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Indicate by (check mark) X 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 period 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 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 From 10-K. 9
The aggregate market value of Registrant's Common Stock held by
non-affiliates of the Registrant as of March 22, 1999 was $218,502,422 based
upon the average of the high and low price of a share of Common Stock as
reported by the NASDAQ National Market on such date. As of March 22, 1999,
10,059,479 shares of Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of the following documents (as more specifically
identified elsewhere in this Annual Report) are incorporated by reference
herein:
Part of Form 10-K into which
Name of Document the document is incorporated
Portions of the Registrant's Proxy Statement for Part III
1999 Annual Meeting of Stockholders
[COVER PAGE 2 OF 2 PAGES]
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FORWARD-LOOKING STATEMENTS
Information contained (or incorporated by reference) in this Annual
Report may constitute "forward-looking statements." Statements used (or
incorporated by reference) in this Annual Report which use words such as
"believes," "expects," "may," "will," "should," "projected," "contemplates" or
"anticipates" or the negative of such terms or other variations may constitute
forward-looking statements. Forward-looking statements are inherently uncertain,
and there is no assurance that such forward-looking statements will be accurate.
Such forward-looking statements include, without limitation, the Company's
expectations and estimates as to domestic and international business and
economic conditions and its business operations, including growth in net
interest income and net income and allocations of country exposures. Such
forward-looking statements also include the Company's expectations and beliefs
as to the projected costs and anticipated timetable to address Year 2000
compliance issues, the adequacy of its plans to address such issues and the
impact on the Company's operations in the event that certain or all of its plans
or the plans of third parties in respect of Year 2000 compliance issues prove to
be inadequate. Other factors, such as the general state of the United States
economy, as well as the economic and political conditions of the countries in
which the Company conducts business operations, could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
PART I
ITEM 1. BUSINESS.
General
Hamilton Bancorp Inc. ("Hamilton Bancorp"), through its subsidiary,
Hamilton Bank, N.A. ("Hamilton Bank"), (Hamilton Bancorp and Hamilton Bank are
collectively referred to herein as the "Company"), is engaged in providing
global trade finance with particular emphasis on trade with and between South
America, Central America and the Caribbean (collectively, the "Region") and the
United States or otherwise involving the Region. Management believes that trade
finance provides the Company with the opportunity for substantial and profitable
growth, primarily with moderate credit risk, and that Hamilton Bank is the only
domestic financial institution in the State of Florida focusing primarily on
financing foreign trade. Through its relationships with approximately 500
correspondent banks and with importers and exporters in the United States and
the Region, as well as its location in South Florida, which is becoming a focal
point for trade in the Region, the Company has been able to take advantage of
substantial growth in this trade. Much of this growth has been associated with
the adoption of economic stabilization policies in the major countries of the
Region.
The Company operates in all major countries throughout the Region and
has been particularly active in several smaller markets, such as Guatemala,
Ecuador, Panama and Peru. Management believes that these smaller markets are not
primary markets for the larger, multinational
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financial institutions and, therefore, customers in such markets do not receive
a similar level of service from such institutions as that provided by the
Company. To enhance its position in certain markets, the Company has made
minority investments in indigenous financial institutions in Guyana, Peru and
Nicaragua. The Company has also strengthened its relationships with
correspondent financial institutions in the Region by acting as placement agent,
from time to time, for debt instruments or certificates of deposit issued by
many of such institutions.
The Company seeks to generate income by participating in multiple
aspects of trade transactions that generate both fee and interest income. The
Company earns fees primarily from opening and confirming letters of credit and
discounting acceptances and earns interest on credit extended, primarily in the
form of commercial loans, for pre- and post-export financing, such as
refinancing of letters of credit, and to a lesser extent, from discounted
acceptances. As the economy in the Region has grown and stabilized and the
Company has begun to service larger customers, the balance of the Company's
trade financing activities has shifted somewhat from letters of credit to the
discounting of commercial trade paper and the granting of loans, resulting in
relatively less fee income but increased interest income. Virtually all of the
Company's business is conducted in United States dollars. Management believes
that the Company's primary focus on trade finance, its wide correspondent
banking network in the Region, broad range of services offered, management
experience, reputation and prompt decision-making and processing capabilities
provide it with important competitive advantages in the trade finance business.
The Company seeks to mitigate its credit risk through its knowledge and analysis
of the markets it serves, by obtaining third-party guarantees of both local
banks and importers on many transactions, by often obtaining security interests
in goods being financed and by the short-term, self-liquidating nature of trade
transactions. At December 31, 1998, approximately 60% of the Company's loan
portfolio consisted of short-term trade related loans with an average original
maturity of approximately 180 days and approximately 70% maturing within 365
days. Credit is generally extended under specific credit lines for each customer
and country. These credit lines are reviewed at least annually.
Lending activities are funded primarily through domestic consumer
deposits gathered through a network of seven branches in Florida and one branch
in San Juan, Puerto Rico as well as deposits received from correspondent banks,
corporate customers and private banking customers within the Region. The
Company's branches are strategically located in markets where it believes there
is both a concentration of retail deposits and foreign trade activity. The
Company also participates in various community lending activities, and under
several United States and Florida laws and regulations Hamilton Bank is
considered a minority bank and is able to participate in certain beneficial
minority programs involving both deposits and loans.
Developments in Certain Emerging Market Countries
The economies of various countries in the Region, including Brazil,
Ecuador and Venezuela, have been characterized by frequent and occasionally
drastic intervention by the governments and volatile economic cycles.
Governments have often changed monetary, credit, tariff and other policies to
influence the course of their respective economies. The actions of the
Brazilian,
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Ecuadorian and Venezuelan Governments to control inflation and effect other
policies have often involved wage and price controls as well as other
interventionist measures, such as Ecuador's recent freezing of bank accounts.
Changes in policies in other countries in the Region involving tariffs, exchange
controls, regulations and taxation could significantly increase the likelihood
of causing restrictions on transfers of Dollars out of such countries, as could
inflation, devaluation, social instability and other political, economic or
diplomatic developments.
Brazilian, Ecuadorian and Venezuelan financial and securities markets,
as well as other financial and securities markets in the Region, are, to varying
degrees, influenced by economic and market conditions in other emerging market
countries and other countries in the Region. Although economic conditions are
different in each country, investor reaction to developments in one country can
have significant effects on the financial markets and securities of issuers in
other countries. These developments as well as the recent devaluation of various
Asian currencies have adversely affected the securities and other financial
markets in many emerging markets, including Brazil, Ecuador and Venezuela. One
result of these difficulties has been the closing of numerous banks in some
countries in the Region, especially in Ecuador. To date, however, the Ecuadorian
government has guaranteed the obligations of such closed banks in Ecuador. The
ensuing increased market volatility in these securities and other financial
markets has also been attributed, at least in part, to the effect of these and
other similar events. There can be no assurance that the various financial and
securities markets in the Region, including Brazil, Ecuador and Venezuela, will
not continue to be adversely affected by events elsewhere, especially in other
emerging markets and in other countries in the Region.
The Company will continue to take advantage of the United States and
international economic environment by emphasizing the financing of trade from
the Region into the United States. As a result of the recent deterioration of
economic conditions in some countries in the Region, the Company expects that
trade flows into the Region will on a relative basis diminish compared to recent
years. In light of the United States' strong economy, government budget surplus,
low interest rates, strong stock market, high employment levels and strong
consumer demand, the Company expects trade flows from the Region into the United
States will increase as such countries attempt to capitalize on export
opportunities as a way to increase production, stimulate revenues and thereby
"export out" of their economic difficulties. The Company has recently placed and
expects to continue to place more emphasis on financing imports of goods into
the United States and thereby increase the relative size of its assets employed
in the United Sates as compared to its exposure in the Region. In addition,
prudent risk management, in particular with regard to emerging market countries,
calls for avoidance of high concentrations of risk in these countries in
relation to a bank's capital. Currently, United States bank regulatory agencies
consider that exposure in these markets should be limited to levels that would
not impair the safety and soundness of a banking institution. As a consequence,
the Company's exposure in the Region was significantly reduced at December 31,
1998 and will be further reduced in 1999. The Company, however, will continue
to have significant exposure in the Region.
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Background of the Company
Hamilton Bancorp was formed as a bank holding company in 1988 in Miami,
Florida, to acquire 99.7% of the issued and outstanding shares of Hamilton Bank.
Hamilton Bank was acquired by Hamilton Bancorp to take advantage of perceived
opportunities to finance foreign trade between United States corporate customers
and companies in the Region, as the area emerged from the Latin American debt
crisis of the early 1980's, particularly since most non-Regional financial
institutions had limited interest in financing trade with the Region at that
time. Members of Bank management, who had extensive experience in trade finance
in the Region, re-established contacts in the Region, primarily with banks.
Hamilton Bank initially offered its services confirming letters of credit for
banks in the Region. Hamilton Bank then began to market its other trade related
services and products to beneficiaries of its letters of credit. As Hamilton
Bank's relationships with correspondent banks developed and as it developed
corporate clients in the United States, Hamilton Bank's trade finance activity
continued to increase. Hamilton Bank's business expanded into its other products
and services, which primarily included other types of trade financing
instruments.
Market for Company Services
International trade between the United States and the Region as well as
between the State of Florida and the Region has grown significantly during the
five year period ended December 31, 1998. Recent treaties and agreements
relating to trade are expected to eliminate certain trade barriers and open up
certain economic sectors to competition, as well as to liberalize trade between
the United States and many countries with respect to a variety of goods and
services. A high and increasing percentage of this trade requires financing. The
growth and importance of trade in the United States and the Region also
increases the number of small and medium-sized firms engaged in trade and in
need of trade finance services. Many financial institutions in the United States
in general and Florida in particular are not adequately staffed to handle such
financing on a large scale, or to judge the creditworthiness of companies or
banks in the Region and, accordingly, eschew trade financing or limit the scope
of their trade financing activity. This has been partially responsible for the
expanding market for the Company's trade financing services.
Management believes that the Company has carved out a niche for itself
as the only Florida financial institution the business of which is focused
predominantly on financing foreign trade in the Region. The Company initially
focused on providing services and products to smaller banks and corporate
customers in the Region and smaller companies in Florida doing business in the
Region, as well as financial institutions and customers in smaller countries in
the Region where a more limited number of large, multinational banks conduct
business. The Company's willingness to provide trade financing in these
situations frequently results in it obtaining business from the same customers
involving larger countries in the Region, as well. A significant percentage of
the Company's trade financing business now involves such larger countries. The
Company does not, however, have a significant share of the overall market in
larger countries in the Region, such as Brazil and Argentina, where it competes
more frequently with larger, multinational financial
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institutions. The Company also provides products and services for multinational
corporations, such as major commodities houses, and purchases participation
interests in the trade financing of multinational financial institutions to
companies in the Region. The Company's trade financing allows for the movement
of commodities such as sugar, grain and steel, and consumer goods such as
textiles and appliances, as well as computer hardware, capital equipment and
other items.
Trade Finance Services and Products
The manufacture or production and distribution of any product or good
generally results in a number of trade transactions which, together, make up a
trade cycle. For example, a seller of shirts purchases buttons and materials,
arranges for manufacture and often contracts with a distributor who sells the
products to retailers. The Company attempts to become involved in and to finance
as many stages of a trade cycle as possible. Since the Company's primary focus
is on trade finance, the Company offers a wider array of trade finance products
and services than most institutions it competes with, although some of the
Company's products and services, such as import and export letters of credit,
are offered by almost all financial institutions engaged in trade finance, and
most of the Company's products are offered by some financial institutions. The
principal trade related products and services which the Company offers include:
. Commercial Documentary Letters of Credit. Commercial documentary
letters of credit are obligations issued by a financial institution in
connection with trade transactions where the financial institution's
credit is effectively substituted for that of its customer, who is
buying goods or services from the beneficiaries of those letters of
credit. When the bank issuing a letter of credit is not well known or
is an unacceptable risk to the beneficiary, the issuing bank must
obtain a guarantee or confirmation of the letter of credit by an
acceptable bank in the beneficiary's market. When the Company confirms
a letter of credit it assumes the credit risk of the issuing bank and
generally takes a security interest in the goods being financed. These
obligations, which are governed by their own special set of legal
rules, call for payment by the financial institution against
presentation of certain documents showing that the purchased goods or
services have been provided or are forthcoming. From time to time, a
financial institution issues a commercial documentary letter of credit
("back-to-back") against receipt of a letter of credit from another
bank in order to finance the purchase of goods. The Company commenced
its trade financing activities by confirming letters of credit for
correspondent financial institutions in the Region and then began to
sell other products and services to the beneficiaries of such letters
of credit. Commercial letters of credit are contingent liabilities of
the Company that are not recorded on the Company's balance sheet and
which generate fee income. Upon payment of a letter of credit, the
Company may refinance the obligation through a loan which will be
reflected on the Company's balance sheet as "Loans-net."
. Bankers' Acceptances. A bankers' acceptance is a time draft drawn on a
bank and accepted by it. Acceptance of the draft obligates the bank to
unconditionally pay the face value to whomever presents it at maturity.
Drafts accepted by the Company are reflected on the asset
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side of the Company's balance sheet as "Due from Customers on Bankers'
Acceptances" and on the liability side as "Bankers' Acceptances
Outstanding." The Company receives a fee upon acceptance of a draft.
Discounted bankers' acceptances represent the purchase by a financial
institution of a draft at a discount. This assists an exporter in
providing terms to an importer under a letter of credit and also
provides liquidity to the exporter. Discounted bankers' acceptances are
discounts of forward maturity items and are included on the Company's
balance sheet under "Loans-net." The Company receives both fee and
interest income from discounted bankers' acceptances.
. Discounted Trade Acceptances. Discounted trade acceptances represent an
obligation of an importer to pay money on a certain date in the future,
which obligation has been accepted by the importer as payable to the
exporter, then sold by the exporter at a discount to a financial
institution. If with recourse, the financial institution as holder of
this instrument has recourse at maturity of the acceptance to the
exporter as well as the accepting importer. If without recourse, the
financial institution holding the acceptance has no recourse to the
exporter, but only to the accepting importer. Discounted trade
acceptances are discounts of forward maturity items and are included on
the Company's balance sheet under "Loans-net." The Company receives
primarily interest income from discounted trade acceptances.
. Pre-export Financing. Pre-export financing is provided by a financial
institution, either directly or indirectly through a second bank, to an
exporter who has a definitive international contract for the sale of
certain goods or services. Such financing funds the exporter's
manufacture, assembly and sale of these goods or services to the
purchaser abroad. Pre-export financing is reflected on the balance
sheet as "Loans-net". The Company receives primarily interest income
from pre-export financing.
. Warehouse Receipt Financing. Warehouse receipt financing provides
temporary financing, usually at a significant loan to collateral
discount, for goods temporarily held in an independent warehouse
pending their sale and/or delivery in a trade transaction. The goods
are evidenced by a receipt issued by the independent warehouse where
the goods are stored. Possession of that receipt gives the financial
institution a perfected security interest in those goods to
collateralize the credit that it is providing. Warehouse receipt
financing is reflected on the balance sheet as "Loans-net". The Company
receives primarily interest income from warehouse receipt financing.
. Documentary Collections. For a fee, a United States financial
institution will assist financial institutions to collect at maturity
various drafts, acceptances or other obligations which have come due
and which are owed by parties abroad or in the United States.
Documentary collections are not reflected on the balance sheet and are
not contingent obligations of the Company. The Company receives fee
income from documentary collections.
. Foreign Exchange Transactions. Foreign exchange services consist of the
purchase of foreign currency on behalf of a customer. This service
includes both spot and forward
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transactions. Such transactions may be conducted in both hard and soft
currencies (i.e., those which are widely accepted internationally and
those that are not). The Company conducts such transactions in both
types of currencies. Foreign exchange transactions are not reflected on
the balance sheet and represent contingent liabilities of the Company.
The Company receives fee income from foreign exchange transactions.
. Standby Letters of Credit. Standby letters of credit effectively
represent a guarantee of payment to a third party by a financial
institution, usually not in connection with an individual trade
transaction. The Company does not favor standby letters of credit. They
are only issued by the Company in situations where the Company believes
it is adequately and properly secured or that the customer is in very
strong financial condition. Standby letters of credit are not reflected
on the balance sheet and represent contingent liabilities of the
Company. The Company receives fee income from standby letters of
credit.
. International Cash Management. The Company assists corporations and
banks in the Region with the clearing of checks drawn on United States
financial institutions. As a United States financial institution and a
member of the Federal Reserve System, Hamilton Bank is able to provide
quick and efficient clearing of these items. The provision of these
services often leads to the Company providing other products and
services to corporations and banks.
Most of the Company's customers are serviced through its International
Banking and Domestic Corporate Trade Departments. The International Banking
Department services the Company's international corporate and correspondent
banking customers. The Domestic Corporate Trade Department services United
States-based relationships, primarily with domestic corporate clients. Each
corporate customer's account is coordinated by a specific officer at the
Company. Each such customer will also generally do business with the Company
officers responsible for the countries involved in a particular transaction.
Company officers meet in person with key officials from each of the
correspondent banks and corporate customers each year. In addition, the Company
communicates with its correspondent banks and corporate customers in a variety
of other ways.
Competition
International trade financing is a highly competitive industry that is
dominated by large, multinational financial institutions such as Citibank, N.A.,
ABN-AMRO Bank and Barclays Bank PLC, among others. With respect to trade finance
in or relating to larger countries in the Region, primarily in South America,
these larger institutions are the Company's primary competition. The Company has
less competition from these multinational financial institutions providing trade
finance services with or in smaller countries in the Region, primarily in
Central America and the Caribbean, because the volume of trade financing in such
smaller countries has not been as attractive to these larger institutions. With
respect to Central American and Caribbean countries, as well as United States
domestic customers, the Company also competes with regional United States and
smaller local financial institutions engaged in trade finance. Many of the
Company's competitors, particularly
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multinational financial institutions, have substantially greater financial and
other resources than the Company. In general, the Company competes on the basis
of the range of services offered, convenience and speed of service,
correspondent banking relationships and on the basis of the rates of fees and
commissions charged. Management believes that none of the Company's significant
United States competitors have the focus on trade finance and offer the range of
services that the Company offers. Management further believes that the Company's
strong trade culture, range of services offered, liquid portfolio, management
experience, reputation and prompt decision-making and processing capabilities
provide it with a competitive advantage that allows it to compete favorably with
its competitors for the trade finance business in the Region. The Company also
has adjusted to its competition by often participating in transactions with
certain of its competitors, particularly the larger, multinational financial
institutions.
Although to date the Company has competed successfully, on a limited
basis, in those countries in the Region which have high trade volumes, such as
Brazil and Argentina, there can be no assurance that the Company will be able to
continue competing successfully in those countries with either large,
multinational financial institutions or regional United States or local
financial institutions. Any significant decrease in the Company's trade volume
in such large-volume countries could adversely affect the Company's result of
operations. Although the Company faces less competition from multinational
financial institutions in those countries in the Region, particularly countries
in Central America and the Caribbean, where the trading volume has not been
large enough to be meaningful for multinational financial institutions, there
can be no assurance that such financial institutions will not seek to finance
greater volumes of trade in those countries or that the Company would be able to
successfully compete with such financial institutions in the event of increased
competition. In addition, there is no assurance that the Company will be able to
continue to compete successfully in smaller countries with the regional United
States financial institutions and smaller local financial institutions engaged
in trade finance in such countries. Continued political stability and
improvement in economic conditions in such countries are likely to result in
increased competition.
Employees
At December 31, 1998 the Company had 264 full-time employees. The
Company's employees are not represented by a collective bargaining group, and
the Company considers its overall relations with its employees to be good.
Hamilton Bancorp Regulation
General
As a result of its ownership of Hamilton Bank, Hamilton Bancorp is
registered as a bank holding company and is regulated and subject to periodic
examination by the Board of Governors of the Federal Reserve System ("Federal
Reserve") under the United States Bank Holding Company Act.
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Pursuant to the United States Bank Holding Company Act and the Federal
Reserve's regulations, Hamilton Bancorp is limited to the business of owning,
managing or controlling banks and engaging in certain other financial related
activities, including those activities that the Federal Reserve determines from
time to time to be so closely related to the business of banking as to be a
proper incident thereto.
The United States Bank Holding Company Act requires, among other
things, the prior approval of the Federal Reserve in any case where a bank
holding company proposes to (i) acquire all or substantially all of the assets
of a bank in the United States, (ii) acquire direct or indirect ownership or
control of more than 5% of the outstanding voting stock of any bank in the
United States (unless it already owns a majority of such bank's voting shares)
or (iii) merge or consolidate with any other bank holding company.
Hamilton Bancorp is required by the Federal Reserve to act as a source
of financial strength and to take measures to preserve and protect Hamilton
Bank. As a result, Hamilton Bancorp may be required to inject capital in
Hamilton Bank if Hamilton Bank at any time lacks such capital and requires it.
The Federal Reserve may charge a bank holding company such as Hamilton Bancorp
with unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. Any loans from Hamilton Bancorp to Hamilton Bank
which would count as capital of Hamilton Bank must be on terms subordinate in
right of payment to deposits and to most other indebtedness of Hamilton Bank.
The Federal Reserve, the Office of the Comptroller of the Currency and
the Federal Deposit Insurance Corporation collectively have extensive
enforcement authority over bank holding companies and national banks in the
United States. This enforcement authority, initiated generally for violations of
law and unsafe or unsound practices, includes, among other things, the ability
to assess civil money penalties, to initiate injunctive actions, to issue orders
prohibiting or removing a bank holding company's or a bank's officers, directors
and employees from participating in the institution and, in rare cases, to
terminate deposit insurance.
The Federal Reserve's, the Office of the Comptroller of the Currency's
and the Federal Deposit Insurance Corporation's enforcement authority was
enhanced substantially by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FIRREA significantly increased the amount
and the grounds for civil money penalties. Also, under FIRREA, should a failure
of Hamilton Bank cause a loss to the Federal Deposit Insurance Corporation, any
other Federal Deposit Insurance Corporation-insured subsidiaries of Hamilton
Bancorp could be required to compensate the Federal Deposit Insurance
Corporation for the estimated amount of the loss (Hamilton Bancorp does not
currently have any such subsidiaries). Additionally, pursuant to FDICIA,
Hamilton Bancorp in the future could have the potential obligation to guarantee
the capital restoration plans of any undercapitalized Federal Deposit Insurance
Corporation insured depository institution subsidiaries it may control.
Capital Adequacy
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The federal bank regulatory authorities have adopted risk-based capital
guidelines to which Hamilton Bancorp and Hamilton Bank are each subject. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profile among banking
organizations, takes off-balance sheet exposures into explicit account in
assessing capital adequacy and minimizes disincentives to holding liquid,
low-risk assets. These risk-based capital ratios are determined by allocating
assets and specified off-balance sheet financial instruments into four weighting
categories, with higher levels of capital being required for the categories
perceived as representing greater risk.
Under these guidelines a banking organization's capital is divided into
two tiers. The first tier (Tier 1) includes common equity, perpetual preferred
stock (excluding auction rate issues) and minority interests that are held by
others in a consolidated subsidiary, less goodwill and any disallowed
intangibles. Supplementary (Tier 2) capital includes, among other items,
cumulative and limited-life preferred stock, mandatory convertible securities,
subordinated debt and the allowance for loan and lease losses, subject to
certain limitations and less required deductions as provided by regulation.
Banking organizations are required to maintain a risk-based capital
ratio of total capital (Tier 1 plus Tier 2) to risk-weighted assets of 8% of
which at least 4% must be Tier 1 capital. The federal bank regulatory
authorities may, however, set higher capital requirements when a banking
organization's particular circumstances warrant. As a practical matter, banking
organizations are expected to maintain capital ratios well above the regulatory
minimums. The risk-based capital ratios of Hamilton Bancorp and Hamilton Bank as
of December 31, 1997 and 1998 are discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Capital Resources."
In addition, the federal bank regulatory authorities have established
guidelines for a minimum leverage ratio (Tier 1 capital to average total
assets). These guidelines provide for a minimum leverage ratio of 3% for banking
organizations that meet certain specified criteria, including excellent asset
quality, high liquidity, low interest rate exposure and the highest regulatory
rating. Banking organizations not meeting these criteria or which are
experiencing or anticipating significant growth are required to maintain a
leverage ratio which exceeds the 3% minimum by at least 100 to 200 basis points.
The leverage ratios of Hamilton Bancorp and Hamilton Bank as of December 31,
1997 and 1998 are discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources."
Failure to meet applicable capital guidelines could subject a bank or
bank holding company to a variety of "prompt corrective action" enforcement
remedies available to the federal bank regulatory authorities, including
limitation on the ability to pay dividends, the issuance of a capital directive
to increase capital and, in the case of a bank, the issuance of a cease and
desist order, the imposition of civil money penalties, the termination of
deposit insurance by the Federal Deposit Insurance Corporation or (in severe
cases) the appointment of a conservator or receiver.
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While Hamilton Bancorp is well capitalized for the purposes of the
"prompt corrective action" provisions of FDICIA, to date it has not paid any
dividends and does not anticipate doing so. Nevertheless, due to economic
difficulties being experienced by various countries in the Region, the Federal
Reserve has requested that Hamilton Bancorp not pay any dividends or incur any
debt (excluding "trust preferred" securities) without the consent of the Federal
Reserve.
Interstate Banking
As of September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 permitted adequately capitalized and managed
bank holding companies to acquire control of banks in any state. Although
individual states could authorize interstate branches earlier, beginning on June
1, 1997, the Interstate Banking Act allows banks to branch across state lines,
unless a state elects to opt-out entirely. Florida did not so opt-out and allows
out-of-state banks to enter Florida by merger with an existing Florida-based
bank and to branch throughout the state. This has further increased competition
for Hamilton Bank by allowing large banks from other parts of the United States
to operate directly in Florida.
Regulation of Hamilton Bank
General
Hamilton Bank, as a Federal Deposit Insurance Corporation-insured
national bank, is subject to regulation primarily by the Office of the
Comptroller of the Currency and secondarily by the Federal Deposit Insurance
Corporation. Also, as a national bank Hamilton Bank is a member of the Federal
Reserve System and its operations are therefore also subject to certain Federal
Reserve regulations. Various other federal and state consumer laws and
regulations also affect the operations of Hamilton Bank.
As a national bank, Hamilton Bank may be able to engage in certain
activities approved by the Office of the Comptroller of the Currency which the
Federal Reserve would not necessarily approve for Hamilton Bancorp or its
non-national bank subsidiaries. The Office of the Comptroller of the Currency
has been particularly aggressive in recent years in allowing national banks to
undertake an ever-increasing range of securities and insurance activities. Along
these lines, pursuant to certain revisions to the Office of the Comptroller of
the Currency's regulations pertaining to national bank activities effective on
December 31, 1996, national banks, among other things, are permitted on a
case-by-case basis to operate subsidiaries that may engage in activities some of
which are not permissible for the bank itself. Although the revised regulations
do not authorize any new activities per se, it is expected that national banks,
if eligible and if they obtain the approval of the Office of the Comptroller of
the Currency, will use them to expand further into the businesses of insurance
and securities underwriting.
The revised Office of the Comptroller of the Currency regulations
contain "fire walls" intended to protect a national bank from the risks taken by
its subsidiary, including a 10% cap on
11
<PAGE> 13
the amount of bank capital that may be invested in the new subsidiary, as well
as requirements that extensions of credit to the operating subsidiary be
fully-collateralized and that transactions between the bank and the subsidiary
be conducted at arm's-length. Also, other safeguards are that the parent
national bank's exposure to any losses the subsidiary may incur be limited to
the bank's equity investment in the subsidiary, and that the parent national
bank be well-capitalized both before and after the investment is made.
Since Office of the Comptroller of the Currency approval is required on
a case-by-case basis for an eligible bank to be permitted to engage in
activities not permissible for the bank to conduct directly, it is unclear at
this time what the effect of these revised regulations on the operations of
national banks will be.
As a national bank, Hamilton Bank may not ordinarily lend more than 15%
of its capital unsecured to any one borrower, and may lend up to an additional
10% of its capital to that same borrower on a fully secured basis involving
readily marketable collateral having a market value, as determined by reliable
and continuously available price quotations, equal at least to the amount
borrowed. In addition, there are various other circumstances in which Hamilton
Bank may lend in excess of such limits, including authority to lend up to 35% of
capital and surplus when the loan is secured by documents of title to readily
marketable staples and certain other exceptions relevant to international trade
finance.
Federal law also imposes additional restrictions on Hamilton Bank with
respect to loans and extensions of credit to certain related parties and
purchases from and other transactions with Hamilton Bancorp's principal
shareholders, officers, directors and affiliates. Such loans and extensions of
credit (i) must be made on substantially the same terms (including interest
rates and collateral) as, and follow credit underwriting procedures that are not
less stringent than, those prevailing at the time for comparable transactions
with members of the general public or otherwise available to any employee of
Hamilton Bank, and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features. In addition, extensions of credit to each
such person beyond certain limits set by applicable law must be approved by
Hamilton Bank's Board of Directors, with the individual who is applying for the
credit abstaining from participation in the decision. Hamilton Bank also is
subject to certain lending limits and restrictions on overdrafts to such
persons. A violation of these restrictions may result in the assessment of
substantial civil monetary penalties against Hamilton Bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of Hamilton Bank or the imposition by the Federal Reserve of a cease and
desist order.
Dividends
Hamilton Bank is subject to legal limitations on the frequency and
amount of cash dividends that can be paid to Hamilton Bancorp. The Office of the
Comptroller of the Currency, in general, also has the ability to prohibit cash
dividends by Hamilton Bank which would otherwise be permitted under applicable
regulations if the Office of the Comptroller of the Currency determines
12
<PAGE> 14
that such distribution would constitute an unsafe or unsound practice.
For Hamilton Bank, the approval of the Office of the Comptroller of the
Currency is required for the payment of cash dividends in any calendar year if
the total of all cash dividends declared by Hamilton Bank in that year exceeds
the current year's net income combined with the retained net income of the two
preceding years. "Retained net income" means the net income of a specified
period less any common or preferred stock cash dividends declared for that
period. Moreover, no cash dividends may be paid by a national bank in excess of
its undivided profits account.
In addition, the Federal Reserve and the Federal Deposit Insurance
Corporation have issued policy statements which provide that, as a general
matter, insured banks and bank holding companies may pay cash dividends only out
of current operating earnings.
In accordance with the above regulatory restrictions, Hamilton Bank
currently has the ability to pay cash dividends, and on December 31, 1998 an
aggregate of $31.3 million was available for the payment of dividends to
Hamilton Bancorp without prior regulatory approval.
There are also statutory limits on other transfer of funds to Hamilton
Bancorp and any other future non-banking subsidiaries of Hamilton Bancorp by
Hamilton Bank, whether in the form of loans or other extensions of credit,
investments or asset purchases. Such transfers by Hamilton Bank generally are
limited in amount to 10% of Hamilton Bank's capital and surplus, to Hamilton
Bancorp or any such future Hamilton Bancorp subsidiary, or 20% in the aggregate
to Hamilton Bancorp and all such subsidiaries. Furthermore, such loans and
extensions of credit are required to be fully collateralized in specified
amounts depending on the nature of the collateral involved.
FDICIA
FDICIA was enacted on December 19, 1991. It substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to other federal banking statutes. FDICIA provided
for, among other things, (i) a recapitalization of the Bank Insurance Fund of
the Federal Deposit Insurance Corporation (the "BIF") by increasing the Federal
Deposit Insurance Corporation's borrowing authority and providing for
adjustments in its assessments rates; (ii) annual on-site examinations of
federally-insured depository institutions by banking regulators; (iii) publicly
available annual financial condition and management reports for financial
institutions, including audits by independent accountants; (iv) the
establishment of uniform accounting standards by federal banking agencies; (v)
the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on depository institutions with lower levels of capital;
(vi) additional grounds for the appointment of a conservator or receiver; (vii)
a requirement that the Federal Deposit Insurance Corporation use the least-cost
method of resolving cases of troubled institutions in order to keep the costs to
insurance funds at a minimum; (viii) more comprehensive regulation and
examination of foreign banks; (ix) consumer protection provisions, including a
Truth-in-Savings Act; (x) a requirement that the Federal Deposit Insurance
Corporation establish a risk-based deposit
13
<PAGE> 15
insurance assessment system; (xi) restrictions or prohibitions on accepting
brokered deposits, except for institutions which significantly exceed minimum
capital requirements; and (xii) certain additional limits on deposit insurance
coverage.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions they
supervise. Under these regulations, a depository institution is classified in
one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically under-capitalized." Based on the current regulatory capital position
of Hamilton Bank, Hamilton Bancorp believes that Hamilton Bank is in the highest
classification of "well capitalized."
FDICIA generally prohibits Hamilton Bank from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to Hamilton Bancorp if Hamilton Bank would thereafter be undercapitalized.
Undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans acceptable to the federal
banking agencies. If a depository institution fails to submit an acceptable
plan, it is treated as if it is "significantly undercapitalized."
Significantly undercapitalized depository institutions may be subject
to a number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, and requirements to
reduce total assets and to stop accepting deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator, generally within 90 days of the date such institution
is determined to be critically undercapitalized.
FDICIA also provided for increased funding of the Federal Deposit
Insurance Corporation insurance funds. Under the Federal Deposit Insurance
Corporation's risk-based insurance premium assessment system, each bank whose
deposits are insured by the BIF is assigned one of the nine risk classifications
based upon certain capital and supervisory measures and, depending upon its
classification, is assessed premiums. On November 14, 1995, the Federal Deposit
Insurance Corporation board of directors voted to lower the BIF premium range to
zero from .27% effective January 1996. The rate schedule is subject to future
adjustments by the Federal Deposit Insurance Corporation. In addition, the
Federal Deposit Insurance Corporation has authority to impose special
assessments from time to time. As a result of the enactment of the Federal
Deposit Insurance Funds Act of 1996 on September 30, 1996, commercial banks are
now required to pay part of the interest on the Financing Corporation's bonds
issued to deal with the savings and loan crisis of the late 1980's. As a result,
commercial bank deposits are now also subject to assessment by the Financing
Corporation upon the approval by the Federal Deposit Insurance Corporation of
such assessment. Beginning in 1997 and until the earlier of December 31, 1999 or
the date on which the last saving association ceases to exist, the assessment
rate the Financing Corporation imposes on a commercial
14
<PAGE> 16
bank must be at a rate equal to one-fifth the assessment rate applicable to
deposits assessable by the Savings Association Insurance Fund.
Reserve Requirements
Hamilton Bank is required to maintain reserves against its transaction
account. The reserves must be maintained in an interest-free account at the
Federal Reserve Bank of Atlanta. Reserve requirements and the amount of required
reserves is subject to adjustment by the Federal Reserve from time to time. The
current rate for reserves is 3% of a depository institution's transaction
accounts (less certain permissible deductions) up to $52 million, plus 10% of
the amount over $52 million.
ITEM 2. PROPERTIES.
The Company's operations are currently managed from their corporate
headquarters located in Miami, Florida, where a branch office is also located.
Hamilton Bank's other branch offices are located in Tampa, Winter Haven,
Sarasota, West Palm Beach and Miami, Florida, and in San Juan, Puerto Rico.
Three of the facilities are owned by the Company and five are leased (including
the Company's headquarters).
The table below summarizes the Company's owned and leased facilities.
<TABLE>
<CAPTION>
LOCATION TYPE OF FACILITY APPROXIMATE SQUARE LEASED OR OWNED
FEET
<S> <C> <C> <C>
Miami, Florida Corporate headquarters 75,500 Leased
and branch
Miami, Florida Branch 3,000 Leased
Miami, Florida Branch 3,000 Owned
San Juan, Puerto Rico Branch 3,500 Leased
Sarasota, Florida Branch 2,000 Owned
Tampa, Florida Branch 3,000 Leased
West Palm Beach, Florida Branch 5,000 Leased
Winter Haven, Florida Branch 4,500 Owned
</TABLE>
15
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS.
On January 13, 1998 Development Specialists, Inc., the Liquidating Trustee of
the Model Imperial Liquidating Trust established under the Plan of
Reorganization in the Model Imperial, Inc. Chapter 11 Bankruptcy proceeding,
filed an action against Hamilton Bank in the United States Bankruptcy Court for
the Southern District of Florida objecting to Hamilton Bank's proof of claim in
the Chapter 11 proceeding and affirmatively seeking damages against Hamilton
Bank in excess of $34 million for alleged involvement with former officers and
directors of Model Imperial, Inc. in a scheme to defraud Model Imperial, Inc.
and its bank lenders. The action is one of several similar actions that were
filed by the Trustee against other defendants that were involved with Model
Imperial seeking essentially the same amount of damages as in the action against
Hamilton Bank. The Company believes the claims are without merit either as a
matter of law or fact and intends to vigorously defend the action.
Neither Hamilton Bancorp nor Hamilton Bank is involved in any other
legal proceedings except for routine litigation incidental to the business of
banking, none of which is expected to have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) The Company's Common Stock is traded on the NASDAQ National Market
(Symbol HABK). The following table sets forth the high and low sales prices of a
share of Common Stock as reported by the NASDAQ National Market since the date
of the public offering of Common Stock on March 26, 1997.
<TABLE>
<CAPTION>
Quarter High Low
------- ---- ---
<S> <C> <C>
Fourth Quarter 1998 $29.668 $23.00
Third Quarter 1998 40.75 21.00
Second Quarter 1998 36.25 31.656
First Quarter 1998 37.00 27.75
</TABLE>
<PAGE> 18
<TABLE>
<S> <C> <C>
Fourth Quarter 1997 31.00 26.00
Third Quarter 1997 31.00 21.00
Second Quarter 1997 26.75 16.75
March 26, 1997 (date of public
offering) - March 31, 1997 $17.375 $16.50
</TABLE>
As of March 22, 1999 there were approximately 72 holders of record of
the Company's Common Stock and the closing price of Common Stock as reported by
the NASDAQ National Market for such date was $26.375. The Company has not paid
any cash dividends to date on its Common Stock and does not intend to pay any
such cash dividends in the foreseeable future. As stated in Part I above, due to
economic difficulties being experienced by various countries in the Region, the
Federal Reserve has requested that Hamilton Bancorp not pay any dividends
without the consent of the Federal Reserve.
(b) As reported in Registrant's Form SR for the period ending June 25,
1997 relating to the use of proceeds from the sale of common stock pursuant to
Registrant's Registration Statement No.2-20960 effective March 25, 1997 and in
Registrant's Form 10-Q for the period ending June 30, 1998, US$3,600,000 of the
proceeds remain temporarily invested in short term investments as of December
31, 1998. This remaining amount was invested by Registrant in Hamilton Bank in
March, 1999.
17
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA.
TABLE ONE. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA.
(Dollars in thousands except per share amounts)
The selected consolidated financial data for the five years ended December 31,
1998 have been derived from the Company's audited financial statements. The data
set forth below should be read in conjunction with the consolidated financial
statements and related notes, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income $ 53,981 $ 38,962 $ 27,250
Provision for credit losses 9,621 6,980 3,040
----------- ----------- -----------
Net interest income after provision for credit losses 44,360 31,982 24,210
Trade finance fees and commissions 13,101 12,768 9,325
Structuring and syndication fees 3,352 2,535 138
Customer services fees 556 713 1,252
Net gain (loss) on sale of securities available for sale -- 108 --
Other income 544 318 270
----------- ----------- -----------
Other non-interest income 17,553 16,442 10,985
----------- ----------- -----------
Operating expenses 28,093 23,423 19,630
----------- ----------- -----------
Income before provision for income taxes 33,820 25,001 15,565
Provision for income taxes 12,021 9,098 5,855
----------- ----------- -----------
Net income $ 21,799 $ 15,903 $ 9,710
=========== =========== ===========
PER COMMON SHARE DATA:
Net income per common share (1) $ 2.12 $ 1.73 $ 1.79
Book value per common share $ 12.29 $ 10.00 $ 8.07
Average weighted shares (1) 10,304,180 9,173,680 5,430,030
AVERAGE BALANCE SHEET DATA:
Total assets $ 1,508,052 $ 1,007,846 $ 687,990
Total loans 1,168,451 737,921 485,758
Total deposits 1,301,444 842,117 574,388
Stockholder's equity 108,943 79,311 39,969
PERFORMANCE RATIOS:
Net interest spread 3.28% 3.56% 3.89%
Net interest margin 3.89% 4.31% 4.56%
Return on average equity 20.01% 20.05% 24.29%
Return on average assets 1.45% 1.58% 1.41%
Efficiency ratio (2) 39.27% 42.28% 51.31%
ASSET QUALITY RATIOS:
Allowance for credit losses as a percentage of total loans 1.08% 1.07% 1.07%
Non-performing assets as a percentage of total loans 0.73% 0.65% 0.91%
Allowance for credit losses as a percentage of non-performing assets 149.01% 166.03% 117.97%
Net loan charge-offs as a percentage of average outstanding loans 0.61% 0.32% 0.36%
CAPITAL RATIOS:
Leverage capital ratio 7.98% 7.88% 5.80%
Tier 1 capital 12.03% 12.43% 10.20%
Total capital 13.19% 13.78% 11.50%
Average equity to average assets 7.22% 7.87% 5.81%
<CAPTION>
Year Ended December 31,
1995 1994
----------- -----------
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income $ 23,885 $ 17,201
Provision for credit losses 2,450 2,875
----------- -----------
Net interest income after provision for credit losses 21,435 14,326
Trade finance fees and commissions 9,035 7,422
Structuring and syndication fees 419 1,410
Customer services fees 890 1,044
Net gain (loss) on sale of securities available for sale 3 (168)
Other income 342 322
----------- -----------
Other non-interest income 10,689 10,030
----------- -----------
Operating expenses 18,949 14,946
----------- -----------
Income before provision for income taxes 13,175 9,410
Provision for income taxes 5,172 3,721
----------- -----------
Net income $ 8,003 $ 5,689
=========== ===========
PER COMMON SHARE DATA:
Net income per common share (1) $ 1.47 $ 1.05
Book value per common share $ 6.41 $ 5.06
Average weighted shares (1) 5,430,030 5,430,030
AVERAGE BALANCE SHEET DATA:
Total assets $ 534,726 $ 391,606
Total loans 370,568 270,798
Total deposits 444,332 317,176
Stockholder's equity 32,358 22,195
PERFORMANCE RATIOS:
Net interest spread 4.20% 4.33%
Net interest margin 4.94% 5.06%
Return on average equity 24.73% 25.63%
Return on average assets 1.50% 1.45%
Efficiency ratio (2) 54.68% 54.89%
ASSET QUALITY RATIOS:
Allowance for credit losses as a percentage of total loans 1.05% 1.31%
Non-performing assets as a percentage of total loans 1.07% 0.59%
Allowance for credit losses as a percentage of non-performing assets 98.56% 221.13%
Net loan charge-offs as a percentage of average outstanding loans 0.58% 0.74%
CAPITAL RATIOS:
Leverage capital ratio 5.68% 5.48%
Tier 1 capital 9.98% 10.30%
Total capital 10.92% 11.47%
Average equity to average assets 6.05% 5.67%
</TABLE>
(1) Represents diluted earnings per share and average weighted shares
outstanding respectively.
(2) Amount reflects operating expenses as a percentage of net interest income
plus non-interest income.
18
<PAGE> 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1998 COMPARED TO 1997
OVERVIEW
Hamilton Bancorp Inc. ("Bancorp") is a bank holding company which conducts
operations principally through its 99.8 percent owned subsidiary Hamilton Bank,
N.A. (the "Bank") collectively (the "Company"). The Bank is a national bank
which specializes in financing trade flows between domestic and international
companies on a global basis. The Bank has a network of seven FDIC-insured
branches in Florida, with locations in Miami, Sarasota, Tampa, West Palm Beach
and Winter Haven, and an FDIC-insured branch in San Juan, Puerto Rico opened in
the first quarter of 1998.
The Company completed its initial public offering of 2,400,000 shares of common
stock on March 26, 1997. Following the public offering, on April 9, 1997 the
Company issued 360,000 additional shares of common stock upon the exercise of
the over-allotment option granted to Oppenheimer and Company, Inc., and NatWest
Securities Ltd.
On December 28, 1998, a trust formed by the Company issued $11.0 million of 9.75
percent Beneficial Unsecured Securities, Series A (the "Preferred Securities").
These securities are considered to be Tier 1 capital for regulatory purposes.
Net income for the year ended December 31, 1998 was $21.8 million, a 37 percent
increase over the previous year's net income of $15.9 million. The growth in
earnings is attributed primarily to the 58 percent increase in average loans to
$1,168 million at December 31, 1998 from $738.0 million in the same period in
1997. Net income per share (basic) was reported at $2.18 from $1.81 and
(diluted) reported at $2.12 from $1.73 for the years ended December 31, 1998 and
1997 respectively.
KEY PERFORMANCE HIGHLIGHTS FOR 1998
During 1998, the Company achieved significant earnings growth relative to the
prior year, primarily as a result of (i) increases in net interest income of 39
percent as a result of the growth in average assets of 50 percent fueled in part
by the Company's retention of earnings, (ii) an important increase of 6.8
percent in non-interest income related to the Company's core trade finance
business (iii) overall favorable credit quality as evidenced by the 0.61 percent
net charge offs to average loans, and (iv) improved operating efficiencies.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
NET INTEREST INCOME
An analysis of the Company's net interest income and average balance sheet for
the last five years is presented in TABLE ONE and TABLE TWO. Net interest income
is the difference between interest and fees earned on loans and investments and
interest paid on deposits and other sources of funds, and it constitutes the
Company's principal source of income. Net interest income increased to $54.0
million for the year ended December 31, 1998 from $39.0 million for the same
period in 1997, a 39 percent increase. The increase was due largely to the
growth in average earning assets offset, to some extent, by a decrease in net
interest margin. Average earning assets increased to $1,389.0 million for the
year ended December 31, 1998 from $903.4 million for the same period in 1997 a
54 percent increase while yields earned on average assets decreased by 25 basis
points compared to the same period. Average loans and acceptances discounted
increased to $1,168.5 million for the year ended December 31, 1998 from $737.9
million for the same period in 1997, a 58 percent increase, while average
interest earning deposits due from other banks increased to $122.3 million for
the year ended December 31, 1998 from $102.4 million for the same period in
1997, a 19 percent increase. Net interest margin decreased to 3.89 percent for
the year ended December 31, 1998 from 4.31 percent for the same period in 1997,
a 42 basis point decrease. The primary reasons for this decrease were (i) loan
yields relative to reference rates decreased in certain countries in the Region
and (ii) transactions with larger customers and transactions with multi-national
customers, which command more competitive pricing.
Interest income increased to $124.3 million for the year ended December 31, 1998
from $83.2 million for the same period in 1997, a 49 percent increase,
reflecting an increase in loans in the Region and the United States, partially
offset by a decrease in prevailing interest
19
<PAGE> 21
rates and a tightening of loan spreads in the Region as discussed above.
Interest expense increased to $70.3 million for the year ended December 31, 1998
from $44.2 million for the same period in 1997, a 59 percent increase,
reflecting the increase in deposits to fund asset growth and a two basis point
increase in interest rates paid. Average interest-bearing deposits increased to
$1,231.7 million for the year ended December 31, 1998 from $778.2 million for
the same period in 1997, a 58 percent increase. The growth in deposits was
primarily a result of the Company increasing its core deposit base from its
expanding branch network, as well as its international customers. The Company's
time deposits due from banks also increased to $129.0 million for the year ended
December 31, 1998 from $128.0 million for the same period in 1997.
An analysis of the Company's yields earned and average loan balances segregating
domestic and foreign earning assets is presented in TABLE THREE. The yields
earned on domestic loans have decreased by three basis points to 10.1 percent
from 10.4 percent.
PROVISION FOR CREDIT LOSSES
The Company's provision for credit-losses increased to $9.6 million for the year
ended December 31, 1998 from $7.0 million for the same period in 1997. This 37
percent increase was largely a function of the 22 percent growth in total loans.
Net loan chargeoffs during the year ended December 31, 1998 amounted to $7.1
million compared to $2.4 million for the year 1997. The allowance for credit
losses was increased to $12.8 million at December 31, 1998 from $10.3 at
December 31, 1997, a 24 percent increase. The ratio of the allowance for credit
losses to total loans was 1.08 percent at December 31, 1998 from 1.07 percent
for the same period in 1997. A more detailed review of the provision for credit
losses is presented in TABLE SEVENTEEN through TABLE TWENTY.
NON-INTEREST INCOME
Non-interest income increased to approximately $17.6 million for the year ended
December 31, 1998 from $16.4 million for the same period in 1997, a 7 percent
increase. Trade finance fees and commissions increased by $333 thousand due
largely to lending facility fees which increased by $185 thousand during the
year 1998 compared to 1997 as a result of the growth in loans. Structuring and
syndication fees increased by $817 thousand as a result of various structuring
and syndication transactions completed during the year; increasing these fees to
$3.4 million from $2.5 million for the periods ended December 31, 1998 and 1997
respectively. Customer service fees decreased by $157 thousand as a result of
lower overdrafts experienced in the period. The changes in non-interest income
from year to year are analyzed in TABLE SIX.
20
<PAGE> 22
TABLE TWO. YIELDS EARNED AND RATES PAID
(Dollars in thousands)
<TABLE>
<CAPTION>
For The Years Ended
---------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
---------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- ------- ---- -------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Total Interest Earning Assets
Loans:
Commercial loans $1,013,273 $91,439 9.02% $611,744 $57,257 9.36%
Acceptances discounted 131,158 12,165 9.27% 107,818 10,733 9.95%
Overdraft 12,212 2,306 18.89% 6,890 1,307 18.96%
Mortgage loans 11,523 949 8.24% 11,144 934 8.38%
Installment loans 285 26 9.22% 325 31 9.56%
---------- ------- ---- -------- ------- ----
Total Loans 1,168,451 106,885 9.15% 737,921 70,262 9.52%
Time deposits with banks 122,278 10,989 8.99% 102,360 8,909 8.70%
Investments 70,916 4,903 6.91% 44,978 2,980 6.63%
Federal funds sold 27,307 1,484 5.43% 18,186 1,008 5.54%
---------- ------- ---- -------- ------- ----
Total investments and interest earning
deposits with banks 220,501 17,376 7.88% 165,524 12,897 7.79%
Total interest earning assets 1,388,952 124,261 8.95% 903,445 83,159 9.20%
Total non interest earning assets 119,100 ------- ---- 104,401 ------- ----
---------- ----------
Total Assets $1,508,052 $1,007,846
========== ==========
Interest bearing liabilities
Deposits:
Super NOW, NOW 15,286 271 1.77% 15,675 300 1.91%
Money Market 46,342 2,177 4.70% 43,752 2,060 4.71%
Presidential Money Market 3,284 121 3.68% 3,385 97 2.87%
Super Savings, Savings 4,932 153 3.09% 4,426 139 3.14%
Certificate of deposits (including IRA) 1,033,030 59,730 5.78% 582,933 34,463 5.91%
Time deposits from banks (IBF) 128,853 7,266 5.64% 127,964 6,853 5.36%
Other 18 1 2.96% 61 2 2.92%
---------- ------- ---- -------- ------- ----
Total deposits 1,231,745 69,719 5.66% 778,196 43,913 5.64%
Federal funds purchased 3,423 197 5.77% 4,975 284 5.70%
Other borrowings 4,743 364 8.65% 0 0 0.00%
---------- ------- ---- -------- ------- ----
Total interest bearing liabilities 1,239,912 70,280 5.67% 783,171 44,197 5.64%
---------- ------- ---- -------- ------- ----
Non interest bearing liabilities
Demand deposits 69,699 63,921
Other liabilities 89,498 81,443
------ ------
Total non interest bearing liabilities 159,197 145,364
Stockholders' equity 108,943 79,311
------ ------
Total liabilities and stockholder's equity $1,508,052 $1,007,846
========== ==========
Net Interest income / net interest spread $53,981 3.28% $38,962 3.56%
======= ==== ======= ====
Margin:
Interest income / interest earning assets 8.95% 9.20%
Interest expense / interest earning assets 5.06% 4.89%
Net interest margin 3.89% 4.31%
<CAPTION>
For The Years Ended
-----------------------------------
December 31, 1996
-----------------------------------
Average
Average Yield/
Balance Interest Rate
-------- ------- ----
<S> <C> <C> <C>
Total Interest Earning Assets
Loans:
Commercial loans $375,054 $36,714 9.79%
Acceptances discounted 93,511 9,395 10.05%
Overdraft 5,704 1,007 17.65%
Mortgage loans 11,089 936 8.44%
Installment loans 400 39 9.74%
-------- ------- ----
Total Loans 485,758 48,090 9.90%
Time deposits with banks 62,404 5,751 9.22%
Investments 25,498 1,551 6.08%
Federal funds sold 23,490 1,274 5.42%
-------- ------- ----
Total investments and interest earning
deposits with banks 111,392 8,576 7.70%
Total interest earning assets 597,150 56,666 9.49%
Total non interest earning assets 90,840 ------- ----
--------
Total Assets $687,990
========
Interest bearing liabilities
Deposits:
Super NOW, NOW 16,086 516 3.20%
Money Market 40,779 2,021 4.96%
Presidential Money Market 3,370 127 3.77%
Super Savings, Savings 8,636 281 3.25%
Certificate of deposits (including IRA) 362,724 21,435 5.91%
IRA)
Time deposits from banks (IBF) 93,670 5,010 5.35%
Other 71 3 3.67%
-------- ------- ---
Total deposits 525,336 29,392 5.59%
Federal funds purchased 240 14 5.68%
Other borrowings 164 10 6.29%
-------- ------- ---
Total interest bearing liabilities 525,740 29,416 5.60%
-------- ------- ---
Non interest bearing liabilities
Demand deposits 49,052
Other liabilities 73,229
------
Total non interest bearing liabilities 122,281
Stockholders' equity 39,969
------
Total liabilities and stockholder's equity $687,990
========
Net Interest income / net interest spread $27,250 3.89%
======= ====
Margin:
Interest income / interest earning assets 9.49%
Interest expense / interest earning assets 4.93%
Net interest margin 4.56%
</TABLE>
21
<PAGE> 23
TABLE THREE. YIELDS EARNED - DOMESTIC AND FOREIGN EARNING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------------------------------------------------------------------------
% of % of
Total Total
Average Average Average Average Average Average
Balance Interest Yield/Rate Assets Balance Interest Yield/Rate Assets
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Interest Earning Assets
Loans:
Domestic $249,027 $25,155 10.1% 16.5% $175,209 $18,240 10.4% 17.4%
Foreign 919,424 81,730 8.9% 61.0% 562,712 52,022 9.2% 55.8%
----------------------------------------------------------------------------------------
Total Loans $1,168,451 $106,885 9.1% 77.5% $737,921 $70,262 9.5% 73.2%
Investment and time deposits with banks
Domestic 71,751 3,924 5.5% 4.8% 45,786 2,487 5.4% 4.5%
Foreign 148,750 13,452 9.0% 9.9% 119,738 10,410 8.7% 11.9%
----------------------------------------------------------------------------------------
Total investments and interest earning 220,501 17,376 7.9% 14.6% 165,524 12,897 7.8% 16.4%
with banks
Total interest earning assets $1,388,952 $124,261 8.9% 92.1% $903,445 $83,159 9.2% 89.6%
Total non interest earning assets 119,100 7.9% 104,401 10.4%
Total Assets $1,508,052 100.0% $1,007,846 100.0%
<CAPTION>
December 31, 1996
----------------------------------------
% of
Total
Average Average Average
Balance Interest Yield/Rate Assets
----------------------------------------
<S> <C> <C> <C> <C>
Total Interest Earning Assets
Loans:
Domestic $156,453 $17,172 11.0% 22.7%
Foreign 329,305 30,918 9.4% 47.9%
----------------------------------------
Total Loans $485,758 $48,090 9.9% 70.6%
Investment and time deposits with banks
Domestic 44,655 2,416 5.4% 6.5%
Foreign 66,737 6,160 9.2% 9.7%
----------------------------------------
Total investments and interest earning 111,392 8,576 7.7% 16.2%
with banks
Total interest earning assets $597,150 $56,666 9.4% 86.8%
Total non interest earning assets 90,840 13.2%
Total Assets $687,990 100.0%
</TABLE>
22
<PAGE> 24
TABLE FOUR. RATE VOLUME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to Year Ended Compared to Year Ended
December 31, December 31,
1997 1996
Changes Due To: Changes Due To:
------------------------------------ ------------------------------------
Increase (decrease) in net interest income due to: Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial loans $ 37,582 $ (3,400) $ 34,182 $ 23,169 $ (2,625) $ 20,544
Acceptances discounted 2,323 (891) 1,432 1,438 (100) 1,338
Overdrafts 1,009 (10) 999 209 91 300
Mortgage loans 32 (17) 15 5 (6) (1)
Installment loans (4) (1) (5) (7) (1) (8)
Investments:
Time deposits with other banks 1,734 346 2,080 3,682 (524) 3,158
Investment securities 1,719 204 1,923 1,185 244 1,429
Federal funds sold 505 (29) 476 (288) 21 (267)
-------- -------- -------- -------- -------- --------
Total earning assets 44,900 (3,798) 41,102 29,393 (2,900) 26,493
Deposits:
Super NOW, NOW (7) (22) (29) (13) (203) (216)
Money market 122 (5) 117 147 (108) 39
Presidential money market (3) 27 24 1 (31) (30)
Super savings, savings 16 (2) 14 (137) (5) (142)
Certificates of deposits 13,027 12,240 25,267 13,027 -- 13,027
Time deposits with banks (IBF) 48 365 413 1,834 9 1,843
Other (1) -- (1) -- (1) (1)
Federal funds purchased (88) 2 (86) 271 (1) 270
Other borrowings 364 -- 364 (10) -- (10)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 13,478 $ 12,605 $ 26,083 $ 15,120 $ (340) $ 14,780
-------- -------- -------- -------- -------- --------
Change in net interest income $ 31,422 $(16,403) $ 15,019 $ 14,273 $ (2,560) $ 11,713
======== ======== ======== ======== ======== ========
</TABLE>
23
<PAGE> 25
TABLE FIVE. RATE VOLUME ANALYSIS - DOMESTIC AND FOREIGN
(Dollars in thousands)
<TABLE>
<CAPTION>
Compared to Year Ended Compared to Year Ended
December 31, December 31,
1997 1996
Changes Due To: Changes Due To:
---------------------------------- ----------------------------------
Increase (decrease) in net interest income due to: Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans:
Domestic $ 7,685 $ (770) $ 6,915 $ 2,047 $ (954) $ 1,093
Foreign 32,978 (3,270) 29,708 21,797 (720) 21,077
Investments and time deposits with banks:
Domestic 1,410 27 1,437 61 10 73
Foreign 2,522 520 3,042 4,892 (642) 4,250
------- ------- ------- ------- ------- -------
Total earning assets $44,595 $(3,493) $41,102 $28,797 $(2,306) $26,493
======= ======= ======= ======= ======= =======
</TABLE>
TABLE SIX. NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------------
1996 to 1997 1997 to 1998
1996 % Change 1997 % Change 1998
------- ---- ------- --- -------
<S> <C> <C> <C> <C> <C>
Trade finance fees and commissions $ 9,325 36.9% $12,768 2.6% $13,101
Structuring and syndication fees 138 1737.0% 2,535 32.2% 3,352
Customer service fees 1,252 -43.1% 713 -22.0% 556
Other 270 57.8% 426 27.7% 544
------- ---- ------- --- -------
Total non-interest income $10,985 49.7% $16,442 6.8% $17,553
======= ==== ======= === =======
</TABLE>
OPERATING EXPENSES
Operating expenses increased to $28.1 million for the year ended December 31,
1998 from $23.4 million for the same period in 1997, a 20 percent increase. The
growth in expenditures was primarily to support revenue growth. A discussion of
the significant components of noninterest expense in 1998 compared to 1997 is as
follows: employee compensation and benefits increased to $14.5 million for the
year ended December 31, 1998 from $13.2 million for the same period in 1997, a
10 percent increase. This was primarily due to an increase in the number of
employees to 264 at December 31, 1998 from 250 at the same period in 1997. The
majority of the employees were added to support the Puerto Rico branch and other
areas within the bank. There were also salary increases for existing personnel.
Occupancy expenses increased to $4.2 million for the year ended December 31,
1998 from $3.3 million for the same period in 1997, a 27 percent increase as a
result of the additional branches. Other expenses increased to $9.3 million for
the year ended December 31, 1998 from $7.0 million for the same period in 1997,
primarily due to the increase in legal expense as a result of various litigation
actions commenced by or against the Company in 1998. The Company's efficiency
ratio experienced a favorable decrease to 39 percent in 1998 from 42.3 percent
in 1997. The changes in operating expenses from year to year are analyzed in
TABLE SEVEN.
The Company's income tax expense for 1998 was $12.0 million, for an effective
tax rate of 36 percent of pretax income. Income tax expense for 1997 was $9.1
million for an effective rate of 36 percent. The decrease in the effective tax
rate is the result of a state income tax refund for prior year filings. The year
to year increase of income tax expense was the result of the 35 percent
24
<PAGE> 26
increase in pretax income. As the Company increases its foreign loans and
investments in relation to total assets these activities are not taxable in the
State of Florida thus reducing the overall effective tax rate. NOTE SIX of the
consolidated financial statements includes an analysis of the components of the
provision for income taxes.
TABLE SEVEN. OPERATING EXPENSES
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------------------------
1996 to 1997 1997 to 1998
1996 % Change 1997 % Change 1998
------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Employee compensation and benefits $10,935 20.4% $13,162 10.4% $14,527
Occupancy and equipment 2,907 11.8% 3,251 30.1% 4,229
Other operating expenses 5,341 29.2% 6,902 12.1% 7,736
Legal Expense 447 -75.8% 108 1382.4% 1,601
------- ---- ------- ---- -------
Total Operating Expenses $19,630 19.3% $23,423 19.9% $28,093
======= ==== ======= ==== =======
</TABLE>
YEAR 2000
The ability of computers, software and other equipment utilizing microprocessors
to recognize and properly process data fields containing a 2-digit year after
1999 is commonly referred to as the "Year 2000" compliance issue. The Year 2000
issue is the result of computer programs and equipment which are dependent on
"embedded chip technology" using two digits rather than four to define the
applicable year. Any of the Company's computer programs or equipment that are
date dependent may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, or a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The Company began the process of assessing and preparing its computer systems
and applications to be functional on January 1, 2000 in June 1996. The Company
has also been communicating with third parties which it interfaces with, such as
customers, counter parties, payment systems, vendors and others to determine
whether they will be functional on or before January 1, 2000.
The Company has provided compliance certification questionnaires to each of its
customers in order to determine their ability to be Year 2000 compliant. The
Company has amended its Credit Policy Manual to require the Company to terminate
business with a customer unless the Company is assured that such customer is or
will be Year 2000 compliant in the near future, except in such instances where
the customer's failure to be Year 2000 compliant will not, either individually
or in the aggregate, have a material adverse effect on the Company. If a
customer does not respond to the questionnaire or if its response does not
provide the Company with adequate assurance that such customer's failure to be
Year 2000 compliant would not have a material adverse effect on the Company, the
Company will not renew its current relationship with that customer. Since 70
percent of the loan portfolio matures within 365 days, the majority of the
portfolio would be subject to the amended credit policy. There can be no
assurance that the parties mentioned above will become Year 2000 compliant on a
timely basis. We believe that the process of modifying all mission critical
applications of the Company will continue as planned and expect all of the
testing, changes and verifications by June 30, 1999 as dictated by FFIEC
guidelines.
Research to verify compatibility of counter parties, payment systems, vendors
and others has been conducted. These systems were divided into critical and
non-critical categories. The Company expects to have all testing, changes and
verification on the critical systems completed by June 30, 1999 as dictated by
FFIEC guidelines. The non-critical systems will continue to be reviewed and
tested and management will determine if changes or replacement is deemed
necessary.
Concurrently, the Company is in the process of upgrading its computers systems
to accommodate the growth of the past two years. These new systems when
installed are Year 2000 compliant. We believe the total costs relating
exclusively to Year 2000 compliance will be approximately $250,000, which amount
is not material to the Company's financial position or results of operations. To
date, the Company has incurred approximately $100,000 of these estimated
expenses. Any purchased hardware
25
<PAGE> 27
or software in connection with this process will be capitalized in accordance
with normal Company policy. Personnel and all other costs are being expensed as
incurred
The costs and dates on which the Company plans to complete the Year 2000 process
are based on our best estimates. However, there can be no assurance that these
estimates will be achieved and actual results could differ.
1997 COMPARED TO 1996
NET INTEREST INCOME
Net interest income increased to $39.0 million for the year ended December 31,
1997 from $27.2 million for the same period in 1996, a 43 percent increase. The
increase was due largely to the growth in average earning assets offset, to some
extent, by a decrease in net interest margin. Average earning assets increased
to $903.4 million for the year ended December 31, 1997 from $597.2 million for
the same period in 1996, a 51 percent increase while yields earned on average
assets decreased by 29 basis points comparing the same period. Average loans and
acceptances discounted increased to $737.9 million for the year ended December
31, 1997 from $485.8 million for the same period in 1996, a 52 percent increase,
while average interest earning deposits due from other banks increased to $102.4
million for the year ended December 31, 1997 from $62.4 million for the same
period in 1996, a 64.1 percent increase. Net interest margin decreased to 4.31
percent for the year ended December 31, 1997 from 4.56 percent for the same
period in 1996, a 25 basis point decrease. The primary reasons for this decrease
were (i) loan yields relative to reference rates decreased in certain countries
in the Region as a result of perceived economic stability and lower credit risk,
(ii) loans to larger corporate and bank customers, which command more
competitive pricing and (iii) excess liquidity in the Region.
Interest income increased to $83.2 million for the year ended December 31, 1997
from $56.7 million for the same period in 1996, a 47 percent increase,
reflecting an increase in loans in the Region and the United States, partially
offset by a decrease in prevailing interest rates and a tightening of loan
spreads in the Region as discussed above. Interest expense increased to $44.2
million for the year ended December 31, 1997 from $29.4 million for the same
period in 1996, a 50 percent increase, reflecting the increase in deposits to
fund asset growth and 5 basis points increase in interest rates paid. Average
interest-bearing deposits increased to $778.2 million for the year ended
December 31, 1997 from $525.3 million for the same period in 1996, a 48 percent
increase. The growth in deposits was primarily a result of the Company
increasing its core deposit base from its expanding branch network as well as
its international customers. The Company's time deposits due from banks also
increased to $128.0 million for the year ended December 31, 1997 from $93.7
million for the same period in 1996.
An analysis of the Company's yields earned and average loan balances segregating
domestic and foreign earning assets is presented in TABLE THREE. The yields
earned on domestic loans have decreased by 50 basis points to 10.4 percent from
11 percent.
PROVISION FOR CREDIT LOSSES
The Company's provision for credit-losses increased to $7.0 million for the year
ended December 31, 1997 from $3.0 million for the same period in 1996. This $4.0
million increase was largely to support the 80 percent loan portfolio growth.
Net loan chargeoffs during the year ended December 31, 1997 amounted to $2.4
million compared to $1.8 million for the year 1996. The allowance for credit
losses was increased to $10.3 million at December 31, 1997 from $5.7 million for
the end of the fiscal year 1996, an 81 percent increase. The ratio of the
allowance for credit losses to total loans remained the same at 1.07 percent at
December 31, 1997 and 1996. A more detailed review of the provision for credit
losses is presented in TABLE SEVENTEEN through TABLE TWENTY.
NON-INTEREST INCOME
Non-interest income increased to approximately $16.4 million for the year ended
December 31, 1997 from $11.0 million for the same period in 1996, a 49 percent
increase. Trade finance fees and commissions increased by $3.4 million due
largely to higher letters of credit volume, which registered an increase of 20
percent in overall volume in 1997 relative to 1996. In addition, lending
facility fees increased by $1.2 million during the year ended December 31, 1997
compared to 1996 as a result of the growth in loans. Structuring and syndication
fees increased by $2.4 million as a result of various structuring and
syndication transactions completed during the year compared to almost a flat
year for 1996. The globalization of investments in the region created more
structuring and syndication opportunities. Customer service fees decreased by
$538 thousand as a result of lower overdrafts experienced in the period. The
changes in non-interest income from year to year are analyzed in TABLE SIX.
26
<PAGE> 28
OPERATING EXPENSES
Operating expenses increased to $23.4 million for 1997 from $19.6 million for
1996, a 19.3 percent increase. The growth in expenditures was primarily to
support revenue growth. A discussion of the significant components of
noninterest expense in 1997 compared to 1996 is as follows: Employee
compensation and benefits increased to $13.2 million for 1997 from $10.9 million
for 1996, a 20.4 percent increase. This was primarily due to an increase in the
number of employees to 250 at December 31, 1997 from 220 at December 31, 1996,
the majority of the employees were added to support the two branches opened
during 1997 as well as salary increases for existing personnel. Occupancy
expenses increased slightly to $3.3 million from $2.9 million as a result of the
two new branches. Other expenses increased to $7.0 million for 1997 from $5.8
million for 1996, primarily due to a loss realized as a result of a default on a
loan in which inventory was acquired in 1996 and fully liquidated in 1997. As a
result of the enactment of the Federal Deposit Insurance Funds Act of 1996 on
September 30, 1996, commercial banks are now required to pay part of the
interest on the Financing Corporation ("FICO") bonds issued to deal with the
savings and loan crisis of the late 1980's. The Company's efficiency ratio
experienced a favorable decrease to 42.3 percent from 51.3 percent for 1997 and
1996, respectively. The changes in operating expenses from year to year are
analyzed in TABLE SEVEN.
The Company's income tax expense for 1997 was $9.1 million, for an effective tax
rate of 36.4 percent of pretax income. Income tax expense for 1996 was $5.9
million for an effective rate of 37.5 percent. The year to year increase of
income tax expense was the result of the 61 percent increase in pretax income.
As the Company increases its foreign loans and investments in relation to total
assets these activities are not taxable in the State of Florida thus reducing
the overall effective tax rate. NOTE SIX of the consolidated financial
statements includes an analysis of the components of the provision for income
taxes.
BALANCE SHEET REVIEW
The Company manages its balance sheet by monitoring interest rate sensitivity,
credit risk, liquidity risk and capital positions to reduce the potential
adverse impact on net interest income that might result from changes in interest
rates. Control of interest rate risk is conducted through systematic monitoring
of maturity mismatches. The Company's investment decision-making takes into
account not only the rates of return and their underlying degree of risk, but
also liquidity requirements, including minimum cash reserves, withdrawal and
maturity of deposits and additional demand for funds.
Total consolidated assets increased 27 percent, or $365.4 million for the year
ended December 31, 1998, which included an increase of $383.7 million in
interest earning assets and a decrease of $18.3 million in non-interest earning
assets. The increase in consolidated assets reflects increases of $211.3 million
in net loans and $86.5 million in interest-earning deposits with other banks.
These increases were principally funded by deposits from the branch network,
time deposits due to banks and deposits due to other financial institutions as
well as increases in retained earnings. The Company opened a branch in Puerto
Rico during the first quarter to further support asset growth.
CASH, DEMAND DEPOSITS WITH OTHER BANKS AND FEDERAL FUNDS SOLD
Cash, demand deposits with other banks and federal funds sold are considered
cash and cash equivalents. Balances of these items fluctuate daily depending on
many factors which include or relate to the particular banks that are clearing
funds, loan payoffs, deposit gathering and reserve requirements. Cash, demand
deposits with other banks and federal funds sold were $111.8 million at December
31, 1998 compared to $91.4 million at December 31, 1997.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND SECURITIES
Interest-earning deposits with other banks increased to $200.2 million at
December 31, 1998 from $113.7 million at December 31, 1997. As part of its
overall liquidity management process, the Company places funds with foreign
correspondent banks. These placements are typically short-term, typically 180
days or less. The purpose of these placements is to obtain an enhanced return on
high quality short-term instruments and to solidify existing relationships with
correspondent banks. The banks with which placements are made and the amount
placed are currently approved by the Bank's Asset Liability Committee. In
addition, this Committee reviews adherence with internal interbank liability
policies and procedures. As indicated in TABLE EIGHT these interest-earning
deposits with other banks are well-diversified throughout the Region and in
other countries. The level of such deposits has grown as the overall assets of
the Company have increased during the year ended December 31, 1998. The
short-term nature of these deposits allows the Company the flexibility to
redeploy these assets into higher yielding loans which are largely related to
the financing of trade.
27
<PAGE> 29
Investment securities increased to $115.0 million at December 31, 1998 from
$54.6 million at December 31, 1997. The increase has been primarily in U.S.
Government Agency Mortgage backed securities classified as held to maturity.
These securities diversify the Company's portfolio, are eligible collateral for
securing public funds and qualify as community Reinvestment Act investment.
During the year the Company also invested $15 million in investment grade
perpetual subordinated euronotes of multinational banks. These investments
further diversify the portfolio and are eligible as collateral for overnight
investments.
NOTE TWO of the consolidated financial statements reports amortized fair value
and maturity information on the securities portfolio.
TABLE EIGHT. INTEREST-EARNING DEPOSITS WITH OTHER BANKS
(Dollars in thousands)
<TABLE>
Country December 31, 1998
<S> <C>
Ecuador $43,394
Brazil 24,741
Bahamas (1) 23,000
Suriname 20,000
Dominican Republic 16,035
Argentina 14,633
Jamaica 12,060
Germany 10,000
Grand Cayman 10,000
Panama 7,900
British West Indies 6,640
Bolivia 5,000
Honduras 5,000
Nicaragua 1,000
United States 800
--------
Total $200,203
========
</TABLE>
(1) Consists of placements in the Bahamas branch of a multinational financial
institution.
28
<PAGE> 30
LOAN PORTFOLIO
The Company's loan portfolio increased by $214.7 million, or 22 percent, during
the year ended December 31, 1998 in relation to December 31, 1997. This was due
to management's ability to increase lending to its existing customer base. In
addition, the growth also reflected the overall increased economic trade
activity throughout the Region. At December 31, 1998 commercial-domestic loans
increased by $109.6 million, commercial foreign loans increased by $85.9 million
and government and official institutions increased by $37.5 million from the
balances at December 31, 1997. Details on the loans by type are shown in TABLE
NINE below. At December 31, 1998 approximately 30 percent of the Company's
portfolio consisted of loans to domestic borrowers and 70 percent of the
Company's portfolio consisted of loans to foreign borrowers. The Company's loan
portfolio is relatively short-term, as approximately 60 percent of loans at
December 31, 1998 were short-term trade finance loans with average maturities of
approximately 180 days as detailed on TABLE TEN.
The Company's loan portfolio is an important source of liquidity since the
Company's predominant business, international trade finance, is self liquidating
in nature and a significant part of the loans and extensions of credit mature
within one year. The term to maturity of the Company's loans at December 31,
1998 are shown on TABLE TEN.
TABLE NINE. LOANS BY TYPE
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial (1) $ 289,032 $ 179,435 $ 110,322 $ 96,511 $ 66,413
Acceptances discounted 56,706 45,153 23,314 33,059 42,764
Residential mortgages 10,494 12,008 10,610 11,363 11,050
Installment 232 238 428 345 334
---------- ---------- ---------- ---------- ----------
Subtotal Domestic 356,464 236,834 144,674 141,278 120,561
Foreign:
Banks and other financial institutions 304,011 349,643 129,376 136,681 96,563
Commercial and industrial (1) 405,819 319,925 179,824 81,433 77,897
Acceptances discounted 72,597 55,301 80,935 62,838 19,962
Government and official institutions 40,639 3,091 750 750 550
---------- ---------- ---------- ---------- ----------
Subtotal Foreign 823,066 727,960 390,885 281,702 194,972
---------- ---------- ---------- ---------- ----------
Total loans $1,179,530 $ 964,794 $ 535,559 $ 422,980 $ 315,533
========== ========== ========== ========== ==========
</TABLE>
(1) Includes pre-export financing, warehouse receipts and refinancing of
letters of credits.
29
<PAGE> 31
TABLE TEN. LOAN MATURITIES
(In thousands)
<TABLE>
<CAPTION>
As of December 31, 1998 (1)
Mature
Mature After One But Mature
Within Within After Five
One Year Five Years Years Total
---------- ---------- ---------- ----------
Domestic loans:
<S> <C> <C> <C> <C>
Commercial and Industrial $ 210,938 $ 58,751 $ 19,343 $ 289,032
Acceptances discounted 56,706 -- -- 56,706
Foreign loans:
Commercial and Industrial 458,207 248,912 43,350 750,469
Acceptances discounted 71,061 1,536 -- 72,597
---------- ---------- ---------- ----------
Total $ 796,912 $ 309,200 $ 62,693 $1,168,805
========== ========== ========== ==========
Fixed $ 546,552 $ 242,113 $ 55,972 $ 844,637
Adjustable 250,360 67,086 6,721 324,167
---------- ---------- ---------- ----------
Total fixed and adjustable $ 796,912 $ 309,199 $ 62,693 $1,168,804
========== ========== ========== ==========
</TABLE>
(1) Does not include mortgage loans and installment loans in the aggregate
amount of $10.7 million.
TABLE ELEVEN reflects both the Company's growth and diversification in financing
trade flows between the United States and the Region in terms of loans by
country and cross-border outstanding by country. The aggregate amount of the
Company's crossborder outstandings by primary credit risk includes cash and
demand deposits with other banks, interest earning deposits with other banks,
investment securities, due from customers on bankers acceptances, due from
customers on deferred payment letters of credit and loans-net. Exposure levels
in any given country at the end of each period may be impacted by the flow of
trade between the United States (and to a large extent, Florida) and the given
countries, as well as the price of the underlying goods or commodities being
financed.
At December 31 1998 approximately 34.6 percent in principal amount of the
Company's loans were outstanding to borrowers in five countries other than the
United States: Panama (10.1 percent), Guatemala (10.1 percent), Brazil (5.1
percent), Honduras (5.1 percent) and Peru (4.2 percent).
30
<PAGE> 32
TABLE ELEVEN. LOANS BY COUNTRY
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
% of % of % of
Total Total Total
Country Amount Loans Amount Loans Amount Loans
---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
United States $ 356,464 30.22% $ 236,834 24.55% $ 144,674 27.01%
Argentina 38,171 3.24% 58,477 6.06% 35,241 6.58%
Bolivia 20,816 1.76% 38,058 3.94% 15,815 2.95%
Brazil 60,685 5.14% 58,040 6.02% 27,255 5.09%
British West Indies (2) -- 0.00% -- 0.00% 14,740 2.75%
Colombia (2) 43,793 3.71% 23,768 2.46% -- 0.00%
Dominican Republic 29,563 2.51% 40,161 4.16% 9,450 1.76%
Ecuador 46,917 3.98% 74,485 7.72% 29,799 5.56%
El Salvador 37,196 3.15% 40,306 4.18% 28,472 5.32%
Guatemala 119,227 10.11% 91,178 9.45% 79,483 14.84%
Honduras 59,564 5.05% 59,439 6.16% 24,277 4.53%
Jamaica (2) 29,066 2.46% -- 0.00% 10,971 2.05%
Mexico 25,250 2.14% -- 0.00%
Panama 119,615 10.14% 77,295 8.01% 50,553 9.44%
Peru 49,382 4.19% 68,094 7.06% 26,658 4.98%
Russia -- 0.00% 17,500 1.81% -- 0.00%
Suriname 21,868 1.85%
Venezuela 19,756 1.67% 16,299 1.69% 10,245 1.91%
Other (1) 102,197 8.66% 64,860 6.72% 27,926 5.21%
---------- ------ ---------- ------ ---------- ------
Total $1,179,530 100.00% $ 964,794 100.00% $ 535,559 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
(1) Other consists of loans to borrowers in countries in which loans did
not exceed 1 percent of total loans.
(2) These Countries had loans which did not exceed 1 percent of total loans
in the periods indicated.
31
<PAGE> 33
At December 31, 1998 approximately 30.6 percent in cross-border outstanding were
due from borrowers in five countries other than the United States: Guatemala
(7.7 percent), Panama (7.0 percent), Brazil (5.9 percent), Ecuador (5.9 percent)
and Honduras (4.1 percent).
TABLE TWELVE. TOTAL CROSS-BORDER OUTSTANDING BY COUNTRY AND TYPE
(Dollars in million)
<TABLE>
<CAPTION>
At December 31,
% of % of % of
Total Total Total
1998 Assets 1997 Assets 1996 Assets
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Argentina 59 3.5% $ 69 5.2% $ 58 7.7%
Bolivia 26 1.5% 44 3.3% 27 3.6%
Brazil 100 5.9% 85 6.3% 36 4.7%
British West Indies 36 2.1% 11 0.8% 11 1.5%
Colombia 54 3.2% 24 1.8% 6 0.8%
Costa Rica (2) 16 0.9% -- -- -- --
Dominican Republic 48 2.8% 39 2.9% 6 0.8%
Ecuador 100 5.9% 90 6.7% 35 4.6%
El Salvador 52 3.1% 46 3.4% 32 4.2%
Guatemala 131 7.7% 92 6.9% 96 12.7%
Honduras 69 4.1% 52 3.9% 33 4.4%
Jamaica 40 2.4% 32 2.4% 22 2.9%
Mexico (2) 25 1.5% -- -- -- --
Nicaragua (2) 15 0.9% 12 0.9% -- 0.0%
Panama 119 7.0% 72 5.4% 41 5.4%
Peru 56 3.3% 74 5.5% 26 3.4%
Russia (2) -- -- 17 1.3% -- 0.0%
Suriname (2) 27 1.6% -- -- -- --
Venezuela (2) 19 1.1% -- 0.0% 10 1.3%
Other (1) 83 4.9% 39 2.9% 17 2.3%
------ ------ ------ ------ ------ ------
Total $1,075 63.4% $ 798 59.6% $ 456 60.3%
====== ====== ====== ====== ====== ======
</TABLE>
(1) Other consists of cross-border outstanding to countries in which such
cross-border outstanding did not exceed 0.75 percent of the Company's
total assets at any of the period indicated.
(2) These countries had cross-border outstanding which did not exceed .75
percent of total assets at any of the period indicated.
32
<PAGE> 34
TOTAL CROSS-BORDER OUTSTANDINGS BY TYPE
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Government and official institutions $ 73 $ 25 $ 1
Banks and other financial institutions 498 442 161
Commercial and industrial 418 275 213
Acceptances discounted 86 56 81
------ ------ ------
Total $1,075 $ 798 $ 456
====== ====== ======
</TABLE>
DUE FROM CUSTOMERS ON BANKERS' ACCEPTANCES AND DEFERRED PAYMENT LETTERS OF
CREDIT.
Due from customers on bankers' acceptances and deferred payment letters of
credit were $75.6 million and $6.5 million, respectively, at December 31, 1998
compared to $95.3 million and $8.4 million, respectively, at December 31, 1997.
These assets represent a customer's liability to the Company while the Company's
corresponding liability to third parties is reflected on the balance sheet as
"Bankers Acceptances Outstanding" and "Deferred Payment Letters of Credit
Outstanding".
DEPOSITS
The primary sources of Company's domestic time deposits are its seven Bank
branches located in Florida and one in Puerto Rico. The Company has three Bank
branches in Miami, one in Tampa, Winter Haven, Sarasota and West Palm Beach. The
Company has opened a branch in San Juan, Puerto Rico in the first quarter of
fiscal 1998. In pricing its deposits, the Company analyzes the market carefully,
attempting to price its deposits competitively with the larger financial
institutions in the area. TABLE TWO provides information on average deposit
amounts and rates paid to each deposit category. Total deposits were $1,477.1
million at December 31, 1998 compared to $1,135.0 million at December 31, 1997.
Average interest bearing deposits increased by 58.3 percent to $1,231.7 million
at December 31, 1998 from $778.2 million at December 31, 1997. During the year
the Company also increased deposits from other financial institutions. In
addition, the Company obtained deposits from the State of Florida as the Bank is
a qualified public depository pursuant to Florida law and has also obtained
approximately $75.5 million of brokered deposits participated out by the broker
in denominations of less than $100,000 through a retail certificate of deposit
program. These deposits were used to further diversify the Company's deposit
base and as a cost effective alternative for the short term funding needs of the
Company.
OTHER BORROWINGS
The Company entered into two transactions in which foreign debt securities were
purchased using proceeds from the other borrowings described in Note 7 to the
Consolidated Financial Statements. The securities collaterize the borrowings.
The borrowings and the related securities mature at the same time.
TRUST PREFERRED SECURITIES
Trust Preferred Securities increased by $11 million as a result of the issuance
of Beneficial Unsecured Securities, of Series A (the "Preferred Securities") out
of a guarantor trust at a rate of 9.75 percent. The Preferred Securities are
considered Tier I capital for regulatory purposes.
In addition, on January 14, 1999, the Trust issued an additional $1.7 million of
Preferred Securities upon the exercise of an over-allotment option by the
underwriter. See Note 8 of the Consolidated Financial Statements on page 57 for
further details.
33
<PAGE> 35
TABLE THIRTEEN reports maturity periods of certificate of deposits of $100,000
and greater.
TABLE THIRTEEN. MATURITIES OF AND AMOUNTS OF CERTIFICATES OF DEPOSITS AND OTHER
TIME DEPOSITS $100,000 OR MORE
(In thousands)
<TABLE>
<CAPTION>
Certificates Other Time
of Deposit Deposits-IBF
$100,000 or More $100,000 or More Total
<S> <C> <C> <C>
Three months or less $180,883 $ 55,321 $236,204
Over 3 through 6 months 138,528 1,900 140,428
Over 6 through 12 months 185,366 -- 185,366
Over 12 months 25,596 -- 25,596
-------- -------- --------
Total $530,373 $ 57,221 $587,594
======== ======== ========
</TABLE>
OFF-BALANCE SHEET
CONTINGENCIES
In the normal course of business, the Company utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers, including commitments to extend credit, commercial letter of credit,
shipping guarantees, standby letters of credit and forward foreign exchange
contracts.
TABLE FOURTEEN reports the total volume and average monthly volume of the
Company's export and import letters of credit for the periods indicated. The
letter of credit volume decreased by 10 percent to $746.8 million from $819.5
million as a result of shifts toward more on-balance sheet financing.
TABLE FOURTEEN. CONTINGENCIES - COMMERCIAL LETTERS OF CREDIT
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
Average Average Average
Total Monthly Total Monthly Total Monthly
Volume Volume Volume Volume Volume Volume
<S> <C> <C> <C> <C> <C> <C>
Export Letters of Credit (1) $397,683 $ 33,140 $424,748 $ 35,396 $369,367 $ 30,781
Import Letters of Credit (1) 349,099 29,092 394,758 32,897 312,964 26,080
-------- -------- -------- -------- -------- --------
Total $746,782 $ 62,232 $819,506 $ 68,293 $682,331 $ 56,861
======== ======== ======== ======== ======== ========
</TABLE>
(1) Represents certain contingent liabilities not reflected on the
Company's balance sheet.
34
<PAGE> 36
The Company provides letter of credit services globally. TABLE FIFTEEN sets
forth the distribution of the Company's contingent liabilities by country of the
applicant and issuing bank for import and export letters of credit,
respectively. As shown by the table, contingent liabilities decreased by 35
percent to $128.7 million at December 31, 1998 from December 31, 1997 as a
result of shifts toward more on-balance sheet financing.
TABLE FIFTEEN. CONTINGENT LIABILITIES (1)
(In thousands)
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Argentina (3) $ 1,680 $ -- $ 7,095
Bolivia 3,890 3,883 4,401
Brazil -- 4,123 4,770
Colombia (3) -- 3,936 --
Costa Rica (3) 2,846 3,168 --
Dominican Republic 7,015 4,759 2,719
Ecuador 3,703 17,839 1,858
El Salvador 1,995 3,837 5,616
Guatemala 26,132 11,577 13,981
Guayana 2,374 -- --
Haiti (3) 2,088 7,857 --
Honduras 2,427 5,550 8,315
Jamaica (3) -- -- 1,556
Nicaragua -- 3,386 1,414
Panama 14,538 12,439 9,803
Paraguay 1,961 2,395 5,105
Peru -- 5,566 5,864
Suriname 11,690 -- --
Switzerland 1,588 -- --
United States 39,415 94,629 55,991
Venezuela (3) -- -- --
Other (2) 5,374 13,139 3,224
-------- -------- --------
Total $128,716 $198,083 $131,712
======== ======== ========
</TABLE>
(1) Includes export and import letters of credit, standby letters of credit
and letters of indemnity.
(2) Other includes those countries in which contingencies represent less
than 1 percent of the Company's total contingencies at each of the
above dates.
(3) These countries had contingencies, which did not exceed 1 percent of
the Company's total contingencies during the period indicated.
35
<PAGE> 37
LIQUIDITY
The Company seeks to manage its assets and liabilities to reduce the potential
adverse impact on net interest income that might result from changes in interest
rates through systematic monitoring of maturity mismatches. The Company's
investment decision-making takes into account not only the rates of return and
their underlying degree of risk, but also liquidity requirements, including
minimum cash reserves, withdrawal and maturity of deposits and additional demand
for funds. For any given period, the pricing structure is matched when an equal
amount of assets and liabilities reprice. An excess of assets or liabilities
over these matched items results in a gap or mismatch, as shown on TABLE
SIXTEEN. A positive gap denotes asset sensitivity and normally means that an
increase in interest rates would have a positive effect on net interest income
while a decrease in interest rates would have a negative effect on net interest
income. However, because different types of assets and liabilities with similar
maturities may reprice at different rates or may otherwise react differently to
changes in overall market rates or conditions, changes in prevailing interest
rates may not necessarily have such effects on net interest income. All of the
Company's assets and liabilities are denominated in dollars and therefore the
Company has no material foreign exchange risk.
Cash and cash equivalents were $111.8 million on December 31, 1998, an increase
from $91.4 million from December 31, 1997. During 1998, net cash provided by
operating activities was $114.2 million, net cash used in investing activities
was $455.0 million and net cash provided by financing activities was $361.2
million. For further information on cash flows, see the Consolidated Statement
of Cash Flows on page 47 in the Consolidated Financial Statements.
The Company's principal sources of liquidity and funding are its diverse deposit
base and the sales of bankers' acceptances as well as loan participations. The
level and maturity of deposits necessary to support the Company's lending and
investment activities is determined through monitoring loan demand and through
its asset/liability management process. The other borrowings mentioned in the
balance sheet review and in Note Seven of the Financial Statements were a result
of a security transaction. The trust preferred offering completed December 28,
1998 will provide adequate liquidity for the next year so that management does
not consider the request by the Federal Reserve that was mentioned in Part I
Item 1 of this document to have a material effect on the operations for the
remainder of calendar year 1999. Considerations in managing the Company's
liquidity position include, but is not limited to, scheduled cash flows from
existing assets, contingencies and liabilities, as well as projected liquidity
needs arising from anticipated extensions of credit. Furthermore, the liquidity
position is monitored daily by management to maintain a level of liquidity
conducive to efficient operations and is continuously evaluated as part of the
asset/liability management process.
Historically, the Company has increased its level of deposits to allow for its
planned asset growth. Customer deposits have increased through the branch
network, and private banking customers, as well as deposits related to the trade
activity. The majority of the Company's deposits are short-term and closely
match the short-term nature of the Company's assets. At December 31, 1998
interest-earning assets maturing within 180 days were $1,022 million,
representing 65 percent of total earning assets. The short-term nature of the
loan portfolio and the fact that a portion of the loan portfolio consists of
bankers' acceptances provides additional liquidity to the Company. Liquid assets
at December 31, 1998 were $353 million, 21 percent of total assets, and
consisted of cash and cash equivalents, due from banks-time and foreign treasury
bills. At December 31, 1998 the Company had been advised of $94.5 million in
available interbank funding.
TABLE SIXTEEN presents the projected maturities or interest rate adjustments of
the Company's earning assets and interest-bearing funding sources based upon the
contractual maturities or adjustment dates at December 31, 1998. The
interest-earning assets and interest-bearing liabilities of the Company and the
related interest rate sensitivity gap given in the following table may not be
reflective of positions in subsequent periods.
36
<PAGE> 38
TABLE SIXTEEN. INTEREST RATE SENSITIVITY REPORT
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------------
0 to 30 31 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Days Years Years Total
--------------------------------------------------------------------------------------
Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans $181,722 $270,944 $244,502 $120,970 $288,968 $72,424 $1,179,530
Federal funds sold 87,577 87,577
Investment securities 32,962 23,854 5,533 600 4,170 47,731 114,850
Interest earning deposits with
other banks 70,410 53,771 50,997 25,025 200,203
--------------------------------------------------------------------------------------
Total 372,671 348,569 301,032 146,595 293,138 120,155 1,582,160
--------------------------------------------------------------------------------------
Funding Sources:
Savings and transaction deposits 55,257 35,220 90,477
Certificates of deposits of $100 or more 64,830 116,053 138,528 185,366 25,596 530,373
Certificates of deposits under $100 54,459 86,325 201,762 309,986 20,111 92 672,735
Other time deposits 28,763 16,558 10,000 1,900 57,221
Funds overnight 49,350 49,350
Other Borrowing 6,116 6,116
Trust preferred securities 11,000 11,000
--------------------------------------------------------------------------------------
Total $252,659 $254,156 $356,406 $497,252 $45,707 $11,092 $1,417,272
Interest sensitivity gap $120,012 $94,413 ($55,374) ($350,657) $247,431 $109,063 $164,888
======================================================================================
Cumulative gap $120,012 $214,425 $159,051 ($191,606) $55,825 $164,888
======================================================================
Cumulative gap as a percentage
of total earning assets 7.59% 13.55% 10.05% -12.11% 3.53% 10.42%
======================================================================
</TABLE>
37
<PAGE> 39
CREDIT QUALITY REVIEW
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment of the level of
allowance adequate to provide for reasonably foreseeable losses, based upon the
following factors: (i) the economic conditions in those countries in the Region
in which the Company conducts trade finance activities; (ii) the credit
condition of its customers and correspondent banks, as well as the underlying
collateral, if any; (iii) historical experience; and (iv) the average maturity
of its loan portfolio.
In addition, although the Company's credit losses have been relatively limited
to date, management believes that the level of the Company's allowance should
reflect the potential for political and economic instability in certain
countries of the Region and the possibility that serious economic difficulties
in a country could adversely affect all of the Company's loans to borrowers in
or doing business with that country.
Determining the appropriate level of the allowance for credit losses requires
management's judgment, including application of the factors described above to
assumptions and estimates made in the context of changing political and economic
conditions in many of the countries of the Region. Accordingly, there can be no
assurance that the Company's current allowance for credit losses will prove to
be adequate in light of future events and developments. At December 31, 1998,
the allowance for credit losses was approximately $12.8 million, an increase of
24 percent from $10.3 million at December 31, 1997. This increase is largely a
function of the loan growth during the year.
38
<PAGE> 40
TABLE SEVENTEEN PROVIDES certain information with respect to the Company's
allowance for credit losses, provision for credit losses and chargeoff and
recovery activity for the periods shown.
TABLE SEVENTEEN. CREDIT LOSS EXPERIENCE
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance of allowance for credit losses at
beginning of period $ 10,317 $ 5,725 $ 4,450 $ 4,133 $ 3,270
Charge-offs:
Domestic:
Commercial (3,357) (1,693) (951) (1,097) (352)
Acceptances (100) -- -- -- --
Residential -- -- -- -- --
Installment -- (3) (8) (3) --
----------- ----------- ----------- ----------- -----------
Total domestic (3,457) (1,696) (959) (1,100) (352)
Foreign:
Government and official institutions -- -- -- -- --
Banks and other financial institutions (3,901) (896) (678) -- --
Commercial and industrial -- -- (146) (1,044)(1) (1,686)(1)
Acceptances discounted -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total foreign (3,901) (896) (824) (1,044) (1,686)
----------- ----------- ----------- ----------- -----------
Total charge-offs (7,358) (2,592) (1,783) (2,144) (2,038)
Recoveries:
Domestic:
Commercial 12 203 16 10 19
Acceptances -- -- -- -- --
Residential -- -- -- -- --
Installment -- 1 2 1 7
Foreign:
Banks and Other Financial Institutions 202 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total recoveries 214 204 18 11 26
----------- ----------- ----------- ----------- -----------
Net (charge-offs) recoveries (7,144) (2,388) (1,765) (2,133) (2,012)
Provision for credit losses 9,621 6,980 3,040 2,450 2,875
----------- ----------- ----------- ----------- -----------
Balance at end of period $ 12,794 $ 10,317 $ 5,725 $ 4,450 $ 4,133
=========== =========== =========== =========== ===========
Average loans $ 1,168,451 $ 737,921 $ 485,758 $ 370,568 $ 270,798
Total loans $ 1,179,530 $ 964,794 $ 535,559 $ 422,980 $ 315,533
Net charge-offs to average loans 0.61% 0.32% 0.36% 0.58% 0.74%
Allowance to total loans 1.08% 1.07% 1.07% 1.05% 1.31%
</TABLE>
(1) Related to extension of credit to a domestic-based business operated by a
company organized under the laws of a foreign country.
39
<PAGE> 41
TABLE EIGHTEEN SETS forth an analysis of the allocation of the allowance for
credit losses by category of loans and the allowance for credit losses allocated
to foreign loans. The allowance is established to cover potential losses
inherent in the portfolio as a whole or is available to cover potential losses
on any of the Company's loans.
TABLE EIGHTEEN. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Allocation of the allowance by category of loans:
Domestic:
Commercial $ 945 $ 1,896 $ 1,900 $ 639 $ 1,694
Acceptances 211 315 226 333 299
Residential 66 59 54 57 55
Installment 3 3 6 4 4
Overdraft 190 154 58 37 19
--------- --------- -------- -------- --------
Total domestic 1,415 2,427 2,244 1,070 2,071
Foreign:
Government and official institutions -- -- -- -- --
Banks and other financial institutions 3,033 3,854 2,112 1,900 550
Commercial and industrial 8,010 3,442 920 1,101 1,381
Acceptances discounted 336 594 449 379 131
--------- --------- -------- -------- --------
Total foreign 11,379 7,890 3,481 3,380 2,062
Total $ 12,794 $ 10,317 $ 5,725 $ 4,450 $ 4,133
========= ========= ======== ======== ========
Percent of loans in each category to total loans:
Domestic:
Commercial 23.9% 18.0% 20.1% 21.9% 20.6%
Acceptances 4.8% 4.7% 4.4% 7.8% 13.6%
Residential 0.9% 1.2% 2.0% 2.7% 3.5%
Installment 0.0% 0.0% 0.1% 0.1% 0.1%
Overdraft 0.6% 0.6% 0.4% 0.8% 0.5%
--------- --------- -------- -------- --------
Total domestic 30.2% 24.5% 27.0% 33.3% 38.3%
Foreign:
Government and official institutions 3.4% 0.1% 0.1% 0.2% 0.2%
Banks and other financial institutions 25.8% 36.5% 24.2% 32.3% 30.5%
Commercial and industrial 34.4% 33.2% 33.6% 19.3% 24.7%
Acceptances discounted 6.2% 5.7% 15.1% 14.9% 6.3%
--------- --------- -------- -------- --------
Total foreign 69.8% 75.5% 73.0% 66.7% 61.7%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ======== ======== ========
</TABLE>
40
<PAGE> 42
TABLE NINETEEN. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ALLOCATED TO FOREIGN
LOANS (In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 7,890 $ 3,481 $ 3,380 $ 2,062 $ 910
Provision for credit losses 7,188 5,305 925 2,362 2,838
Net charge-offs (3,699) (896) (824) (1,044)(1) (1,686)(1)
-------- -------- -------- -------- --------
Balance, end of period $ 11,379 $ 7,890 $ 3,481 $ 3,380 $ 2,062
======== ======== ======== ======== ========
</TABLE>
(1) Related to extensions of credit to a domestic-based business operated by a
company organized under the laws of a foreign country.
The Company usually places an asset on nonaccrual status when any payment of
principal or interest is over 90 days past due or earlier if management
determines the collection of principal or interest to be unlikely. Loans over 90
days past due may not be placed on nonaccrual if they are in the process of
collection and are either secured by property having a realizable value at least
equal to the outstanding debt and accrued interest or are fully guaranteed by a
financially responsible party whom the Company believes is willing and able to
discharge the debt, including accrued interest. In most cases, if a borrower has
more than one loan outstanding under its line with the Company and any of its
individual loans becomes over 90 days past due, the Company places all
outstanding loans to that borrower on nonaccrual status.
The Company does not have a rigid chargeoff policy but instead charges off
loans on a case-by-case basis as determined by management and approved by
the Board of Directors. In some instances, loans may remain in the
nonaccrual category for a period of time during which the borrower and the
Company negotiate restructured repayment terms.
The Company attributes its consistent basis of asset quality to the
short-term nature of its loan portfolio, the composition of its borrower
base, the importance that borrowers in the Region attach to maintaining
their continuing access to financing for foreign trade and to the Company's
loan underwriting policies.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan. Under these standards, individually identified
impaired loans are measured based on the present value of payments expected
to be received, using the historical effective loan rate as the discount
rate. Alternatively, measurement may also be based on observable market
prices or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the collateral. The
Company evaluates commercial loans individually for impairment, while groups
of smaller-balance homogeneous loans (generally residential mortgage and
installment loans) are collectively evaluated for impairment.
The following table sets forth information regarding the Company's
nonperforming loans at the dates indicated. Total nonperforming loans to
total loans remains within the historical levels. However, the nonperforming
loans to total assets ratio has improved when compared to prior year
results.
TABLE TWENTY. NONPERFORMING LOANS
(In thousands)
41
<PAGE> 43
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Domestic:
Non accrual $2,189 $3,100 $3,087 $1,345 $ 584
Past due over 90 days and accruing 69 -- -- 582 --
------ ------ ------ ------ ------
Total domestic nonperforming loans 2,258 3,100 3,087 1,927 584
Foreign:
Non accrual 6,396 2,949 1,654 2,287 1,285
Past due over 90 days and accruing 404 -- 112 301 --
------ ------ ------ ------ ------
Total foreign nonperforming loans 6,800 2,949 1,766 2,588 1,285
Total nonperforming loans (1) $9,058 $6,049 $4,853 $4,515 $1,869
====== ====== ====== ====== ======
Total nonperforming loans to total loans 0.77% 0.48% 0.91% 1.07% 0.59%
Total nonperforming assets to total assets 0.53% 0.64% 0.64% 0.73% 0.41%
</TABLE>
(1) During such periods the Company did not have any loans which were deemed to
be "troubled debt restructurings" as defined in SFAS No. 15.
At December 31, 1997, and December 31, 1998 the Company had no nonaccruing
investment securities.
For the year ended December 31, 1998 the amount of interest income that was
accrued and that would have been accrued on the loans in the previous table in
accordance with their contractual terms were approximately $7 thousand, all of
which represented interest income on domestic loans, and $615 thousand of which
$96 thousand represented interest income on domestic loans and $519 thousand
represented interest income on foreign loans, respectively.
Management does not believe that there is a material amount of loans not
included in the foregoing table where known information about possible credit
problems of the borrowers would cause management to have serious doubts as to
the ability of the borrowers to comply with the present loan repayment terms and
which may result in such loans becoming nonaccruing loans.
CAPITAL RESOURCES
Stockholders' equity at December 31, 1998 was $123.5 million compared to $98.3
million at December 31, 1997. This increase was due to $21.8 million of retained
earnings and $2.0 million of common stock issued from exercise of stock options.
During 1997 the Company paid dividends on preferred stock of $319 thousand,
which were within the amounts allowed by banking and holding Company
regulations.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. The regulations require
the Company and the Bank to meet specific capital adequacy guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital classification is also subject to qualitative
judgments by the regulators about interest rate risk, concentration of credit
risk and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital (as defined in the regulations) to total average assets (as defined)
and minimum ratios of Tier I and total capital (as defined) to risk-weighted
assets (as defined).
42
<PAGE> 44
NOTE NINE of the consolidated financial statements reports Company and Bank
capital ratios.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK MANAGEMENT
In the normal course of conducting business activities, the Company is exposed
to market risk which includes both price and liquidity risk. The Company's price
risk arises from fluctuations in interest rates, and foreign exchange rates that
may result in changes in values of financial instruments. The Company does not
have material direct market risk related to commodity and equity prices.
Liquidity risk arises from the possibility that the Company may not be able to
satisfy current and future financial commitments or that the Company may not be
able to liquidate financial instruments at market prices. Risk management
policies and procedures have been established and are utilized to manage the
Company's exposure to market risk. The strategy of the Company is to operate at
an acceptable risk environment while maximizing its earnings.
Market risk is managed by the Asset Liability Committee which formulates and
monitors the performance of the Company based on established levels of market
risk as dictated by policy. In setting the tolerance levels of market risk, the
Committee considers the impact on both earnings and capital potential changes in
the outlook in market rates, global and regional economies, liquidity, business
strategies and other factors.
The Company's asset and liability management process is utilized to manage
interest rate risk through the structuring of balance sheet and off-balance
sheet portfolios. It is the strategy of the Company to maintain as neutral an
interest rate risk position as possible. By utilizing this strategy the Company
"locks in" a spread between interest earning assets and interest-bearing
liabilities. Given the matching strategy of the Company and the fact that it
does not maintain significant medium and/or long-term exposure positions, the
Company's interest rate risk will be measured and quantified through an interest
rate sensitivity report. For any given period, the Company's pricing structure
is matched when an equal amount of assets and liabilities reprice. An excess of
assets or liabilities over these matched items results in a gap or mismatch. A
positive gap denotes asset sensitivity and normally means that an increase in
interest rates would have a positive effect on net interest income. On the other
hand a negative gap denotes liability sensitivity and normally means that a
decline in interest rates would have a positive effect in net interest income.
However, because different types of assets and liabilities with similar
maturities may reprice at different rates or may otherwise react differently to
changes in overall market rates or conditions, changes in prevailing interest
rates may not necessarily have such effects on net interest income.
TABLE SIXTEEN provides the Company's Interest Rate Sensitivity Reports as of
December 31, 1998. This table shows that interest-bearing liabilities maturing
or repricing within one year exceeded interest-earning assets by $191.6 million.
The Company monitors that the assets and liabilities are closely matched to
minimize interest rate risk. On December 31, 1998 the interest rate risk
position of the Company was not significant since the impact of a 100 basis
point rise or fall of interest rates over the next 12 months is estimated at 2
percent of net income.
Substantially all of the Company's assets and liabilities are denominated in
dollars therefore the Company has no material foreign exchange risk. In
addition, the Company has no trading account securities; therefore it is not
exposed to market risk resulting from trading activities.
NOTE FOURTEEN of the consolidated financial statements reports fair value
calculations of financial instruments. As reported in this note, the carrying
values approximate their fair values which generally minimizes the exposure to
market risk resulting from interest from interest rate fluctuations. This
minimal risk is the result of the short-term nature of the Company's interest
earning assets and the matching maturity level of the interest bearing
liabilities.
On a daily basis the Bank's Senior Vice President of Finance and the Bank's
Treasurer are responsible for measuring and managing market risk.
43
<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Hamilton Bancorp Inc.:
We have audited the accompanying consolidated statements of condition of
Hamilton Bancorp Inc. and its subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial condition of the Company at
December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
February 5, 1999
44
<PAGE> 46
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands, Except Share Information)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 24,213 $ 29,434
FEDERAL FUNDS SOLD 87,577 62,000
----------- -----------
Total cash and cash equivalents 111,790 91,434
INTEREST-EARNING DEPOSITS WITH OTHER BANKS 200,203 113,730
SECURITIES AVAILABLE FOR SALE (Amortized cost: $70,509
in 1998 and $54,725 in 1997) 69,725 54,641
SECURITIES HELD TO MATURITY 30,291
OTHER INVESTMENTS, AT COST 15,000
LOANS - NET 1,163,705 952,431
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 75,567 95,312
DUE FROM CUSTOMERS ON DEFERRED PAYMENT
LETTERS OF CREDIT 6,468 8,352
PROPERTY AND EQUIPMENT - NET 4,775 4,785
ACCRUED INTEREST RECEIVABLE 19,201 14,441
GOODWILL - NET 1,833 2,008
OTHER ASSETS 9,005 5,000
----------- -----------
TOTAL $ 1,707,563 $ 1,342,134
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 1,477,052 $ 1,135,047
OTHER BORROWINGS 6,116
TRUST PREFERRED SECURITIES 11,000
BANKERS ACCEPTANCES OUTSTANDING 75,567 95,312
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 6,468 8,352
OTHER LIABILITIES 7,814 5,096
----------- -----------
Total liabilities 1,584,017 1,243,807
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 4,13)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares authorized,
10,050,062 shares issued and outstanding at December 31, 1998 and
9,827,949 shares issued and outstanding at December 31, 1997 100 98
Capital surplus 60,117 56,266
Retained earnings 63,815 42,016
Accumulated other comprehensive loss (486) (53)
----------- -----------
Total stockholders' equity 123,546 98,327
----------- -----------
TOTAL $ 1,707,563 $ 1,342,134
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 47
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands, Except Share Information)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 106,885 $ 70,262 $ 48,090
Deposits with other banks 10,989 8,909 5,751
Investment securities 4,903 2,980 1,551
Federal funds sold 1,484 1,008 1,274
----------- ---------- ----------
Total 124,261 83,159 56,666
----------- ---------- ----------
INTEREST EXPENSE:
Deposits 69,719 43,913 29,392
Federal funds purchased, other borrowings, and trust preferred securities 561 284 24
----------- ---------- ----------
Total 70,280 44,197 29,416
----------- ---------- ----------
NET INTEREST INCOME 53,981 38,962 27,250
PROVISION FOR CREDIT LOSSES 9,621 6,980 3,040
----------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 44,360 31,982 24,210
----------- ---------- ----------
NON-INTEREST INCOME:
Trade finance fees and commissions 13,101 12,768 9,325
Syndication and structuring fees 3,352 2,535 138
Customer service fees 556 713 1,252
Net gain on sale of securities available for sale 108
Other 544 318 270
----------- ---------- ----------
Total 17,553 16,442 10,985
----------- ---------- ----------
OPERATING EXPENSES:
Employee compensation and benefits 14,527 13,162 10,935
Occupancy and equipment 4,229 3,251 2,907
Other 9,337 7,010 5,788
----------- ---------- ----------
Total 28,093 23,423 19,630
----------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 33,820 25,001 15,565
PROVISION FOR INCOME TAXES 12,021 9,098 5,855
----------- ---------- ----------
NET INCOME $ 21,799 $ 15,903 $ 9,710
=========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic $ 2.18 $ 1.81 $ 1.87
=========== ========== ==========
Diluted $ 2.12 $ 1.73 $ 1.79
=========== ========== ==========
AVERAGE SHARES OUTSTANDING:
Basic 9,983,208 8,806,379 5,205,030
=========== ========== ==========
Diluted 10,304,180 9,173,680 5,430,030
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 48
\
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET INCOME $ 21,799 $ 15,903 $ 9,710
OTHER COMPREHENSIVE INCOME, Net of tax:
Unrealized (depreciation) appreciation in securities available for
sale during year (433) 18 (4)
Less: Reclassification adjustment for gains included
in net income (69)
-------- -------- -------
Total (433) (51) (4)
-------- -------- -------
COMPREHENSIVE INCOME $ 21,366 $ 15,852 $ 9,706
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 49
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996,
1997 AND 1998
(Dollars in Thousands, Except Share Information)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMU-
LATED
OTHER TOTAL
PREFERRED STOCK COMMON STOCK COMPRE- STOCK-
--------------------- ----------------- CAPITAL RETAINED HENSIVE HOLDERS'
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS LOSS EQUITY
------ ------ ------ ------ ------- -------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 101,207 $ 1 4,731,804 $ 47 $14,410 $20,343 $ 2 $ 34,802
Net change in unrealized gain on securities
available for sale, net of taxes (4) (4)
Cash dividends on preferred stock,
net of withholding taxes (708) (708)
Stock dividend (10%) 473,226 5 2,908 (2,913)
Net income 9,710 9,710
------- --- --------- ---- ------- ------- ------ --------
BALANCE, DECEMBER 31, 1996 101,207 1 5,205,030 52 17,318 26,432 (2) 43,800
Net change in unrealized loss on securities
available for sale, net of taxes (51) (51)
Cash dividends on preferred stock,
net of withholding taxes (319) (319)
Conversion of preferred stock into
common stock with 6.5 to 1 split (101,207) (1) 466,160 5 (4)
Conversion of Bank stock and warrants
into common stock with 6.5 to 1 split 1,396,759 14 (14)
Sale of 2,760,000 shares of common
stock in public offering, net 2,760,000 27 38,966 38,993
Net income 15,903 15,903
------- --- --------- ---- ------- ------- ------ --------
BALANCE, DECEMBER 31, 1997 -- -- 9,827,949 98 56,266 42,016 (53) 98,327
Issuance of 222,113 shares of common
stock from exercise of options 222,113 2 2,048 2,050
Reduction of tax liability due to
deductibility of stock options exercised 1,803 1,803
Net change in unrealized loss on securities
available for sale, net of taxes (433) (433)
Net Income 21,799 21,799
------- --- --------- ---- ------- ------- ------ --------
BALANCE, DECEMBER 31, 1998 -- $-- 10,050,062 $100 $60,117 $63,815 $ (486) $123,546
======= === ========= ==== ======= ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 50
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 21,799 $ 15,903 $ 9,710
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,173 1,024 1,074
Provision for credit losses 9,621 6,980 3,040
Deferred tax (benefit) provision (723) (2,615) 73
Write down on security available for sale 587
Net gain on sale of securities available for sale (108)
Net loss (gain) on sale of loans and other real estate owned 220 (8)
Proceeds from the sale of bankers acceptances and loan
participations, net of loan participations purchased 84,939 80,007 102,353
Increase in accrued interest receivable and other assets (7,963) (5,248) (3,923)
Increase in other liabilities 4,554 107 794
--------- --------- ---------
Net cash provided by operating activities 114,207 96,050 113,113
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest-earning deposits with other banks (86,473) (33,253) (42,058)
Purchase of securities available for sale (230,442) (201,448) (59,431)
Purchase of securities held to maturity (31,299)
Purchase of other investments (15,000)
Proceeds from paydowns of securities held to maturity 989 20,946
Proceeds from sales and maturities of securities available for sale 214,037 176,203 38,375
Increase in loans - net (327,696) (512,139) (216,711)
Purchases of property and equipment - net (936) (2,166) (640)
Proceeds from sale of loans and other real estate owned 21,798 56
--------- --------- ---------
Net cash used in investing activities (455,022) (572,803) (259,463)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net 342,005 496,407 133,575
Proceeds from trust preferred securities offering 11,000
Proceeds from other borrowing 6,116
Net proceeds from issuance of common stock 2,050 38,993
Cash dividends on preferred stock (319) (708)
--------- --------- ---------
Net cash provided by financing activities 361,161 535,081 132,867
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,346 58,328 (13,483)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 91,434 33,106 46,589
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 111,790 $ 91,434 $ 33,106
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 68,665 $ 42,555 $ 29,551
========= ========= =========
Income taxes paid during the year $ 12,717 $ 9,077 $ 5,540
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Other real estate owned acquired through foreclosure $ 165
=========
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 51
HAMILTON BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hamilton Bancorp Inc. (the "Company") is a holding company formed in
1988 primarily to acquire ownership in Hamilton Bank, N.A. (the
"Bank"), a national Federal Reserve member bank which commenced
operations in February 1983. As of December 31, 1998, the Company owned
99.78% of the outstanding common stock of the Bank. The Bank's business
is focused primarily on foreign trade and providing innovative services
for its financial correspondents and exporting/importing firms. The
Bank offers these services through its main office and three branches
in Miami, Florida, and a branch in Tampa, Winter Haven, Sarasota, West
Palm Beach, Florida and San Juan, Puerto Rico.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practices
within the banking industry. The following summarizes the more
significant of these policies:
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company, the Bank and Hamilton
Capital Trust I (the "Trust", see Note 8). All significant intercompany
amounts have been eliminated in consolidation.
USE OF ESTIMATES - 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.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated statements
of cash flows, the Company considers cash, demand deposits with other
banks, and federal funds sold as cash and cash equivalents. Generally,
federal funds are sold for one-day periods.
The Federal Reserve requires banks to maintain certain average reserve
balances, in the form of vault cash or funds on deposit with the
Federal Reserve, based upon the total of a bank's net transaction
accounts. At December 31, 1998 and 1997, the Bank met its average
reserve requirement.
INVESTMENT SECURITIES - Investment securities are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under
SFAS No. 115, investment securities must be classified and accounted
for under the following conditions:
TRADING ACCOUNT SECURITIES - Trading account securities are held in
anticipation of short-term sales or market movements. Trading account
securities are stated at fair value. Gains or losses on the sale of
trading account securities, as well as unrealized fair value
adjustments, are included in operating income. At December 31, 1998 and
1997, the Company held no trading account securities.
50
<PAGE> 52
SECURITIES AVAILABLE FOR SALE - Securities to be held for unspecified
periods of time including securities that management intends to use as
part of its asset/liability strategy, or that may be sold in response
to changes in interest rates, changes in prepayment risk, or other
similar factors are classified as available for sale and are carried at
fair value. Unrealized gains or losses are reported as a net amount in
a separate component of stockholders' equity until realized. Gains and
losses are recognized using the specific identification method upon
realization.
SECURITIES HELD TO MATURITY - Securities that management has a positive
intent and the ability to hold to maturity are carried at cost,
adjusted for amortization of premiums and accretions of discounts over
the life of the securities using a method which approximates the
level-yield method. At December 31, 1997, the Company held no
securities classified as securities held to maturity.
OTHER INVESTMENTS - The Company's investment in investment grade
perpetual subordinated euronotes are carried at cost, as these
securities do not have a readily determinable fair value or stated
maturity date.
ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is
established through a provision for credit losses charged to expense
based on management's evaluation of the potential losses in its loan
portfolio. Such evaluation, which includes a review of all loans for
which full collectability may not be reasonably assured, considers,
among other matters, historical loss experience, net realizable value
of collateral, current economic conditions and trends, geographical
considerations, and such other factors as in management's judgment
deserve recognition. Many of these factors involve a significant degree
of estimation and are beyond management's control or are subject to
changes which may be unforeseen. Although management believes the
allowance is adequate to absorb losses on existing loans that may
become uncollectible, the ultimate losses may vary significantly from
the current estimates.
IMPAIRED LOANS - A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan
agreement. A loan is not impaired during a period of delay in payment
if the creditor expects to collect all amounts due including interest
accrued at the contractual interest rate for the period of delay.
Individually identified impaired loans are measured based on the
present value of payments expected to be received, using the historical
effective loan rate as the discount rate. Alternatively, measurement
may also be based on observable market prices, or for loans that are
solely dependent on the collateral for repayment, measurement may be
based on the fair value of the collateral. The Company evaluates
commercial loans individually for impairment, while groups of
smaller-balance homogeneous loans (generally residential mortgage and
installment loans) are collectively evaluated for impairment. The
Company has classified all non-accrual loans as impaired.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed by
the straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized by the straight-line
method over the remaining term of the applicable leases or their useful
lives, whichever is shorter. The useful lives used are as follows:
<TABLE>
<S> <C>
Building 30 years
Leasehold improvements 5 - 10 years
Furniture and equipment 5 - 7 years
Automobiles 5 years
</TABLE>
51
<PAGE> 53
GOODWILL - Goodwill of approximately $861,000 arising from the
acquisition of the Bank during 1988 and of approximately $1,980,000
arising from the Bank's branch purchase and assumption of deposits
during 1994 are being amortized on a straight-line basis over a period
of twenty and fifteen years, respectively. The Company reviews goodwill
periodically for events or changes in circumstances that may indicate
that the carrying amount is not recoverable on an undiscounted cash
flow basis.
FEDERAL FUNDS PURCHASED - Federal funds purchased generally mature
within one to four days from the transaction date. At December 31, 1998
and 1997, there were no federal funds purchased outstanding.
INCOME RECOGNITION - Interest income on loans is recognized based upon
the principal amounts outstanding. Loans over 90 days past due may not
be placed on nonaccrual if they are in the process of collection and
are either secured by property having a realizable value at least equal
to the outstanding debt and accrued interest or are fully guaranteed by
a financially responsible party whom the Bank believes is willing and
able to discharge the debt, including accrued interest. Loans are
placed on a nonaccruing status when management believes that interest
on such loans may not be collected in the normal course of business.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
Trade finance fees and commissions include fees for letters of credit
and acceptances. Nonrefundable fees on letters of credit and
acceptances are recognized at execution date.
Syndication and structuring fees are earned in connection with the
purchase, participation and placement, without recourse or future
obligation, of trade finance obligations and for arranging financing
for domestic and foreign customers. Nonrefundable fees earned for such
transactions are fully recognized in income at the time the transaction
is consummated.
INCOME TAXES - The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. The Company provides for deferred
taxes under the liability method. Under such method, deferred taxes are
adjusted for tax rate changes as they occur. Deferred income tax assets
and liabilities are computed annually for differences between the
financial statements and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
NET INCOME PER COMMON SHARE - Basic earnings per share is computed
based on the average number of common shares outstanding and diluted
earnings per share is computed based on the average number of common
and potential common shares (consisting of stock options, see Note 10)
outstanding under the treasury stock method.
STOCK SPLIT - On January 21, 1997, the Company's Board of Directors
(the "Board") approved a 6.5 for 1 common stock split (see Note 9).
Retroactive restatement has been made to all share amounts to reflect
the stock split.
STOCK - BASED COMPENSATION - SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee and non-employee members of
the Board compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation to employees and
non-employee members of the Board using the intrinsic value method as
prescribed by Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options issued to employees
and non-employee members of the Board are measured as the
52
<PAGE> 54
excess, if any, of the fair value of the Company's stock at the date of
grant over the amount an employee or non-employee member of the Board
must pay for the stock.
RECLASSIFICATIONS - Certain amounts in the 1997 and 1996 financial
statements have been reclassified for comparative purposes.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1996, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,
which is effective for transactions occurring after December 31, 1996.
SFAS No. 125 provides guidance for determining whether a transfer of a
financial asset is treated as a sale versus a financing. Additionally,
if a transfer qualifies as a financing transaction, the statement
contains provisions that may require the recognition of collateral
received or provided, in addition to the financing balance.
In December 1996, the FASB issued SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125, which
defers for one year the effective date of the collateral provisions for
all transactions and the sale provisions for repurchase agreement,
securities lending, and similar transactions. The provisions of SFAS
No. 125 deferred by SFAS No. 127 have been adopted as of January 1,
1998, and did not have a material impact on the Company's results of
operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS No.
130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements. SFAS No. 130 was adopted as of January 1,
1998.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 changes the way
public companies report information about segments of their business in
their annual financial statement and requires them to report selected
segment information in their quarterly reports issued to shareholders.
SFAS No. 131 also requires entitywide disclosures about the products
and services an entity provides, the foreign countries in which it
holds assets and reports revenues, and its major customers. SFAS No.
131 was adopted as of January 1, 1998 and did not have a material
impact on the Company's consolidated financial statement presentation.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1
provides guidance for capitalizing and expensing the costs of computer
software developed or obtained for internal use. SOP 98-1 is effective
for financial statements for fiscal years beginning after December 15,
1998. Management does not expect the adoption of SOP 98-1 to have a
significant impact on the Company's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Among other provisions, SFAS No.
133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It also requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. SFAS No. 133 is effective for financial statements for fiscal
years beginning after June 15, 1999. Management has not determined what
effects, if any, the adoption of SFAS No. 133 will have on the
Company's consolidated financial statements.
53
<PAGE> 55
2. INVESTMENT SECURITIES
A comparison of the amortized cost and fair value of investment
securities at December 31, 1998 and 1997 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998
--------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government and agency securities $46,835 $ 11 $ 2 $46,844
Foreign debt securities 20,284 15 383 19,916
Federal Reserve Bank stock 1,262 1,262
Foreign bank stocks 1,028 276 752
Other 1,100 28 177 951
------- ------- ---- -------
Total $70,509 $ 54 $838 $69,725
======= ======= ==== =======
HELD TO MATURITY:
Mortgage backed securities $17,242 $ 30 $203 $17,069
Municipal bonds 3,000 3,000
Foreign government debt securities 10,049 10,049
------- ------- ---- -------
Total $30,291 $ 30 $203 $30,118
======= ======= ==== =======
OTHER INVESTMENTS:
Perpetual Subordinated Euronotes $15,000 $15,000
======= ======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government and agency securities $29,716 $ 5 $29,711
Foreign debt securities 20,179 $ 15 - 20,194
Federal Reserve Bank stock 1,262 1,262
Foreign bank stocks 1,881 99 1,782
Mutual Funds 1,687 95 90 1,692
------- ------- ---- -------
Total $54,725 $ 110 $194 $54,641
======= ======= ==== =======
</TABLE>
There were no sales of securities available for sale during the years
ended December 31, 1998 and 1996. During the year ended December 31,
1997, gross realized gains on the sale of securities available for sale
were approximately $109,000 and gross realized losses were
approximately $1,000.
Investment securities with an amortized cost and fair value of
approximately $38,031,000 and $37,896,000, respectively, at December
31, 1998, were pledged as collateral for public deposits. In addition,
investment securities with an amortized cost and fair value of
approximately $7,920,000 and $7,889,000, respectively, at December 31,
1998, were pledged as collateral for other borrowings (see Note 7).
54
<PAGE> 56
The following table shows the amortized cost and the fair value by maturity
distribution of the securities portfolio at December 31, 1998:
<TABLE>
<CAPTION>
Available for sale Held to Maturity Other Investments
-------------------- ---------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
Within one year $62,949 $62,938
One to five years 4,170 3,822
Over five years $30,291 $30,118
------- ------- ------- -------
Total 67,119 66,760 30,291 30,118
Federal Reserve Bank stock 1,262 1,262
Foreign bank stocks 1,028 752
Perpetual subordinated
euronotes $15,000 $15,000
Other 1,100 951
------- ------- ------- ------- ------- -------
Total securities $70,509 $69,725 $30,291 $30,118 $15,000 $15,000
======= ======= ======= ======= ======= =======
</TABLE>
3. LOANS
Loans consist of the following at December 31, 1998 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commercial (primarily trade related):
Domestic $ 289,032 $179,435
Foreign 750,469 672,659
Acceptances discounted - trade related:
Domestic 56,706 45,153
Foreign 72,597 55,301
Residential mortgages 10,494 12,008
Installment 232 238
---------- --------
Total 1,179,530 964,794
Less:
Unearned income:
Acceptances discounted 2,814 1,809
Other 217 237
Allowance for credit losses 12,794 10,317
---------- --------
Loans - net $1,163,705 $952,431
========== ========
</TABLE>
The Bank's business activity is mostly with customers and correspondent banks
located in South Florida, Central America, South America, and the Caribbean. The
majority of the credits are for the finance of imports and exports and have
maturities of up to 180 days. These credits are secured either by banks,
factored receivables, cash, or the underlying goods. Management closely monitors
its credit concentrations by industry, geographic locations, and type of
collateral as well as individual customers.
55
<PAGE> 57
A summary of the activity in the allowance for credit losses for the
years ended December 31, 1998, 1997 and 1996 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at the beginning of year $ 10,317 $ 5,725 $ 4,450
Provision charged to operations 9,621 6,980 3,040
Loan charge-offs, net of recoveries (7,144) (2,388) (1,765)
-------- -------- -------
Balance at the end of year $ 12,794 $ 10,317 $ 5,725
======== ======== =======
</TABLE>
At December 31, 1998 and 1997, the recorded investment in impaired
loans was approximately $8,586,000 and $6,049,000, respectively. These
impaired loans required an allowance for credit losses of approximately
$2,786,000 and $2,294,000, respectively. The average recorded
investment in impaired loans during the years ended December 31, 1998
and 1997 was approximately $8,562,000 and $5,743,000, respectively. For
the years ended December 31, 1998 and 1997, the Bank recognized
interest income on these impaired loans prior to their classification
as impaired of approximately $412,000 and $65,000, respectively.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31,
1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land $ 811 $ 811
Building and improvements 1,530 1,448
Leasehold improvements 2,553 2,437
Furniture and equipment 5,691 5,065
Automobiles 80 80
------- ------
Total 10,665 9,841
Less accumulated depreciation and amortization 5,890 5,056
------- ------
Property and equipment - net $ 4,775 $4,785
======= ======
</TABLE>
Depreciation and amortization expense related to property and equipment
for the years ended December 31, 1998, 1997 and 1996 was approximately
$944,000, $841,000 and $899,000, respectively.
The Bank owns the land and the building for one of its Miami branches,
the Winter Haven and Sarasota branches and leases its main facilities,
five branches and certain equipment under noncancelable agreements
(accounted for as operating leases). The leases have renewal periods of
five to ten years, available to the Bank under the same terms and
conditions as the initial leases and one subject to annual rent
adjustments based upon the Consumer Price Index.
56
<PAGE> 58
The approximate future minimum payments, by year and in the aggregate,
on these leases at December 31, 1998 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
<S> <C>
1999 $ 1,967
2000 1,924
2001 1,716
2002 1,612
2003 1,559
Thereafter 4,616
-------
Total minimum lease payments $13,394
=======
</TABLE>
Rent expense was approximately $1,726,000, $1,381,000 and $1,006,000,
for the years ended December 31, 1998, 1997 and 1996, respectively.
5. DEPOSITS
Deposits consist of the following at December 31, 1998 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Noninterest-bearing $ 76,895 $ 78,508
---------- ----------
Interest-bearing:
NOW, money market and savings 90,477 69,970
Time, under $100,000 672,736 475,161
Time, $100,000 and over 530,373 348,651
International Banking Facility (IBF) deposits 106,571 162,757
---------- ----------
Total interest-bearing 1,400,157 1,056,539
---------- ----------
Total $1,477,052 $1,135,047
========== ==========
</TABLE>
Time deposits in amounts of $100,000 and over at December 31, 1998
mature as follows (dollars in thousands):
<TABLE>
<CAPTION>
Amount
<S> <C>
Three months or less $180,883
Three months to twelve months 323,894
One year to five years 25,596
--------
Total $530,373
========
</TABLE>
57
<PAGE> 59
6. INCOME TAXES
The components of the provision for income taxes are as follows for the
years ended December 31, 1998, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current income taxes:
Federal $ 11,503 $ 10,352 $4,629
State 149 481 263
Foreign 1,092 880 890
-------- -------- ------
Total current provision 12,744 11,713 5,782
Deferred income taxes:
Federal (683) (2,515) 70
State (40) (100) 3
-------- -------- ------
Total deferred (benefit) provision (723) (2,615) 73
-------- -------- ------
Provision for income taxes $ 12,021 $ 9,098 $5,855
======== ======== ======
</TABLE>
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to pretax income for the
following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Increase in taxes:
State income tax, net of federal income tax benefit 0.1 1.0 1.7
Other, net 0.4 0.4 0.9
---- ---- ----
Effective income tax rate 35.5% 36.4% 37.6%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes. The
tax effects of significant items comprising the Company's net deferred
tax asset as of December 31, 1998 and 1997 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Difference between book and tax basis
of allowance for credit losses $4,734 $3,551
Difference between book and tax basis of property 63 293
Securities available for sale 298
------ ------
Total deferred tax assets 5,095 3,844
------ ------
Deferred tax liabilities:
Other 230
Securities available for sale 3
------ ------
Total deferred tax liabilities 230 3
------ ------
Net deferred tax asset $4,865 $3,841
====== ======
</TABLE>
58
<PAGE> 60
Recognition of deferred tax assets is based on management's belief that
it is more likely than not that the tax benefit associated with certain
temporary differences and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is more
likely than not that realization will not occur. No valuation
allowances have been recorded at December 31, 1998 and 1997,
respectively.
7. OTHER BORROWINGS
Other borrowings consist of the following at December 31, 1998 (dollars
in thousands):
<TABLE>
<CAPTION>
Amount
<S> <C>
7.13% loan secured by a foreign treasury
bill, interest and principal due at
maturity (March 1999) $3,728
8.04% loan secured by a foreign corporate
security, interest and principal due at
maturity (March 1999) 2,388
------
Total $6,116
======
</TABLE>
8. TRUST PREFERRED SECURITIES
On December 28, 1998, the Company issued $11,000,000 of 9.75%
Beneficial Unsecured Securities, Series A (the "Preferred Securities")
out of a guarantor trust. The Trust holds 9.75% Junior Subordinated
Deferrable Interest Debentures, Series A (the "Subordinated
Debentures") of the Company purchased with the proceeds of the
securities issued. Interest from the Subordinated Debentures of the
Company is used to fund the preferred dividends of the Trust.
Distributions on the Preferred Securities are cumulative and are
payable quarterly. The Trust must redeem the Preferred Securities when
the Subordinated Debentures are paid at maturity on or after December
31, 2028, or upon earlier redemption. Subject to the Company having
received any required approval of regulatory agencies, the Company has
the option at any time on or after December 31, 2008 to redeem the
Subordinated Debentures, in whole or in part. Additionally, the Company
has the option at any time prior to December 31, 2008 to redeem the
Subordinated Debentures, in whole but not in part, if certain
regulatory or tax events occur or if there is a change in certain laws
that require the Trust to register under the law. The Preferred
Securities are considered to be Tier I capital for regulatory purposes.
On January 14, 1999, the Trust issued an additional $1,650,000 of
Preferred Securities upon the exercise of an over-allotment by the
underwriters.
9. STOCKHOLDERS' EQUITY
REGULATORY MATTERS - The Bank 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 Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
59
<PAGE> 61
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table 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, 1998, that the Bank meets all capital
adequacy requirements to which its is subject.
As of December 31, 1998, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The Company's consolidated and the Bank's actual capital amounts and
ratios are also presented in the table (dollars in thousands).
<TABLE>
<CAPTION>
To Be Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Company
Total Capital (to Risk Weighted Assets) $146,397 13.2% $88,822 8.0%
======== ==== ======= ===
Tier I Capital (to Risk Weighted Assets) $133,603 12.0% $44,411 4.0%
======== ==== ======= ===
Tier I Capital (to Average Assets) $133,603 8.0% $50,204 3.0%
======== ==== ======= ===
Bank
Total Capital (to Risk Weighted Assets) $134,680 12.2% $88,614 8.0% $110,768 10.0%
======== ==== ======= === ======== ====
Tier I Capital (to Risk Weighted Assets) $121,886 11.0% $44,307 4.0% $ 66,461 6.0%
======== ==== ======= === ======== ====
Tier I Capital (to Average Assets) $121,886 7.3% $66,469 4.0% $ 83,086 5.0%
======== ==== ======= === ======== ====
As of December 31, 1997:
Company
Total Capital (to Risk Weighted Assets) $106,093 13.7% $62,053 8.0%
======== ==== ======= ===
Tier I Capital (to Risk Weighted Assets) $ 96,405 12.4% $31,027 4.0%
======== ==== ======= ===
Tier I Capital (to Average Assets) $ 96,405 7.9% $36,858 3.0%
======== ==== ======= ===
Bank
Total Capital (to Risk Weighted Assets) $ 96,217 12.4% $61,917 8.0% $ 77,396 10.0%
======== ==== ======= === ======== ====
Tier I Capital (to Risk Weighted Assets) $ 86,551 11.2% $30,959 4.0% $ 46,438 6.0%
======== ==== ======= === ======== ====
Tier I Capital (to Average Assets) $ 86,551 7.1% $48,785 4.0% $ 60,982 5.0%
======== ==== ======= === ======== ====
</TABLE>
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
1998, approximately $43,797,000 of retained earnings were available for
dividend declaration without prior regulatory approval. During 1998 and
1997, approximately $2,252,000 and $1,104,000 of dividends were paid by
the Bank to the Company, respectively, which are within the amounts
allowed by regulations.
60
<PAGE> 62
The Company has recently placed and expects to continue to place more
emphasis on financing imports of goods into the United States and
thereby increase the relative size of its assets employed in the United
States as compared to its exposure in the Region (as defined in Note
15). In addition, prudent risk management, in particular with regard to
emerging market countries, calls for avoidance of high concentrations
of risk in these countries in relation to a bank's capital. Currently,
United States bank regulatory agencies consider that exposure in these
markets should be limited to levels that would not impair the safety
and soundness of a banking institution. As a consequence, the Company's
exposure in the Region was significantly reduced at December 31, 1998
and will be further reduced in 1999. While the Company is well
capitalized for the purposes of the "prompt corrective action"
provisions, to date it has not paid any dividends and does not
anticipate doing so. Nevertheless, due to economic difficulties being
experienced by various countries in the Region, the Federal Reserve has
requested that the Company not pay any dividends or incur any debt
(excluding "trust preferred securities") without the consent of the
Federal Reserve.
PUBLIC OFFERING - On March 26, 1997 the Company completed its initial
public offering issuing an aggregate of 2,760,000 shares at $15.50 per
share with net proceeds of approximately $38,994,000. In connection
with the initial public offering, the Board amended and restated the
articles of incorporation of the Company authorizing 75,000,000 shares
of common stock and 10,000,000 shares of "blank check" preferred stock.
In addition, the Board approved a 6.5 for 1 common stock split and
reorganization of the capital structure of the Company consisting of
(i) the conversion of all outstanding shares of the Company's Preferred
Shares (Series B and C) into 466,160 shares (post-stock split) of
common stock and (ii) the issuance of an aggregate of 1,396,759 shares
(post-stock split) of common stock for all outstanding warrants to
purchase shares of common stock of the Bank.
PREFERRED STOCK - During June 1994, the Company's Board amended and
restated the Company's articles of incorporation providing for the
issuance of shares of Series B and Series C ("Preferred Shares"), 14%
fixed rate, non-cumulative, non-voting, perpetual preferred stock.
The Company, on June 30, 1994, issued an aggregate of 60,207 shares of
Series B Preferred Shares at $50 per share and on December 31, 1994
issued 41,000 shares of Series C Preferred Shares at $50 per share. In
connection with the public offering and reorganization the preferred
shares were converted into 466,160 shares (post-stock split) of common
stock.
WARRANTS - In connection with the stock purchase and sale agreement
dated March 21, 1988, stock warrants were issued which granted an
option to acquire additional common shares of the Bank in an amount
equal to twenty percent of the outstanding common shares of the Bank at
the time of exercise, at $.01 per share. The option was for a period of
ten years that commenced on May 28, 1988. In connection with the public
offering and reorganization the warrants (and bank stock resulting from
exercise of warrants) were converted into 1,396,759 shares (post-stock
split) of common stock.
10. STOCK OPTION PLAN
In December 1993, the Company adopted the 1993 Stock Option Plan (the
"1993 Plan"), pursuant to which 877,500 shares of Common Stock
(post-stock split) were reserved for issuance upon exercise of options.
The 1993 Plan is designed as a means to retain and motivate key
employees and directors. The Company's Compensation Committee, or in
the absence thereof, the Board, administers and interprets the 1993
Plan and is authorized to grant options thereunder to all eligible
employees of the Company, including executive officers and directors
(whether or not they are employees) of the Company or affiliated
companies. Options granted under the 1993 Plan are on such terms and at
such prices as determined by the Compensation Committee, except that
the per share exercise price of incentive stock options cannot be less
than the fair market value of the Common Stock on the date of grant.
The 1993 Plan will terminate on December 31, 2003, unless sooner
terminated by the Company's Board.
61
<PAGE> 63
Option activity for the years ended December 31, 1998, 1997 and 1996
are presented below:
<TABLE>
<CAPTION>
NUMBER OPTION FAIR
1998 OF SHARES PRICE VALUE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance 776,875 $ 9.23 - 29.125
Granted (3) 173,388 25.00 - 25.47 $7.64 - 7.50
Exercised (222,113) 9.23
Forfeited --
Canceled (16,931) 9.23 - 29.125
-------- ---------------
Ending Balance 711,219 $ 9.23 - $29.125
======== ================
Options which became exercisable
during the year 649,500
Options exercisable at December 31, 427,387
</TABLE>
<TABLE>
<CAPTION>
NUMBER OPTION FAIR
1997 OF SHARES PRICE VALUE
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance 585,000 $ 9.23
Granted (3) 193,500 29.125 $ 6.55
Exercised -- --
Forfeited (1,625) 9.23
Canceled -- --
------- ---------------
Ending Balance 776,875 $9.23 - $29.125
======= ===============
Options which became exercisable
during the year --
Options exercisable at December 31, --
</TABLE>
<TABLE>
<CAPTION>
NUMBER OPTION FAIR
1996 OF SHARES PRICE VALUE
- --------------------------------------------------------------------------
Beginning balance -- --
<S> <C> <C> <C>
Granted (2) 585,000(1) $9.23 $1.69
Exercised -- --
Canceled -- --
------- -----
Ending Balance 585,000 $9.23
======= =====
Options which became exercisable
during the year --
Options exercisable at December 31, --
</TABLE>
- --------------
(1) - Shares reflect 6.5 to 1 stock split.
(2) - The grants vest immediately as to 50% of the grant with the remaining
50% vesting fifteen months after grant or upon the death of the option
holder if earlier.
(3) - The grants vest twelve months after the grant as to 33.3% of the
grant, 33.3% vesting eighteen months after grant and the remaining
33.4% vesting twenty-four months after grant or upon the death of the
option holder if earlier.
62
<PAGE> 64
The following table summarizes information about all stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
OPTIONS REMAINING
OUTSTANDING CONTRACTED LIFE EXERCISE PRICE
----------- --------------- --------------
<S> <C> <C>
351,500 7.8 years $ 9.230
186,331 9 years $ 29.125
173,388 10 years $25.00 - $25.47
</TABLE>
The Company applies APB No. 25 and related interpretations in
accounting for its stock options plan to employees and non-employee
members of the Board as described in Note 1. Accordingly, no
compensation expense has been recognized in the years ended December
31, 1998, 1997 and 1996, related to this plan.
For purposes of the following proforma disclosures, the fair value of
the options granted in 1998 and 1997 have been estimated on the date of
grant using the Black-Scholes options pricing model with the following
assumptions used for grants in 1998 and 1997, respectively: no dividend
yield; expected volatility of 48% and 32%; risk-free interest rate of
4.5% and 5.68% and an expected term of two years and the fair value of
the options granted in 1996 was estimated using the minimum value
method prescribed by SFAS No. 123 for nonpublic entities. Had
compensation cost been determined based on the fair value at the date
of grant consistent with requirement of SFAS 123 the Company's net
income and net income and per common share would have been reduced to
the proforma amounts indicated below (dollars in thousands, except
share information).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Net income:
As reported $21,799 $15,903 $9,710
Proforma 21,185 15,762 9,516
Net income per common share:
Basic:
As reported
2.18 1.81 1.87
Proforma
2.12 1.79 1.83
Diluted:
As reported
2.12 1.73 1.79
Proforma
2.06 1.72 1.75
</TABLE>
11. 401(K) PLAN
The Company maintains a 401(k) plan, which was initiated in 1993, for
its executive officers and other employees. Under the terms of the
401(k) plan, for each dollar contributed by an employee, the Company
intends to contribute a discretionary amount on behalf of participants
(the "Matching Contribution"). In addition, at the end of the plan
year, the Company may make an additional contribution (the "Additional
Contributions") on behalf of participants. Additional Contributions are
allocated in the same proportion that the Matching Contribution made on
the participant's behalf bears to the Matching Contribution made on
behalf of all participants during the year. The amount that the Company
contributes to the 401(k) plan has historically varied from year to
year. During the years ended December 31, 1998, 1997 and 1996, the
Company's matching and additional contributions amounted to
approximately $155,000, $128,000 and $52,000, respectively.
63
<PAGE> 65
12. RELATED PARTY TRANSACTIONS
Directors, officers and their related entities have borrower and
depositor relationships with the Bank in the ordinary course of
business. Loan balances to these individuals and their related entities
approximated $324,000 and $4,936,000 at December 31, 1998 and 1997,
respectively, and the balance of deposit accounts approximated
$1,722,000 and $2,154,000 at December 31, 1998 and 1997, respectively.
At December 31, 1998 there were approximately $100,000 of outstanding
commercial and standby letters of credit transactions with these
individuals and their related entities. There were no outstanding
commercial and standby letters of credit transactions outstanding with
these individuals at December 31, 1997.
13. OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of
its customers, including commitments to extend credit, commercial
letters of credit, shipping guarantees, standby letters of credit and
forward foreign exchange contracts. These financial instruments
involve, to varying degrees, elements of credit risk. The credit risk
associated with these financial instruments, as further discussed
herein, is not recorded in the statement of condition. The contractual
or notional amounts of such instruments reflect the extent of
involvement the Bank has in particular classes of financial
instruments. The credit risks associated with financial instruments are
generally managed in conjunction with the Bank's statements of
condition activities and are subject to normal credit policies,
financial controls, and risk limiting and monitoring procedures.
Credit losses are incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Bank's exposure to
credit loss is represented by the contractual or notional amount of the
commercial letters of credit, shipping guarantees, and standby letters
of credit. This is the maximum potential loss of principal in the event
the commitment is drawn upon and the counterparty defaults.
A summary of the Bank's contractual or notional amounts for financial
instruments with off-balance sheet risk as of December 31, 1998 and
1997 along with a further discussion of these instruments, is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
CONTRACTUAL OR
NOTIONAL AMOUNT
------------------------
1998 1997
<S> <C> <C>
Commercial letters of credit $116,078 $187,320
Standby letters of credit 12,566 10,763
Shipping guarantees (indemnity letters) 72
Commitments to purchase foreign currency
2,850 7,712
Commitments to sell foreign currency
4,303 7,488
Commitments to extend credit 47,636 47,433
</TABLE>
A commercial letter of credit is an instrument containing the
commitment of the Bank stating that the Bank will honor drawings under
and in full compliance with the terms of the letter of credit. The
letters of credit are usually drawn on the presentation of certain
required documents, such as commercial invoice and bills of lading.
Essentially, letters of credit facilitate the purchase of merchandise
by the Bank's customers by substituting the credit standing of the Bank
for that of the Bank's customer. Commercial letter of credit contracts
are generally for a short commitment period.
64
<PAGE> 66
Standby letters of credit are commitments issued to guarantee the
performance of a customer to a third party. The Bank issues standby
letters of credit to ensure contract performance or assure payment by
its customers. The guarantees extend for periods up to 12 months. The
risk involved in issuing standby letters of credit is the same as the
credit risk involved in extending loan facilities to customers and they
are subject to the same credit approvals and monitoring procedures. The
Bank holds certificates of deposit and guarantees from other banks as
collateral supporting those commitments for which collateral is deemed
necessary. The extent of collateral held for standby letters of credit
commitments at December 31, 1998 varies from zero percent to 100
percent.
Shipping guarantees (also known as indemnity letters) are letters of
guarantee issued by the Bank on behalf of its customer in favor of
shipping agents. Normally, such facility is extended in instances where
goods purchased under letters of credit have arrived at the port of
destination and the shipping documents necessary for the release of the
goods have not been received by the Bank. The purpose of the shipping
guarantee is to indemnify the transportation company for any loss that
might arise from the release of goods to the Bank's customer in the
absence of the shipping documents.
The Bank enters into forward foreign exchange contracts with its
customers for the delayed exchange of foreign currency for U.S. dollars
on behalf of such customers. These contracts provide a vehicle for the
Bank's customers to hedge their future obligations in foreign currency.
Upon entering such contracts with its customers, the Bank meets these
foreign currency commitments by entering into equivalent contracts with
other banks to purchase or sell equal amounts of the foreign currency
to be delivered or received. Risks arise from the possible inability of
the Bank's counterparties to meet the terms of their contracts and from
movements in foreign currency exchange rates. However, the full
notional amount of the contract is not at risk, as the Bank has the
ability to settle these contracts in the foreign exchange market.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do 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.
On January 31, 1998, Development Specialists, Inc., the Liquidating
Trustee of the Model Imperial Liquidating Trust established under the
Plan of Reorganization in the Model Imperial, Inc. Chapter 11
Bankruptcy proceeding, filed an action against the Bank in the United
States Bankruptcy Court for the Southern District of Florida objecting
to the Bank's proof of claim in the Chapter 11 proceeding and
affirmatively seeking damages against the Bank in excess of $34 million
for alleged involvement with former officers and directors of Model
Imperial, Inc. in a scheme to defraud Model Imperial, Inc. and its bank
lenders. The action is one of several similar actions filed by the
Trustee against other defendants that were involved with Model Imperial
seeking the same damages as in the action against the Bank. The Bank
believes the claims are without merit either as a matter of law or fact
and intends to vigorously defend the action.
From time to time the Bank is engaged in additional litigation
incidental to its operations.
While any litigation contains an element of uncertainty, the Bank,
after considering the advice of legal counsel, believes the outcome of
all aforementioned litigation will not have a material adverse effect
on the Bank's financial position, results of operations or liquidity.
65
<PAGE> 67
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, Disclosures About Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use
of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since December 31, 1998 and, therefore, current estimates of fair value
may differ significantly from the amounts presented herein (dollars in
thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 111,790 $ 111,790 $ 91,434 $ 91,434
Interest-earning deposits
with other banks 200,203 200,203 113,730 113,730
Securities available for sale 69,725 69,725 54,641 54,641
Securities held to maturity 30,291 30,118
Other investments 15,000 15,000
Loans, net 1,163,705 1,160,775 952,431 951,624
Liabilities:
Demand deposits 167,372 148,478 148,478 148,478
Time deposits 1,309,680 1,314,000 986,569 986,445
Other borrowings 6,116 6,116
Trust preferred securities 11,000 11,000
Contingent assets and liabilities:
Bankers acceptances 75,567 567 95,312 477
Deferred payment letters of credit 6,468 29 8,352 30
Off-balance sheet instruments -
unrealized gains (losses):
Commitments to extend credit 90 210
Commercial letters of credit 273 251
Standby letters of credit 188 108
Indemnity letters of credit 1
Commitments to purchase foreign currency (8) 147
Commitments to sell foreign currency 29 137
</TABLE>
CASH AND CASH EQUIVALENTS - The carrying amount of cash on hand, demand
deposits with other banks, and federal funds sold is a reasonable
estimate of fair value.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS - The fair value of time
deposits with other banks (several of which are foreign) is estimated
using the rates currently offered for deposits of similar remaining
maturities and taking into account the creditworthiness of the other
bank.
66
<PAGE> 68
SECURITIES AVAILABLE FOR SALE, SECURITIES HELD TO MATURITY AND TRUST
PREFERRED SECURITIES - The fair values are based on quoted market
prices or dealer quotes. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities.
LOANS - The interest rates for commercial loans and acceptances
discounted are based on the prime lending rate. The Bank updates these
interest rates on a monthly basis. Thus, the carrying amount of
commercial loans and acceptances discounted is a reasonable estimate of
fair value. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
DEMAND DEPOSITS AND TIME DEPOSITS - The fair value of demand deposits,
savings accounts, and certain money market deposits is the amount
payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
OTHER INVESTMENTS AND OTHER BORROWINGS - The carrying amount of other
investments and other borrowings is a reasonable estimate of fair
value.
CONTINGENT ASSETS AND LIABILITIES - The fair values of these assets and
corresponding liabilities 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.
OFF-BALANCE SHEET INSTRUMENTS - The fair value of commitments is
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. For fixed-rate
loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for
similar agreements, or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the
reporting date. The fair values of commitments to purchase and sell
foreign currency are based on quoted market prices or dealer quotes.
15. FOREIGN ACTIVITIES
The Company's foreign activities primarily consist of providing global
trade finance, with particular emphasis on trade finance, with and
between South America, Central America, the Caribbean (the "Region")
and the United States or otherwise involving the Region. The Company
considers assets and revenues as associated with foreign activities on
the basis of the country of domicile of the customer. The nature of the
Company's operations make it difficult to determine precisely foreign
activities profitability since it involves the use of certain
judgmental allocations. Rates used to determine charges or credits for
funds used or generated by foreign activities are based on actual costs
during the period for selected interest-bearing sources of funds. Other
operating income and expenses are determined based upon internal
allocations appropriate to the individual activities. A summary of
67
<PAGE> 69
the Company's domestic and foreign activities as of and for the years
ended December 31, 1998, 1997 and 1996 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
INCOME BEFORE
OPERATING PROVISION FOR NET TOTAL
INCOME INCOME TAXES INCOME ASSETS
<S> <C> <C> <C> <C>
1998
Domestic $ 16,708 $ 8,789 $ 6,897 $ 610,834
Foreign 54,826 25,031 14,902 1,096,729
---------- ---------- ---------- ----------
Total $ 71,534 $ 33,820 $ 21,799 $1,707,563
========== ========== ========== ==========
1997
Domestic $ 12,635 $ 5,548 $ 3,529 $ 426,130
Foreign 42,769 19,453 12,374 916,004
---------- ---------- ---------- ----------
Total $ 55,404 $ 25,001 $ 15,903 $1,342,134
========== ========== ========== ==========
1996
Domestic $ 13,639 $ 5,809 $ 3,623 $ 279,283
Foreign 24,596 9,756 6,087 476,287
---------- ---------- ---------- ----------
Total $ 38,235 $ 15,565 $ 9,710 $ 755,570
========== ========== ========== ==========
</TABLE>
16. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Hamilton Bancorp Inc. (Parent
Company only) is as follows (dollars in thousands):
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Demand deposit with the Bank $ 190 $ 8,195
Securities available for sale 9,763 1,447
Goodwill, net 404 447
Other assets 960 301
Investment in subsidiaries 93,543 73,187
Investment in the Bank's preferred stock 30,050 14,750
Total $134,910 $ 98,327
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debentures held by the Trust $ 11,340
Other liabilities 24
Stockholders' equity 123,546 $ 98,327
-------- --------
Total $134,910 $ 98,327
======== ========
</TABLE>
68
<PAGE> 70
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
STATEMENTS OF INCOME 1998 1997 1997
<S> <C> <C> <C>
Interest income $ 530 $ 339 $ 8
Dividends from Bank and other income 2,258 1,105 712
-------- -------- --------
Total income 2,788 1,444 720
Interest expense 12
Operating expenses 1,539 294 43
-------- -------- --------
Total expenses 1,551 294 43
-------- -------- --------
Income before equity in undistributed income of subsidiary 1,237 1,150 677
Equity in undistributed income of subsidiaries 20,391 14,787 9,033
-------- -------- --------
Income before income tax (benefit) provision 21,628 15,937 9,710
Income tax (benefit) provision (171) 34
-------- -------- --------
Net income $ 21,799 $ 15,903 $ 9,710
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
STATEMENTS OF CASH FLOWS 1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 21,799 $ 15,903 $ 9,710
Adjustments to reconcile net income to
net cash provided by operations:
Equity in undistributed income of subsidiary (20,391) (14,787) (9,033)
Write down on security available for sale 587
Amortization of goodwill 43 43 43
Other (1,198) (269)
--------- --------- ---------
Net cash provided by operating activities 3,236 890 720
--------- --------- ---------
Cash flows from investing activities:
Purchase of securities available for sale (140,163) (96,504) (249)
Proceeds from maturities of securities available for sale 131,172 95,216
Payment for investment in Bank's common stock (20,237)
Payment for investment in the Bank's preferred stock (15,300) (10,000)
Payment for investment in the Trust's common stock (340)
--------- --------- ---------
Net cash used in investing activities (24,631) (31,525) (249)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,050 38,994
Proceeds from issuance of trust preferred securities 11,340
Cash dividends on preferred stock (319) (708)
--------- --------- ---------
Net cash provided by (used in) financing activities 13,390 38,675 (708)
--------- --------- ---------
Net (decrease) increase in cash (8,005) 8,040 (237)
Cash at beginning of year 8,195 155 392
--------- --------- ---------
Cash at end of year $ 190 $ 8,195 $ 155
========= ========= =========
</TABLE>
* * * * *
69
<PAGE> 71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to information under the captions "Information as to
Directors and Executive Officers" and "Meetings of the Board of Directors and
Committees" in the Registrant's definitive proxy statement relating to its 1999
Annual Meeting of Stockholders, which will be filed with the Commission within
120 days after the close of the Registrant's fiscal year ended December 31,
1998, all of which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the information set forth in the Registrant's
definitive proxy statement relating to its 1999 Annual Meeting of Stockholders
under the caption "Executive Compensation" and continuing through the caption
"Certain Transactions with Management" (excluding the information set forth
under the caption "Compensation Committee Report") which will be filed with the
Commission within 120 days after the close of the Registrant's fiscal year ended
December 31, 1998, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the information set forth under the caption
"Ownership of Equity Securities" in the Registrant's definitive proxy statement
relating to its 1999 Annual Meeting of Stockholders, which will be filed with
the Commission within 120 days after the close of the Registrant's fiscal year
ended December 31, 1998, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information set forth under the caption
"Certain Transactions with Management" in the Registrant's definitive proxy
statement relating to its 1999 Annual Meeting of Stockholders, which will be
filed with the Commission within 120 days after the close of the Registrant's
fiscal year ended December 31, 1998, which information is incorporated herein by
reference.
70
<PAGE> 72
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. The following financial statements and financial
statement schedules are contained herein or are incorporated herein by
reference:
<TABLE>
<CAPTION>
Page in
Form 10-K
<S> <C>
Independent Auditors' Report 44
Consolidated Statements of Condition as of December 31, 1998
and 1997 45
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 46
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1998, 1997 and 1996 47
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996 48
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 49
Notes to Consolidated Financial Statements 50
All Schedules are omitted because they are either not required or the
information is otherwise included in the consolidated financial
statements or notes thereto.
</TABLE>
2. Exhibits. The following exhibits are contained herein or are
incorporated herein by reference:
DESCRIPTION OF EXHIBIT
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, Registration No. 333-20435)
3.2 Amended and Restated Bylaws of the Company (incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form S-1,
Registration No. 333-20435)
71
<PAGE> 73
4.1 Form of Common Stock certificate (incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-1, Registration
No. 333-20435)
4.2 Certificate of Trust for Hamilton Capital Trust I (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement,
Registration No. 333-68453)
4.3 Declaration of Trust for Hamilton Capital Trust I (incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement,
Registration No. 333-68453)
4.4 Form of Amended and Restated Declaration of Trust (incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement,
Registration No. 333-68453)
4.5 Form of Series A Subordinated Debenture (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement, Registration No.
333-68453)
4.6 Form of Series A Capital Security (incorporated by reference to Exhibit
4.5 to the Company's Registration Statement, Registration No.
333-68453)
4.7 Form of Indenture (incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement, Registration No. 333-68453)
10.1 Company's 1993 Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-20435)
10.2 Lease Agreement, dated December 20, 1997, by and between Hamilton Bank,
N.A. and System Realty Twelve, Inc. regarding the Company's corporate
headquarters (incorporated by reference to Exhibit 10.2 of the
Company's Registration Statement on Form S-1, Registration No.
333-20435)
21.1 Subsidiaries of the Company*
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed during the fourth quarter of
1998.
* To be filed by amendment
72
<PAGE> 74
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, this 30th day of
March, 1999.
HAMILTON BANCORP INC.
/s/ Eduardo A. Masferrer
------------------------------------
Eduardo A. Masferrer, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on March 30, 1999 on
behalf of the Registrant and in the capacities indicated.
/s/ Eduardo A. Masferrer /s/ Maura A. Acosta
------------------------- ------------------------------------------
Eduardo A. Masferrer Maura A. Acosta
Director Director
/s/ William Alexander /s/ William Bickford
------------------------- ------------------------------------------
William Alexander William Bickford
Director Director
/s/ Thomas F. Gaffney /s/ Virgilio E. Sosa, Jr.
------------------------- ------------------------------------------
Thomas F. Gaffney Virgilio E. Sosa, Jr.
Director Director
/s/ Ronald A. Lacayo /s/ John M. R. Jacobs
------------------------- ------------------------------------------
Ronald A. Lacayo John M. R. Jacobs, Senior Vice President
Director Finance and Treasurer (principal financial
officer and principal accounting officer)
73
<PAGE> 75
INSERT FOR EXHIBIT INDEX TO HAMILTON BANCORP 10-K
4.2 Certificate of Trust for Hamilton Capital Trust I (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement,
Registration No. 333-68453)
4.3 Declaration of Trust for Hamilton Capital Trust I (incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement,
Registration No. 333-68453)
4.4 Form of Amended and Restated Declaration of Trust (incorporated by
reference to Exhibit 4.3 to the Company's Registration Statement,
Registration No. 333-68453)
4.5 Form of Series A Subordinated Debenture (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement, Registration No.
333-68453)
4.6 Form of Series A Capital Security (incorporated by reference to Exhibit
4.5 to the Company's Registration Statement, Registration No.
333-68453)
4.7 Form of Indenture (incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement, Registration No. 333-68453)
27.1 Financial Data Schedule (for SEC use only)
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by the reference in Registration Statement No.
333-34725 of Hamilton Bancorp Inc. on Form S-8 of our report dated February 5,
1999, appearing in this Annual Report on Form 10-K of Hamilton Bancorp Inc. for
the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Miami, Florida
March 30, 1999
74
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 24,213
<INT-BEARING-DEPOSITS> 200,203
<FED-FUNDS-SOLD> 87,577
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,725
<INVESTMENTS-CARRYING> 30,291
<INVESTMENTS-MARKET> 30,118
<LOANS> 1,163,705
<ALLOWANCE> 12,794
<TOTAL-ASSETS> 1,707,563
<DEPOSITS> 1,477,052
<SHORT-TERM> 6,116
<LIABILITIES-OTHER> 7,814
<LONG-TERM> 11,000
0
0
<COMMON> 100
<OTHER-SE> 123,446
<TOTAL-LIABILITIES-AND-EQUITY> 1,707,563
<INTEREST-LOAN> 106,885
<INTEREST-INVEST> 4,903
<INTEREST-OTHER> 12,473
<INTEREST-TOTAL> 124,261
<INTEREST-DEPOSIT> 69,719
<INTEREST-EXPENSE> 70,280
<INTEREST-INCOME-NET> 53,981
<LOAN-LOSSES> 9,621
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 28,093
<INCOME-PRETAX> 33,820
<INCOME-PRE-EXTRAORDINARY> 33,820
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,799
<EPS-PRIMARY> 2.18
<EPS-DILUTED> 2.12
<YIELD-ACTUAL> 3.89
<LOANS-NON> 8,585
<LOANS-PAST> 473
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 10,317
<CHARGE-OFFS> 7,358
<RECOVERIES> 214
<ALLOWANCE-CLOSE> 12,794
<ALLOWANCE-DOMESTIC> 1,415
<ALLOWANCE-FOREIGN> 11,379
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
