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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
RULE 13E-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
HAWAII NATIONAL BANCSHARES, INC.
(Name of Issuer)
HAWAII NATIONAL BANCSHARES, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class of Securities)
419758107
(CUSIP Number of Class of Securities)
WARREN K. K. LUKE STEPHEN M. KLEIN, ESQ.
PRESIDENT GRAHAM & DUNN PC
HAWAII NATIONAL BANCSHARES, INC. 1420 FIFTH AVENUE, 33RD FLOOR
45 N. KING ST. SEATTLE, WA 98101-2390
HONOLULU, HAWAII 96812 (206) 340-9648
(808) 528-7711
(Name, address and Telephone Number of Person Authorized to Receive Notices and
Communications on Behalf of Person(s) Filing Statement)
This statement is filed in connection with (check appropriate box):
a. [X] The filing of solicitation materials or an Proxy/Tender Offer
Statement subject to Regulation 14A, Regulation 14C or Rule
13e-3(c) under the Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act
of 1933.
c. [X] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or Proxy/Tender Offer
Statement referred to in checking box (a) are preliminary copies: [X]
Calculation of Filing Fee:
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- - --------------------------------------------------------------------------------
Transaction Valuation:* Amount of Filing Fee:
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$31,995,000 $6,399
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* Up to 711,000 shares of the Issuer's Common Stock, par value $1.00 per
share, redeemed for cash consideration of $45.00 per share.
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[X] Check box if any part of the fee is offset as provided by Rule
0-11(a)(2) and identify the filing with which the offsetting fee
was previously paid. Identify the previous filing by
registration statement number, or the Form or Schedule and the
date of its filing.
Amount Previously Paid: $6,399
Form or Registration No.: Schedule 13E-4
Filing Party: Hawaii National Bancshares, Inc.
Date Filed: May 14, 1999
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INTRODUCTION
This Rule 13e-3 transaction involves a transaction subject to Regulation
14A of the Securities Exchange Act of 1934, as amended (the "Act") and the
information contained in the Proxy/Tender Offer Statement filed concurrently
herewith by Hawaii National Bancshares, Inc. (the `Company") is incorporated by
reference into the Items in this Schedule.
The Rule 13e-3 transaction involves a going-private plan adopted by the
Board of Directors of the Company, which has two features, each of which
involves a Rule 13e-3 transaction. The first feature is a proposal to amend the
Company's Articles of Incorporation to provide that each 200 outstanding shares
of Company common stock ("Existing Shares') will be consolidated and converted
into one share of "New Common Stock" (the "Reverse Stock Split"). Upon
completion of the Reverse Stock Split, holders of less than 200 Existing Shares
will cease to be shareholders of the Company and the Company will acquire for
cash all resulting fractional shares of New Common Stock at a price equal to
$45.00 per Existing Share.
The second feature of the going-private plan involves an issuer tender
offer (the "Tender Offer"). Commencing June 1, 1999, the Company will offer to
acquire Existing Shares from any and all Company shareholders at $45.00 per
Existing Share, which is the same per-share price as will be received by holders
of fractional shares of New Common Stock pursuant to the Reverse Stock Split.
The Tender Offer will terminate on June 30, 1999. The Tender Offer is open to
all shareholders of the Company, even those whose shares will be converted into
fractional shares of New Common Stock, and thus into a right to receive cash
only, pursuant to the Reverse Stock Split. The purpose of the Tender Offer is to
allow holders of 200 or more Existing Shares the ability, if they elect to
tender their shares, to liquidate their equity investment in the Company on the
same economic terms as will apply to the holders of less than 200 Existing
Shares in the Reverse Stock Split.
Concurrently with the filing of this Statement, the Company is filing an
Issuer Tender Offer Statement, Schedule 13E-4 ("Schedule 13E-4") with the
Securities and Exchange Commission with respect to the Tender Offer. The cross
reference sheet below is provided pursuant to General Instruction F of Schedule
13E-3 and shows the location in the Schedule 13E-4 and in the Proxy/Tender Offer
Statement of the information required to be included in response to the items in
this Schedule 13E-3. If any Item is inapplicable or the answer thereto is in the
negative and omitted from the Proxy/Tender Offer Statement, a statement to that
effect has been included on the cross reference sheet.
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CROSS REFERENCE SHEET
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SCHEDULE 13E-3 LOCATION OF ITEM PROXY/TENDER OFFER STATEMENT
ITEM NUMBER AND HEADING IN SCHEDULE 13E-4 HEADING
- - ----------------------- ----------------- ----------------------------
<S> <C> <C> <C>
ITEM 1. ISSUER AND CLASS OF SECURITY
SUBJECT TO TRANSACTION
(a) Name and Address of Issuer and Item 1(a)
Class of Securities
(b) Title and Amount of Securities; Item 1(b) "MARKET AND DIVIDEND
Number of Holders INFORMATION"
(c) Principal Securities market; Item 1(c) "MARKET AND DIVIDEND
Quarterly High and Low Sales INFORMATION - Market
Prices Information"
(d) Frequency and Amount of Dividends * "MARKET AND DIVIDEND
(2 years) INFORMATION - Dividends"
(e) Underwritten public offering for * Not applicable
cash within 3 years
(f) Purchases of Securities by Issuer * Not applicable
or Affiliate; Amount and average
price
Item 2. IDENTITY AND BACKGROUND
(a)-(f) The Company is filing this * Not applicable
Statement and is the issuer of
the class of equity securities
which is the subject of the Rule
13e-3 transaction.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR
NEGOTIATIONS.
(a) Relating to Affiliates * Not Applicable
(b) Contracts between Affiliates or * Not applicable
Issuer and Unaffiliated Persons
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<TABLE>
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SCHEDULE 13E-3 LOCATION OF ITEM PROXY/TENDER OFFER STATEMENT
ITEM NUMBER AND HEADING IN SCHEDULE 13E-4 HEADING
- - ----------------------- ----------------- ----------------------------
<S> <C> <C> <C>
ITEM 4. TERMS OF TRANSACTION. Item 1(b)
(a) Material Terms of Transaction * "SUMMARY OF THE REVERSE STOCK
SPLIT"; "THE REVERSE STOCK
SPLIT"; "SUMMARY OF THE TENDER
OFFER"; and "THE TENDER OFFER"
(b) Different Terms for Certain "THE REVERSE STOCK SPLIT -
Shareholders Basic Terms of the Reverse
Stock Split"
ITEM 5. PLANS OR PROPOSALS OF THE
ISSUER OR AFFILIATE.
(a) Extraordinary Corporate Not Applicable Not Applicable
Transaction
(b) Sale of Assets Not Applicable Not Applicable
(c) Change in the Present Board of Not Applicable Not Applicable
Directors or Management
(d) Change in Dividend Rate, Item 3(e) Not Applicable
Indebtedness or Capitalization or
Issuer
(e) Material Change in Issuer's Item 3(f) Not Applicable
Business or Corporate Structure
(f) Securities Becoming Eligible for Item 3(i) "THE REVERSE STOCK SPLIT -
Termination of Registration Termination of Exchange Act
(Section 12(g)(4)) Registration"
(g) Suspension of Obligation to File Item 3(j) "THE REVERSE STOCK SPLIT -
Reports (Section 15(d)) Termination of Exchange Act
Registration"
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR
OTHER CONSIDERATION.
(a) Source and Amount of Funds Item 2(a) "THE REVERSE STOCK SPLIT - Fees
and Expenses; Sources of Funds"
(b) Statement of Expenses Incurred * "THE REVERSE STOCK SPLIT - Fees
with Transaction and Expenses; Sources of Funds"
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<TABLE>
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SCHEDULE 13E-3 LOCATION OF ITEM PROXY/TENDER OFFER STATEMENT
ITEM NUMBER AND HEADING IN SCHEDULE 13E-4 HEADING
- - ----------------------- ----------------- ----------------------------
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(c) Borrowed Funds Not Applicable Not Applicable
(d) Funds Provided by Bank Not Applicable Not Applicable
ITEM 7. PURPOSE(S), ALTERNATIVES,
REASONS AND EFFECTS.
(a) Purpose Item 3 "THE REVERSE STOCK SPLIT -
Reasons for the Reverse Stock
Split"
(b) Alternatives to Accomplish Such * "THE REVERSE STOCK SPLIT
Purpose -Background"
(c) Reasons for Structure of * "THE REVERSE STOCK SPLIT
Transaction -Background; Alternatives
Considered"; "- Reasons for the
Reverse Stock Split"
(d) Effects of Transaction; Federal Item 8 "THE REVERSE STOCK SPLIT
Tax Consequences -Effect on Market for Shares";
"- Termination of Exchange Act
Registration"; "THE TENDER
OFFER - Investment
Considerations"; "- Certain
Federal Income Tax
Considerations"
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) Issuer's Statement of Fairness; * "THE REVERSE STOCK SPLIT -
Dissenting Directors Fairness of Cash Consideration
for Fractional Shares"; "- Opinion
of Financial Advisor";
"- Recommendation of the Board
of Directors"
(b) Material Factors of Determination * "THE REVERSE STOCK SPLIT -
of Fairness Fairness of Cash Consideration
for Fractional Shares;" "- Opinion
of Financial Advisor";
"- Recommendation of the Board
of Directors"
(c) Whether Transaction is Structured * "THE REVERSE STOCK SPLIT -
to Require Approval of Majority Required Vote"
of Unaffiliated Shareholders
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<TABLE>
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SCHEDULE 13E-3 LOCATION OF ITEM PROXY/TENDER OFFER STATEMENT
ITEM NUMBER AND HEADING IN SCHEDULE 13E-4 HEADING
- - ----------------------- ----------------- ----------------------------
<S> <C> <C> <C>
(d) Whether Unaffiliated * "THE REVERSE STOCK SPLIT -
Representative Retained by Fairness of Cash Consideration
Directors to Negotiate Transaction for Fractional Shares"; "- Opinion
of Financial Advisor"
(e) Transaction Approved by Majority * "THE REVERSE STOCK SPLIT -
of Non-employee Directors Fairness of Cash Consideration
for Fractional Shares"; "- Opinion
of Financial Advisor"
(f) Other Offers by Unaffiliated * Not Applicable
Persons
ITEM 9 REPORTS, OPINIONS, APPRAISALS
AND CERTAIN NEGOTIATIONS.
(a) Fairness Opinion by Representative * "THE REVERSE STOCK SPLIT -
Opinion of Financial Advisor"
(b) (1-6) Representative (Identify, * "THE REVERSE STOCK SPLIT -
qualifications, method of Opinion of Financial Advisor"
selection, material relationship,
recommendation of consideration
and summary of opinion.)
(c) Legend Regarding Availability of * Appendix A to Proxy/Tender
Fairness Opinion; Copy of Offer Statement
Fairness Opinion
ITEM 10. INTEREST IN SECURITIES OF
ISSUER.
(a) Beneficial Ownership of * "THE REVERSE STOCK SPLIT -
Securities by Plan, Officers, Reasons for the Reverse Stock
Directors, etc. Split"; "- Interests of Certain
Persons in the Reverse
Stock Split"; "ELECTION OF
DIRECTORS - Information
With Respect to Directors/
Nominees"; "SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS/MANAGEMENT"
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE 13E-3 LOCATION OF ITEM PROXY/TENDER OFFER STATEMENT
ITEM NUMBER AND HEADING IN SCHEDULE 13E-4 HEADING
- - ----------------------- ----------------- ----------------------------
<S> <C> <C> <C>
(b) Transactions in Common Stock by Item 4 "TRANSACTIONS IN COMMON STOCK"
Beneficial Owners Within Last 60
Days
ITEM 11. CONTRACTS, ARRANGEMENTS, OR Item 5 "ABOUT THE ANNUAL MEETING -
UNDERSTANDINGS WITH RESPECT TO What are the Company's
THE ISSUER'S SECURITIES. Objectives?"; "THE TENDER OFFER
- Investment Considerations"
ITEM 12. PRESENT INTENTION AND
RECOMMENDATION OF CERTAIN
PERSONS WITH REGARD TO THE
TRANSACTION.
(a) Present Intent of Director or Item 1(b) "THE REVERSE STOCK SPLIT -
Officer to Sell or Vote Securities Required Vote; Indications of
Voting Intent by Luke Family
Shareholders and Management"
(b) Recommendation or Opposition to * "THE REVERSE STOCK SPLIT -
Transaction Recommendation of the Board of
Directors"
ITEM 13. OTHER PROVISIONS OF THE
TRANSACTION.
(a) Appraisal Rights * "THE REVERSE STOCK SPLIT -
Rights of Dissenting
Shareholders"
(b) Provision for Access to Corporate Not Applicable Not Applicable
Files; Unaffiliated Shareholders'
Right to Counsel at Issuer's
Expense
(c) Exchange of Debt Securities Not Applicable Not Applicable
ITEM 14. FINANCIAL INFORMATION
(a) (1) Financial Statements (2 yrs) Item 7(a)(1) Incorporated by reference to
1998 Annual Report
(2) Unaudited Balance Sheets, etc. Item 7(a)(2) Incorporated by reference to
1998 Annual Report
</TABLE>
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<TABLE>
<CAPTION>
SCHEDULE 13E-3 LOCATION OF ITEM PROXY/TENDER OFFER STATEMENT
ITEM NUMBER AND HEADING IN SCHEDULE 13E-4 HEADING
- - ----------------------- ----------------- ----------------------------
<S> <C> <C> <C>
(3) Ratio of Earnings to Fixed Item 7(a)(3) RATIO OF EARNINGS TO FIXED
Charges (2 yrs.) CHARGES
(4) Book Value Item 7(a)(4)
(b) Pro Forma Data Not Applicable Not Applicable
ITEM 15. PERSONS AND ASSETS EMPLOYED,
RETAINED OR UTILIZED.
(a) Purpose * "THE REVERSE STOCK SPLIT - Fees
and Expenses; Sources of Funds
- Persons and Assets Employed,
Retained or Utilized"
(b) Identity of Persons Item 6 "THE REVERSE STOCK SPLIT - Fees
and Expenses; Sources of Funds
- Persons and Assets Employed,
Retained or Utilized"
ITEM 16. ADDITIONAL INFORMATION Item 8(e) Additional information
concerning the Reverse Stock
Split is set forth in the
Proxy/Tender Offer Statement
attached hereto as Exhibit
17(d) which information is
incorporated herein by
reference in its entirety.
ITEM 17. EXHIBITS
(a) Loan Agreement Not Applicable Not Applicable
(b) Opinion; Appraisal * Appendix B to Proxy/Tender
Offer Statement
(c) Contract Item 11 Not Applicable Not Applicable
(d) Disclosure Materials Item 9(a) Proxy/Tender Offer Statement,
including Annexes A and B
(e) Appraisal Rights * Appendix A to Proxy/Tender
Offer Statement
(f) Written Instruction Re Not Applicable Not Applicable
Solicitations - Recommendations
</TABLE>
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*The Item is not required by Schedule 13E-4.
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The name of the issuer is Hawaii National Bancshares, Inc., a Hawaii
corporation, and the address of its principal executive office is 45 N.
King Street, P.O. Box 3740, Honolulu, Hawaii 96812.
(b) The exact title of the class of equity securities to which this
statement relates is Common Stock, par value $1.00 per share. The
information set forth under the caption "MARKET AND DIVIDEND
INFORMATION" of the Proxy/Tender Offer Statement is incorporated herein
by reference.
(c) The information set forth under the caption "MARKET AND DIVIDEND
INFORMATION - Market Information" of the Proxy/Tender Offer Statement is
incorporated herein by reference.
(d) The information set forth under the caption "MARKET AND DIVIDEND
INFORMATION - Dividends" of the Proxy/Tender Offer Statement is
incorporated herein by reference.
(e) Not applicable.
(f) Not applicable.
ITEM 2. IDENTITY AND BACKGROUND.
This Statement is filed by the issuer of the securities to which this
Schedule 13E-3 relates.
ITEM 3. PAST CONTRACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) Not applicable.
(b) Not applicable
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth under the captions "SUMMARY OF THE REVERSE
STOCK SPLIT," "THE REVERSE STOCK SPLIT," "SUMMARY OF THE TENDER OFFER,"
and "THE TENDER OFFER" of the Proxy/Tender Offer Statement is
incorporated herein by reference.
(b) The information set forth under the caption "THE REVERSE STOCK SPLIT -
Basic Terms of the Reverse Stock Split" of the Proxy/Tender Offer
Statement is incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(e) Not applicable.
(f)-(g) The information set forth under the caption "THE REVERSE STOCK SPLIT -
Termination of Exchange Act Registration" of the Proxy/Tender Offer
Statement is incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) The information set forth under the captions "THE REVERSE STOCK SPLIT -
Fees and Expenses; Sources Of Funds" and "THE TENDER OFFER -
Fees and Expenses;
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Sources Of Funds" of the Proxy/Tender Offer Statement is incorporated
herein by reference.
(c)-(d) Not applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The information set forth under the caption "THE REVERSE STOCK SPLIT -
Reasons for the Reverse Stock Split" of the Proxy/Tender Offer Statement
is incorporated herein by reference.
(b) The information set forth under the captions "THE REVERSE STOCK SPLIT -
Background; Alternatives Considered" of the Proxy/Tender Offer Statement
is incorporated herein by reference.
(c) The information set forth under the captions "THE REVERSE STOCK SPLIT -
Background; Alternatives Considered" and "- Reasons for the Reverse
Stock Split" of the Proxy/Tender Offer Statement is incorporated herein
by reference.
(d) The information set forth under the caption "THE REVERSE STOCK SPLIT -
Effect on Market for Shares," "- Termination of Exchange Act
Registration," "- Certain Federal Income Tax Considerations," and "THE
TENDER OFFER - Investment Considerations" and "- Certain Federal Income
Tax Considerations" of the Proxy/Tender Offer Statement is incorporated
herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a)-(b) The information set forth under the captions "THE REVERSE STOCK SPLIT -
Fairness of Cash Consideration for Fractional Shares;" and "- Opinion of
Financial Advisor" and "- Recommendation of the Board of Directors" of
the Proxy/Tender Offer Statement is incorporated herein by reference.
(c) The information set forth under the captions "THE REVERSE STOCK SPLIT -
Required Vote" of the Proxy/Tender Offer Statement is incorporated
herein by reference.
(d)-(e) The information set forth under the captions "THE REVERSE STOCK SPLIT -
Fairness of Cash Consideration for Fractional Shares;" and "- Opinion
of Financial Advisor" of the Proxy/Tender Offer Statement is
incorporated herein by reference.
(f) Not applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a)-(b) The information set forth under the captions "THE REVERSE STOCK SPLIT -
Opinion of Financial Advisor" of the Proxy/Tender Offer Statement is
incorporated herein by reference.
(c) The opinion shall be included in the Proxy/Tender Offer Statement
delivered to shareholders as Appendix A.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information concerning the ownership of and transactions in Common
Stock set forth under the captions "THE REVERSE STOCK SPLIT - Reasons
for the Reverse Stock Split" "- Interests of
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Certain Persons in the Reverse Stock Split," "ELECTION OF DIRECTORS
Information With Respect to Directors/ Nominees; and "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS/MANAGEMENT" of the Proxy/Tender Offer
Statement is incorporated herein by reference.
(b) The information set forth under the caption "TRANSACTIONS IN COMMON
STOCK" of the Proxy/Tender Offer Statement is incorporated herein by
reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth under the caption "ABOUT THE ANNUAL MEETING -
What Are the Company's Objectives? " and "THE TENDER OFFER - Investment
Considerations" is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) The information set forth under the captions "THE REVERSE STOCK SPLIT -
Required Vote; Indications of Voting Intent by Luke Family Shareholders
and Management" of the Proxy/Tender Offer Statement is incorporated
herein by reference.
(b) The information set forth under the caption "THE REVERSE STOCK SPLIT -
Recommendation Of The Board Of Directors" of the Proxy/Tender Offer
Statement is incorporated herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth under the caption "THE REVERSE STOCK SPLIT -
Rights of Dissenting Shareholders" of the Proxy/Tender Offer Statement
is incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) Audited financial statements of the Company for the fiscal years ended
December 31, 1997 and 1998 and the report of independent accountants
thereon are set forth in the Financial Statements and notes thereto in
the portions of the Corporation's 1998 Annual Report to Shareholders
(the "1998 Annual Report") which are attached hereto as an exhibit.
Management's Discussion and Analysis of Financial Condition and Results
of Operations for such periods is set forth in the portions of the 1998
Annual Report attached hereto as an exhibit.
Unaudited financial statements of the Company are set forth in the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1999 (the "Form 10-Q"), which is attached as Appendix D to the
Proxy/Tender Offer Statement (which is filed as an exhibit hereto).
Management's Discussion and Analysis of Financial Condition and Results
of Operations for such periods is set forth in the Form 10-Q. The above
noted sections of the 1998 Annual Report and Form 10-Q are hereby
incorporated by reference.
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(a) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a)-(b) The information set forth in the cover page of the Proxy/Tender Offer
Statement, and under the caption "THE REVERSE STOCK SPLIT - Fees and
Expenses; Sources of Funds Persons and Assets Employed, Retained or
Utilized," of the Proxy/Tender Offer Statement is incorporated herein by
reference. The time and efforts of certain officers and other employees
of the Corporation have been utilized in connection with the preparation
of the Schedule 13E-3 and the Proxy/Tender Offer Statement and related
materials to be sent to stockholders and have been and will be utilized
in connection with overseeing this transaction. The Corporation may
utilize its employees to solicit tenders of shares from stockholders.
Except as otherwise disclosed in this Item 15, no person has been or
will be retained, employed or compensated to make solicitations or
recommendations in connection with the Rule 13E-3 transaction.
ITEM 16. ADDITIONAL INFORMATION.
All of the information set forth in the Proxy/Tender Offer Statement is
incorporated herein by reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a) Not applicable.
(b) Opinion of NationsBanc Montgomery Securities LLC (Appendix C to the
Proxy/Tender Offer Statement).
(c) Form of Subscription Agreement.
(d) (1) Proxy/Tender Offer Statement of Hawaii National Bancshares, Inc.
(2) Letter to Shareholders dated ________ ___, 1999.
(3) Form of Proxy.
(4) Financial Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations excerpted from the
draft Annual Report to Shareholders of Hawaii National
Bancshares, Inc. for the fiscal year ended December 31, 1998.
(e) Hawaii Dissenters' Rights Statute (Appendix A to the Proxy/Tender Offer
Statement).
(f) Not applicable.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: May 14, 1999 HAWAII NATIONAL BANCSHARES, INC.
By: /s/ Ernest T. Murata
-------------------------------------
Name: Ernest T. Murata
Title: Vice President, Treasurer
and Chief Financial Officer
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EXHIBIT 17(c)
SUBSCRIPTION AGREEMENT
This Subscription Agreement is made between Hawaii National Bancshares,
Inc. (the "Corporation") and the undersigned subscriber ("Subscriber") on the
terms and conditions set forth below:
W I T N E S S E T H:
1. Subscription.
a. Shares Subscribed For. Subscriber subscribes for the number of shares
of common stock of the Corporation (the "Shares") set forth on Exhibit A
attached hereto and made a part hereof, for the price set forth on Exhibit A.
b. Corporation's Right to Reduce. Subscriber understands that
Corporation is offering to sell a maximum of 457 shares to Subscriber and
others. If the offering is over-subscribed, Corporation shall have the right to
reduce the number of Shares subscribed for by Subscriber.
2. Conditions Precedent. Subscriber's obligation to purchase the Shares is
conditioned upon the following:
a. Tender Offer. Completion of the tender offer ("Tender Offer")
described in the going private plan (the "Plan") approved by the Corporation's
Board of Directors on April 27, 1999.
b. Reverse Stock Split. Amendment of the Corporation's Articles of
Incorporation and completion of the one-for-200 reverse stock split ("Reverse
Split") described in the Plan.
c. Other Stock Subscriptions. The Corporation's receipt of executed
subscription agreements in the form hereof (except as to the identity of the
subscriber and number of shares subscribed for) for a sufficient number of
shares (including the shares subscribed for hereunder) of the Corporation's
common stock, at a price of nine thousand dollars ($9,000) per share, to fund at
least ninety-five percent (95%) of the amount to be paid by the Corporation to
its shareholders for whole and fractional shares in connection with the Tender
Offer and the Reverse Split pursuant to the Plan.
d. No Material Adverse Change. There shall have been no material adverse
change in the financial condition of the Corporation from March 31, 1999,
excluding any change resulting from the Tender Offer or Reverse Split.
e. No Pending Litigation With Respect to Plan. There shall be no pending
litigation against the Corporation for substantial damages in connection with
the Plan or to enjoin the issuance of the shares subscribed for hereunder.
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3. Payment for and Issuance of Shares.
a. Notice of Closing. The Corporation give Subscriber at least five (5)
calendar days' notice of the date (the "Closing Date") on which closing of the
payment for and issuance of the Shares is to occur and if the number of Shares
will be reduced pursuant to Section 1.b above, the number of Shares to be issued
and total Subscription Price therefor. The Closing Date is tentatively planned
to occur on or about June 30, 1999.
b. At Closing, Subscriber shall tender to the Corporation in immediately
available funds the full Subscription Price for the Shares. Concurrently
therewith, the Corporation shall issue to Subscriber a stock certificate
reflecting Subscriber's ownership of the Shares.
4. Representations and Warranties by Subscriber.
a. Securities. Subscriber acknowledges its understanding that the
offering and sale of the Shares is intended to be exempt from registration under
(i) the Securities Act of 1933, as amended, by virtue of Section 4(2) of the Act
and the provisions of Rule 506 of Regulation D ("Regulation D") promulgated
thereunder, and (ii) corresponding provisions of Hawaii securities laws. In
furtherance thereof, Subscriber hereby represents and warrants to the
Corporation the following:
(1) Accredited Investor. Subscriber is an "accredited investor"
within the meaning of Rule 501 of Regulation D under the Securities Act
of 1933 (the "1933 Act").
(2) Investment Intent. Subscriber is purchasing the Shares solely
on Subscriber's own account for investment purposes, and not with a view
to or for the resale, distribution, subdivision, or fractionalization
thereof, in whole or in part. Subscriber has not entered, and has no
present plans to enter, into any contract, undertaking, agreement, or
arrangement for any such resale, distribution, subdivision, or
fractionalization thereof, in whole or in part. Subscriber does not
presently have reason to anticipate any change in Subscribers's
circumstances, or any particular occasion or event, which would cause
Investor to sell or otherwise dispose of such Shares. No interests in
the Shares have been offered or solicited by Subscriber in violation of
the 1933 Act.
(3) Investment Experience; Suitability. Subscriber has such prior
knowledge and experience in financial and business matters that is
capable of evaluating the merits and risks of owning the Shares.
Subscriber understands that the purchase of the Shares is a long-term
commitment of capital, the timing and amount of return of which cannot
be assured. Subscriber has determined that the Shares are a suitable
investment for Subscriber. Subscriber has adequate means for providing
for its current needs and contingencies, has no need for liquidity in
this investment and can withstand the loss of its entire investment in
the Shares.
(4) Present Status as Shareholder. Subscriber is presently a
shareholder of the Corporation.
2
<PAGE> 17
b. Status and Authority. Subscriber represents and warrants to the
Corporation the following:
(1) The description of Subscriber in Exhibit A is true and
correct. Subscriber is authorized and qualified to own the Shares. The
execution, delivery, and performance by Subscriber of this Subscription
Agreement are within the powers of Subscriber, have been duly
authorized, and will not constitute or result in a breach or default
under or conflict with any order, ruling, regulation of any court or
other tribunal or of any governmental commission or agency, or any
agreement or other undertaking, to which Subscriber is a party or by
which Subscriber is bound, and if Subscriber is an entity will not
violate any provision of the organizational and governing documents of,
Subscriber.
(2) The person signing this Subscription Agreement on behalf of
Subscriber has been duly authorized by Subscriber to do so, and the
signature on this Subscription Agreement is genuine. This Subscription
Agreement constitutes a legal, valid, and binding obligation of
Subscriber, enforceable in accordance with its terms.
(3) Subscriber is a "United States Person" for purposes of the
U.S. Internal Revenue Code.
c. Independent Investigation. Subscriber represents and warrants to the
Corporation that Subscriber has had full opportunity to investigate and conduct
its own due diligence with respect to its purchase of the Shares, including
without limitation the opportunity to request of the Corporation information,
documents and other materials, as Subscriber has deemed pertinent to its
diligence review.
d. No Disposition of Shares Without Securities Law Compliance.
Subscriber agrees not to subdivide the Shares to offer, sell, pledge,
hypothecate, or otherwise transfer or dispose of any portion of Shares, absent
compliance with the 1933 Act (and the Hawaii Act, if applicable). Subscriber
understands that:
(1) No federal or state agency has made any finding or
determination as to the fairness of the terms of the this Subscription
Agreement, or any recommendation or endorsement of the Shares.
(2) The Company intends to apply to the Securities and Exchange
Commission to deregister the Company's shares under the Securities
Exchange Act of 1934 (the "1934 Act") and that such deregistration will
adversely affect the liquidity of the Shares.
5. Representations and Warranties by the Corporation. The Corporation represents
and warrants the following:
a. Status and Authority.
(1) the Corporation is a duly formed, validly existing Hawaii
corporation in good standing in the State of Hawaii.
3
<PAGE> 18
(2) The execution, delivery, and performance by the Corporation
of this Subscription Agreement are within the powers of the Corporation,
have been duly authorized, and will not constitute or result in a breach
or default under or conflict with any order, ruling, regulation of any
court or other tribunal or of any governmental commission or agency, or
any agreement or other undertaking, to which the Corporation is a party
or by which the Corporation is bound, and will not violate any provision
of the organizational and governing documents, of the Corporation.
(3) The person signing this Subscription Agreement on behalf of
the Corporation has been duly authorized by the Corporation to do so,
and such signature on this Subscription Agreement is genuine. This
Subscription Agreement constitutes a legal, valid, and binding
obligation of the Corporation, enforceable in accordance with its terms.
6. Counsel for Corporation. Subscriber agrees that the law firm Carlsmith Ball
has acted as counsel for the Corporation and is not representing or acting on
behalf of Subscriber.
7. Termination. This Agreement shall terminate on September 30, 1999, if Closing
does not occur by 5:00 p.m. H.S.T. on that date.
8. Miscellaneous.
a. No Assignment. Without prior written consent of the Corporation,
which consent may be withheld in the Corporation's sole discretion, this
Subscription Agreement may not be assigned by Subscriber and Subscriber agrees
not to transfer or assign this Subscription Agreement or the obligations or
duties contained herein. Without prior written consent of Subscriber, which
consent may be withheld in Subscriber's sole discretion, this Subscription
Agreement may not be assigned by the Corporation and the Corporation agrees not
to transfer or assign this Subscription Agreement or the obligations or duties
contained herein.
b. Governing Law and Jurisdiction. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of Hawaii.
c. Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be deemed given when personally
delivered, or if mailed one day after mailing by certified first-class mail,
postage prepaid, addressed in the case of Subscriber to Subscriber's address set
forth on Exhibit A and in the case of the Corporation to:
Hawaii National Bancshares
45 King Street
Honolulu, Hawaii 96817
Attn: Corporate Secretary
or to such other address as such party shall have given notice hereunder.
d. Amendment. Neither this Subscription Agreement nor any provision
hereof shall be modified, discharged, or terminated except by instrument in
writing signed by the party against whom any waiver, change, discharge, or
termination is sought.
4
<PAGE> 19
e. Binding Effect; Entire Agreement. Except as otherwise provided
herein, this Subscription Agreement shall be binding upon and inure to the
benefit of the parties and their heirs, executors, administrators, successors,
legal representatives, and permitted assigns. This Subscription Agreement
embodies the entire agreement and understanding between Subscriber and the
Corporation regarding the subject matter hereof and supersedes all prior
agreements and understandings with respect to the subject matter hereof.
f. Section Headings. The headings in this Subscription Agreement are
inserted for convenience and identification only; they are not intended to
describe, interpret, define, or limit the scope, extent, or intent of this
Subscription Agreement or any of its provisions.
IN WITNESS WHEREOF, the parties have executed this Subscription
Agreement this ____ day of _____________, 1999.
Subscriber: Corporation:
Hawaii National Bancshares, Inc.
By
- - ------------------------------------ --------------------------------------
Its
5
<PAGE> 20
Exhibit A
Full Legal Name of Subscriber: ________________________________
Type of Entity: o Individual o Trust o Corporation o General Partnership
o Limited Partnership o Limited Liability Company
Jurisdiction of Formation (if entity): ____________________
Address: ____________________________________________
____________________________________________
____________________________________________
____________________________________________
____________________________________________
Telephone: ____________________________________________
Taxpayer Identification Number:____________________________
Number of Shares Subscribed for:___________________________
Price per share $9,000
Total Subscription Price $_______
6
<PAGE> 21
EXHIBIT 17(d)(1)
HAWAII NATIONAL BANCSHARES, INC.
45 North King Street
Honolulu, Hawaii 96817
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------
NOTICE IS HEREBY GIVEN that, pursuant to call of its Directors, the Annual
Meeting of Shareholders of Hawaii National Bancshares, Inc. (the "Company") will
be held in the Board Room of the Banking House, Fourth Floor, 45 North King
Street, Honolulu, Hawaii, on Wednesday, June 30, 1999, at 10:00 a.m., for the
purpose of considering and voting upon the following matters:
1. AMENDMENT OF ARTICLES OF INCORPORATION. To consider and act upon
a proposal to amend the Company's Articles of Incorporation, to (i) reduce the
number of shares of common stock which the Company is authorized to issue from
10 million shares, $1.00 par value per share ("Existing Shares"), to 50,000
shares, $200.00 par value per share ("New Common Stock"), and (ii) consolidate
and convert each 200 outstanding Existing Shares into one share of New Common
Stock.
2. ELECTION OF DIRECTORS. To elect a Board of Directors to hold
office until the next Annual Meeting of Shareholders or until their successors
have been elected and qualified.
3. WHATEVER OTHER BUSINESS may properly be brought before the
meeting or any adjournment thereof.
Only those shareholders of record at the close of business on June 2, 1999,
shall be entitled to notice of the meeting and to vote at the meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Gordon J. Mau
Secretary
Honolulu, Hawaii
June _, 1999
YOUR VOTE IS IMPORTANT
WE URGE YOU TO COMPLETE AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE
MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
TENDER OFFER
PLEASE NOTE: THE ENCLOSED PROXY STATEMENT ALSO ANNOUNCES, AND PROVIDES
INFORMATION ABOUT, THE COMPANY'S OFFER TO PURCHASE ALL OF THE EXISTING SHARES
THAT YOU OWN, AT $45.00 PER SHARE. THIS OFFER ("TENDER OFFER") COMMENCES ON JUNE
_, 1999 AND ENDS ON JUNE 30, 1999. IF YOU DESIRE TO SELL YOUR EXISTING SHARES IN
THE TENDER OFFER, SEE "ABOUT THE ANNUAL MEETING," "SUMMARY OF THE TENDER OFFER"
AND "THE TENDER OFFER."
<PAGE> 22
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
ABOUT THE ANNUAL MEETING..............................................................1
SUMMARY OF THE REVERSE STOCK SPLIT....................................................3
SUMMARY OF THE TENDER OFFER...........................................................5
SUMMARY OF OTHER MATTERS IN CONNECTION WITH THE MEETING...............................6
ANNUAL MEETING OF SHAREHOLDERS........................................................7
Date, Time and Place..........................................................7
Purpose.......................................................................7
Record Date; Shares Outstanding and Entitled to Vote..........................7
Vote Required.................................................................7
Voting, Solicitation and Revocation of Proxies................................8
THE REVERSE STOCK SPLIT...............................................................9
General.......................................................................9
Background; Alternatives Considered...........................................9
Reasons for the Reverse Stock Split..........................................10
Basic Terms of the Reverse Stock Split.......................................11
Exchange of Stock Certificates...............................................13
Cash for Fractional Shares...................................................14
Conditions of the Reverse Stock Split; Regulatory Approvals..................14
Effect on Market for Shares..................................................14
Termination of Exchange Act Registration.....................................14
Fees and Expenses; Sources of Funds..........................................15
Interests of Certain Persons in the Reverse Stock Split......................16
Fairness of Cash Consideration for Fractional Shares.........................16
Opinion of Financial Advisor.................................................17
Other Considerations.........................................................21
Certain Federal Income Tax Considerations....................................22
Rights of Dissenting Shareholders............................................24
Required Vote; Indications of Voting Intent by Luke Family
Shareholders and Management...............................................27
Recommendation of the Board of Directors.....................................27
THE TENDER OFFER.....................................................................27
General......................................................................27
Tender Offer Open to All Shareholders........................................28
Reasons for the Tender Offer.................................................28
Basic Terms of the Tender Offer..............................................29
Investment Considerations....................................................29
Tender Offer Procedures......................................................31
</TABLE>
i
<PAGE> 23
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Possible Extension or Termination............................................32
Determination Of Validity....................................................32
Lost, Destroyed or Stolen Certificates.......................................33
Withdrawal Rights............................................................33
Conditions to the Tender Offer...............................................34
Effect on Market for Shares..................................................35
Fees and Expenses; Sources of Funds..........................................35
Interests of Certain Persons in the Tender Offer.............................36
Fairness of Cash Consideration for Tendered Shares;
Opinion of Financial Advisor..............................................36
Certain Federal Income Tax Considerations....................................36
Approval by the Board of Directors; No Shareholder Approval Required.........38
MARKET AND DIVIDEND INFORMATION......................................................39
Market Information...........................................................39
Number of Equity Holders.....................................................39
Dividends....................................................................39
ELECTION OF DIRECTORS................................................................39
General......................................................................39
Information With Respect to Directors/Nominees...............................40
Compensation of Directors....................................................42
Information Regarding the Board of Directors and Committees..................42
Required Vote; Recommendation of the Board of Directors......................43
EXECUTIVE COMPENSATION...............................................................43
Compensation of Named Executive Officers.....................................43
Summary Compensation Table...................................................43
Compensation Committee Report on Executive Compensation......................45
Performance Graph............................................................46
Compensation Committee Interlocks and Insider Participation..................47
PRINCIPAL SHAREHOLDERS...............................................................47
SECURITY OWNERSHIP OF MANAGEMENT.....................................................50
TRANSACTIONS IN COMMON STOCK.........................................................50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................51
COMPLIANCE WITH SECTION 16(a) REQUIREMENTS...........................................52
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS............................................52
SHAREHOLDER PROPOSALS................................................................53
WHERE YOU CAN FIND MORE INFORMATION..................................................53
</TABLE>
ii
<PAGE> 24
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
INFORMATION INCORPORATED BY REFERENCE................................................53
OTHER BUSINESS.......................................................................54
</TABLE>
APPENDIX A - HAWAII BUSINESS CORPORATION ACT
APPENDIX B - PROPOSED AMENDMENT TO HAWAII NATIONAL BANCSHARES, INC.
ARTICLES OF INCORPORATION
APPENDIX C - OPINION OF NATIONSBANC MONTGOMERY SECURITIES LLC
APPENDIX D - QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED
MARCH 31, 1999
iii
<PAGE> 25
PRELIMINARY PROXY/TENDER OFFER STATEMENT
HAWAII NATIONAL BANCSHARES, INC.
45 N. King Street
P.O. Box 3740
Honolulu, Hawaii 96812
(808) 528-7711
-----------------------
THIS PROXY STATEMENT AND THE ACCOMPANYING FORM OF PROXY ARE BEING SENT TO
SHAREHOLDERS OF HAWAII NATIONAL BANCSHARES, INC. (THE "COMPANY") ON OR ABOUT
JUNE ___, 1999 FOR USE IN CONNECTION WITH THE ANNUAL MEETING OF SHAREHOLDERS OF
THE COMPANY ("ANNUAL MEETING") TO BE HELD ON JUNE 30, 1999. THIS DOCUMENT ALSO
SERVES AS THE TENDER OFFER STATEMENT IN CONNECTION WITH THE TENDER OFFER THAT IS
SUMMARIZED BELOW AND DESCRIBED UNDER "THE TENDER OFFER."
THE TRANSACTIONS DESCRIBED IN THIS PROXY/TENDER OFFER STATEMENT HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED ON THE FAIRNESS OR MERITS OF SUCH TRANSACTIONS NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
ABOUT THE ANNUAL MEETING
WHEN AND WHERE IS THE ANNUAL MEETING?
The Annual Meeting will be held at 10:00 a.m. on Wednesday, June 30,
1999, in the Board Room of the Banking House, Fourth Floor, 45 N. King Street,
Honolulu, Hawaii 96817.
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At the Annual Meeting, shareholders will act upon the matters outlined
in the accompanying notice of meeting, including a proposal to amend the
Company's Articles of Incorporation to provide for a one-for-200 reverse stock
split (the "Reverse Stock Split") and the election of directors.
WHAT ARE THE COMPANY'S OBJECTIVES?
On April 27, 1999, the Company's Board of Directors adopted resolutions
providing for a going-private plan (the "Plan") to restructure the share
ownership of the Company. The purpose of the Plan is to reduce the number of
Company shareholders below 300, thus allowing the Company to terminate its
reporting obligations under the Securities Exchange Act of 1934, as
1
<PAGE> 26
amended (the "1934 Act"). This will allow the Company to eliminate the
substantial time and expense associated with 1934 Act compliance. The Company's
Board of Directors believes that the Company's shareholders derive little
benefit from the Company's status as a publicly-held corporation. Over the past
several years, the Company believes that third-party purchase or sale
transactions have been negligible. Since January 1, 1996, shares representing
less than 4% of the Company's outstanding common stock (just over 1% on a
annualized basis) have been purchased or sold. Accordingly, the Company believes
that the benefit of the public market for the Existing Shares is limited. The
Plan will also allow the Company to operate effectively as a private company,
which is more consistent with its ownership concentration. See "THE REVERSE
STOCK SPLIT - Reasons for the Reverse Stock Split."
HOW WILL THESE OBJECTIVES BE ACCOMPLISHED?
o A ONE-FOR-200 REVERSE STOCK SPLIT ("REVERSE STOCK SPLIT") that will have
the effect of eliminating the shares of all Company shareholders who own
less than 200 shares of the Company's currently outstanding common stock
("Existing Shares") by converting such Existing Shares into a right to
receive cash in the amount of $45.00 per Existing Share. Company
shareholders who own 200 or more Existing Shares will have each 200 of
such shares converted into one share of common stock (the "New Common
Stock") and will receive cash in lieu of fractional shares at $45.00 per
Existing Share, unless such shareholders elect to participate in the
tender offer described below. The Reverse Stock Split is summarized
below and is described in detail under "THE REVERSE STOCK SPLIT."
o A TENDER OFFER ("TENDER OFFER") extended to all Company shareholders.
Although it is open to all shareholders, the Tender Offer is primarily
directed at those shareholders who own 200 or more Existing Shares (that
is, all shareholders who will not have all of their Existing Shares
automatically converted into a right to receive cash as a result of the
Reverse Stock Split). The Company will offer to purchase all (but not
less than all) of the Existing Shares owned by any Company shareholder
at $45.00 per share. THE TENDER OFFER WILL COMMENCE ON JUNE ____, 1999
AND END AT 5:00 P.M. HONOLULU TIME ON JUNE 30, 1999. The Tender Offer is
summarized below and is described in detail under "THE TENDER OFFER."
The Company does not believe that Mr. K.J. Luke, together with his
family, descendants and their related entities (the "Luke Family") will
tender any of their Existing Shares in the Tender Offer. See "THE TENDER
OFFER - Interests of Certain Persons in the Tender Offer."
o A PRIVATE PLACEMENT OF NEW COMMON STOCK, to occur after the filing of
the amendment to the Company's Articles of Incorporation and the
completion of the Tender Offer. In the private placement, the Company
will sell shares of New Common Stock to members of the Luke Family, and
entities owned or controlled by them, at an effective pre-Reverse Stock
Split price of $45.00 per share (which is the same price offered in the
Tender Offer). The proceeds of this private placement will be used to
fund the Reverse Stock Split and the Tender Offer. See "THE REVERSE
STOCK SPLIT - Fees and Expenses; Sources of Funds."
IF YOU OWN LESS THAN 200 EXISTING SHARES, AND IF THE REVERSE STOCK SPLIT
IS APPROVED AND IMPLEMENTED, YOU WILL RECEIVE CASH FOR THE SHARES THAT YOU OWN.
SEE "THE REVERSE
2
<PAGE> 27
STOCK SPLIT." YOU MAY TENDER SUCH SHARES IN THE TENDER OFFER, BUT YOU DO NOT
NEED TO DO SO, AS YOU WILL RECEIVE THE SAME AMOUNT OF CASH PURSUANT TO THE
REVERSE STOCK SPLIT AS YOU WOULD RECEIVE IN THE TENDER OFFER. SEE "THE TENDER
OFFER - TENDER OFFER OPEN TO ALL SHAREHOLDERS."
IF YOU OWN 200 OR MORE EXISTING SHARES, YOU WILL RECEIVE ONE SHARE OF
NEW COMMON STOCK FOR EACH 200 SHARES OF EXISTING COMMON STOCK THAT YOU OWN, AND
CASH IN LIEU OF ANY FRACTIONAL SHARE. YOU MAY ELECT, HOWEVER, TO SELL ALL (BUT
NOT LESS THAN ALL) OF YOUR EXISTING SHARES TO THE COMPANY IN THE TENDER OFFER.
SEE "THE TENDER OFFER."
SUMMARY OF THE REVERSE STOCK SPLIT
WHAT EFFECT WILL THE REVERSE STOCK SPLIT HAVE ON ME?
o If you own less than 200 Existing Shares on the effective date of the
Reverse Stock Split, you will receive cash in lieu of the fractional
share of New Common Stock to which you would otherwise be entitled, at a
price equal to $45.00 per Existing Share. After the effective date of
the Reverse Stock Split, you will have no continuing interest as a
shareholder of the Company. As noted under "THE TENDER OFFER - Tender
Offer Open to All Shareholders" below, you may tender your Existing
Shares in the Tender Offer, but you need not do so, as the amount per
share you would receive is the same as you will receive pursuant to the
Reverse Stock Split.
o If you own 200 or more Existing Shares on the effective date of the
Reverse Stock Split, you will receive one (1) share of New Common Stock
for each 200 shares of Existing Common Stock that you own, and you will
receive cash (at a rate equal to $45.00 per Existing Share) in lieu of
any fractional share that would otherwise be issuable. HOWEVER, you may
elect to participate in the Tender Offer, in which case the Company
would purchase all of your Existing Shares, at $45.00 per share, and you
would not receive any shares of New Common Stock.
See "THE REVERSE STOCK SPLIT - Basic Terms of the Reverse Stock Split."
AM I ENTITLED TO DISSENT FROM THE REVERSE STOCK SPLIT?
To be able to dissent from the Reverse Stock Split and demand the right
to receive a cash payment from the Company for the fair value of the Existing
Shares held by any such dissenter, a record shareholder must file a notice in
writing with the Company before the time of the vote to approve the Reverse
Stock Split at the Annual Meeting, advising that the shareholder intends to
demand to be paid fair compensation for his or her Existing Shares, and such
dissenting shareholder must refrain from voting for the Reverse Stock Split at
the Annual Meeting. Dissenting shareholders also must follow the procedures set
forth in the Hawaii Business Corporations Act, the applicable sections of which
are attached to this Proxy/Tender Offer Statement as APPENDIX A. The failure of
a shareholder to follow the specific requirements set forth in the Hawaii
Business Corporations Act concerning such dissenters' rights will result in the
loss of such rights. See "THE REVERSE STOCK SPLIT Rights of Dissenting
Shareholders."
3
<PAGE> 28
WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT?
Shareholders who receive cash upon redemption of their fractional share
interests in the New Common Stock as a result of the Reverse Stock Split will
generally recognize gain or loss based on their adjusted basis in the fractional
share interests redeemed. The Company has not received an opinion of counsel in
connection with the tax consequences of the Reverse Stock Split. Each
shareholder is urged to consult his or her own tax advisor regarding the tax
consequences of the Reverse Stock Split. See "THE REVERSE STOCK SPLIT Certain
Federal Income Tax Considerations."
WHAT IS THE BOARD'S RECOMMENDATION?
The Board of Directors recommends that you vote "FOR" the proposal to
amend the Company's Articles of Incorporation, effecting the Reverse Stock
Split.
At a meeting held on April 27, 1999, the Company's Board of Directors
unanimously approved the Plan, including the Reverse Stock Split. The Board of
Directors has concluded that the Plan, and the Reverse Stock Split provided for
in the Plan, is fair to, and in the best interests of, the Company and its
shareholders. The Board reserves the right to abandon the Reverse Stock Split,
and not to file an amendment to the Company's Articles of Incorporation to
effect the Reverse Stock Split, even if approved by the Company's shareholders,
if the Board subsequently determines that the Reverse Stock Split is no longer
in the best interests of the Company and its shareholders.
WHAT VOTE IS REQUIRED TO APPROVE THE REVERSE STOCK SPLIT?
The affirmative vote of at least 66 2/3% of all Existing Shares
outstanding on the record date is required to approve the amendment of the
Company's Articles of Incorporation to effect the Reverse Stock Split.
As described under "ANNUAL MEETING OF SHAREHOLDERS - Vote Required,"
those members of the Luke Family who are Company directors, executive officers
or 10% shareholders have indicated that they intend to vote in favor of the
Reverse Stock Split. Thus, approval of the Reverse Stock Split is assured. Only
two of the five directors of the Company (Messrs. Arthur S.K. Fong and Tan Tek
Lum) are outside directors (i.e., neither a member of the Luke Family nor an
employee of the Company or Hawaii National Bank, the Company's subsidiary). See
"THE REVERSE STOCK SPLIT - Interests of Certain Persons in the Reverse Stock
Split."
HAS THE COMPANY OBTAINED AN INDEPENDENT OPINION REGARDING THE REVERSE STOCK
SPLIT?
As described under "THE REVERSE STOCK SPLIT - Background; Alternatives
Considered," NationsBanc Montgomery Securities LLC ("NMS") has rendered its
opinion as investment bankers to the Board with respect to the fairness from a
financial point of view to the shareholders of the Company of the cash
consideration to be received by such shareholders in the Reverse Stock Split and
the Tender Offer. See "THE REVERSE STOCK SPLIT - Opinion of Financial Advisor."
4
<PAGE> 29
SUMMARY OF THE TENDER OFFER
WHY IS THE COMPANY CONDUCTING THE TENDER OFFER?
The Reverse Stock Split is designed to reduce the number of Company
shareholders below 300, thus allowing the Company to accomplish its objective of
deregistering under the 1934 Act. The purpose of the Tender Offer is to allow
Company shareholders who own 200 or more Existing Shares to sell such shares at
the same price ($45.00 per share) as will be received by shareholders who
receive cash for all of their Existing Shares pursuant to the Reverse Stock
Split.
Holders of 200 or more Existing Shares who elect not to sell such shares
to the Company pursuant to the Tender Offer will receive New Common Stock as
described in "THE REVERSE STOCK SPLIT." Because there may be some disadvantages
associated with owning shares of New Common Stock (see "THE TENDER OFFER -
Investment Considerations"), the Company has determined to offer persons who
will otherwise receive such shares the option to sell their Existing Shares for
cash. See "THE TENDER OFFER - Reasons for the Tender Offer."
WHO CAN PARTICIPATE IN THE TENDER OFFER?
All Company shareholders may participate in the Tender Offer. The Tender
Offer is open to all shareholders in order to comply with applicable rules and
regulations of the Securities and Exchange Commission ("SEC"). However, if you
own less than 200 Existing Shares, you will receive cash for such shares
assuming the Reverse Stock Split is effective, so you do not need to participate
in the Tender Offer, as you would receive the same amount of cash per share in
the Tender Offer. See "THE TENDER OFFER - Tender Offer Open to All
Shareholders." The Company does not believe that members of the Luke Family will
tender their Existing Shares in the Tender Offer. See "THE TENDER OFFER -
Interests of Certain Persons in the Tender Offer."
WHAT DOES THE TENDER OFFER MEAN TO ME?
You may sell all (but not less than all) of your Existing Shares to the
Company pursuant to the Tender Offer. The Company will purchase all Existing
Shares validly tendered pursuant to the terms of the Tender Offer at a purchase
price of $45.00 per Existing Share. To participate in the Tender Offer, a
shareholder must deliver his or her Existing Shares to the Company with the
accompanying Letter of Transmittal as described under "THE TENDER OFFER - Tender
Offer Procedures" by the Expiration Date. The Expiration Date is June 30, 1999
or such later date to which the Company may extend the Tender Offer as described
under "THE TENDER OFFER - Basic Terms of the Tender Offer."
The consummation of the Tender Offer is conditioned on the approval by
the Company's shareholders of, and the effectiveness of, the Reverse Stock
Split. Pending the effectiveness of the Reverse Stock Split, all tendered
Existing Shares will be held in escrow, and not accepted for payment by the
Company. See "THE TENDER OFFER - Conditions to the Tender Offer." Prior to the
Expiration Date and the effectiveness of the Reverse Stock Split, you may
withdraw your Existing Shares from the Tender Offer by providing a written
notice to the Company. See "THE TENDER OFFER - Withdrawal Rights."
5
<PAGE> 30
WHAT OTHER MATTERS SHOULD I CONSIDER IN EVALUATING THE TENDER OFFER?
Following the Reverse Stock Split, the Company intends to terminate its
registration under the 1934 Act, and thereafter it will not be required to file
periodic reports with the SEC. It is expected that there will be little or no
market for shares of New Common Stock. Although it has no present plans to do
so, the Company reserves the right to take corporate action in the future in
order to eliminate non-tendering shareholders who are not members of the Luke
Family, causing the Company to be wholly owned by the Luke Family. See "THE
TENDER OFFER - Investment Considerations."
NEITHER THE COMPANY, THE BOARD OF DIRECTORS NOR NMS MAKES ANY
RECOMMENDATION AS TO WHETHER ANY COMPANY SHAREHOLDER SHOULD TENDER OR RETAIN HIS
OR HER EXISTING SHARES IN THE TENDER OFFER.
WHAT ARE THE FEDERAL TAX CONSEQUENCES OF PARTICIPATING IN THE TENDER OFFER?
Shareholders who receive cash from the Company as a result of tendering
their Existing Shares in the Tender Offer will recognize gain or loss based on
their adjusted basis in the shares purchased by the Company. Each shareholder is
urged to consult his or her tax advisor regarding the tax consequences of
tendering his or her Existing Shares in the Tender Offer. See "THE TENDER OFFER
- - - Certain Federal Income Tax Considerations."
SUMMARY OF OTHER MATTERS IN CONNECTION
WITH THE MEETING
WHAT DO I NEED TO DO NOW?
ALL COMPANY SHAREHOLDERS will vote on the Reverse Stock Split and on the
election of directors. Read this Proxy/Tender Offer Statement and mail your
signed proxy card in the enclosed return envelope as soon as possible, so that
your shares can be represented at the Annual Meeting.
ALL COMPANY SHAREHOLDERS MAY PARTICIPATE IN THE TENDER OFFER. However,
as described under "THE TENDER OFFER - Tender Offer Open to All Shareholders,"
if you own less than 200 Existing Shares, you need not participate in the Tender
Offer, as you will automatically receive the same amount per Existing Share
pursuant to the Reverse Stock Split. IF YOU OWN 200 OR MORE EXISTING SHARES, you
have two choices. You may either sell your Existing Shares to the Company in the
Tender Offer, or you may retain such shares. If you retain your Existing Shares,
and if the Reverse Stock Split is approved, you will receive shares of New
Common Stock, and cash in lieu of fractional shares, as described under "THE
REVERSE STOCK SPLIT." THE TENDER OFFER COMMENCES ON JUNE _____, 1999 AND
TERMINATES AT 5:00 P.M. HONOLULU TIME ON JUNE 30, 1999. IF YOU ELECT TO
PARTICIPATE IN THE TENDER OFFER, YOU SHOULD READ THIS PROXY/TENDER OFFER
STATEMENT, AND FOLLOW THE INSTRUCTIONS IN "THE TENDER OFFER - TENDER OFFER
PROCEDURES."
CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
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Yes. See "ANNUAL MEETING OF SHAREHOLDERS - Voting, Solicitation and
Revocation of Proxies."
SHOULD I SEND MY STOCK CERTIFICATES IN NOW?
IF YOU DO NOT WANT TO PARTICIPATE IN THE TENDER OFFER, DO NOT SEND IN
YOUR STOCK CERTIFICATES NOW. After the Reverse Stock Split is approved and
effected, the Company will send you instructions for submitting your stock
certificate(s) in exchange for a stock certificate representing your shares of
New Common Stock, if any, and cash in lieu of fractional shares.
IF YOU ELECT TO PARTICIPATE IN THE TENDER OFFER (REGARDLESS OF THE
NUMBER OF EXISTING SHARES THAT YOU OWN), YOU SHOULD SEND IN YOUR STOCK
CERTIFICATE(S) NO LATER THAN JUNE 30, 1999, in accordance with the instructions
in "THE TENDER OFFER - Tender Offer Procedures." However, you must tender all of
the shares that you own of record to participate in the Tender Offer.
ANNUAL MEETING OF SHAREHOLDERS
DATE, TIME AND PLACE
The Annual Meeting will be held on Wednesday, June 30, 1999, at 10:00
a.m. Honolulu time, in the Board Room of the Banking House, Fourth Floor, 45
North King Street, Honolulu, Hawaii 96817.
PURPOSE
The purpose of the Annual Meeting is to consider and vote upon:
o The amendment of the Company's Articles of Incorporation, which will
effect the Reverse Stock Split;
o The election of directors for the ensuing year; and
o Other matters, if any, that may properly come before the Annual Meeting.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
The Company has fixed 5:00 p.m. Honolulu time on June 2, 1999 as the
record date for determining the holders of Company common stock entitled to
notice of, and to vote at, the Annual Meeting. At the close of business on the
record date, there were [711,000] Existing Shares issued and outstanding, held
by approximately ____ holders of record. Holders of record of Existing Shares
are entitled to one vote per share.
VOTE REQUIRED
Amendment of Articles of Incorporation. The affirmative vote of at least
66 2/3% of all Existing Shares outstanding on the record date is required to
approve the amendment of the Company's Articles of Incorporation, which will
effect the Reverse Stock Split. Certain
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<PAGE> 32
members of the Luke Family, who hold approximately 88% of the outstanding
Existing Shares, have indicated that they intend to vote in favor of the
amendment. Thus, approval of the amendment is assured. See "THE REVERSE STOCK
SPLIT - Required Vote; Indications of Voting Intent by Luke Family Shareholders
and Management."
Election of Directors. Each shareholder will have one vote for each
Existing Share held, except that cumulative voting may be required in the
election of directors. If cumulative voting applies, the necessary vote for the
election of directors is described below. If cumulative voting does not apply,
directors must be elected by a majority of the Existing Shares represented in
person or by proxy at the Annual Meeting, assuming that a quorum (a majority of
all Existing Shares entitled to vote) is present at such meeting.
Hawaii law requires use of cumulative voting in the election of
directors if, not less than 48 hours prior to the time fixed for the Annual
Meeting, any shareholder delivers a request therefor to an office of the
Company. Cumulative voting means that each shareholder present in person or by
proxy may cast a number of votes equal to the number of his or her shares
multiplied by the number of directors to be elected. The shareholder may cast
all of such votes for a single director or may distribute them among the number
to be voted for, or any two or more as the shareholder see fit. The nominees
receiving the highest number of votes on the foregoing basis, up to the total
number to be elected, will be the successful nominees. If cumulative voting is
requested, the holders of management proxies will vote the proxies received by
them cumulatively in such manner as is determined by them at that time.
VOTING, SOLICITATION AND REVOCATION OF PROXIES
If the enclosed proxy is duly executed and received in time for the
Annual Meeting, it will be voted in accordance with the instructions given. If
no instruction is given, it is the intention of the persons named in the proxy
to vote the shares represented by the proxy FOR (i) the approval of the
amendment of the Company's Articles of Incorporation and (ii) the election of
the nominated directors. Any proxy given by a shareholder may be revoked before
its exercise by written notice to the Secretary of the Company, or by a
subsequently dated proxy, or in open meeting before the shareholder vote is
taken. The shares represented by properly executed unrevoked proxies will be
voted in accordance with the instructions on the proxy. With regard to any other
matters that may properly come before the Annual Meeting, it is the intention of
the persons named in the proxy to vote the proxy in accordance with the
recommendations of management on such matters.
The proxy for the Annual meeting is being solicited on behalf of the
Company's Board of Directors. The Company will bear the cost of solicitation of
proxies from its shareholders. In addition to using the mails, proxies may be
solicited by personal interview, telephone and wire. Banks, brokerage houses,
other institutions, nominees and fiduciaries will be requested to forward their
proxy soliciting material to their principals and obtain authorization for the
execution of the proxies. Officers and other employees of the Company may
solicit proxies personally. The Company does not expect to pay any compensation
for the solicitation of proxies, but will, upon request, pay the standard
charges and expenses of banks, brokerage houses, other institutions, nominees,
and fiduciaries for forwarding proxy material to and obtaining proxies from
their principals.
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THE REVERSE STOCK SPLIT
GENERAL
The purpose of the Reverse Stock Split is to reduce the number of
Company shareholders below 300 by buying the Existing Shares of small
shareholders (under 200 Existing Shares) in the Company. As described below
under "Basic Terms of the Reverse Stock Split," the Reverse Stock Split consists
of an amendment to the Company's Articles of Incorporation, pursuant to which
each 200 Existing Shares will be converted into one share of New Common Stock.
The text of the proposed amendment to the Company's Articles of Incorporation is
attached as APPENDIX B. Because the Company will not issue fractional shares of
New Common Stock, any shareholder who owns less than 200 Existing Shares (which
would convert into less than a whole share of New Common Stock) will instead
receive cash in lieu of such fractional interest, at a price equal to $45.00 per
Existing Share. Shareholders who own less than 200 Existing Shares may elect to
tender such shares in the Tender Offer, although they need not do so, as they
would receive the same amount in the Tender Offer as they will pursuant to the
Reverse Stock Split. See "THE TENDER OFFER Tender Offer Open to All
Shareholders." Shareholders who own 200 Existing Shares or more will receive one
share of New Common Stock for each 200 Existing Shares that they own (and cash
in lieu of any resulting fraction of a share of New Common Stock, at a price
equal to $45.00 per Existing Share), UNLESS such shareholders instead elect to
sell all of their Existing Shares in the Tender Offer.
BACKGROUND; ALTERNATIVES CONSIDERED
The Company's Board of Directors has informally discussed the
feasibility of reducing the number of Company shareholders in order to permit
deregistration of the Company's common stock under the 1934 Act for several
years. Based on discussions with its legal counsel in early 1999, the Board
authorized the exploration of strategies for accomplishing this objective. After
review of the legal, economic and procedural issues involved, management, in
consultation with its legal counsel, determined that the Plan, which includes
the Reverse Stock Split, the Tender Offer and the Private Placement, was
appropriate and decided to recommend the Plan to the Board. On April 8, 1999,
the Board of Directors engaged NMS to render its opinion as investment bankers
to the Board with respect to the fairness from a financial point of view to the
shareholders of the Company of the cash consideration to be received by the
shareholders in the Reverse Stock Split and the Tender Offer. See "Opinion of
Financial Advisor."
The Board concurred with management's recommendation that the Reverse
Stock Split is the most efficient way to reduce the number of Company
shareholders below 300, and determined that the Tender Offer is an appropriate
procedure for allowing holders of 200 or more Existing Shares the option to
liquidate their investment on the same economic terms as will apply to holders
of less than 200 Existing Shares in the Reverse Stock Split. On April 27, 1999,
the Board approved and adopted the Plan, and determined to submit the Plan
(specifically the amendment of the Company's Articles of Incorporation to effect
the Reverse Stock Split) to the Company's shareholders at the Annual Meeting.
The Company also considered, as a possible alternative to the Reverse
Stock Split, a merger of the Company into a newly-formed corporation owned
either by the Company or the
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<PAGE> 34
Luke Family, with conversion of the outstanding Existing Shares occurring in the
same general manner as in the Reverse Stock Split. The Company determined that
this alternative was unduly burdensome due to constraints imposed by state and
federal securities laws, and because of the need for filings with, and approval
of, bank regulatory agencies.
The Company determined to proceed with the Plan at this time because of
the continuing stagnant state of the economy in Hawaii and the lack of trading
activity in the Existing Shares. Additionally, until 1997 the Existing Shares
had historically traded at prices below the book value of such shares, and the
Company did not believe that it was appropriate to proceed with a going-private
transaction under such circumstances.
REASONS FOR THE REVERSE STOCK SPLIT
In considering the Reverse Stock Split, the Board of Directors
determined that there was little benefit to either the Company or its
shareholders from the Company's status as a public company. Approximately 88% of
Existing Shares are owned by members of the Luke Family. There are no
shareholders with significant holdings outside the Luke Family. Approximately
1,138 Company shareholders of record own less than 250 Existing Shares each. Of
such shareholders, approximately 854 own less than 50 Existing Shares each.
Given the very large percentage of Existing Shares owned by the Luke Family, and
the large number of shareholders with very small holdings of Existing Shares,
the Board of Directors no longer believes that it is efficient to allocate
corporate resources, including management time, to compliance with public
company regulatory and reporting requirements. Given the relative lack of
trading activity in the Existing Shares, the Board believes few shareholders
receive any significant benefit from such compliance. In considering the effect
of its public company status on its operations and business plan, the Board
believes both would be enhanced if Company management had the flexibility to
make long-term decisions without disproportionate emphasis on the short-term
profitability associated with such decisions in the context of a more broadly
held public reporting company.
As a result of the current composition of stock ownership, the relative
lack of trading in the Existing Shares, the Board of Directors believes that the
risks and expenses of continuing as a publicly-held company substantially
outweigh the benefits to current shareholders. Accordingly, the Board of
Directors proposed the Reverse Stock Split to achieve the following purposes:
o To reduce the number of shareholders of record of the Company to less
than 300 in order to terminate the registration of the Company's common
stock under the 1934 Act;
o To relieve the Company of the burdens, risks and costs associated with
the regulatory and reporting requirements of the 1934 Act and the rules
and regulations of the SEC pursuant to the 1934 Act (see "Termination of
Exchange Act Registration"), which have not, in view of the relatively
inactive trading market for Existing Shares, provided countervailing
benefits;
o To facilitate management's long-term business plan of growth without
undue emphasis on short-term profitability;
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<PAGE> 35
o To enable management to pursue the Company's long-term business plan
without consideration of its effects on public shareholders and the
risks of liability resulting from its status as a public company;
o To reduce the costs of servicing small shareholders, while at the same
time paying such shareholders what the Company believes is a fair price
for their Existing Shares in an otherwise illiquid market.
o To allow shareholders to avoid incurring the attendant costs of a sale
on the open market, including sales commissions, with the price of such
market sales uncertain due to the sometimes significant spread (as much
as 20% historically) between bid and ask prices for Existing Shares.
BASIC TERMS OF THE REVERSE STOCK SPLIT
Upon shareholder approval and the filing of the amendment of the
Company's Articles of Incorporation, the outstanding shares of Company common
stock will be consolidated and converted from 10 million to 50,000 and the par
value will be increased from $1.00 to $200.00 per share. Accordingly, each 200
Existing Shares that are outstanding on the date of the filing of the amendment
will be converted into one share of New Common Stock. After giving effect to the
Reverse Stock Split, the Company expects that the number of shareholders of
record will be reduced such that the Company's regulatory and reporting
requirements under the 1934 Act could be terminated. Based on the Company's
shareholder records, the Company believes that the Reverse Stock Split will
reduce the number of Company shareholders to approximately 100. (This number
will be further reduced to the extent that shareholders owning 200 or more
Existing Shares elect to participate in the Tender Offer. See "THE TENDER OFFER
- - - Investment Considerations"). Following the Company's termination of its
registration under the 1934 Act, the Company will no longer incur the expense of
compliance with 1934 Act regulatory and reporting requirements. Corporate
resources currently devoted to such compliance (estimated to be approximately
$175,000, inclusive of management time, per year) can be allocated to other
areas where they can be used more efficiently.
Holders of Less Than 200 Existing Shares. Upon the effectiveness of the
Reverse Stock Split, shareholders who are not entitled to receive a whole share
of New Common Stock (all shareholders who own less than 200 Existing Shares on
the effective date of the Reverse Stock Split) will cease to be shareholders or
have any interest in the equity or future prospects of the Company. Such
shareholders will receive cash in lieu of the fractional share of New Common
Stock which they would otherwise receive, in an amount equal to $45.00 per
Existing Share. Such shareholders will not participate in any increase or
decrease in the value of the Company or the New Common Stock.
As noted under "THE TENDER OFFER - Tender Offer Open to All
Shareholders," holders of less than 200 Existing Shares may also elect to
participate in the Tender Offer. The Company is making the Tender Offer open to
all shareholders in order to comply with certain regulations of the SEC
regarding tender offers. However, if you own less than 200 Existing Shares, it
is not necessary for you to participate in the Tender Offer, as you will receive
the same amount per Existing Share automatically, pursuant to the Reverse Stock
Split, as you would
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<PAGE> 36
receive if you tendered your Existing Shares in the Tender Offer ($45.00 per
Existing Share). You may receive payment a few days earlier, however, if you
tender your Existing Shares in the Tender Offer instead of having such shares
converted into the right to receive cash pursuant to the Reverse Stock Split.
EXAMPLE - LESS THAN 200 SHARES
On the effective date of the Reverse Stock Split, Shareholder A
owns 100 Existing Shares. At the ratio of one (1) share of New Common
Stock for each 200 Existing Shares, Shareholder A would be entitled to
receive only one-half of a share of New Common Stock. Because no
fractional shares will be issued in the Reverse Stock Split, Shareholder
A will not receive any New Common Stock, but will instead receive a cash
payment from the Company, at the rate of $45.00 per Existing Share. In
this example, Shareholder A will receive $4,500.00 and will no longer be
a shareholder of the Company.
Holders of 200 or More Existing Shares. Shareholders who own 200 or more
Existing Shares will be entitled to receive one (1) share of New Common Stock
for each 200 Existing Shares that they own on the effective date of the Reverse
Stock Split. Except for the difference in the number of shares authorized, the
number of shares owned by shareholders, and par value, the New Common Stock be
identical, with respect to voting, dividend and other rights, to the former
Existing Shares. However, because the Company intends to terminate its
registration under the 1934 Act following the Reverse Stock Split, and
thereafter will not file reports pursuant to the 1934 Act, and because of the
number and composition of the Company's shareholders following the Reverse Stock
Split, it is anticipated that there will not be a market for the New Common
Stock. See "THE TENDER OFFER - Investment Considerations."
A shareholder who owns 200 or more Existing Shares may elect to:
o Retain such Existing Shares, which will be converted into shares of New
Common Stock as a result of the Reverse Stock Split (with cash in lieu
of fractional shares), or
o Participate in the Tender Offer, by tendering all of his or her Existing
Shares to the Company, in exchange for $45.00 per share in cash.
EXAMPLE -200 OR MORE SHARES
On the effective date of the Reverse Stock Split, Shareholder B
owns 750 Existing Shares. At the ratio of one (1) share of New Common
Stock for each 200 Existing Shares, Shareholder B will be entitled to
receive 3 3/4 shares of New Common Stock. Because no fractional shares
will be issued in the Reverse Stock Split, Shareholder B would receive 3
shares of New Common Stock and $6,750.00 in cash as payment for the
fractional ( 3/4) share.
Shareholder B may elect:
o To retain his or her Existing Shares, which will be converted on
the effective date of the Reverse Stock Split into 3 3/4 shares
of New Common Stock,
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<PAGE> 37
(resulting in receipt of 3 shares of New Common Stock and cash
in payment for the fractional share as described above) and
continue to be a shareholder of the Company; OR
o To tender all of his or her Existing Shares in the Tender Offer,
and receive cash in the amount of $45.00 per share (in this
example, a total of $33,750.00).
THE DECISION WHETHER OR NOT TO TENDER SHARES IN THE TENDER OFFER IS
COMPLETELY AT THE DISCRETION OF THE SHAREHOLDER, AND NEITHER THE COMPANY, ITS
MANAGEMENT, THE BOARD OF DIRECTORS, NOR NMS MAKES ANY RECOMMENDATION AS TO
WHETHER ANY COMPANY SHAREHOLDER SHOULD RETAIN OR TENDER HIS OR HER SHARES IN THE
TENDER OFFER. SEE "THE TENDER OFFER."
EXCHANGE OF STOCK CERTIFICATES
If the amendment to the Company's Articles of Incorporation is approved
by the Company's shareholders, the Board of Directors will cause Amended and
Restated Articles of Incorporation to be filed with the Hawaii Department of
Commerce and Consumer Affairs, and a notice of such filing ("Notice"), along
with a Transmittal Letter, to be sent to all holders of Existing Shares who have
elected not to tender such shares pursuant to the Tender Offer, promptly after
the effective date of the amendment.
On the effective date of the Reverse Stock Split, each certificate
representing an Existing Share will be deemed for all corporate purposes, and
without any further action by any person, to evidence ownership of the reduced
number of shares of New Common Stock and/or the right to receive cash for any
fractional share interest. Each shareholder who holds fewer than 200 Existing
Shares on the effective date of the Reverse Stock Split will cease to have any
rights with respect to New Common Stock, and will have only the right to receive
cash in lieu of the fractional share to which such holder would otherwise be
entitled, as described in "Cash for Fractional Shares" below.
If certificates for Existing Shares have been lost or destroyed, the
Company may, in its sole discretion, accept in connection with the Reverse Stock
Split a duly executed affidavit and indemnity agreement of loss or destruction,
in a form satisfactory to the Company, in lieu of the lost or destroyed
certificate. The Company's bylaws provide that if a certificate is lost or
destroyed, the shareholder must submit, in addition to other documents, a bond
or other security to the Company, satisfactory to the Board, indemnifying the
Company and all other persons against any losses incurred as a consequence of
the issuance of a new stock certificate. Shareholders whose certificates
representing Existing Shares have been lost or destroyed should contact the
Company. Additional instructions regarding lost or destroyed stock certificates
will be included in the Notice and Transmittal Letter sent to Company
shareholders after the effectiveness of the Reverse Stock Split.
THE NOTICE AND TRANSMITTAL LETTER WILL BE SENT BY THE COMPANY TO
SHAREHOLDERS PROMPTLY AFTER THE EFFECTIVE DATE OF THE REVERSE STOCK SPLIT. IF
YOU ELECT NOT TO TENDER YOUR SHARES AS DESCRIBED UNDER "THE TENDER OFFER," DO
NOT SEND IN YOUR STOCK CERTIFICATE(S) UNTIL YOU RECEIVE THE NOTICE AND
TRANSMITTAL LETTER.
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<PAGE> 38
There will be no service charges or costs payable by Company
shareholders in connection with the exchange of their certificates or in
connection with the payment of cash in lieu of fractional shares. These costs
will be borne by the Company.
CASH FOR FRACTIONAL SHARES
The Company will not issue fractional shares of New Common Stock.
Accordingly, if you own less than 200 Existing Shares, you will not receive a
fractional share of New Common Stock, but will instead receive cash in lieu of
such fractional interest. The amount of cash that you will receive will be equal
to $45.00 for each Existing Share that you own on the effective date of the
Reverse Stock Split.
If you own 200 or more Existing Shares, and if you elect not to tender
such Existing Shares to the Company in the Tender Offer, you will receive one
share of New Common Stock for each 200 Existing Shares that you own on the
effective date of the Reverse Stock Split, and you will receive cash in lieu of
any resulting fractional share of New Common Stock, also at a price equal to
$45.00 per Existing Share represented.
CONDITIONS OF THE REVERSE STOCK SPLIT; REGULATORY APPROVALS
Aside from shareholder approval of the amendment of the Company's
Articles of Incorporation (see "Required Vote; Indications of Voting Intentions
of Luke Family Shareholders and Management") the Reverse Stock Split is not
subject to any conditions or regulatory approvals. However, the Board of
Directors may abandon the Reverse Stock Split before the Amendment to the
Company's Articles of Incorporation is filed, if it believes that it is in the
best interests of the Company or its shareholders to do so. In addition, the
Company is required to make certain filings with the SEC under the 1934 Act in
connection with the Reverse Stock Split, the Tender Offer and this Proxy/Tender
Offer Statement. Such filings have been made.
EFFECT ON MARKET FOR SHARES
Following the Reverse Stock Split, the Company intends to deregister its
common stock under the 1934 Act. See "Termination of Exchange Act Registration"
below. This and other factors will likely mean that the market for New Common
Stock will be significantly more limited than the market for Existing Shares has
historically been. These factors are discussed at "THE TENDER OFFER - Investment
Considerations."
TERMINATION OF EXCHANGE ACT REGISTRATION
The Existing Shares are currently registered under the 1934 Act. Such
registration may be terminated upon application of the Company to the SEC if
there are fewer than 300 record holders of the Company's outstanding shares.
Upon the consummation of the Reverse Stock Split, the Company will have
approximately 100 shareholders of record (less any shareholders who own 200 or
more Existing Shares and who elect to tender such shares in the Tender Offer).
The Company intends to make application for termination of registration of the
shares of New Common Stock as promptly as possible after the effective date of
the Reverse Stock Split.
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<PAGE> 39
Termination of registration under the 1934 Act will substantially reduce
the information required to be furnished by the Company to its shareholders and
to the SEC and would make certain provisions of the 1934 Act, such as the
short-swing profit provisions of Section 16(b), the requirement of furnishing a
proxy or information statement in connection with shareholder meetings pursuant
to Section 14(a), and the requirements of Rule 13E-3 under the 1934 Act
regarding "going private" transactions, no longer applicable to the Company.
Furthermore, "affiliates" of the Company may be deprived of the ability to
dispose of their New Common Stock pursuant to Rule 144 promulgated under the
1934 Act.
The Company estimates that termination of registration of the New Common
Stock under the 1934 Act will save the Company as much as approximately $175,000
per year in legal, accounting, printing, management time, and other expenses per
year.
FEES AND EXPENSES; SOURCES OF FUNDS
The total amount of funds that will be required by the Company to fund
the cash payments in lieu of fractional shares of New Common Stock pursuant to
the Reverse Stock Split and to purchase Existing Shares in the Tender Offer (the
"Purchase Funds") is estimated to be as much as approximately $3,840,000. This
estimated total is based on the stock records of the Company as of March 31,
1999 and assumes that all holders of more than 200 Existing Shares tender such
shares in the Tender Offer, except the officers, directors and affiliates of the
Company who have indicated to the Company that they do not intend to tender
their shares. See "THE TENDER OFFER - Interests of Certain Persons in the Tender
Offer." Additionally the Company anticipates legal, financial advisory,
accounting, printing, and other fees and expenses in relation to the
transactions contemplated by the Plan (the "Transaction Expenses") of
approximately $250,000.
The Company will obtain the Purchase Funds through a private placement
of New Common Stock (the "Private Placement") to certain members of the Luke
Family and entities owned or controlled by them ("Luke Family Purchasers"). It
is anticipated that the Private Placement will occur on or about June 30, 1999.
The Private Placement will comply with applicable exemptions from registration
under federal and state securities laws.
In the Private Placement, The Luke Family Purchasers will acquire shares
of New Common Stock at a post-Reverse Stock Split price of $9,000 per share.
Adjusted to give effect to the Reverse Stock Split, this is exactly the same
per-share price that Company shareholders will receive for fractional shares in
the Reverse Stock Split and for tendered Existing Shares in the Tender Offer.
The Luke Family Purchasers will acquire sufficient shares of New Common Stock in
the Private Placement to fund, on a dollar-for-dollar basis, the Company's
obligation to pay the Purchase Funds. For example, if the total Purchase Funds
required in the Reverse Stock Split and the Tender Offer are $3,840,000, then
The Luke Family Purchasers will acquire 427 shares of New Common Stock in order
to fund such payments. The effect of the Private Placement will be to further
concentrate the ownership of New Common Stock in the Luke Family. See "THE
TENDER OFFER - Investment Considerations."
The Company will pay all Transaction Expenses in connection with the
Reverse Stock Split and the Tender Offer. The Transaction Expenses will be
funded by means of a dividend in
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<PAGE> 40
an amount equal to the amount of the Transaction Expenses, paid by the Company's
subsidiary, Hawaii National Bank (the "Bank") to the Company.
Persons and Assets Employed, Retained or Utilized. As described above,
the Company will fund the Transaction Expenses through a dividend in the
approximate amount of such expenses from the Bank payable to the Company. No
other significant assets of the Company or the Bank will be employed or utilized
in connection with the Reverse Stock Split or the Tender Offer. As described in
"THE ANNUAL MEETING - Voting, Solicitation and Revocation of Proxies," certain
officers and employees of the Company and/or the Bank may personally solicit
proxies in connection with the Annual Meeting. Additionally, certain employees
of the Bank will be involved in coordinating the procedural aspects of the
Tender Offer, as the Bank serves as the transfer agent for the Company. No
officer or employee of the Company or the Bank will be separately compensated
for the solicitation of proxies or any other activity undertaken in connection
with the solicitation of proxies or the consummation of the Reverse Stock Split
or Tender Offer generally.
INTERESTS OF CERTAIN PERSONS IN THE REVERSE STOCK SPLIT
Company directors Messrs. K. J. Luke, Warren K. K. Luke and Gordon J.
Mau are members of the Luke Family. Although Mr. Tan Tek Lum is not a member of
the Luke Family, he is the brother-in-law of the wife of Warren K. K. Luke. As
described above under "Reasons for the Reverse Stock Split," the purpose of the
Reverse Stock Split is to reduce the number of Company shareholders in order to
allow the Company to "go private" by deregistering under the 1934 Act. The
elimination of small holdings of Existing Shares, together with the anticipated
effects of the Tender Offer and the Private Placement, will further concentrate
the equity ownership of the Company in the Luke Family. Members of the Luke
Family, including directors named above, have a substantial interest, by virtue
of being members of the Luke Family, in the implementation of the Reverse Stock
Split and the other elements of the Plan.
FAIRNESS OF CASH CONSIDERATION FOR FRACTIONAL SHARES
In determining that the cash consideration to be paid in connection with
fractional shares ($45.00 per Existing Share) is fair from a financial point of
view, the Board of Directors evaluated the recommendations of the Company's
management, which recommendations were based on several factors, including the
relation of such cash consideration to both the current and historical trading
prices for the Existing Shares, the book value of the Existing Shares, the state
of the Company's and the Bank's financial condition and results of operations,
both currently and historically, the relative lack of a trading market for the
Existing Shares, the ownership composition of the outstanding Existing Shares,
and the state of the Hawaiian economy generally.
Based on its analysis of these factors, the Board of Directors accepted
and approved management's recommendation that $45.00 per Existing Share is fair
from a financial point of view to the Company's shareholders. As additional
support for its conclusion that the cash consideration is fair to the Company's
shareholders, the Board engaged NMS to deliver an opinion with respect to the
matter.
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OPINION OF FINANCIAL ADVISOR
General: Pursuant to an engagement letter dated April 8, 1999 (the
"Engagement Letter"), the Company engaged NMS to render to the Company's Board
an opinion with respect to the fairness from a financial point of view of the
price per Existing Share to be received by holders of the Company's Existing
Shares in the Tender Offer and the Reverse Stock Split. NMS is a nationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the valuation of businesses and their
securities in connection with merger transactions and other types of
acquisitions, negotiated underwritings, private placements and valuations for
corporate and other purposes. The Company selected NMS to render the opinion on
the basis of its experience and expertise and its reputation in the banking and
investment communities. NMS was not retained nor did it advise the Company with
respect to the terms or structure of the Reverse Stock Split or the Tender Offer
or with respect to alternatives to the Reverse Stock Split or the Tender Offer
or the Company's underlying decision to proceed with or effect the Reverse Stock
Split or the Tender Offer.
At a meeting of the Company's Board on April 27, 1999, NMS delivered its
opinion that the price per Existing Share to be received by the holders of the
Company's Existing Shares pursuant to the Tender Offer and the Reverse Stock
Split was fair to such shareholders from a financial point of view, as of the
date of such opinion.
THE FULL TEXT OF NMS'S WRITTEN OPINION TO THE COMPANY'S BOARD, DATED
APRIL 27, 1999, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED, AND
LIMITATIONS OF THE REVIEW BY NMS, IS ATTACHED HERETO AS APPENDIX C AND IS
INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY OF NMS'S OPINION IS
QUALIFIED IN ITS ENTIRETY. NMS'S OPINION IS DIRECTED TO THE COMPANY'S BOARD IN
ITS CONSIDERATION OF THE REVERSE STOCK SPLIT AND THE TENDER OFFER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF THE COMPANY'S EXISTING SHARES AS TO
WHETHER SUCH HOLDER SHOULD TENDER EXISTING SHARES IN THE TENDER OFFER OR AS TO
HOW SUCH HOLDER SHOULD VOTE WITH RESPECT TO THE REVERSE STOCK SPLIT AT THE
ANNUAL MEETING. NMS'S OPINION ADDRESSES ONLY THE FINANCIAL FAIRNESS OF THE PER
SHARE PRICE TO BE RECEIVED BY HOLDERS OF EXISTING SHARES IN THE REVERSE STOCK
SPLIT AND THE TENDER OFFER AND DOES NOT ADDRESS THE RELATIVE MERITS OF ANY
ASPECT OF THE REVERSE STOCK SPLIT OR THE TENDER OFFER OR ANY ALTERNATIVES TO THE
REVERSE STOCK SPLIT OR THE TENDER OFFER. STATEMENTS TO SUCH EFFECT ARE INCLUDED
IN NMS'S OPINION.
In connection with its April 27, 1999 opinion, NMS, among other things:
(i) reviewed certain publicly available financial and other data with respect to
the Company, including the consolidated financial statements for recent years
and subsidiary bank financial statements for the quarter ended March 31, 1999
and certain other relevant financial and operating data relating to the Company
made available to it from published sources and from the internal records of the
Company; (ii) reviewed the financial terms and conditions of the Reverse Stock
Split and the Tender Offer; (iii) reviewed certain publicly available
information concerning the trading of, and the trading market for, the Existing
Shares; (iv) compared the Company from a financial point of view with certain
other companies in the banking industry which it deemed to be relevant; (v)
considered the financial terms, to the extent publicly available, of selected
recent business combinations of companies in the banking industry and selected
"going-private" transactions involving self-tenders, which it deemed to be
comparable, in whole or in part, to the Tender
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<PAGE> 42
Offer and the Reverse Stock Split; (vi) reviewed and discussed with
representatives of the management of the Company certain information of a
business and financial nature regarding the Company, furnished to it by them,
including financial forecasts and related assumptions of the Company; (vii) made
inquiries regarding and discussed the Tender Offer and the Reverse Stock Split
and other matters related thereto with the Company's counsel; and (viii)
performed such other analyses and examinations as it deemed appropriate.
In connection with its review, NMS did not assume any obligation
independently to verify the foregoing information and relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for the Company provided to NMS by its management, upon their advice
and with the Company's consent, NMS assumed for purposes of its opinion that the
forecasts, including management's assessment of the prospects for earnings
growth subsequent to 2001, were reasonably prepared on bases reflecting the best
available estimates and judgments of its management at the time of preparation
as to the future financial performance of the Company and that it provided a
reasonable basis upon which NMS could form its opinion. NMS assumed that there
were no material changes in the Company's assets, financial condition, results
of operations, business or prospects since the date of the last financial
statements made available to NMS. NMS relied on advice of counsel and
independent accountants to the Company as to all legal and financial matters
with respect to the Company, the Tender Offer and the Reverse Stock Split. NMS
assumed that the Tender Offer and the Reverse Stock Split will be consummated in
a manner that complies in all respects with the applicable provisions of the
Securities Act of 1933, as amended, the 1934 Act and all other applicable
federal and state statutes, rules and regulations. In addition, NMS did not
assume responsibility for reviewing any individual credit files, or making an
independent evaluation, appraisal or physical inspection of any of the assets or
liabilities (contingent or otherwise) of the Company, nor was NMS furnished with
any such appraisals. NMS is not an expert in the evaluation of loan portfolios
for purposes of assessing the adequacy of the allowances for losses with respect
thereto and assumed, with the Company's consent, that such allowances were in
the aggregate adequate to cover such losses. Finally, NMS's opinion was based on
economic, monetary and market and other conditions as in effect on, and the
information made available to NMS as of, the date of the opinion.
Set forth below is a brief summary of the information presented by NMS
to the Company's Board of Directors on April 27, 1999 in connection with its
opinion.
Discounted Cash Flow Analysis: In performing the discounted cash flow
analysis, NMS utilized management's estimates of future net income and assumed
that any equity in excess of 7% generated through earnings would be distributed
as cash distributions to shareholders of the Company over a four-year period.
The estimated net income in the year 2003 was multiplied by estimated price to
forward earnings multiples ranging from 10.0x to 14.0x to generate a terminal
value representing the potential value of the Company in 2002. The cash
distributions and the terminal value were discounted back to the present using a
15% discount rate. This analysis indicated that the present value of the
Company's future stock price plus cash distributions ranged from $9.79 to $10.35
per share. The $45.00 Tender Offer and Reverse Stock Split price per Existing
Share exceeded the range of values implied by this analysis.
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<PAGE> 43
Comparable Public Company Analysis: NMS analyzed the trading multiples
of a comparison group of three Hawaii-based banks and 21 publicly traded banks
nationwide with assets less than $1 billion and a return on average assets of
less than 1.00% on average over the last three years. The Company's return on
average assets during this period was 0.17%. The multiples that were analyzed
were price to book value, price to tangible book value, price to 1999 estimated
earnings, price to deposits, and the ratio of the premium (i.e., purchase price
in excess of tangible book value) to core deposits. The price to latest twelve
months' earnings multiple was not considered due to the net loss that the
Company reported for 1998. The median values of these multiples were then
applied to the Company's financial data. Based on the group of three
Hawaii-based banks, this analysis indicated that the Company's current Existing
Share price should range from $5.50 to $56.17 per share. Based on two common
measures of public market valuation, price to book value and price to tangible
book value, the analysis indicated the Company's current Existing Share price
should range from $44.03 to $48.65 with a median value of $48.11, as compared to
the Tender Offer and the Reverse Stock Split price per Existing Share of $45.00
per share. NMS noted, however, that based on price to projected earnings, also a
common measure of public market valuation, the Company's current Existing Share
price should range from $5.50 to $5.63.
Based on the group of 21 publicly traded banks, this analysis indicated
that the Company's current Existing Share price should range from $4.89 to
$45.04 per share. Based on the two common measures of public market valuation,
price to book value and price to tangible book value, the analysis indicated the
Company's current Existing Share price should range from $35.40 to $38.68 with a
median value of $36.47, as compared to the Tender Offer and the Reverse Stock
Split price per Existing Share of $45.00 per share. NMS noted, however, that
based on the ratio of price to projected earnings, also a common measure of
public market valuation, the Company's current Existing Share price should range
from $4.89 to $5.48.
Analysis of Selected Merger Transactions: NMS reviewed the multiples
paid in selected categories of bank transactions. Specifically, NMS reviewed
selected bank transactions from January 1, 1990 to April 27, 1999 involving (i)
merger transactions with transaction value greater than $10 million and less
than $100 million that involved a seller with an ROA of less than 0.50% on
average over the three year period prior to sale; and (ii) merger transactions
for Hawaiian banks with a transaction value less than $100 million and greater
than $5 million (one transaction only). The multiples paid by the Company in the
Tender Offer and the Reverse Stock Split are below the multiples paid for the
first group and similar to multiples paid in the single transaction involving a
Hawaiian bank. For each transaction, NMS analyzed data illustrating, among other
things, purchase price to book value, purchase price to "adjusted" book value
(assuming a premium is paid on a 6% "normalized" equity to assets level and
dollar for dollar for equity above 6%), purchase price to tangible book value,
purchase price to adjusted book value, purchase price to deposits, the ratio of
the premium (i.e., purchase price in excess of tangible book value) to core
deposits, and the premium paid to the seller's stock price thirty days prior to
announcement.
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<PAGE> 44
A summary of the median multiples in the analysis is as follows:
<TABLE>
<CAPTION>
Price to Price to
Price to Tang. Adj. Premium Premium
Book Book Book Price to to Core to Price 30
Transaction Categories Value Value Value Deposits Deposits Days Prior
- - ---------------------- -------- -------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Selected Mergers with 1.4x 1.4x 1.5x 12.7% 3.7% 22.3%
Transaction Value
Greater than $10 Million
and Less than $100
Million
Hawaii: Liberty Bank 1.2x 1.2x 1.2x 8.6% 1.5% NA
Merger with BankAmerica
Reverse Stock 1.2x 1.2x 1.3x 11.6% 1.7% 9.8%
Split/Tender Offer Price
</TABLE>
No transaction used in the above analyses as a comparison is identical
to the Reverse Stock Split and Tender Offer. Accordingly, an analysis of the
results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in the financial and
operating characteristics of the companies and other factors that could affect
the announced acquisition prices of the companies to which the Company is being
compared. Given that only one of the transactions involved a Hawaii bank and all
of the transactions represented acquisitions of an entire institution as opposed
to a minority position, NMS placed significantly less weight on this analysis.
Premiums Paid Analysis: NMS reviewed market premiums paid in five other
self-tender offer transactions of $25 million or less from January 1, 1990 to
April 27, 1999. In these transactions, the median and average premium paid over
the stock price 30 days before the announcement was 10.9% and 10.4%, as compared
to the Company's proposed market premium of 9.8%.
Earnings Growth Analysis: Using a 12.6x terminal multiple (the median
price to 1999 First Call estimated earnings multiple of the 4 Hawaii Banks
excluding BancWest Corporation) and a 15% discount rate, NMS determined that the
Company would have to achieve an average annual earnings growth rate of 112.8%
through the year 2003 in order to obtain a present value stock price of $45.00.
The Company's estimated stand-alone earnings growth rate from 1999 through the
year 2003 is 13.0%. NMS noted that the Company's estimated stand-alone earnings
per share growth rate for 1999 through the year 2001 is 0.0%.
The summary set forth above does not purport to be a complete
description of the presentation by NMS to the Company's Board or of the analyses
performed by NMS. The preparation of a fairness opinion is not necessarily
susceptible to partial analysis or summary description. NMS believes that its
analyses and the summary set forth above must be considered as a whole and that
selecting a portion of its analyses and factors, without considering all
20
<PAGE> 45
analyses and factors, would create an incomplete view of the process underlying
the analyses set forth in its presentation to the Company's Board. In addition,
NMS may have given various analyses more or less weight than other analyses, and
may have deemed various assumptions more or less probable than other
assumptions, so that the ranges of valuations resulting from any particular
analysis described above should not be taken to be NMS's view of the actual
value of the Company. The fact that any specific analysis has been referred to
in the summary above is not meant to indicate that such analysis was given
greater weight than any other analysis.
In performing its analyses, NMS made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of the Company. The analyses
performed by NMS are not necessarily indicative of actual values or actual
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of NMS's analysis
of the fairness of the price per Existing Share to be received by the holders of
the Company's Existing Shares in the Tender Offer and the Reverse Stock Split
and were provided to the Company's Board in connection with the delivery of
NMS's opinion. The analyses do not purport to be appraisals or to reflect the
prices at which a company might actually be sold or the prices at which any
securities may trade at the present time or any time in the future. The
forecasts used by NMS in certain of its analyses are based on numerous variables
and assumptions, which are inherently unpredictable and must be considered not
certain of occurrence as projected. Accordingly, actual results could vary
significantly from those contemplated in such forecasts.
As described above in this section, NMS's opinion and presentation to
the Company's Board were among several factors taken into consideration by the
Company's Board in making its determination to approve the Tender Offer and the
Reverse Stock Split.
Pursuant to the Engagement Letter, the Company paid NMS a fee of
$100,000 upon the delivery of its written fairness opinion. The Company has also
agreed to reimburse NMS for its reasonable out-of-pocket expenses, including
reasonable fees and disbursements for NMS's legal counsel and other experts
retained by NMS. The Company has agreed to indemnify NMS, its affiliates, and
their respective partners, directors, officers, agents, consultants, employees
and controlling persons against certain liabilities, including liabilities under
the federal securities laws.
OTHER CONSIDERATIONS
In view of the large number of Company shareholders with small holdings
of Existing Shares and past voting practices of such shareholders, the Board of
Directors determined that it is not feasible to structure the Reverse Stock
Split to require the approval of at least a majority of the Company's
shareholders who are not members of the Luke Family. Based on its inquiry, the
Company believes that approval of the Reverse Stock Split is assured. See
"Required Vote; Indications of Voting Intent by Luke Family Shareholders and
Management" below.
The Company's directors (Messrs. Arthur S.K. Fong and Tan Tek Lum) who
are neither Luke Family members nor officers or employees of the Company or the
Bank have not, in connection with the Reverse Stock Split, retained unaffiliated
representatives to act solely on
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<PAGE> 46
behalf of the Company shareholders who are not Luke Family members for the
purpose of negotiating the terms of the Reverse Stock Split, the Tender Offer or
the Private Placement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The receipt by a holder of Existing Shares of cash in lieu of fractional
shares of New Common Stock pursuant to the Reverse Stock Split will be a taxable
transaction for federal income tax purposes under the United States Internal
Revenue Code of 1986, as amended (the "Code").
Under Section 302 of the Code, a shareholder will recognize gain or loss
upon receiving cash in lieu of fractional shares of New Common Stock pursuant to
the Reverse Stock Split if:
o The Reverse Stock Split results in a "complete redemption" of all of the
shareholder's Existing Shares;
o The receipt of cash is "substantially disproportionate" with respect to
the shareholder; or
o The receipt of cash is "not essentially equivalent to a dividend" with
respect to the shareholder.
These three tests are applied by taking into account not only shares
that a shareholder actually owns, but also shares that the shareholder
constructively owns pursuant to Section 318 of the Code, as described below.
If any one of the three tests is satisfied, the shareholder will
recognize gain or loss on the difference between the amount of cash received by
the shareholder pursuant to the Reverse Stock Split and the tax basis in the
Existing Shares or the shares of New Common Stock held by such shareholder.
Provided that the shares of New Common Stock constitute a capital asset in the
hands of the shareholder, this gain or loss will be long-term capital gain or
loss if the eligible Existing Shares are held for more than one year and will be
short-term capital gain or loss if such shares are held for one year or less. In
determining the basis and holding period of a shareholder's New Common Stock,
the basis and holding period of such shareholder's Existing Shares will carry
over as the basis and holding period of such shares of New Common Stock.
Under the constructive ownership rules of Section 318 of the Code, a
shareholder is deemed to constructively own shares owned by certain related
individuals and entities in addition to shares directly owned by the
shareholder. For example, an individual shareholder is considered to own shares
owned by or for his or her spouse and his or her children, grandchildren and
parents ("family attribution"). In addition, a shareholder is considered to own
a proportionate number of shares owned by estates or certain trusts in which the
shareholder has a beneficial interest, by partnerships in which the shareholder
is a partner, and by corporations in which 50% or more in value of the stock is
owned directly or indirectly by or for such shareholder. Similarly, shares
directly or indirectly owned by beneficiaries of estates of certain trusts, by
partners of partnerships and, under certain circumstances, by shareholders of
corporations may be considered owned by these entities ("entity attribution"). A
shareholder is
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<PAGE> 47
also deemed to own shares which the shareholder has the right to acquire by
exercise of an option.
The receipt of cash by a shareholder pursuant to the Reverse Stock Split
will result in a "complete redemption" of all of the shareholder's Existing
Shares as long as the shareholder does not constructively own any shares of New
Common Stock immediately after the Reverse Stock Split. However, a shareholder
may qualify for gain or loss treatment under the "complete redemption" test even
though such shareholder constructively owns shares of New Common Stock provided
that (i) the shareholder constructively owns shares of New Common Stock as a
result of the family attribution rules (or, in some cases, as a result of a
combination of the family and entity attribution rules), and (ii) the
shareholder qualifies for a waiver of the family attribution rules (such waiver
being subject to several conditions, one of which is that the shareholder has no
interest in the Company immediately after the Reverse Stock Split, including as
an officer, director or employee, other than an interest as a creditor.
It is anticipated that most who receive cash in lieu of fractional
shares of New Common Stock pursuant to the Reverse Stock Split will qualify for
capital gain or loss treatment as a result of satisfying the "complete
redemption" requirements. However, if the constructive ownership rules prevent
compliance with these requirements, such shareholder may nonetheless qualify for
capital gain or loss treatment by satisfying either the "substantially
disproportionate" or the "not essentially equivalent to a dividend"
requirements. In general, the receipt of cash pursuant to the Reverse Stock
Split will be "substantially disproportionate" with respect to the shareholder
if the percentage of shares of New Common Stock owned by the shareholder
immediately after the Reverse Stock Split is less than 80% of the percentage of
Existing Shares directly and constructively owned by the shareholder immediately
before the Reverse Stock Split (giving effect to the difference in number of
shares due to the Reverse Stock Split). Alternatively, the receipt of cash
pursuant to the Reverse Stock Split will, in general, be "not essentially
equivalent to a dividend" if the receipt of payment results in a "meaningful
reduction" in the shareholder's proportionate interest in the Company.
If none of the three tests described above is satisfied, the shareholder
will be treated as having received a taxable dividend in an amount equal to the
entire amount of cash received by the shareholder pursuant to the Reverse Stock
Split.
The receipt of shares of New Common Stock in the Reverse Stock Split by
owners of more than 200 Existing Shares who elect not to participate in the
Tender Offer will be a non-taxable transaction for federal income tax purposes.
Accordingly, a holder of more than 200 Existing Shares who receives shares of
New Common Stock will not recognize gain or loss, or dividend income, as a
result of the Reverse Stock Split with respect to the shares of New Common Stock
received (but, as described above, cash received in lieu of a fractional share
of New Common Stock will be a taxable transaction to the extent of such cash
received). In addition, the basis and holding period of such shareholder's
shares of New Common Stock will carry over as the basis and holding period of
such shareholder's shares of New Common Stock.
The backup withholding rules require a payor to deduct and withhold a
tax if (i) the payee fails to furnish a taxpayer identification number ("TIN")
to the payor; (ii) the IRS notifies the payor that the TIN furnished by the
payee is incorrect; (iii) the payee has failed to properly report
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<PAGE> 48
the receipt of "reportable payment" on several occasions and the IRS has
notified the payor that withholding is required; or (iv) there has been a
failure of the payee to certify under the penalty of perjury that the payee is
not subject to withholding under Section 3406 of the Code. As a result, if any
one of the events discussed above occurs, the Company will be required to
withhold a tax equal to 31% of any "reportable payment" made in connection with
the Tender Offer. A "reportable payment" includes, among other things, dividends
and amounts paid through brokers in retirement of securities. Any amounts
withheld from a payment to a shareholder under the backup withholding rules will
be allowed as a refund or credit against such shareholder's federal income tax,
provided that the required information is furnished to the IRS. Certain
shareholders (including corporations and tax exempt organizations) are not
subject to the backup withholding requirements.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT, WITHOUT
REFERENCE TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY PARTICULAR
SHAREHOLDER. EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE REVERSE
STOCK SPLIT (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND
OTHER TAX LAWS).
RIGHTS OF DISSENTING SHAREHOLDERS
Although Hawaii law does not require dissenters' rights in connection
with a reverse stock split, the Company has voluntarily elected to provide
shareholders the right to dissent from the Reverse Stock Split and obtain
payment for their Existing Shares pursuant to Sections 415-80 and 415-81 of the
Hawaii Business Corporation Act (the "Act"). A shareholder who wishes to dissent
must file with the Company, prior to the vote on the Reverse Stock Split at the
Annual Meeting, a written notice that the shareholder intends to demand to be
paid fair compensation for his Existing Shares, and he or she must refrain from
voting such shares in approval of the Reverse Stock Split. A shareholder who
fails in either respect will have no right to payment for the Existing Shares
under either Section 415-80 or Section 415-81 of the Act. Such notice should be
sent to Hawaii National Bancshares, Inc., 45 N. King Street, P.O. Box 3740,
Honolulu, Hawaii 96812; Attention: President/Chief Executive Officer. IF YOU
TENDER YOUR SHARES IN THE TENDER OFFER, YOU WILL NOT BE ABLE TO QUALIFY FOR
DISSENTERS' RIGHTS.
A PROXY CARD DIRECTING A VOTE AGAINST THE AMENDMENT OF THE COMPANY'S
ARTICLES OF INCORPORATION TO EFFECT THE REVERSE STOCK SPLIT, OR AN ABSTENTION
FROM VOTING, IS INSUFFICIENT TO SATISFY THE REQUIREMENTS FOR THE WRITTEN NOTICE
THAT IS REQUIRED UNDER SECTION 415-81 OF THE ACT.
Sections 415-80 and 415-81 of the Act are reprinted in their entirety as
APPENDIX A to this Proxy /Tender Offer Statement. All references in Sections
415-80 and 415-81 of the Act and in this section to a "shareholder" are
references to the record holder of Existing Shares. A person or persons having a
beneficial interest in Existing Shares held of record in the name of another
person or persons, such as a broker or nominee, and wishing to exercise
dissenters' rights should act promptly to cause the shareholder of record to
properly follow the steps summarized below and in a timely manner to perfect
dissenters' rights concerning such Existing Shares.
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<PAGE> 49
A SUMMARY OF IMPORTANT DETAILS CONCERNING THESE REQUIREMENTS IS SET
FORTH BELOW; THE REQUIRED PROCEDURES SET FORTH IN SECTIONS 415-80 AND 415-81 OF
THE ACT MUST BE FOLLOWED EXACTLY OR DISSENTERS' RIGHTS MAY BE LOST.
The following discussion is not a complete statement of the law relating
to dissenters' rights; it is qualified in its entirety by APPENDIX A. This
discussion and APPENDIX A should be reviewed carefully by any shareholder who
wishes to exercise dissenters' rights, or who wishes to preserve the right to do
so; failure to comply with the procedures set forth in Sections 415-80 and
415-81 of the Act will result in the loss of dissenters' rights. Shareholders
should consult their own legal advisors.
If the Reverse Stock Split is effectuated, those shareholders of the
Company who elect to exercise their dissenters' rights and who properly and
timely perfect such rights will be entitled to receive the fair value in cash of
their Existing Shares. Such cash payment would be in lieu of the shares of New
Common Stock and/or amount of the cash they would otherwise receive upon the
effectiveness of the Reverse Stock Split. Pursuant to Section 415-81 of the Act,
"fair value" means the value of the Existing Shares immediately before the
effectuation of the Reverse Stock Split, excluding any appreciation or
depreciation in anticipation of the Reverse Stock Split, unless such exclusion
would be inequitable.
If the Company's shareholders approve the Reverse Stock Split by the
required vote, then the Company must mail to those shareholders who submitted a
written notice of intention to demand dissenters' rights and who refrained from
voting their Existing Shares to approve of the Reverse Stock Split, a notice
that the required shareholder approval of the Reverse Stock Split was obtained
(the "Notice of Approval"). The Notice of Approval must: (i) state where and
when a demand for payment must be sent and certificates of certificated shares
must be deposited to obtain payment; (ii) inform holders of uncertificated
shares to what extent transfer of shares will be restricted from the time that
demand for payment is received; (iii) supply a form for demanding payment that
includes a request for certification of the date on which the shareholder, or
the person on whose behalf the shareholder dissents, acquired beneficial
ownership of the shares; and (iv) be accompanied by a copy of Sections 415-80
and 415-81 of the Act. The time set for the demand and deposit must not be less
than 30 days from the Company's mailing of the Notice of Approval.
A shareholder who fails to demand payment and deposit his or her shares
in the time and in the manner set forth in the Notice of Approval, will have no
right as a dissenter to receive the fair value of his or her Existing Shares.
The dissenter will retain all other rights of a shareholder until those rights
are modified by effectuation of the Reverse Stock Split.
Immediately upon effectuating the Reverse Stock Split, or upon receipt
of timely demand for payment if the Reverse Stock Split already has been
effectuated, the Company must remit to dissenters who have properly made their
demand and deposited their stock certificates, the amount that the Company
estimates to be the fair value of the Existing Shares, with interest if any has
accrued. The Company's Board has determined that the fair value of the Existing
Shares to be forty-five dollars ($45.00) per share, which is the same price
offered in the Tender Offer and effectively the price to be paid for fractional
shares after the Reverse Stock Split. See "Basic Terms of the Reverse Stock
Split" and "THE TENDER OFFER - Tender Offer Open to All
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<PAGE> 50
Shareholders."
The payment from the Company must be accompanied by: (i) the Company's
balance sheet and statement of income for the fiscal year ending as of December
31, 1998, together with the Company's latest interim financial statements; (ii)
a statement of the Company's estimate of the fair value of the Existing Shares;
and (iii) a statement of the dissenter's right to demand supplemental payment
for Existing Shares, with a copy of Sections 415-80 and 415-80 of the Act.
If, within 60 days after the date set for demanding payment and
depositing certificates as set forth in the Notice of Approval, the Company has
not effectuated the Reverse Stock Split and remitted payment to dissenting
shareholders, then the Company must return any stock certificates that have been
deposited.
If the Company fails to remit payment as set forth above or if the
dissenter believes that the amount remitted is less than the fair value, or that
the interest is incorrectly determined, then the dissenter may send to the
Company his or her own estimate of the value of the Existing Shares or of the
interest, and demand payment of the deficiency (the "Deficiency Notice"). If the
dissenter does not file the Deficiency Notice with the Company within 30 days
after the Company's mailing of the remittance to the dissenter, then the
dissenter will be entitled to no more than the amount already remitted.
Within 60 days of receiving a Deficiency Notice from a dissenter in
accordance with the terms of Sections 415-80 and 415-81 of the Act, if any such
demands for payment remain unsettled, the Company must file an action in an
appropriate court of competent jurisdiction in the County of Honolulu, Hawaii,
requesting that the court determine the fair value of the Existing Shares and
interest. All dissenters who have complied fully with Sections 415-80 and 415-81
of the Act, wherever residing, whose demands have not been settled must be made
parties to that proceeding. The court may appoint one or more persons as
appraisers, to receive evidence and recommend a decision on the question of fair
value. All dissenters made parties will be entitled to judgment for the amount
by which the fair value of their shares is found to exceed the amount the
Company previously remitted, with interest. If the Company fails to file suit in
the time frame specified above, then the Company must pay each dissenter the
amount he or she demanded in his or her Deficiency Notice.
The costs and expenses of any proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, will be
determined by the court and assessed against the Company; however, the court may
apportion and assess any part of the costs and expenses as it deems equitable,
against all or some of the dissenters who are parties and whose action in
demanding supplemental payment the court finds to be arbitrary, vexatious, or
not in good faith. Fees and expenses of counsel and of experts for the
respective parties may be assessed as the court deems equitable against the
Company and for any or all dissenters, if the Company failed to comply
substantially with the requirements of Section 415-81 of the Act. The court may
assess fees and costs against either the Company or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
concerning the rights provided by Sections 415-80 and 415-81 of the Act.
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If the shareholder votes for the Reverse Stock Split (either in person
or by proxy), or if the Company does not timely receive such shareholder's
written demand and deposit of shares or if the shareholder otherwise fails to
comply in a timely manner with the procedures of Sections 415-80 and 415-81 of
the Act, then such shareholder will be bound by the terms of the Reverse Stock
Split, and he or she will lose the right as a dissenter to receive the fair
value of his or her Existing Shares in cash. Any shares that lose their status
as dissenting Existing Shares will be, or be deemed to have been, converted into
the right to receive pursuant to the Reverse Stock Split: (i) one share of New
Common Stock for every 200 Existing Stock Shares, and (ii) cash in lieu of
fractional shares. See "Basic Terms of the Reverse Stock Split" and "Cash for
Fractional Shares."
REQUIRED VOTE; INDICATIONS OF VOTING INTENT BY LUKE FAMILY SHAREHOLDERS AND
MANAGEMENT
The affirmative vote of at least 66 2/3 % of all Existing Shares
outstanding on the record date is required to approve the amendment of the
Company's Articles of Incorporation to effect the Reverse Stock Split. To the
extent known to the Company after reasonable inquiry, the officers, directors
and affiliates of the Company (including all members of the Luke Family) intend
to vote in favor of the amendment of the Company's Articles of Incorporation.
Such shareholders beneficially own approximately 88% of the outstanding Existing
Shares. Thus approval of the amendment to the Articles of Incorporation is
assured. Approval of the amendment of the Company's Articles of Incorporation
has not been structured so that approval by at least of a majority of
unaffililiated shareholders is required.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors has unanimously concluded that the Reverse Stock
Split is fair to, and in the best interests of, the shareholders of the Company.
The Reverse Stock Split has been approved by the directors (Messrs. Arthur S.K.
Fong and Tan Tek Lum) who are neither Luke Family members nor officers or
employees of the Company or the Bank. The Board of Directors recommends that you
vote "FOR" the proposal to amend the Company's Articles of Incorporation,
effecting the Reverse Stock Split.
THE TENDER OFFER
GENERAL
The Board of Directors has determined to include the Tender Offer as a
part of the Plan so that those Company shareholders who own 200 or more Existing
Shares will have the option to elect to receive cash for such shares, on the
same economic terms as will apply to holders of less than 200 Existing Shares in
the Reverse Stock Split. Holders of 200 or more Existing Shares will thus be
able to sell all (but not less than all) of their Existing Shares to the Company
pursuant to the Tender Offer, or they may retain such shares, which will be
converted into shares of New Common Stock as described in "THE REVERSE STOCK
SPLIT."
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TENDER OFFER OPEN TO ALL SHAREHOLDERS
As described under "THE REVERSE STOCK SPLIT," if you own less than 200
Existing Shares, and if the Reverse Stock Split is approved and implemented, you
will receive cash in lieu of the fractional share of New Common Stock that you
would otherwise be entitled to, in an amount equal to $45.00 per Existing Share
that you own. Accordingly, there is no need for you to participate in the Tender
Offer, as the amount per Existing Share to be paid in the Tender Offer is also
$45.00 per Existing Share. However, certain regulations of the SEC require that
tender offers be made available to all shareholders. In order to comply with
these regulations, the Company is making the Tender Offer to all shareholders,
even though holders of less than 200 Existing Shares will receive the same
amount of cash per share regardless of whether they tender their Existing Shares
in the Tender Offer or retain their shares, which will be converted
automatically into the right to receive cash pursuant to the Reverse Stock
Split.
As a result, if you own less than 200 Existing Shares, you may:
o Tender all (but not less than all) your Existing Shares in the Tender
Offer, and receive $45.00 per Existing Share tendered; or
o Retain your Existing Shares, which will, on the effective date of the
Reverse Stock Split, be converted into the right to receive $45.00 per
Existing Share.
Although the amount you receive per Existing Share will be exactly the
same regardless of the election you make, it is possible that you would receive
payment for your shares a few days earlier if you tender your shares in the
Tender Offer.
REASONS FOR THE TENDER OFFER
Based on current shareholder records, the Company believes that the
effect of the Reverse Stock Split will be to reduce the number of Company
shareholders below 300, thus allowing the Company to accomplish its objective of
deregistering under the 1934 Act. The purpose of the Tender Offer is to allow
Company shareholders who own 200 or more Existing Shares to sell such shares at
the same price per share as will be received by shareholders who receive cash
for their shares in the Reverse Stock Split. If the Company did not conduct the
Tender Offer, shareholders owning 200 or more Existing Shares would only have
the right to receive New Common Stock as a result of the Reverse Stock Split
(except for the receipt of cash in lieu of fractional shares), and would not
have the opportunity to liquidate their investment in the Company by receiving
cash for all of their shares.
Because there may be certain disadvantages to owning New Common Stock
(see "Investment Considerations" below) the Board of Directors has determined to
approve the Tender Offer to provide shareholders who would receive such New
Common Stock with a liquidation alternative. Additionally, as described under
"Investment Considerations," the Company reserves the right to take corporate
action in the future to cause the Company to be wholly owned by the Luke Family,
and the Tender Offer, if it is elected by some or all non-Luke Family
shareholders, may serve to facilitate this objective.
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BASIC TERMS OF THE TENDER OFFER
The Tender Offer commences on ______, 1999 and ends at 5:00 P.M.
HONOLULU TIME, JUNE 30, 1999 (THE "EXPIRATION DATE"). As described below under
"Possible Extension or Termination," the Tender Offer may be extended under
certain circumstances, and in such event the term `Expiration Date" means the
date and time to which the Tender Offer is extended.
If you desire to tender your Existing Shares in the Tender Offer,
carefully follow the instructions under "Tender Offer Procedures" below, and the
instructions in the Letter of Transmittal that is described in that section.
As described above, the Tender Offer is open to all holders of Existing
Shares, but if you own less than 200 Existing Shares, you will receive the same
amount of cash for such shares pursuant to the Reverse Stock Split as you would
receive if you tendered them in the Tender Offer. See "Tender Offer Open to All
Shareholders."
If you elect to tender your Existing Shares in the Tender Offer, you
must tender all of the Existing Shares that you own.
If you tender your Existing Shares, you have the right to withdraw such
tender and have your Existing Shares returned to you, as described under
"Withdrawal Rights" below.
If you desire to tender your Existing Shares, but your stock
certificate(s) for such shares have been lost, destroyed or stolen, you should
contact the Company IMMEDIATELY in order to obtain the necessary affidavits or
other documents, so that you can submit such documents prior to the Expiration
Date. The Company's bylaws provide that a bond or other security will be
required in connection with lost or destroyed certificates. See "Lost, Destroyed
or Stolen Certificates."
The Tender Offer is subject to certain conditions. (See "Conditions to
the Tender Offer"). Among these conditions is the approval and effectiveness of
the Reverse Stock Split. Until the Reverse Stock Split is effective, all
tendered Existing Shares will be held in escrow by the Company and will not be
accepted for payment. If the Reverse Stock Split does not become effective for
any reason, all tendered Existing Shares will be returned to the shareholders
who tendered them. If the Reverse Stock Split is approved by the shareholders
and becomes effective, the Company will pay for the Existing Shares that have
been properly tendered prior to the Expiration Date, and not properly withdrawn,
as described under "Tender Offer Procedures."
INVESTMENT CONSIDERATIONS
Each holder of Existing Shares should carefully review the following
considerations in deciding whether to tender such shares pursuant to the Tender
Offer or retain such shares for conversion into shares of New Common Stock (and
cash for fractional shares) pursuant to the Reverse Stock Split.
Change in Capitalization. Because members of the Luke Family have agreed
to purchase New Common Stock in an amount equal to the funds expended by the
Company in the Reverse Stock Split and the Tender Offer (see "Fees and Expenses;
Sources of Funds"), other than the
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number of shares of New Common Stock outstanding after the Reverse Stock Split
and Tender Offer and the out-of-pocket expenses related to those transactions,
the capitalization of the Company will effectively be unchanged.
Controlling Shareholders. The effect of the Reverse Stock Split and the
Private Placement, and the anticipated effect of the Tender Offer, will be to
further concentrate the equity ownership of the Company in members of the Luke
Family, who together currently own approximately 88% of the outstanding Existing
Shares. The various members of the Luke Family, and the entities that they own
or control, do not have any contract, arrangement or understanding pursuant to
which any of them has agreed to vote his, hers or its shares together with any
other member of the Luke Family.
Because the number, if any, of unaffiliated holders of 200 or more
Existing Shares who will elect to tender such shares in the Tender Offer cannot
be predicted, the percentage of New Common Stock that the Luke Family will own
following the Reverse Stock Split, Tender Offer and Private Placement cannot be
determined at this time. Additionally, as discussed below under "Possibility of
Company Becoming Wholly Owned by Luke Family," the Company could take corporate
action in the future to become 100% owned by members of the Luke Family,
although it has no current plans in that regard.
Lack of Public Information; Lack of Market for New Common Stock.
Following completion of the Reverse Stock Split, the Company anticipates that it
will have less that 300 shareholders of record and that it will not be required
to file public information with the SEC thereafter. Although the Company does
not believe that their is a substantial market for the Existing Shares
currently, it anticipates that there will be little or no market for the New
Common Stock. Shareholders who may need to subsequently liquidate their
investment in the Company should consider the fact that a public market is not
expected to exist for shares of New Common Stock after the Reverse Stock Split
and the Tender Offer. This lack of liquidity could restrict the ability of
holders of New Common Stock to sell or pledge such shares as collateral for
loans.
Further impacting the anticipated lack of a market for New Common Stock
will be the higher per-share cost of shares of New Common Stock. Assuming by way
of illustration only a current trading price of $45.00 per share for the
Existing Shares, the shares of New Common Stock would have a trading price of
$9,000.00 per share. The Company will not be required to, and will not, permit
transfers of fractional shares of New Common Stock. The substantial anticipated
trading price of a single share of New Common Stock can be expected to further
reduce the liquidity of such shares. Although the Company could in the future
mitigate this circumstance by effecting a stock split that would reduce the
per-share trading price of the New Common Stock, it is not obligated to do so,
and it has no current plans to do so.
Possibility of Company Becoming Wholly Owned by Luke Family. The Company
has no present plan or timetable to take steps to cause the Company to become
wholly owned by the Luke Family and entities owned or controlled by the Luke
Family. However, the Company reserves the right to take such steps in the
future. The Company believes that in view of the very small percentage of
non-Luke Family member shareholders projected to own New Common Stock following
the effectiveness of the Reverse Stock Split and the completion of the Tender
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Offer, the benefits of eliminating such interests may substantially outweigh the
limitations and risks associated with unaffiliated minority shareholders. The
future actions that the Company could take to cause the Company to be wholly
owned by the Luke Family cannot be determined or predicted at this time, but
could take the form of an additional reverse stock split, merger or similar
corporate action. The possibility that the Company might take such actions in
the future means that holders of 200 or more Existing Shares who elect not to
participate in the Tender Offer, but elect instead to receive New Common Stock
in the Reverse Stock Split, may not be able, over the long term, to continue
such equity investment in the Company.
TENDER OFFER PROCEDURES
Upon the terms and subject to the conditions of the Tender Offer,
promptly after the latest to occur of (i) the Expiration Date and (ii) the
satisfaction or waiver of the conditions to the Tender Offer set forth in
"Conditions to the Tender Offer" the Company will accept for payment and pay a
purchase price of $45.00 per Existing Share properly tendered, and not properly
withdrawn. Subject to applicable rules of the SEC, the Company expressly
reserves the right to delay acceptance for payment of, or payment for, Existing
Shares in order to comply with any applicable law or regulation.
Payment for Existing Shares tendered and accepted for payment pursuant
to the Tender Offer will be made only after timely receipt by the Company of:
o the certificates evidencing such Existing Shares;
o the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed, with any required signature guarantees; and
o any other documents required in the Letter of Transmittal.
UNDER NO CIRCUMSTANCES WILL INTEREST ON THE PURCHASE AMOUNT FOR EXISTING
SHARES BE PAID, REGARDLESS OF ANY DELAY IN MAKING SUCH PAYMENT. In addition, if
certain events occur, the Company may not be obligated to purchase Existing
Shares pursuant to the Tender Offer. See "Conditions to the Tender Offer." In
such a case, any Existing Shares tendered and not purchased will be returned to
the tendering shareholder at the Company's expense as promptly as practicable
after the Expiration Date or termination of the Tender Offer without expense to
the tendering shareholder.
The Company will pay all stock transfer taxes, if any, payable on the
transfer to it of Existing Shares purchased pursuant to the Tender Offer.
Shareholders who hold shares through brokers or banks are urged to consult such
brokers or banks to determine whether transaction costs are applicable if
shareholders tender shares through such brokers or banks and not directly to the
Company. If, however, payment of the purchase price is to be made to any person
other than the registered holder, or if tendered certificates are registered in
the name of any person other than the person signing the Letter of Transmittal,
the amount of all stock transfer taxes, if any (whether imposed on the
registered holder or the other person), payable on account of the transfer to
the person will be deducted from the Purchase Price unless satisfactory evidence
of the payment of the stock transfer taxes, or exemption therefrom, is
submitted.
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THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE COMPANY. IF
DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
POSSIBLE EXTENSION OR TERMINATION
Subject to the conditions of the Tender Offer (see "Conditions to the
Tender Offer"), all Existing Shares that are validly tendered prior to the
Expiration Date and not properly withdrawn will be purchased by the Company.
Subject to applicable regulations of the SEC, the Company reserves the
right, in its sole discretion, at any time, to:
o Extend the period of time that the Tender Offer is open;
o Terminate the Tender Offer and not accept for payment any
Existing Shares, upon the occurrence of any of the conditions
described in "Conditions to the Tender Offer"; and
o To waive any condition or otherwise amend the Tender Offer in
any respect.
If the Company makes a material change in the terms of the Tender Offer,
or if it waives a material condition of the Tender Offer, and the Tender Offer
is scheduled to expire at any time earlier than the tenth business day from the
date of the Company's notice of such change or waiver (as described below), then
the Tender Offer will be extended until the tenth business day following such
notice.
If the Company extends the Tender Offer, during the period of any such
extension shareholders who have previously tendered Existing Shares will
continue to have the right to withdraw such Existing Shares. See "Withdrawal
Rights."
Any extension of the Tender Offer, or any material change in the Tender
Offer or waiver of a material condition of the Tender Offer will be followed as
promptly as practicable by a public announcement. In the case of an extension of
the Tender Offer, such announcement will be made no later than 9:00 a.m.,
Honolulu time, on the business day subsequent to the previously scheduled
Expiration Date. The Company will make any such announcement by issuing a press
release or by other means reasonably calculated to inform shareholders of the
change.
DETERMINATION OF VALIDITY
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for payment of any tender of Existing Shares will be
determined by the Company in its sole discretion, which determination shall be
final and binding on all parties. The Company reserves the absolute right to
reject any and all tenders determined by it not to be in proper form or the
acceptance for payment of which may, in the opinion of its counsel, be unlawful.
The Company also reserves the absolute right to waive any condition of the
Tender Offer or any
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defect or irregularity in the tender of any Existing Shares of any particular
shareholder, whether or not similar defects or irregularities are waived in the
case of other shareholders. No tender of Existing Shares will be deemed to have
been validly made until all defects and irregularities have been cured or
waived. Neither the Company nor any other person will be under any duty to give
notification of any defects or irregularities in tenders or incur any liability
for failure to give any such notification. The Company's interpretation of the
terms and conditions of the Tender Offer (including the Letter of Transmittal
and the instructions contained in, or applying to, the Letter of Transmittal)
will be final and binding.
LOST, DESTROYED OR STOLEN CERTIFICATES
If any certificates for the Existing Shares have been lost, destroyed or
stolen, shareholders should contact the Company immediately at the address and
telephone number set forth on the first page of this Proxy/Tender Offer
Statement. The Company then will forward additional documentation necessary to
be completed in order to surrender effectively such lost, destroyed or stolen
certificate(s). The purchase price for the relevant Existing Shares will not be
paid until the procedures for replacing lost, destroyed or stolen certificates
have been followed. The Company's bylaws provide that if a certificate is lost
or destroyed, the shareholder must submit, in addition to other documents, a
bond or other security to the Company, satisfactory to the Board, indemnifying
the Company and all persons against any losses incurred as a consequence of the
issuance of a new stock certificate.
WITHDRAWAL RIGHTS
Tenders of Existing Shares made pursuant to the Tender Offer are
irrevocable except that such tendered Existing Shares may be withdrawn at any
time prior to the Expiration Date and, unless accepted for payment by the
Company pursuant to the Tender Offer, may also be withdrawn at any time before
_____________, 1999. If the Company extends the Tender Offer, is delayed in its
acceptance for payment of Existing Shares or is unable to accept Existing Shares
for payment pursuant to the Tender Offer, the Company may, nevertheless, retain
tendered Existing Shares, and such Existing Shares may not be withdrawn except
to the extent that tendering shareholders are entitled to withdrawal rights as
described in this section.
For a withdrawal to be effective, a written or facsimile transmission of
a notice of withdrawal must be timely received by the Company. Any notice of
withdrawal must specify the name of the person who tendered the shares, the name
of the registered holder if different from the name of the person who tendered
the shares, the number of Existing Shares tendered, and the number of shares to
be withdrawn. If certificates representing shares to be withdrawn have been
delivered or otherwise identified to the Company, the serial numbers shown on
the particular certificates evidencing the shares to be withdrawn and a signed
written notice of withdrawal (with the signature guaranteed if the signature was
required to be guaranteed when the Existing Shares were tendered or if the
person making withdrawal is not the person who tendered the Existing Shares)
must be submitted prior to the physical release of certificates for the Existing
Shares to be withdrawn. Released certificates will be returned to the registered
holder of such Existing Shares or as otherwise directed by the letter of
transmittal.
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All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined in the sole discretion of the Company,
which determination will be final and binding. Neither the Company nor any other
person will be under any duty to give notification of any defects or
irregularities in any notice of withdrawal no will any of them incur any
liability of any kind for failure to give any such notification.
Any Existing Shares withdrawn will be deemed not validly tendered for
purposes of the Tender Offer. However, withdrawn Existing Shares may be
retendered at any subsequent time prior to the Expiration Date.
CONDITIONS TO THE TENDER OFFER
The consummation of the Tender Offer is conditioned upon the approval by
the Company's shareholders of the Reverse Stock Split (see "THE REVERSE STOCK
SPLIT - Required Vote; Indications of Voting Intent of Luke Family Members and
Management") and the effectiveness of such Reverse Stock Split. Prior to the
Expiration Date and pending the effectiveness of the Reverse Stock Split, all
Existing Shares tendered pursuant to the Tender Offer will be held in escrow and
will not be accepted for payment. The Bank, as the Company's transfer agent,
will retain all stock certificates representing escrowed Existing Shares until
such time as they are (i) accepted for payment pursuant to the terms of the
Tender Offer, or (ii) returned to the shareholder having tendered such
certificates.
Notwithstanding any term of the Tender Offer, the Company may, at its
option, withdraw the Tender Offer and will not be required to accept for payment
or purchase or pay for any Existing Shares tendered, if before termination of
the Tender Offer, any event has occurred that has been determined by the
Company, in its sole judgment, and regardless of the circumstances giving rise
to it (including any action or omission to act by the Company), making it
inadvisable to proceed with the Tender Offer or with the acceptance for payment
or payment for the Existing Shares, including but not limited to the following
events:
o There shall have been instituted or threatened any action or
proceeding before any court or administrative agency which
challenges the purchase of shares pursuant to the Tender Offer
or otherwise relates in any manner to the Tender Offer, or in
the judgment of the Company could otherwise materially and
adversely affect the Company; or
o Any action shall have been taken, or any statute, rule,
regulation or order shall have been proposed, enacted, enforced,
or deemed to be applicable to the Tender Offer, by any
governmental agency or other regulatory administrative
authority, which, in the judgment of the Company would or might
prohibit, restrict or delay consummation of the Tender Offer or
materially impair the contemplated benefits of the Tender Offer
to the Company; or
o There shall have occurred any commencement of armed hostilities
directly or indirectly involving the United States, or any
national emergency, banking moratorium or suspension of payments
by banks in the United States, or any general suspension of
trading or limitation of prices for securities on any primary
securities
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exchange or in the over-the-counter market in the United States,
or any decline in either the Dow Jones Industrial Average or the
Standard & Poor's Index of 500 Industrial Companies by an amount
in excess of ten percent measured from the close of business on
___________, 1999; or
o Any change shall occur or be threatened in the business,
condition (financial or otherwise), operations, stock ownership,
prospects of the Company or the Bank, which, in the judgment of
the Company, is or may be material to the Company or the Bank,
any of which in the sole judgment of the Company makes it
inadvisable to proceed with the acceptance of tenders, purchase
of Existing Shares, or payment.
Any determination by the Company concerning any events described in this
section and any related judgment or decision by the Company regarding the
inadvisability of proceeding with the purchase of or the payment for any shares
tendered will be final and binding upon all parties. The conditions described
above are for the sole benefit of the Company and may be asserted by the Company
regardless of the circumstances giving rise to those conditions or may be waived
by the Company in whole or in part. The Company's failure at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right.
EFFECT ON MARKET FOR SHARES
The Tender Offer itself will have little effect on the market for shares
of New Common Stock, except that the number of Company shareholders (and the
number of shareholders who are not members of the Luke Family) will be decreased
to the extent of shares tendered in the Tender Offer. However, the Reverse Stock
Split and the Company's subsequent deregistration under the 1934 Act, as
described above in "Investment Considerations," will have a substantial effect
on the liquidity of the New Common Stock.
FEES AND EXPENSES; SOURCES OF FUNDS
Transaction expenses related to the Tender Offer will be funded by means
of a dividend paid by the Bank to the Company. Purchase Funds necessary to pay
for tendered Existing Shares will be raised through the Private Placement. See
"THE REVERSE STOCK SPLIT - Fees and Expenses; Sources of Funds."
The Company will reimburse any broker or dealer, commercial bank or
trust company for customary handling and mailing expenses incurred in forwarding
the Proxy/Tender Offer Statement and related documents. No broker, dealer,
commercial bank or trust company has been authorized to act as an agent of the
Company for purposes of the Tender Offer.
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INTERESTS OF CERTAIN PERSONS IN THE TENDER OFFER
Company shareholders and directors who are members of the Luke Family
have a substantial interest in the implementation of the Tender Offer and the
other elements of the Plan, as described in "THE REVERSE STOCK SPLIT - Interests
of Certain Persons in the Reverse Stock Split."
To the extent known by the Company after reasonable inquiry, the Company
believes that no director, executive officer or affiliate of the Company
("affiliate" includes any member of the Luke Family or any entity owned or
controlled by any member of the Luke Family) will tender any of the Existing
Shares owned by such persons in the Tender Offer.
FAIRNESS OF CASH CONSIDERATION FOR TENDERED SHARES; OPINION OF FINANCIAL ADVISOR
The Company considered a variety of factors, including the opinion of
NMS, in determining that the amount to be paid for Existing Shares that are
tendered in the Tender Offer is fair from a financial point of view to tendering
shareholders. These factors are discussed at "THE REVERSE STOCK SPLIT - Fairness
of Cash Consideration for Tendered Shares" and "THE REVERSE STOCK SPLIT -
Opinion of Financial Advisor." A copy of the written opinion of NMS is attached
to this Proxy/Tender Offer Statement as APPENDIX C.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The receipt by a holder of Existing Shares of cash in connection with
the tender of such shares pursuant to the Tender Offer will be a taxable
transaction for federal income tax purposes under the Code.
Under Section 302 of the Code, a shareholder will recognize gain or loss
upon receiving cash upon the tender of Existing Shares pursuant to the Tender
Offer if:
o The tender results in a "complete redemption" of all of the
shareholder's Existing Shares;
o The receipt of cash is "substantially disproportionate" with
respect to the shareholder; or
o The receipt of cash is "not essentially equivalent to a
dividend" with respect to the shareholder.
These three tests are applied by taking into account not only shares
that a shareholder actually owns, but also shares that the shareholder
constructively owns pursuant to Section 318 of the Code, as described below.
If any one of the three tests is satisfied, the shareholder will
recognize gain or loss on the difference between the amount of cash received by
the shareholder pursuant to the Tender Offer and the tax basis in the Existing
Shares tendered by such shareholder. Provided that the Existing Shares
constitute a capital asset in the hands of the shareholder, this gain or loss
will be long-
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term capital gain or loss if the eligible Existing Shares are held for more than
one year and will be short-term capital gain or loss if such shares are held for
one year or less.
Under the constructive ownership rules of Section 318 of the Code, a
shareholder is deemed to constructively own shares owned by certain related
individuals and entities in addition to shares directly owned by the
shareholder. For example, a individual shareholder is considered to own shares
owned by or for his or her spouse and his or her children, grandchildren and
parents ("family attribution"). In addition, a shareholder is considered to own
a proportionate number of shares owned by estates or certain trusts in which the
shareholder has a beneficial interest, by partnerships in which the shareholder
is a partner, and by corporations in which 50% or more in value of the stock is
owned directly or indirectly by or for such shareholder. Similarly, shares
directly or indirectly owned by beneficiaries of estates of certain trusts, by
partners of partnerships and, under certain circumstances, by shareholders of
corporations may be considered owned by these entities ("entity attribution"). A
shareholder is also deemed to own shares which the shareholder has the right to
acquire by exercise of an option.
The receipt of cash by a shareholder in the Tender Offer will result in
a "complete redemption" of all of the shareholder's Existing Shares as long as
the shareholder does not constructively own any Existing Shares immediately
after the receipt of payment pursuant to the Tender Offer. However, a
shareholder may qualify for gain or loss treatment under the "complete
redemption" test even though such shareholder constructively owns Existing
Shares provided that (i) the shareholder constructively owns Existing Shares as
a result of the family attribution rules (or, in some cases, as a result of a
combination of the family and entity attribution rules), and (ii) the
shareholder qualifies for a waiver of the family attribution rules (such waiver
being subject to several conditions, one of which is that the shareholder has no
interest in the Company immediately after the receipt of payment pursuant to the
Tender Offer, including as an officer, director or employee, other than an
interest as a creditor.
It is anticipated that most shareholders tendering Existing Shares in
the Tender Offer will qualify for capital gain or loss treatment as a result of
satisfying the "complete redemption" requirements. However, if the constructive
ownership rules prevent compliance with these requirements, such shareholder may
nonetheless qualify for capital gain or loss treatment by satisfying either the
"substantially disproportionate" or the "not essentially equivalent to a
dividend" requirements. In general, the receipt of cash pursuant to the Tender
Offer will be "substantially disproportionate" with respect to the shareholder
if the percentage of Existing Shares owned by the Shareholder immediately after
receipt of payment pursuant to the Tender Offer is less than 80% of the
percentage of Existing Shares directly and constructively owned by the
shareholder immediately before the Tender Offer. Alternatively, the receipt of
cash pursuant to the Tender Offer will, in general, be "not essentially
equivalent to a dividend" if the receipt of payment results in a "meaningful
reduction" in the shareholder's proportionate interest in the Company.
If none of the three tests described above is satisfied, the shareholder
will be treated as having received a taxable dividend in an amount equal to the
entire amount of cash received by the shareholder pursuant to the Tender Offer.
37
<PAGE> 62
The backup withholding rules require a payor to deduct and withhold a
tax if (i) the payee fails to furnish a taxpayer identification number ("TIN")
to the payor; (ii) the IRS notifies the payor that the TIN furnished by the
payee is incorrect; (iii) the payee has failed to properly report the receipt of
"reportable payment" on several occasions and the IRS has notified the payor
that withholding is required; or (iv) there has been a failure of the payee to
certify under the penalty of perjury that the payee is not subject to
withholding under Section 3406 of the Code. As a result, if any one of the
events discussed above occurs, the Company will be required to withhold a tax
equal to 31% of any "reportable payment" made in connection with the Tender
Offer. A "reportable payment" includes, among other things, dividends and
amounts paid through brokers in retirement of securities. Any amounts withheld
from a payment to a shareholder under the backup withholding rules will be
allowed as a refund or credit against such shareholder's federal income tax,
provided that the required information is furnished to the IRS. Certain
shareholders (including corporations and tax exempt organizations) are not
subject to the backup withholding requirements.
TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING WITH RESPECT TO PAYMENT
TO CERTAIN SHAREHOLDERS OF THE PURCHASE PRICE OF SHARES PURCHASED PURSUANT TO
TENDER OFFER, EACH SUCH SHAREHOLDER MUST PROVIDE THE COMPANY WITH SUCH
SHAREHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH
SHAREHOLDER IS NOT SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY
COMPLETING THE SUBSTITUTE FORM W-9 IN THE LETTER OF TRANSMITTAL. IF BACKUP
WITHHOLDING APPLIES WITH RESPECT TO A SHAREHOLDER, THE COMPANY IS REQUIRED TO
WITHHOLD 31% OF ANY PAYMENTS MADE TO SUCH SHAREHOLDER. SEE INSTRUCTION 7 OF THE
LETTER OF TRANSMITTAL.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE TENDER OFFER, WITHOUT REFERENCE TO
THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY PARTICULAR SHAREHOLDER. EACH
SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES TO SUCH SHAREHOLDER OF PARTICIPATION IN THE TENDER
OFFER (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER
TAX LAWS).
APPROVAL BY THE BOARD OF DIRECTORS; NO SHAREHOLDER APPROVAL REQUIRED
The Board of Directors, in approving the Plan, has unanimously
determined that the Tender Offer is in the best interests of the Company. No
shareholder approval is required with respect to the Tender Offer.
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS MAKES ANY RECOMMENDATION
AS TO WHETHER ANY HOLDER OF EXISTING SHARES SHOULD TENDER SUCH SHARES IN THE
TENDER OFFER OR RETAIN SUCH SHARES.
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<PAGE> 63
MARKET AND DIVIDEND INFORMATION
MARKET INFORMATION
The Company's Existing Shares consist of common stock, par value $1.00
per share. COMPLETION OF THE REVERSE STOCK SPLIT IS EXPECTED TO RESULT IN THE
DEREGISTRATION OF THE NEW COMMON STOCK UNDER THE 1934 ACT. See "THE TENDER OFFER
- - - Investment Considerations."
The Company's Existing Shares are not actively traded and are 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 the Company, the price of the
Company's common stock during 1998 ranged between $38.00 to $46.20 and during
1997 from $34.00 to $38.00. The Company's 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 the Company's common stock.
During the first quarter of 1999 the price of the Company's common stock ranged
between $41.00 and $43.00. The most recent trade prior to the date of this
Proxy/Tender Offer Statement [April 26, 1999] was at $40.00 per share.
NUMBER OF EQUITY HOLDERS
As of March 31, 1999, there were approximately 1,221 common shareholders
of record. The Company's transfer agent is the Bank.
DIVIDENDS
The Company's historical practice has been to pay dividends in February
of each year. The Company paid cash dividends of $0.15 per share of common stock
on February 14, 1997 and on February 17, 1998. In view of the Company's
performance in 1998 and the weakened local economy, the Company did not declare
or pay a dividend in February 1999. The Company 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 the Company's 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.
ELECTION OF DIRECTORS
GENERAL
The persons nominated for election at the Annual Meeting are Messrs.
K.J. Luke, Warren K.K. Luke, Gordon J. Mau, Tan Tek Lum and Arthur S.K. Fong.
These persons will be nominated for election to serve until the 2000 Annual
Meeting of Shareholders and until their successors are elected and have
qualified. Other nominations may be made at the meeting.
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<PAGE> 64
INFORMATION WITH RESPECT TO DIRECTORS/NOMINEES
The following table sets forth certain information with respect to the
nominees for director, including their ages, their principal occupations during
the past five years, the year first elected a Director of the Company and the
number of shares and percent (if more than one percent) of the Company's common
stock beneficially owned by each on March 31, 1999. All of the nominees are
presently directors of the Company.
<TABLE>
<CAPTION>
Shares of
Name and Age of Nominee, Year First Company
Principal Occupation Elected Common Stock Percent
During Past Five Years Director of Beneficially of
and Family Relationship Company Owned Class
- - ------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
K.J. Luke, 84, 1986 37,201(1) 5.2%
Chairman of the Board of the Company;
Chief Executive Officer of the Company
until December 1998; Chairman of the
Board of the Bank; Father of Warren K.K.
Luke
Warren K.K. Luke, 54, 1986 291,286(2) 41.0%
Chief Executive Officer of the Company
since December 1998; President and
Director of the Company; Vice Chairman,
President and Chief Executive Officer of
the Bank; son of K.J. Luke
Gordon J. Mau, 52, 1990 66,184(3) 9.3%
Secretary and Director of the Company;
Assistant Secretary and Director of the
Bank; 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.
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<PAGE> 65
(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.
- - ---------------
While not subject to election by the shareholders of the Company, the
following, in addition to Messrs. K. J. Luke, Warren Luke, Gordon J. Mau, Tan
Tek Lum and Arthur S. K. Fong, are expected to be elected by the Company to
serve as directors of the Bank for the ensuing year:
William S. Chee
Lawrence Kunihisa
If any nominee should refuse or be unable to serve, the proxy will be
voted for such person as shall be designated by the Board of Directors to
replace any such nominee. The Board
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<PAGE> 66
of Directors presently has no knowledge that any of the nominees will refuse or
be unable to serve.
COMPENSATION OF DIRECTORS
All of the members of the Board of Directors of the Bank receive a fee
of $100 per month plus $250 for each meeting attended. Additionally, nonemployee
directors of the Discount (Loan), Examining and Executive committees of the
Board of Directors of the Bank receive a fee of $100 per month for each of the
committees on which they serve, and members of the Discount and CRA committees
also receive $100 per meeting attended. No separate directors fees are paid by
the Company.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors of the Company may establish certain standing
committees, including an Executive Committee and Audit Committee. Presently, the
Company has no standing committees. However, the Examining Committee of the
Bank, the Company's sole subsidiary, effectively serves as the Audit Committee
for the Company.
The Board of Directors of the Bank meets monthly while the Board of
Directors of the Company meets periodically. Accordingly, there were five
meetings of the Board of Directors of the Company during 1998. All of the
foregoing nominees attended at least 75% of the meetings of the Board during
1998, except for Mr. K. J. Luke, who was excused for health reasons.
Among the standing committees of the Bank are the Examining Committee,
Community Reinvestment Act Committee ("CRA") and the Executive Committee.
Neither the Company nor the Bank have nominating committees.
The Examining Committee of the Bank, which met four times during 1998,
determines on behalf of the Board whether the performance and examination of the
independent public accounting firm and the internal Bank Auditor are
satisfactory and adequate to meet the Board's supervisory responsibility. The
Committee reviews internal auditing procedures, the adequacy of internal
financial and accounting controls, the work of the external and internal
auditors and management's responses to their audit reports and recommendations.
The members of the Examining Committee are Messrs. Lawrence Kunihisa (Chairman),
Arthur S. K. Fong, Tan Tek Lum and Gordon J. Mau.
The Executive Committee of the Bank met five times during 1998. The
Committee acts from time to time between Board meetings, but its actions are
subject to Board approval. The members of the Committee are Messrs. Arthur S. K.
Fong (Chairman), Lawrence Kunihisa, K. J. Luke, Warren K. K. Luke and Tan Tek
Lum. The Compensation Committee is a subcommittee of the Executive Committee
which is composed of independent, nonemployee directors. The Committee reviews
the performance, salaries, and benefit plans of executive officers and
directors. The members of the Committee are Messrs. Arthur S. K. Fong
(Chairman), Lawrence Kunihisa and Tan Tek Lum.
The CRA Committee of the Bank met four times during 1998. The Committee
reviews the Bank's CRA policies and activities and monitors the Bank's contacts,
communications and
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<PAGE> 67
involvement in projects and organizations affecting low and moderate income
areas in the community. The Bank actively seeks interchange with organizations
and members of the community regarding ways in which the credit needs of these
areas can be better served. The long-term benefits of the Bank's lending policy
on loans to new entrepreneurs, small businesses, young professionals, and
low-income housing programs to help build a better and more profitable community
are part of its objectives. The members of the committee are Messrs. Tan Tek Lum
(Chairman), Lawrence Kunihisa, William S. Chee and Gordon J. Mau.
REQUIRED VOTE; RECOMMENDATION OF THE BOARD OF DIRECTORS
With respect to the election of directors, each shareholder will have
one vote for each Existing Share held, except that cumulative voting may be
required in the election of directors. Hawaii law requires use of cumulative
voting in the election of directors if, not less than 48 hours prior to the time
fixed for the Annual Meeting, any shareholder delivers a request therefor to an
office of the Company. Under cumulative voting, each shareholder present in
person or by proxy may cast a number of votes equal to the number of his or her
shares multiplied by the number of directors to be elected. The shareholder may
cast all of such votes for a single director or may distribute them among the
number to be voted for, or any two or more as the shareholder see fit. The
nominees receiving the highest number of votes on the foregoing basis, up to the
total number to be elected, will be the successful nominees. If cumulative
voting is requested, the holders of management proxies will vote the proxies
received by them cumulatively in such manner as is determined by them at that
time.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE NOMINEES FOR
ELECTION AS DIRECTORS.
EXECUTIVE COMPENSATION
COMPENSATION OF NAMED EXECUTIVE OFFICERS
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
<TABLE>
<CAPTION>
Annual Compensation
Other Annual
Name and Principal Position Year Salary (1) Bonus Compensation
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
K. J. Luke 1998 $124,685 $ -- $ --
Chairmen of the 1997 $156,393 $1,529 $ --
Board of the Company until 1996 $156,726 $1,525 $ --
December 1998; Chairman of
the Board of the Bank
</TABLE>
43
<PAGE> 68
<TABLE>
<CAPTION>
Annual Compensation
Other Annual
Name and Principal Position Year Salary (1) Bonus Compensation
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warren K. K. Luke 1998 $243,941 $ -- $3,300
Chief Executive Officer of 1997 $232,727 $2,283 $3,300
the Company since December 1996 $232,881 $2,276 $3,300
1998; President and Director
of the Company; Vice
Chairman, President and Chief
Executive Officer of the Bank
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 the
Company; Senior Executive
Vice President, Cashier,
Secretary and Chief Financial
Officer of the Bank
Denis C. H. Kam 1998 $104,500 $ -- $ --
Executive Vice President and 1997 $ 83,333 $ 833 $ --
Senior Loan Administrator of the
Bank since March 1997
</TABLE>
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.
The Company and the Bank have not granted any options or other forms of
long-term incentive awards and, consequently, no such options or awards are
outstanding.
PENSION PLAN
The Bank has a noncontributory pension plan. As of December 31, 1998,
the Bank's Employees' Retirement Plan ("Plan") had 254 participating employees
in the Plan. The Plan is funded annually. Bank 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
44
<PAGE> 69
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 the
Bank. 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 the Bank's contribution to the
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 the Bank
------------------------------------------------------------------------
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>
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 the Bank 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. 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.
The Bank has established a nonqualified and unfunded supplemental
executive retirement plan ("SERP"). The SERP is intended to supplement payments
due to participants upon retirement under the Bank'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 ON EXECUTIVE COMPENSATION
The Compensation Committee administers the compensation program for
executive officers of the Company and the Bank. The objective of the program is
to attract and retain qualified executives and to reward them for their
achievements and contributions to the Company and the Bank.
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<PAGE> 70
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, the Bank'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 the Company's 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 the Company, and the founder
and Chairman of the Board of the Bank. He has guided the Bank 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, President and Director of operations of the Company and Vice Chairman
of the Board, President and Chief Executive Officer of the Bank. He manages the
day-to-day operations of the Company and the Bank and leads both companies in
strategic planning. Warren K. K. Luke has significantly enhanced the Bank'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 the Bank's ranking in
the survey in terms of asset size. Except for the Bank, 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
The Company's 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.
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<PAGE> 71
[FIVE YEAR CUMULATIVE RETURN COMPARISON CHART]
* Assumes $100.00 invested on December 31, 1993 in the Company's 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.
Since the original compilation, certain of these companies have become listed.
Total return assumes reinvestment of dividends.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is a subcommittee of the Executive Committee
of the Board of Directors of the Bank. The Committee consists of three
independent, outside Bank 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 the Company or the Bank. 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS/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 the Company's common stock as of
March 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 the Company's common stock as of March 31,
1999. The Company knows of no other persons who, as of March 31, 1999, owned
beneficially, directly or indirectly, more than five percent of the
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<PAGE> 72
Company's outstanding voting securities and knows of no voting trust, pledge, or
other similar agreement affecting any of the Company's outstanding voting
securities.
<TABLE>
<CAPTION>
%
Class
Relationship with the Company Record Beneficially Beneficially
Name or the Bank Ownership Owned Owned
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
K. J. Luke Chief Executive Officer until 1,308 37,201(1) 5.2%
December 1998 and Chairman of
the Board of the Company;
Chairman of the Board of the
Bank
Warren K. K. Luke Chief Executive Officer since 46,967 291,286(2) 41.0%
December 1998 and President and
Director of the Company; Vice
Chairman, President and Chief
Executive Officer of the Bank
Loretta H. W. Yajima Principal Shareholder, daughter 30,792 88,210(3) 12.4%
of K. J. Luke and sister of
Warren K. K. Luke
Gordon J. Mau Secretary and Director of the 14,201 66,184(4) 9.3%
Company; Assistant Secretary
and Director of the Bank
Sharlene K. S. Mau Principal Shareholder, daughter 28,058 98,859(5) 13.9%
of K. J. Luke and sister of
Warren K. K. Luke
Janice M. T. Loo Principal Shareholder, daughter 37,027 81,401(6) 11.4%
of K. J. Luke and sister of
Warren K. K. Luke
Jeanette Lum Chun Principal Shareholder 118(7) 183,198(7) 25.8%
Herbert Y. H. Chinn Principal Shareholder 994(8) 48,814(8) 6.9%
Tan Tek Lum Principal Shareholder and 200 52,580(9) 7.4%
Director of the Company and the
Bank
</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.
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<PAGE> 73
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 off (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 held by Mrs. Yajima's husband, Tyler Yajima, as
trustee of the Tyler N. Yajima Trust dated 12/15/95, 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.
(6) Includes 11,699 shares owned by Mrs. Loo's husband, Wilson Loo, over
which Mrs. Loo exercises no voting or investment power, and 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.
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<PAGE> 74
(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
The following table sets forth information as of March 31, 1999 with
respect to named executive officers who are not directors or nominees for
directors.
NAMED EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
SHARES OF THE COMPANY'S % OF CLASS
COMMON STOCK BENEFICIALLY BENEFICIALLY
NAME AND AGE POSITION OWNED OWNED
------------ -------- ------------------------- ------------
<S> <C> <C> <C>
Ernest T. Murata, 65 Vice President, Treasurer, 400 *
Assistant Secretary and
Chief Financial Officer of
the Company; Senior
Executive Vice President,
Cashier, Secretary and
Chief Financial Officer of
the Bank
Denis C. H. Kam, 62 Executive Vice President 2 *
and Senior Loan
Administrator of the Bank;
prior to 1997, served as
Senior Vice President in
various administrative and
managerial capacities at
Bank of Hawaii.
All directors and executive officers 459,030 64.6%
as a group (7 persons)
</TABLE>
* Denotes ownership of less than 1%
TRANSACTIONS IN COMMON STOCK
PUBLIC OFFERINGS IN PAST THREE YEARS
The Company has not made an underwritten public offering of its common
stock during the past three years that was registered under the Securities Act
of 1933, or exempt from such registration under Regulation A promulgated under
such Act.
PURCHASES BY COMPANY, OFFICERS, DIRECTORS OR AFFILIATES IN PAST TWO YEARS
Mr. Warren K. K. Luke, Chairman of the Board of the Company, has
purchased Company common stock in the following amounts since January 1, 1997:
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<PAGE> 75
<TABLE>
<CAPTION>
RANGE OF AVERAGE PURCHASE
1997 AMOUNT PRICES PAID PRICE
---- ------ ----------- ----------------
<S> <C> <C> <C>
First quarter 90 $34.75 $34.75
Second quarter 419 $34.75 - $35.75 $35.09
Third quarter 133 $36.00 $36.00
Fourth quarter 155 $36.00 $36.00
1998
First quarter 231 $36.00 $36.00
Second quarter 118 $36.00 $36.00
Third quarter 249 $44.00 $44.00
Fourth quarter 41 $44.00 $44.00
</TABLE>
Additionally, Mrs. Beatrice S. Y. Luke, the wife of Mr. K. J. Luke,
purchased 7,865 shares on July 17, 1998, at $46.00 per share.
CERTAIN RELATIONSHIPS AND 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 the Company and
the Bank were customers of the Bank. It is anticipated that such directors,
officers, principal shareholders and their associates will continue to be
customers of the Bank in the future. All transactions between the Bank 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.
The Bank 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.
During 1998, the Bank 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 the Bank and a
second for storage space for the Bank. 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 the Bank's need
51
<PAGE> 76
for less storage space, the Bank 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 the Company and the Bank believe that the
lease terms discussed above are as favorable to the Bank as those which could
have been obtainable in transactions with persons or companies not affiliated
with the Company or the Bank.
The Bank utilizes the firm of Loyalty Insurance Agency, Ltd. In placing
the Bank's insurance, which includes a variety of standard Bank insurance, such
as, fidelity, liability, fire, etc. Mr. Warren K. K. Luke, a director and
officer of the Company and the Bank, 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 the Bank 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, the Bank paid an
aggregate premium of $291,455 to such firm. The Bank plans to continue to
utilize the agency during 1999.
COMPLIANCE WITH SECTION 16(a) REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended,
("Section 16(a)") requires that all executive officers and directors of the
Company and the Bank and all persons who beneficially own more than 10% of the
Company's common stock file reports with the Securities and Exchange Commission
with respect to beneficial ownership of the Company's securities. The Company
has adopted procedures to assist its directors and executive officers in
complying with the Section 16(a) filings.
Based solely upon the Company's 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, the Company believes
that all reporting persons made all filings required by Section 16(a) on a
timely basis.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The firm of PricewaterhouseCoopers LLP (formerly Coopers and Lybrand
L.L.P.) performed the audit of the consolidated financial statements for the
Company and the Bank for the year ended December 31, 1998. The Board of
Directors has appointed PricewaterhouseCoopers LLP as independent auditors of
the Company and the Bank for the current year. Shareholders are not required to
take action on this selection. Representatives of PricewaterhouseCoopers LLP
will be present at the Annual Meeting. They will be given the opportunity to
present a statement, if they so desire, and will be available to respond to
appropriate questions.
52
<PAGE> 77
SHAREHOLDER PROPOSALS
The 2000 Annual Meeting of Shareholders will be held on or about April
18, 2000. Therefore, proposals of shareholders intended to be presented at the
2000 Annual Meeting must be received by the Secretary of the Board of Directors
before November 12, 1999 for inclusion in the 2000 Proxy Statement and form of
Proxy. In addition, if the Company receives notice of a shareholder proposal
after February 3, 2000, the persons named as the proxies in such proxy statement
and form of proxy will have discretionary authority to vote on such shareholder
proposal. All notices of proposals should be directed to the Secretary of the
Board of Directors, Hawaii National Bancshares, Inc., P.O. Box 3740, 45 North
King Street, Honolulu, Hawaii 96817.
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that the Company files at the SEC's
public reference room at 450 Fifth Street, N. W., Washington, D. C. 20549. You
can request copies of these documents, upon payment of a duplicating fee, by
writing the SEC. Please call the SEC at 1-800-SEC-0330 for further information
on the operation of the public reference rooms. The Company's SEC filings are
also available to the public on the SEC Internet site (http://www.sec.gov).
The Company has filed a Schedule 13E-3 with the SEC in connection with
the proposed going-private transaction and a Schedule 13E-4 with the SEC in
connection with the Tender Offer. This Proxy/Tender Offer Statement does not
contain all of the information set forth in the Schedule 13E-3 and the Schedule
13E-4, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The Schedule 13E-3, including exhibits, and the Schedule
13E-4, including exhibits, and other filings made with the SEC as described
above, may be inspected or obtained by contacting the SEC as described above.
INFORMATION INCORPORATED BY REFERENCE
The consolidated financial statements of the Company and the report of
its independent accountants thereon, together with supplementary financial data,
management's discussion and analysis and analysis of financial condition and
results of operations, and quantitative and qualitative disclosures about market
risk, are included in the Company's Annual Report to Shareholders for the fiscal
year ended December 31, 1998 and are incorporated by reference in this Proxy
Statement. A copy of such Annual Report to Shareholders is enclosed.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS REQUIRED TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE MADE AVAILABLE WITHOUT
CHARGE TO EACH SHAREHOLDER UPON REQUEST TO:
53
<PAGE> 78
Mr. Ernest T. Murata
Vice President, Treasurer, Assistant Secretary and
Chief Financial Officer
Hawaii National Bancshares, Inc.
P. O. Box 3740
Honolulu, Hawaii 96812
Phone: (808) 528-7711
OTHER BUSINESS
The Board of Directors knows of no other matters to be brought before
the Annual Meeting. However, if other matters should properly come before the
meeting, it is the intention of the persons named in the Proxy to vote the Proxy
in accordance with the recommendations of management on such matters.
By Order of the Board of Directors
Gordon J. Mau
Secretary
Honolulu, Hawaii
June ______, 1999
Appendix A - Hawaii Dissenters' Rights Statue
Appendix B - Proposed Amendment to Company's Articles of Incorporation
Appendix C - NMS Fairness Opinion
Appendix D - Quarterly Report on Form 10-Q for the Three Months ended March 31,
1999
54
<PAGE> 79
APPENDIX A
HAWAII BUSINESS CORPORATION ACT
HAWAII REVISED STATUTES CH. 415
SECTION 415-80. RIGHT OF SHAREHOLDERS TO DISSENT.
(a) Any shareholder of a corporation shall have the right to dissent
from, and to obtain payment for the shareholder's shares in the event of, any of
the following corporate actions:
(1) Any plan of merger or consolidation to which the corporation
is a party, except as provided in subsection (c);
(2) Any sale or exchange of all or substantially all of the
property and assets of the corporation not made in the usual and regular course
of its business, including a sale in dissolution, but not including a sale
pursuant to an order of a court having jurisdiction in the premises or a sale
for cash on terms requiring that all or substantially all of the net proceeds of
sale be distributed to the shareholders in accordance with their respective
interests within one year after the date of sale;
(3) Any plan of exchange to which the corporation is a party as
the corporation the shares of which are to be acquired;
(4) Any amendment of the articles of incorporation which
materially and adversely affects the rights appurtenant to the shares of the
dissenting shareholder in that it:
(A) Alters or abolishes a preferential right of the
shares;
(B) Creates, alters, or abolishes a right in respect of
the redemption of the shares, including a provision respecting a sinking fund
for the redemption or repurchase of the shares;
(C) Alters or abolishes a preemptive right of the holder
of the shares to acquire shares or other securities; or
(D) Excludes or limits the right of the holder of the
shares to vote on any matter, or to cumulate the holder's votes, except as the
right may be limited by dilution through the issuance of shares or other
securities with similar voting rights; or
(5) Any other corporate action taken pursuant to a shareholder
vote with respect to which the articles of incorporation, the bylaws, or a
resolution of the board of directors directs that dissenting shareholders shall
have a right to obtain payment for their shares.
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(b) (1) A record holder of shares may assert dissenters' rights as
to less than all of the shares registered in the record holder's name only if
the record holder dissents with respect to all the shares beneficially owned by
any one person, and discloses the name and address of the person or persons on
whose behalf the record holder dissents. In that event, the record holder's
rights shall be determined as if the shares as to which the record holder has
dissented and the record holder's other shares were registered in the names of
different shareholders.
(2) A beneficial owner of shares who is not the record holder
may assert dissenters' rights with respect to shares held on the beneficial
owner's behalf, and shall be treated as a dissenting shareholder under the terms
of this section and section 415-31 if the beneficial owner submits to the
corporation at the time of or before the assertion of these rights a written
consent of the record holder.
(c) The right to obtain payment under this section shall not apply
to the shareholders of the surviving corporation in a merger if a vote of the
shareholders of the corporation is not necessary to authorize the merger.
(d) A shareholder of a corporation who has a right under this
section to obtain payment for the shareholder's shares shall have no right at
law or in equity to attack the validity of the corporate action that gives rise
to the shareholder's right to obtain payment, nor to have the action set aside
or rescinded, except when the corporate action is unlawful or fraudulent with
regard to the complaining shareholder or to the corporation.
SECTION 415-81. RIGHTS OF DISSENTING SHAREHOLDERS.
(a) As used in this section:
"Dissenter" means a shareholder or beneficial owner who is entitled to and does
assert dissenters' rights under section 415-80, and who has performed every act
required up to the time involved for the assertion of such rights.
"Corporation" means the issuer of the shares held by the dissenter before the
corporate action, or the successor by merger or consolidation of that issuer.
"Fair value" of shares means their value immediately before the effectuation of
the corporate action to which the dissenter objects, excluding any appreciation
or depreciation in anticipation of the corporate action unless the exclusion
would be inequitable.
"Interest" means interest from the effective date of the corporate action until
the date of payment, at the average rate currently paid by the corporation on
its principal bank loans, or, if none, at such rate as is fair and equitable
under all of the circumstances.
(b) If a proposed corporate action which would give rise to
dissenters' rights under section 415-80(a) is submitted to a vote at a meeting
of shareholders, the notice of meeting shall notify all shareholders that they
have or may have a right to dissent and obtain payment for their shares by
complying with the terms of this section, and shall be accompanied by a copy of
sections 415-80 and 415-81 of this chapter.
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(c) If the proposed corporate action is submitted to a vote at a
meeting of shareholders, any shareholder who wishes to dissent and obtain
payment for the shareholder's shares must file with the corporation, prior to
the vote, a written notice of intention to demand that the shareholder be paid
fair compensation for the shareholder's shares if the proposed action is
effectuated and shall refrain from voting the shareholder's shares in approval
of the action. A shareholder who fails in either respect shall acquire no right
to payment for the shareholder's shares under this section or section 415-80.
(d) If the proposed corporate action is approved by the required
vote at a meeting of shareholders, the corporation shall mail a further notice
to all shareholders who gave due notice of intention to demand payment and who
refrained from voting in favor of the proposed action. If the proposed corporate
action is to be taken without a vote of shareholders, the corporation shall send
to all shareholders who are entitled to dissent and demand payment for their
shares a notice of the adoption of the plan of corporate action. The notice
shall: (1) state where and when a demand for payment must be sent and
certificates of certificated shares must be deposited in order to obtain
payment; (2) inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is received; (3)
supply a form for demanding payment which includes a request for certification
of the date on which the shareholder, or the person on whose behalf the
shareholder dissents, acquired beneficial ownership of the shares; and (4) be
accompanied by a copy of sections 415-80 and 415-81 of this chapter. The time
set for the demand and deposit shall not be less than thirty days from the
mailing of the notice.
(e) A shareholder who fails to demand payment, or fails (in the case
of certified shares) to deposit certificates, as required by a notice pursuant
to subsection (d) shall have no right under this section or section 415-80 to
receive payment for the shareholder's shares. If the shares are not represented
by certificates, the corporation may restrict their transfer from the time of
receipt of demand for payment until effectuation of the proposed corporate
action, or the release of restrictions under the terms of subsection (f). The
dissenter shall retain all other rights of a shareholder until these rights are
modified by effectuation of the proposed corporate action.
(f) (1) Within sixty days after the date set for demanding payment
and depositing certificates, if the corporation has not effectuated the proposed
corporate action and remitted payment for shares pursuant to paragraph (3), it
shall return any certificates that have been deposited, and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment.
(2) When uncertificated shares have been released from transfer
restrictions, and deposited certificates have been returned, the corporation may
at any later time send a new notice conforming to the requirements of subsection
(d), with like effect.
(3) Immediately upon effectuation of the proposed corporate
action, or upon receipt of demand for payment if the corporate action has
already been effectuated, the corporation shall remit to dissenters who have
made demand and (if their shares are certificated) have deposited their
certificates the amount which the corporation estimates to be the fair value of
the shares, with interest if any has accrued. The remittance shall be
accompanied by:
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(A) The corporation's closing balance sheet and
statement of income for a fiscal year ending not more than sixteen months before
the date of remittance, together with the latest available interim financial
statements;
(B) A statement of the corporation's estimate of fair
value of the shares; and
(C) A notice of the dissenter's right to demand
supplemental payment, accompanied by a copy of sections 415-80 and 415-81 of
this chapter.
(g) (1) If the corporation fails to remit as required by subsection
(f), or if the dissenter believes that the amount remitted is less than the fair
value of the dissenter's shares, or that the interest is not correctly
determined, the dissenter may send the corporation the dissenter's own estimate
of the value of the shares or of the interest, and demand payment of the
deficiency.
(2) If the dissenter does not file such an estimate within
thirty days after the corporation's mailing of its remittance, the dissenter
shall be entitled to no more than the amount remitted.
(h) (1) Not more than sixty days after receiving a demand for
payment pursuant to subsection (g), if any such demands for payment remain
unsettled, the corporation shall file in an appropriate court a petition
requesting that the fair value of the shares and interest thereon be determined
by the court.
(2) An appropriate court shall be a court of competent
jurisdiction in the county of this State where the principal office of the
corporation is located. If, in the case of a merger or consolidation or share
exchange, the corporation is a foreign corporation without a registered office
in this State, the petition shall be filed in the county where the principal
office of the domestic corporation was last located.
(3) All dissenters, wherever residing, whose demands have not
been settled shall be made parties to the proceeding as in an action against
their shares. A copy of the petition shall be served on each dissenter; if a
dissenter is a nonresident, the copy may be served on the dissenter by
registered or certified mail or by publication as provided by law.
(4) The jurisdiction of the court shall be plenary and
exclusive. The court may appoint one or more persons as appraisers to receive
evidence and recommend a decision on the question of fair value. The appraisers
shall have such power and authority as shall be specified in the order of their
appointment or in any amendment thereof. The dissenters shall be entitled to
discovery in the same manner as parties in other civil suits.
(5) All dissenters who are made parties shall be entitled to
judgment for the amount by which the fair value of their shares is found to
exceed the amount previously remitted, with interest.
(6) If the corporation fails to file a petition as provided in
paragraph (1) of this subsection, each dissenter who made a demand and who has
not already settled the dissenter's
A-4
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claim against the corporation shall be paid by the corporation the amount
demanded by the dissenter, with interest, and may sue therefor in an appropriate
court.
(i) (1) The costs and expenses of any proceeding under subsection
(h), including the reasonable compensation and expenses of appraisers appointed
by the court, shall be determined by the court and assessed against the
corporation, except that any part of the costs and expenses may be apportioned
and assessed as the court may deem equitable against all or some of the
dissenters who are parties and whose action in demanding supplemental payment
the court finds to be arbitrary, vexatious, or not in good faith.
(2) Fees and expenses of counsel and of experts for the
respective parties may be assessed as the court may deem equitable against the
corporation and in favor of any or all dissenters if the corporation failed to
comply substantially with the requirements of this section, and may be assessed
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted arbitrarily, vexatiously, or not in good faith in respect to the rights
provided by this section and section 415-80.
(3) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
and should not be assessed against the corporation, it may award to these
counsel reasonable fees to be paid out of the amounts awarded to the dissenters
who were benefited.
(j) (1) Notwithstanding the foregoing provisions of this section,
the corporation may elect to withhold the remittance required by subsection (f)
from any dissenter with respect to shares of which the dissenter (or the person
on whose behalf the dissenter acts) was not the beneficial owner on the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action. With respect to such shares, the corporation shall,
upon effectuating the corporate action, state to each dissenter its estimate of
the fair value of the shares, state the rate of interest to be used (explaining
the basis thereof), and offer to pay the resulting amounts on receiving the
dissenter's agreement to accept them in full satisfaction.
(2) If the dissenter believes that the amount offered is less
than the fair value of the shares and interest determined according to this
section, the dissenter may within thirty days after the date of mailing of the
corporation's offer, mail to the corporation the dissenter's own estimate of
fair value and interest, and demand their payment. If the dissenter fails to do
so, the dissenter shall be entitled to no more than the corporation's offer.
(3) If the dissenter makes a demand as provided in paragraph
(2), the provisions of subsections (h) and (i) shall apply to further
proceedings on the dissenter's demand.
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APPENDIX B
PROPOSED AMENDMENT
TO
HAWAII NATIONAL BANCSHARES, INC.
ARTICLES OF INCORPORATION
Article 4 of the Company's Articles of Incorporation is proposed to be
amended to read as follows:
ARTICLE 4
The aggregate number of shares which the Corporation
shall be authorized to issue is 50,000 all of which shall be
common stock with a par value of $200 per share. On the
effective date of this Article 4, every outstanding share of the
Corporation is consolidated and converted into 1/200 (0.005) of
a share. Fractional shares of common stock may not be issued,
and the Corporation shall pay in cash to holders of fractional
shares the fair value of such fractional shares.
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<PAGE> 85
APPENDIX C
OPINION OF NATIONSBANC MONTGOMERY SECURITIES LLC
April 27, 1999
Board of Directors
Hawaii National Bancshares, Inc.
45 N. King Street
Honolulu, Hawaii 96812
Gentlemen:
We understand that the Board of Directors of Hawaii National Bancshares,
Inc., a Hawaii corporation ("HNB"), has adopted a Resolution dated April 27,
1999 (the "Board Resolution"), pursuant to which HNB will, subject to the
receipt of necessary shareholder approval: (i) effect a 1 for 200 reverse stock
split of its common stock by means of an amendment to HNB's certificate of
incorporation (the "Reverse Split"), with cash to be issued in lieu of
fractional shares at a value of $45.00 per pre-split share, (ii) offer to
purchase all shares of HNB common stock held by its shareholders for $45.00 per
pre-split share (the "Tender Offer"), and (iii) fund both the Reverse Split and
Tender Offer through a private placement of newly issued shares of HNB common
stock at a purchase price of $45.00 per pre-split share to certain members of
the Luke family (the "Private Placement"). The Reverse Split, Tender Offer and
Private Placement are referred to herein collectively as the "Transaction". The
terms and conditions of the Transaction are set forth in more detail in the
Proxy/Tender Offer Statement and the Board Resolution.
You have asked for our opinion as investment bankers as to whether the
per share price to be received by shareholders of HNB in the Reverse Split and
Tender Offer is fair to such shareholders from a financial point of view, as of
the date hereof. As you are aware, we were not retained to nor did we advise HNB
with respect to the terms or structure of the Transaction or with respect to
alternatives to the Transaction or HNB's underlying decision to proceed with or
effect the Transaction.
In connection with our opinion, we have, among other things: (i)
reviewed certain publicly available financial and other data with respect to
HNB, including the consolidated financial statements for recent years and
subsidiary bank financial statements for the quarter ended March 31, 1999 and
certain other relevant financial and operating data relating to HNB made
available to us from published sources and from the internal records of HNB;
(ii) reviewed the financial terms and conditions of the Reverse Split and the
Tender Offer; (iii) reviewed certain publicly available information concerning
the trading of, and the trading market for, HNB Common Stock; (iv) compared HNB
from a financial point of view with certain other companies in the banking
industry which we
C-1
<PAGE> 86
deemed to be relevant; (v) considered the financial terms, to the extent
publicly available, of selected recent business combinations of companies in the
banking industry and selected "going-private" transactions involving
self-tenders, which we deemed to be comparable, in whole or in part, to the
Reverse Split and the Tender Offer; (vi) reviewed and discussed with
representatives of the management of HNB certain information of a business and
financial nature regarding HNB, furnished to us by them, including financial
forecasts and related assumptions of HNB; (vii) made inquiries regarding and
discussed the Reverse Split and the Tender Offer and other matters related
thereto with HNB's counsel; and (viii) performed such other analyses and
examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation
independently to verify the foregoing information and have relied on its being
accurate and complete in all material respects. With respect to the financial
forecasts for HNB provided to us by its management, upon your advice and with
your consent we have assumed for purposes of our opinion that the forecasts,
including management's assessment of the prospects for earnings growth
subsequent to 2001, have been reasonably prepared on bases reflecting the best
available estimates and judgments of their respective management at the time of
preparation as to the future financial performance of HNB and that they provide
a reasonable basis upon which we can form our opinion. We have also assumed that
there have been no material changes in HNB's assets, financial condition,
results of operations, business or prospects since the respective dates of HNB's
last financial statements made available to us. We have relied on advice of
counsel and independent accountants to HNB as to all legal and financial
reporting matters with respect to HNB, the Transaction and the Board Resolution.
We have assumed that the Transaction will be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, and all other
applicable federal and state statutes, rules and regulations. In addition, we
have not assumed responsibility for reviewing any individual credit files, or
making an independent evaluation, appraisal or physical inspection of any of the
assets or liabilities (contingent or otherwise) of HNB, nor have we been
furnished with any such appraisals. We are not experts in the evaluation of loan
portfolios for purposes of assessing the adequacy of the allowances for losses
with respect thereto and assumed, with HNB's consent, that such allowances were
in the aggregate adequate to cover such losses. Finally, our opinion is based on
economic, monetary and market and other conditions as in effect on, and the
information made available to us as of, the date hereof.
We have further assumed with your consent that the Reverse Split and the
Tender Offer will be consummated in accordance with the terms described in the
Board Resolution, without any further amendments thereto, and without waiver by
HNB of any of the conditions to its obligations thereunder.
We will receive a fee for our services to HNB in connection with the
rendering of this opinion.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the price per pre-split share to be received by
shareholders in the Reverse Split and Tender Offer is fair to such shareholders
from a financial point of view, as of the date hereof.
We are not expressing any opinion regarding the price at which HNB
common stock may trade at any future time.
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<PAGE> 87
This opinion is directed to the Board of Directors of HNB in its
consideration of the Reverse Split and the Tender Offer and is not a
recommendation to any shareholder as to whether such shareholders should tender
shares of HNB common stock in the Tender Offer or as to how such shareholder
should vote with respect to the Reverse Split or any other aspect of the
Transaction. Further, this opinion addresses only the financial fairness of the
per share price to be received by shareholders in the Reverse Split and the
Tender Offer and does not address the relative merits of any aspect of the
Transaction and any alternatives to the Transaction, HNB's underlying decision
to proceed with or effect the Transaction, or any other aspect of the
Transaction. This opinion may not be used or referred to by HNB, or quoted or
disclosed to any person in any manner, without our prior written consent, which
consent is hereby given to the inclusion of this opinion in the Proxy/Tender
Offer Statement filed with the Securities and Exchange Commission in connection
with the Transaction.
Very truly yours,
/s/
NATIONSBANC MONTGOMERY SECURITIES LLC
C-3
<PAGE> 88
APPENDIX D
HAWAII NATIONAL BANCSHARES, INC.
QUARTERLY REPORT ON
FORM 10-Q
FOR THE
THREE MONTHS ENDED MARCH 31, 1999
D-1
<PAGE> 89
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to __________
Commission File Number 0-15508
HAWAII NATIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
HAWAII 99-0250218
(State of incorporation) (IRS Employer Identification No.)
45 NORTH KING STREET, HONOLULU, HAWAII 96817
(Address of principal executive offices) (Zip Code)
(808) 528-7711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest date is:
Common Stock, $1 Par Value; outstanding at April 30, 1999 - 711,000 shares
-1-
<PAGE> 90
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999,
December 31, 1998 and March 31, 1998 (Unaudited).................3
Consolidated Statements of Operations - Three months
ended March 31, 1999 and 1998 (Unaudited)........................4
Consolidated Statements of Cash Flows - Three months
ended March 31, 1999 and 1998 (Unaudited)........................5
Notes to Consolidated Financial Statements (Unaudited)..............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................15
SIGNATURES ....................................................................16
EXHIBIT INDEX .................................................................17
</TABLE>
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<PAGE> 91
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 1999, December 31, 1998 and March 31, 1998
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31 MARCH 31
1999 1998 1998
--------- ----------- ---------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 15,550 $ 16,400 $ 16,593
Federal funds sold 27,500 16,000 4,750
--------- --------- ---------
Cash and cash equivalents 43,050 32,400 21,343
Investment securities-
Held-to-maturity (fair value of $44,958,
$45,108 and $44,525 as of
March 31, 1999, December 31,
1998 and March 31, 1998,
respectively) 44,976 44,980 44,484
Available-for-sale 1,760 1,760 1,760
Trading 117 115 --
Loans and leases, net of allowance for
loan and lease losses of $3,355, $3,296,
and $3,301 as of March 31, 1999,
December 31, 1998 and March 31, 1998,
respectively (Note 2) 206,863 220,551 219,331
Premises and equipment 4,765 4,906 3,667
Other assets 6,746 7,321 7,052
--------- --------- ---------
Total assets $ 308,277 $ 312,033 $ 297,637
========= ========= =========
LIABILITIES:
Deposits -
Demand $ 98,565 $ 100,639 $ 89,764
Savings 91,795 94,006 85,512
Time 81,934 81,256 73,689
--------- --------- ---------
Total deposits 272,294 275,901 248,965
Short-term borrowings 5,672 5,516 17,981
Other liabilities 2,882 3,327 2,466
--------- --------- ---------
Total liabilities 280,848 284,744 269,412
SHAREHOLDERS' EQUITY (Note 3)
Common stock, par value $1 per share;
Authorized - 10,000,000 shares
Issued and outstanding - 711,000 shares 711 711 711
Capital in excess of par value 12,148 12,148 12,148
Retained earnings 15,170 15,030 15,366
Accumulated other comprehensive loss (600) (600) --
--------- --------- ---------
Total shareholders' equity 27,429 27,289 28,225
--------- --------- ---------
Total liabilities and shareholders' equity $ 308,277 $ 312,033 $ 297,637
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 92
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the three months ended March 31, 1999 and 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 4,883 $ 5,019
Interest on direct financing leases 25 30
Interest on Federal funds sold 220 16
Interest on investment securities 666 707
--------- ---------
Total interest income 5,794 5,772
--------- ---------
INTEREST EXPENSE:
Deposits 1,504 1,566
Federal funds purchased -- 6
Short-term borrowings 80 197
--------- ---------
Total interest expense 1,584 1,769
--------- ---------
Net interest income 4,210 4,003
PROVISION FOR LOAN AND LEASE LOSSES (Note 2) 300 270
--------- ---------
Net interest income after provision
for loan and lease losses 3,910 3,733
--------- ---------
OTHER INCOME:
Service charges on deposit accounts 308 272
Other service charges, collection and
exchange charges, commissions and fees 619 600
--------- ---------
927 872
--------- ---------
OTHER EXPENSES:
Salaries and employee benefits 2,389 2,423
Occupancy expense of bank premises 1,209 1,217
Other operating expenses 1,053 974
--------- ---------
4,651 4,614
--------- ---------
Income (loss) before income taxes 186 (9)
INCOME TAX PROVISION 46 1
--------- ---------
Net income (loss) $ 140 $ (10)
========= =========
PER SHARE DATA:
Earnings (basic and diluted) $ 0.20 $ (0.01)
Cash dividend $ -- $ 0.15
Average shares outstanding 711,000 711,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE> 93
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 1999 and 1998
(in thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees received $ 5,794 $ 5,637
Interest paid (1,726) (1,683)
Service charges, collection and exchange charges, commission and fees received 927 872
Cash paid to suppliers and employees (4,358) (4,243)
-------- --------
Net cash provided by operating activities 637 583
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities held-to-maturity 9,024 10,993
Purchase of investment securities held-to-maturity (9,020) (7,996)
Net decrease (increase) in loans and leases made to customers 13,313 (4,229)
Proceeds from sale of loans 199 500
Capital expenditures (53) (256)
-------- --------
Net cash provided by (used in) investing activities 13,463 (988)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits and savings accounts (4,285) (13,261)
Net increase in time deposits 679 3,506
Net increase in short-term borrowings 156 12,981
Net decrease in federal funds purchased -- (4,000)
Dividends paid -- (107)
-------- --------
Net cash used in financing activities (3,450) (881)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,650 (1,286)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,400 22,629
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,050 $ 21,343
======== ========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net income (loss) $ 140 $ (10)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation on bank premises and equipment 194 128
Provision for loan and lease losses 300 270
Amortization of deferred loan fees (124) (51)
Changes in -
Interest receivable 127 (84)
Interest payable (142) 86
Taxes payable 46 1
Other assets 446 489
Other liabilities (350) (246)
-------- --------
Net cash provided by operating activities $ 637 $ 583
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
<PAGE> 94
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results anticipated for the year ended
December 31, 1999. For additional information, refer to the consolidated
financial statements and footnotes thereto included in Hawaii National
Bancshares, Inc.'s annual report on Form 10-K for the year ended December 31,
1998.
2. ALLOWANCE FOR LOAN AND LEASE LOSSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------------
(IN THOUSANDS) 1999 1998
------- -------
<S> <C> <C>
Balance, beginning of period $ 3,296 $ 3,198
Provision charged to operations 300 270
Loans and leases charged-off (253) (178)
Recoveries on loans and leases
previously charged-off 12 11
------- -------
Net charge-offs (241) (167)
------- -------
Balance, end of period $ 3,355 $ 3,301
======= =======
</TABLE>
The following table presents information on the recorded investment in impaired
loans for the dates indicated:
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31 MARCH 31
(in thousands) 1999 1998 1998
------ ------ ------
<S> <C> <C> <C>
Impaired loans for which there is a related allowance $1,622 $1,835 $1,604
Impaired loans for which there is no related allowance 1,820 1,768 2,243
------ ------ ------
Total recorded investment $3,442 $3,603 $3,847
====== ====== ======
</TABLE>
The average recorded investment in impaired loans was $3,450,000 for the three
months ended March 31, 1999, $3,647,000 for the year ended December 31, 1998 and
$3,677,000 for the three months ended March 31, 1998. Interest income on
impaired loans is recognized in accordance with the Company's nonaccrual loan
policy. There was no interest income recognized on impaired loans in any or the
previously mentioned periods.
3. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------------
(IN THOUSANDS) 1999 1998
-------- --------
<S> <C> <C>
Balance, beginning of period $ 27,289 $ 28,342
Net income (loss) 140 (10)
Cash dividends -- (107)
-------- --------
Balance, end of period $ 27,429 $ 28,225
======== ========
</TABLE>
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<PAGE> 95
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Hawaii National Bancshares, Inc. ("Company") is a bank holding company
whose wholly-owned subsidiary is Hawaii National Bank ("HNB" or the "Bank"), a
national banking association. The Company derives substantially all of its
income from the operations of the Bank and the Bank's assets constitute the
majority of the Company's assets. Therefore, the discussion that follows relates
mainly to the activities of the Bank.
FORWARD LOOKING STATEMENTS
In this report, the Company has included certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. This statement is for the express purpose of availing the Company of
the protections of such safe harbor with respect to all "forward looking
statements." The Company has used "forward looking statements" to describe
future plans and strategies, including expectations of the Company's future
financial results. Management's ability to predict results or the effect of
future plans and strategy is inherently uncertain. Factors that could affect
results include interest rate trends, the general economic climate in the state
of Hawaii and the nation as a whole, loan delinquency rates, the local real
estate market, Year 2000 issues, and changes in federal and state regulation.
These factors should be considered in evaluating the "forward looking
statements" and undue reliance should not be placed on such statements.
LOCAL ECONOMY
Hawaii's economy remains in a prolonged economic slump which began in
1990. In March 1999, both Moodys and Standard and Poors downgraded the City and
County of Honolulu's bonds by one notch to Aa3 and AA-, respectively. Hawaii's
unemployment rate was 5.7% in March 1999, a slight improvement from 6.1% a year
ago and 5.8% in the prior month. Job losses, however, continued with the number
of jobs statewide declining to 531,500 in March 1999 from 532,900 a year
earlier. In the real estate area, it continued to be a buyer's market. The
median price for a single-family home on Oahu was 5.6% lower in March 1999,
compared to a year earlier, while the median condominium price was down 8.9%.
Likewise, commercial property values remained under pressure, particularly in
the outlying areas, due to corporate downsizings, failures and migrations to
other states.
HIGHLIGHTS
The Company reported net income of $140,000, or $0.20 per share, for
the first quarter of 1999, compared to a net loss of $10,000, or $0.01 per
share, for the same quarter in 1998. The increase was primarily due to the
recognition of $112,000 in origination fees and prepayment penalties that were
related to the early payoff of two loans.
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<PAGE> 96
During the quarter, the Company provided $300,000 for loan and leases
losses, an 11.1% increase over the $270,000 provided for the same period last
year. Net charge-offs through March 31, 1999 increased 44.3% to $241,000 from
the respective period in 1998. Noncurrent loans and leases, as a percentage of
total outstandings, were 1.8% at March 31, 1999, unchanged from December 31,
1998.
At March 31, 1999, total assets stood at $308,277,000, compared to
$312,033,000 at December 31, 1998. Loans and leases declined 6.1% to
$210,218,000 due to several large payoffs, while deposits declined 1.3% to
$272,294,000. At December 31, 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
March 31, 1999 and December 31, 1998, shareholders' equity totaled $27,429,000
and $27,289,000, respectively. Leverage and risk-based capital ratios continued
to exceed regulatory requirements by a substantial margin.
SUBSEQUENT EVENT
On April 27, 1999, the Company's Board of Directors adopted resolutions
recommending to the Company shareholders a plan to restructure the share
ownership of the Company. The plan proposed by the Company involves a one for
200 reverse stock split which would reduce the number of Company shareholders
below 300, thus allowing the Company to terminate its reporting obligations
under the Securities and Exchange Act of 1934, as amended. Since the Company's
stock is unlisted, the benefits of public ownership are minimal. As a private
corporation, the Company would be able to eliminate the substantial time and
expense associated with being a public-reporting company. In addition, the
Company's plan involves an opportunity for all shareholders to sell their shares
to the Company at the same price per share without commissions as will be
received by shareholders who receive cash for their fractional shares at $45.00
per pre-split share in the reverse stock split. The Company has received an
opinion from the investment banking firm of NationsBanc Montgomery Securities
LLC that the $45.00 price per pre-split share is fair to shareholders from a
financial point of view.
In order to provide adequate time for review of the Company's plan and
related shareholder materials by the Securities and Exchange Commission, the
Company's 1999 Annual Meeting of Shareholders has been postponed. It is
currently anticipated that the Annual Meeting will be held in July 1999, and
that Annual Meeting materials will be sent to the Company's shareholders in
June. (For additional information on the proposed going private plan, see the
Company's Current Report on Form 8-K dated April 27, 1999.)
-8-
<PAGE> 97
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three months ended March 31, 1999 increased
$207,000, or 5.2%, from the respective period in 1998. The improvement was
primarily due to a decline in interest expense. During the quarter, the average
cost of funds declined by 48 basis points, while the average yield on
interest-earning assets fell by 41 basis points. The average net interest margin
for the first quarters of 1999 and 1998 was 5.98% and 5.99%, respectively.
Interest income for the three months ended March 31, 1999 increased
$22,000, or 0.4%, from the comparable period in 1998. Included in the results
for the current period were origination fees and prepayment penalties related to
the early payoff of two loans that aggregated $112,000. Loan origination fees,
net of direct costs of origination, are deferred and amortized into interest
income over the effective life of the loan. In the event the loan is sold or
paid off early, the unamortized fees, including any prepayment penalties, are
recognized as income. The average yield on interest-earning assets for the first
quarter of 1999 was 8.23%, compared to 8.64% for the same period in 1998. The
decline was attributable to a lower interest rate environment and a shift in the
mix of interest-earning assets from higher-yielding loans and leases into
lower-yielding federal funds sold.
Interest expense for the three months ended March 31, 1999 decreased
$185,000 or 10.5%, versus the same period a year earlier. The decline was
primarily due to a reduction in interest expense on short-term borrowings and
deposits. The average rate paid on interest-bearing deposits and liabilities for
the quarter was 3.06%, compared to 3.54% for the same period in 1998. The
improvement was due to lower average rates paid on deposits and a lower average
balance of short-term borrowings.
Other Income and Expenses
Other income for the three months ended March 31, 1999 increased
$55,000, or 6.3%, compared to the same quarter in the prior year. The increase
was primarily due to higher revenue from VISA merchant settlement fees.
Other expenses were comprised of salaries and employee benefits,
occupancy expense and other operating expenses. For the three months ended March
31, 1999, other expenses increased $37,000 or 0.8%, compared to the same period
last year.
Salaries and employee benefits for the first quarter of 1999 decreased
$34,000 or 1.4%, over the same period a year earlier. Occupancy expenses through
the end of March were lower by $8,000 or 0.7% from the comparable period in
1998. Other operating expenses for the year-to-date increased $79,000 or 8.1%,
over the respective period in 1998. The increase in this category was due
primarily to higher legal and professional fees.
-9-
<PAGE> 98
Year 2000
The Year 2000 project remains a high priority. The Company is currently
on target with respect to internal and regulatory timetables. All
mission-critical systems have been tested and implemented. The Company is in the
process of validating its contingency plans for core business processes which is
anticipated to be completed by June 30, 1999. The remaining future costs for the
Year 2000 project are projected to be $25,000 which will be expensed when
incurred. (For additional information on the Year 2000, see "Provision and
Allowance for Loan and Lease Losses", "Liquidity" and the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.)
Income Taxes
The Company's federal and state income tax provision for the first
quarter of 1999 was $46,000, compared to $1,000 for the same quarter a year ago.
The effective income tax rates for these periods were 24.7% and (10%),
respectively, due to the utilization of certain tax benefits.
FINANCIAL CONDITION
Investment Securities
Investment securities consist principally of short and intermediate
term debt instruments issued by the U.S. Treasury and other U.S. government
agencies. The Bank is also a stockholder in the Federal Reserve Bank and the
Federal Home Loan Bank of Seattle. The Bank has no structured notes, zero coupon
bonds, collateralized mortgage obligations or stripped mortgage-backed
securities.
At March 31, 1999, the book and fair value of the held-to-maturity
portfolio was $44,976,000 and $44,958,000, respectively. As of the same date,
the book and fair value of the available-for-sale portfolio was $1,760,000.
Trading securities amounted to $117,000 at quarter-end 1999, and have been
designated to satisfy certain of the Bank's retirement plan obligations. During
the first quarter of 1999, there were no sales or transfers of investment
securities between the held-to-maturity, available-for-sale or trading
categories.
Loan Portfolio and Loan Concentrations
At March 31, 1999, loans and leases were $210,218,000, a decrease of
$13,629,000 or 6.1% from $223,847,000 at year-end 1998. The decline was
attributable to unscheduled payoffs on several large commercial and real estate
loans. During the quarter, growth in the portfolio continued to be constrained
by a weak local economy. The Bank has no foreign loans in its portfolio. In
addition, there are no significant concentrations of credit with any individual
party; however, the Bank's lending is concentrated on the island of Oahu.
The following table presents the composition of the Bank's loan and
lease portfolio at the dates indicated.
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<PAGE> 99
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 March 31, 1998
----------------------- ---------------------- -----------------------
Balance % Balance % Balance %
------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Real estate
Family residential $96,251,000 45.8% $101,663,000 45.4% $108,408,000 48.7%
Construction 65,000 0.0 1,044,000 0.5 2,124,000 1.0
Commercial property 31,271,000 14.9 32,270,000 14.4 29,918,000 13.4
------------ ----- ------------ ----- ------------ -----
Total 127,587,000 60.7 134,977,000 60.3 140,450,000 63.1
Commercial, industrial
and agricultural 72,265,000 34.4 78,086,000 34.9 72,732,000 32.7
Consumer 9,094,000 4.3 9,210,000 4.1 7,817,000 3.5
All other loans 126,000 0.1 355,000 0.2 252,000 0.1
Direct financing leases 1,146,000 0.5 1,219,000 0.5 1,381,000 0.6
------------ ----- ------------ ----- ------------ -----
Total $210,218,000 100.0% $223,847,000 100.0% $222,632,000 100.0%
============ ====== ============ ====== ============ ======
</TABLE>
Loan Portfolio Risk Elements and Other Real Estate Owned
Noncurrent loans and leases consist of loans and leases that are past
due for 90 days or more and still accruing interest and loans and leases on
nonaccrual status. At March 31, 1999, noncurrent loans and leases declined to
$3,761,000, representing 1.8% of loans and leases outstanding, compared to
$4,111,000, or 1.8%, at December 31, 1998, and $3,954,000, or 1.8%, at March 31,
1998. At quarter-end, over eighty percent of the dollar amount in the noncurrent
category was collateralized by real estate. The Bank had no restructured loans
or leases as of March 31, 1999, December 31, 1998 or March 31, 1998.
Other real estate owned ("OREO"), which is included in other assets, is
generally comprised of properties acquired through foreclosure proceedings in
settlement of debts previously contracted. These assets are recorded at the
lower of cost or fair market value based on current appraisals less estimated
selling costs. Any excess of the carrying amount of the loan over the fair
market value of the assets, net of estimated disposal costs, is charged against
the allowance for loan and lease losses at the time of transfer. After a
property has been transferred to OREO, any losses on disposition or writedowns
as a result of declines in the market value of specific properties are recorded
as a charge to other expenses, which reduces current earnings. At March 31,
1999, OREO was $976,000, unchanged from December 31, 1998. The portfolio
consisted of two commercial properties and a residential condominium. Subsequent
to quarter-end, the Bank accepted an offer for the condominium that was $18,000
below its carrying value. Accordingly, the Bank will be reducing its investment
in this asset with a charge to other expenses that will directly impact current
earnings next quarter. The Bank is currently in the process of re-appraising the
other properties. Given the downward trend in real estate values, there is a
possibility that additional writedowns may be required in the future. In 1998,
OREO writedowns aggregated $334,000.
The following table presents information on noncurrent loans and leases
and OREO for the dates indicated:
-11-
<PAGE> 100
<TABLE>
<CAPTION>
March 31 December 31 March 31
1999 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
Noncurrent
Past due 90 days or more $ 138,000 $ 405,000 $ 44,000
Nonaccrual 3,623,000 3,706,000 3,910,000
---------- ---------- ----------
Total $3,761,000 $4,111,000 $3,954,000
---------- ---------- ----------
OREO $ 976,000 $ 976,000 $1,668,000
========== ========== ==========
</TABLE>
Note: Impaired loans are included in nonaccrual loans and leases.
Provision and Allowance for Loan and Lease Losses
During the three months ended March 31, 1999, the Bank provided
$300,000 for loan and leases losses, compared to $270,000 for the three months
ended March 31, 1998. The increase was attributable to higher charge-offs. The
provision for the second quarter of 1999 is expected to be approximately
$300,000. The appropriateness of maintaining the provision at this level will be
re-evaluated at least quarterly.
Gross charge-offs increased to $253,000 for the three months ended
March 31, 1999, an increase from $178,000 for the same period in 1998. Of the
losses in the current period, nearly three-quarters were attributable to 1
commercial loan and 2 real estate loans. Recoveries for the first quarters of
1999 and 1998 were $12,000 and $11,000, respectively. Net charge-offs through
the end of March were $241,000, substantially above the $167,000 reported for
the same period in 1998. The annualized ratio of net charge-offs to average
loans and leases for the first quarter of 1999 was 0.45%, compared to 0.30% for
the same period a year earlier.
The allowance for loan and lease losses is reviewed at least quarterly
using a systematic and consistent procedure which is described in the 1998
Annual Report on Form 10-K. The evaluation for this quarter also included an
assessment of customer readiness for the Year 2000. At March 31, 1999, the
allowance for loan and lease losses stood at $3,355,000, compared to $3,296,000
at December 31, 1998 and $3,301,000 at March 31, 1998. The ratio of the
allowance to total loans and leases outstanding was 1.60%, 1.47% and 1.48% at
March 31, 1999, December 31, 1998 and March 31, 1998, respectively. While the
reserve represented 89.2% of noncurrent loans and leases at quarter-end, in the
opinion of management, it remained at a sufficient level to absorb losses
inherent in the loan and lease portfolio. As noted earlier, over 80% of the
dollar amount in the noncurrent category is collateralized by real estate.
Generally, the loss rates on real estate loans are much lower than those on
commercial or consumer loans due to the protection afforded by the collateral.
Deposits
At March 31, 1999, total deposits were $272,294,000, a decrease of
$3,607,000 or 1.3%, compared to $275,901,000 at December 31, 1998.
Noninterest-bearing demand deposits ended the quarter at $1,277,000 below the
balance reported at year-end 1998. Interest-bearing demand deposits at
quarter-end were lower by $797,000 from December 31, 1998. Savings
-12-
<PAGE> 101
deposits decreased by $2,211,000 over year-end 1998 levels, partly offsetting an
increase in time deposits of $678,000.
The following table presents the distribution of the Bank's deposit
accounts for the dates indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 March 31, 1998
------------------------- ----------------- ------------------------
Balance % Balance % Balance %
------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 71,218,000 26.2% $ 72,495,000 26.3% $ 62,200,000 25.0%
Interest-bearing demand 27,347,000 10.0 28,144,000 10.2 27,564,000 11.1
Savings 91,795,000 33.7 94,006,000 34.1 85,512,000 34.3
Time 81,934,000 30.1 81,256,000 29.4 73,689,000 29.6
---------- ---- ---------- ---- ---------- ----
Total deposits $272,294,000 100.0% $275,901,000 100.0% $248,965,000 100.0%
============ ====== ============ ====== ============ ======
</TABLE>
Included in time deposits are certificates of deposits ("CDs")
purchased by the State of Hawaii, its counties and other government agencies.
Historically, these CDs have been a stable source of funds for the Bank and are
considered to be core deposits. At March 31, 1999, December 31, 1998, and March
31, 1998, public time deposits totaled $34,968,000, $35,415,000, and
$32,798,000, respectively, representing 12.8%, 12.8%, and 13.2% of the Bank's
total deposits.
Liquidity
The Bank has adequate liquidity to accommodate fluctuations in deposit
levels, fund operations, provide for customer credit needs and meet obligations
and commitments on a timely basis. The Bank has also incorporated Year 2000
issues into its contingency funding plan and is planning for increased customer
cash needs at the turn of the century. While deposits have traditionally been
the principal source of funds for HNB, the wholesale markets are anticipated to
play a greater role in the future due to the migration of household financial
assets into direct investment vehicles. The Bank has alternative sources of
liquidity which include federal funds lines with other banks, the discount
facilities of the Federal Reserve, and advances from the Federal Home Loan Bank
("FHLB"). During the quarter, there were no drawings under federal funds lines
or borrowings from the Federal Reserve. Advances under the FHLB's Community
Investment Program amounted to $5,300,000 at quarter-end. These advances were
repaid on April 1 when they matured.
Net cash provided by operating activities was $637,000 for the first
three months of 1999. Investing activities provided net cash of $13,463,000 due
primarily to several large loan payoffs. Net cash used in financing activities
was $3,450,000 due mainly to an outflow in demand and savings deposits.
-13-
<PAGE> 102
Shareholders' Equity and Capital Resources
Shareholders' equity was $27,429,000 at March 31, 1999, $27,289,000 at
December 31, 1998 and $28,225,000 at March 31, 1998. At December 31, 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. (For additional information on the Company's
Pension Plan, see "Pension Plan" in Management's Discussion and Analysis of
Financial Condition and the Results of Operations" and Note 12 to the
Consolidated Financial Statements in the 1998 Annual Report on Form 10-K.)
Book value per share was $38.58, $38.38 and $39.70 at March 31, 1999, December
31, 1998 and March 31, 1998, respectively.
The Company's historical practice has been to pay dividends in February
of each year. The Company paid cash dividends of $0.15 per share of common stock
on February 14, 1997 and on February 17, 1998. In view of the Company's
performance in 1998 and the weakened local economy, the Company did not declare
or pay a dividend in February 1999. The Company 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 the Company's 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.
In order to be considered well-capitalized by the bank regulatory
agencies, an institution must have at minimum a 5.0% leverage ratio, a Tier 1
risk-based capital ratio of 6.0% and a total capital ratio of 10.0%. The
Company's leverage ratio was 8.9% at March 31, 1999, 9.0% at December 31, 1998,
and 9.6% at March 31, 1998. At March 31, 1999, the Company's Tier 1 and total
capital ratios were 13.1% and 14.4%, respectively, compared to 12.4% and 13.7%
at December 31, 1998, and 13.3% and 14.5% at March 31, 1998.
Effect of New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
-14-
<PAGE> 103
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 was effective for the
first quarter beginning after December 15, 1998. This Statement amended 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 did not have
a material impact on the consolidated financial statements of the Company.
In February 1999, the FASB issued SFAS No. 135, "Recission of FASB
Statement No. 75 and Technical Corrections" which is effective for fiscal years
ending after February 15, 1999. This Statement rescinds SFAS No. 75 and amends
SFAS No. 35 and other existing authoritative literature to make various
technical corrections, clarify meanings or describe applicability under changed
conditions. The adoption of this SFAS is not expected to have a material impact
on the Company's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is in the form of interest rate
risk. The manner in which this exposure is managed and an estimate of the
potential impact on net interest income assuming a 1-year horizon was disclosed
on pages 41 to 42 in Hawaii National Bancshares, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998. As of March 31, 1999, there were no
material changes to report.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On March 8, 1999, the Company filed a Form 8-K announcing
its 1998 Financial Report.
On April 27, 1999, the Company filed a Form 8-K announcing
a going private plan.
-15-
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAWAII NATIONAL BANCSHARES, INC.
(Registrant)
Date May 12, 1999 By /s/Warren K.K. Luke
---------------------- ------------------------------------
Warren K.K. Luke
Chief Executive Officer
Date May 12, 1999 By /s/Ernest T. Murata
---------------------- ------------------------------------
Ernest T. Murata
Vice President, Treasurer,
Assistant Secretary and
Chief Financial Officer
-16-
<PAGE> 105
EXHIBIT 17(d)(2)
[HAWAII NATIONAL BANCSHARES, INC. LETTERHEAD]
June ___, 1999
To the Shareholders of
Hawaii National Bancshares, Inc.
Dear Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of Hawaii National Bancshares, Inc. (the "Company"), at
the Banking House, Fourth Floor, 45 N. King Street, Honolulu, Hawaii, on
Wednesday, June 30, 1999, at 10:00 a.m.
On April 27, 1999, the Company's Board of Directors adopted a
going-private plan (the "Plan") to restructure the share ownership of the
Company. The purpose of the Plan is to reduce the number of Company shareholders
below 300, thus allowing the Company to terminate its reporting obligations
under the Securities Exchange Act of 1934, as amended (the "1934 Act"). This
will allow the Company to eliminate the substantial time and expense associated
with 1934 Act compliance. The Board of Directors believes that the Company's
shareholders derive little benefit from the Company's status as a publicly-held
corporation.
The objectives of the Plan will be accomplished by a one-for-200 reverse
stock split that will have the effect of eliminating the shares of all Company
shareholders who own less than 200 shares of the Company's currently outstanding
common stock by converting such shares into a right to receive cash in the
amount of $45.00 per share.
The Plan also includes a tender offer to purchase all of the shares
owned by any Company shareholder at $45.00 per share. The purpose of the tender
offer is to allow Company shareholders who own 200 or more shares to sell their
shares at the same price per share as will be received by shareholders who
receive cash for their shares in the reverse stock split. The Company has
received an opinion from the investment banking firm of NationsBanc Montgomery
Securities LLC that the $45.00 per share price is fair to the shareholders from
a financial point of view.
You are urged to read the accompanying Proxy/Tender Offer Statement,
which provides you with a description of the terms of the proposed transactions.
As described in the enclosed Proxy/Tender Offer Statement, at the Annual
Meeting, in addition to the election of directors, you will be asked to consider
and vote upon a proposal to approve and adopt the reverse stock split. Your
Board of Directors has determined that the reverse stock split is in the best
interest of Hawaii National Bancshares and its shareholders and has unanimously
approved reverse stock split. THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE
"FOR" THE APPROVAL AND ADOPTION OF THE REVERSE STOCK SPLIT AND THE ELECTION OF
DIRECTORS.
<PAGE> 106
If the reverse stock split is consummated, shareholders who vote against
approval of the reverse stock split and who otherwise comply with the procedures
described in the Proxy/Tender Offer Statement will be granted appraisal rights.
See "THE REVERSE STOCK SPLIT - Dissenters' Rights."
It is very important that your shares be represented at the Annual
Meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, you are requested
to complete, date, sign and return the enclosed Proxy in the postage-paid
envelope provided. Failure to return a properly executed Proxy or vote at the
Annual Meeting, will have the same effect as a vote against approval of the
reverse stock split. Executed proxies with no instructions indicated thereon
will be voted for approval and adoption of the reverse stock split.
Please do not send any of your stock certificates at this time, unless
you elect to participate in the tender offer. If the reverse stock split is
consummated, you will be sent a letter explaining the procedures for exchanging
your shares for cash or new shares.
We look forward to seeing you at the 1999 Annual Meeting of
Shareholders. If you have questions before the Annual Meeting regarding the
matters discussed in this letter, you may call Michael Lai at (808) 528-7829.
Very truly yours,
Warren K.K. Luke
Vice Chairman of the Board
Attachment
<PAGE> 107
EXHIBIT 17(d)(3)
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS OF
HAWAII NATIONAL BANCSHARES, INC.
-------------
THIS PROXY IS BEING SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
PLEASE SIGN AND RETURN IMMEDIATELY
KNOW ALL MEN BY THESE PRESENTS, that I, the undersigned Shareholder of
Hawaii National Bancshares, Inc., Honolulu, Hawaii (the "Company") do hereby
nominate, constitute and appoint Herbert Nagata and Gordon J. Mau and each of
them (with full power to act alone) my true and lawful attorney with full power
of substitution, for me and in my name, place and stead to vote all the Common
Stock of the Company standing in my name and on its books on June 2, 1999, at
the Annual Meeting of Shareholders to be held in the Board Room of the Banking
House, Fourth Floor, 45 North King Street, Honolulu, Hawaii 96817 on Wednesday,
June 30, 1999 at 10:00 a.m., or at any adjournments thereof, with all the powers
the undersigned would possess if personally present, as follows:
1. AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION. The
amendment of the Company's Articles of Incorporation to reduce
the number of the Company's authorized shares from 10 million
shares of common stock, $1.00 par value, to 50,000 shares of
common stock, $200.00 par value, and the consolidation and
conversion of each 200 shares of issued and outstanding common
stock into one share of common stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS. The election of the persons listed below
to serve as directors for the ensuing year.
FOR all nominees listed _____ WITHHOLD AUTHORITY _____
below (except as marked to vote for all nominees
to the contrary below) listed below
K.J. Luke, Warren K.K. Luke, Gordon J. Mau, Tan Tek Lum and
Arthur S. K. Fong
INSTRUCTION: To withhold authority to vote for any individual
nominee, write that nominee's name on the space provided below.
3. In their discretion, upon such other matters as may properly
come before the meeting.
Page 1 of 2
<PAGE> 108
THIS PROXY CONFERS AUTHORITY TO VOTE "FOR" AND WILL BE VOTED "FOR" THE
PROPOSITIONS LISTED UNLESS AUTHORITY IS WITHHELD, IN WHICH CASE THIS
PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATION SO MADE.
Management knows of no other matters that may properly be, or which are
likely to be brought before the meeting. However, if any other matters are
properly presented at said meeting, this proxy shall be voted in accordance with
the recommendations of management.
The Board of Directors recommends a vote "FOR" the listed propositions.
DATED:_________________________, 1999
----------------------------------------
(Signature of Shareholder)
----------------------------------------
(Signature of Shareholder)
WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN,
PLEASE GIVE FULL TITLE. IF MORE THAN ONE
TRUSTEE, ALL SHOULD SIGN. ALL JOINT
OWNERS MUST SIGN.
Page 2 of 2
<PAGE> 109
EXHIBIT 17(d)(4)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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
1
<PAGE> 110
compared to 1997, while the condominium 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 Bank 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 or the Bank to revise
its operating strategy. The operating results of the Company and Bank are
expected to remain dependent upon general economic conditions and other external
factors for the foreseeable future.
2
<PAGE> 111
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 write-downs 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 $30,000 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 write-downs.
3
<PAGE> 112
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 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.
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<PAGE> 113
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 write-downs to OREO which amounted
to $334,000 in 1998 and $138,000 in 1997. (see "Risk Elements and Other Real
Estate Owned"). Besides OREO write-downs, 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.
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<PAGE> 114
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> 115
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.
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<PAGE> 116
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 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
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<PAGE> 117
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 write-downs as a result of declines in the market value
of specific properties are recorded as a charge to other expenses, which reduces
current earnings. During 1998, a periodic re-evaluation of certain OREO
properties indicated lower values due to a weak local economy which has
depressed real 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,
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<PAGE> 118
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
========== ========== ========== ============== ==========
Note: Impaired loans are included in nonaccrual loans and leases.
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
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
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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 groups of smaller balance 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 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.
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<PAGE> 120
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.
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.
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<PAGE> 121
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 10% 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.
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<PAGE> 122
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 strategy. Finally, in
14
<PAGE> 123
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.
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
15
<PAGE> 124
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.
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.
16
<PAGE> 125
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.
COMMON STOCK AND DIVIDEND INFORMATION
Bancshares' common stock is not actively traded and is not listed on any
exchange. The number of shares transferred including gifts was approximately
0.01% of outstanding shares in 1998, 1997 and 1996. 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.
As of February 28, 1999, there were 1,224 common shareholders of record.
Bancshares' transfer agent is HNB.
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.)
17
<PAGE> 126
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
1
<PAGE> 127
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.
2
<PAGE> 128
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.
3
<PAGE> 129
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.
4
<PAGE> 130
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.
5
<PAGE> 131
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.
6
<PAGE> 132
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 carried
7
<PAGE> 133
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
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.
8
<PAGE> 134
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.
9
<PAGE> 135
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.
10
<PAGE> 136
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.
11
<PAGE> 137
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.
12
<PAGE> 138
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.
13
<PAGE> 139
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>
14
<PAGE> 140
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.
15
<PAGE> 141
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.
16
<PAGE> 142
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>
17
<PAGE> 143
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.
18
<PAGE> 144
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.
19
<PAGE> 145
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 10% 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>
20
<PAGE> 146
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.
21
<PAGE> 147
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.
22
<PAGE> 148
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>
23
<PAGE> 149
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.
24
<PAGE> 150
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>
25
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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>
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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.
27
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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.
28
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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 contractual amount of those instruments.
The Bank manages the credit risk of counterparty
29
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HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
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.
30
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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>
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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.
32
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HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
33
