<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to_______________
Commission file number: 0-20960
HAMILTON BANCORP INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
FLORIDA 65-0149935
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
3750 N.W. 87TH AVENUE, MIAMI, FLORIDA 33178
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (305) 717-5500
---------------------------------------------------------------------
Indicate by check 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 [ ].
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
<PAGE> 2
ITEM 1
PART I. FINANCIAL INFORMATION
HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
<TABLE>
<CAPTION>
June December 31,
----------- -----------
1999 1998
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 20,200 $ 24,213
FEDERAL FUNDS SOLD 81,538 87,577
----------- -----------
Total cash and cash equivalents 101,738 111,790
INTEREST EARNING DEPOSITS WITH OTHER BANKS 173,602 200,203
SECURITIES AVAILABLE FOR SALE 58,323 69,725
SECURITIES HELD TO MATURITY 39,173 30,292
OTHER INVESTMENT, AT COST 15,000 15,000
LOANS-NET 1,143,563 1,163,705
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 34,004 75,567
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 4,684 6,468
PROPERTY AND EQUIPMENT-NET 4,877 4,775
ACCRUED INTEREST RECEIVABLE 15,443 19,201
GOODWILL-NET 1,746 1,833
OTHER ASSETS 14,918 9,004
----------- -----------
TOTAL $ 1,607,071 $ 1,707,563
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 1,412,988 $ 1,477,052
TRUST PREFERRED SECURITIES 12,650 11,000
OTHER BORROWINGS -- 6,116
BANKERS ACCEPTANCES OUTSTANDING 34,004 75,567
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 4,684 6,468
OTHER LIABILITIES 6,165 7,814
----------- -----------
Total liabilities 1,470,491 1,584,017
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares authorized, 10,070,313 shares
issued and outstanding at June 30, 1999 and 10,050,062 shares issued
and outstanding at December 31, 1998 101 100
Capital surplus 60,422 60,117
Retained earnings 76,316 63,815
Accumulated other comprehensive loss (259) (486)
----------- -----------
Total stockholders' equity 136,580 123,546
----------- -----------
TOTAL $ 1,607,071 $ 1,707,563
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE> 3
HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 25,606 $ 26,406 $ 51,136 $ 49,813
Deposits with other banks 3,754 2,260 6,995 4,538
Investment securities 1,744 1,120 4,499 2,130
Federal funds sold 383 280 849 532
----------- ----------- ----------- -----------
Total 31,487 30,066 63,479 57,013
INTEREST EXPENSE:
Deposits 16,846 16,842 35,014 31,579
Trust preferred securities 313 -- 615 --
Federal funds purchased and other borrowing 39 157 144 283
----------- ----------- ----------- -----------
Total 17,198 16,999 35,773 31,862
----------- ----------- ----------- -----------
NET INTEREST INCOME 14,289 13,067 27,706 25,151
PROVISION FOR CREDIT LOSSES 1,746 1,766 2,646 4,081
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES 12,543 11,301 25,060 21,070
----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Trade finance fees and commissions 3,442 3,228 6,432 6,623
Structuring and syndication fees 1,220 454 1,797 743
Customer service fees 142 166 325 311
Gain on sale of assets 27 -- 214 --
Other 270 114 621 250
----------- ----------- ----------- -----------
Total 5,101 3,962 9,389 7,927
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Employee compensation and benefits 3,167 3,053 6,511 6,048
Occupancy and equipment 1,037 1,066 1,997 2,136
Other 3,257 2,317 6,122 4,188
----------- ----------- ----------- -----------
Total 7,461 6,436 14,630 12,372
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 10,183 8,827 19,819 16,625
PROVISION FOR INCOME TAXES 3,750 3,273 7,318 6,166
----------- ----------- ----------- -----------
NET INCOME $ 6,433 $ 5,554 $ 12,501 $ 10,459
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ 0.64 $ 0.56 $ 1.24 $ 1.05
=========== =========== =========== ===========
DILUTED $ 0.63 $ 0.54 $ 1.22 $ 1.02
=========== =========== =========== ===========
AVERAGE SHARES OUTSTANDING:
BASIC 10,065,908 9,988,481 10,061,037 9,917,070
=========== =========== =========== ===========
DILUTED 10,274,527 10,326,021 10,276,353 10,279,270
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
-------- ------- -------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET INCOME $ 6,433 $ 5,554 $ 12,501 $10,459
OTHER COMPREHENSIVE INCOME, Net of tax:
Unrealized appreciation (depreciation) in securities
available for sale during period 70 54 414 (90)
Less: Reclassification adjustment for write off of a
foreign bank stock 0 0 (187) 0
-------- ------- -------- -------
Total 70 54 227 (90)
-------- ------- -------- -------
COMPREHENSIVE INCOME $ 6,503 $ 5,608 $ 12,728 $10,369
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 5
HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
---------------------- Capital Retained Comprehensive Stockholders'
Shares Amount Surplus Earnings Loss Equity
---------- ------ ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 (audited) 10,050,062 $100 $60,117 $63,815 $(486) $123,546
Issuance of 20,251 shares of common
stock from exercise of options 20,251 1 187 188
Reduction of tax liability due to
deductibility of stock options excercised 118 118
Net change in unrealized loss on
securities available for sale, net of taxes 227 227
Net income for the six months ended
June 30, 1999 12,501 12,501
---------- ---- ------- ------- ----- --------
Balance as of June 30, 1999
(Unaudited) 10,070,313 $101 $60,422 $76,316 $(259) $136,580
========== ==== ======= ======= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For Six Months Ended June
--------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,501 $ 10,459
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 665 567
Provision for credit losses 2,646 4,081
Deferred tax provision (benefit) 59 (831)
Write off of available for sale security 187 0
Gain on sale of loans (188) 0
Net (gain) loss on sale of other real estate owned (26) 34
Proceeds from the sale of bankers acceptances and
loan participations, net of loan participations purchased 77 60,749
Increase in accrued interest receivable and other assets (2,304) (7,557)
(Decrease) increase in other liabilities (1,550) 914
--------- ---------
Net cash provided by operating activities 12,067 68,416
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest-earning deposits with other banks 26,601 (8,358)
Purchase of securities available for sale (401,679) (127,516)
Purchase of securities held to maturity (10,760) (13,084)
Proceeds from sales and maturities of securities available for sale 413,172 127,218
Proceeds from paydowns of securities held to maturity 1,864 0
Proceeds from sale of loans 11,148 0
Decrease (increase) in loans-net 6,420 (287,564)
Purchases of property and equipment-net (581) (712)
Proceeds from sale of other real estate owned 38 122
--------- ---------
Net cash provided by (used in) investing activities 46,223 (309,894)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (64,064) 211,521
Proceeds from trust preferred securities offering 1,650 0
Payment of other borrowing (6,116) 6,116
Net proceeds from exercise of common stock options 188 1,854
--------- ---------
Net cash (used in) provided by financing activities (68,342) 219,491
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,052) (21,987)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 111,790 91,434
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 101,738 $ 69,447
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the period $ 37,002 $ 29,670
========= =========
Income taxes paid during the period $ 7,569 $ 7,027
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
HAMILTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
NOTE 1: BASIS OF PRESENTATION
The consolidated statements of condition for Hamilton Bancorp Inc. and
Subsidiary (the "Company") as of June 30, 1999 and December 31, 1998, the
related consolidated statements of income, comprehensive income, stockholders'
equity and of cash flows for the six months ended June 30, 1999 and 1998
included in the Form 10-Q have been prepared by the Company in conformity with
the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore,
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The statements
are unaudited except for the consolidated statement of condition as of December
31, 1998.
The accounting policies followed for interim financial reporting are consistent
with the accounting policies set forth in Note 1 to the consolidated financial
statements appearing in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 as filed with the Securities and Exchange Commission.
NOTE 2: NET INCOME PER COMMON SHARE
Basic earnings per share is computed by dividing the Company's net income by the
weighted average number of shares outstanding during the period.
Diluted earnings per share is computed by dividing the Company's net income by
the weighted average number of shares outstanding and the dilutive impact of
potential common stock, primarily stock options. The dilutive impact of common
stock is determined by applying the treasury stock method.
NOTE 3: SALE OF LOANS
During the six months ended June 30, 1999, the Company sold $8.1 million of its
residential mortgage loan portfolio realizing a gain of $106 thousand. This sale
was the result of a status change during 1998 in the Bank's designation to a
wholesale bank for purposes of the Community Reinvestment Act. This designation
is due largely to the Company's focus on trade finance. In addition, the Company
sold a $3.0 million foreign loan realizing a gain of $82 thousand.
NOTE 4: 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. 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.
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.
6
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Hamilton Bancorp Inc. ("Bancorp") is a bank holding company which conducts
operations principally through its 99.8 percent subsidiary, Hamilton Bank, N.A.
(the "Bank" and, collectively with Bancorp, the "Company"). The Bank is a
national bank which specializes in financing trade flows between domestic and
international companies on a global basis, with particular emphasis on trade
with and between South America, Central America, the Caribbean (collectively,
the "Region") and the United States. The Bank has a network of eight
FDIC-insured branches with seven Florida locations in Miami, Sarasota, Tampa,
West Palm Beach and Winter Haven, and a branch in San Juan, Puerto Rico. On
March 8, 1999, the Company received regulatory approval for the opening of an
additional branch in Weston, Florida. This branch opened on July 6, 1999.
FINANCIAL CONDITION - JUNE 30, 1999 VS. DECEMBER 31, 1998.
Total consolidated assets decreased $100.5 million, or 5.9 percent, during the
first six months of 1999, which included a decrease of $55.3 million in interest
earning assets and $45.2 million in non-interest earning assets. As a
consequence, total deposits decreased $64.1 million. The decrease in
consolidated assets reflects decreases of $20.1 million in loans-net, $26.6
million in interest-earning deposits with other banks and $6.0 million in
federal funds sold. During the quarter, the Company began to adjust its asset
composition to take advantage of a greater flow of goods into the U. S. market,
due to its high consumer demand and vibrant economic environment. As a
consequence, the Company's exposure in the Region was significantly reduced
relative to the U. S.
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 totaled $101.7 million at June
30, 1999 compared to $111.8 million at December 31, 1998.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND INVESTMENT SECURITIES
Interest-earning deposits with other banks decreased to $173.6 million at June
30, 1999 from $200.2 million at December 31, 1998. These deposits are placed
with correspondent banks in the Region, generally on a short term basis (less
than 365 days), to increase yields and enhance relationships with the
correspondent banks. The level of such deposits has diminished as the exposure
in the Region has decreased during the six months ended June 30, 1999. The
short-term nature of these deposits allows the Company the flexibility to later
redeploy assets into a higher yielding domestic loan component.
Investment securities decreased to $112.5 million at June 30, 1999 from $115.0
million at December 31, 1998. The decrease has been primarily in foreign
securities that matured and were partially replaced with U.S. government agency
securities. The government agency securities are short term in nature and allow
the Company the flexibility of liquidity and the ability to convert these assets
into higher yielding loans as these become accessible.
7
<PAGE> 9
LOANS
The Company's gross loan portfolio decreased by $21.2 million, or 1.8 percent,
during the first six months of 1999 in relation to the year ended December 31,
1998. Commercial-domestic loans increased by $60.5 million and domestic
acceptances discounted increased by $15.1 million, a combined increase of 21.1
percent. This was offset by decreases in loans to banks and other financial
institutions - foreign of $39.7 million and commercial foreign loans of $21.5
million. Details on the loans by type are shown in the table below. At June 30,
1999 approximately 36.6 percent of the Company's portfolio consisted of loans to
domestic borrowers and 63.4 percent of the Company's portfolio consisted of
loans to foreign borrowers. The Company's loan portfolio is relatively
short-term, as approximately 52.2 and 65.1 percent of loans at June 30, 1999
were short-term loans with average maturities of less than 180 and less than 365
days, respectively. See "Interest Rate Sensitivity Report".
The following table sets forth the loans by type in the Company's loan portfolio
at the dates indicated.
LOANS BY TYPE
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Domestic:
Commercial (1) $ 349,519 $ 289,032
Acceptances discounted 71,783 56,706
Residential mortgages 2,148 10,494
Installment 205 232
---------- ----------
Subtotal Domestic 423,655 356,464
---------- ----------
Foreign:
Banks and other financial institutions 264,337 304,011
Commercial and industrial (1) 384,765 405,819
Acceptances discounted 34,400 72,597
Government and official institutions 51,203 40,639
---------- ----------
Subtotal Foreign 734,705 823,066
---------- ----------
Total Loans $1,158,360 $1,179,530
========== ==========
</TABLE>
(1) Includes pre-export financing, warehouse receipts and refinancing of letter
of credits.
8
<PAGE> 10
The following tables reflect largely both the Company's diversification in
financing trade flows between the United States and the Region in terms of loans
by country and cross-border outstandings by country. The aggregate amount of the
Company's crossborder outstandings by primary credit risk include 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 June 30, 1999 approximately 28.9 percent in principal amount of the Company's
loans were outstanding to borrowers in four countries other than the United
States: Panama (10.0 percent), Brazil (9.1 percent), Guatemala (5.0 percent) and
Ecuador (4.8 percent).
LOANS BY COUNTRY
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------- ---------------------------
Percent of Percent of
Country Amount Total Loans Amount Total Loans
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
United States $ 423,655 36.6% $ 356,464 30.2%
Argentina 31,546 2.7% 38,171 3.2%
Bolivia 15,856 1.4% 20,816 1.8%
Brazil 105,396 9.1% 60,685 5.1%
British West Indies (1) 17,994 1.6% -- --
Colombia 36,277 3.1% 43,793 3.7%
Dominican Republic (1) -- -- 29,563 2.5%
Ecuador 55,057 4.8% 46,917 4.0%
El Salvador 31,275 2.7% 37,196 3.2%
Guatemala 58,445 5.0% 119,227 10.1%
Honduras 44,302 3.8% 59,564 5.0%
Jamaica 38,411 3.3% 29,066 2.5%
Mexico 23,000 2.0% 25,250 2.1%
Panama 115,989 10.0% 119,615 10.1%
Peru 49,469 4.3% 49,382 4.2%
Suriname 16,931 1.5% 21,868 1.9%
Venezuela 20,395 1.8% 19,756 1.7%
Other (2) 74,362 6.4% 102,197 8.7%
---------- ----- ---------- -----
Total $1,158,360 100.0% $1,179,530 100.0%
========== ===== ========== =====
</TABLE>
(1) These countries had loans in periods presented which did not exceed 1
percent of total assets.
(2) Other consists of loans to borrowers in countries in which loans did not
exceed 1 percent of total assets.
9
<PAGE> 11
At June 30, 1999 approximately 32.2 percent in cross-border outstandings were
outstanding to borrowers in five countries other than the United States: Brazil
(11.0 percent), Panama (8.6 percent), Ecuador (4.5 percent), Guatemala (4.1
percent), and Argentina (4.0 percent).
TOTAL CROSS-BORDER OUTSTANDINGS BY COUNTRY
(Dollars in millions)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------- -----------------------
% of Total % of Total
Amount Assets Amount Assets
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Argentina $ 64 4.0% $ 59 3.5%
Bahamas (1) 30 1.9% -- --
Bolivia 20 1.2% 26 1.5%
Brazil 177 11.0% 100 5.9%
B.W. Indies 36 2.2% 36 2.1%
Colombia 49 3.0% 54 3.2%
Costa Rica 13 0.8% 16 0.9%
Dominican Republic 20 1.2% 48 2.8%
Ecuador 72 4.5% 100 5.9%
El Salvador 48 3.0% 52 3.1%
Guatemala 66 4.1% 131 7.7%
Honduras 60 3.7% 69 4.1%
Jamaica 42 2.6% 40 2.4%
Mexico 23 1.4% 25 1.5%
Nicaragua (1) -- -- 15 0.9%
Panama 138 8.6% 119 7.0%
Peru 62 3.9% 56 3.3%
Suriname 20 1.2% 27 1.6%
Venezuela 19 1.2% 19 1.1%
Other (2) 48 3.2% 83 4.9%
------ ---- ------ ----
Total $1,007 62.7% $1,075 63.4%
====== ==== ====== ====
</TABLE>
(1) These countries had outstandings in periods presented which did not exceed
0.75 percent of total assets.
(2) Other consists of cross-border outstandings to countries in which such
cross-border outstandings did not exceed 0.75 percent of the Company's total
assets at any of the dates shown.
10
<PAGE> 12
CONTINGENCIES - COMMERCIAL LETTERS OF CREDIT
(in thousands)
The following table sets forth the total volume and average monthly volume of
the Company's export and import letters of credit for each of the periods
indicated. As shown by the table, the volume of commercial letters of credit
decreased by 43.3 percent to $230.4 million for the six months ended June 30,
1999 when compared to the same period in 1998. This is a result of shifts
towards more on-balance sheet financing and an increase in financing a greater
domestic component.
<TABLE>
<CAPTION>
(in thousands) Six Months Ended June 30, Year Ended
------------------------------------------------- ------------------------
1999 1998 December 31, 1998
---------------------- --------------------- ------------------------
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) $ 104,352 $ 17,392 $ 226,106 $ 37,684 $ 397,683 $ 33,140
Import Letters of Credit (1) 126,031 21,005 180,083 30,014 349,099 29,092
---------------------- --------------------- ------------------------
Total $ 230,383 $ 38,397 $ 406,189 $ 67,698 $ 746,782 $ 62,232
====================== ===================== ========================
</TABLE>
(1) Represents certain contingent liabilities not reflected on the Company's
balance sheet.
11
<PAGE> 13
The following table 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
increased by 11.7 percent from December 31, 1998 to June 30, 1999. Individual
fluctuations reflect relative changes in the flow of trade or instruments used
in financing such trade.
CONTINGENT LIABILITIES (1)
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Argentina (2) $ -- $ 1,680
Bolivia 1,697 3,890
Brazil (2) 6,945 --
Costa Rica 8,527 2,846
Dominican Republic 6,526 7,015
Ecuador (2) -- 3,703
El Salvador 2,531 1,995
Guatemala 8,930 26,132
Guyana 3,867 2,374
Haiti 4,839 2,088
Honduras 2,447 2,427
Panama 9,219 14,538
Paraguay (2) -- 1,961
Peru (2) 2,176 --
Suriname (2) -- 11,690
Switzerland 2,119 1,588
United States 74,924 39,415
Venezuela (2) 1,781 --
Other (3) 7,218 5,374
-------- --------
Total $143,746 $128,716
======== ========
</TABLE>
(1) Includes export and import letters of credit, standby letters of credit and
letters of indemnity.
(2) These countries had contingencies which represented less than 1 percent of
the Company's total contingencies at each of the above dates.
(3) Other includes those countries in which contingencies represent less than 1
percent of the Company's total contingencies at each of the above dates.
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
12
<PAGE> 14
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 June 30, 1999 the
allowance for credit losses was approximately $12.7 million.
The following table provides certain information with respect to the Company's
allowance for credit losses, provision for credit losses, charge-off and
recovery activity for the periods shown.
CREDIT LOSS EXPERIENCE
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
---------------- -----------------
<S> <C> <C>
Balance of allowance for credit losses at beginning of period $ 12,794 $ 10,317
Charge-offs:
Domestic:
Commercial (639) (3,357)
Acceptances -- (100)
Installment (1) --
----------- -----------
Total Domestic (640) (3,457)
----------- -----------
Foreign:
Banks and other financial institutions -- (3,901)
Commercial and industrial (2,101) --
----------- -----------
Total Foreign (2,101) (3,901)
----------- -----------
Total charge-offs (2,741) (7,358)
----------- -----------
Recoveries:
Domestic:
Commercial 1 12
Foreign:
Banks and other financial institutions -- 202
----------- -----------
Total recoveries 1 214
----------- -----------
Net (charge-offs) recoveries (2,740) (7,144)
Provision for credit losses 2,646 9,621
----------- -----------
Balance at end of the period $ 12,700 $ 12,794
=========== ===========
Average loans $ 1,164,767 $ 1,168,451
Total loans $ 1,158,360 $ 1,179,530
Net charge-offs to average loans 0.24% 0.61%
Allowance to total loans 1.10% 1.08%
</TABLE>
13
<PAGE> 15
The following tables set 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. Because of the decrease in foreign loans,
the allowance allocated to foreign loans was also reduced which reflects a
negative provision for credit losses attributable to foreign loans.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
(in thousands)
<TABLE>
<CAPTION>
As of As of
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Allocation of the allowance by category of loans:
Domestic:
Commercial $ 3,621 $ 945
Acceptances 742 211
Residential 18 66
Installment 4 3
Overdraft 60 190
--------- ---------
Total domestic 4,445 1,415
Foreign:
Government and official institutions 604 --
Banks and other financial institutions 2,970 3,033
Commercial and industrial 4,323 8,010
Acceptances discounted 358 336
--------- ---------
Total foreign 8,255 11,379
Total $ 12,700 $ 12,794
========= =========
Percent of loans in each category to total loans:
Domestic:
Commercial 29.8% 23.9%
Acceptances 6.2% 4.8%
Residential 0.2% 0.9%
Installment 0.0% 0.0%
Overdraft 0.4% 0.6%
--------- ---------
Total domestic 36.6% 30.2%
Foreign:
Banks and other financial institutions 22.8% 25.8%
Commercial and industrial 33.2% 34.4%
Acceptances discounted 3.0% 6.2%
Government and official Institutions 4.4% 3.4%
--------- ---------
Total foreign 63.4% 69.8%
Total 100.0% 100.0%
========= =========
</TABLE>
14
<PAGE> 16
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ALLOCATED TO FOREIGN LOANS
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Balance, beginning of period $ 11,379 $ 7,890
Provision for credit losses (1,023) 7,188
Net charge-offs (2,101) (3,699)
-------- --------
Balance, end of period $ 8,255 $ 11,379
======== ========
</TABLE>
The Company does not have a rigid charge-off 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 favorable 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 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.
NONPERFORMING LOANS
(in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Domestic:
Non accrual $1,545 $2,189
Past due over 90 days and accruing 92 69
------ ------
Total domestic nonperforming loans 1,637 2,258
------ ------
Foreign
Non accrual 8,187 6,396
Past due over 90 days and accruing -- 404
------ ------
Total foreign nonperforming loans 8,187 6,800
------ ------
Total nonperforming loans $9,824 $9,058
====== ======
Total nonperforming loans to total loans 0.85% 0.77%
Total nonperforming assets to total assets 0.61% 0.53%
</TABLE>
At June 30, 1999 and December 31, 1998 the Company had no nonaccruing investment
securities.
15
<PAGE> 17
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 $34.0 million and $4.7 million, respectively, at June 30, 1999
compared to $75.6 million and $6.5 million, respectively, at December 31, 1998.
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 the Company's domestic time deposits are its eight Bank
branches located in Florida and Puerto Rico. The Company opened a branch in
Weston, Florida on July 6, 1999. In pricing its deposits, the Company analyzes
the market carefully, attempting to price its deposits competitively with the
other financial institutions in the area.
Total deposits were $1,413.0 million at June 30, 1999 compared to $1,477.1
million at December 31, 1998. The decrease in deposits during the six month
period was largely in certificates of deposits over $100,000 which decreased by
$125.3 million. This decrease was offset by certificates of deposit under
$100,000 which increased by $25.6 million.
The following table indicates the maturities and amounts of certificates of
deposit and other time deposits issued in denominations of $100,000 or more as
of June 30, 1999:
MATURITIES OF AND AMOUNTS OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS
$100,000 OR MORE
(in thousands)
<TABLE>
<CAPTION>
Certificates of Deposit Other Time Deposits
$100,000 or More $100,000 or More Total
----------------------- ------------------- --------
<S> <C> <C> <C>
Three months or less $104,074 $53,475 $157,549
Over 3 through 6 months 138,638 4,261 142,899
Over 6 through 12 months 129,126 2,402 131,528
Over 12 months 33,255 -- 33,255
-------- ------- --------
Total $405,093 $60,138 $465,231
======== ======= ========
</TABLE>
TRUST PREFERRED SECURITIES
The trust preferred securities increased by $1.7 million as a result of the
exercise of the over allotment option by the underwriter. See Note 4 to the
Consolidated Financial Statements for further details.
STOCKHOLDERS' EQUITY
The Company's stockholders' equity at June 30, 1999 was $136.6 million compared
to $123.5 million at December 31, 1998. During this period stockholders' equity
increased by $13.1 million primarily due to the retention of net income.
16
<PAGE> 18
INTEREST RATE SENSITIVITY
The following table 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 June 30, 1999. 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.
INTEREST RATE SENSITIVITY REPORT
(Dollars in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
0 to 30 31 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Days Years Years Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans $177,391 $230,665 $196,565 $ 149,588 $329,996 $ 74,155 $1,158,360
Federal funds sold 81,538 81,538
Investment securities 40,940 2,036 6,503 1,200 600 59,511 110,790
Interest earning deposits with
other banks 55,825 13,850 56,450 47,477 -- 173,602
--------------------------------------------------------------------------------------
Total 355,694 246,551 259,518 198,265 330,596 133,666 1,524,290
--------------------------------------------------------------------------------------
Funding Sources:
Savings and transaction deposits 85,918 29,336 115,254
Certificates of deposits of $100 or more 35,270 68,804 138,638 129,126 33,255 -- 405,093
Certificates of deposits under $100 59,695 173,978 202,548 249,996 12,054 78 698,349
Other time deposits 43,170 10,305 4,261 2,402 60,138
Funds overnight 51,900 51,900
Trust preferred securities 12,650 12,650
--------------------------------------------------------------------------------------
Total $275,953 $282,423 $345,447 $ 381,524 $ 45,309 $ 12,728 $1,343,384
======================================================================================
Interest sensitivity gap $ 79,741 $(35,872) $(85,929) $(183,259) $285,287 $120,938 $ 180,906
======================================================================================
Cumulative gap $ 79,741 $ 43,869 $(42,060) $(225,319) $ 59,968 $180,906
========================================================================
Cumulative gap as a percentage
of total earning assets 5.23% 2.88% (2.76)% (14.78)% 3.93% 11.87%
========================================================================
</TABLE>
17
<PAGE> 19
LIQUIDITY
Cash and cash equivalents decreased by $10.1 million from December 31, 1998.
During the first quarter of 1999, net cash provided by operating activities was
$12.1 million, net cash provided by investing activities was $46.2 which was
offset by net cash used by financing activities of $68.3 million. For further
information on cash flows, see the Consolidated Statement of Cash Flows.
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. Consideration 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.
The majority of the Company's deposits are short-term and closely match the
short-term nature of the Company's assets. See "Interest Rate Sensitivity
Report." At June 30, 1999 interest-earning assets maturing within six months
were $861.8 million, representing 56.5 percent of total earning assets and
earning assets maturing within one year were $1.060 billion or 69.5 percent of
total earning assets. The interest bearing liabilities maturing within six
months were $903.8 million or 67.3 percent of total interest bearing liabilities
and maturing within one year were $1.285 billion or 95.7 percent of the total at
June 30, 1999.
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 June 30, 1999 were $315 million, 19.6 percent of
total assets, and consisted of cash and cash equivalents, due from banks-time
and U. S. government agency securities that are unpledged. At June 30, 1999 the
Company had been advised of $66 million in available interbank funding.
CAPITAL RESOURCES
Bancorp 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
Bancorp 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. Bancorp's and the
Bank's capital classification are 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 Bancorp and the Bank to maintain minimum amounts and ratios (set forth
in the table below) of Tier I capital (as defined in the regulations) to total
averages assets (as defined) and minimum ratios of Tier I and total capital (as
defined) to risk-weighted assets (as defined). Bancorp's and the Bank's actual
capital amounts and ratios are also presented in the table.
18
<PAGE> 20
BANCORP CAPITAL RATIOS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
-------------------------- --------------------------
Amount Ratio Amount Ratio
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Tier 1 risk-weighted
Capital:
Actual $ 147,469 13.7% $ 133,603 12.0%
Minimum 42,588 4.0% 44,411 4.0%
Total risk-weighted
Capital:
Actual 160,169 14.8% 146,397 13.2%
Minimum 85,176 8.0% 88,822 8.0%
Leverage:
Actual 147,469 9.4% 133,603 8.0%
Minimum 47,134 3.0% 50,204 3.0%
</TABLE>
BANK CAPITAL RATIOS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------- -------------------------
Amount Ratio Amount Ratio
------------------------- -------------------------
<S> <C> <C> <C> <C>
Tier 1 risk-weighted capital:
Actual $ 141,979 13.2% $ 121,886 11.0%
Minimum to be well capitalized 63,677 6.0% 66,461 6.0%
Minimum to be adequately capitalized 42,451 4.0% 44,307 4.0%
Total risk-weighted capital:
Actual 154,679 14.4% 134,680 12.2%
Minimum to be well capitalized 106,128 10.0% 110,768 10.0%
Minimum to be adequately capitalized 84,903 8.0% 88,614 8.0%
Leverage:
Actual 141,979 9.1% 121,886 7.3%
Minimum to be well capitalized 78,309 5.0% 83,086 5.0%
Minimum to be adequately capitalized 62,647 4.0% 66,649 4.0%
</TABLE>
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.
19
<PAGE> 21
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, based on 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. 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.
Interest Rate Sensitivity Report as of June 30, 1999 shows that interest bearing
liabilities maturing or repricing within one year exceed interest earning assets
by $225.3 million. The Company monitors that the assets and liabilities are
closely matched to minimize interest rate risk. On June 30, 1999 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 2.2 percent of net income.
The level of imbalance between the repricing of rate sensitive assets and rate
sensitive liabilities will be measured through a series of ratios. 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.
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.
RESULTS OF OPERATIONS-SIX MONTHS
NET INTEREST INCOME
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 $27.7 million for the six months ended June 30, 1999 from $25.2
million for the same period in 1998, a 9.9 percent increase. The increase was
due largely to an increase in average earning assets offset, to some extent, by
a decrease in net interest margin. Average earning assets increased to $1.517
billion for the six months ended June 30, 1999 from $1.277 billion for the same
period in 1998, a 18.8 percent increase. Average loans and acceptances
discounted increased to $1.164 billion for the six months ended June 30, 1999
from $1.092 billion for the same period in 1998, a 6.6 percent increase. The
increase in loans was largely attributable to an increase in the U. S. component
of the loan portfolio. Average interest earning deposits with other banks
increased to $158.8 million for the six months ended June 30, 1999 from $100.2
million for the same period in 1998, a 58.5 percent increase. Net interest
margin decreased to 3.68 percent for the six months ended June 30, 1999 from
3.98 percent for the same period in 1998, a 30 basis point decrease. The primary
reasons for this decrease were (i) the temporary increase of lower yielding U.S.
government agency securities while assets are redeployed into the higher
yielding loan category and (ii) transactions with larger customers and
transactions with multi-national companies which command more competitive
pricing, but
20
<PAGE> 22
in turn tend to be stronger in terms of credit quality.
Interest income increased to $63.5 million for the six months ended June 30,
1999 from $57.0 million for the same period in 1998, an 11.4 percent increase,
reflecting an increase in loans, partially offset by a decrease in prevailing
interest rates, as well as the temporary increase in liquid lower yielding U. S.
government agency securities as discussed above. Interest expense increased to
$35.8 million for the six months ended June 30, 1999 from $31.9 million for the
same period in 1998, a 12.2 percent increase, reflecting the additional deposits
to fund asset growth. Average interest-bearing deposits increased to $1.329
billion for the six months ended June 30, 1999 from $1.121 billion for the same
period in 1998, a 18.6 percent increase.
21
<PAGE> 23
<TABLE>
<CAPTION>
YIELDS EARNED AND RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------------------------- -----------------------------------
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL EARNING ASSETS
LOANS:
Commercial loans $1,038,293 $44,994 8.62% $ 943,288 $42,500 8.96%
Acceptances discounted 113,276 5,031 8.83% 125,176 5,820 9.25%
Overdraft 9,271 985 21.13% 11,305 994 17.49%
Mortgage loans 3,711 116 6.22% 11,787 486 8.20%
Installment loans 216 10 9.21% 274 13 9.44%
--------------------- ----------------------
TOTAL LOANS 1,164,767 51,136 8.73% 1,091,830 49,813 9.07%
Time deposits with banks 158,758 6,995 8.76% 100,225 4,538 9.01%
Investments 159,007 4,499 5.63% 65,262 2,130 6.49%
Federal funds sold 34,764 849 4.86% 19,258 532 5.49%
--------------------- ----------------------
Total investments and time deposits with banks 352,529 12,343 6.96% 184,745 7,200 7.75%
Total interest earning assets 1,517,296 63,479 8.32% 1,276,575 57,013 8.88%
------- -------
Total non interest earning assets 104,533 131,509
---------- ----------
TOTAL ASSETS $1,621,829 $1,408,084
========== ==========
INTEREST BEARING LIABILITIES
DEPOSITS:
NOW amd savings accounts $ 22,756 271 2.37% $ 20,230 211 2.07%
Money Market 44,762 1,028 4.57% 45,046 1,016 4.49%
Presidential Money Market 33,119 789 4.74% 2,769 38 2.73%
Certificate of Deposits (including IRA) 1,121,146 30,444 5.40% 900,038 26,244 5.80%
Time Deposits with Banks (IBF) 99,461 2,286 4.57% 151,651 4,049 5.31%
Other 8,234 196 4.73% 973 21 4.29%
--------------------- ----------------------
TOTAL DEPOSITS 1,329,478 35,014 5.24% 1,120,707 31,579 5.60%
Trust Preferred Securities 12,522 615 9.77% 0 0 0.00%
Other Borrowings 2,734 103 7.49% 3,100 117 7.51%
Federal Funds Purchased 1,614 41 5.05% 5,837 166 5.66%
--------------------- ----------------------
Total interest bearing liabilities 1,346,348 35,773 5.28% 1,129,644 31,862 5.61%
--------------------- ----------------------
Non interest bearing liabilities
Demand Deposits 73,940 69,428
Other Liabilities 71,832 95,351
---------- ----------
Total non interest bearing liabilities 145,772 164,779
Stockholders equity 129,709 105,364
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,621,829 $1,399,787
========== ==========
NET INTEREST INCOME / NET INTEREST SPREAD $27,706 3.04% $25,151 3.27%
======= ===== ======= =====
MARGIN
INTEREST INCOME / INTEREST EARNING ASSETS 8.44% 9.01%
INTEREST EXPENSE / INTEREST EARNING ASSETS 4.76% 5.03%
----- -----
NET INTEREST MARGIN 3.68% 3.98%
===== =====
</TABLE>
22
<PAGE> 24
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses decreased to $2.6 million for the six
months ended June 30, 1999 from $4.1 million for the same period in 1998. Net
loan charge-offs during the first six months of 1999 amounted to $2.7 million
compared to $994 thousand for the same period in 1998. The allowance for credit
losses decreased from $12.8 million at December 31, 1998 to $12.7 million at
June 30, 1999. The ratio of the allowance for credit losses to total loans was
1.10 percent at June 30, 1999 increasing from approximately 1.08 percent at
December 31, 1998. This increase in the ratio is due primarily to the decrease
in loans during the first six months of 1999.
NON-INTEREST INCOME
Non-interest income increased to $9.4 million for the six months ended June 30,
1999 from $7.9 million for the same period in 1998, a 19.0 percent increase.
Structuring and syndication fees increased by $1.1 million as a result of
several transactions completed during the period. This was offset by a decrease
in trade finance fees and commissions of $191 thousand. The increase in other
non-interest income is due to an increase in account analysis fees. In addition,
non-interest income included a gain on sale of loans of $188 thousand due
largely to the sale of the residential mortgage portfolio discussed in Note 3 to
the consolidated financial statements.
The following table sets forth details regarding the components of non-interest
income for the periods indicated.
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 to 1999
1998 Percent Change 1999
------ -------------- ------
<S> <C> <C> <C>
Trade finance fees and commissions $6,623 (2.9)% $6,432
Structuring and syndication fees 743 141.9% 1,797
Customer service fees 311 4.5% 325
Gain on sale of assets 100.0% 214
Other 250 148.4% 621
------ ----- ------
Total non-interest income $7,927 18.4% $9,389
====== ===== ======
</TABLE>
OPERATING EXPENSES
Operating expenses increased to $14.6 million for the six months ended June 30,
1999 from $12.4 million for the same period in 1998, a 17.7 percent increase.
The majority of this increase was in other expenses which increased to
$6.1million for the six months ended June 30, 1999 from $4.2 million for the
same period in 1998. This increase was largely due to increased legal expenses
as well as miscellaneous losses and charge offs. The increase in legal expenses
was the result of an increase in the number of litigation cases in the ordinary
course of business during the period. The Company's efficiency ratio increased
to 39.4 percent for the six month period ended June 30, 1999 from 37.4 percent
for the same period in 1998.
23
<PAGE> 25
The following table sets forth details regarding the components of operating
expenses for the periods indicated.
OPERATING EXPENSES
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-------------------------------------
1998 to 1999
1998 Percent Change 1999
------- -------------- -------
<S> <C> <C> <C>
Employee compensation and benefits $ 6,048 7.7% $ 6,511
Occupancy and equipment 2,136 (6.5)% 1,997
Other operating expenses 4,188 46.2% 6,122
------- ---- -------
Total operating expenses $12,372 18.3% $14,630
======= ==== =======
</TABLE>
YEAR 2000
The Company began the process in June 1996 of assessing and preparing its
computer systems and applications to be functional on January 1, 2000. The
Company has also been communicating with third parties which interface with the
Company, such as customers, counter parties, payment systems, vendors and
others, to determine whether they will be functional. The Company has
incorporated Year 2000 as part of its credit policy process and addresses the
issues in each new loan and as part of its credit renewals.
The Company believes that the process of modifying all mission critical
applications of the Company has been completed in accordance with guidelines
dictated by FFIEC (Federal Financial Institutions Examination Council). The
non-critical systems will continue to be reviewed and tested and management will
determine if changes or replacement is deemed necessary.
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 believes that those identified as critical
have demonstrated to be Year 2000 compliant or were replaced by parties or
systems that are Year 2000 compliant. Those identified as non-critical will
continue to be reviewed and tested and management will determine if changes or
replacement is deemed necessary.
The Company provided compliance certification questionnaires to each of its
customers in order to determine their ability to be Year 2000 compliant. The
Company amended its Credit Policy Manual which 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 did not respond to the questionnaire or if its response did 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
did not renew its current relationship with that customer.
Concurrently, the Company is in the process of upgrading its computers systems
to accommodate the growth of the past two years. These new systems being
installed are Year 2000 compliant. The Company believes 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 $115,000 of these estimated
expenses. Any purchased hardware 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.
There can be no assurance that all of the parties mentioned above will become
Year 2000 compliant on a timely basis. The costs and dates on which the Company
plans to complete the Year 2000 process are based on the Company's best
24
<PAGE> 26
estimates. However, there can be no assurance that these estimates will be
achieved and actual results could differ.
RESULTS OF OPERATIONS-SECOND QUARTER
NET INTEREST INCOME
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 $14.3 million for the quarter ended June 30, 1999 from $13.1
million for the same period in 1998, a 9.2 percent increase. The increase was
due largely to an increase in average earning assets and an increase in net
interest margin. Average earning assets increased to $1.483 billion for the
quarter ended June 30, 1999 from $1.348 billion for the same period in 1998, a
10.0 percent increase. Average loans and acceptances discounted remained
relatively consistent at $1.167 billion for the quarter ended June 30, 1999 and
the same period in 1998. The increase in average interest earning assets for the
quarter was primarily in time deposits with other banks increased by 62.6
percent to $162.3 million and investments which increased by 80.6 percent to
$122.7 million for the quarter. Net interest margin increased slightly to 3.91
percent for the quarter ended June 30, 1999 from 3.89 percent for the same
period in 1998. The primary reason for the increase is the 39 basis point
decrease in the cost of funds rate. The cost of funds decreased to 5.21 percent
for the quarter ended June 30, 1999 from 5.60 percent for the same period in
1998.
Interest income increased to $31.5 million for the quarter ended June 30, 1999
from $30.1 million for the same period in 1998, a 4.7 percent increase,
reflecting an increase in loans in the U. S. This increase was partially offset
by a decrease in prevailing interest rates, as well as the temporary increase in
liquid lower yielding U. S. government agency securities as discussed above.
Interest expense increased to $17.2 million for the quarter ended June 30, 1999
from $17.0 million for the same period in 1998, a 1.2 percent increase,
reflecting the additional deposits to fund asset growth. Average
interest-bearing deposits increased to $1.293 billion for the quarter ended
June 30, 1999 from $1.190 billion for the same period in 1998, an 8.6 percent
increase.
25
<PAGE> 27
<TABLE>
<CAPTION>
YIELDS EARNED AND RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------------------------- -----------------------------------
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
TOTAL EARNING ASSETS
LOANS:
Commercial loans $1,048,708 $22,879 8.73% $1,003,498 $22,681 8.94%
Acceptances discounted 109,550 2,389 8.72% 133,748 2,984 8.83%
Overdraft 6,505 289 17.77% 10,986 491 17.68%
Mortgage loans 2,322 45 7.75% 11,653 242 8.22%
Installment loans 215 5 9.30% 315 7 8.79%
---------------------- ----------------------
TOTAL LOANS 1,167,300 25,606 8.77% 1,160,200 26,405 9.00%
Time deposits with banks 162,295 3,754 9.25% 99,833 2,260 8.96%
Investments 122,672 1,744 5.69% 67,927 1,120 6.52%
Federal funds sold 31,084 383 4.93% 20,028 281 5.55%
---------------------- ----------------------
Total investments and time deposits with banks 316,051 5,881 7.44% 187,788 3,661 7.71%
Total interest earning assets 1,483,351 31,487 8.49% 1,347,988 30,066 8.82%
------- -------
Total non interest earning assets 87,781 114,949
---------- ----------
TOTAL ASSETS $1,571,132 $1,462,937
========== ==========
INTEREST BEARING LIABILITIES
DEPOSITS:
NOW and savings accounts $ 23,847 162 2.72% $ 19,835 103 2.05%
Money Market 43,686 499 4.57% 45,979 511 4.40%
Presidential Money Market 40,482 484 4.78% 2,236 17 3.01%
Certificate of Deposits (including IRA) 1,082,645 14,556 5.38% 969,388 14,172 5.78%
Time Deposits with Banks (IBF) 95,669 982 4.11% 151,243 2,024 5.29%
Other 6,476 163 10.07% 1,230 15 4.82%
---------------------- ----------------------
TOTAL DEPOSITS 1,292,805 16,846 5.21% 1,189,911 16,842 5.60%
Trust Preferred Securities 12,650 313 9.90% 0 0 0.00%
Other Borrowings 0 0 0.00% 6,034 114 7.47%
Federal Funds Purchased 3,101 39 5.03% 2,989 43 5.69%
---------------------- ----------------------
Total interest bearing liabilities 1,308,556 17,198 5.26% 1,198,934 16,999 5.61%
---------------------- ----------------------
Non interest bearing liabilities
Demand Deposits 72,389 66,284
Other Liabilities 57,126 89,148
---------- ----------
Total non interest bearing liabilities 129,515 155,432
Stockholders equity 133,061 108,571
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,571,132 $1,462,937
========== ==========
NET INTEREST INCOME / NET INTEREST SPREAD $14,289 3.23% $13,067 3.21%
======= ===== ======= =====
MARGIN
INTEREST INCOME / INTEREST EARNING ASSETS 8.61% 8.95%
INTEREST EXPENSE / INTEREST EARNING ASSETS 4.70% 5.06%
----- -----
NET INTEREST MARGIN 3.91% 3.89%
===== =====
</TABLE>
26
<PAGE> 28
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses remained relatively consistent at $1.7
million for the quarters ended June 30, 1999 and 1998. Net loan charge-offs
during the second quarter of 1999 amounted to $2.6 million compared to $827
thousand for the same period in 1998. The allowance for credit losses decreased
from $12.8 million at December 31, 1998 to $12.7 million at June 30, 1999. The
ratio of the allowance for credit losses to total loans was 1.10 percent at June
30, 1999 increasing from approximately 1.08 percent at December 31, 1998.
NON-INTEREST INCOME
Non-interest income increased to $5.1 million for the quarter ended June 30,
1999 from $4.0 million for the same period in 1998, a 27.5 percent increase.
Structuring and syndication fees increased by $766 thousand while trade finance
fees increased by $214 thousand.
The following table sets forth details regarding the components of non-interest
income for the periods indicated.
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------
1998 to 1999
1998 Percent Change 1999
------ -------------- ------
<S> <C> <C> <C>
Trade finance fees and commissions $3,228 6.6% $3,442
Structuring and syndication fees 454 168.7% 1,220
Customer service fees 166 (14.5)% 142
Gain on sale of assets -- 100.0% 27
Other 114 136.8% 270
------ ----- ------
Total non-interest income $3,962 28.7% $5,101
====== ===== ======
</TABLE>
OPERATING EXPENSES
Operating expenses increased to $7.4 million for the quarter ended June 30, 1999
from $6.4 million for the same period in 1998, a 15.6 percent increase. The
majority of this increase was in other expenses which increased to $3.3 million
for the quarter ended June 30, 1999 from $2.3 million for the same period in
1998. This increase was largely due to increased legal expenses. The increase in
legal expenses was the result of an increase in the number of litigation cases
in the ordinary course of business during the period. The Company's efficiency
ratio increased to 38.5 percent for the three month period ended June 30, 1999
from 38.1 percent for the same period in 1998.
27
<PAGE> 29
The following table sets forth details regarding the components of operating
expenses for the periods indicated.
OPERATING EXPENSES
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-------------------------------------
1998 to 1999
1998 Percent Change 1999
------ -------------- ------
<S> <C> <C> <C>
Employee compensation and benefits $3,053 3.7% $3,167
Occupancy and equipment 1,066 (2.7)% 1,037
Other operating expenses 2,317 40.6% 3,257
------ ---- ------
Total operating expenses $6,436 15.9% $7,461
====== ==== ======
</TABLE>
28
<PAGE> 30
EXHIBIT 1
HAMILTON BANCORP INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER SHARE
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic
Weighted average number of common shares outstanding 10,065,908 9,988,481 10,061,037 9,917,070
Net income $ 6,433 $ 5,554 $ 12,501 $ 10,459
Basic earnings $ 0.64 $ 0.56 $ 1.24 $ 1.05
Diluted:
Weighted average number of common shares outstanding 10,065,908 9,988,481 10,061,037 9,917,070
Common equivalent shares outstanding - options 208,619 337,540 215,316 362,200
----------- ----------- ----------- -----------
Total common and common equivalent shares outstanding 10,274,527 10,326,021 10,276,353 10,279,270
Net income $ 6,433 $ 5,554 $ 12,501 $ 10,459
Diluted earnings per share $ 0.63 $ 0.54 $ 1.22 $ 1.02
</TABLE>
29
<PAGE> 31
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
30
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1999 Hamilton Bancorp, Inc.
/s/ Eduardo A. Masferrer
-------------------------------------------------
Eduardo A. Masferrer,
Chairman, President and Chief Executive Officer
/s/ John M. R. Jacobs
-------------------------------------------------
John M. R. Jacobs,
Senior Vice President and Chief Financial Officer
31
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,200
<INT-BEARING-DEPOSITS> 173,602
<FED-FUNDS-SOLD> 81,538
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,323
<INVESTMENTS-CARRYING> 39,173
<INVESTMENTS-MARKET> 38,563
<LOANS> 1,143,563
<ALLOWANCE> 12,700
<TOTAL-ASSETS> 1,607,071
<DEPOSITS> 1,412,988
<SHORT-TERM> 0
<LIABILITIES-OTHER> 44,853
<LONG-TERM> 12,650
0
0
<COMMON> 101
<OTHER-SE> 136,479
<TOTAL-LIABILITIES-AND-EQUITY> 1,607,071
<INTEREST-LOAN> 51,136
<INTEREST-INVEST> 4,499
<INTEREST-OTHER> 7,844
<INTEREST-TOTAL> 63,479
<INTEREST-DEPOSIT> 35,014
<INTEREST-EXPENSE> 35,773
<INTEREST-INCOME-NET> 27,706
<LOAN-LOSSES> 2,646
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,630
<INCOME-PRETAX> 19,819
<INCOME-PRE-EXTRAORDINARY> 19,819
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,501
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 3.04
<LOANS-NON> 9,824
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,794
<CHARGE-OFFS> 2,741
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 12,700
<ALLOWANCE-DOMESTIC> 4,445
<ALLOWANCE-FOREIGN> 8,255
<ALLOWANCE-UNALLOCATED> 12,700
</TABLE>
