<PAGE>   1
                                     UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION

                                Washington, D.C.  20549

                                       FORM 10-K

(Mark One)

      [X] ANNUAL REPORT PURSUANT TO SECTION 13D OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996

                                       OR

   [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
               For the transition period from ________ to ________

                            Commission File Number 0-15508

                           HAWAII NATIONAL BANCSHARES, INC.
                (Exact name of registrant as specified in its charter)

                   HAWAII                            99-0250218
         (State of incorporation)        (IRS Employer Identification No.)

      45 NORTH KING STREET, HONOLULU, HAWAII               96817
     (Address of principal executive offices)           (Zip Code)

                                 (808) 528-7711
              (Registrant's telephone number, including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                              Name of Each Exchange on
             Title of Each Class                 on Which Registered
             -------------------              ------------------------
                    None                           Not Applicable

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          Common Stock, $1.00 Par Value
                                (Title of Class)

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                   Yes  X    No
                                       ---     ---
      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]

      The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of February 28, 1997 was $3,262,521.

      The number of shares outstanding of each of the registrant's classes of
common stock as of February 28, 1997 was:

                  Title of Class               Number of Shares Outstanding
                  --------------               ----------------------------
            Common Stock, $1 Par Value                711,000 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on April 15, 1997, are incorporated by reference under
Part III of this Report.
<PAGE>   2
                                     PART I

ITEM 1.     BUSINESS

DESCRIPTION OF BUSINESS

      Hawaii National Bancshares, Inc. ("Bancshares"), whose principal office is
maintained at 45 North King Street, Honolulu, Hawaii, is a Hawaii corporation.
Bancshares is a bank holding company whose wholly-owned subsidiary is Hawaii
National Bank ("HNB" or the "Bank"), a national banking association.

      The main office of the Bank is also located at 45 North King Street,
Honolulu, Hawaii. While the Bank's customer base covers the entire State of
Hawaii, the principal market areas are the county of Honolulu on the island of
Oahu, which currently is served by nine 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. In 1997,
the Bank anticipates opening a branch in Pearl City, Oahu. (See ITEM 2.
Properties).

      The principal components of Hawaii's economy are the tourism industry,
government expenditures, agriculture, construction, manufacturing, retailing,
wholesaling, and service businesses.

      HNB offers a full range of banking services to businesses as well as
individuals. These include personal and business checking accounts; savings
accounts; time deposits; automated teller equipment; commercial loans -
collateralized and uncollateralized; consumer loans for such things as
automobiles, household appliances, home improvements, and college aid; real
estate collateralized loans; bank credit cards; direct lease financing; foreign
exchange; commercial letters of credit; collections and discounts; safe deposit
boxes; travelers checks; money orders; cashier's checks; sale of United States
Savings Bonds; and night depository. The Bank does not have a trust department
and, therefore, does not perform any trust functions.

      HNB's ability to extend its existing branch banking system is subject to
approval by the Office of Comptroller of the Currency ("OCC") in compliance with
applicable Hawaii law. Currently, Hawaii law generally permits a bank to branch
anywhere in the State. Recent federal legislation designed to expand interstate
branching and relax federal restrictions on interstate banking will continue to
be phased in over the next few months and may expand opportunities for bank
holding companies. Hawaii has adopted legislation effective June 1, 1997 which
generally permits interstate mergers, subject to certain restrictions. For a
more detailed discussion of this federal legislation and Hawaii's response, see
the discussion following under the heading "Supervision and Regulation - Bank
-Recent Federal Banking Legislation - Interstate Banking and Branching."
<PAGE>   3
COMPETITION

      The banking business in Hawaii is highly competitive. There are five other
commercial banks doing general banking business and six savings and loan
associations doing business in Hawaii. The Bank actively competes for business
with other banks, savings and loan associations, credit unions, and individual
loan companies within its market areas. In varying degrees, the Bank also faces
competition from other types of financially oriented institutions which are
either lenders of money or credit, or accept savings or other deposits.
Insurance companies, investment management service firms and other business
firms, and individuals actively compete with the Bank's mortgage loan services.
In addition, foreign (non-Hawaii) banks currently conduct banking activities,
also performed by banks in Hawaii, except for retail deposit-taking.

      As of December 31, 1996, HNB, with $264,170,000 in deposits, $207,270,000
in loans, and $293,867,000 in total assets, ranked fifth among the six
commercial banks in Hawaii.

EMPLOYEES

      On December 31, 1996, HNB had 221 full-time employees and 8 part-time
employees. HNB considers its relations with its employees to be good.

SUPERVISION AND REGULATION

BANCSHARES

Introduction

      The following generally refers to certain significant statutes and
regulations affecting the banking industry. These references are only intended
to provide brief summaries and, therefore, are not complete and are qualified by
the statutes and regulations referenced. In addition, due to the numerous
statutes and regulations which apply to and regulate the operation of the
banking industry, many are not referenced below.

General

      As a bank holding company, Bancshares is subject to the Bank Holding
Company Act of 1956 ("BHCA"), as amended, which places Bancshares under the
supervision of the Board of Governors of the Federal Reserve System ("FRB"). In
general, the BHCA limits the business of bank holding companies to owning or
controlling banks and engaging in other activities related to banking. Certain
recent legislation designed to expand interstate branching and relax federal
restrictions on interstate banking may expand opportunities for bank holding
companies (for additional information see below under the heading "Bank - Recent
Federal Banking Legislation - Interstate Banking and Branching"). However, the
impact of this legislation on Bancshares is unclear at this time.
<PAGE>   4
Holding Company Structure

      FRB Regulation. Bancshares must obtain the approval of the FRB: (1) before
acquiring direct or indirect ownership or control of any voting shares of any
bank if, after the acquisition, it would own or control, directly or indirectly,
more than 5% of the bank's voting shares; (2) before merging or consolidating
with another bank holding company; and (3) before acquiring substantially all of
the assets of any additional banks. Until September of 1995, the BHCA also
prohibited the acquisition by Bancshares of any such interest in any bank or
bank holding company located in a state other than Hawaii unless the laws of the
state in which such bank was located expressly authorized such acquisition. Now,
subject to certain state laws, such as age and contingency laws, a bank holding
company that is adequately capitalized and adequately managed may acquire the
assets of an out-of-state bank without regard to whether the transaction is
prohibited by the laws of any state.

      Bancshares files annual and quarterly reports and any other reports the
FRB may require from time to time. In addition, the FRB periodically examines
Bancshares and the Bank.

      Holding Company Control of Nonbanks. With certain exceptions, the BHCA
prohibits bank holding companies from acquiring direct or indirect ownership or
control of voting shares in any company other than a bank or a bank holding
company, unless the FRB finds the company's business activities are incidental
to the business of banking or managing or controlling banks. When making this
determination, the FRB in part considers whether allowing a bank holding company
to engage in those activities would offer advantages to the public that would
outweigh possible adverse effects. The FRB has by regulation found certain
activities incidental to the business of banking. These activities include (1)
operating an industrial loan company, industrial bank, savings association,
mortgage company, finance company, trust company, credit card company or
factoring company; (2) performing certain data processing operations; and (3)
providing investment and financial advice. On the other hand, the FRB has
concluded that certain other activities are not incidental to the business of
banking. These activities include real estate brokerage and syndication, land
development, property management, underwriting of life insurance not related to
credit transactions and, with certain exceptions, securities underwriting and
equity funding. From time to time, the FRB may add to or delete from the list of
activities permissible for bank holding companies.

      Transactions With Affiliates. Bancshares and HNB are considered affiliates
within the meaning of the Federal Reserve Act, and transactions between
affiliates are subject to certain restrictions. Section 23A of the Federal
Reserve Act places limits on certain covered transactions. These covered
transactions include, subject to specific exceptions, loans by bank subsidiaries
to affiliates; investments by bank subsidiaries in securities issued by an
affiliate or the accepting of those securities as collateral; and the purchase
by a bank subsidiary of an affiliate's assets. Section 23B of the Federal
Reserve Act, among other things, restricts an institution from engaging in
certain transactions with certain affiliates unless the transactions are on
terms substantially the same, or at least as favorable, to the institution as
those prevailing at the time for comparable transactions with nonaffiliated
companies.
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      Tie-In Arrangements. Bancshares and the Bank are prohibited from engaging
in certain tie-in arrangements in connection with any extension of credit, sale
or lease of property or furnishing of services. For example, with certain
exceptions, neither Bancshares nor the Bank may condition an extension of credit
to a customer on either (1) a requirement that the customer obtain additional
services provided by it or (2) an agreement by the customer to refrain from
obtaining other services from a competitor.

      State Law Restrictions. As a corporation incorporated under Hawaii
corporate laws, Bancshares may also be subject to certain limitations and
restrictions as provided under applicable Hawaii laws.

      Securities Registration and Reporting. The common stock of Bancshares is
registered as a class with the Securities and Exchange Commission ("SEC") under
the Securities Exchange Act of 1934. Thus, Bancshares is subject to the periodic
reporting and proxy solicitation requirements and the insider-trading
restrictions of that Act. The periodic reports, proxy statements, and other
information filed by Bancshares under that Act can be inspected and copied at or
obtained from the Washington, D.C., office of the SEC. In addition, the
securities issued by Bancshares are subject to the registration requirements of
the Securities Act of 1933 and applicable state securities laws, unless
exemptions are available.

Control Transactions

      The Change in Bank Control Act of 1978, as amended, requires a person or
group of persons acting in concert acquiring "control" of a bank holding company
to provide the FRB with at least 60 days' advance written notice of the proposed
acquisition. Following receipt of this notice, the FRB has 60 days to issue a
notice disapproving the proposed acquisition, but the FRB may extend this time
period for up to an additional 30 days. An acquisition may be completed before
the expiration of the disapproval period if the FRB issues written notice of its
intent not to disapprove the transaction.

      In addition, any "company" would be required to obtain the FRB's approval
before acquiring 25% (5% if the company is a bank holding company) or more of
the outstanding shares of Bancshares or otherwise obtaining control over
Bancshares.

BANK

General

      Despite some recent legislative initiatives to reduce regulatory burdens,
banking remains a highly regulated industry. Legislation enacted from time to
time may increase the cost of doing business, limit or expand permissible
activities, or affect the competitive balance between banks and other financial
and nonfinancial institutions. Proposals to change the laws and regulations
governing the operations and taxation of banks and other financial institutions
are frequently made in Congress, in state legislatures, and before various bank
regulatory agencies. In addition, there continues to be proposals in Congress to
restructure the banking system.

      Some of the significant areas of bank regulation are generally discussed
below.
<PAGE>   6
Regulation of National Banks

      HNB, as a national banking association, is subject to primary regulation
and examination by the OCC. It is also subject to regulation by the FRB and, to
a more limited extent, by the Federal Deposit Insurance Corporation ("FDIC").
Federal statutes and regulations which govern HNB's operations relate to
required reserves against deposits, investments, loans, mergers and
consolidations, borrowings, issuance of securities, payment of dividends,
establishment of branches, and other aspects of its operations. The National
Bank Act restricts HNB to performing commercial banking business and engaging in
activities incidental to the business of banking and prohibits HNB from
investing in equity securities, except in its fiduciary capacity. The OCC also
may prohibit a national bank from engaging in activities it considers unsafe and
unsound business practices.

Regulation of Management

      Federal law: (1) sets forth circumstances under which officers or
directors of a bank may be removed by the institution's federal supervisory
agency; (2) places restraints on lending by a bank to its executive officers,
directors, principal shareholders, and their related interests; and (3)
prohibits management personnel of a bank from serving as a director or in other
management positions of another financial institution whose assets exceed a
specified amount or which has an office within a specified geographic area.

Control of Financial Institutions

      No person may acquire "control" of a bank unless the appropriate federal
agency has been given 60 days prior written notice and within that time the
agency has not disapproved the acquisition. Substantial monetary penalties may
be imposed for violation of the change in control or other provisions of banking
laws.

Recent Federal Banking Legislation

      Interstate Banking and Branching. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Act") generally will, over the
next few months, permit nationwide interstate banking and branching. This
legislation generally authorizes interstate branching and relaxes federal law
restrictions on interstate banking. Subject to certain state laws, such as age
and contingency laws, the Interstate Act allows adequately capitalized and
adequately managed bank holding companies to purchase the assets of out-of-state
banks (effective as of September 29, 1995). Additionally, beginning June 1,
1997, the Interstate Act permits interstate bank mergers, subject to certain
state laws, such as age and contingency laws, unless the home state of either
merging bank has "opted-out" of these provisions by enacting "opt-out"
legislation. States may also "opt-in" to these bank merger provisions early by
enacting non-discriminatory "opting-in" legislation permitting interstate
mergers within their own borders before June 1, 1997. The Interstate Act does
allow states to impose certain conditions on interstate bank mergers within
their borders; for example, states may require that the in-state merging bank
exist for up to five years before the interstate merger. Under the Interstate
Act, states may also "opt-in" to de novo branching, allowing out-of-state banks
to establish de novo branches within the state.
<PAGE>   7
      Legislation adopted in Hawaii in June of 1996, effective June 1, 1997,
generally permits interstate mergers, subject to certain restrictions. Under
this legislation, a Hawaii state bank must exist for at least five years before
it can be acquired by an out-of-state bank. In addition, out-of-state banks that
do not already operate a branch in Hawaii may not establish de novo branches in
Hawaii or establish and operate a branch by acquiring a branch in Hawaii.
Additional legislation is currently being considered in Hawaii which would make
entrance into the Hawaii market via branching easier in the future. However, the
probability that this legislation will be adopted or amended cannot be predicted
at this time.

      Regulatory Improvement. In 1994, Congress enacted the Community
Development and Regulatory Improvement Act ("Regulatory Improvement Act") with
the intent of, among other things, reducing the regulatory burden on financial
institutions. This Act is intended to streamline certain regulatory procedures
and relax regulatory compliance requirement. In addition, the Regulatory
Improvement Act specifically directs each federal banking agency to review and
streamline its regulations and written supervisory policies.

Other Significant Federal Banking Legislation

      Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDICIA"). FDICIA was enacted into law in late 1991. As required by FDICIA,
numerous regulations have been adopted by federal bank regulatory agencies,
including the following: (1) federal bank regulatory authorities have
established five different capital levels for banks and, as a general matter,
enable banks with higher capital levels to engage in a broader range of
activities; (2) the FRB has issued regulations requiring standardized
disclosures with respect to interest paid on deposits; (3) the FDIC has imposed
restrictions on the acceptance of brokered deposits by weaker banks; (4) the
FDIC has implemented risk-based deposit insurance premiums; and (5) the FDIC has
issued regulations requiring state chartered banks to comply with certain
restrictions with respect to equity investments and activities in which the
banks act as a principal.

      FDICIA recapitalized the Bank Insurance Fund ("BIF") and required the FDIC
to maintain the BIF and Savings Association Insurance Fund ("SAIF") at 1.25% of
insured deposits by increasing deposit insurance premiums as necessary to
maintain such ratio. FDICIA also required federal bank regulatory authorities to
prescribe, by December 1, 1993, (1) non-capital standards of safety and
soundness; (2) operational and managerial standards for banks; (3) asset and
earnings standards for banks and bank holding companies addressing such areas as
classified assets, capital, and stock price; and (4) standards for compensation
of executive officers and directors of banks. However, this provision was
modified by subsequent legislation to allow federal regulatory agencies to
implement these standards through either guidelines or regulations.

      The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). FIRREA became effective on August 9, 1989. Among other things, this
far-reaching legislation: (1) phased in significant increases in the FDIC
insurance premiums paid by commercial banks; (2) created two deposit insurance
pools within the FDIC, one to insure commercial bank and savings bank deposits
and the other to insure savings association deposits; (3) for the first time,
permitted bank holding companies to acquire healthy savings associations; (4)
permitted commercial banks that meet certain housing-related asset requirements
to secure advances and
<PAGE>   8
other federal services from their local Federal Home Loan Banks; and (5) greatly
enhanced the regulators' enforcement powers by removing procedural barriers and
sharply increasing the civil and criminal penalties for violating statutes and
regulations.

Restrictions on Capital Distributions

      Dividends paid by HNB to Bancshares are a material source of Bancshares'
cash flow. Various federal statutory provisions limit the amount of dividends
HNB is permitted to pay to Bancshares without regulatory approval. FRB policy
further limits the circumstances under which bank holding companies may declare
dividends. For example, a bank holding company should not continue its existing
rate of cash dividends on its common stock unless its net income is sufficient
to fully fund each dividend and its prospective rate of earnings retention
appears consistent with its capital needs, asset quality, and overall financial
condition.

      If, in the opinion of the applicable federal banking agency, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
institution, could include the payment of dividends), the agency may require,
after notice and hearing, that the institution cease and desist from that
practice. In addition, the FRB and the FDIC have issued policy statements which
provide that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.

      Under the National Bank Act, national banks may only pay dividends without
advance approval of the OCC if the total of all dividends declared by the
national bank in any calendar year exceeds the sum of its net profits (as
defined) for that year plus its retained profits for the preceding two calendar
years, less any required transfers to surplus. The National Bank Act also
prohibits national banks from paying dividends that would be in an amount
greater than net profits then on hand (as defined) after deducting losses and
bad debts (as defined). The amount available for dividend distribution by the
Bank as of December 31, 1996 was approximately $2,302,000.

Capital Requirements

      Capital Adequacy Requirements. The FRB, the FDIC, and the OCC
(collectively, the "Federal Banking Agencies") have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profiles
among banks and bank holding companies and account for off-balance sheet items.
These guidelines are minimums, and the federal regulators have noted that banks
and bank holding companies contemplating significant expansion programs should
not allow expansion to diminish their capital ratios and should maintain ratios
in excess of the minimums. Failure to achieve and maintain adequate capital
levels may give rise to supervisory action through the issuance of a capital
directive to ensure the maintenance of required capital levels.

      The current guidelines require all federally-regulated banks to maintain a
minimum risk- based total capital ratio equal to 8%, of which at least 4% must
be Tier 1 capital. Tier 1 capital includes common shareholders' equity,
qualifying perpetual preferred stock, and minority interests in equity accounts
of consolidated subsidiaries, but excludes goodwill and most other
<PAGE>   9
intangibles and the allowance for loan and lease losses. Tier 2 capital includes
the excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate-term preferred stock, and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets. The Bank has not received any notice
that it will be subject to higher capital requirements.

      Under these guidelines, banks' assets are given risk-weights of 0%, 20%,
50% or 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully collateralized by residential property and, under
certain circumstances, residential construction loans (both carry a 50% rating).
Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds (which have a 50% rating) and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government Agencies (which have a 0% rating).

      The Federal Banking Agencies have also implemented a leverage ratio, which
is equal to Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank may leverage its equity capital base. The minimum
required leverage ratio for top-rated institutions is 3%, but most institutions
are required to maintain an additional cushion of at least 100 to 200 basis
points. Any institution operating at or near the 3% level is expected to have
well-diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity and good earnings, and in general, to be a strong
banking organization without any supervisory, financial or operational
weaknesses or deficiencies. Any institutions experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions, well above the minimum levels.

      Regulations adopted by the Federal Banking Agencies as required by FDICIA
impose even more stringent capital requirements. The regulators require the OCC
and other Federal Banking Agencies to take certain "prompt corrective action"
when a bank fails to meet certain capital requirements. The regulations
establish and define five capital levels: (1) "well- capitalized," (2)
"adequately capitalized," (3) "undercapitalized," (4) "significantly
undercapitalized" and (5) "critically undercapitalized." To qualify as
"well-capitalized," an institution must maintain at least 10% total risk-based
capital, 6% Tier 1 risk-based capital and a leverage ratio of no less than 5%.
Increasingly severe restrictions are imposed on the payment of dividends and
management fees, asset growth and other aspects of the operations of
institutions that fall below the category of being "adequately capitalized"
(which requires at least 8% total risk-based capital, 4% Tier 1 risk-based
capital and a leverage ratio of at least 4%). Undercapitalized institutions are
required to develop and implement capital plans acceptable to the appropriate
federal regulatory agency. Such plans must require that any company that
controls the undercapitalized institution must provide certain guarantees that
the institution will comply with the plan until it is adequately capitalized. As
of December 31, 1996, neither Bancshares nor HNB were subject to any regulatory
order, agreement, or directive to meet and maintain a specific capital level for
any capital measure.
<PAGE>   10
      In August of 1995, the Federal Banking Agencies adopted a final rule
implementing the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. Effective September 1,
1995, when evaluating the capital adequacy of a bank, the Federal Banking
Agencies' examiners will consider exposure to declines in the economic value of
the bank's capital due to changes in interest rates. A bank may be required to
hold additional capital for interest rate risk if it has a significant exposure
or a weak interest rate risk management process. Concurrent with the publication
of this rule, the Federal Banking Agencies proposed for comment a joint policy
statement describing the process the Federal Banking Agencies will use to
measure and assess a bank's interest rate risk. This joint policy statement was
superseded by an updated Joint Policy Statement in June of 1996. Any impact the
joint final rule and the Joint Policy Statement may have on Bancshares or HNB
cannot be predicted at this time.

      In addition, the Agencies published a joint final rule on September 6,
1996, amending their respective risk-based capital standards to incorporate a
measure of market risk to cover all positions located in an institution's
trading account and foreign exchange and commodity positions wherever located.
This final rule, effective January 1, 1997, implements an amendment to the Basle
Capital Accord that sets forth a supervisory framework for measuring market
risk. The final rule effectively requires banks and bank holding companies with
significant exposure to market risk to measure that risk using its own internal
value-at-risk model, subject to the parameters of the final rule, and to hold a
sufficient amount of capital to support the institution's risk exposure.

      Institutions subject to this final rule must be in compliance with it by
January 1, 1998. This final rule applies to any bank or bank holding company,
regardless of size, whose trading activity equals 10% or more of its total
assets, or whose trading activity equals $1 billion or more. An institution's
trading activity is defined as the sum of its total assets and trading
liabilities as reported in its most recent call report for a bank, or its most
recent Y-9C Report for a bank holding company. Total assets means quarter-end
total assets. The Agencies may require an institution not otherwise subject to
the final rule to comply with it for safety and soundness reasons and also may
exempt an institution otherwise subject to the final rule from compliance under
certain circumstances.

FDIC Insurance

      Generally, customer deposit accounts in banks are insured by the FDIC for
up to a maximum amount of $100,000. The FDIC has adopted a risk-based insurance
assessment system under which depository institutions contribute funds to the
BIF and the SAIF based on their risk classification. The FDIC assigns
institutions a risk classification based on three capital groups and three
supervisory subgroups. The capital groups are "well-capitalized," "adequately
capitalized," and "undercapitalized." The three supervisory subgroups are Group
"A" (for financially sound institutions with only a few minor weaknesses), Group
"B" (for those institutions with weaknesses which, if uncorrected, could cause
substantial deterioration of the institution and increase risk to the deposit
insurance fund), and Group "C" (for those institutions with a substantial
probability of loss to the fund absent effective corrective action).
<PAGE>   11
      On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds
Act") was enacted. The Funds Act provides, among other things, for the
recapitalization of the SAIF through a special assessment on all depository
institutions that hold SAIF insured deposits. The one-time assessment is
designed to place the SAIF at its 1.25% reserve ratio.

      The Funds Act for the three year period beginning in 1997, subjects BIF
insured deposits to a Financing Corporation ("FICO") premium assessment on
domestic deposits at one-fifth the premium rate (approximately 1.3 cents)
imposed on SAIF insured deposits (approximately 6.5 cents). In addition, service
debt funding on FICO bonds for the first half of 1997 is expected to result in
BIF insured institutions paying .64 cents for each $100 of assessed deposits,
and SAIF insured institutions paying 3.2 cents on each $100 of deposits.
Beginning in the year 2000, BIF insured institutions will be required to pay the
FICO obligations on a pro-rata basis with all thrift institutions; annual
assessments are expected to equal approximately 2.4 cents until 2017, to be
phased out completely by 2019.

      For at least the first half of 1997, BIF premiums will be maintained at
their current level. Accordingly, institutions in the lowest risk category will
continue to pay no premiums, and other institutions will be assessed based on a
range of rates, with those in the highest risk category paying 27 cents for
every $100 of BIF insured deposits. Rates in the SAIF assessment schedule,
previously ranging from 4 to 31 cents, have recently been adjusted by 4 cents to
a range of 0 to 27 cents (as of October 1, 1996).

      Banking regulators are empowered under the Funds Act to prohibit insured
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from the SAIF to the BIF in order to avoid higher
assessment rates. Accordingly, the FDIC recently proposed a rule that would, if
adopted as proposed, impose entrance and exit fees on depository institutions
attempting to shift deposits from the SAIF to the BIF as contemplated by the
Funds Act. The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, only if no thrift institutions exist on that date. It is
expected that Congress will address comprehensive legislation on the merger of
the funds and elimination of the thrift charter during the 1997 session.

EFFECTS OF GOVERNMENT MONETARY POLICY

      Bancshares and HNB are affected not only by general economic conditions,
but also by the monetary and fiscal policies of the United States government and
its various agencies, particularly the Federal Reserve Board. In its role of
implementing the national monetary policy, the Federal Reserve Board has the
power to regulate the national supply of bank credit through such methods as
open market operations in the United States government securities market,
control of the discount rate on bank borrowings, and establishment of reserve
requirements against bank deposits. These means are used in varying combinations
and have an influence over the growth of bank loans, investments, and deposits.
They may also affect interest rates charged on loans or paid on deposits. The
nature and timing of future changes in monetary policies and their impact on HNB
are not predictable. As a consequence of the extensive regulation of commercial
banking activities in the United States, HNB's business is particularly
susceptible to being affected by Federal legislation and regulations which may
have the effect of increasing the cost of doing business or limiting permissible
activities.
<PAGE>   12
STATISTICAL DISCLOSURES

      Guide 3 of the "Guides for the Preparation and Filing of Reports and
Registration Statements" under the Securities Exchange Act of 1934 sets forth
certain statistical disclosures in the "Description of Business" section of bank
holding company filings. The statistical information requested is presented in
the following tables. The tables and information contained therein have been
prepared by Hawaii National Bancshares, Inc. and have not been audited or
reported upon by Bancshares' independent certified public accountants.
<PAGE>   13
I. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES
   AND INTEREST DIFFERENTIAL

The following table shows the condensed consolidated average balance sheets, an
analysis of interest income/expense and the average yield/rate for each major
category of interest-bearing assets and interest-bearing liabilities at
December 31 for the year indicated.

                 Hawaii National Bancshares, Inc. & Subsidiary
                               Table I-A and I-B
  Condensed Consolidated Average Balance Sheets, Interest Income and Expense,
                              and Yields and Rates
                                 (in thousands)

<TABLE>
<CAPTION>
                                                   1996                          1995                         1994
                                       -----------------------------  ---------------------------   ---------------------------
ASSETS                                           INTEREST                     INTEREST                      INTEREST
                                        AVERAGE   INCOME/     YIELD/  AVERAGE  INCOME/     YIELD/   AVERAGE   INCOME/    YIELD/
                                        BALANCE   EXPENSE      RATE   BALANCE  EXPENSE      RATE    BALANCE   EXPENSE     RATE
                                       --------  --------   -------- -------- --------   --------   --------  --------   -------
<S>                                    <C>       <C>        <C>      <C>       <C>       <C>       <C>        <C>        <C>
Interest-earning assets:
 Federal funds sold and securities
  purchased under agreement to resell  $ 17,005  $    907     5.33%  $  9,482  $   555     5.85%    $ 12,504   $   492    3.93%
 Investment securities-
  Held-to-maturity                       46,878     2,683     5.72%    43,772    2,301     5.26%      44,082     2,130    4.83%
  Available-for-sale                      1,495       107     7.16%     1,526       93     6.09%       1,155        24    2.08%
                                       --------  --------   -------- -------- --------   --------   --------  --------   -------
   Total investment securities           48,373     2,790     5.77%    45,298    2,394     5.29%      45,237     2,154    4.76%
                                       --------  --------   -------- -------- --------   --------   --------  --------   -------
 Assets held in trading account              --        --       --         --       --       --           --        --      --
 Loans and leases-
  Domestic                              207,289    18,658     9.00%   215,492   19,684     9.13%     213,729    17,530    8.20%
  Foreign                                    --        --       --         --       --       --           --        --      --
                                       --------  --------   -------- -------- --------   --------   --------  --------   -------
   Total loans & leases                 207,289    18,658     9.00%   215,492   19,684     9.13%     213,729    17,530    8.20%
                                       --------  --------   -------- -------- --------   --------   --------  --------   -------
 Other                                      402        21     5.22%       179        7     3.91%          79         3    3.80%
                                       --------  --------   -------- -------- --------   --------   --------  --------   -------
    Total interest-earning assets       273,069  $ 22,376     8.19%   270,451  $22,640     8.37%     271,549   $20,179    7.43%
                                                 ========   ========          ========   ========             ========   =======
 Cash and due from banks                 15,261                        15,665                         16,561
 Premises and equipment                   4,050                         4,271                          4,074
 Other assets                             1,310                           916                            573
                                       --------                      --------                       --------
    Total assets                       $293,690                      $291,303                       $292,757
                                       ========                      ========                       ========
</TABLE>
<PAGE>   14
LIABILITIES AND
SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                         1996                          1995                          1994
                                            ----------------------------  ---------------------------- ----------------------------
                                                       INTEREST                      INTEREST                     INTEREST
                                             AVERAGE   INCOME/  YIELD/    AVERAGE    INCOME/  YIELD/    AVERAGE    INCOME/  YIELD/
                                             BALANCE   EXPENSE   RATE     BALANCE    EXPENSE   RATE     BALANCE    EXPENSE   RATE
                                            --------   -------- --------  --------   -------- -------- --------   -------- --------
<S>                                         <C>        <C>      <C>       <C>        <C>      <C>       <C>       <C>     <C>
Interest-bearing deposits and liabilities:
 Deposits -
  Interest-bearing demand                    $27,248     $488    1.79%     $28,728     $579    2.02%     $30,656     $583    1.90%
  Savings                                    114,833    3,365    2.93%     117,275    3,447    2.94%     123,257    2,915    2.36%
  Time                                        63,647    3,110    4.89%      57,615    2,923    5.07%      50,532    1,744    3.45%
  Foreign                                          -        -       -            -        -       -            -        -       -
                                            --------   -------- --------  --------   -------- -------- --------   -------- --------
   Total interest-bearing deposits           205,728    6,963    3.38%     203,618    6,949    3.41%     204,445    5,242    2.56%
                                            --------   -------- --------  --------   -------- -------- --------   -------- --------
 Short-term borrowings-
  Domestic                                       789       41    5.20%       2,506      156    6.23%       1,469       58    3.95%
 Long-term debt-
  Domestic                                         -        -       -            -        -       -            -        -       -
                                            --------   -------- --------  --------   -------- -------- --------   -------- --------
   Total interest-bearing deposits
    and liabilities                          206,517    7,004    3.39%     206,124    7,105    3.45%     205,914    5,300    2.57%
                                                       -------- --------             -------- --------            -------- --------
 Noninterest-bearing demand deposits          57,539                        56,066                        59,154
 Other liabilities                             2,530                         2,770                         1,899
                                            --------                       -------                       -------
   Total liabilities                         266,586                       264,960                       266,967
 Shareholders' equity                         27,104                        26,343                        25,790
                                            --------                      --------                      --------
    Total liabilities and
     shareholders' equity                   $293,690                      $291,303                      $292,757
                                            ========                      ========                      ========
    Net interest income and
     margin on earnings assets                        $15,372    5.63%              $15,535    5.74%              $14,879    5.48%
                                                      ======== ========            ========  ========            ========   =======
</TABLE>
<PAGE>   15
The following table sets forth the dollar amount of changes in interest income
and expense and the changes in dollar amounts attributable to (a) changes in
volume (change in volume times old rates), (b) changes in rate (change in rate
times new volume), and (c) changes in rate/volume (change in rate times change
in volume). In this table, the dollar change in rate/volume is prorated to
volume and rate proportionally. Nonaccruing loans and leases have been included
in computation of average loans and leases.

                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table I-C
                 Analysis of Change in Interest Earned and Paid
                       Due to Changes in Volume and Rates
                            1996-1995 and 1995-1994
                                 (in thousands)

<TABLE>
<CAPTION>
                                           1996 Compared to 1995            1995 Compared to 1994
                                        Increase (Decrease) Due to:       Increase (Decrease) Due to:
                                      ---------------------------------  --------------------------------
                                                                Net                               Net
                                                              Increase                         Increase
                                         Volume      Rate    (Decrease)    Volume      Rate    (Decrease
                                      ----------  ---------- ----------  ---------- ---------- ----------
<S>                                    <C>        <C>         <C>        <C>         <C>        <C>
Interest Earned on:
  Federal funds sold and securities
    purchased under agreement to resell     $440      ($88)       $352       ($119)     $182        $63
  Investment securities-
    Held-to-maturity                         163       219         382         (15)      186        171
    Available-for-sale                        (2)       16          14           8        61         69
                                      ----------  ---------- ----------  ---------- ---------- ----------
      Total investment securities            161       235         396          (7)      247        240
                                      ----------  ---------- ----------  ---------- ---------- ----------
  Interest from trading account                -         -           -           -         -          -
  Loans and leases-
    Domestic                                (749)     (277)     (1,026)        145     2,009      2,154
    Foreign                                    -         -           -           -         -          -
                                      ----------  ---------- ----------  ---------- ---------- ----------
      Total loans and leases                (749)     (277)     (1,026)        145     2,009      2,154
                                      ----------  ---------- ----------  ---------- ---------- ----------
  Other                                        9         5          14           4         0          4
                                      ----------  ---------- ----------  ---------- ---------- ----------

      Total interest-earning assets        ($139)    ($125)      ($264)        $23    $2,438     $2,461
                                      ==========  ========== ==========  ========== ========== ==========
</TABLE>
<PAGE>   16
<TABLE>
<CAPTION>
                                               1996 Compared to 1995            1995 Compared to 1994
                                             Increase (Decrease) Due to:      Increase (Decrease) Due to:
                                           -------------------------------- --------------------------------
                                                                    Net                              Net
                                                                  Increase                         Increase
                                             Volume      Rate    (Decrease)   Volume      Rate    (Decrease)
                                           ---------- ---------- ---------- ---------- ---------- ----------
<S>                                         <C>        <C>        <C>        <C>         <C>        <C>
Interest Paid on:
  Deposits-
    Interest-bearing demand                     ($30)      ($61)      ($91)      ($37)       $33        ($4)
    Savings                                      (72)       (10)       (82)      (141)       673        532
    Time                                         306       (119)       187        244        935      1,179
    Foreign                                        -          -          -          -          -          -
                                           ---------- ---------- ---------- ---------- ---------- ----------
      Total interest-bearing deposits            204       (190)        14         66      1,641      1,707
                                           ---------- ---------- ---------- ---------- ---------- ----------
  Short-term borrowings-
    Domestic                                    (107)        (8)      (115)        41         57         98
  Long-term debt-
    Domestic                                       -          -          -          -          -          -
                                           ---------- ---------- ---------- ---------- ---------- ----------
      Total interest-bearing deposits
        and interest-bearing liabilities          97       (198)      (101)       107      1,698      1,805
                                           ---------- ---------- ---------- ---------- ---------- ----------
      Increase (decrease)
         in net interest income                ($236)       $73      ($163)      ($84)      $740       $656
                                           ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>   17
II.  INVESTMENT SECURITIES PORTFOLIO

The following table presents the carrying value of the portfolio of investment
securities at December 31 of each of the past three years.

                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table II-A
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                      1996     1995     1994
                                                                    -------  -------  -------
<S>                                                                 <C>      <C>      <C>
    Securities held-to-maturity:
    U.S. Treasury and Other U.S. Government Agencies                $47,930  $44,993  $43,930
    States and Political Subdivisions                                    --    1,000    1,000
                                                                    -------  -------  -------
                                                                    $47,930  $45,993  $44,930
    Securities available-for-sale:                                  =======  =======  =======
    Equity Securities                                                $1,487   $1,497   $1,489
                                                                    =======  =======  =======
</TABLE>

Note: See Notes 1 and 2 of the Notes to the Consolidated Financial Statements.

The following table presents the maturities of investment securities excluding
securities which have no stated maturity at December 31, 1996, and the weighted
average yields.

                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table II-B
                                 (in thousands)

<TABLE>
<CAPTION>
                                                         After One           After Five
                                   Within                But Within          But Within        After
                                  One Year               Five Years          Ten Years       Ten Years            Total

                              Amount     Yield       Amount     Yield     Amount   Yield   Amount   Yield   Amount    Yield
                              ------     -----       ------     -----     ------   -----   ------   -----   ------    -----
<S>                            <C>        <C>       <C>         <C>       <C>       <C>     <C>      <C>   <C>        <C>
U.S. Treasury and Other U.S.
   Government Agencies        $16,953    5.84%      $30,977     6.09%        -        -       -       -    $47,930    6.00%
                              ========   ======     =======     =====     ======   =====   ======   =====  =======    =====
</TABLE>

At December 31, 1996, the Company had no investment securities with aggregate
carrying values exceeding 10% of shareholders' equity.

                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table II-C
                                 (in thousands)

<TABLE>
                                                     Security                Carrying          Market
                            Issuer                    Rating                  Value             Value
                            ------                   --------                --------          ------

<S>                         <C>                      <C>                     <C>               <C>
                                --                      --                      --               --
</TABLE>
<PAGE>   18
III.  LOAN AND LEASE PORTFOLIO

The following table presents the outstanding domestic loans and leases at
December 31 of each of the five years indicated.



                 Hawaii National Bancshares, Inc. & Subsidiary
                                  Table III-A
                                 (in thousands)

<TABLE>
<CAPTION>
                                             1996           1995           1994           1993           1992
                                           --------       --------       --------       --------       --------
<S>                                        <C>            <C>            <C>            <C>            <C>
Real Estate -
  Residential and commercial               $130,642       $133,847       $138,264       $132,505       $130,982
  Construction                                2,572          4,558          3,108          5,243          7,043

Loans to U.S. banks                               -              -              -              -              -
Commercial, industrial and agricultural      64,805         66,021         67,484         66,188         66,373
Consumer*                                     7,674          7,255          7,076          7,923          9,239
All other loans                                 557            248            241            266            302
Lease financing                               1,013          1,165          1,241          1,546          1,990
                                           --------       --------       --------       --------       --------
  Total Loans and Leases                   $207,263       $213,094       $217,414       $213,671       $215,929
                                           ========       ========       ========       ========       ========
</TABLE>

Note: *Loans to individuals for household, family and other personal
expenditures.
<PAGE>   19
The following table presents maturity and interest rate sensitivity data for all
loans and leases, except real estate -- residential and commercial, consumer
loans and lease financing, at December 31, 1996.

                 Hawaii National Bancshares, Inc. & Subsidiary
                                  Table III-B
                          Loan and Lease Maturity and
                         Interest Rate Sensitivity Data
                               December 31, 1996
                                 (in thousands)

<TABLE>
<CAPTION>
                                                            After One        After
                                               One Year    Year through      Five
                                               or Less      Five Years       Years         Total
                                                -------       -------        ------       -------

<S>                                             <C>           <C>            <C>          <C>
    Commercial, industrial and agricultural     $50,356       $13,018        $1,430       $64,804

    Real estate - construction                    2,471           101             -         2,572

    Foreign                                           -             -             -             -
                                                -------       -------        ------       -------

                                                $52,827       $13,119        $1,430        67,376

    Real estate - residential and commercial                                              130,642
    Consumer                                                                                7,674
    All other loans                                                                           557
    Lease financing                                                                         1,013
                                                                                         --------
          Total loans and leases                                                         $207,262
                                                                                         ========

    Loans with fixed or predetermined
      interest rates                             $6,358        $2,222        $1,303        $9,883

    Loan with floating or adjustable
      interest rates                             46,469        10,897           127        57,493
                                                -------       -------        ------       -------

                                                $52,827       $13,119        $1,430       $67,376
</TABLE>
<PAGE>   20
Risk Elements (See Management's Discussion and Analysis)

The following table presents information related to loans and leases accounted
for on a nonaccrual basis, accruing loans and leases which are contractually
past due ninety days or more as to principal and/or interest payments, and
restructured loans and leases at December 31 for the years indicated.

                     National Bancshares, Inc. & Subsidiary
                                 Table III-C(1)
            Nonaccrual, Past Due, and Restructured Loans and Leases
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     1996          1995          1994         1993        1992
                                                    ------        ------        ------       ------       ------
<S>                                                 <C>           <C>           <C>           <C>          <C>
Nonaccrual loans and leases
   Domestic
     Real estate                                    $1,972        $5,142        $  771        $924            $-
     Commercial, industrial and agricultural         1,208         1,064           555          --             2
     Consumer                                           --            --            --          --            --
     All other loans                                    --            --            --          --            --
     Lease financing                                    --            --            --          --            --
   Foreign                                              --            --            --          --            --
                                                    ------        ------        ------       ------       ------
       Total                                        $3,180        $6,206        $1,326        $924        $    2
                                                    ======        ======        ======       ======       ======
Loans and leases past due 90 days or more
   Domestic
     Real estate                                    $  134        $  393        $  841        $439        $  836
     Commercial, industrial and agricultural            56            --         1,365         169           238
     Consumer                                           22            21            35          26            20
     All other loans                                    --            --            --          --            --
     Lease financing                                    --            --            --          --            --
   Foreign                                              --            --            --          --            --
                                                    ------        ------        ------       ------       ------
       Total                                        $  212        $  414        $2,241        $634        $1,094
                                                    ======        ======        ======       ======       ======
Restructured loans and leases
   Domestic
     Real estate                                        $-            $-            $-          $-            $-
     Commercial, industrial and agricultural            --            --            --          52            61
     Consumer                                           --            --            --          --            --
     All other loans                                    --            --            --          --            --
     Lease financing                                    --            --            --          --            --
   Foreign                                              --            --            --          --            --
                                                    ------        ------        ------       ------       ------
       Total                                            $-            $-            $-        $ 52          $ 61
                                                    ======        ======        ======       ======       ======
</TABLE>
<PAGE>   21
The following table presents information related to loans and leases on a
nonaccrual basis for the year ended December 31, 1996.



                Hawaii National Bancshares, Inc. and Subsidiary
                                 Table III-C(2)
                     Nonaccrual Loan and Lease Information
                          Year Ended December 31, 1996
                                 (in thousands)

<TABLE>
<CAPTION>
                                                Domestic     Foreign     Total
                                                --------    --------    --------
<S>                                             <C>        <C>         <C>
Interest income which would have
    been recorded if loans and
    leases had been current                       $464          $-          $464
                                                ========    ========    ========
Interest income recorded during
    this period                                     $-          $-            $-
                                                ========    ========    ========
</TABLE>


Note: See Notes 1 and 5 of the Notes to the Consolidated Financial Statements
and Table III-C(1).



                Hawaii National Bancshares, Inc. and Subsidiary
                                 Impaired Loans
                               December 31, 1996
                                 (in thousands)

<TABLE>
<CAPTION>
                                          Present value of
                                           expected future    Fair value of
                                             cash flows     loan's collateral     Total
                                          ----------------  -----------------     ------

<S>                                           <C>               <C>               <C>
Real estate                                   $  398            $1,282            $1,680

Commercial, industrial and agriculture           416               978             1,394
                                              ------            ------            ------

    Total Impaired Loans                      $  814            $2,260            $3,074
                                              ======            ======            ======
</TABLE>
<PAGE>   22
IV. SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE

The following table presents the Company's loan and lease loss experience at
December 31 for the years indicated.

                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table IV-A
                                   Year Ended
                                 (in thousands)

<TABLE>
<CAPTION>
                                                     1996         1995         1994         1993         1992
                                                   --------     --------     --------     --------     --------
<S>                                                <C>          <C>          <C>          <C>          <C>
Average loans and leases outstanding               $207,289     $215,492     $213,729     $217,025     $217,072
                                                   ========     ========     ========     ========     ========


Loan and lease loss reserve summary-
    Balance at beginning of year                     $3,096       $3,422       $3,129       $2,783       $2,475
                                                   --------     --------     --------     --------     --------
    Loans and leases charged off:
        Real estate                                     194          112           81           35            1
        Commercial, industrial and agricultural       1,266          837          350           86            7
        Consumer                                         71          155           69           33           61
        All other loans                                   -            -            -            -            -
        Lease financing                                   -            -            -            -            4
                                                   --------     --------     --------     --------     --------

            Total loans and leases charged off        1,531        1,104          500          154           73
                                                   --------     --------     --------     --------     --------
    Recoveries on loans and leases charged off:
        Real estate                                       -            -            1            2            -
        Commercial, industrial and agricultural         651           62            9           10            6
        Consumer                                         41           16           18            7           12
        All other loans                                   -            -            -            -            -
        Lease financing                                   -            -            -            1            3
                                                   --------     --------     --------     --------     --------
            Total recoveries on loans
                and leases charged off                  692           78           28           20           21
                                                   --------     --------     --------     --------     --------

            Net charge-offs                             839        1,026          472          134           52

    Provision charged to expense                        810          700          765          480          360
                                                   --------     --------     --------     --------     --------
    Balance at end of year                           $3,067       $3,096       $3,422       $3,129       $2,783
                                                   ========     ========     ========     ========     ========
Ratio of net charge-offs
    to average loans and leases outstanding            0.40%        0.48%        0.22%        0.06%        0.02%
                                                   ========     ========     ========     ========     ========
</TABLE>
<PAGE>   23
The Company has allocated a portion of the allowance for loan and lease losses
according to the amount deemed to be reasonably necessary to provide for the
possibility of losses being incurred within the various loan and lease
categories. The following table presents the allocation of the reserve amounts
to the related outstanding loan and lease balances at December 31 for the years
indicated. In 1994, the Company adopted a new reserve allocation method which
took into account differences in risk classifications. In 1995, the reserve
methodology was refined further to analyze each credit for loss potential which
was over $50,000 and had been placed on nonaccrual.


                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table IV-B
              Allocation of the Reserve for Loan and Lease Losses
                        to Outstanding Loans and Leases
                                 (in thousands)

<TABLE>
<CAPTION>
                               1996                1995                 1994                   1993                   1992
                       --------------------  -------------------- --------------------  --------------------   --------------------
                                  Percent               Percent              Percent              Percent                Percent
                               Loans/Leases          Loans/Leases          Loans/Leases          Loans/Leases           Loans/Leases
                                 in Each               in Each              in Each               in Each               in Each
                                 Category              Category             Category              Category              Category
                        Reserve  to Total    Reserve   to Total    Reserve   to Total    Reserve   to Total    Reserve   to Total
                         Amount Loans/Leases  Amount  Loans/Leases Amount   Loans/Leases  Amount  Loans/Leases Amount  Loans/Leases
                       -------- ------------ ------- ------------- ------- ------------- -------  ------------ ------- ------------
<S>                    <C>        <C>       <C>         <C>        <C>        <C>      <C>          <C>      <C>         <C>
Commercial, industrial
 and agricultural        $1,373     31%      $1,365        31%     $1,713        31%      $892        31%     $  736       31%
Real estate
 -construction                3      1%         245         2%        276         1%         7         2%          4        3%
Real estate
 -residential
  and commercial            657     63%         560        63%        579        64%       294        62%        202       61%
Consumer                    469      4%         347         3%        346         3%       375         4%        166        4%
All other loans              11      0%          --        --          --        --         --        --          --        --
Lease financing               9      1%          14         1%         13         1%        15         1%         20        1%
Foreign                      --     --           --        --          --        --         --        --          --        --
Loans to U.S. Banks
 under repurchase
 agreement                   --     --           --        --          --        --         --        --          --        --
General reserve             545    N/A          565       N/A         495       N/A      1,546       N/A       1,655       N/A
                         ------   -----      ------      -----     ------       ----    ------      ----      ------      ----
Consolidated             $3,067    100%      $3,096       100%     $3,422       100%    $3,129       100%     $2,783      100%
                         ======   =====      ======      =====     ======       ====    ======      ====      ======      ====
</TABLE>
<PAGE>   24
The following table sets forth by major category the ratio of net loans and
leases charged-off to total average loans and leases outstanding for the years 
indicated.


                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table IV-C


<TABLE>
<CAPTION>
                                                   1996          1995          1994          1993          1992
                                                   ----          ----          ----          ----          ----

<S>                                                <C>           <C>           <C>           <C>           <C>
    Real estate                                    0.09%         0.05%         0.04%         0.01%         0.00%
    Commercial, industrial and agricultural        0.30%         0.36%         0.16%         0.04%         0.00%
    Consumer                                       0.01%         0.07%         0.02%         0.01%         0.02%
    All other loans                                0.00%         0.00%         0.00%         0.00%         0.00%
    Leasing                                        0.00%         0.00%         0.00%         0.00%         0.00%
                                                   ----          ----          ----          ----          ----

    Total                                          0.40%         0.48%         0.22%         0.06%         0.02%
                                                   ====          ====          ====          ====          =====
</TABLE>
<PAGE>   25
V.  DEPOSITS

The following table presents the average amount and average rate paid on
deposits for the years indicated.


                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table V-A
                            Average Deposits by Type
                                 (in thousands)

<TABLE>
<CAPTION>
                                             1996                  1995                    1994
                                       -------------------   -------------------     ------------------
                                       Amount     Rate         Amount     Rate          Amount      Rate
                                       ------    ------       -------    ------        -------     -------
        <S>                            <C>      <C>         <C>          <C>         <C>           <C>
        Noninterest-bearing demand     $57,539      -         $56,066         -        $59,154          -
        Interest-bearing demand         27,248    1.79%        28,728     2.02%         30,656      1.90%
        Savings                        114,833    2.93%       117,275     2.94%        123,257      2.36%
        Time                            63,647    4.89%        57,615     5.07%         50,532      3.45%
        Foreign                              -      -               -         -              -          -
                                      --------               --------                 --------
            Total                     $263,267               $259,684                 $263,599
                                      ========               ========                 ========
</TABLE>

The following table presents the maturity distribution of domestic time
certificates of deposit issued in amounts of $100,000 or more at December 31 for
the years indicated.

                 Hawaii National Bancshares, Inc. & Subsidiary
                                   Table V-B
              Maturity Distribution of Domestic Time Certificates
                         of Deposit of $100,000 or More
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                  1996        1995        1994
                                                                 -------     -------     -------
                        <S>                                     <C>         <C>         <C>
                        3 months or less                         $26,525     $25,213     $21,495
                        Over 3 months through 6 months            17,122      11,492      11,543
                        Over 6 months through 12 months            4,154       4,842       4,040
                        Over 12 months                               144           -       1,319
                                                                 -------     -------     -------
                                                                 $47,945     $41,547     $38,397
                                                                 =======     =======     =======
</TABLE>

Note: At December 31, 1996, 1995, and 1994, public time deposits totaled
$32,192,000; $30,197,000; and $29,547,000, respectively.
<PAGE>   26
VI. RETURN ON EQUITY AND ASSETS

The following table presents for the years indicated:

1. Return on average assets (net income divided by average total assets);
2. Return on average equity (net income divided by average shareholders'
   equity);
3. Dividend payout ratio (dividends per share divided by net income per share);
4. Average equity to average assets ratio (average shareholders' equity divided
   by average total assets).



                 Hawaii National Bancshares, Inc. & Subsidiary
                                    Table VI
                    Operating, Dividend, and Capital Ratios


<TABLE>
<CAPTION>
                                                  1996         1995          1994
                                                 -------      -------      --------

<S>                                               <C>          <C>          <C>
    1.  Return on average assets                    0.24%        0.36%        0.30%

    2.  Return on average equity                    2.62%        3.96%        3.38%

    3.  Dividend payout ratio                      15.00%       10.20%       12.20%

    4.  Average equity to average assets ratio      9.23%        9.04%        8.81%
</TABLE>

<PAGE>   27
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 up to 2024. Rent
expense was $2,366,000 in 1996; $2,294,000 in 1995 and $2,125,000 in 1994, net
of sublease income of $59,000 in 1996 and $46,000 in 1995 and 1994. Premise
leases extend for varying periods up to 28 years and provide for periodic
renegotiation of rents based upon a percentage of the appraised value of the
leased property. At December 31, 1996, the aggregate minimum rental commitments
under all non-cancelable leases were as follows: 1997 - $2,253,000; 1998 -
$1,933,000; 1999 - $1,893,000; 2000 - $1,900,000; 2001 - $1,823,000; and
thereafter to 2024 - $24,483,000 (aggregate $34,285,000). Additional information
is provided in Note 9 of the Notes to the Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

         The Bank is party to legal actions from time to time as part of its
normal course of business. Management, after consulting with counsel on these
matters, believes the outcome of these cases will not have a materially adverse
effect upon Bancshares' or the Bank's financial position or the results of
operations.

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 1996.

INFORMATION ON EXECUTIVE OFFICERS

         Information regarding each executive officer of Bancshares or HNB who
is not also a director of Bancshares is as follows:

<TABLE>
<CAPTION>
Name, Age, and
Principal Occupation                  Year First
During Past Five                        Became                  Year Term            Shares of Bancshares
Years and Family                        Officer                 of Office            Common Stock as of
Relationships                       of Bancshares                Expires             January 31, 1997*
--------------------                -------------                -------             -----------------

<S>                                        <C>                      <C>                           <C>
Ernest T. Murata, 63,                      1986                     1997                          400
Vice President, Treasurer,
Assistant Secretary and
Chief Financial Officer
("CFO") of Bancshares; Executive
Vice President, Cashier, Secretary
and CFO of HNB.
</TABLE>

*Does not include the percentage of shares beneficially owned if less than 1.0%
of the total outstanding shares of Bancshares.
<PAGE>   28
                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDERS MATTERS.

MARKET INFORMATION

         Bancshares' common stock is not actively traded and is not listed on
any exchange. Management is not aware of any broker/dealer who formally makes a
market in its common stock. However, based upon bid quotations published in the
Pacific Business News and actual transactions known to Bancshares, the price of
Bancshares' common stock during 1996 has ranged between $33.00 to $36.00 and
during 1995 from $27.75 to $33.00. Bancshares' book value per share at December
31, 1996 and 1995 was $39.10 and $38.25, 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, 1997, there were 1,299 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 14, 1997, 1996 and 1995. 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. SELECTED FINANCIAL DATA

         A summary of operations and selected financial data for the five years
ended December 31 is presented as follows:
<PAGE>   29
ITEM 6. SELECTED FINANCIAL DATA

                        HAWAII NATIONAL BANCSHARES, INC.
                                  & SUBSIDIARY
             SUMMARY OF OPERATIONS AND OTHER SELECTED FINANCIAL DATA
                      for the five years ended December 31
                    (in thousands except for per share data)

<TABLE>
<CAPTION>
                                                          1996           1995           1994           1993           1992
                                                        --------       --------       --------       --------       --------
<S>                                                     <C>            <C>            <C>            <C>            <C>     
SUMMARY OF OPERATIONS
     Interest income                                    $ 22,376       $ 22,640       $ 20,179       $ 20,933       $ 23,358
     Interest expense                                      7,004          7,105          5,300          6,063          8,664
                                                        --------       --------       --------       --------       --------
         Net interest income                              15,372         15,535         14,879         14,870         14,694
     Provision for loan and lease losses                     810            700            765            480            360
                                                        --------       --------       --------       --------       --------
         Net interest income after provision
            for loan and lease losses                     14,562         14,835         14,114         14,390         14,334
     Other income                                          2,445          2,336          2,348          2,478          2,482
     Other expenses                                       15,865         15,507         15,085         15,272         14,357
                                                        --------       --------       --------       --------       --------
     Income before income taxes and cumulative
         effect of change in accounting principle          1,142          1,664          1,377          1,596          2,459
     Income tax provision                                    431            620            505            670            869
                                                        --------       --------       --------       --------       --------
     Income before cumulative effect of change
         in accounting principle                             711          1,044            872            926          1,590
     Cumulative effect of change in method
         of accounting for income taxes                       --             --             --            350             --
                                                        --------       --------       --------       --------       --------
                Net income                              $    711       $  1,044       $    872       $  1,276       $  1,590
                                                        ========       ========       ========       ========       ========

     Earnings Per Common Share:
         Earnings before cumulative effect of
            accounting change                           $   1.00       $   1.47       $   1.23       $   1.30       $   2.24
         Cumulative effect of change in
            accounting principle                              --             --             --           0.49             --
                                                        --------       --------       --------       --------       --------
     Earnings per common share                          $   1.00       $   1.47       $   1.23       $   1.79       $   2.24
                                                        ========       ========       ========       ========       ========
     Cash dividends per share                           $   0.15       $   0.15       $   0.15       $   0.15       $   0.15
                                                        ========       ========       ========       ========       ========

OTHER SELECTED FINANCIAL DATA:
     Total assets                                       $296,025       $299,590       $290,256       $306,407       $316,622
     Investment securities                              $ 49,417       $ 47,490       $ 46,419       $ 44,437       $ 42,216
     Loans and leases, net of allowance for
         possible loan and leases losses                $204,195       $209,998       $213,993       $210,542       $213,146
     Deposits                                           $264,594       $268,906       $260,973       $278,168       $288,816
     Shareholders' equity                               $ 27,797       $ 27,193       $ 26,243       $ 25,478       $ 24,308
     Book value per share                               $  39.10       $  38.25       $  36.91       $  35.83       $  34.19
</TABLE>
<PAGE>   30
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
        RESULTS OF OPERATIONS

                In reviewing this discussion, reference should be made to the
accompanying table of analysis of operations, the financial statements, and
selected financial data presented elsewhere in this report.

                  Hawaii National Bancshares, Inc. & Subsidiary
                        Analysis of Results of Operations
                                 (in thousands)

<TABLE>
<CAPTION>
                                                          Year Ended December 31           1996 vs 1995           1995 vs 1994
                                                       -----------------------------  ----------------------  --------------------
                                                                                      Increase    Percent of  Increase    Percent of
                                                         1996       1995      1994    (Decrease)    Change    (Decrease)   Change
                                                       --------    -------   -------  ----------  ----------  ----------  ----------
<S>                                                    <C>         <C>       <C>        <C>         <C>        <C>         <C>  
Interest Income:
     Interest and fees on loans
         and leases                                    $ 18,658    $19,684   $17,530    ($1,026)      -5.2%    $ 2,154      12.3%
     Interest on federal funds sold                         907        555       492        352       63.4%         63      12.8%
     Interest on investment securities                    2,683      2,301     2,130        382       16.6%        171       8.0%
     Other                                                  128        100        27         28       28.0%         73     270.4%
                                                       --------    -------   -------    -------     ------     -------     -----
            Total interest income                        22,376     22,640    20,179       (264)      -1.2%      2,461      12.2%
                                                       --------    -------   -------    -------     ------     -------     -----
Interest Expense:
     Deposits                                             6,963      6,949     5,242         14        0.2%      1,707      32.6%
     Interest on borrowed funds                              41        156        58       (115)     -73.7%         98     169.0%
                                                       --------    -------   -------    -------     ------     -------     -----
            Total interest expense                        7,004      7,105     5,300       (101)      -1.4%      1,805      34.1%
            Net interest income                          15,372     15,535    14,879       (163)      -1.0%        656       4.4%
Provision for loan and lease losses                         810        700       765        110       15.7%        (65)     -8.5%
                                                       --------    -------   -------    -------     -------    -------     -----
            Net interest income after provision
                for loan and lease losses                14,562     14,835    14,114       (273)      -1.8%        721       5.1%
                                                       --------    -------   -------    -------     ------     -------     -----
Other Income:
     Service charges on deposit accounts                  1,110      1,086       989         24        2.2%         97       9.8%
     Other service charges, collection and exchange
         charges, commissions and fees                    1,320      1,231     1,359         89        7.2%       (128)     -9.4%
     Gain (loss) on available-for-sale securities           (10)        19        --        (29)    -152.6%         19        --
     Gain on investment securities held-to-maturity          25         --        --         25         --          --        --
                                                       --------    -------   -------    -------     ------     -------     -----
                                                          2,445      2,336     2,348        109        4.7%        (12)     -0.5%
                                                       --------    -------   -------    -------     ------     -------     -----
Other Expenses:
     Salaries and employee benefits                       8,132      7,722     7,295        410        5.3%        427       5.9%
     Occupancy expense of bank premises                   3,511      3,381     3,178        130        3.8%        203       6.4%
     Equipment expense                                      853        777       708         76        9.8%         69       9.7%
     Computer services                                      729        690       846         39        5.7%       (156)    -18.4%
     Other operating expenses                             2,640      2,937     3,058       (297)     -10.1%       (121)     -4.0%
                                                       --------    -------   -------    -------     ------     -------     -----
                                                         15,865     15,507    15,085        358        2.3%        422       2.8%
                                                       --------    -------   -------    -------     ------     -------     -----
         Income before income taxes                       1,142      1,664     1,377       (522)     -31.4%        287      20.8%

Income Tax Provision                                        431        620       505       (189)     -30.5%        115      22.8%
                                                       --------    -------   -------    -------     ------     -------     -----

         Net income                                    $    711    $ 1,044   $   872    ($  333)     -31.9%    $   172      19.7%
                                                       ========    =======   =======    =======     ======     =======     =====
</TABLE>
<PAGE>   31
         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 issued by federal, state, and municipal authorities.
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.

LOCAL ECONOMY

         As the U.S. embarked upon its sixth year of economic expansion,
Hawaii's economy continued to struggle. Preliminary estimates by local
economists place the State's real growth in 1996 at 1.0%, well below the 2.5%
estimated for the nation's economy. Hawaii continued to lose jobs in 1996 for
the fourth consecutive year and Honolulu, the State's capital, ranked last out
of 100 metropolitan areas in terms of job growth according to a nationwide
survey. As job losses continued to mount, bankruptcies and foreclosures have
soared. The number of bankruptcy filings of 3,083 in 1996 is a 52.5% increase
over last year's record of 2,022. As of December 26, 1996, the number of
foreclosures filed amounted to 2,753, a 40.7% increase over the prior year's
record of 1,957. The lack of job creation, combined with corporate downsizings,
failures and migrations to other states, have led to a soft construction and
real estate market. While Oahu home sales rose 6.5% in 1996, the number of homes
sold that year was 18.7% below the number sold in 1994. Meanwhile, condominium
sales declined 12% in 1996, compared to the prior year and the number of units
sold was 41.0% below the level reported in 1994. The median price for a
single-family home in 1996 was $335,000, 4.0% below the 1995 median of $349,000.
The 1996 condominium median price of $175,000 was 3.8% lower than 1995's
$182,000. Although comparable statistics on commercial real estate are not
available, this market has also experienced lower activity levels and lower
prices. In 1997, local economists are projecting the slow recovery in Hawaii's
economy to continue. The general consensus is that growth will approximate 2.0%.

OVERVIEW

         The consolidated net income of Hawaii National Bancshares, Inc. and
Hawaii National Bank (collectively, the "Company") was $711,223 in 1996,
compared to $1,043,935 in 1995 and $872,340 in 1994. Earnings per share were
$1.00, $1.47, and $1.23 in 1996, 1995 and 1994, respectively.

         The 1996 earnings represented a decline of $332,712 or 31.9% from the
prior year. The lower results were attributable to a decrease in net interest
income, an increase in the provision for loan and lease losses and the full
year's effect of the Maui branches which were acquired in mid 1995, partly
offset by a reduction in Federal Deposit Insurance Corporation ("FDIC")
insurance premiums. Since the Bank has not gone outside of the State in its
quest for new business, Hawaii's weak economy had a major adverse impact on its
performance in 1996.
<PAGE>   32
         Net income increased by $171,595 or 19.7% in 1995, due primarily to an
increase in net interest income and a rebate in FDIC insurance premiums after
the Bank Insurance Fund exceeded its mandated reserve ratio.

         In 1995, the Bank entered into a purchase and assumption agreement with
the FDIC to acquire two offices of the former Bank USA, N.A. on the island of
Maui. During the third quarter of that year, the Wailuku branch was relocated to
Kahului, a rapidly growing and more densely populated community.

         Noncurrent loans and leases declined to $3,392,000 at December 31,
1996, representing 1.6% of total loans and leases, compared to $6,620,000, or
3.1%, at December 31, 1995. Net charge-offs declined to $838,999, compared to
$1,025,203 in 1995.

         At December 31, 1996, total assets stood at $296,025,258, a decrease
from $299,590,457 at December 31, 1995. Shareholders equity grew to $27,797,288
at year-end 1996, representing an increase of 2.2% over the previous year-end
balance. Book value per share rose from $38.25 at December 31, 1995 to $39.10 at
December 31, 1996. Leverage and risk-based capital ratios exceeded regulatory
capital requirements by a substantial margin at December 31, 1996 and 1995.

         The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act") generally will, over the next few months, permit nationwide
interstate banking and branching. This legislation generally authorizes
interstate branching and relaxes federal law restrictions on interstate banking.
Subject to certain state laws, such as age and contingency laws, the Interstate
Act allows adequately capitalized and adequately managed bank holding companies
to purchase the assets of out-of-state banks (effective as of September 29,
1995). Additionally, beginning June 1, 1997, the Interstate Act permits
interstate bank mergers, subject to certain state laws, such as age and
contingency laws, unless the home state of either merging bank has "opted-out"
of these provisions by enacting "opt-out" legislation. States may also "opt-in"
to these bank merger provisions early by enacting non-discriminatory "opting-in"
legislation permitting interstate mergers within their own borders before June
1, 1997. The Interstate Act does allow states to impose certain conditions on
interstate bank mergers within their borders; for example, states may require
that the in-state merging bank exist for up to five years before the interstate
merger. Under the Interstate Act, states may also "opt-in" to de novo branching,
allowing out-of-state banks to establish de novo branches within the state.

         Legislation adopted in Hawaii in June of 1996, effective June 1, 1997,
generally permits interstate mergers, subject to certain restrictions. Under
this legislation, a Hawaii state bank must exist for at least five years before
it can be acquired by an out-of-state bank. In addition, out-of-state banks that
do not already operate a branch in Hawaii may not establish de novo branches in
Hawaii or establish and operate a branch by acquiring a branch in Hawaii.
Additional legislation is currently being considered in Hawaii which would make
entrance into the Hawaii market via branching easier in the future. However, the
probability that this legislation will be adopted or amended cannot be predicted
at this time.
<PAGE>   33
         In 1997, the Bank anticipates opening a branch in the Times Square
Shopping Center in Pearl City, Oahu which will provide it with an opportunity to
expand its loan and deposit base. Based on past experience, initially new
branches have an adverse impact on earnings until the volume of business grows
to cover overhead expenses. This may be mitigated to some extent since staffing
for the new office is expected to be accomplished internally.

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 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.

         In 1996, net interest income was $15,372,384, compared to $15,534,686
in 1995 and $14,879,671 in 1994. The lower results reported in 1996 were due
primarily to 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. During 1995, the yield on interest-earning assets rose
more than the average cost of interest-bearing liabilities resulting in an
increase in net interest income. Net interest margin was 5.63%, 5.74% and 5.48%
for 1996, 1995 and 1994, respectively.

         Total interest income amounted to $22,376,745 in 1996 versus
$22,640,331 in 1995 and $20,179,900 in 1994. The decrease of $263,586 in 1996
was mainly due to a lower average balance of loans and leases and a lower
average loan and lease yield. The average balance of loans and leases was
$207,289,000 in 1996, a decline from $215,492,000 in 1995. The decrease was due
to a weak local economy which served to constrain the demand for credit.
Compared to the prior year, the prime lending rate was 50 to 75 basis points
lower in 1996 which contributed to a 13 basis point decline in the average yield
on loans and leases. Interest income foregone on nonaccrual loans and leases
amounted to $464,000 and $318,000 in 1996 and 1995, respectively. The higher
interest revenue reported in 1995 was due primarily to an increase in average
asset yields.

         Total interest expense decreased by $101,284 to $7,004,361 in 1996,
compared to $7,105,645 and $5,300,229 in 1995 and 1994, respectively. The
improvement in 1996 was due to a lower average balance of short-term borrowings
which declined from $2,506,000 in 1995 to $789,000 in 1996. During 1996, a
decrease in the average cost of deposits offset a continued shift from
lower-costing savings into higher-costing time deposits. The increase in
interest expense in 1995 was primarily due to a higher average cost of deposits
which resulted from higher market interest rates and a migration from savings
into time deposits.
<PAGE>   34
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 totaled $2,445,479 in 1996,
$2,336,523 in 1995 and $2,348,058 in 1994. The increase of $108,956 or 4.7% in
1996 reflects improved fee income generation on loan and deposit accounts. For
the years ended 1996 and 1995, gains and losses on investment securities were
not significant and were nonexistent in 1994.

         Other expenses consist of salaries and employee benefits, occupancy
expense of bank premises, equipment expense, computer services and other
operating expenses. In 1996, other expenses amounted to $15,865,640, compared to
$15,507,274 in 1995 and $15,085,389 in 1994. The increases of $358,366 or 2.3%
in 1996 and $421,885 or 2.8% in 1995 were primarily due to the opening of two
new branches on Maui in May 1995, partly offset by a reduction in FDIC premiums.

         Salaries and employee benefits increased $410,376 or 5.3% in 1996,
compared to an increase of $426,673 or 5.8% a year earlier. The growth in this
category reflects an increase in staff and normal merit and inflationary
adjustments which were adopted to keep the Bank's salary and benefit packages
competitive. In 1995, the Bank retained the employees from the former Bank USA
to operate the Maui branches. The number of full-time equivalent employees
totaled 221 at December 31, 1996, compared to 218 and 213 at December 31, 1995
and 1994, respectively. Consistent with management's goals of controlling growth
and improving long-term profitability to shareholders, increases in staff
continue to be closely monitored.

         Occupancy expense of bank premises rose $129,663 or 3.8% in 1996 versus
an increase of $203,287, or 6.4%, in the previous year. The increases in 1996
and 1995 were principally due to the addition of two new branches on Maui in May
1995.

         Equipment expense increased $76,219 or 9.8% in 1996 and $68,750 or 9.7%
in 1995. The increases in both years resulted primarily from higher depreciation
charges.

         Computer services are obtained from Computer Systems International,
Ltd. ("CSI"), a bank service corporation formed to provide data processing
services to financial institutions, including the Bank. The company is currently
considering several alternatives to achieve year 2000 compliance. At December
31, 1996, the Bank and an affiliate of a director each owned a 50% interest in
CSI. Charges for data processing service were $729,000 in 1996, $690,000 in 1995
and $846,000 in 1994.

         Other operating expenses decreased $296,617 or 10.1% in 1996 and
$121,380 or 4.0% in 1995. The improvement in both years was principally due to a
decline in FDIC insurance rates. The first reduction retroactively took effect
on June 1, 1995 when the premiums that banks pay to the FDIC for deposit
insurance were reduced from the prior range of 23 cents to 31 cents per $100 of
deposits to a wider range of 4 cents to 31 cents. Banks that overpaid were given
a one-time refund plus interest. In September 1995, the Bank received a
reimbursement of $159,000 from the FDIC. The second reduction was effective
January 1, 1996 when the
<PAGE>   35
assessment range was reduced by another 4 cents to 0 cents to 27 cents. The
actual rate assessed each bank in 1995 and 1996 continued to be contingent upon
its capital adequacy and risk classification.

         On September 26, 1996, the Deposit Insurance Funds Act of 1996 was
signed into law. Among other things, the new law generally requires commercial
banks to share in repaying the Financing Corporation ("FICO") bonds which were
issued in the late 1980's when a number of thrifts failed. This is a special
assessment over and above the regular FDIC insurance premiums. Beginning January
1, 1997, thrifts will generally pay an estimated 6.5 cents for every $100 of
deposits for the next 3 years and commercial banks will generally pay an
estimated 1.3 cents for every $100 of deposits. After January 1, 2000, the FICO
assessment will be spread evenly among all thrift and commercial bank deposits
at an estimated rate of 2.4 cents per $100 of deposits. Assuming a deposit base
of $265,000,000, the Bank's assessment for the FICO bonds will be $34,450 in
1997 and rise to $63,600 in 2000.

         Also included in other operating expenses are adjustments to the Bank's
investment in CSI which is accounted for under the equity method. The Bank's
equity in losses of CSI was $59,000, $200,000 and $60,000 in 1996, 1995 and
1994, respectively. At December 31, 1995, the Bank's investment in CSI amounted
to $59,000 (included in other assets) which was reduced to zero at December 31,
1996.

Income Tax Expense

         The Company's federal and state income tax provision decreased to
$431,000 in 1996, compared to $620,000 in 1995 and $505,000 in 1994. The
effective tax rates for those years were 37.7%, 37.3%, and 36.7%, respectively.

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, 1996, total deposits amounted to $264,594,380,
representing a decrease of $4,311,405 or 1.6% from total deposits of
$268,905,785 at December 31, 1995.
<PAGE>   36
         The following table presents the distribution of the Bank's deposit
accounts at December 31 for the years indicated.

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                         1996                          1995                          1994
                                   Amount         %              Amount         %              Amount          %
-------------------------------------------------------------------------------------------------------------------

<S>                            <C>             <C>           <C>             <C>           <C>              <C>   
Noninterest-bearing demand     $ 59,989,127     22.7%        $ 66,331,301     24.7%        $ 59,714,902      22.9%
Interest-bearing demand          28,144,031     10.6           29,316,390     10.9           31,615,598      12.1
Savings                         110,032,161     41.6          113,736,751     42.3          117,447,338      45.0
Time                             66,429,061     25.1           59,521,343     22.1           52,195,280      20.0
                                 ----------     ----           ----------     ----           ----------      ----
    Total deposits             $264,594,380    100.0%        $268,905,785    100.0%        $260,973,118     100.0%
                               ============    =====         ============    =====         ============     ===== 
</TABLE>
--------------------------------------------------------------------------------


         Noninterest-bearing demand deposits ended 1996 $6,342,174 below the
balance reported at year-end 1995. The decline in these deposits was due to a
weak local economy and a soft real estate market which resulted in lower
balances in corporate checking and escrow fund accounts. Interest-bearing demand
deposits at year-end 1996 were $1,172,359 lower, compared to the same date in
1995. 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 $6,907,718 over year-end 1995
levels, offsetting a decline in savings deposits of $3,704,590. During 1996,
customers continued to shift their funds from savings to time deposits to take
advantage of higher rates. The average rate paid on savings and time deposits
for the year was 2.93% and 4.89%, respectively. Since December 31, 1994, time
deposits, as a percentage of total deposits, have grown from 20.0% to 25.1% at
December 31, 1996. Meanwhile, over the same period, savings deposits have
declined from 45.0% to 41.6%. This change in the deposit mix offset the benefit
from lower average deposit rates in 1996. 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,
1996, 1995 and 1994, public time deposits totaled $32,192,000, $30,197,000, and
$29,547,000, respectively, representing 12.2%, 11.2%, and 11.3% of the Bank's
total deposits.

         In 1995, total deposits increased by $7,932,667. During the year, the
Bank assumed $8,061,823 in deposits from the former Bank USA, consisting of
$1,423,507 in noninterest-bearing demand deposits, $1,507,291 in
interest-bearing demand deposits, $740,076 in savings deposits, and $4,390,949
in time deposits.

         The Bank's ability to attract and retain deposits (primarily savings
and time deposits) has been, and will continue to be, significantly affected by
market conditions. When direct investment vehicles, such as stocks and mutual
funds, offer a higher return, the possibility of disintermediation (i.e., the
flow of funds away from financial institutions into the capital market) exists.
This was the case in 1994 when a deposit outflow of $17,194,607 was recorded.
The Bank's experience in that year was consistent with an industry trend.
<PAGE>   37
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, 1996 and 1995. The
book and fair values of investment securities held-to-maturity at December 31,
1996 were $47,929,910 and $48,007,000, respectively, compared to $45,993,061 and
$46,165,000 at December 31, 1995. There were no sales from the held-to-maturity
portfolio in 1996 or 1995. During 1996, an investment security held-to-maturity
was called at a premium by the issuer resulting in a gain of $25,000. During the
same year, 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. At December 31, 1996, the book and fair
value of investment securities available-for-sale was $1,487,003, compared to
$1,497,003 at December 31, 1995. During 1996 and 1995, there were no transfers
between the held-to-maturity, available-for-sale and trading categories.

Loan and Lease Portfolio

         At December 31, 1996, total loans and leases stood at $207,262,739,
representing a decrease of $5,831,289 or 2.7% from the level reported at
December 31, 1995. The decline was primarily due to: 1) a weak local economy; 2)
loan sales of $5,319,000; and 3) gross charge-offs amounting to $1,531,106.

         Real estate loans declined to $133,214,237 at year-end 1996, $5,190,301
lower than the level at year-end 1995. During the first quarter of 1996, the
Bank sold a nonaccrual commercial property loan of $2,673,000 to an affiliate of
a director at the Bank's full carrying value. The loan was repaid in the third
quarter. Commercial, industrial and agricultural loans ended the year at
$64,804,301, a decrease of $1,216,348 from December 31, 1995. The decline was
attributable to the sale of two commercial loan participations aggregating
$2,500,000 to other financial institutions and gross charge-offs of $1,266,000.
Consumer loans, which consist of loans to individuals for household, family and
other personal expenditures, rose to $7,674,104 at year-end 1996, an increase
from the $7,255,125 reported for the same date a year earlier. At December 31,
1996, direct financing leases and other loans totaled $1,013,049 and $557,048,
respectively, compared to $1,165,370 and $248,346 at December 31, 1995.

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.
<PAGE>   38
         At December 31, 1996, real estate loans totaled $133,214,237,
accounting for 64.3% of the loan and lease portfolio. Included in this category
are family residential, construction and commercial property loans which at
year-end 1996 amounted to $104,791,169; $2,572,102; and $25,850,966,
respectively. While low mortgage rates combined with lower prices has 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 1997.

Loan Impairment

         On January 1, 1995, the Bank adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan," and Statement No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures," which
amends Statement No. 114 to allow a creditor to use existing methods for
recognizing interest income on impaired loans. Under the new standards, a loan
is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest 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 rate or
the fair value of collateral if the loan is collateral dependent. Excluded from
the scope of Statement No. 114 are: 1) commitments to lend; 2) large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment; 3) loans measured at fair value or lower of cost or market value; 4)
leases; and 5) debt securities. 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.

         Generally, at the time a loan is placed on nonaccrual, it is considered
impaired. It is the Bank's policy to place a loan on nonaccrual when: 1) it is
maintained on a cash basis because of deterioration in the financial condition
of the borrower; 2) payment in full of principal and interest is not expected;
or 3) principal and interest has been in default for a period of 90 days or more
unless the asset is both well collateralized and in the process of collection.
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.
<PAGE>   39
         Interest income on impaired loans is recognized in accordance with the
Bank's nonaccrual loan policy. Subsequent payments received are generally
applied to reduce the principal balance. For more information on the accounting
policies for this area, refer to the Consolidated Notes to the Financial
Statements - Income Recognition On Impaired and Nonaccrual Loans.

         Charge-offs of impaired loans are processed when collection becomes
doubtful and the underlying collateral, if any, is considered inadequate to
liquidate the outstanding debt. Additional information about the Bank's
charge-off policies is provided in the Notes to the Consolidated Financial
Statements - Allowance for Possible Loan and Lease Losses.

         At December 31, 1996, the recorded investment in impaired loans
amounted to approximately $3,074,000 and $6,084,000, respectively, of which
$1,650,000 and $4,633,000, respectively, related to loans for which there was no
valuation allowance determined in accordance with Statement No. 114 and
$1,424,000 and $1,451,000, respectively, related to loans with a corresponding
valuation allowance determined under Statement No. 114 of $253,000 and $292,000,
respectively. For the year ended December 31, 1996 and 1995, the average
recorded investment in impaired loans was approximately $3,970,000 and
$2,717,000, respectively. There was no interest recognized on these impaired
loans in 1996 and 1995.

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,
1996, noncurrent loans and leases declined to $3,392,000, representing 1.6% of
loans and leases outstanding, compared to $6,620,000, or 3.1%, at December 31,
1995. The improvement was primarily attributable to the collection of a large
nonaccrual loan (see "Loan and Lease Portfolio"). Most of the credits in the
noncurrent category are collateralized by real estate. There were no
restructured loans or leases as of December 31, 1996 or 1995.

         Other real estate owned ("OREO"), which is included in other assets,
increased from $1,162,000, or 0.39% of total assets, at December 31, 1995 to
$1,219,000, or 0.41% of total assets, at December 31, 1996. The OREO portfolio
consisted of a commercial property and two residential condominiums at the end
of 1996. The commercial property generates a positive cash flow. The
condominiums are currently listed for sale. At December 31, 1996 and 1995, the
market values of the properties in OREO, less estimated selling costs, exceeded
their respective carrying values. There was no activity in the reserve in any of
those years.
<PAGE>   40
         The following table presents information on restructured and noncurrent
loans and leases at December 31 for the years indicated:

<TABLE>
<CAPTION>
                                          1996             1995           1994           1993        1992
-------------------------------------------------------------------------------------------------------------

<S>                                    <C>             <C>             <C>           <C>           <C>       
Noncurrent loans and leases
  Past due 90 days or more             $  212,000      $  414,000      $2,241,000    $  634,000    $1,094,000
  Nonaccrual                            3,180,000       6,206,000       1,326,000       924,000         2,000
                                       ----------      ----------      ----------    ----------    ----------
    Total                              $3,392,000      $6,620,000      $3,567,000    $1,558,000    $1,096,000
                                       ==========      ==========      ==========    ==========    ==========
                                                                                                 
Restructured loans and leases          $       --      $       --      $       --    $   52,000    $   61,000
                                       ==========      ==========      ==========    ==========    ==========
                                                                                                 
OREO                                   $1,219,000      $1,162,000      $  938,000    $  150,000    $  150,000
                                       ==========      ==========      ==========    ==========    ==========
</TABLE>

Note:  Impaired loans are included in nonaccrual loans and leases.
--------------------------------------------------------------------------------


Potential Problem Loans

         The Bank has an internal grading and review system for the purpose of
identifying risk and controlling potential problem credits. 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 1996, the Bank provided $810,000 for possible loan and lease
losses, compared to $700,000 and $765,000 in 1995 and 1994, respectively. Gross
charge-offs for 1996 and 1995 were $1,531,106 and $1,103,875, respectively. Of
these losses, nearly 63% were attributable to two commercial loans in 1996 and
58% to one commercial loan in 1995. Comparatively, for 1994, gross charge-offs
totaled $500,112. In July 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 $838,999
<PAGE>   41
in 1996, compared to $1,025,203 in 1995 and $472,834 in 1994. The ratio of net
charge offs to average loans and leases for those years were 0.40%, 0.48%, and
0.22% respectively.

         At December 31, 1996, the allowance for loan and lease losses stood at
$3,067,434, representing 1.48% of total loans and leases outstanding, compared
to $3,096,433 or 1.45%, at year-end 1995. As of the same date, the reserve
provided coverage of 90.4% of noncurrent loans and leases, up from 46.8% at
December 31, 1995. The majority of the credits in the noncurrent category are
collateralized by real estate.

Liquidity Management

         The objective of liquidity management is to provide sufficient cash
flows 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, 1996, these resources totaled $33,276,700
or 11.2% of total assets compared to $32,658,709 or 10.9% at December 31, 1995.
The improvement was primarily due to an increase in federal funds sold which
rose from $13,750,000 at December 31, 1995 to $16,000,000 at December 31, 1996.
During the years ended December 31, 1996, 1995 and 1994, the Bank was a net
seller of federal funds.

         On the liability side of the balance sheet, liquidity is provided
primarily by increases in deposits and, to a lesser extent, borrowings. 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, 1996, 1995, and 1994, public time deposits represented 12.2%,
11.2% and 11.3%, respectively, of the total deposit base. Additional liquidity
is available to the Bank through federal funds lines at other banks and the
discounting facilities at the Federal Reserve Bank. In 1994, the Bank
established a line of credit with the FHLB equal to 10.0% of total assets,
including a cash management agreement line of 5.0%. There were no borrowings
outstanding from the FHLB at December 31, 1996 and 1995.

         Operating activities provided net cash of $2,214,134 in 1996,
$3,060,597 in 1995, and $2,140,463 in 1994. The decline in 1996 was primarily
due to lower receipts of interest and fees on loans and leases and higher
outlays to employees and suppliers. Loan sales accounted for a significant
portion of the net cash provided by investing activities of $2,880,677 and
$1,739,085 in 1996 and 1995, respectively. In 1994, most of the net cash used of
$6,845,523 was employed for loan fundings. Financing activities used net cash of
$4,476,820 in 1996 and $17,261,257 in 1994. During those years, the Bank
experienced an attrition in deposits of $4,311,405 and $17,194,607,
respectively, which was related to the interest rate differential between
interest-bearing deposits and capital market investments. (For a discussion of
how market interest rates may affect deposit outflows, refer to the preceding
section on "Deposits".) In 1995, net cash provided by financing activities was
$7,248,756, due primarily to the
<PAGE>   42
assumption of $8,061,823 in deposits from the former Bank USA. The Bank also
obtained that year a $4,000,000, 120 day advance from the FHLB. This borrowing
was repaid at maturity with proceeds from the sale of a commercial mortgage loan
package.

Interest Rate Sensitivity Management

         The objective of interest rate sensitivity management is to ensure the
safety and soundness of the institution by reducing the vulnerability of
earnings to interest rate fluctuations. In order to achieve this objective, the
Bank has an Asset and Liability Committee, whose responsibility is to measure
and monitor the institution's interest rate risk exposure and to develop and
implement an appropriate interest rate risk strategy.

         In order to mitigate exposure to rising interest rates, emphasis
remains on maintaining the interest rate sensitivity of assets. The current
strategy is generally to originate adjustable-rate mortgages to portfolio and to
sell fixed-rate production in the secondary market primarily to government
sponsored instrumentalities like the Federal Home Loan Mortgage Corporation and
the Federal National Mortgage Association. In addition, the Bank underwrites the
majority of its commercial loans on a floating-rate basis. No derivative
financial instruments, such as futures, options or interest rate swaps are used
for hedging or speculative purposes.

         As illustrated below, the Bank is asset-sensitive on a cumulative
basis, which implies that more interest-earning assets could reprice than
interest-bearing liabilities. Generally, a decline in interest rates will
adversely affect net interest income, as yields on interest-earning assets
decrease at a faster rate than costs of interest-bearing liabilities.
Conversely, in a rising interest rate environment, net interest income will
generally benefit, as yields increase at a faster rate than interest costs. As a
conservative assumption, a 15.0% annual run-off rate for interest-bearing demand
and savings deposits was used in the following schedule.
<PAGE>   43
                            INTEREST RATE SENSITIVITY
                             AS OF DECEMBER 31, 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        Days
-------------------------------------------------------------------------------------------------------------------
                                                                                       365           Non-Int.
                                        0-90           91-180         181-365        and Over        Bearing        Total
-----------------------------------------------------------------------------------------------------------------------------

<S>                                    <C>            <C>            <C>            <C>              <C>             <C>     
ASSETS

Investment securities                  $  2,000       $  6,000       $  9,000       $  32,417        $     --        $ 49,417
Short-term investments                   16,000             --             --              --              --          16,000
Loans and leases                        139,251         32,700         30,641           4,671              --         207,263
Other assets                                 --             --             --              --          23,345          23,345
                                       --------       --------       --------       ---------        --------        --------

Total assets                           $157,251       $ 38,700       $ 39,641       $  37,088        $ 23,345        $296,025
                                       --------       --------       --------       ---------        --------        --------


LIABILITIES AND CAPITAL

Demand deposits                        $     --       $     --       $     --       $      --        $ 59,989        $ 59,989
Interest-bearing demand deposits          1,407          1,407          1,407          23,923              --          28,144
Savings deposits                          5,502          5,502          5,502          93,526              --         110,032
Time deposits                            38,264         21,150          6,418             597              --          66,429
Short-term borrowings                       844             --             --              --              --             844
Other liabilities                            --             --             --              --           2,790           2,790
Shareholders' equity                         --             --             --              --          27,797          27,797
                                       --------       --------       --------       ---------        --------        --------

Total liabilities
  and shareholders' equity             $ 46,017       $ 28,059       $ 13,327       $ 118,046        $ 90,576        $296,025
                                       --------       --------       --------       ---------        --------        --------

Interest sensitivity
  gap                                  $111,234       $ 10,641       $ 26,314       $ (80,958)       $(67,231)       $     --
                                       --------       --------       --------       ---------        --------        --------

Cumulative gap                         $111,234       $121,875       $148,189       $  67,231        $     --        $     --
                                       --------       --------       --------       ---------        --------        --------
</TABLE>

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 $27,797,288 at year-end 1996, an increase
of $604,573 or 2.2% 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 $38.25 at December 31, 1995 to $39.10 at December
31, 1996.

         The Company is subject to risk-based capital guidelines which are used
by bank regulatory agencies to evaluate capital adequacy. Under this system,
assets and off-balance sheet items are assigned to one of four risk-weight
categories to calculate a risk-weighted asset base. The rules require a minimum
Tier 1 capital ratio of 4.0% of risk-weighted assets and a minimum total capital
ratio of 8.0% of risk-weighted assets. Tier 1 capital generally consists
<PAGE>   44
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, 1996,
the Company's Tier 1 and total capital ratios were 14.0% and 15.2%,
respectively, compared to 13.1% and 14.4% at December 31, 1995. At year-end 1996
and 1995, the Company's leverage ratio was 9.5% and 9.2%, 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. As part of its
long-term planning, 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 borrow up to 30%
of its capital without prior approval of the Federal Reserve System. Based on
year-end 1996 figures, this would amount to $8,339,186. A third alternative is
to obtain an intermediate or long-term advance under the Bank's line of credit
with the FHLB. At year-end 1996, the Bank could borrow up to $14,850,000 under
this tranche of the facility while a similar amount was available for use as a
cash management or federal funds line.

Effects of New Accounting Standards

         In May 1995, the FASB issued Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," which amends Statement 65
"Accounting for Certain Mortgage Banking Activities" and requires that mortgage
banking enterprises recognize as separate assets rights to service mortgage
loans for others, however those servicing rights are acquired. This Statement
applies to transactions in which a mortgage banking enterprise sells or
securitizes mortgage loans with servicing rights retained and to impairment
evaluations of all amounts capitalized as mortgage servicing rights. Statement
No. 122 is to be generally applied prospectively and is effective for fiscal
years beginning after December 15, 1995. The adoption of this Statement did not
have a material effect on the consolidated financial statements of the Company.

         In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation plans and applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. SFAS No. 123 is effective for fiscal years
beginning after December 15, 1995. Since the Company does not offer these types
of stock plans to its employees and does not enter into these types of
transactions, this standard had no effect on the consolidated financial
statements of the Company.
<PAGE>   45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The consolidated financial statements, notes, and supplementary data
thereto called for by this item and the report of independent certified public
accountants are provided in item 14(a).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE

         None.

                                    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 annual meeting of
shareholders to be held on April 15, 1997, as provided below:

ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Election of Directors on pages 2-4.
         See also Item 4 for additional information regarding certain executive
         officers of the registrant.

ITEM 11: EXECUTIVE COMPENSATION

         Executive Compensation on pages 5-9.

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

         Principal Shareholders and Ownership of Stock by Officers and Directors
         of Bancshares on pages 11-15.

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Related Transactions on pages 10-11.
<PAGE>   46
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND
         REPORTS ON FORM 8-K

     (a) (1)      Financial Statements

                  Hawaii National Bancshares, Inc. and Subsidiary:
                     Report of Independent Accountants
                     Consolidated Balance Sheets at December 31, 1996 and 1995
                     Consolidated Statements of Income for the
                        years ended December 31, 1996, 1995 and 1994
                     Consolidated Statements of Changes in Shareholders' Equity
                        for the years ended December 31, 1996, 1995 and 1994
                     Consolidated Statements of Cash Flows for the
                        years ended December 31, 1996, 1995 and 1994
                     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.

<PAGE>   47
                       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, 1996 and 1995, 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,
1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," effective January 1, 1995 which changed its
method of accounting
for impaired loans.


/s/ Coopers & Lybrand L.L.P.
    ------------------------


Honolulu, Hawaii
January 22, 1997
<PAGE>   48
                HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY


                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                         1996                1995
<S>                                                              <C>                 <C>
ASSETS:
     Cash and due from banks                                     $ 17,276,700        $ 18,908,709
     Federal funds sold                                            16,000,000          13,750,000
     Investment securities (Notes 1 and 2) -
          Held-to-maturity (fair value of $48,007,000
            in 1996 and $46,165,000 in 1995)                       47,929,910          45,993,061
     Available-for-sale                                             1,487,003           1,497,003
     Loans and leases, net of allowance for possible
          loan and lease losses of $3,067,434 in 1996 and
            $3,096,433 in 1995 (Notes 4 and 5)                    204,195,305         209,997,595
     Premises and equipment (Note 6)                                3,900,122           4,189,043
     Other assets                                                   5,236,218           5,255,046
                                                                 ------------        ------------


        Total assets                                             $296,025,258        $299,590,457
                                                                 ============        ============


LIABILITIES:
     Deposits (Note 7) -
          Noninterest-bearing demand                             $ 59,989,127        $ 66,331,301
          Interest-bearing demand                                  28,144,031          29,316,390

          Savings                                                 110,032,161         113,736,751
          Time                                                     66,429,061          59,521,343
                                                                 ------------        ------------
             Total deposits                                       264,594,380         268,905,785

     Short-term borrowings (Note 8)                                   843,974             902,739
     Other liabilities                                              2,789,616           2,589,218
                                                                 ------------        ------------
        Total liabilities                                         268,227,970         272,397,742
                                                                 ------------        ------------
     Commitments (Notes 9 and 14)



SHAREHOLDERS' EQUITY (Note 10):
     Common stock, par value $1 per share;
          Authorized - 10,000,000 shares
          Issued and outstanding - 711,000 shares
             in 1996 and 1995                                         711,000             711,000
     Capital in excess of par value                                12,147,676          12,147,676
     Retained earnings                                             14,938,612          14,334,039
                                                                 ------------        ------------
          Total shareholders' equity                               27,797,288          27,192,715
                                                                 ------------        ------------
          Total liabilities and shareholders' equity             $296,025,258        $299,590,457
                                                                 ============        ============
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.


                                                                              48
<PAGE>   49
                HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY



                       CONSOLIDATED STATEMENTS OF INCOME
              for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                         1996                1995               1994
<S>                                                                 <C>                  <C>               <C>
INTEREST INCOME:
     Interest and fees on loans                                     $ 18,556,817         $19,561,816        $17,396,683
     Interest on investment securities -
        Taxable                                                        2,645,750           2,225,749          2,055,527
        Exempt from Federal income tax                                    37,750              75,500             75,500
     Interest on Federal funds sold                                      906,607             554,816            491,670
     Interest on direct financing leases                                 101,754             121,878            132,925
     Other                                                               128,067             100,572             27,595
                                                                    ------------         -----------        -----------
          Total interest income                                       22,376,745          22,640,331         20,179,900
                                                                    ------------         -----------        -----------
INTEREST EXPENSE:
     Deposits                                                          6,963,425           6,949,033          5,242,260
     Federal funds purchased                                               1,739             109,056             26,012
     Short-term borrowings                                                39,197              47,556             31,957
                                                                    ------------         -----------        -----------
          Total interest expense                                       7,004,361           7,105,645          5,300,229
                                                                    ------------         -----------        -----------


          Net interest income                                         15,372,384          15,534,686         14,879,671
PROVISION FOR LOAN AND LEASE LOSSES (Note 5)                             810,000             700,000            765,000
                                                                    ------------         -----------        -----------
          Net interest income after provision for
             loan and lease losses                                    14,562,384          14,834,686         14,114,671
                                                                    ------------         -----------        -----------
OTHER INCOME:
     Service charges on deposit accounts                               1,109,880           1,086,312            988,730
     Other service charges, collection and exchange
        charges, commissions and fees                                  1,320,599           1,231,496          1,359,328
     Gain on investment securities held-to-maturity                       25,000                --                 --
     Gain (loss) on investment securities available-for-sale             (10,000)             18,715               --   
                                                                    ------------         -----------        -----------
                                                                       2,445,479           2,336,523          2,348,058
                                                                    ------------         -----------        -----------

OTHER EXPENSES:
     Salaries and employee benefits                                    8,132,437           7,722,061          7,295,388
     Occupancy expense of bank premises                                3,511,014           3,381,351          3,178,064
     Equipment expense                                                   852,674             776,455            707,705
     Computer services (Note 3)                                          729,098             690,373            845,818
     Other operating expenses (Note 13)                                2,640,417           2,937,034          3,058,414
                                                                    ------------         -----------        -----------
                                                                      15,865,640          15,507,274         15,085,389
                                                                    ------------         -----------        -----------



          Income before income taxes                                   1,142,223           1,663,935          1,377,340

INCOME TAX PROVISION (Note 11)                                           431,000             620,000            505,000
                                                                    ------------         -----------        -----------
          Net income                                                $    711,223         $ 1,043,935        $   872,340
                                                                    ============         ===========        ===========
EARNINGS PER COMMON SHARE                                           $       1.00         $      1.47        $      1.23
                                                                    ============         ===========        ===========
</TABLE>

                                                                 
The accompanying notes are an integral part of the consolidated financial
statements.


                                                                              49
<PAGE>   50
                HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY



           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
              for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                 CAPITAL IN  
                                                  COMMON         EXCESS OF           RETAINED 
                                                  STOCK          PAR VALUE           EARNINGS               TOTAL
<S>                                              <C>             <C>               <C>                   <C>    
BALANCE, JANUARY 1, 1994                         $711,000        $12,135,655        $ 12,631,064         $ 25,477,719
     Cash dividends paid ($.15 per share)            --                 --              (106,650)            (106,650)
     Net income for the year                         --                 --               872,340              872,340
                                                 --------        -----------        ------------         ------------
BALANCE, DECEMBER 31, 1994                        711,000         12,135,655          13,396,754           26,243,409
     Cash dividends paid ($.15 per share)            --                 --              (106,650)            (106,650)
     Adjustment to capital in excess of
        par value                                    --               12,021                --                 12,021
     Net income for the year                         --                 --             1,043,935            1,043,935
                                                 --------        -----------        ------------         ------------
BALANCE, DECEMBER 31, 1995                        711,000         12,147,676          14,334,039           27,192,715
     Cash dividends paid ($.15 per share)            --                 --              (106,650)            (106,650)
     Net income for the year                         --                 --               711,223              711,223
                                                 --------        -----------        ------------         ------------
BALANCE, DECEMBER 31, 1996                       $711,000        $12,147,676        $ 14,938,612         $ 27,797,288
                                                 ========        ===========        ============         ============
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.



                                                                              50
<PAGE>   51
                HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              for the years ended December 31, 1996, 1995 and 1994



<TABLE>
<CAPTION>
                                                                     1996                 1995                 1994
<S>                                                              <C>                  <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Interest and fees received                                  $ 22,409,739         $ 22,588,077         $ 20,122,519
     Interest paid                                                 (6,986,316)          (6,921,257)          (5,118,608)

Service charges, collection and exchange charges,
     commission and fees received                                   2,430,479            2,317,808            2,359,712

Cash paid to suppliers and employees                              (15,233,320)         (14,114,951)         (14,670,439)

Income taxes paid                                                    (406,448)            (809,080)            (552,721)
                                                                 ------------         ------------         ------------
          Net cash provided by operating activities                 2,214,134            3,060,597            2,140,463
                                                                 ------------         ------------         ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from maturity of investment securities
     held-to-maturity                                              36,998,815           19,932,559           11,000,000
     Purchase of investment securities held-to-maturity           (38,910,664)         (20,995,308)         (11,912,813)
     Proceeds from sale of investment securities
          available-for-sale                                               --            2,122,073                   --
     Purchase of investment securities available-for-sale                  --           (2,111,058)          (1,069,500)
     Net increase in loans and leases made
          to customers                                                (56,551)          (1,119,353)          (4,269,676)
     Proceeds from sale of loans                                    5,319,000            4,427,468                   --
     Capital expenditures                                            (309,438)            (447,163)            (593,534)
     Proceeds from sale of equipment                                   33,899              154,867                   --
     Purchase of other real estate                                   (194,384)            (225,000)                  --
                                                                 ------------         ------------         ------------

          Net cash provided by (used in) investing
               activities                                           2,880,677            1,739,085           (6,845,523)
                                                                 ------------         ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Net decrease in demand deposits and
          savings accounts                                        (11,219,123)          (3,064,270)         (19,411,955)
     Net increase in time deposits                                  6,907,718            2,935,114            2,217,348

     Proceeds from deposit acquisitions                                    --            8,061,823                   --
     Net increase (decrease) in federal funds purchased               (58,765)            (480,000)              40,000
     Proceeds from short-term borrowings                                   --            4,000,000                   --
     Repayment of short-term borrowings                                    --           (4,097,261)                  --
     Dividends paid                                                  (106,650)            (106,650)            (106,650)
                                                                 ------------         ------------         ------------
          Net cash provided by (used in)
               financing activities                                (4,476,820)           7,248,756          (17,261,257)
                                                                 ------------         ------------         ------------


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                  617,991           12,048,438          (21,966,317)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                     32,658,709           20,610,271           42,576,588
                                                                 ------------         ------------         ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                         $ 33,276,700         $ 32,658,709         $ 20,610,271
                                                                 ============         ============         ============
</TABLE>









The accompanying notes are an integral part of the consolidated financial
statements.

                                                                              51
<PAGE>   52
                HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY



               CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
              for the years ended December 31, 1996, 1995 and 1994

<TABLE>
<CAPTION>
                                                                1996                1995                1994
<S>                                                      <C>                <C>                 <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
   BY OPERATING ACTIVITIES:

     Net income                                          $   711,223         $ 1,043,935         $   872,340

     Adjustments to reconcile net income to net cash
       provided by operating activities:
          Depreciation on bank premises and
               equipment                                     564,460             480,109             404,107
          Provision for loan and lease losses                810,000             700,000             765,000
          Amortization of deferred loan fees                (317,073)           (280,960)           (352,759)
          Loan fees                                          184,196             267,803             406,976

          Reduction of investment in Computer
               Systems International, Ltd.                    59,000            200,000               60,000

          (Gain) loss on investment securities
               available-for-sale                             10,000             (18,715)                 --
          Gain on investment securities
               held-to-maturity                              (25,000)                 --                  --
          Changes in -
               Interest receivable                           165,871             (40,161)           (111,598)
               Interest payable                               18,045             184,388             181,621
               Taxes payable                                  24,552            (52,500)               1,719
               Other assets                                 (148,941)           (332,888)           (141,636)
               Other liabilities                             157,801             909,586              54,693
                                                         -----------         -----------         -----------
                Total adjustments                          1,502,911           2,016,662           1,268,123
                                                         -----------         -----------         -----------


NET CASH PROVIDED BY OPERATING ACTIVITIES                $ 2,214,134         $ 3,060,597         $ 2,140,463
                                                         ===========         ===========         ===========


SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
     FINANCING ACTIVITIES:
     Transfer from loans to real estate acquired
          through foreclosure                            $   175,330         $   168,364         $   744,602
                                                         ===========         ===========         ===========


     Loan issued for sale of other real estate           $   137,282         $        --         $        --
                                                         ===========         ===========         ===========
</TABLE>


The accompanying notes are an integral part of the consolidated financial
statements.


                                                                              52
<PAGE>   53
                HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Hawaii National Bancshares, Inc. was incorporated on September 29, 1986 under
the laws of the State of Hawaii for the purpose of becoming a bank holding
company for Hawaii National Bank. Hawaii National Bank operates twelve 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, 1996.

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 


                                                                              53
<PAGE>   54
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

    the Federal Home Loan Bank of Seattle ("FHLB of Seattle") and the Federal
    Reserve Bank.

    Investment securities are classified in one of three categories and
    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 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.

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 by charges 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.

    In May 1995, the FASB issued Statement of Financial Accounting Standards No.
    122, "Accounting for Mortgage Servicing Rights," which amends Statement 65
    "Accounting for Certain Mortgage Banking Activities" and requires that
    mortgage banking enterprises recognize as separate assets rights to service
    mortgage loans for others, however those servicing rights are acquired. This
    Statement applies to transactions in which a mortgage banking enterprise
    sells or securitizes mortgage loans with servicing rights retained and to
    impairment evaluations of all amounts capitalized as mortgage servicing
    rights. The adoption of this Statement did not have a material effect on the
    consolidated financial statements of the Company.


                                                                              54
<PAGE>   55
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Allowance For Possible Loan And Lease Losses -

    Effective January 1, 1995, the Company adopted FASB Statement of Financial
    Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
    Loan," and Statement No. 118, "Accounting by Creditors for Impairment of a
    Loan - Income Recognition and Disclosures," which amends Statement No. 114
    to allow a creditor to use existing methods for recognizing interest income
    on impaired loans. Under the new standards, 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. The
    adoption of Statements No. 114 and 118 did not have a material effect on the
    consolidated financial statements of the Company.

    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 the 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 


                                                                              55
<PAGE>   56
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

    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.

    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.


                                                                              56
<PAGE>   57
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Investment In Computer Systems International, Ltd. -

    The Bank's investment in Computer Systems International, Ltd. (CSI) is
    accounted for under the equity method.

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.


                                                                              57
<PAGE>   58
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS







    Investment securities: Fair values of investment securities are based on
    quoted market prices or dealer quotes, where available. If quoted market
    prices are not available, fair values are based on quoted market prices of
    comparable instruments.

    Loan and leases: For variable-rate loans that reprice at least quarterly and
    with no significant change in credit risk, fair values are based on carrying
    values. The fair values of other types of loans, such as fixed-rate loans
    and variable-rate loans that reprice infrequently, are estimated using
    discounted cash flow analyses, which utilize interest rates currently being
    offered for loans with similar terms to borrowers of similar credit quality.
    The carrying amount of accrued interest approximates its fair value.

    Deposits: The fair values of demand deposits (e.g., interest and noninterest
    checking, passbook savings, and certain types of money market accounts) are,
    by definition, equal to the amount payable on demand at the reporting date
    (i.e., their carrying amounts). Fair values of fixed-rate certificates of
    deposit are estimated using a discounted cash flow calculation that applies
    interest rates currently being offered on certificates to a schedule of
    aggregated expected monthly maturities on time deposits.

    Short-term borrowings: The carrying amounts of federal funds purchased and
    other short-term borrowings approximate their fair values.

    Off-balance sheet commitments: The fair values of off-balance sheet
    commitments are estimated using the fees currently charged to enter into
    similar agreements, taking into account the remaining terms of the
    agreements and the present creditworthiness of the counterparties.

Per Share Data -

    Per share data is based on the weighted average number of shares of common
    stock outstanding during the respective years. Weighted average shares
    outstanding was 711,000 in 1996, 1995 and 1994.

Reclassification -

    Certain balances in the 1994 and 1995 financial statements have been
    reclassified to conform with the 1996 presentation. These reclassifications
    have no effect on net income as previously reported.


                                                                              58
<PAGE>   59
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

2.  INVESTMENT SECURITIES



Comparative amortized cost and fair value of investment securities at December
31, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                                     AMORTIZED    UNREALIZED     UNREALIZED        FAIR 
                                        COST         GAINS         LOSSES          VALUE
                                                        (in thousands)
<S>                                  <C>          <C>            <C>               <C>
1996
Securities held-to-maturity -
     U.S. Treasury and other
       U.S. government agencies        $47,930        $148        $    71        $48,007
                                       =======        ====        =======        =======




Securities available-for-sale -
     Equity securities                 $ 1,487        $ --        $    --        $ 1,487
                                       =======        ====        =======        =======


1995
Securities held-to-maturity -
     U.S. Treasury and other
       U.S. government agencies        $44,993        $206        $    76        $45,123

     States of the U.S. and
       political subdivisions            1,000          42             --          1,042
                                       -------        ----        -------        -------
                                       $45,993        $248        $    76        $46,165
                                       =======        ====        =======        =======
Securities available-for-sale -
     Equity securities                 $ 1,497        $ --        $    --        $ 1,497
                                       =======        ====        =======        =======
</TABLE>


                                                                              59
<PAGE>   60
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and fair value of investment securities at December 31, 1996,
by contractual maturity, excluding securities which have no stated maturity,
were as follows:

<TABLE>
<CAPTION>

                                              AMORTIZED         FAIR 
                                                COST           VALUE
                                                   (in thousands)
<S>                                           <C>              <C>
Securities held-to-maturity -
     Due within one year                        $16,953        $16,981
     Due after one but within five years         30,977         31,026
     Due after five but within ten years             --             --
     Due after ten years                             --             --
                                                -------        -------
                                                $47,930        $48,007
                                                =======        =======
</TABLE>

Investment securities with an aggregate book value of $48,000,000 and
$44,020,000 at December 31, 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 are obtained from Computer Systems International, Ltd. (CSI),
a company formed to provide data processing services to financial institutions,
including the Bank. At December 31, 1996, the Bank and an affiliate of a
director each owned a 50% interest in this bank-service corporation. Charges for
data processing services provided by CSI amounted to $729,000, $690,000 and
$846,000 in 1996, 1995 and 1994, respectively.



The Bank's equity in losses of CSI amounted to $59,000, $200,000 and $60,000 in
1996, 1995 and 1994, respectively. The Bank's investment in CSI was written off
as of December 31, 1996. At December 31, 1995, the Bank's investment in CSI
amounted to $59,000 (included in other assets).

                                                                              60
<PAGE>   61
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

4.  LOANS AND LEASES



Loans and leases outstanding at December 31, 1996 and 1995 are summarized as
follows:

<TABLE>
<CAPTION>
                                                 1996                                      1995
                                     Book Value        Fair Value           Book Value           Fair Value
<S>                                <C>                 <C>                 <C>                 <C>
Real estate -
     Family residential            $104,791,169        $107,358,364        $106,200,103        $110,450,784
     Construction                     2,572,102           2,572,201           4,557,472           4,558,305
     Commercial property             25,850,966          26,768,768          27,646,963          27,792,909
Commercial, industrial
     and agricultural                64,804,301          64,659,442          66,020,649          65,761,616
Individuals for household,
     family and other
     personal expenditures            7,674,104           7,685,184           7,255,125           7,264,577
All other loans                         557,048             557,048             248,346             248,346
                                   ------------        ------------        ------------        ------------
                                    206,249,690         209,601,007         211,928,658         216,076,537
Direct financing leases               1,013,049           1,013,049           1,165,370           1,165,370
                                   ------------        ------------        ------------        ------------
                                    207,262,739         210,614,056         213,094,028         217,241,907
Less allowance for possible
     loan and lease losses            3,067,434                  --           3,096,433                  --
                                   ------------        ------------        ------------        ------------
                                   $204,195,305        $210,614,056        $209,997,595        $217,241,907
                                   ============        ============        ============        ============
</TABLE>


Loans to officers, directors and their affiliates amounted to $81,000 and
$80,000 at December 31, 1996 and 1995, respectively.

There were no loans pledged as collateral for U.S. government funds on deposit
at December 31, 1996 and 1995.

At December 31, 1996 and 1995, the Company serviced loans for others amounting
to $49,064,000 and $51,753,000, respectively. There were no loans held for sale
at December 31, 1996 and 1995.

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 which were paid in full by year end.


                                                                              61
<PAGE>   62
               HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


At December 31, 1996 and 1995, the Company's investment in vehicle and equipment
direct financing leases comprised the following:

<TABLE>
<CAPTION>
                                                     1996                1995
<S>                                               <C>                 <C>
Minimum lease payments receivable and
     guaranteed residual values                  $ 1,123,450         $ 1,358,737

Unearned income                                     (110,401)           (193,367)
                                                 -----------         -----------


                                                 $ 1,013,049         $ 1,165,370
                                                 ===========         ===========
</TABLE>








As of December 31, 1996, the future minimum lease payments to be received from
direct financing leases are as follows for the years ending December 31:

<TABLE>
<S>                                    <C>
            1997                       $        517,000
            1998                                406,000
            1999                                191,000
            2000                                  9,000
                                       ----------------            
            
            
                                       $      1,123,000
                                       ================
</TABLE>

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, 1996, 1995 and 1994 is presented below:

<TABLE>
<CAPTION>
                                            1996                1995                1994
<S>                                     <C>                 <C>                 <C>
Balance, beginning of year              $ 3,096,433         $ 3,421,636         $ 3,129,470
Provision charged to operations             810,000             700,000             765,000
Recoveries credited to allowance            692,107              78,672              27,278
Loans and leases charged off             (1,531,106)         (1,103,875)           (500,112)
                                         ----------          ----------            -------- 



Balance, end of year                    $ 3,067,434         $ 3,096,433         $ 3,421,636
                                        ===========         ===========         ===========
</TABLE>




                                                                              62
<PAGE>   63
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Nonaccrual loans amounted to approximately $3,180,000 and $6,206,000 at December
31, 1996 and 1995, respectively. There was no interest income recognized on
nonaccrual loans in 1996, 1995 and 1994. Had these loans performed in accordance
with their original terms, interest income of $464,000, $318,000 and $54,000
would have been recorded in 1996, 1995 and 1994, respectively.

At December 31, 1996 and 1995, the recorded investment in impaired loans
amounted to approximately $3,074,000 and $6,084,000, respectively, of which
$1,650,000 and $4,633,000, respectively, related to loans for which there was no
valuation allowance determined in accordance with Statement No. 114 and
$1,424,000 and $1,451,000, respectively, related to loans with a corresponding
valuation allowance determined under Statement No. 114. The valuation allowance
amounted to $253,000 and $292,000 at December 31, 1996 and 1995, respectively.
For the year ended December 31, 1996 and 1995, the average recorded investment
in impaired loans was approximately $3,970,000 and $2,717,000, respectively.
There was no interest recognized on impaired loans in 1996 and 1995.

During fiscal 1996 and 1995, loans were written down by approximately $516,000
and $643,000, respectively, to the fair value of the collateral.

6.  PREMISES AND EQUIPMENT

Premises and equipment as of December 31, 1996 and 1995 are summarized as
follows:

<TABLE>
<CAPTION>
                                        1996              1995
<S>                                  <C>               <C>
Buildings and improvements           $3,222,823        $3,218,727


Furniture and equipment               6,691,803         6,524,571
                                     ----------        ----------
                                      9,914,626         9,743,298
Less accumulated depreciation         6,014,504         5,554,255
                                     ----------        ----------
                                     $3,900,122        $4,189,043
                                     ==========        ==========
</TABLE>

Depreciation expense on premises and equipment amounted to $564,460, $480,109
and $404,107 in 1996, 1995 and 1994, respectively.


                                                                              63
<PAGE>   64
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

7.  DEPOSITS



Time certificates of deposit include certificates of $100,000 or more
aggregating $47,945,000 at December 31, 1996 and $41,547,000 at December 31,
1995. Interest expense on such certificates was $2,197,000, $2,137,000 and
$1,277,000 in 1996, 1995 and 1994, respectively.

Variable rate deposits limited to three withdrawals or less per month are
classified as savings deposits. At December 31, 1996 and 1995, such deposits
aggregated $42,241,000 and $37,129,000, respectively.

8.  SHORT-TERM BORROWINGS

Short-term borrowings consist of U.S. Treasury tax and loan collections on
deposit with the Company. Such deposits bear interest (5.15% at December 31,
1996 and 1995) and are due on demand.

The Bank maintains a line of credit with the FHLB of Seattle equal to 10% of
total assets, including a cash management agreement line of 5%. There were no
borrowings at December 31, 1996 and 1995.

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.


                                                                              64
<PAGE>   65
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 1996, the aggregate minimum rental commitments under
noncancelable leases are as follows for the years ending December 31:

<TABLE>
<CAPTION>
                                    LEASE 
                                    RENTAL
<S>                             <C>
     1997                       $ 2,253,000

     1998                         1,933,000

     1999                         1,893,000

     2000                         1,900,000

     2001                         1,823,000

    Thereafter                   24,483,000
                                -----------

                                $34,285,000
                                ===========
</TABLE>

Where future rentals are subject to renegotiation, the minimum amounts shown
above are based on the latest rents.

Rent expense was $2,366,000 in 1996, $2,294,000 in 1995 and $2,125,000 in 1994,
net of sublease income of $59,000 in 1996 and $46,000 in 1995 and 1994. The
Company leases bank and office premises from affiliated parties under leases
expiring in 2024. Rent expense includes rent paid to affiliates on these leases
amounting to $1,263,000 in 1996 and 1995 and $1,207,000 in 1994.

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.


                                                                           65
<PAGE>   66
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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 I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996 and 1995, that
the Company met all capital adequacy requirements to which it is subject.

<TABLE>
<CAPTION>
                                                                                                                
                                                                                                                
                                                                        FOR CAPITAL ADEQUACY                                       
                                      ACTUAL                                  PURPOSES                                  
                               ---------------------                -----------------------------                                
                               AMOUNT          RATIO                AMOUNT                  RATIO             

                              (in thousands)                        (in thousands)                              
<S>                            <C>            <C>         <C>       <C>           <C>        <C>        <C>     
DECEMBER 31, 1996
Total Capital (to Risk                                                                                          
     Weighted Assets)          $30,293        15.2%        >        $15,926        >         8.0%       >       
                                                           -                       -                    -

Tier l Capital (to Risk
     Weighted Assets)          $27,797        14.0%        >        $ 7,963        >         4.0%       >       
                                                           -                       -                    -
Tier l Capital (to
     Average Assets)           $27,797         9.5%        >        $11,764        >         4.0%       >       
                                                           -                       -                    -
DECEMBER 31, 1995


Total Capital (to Risk
     Weighted Assets)          $29,794        14.4%        >        $16,604        >         8.0%       >       
                                                           -                       -                    -
Tier l Capital (to Risk
     Weighted Assets)          $27,193        13.1%        >        $ 8,302        >         4.0%       >       
                                                           -                       -                    -
Tier 1 Capital (to
     Average Assets)           $27,193         9.2%        >        $11,813        >         4.0%       >       
                                                           -                       -                    -
</TABLE>

<TABLE>
<CAPTION>
                                         TO BE WELL CAPITALIZED  
                                             UNDER PROMPT        
                                               CORRECTIVE        
                                           ACTION PROVISIONS     
                                      --------------------------- 
                                      Amount                Ratio
                                                                 
                                    (in thousands)               
<S>                                 <C>            <C>      <C>  
DECEMBER 31, 1996                                                
Total Capital (to Risk                                           
     Weighted Assets)               $19,908        >        10.0%
                                                   -                                                               
Tier l Capital (to Risk                                          
     Weighted Assets)               $11,945        >         6.0%
                                                   -                
Tier l Capital (to                                               
     Average Assets)                $14,705        >         5.0%
                                                   -                   
DECEMBER 31, 1995                                                
                                                                 
                                                                 
Total Capital (to Risk                                           
     Weighted Assets)               $20,755        >        10.0%
                                                   -                       
Tier l Capital (to Risk                                          
     Weighted Assets)               $12,453        >         6.0%
                                                   -                       
Tier 1 Capital (to                                               
     Average Assets)                $14,766        >         5.0%
                                                   -                                                               
</TABLE>                           

As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency and the Federal Reserve Bank categorized the Company
as well capitalized under the regulatory framework for prompt corrective action.
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.


                                                                              66
<PAGE>   67
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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, 1996, retained earnings of the Bank available for dividends
    without prior approval of the Comptroller of the Currency amounted to
    $2,302,000.


11.  INCOME TAXES



    The provision for income taxes for 1996, 1995 and 1994 consisted of the
    following:

<TABLE>
<CAPTION>
                      1996              1995             1994
<S>                 <C>               <C>              <C>
Current -
     Federal        $ 440,000         $ 555,000         $312,000
     Hawaii            76,000           104,000           71,000
                    ---------         ---------         --------
                      516,000           659,000          383,000
                    ---------         ---------         --------
Deferred -
     Federal          (69,000)          (32,000)          99,000
     Hawaii           (16,000)           (7,000)          23,000
                    ---------         ---------         --------
                      (85,000)          (39,000)         122,000
                    ---------         ---------         --------
                    $ 431,000         $ 620,000         $505,000
                    =========         =========         ========
</TABLE>





                                                                              67
<PAGE>   68
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 1996 and 1995, the components of the net deferred tax asset were
as follows:

<TABLE>
<CAPTION>
                                                                    1996                1995
<S>                                                            <C>                <C>
Deferred tax asset:
     Loan and lease losses                                     $   884,000         $   895,000
     Investment in Computer Systems International, Ltd.            402,000             379,000
     Interest on nonaccrual loans                                  138,000             208,000
     Deferred loan fees and related origination costs              107,000             130,000
     Hawaii state franchise tax                                     24,000              44,000
     Net operating loss carryforwards                               20,000              20,000
     Other                                                           8,000              12,000
                                                                ----------          ---------- 

                                                                 1,583,000           1,688,000
                                                                ----------          ---------- 

Deferred tax liabilities:
     Tax over book depreciation                                   (769,000)           (741,000)
     Direct financing leases capitalized for tax                  (166,000)           (247,000)
     Excess pension contributions over expenses                   (120,000)           (155,000)
     Deferred gain on fixed assets                                 (45,000)                 --
                                                                ----------          ---------- 
                                                                (1,100,000)         (1,143,000)
                                                                ----------          ---------- 

                                                                   483,000             545,000

Valuation allowance                                               (422,000)           (399,000)
                                                               -----------         -----------
Net deferred tax asset                                         $    61,000         $   146,000
                                                               ===========         ===========
</TABLE>

The change in the total valuation allowance for the years ended December 31,
1996 and 1995 was an increase of $23,000 and $77,000, respectively. The
valuation allowance relates to the investment in Computer Systems International,
Ltd. and net operating loss carryforwards.


                                                                              68
<PAGE>   69
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

A reconciliation of the Company's effective tax rate with the statutory Federal
income tax rate is as follows:

<TABLE>
<CAPTION>
                                                          1996          1995           1994
<S>                                                     <C>            <C>            <C>
Statutory Federal income tax rate                        34.0%          34.0%          34.0%
Tax-exempt interest income                               (1.1)          (1.6)          (1.9)
State franchise tax, net of Federal tax benefit           5.5            5.5            5.5
Change in valuation allowance                             2.0            4.6            1.6
Stock dividends                                          (2.5)          (1.4)            --
Other, net                                               (0.2)          (3.8)          (2.5)
                                                         ----           ----           ---- 
                                                         37.7%          37.3%          36.7%
                                                         ====            ====          ==== 
</TABLE>

A consolidated Federal income tax return and a consolidated franchise tax return
are filed for the Company. Prior to 1993, Hawaii National Bancshares, Inc. filed
a separate State corporate income tax return from that of the Bank. Net
operating losses of the Parent since inception approximating $260,000 at
December 31, 1996 are available to offset future State taxable income of the
Parent, if any, and expire at various dates through 2007.

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.

Net pension expense for 1996, 1995 and 1994 was comprised of the following:

<TABLE>
<CAPTION>
                                                1996             1995               1994
<S>                                          <C>               <C>               <C>
Service cost representing benefits
     earned during the year                  $ 233,162         $ 166,611         $ 195,561
Interest cost on projected benefit
     obligation                                333,025           328,762           317,978
Loss (return) on plan assets - actual         (137,621)         (566,771)          120,320
Net amortization and deferral                 (165,094)          199,273          (472,711)
                                             ---------         ---------         ---------
         Total net pension expense           $ 263,472         $ 127,875         $ 161,148
                                             =========         =========         =========
</TABLE>


                                                                              69
<PAGE>   70
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The funded status of the plan and prepaid pension cost at December 31, 1996 and
1995 were as follows:

<TABLE>
<CAPTION>
                                                                                    1996                1995
<S>                                                                             <C>                <C>
Actuarial present value of projected benefit obligation, based upon

   employment service to date and current salary levels -

     Vested employees                                                           $ 3,935,270         $ 3,549,322
                                                                                -----------         -----------
     Nonvested employees                                                             69,690              79,738
                                                                                -----------         -----------
Accumulated benefit obligation                                                    4,004,960           3,629,060

Additional amounts related to projected salary increases                            765,662             675,368
                                                                                -----------         -----------
Projected benefit obligation                                                      4,770,622           4,304,428

Plan assets available for benefits consisting of U.S. government
   and agencies bonds and money market funds                                      4,054,127           4,029,844
                                                                                -----------         -----------
Deficiency of plan assets over projected benefit
   obligation at end of year                                                       (716,495)           (274,584)
Unrecognized differences in actual plan assets and projected benefit
   obligations from that assumed                                                  1,162,609             833,156
Prior service cost not yet recognized in pension cost                               295,313             319,415
Unrecognized net assets at January 1, 1986 being amortized over 16 years           (365,440)           (438,528)
                                                                                -----------         -----------
Prepaid pension cost included in other assets                                   $   375,987         $   439,459
                                                                                ===========         ===========
</TABLE>


                                                                              70
<PAGE>   71
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The actuarial computation of projected benefit obligations was based upon a
discount rate of 7.25% at December 31, 1996, 7.0% at December 31, 1995 and 8.0%
at December 31, 1994 and a rate of increase in compensation levels of 5.0% in
1996, 1995 and 1994. The expected long-term rate of return on plan assets was
7.5% in 1996, 1995 and 1994.

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 $27,000, $25,500 and $24,000 in 1996, 1995 and 1994, 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 based on a specified
percentage of each covered employee's salary which are voluntary.


13.  SUPPLEMENTARY INCOME STATEMENT INFORMATION



Other operating expenses for 1996, 1995 and 1994 included the following:

<TABLE>
<CAPTION>
                                          1996              1995             1994
<S>                                   <C>               <C>              <C>
Stationery and office supplies        $  394,198        $  326,084        $  367,339
Insurance                                253,991           253,338           290,559
Other                                  1,992,228         2,357,612         2,400,516
                                       ---------         ---------         ---------



Total other operating expenses        $2,640,417        $2,937,034        $3,058,414
                                      ==========        ==========        ==========
</TABLE>

Repairs and maintenance expenditures included in occupancy expense and equipment
expense amounted to $517,428, $506,272 and $478,511 in 1996, 1995 and 1994,
respectively.


                                                                              71
<PAGE>   72
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


14.  FAIR VALUES OF FINANCIAL INSTRUMENTS



The carrying amounts and fair values of the Company's financial instruments held
or issued for purposes other than trading at December 31, 1996 and 1995 were as
follows:

<TABLE>
<CAPTION>
                                          CARRYING              FAIR 
                                           AMOUNT               VALUE
<S>                                     <C>                 <C>
1996
Cash and due from banks                 $ 17,276,700        $ 17,276,700
Federal funds sold                        16,000,000          16,000,000
Investment securities:
     Held-to-maturity                     47,929,910          48,007,000
     Available-for-sale                    1,487,003           1,487,003
Loans and leases, net                    204,195,305         210,614,056
Deposits -
     Demand deposits and savings         198,165,319         198,165,319
     Time                                 66,429,061          66,554,865
Short-term borrowings                        843,974             843,974



1995
Cash and due from banks                   18,908,709          18,908,709
Federal funds sold                        13,750,000          13,750,000
Investment securities:
     Held-to-maturity                     45,993,061          46,165,000
     Available-for-sale                    1,497,003           1,497,003
Loans and leases, net                    209,997,595         217,241,907
Deposits -
     Demand deposits and savings         209,384,442         209,384,442
     Time                                 59,521,343          59,695,532
Short-term borrowings                        902,739             902,739
</TABLE>





                                                                              72
<PAGE>   73
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
                                          CONTRACT AMOUNT

                                       1996               1995
<S>                                 <C>                <C>
Commitments to extend credit        $60,769,000        $63,671,000
Standby letters of credit             2,644,000          3,690,000
Commercial letters of credit          2,140,000            354,000
</TABLE>

The fair values of off-balance sheet financial instruments at December 31, 1996
and 1995 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, 1996 and 1995,
the fair values of commitments to extend credit amounted to $30,000 and
$100,000, respectively, and the fair values of letters of credit amounted to
$40,000 and $55,000, respectively.


                                                                              73
<PAGE>   74
                 HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



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, 1996 and 1995 and for the years ended December
31, 1996, 1995 and 1994 consists of the following:



                                 BALANCE SHEETS
                           DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
                                                     1996               1995
<S>                                              <C>               <C>
Assets:

Cash on deposit with Hawaii National Bank        $   122,267        $   129,415
Investment in Hawaii National Bank                27,675,021         27,063,300



                                                 $27,797,288        $27,192,715



Shareholders' Equity:

Common stock                                     $   711,000        $   711,000

Capital in excess of par value                    12,147,676         12,147,676

Retained earnings                                 14,938,612         14,334,039
                                                  ----------         ----------
                                                 $27,797,288        $27,192,715
                                                 ===========        ===========
</TABLE>





                                                                              74
<PAGE>   75
                HAWAII NATIONAL BANCSHARES, INC. AND SUBSIDIARY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                             1996                1995              1994
<S>                                                                       <C>               <C>                 <C>
Dividends from Hawaii National Bank                                       $ 147,750         $   147,750         $ 147,750

Operating expenses                                                           48,248              37,356            32,390
                                                                          ---------         -----------         ---------
     Income before equity in undistributed
     income of bank subsidiary                                               99,502             110,394           115,360
Equity in undistributed income of Hawaii National
     Bank


                                                                            611,721             933,541           756,980
                                                                          ---------         -----------         ---------


Net income                                                                $ 711,223         $ 1,043,935         $ 872,340
                                                                          =========         ===========         =========

<CAPTION>


                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

                                                                             1996                1995              1994
<S>                                                                       <C>               <C>                 <C>
Cash flows from operating activities:
     Dividends from Hawaii National Bank                                  $ 147,750         $   147,750         $ 147,750
     Cash paid to suppliers                                                 (48,248)            (37,241)          (32,505)
                                                                          ---------         -----------         ---------
          Net cash provided by operating activities                          99,502             110,509           115,245

Cash flows from financing activities:
     Dividends paid                                                        (106,650)           (106,650)         (106,650)
                                                                          ---------         -----------         ---------
          Net cash used in financing activities                            (106,650)           (106,650)         (106,650)
                                                                          ---------         -----------         ---------
Net (decrease) increase in cash                                              (7,148)              3,859             8,595
Cash at beginning of year                                                   129,415             125,556           116,961
                                                                          ---------         -----------         ---------

Cash at end of year                                                       $ 122,267         $   129,415         $ 125,556
                                                                          =========         ===========         =========



Reconciliation of net income to net cash provided by
   operating activities:

     Net income                                                           $ 711,223         $ 1,043,935         $ 872,340

     Adjustments to reconcile net income to net cash
       provided by operating activities:
          Undistributed earnings of subsidiary                             (611,721)           (933,541)         (756,980)
     (Increase) decrease in prepaid expenses                                     --                 115              (115)
                                                                          ---------         -----------         ---------

Net cash provided by operating activities                                 $  99,502         $   110,509         $ 115,245
                                                                          =========         ===========         =========
</TABLE>

In the above condensed financial information, the Parent's investment in Hawaii
National Bank is accounted for by the equity method.


                                                                              75
<PAGE>   76
                                   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 14th day of
March 1997.

                                  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:

<TABLE>
<CAPTION>
         Signatures                                        Title                                   Date
         ----------                                        -----                                   ----
<S>                                             <C>                                          <C>
Principal Executive Officer:


       /s/ K.J. Luke                            Chairman of the Board,
----------------------------                    Director and Chief
         K.J. Luke                              Executive Officer                            March 14, 1997



Chief Financial and Accounting
Officer:


       /s/ Ernest T. Murata                     Vice President, Treasurer                    March 14, 1997
----------------------------                    and Assistant Secretary
         Ernest T. Murata


A Majority of the Board of
Directors:


       /s/ Warren K.K. Luke                     Director                                     March 14, 1997
----------------------------
         Warren K.K. Luke


       /s/ Gordon J. Mau                        Director                                     March 14, 1997
----------------------------
         Gordon J. Mau
</TABLE>


                                                                              76
<PAGE>   77
                                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 Schedules