<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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 July 31, 1999 - 711,000 shares
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999, December 31,
1998 and June 30, 1998 (Unaudited)......................... 3
Consolidated Statements of Operations - Three and six
months ended June 30, 1999 and 1998 (Unaudited)............ 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 17
SIGNATURES............................................................... 18
EXHIBIT INDEX............................................................ 19
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1999, DECEMBER 31, 1998 AND JUNE 30, 1998 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
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JUNE 30 DECEMBER 31 JUNE 30
1999 1998 1998
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ASSETS:
Cash and due from banks $ 18,410 $ 16,400 $ 18,626
Federal funds sold 23,500 16,000 2,500
--------- --------- ---------
Cash and cash equivalents 41,910 32,400 21,126
Investment securities-
Held-to-maturity (fair value of $45,153, 45,465 44,980 44,487
$45,108 and $44,530 as of June 30, 1999,
December 31, 1998 and June 30, 1998,
respectively)
Available-for-sale 1,760 1,760 1,760
Trading 166 115 112
Loans and leases, net of allowance for loan and
lease losses of $3,479, $3,296 and
$3,346 as of June 30, 1999, December 31,
1998 and June 30, 1998, respectively (Note 2) 207,532 220,551 217,865
Premises and equipment 4,587 4,906 3,613
Other assets 6,913 7,321 7,825
--------- --------- ---------
Total assets $ 308,333 $ 312,033 $ 296,788
========= ========= =========
LIABILITIES:
Deposits -
Demand $ 105,938 $ 100,639 $ 92,521
Savings 89,917 94,006 90,224
Time 80,690 81,256 77,240
--------- --------- ---------
Total deposits 276,545 275,901 259,985
Short-term borrowings 1,000 5,516 6,300
Other liabilities 3,284 3,327 2,565
--------- --------- ---------
Total liabilities 280,829 284,744 268,850
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 15,245 15,030 15,079
Accumulated other comprehensive loss (600) (600) --
--------- --------- ---------
Total shareholders' equity 27,504 27,289 27,938
--------- --------- ---------
Total liabilities and shareholders' equity $ 308,333 $ 312,033 $ 296,788
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (IN THOUSANDS,
EXCEPT PER SHARE DATA)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
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Interest Income:
Interest and fees on loans $ 4,646 $ 5,053 $ 9,530 $ 10,071
Interest on direct financing leases 24 27 49 58
Interest on Federal funds sold 265 15 485 31
Interest on investment securities 650 701 1,315 1,408
--------- --------- --------- ---------
Total interest income 5,585 5,796 11,379 11,568
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 1,489 1,655 2,994 3,220
Federal funds purchased -- 7 -- 14
Short-term borrowings 9 94 88 291
--------- --------- --------- ---------
Total interest expense 1,498 1,756 3,082 3,525
--------- --------- --------- ---------
Net interest income 4,087 4,040 8,297 8,043
PROVISION FOR LOAN AND LEASE LOSSES (Note 2) 300 270 600 540
--------- --------- --------- ---------
Net interest income after provision
for loan and lease losses 3,787 3,770 7,697 7,503
--------- --------- --------- ---------
OTHER INCOME:
Service charges on deposit accounts 301 262 609 534
Other service charges, collection and
exchange charges, commissions and fees 658 560 1,277 1,160
--------- --------- --------- ---------
959 822 1,886 1,694
--------- --------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 2,402 2,482 4,791 4,905
Occupancy expense of bank premises 1,194 1,219 2,403 2,436
Other operating expenses 1,069 1,416 2,122 2,389
--------- --------- --------- ---------
4,665 5,117 9,316 9,730
--------- --------- --------- ---------
Income (loss) before income taxes 81 (525) 267 (533)
INCOME TAX PROVISION (BENEFIT) 6 (237) 52 (236)
--------- --------- --------- ---------
Net income (loss) $ 75 $ (288) $ 215 $ (297)
========= ========= ========= =========
PER SHARE DATA:
Earnings (basic and diluted) $ 0.11 $ (0.41) $ 0.30 $ (0.42)
Cash dividend $ 0.00 $ 0.00 $ 0.00 $ 0.15
Average shares outstanding 711,000 711,000 711,000 711,000
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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SIX MONTHS ENDED
JUNE 30
---------------------
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and fees received $ 10,619 $ 11,269
Interest paid (3,425) (3,484)
Service charges, collection and exchange charges, commission and fees received 1,754 1,562
Cash paid to suppliers and employees (7,836) (9,440)
Income tax refund 144 67
Cash paid for trading securities -- (112)
-------- --------
Net cash provided by (used in) operating activities 1,256 (138)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities held-to-maturity 26,024 16,993
Purchase of investment securities held-to-maturity (26,509) (13,999)
Net decrease (increase) in loans and leases made to customers 12,533 (4,983)
Proceeds from sale of loans -- 2,500
Capital expenditures (70) (334)
Proceeds from sale of other real estate owned 147 --
-------- --------
Net cash provided by investing activities 12,125 177
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits and savings accounts 1,210 (5,792)
Net increase (decrease) in time deposits (565) 7,057
Net decrease in federal funds purchased -- (4,000)
Net increase (decrease) in short-term borrowings (4,516) 1,300
Dividends paid -- (107)
-------- --------
Net cash used in financing activities (3,871) (1,542)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,510 (1,503)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 32,400 22,629
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,910 $ 21,126
======== ========
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 215 $ (297)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation on bank premises and equipment 389 260
Provision for loan and lease losses 600 540
Amortization of deferred loan fees (192) (101)
Write-down of other real estate owned 17 334
Amortization of goodwill (132) (132)
Changes in -
Trading securities (51) (112)
Interest receivable (517) (198)
Taxes receivable 144 --
Interest payable (343) 41
Taxes payable 52 (4)
Other assets 826 (506)
Other liabilities 248 37
-------- --------
Net cash provided by (used in) operating activities $ 1,256 $ (138)
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Transfer from loans to real estate acquired through foreclosure $ 78 $ --
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Hawaii National Bancshares, Inc. ("Company") is a bank holding company whose
wholly-owned subsidiary is Hawaii National Bank ("HNB" or the "Bank"), a
national banking association. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, the Bank. All
significant intercompany balances and transactions have been eliminated in
consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 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
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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(IN THOUSANDS) 1999 1998 1999 1998
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Balance, beginning of period $ 3,355 $ 3,301 $ 3,295 $ 3,198
Provision charged to operations 300 270 600 540
Loans and leases charged-off (199) (233) (451) (411)
Recoveries on loans and leases
previously charged-off 23 8 35 19
------- ------- ------- -------
Net charge-offs (176) (225) (416) (392)
------- ------- ------- -------
Balance, end of period $ 3,479 $ 3,346 $ 3,479 $ 3,346
======= ======= ======= =======
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The following table presents information on the recorded investment in impaired
loans for the dates indicated:
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JUNE 30 DECEMBER 31 JUNE 30
(IN THOUSANDS) 1999 1998 1998
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Impaired loans for which there is a related allowance $1,654 $1,835 $1,786
Impaired loans for which there is no related allowance 1,458 1,768 1,876
------ ------ ------
Total recorded investment $3,112 $3,603 $3,662
====== ====== ======
</TABLE>
The average recorded investment in impaired loans for the three and six months
ended June 30, 1999 was $3,054,000 and $3,248,000, respectively, compared to
$3,754,000 and $3,716,000 for the same periods in 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 of the
previously mentioned periods.
3. STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
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(IN THOUSANDS) 1999 1998 1999 1998
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Balance, beginning of period $ 27,429 $ 28,226 $ 27,289 $ 28,342
Net income (loss) 75 (288) 215 (297)
Cash dividends -- -- -- (107)
-------- -------- -------- --------
Balance, end of period $ 27,504 $ 27,938 $ 27,504 $ 27,938
======== ======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
Hawaii National Bancshares, Inc. ("Company") is a bank holding company
whose wholly-owned subsidiary is Hawaii National Bank ("HNB" or the "Bank"), a
national banking association. The Company derives substantially all of its
income from the operations of the Bank and the Bank's assets constitute the
majority of the Company's assets. Therefore, the discussion that follows relates
mainly to the activities of the Bank.
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
As Hawaii settles into its ninth year of an economic slump, the
prospects for a near term recovery appear unlikely. While bankruptcy filings
through the first half of 1999 have slowed to a 2.7% increase after years of
double-digit growth and foreclosures have declined 18.7% through the same
period, there is no driving force in the immediate future that appears capable
of jump-starting the State's economy. Tourism, Hawaii's largest industry, is
flat with a strong U.S. market helping to offset continued weakness from Japan.
Job growth in Hawaii is at a standstill and the unemployment rate in the islands
is nearly 1.5% points higher than the national average. In the real estate area,
property values remain under pressure, especially in the commercial sector where
corporate downsizings, failures, and migrations to other states have taken their
toll. The vacancy rate for offices in downtown Honolulu is approximately 14%,
while retail vacancy on Oahu is about 10%. Meanwhile, for residential real
estate, it continues to be a buyer's market. In the first half of 1999, sales of
single-family homes and condominiums on Oahu increased 18.4% and 33.2%,
respectively, over the comparable period in 1998. The median price of a
single-family home on Oahu in June 1999 was $300,000, a decline of 3.1% from the
June 1998 median of $309,500. As of the same date, the median price for an Oahu
condominium was $125,000, down 6.0% from $133,000 in the previous June.
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HIGHLIGHTS
The Company reported net income of $75,000 or $0.11 per share for the
three months ended June 30, 1999, compared to a net loss of $288,000 or $.41 per
share for the same period last year. Year-to-date earnings were $215,000 or
$0.30 per share versus a net loss of $297,000 or $0.42 for the first half of
1998. The improved results were primarily due to: 1) the recognition of loan
fees aggregating $46,000 and $158,000 for the quarter and year-to-date,
respectively, relating to the early payoff of 3 loans; and 2) a significant
reduction in writedowns in other real estate owned from $334,000 in the second
quarter of 1998 to $17,000 in the comparable period in 1999.
During the three and six months ended June 30, 1999, the Bank provided
$300,000 and $600,000, respectively, for loan and lease losses, an 11.1%
increase from the $270,000 and $540,000 provided for the same periods a year
ago. Net charge-offs for the quarter were $176,000, bringing the total for the
year-to-date to $416,000. Net charge-offs for the comparable periods in 1998
were $225,000 and $392,000, respectively. At June 30, 1999, noncurrent loans and
leases totaled $3,769,000, compared to $4,111,000 at year-end 1998. The
allowance for loan and lease losses at June 30, 1999 increased to $3,479,000 or
1.65% of total loans and leases outstanding from $3,296,000 or 1.47% at December
31, 1998.
At June 30, 1999, total assets were $308,333,000, compared to
$312,033,000 at December 31, 1998. Loans and leases declined 5.7% to
$211,011,000 at June 30, 1999 from December 31, 1998 due to several large
payoffs. Deposits ended the quarter at $276,545,000, little changed from the
prior year-end. 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
June 30, 1999 and December 31, 1998, shareholders' equity totaled $27,504,000
and $27,289,000, respectively. Leverage and risk-based capital ratios continued
to exceed regulatory requirements by a substantial margin.
PROPOSED "GOING PRIVATE PLAN"
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
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<PAGE> 9
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 Banc of
America Securities LLC (formerly known as NationsBanc Montgomery Securities LLC)
that the $45.00 price per pre-split share is fair to shareholders from a
financial point of view.
The Annual Meeting of Shareholders will be held on August 31, 1999, at
which time shareholders will vote on the Company's proposal to approve and adopt
the reverse stock split. (For additional information on the proposed "going
private plan", readers should refer to the Company's Proxy/Tender Offer
Statement dated July 31, 1999.)
RESULTS OF OPERATIONS
Net Interest Income
Net interest income for the three and six months ended June 30, 1999
increased $47,000 or 1.2% and $254,000 or 3.2%, respectively, from the
comparable periods in 1998. The improvement for both periods was due to a
decline in interest expense. The average net interest margin declined to 5.82%
for the second quarter of 1999 from the 6.02% reported for the second quarter of
1998. Net interest margin for the year-to-date decreased to 5.90% from 6.00% for
the same period last year.
Interest income for the three and six months ended June 30, 1999
decreased $211,000 or 3.6% and $189,000 or 1.6% from the same periods in 1998.
The decline for both periods was primarily due to lower interest and fees on
loans. Included in the results for the second quarter and the first half of 1999
were loan fees aggregating $46,000 and $158,000, respectively, related to the
early payoff of 3 loans. 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 declined to 7.95% for the second
quarter of 1999 from 8.63% for the comparable quarter a year ago. For the first
half of 1999 and 1998, the average yield was 8.09% and 8.62%, respectively.
Interest expense for the three and six months ended June 30, 1999
decreased $258,000 or 14.7% and $443,000 or 12.6% from the comparable periods in
1998. The improved results for both periods were due to a reduction in interest
expense on deposits and short-term borrowings. The average rate paid on
interest-bearing deposits and liabilities for the quarter was 2.94%, compared to
3.49% for the same period in 1998. The year-to-date average cost of funds for
1999 and 1998 was 3.00% and 3.51%, respectively.
On June 30, 1999, the Federal Reserve Open Market Committee increased
its target for the federal funds rate by 0.25% to 5.0%, prompting most financial
institutions, including HNB, to raise their base lending rates by an identical
amount. The Bank has an asset-sensitive balance sheet. Generally, an increase in
interest rates will benefit net interest income, as yields on interest-earning
assets increase at a faster rate than the costs of interest-bearing liabilities.
Conversely, in a declining interest rate environment, net interest income will
generally be adversely impacted, as yields decrease at a faster rate than
interest costs.
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Other Income and Expenses
Other income for the three months and six months ended June 30, 1999
increased $137,000 or 16.6% and $192,000 or 11.3%, respectively, compared to the
same periods a year ago. The increase was primarily due to higher revenue from
credit card transactions and other miscellaneous fees.
Other expenses consist of salaries and employee benefits, occupancy
expense and other operating expenses. For the three and six months ended June
30, 1999, other expenses decreased $452,000 or 8.8% and $414,000 or 4.3%,
respectively, compared to the same periods last year.
Salaries and employee benefits for the three and six months ended June
30, 1999 decreased $80,000 or 3.2% and $114,000 or 2.3%, respectively, from the
same periods a year earlier. The decline for the quarter and year-to-date
resulted mainly from a decrease in salary expense, partly offset by an increase
in the pension contribution.
Occupancy expenses for the three and six months ended June 30, 1999
declined $25,000 or 2.1% and $33,000 or 1.4%, respectively, from the comparable
period in 1998. The lower expenses for both periods were largely due to a
reduction in miscellaneous repairs and utility costs.
Other operating expenses for the three and six months ended June 30,
1999 decreased $347,000 or 24.5% and $267,000 or 11.2%, respectively, compared
to the same periods a year ago. The improvement for both periods was primarily
due to a reduction in other real estate owned writedowns which totaled $17,000
for the current quarter versus $334,000 for the same period last year.
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.
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<PAGE> 11
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 allocate resources accordingly. As
of the date of this report, the Bank has met all regulatory milestones and has
completed all five phases of the FFIEC's project plan 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 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 June 30, 1999, $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 last year. In 1998, the Bank
expensed $90,000 for training costs and capitalized $1,385,000 which 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, obtained a $5,000,000 irrevocable line of credit
from the Federal Home Loan Bank
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<PAGE> 12
of Seattle, 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 is 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 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 ready, the possibility
that new systems, or modifications to existing ones, 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.
Income Taxes
The Company's federal and state income tax provision for the three and
six months ended June 30, 1999 was $6,000 and $52,000, respectively, compared to
an income tax benefit of $237,000 and $236,000 for the same periods in 1998. The
effective income tax rates for the first half of 1999 and 1998 were 19.5% and
(44.3%), respectively, due to the utilization of certain tax benefits.
FINANCIAL CONDITION
Investment Securities
Investment securities consist principally of short 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 June 30, 1999, the book and fair value of the held-to-maturity
portfolio was $45,465,000 and $45,153,000, 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 $166,000 at June 30, 1999 and have been
designated to satisfy certain of the Bank's retirement plan obligations. During
the first half 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 June 30, 1999, loans and leases were $211,011,000, a decrease of
$12,836,000 or 5.7% from $223,847,000 at December 31, 1998. The decline was
primarily due to unscheduled payoffs on several large commercial loans and a
number of smaller residential real estate loans.
-12-
<PAGE> 13
During the first six months of 1999, 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.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 June 30, 1998
---------------------- ----------------------- -----------------------
Balance % Balance % Balance %
------------ ---- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Real estate
Family residential $ 95,492,000 45.3% $101,663,000 45.4% $105,791,000 47.9%
Construction 879,000 0.5 1,044,000 0.5 1,774,000 0.8
Commercial property 31,099,000 14.7 32,270,000 14.4 30,390,000 13.7
------------ ----- ------------ ----- ------------ -----
Total 127,470,000 60.5 134,977,000 60.3 137,955,000 62.4
Commercial, industrial
and agricultural 73,045,000 34.6 78,086,000 34.9 73,193,000 33.1
Consumer 9,089,000 4.3 9,210,000 4.1 8,632,000 3.9
All other loans 294,000 0.1 355,000 0.2 284,000 0.1
Direct financing leases 1,113,000 0.5 1,219,000 0.5 1,147,000 0.5
------------ ----- ------------ ----- ------------ -----
Total $211,011,000 100.0% $223,847,000 100.0% $221,211,000 100.0%
============ ===== ============ ===== ============ =====
</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 June 30, 1999, noncurrent loans and leases amounted to
$3,769,000, representing 1.8% of loans and leases outstanding, compared to
$4,111,000 or 1.8% at December 31, 1998. Eighty one percent of the dollar amount
in the noncurrent category was collateralized by real estate at the end of June
1999. The Bank had no restructured loans or leases at June 30, 1999 or December
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. Subsequent to
transfer, any losses on disposition or writedowns as a result of declines in the
market value of specific properties are recorded as a charge to other expenses,
which reduces current earnings.
In the second quarter of 1999, OREO writedowns totaled $17,000,
compared to $334,000 in the second quarter of 1998. Given the downward trend in
real estate values, there is a possibility that additional writedowns may be
required in the future. At June 30, 1999 and December 31, 1998, OREO totaled
$890,000 and $976,000, respectively. The portfolio currently consists of two
commercial properties and a single-family residence.
-13-
<PAGE> 14
The following table presents information on noncurrent loans and leases
and OREO for the dates indicated:
<TABLE>
<CAPTION>
June 30 December 31 June 30
1999 1998 1998
---------- ---------- -----------
<S> <C> <C> <C>
Noncurrent
Past due 90 days or more $ 539,000 $ 405,000 $ 249,000
Nonaccrual 3,230,000 3,706,000 3,675,000
---------- ---------- ----------
Total $3,769,000 $4,111,000 $3,924,000
========== ========== ==========
OREO $ 890,000 $ 976,000 $1,334,000
========== ========== ==========
</TABLE>
Provision and Allowance for Loan and Lease Losses
During the three and six months ended June 30, 1999, the Bank provided
$300,000 and $600,000, respectively, for loan and lease losses, compared to
$270,000 and $540,000 for the three and six months ended June 30, 1998. The
increase was attributable to the higher losses experienced in the first half of
1999. The provision for the third 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.
Net charge-offs for the quarter and year-to-date were $176,000 and
$416,000, respectively, compared to $225,000 and $392,000 for the same periods
in 1998. Seventy eight percent of the Bank's losses in the first half of 1999
were due to 3 commercial credits, a conventional residential mortgage and 3 home
equity creditlines. The annualized ratio of net charge-offs to average loans and
leases for the year-to-date was 0.39%, compared to 0.35% for the same period
last year.
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 June 30, 1999, the
allowance for loan and lease losses stood at $3,479,000, compared to $3,296,000
at December 31, 1998. The ratio of the allowance to total loans and leases
outstanding was 1.65% and 1.47% at June 30, 1999 and December 31, 1998,
respectively. While the reserve represented 92.3% 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.
Deposits
At June 30, 1999, total deposits were $276,545,000, compared to
$275,901,000 at December 31, 1998. Noninterest-bearing demand deposits ended the
quarter $7,084,000 above the balance reported at year-end 1998. The growth in
these deposits are important to the Bank because they represent an interest-free
source of funds which enhances net interest margin.
-14-
<PAGE> 15
Interest-bearing demand deposits at quarter-end were $1,785,000 below December
31, 1998 balances. Savings and time deposits decreased $4,089,000 and $566,000
from year-end 1998 levels, respectively. Included in time deposits are
certificates of deposits ("CD") purchased by the State of Hawaii, its counties
and other government agencies. Historically, these CDs have been a stable source
of funds for the Bank and are considered to be core deposits. At June 30, 1999
and December 31, 1998, public time deposits totaled $33,193,000 and $35,415,000,
respectively, representing 12.0% and 12.8% of the Bank's total deposits.
The following table presents the distribution of the Bank's deposit
accounts for the dates indicated.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998 June 30, 1998
---------------------- ---------------------- ------------------------
Balance % Balance % Balance %
------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 79,579,000 28.8% $ 72,495,000 26.3% $ 64,118,000 24.7%
Interest-bearing demand 26,359,000 9.5 28,144,000 10.2 28,403,000 10.9
Savings 89,917,000 32.5 94,006,000 34.1 90,224,000 34.7
Time 80,690,000 29.2 81,256,000 29.4 77,240,000 29.7
------------ ----- ------------ ----- ------------ -----
Total deposits $276,545,000 100.0% $275,901,000 100.0% $259,985,000 100.0%
------------ ----- ------------ ----- ------------ -----
</TABLE>
Liquidity
The Bank has adequate liquidity to accommodate fluctuations in deposit
levels, fund operations, provide for customer credit needs and meet obligations
and commitments on a timely basis. While deposits have traditionally been the
principal source of funds for HNB, the wholesale markets are anticipated to play
a greater role in the future 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 of Seattle
("FHLB"). The Bank's line of credit with the FHLB is equal to 15% of total
assets, including a cash management agreement line of 5%. As of June 30, 1999,
there were no federal funds purchased or short-term borrowings outstanding from
the Federal Reserve or the FHLB.
The Bank has incorporated liquidity issues into its contingency funding
plan for the Year 2000 and is planning for increases in customer cash needs
prior to, during, and after the turn of the century. The Bank has obtained a
$5,000,000 irrevocable line of credit from the FHLB from October 1, 1999 through
March 31, 2000. It may also access the Federal Reserve's Century Date Change
Special Liquidity Facility, which is open to depository institutions from
October 1, 1999 to April 7, 2000.
For the first six months of 1999, net cash provided by operating
activities was $1,256,000. Comparatively, in the first half of 1998, operating
activities used net cash of $138,000. Loan payoffs accounted for a substantial
portion of the net cash provided by investing activities of $12,125,000 for the
six months ended June 30, 1999. In the comparable period in 1998, net cash
provided by investing activities was $177,000. Financing activities through the
-15-
<PAGE> 16
end of June 1999 used net cash of $3,871,000 due primarily to a reduction in
short-term borrowings. In the first half of 1998, increases in time deposits and
short-term borrowings were used to finance an outflow of demand and savings
deposits and payoff federal funds purchased.
Shareholders' Equity and Capital Resources
Shareholders' equity totaled $27,504,000 at June 30, 1999 and
$27,289,000 at December 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 $38.68 and $38.38 at June 30, 1999 and December 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 9.0% at June 30, 1999, unchanged from December 31,
1998. At June 30, 1999, the Company's Tier 1 and total capital ratios were 13.3%
and 14.5%, respectively, compared to 12.4% and 13.7% at December 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." 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. In June 1999, the FASB issued SFAS No. 137
which deferred the effective date of SFAS No. 133 to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The adoption of this SFAS is not
expected to have a material impact on the Company's consolidated financial
statements.
-16-
<PAGE> 17
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 June 30, 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 April 27, 1999, the Company filed a Form 8-K announcing a going private plan.
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HAWAII NATIONAL BANCSHARES, INC.
(Registrant)
Date August 10, 1999 By /s/ Warren K.K. Luke
------------------------------------------------
Warren K.K. Luke
Chief Executive Officer
Date August 10, 1999 By /s/ Ernest T. Murata
------------------------------------------------
Ernest T. Murata
Vice President, Treasurer,
Assistant Secretary and
Chief Financial Officer
-18-
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- ------------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
-19-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS' FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,410
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,500
<TRADING-ASSETS> 166
<INVESTMENTS-HELD-FOR-SALE> 1,760
<INVESTMENTS-CARRYING> 45,465
<INVESTMENTS-MARKET> 45,153
<LOANS> 211,011
<ALLOWANCE> 3,479
<TOTAL-ASSETS> 308,333
<DEPOSITS> 276,545
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 3,284
<LONG-TERM> 0
0
0
<COMMON> 711
<OTHER-SE> 26,793
<TOTAL-LIABILITIES-AND-EQUITY> 308,333
<INTEREST-LOAN> 9,530
<INTEREST-INVEST> 1,315
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,379
<INTEREST-DEPOSIT> 2,994
<INTEREST-EXPENSE> 3,082
<INTEREST-INCOME-NET> 8,297
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,316
<INCOME-PRETAX> 267
<INCOME-PRE-EXTRAORDINARY> 215
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 215
<EPS-BASIC> .30
<EPS-DILUTED> .30
<YIELD-ACTUAL> 5.90
<LOANS-NON> 3,230
<LOANS-PAST> 539
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,295
<CHARGE-OFFS> 451
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 3,479
<ALLOWANCE-DOMESTIC> 3,479
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
