<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Mark One)
[X] AMENDMENT TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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)
FLORIDA 65-0149935
------------------------------ -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3750 N.W. 87TH AVENUE, MIAMI, FLORIDA 33178
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
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 [ ] No [X]
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 and 2 of Part I of the Registrant's Form 10Q for the quarterly period
ended September 30, 1999 are hereby amended to read as follows:
ITEM 1
PART I. FINANCIAL INFORMATION
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands) (Unaudited)
<TABLE>
<CAPTION>
As restated, see As restated, see
note 5 note 5
September 30, December 31,
------------------------ ---------------------
1999 1998
------------------------ ---------------------
<S> <C> <C>
ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 19,934 $ 24,213
FEDERAL FUNDS SOLD 38,921 87,577
----------- -----------
Total cash and cash equivalents 58,855 111,790
INTEREST EARNING DEPOSITS WITH OTHER BANKS 220,162 200,203
SECURITIES AVAILABLE FOR SALE 48,430 69,725
SECURITIES HELD TO MATURITY 47,945 35,870
LOANS-NET 1,190,983 1,150,903
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 29,454 75,567
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 7,079 6,468
PROPERTY AND EQUIPMENT-NET 5,249 4,775
ACCRUED INTEREST RECEIVABLE 17,869 19,201
GOODWILL-NET 1,702 1,833
OTHER ASSETS 34,432 16,894
----------- -----------
TOTAL $ 1,662,160 $ 1,693,229
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 1,484,270 $ 1,477,052
TRUST PREFERRED SECURITIES 12,650 11,000
OTHER BORROWINGS -- 6,116
BANKERS ACCEPTANCES OUTSTANDING 29,454 75,567
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 7,079 6,468
OTHER LIABILITIES 6,854 7,784
----------- -----------
Total liabilities 1,540,307 1,583,987
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares authorized, 10,081,147
shares issued and outstanding at September 30, 1999 and 10,050,062 shares
issued and outstanding at December 31, 1998 101 100
Capital surplus 60,522 60,117
Retained earnings 61,276 49,511
Accumulated other comprehensive loss (46) (486)
----------- -----------
Total stockholders' equity 121,853 109,242
----------- -----------
TOTAL $ 1,662,160 $ 1,693,229
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 27,490 $ 27,828 $ 78,627 $ 77,640
Deposits with other banks 4,527 3,146 11,522 7,684
Investment securities 1,970 1,164 6,469 3,295
Federal funds sold 255 312 1,104 844
------------ ------------ ----------- ------------
Total 34,242 32,450 97,722 89,463
INTEREST EXPENSE:
Deposits 17,544 18,581 52,558 50,161
Trust preferred securities 308 -- 923 --
Federal funds purchased and other borrowing 33 148 178 431
------------ ------------ ----------- ------------
Total 17,885 18,729 53,659 50,592
------------ ------------ ----------- ------------
NET INTEREST INCOME 16,357 13,721 44,063 38,871
PROVISION FOR CREDIT LOSSES 15,019 3,040 17,665 7,121
------------ ------------ ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES 1,338 10,681 26,398 31,750
------------ ------------ ----------- ------------
NON-INTEREST INCOME:
Trade finance fees and commissions 2,948 3,513 9,380 10,136
Structuring and syndication fees 1,102 563 2,899 1,306
Customer service fees 140 132 465 443
Gain (loss) on sale of assets 346 (186) 560 (220)
Other 286 242 907 527
------------ ------------ ----------- ------------
Total 4,822 4,264 14,211 12,192
------------ ------------ ----------- ------------
OPERATING EXPENSES:
Employee compensation and benefits 3,258 3,033 9,769 9,080
Occupancy and equipment 1,118 997 3,115 3,133
Other 2,934 2,729 9,056 6,919
------------ ------------ ----------- ------------
Total 7,310 6,759 21,940 19,132
------------ ------------ ----------- ------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,150) 8,186 18,669 24,810
PROVISION (CREDIT) FOR INCOME TAXES (414) 2,501 6,904 8,666
------------ ------------ ----------- ------------
NET INCOME (LOSS) $ (736) $ 5,685 $ 11,765 $ 16,144
============ ============ =========== ============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ (0.07) $ 0.57 $ 1.17 $ 1.62
============ ============ =========== ============
DILUTED $ (0.07) $ 0.54 $ 1.14 $ 1.56
============ ============ =========== ============
AVERAGE SHARES OUTSTANDING:
BASIC 10,076,147 10,046,377 10,066,107 9,960,679
============ ============ =========== ============
DILUTED 10,284,150 10,477,637 10,278,347 10,336,199
============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------------
1999 1998 1999 1998
----- ------- -------- -------
<S> <C> <C> <C> <C>
NET (LOSS) INCOME $(736) $ 5,685 $ 11,765 $16,144
OTHER COMPREHENSIVE INCOME, Net of tax:
Unrealized appreciation (depreciation) in securities
available for sale during period 213 (409) 627 499
Less: Reclassification adjustment for write off of a
foreign bank stock 0 0 (187) 0
----- ------- -------- -------
Total 213 (409) 440 499
----- ------- -------- -------
COMPREHENSIVE INCOME (LOSS) $(523) $ 5,276 $ 12,205 $16,643
===== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 5
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
As restated, see note 5
(Dollars in thousands, except per share data) (Unaudited)
<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 10,050,062 $100 $60,117 $49,511 ($486) $109,242
Issuance of 31,085 shares of common
stock from exercise of options 31,085 1 287 288
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 440
taxes 440
Net income for the nine months ended
September 30, 1999 11,765 11,765
-------------- --------- ---------- ---------- ----------------- -----------------
Balance as of September 30, 1999 10,081,147 $101 $60,522 $61,276 ($46) $121,853
============== ========= ========== ========== ================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
For Nine Months Ended September
------------------------------------------
1999 1998
-------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,765 $ 16,144
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 928 837
Provision for credit losses 17,665 7,121
Deferred tax (benefit) provision (4,686) 922
Write off of available for sale security 187 587
Gain on sale of loans (534) 0
Net (gain) loss on sale of other real estate owned (26) 34
Proceeds from the sale of bankers acceptances 18,373 62,334
Increase in accrued interest receivable and other assets (11,779) (6,536)
(Decrease) increase in other liabilities (673) 4,073
-------------------- -----------------
Net cash provided by operating activities 31,220 85,516
-------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest-earning deposits with other banks (19,959) (68,114)
Purchase of securities available for sale (572,029) (176,473)
Purchase of securities held to maturity (14,703) (15,905)
Purchase of other investment 0 (15,000)
Purchase of loan participations (55,815) (9,826)
Proceeds from sales and maturities of securities available for sale 593,819 175,770
Proceeds from paydowns of securities held to maturity 2,607 0
Proceeds from sale of loans 18,186 0
Increase in loans-net (37,939) (309,211)
Purchases of property and equipment-net (1,230) (794)
Proceeds from sale of other real estate owned 38 122
-------------------- -----------------
Net cash used in investing activities (87,025) (419,431)
-------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 7,218 331,282
Proceeds from trust preferred securities offering 1,650 0
(Payment of) proceeds from other borrowing (6,116) 6,116
Net proceeds from exercise of common stock options 118 2,050
-------------------- -----------------
Net cash provided by financing activities 2,870 339,448
-------------------- -----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (52,935) 5,533
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 111,790 91,434
-------------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 58,855 $ 96,967
==================== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 54,625 $ 47,537
==================== =================
Income taxes paid during the period $ 10,845 $ 7,027
==================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
HAMILTON BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1: BASIS OF PRESENTATION
The consolidated statements of condition for Hamilton Bancorp Inc. and
Subsidiaries (the "Company") as of September 30, 1999 and December 31, 1998, the
related consolidated statements of income, comprehensive income, stockholders'
equity and of cash flows for the nine months ended September 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/A 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 nine months ended September 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 $10.0 million foreign loans realizing gains of $543
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
NOTE 5: RESTATEMENT
Subsequent to the filing of the Company's quarterly report on Form 10Q for the
quarter ended September 30, 1999, the Company determined that the purchase of
certain securities and the sale of certain loans entered into by the Company in
1998 should have been recorded as an exchange transaction in accordance with
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, and that a loss of $22,223,000 ($14,304,000 after
tax) should have recorded on the exchange. The Company had previously accounted
for the purchases of the securities and sales of the loans as separate unrelated
transactions. The purchases were recorded at cost and the sales were recorded
based on the proceeds received for the loans sold, with no gain or loss being
recognized. During the second quarter of 2000 the OCC, through a temporary cease
and desist order dated April 25, 2000, required the Company to re-file its
regulatory reports to account for the purchase and sale transactions referred to
above as related transactions and to record a loss on such transactions. The
Company's Audit Committee, with the assistance of independent counsel, conducted
an investigation that began in August 2000 and was completed during December
2000 into these transactions, including the consideration of certain additional
information that the Company received from the OCC. After evaluating the results
of the investigation, the Company concluded that the above transactions should
have been accounted for as an exchange (i.e., one related transaction) rather
than as separate transactions and that a loss should be recorded. As a result
the Company restated its 1998 consolidated financial statements. The loss on
exchange created a lower cost basis, by a like amount, for the assets purchased.
The following table summarizes the items that have been restated in the
September 30, 1999 consolidated financial statements as a result of the exchange
in 1998:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
REPORTED RESTATED
-------------- --------
<S> <C> <C>
As of September 30, 1999:
Securities Held to Maturity (includes other investments) $ 57,366 $ 47,945
Loans - Net 1,203,785 1,190,983
Other Assets 26,543 34,432
Other Liabilities 6,884 6,854
Retained Earnings 75,580 61,276
As of December 31, 1998:
Securities Held to Maturity (includes other investments) 45,291 35,870
Loans - Net 1,163,705 1,150,903
Other Assets 9,005 16,894
Other Liabilities 7,814 7,784
Retained Earnings 63,815 49,511
</TABLE>
7
<PAGE> 9
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 nine FDIC-insured
branches with eight Florida locations in Miami, Sarasota, Tampa, West Palm
Beach, Winter Haven and Weston and a branch in San Juan, Puerto Rico.
RESTATEMENT
Subsequent to the filing of the Company's quarterly report on Form 10Q for the
quarter ended September 30, 1999, the Company determined that the purchase of
certain securities and the sale of certain loans entered into by the Company in
1998 should have been recorded as an exchange transaction in accordance with
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, and that a loss of $22,223,000 ($14,304,000 after
tax) should have recorded on the exchange. The Company had previously accounted
for the purchases of the securities and sales of the loans as separate unrelated
transactions. The purchases were recorded at cost and the sales were recorded
based on the proceeds received for the loans sold, with no gain or loss being
recognized. During the second quarter of 2000 the OCC, through a temporary cease
and desist order dated April 25, 2000, required the Company to re-file its
regulatory reports (the "Call Reports") to account for the purchase and sale
transactions referred to above as related transactions and to record a loss on
such transactions. The Company's Audit Committee, with the assistance of
independent counsel, conducted an investigation that began in August 2000 and
was completed during December 2000 into these transactions, including the
consideration of certain additional information that the Company received from
the OCC. After evaluating the results of the investigation, the Company
concluded that the above transactions should have been accounted for as an
exchange (i.e., one related transaction) rather than as separate transactions
and that a loss should be recorded. As a result the Company restated its 1998
consolidated financial statements. The loss on exchange created a lower cost
basis, by a like amount, for the assets purchased. See Note 5 of the notes to
the unaudited consolidated financial statements for a discussion of these
restatements.
In addition, as part of this process, the Company will again re-file its Call
Reports to reflect the same accounting treatment and loss described above. This
action is being taken as the original loss of $24,602,000, which amount was
based on a directive of the OCC (under a temporary cease and desist order),
recorded by the Company for regulatory purposes in the previously re-filed Call
Reports differed from the Company's final conclusions and recording of the
$22,223,000 loss described above, which amount was based on management's
determination of the fair value of the assets acquired. The Company's
determination of the fair value was agreed to by the OCC in recent discussions
with the OCC. Therefore, the Company's restated consolidated financial
statements and the Company's re-filed Call Reports will be consistent as it
relates to this loss on exchange.
The Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three and nine months ended September 30, 1999 presented
herein have been adjusted to reflect the restatement described above.
8
<PAGE> 10
FINANCIAL CONDITION - SEPTEMBER 30, 1999 VS. DECEMBER 31, 1998.
Total consolidated assets decreased $31.1 million, or 1.8 percent, during
the first nine months of 1999, which included a decrease of $33.2 million
in non-interest earning assets offset by an increase of $2.1 million in
interest earning assets. The decrease in consolidated assets is due
primarily to a decrease of $46.1 million in amounts due from customers on
bankers acceptances. Loans-net increased by $40.1 million, while
interest-earning deposits with other banks increased by $20.0 million.
During the quarter, the Company continued to adjust its asset composition
to take advantage of opportunities in the U. S. market with its rising
trade deficits and the need for the countries of Latin America to export
their way out of their recessionary environment. As a consequence, the
Company's exposure in the U. S increased relative to the Region.
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 $58.9 million at September 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 increased to $220.2 million at
September 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 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 $96.4 million at September 30, 1999
from $105.6 million at December 31, 1998. The decrease has been primarily
in government agency securities which 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.
9
<PAGE> 11
LOANS
The Company's gross loan portfolio increased by $52.3 million, or 4.5 percent,
during the first nine months of 1999 in relation to the year ended December 31,
1998. Commercial-domestic loans increased by $82.6 million and domestic
acceptances discounted increased by $9.7 million, a combined increase of 26.7
percent. At September 30, 1999 approximately 36.1 percent of the Company's
portfolio consisted of loans to domestic borrowers and 63.9 percent of the
Company's portfolio consisted of loans to foreign borrowers. The Company's loan
portfolio is relatively short-term, as approximately 52.1 and 69.5 percent of
loans at September 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>
September 30, 1999 December 31, 1998
------------------------ -----------------------
<S> <C> <C>
Domestic:
Commercial (1) $ 371,599 $ 289,032
Acceptances discounted 66,389 56,706
Residential mortgages 2,165 10,494
Installment 167 232
------------------------ -----------------------
Subtotal Domestic 440,320 356,464
------------------------ -----------------------
Foreign:
Banks and other financial institutions 299,161 302,371
Commercial and industrial (1) 354,388 395,987
Acceptances discounted 44,379 72,597
Government and official institutions 80,833 39,309
------------------------ -----------------------
Subtotal Foreign 778,761 810,264
------------------------ -----------------------
Total Loans $ 1,219,081 $ 1,166,728
======================== =======================
</TABLE>
(1) Includes pre-export financing, warehouse receipts and refinancing of letter
of credits.
10
<PAGE> 12
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 September 30, 1999 approximately 30.5 percent in principal amount of the
Company's loans were outstanding to borrowers in four countries other than the
United States: Brazil (11.0 percent), Panama (8.5 percent), Argentina (5.8
percent) and Guatemala (5.2 percent).
LOANS BY COUNTRY
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------------------ --------------------------------------
Percent of Percent of
Country Amount Total Loans Amount Total Loans
--------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
United States $ 440,320 36.1% $ 356,464 30.6%
Argentina 71,012 5.8% 36,276 3.1%
Bolivia (1) -- -- 20,816 1.8%
Brazil 134,148 11.0% 54,862 4.7%
British West Indies (1) 22,208 1.8% -- --
Colombia 38,350 3.1% 41,911 3.6%
Dominican Republic 28,043 2.3% 29,563 2.5%
Ecuador 42,087 3.5% 46,917 4.0%
El Salvador 30,246 2.5% 37,196 3.2%
Guatemala 63,095 5.2% 119,227 10.2%
Honduras 40,348 3.3% 59,564 5.1%
Jamaica 42,943 3.5% 29,066 2.5%
Mexico 18,028 1.5% 22,983 2.0%
Panama 103,364 8.5% 118,680 10.2%
Peru 47,413 3.9% 49,382 4.2%
Suriname (1) -- -- 21,868 1.9%
Venezuela (1) -- -- 19,756 1.7%
Other (2) 97,476 8.0% 102,197 8.8%
--------------- ----------------- ----------------- -----------------
Total $ 1,219,081 100.0% $ 1,166,728 100.0%
=============== ================= ================= =================
</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.
At September 30, 1999 approximately 33.4 percent in cross-border outstandings
were outstanding to borrowers in five countries other than the United States:
Brazil (11.3 percent), Argentina (7.0 percent), Panama (6.1 percent), Ecuador
(4.6 percent), and Guatemala (4.4 percent).
11
<PAGE> 13
TOTAL CROSS-BORDER OUTSTANDINGS BY COUNTRY
(Dollars in millions)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------------- ----------------------------
% of Total % of Total
Amount Assets Amount Assets
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Argentina $ 117 7.0% $ 57 3.4%
Bahamas (1) 37 2.2% -- 0.0%
Bolivia 13 0.8% 26 1.5%
Brazil 187 11.3% 94 5.6%
British West Indies 15 0.9% 36 2.1%
Colombia 45 2.7% 49 2.9%
Costa Rica (1) -- 0.0% 16 0.9%
Dominican Republic 48 2.9% 48 2.8%
Ecuador 77 4.6% 100 5.9%
El Salvador 34 2.0% 52 3.1%
Guatemala 73 4.4% 131 7.7%
Honduras 46 2.8% 69 4.1%
Jamaica 49 2.9% 40 2.4%
Mexico 18 1.1% 23 1.4%
Nicaragua (1) -- 0.0% 15 0.9%
Panama 101 6.1% 118 7.0%
Peru 58 3.5% 56 3.3%
Suriname 28 1.7% 27 1.6%
United Kingdom (1) 15 0.9% -- 0.0%
Venezuela 19 1.1% 19 1.1%
Other (2) 50 3.0% 76 4.5%
------------ ------------ ------------- ------------
Total $ 1,030 62.0% $ 1,052 62.1%
============ ============ ============= ============
</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.
12
<PAGE> 14
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 33.8 percent to $381.9 million for the nine months ended September
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) Nine Months Ended September 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) $ 176,363 $ 19,596 $ 306,390 $ 34,043 $ 397,683 $ 33,140
Import Letters of Credit (1) 205,554 22,839 270,761 30,085 349,099 29,092
-------------------------- -------------------------- ------------------------------
Total $ 381,917 $ 42,435 $ 577,151 $ 64,128 $ 746,782 $ 62,232
========================== ========================== ==============================
</TABLE>
(1) Represents certain contingent liabilities not reflected on the Company's
balance sheet.
13
<PAGE> 15
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 7.5 percent from December 31, 1998 to September 30, 1999.
Individual fluctuations reflect relative changes in the flow of trade or
instruments used in financing such trade.
CONTINGENT LIABILITIES (1)
(in thousands) September 30, 1999 December 31, 1998
-------------------- -----------------------
Argentina (2) $ -- $ 1,680
Aruba (2) 3,525 --
Bolivia (2) -- 3,890
Brazil (2) 3,343 --
Costa Rica 8,856 2,846
Dominican Republic 13,466 7,015
Ecuador (2) -- 3,703
El Salvador 5,021 1,995
Guatemala 8,814 26,132
Guyana 3,954 2,374
Haiti 4,793 2,088
Honduras 2,963 2,427
Nicaragua (2) 2,097 -
Panama 4,856 14,538
Paraguay (2) -- 1,961
Suriname 6,504 11,690
Switzerland (2) -- 1,588
United States 61,640 39,415
Venezuela (2) 2,593 -
Other (3) 5,928 5,374
-------------------- -----------------------
Total $ 138,353 $ 128,716
==================== =======================
(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 loans to borrowers in
or doing business with that country.
14
<PAGE> 16
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 September 30, 1999
the allowance for credit losses was approximately $25.1 million. The increase in
the allowance is related to recent economic and political events in Ecuador as
well as conditions in Latin America.
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>
Nine Months Ended Year Ended
September 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 (1,325) (3,357)
Acceptances -- (100)
Installment (5) --
------------------------ -------------------------
Total Domestic (1,330) (3,457)
------------------------ -------------------------
Foreign:
Banks and other financial institutions (656) (3,901)
Commerical and industrial (3,337) -
------------------------ -------------------------
Total Foreign (3,993) (3,901)
------------------------ -------------------------
Total charge-offs (5,323) (7,358)
------------------------ -------------------------
Recoveries:
Domestic:
Commercial 1 12
Foreign:
Banks and other financial institutions -- 202
------------------------ -------------------------
Total recoveries 1 214
------------------------ -------------------------
Net (charge-offs) recoveries (5,322) (7,144)
Provision for credit losses 17,665 9,621
------------------------ -------------------------
Balance at end of the period $ 25,137 $ 12,794
======================== =========================
Average loans $ 1,160,159 $ 1,165,224
Total loans $ 1,219,081 $ 1,166,728
Net charge-offs to average loans 0.45% 0.61%
Allowance to total loans 2.06% 1.10%
</TABLE>
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.
15
<PAGE> 17
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
(in thousands)
<TABLE>
<CAPTION>
As of As of
September 30, 1999 December 31, 1998
------------------------ -----------------------
<S> <C> <C>
Allocation of the allowance by category of loans:
Domestic:
Commercial $ 4,338 $ 945
Acceptances 430 211
Residential 14 66
Installment 3 3
Overdraft 85 190
------------------------ -----------------------
Total domestic 4,870 1,415
Foreign:
Government and official institutions 1,285 --
Banks and other financial institutions 4,432 3,033
Commercial and industrial 14,099 8,010
Acceptances discounted 451 336
------------------------ -----------------------
Total foreign 20,267 11,379
Total $ 25,137 $ 12,794
======================== =======================
Percent of loans in each category to total loans:
Domestic:
Commercial 30.5% 24.8%
Acceptances 5.5% 4.9%
Residential 0.2% 0.9%
Installment 0.0% 0.0%
Overdraft 0.0% 0.0%
------------------------ -----------------------
Total domestic 36.2% 30.6%
Foreign:
Banks and other financial institutions 24.5% 25.9%
Commercial and industrial 29.1% 33.9%
Acceptances discounted 3.6% 6.2%
Government and official institutions 6.6% 3.4%
------------------------ -----------------------
Total foreign 63.8% 69.4%
Total 100.0% 100.0%
======================== =======================
</TABLE>
16
<PAGE> 18
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ALLOCATED TO FOREIGN LOANS
(in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------ -----------------------
<S> <C> <C>
Balance, beginning of period $ 11,379 $ 7,890
Provision for credit losses
12,881 7,188
Net charge-offs (3,993) (3,699)
------------------------ -----------------------
Balance, end of period $ 20,267 $ 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>
September 30, 1999 December 31, 1998
------------------------ -----------------------
<S> <C> <C>
Domestic:
Non accrual $ 2,578 $ 2,189
Past due over 90 days and accruing 5 69
------------------------ -----------------------
Total domestic nonperforming loans 2,583 2,258
------------------------ -----------------------
Foreign
Non accrual 10,319 6,396
Past due over 90 days and accruing -- 404
------------------------ -----------------------
Total foreign nonperforming loans 10,319 6,800
------------------------ -----------------------
Total nonperforming loans $ 12,902 $ 9,058
======================== =======================
Total nonperforming loans to total loans 1.06% 0.78%
Total nonperforming assets to total assets 0.78% 0.53%
</TABLE>
At September 30, 1999 and December 31, 1998 the Company had no nonaccruing
investment securities.
17
<PAGE> 19
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 $29.5 million and $7.1 million, respectively, at September 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 nine Bank
branches located in Florida and Puerto Rico. 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 $1,484.3 million at September 30, 1999 compared to $1,477.1
million at December 31, 1998. The increase in deposits during the nine month
period was largely in savings and transaction deposit accounts which increased
by $34.8 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 September 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 $ 191,710 $ 27,022 $ 218,732
Over 3 through 6 months 60,752 932 61,684
Over 6 through 12 months 126,565 5,589 132,154
Over 12 months 63,661 -- 63,661
---------------------- ---------------------- -------------------
Total $ 442,688 $ 33,543 $ 476,231
====================== ====================== ===================
</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 September 30, 1999 was $121.9 million
compared to $109.2 million at December 31, 1998. During this period
stockholders' equity increased by $12.6 million primarily due to the retention
of net income.
18
<PAGE> 20
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 September 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.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY REPORT
(Dollars in thousands)
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 $ 183,405 $ 244,792 $ 207,022 $212,478 $ 294,950 $ 76,434 $1,219,081
Federal funds sold 38,921 38,921
Investment securities 998 35,305 2,946 1,200 3,100 50,790 94,339
Interest earning deposits with
other banks 63,459 36,351 48,550 71,802 -- 220,162
------------------------------------------------------------------------------------
Total 286,783 316,448 258,518 285,480 298,050 127,224 1,572,503
------------------------------------------------------------------------------------
Funding Sources:
Savings and transaction deposits 96,609 28,719 125,328
Certificates of deposits of $100 thousand
or more 38,949 152,761 60,752 126,565 63,661 -- 442,688
Certificates of deposits under $100 thousand 81,936 187,416 181,728 256,244 57,321 78 764,723
Other time deposits 20,322 6,700 932 5,589 33,543
Funds overnight 4,550 4,550
Trust preferred securities 12,650 12,650
------------------------------------------------------------------------------------
Total $242,366 $ 375,596 $243,412 $ 388,398 $120,982 $ 12,728 $1,383,482
====================================================================================
Interest sensitivity gap $ 44,417 $ (59,148) $ 15,106 $ (102,918) $177,068 $ 114,496 $ 189,021
====================================================================================
Cumulative gap $ 44,417 $ (14,731) $ 375 $(102,543) $ 74,525 $ 189,021
=======================================================================
Cumulative gap as a percentage
of total earning assets 2.82% -0.94% 0.02% -6.52% 4.74% 12.02%
=======================================================================
</TABLE>
19
<PAGE> 21
LIQUIDITY
Cash and cash equivalents decreased by $52.9 million from December 31, 1998.
During the first nine months of 1999, net cash provided by operating activities
was $31.2 million, net cash used in investing activities was $87.0 which was
offset by net cash provided by financing activities of $2.8 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. 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.
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 September 30, 1999 interest-earning assets maturing within six
months were $861.7 million, representing 54.8 percent of total earning assets
and earning assets maturing within one year were $1.147 billion or 73.0 percent
of total earning assets. The interest bearing liabilities maturing within six
months were $861.4 million or 62.2 percent of total interest bearing liabilities
and maturing within one year were $1.250 billion or 90.3 percent of the total at
September 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 September 30, 1999 were $305 million, 18.3 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 September 30, 1999
the Company had been advised of $57 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.
The Company is in discussions with its banking regulatory agency regarding the
proper application of the mandatory regulatory accounting reserve rules under
the requirements of the Interagency Country Exposure Review Committee of the
U.S. bank regulatory agencies. If such mandatory regulatory accounting reserves
are applicable, the Company's capital ratios for regulatory purposes may be
reduced, but are expected to remain within the current classification of "well
capitalized," the highest classification category.
20
<PAGE> 22
BANCORP CAPITAL RATIOS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------------------ ------------------------------------
Amount Ratio Amount Ratio
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
Tier 1 risk-weighted
Capital:
Actual $ 110,378 10.2% $ 118,964 10.9%
Minimum 43,416 4.0% 43,816 4.0%
Total risk-weighted
Capital:
Actual 124,460 11.5% 131,758 12.0%
Minimum 86,832 8.0% 87,633 8.0%
Leverage:
Actual 110,378 7.0% 118,964 7.3%
Minimum 47,578 3.0% 49,102 3.0%
</TABLE>
BANK CAPITAL RATIOS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
---------------------------------- ----------------------------------
Amount Ratio Amount Ratio
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Tier 1 risk-weighted capital:
Actual $ 103,600 9.6% $ 108,410 11.1%
Minimum to be well capitalized 64,950 6.0% 65,680 6.0%
Minimum to be adequately capitalized 43,300 4.0% 43,787 4.0%
Total risk-weighted capital:
Actual 117,644 10.9% 121,204 11.1%
Minimum to be well capitalized 108,251 10.0% 109,467 10.0%
Minimum to be adequately capitalized 86,600 8.0% 87,574 8.0%
Leverage:
Actual 103,600 6.6% 108,410 6.6%
Minimum to be well capitalized 79,056 5.0% 81,856 5.0%
Minimum to be adequately capitalized 63,245 4.0% 65,485 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.
21
<PAGE> 23
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 September 30, 1999 shows that interest
bearing liabilities maturing or repricing within one year exceed interest
earning assets by $101.6 million. The Company monitors that the assets and
liabilities are closely matched to minimize interest rate risk. On September 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 .7 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.
On a daily basis the Bank's Chief Financial Officer and the Bank's Treasurer are
responsible for measuring and managing market risk.
RESULTS OF OPERATIONS-NINE 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 $44.0 million for the nine months ended September 30, 1999 from
$38.9 million for the same period in 1998, a 13.1 percent increase. The increase
was due largely to an increase in average earning assets coupled with a slight
increase in the net interest margin. Average earning assets increased to $1.500
billion for the nine months ended September 30, 1999 from $1.337 billion for the
same period in 1998, a 12.2 percent increase. Average loans and acceptances
discounted increased to $1.160 billion for the nine months ended September 30,
1999 from $1.136 billion for the same period in 1998, a 2.1 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 $171.9 million for the nine months ended September 30, 1999
from $113.9 million for the same period in 1998, a 50.9 percent increase. Net
interest margin increased to 3.93 percent for the nine months ended September
30, 1999 from 3.89 percent for the same period in 1998, a 4 basis point
increase.
Interest income increased to $97.7 million for the nine months ended September
30, 1999 from $89.5 million for the same period in 1998, a 9.2 percent increase,
reflecting an increase in time deposits with banks as well as loans. This
increase was partially offset by a decrease in prevailing interest rates.
Interest expense increased to $53.7 million for the nine months ended September
30, 1999 from $50.6 million for the same period in 1998, a 6.1 percent increase,
reflecting the additional deposits to fund asset growth and offset by a decrease
in cost of funds. Average interest-bearing deposits increased to $1.331 billion
for the nine months ended September 30, 1999 from $1.177 billion for the same
period in 1998, a 13.1 percent increase.
22
<PAGE> 24
<TABLE>
<CAPTION>
YIELDS EARNED AND RATE PAID
----------------------------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 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 $1,038,115 $69,689 8.85% $983,953 $66,402 8.90%
Acceptances discounted 110,611 7,417 8.84% 127,602 8,951 9.25%
Overdraft 8,022 1,347 22.14% 12,057 1,547 16.93%
Mortgage loans 3,194 160 6.61% 11,708 720 8.10%
Installment loans 217 14 8.51% 282 20 9.13%
---------------------------- ----------------------------
TOTAL LOANS 1,160,159 78,627 8.94% 1,135,602 77,640 9.02%
Time deposits with banks 171,931 11,522 8.84% 113,929 7,684 8.89%
Investments 138,699 6,469 6.15% 66,861 3,295 6.50%
Federal funds sold 29,659 1,104 4.91% 20,172 844 5.52%
---------------------------- ----------------------------
Total investments and time deposits
with banks 340,289 19,095 7.40% 200,962 11,823 7.76%
------------- ------------
Total interest earning assets 1,500,448 97,722 8.59% 1,336,564 89,463 8.83%
------------- ------------
Total non interest earning assets 104,485 119,058
--------------- ----------------
TOTAL ASSETS $1,604,933 $1,455,622
=============== ================
INTEREST BEARING LIABILITIES
DEPOSITS:
NOW amd savings accounts $23,398 425 2.40% $20,241 318 2.07%
Money Market 44,081 1,558 4.66% 46,119 1,626 4.65%
Presidential Money Market 38,797 1,391 4.73% 2,440 52 2.83%
Certificate of Deposits (including IRA) 1,126,761 45,750 5.35% 967,504 42,323 5.77%
Time Deposits with Banks (IBF) 91,736 3,200 4.60% 140,134 5,800 5.46%
Other 6,393 234 4.83% 1,180 41 4.58%
---------------------------- ----------------------------
TOTAL DEPOSITS 1,331,166 52,558 5.21% 1,177,618 50,160 5.62%
Trust Preferred Securities 12,565 923 9.69% 0 0 0.00%
Other Borrowings 1,813 104 7.56% 4,116 234 7.49%
Federal Funds Purchased 1,876 74 5.20% 4,577 197 5.69%
---------------------------- ----------------------------
Total interest bearing liabilities 1,347,420 53,659 5.25% 1,186,311 50,592 5.62%
---------------------------- ----------------------------
Non interest bearing liabilities
Demand Deposits 75,097 69,545
Other Liabilities 63,573 91,284
--------------- ----------------
Total non interest bearing liabilities 138,670 160,829
Stockholders equity 118,843 108,482
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,604,933 $1,455,622
=============== ================
NET INTEREST INCOME/NET INTEREST SPREAD $44,063 3.34% $38,872 3.20%
============= ========== ============ =========
MARGIN:
INTEREST INCOME/INTEREST EARNING ASSETS 8.71% 8.95%
INTEREST EXPENSE/INTEREST EARNING ASSETS 4.78% 5.06%
---------- ---------
NET INTEREST MARGIN 3.93% 3.89%
========== =========
</TABLE>
23
<PAGE> 25
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses increased to $17.7 million for the
nine months ended September 30, 1999 from $7.1 million for the same period in
1998. Management decided to increase the provision for loan losses reflecting
recent economic and political events in Ecuador coupled with conditions in Latin
America. Net loan charge-offs during the first nine months of 1999 amounted to
$5.3 million compared to $7.1 million for the same period in 1998. The allowance
for credit losses increased from $12.8 million at December 31, 1998 to $25.1
million at September 30, 1999. The ratio of the allowance for credit losses to
total loans was 2.06 percent at September 30, 1999 increasing from approximately
1.10 percent at December 31, 1998.
NON-INTEREST INCOME
Non-interest income increased to $14.2 million for the nine months ended
September 30, 1999 from $12.2 million for the same period in 1998, a 16.4
percent increase. Structuring and syndication fees increased by $1.6 million as
a result of several transactions completed during the period. This was offset by
a decrease in trade finance fees and commissions of $756 thousand. The increase
in other non-interest income is due to an increase in account analysis fees,
Harmoney(R); a proprietary internet based remote banking system; and other fees.
In addition, non-interest income included gains on sales of loans of $543
thousand, which is 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 Nine Months Ended September 30,
-----------------------------------------------
1998 to 1999
1999 Percent Change 1998
------------- ---------------- -------------
<S> <C> <C> <C>
Trade finance fees and commissions $ 9,380 -7.5% $ 10,136
Structuring and syndication fees 2,899 122.0% 1,306
Customer service fees 465 5.0% 443
Gain (loss) on sale of assets 560 -354.5% (220)
Other 907 72.1% 527
------------- ---------------- -------------
Total non-interest income $ 14,211 16.6% $ 12,192
============= ================ =============
</TABLE>
OPERATING EXPENSES
Operating expenses increased to $21.9 million for the nine months ended
September 30, 1999 from $19.1 million for the same period in 1998, a 14.7
percent increase. The majority of this increase was in other expenses which
increased to $9.1million for the nine months ended September 30, 1999 from $6.9
million for the same period in 1998. This increase was largely due to increased
legal expenses which was the result of an increase in the number of litigation
cases in the ordinary course of business during the period. In addition, during
1999 the Company purchased political risk insurance which increased the
operating expenses. The Company's efficiency ratio increased slightly to 37.7
percent for the nine month period ended September 30, 1999 from 37.5 percent for
the same period in 1998.
24
<PAGE> 26
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 Nine Months Ended September 30,
---------------------------------------------
1998 to 1999
1999 Percent Change 1998
----------- ----------------- -----------
<S> <C> <C> <C>
Employee compensation and benefits $ 9,769 7.6% $9,080
Occupancy and equipment 3,115 -0.6% 3,133
Other operating expenses 9,056 30.9% 6,919
----------- ----------------- -----------
Total operating expenses $21,940 14.7% $ 19,132
=========== ================= ===========
</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 $150,000 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
estimates. However, there can be no assurance that these estimates will be
achieved and actual results could differ.
25
<PAGE> 27
RESULTS OF OPERATIONS-THIRD 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 $16.3 million for the quarter ended September 30, 1999 from $13.7
million for the same period in 1998, a 19.0 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 $1.511 billion for the
quarter ended September 30, 1999 from $1.455 billion for the same period in
1998, a 3.9 percent increase. Average loans and acceptances discounted decreased
to $1.176 billion for the quarter ended September 30, 1999 from $1.222 billion
for the same period in 1998. The increase in average interest earning assets for
the quarter was primarily in time deposits with other banks which increased by
40.4 percent to $197.8 million and investments which increased by 67.6 percent
to $117.3 million for the quarter. Net interest margin increased significantly
to 4.29 percent for the quarter ended September 30, 1999 from 3.74 percent for
the same period in 1998. The primary reason for the increase is the 48 basis
point decrease in the cost of interest bearing deposits. The overall cost of
funds decreased to 5.20 percent for the quarter ended September 30, 1999 from
5.65 percent for the same period in 1998.
Interest income increased to $34.2 million for the quarter ended September 30,
1999 from $32.5 million for the same period in 1998, a 5.2 percent increase,
reflecting an increase in time deposits with banks as well as loans in the U. S.
Interest expense decreased to $17.9 million for the quarter ended September 30,
1999 from $18.7 million for the same period in 1998, a 4.3 percent decrease.
Average interest-bearing deposits increased to $1.331 billion for the quarter
ended September 30, 1999 from $1.290 billion for the same period in 1998, a 3.2
percent increase; primarily in Presidential Money Market accounts and
Certificates of Deposits.
26
<PAGE> 28
<TABLE>
<CAPTION>
YIELDS EARNED AND RATE PAID
-----------------------------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED
SEPTEMBER 30, 1999 SEPTEMBER 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 $1,062,951 $24,694 9.09% $1,063,958 $23,902 8.79%
Acceptances discounted 105,365 2,386 8.86% 132,374 3,131 9.26%
Overdraft 5,564 362 25.46% 13,535 553 15.99%
Mortgage loans 2,178 44 7.91% 11,550 235 7.93%
Installment loans 218 4 7.18% 299 7 9.09%
------------------------------ ------------------------------
TOTAL LOANS 1,176,276 27,490 9.14% 1,221,716 27,828 8.91%
Time deposits with banks 197,848 4,562 9.02% 140,890 3,146 8.74%
Investments 117,281 1,928 6.43% 70,006 1,164 6.51%
Federal funds sold 19,615 255 5.09% 21,970 312 5.56%
------------------------------ ------------------------------
Total investments and time deposits
with banks 334,744 6,745 7.88% 232,866 4,622 7.77%
-------------- -------------
Total interest earning assets 1,511,020 34,235 8.87% 1,454,582 32,450 8.73%
-------------- -------------
Total non interest earning assets 89,200 110,891
---------------- -----------------
TOTAL ASSETS $1,600,220 $1,565,473
================ =================
INTEREST BEARING LIABILITIES
DEPOSITS:
NOW amd savings accounts $24,661 154 2.44% $20,262 106 2.05%
Money Market 42,743 529 4.84% 48,232 611 4.95%
Presidential Money Market 49,969 602 4.72% 1,793 14 3.07%
Certificate of Deposits (including IRA) 1,134,810 15,306 5.28% 1,100,236 16,099 5.73%
Time Deposits with Banks (IBF) 76,536 914 4.67% 117,603 1,730 5.76%
Other 2,773 39 5.50% 1,461 21 5.65%
------------------------------ ------------------------------
TOTAL DEPOSITS 1,331,492 17,544 5.16% 1,289,587 18,581 5.64%
Trust Preferred Securities 12,650 313 9.68% 0 0 0.00%
Other Borrowings 0 0 0.00% 6,116 117 7.48%
Federal Funds Purchased 2,391 33 5.40% 2,098 31 5.80%
------------------------------ ------------------------------
Total interest bearing liabilities 1,346,533 17,890 5.20% 1,297,801 18,729 5.65%
------------------------------ ------------------------------
Non interest bearing liabilities
Demand Deposits 77,370 69,775
Other Liabilities 50,650 83,285
---------------- -----------------
Total non interest bearing liabilities 128,020 153,060
Stockholders equity 125,667 114,612
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,600,220 $1,565,473
================ =================
NET INTEREST INCOME/NET INTEREST SPREAD $16,345 3.67% $13,721 3.08%
============== ========= ============= ===========
MARGIN:
INTEREST INCOME/INTEREST EARNING ASSETS 8.99% 8.85%
INTEREST EXPENSE/INTEREST EARNING ASSETS 4.70% 5.11%
--------- -----------
NET INTEREST MARGIN 4.29% 3.74%
========= ===========
</TABLE>
27
<PAGE> 29
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses increased to $15.0 million for the
quarter ended September 30, 1999 from $3.0 million in the same period in 1998.
Management decided to increase the provision for credit losses in light of
recent events in Ecuador and Latin America as discussed previously. Net loan
charge-offs during the third quarter of 1999 amounted to $2.6 million compared
to $6.3 million for the same period in 1998. The allowance for credit losses
increased from $12.8 million at December 31, 1998 to $25.1 million at September
30, 1999. The ratio of the allowance for credit losses to total loans was 2.06
percent at September 30, 1999 increasing from approximately 1.10 percent at
December 31, 1998.
NON-INTEREST INCOME
Non-interest income increased to $4.8 million for the quarter ended September
30, 1999 from $4.3 million for the same period in 1998, an 11.6 percent
increase. During the quarter the Company sold a $7.0 million foreign government
loan and realized a gain on sale of $346 thousand. Structuring and syndication
fees increased by $539 thousand while trade finance fees decreased by $565
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 September 30,
------------------------------------------------
1998 to 1999
1999 Percent Change 1998
-------------- ---------------- --------------
<S> <C> <C> <C>
Trade finance fees and commissions $ 2,948 -16.1% $ 3,513
Structuring and syndication fees 1,102 95.7% 563
Customer service fees 140 6.1% 132
Gain on sale of assets 346 100.0% --
Other 286 410.7% 56
-------------- ---------------- --------------
Total non-interest income $ 4,822 13.1% $ 4,264
============== ================ ==============
</TABLE>
OPERATING EXPENSES
Operating expenses increased to $7.3 million for the quarter ended September 30,
1999 from $6.8 million for the same period in 1998, a 8.2 percent increase. The
majority of this increase was due to the opening of the Weston branch on July 6,
1999 as well as additional expenses relating to computer systems upgrades. The
Company's efficiency ratio improved to 34.5 percent for the three month period
ended September 30, 1999 from 37.6 percent for the same period in 1998.
28
<PAGE> 30
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 September 30,
-------------------------------------------------
1998 to 1999
1999 Percent Change 1998
----------- ----------------- ---------------
<S> <C> <C> <C>
Employee compensation and benefits $ 3,258 7.4% $ 3,033
Occupancy and equipment 1,118 12.1% 997
Other operating expenses 2,934 7.5% 2,729
----------- ----------------- ---------------
Total operating expenses $ 7,310 8.2% $ 6,759
=========== ================= ===============
</TABLE>
29
<PAGE> 31
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: December 18, 2000 Hamilton Bancorp Inc.
/s/ J. Carlos Bernace
------------------------------------
J. Carlos Bernace,
Executive Vice President
/s/ Eva Lynn Hernandez
------------------------------------
Eva Lynn Hernandez,
Vice President - Finance, Controller
and Chief Accounting Officer
30
