included in other assets. Operating income
and expenses incurred on these properties are reflected in current earnings.
INTEREST INCOME
Interest is accrued daily on the principal balance of loans outstanding,
except for loans placed on nonaccrual status.
PENSION PLAN
The Company's funding policy is to contribute annually an amount not less
than the minimum required by the Employee Retirement Income Security Act of
1974 plus additional amounts which may be approved by the Company. Funding
requirements are actuarially determined using the entry age normal method.
For financial reporting purposes, the Company utilizes the projected unit
credit actuarial method.
INCOME TAXES
Deferred income taxes reflect the future tax consequences of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year end.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
the fair value of financial instruments:
Cash and due from banks: The carrying amounts reported in the consolidated
balance sheet for cash and short-term instruments approximate fair values.
Federal funds sold: The carrying amounts of federal funds sold approximate
their fair values.
68
<PAGE> 69
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Investment securities: Fair values of investment securities are based on
quoted market prices or dealer quotes, where available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Loan and leases: For variable-rate loans that reprice at least quarterly and
with no significant change in credit risk, fair values are based on carrying
values. The fair values of other types of loans, such as fixed-rate loans
and variable-rate loans that reprice infrequently, are estimated using
discounted cash flow analyses, which utilize interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
The carrying amount of accrued interest approximates its fair value.
Deposits: The fair values of demand deposits (e.g., interest and noninterest
checking, passbook savings, and certain types of money market accounts) are,
by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values of fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds purchased and
other short-term borrowings approximate their fair values.
Off-balance sheet commitments: The fair values of off-balance sheet
commitments are estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties.
PER SHARE DATA
Per share data is based on the weighted average number of shares of common
stock outstanding which was 711,000 in 1998, 1997 and 1996.
RECLASSIFICATION
Certain balances in the 1996 and 1997 financial statements have been
reclassified to conform with the 1998 presentation. These reclassifications
have no effect on net income as previously reported.
69
<PAGE> 70
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NEW PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," in fiscal 1998. The effect of this
SFAS, which established standards for reporting and display of comprehensive
income and its components in the financial statements, are reflected in the
Company's Statement of Changes in Shareholders' Equity.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which was effective for fiscal 1998. SFAS No. 131 required
that information be provided about the different types of business
activities in which an enterprise engages and the different economic
environments in which it operates. This SFAS did not affect the Company's
disclosures as the Company does not have separate operating segments, as
defined in the SFAS, nor does it operate in multiple geographic locations.
Information about the Company's revenues are presented in the Statement of
Operations.
The Company also adopted SFAS No. 132, "Employers' Disclosure about Pensions
and other Postretirement Benefits," in fiscal 1998 which revised and
standardized the Company's pension plan disclosure, but did not change the
measurement of pension expense.
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 SFAS 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 SFAS 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 not securitized mortgage loans held for sale, the adoption of this SFAS
is not expected to have a material impact on the consolidated financial
statements of the Company.
70
<PAGE> 71
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
Comparative amortized cost and fair value of investment securities at
December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Securities held-to-maturity -
U.S. Treasury and other
U.S. government agencies $44,980 $ 168 $ 40 $45,108
======= ======= ======= =======
Securities available-for-sale -
Equity securities $ 1,760 $ -- $ -- $ 1,760
======= ======= ======= =======
Trading securities $ 115 $ -- $ -- $ 115
======= ======= ======= =======
1997
Securities held-to-maturity -
U.S. Treasury and other
U.S. government agencies $47,481 $ 96 $ 37 $47,540
======= ======= ======= =======
Securities available-for-sale -
Equity securities $ 1,760 $ -- $ -- $ 1,760
======= ======= ======= =======
1996
Securities held-to-maturity -
U.S. Treasury and other
U.S. government agencies $47,930 $ 148 $ 71 $48,007
======= ======= ======= =======
Securities available-for-sale -
Equity securities $ 1,487 $ -- $ -- $ 1,487
======= ======= ======= =======
</TABLE>
71
<PAGE> 72
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The amortized cost and fair value of held-to-maturity investment securities
at December 31, 1998, by contractual maturity were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
(IN THOUSANDS)
<S> <C> <C>
Due within one year $11,988 $12,043
Due after one but within five years 32,992 33,065
------- -------
Total held-to-maturity investment securities $44,980 $45,108
======= =======
</TABLE>
Investment securities with an aggregate book value of $44,980,000,
$39,489,000 and $48,000,000 at December 31, 1998, 1997 and 1996,
respectively, were pledged as collateral for U.S. government and public
funds on deposit and for other purposes required by law.
3. INVESTMENT IN COMPUTER SYSTEMS INTERNATIONAL, LTD.
Computer services were previously obtained from Computer Systems
International, Ltd. (CSI), a company formed to provide data processing
services to financial institutions, including the Bank. On August 31, 1997,
CSI became wholly-owned by the Bank when CSI purchased into treasury stock
the other 50% interest from an affiliate of a director. Effective October 1,
1997, CSI's operations were merged into the Bank and CSI was liquidated.
Charges for data processing services provided by CSI, prior to CSI becoming
wholly-owned by the Bank, amounted to $571,000 and $729,000 in 1997 and
1996, respectively.
Prior to August 31, 1997, the Bank's investment in CSI was accounted for
under the equity method. The Bank's equity in losses of CSI amounted to
$59,000 in 1996. The Bank's investment in CSI was written off as of December
31, 1996.
72
<PAGE> 73
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. LOANS AND LEASES
Loans and leases outstanding at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Real estate -
Family residential $101,662,454 $107,180,757
Construction 1,044,165 2,616,724
Commercial property 32,269,448 28,891,754
Commercial, industrial and agricultural 78,086,477 70,956,494
Individuals for household, family and other 9,210,138 7,612,614
personal expenditures
All other loans 354,604 452,692
------------ ------------
222,627,286 217,711,035
Direct financing leases 1,219,220 1,307,313
------------ ------------
223,846,506 219,018,348
Less allowance for loan and lease losses 3,295,647 3,197,815
------------ ------------
$220,550,859 $215,820,533
============ ============
</TABLE>
The loan and lease portfolio is located in the State of Hawaii and
principally on the island of Oahu. The risk inherent in the portfolio is
dependent upon the general economic conditions of the State which affects
property values and the financial well being and creditworthiness of
borrowers.
Loans to officers, directors and their affiliates amounted to $56,000 and
$36,000 at December 31, 1998 and 1997, respectively.
There were no loans pledged as collateral for U.S. government funds on
deposit at December 31, 1998 and 1997.
At December 31, 1998 and 1997, the Company serviced loans for others
amounting to $52,705,000 and $50,350,000, respectively. Loans held for sale
at December 31, 1998 amounted to $1,446,000. There were no loans held for
sale at December 31, 1997.
At December 31, 1998 and 1997, the undisbursed portion of loans amounted to
$1,785,000 and $2,688,000 respectively.
73
<PAGE> 74
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During fiscal 1996, the Company sold loans amounting to $3,819,000,
including a $2,673,000 impaired loan, to an affiliate of a director. No gain
or loss was recognized on the sale of these loans.
At December 31, 1998 and 1997, the Company's investment in vehicle and
equipment direct financing leases consisted of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Minimum lease payments receivable and
guaranteed residual values $ 1,991,374 $ 1,574,401
Unearned income (772,154) (267,088)
----------- -----------
$ 1,219,220 $ 1,307,313
=========== ===========
</TABLE>
As of December 31, 1998, the future minimum lease payments to be received
from direct financing leases are as follows for the years ending December
31:
<TABLE>
<S> <C>
1999 $ 643,000
2000 458,000
2001 406,000
2002 346,000
2003 138,000
----------
$1,991,000
==========
</TABLE>
74
<PAGE> 75
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
An analysis of the allowance for loan and lease losses for the years ended
December 31, 1998, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance, beginning of year $ 3,197,815 $ 3,067,434 $ 3,096,433
Provision charged to operations 1,185,000 720,000 810,000
Recoveries credited to allowance 52,541 179,522 692,107
Loans and leases charged off (1,139,709) (769,141) (1,531,106)
----------- ----------- -----------
Balance, end of year $ 3,295,647 $ 3,197,815 $ 3,067,434
=========== =========== ===========
</TABLE>
Nonaccrual loans amounted to approximately $3,706,000 and $3,782,000 at
December 31, 1998 and 1997, respectively. There was no interest income
recognized on nonaccrual loans in 1998, 1997 and 1996. Had these loans
performed in accordance with their original terms, interest income of
$529,000, $441,000 and $464,000 would have been recorded in 1998, 1997 and
1996, respectively.
The following table presents information related to impaired loans as of and
for the year ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Impaired loans $3,603,000 $3,793,000
Impaired loans with related allowance for
loan losses calculated under SFAS No. 114 1,835,000 1,528,000
Total allowance on impaired loans 349,000 374,000
Average impaired loans 3,647,000 3,584,000
</TABLE>
Impaired loans without a related allowance for loan losses are generally
collateralized by assets with fair values in excess of the recorded
investment in the loans. Interest payments on impaired loans are applied to
principal. There was no interest recognized on impaired loans in 1998 and
1997. During fiscal 1998 and 1997, certain loans were written down by
approximately $510,000 and $287,000, respectively, to the fair value of the
collateral.
75
<PAGE> 76
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Buildings and improvements $ 3,927,280 $ 3,265,979
Furniture and equipment 8,143,512 6,815,328
----------- -----------
12,070,792 10,081,307
Less accumulated depreciation 7,165,120 6,541,928
----------- -----------
$ 4,905,672 $ 3,539,379
=========== ===========
</TABLE>
Depreciation expense on premises and equipment amounted to $666,464,
$589,936 and $564,460 in 1998, 1997 and 1996, respectively.
7. DEPOSITS
Time certificates of deposit include certificates of $100,000 or more
aggregating $58,266,000 at December 31, 1998 and $49,053,000 at December 31,
1997. Interest expense on such certificates was $2,660,000, $2,432,000 and
$2,197,000 in 1998, 1997 and 1996, respectively.
At December 31, 1998, the scheduled maturities of time deposits were as
follows:
<TABLE>
<S> <C>
1999 $55,623,000
2000 25,600,000
2001 11,000
2002 21,000
-----------
$81,255,000
===========
</TABLE>
Variable rate deposits limited to three withdrawals or less per month are
classified as savings deposits. At December 31, 1998 and 1997, such deposits
aggregated $27,118,000 and $27,860,000, respectively.
76
<PAGE> 77
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SHORT-TERM BORROWINGS
At December 31, 1998 and 1997, short-term borrowings were composed of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
U.S. Treasury tax and loan collections $ 215,835 $1,000,000
Advances from FHLB 5,300,000 4,000,000
---------- ----------
$5,515,835 $5,000,000
========== ==========
</TABLE>
The U.S. Treasury tax and loan collections on deposit bear interest (4.11%
at December 31, 1998 and 5.25% at December 31, 1997) and are due on demand.
The Bank maintains a line of credit with FHLB equal to 15% of total assets,
including a cash management agreement line of 5%.
9. LEASE COMMITMENTS
The Company is obligated, under long-term leases of bank premises, for
minimum annual rentals plus property taxes, insurance and maintenance. These
leases extend over varying periods to 2024 with renewal options ranging from
3 to 20 years. Most of the leases provide for periodic renegotiation of
rents based upon a percentage of the appraised value of the leased property.
At December 31, 1998, the aggregate minimum rental commitments under
noncancelable leases are as follows for the years ending December 31:
<TABLE>
<CAPTION>
LEASE
RENTAL
-----------
<S> <C>
1999 $ 2,452,000
2000 2,333,000
2001 2,266,000
2002 1,911,000
2003 1,335,000
Thereafter 21,638,000
-----------
$31,935,000
===========
</TABLE>
77
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HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Where future rentals are subject to renegotiation, the minimum amounts shown
above are based on the latest rents.
Rent expense was $2,572,000 in 1998, $2,493,000 in 1997 and $2,366,000 in
1996, net of sublease income of $49,000 in 1998, $56,000 in 1997 and $59,000
in 1996. The Company leases bank and office premises from affiliated parties
under leases expiring in 2024. Rent paid to affiliates on these leases
amounted to $1,263,000 in 1998, 1997 and 1996.
10. SHAREHOLDERS' EQUITY
REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
tables below) of Total and Tier 1 capital to risk-weighted assets, and of
Tier 1 capital to average assets.
78
<PAGE> 79
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------------- -------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Total Capital (to Risk
Weighted Assets) $30,038 13.7% $17,550 8.0% $21,937 10.0%
Tier 1 Capital (to Risk
Weighted Assets) $27,289 12.4% $ 8,775 4.0% $13,162 6.0%
Tier 1 Capital (to Risk
Average Assets) $27,289 9.0% $12,133 4.0% $15,167 5.0%
DECEMBER 31, 1997
Total Capital (to Risk
Weighted Assets) $30,969 14.8% $16,765 8.0% $20,956 10.0%
Tier 1 Capital (to Risk
Weighted Assets) $28,342 13.5% $ 8,382 4.0% $12,574 6.0%
Tier 1 Capital (to Risk
Average Assets) $28,342 9.9% $11,478 4.0% $14,348 5.0%
</TABLE>
As of December 31, 1998 and 1997, the Company was categorized as well
capitalized under the applicable federal regulations. To be categorized as
well capitalized, the Company must maintain minimum ratios as set forth in
the table above. Management is not aware of any conditions or events
subsequent to December 31, 1998, that would cause a change in the Company's
category.
RESTRICTIONS ON RETAINED EARNINGS
Dividends that may be paid on the Company's common stock, as and when
declared by the Board of Directors, are largely dependent upon the amount of
dividends paid to the Company by its bank subsidiary. Federal law currently
establishes limits on the amount of dividends that may be paid in any one
year by the bank subsidiary without the prior approval of the Comptroller of
the Currency. Such dividends are limited to bank net earnings for the year
in which the dividend is declared together with earnings of the preceding
two years as defined in the Comptroller's regulations, less any required
statutory transfers of retained earnings to capital in excess of par value.
At December 31, 1998, retained earnings of the Bank available for dividends
without prior approval of the Comptroller of the Currency amounted to
$733,000.
79
<PAGE> 80
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. INCOME TAXES
The provision (benefit) for income taxes for 1998, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CURRENT:
Federal $ (60,000) $ 283,000 $ 295,000
Hawaii (7,000) 17,000 51,000
--------- --------- ---------
(67,000) 300,000 346,000
--------- --------- ---------
DEFERRED:
Federal (244,000) 47,000 69,000
Hawaii (57,000) 11,000 16,000
--------- --------- ---------
(301,000) 58,000 85,000
--------- --------- ---------
$(368,000) $ 358,000 $ 431,000
========= ========= =========
</TABLE>
80
<PAGE> 81
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 1998 and 1997, the components of the net deferred tax asset
were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Loan and lease losses $ 972,000 $ 934,000
Net operating loss carryforwards 754,000 754,000
Minimum pension liability adjustment 380,000 --
Interest on nonaccrual loans 178,000 126,000
Writedown of other real estate owned 143,000 39,000
Accrued expenses 109,000 136,000
Direct financing leases 103,000 --
Tax credits 100,000 100,000
Deferred loan fees and related origination costs 82,000 100,000
Other 36,000 23,000
----------- -----------
2,857,000 2,212,000
----------- -----------
Deferred tax liabilities:
Tax over book depreciation (656,000) (682,000)
Excess pension contributions over expenses (158,000) (106,000)
FHLB stock dividends (124,000) (83,000)
Deferred gain on fixed assets (45,000) (45,000)
Direct financing leases capitalized for tax -- (104,000)
Other (13,000) (12,000)
----------- -----------
(996,000) (1,032,000)
----------- -----------
Net deferred tax asset $ 1,861,000 $ 1,180,000
=========== ===========
</TABLE>
In 1998, deferred tax assets of $380,000 were recorded related to the
minimum pension liability adjustment.
As a result of the Company becoming the sole stockholder of CSI in 1997, the
Company recorded $877,000 of deferred tax assets relating to net operating
loss carryforwards of $2,258,000 generated by CSI and $130,000 of tax
credits. In 1997, the Company utilized $318,000 of these net operating loss
carryforwards and $30,000 of these tax credits to partially offset taxable
income.
The valuation allowance decreased $422,000 in 1997 due to the reversal of
the deferred tax asset and related valuation allowance associated with the
Company's investment in CSI. In addition, certain net operating loss
carryforwards were utilized in 1997.
81
<PAGE> 82
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A reconciliation of the Company's effective tax rate with the statutory
Federal income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory Federal income tax rate (34.0)% 34.0% 34.0%
State franchise tax, net of Federal tax benefit (5.6) 5.6 5.5
Amortization of goodwill (12.6) (3.0) --
Change in valuation allowance -- (2.0) 2.0
Stock dividends -- -- (2.5)
Tax-exempt interest income -- -- (1.1)
Other, net 0.7 0.9 (0.2)
------ ------ ------
(51.5)% 35.5% 37.7%
====== ====== ======
</TABLE>
At December 31, 1998, the Company had net operating loss and research and
experimentation tax credit carryforwards that were generated by CSI which
expire in the following years:
<TABLE>
<CAPTION>
NET
OPERATING TAX
LOSS CREDITS
<S> <C> <C>
2005 $ 96,000 $ --
2006 128,000 --
2007 59,000 --
2008 745,000 --
2009 10,000 --
2010 505,000 --
2011 210,000 --
2012 187,000 100,000
---------- ----------
$1,940,000 $ 100,000
========== ==========
</TABLE>
82
<PAGE> 83
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
12. PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. The following tables provide a reconciliation
of the changes in the plan's benefit obligations and fair value of assets
over the three year period ended December 31,1998 and a statement of the
unfunded status as of December 31 for all three years.
The following table provides the components of net periodic benefit cost for
the plan for fiscal years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 279,587 $ 246,278 $ 233,162
Interest cost 396,509 354,863 333,025
Expected return on plan assets (345,027) (316,943) (310,577)
Amortization of prior service cost (46,241) (46,241) (48,986)
Recognized net actuarial loss 75,100 55,693 56,848
----------- ----------- -----------
Net periodic benefit cost $ 359,928 $ 293,650 $ 263,472
=========== =========== ===========
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 5,594,150 $ 4,770,622 $ 4,304,428
Service cost 279,587 246,278 233,162
Interest cost 396,509 354,863 333,025
Actuarial loss 618,434 365,367 242,572
Benefits paid (230,051) (142,980) (342,565)
----------- ----------- -----------
Benefit obligation at end of year $ 6,658,629 $ 5,594,150 $ 4,770,622
=========== =========== ===========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 4,456,778 $ 4,054,127 $ 4,029,844
Actual return on plan assets 243,090 215,794 166,848
Employer contribution 494,050 329,837 200,000
Benefits paid (plus expenses) (230,051) (142,980) (342,565)
----------- ----------- -----------
Fair value of plan assets at end of year $ 4,963,867 $ 4,456,778 $ 4,054,127
=========== =========== ===========
Unfunded status $(1,694,762) $(1,137,372) $ (716,495)
Unrecognized net actuarial loss 2,218,703 1,573,432 1,162,609
Unrecognized prior service cost 22,355 (23,886) (70,127)
----------- ----------- -----------
Prepaid benefit cost $ 546,296 $ 412,174 $ 375,987
=========== =========== ===========
</TABLE>
83
<PAGE> 84
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table provides the amounts recognized in the balance sheet as
of December 31 for all three years presented.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Amounts recognized in the statement of financial
position consisted of:
Prepaid benefit cost $ -- $ 412,174 $ 375,987
Accrued benefit liability (675,195) -- --
Intangible asset 241,619 -- --
Accumulated other comprehensive loss 979,872 -- --
--------- --------- ---------
Net amount recognized $ 546,296 $ 412,174 $ 375,987
========= ========= =========
</TABLE>
The amount included within the accumulated other comprehensive loss arising
from a change in the additional minimum pension liability of $600,000, is
net of tax of $380,000 at December 31, 1998.
Prior-service costs are amortized on a straight-line basis over the average
remaining service period of active participants. Gains and losses in excess
of 10% of the greater of the benefit obligation and the market related value
of plan assets are amortized over the average remaining service period of
active participants.
The assumptions used in the measurement of the Company's benefit obligation
are shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.50% 7.00% 7.25%
Expected return on plan assets 7.50% 7.50% 7.50%
Rate of compensation increase 5.00% 5.00% 5.00%
</TABLE>
The Company established a supplemental executive retirement plan (SERP)
which is a nonqualified unfunded pension plan covering a select group of
senior executives. The SERP provides a retirement benefit payable in the
form of a life annuity to the participants which is based on a specified
percentage of the participant's final average earnings less basic retirement
and social security benefits. The Company recognized an actuarially
determined SERP pension expense of $47,000, $36,000 and $27,000 in 1998,
1997 and 1996, respectively.
84
<PAGE> 85
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company also has a deferred compensation plan established under Section
401(k) of the Internal Revenue Code covering substantially all employees.
Contributions to the plan by participating employees are voluntary and based
on a specified percentage of each covered employee's salary.
13. SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
Other operating expenses for 1998, 1997 and 1996 included the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Stationery and office supplies $ 450,554 $ 403,491 $ 394,198
Writedown of other real estate owned 333,750 137,884 --
Insurance 281,292 286,427 253,991
Telephone 278,466 196,889 167,458
Examination fees 255,709 207,874 219,334
Other 2,110,504 1,669,620 1,605,436
---------- ---------- ----------
Total other operating expenses $3,710,275 $2,902,185 $2,640,417
========== ========== ==========
</TABLE>
Repairs and maintenance expenditures included in occupancy expense and
equipment expense amounted to $635,348, $644,690 and $517,428 in 1998, 1997
and 1996, respectively.
85
<PAGE> 86
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
held or issued for purposes other than trading at December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
<S> <C> <C>
1998
Cash and due from banks $ 32,400,000 $ 32,400,000
Investment securities:
Held-to-maturity 44,980,000 45,108,000
Available-for-sale 1,760,000 1,760,000
Trading 115,000 115,000
Loans and leases, net 220,551,000 225,190,000
Deposits -
Demand deposits and savings 194,646,000 194,646,000
Time 81,255,000 81,581,000
Short-term borrowings 5,516,000 5,516,000
1997
Cash and due from banks $ 22,629,000 $ 22,629,000
Investment securities:
Held-to-maturity 47,481,000 47,540,000
Available-for-sale 1,760,000 1,760,000
Loans and leases, net 215,821,000 224,164,000
Deposits -
Demand deposits and savings 188,538,000 188,538,000
Time 70,183,000 70,295,000
Federal funds purchased 4,000,000 4,000,000
Short-term borrowings 5,000,000 5,000,000
</TABLE>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk
entered into in the normal course of business to meet the financing needs of
its customers. These financial instruments, which are held for purposes
other than trading, include commitments to extend credit, standby and
commercial letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument is represented by the
86
<PAGE> 87
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
contractual amount of those instruments. The Bank manages the credit risk of
counterparty defaults in these transactions by limiting the total amount of
outstanding arrangements, by monitoring the size and maturity structure of
the off-balance sheet portfolio and by applying uniform credit standards for
all of its credit activities. Since many of the commitments to extend credit
may expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory,
property, plant, equipment and income-producing commercial properties.
Off-balance sheet commitments held for purposes other than trading at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
CONTRACT AMOUNT
1998 1997
<S> <C> <C>
Commitments to extend credit $71,510,000 $68,287,000
Standby letters of credit 945,000 1,880,000
Commercial letters of credit 659,000 802,000
</TABLE>
The fair values of off-balance sheet financial instruments at December 31,
1998 and 1997 were estimated using fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. At
December 31, 1998 and 1997, the fair values of commitments to extend credit
amounted to $36,000 and $50,000, respectively, and the fair values of
letters of credit amounted to $14,000 and $28,000, respectively.
CONCENTRATION OF CREDIT RISK
The Company has no significant concentrations of credit risk with any
individual party, however the Bank's lending is concentrated on the island
of Oahu in the State of Hawaii.
87
<PAGE> 88
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. CONDENSED FINANCIAL INFORMATION OF HAWAII NATIONAL BANCSHARES, INC. (PARENT
COMPANY ONLY)
Condensed financial information of Hawaii National Bancshares, Inc. (Parent
Company Only) as of December 31, 1998 and 1997 and for the years ended
December 31, 1998, 1997 and 1996 consists of the following:
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets:
Cash on deposit with Hawaii National Bank $ 93,166 $ 110,136
Investment in Hawaii National Bank 27,196,153 28,231,677
------------ ------------
$ 27,289,319 $ 28,341,813
============ ============
Shareholders' Equity:
Common stock $ 711,000 $ 711,000
Capital in excess of par value 12,147,676 12,147,676
Retained earnings 15,030,643 15,483,137
Accumulated other comprehensive loss (600,000) --
------------ ------------
$ 27,289,319 $ 28,341,813
============ ============
</TABLE>
88
<PAGE> 89
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Dividends from Hawaii National Bank $ 147,750 $ 147,750 $ 147,750
Operating expenses 58,070 53,231 48,248
--------- --------- ---------
Income before equity in undistributed
income of bank subsidiary 89,680 94,519 99,502
Equity in undistributed income (loss) of Hawaii
National Bank (435,524) 556,656 611,721
--------- --------- ---------
Net income (loss) $(345,844) $ 651,175 $ 711,223
========= ========= =========
</TABLE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Dividends from Hawaii National Bank $ 147,750 $ 147,750 $ 147,750
Cash paid to suppliers (58,070) (53,231) (48,248)
--------- --------- ---------
Net cash provided by operating activities 89,680 94,519 99,502
Cash flows from financing activities:
Dividends paid (106,650) (106,650) (106,650)
--------- --------- ---------
Net cash used in financing activities (106,650) (106,650) (106,650)
--------- --------- ---------
Net decrease in cash (16,970) (12,131) (7,148)
Cash at beginning of year 110,136 122,267 129,415
--------- --------- ---------
Cash at end of year $ 93,166 $ 110,136 $ 122,267
========= ========= =========
Reconciliation of net income (loss) to net cash
provided by operating activities:
Net income (loss) $(345,844) $ 651,175 $ 711,223
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Undistributed (earnings) losses of subsidiary 435,524 (556,656) (611,721)
--------- --------- ---------
Net cash provided by operating activities $ 89,680 $ 94,519 $ 99,502
========= ========= =========
</TABLE>
In the above condensed financial information, the Parent's investment in
Hawaii National Bank is accounted for by the equity method.
89
<PAGE> 90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 16th day of
March 1999.
HAWAII NATIONAL BANCSHARES, INC. (Registrant)
By /s/ Warren K.K. Luke
----------------------
Warren K.K. Luke
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated:
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
Principal Executive Officer:
/s/ Warren K.K. Luke Chief Executive Officer March 16, 1999
- ----------------------------
Warren K.K. Luke
Chief Financial and Accounting
Officer:
/s/ Ernest T. Murata Vice President, Treasurer March 16, 1999
- -------------------------------- and Assistant Secretary
Ernest T. Murata
A Majority of the Board of Directors:
/s/ K.J. Luke Chairman of the Board March 16, 1999
- -------------------------------
K.J. Luke
/s/ Gordon J. Mau Director March 16, 1999
- -------------------------------
Gordon J. Mau
</TABLE>
90
<PAGE> 91
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
3.1 Articles of Incorporation of Bancshares - Incorporated by
reference to Exhibit 3.1 of Bancshares' Annual Report on Form
10-K for the fiscal year ended December 31, 1991 filed with the
Securities and Exchange Commission.
3.2 Amended and Restated Bylaws of Bancshares - Incorporated by
reference to Exhibit 3.3 of Bancshares' Annual Report on Form
10-K for the fiscal year ended December 31, 1995 filed with the
Securities and Exchange Commission.
10.1 Supplemental Executive Retirement Plan - Incorporated by
reference to Exhibit 10.1 of Bancshares' Annual Report on Form
10-K for the fiscal year ended December 31, 1994 filed with the
Securities and Exchange Commission.
21 Subsidiaries of Bancshares: The only subsidiary of Bancshares
is Hawaii National Bank, a National Banking Association.
27 Financial Data Schedule
</TABLE>
91
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,400,184
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,000,000
<TRADING-ASSETS> 115,227
<INVESTMENTS-HELD-FOR-SALE> 1,760,103
<INVESTMENTS-CARRYING> 44,980,045
<INVESTMENTS-MARKET> 45,108,000
<LOANS> 223,846,506
<ALLOWANCE> 3,295,647
<TOTAL-ASSETS> 312,003,544
<DEPOSITS> 275,901,399
<SHORT-TERM> 5,515,835
<LIABILITIES-OTHER> 3,326,991
<LONG-TERM> 0
0
0
<COMMON> 711,000
<OTHER-SE> 26,578,319
<TOTAL-LIABILITIES-AND-EQUITY> 312,033,544
<INTEREST-LOAN> 19,880,282
<INTEREST-INVEST> 2,786,149
<INTEREST-OTHER> 20,876
<INTEREST-TOTAL> 23,078,274
<INTEREST-DEPOSIT> 6,560,773
<INTEREST-EXPENSE> 7,035,501
<INTEREST-INCOME-NET> 16,042,773
<LOAN-LOSSES> 1,185,000
<SECURITIES-GAINS> 2,960
<EXPENSE-OTHER> 18,037,085
<INCOME-PRETAX> (713,844)
<INCOME-PRE-EXTRAORDINARY> (345,844)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345,844)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
<YIELD-ACTUAL> 5.84
<LOANS-NON> 3,706,000
<LOANS-PAST> 405,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,197,815
<CHARGE-OFFS> 1,139,709
<RECOVERIES> 52,541
<ALLOWANCE-CLOSE> 3,295,647
<ALLOWANCE-DOMESTIC> 3,295,647
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 388,000
</TABLE>
