ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Hawaii National Bancshares, Inc. ("Bancshares"), whose principal office is maintained at 45 North King Street, Honolulu, Hawaii, is a Hawaii corporation. Bancshares is a bank holding company whose wholly owned subsidiary is Hawaii National Bank ("HNB" or the "Bank"), a national banking association.
The main office of the Bank is also located at 45 North King Street, Honolulu, Hawaii. While the Bank's customer base covers the entire State of Hawaii, the principal market areas are the county of Honolulu on the island of Oahu, which currently is served by ten of the Bank's branches; the county of Hawaii, which is served by a branch in Hilo; and the county of Maui, which is served by branches in Kahului and Kihei. The area of the county of Hawaii served by the Bank's Hilo branch includes the area from the ocean to Haihai to Komohana and Waianuenue. The area of the county of Maui served by the Bank's Kahului and Kihei branches is located in the Wailuku, Kahului and Kihei corridor. The Bank anticipates opening a branch in a new shopping complex called the "Moanalua Ethnic Village" in Mapunapuna, Oahu in March 1998. (See ITEM 2.
ITEM 2. PROPERTIES
Bancshares maintains its office at the same location in Honolulu as the Bank's main office.
The Bank's premises are leased for varying periods to 2024 with renewal options ranging from 3 to 20 years. Rent expense was $2,493,000 in 1997; $2,366,000 in 1996 and $2,294,000 in 1995, net of sublease income of $56,000 in 1997, $59,000 in 1996 and $46,000 in 1995. Premise leases extend for varying periods up to 27 years and provide for periodic renegotiation of rents based upon a percentage of the appraised value of the leased property. At December 31, 1997, the aggregate minimum rental commitments under all non-cancelable leases were as follows: 1998 - $2,438,000; 1999 - $2,332,000; 2000 - $2,213,000; 2001- $2,145,000; 2002 -$1,791,000; and thereafter to 2024 - $22,913,000 (aggregate $33,832,000). Additional information is provided in Note 9 of the Notes to the Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Bank is party to legal actions from time to time as part of its normal course of business. Management, after consulting with counsel on these matters, believes the outcome of these cases will not have a materially adverse effect upon Bancshares' or the Bank's financial position, results of operations or liquidity.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders in the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDERS MATTERS.
MARKET INFORMATION
Bancshares' common stock is not actively traded and is not listed on any exchange. Management is not aware of any broker/dealer who formally makes a market in its common stock. However, based upon quotations obtained from Dow Jones Telerate and actual transactions known to Bancshares, the price of Bancshares' common stock during 1997 has ranged between $34.00 to $38.00 and during 1996 from $33.00 to $36.00. Bancshares' book value per share at December 31, 1997 and 1996 was $39.86 and $39.10, respectively. Neither the book value nor its trading price may be indicative of the value of Bancshares' common stock.
NUMBER OF EQUITY HOLDERS
As of February 28, 1998, there were 1,269 common shareholders of record. Bancshares' transfer agent is HNB.
DIVIDENDS
Bancshares paid cash dividends on its common stock in the amount of $0.15 per share on February 17, 1998, and on February 14, 1997 and 1996. Bancshares' dividend policy is to retain the majority of its earnings to finance future growth and build a strong capital base. Cash dividends are subject, among other things, to certain limitations under applicable national banking laws as described in Note 10 of the Notes to the Consolidated Financial Statements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
A summary of operations and selected financial data for the five years ended December 31 is presented as follows:
ITEM 6. SELECTED FINANCIAL DATA
HAWAII NATIONAL BANCSHARES, INC. & SUBSIDIARY SUMMARY OF OPERATIONS AND OTHER SELECTED FINANCIAL DATA for the five years ended December 31 (in thousands except for per share data)
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS
In reviewing this discussion, reference should be made to the accompanying table of analysis of operations, the financial statements, and selected financial data presented elsewhere in this report.
Hawaii National Bancshares, Inc. & Subsidiary Analysis of Results of Operations (in thousands)
Hawaii National Bancshares, Inc. ("Bancshares") through its wholly owned subsidiary, Hawaii National Bank ("HNB" or the "Bank"), maintains a diverse portfolio of assets ranging from the core business of loans and leases to investment securities. The interest-earning assets of the Bank are financed through a combination of interest-bearing and interest-free sources. In keeping with management's goals of managing risk and improving long-term profitability to shareholders, the Bank continues to emphasize conservative credit underwriting, diversification of revenue sources, and controlled growth. Preserving credit quality, maintaining a liquid and interest rate sensitive balance sheet and building a strong capital position continue to have high priorities.
This report and other filings and communications made by Bancshares and HNB 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 Bancshares or HNB. 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: global, national and local economic conditions; increased competition from bank and nonbank institutions; governmental regulation; the timing and magnitude of interest rate changes; trends in credit quality, liquidity and capital resources; 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 Bancshares or HNB are intended to apply only at the time they are made. Both Bancshares and HNB undertake no obligation to publicly revise or update these forward-looking statements to reflect subsequent events.
LOCAL ECONOMY
In 1997, Hawaii continued to struggle through a prolonged economic slowdown which began in 1990. The gross state product is estimated to have grown by a little more than 1% in 1997, virtually unchanged from the prior year, and substantially below the robust 3.7% estimated for the nation. 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% above the national rate, and making 1997 the fifth consecutive year that Hawaii has lost jobs. Bankruptcies and foreclosures continued to mount in 1997, surpassing the records set in 1996 by 44% and 11%, respectively. While home resales increased during the year, prices continued to slide. The median price for a single-family home on Oahu in 1997 was 8% lower, compared to 1996, while the condominium median was 14% below the prior year. In the commercial real estate area, relatively high vacancy rates continued to depress property values in 1997.
In 1998, Hawaii will be entering its eighth year of an economic slump, which ranks as one of the longest for any U.S. regional economy since World War II. With its close ties to Asia, the outlook for the coming year is less than positive. The well-publicized economic problems in Japan and other Asian countries, combined with sharply weaker currencies, have made Hawaii's tourist-based and capital-poor economy both less attractive as a vacation destination and as a place for foreign investment. 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. Since last year, Japanese arrivals have declined and those that are coming to Hawaii are spending less as a result of the weaker yen. Another major market is Korea, which the Hawaii Visitors and Convention Bureau expects to plunge by as much as 80% in 1998 due to the collapse of the Korean won. Likewise, business is falling from Indonesia, Thailand, the Philippines and other Asian countries, which have undergone severe currency devaluations. These grim prospects for tourism have already prompted several local companies in other industries to initiate unprecedented layoffs. Finally, given the dramatic decline in purchasing power of many Asian nations, it would be optimistic to look to that part of the world as a source of foreign capital to revive Hawaii's ailing construction and real estate industry.
OVERVIEW
The consolidated net income of Hawaii National Bancshares, Inc. and Hawaii National Bank (collectively, the "Company") was $651,175 in 1997, compared to $711,223 in 1996 and $1,043,935 in 1995. Earnings per share were $0.92, $1.00, and $1.47 in 1997, 1996 and 1995, respectively.
The 1997 earnings represented a decline of $60,048 or 8.4% from the prior year. While revenues increased, higher costs associated with expanding the branch network and reductions in the carrying costs of certain properties in other real estate owned, resulted in lower profits for the year.
Net income decreased by $332,712 or 31.9% in 1996, due to lower net interest income, a higher provision for loan and lease losses and the full year's effect of the Maui branches, which were acquired in mid-1995 from the former Bank USA, N.A., partly offset by a reduction in Federal Deposit Insurance Corporation ("FDIC") insurance premiums.
In recent years, the weak local economy has resulted in higher levels of nonaccrual loans and leases and those past due 90 days or more (collectively, referred to as "noncurrent loans and leases"). As of year-end 1997, noncurrent loans and leases increased to $4,206,000, representing 1.9% of total loans and leases, compared to $3,392,000, or 1.6%, as of the same date in 1996. Net charge-offs declined to $589,619 in 1997, compared to $838,999 in 1996.
At December 31, 1997, total assets stood at $298,686,778, an increase from $296,025,258 at December 31, 1996. Loans and leases grew 5.7% to a record $219,018,348 at December 31, 1997. Deposits decreased 2.2% to $258,720,805 at December 31, 1997, due to a large deposit withdrawal related to a customer's real estate
investment. Shareholders' equity increased 2.0% to $28,341,813 at year-end 1997. Leverage and risk-based capital ratios exceeded regulatory capital requirements by a substantial margin at December 31, 1997 and 1996.
OUTLOOK FOR 1998
Looking ahead to 1998, the Company anticipates that its operating results for the year may be substantially below those reported for 1997, due to the execution of certain strategic initiatives and the prospects for increased fall-out from the Asian financial crisis on the local business community.
As part of its long-range planning, the Company has implemented several initiatives in the last few years with the objective of increasing the Bank's franchise value and improving long-term profitability to shareholders. These initiatives include, among other things, expanding the branch network and merging the operations of HNB's data processing provider, Computer Systems International, Ltd. ("CSI"), into the Bank. While these actions may have an adverse impact on the results of operations for 1998, these steps are designed to position the Bank to improve future profitability by strengthening the Bank's ability to effectively compete in the rapidly changing financial services industry, enhance service quality and promote greater operating efficiencies.
Management believes the cornerstone of a community bank is its branch system. While other financial institutions have been closing offices, HNB has expanded into areas where the demographics for small business and future population growth appear favorable. Since 1995, HNB has opened 3 new branches: 2 on Maui (Kihei and Kahului) and 1 in Pearl City, Oahu. The Bank anticipates opening its first "in-store branch" in the Moanalua Ethnic Village on Oahu in March 1998. These new facilities provide the Bank with an opportunity to expand its loan and deposit base. Based on past experience, initially, new branches adversely impact earnings until the volume of business grows to cover overhead expenses.
In order to be competitive in today's market, HNB recognizes that it must become a lower-cost provider. The Bank's strategy to accomplish this objective is to leverage technology to gain operating efficiencies and drive down costs. In keeping with its long-term plan, the operations of CSI, an affiliated bank service company, were merged into HNB, effective October 1, 1997. While the effect of bringing this function inhouse may increase overhead costs in the short-run, the anticipated efficiencies that accrue over time will enable the Bank to significantly reduce costs in other areas, without compromising customer service. The new Information Systems Department is currently in the process of upgrading the Bank's computer hardware and software. The installation of the new system will lower maintenance costs, offsetting the estimated depreciation charges, and provide the technology to expand the Bank's product line. When this project is completed, the department may explore revenue-generating opportunities outside of the Bank. Prior to being acquired by HNB, CSI provided data processing services to other financial institutions in Hawaii and developed several software programs that were used, at one time, by approximately 100 different clients, including the U.S. Navy, Chase Manhattan Bank, Federal Home Loan Bank of Cincinnati,
Fiserv, Inc., University of Virginia, City of Minneapolis, and various other institutions and companies worldwide.
Besides the initiatives described above, the Company's performance in 1998 is expected to be significantly affected by the turmoil in Asia and its backlash on Hawaii, which is still growing. As a community bank, HNB's market area is concentrated in Hawaii, and management continues to believe that its banking activities should remain in the State. Many of the Bank's customers are family enterprises and closely held businesses, which have already been hit hard by the weak local economy prior to the crisis in Asia. During the first quarter of 1998, the Bank will be increasing its provision for loan and lease losses by an additional $90,000 over the first quarter of 1997. The appropriateness of continuing such an increase will be re-evaluated at least quarterly.
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.
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 increased to $15,903,944 in 1997, compared to $15,372,384 in 1996 and $15,534,686 in 1995. The 3.5% increase in 1997 was primarily due to an improvement in net interest margin. During 1996, a lower average balance of loans and leases and a lower average loan and lease yield, partly offset by a reduction in the average balance of short-term borrowings, resulted in a 1.0% decrease in net interest income. Net interest margin was 5.90%, 5.63% and 5.74% for 1997, 1996 and 1995, respectively.
Total interest income increased to $22,574,669 in 1997 versus $22,376,745 in 1996 and $22,640,331 in 1995. The higher interest revenue reported in 1997 was attributable to an increase in average asset yields. The average yield on interest-earning assets rose from 8.19% in 1996 to 8.38% in 1997. The increase was due to generally higher market interest rates, which included a 25 basis point increase in the prime rate in March 1997. The decline in interest income in 1996 was mainly due to a lower average balance of loans and leases and a lower average loan and lease yield. Interest income foregone on nonaccrual loans and leases amounted to $441,000, $464,000 and $318,000 in 1997, 1996 and 1995, respectively.
Total interest expense decreased to $6,670,725 in 1997, compared to $7,004,361 and $7,105,645 in 1996 and 1995, respectively. The 4.8% decline in 1997 was primarily due to lower average rates paid on deposits, which declined to 3.32% from 3.38% in 1996. During 1997, the Bank continued to experience a migration from lower costing savings into higher costing time deposits. The average rates paid on savings and time deposits during the year were 2.72% and 4.88%, respectively. The improvement of 1.4% in 1996 was due to a lower average aggregate balance of federal funds purchased and short-term borrowings which declined from $2,506,000 in 1995 to $789,000 in 1996.
Other Income and Other Expenses
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 foreign exchange charges, commissions and fees; and gains and losses on investment securities. Other income grew from $2,336,523 in 1995 to $2,445,479 in 1996, and to $2,734,128 in 1997. This represents an increase of $108,956 or 4.7% in 1996 and $288,649 or 11.8% in 1997. The increase in 1996 reflected improved fee income generation on loan and deposit accounts. The 1997 increase was attributable to data processing fees of $350,000 paid to HNB by another financial institution. The contract with this institution ended in December 1997. The gains on investment securities held-to-maturity in 1997 and 1996 were premiums paid to the Bank for securities which were called. During 1996, an equity security available-for-sale with a carrying cost of $10,000 was written off after the issuer ceased operations. In 1995, the Bank acquired $2,103,358 in U.S. agency securities from the former Bank USA which were classified as available-for-sale. These securities were subsequently sold, generating proceeds of $2,122,073. The gross realized gain was $18,715 based on the specific identification method.
Other expenses consist of salaries and employee benefits, occupancy expense of bank premises, equipment expense, computer services and other operating expenses. Other expenses totaled $16,908,897 in 1997, $15,865,640 in 1996 and $15,507,274 in 1995. The increase of $1,043,257 or 6.6% in 1997 was primary due to the establishment of a new branch in Pearl City, the merger of CSI into the Bank, and writedowns in the carrying values of certain properties in other real estate owned. The increase of $358,366 or 2.3% in 1996 was primarily due to the opening of two new branches on Maui in 1995, partly offset by a reduction in FDIC premiums.
Salaries and employee benefits increased $632,848 or 7.8% in 1997, compared to an increase of $410,376 or 5.3% a year earlier. The growth in this category reflects several factors including: (1) an increase in staff due to the merger of CSI, the opening of the Pearl City Branch in 1997 and two branches on Maui in 1995; (2) rising costs for health benefits; (3) higher pension expense; and (4) normal merit and inflationary adjustments, which were adopted to keep the Bank's compensation packages competitive.
Occupancy expense of bank premises rose $177,908 or 5.1% in 1997 versus an increase of $129,663, or 3.8%, in the previous year. The increase in 1997 was attributable to the addition of the Pearl City Branch and CSI's office rent. The increase in 1996 was due to the two new branches on Maui.
Equipment expense increased $129,162 or 15.1% in 1997 and $76,219 or 9.8% in 1996. The increase in 1997 was primarily due to repairs for furniture, fixtures and equipment. The increase in 1996 resulted largely from higher depreciation charges.
Computer services were obtained from CSI, a bank service corporation 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, which resulted in additional assets and liabilities of approximately $1,400,000. Charges for data processing service were $571,000 in 1997, $729,000 in 1996 and $690,000 in 1995. The merger of CSI's operations into the Bank will eliminate these fees in the future, but increased costs may be experienced in salaries and employee benefits and occupancy costs until anticipated efficiencies are realized.
Other operating expenses increased $261,768 or 9.9% in 1997 and decreased $296,617 or 10.1% in 1996. The increase in 1997 was primarily due to writedowns approximating $138,000 of certain properties in other real estate owned as a result of declines in market value (see Loan Portfolio Risk Elements and Other Real Estate Owned). The decrease in 1996 was principally due to a decline in FDIC insurance rates. Also included in other operating expenses for 1996 were adjustments to the Bank's investment in CSI which was accounted for under the equity method prior to August 31, 1997. The Bank's equity in losses of CSI was $59,000 and $200,000 in 1996 and 1995, respectively. At December 31, 1996, the Bank's investment in CSI was reduced to zero.
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 third parties with whom the Bank does business.
The Bank is committed to addressing the Year 2000 issue in a timely and responsible manner and has dedicated its internal resources to address this issue. Management has completed an assessment of its mission-critical systems and has implemented a program to monitor the Year 2000 efforts of its suppliers, service providers and large corporate customers. In June 1998, the Bank will be converting its computer system as part of its normal upgrade process to improve efficiency and better serve its customers. The new system, which is Year 2000 compliant, will replace the current one used by the Bank to process its general ledger and core applications, which will no longer be supported by the vendor in the future. The cost for the new computer system is approximately $1,200,000, which will be capitalized and depreciated over its useful life. The estimated depreciation charges are expected to be offset by lower maintenance fees. The costs for other systems are not anticipated to be material and will be accounted for appropriately. Testing of hardware and software upgrades, system replacements and other associated changes is expected to be well underway by December 31, 1998.
Income Tax Provision
The Company's federal and state income tax provision decreased to $358,000 in 1997, compared to $431,000 in 1996 and $620,000 in 1995. The effective tax rates for those years were 35.5%, 37.7%, and 37.3%, respectively. The lower effective rate for 1997 reflected the utilization of tax benefits arising from the acquisition and liquidation of CSI. The increase in the deferred tax assets was primarily due to the net operating loss carryforwards generated by CSI which will be utilized to offset the Company's future taxable income.
FINANCIAL CONDITION
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, 1997, total deposits were $258,720,805, representing a decrease of $5,873,575 or 2.2% from total deposits of $264,594,380 at December 31, 1996. The decline was primarily due to a customer's withdrawal of $15,500,000 from a savings account for a real estate investment which was anticipated by the Bank.
The following table presents the distribution of the Bank's deposit accounts at December 31 for the years indicated.
Noninterest-bearing demand deposits ended 1997 at $9,474,214 above the balance reported at year-end 1996. 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 1997 were essentially unchanged, compared to the same date in 1996. 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. Time deposits increased by
$3,753,723 over year-end 1996 levels, partly offsetting a decline in savings deposits of $18,864,955. During 1997, 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 2.72% and 4.88%, respectively. Since December 31, 1995, time deposits, as a percentage of total deposits, have grown from 22.1% to 27.1% at December 31, 1997. Meanwhile, over the same period, savings deposits have declined from 42.3% to 35.2%. 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, 1997, 1996 and 1995, public time deposits totaled $32,001,000, $32,192,000, and $30,197,000, respectively, representing 12.4%, 12.2% and 11.2% of the Bank's total deposits.
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.
The Bank had no trading securities at December 31, 1997 and 1996. The book and fair values of investment securities held-to-maturity at December 31, 1997, were $47,481,373 and $47,540,000, respectively, compared to $47,929,910 and $48,007,000 at December 31, 1996. There were no sales from the held-to-maturity portfolio in 1997 or 1996. At December 31, 1997, the book and fair value of investment securities available-for-sale was $1,760,103, compared to $1,487,003 at December 31, 1996. During 1997 and 1996, there were no transfers between the held-to-maturity, available-for-sale and trading categories.
Loan and Lease Portfolio
At December 31, 1997, total loans and leases stood at $219,018,348, marking a new milestone for the Bank, and representing an increase of $11,755,609 or 5.7% from the level reported at December 31, 1996. The growth in the portfolio was primarily due to increases in real estate and commercial loans.
Real estate loans increased to $138,689,235 at year-end 1997, $5,474,998 higher than the level at year-end 1996. Most of the growth occurred in family residential and commercial property loans. Commercial, industrial and agricultural loans ended the year at $70,956,494, an increase of $6,152,193 from December 31, 1996. Consumer loans, which consist of loans to individuals for household, family and other personal expenditures, were $7,612,614 at year-end 1997, little changed from the $7,674,104 reported for the same date a year earlier. At December 31, 1997, direct financing leases and other loans totaled $1,307,313 and $452,692, respectively, compared to $1,013,049 and $557,048 at December 31, 1996.
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. The Bank has no foreign loans in its portfolio.
At December 31, 1997, real estate loans totaled $138,689,235, accounting for 63.3% of the loan and lease portfolio. Included in this category are family residential, construction and commercial property loans which at year-end 1997 amounted to $107,180,757; $2,616,724; and $28,891,754, respectively. While low mortgage rates combined with lower prices have made housing in Hawaii more affordable than it has been in years, the residential real estate market, in general, is expected to remain soft until confidence levels in the local economy improve. In the commercial area, lease rents are expected to remain under pressure due to relatively high vacancies. Accordingly, commercial property values could continue to erode in 1998.
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, 1997, noncurrent loans and leases increased to $4,206,000, representing 1.9% of loans and leases outstanding, compared to $3,392,000, or 1.6%, at December 31, 1996. The increase was primarily attributable to three real estate loans which were placed on nonaccrual. Most of the credits in the noncurrent category are collateralized by real estate. There were no restructured loans or leases as of December 31, 1997 or 1996.
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.
Other real estate owned ("OREO"), which is included in other assets, is generally composed of properties acquired through foreclosure proceedings in settlement of debts previously contracted. These assets are recorded at the lower of cost or fair market value based on current appraisals less estimated selling costs. Any excess of the carrying amount of the loan over the fair market value of the assets, net of estimated disposal costs, is charged against the allowance for loan and lease losses at the time of transfer. Subsequent to transfer, any losses on disposition or writedowns as a result of declines in the market value of specific properties are recorded as a charge to other expenses, which reduces current earnings. During 1997, a periodic re-evaluation of certain OREO properties indicated lower values due to a sluggish real estate market. Accordingly, the Bank reduced its carrying costs for those assets with a charge to other expenses of approximately $138,000 that directly impacted current earnings. At December 31, 1997, OREO totaled $1,668,000 or 0.56% of total assets, compared to $1,219,000, or 0.41% of total assets, at December 31, 1996. The portfolio consisted at year-end of two commercial properties, a single-family home and a residential condominium.
The following table presents information on noncurrent loans and leases, restructured loans and leases and OREO at December 31 for the years indicated:
Potential Problem Loans
The Bank has an internal grading and review system for the purpose of identifying risk and controlling potential problem credits. 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.
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 potential losses in the portfolio. The adequacy of the allowance is reviewed at least quarterly by management and approved by the Board of Directors, and more frequent analyses may be performed if warranted. In appraising the adequacy of the allowance, management considers
historical loss experience, the value and adequacy of collateral, levels of and trends in nonperforming loans and leases, loan concentrations, the growth and composition of the portfolio, the review of monthly delinquency reports, the 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. Furthermore, as part of the review process, each credit which is over $50,000 and has been placed on nonaccrual is individually assessed for loss potential. When a loan reaches this stage, it is also the Bank's practice to obtain a current evaluation or appraisal of the collateral.
During 1997, the Bank provided $720,000 for possible loan and lease losses, compared to $810,000 and $700,000 in 1996 and 1995, respectively. Gross charge-offs for 1997, 1996 and 1995 were $769,141, $1,531,106 and $1,103,875, respectively. Of these losses, 49% was attributable to three commercial loans in 1997; 63% to two commercial loans in 1996 and 58% to one commercial loan in 1995. Recoveries totaled $179,522 in 1997, $692,107 in 1996, and $78,672 in 1995. 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 declined to $589,619 in 1997, compared to $838,999 in 1996 and $1,025,203 in 1995. The ratio of net charge offs to average loans and leases for those years were 0.28%, 0.40%, and 0.48% respectively.
At December 31, 1997, the allowance for loan and lease losses stood at $3,197,815, representing 1.46% of total loans and leases outstanding, compared to $3,067,434 or 1.48%, at year-end 1996. As of the same date, the reserve provided coverage of 76.0% of noncurrent loans and leases versus 90.4% at December 31, 1996. The majority of the credits in the noncurrent category are collateralized by real estate.
While there were some indications in the early part of 1997 that Hawaii's economy may be close to bottoming out, the growing problems in Japan and the Asian currency devaluations that occurred later in the year eliminated any prospects for a recovery in the foreseeable future. Accordingly, management has increased the provision for loan and lease losses from $180,000 for the first quarter of 1997 to $270,000 for the first quarter of 1998. The appropriateness of continuing such an increase will be re-evaluated at least quarterly.
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, 1997, these resources totaled $22,628,962 or 7.6% of total assets, compared to $33,276,700 or 11.2% at December 31, 1996. The decrease was primarily due to an decline in federal funds sold which was used to finance the Bank's loan growth and a large savings withdrawal. (See "Loan and Lease Portfolio" and Deposits.") In
order to generate additional liquidity and reduce interest rate risk, the Bank's current strategy is to sell its fixed-rate mortgage loan originations in the secondary market to government instrumentalities like the Federal Home Loan Mortgage Company and the Federal National Mortgage Association.
On the liability side of the balance sheet, deposits historically have been the primary source of liquidity for HNB. The Bank places a high priority on attracting and retaining a stable base of core deposits and, thus, does not actively solicit large time certificates of deposits or deposits from outside of the Bank's market area. Furthermore, no deposits are sold or placed through brokers. The State of Hawaii, City and County of Honolulu, and other public agencies are important providers of funds. At December 31, 1997, 1996, and 1995, public time deposits represented 12.4%, 12.2% and 11.2%, respectively, of the total deposit base.
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 10.0% of total assets, including a cash management agreement line of 5.0%. 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. At year-end 1997, drawings under federal funds lines and advances from the FHLB aggregated $8,000,000. There were no purchased federal funds or FHLB borrowings outstanding at December 31, 1996.
Operating activities provided net cash of $304,769 in 1997, $2,214,134 in 1996 and $3,060,597 in 1995. The decline in 1997 was primarily due to higher outlays to suppliers and employees. Loan originations, net of principal repayments, accounted for a significant portion of the net cash used in investing activities of $13,128,310 in 1997. Comparatively, in 1996 and 1995, proceeds from loan sales contributed largely to the net cash provided by investing activities of $2,880,677 and $1,739,085, respectively. Financing activities provided net cash of $2,175,803 in 1997, due primarily to a short-term advance from the FHLB and a net increase in federal funds purchased, partly offset by a net decrease in deposits due to a large savings withdrawal. Lower corporate checking and escrow fund accounts resulted in a decline in noninterest-bearing demand deposits, which contributed to the net cash used in financing activities of $4,476,820 in 1996. In 1995, net cash provided by financing activities was $7,248,756, due primarily to the assumption of deposits from the former Bank USA.
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. (See also "Net Interest Income," "Liquidity Management" and "Shareholders' Equity and Capital Resources".)
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. All of the Bank's financial instruments (i.e., investments, 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 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, etc.
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, 1997, and remained at those levels, the Bank's net interest income for the year would decrease by approximately 0.06% from the base or flat-rate scenario. Conversely, if U.S. Treasury rates increased by the same magnitude as of the identical date, net interest income for the year would rise by approximately 0.70% from the base case.
The results of these projections are highly dependent upon two key assumptions: loan prepayment rates and the rate-sensitivity of nonmaturity deposits, such as demand and savings accounts. The prepayment assumptions 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) funds are reinvested into the same instruments; and (3) spread relations remain constant. Finally, in interpreting these results, it is important to note that they exclude, among other things, the effects of competition, which have, and will continue to have, a significant impact on the Bank's net interest income.
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.
Shareholders' equity totaled $28,341,813 at year-end 1997, an increase of $544,525 or 2.0% over the previous year-end balance. The growth in equity was achieved through retention in earnings after payment of cash dividends. Book value per share increased from $39.10 at December 31, 1996, to $39.86 at December 31, 1997.
The Company is subject to risk-based capital guidelines which are used by bank regulatory agencies to evaluate capital adequacy. Under this system, assets and off-balance sheet items are assigned to one of four risk-weight categories to calculate a risk-weighted asset base. The rules require a minimum Tier 1 capital ratio of 4.0% of risk-weighted assets and a minimum total capital ratio of 8.0% of risk-weighted assets. Tier 1 capital generally consists of common shareholders' equity less goodwill, while total capital includes in addition to Tier 1 capital, the allowance for possible 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, 1997, the Company's Tier 1 and total capital ratios were 13.5% and 14.8%, respectively, compared to 14.0% and 15.2% at December 31, 1996. At year-end 1997 and 1996, the Company's leverage ratio was 9.9% and 9.5%, 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 1997 figures, this would amount to $8,502,544.
Effects of New Accounting Standards
The Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 - An Amendment of FASB Statement No. 125," on January 1, 1997. Statement No. 125 applies a control-oriented, financial components
approach to financial-asset-transfer transactions whereby the Company (1) recognizes the financial and servicing assets it controls and the liabilities it has incurred, (2) derecognizes financial assets when control has been surrendered, and (3) derecognizes liabilities once they are extinguished. The adoption of this Statement did not have a material impact on the consolidated financial statements of the Company.
In addition, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," in 1997. Since there was no change in the computation and presentation of earnings per share for the Company from previous years, the adoption of this Statement did not have a material impact on the consolidated financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. Statement No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. Statement No. 131 requires that information be provided about the different types of business activities in which an enterprise engages and the different economic environment in which it operates. Since the Company has no items of other comprehensive income and does not have separate operating segments, the adoption of these Statements is not expected to have a material impact on the consolidated financial statements of the Company.
In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" which is effective for fiscal years beginning after December 15, 1997. The Statement revises and standardizes the employers' disclosures about pension and other postretirement benefit plans, but does not change the measurement or recognition of those plans. The Company will adopt this Statement when it becomes effective, which will require modification of the Company's pension plan disclosure.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, notes, and supplementary data thereto called for by this item and the report of independent certified public accountants are provided in item 14(a).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
The following information contained in items 10 to 13, except for the "Compensation Committee Report," is incorporated herein by reference from various pages of Bancshares' Proxy Statement for the 1998 Annual Meeting of Shareholders ("Proxy Statement").
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding "Directors and Executive Officers" of Bancshares located on page 2, 3 and 15 of the Proxy Statement is incorporated by reference.
Information regarding "Compliance of Section 16(a) Filing requirements" located on page 15 of the Proxy Statement is incorporated by reference.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
Information regarding "Executive Compensation" located on pages 5-9 of the Proxy Statement is incorporated by reference.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding "Principal Shareholders and Ownership by Management" is located on pages 11-15 of the Proxy Statement is incorporated by reference.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding "Related Transactions" located on pages 10-11 of the Proxy Statement is incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Hawaii National Bancshares, Inc. and Subsidiary: Report of Independent Accountants Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Notes to the Consolidated Financial Statements
(2) Supplementary Financial Statement Schedules
Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted.
(3) Exhibits
See index to exhibits to this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors Hawaii National Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Hawaii National Bancshares, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income and changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hawaii National Bancshares, Inc. and Subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Honolulu, Hawaii January 21, 1998
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
----------------------
The accompanying notes are an integral part of the consolidated financial statements.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------
The accompanying notes are an integral part of the consolidated financial statements.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------
The accompanying notes are an integral part of the consolidated financial statements.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------
The accompanying notes are an integral part of the consolidated financial statements.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
---------------------------
The accompanying notes are an integral part of the consolidated financial statements.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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 thirteen 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 $300,000 at December 31, 1997.
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
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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investments in the FHLB and FRB are required to be maintained by the Company, are carried at cost and can only be sold back at par value to the FHLB, FRB or to another member institution.
Investment securities are classified in one of three categories and are accounted for as follows: 1) investment securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; 2) investment securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and 3) investment securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale and reported at fair value, with unrealized gains and losses, if any, excluded from earnings and reported in a separate component of shareholders' equity.
Gains and losses realized on the disposition of investment securities are determined using the specific identification method.
Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
LOANS HELD FOR SALE -
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance charged to income.
LOANS AND LEASES -
Loans are carried at face value less undisbursed funds, unearned income and payments received. Loan origination fees net of direct costs of origination are deferred and accounted for as an adjustment of the yield. Commitment fees are deferred and amortized over the commitment term.
Equipment acquired by the Company for its leasing operations is accounted for on the financing method with income recognized over the life of the lease based upon a level rate of return on the unrecovered investment.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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 POSSIBLE LOAN AND LEASE LOSSES -
The allowance for possible loan and lease losses ("allowance") is maintained at a level which, in management's judgment, is adequate to absorb future losses. Estimates of future 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 the historical loss experience, the value and adequacy of collateral, the level of nonperforming loans and leases, loan concentrations, the growth and composition of the portfolio, the review of monthly delinquency reports, the 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.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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 possible 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 estimated economic lives or lease terms 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.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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 possible 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.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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 1997, 1996 and 1995. Although the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," in 1997, there was no change in the computation and presentation of earnings per share for the Company from previous years. Therefore, the adoption of this Statement did not have a material impact on the consolidated financial statements of the Company.
RECLASSIFICATION -
Certain balances in the 1995 and 1996 financial statements have been reclassified to conform with the 1997 presentation. These reclassifications have no effect on net income as previously reported.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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NEW PRONOUNCEMENTS -
The Company adopted Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," as amended by Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125 - An Amendment of FASB Statement No. 125," on January 1, 1997. Statement No. 125 applies a control-oriented, financial-components approach to financial-asset-transfer transactions whereby the Company (1) recognizes the financial and servicing assets it controls and the liabilities it has incurred, (2) derecognizes financial assets when control has been surrendered, and (3) derecognizes liabilities once they are extinguished. The adoption of this Statement did not have a material impact on the consolidated financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" and No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. Statement No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. Statement No. 131 requires that information be provided about the different types of business activities in which an enterprise engages and the different economic environment in which it operates. Since the Company has no items of other comprehensive income and does not have separate operating segments, the adoption of these Statements is not expected to have a material impact on the consolidated financial statements of the Company.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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2. INVESTMENT SECURITIES
Comparative amortized cost and fair value of investment securities at December 31, 1997, 1996 and 1995 were as follows:
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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The amortized cost and fair value of investment securities at December 31, 1997, by contractual maturity, excluding securities which have no stated maturity, were as follows:
Investment securities with an aggregate book value of $39,489,000, $48,000,000 and $44,020,000 at December 31, 1997, 1996 and 1995, 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 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, $729,000 and $690,000 in 1997, 1996 and 1995, 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 and $200,000 in 1996 and 1995, respectively. The Bank's investment in CSI was written off as of December 31, 1996.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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4. LOANS AND LEASES
Loans and leases outstanding at December 31, 1997 and 1996 are summarized as follows:
Loans to officers, directors and their affiliates amounted to $36,000 and $81,000 at December 31, 1997 and 1996, respectively.
There were no loans pledged as collateral for U.S. government funds on deposit at December 31, 1997 and 1996.
At December 31, 1997 and 1996, the Company serviced loans for others amounting to $50,350,000 and $49,064,000, respectively. There were no loans held for sale at December 31, 1997 and 1996.
At December 31, 1997 and 1996, the undisbursed portion of loans amounted to $2,688,000 and $2,719,000 respectively.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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, 1997 and 1996, the Company's investment in vehicle and equipment direct financing leases consisted of the following:
As of December 31, 1997, the future minimum lease payments to be received from direct financing leases are as follows for the years ending December 31:
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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5. ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
An analysis of the allowance for possible loan and lease losses for the years ended December 31, 1997, 1996 and 1995 is presented below:
Nonaccrual loans amounted to approximately $3,782,000 and $3,180,000 at December 31, 1997 and 1996, respectively. There was no interest income recognized on nonaccrual loans in 1997, 1996 and 1995. Had these loans performed in accordance with their original terms, interest income of $441,000, $464,000 and $318,000 would have been recorded in 1997, 1996 and 1995, respectively.
The following table presents information related to impaired loans as of and for the year ended December 31, 1997 and 1996:
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 1997 and 1996. During fiscal 1997 and 1996, certain loans were written down by approximately $287,000 and $516,000, respectively, to the fair value of the collateral.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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6. PREMISES AND EQUIPMENT
Premises and equipment as of December 31, 1997 and 1996 are summarized as follows:
Depreciation expense on premises and equipment amounted to $589,936, $564,460 and $480,109 in 1997, 1996 and 1995, respectively.
7. DEPOSITS
Time certificates of deposit include certificates of $100,000 or more aggregating $49,053,000 at December 31, 1997 and $47,945,000 at December 31, 1996. Interest expense on such certificates was $2,432,000, $2,197,000 and $2,137,000 in 1997, 1996 and 1995, respectively.
At December 31, 1997, the scheduled maturities of time deposits were as follows:
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Variable rate deposits limited to three withdrawals or less per month are classified as savings deposits. At December 31, 1997 and 1996, such deposits aggregated $27,860,000 and $42,241,000, respectively.
8. SHORT-TERM BORROWINGS
At December 31, 1997 and 1996, short-term borrowings were composed of the following:
The U.S. Treasury tax and loan collections on deposit bear interest (5.25% at December 31, 1997 and 5.15% at December 31, 1996) 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.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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At December 31, 1997, the aggregate minimum rental commitments under noncancelable leases are as follows for the years ending December 31:
Where future rentals are subject to renegotiation, the minimum amounts shown above are based on the latest rents.
Rent expense was $2,493,000 in 1997, $2,366,000 in 1996 and $2,294,000 in 1995, net of sublease income of $56,000 in 1997, $59,000 in 1996 and $46,000 in 1995. 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 1997, 1996 and 1995.
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.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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. Management believes, as of December 31, 1997 and 1996, that the Company met all capital adequacy requirements to which it is subject.
As of December 31, 1997 and 1996, 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. There are no conditions or events since that notification that management believes have changed the Company's category.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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, 1997, retained earnings of the Bank available for dividends without prior approval of the Comptroller of the Currency amounted to $2,102,000.
11. INCOME TAXES
The provision for income taxes for 1997, 1996 and 1995 consisted of the following:
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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At December 31, 1997 and 1996, the components of the net deferred tax asset were as follows:
As a result of the Company becoming the sole stockholder of CSI in 1997, the Company recorded $1,047,000 of deferred tax assets relating to net operating loss carryforwards of $2,753,000 generated by CSI and $130,000 of tax credits. In 1997, the Company utilized $325,000 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 and increased $23,000 in 1996. In 1997, the deferred tax asset and related valuation allowance associated with the Company's investment in CSI were reversed. In addition, certain net operating loss carryforwards were utilized in 1997.
A reconciliation of the Company's effective tax rate with the statutory Federal income tax rate is as follows:
At December 31, 1997, the Company had net operating loss and research and experimentation tax credit carryforwards that were generated by CSI which expire in the following years:
12. 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.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Net pension expense for 1997, 1996 and 1995 was composed of the following:
The funded status of the plan and prepaid pension cost at December 31, 1997 and 1996 were as follows:
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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The actuarial computation of projected benefit obligations was based upon a discount rate of 7.0% at December 31, 1997 and 1995, and 7.25% at December 31, 1996 and a rate of increase in compensation levels of 5.0% in 1997, 1996 and 1995. The expected long-term rate of return on plan assets was 7.5% in 1997, 1996 and 1995.
In 1996, the mortality assumption was changed to the 1983 Group Annuity Mortality table which resulted in an increase in the plan's accumulated benefit obligation.
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 $36,000, $27,000 and $25,500 in 1997, 1996 and 1995, respectively.
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 INCOME STATEMENT INFORMATION
Other operating expenses for 1997, 1996 and 1995 included the following:
Repairs and maintenance expenditures included in occupancy expense and equipment expense amounted to $644,690, $517,428 and $506,272 in 1997, 1996 and 1995, respectively.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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, 1997 and 1996 were as follows:
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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 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, 1997 and 1996 were as follows:
The fair values of off-balance sheet financial instruments at December 31, 1997 and 1996 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, 1997 and 1996, the fair values of commitments to extend credit amounted to $50,000 and $30,000, respectively, and the fair values of letters of credit amounted to $28,000 and $40,000, respectively.
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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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.
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, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 consists of the following:
BALANCE SHEETS DECEMBER 31, 1997 AND 1996
HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
In the above condensed financial information, the Parent's investment in Hawaii National Bank is accounted for by the equity method.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 17th day of March 1998.
HAWAII NATIONAL BANCSHARES, INC. (Registrant)
By /s/ K.J. Luke --------------------------------- K.J. Luke Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
INDEX TO EXHIBITS
Exhibit No. Exhibit - ----------- -------
3.1 Articles of Incorporation of Bancshares - Incorporated by reference to Exhibit 3.1 of Bancshares' Annual Report on Form 10-K for the fiscal year ended December 31, 1991 filed with the Securities and Exchange Commission.
3.2 Amended and Restated Bylaws of Bancshares - Incorporated by reference to Exhibit 3.3 of Bancshares' Annual Report on Form 10-K for the fiscal year ended December 31, 1995 filed with the Securities and Exchange Commission.
10.1 Supplemental Executive Retirement Plan - Incorporated by reference to Exhibit 10.1 of Bancshares' Annual Report on Form 10-K for the fiscal year ended December 31, 1994 filed with the Securities and Exchange Commission.
21 Subsidiaries of Bancshares: The only subsidiary of Bancshares is Hawaii National Bank, a National Banking Association.
27 Financial Data Schedule