<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 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
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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> 3
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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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.
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<PAGE> 5
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 31, 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.
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<PAGE> 6
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 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> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Hawaii National Bancshares, Inc. ("Company") is a bank holding company
whose wholly-owned subsidiary is Hawaii National Bank ("HNB" or the "Bank"), a
national banking association. The Company derives substantially all of its
income from the operations of the Bank and the Bank's assets constitute the
majority of the Company's assets. Therefore, the discussion that follows relates
mainly to the activities of the Bank.
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> 8
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.)
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<PAGE> 9
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.
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<PAGE> 10
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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<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:
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<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
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<PAGE> 13
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> 14
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> 15
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> 16
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> 17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
27 Financial Data Schedule
-17-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,550
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 27,500
<TRADING-ASSETS> 117
<INVESTMENTS-HELD-FOR-SALE> 1,760
<INVESTMENTS-CARRYING> 44,976
<INVESTMENTS-MARKET> 44,958
<LOANS> 210,218
<ALLOWANCE> 3,355
<TOTAL-ASSETS> 308,277
<DEPOSITS> 272,294
<SHORT-TERM> 5,672
<LIABILITIES-OTHER> 2,882
<LONG-TERM> 0
0
0
<COMMON> 711
<OTHER-SE> 26,718
<TOTAL-LIABILITIES-AND-EQUITY> 308,277
<INTEREST-LOAN> 4,883
<INTEREST-INVEST> 666
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,794
<INTEREST-DEPOSIT> 1,504
<INTEREST-EXPENSE> 1,584
<INTEREST-INCOME-NET> 4,210
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,651
<INCOME-PRETAX> 186
<INCOME-PRE-EXTRAORDINARY> 140
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 5.98
<LOANS-NON> 3,623
<LOANS-PAST> 138
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,296
<CHARGE-OFFS> 253
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 3,355
<ALLOWANCE-DOMESTIC> 3,355
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 669
</TABLE>
