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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Mark One)
[X] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934:
For the fiscal year ended: December 31, 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
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HAMILTON BANCORP INC.
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(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0149935
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3750 N.W. 87th Avenue, Miami, Florida 33178
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (305) 717-5500
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
9.75% Beneficial Unsecured Securities, Series A
(Liquidation Amount $10 per Capital Security) of Hamilton Capital Trust I
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(Title of Class)
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Indicate by check mark [X] whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this From 10-K.
The aggregate market value of Registrant's Common Stock held by
non-affiliates of the Registrant as of March 23, 2000 was $153,682,346 based
upon the average of the high and low price of a share of Common Stock as
reported by the NASDAQ National Market on such date. As of March 23, 2000,
10,081,147 shares of Registrant's Common Stock were outstanding.
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10-K/A for 12/31/99
Cover to Come.
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ITEMS 1 AND 6 OF PART I AND ITEMS 7, 7A AND 8 OF PART II OF THE REGISTRANT'S
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 ARE HEREBY AMENDED TO READ AS
FOLLOWS:
PART I
ITEM 1. BUSINESS.
GENERAL
Hamilton Bancorp Inc. ("Hamilton Bancorp"), through its subsidiary,
Hamilton Bank, N.A. ("Hamilton Bank"), (Hamilton Bancorp and Hamilton Bank are
collectively referred to herein as the "Company"), is engaged in providing
global trade finance with particular emphasis on trade with and between South
America, Central America and the Caribbean (collectively, the "Region") and the
United States or otherwise involving the Region. Management believes that trade
finance provides the Company with the opportunity for substantial and
profitable growth, primarily with moderate credit risk, and that Hamilton Bank
is the only domestic financial institution in the State of Florida focusing
primarily on financing foreign trade. Through its relationships with
approximately 500 correspondent banks and with importers and exporters in the
United States and the Region, as well as its location in South Florida, which
is becoming a focal point for trade in the Region, the Company has been able to
take advantage of substantial growth in this trade. Much of this growth has
been associated with the adoption of economic stabilization policies in the
major countries of the Region.
The Company operates in all major countries throughout the
Region and has been particularly active in several smaller markets, such as
Guatemala, Ecuador, Panama and Peru. Management believes that these smaller
markets are not primary markets for the larger, multinational financial
institutions and, therefore, customers in such markets do not receive a similar
level of service from such institutions as that provided by the Company. To
enhance its position in certain markets, the Company has made minority
investments in indigenous financial institutions in Guyana, El Salvador, Peru
and Nicaragua. The Company has also strengthened its relationships with
correspondent financial institutions in the Region by acting as placement
agent, from time to time, for debt instruments or certificates of deposit
issued by many of such institutions.
The Company seeks to generate income by participating in multiple
aspects of trade transactions that generate both fee and interest income. The
Company earns fees primarily from opening and confirming letters of credit and
discounting acceptances and earns interest on credit extended, primarily in the
form of commercial loans, for pre- and post-export financing, such as
refinancing of letters of credit, and to a lesser extent, from discounted
acceptances. As the economy in the Region has grown and stabilized and the
Company has begun to service larger customers, the balance of the Company's
trade financing activities has shifted somewhat from letters of credit to the
discounting of commercial trade paper and the granting of loans, resulting in
relatively less fee income but increased interest income. Virtually all of the
Company's business is conducted in United States dollars. Management believes
that the Company's primary focus on trade finance, its wide correspondent
banking network in the Region, broad range of services offered, management
experience, reputation and prompt decision-making and processing capabilities
provide it with important competitive advantages in the trade finance business.
The Company seeks to mitigate its credit risk through its knowledge and
analysis of the markets it serves, by obtaining third-party guarantees of both
local banks and importers on many transactions, by often obtaining security
interests in goods being financed and by the short-term, self-liquidating
nature of trade transactions. At December 31, 1999, approximately 56% of the
Company's loan portfolio consisted of short-term principally trade related
loans maturing within 180 days and approximately 69% maturing within 365 days.
Credit is generally extended under specific credit lines for each customer and
country. These credit lines are reviewed at least annually.
Lending activities are funded primarily through domestic consumer
deposits gathered through a network of eight branches in Florida and one branch
in San Juan, Puerto Rico as well as deposits received from correspondent banks,
corporate customers and private banking customers within the Region. The
Company's branches are strategically located in markets where it believes there
is both a concentration of retail deposits and foreign trade activity. The
Company also participates in various community lending activities, and under
several United States and Florida laws and regulations Hamilton Bank is
considered a minority bank and is able to participate in certain beneficial
minority programs involving both deposits and loans.
DEVELOPMENTS IN CERTAIN EMERGING MARKET COUNTRIES
The economies of various countries in the Region, including Brazil,
Ecuador and Venezuela, have been characterized by frequent and occasionally
drastic intervention by the governments and volatile economic cycles.
Governments have often changed monetary, credit, tariff and other policies to
influence the course of their respective economies. The actions of the
Brazilian, Ecuadorian and Venezuelan Governments to control inflation and
effect other policies have often involved wage and price controls as well as
other interventionist measures, such as Ecuador's freezing of bank accounts
early in 1999. Changes in
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policies in other countries in the Region involving tariffs, exchange controls,
regulations and taxation could significantly increase the likelihood of causing
restrictions on transfers of Dollars out of such countries, as could inflation,
devaluation, social instability and other political, economic or diplomatic
developments.
Brazilian, Ecuadorian and Venezuelan financial and securities markets,
as well as other financial and securities markets in the Region, are, to
varying degrees, influenced by economic and market conditions in other emerging
market countries and other countries in the Region. Although economic
conditions are different in each country, investor reaction to developments in
one country can have significant effects on the financial markets and
securities of issuers in other countries. These developments have adversely
affected the securities and other financial markets in many emerging markets,
including Brazil, Ecuador and Venezuela. One result of these difficulties has
been the closing of numerous banks in some countries in the Region, especially
in Ecuador. To date, however, the Ecuadorian government has guaranteed the
obligations of such closed banks in Ecuador. The ensuing increased market
volatility in these securities and other financial markets has also been
attributed, at least in part, to the effect of these and other similar events.
There can be no assurance that the various financial and securities markets in
the Region, including Brazil, Ecuador and Venezuela, will not continue to be
adversely affected by events elsewhere, especially in other emerging markets
and in other countries in the Region.
The Company will continue to take advantage of the United States and
international economic environment by emphasizing the financing of trade from
the Region into the United States. As a result of the deterioration of economic
conditions in some countries in the Region, trade flows into the Region on a
relative basis diminished in 1999 compared to recent years. In light of the
United States' strong economy, government budget surplus, relatively low
interest rates, strong stock market, high employment levels and strong consumer
demand, trade flows from the Region into the United States increased as such
countries attempt to capitalize on export opportunities as a way to increase
production, stimulate revenues and thereby "export out" of their economic
difficulties. The Company in 1999 placed, and expects to continue to place,
more emphasis on financing imports of goods into the United States and thereby
increase the relative size of its assets employed in the United Sates as
compared to its exposure in the Region. In addition, prudent risk management,
in particular with regard to emerging market countries, calls for avoidance of
high concentrations of risk in these countries in relation to a bank's capital.
Currently, United States bank regulatory agencies consider that exposure in
these markets should be limited to levels that would not impair the safety and
soundness of a banking institution. As a consequence, the Company's exposure in
the Region was significantly reduced in 1999 in relation to the Company's
capital.
BACKGROUND OF THE COMPANY
Hamilton Bancorp was formed as a bank holding company in 1988 in
Miami, Florida, to acquire 99.7% of the issued and outstanding shares of
Hamilton Bank. Hamilton Bank was acquired by Hamilton Bancorp to take advantage
of perceived opportunities to finance foreign trade between United States
corporate customers and companies in the Region, as the area emerged from the
Latin American debt crisis of the early 1980's, particularly since most
non-Regional financial institutions had limited interest in financing trade
with the Region at that time. Members of the Company's management, who had
extensive experience in trade finance in the Region, re-established contacts in
the Region, primarily with banks. Hamilton Bank initially offered its services
confirming letters of credit for banks in the Region. Hamilton Bank then began
to market its other trade related services and products to beneficiaries of its
letters of credit. As Hamilton Bank's relationships with correspondent banks
developed and as it developed corporate clients in the United States, Hamilton
Bank's trade finance activity continued to increase. Hamilton Bank's business
expanded into its other products and services, which primarily included other
types of trade financing instruments.
MARKET FOR COMPANY SERVICES
International trade between the United States and the Region as well
as between the State of Florida and the Region has grown significantly during
the five year period ended December 31, 1999. Recent treaties and agreements
relating to trade are expected to eliminate certain trade barriers and open up
certain economic sectors to competition, as well as to liberalize trade between
the United States and many countries with respect to a variety of goods and
services. A high and increasing percentage of this trade requires financing.
The growth and importance of trade in the United States and the Region also
increases the number of small and medium-sized firms engaged in trade and in
need of trade finance services. Many financial institutions in the United
States in general and Florida in particular are not adequately staffed to
handle such financing on a large scale, or to judge the creditworthiness of
companies or banks in the Region and, accordingly, eschew trade financing or
limit the scope of their trade financing activity. This has been partially
responsible for the expanding market for the Company's trade financing
services.
Management believes that the Company has carved out a niche for itself
as the only Florida financial institution the
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business of which is focused predominantly on financing foreign trade in the
Region. The Company initially focused on providing services and products to
smaller banks and corporate customers in the Region and smaller companies in
Florida doing business in the Region, as well as financial institutions and
customers in smaller countries in the Region where a more limited number of
large, multinational banks conduct business. The Company's willingness to
provide trade financing in these situations frequently results in it obtaining
business from the same customers involving larger countries in the Region, as
well. A significant percentage of the Company's trade financing business now
involves such larger countries. The Company does not, however, have a
significant share of the overall market in larger countries in the Region, such
as Brazil and Argentina, where it competes more frequently with larger,
multinational financial institutions. The Company also provides products and
services for multinational corporations, such as major commodities houses, and
purchases participation interests in the trade financing of multinational
financial institutions to companies in the Region. The Company's trade
financing allows for the movement of commodities such as sugar, grain and
steel, and consumer goods such as textiles and appliances, as well as computer
hardware, capital equipment and other items.
TRADE FINANCE SERVICES AND PRODUCTS
The manufacture or production and distribution of any product or good
generally results in a number of trade transactions which, together, make up a
trade cycle. For example, a seller of shirts purchases buttons and materials,
arranges for manufacture and often contracts with a distributor who sells the
products to retailers. The Company attempts to become involved in and to
finance as many stages of a trade cycle as possible. Since the Company's
primary focus is on trade finance, the Company offers a wider array of trade
finance products and services than most institutions it competes with, although
some of the Company's products and services, such as import and export letters
of credit, are offered by almost all financial institutions engaged in trade
finance, and most of the Company's products are offered by some financial
institutions. The principal trade related products and services which the
Company offers include:
. Commercial Documentary Letters of Credit. Commercial documentary
letters of credit are obligations issued by a financial institution in
connection with trade transactions where the financial institution's
credit is effectively substituted for that of its customer, who is
buying goods or services from the beneficiaries of those letters of
credit. When the bank issuing a letter of credit is not well known or
is an unacceptable risk to the beneficiary, the issuing bank must
obtain a guarantee or confirmation of the letter of credit by an
acceptable bank in the beneficiary's market. When the Company confirms
a letter of credit it assumes the credit risk of the issuing bank and
generally takes a security interest in the goods being financed. These
obligations, which are governed by their own special set of legal
rules, call for payment by the financial institution against
presentation of certain documents showing that the purchased goods or
services have been provided or are forthcoming. From time to time, a
financial institution issues a commercial documentary letter of credit
("back-to-back") against receipt of a letter of credit from another
bank in order to finance the purchase of goods. The Company commenced
its trade financing activities by confirming letters of credit for
correspondent financial institutions in the Region and then began to
sell other products and services to the beneficiaries of such letters
of credit. Commercial letters of credit are contingent liabilities of
the Company that are not recorded on the Company's balance sheet and
which generate fee income. Upon payment of a letter of credit, the
Company may refinance the obligation through a loan which will be
reflected on the Company's balance sheet as "Loans-net."
. Bankers' Acceptances. A bankers' acceptance is a time draft drawn on a
bank and accepted by it. Acceptance of the draft obligates the bank to
unconditionally pay the face value to whomever presents it at
maturity. Drafts accepted by the Company are reflected on the asset
side of the Company's balance sheet as "Due from Customers on Bankers'
Acceptances" and on the liability side as "Bankers' Acceptances
Outstanding." The Company receives a fee upon acceptance of a draft.
Discounted bankers' acceptances represent the purchase by a financial
institution of a draft at a discount. This assists an exporter in
providing terms to an importer under a letter of credit and also
provides liquidity to the exporter. Discounted bankers' acceptances
are discounts of forward maturity items and are included on the
Company's balance sheet under "Loans-net." The Company receives both
fee and interest income from discounted bankers' acceptances.
. Discounted Trade Acceptances. Discounted trade acceptances represent
an obligation of an importer to pay money on a certain date in the
future, which obligation has been accepted by the importer as payable
to the exporter, then sold by the exporter at a discount to a
financial institution. If with recourse, the financial institution as
holder of this instrument has recourse at maturity of the acceptance
to the exporter as well as the accepting importer. If without
recourse, the financial institution holding the acceptance has no
recourse to the exporter, but only to the accepting importer.
Discounted trade acceptances are discounts of forward maturity items
and are included on the Company's balance sheet under "Loans-net." The
Company receives primarily interest income from discounted trade
acceptances.
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. Pre-export Financing. Pre-export financing is provided by a financial
institution, either directly or indirectly through a second bank, to
an exporter who has a definitive international contract for the sale
of certain goods or services. Such financing funds the exporter's
manufacture, assembly and sale of these goods or services to the
purchaser abroad. Pre-export financing is reflected on the balance
sheet as "Loans-net". The Company receives primarily interest income
from pre-export financing.
. Warehouse Receipt Financing. Warehouse receipt financing provides
temporary financing, usually at a significant loan to collateral
discount, for goods temporarily held in an independent warehouse
pending their sale and/or delivery in a trade transaction. The goods
are evidenced by a receipt issued by the independent warehouse where
the goods are stored. Possession of that receipt gives the financial
institution a perfected security interest in those goods to
collateralize the credit that it is providing. Warehouse receipt
financing is reflected on the balance sheet as "Loans-net". The
Company receives primarily interest income from warehouse receipt
financing.
. Documentary Collections. For a fee, a United States financial
institution will assist financial institutions to collect at maturity
various drafts, acceptances or other obligations which have come due
and which are owed by parties abroad or in the United States.
Documentary collections are not reflected on the balance sheet and are
not contingent obligations of the Company. The Company receives fee
income from documentary collections.
. Foreign Exchange Transactions. Foreign exchange services consist of
the purchase of foreign currency on behalf of a customer. This service
includes both spot and forward transactions. Such transactions may be
conducted in both hard and soft currencies (i.e., those which are
widely accepted internationally and those that are not). The Company
conducts such transactions in both types of currencies. Foreign
exchange transactions are not reflected on the balance sheet and
represent contingent liabilities of the Company. The Company receives
fee income from foreign exchange transactions.
. Standby Letters of Credit. Standby letters of credit effectively
represent a guarantee of payment to a third party by a financial
institution, usually not in connection with an individual trade
transaction. The Company does not favor standby letters of credit.
They are only issued by the Company in situations where the Company
believes it is adequately and properly secured or that the customer is
in very strong financial condition. Standby letters of credit are not
reflected on the balance sheet and represent contingent liabilities of
the Company. The Company receives fee income from standby letters of
credit.
. International Cash Management. The Company assists corporations and
banks in the Region with the clearing of checks drawn on United States
financial institutions. As a United States financial institution and a
member of the Federal Reserve System, Hamilton Bank is able to provide
quick and efficient clearing of these items. The provision of these
services often leads to the Company providing other products and
services to corporations and banks.
. Structuring and Syndication Fees. The Company also offers structured
credit facilities to match medium-term financing needs with medium
term assets; to syndicated transactions to maximize the Bank's
capabilities within the international banking markets; to provide
alternatives to lease transactions as well as portfolio and/or capital
equipment financing; and to assist in a consolidation and/or buy-out
environment. These services generate fee income. During 1999,
approximately 32% was related to domestic transactions and 68% was
international transactions.
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Most of the Company's customers are serviced through its International
Banking and Domestic Corporate Trade Departments. The International Banking
Department services the Company's international corporate and correspondent
banking customers. The Domestic Corporate Trade Department services United
States-based relationships, primarily with domestic corporate clients. Each
corporate customer's account is coordinated by a specific officer at the
Company. Each such customer will also generally do business with the Company
officers responsible for the countries involved in a particular transaction.
Company officers meet in person with key officials from each of the
correspondent banks and corporate customers each year. In addition, the Company
communicates with its correspondent banks and corporate customers in a variety
of other ways.
COMPETITION
International trade financing is a highly competitive industry that is
dominated by large, multinational financial institutions such as Citibank,
N.A., ABN-AMRO Bank and Barclays Bank PLC, among others. With respect to trade
finance in or relating to larger countries in the Region, primarily in South
America, these larger institutions are the Company's primary competition. The
Company has less competition from these multinational financial institutions
providing trade finance services with or in smaller countries in the Region,
primarily in Central America and the Caribbean, because the volume of trade
financing in such smaller countries has not been as attractive to these larger
institutions. With respect to Central American and Caribbean countries, as well
as United States domestic customers, the Company also competes with regional
United States and smaller local financial institutions engaged in trade
finance. Many of the Company's competitors, particularly multinational
financial institutions, have substantially greater financial and other
resources than the Company. In general, the Company competes on the basis of
the range of services offered, convenience and speed of service, correspondent
banking relationships and on the basis of the rates of fees and commissions
charged. Management believes that none of the Company's significant United
States competitors have the focus on trade finance and offer the range of
services that the Company offers. Management further believes that the
Company's strong trade culture, range of services offered, liquid portfolio,
management experience, reputation and prompt decision-making and processing
capabilities provide it with a competitive advantage that allows it to compete
favorably with its competitors for the trade finance business in the Region.
The Company also has adjusted to its competition by often participating in
transactions with certain of its competitors, particularly the larger,
multinational financial institutions.
Although to date the Company has competed successfully, on a limited
basis, in those countries in the Region which have high trade volumes, such as
Brazil and Argentina, there can be no assurance that the Company will be able
to continue competing successfully in those countries with either large,
multinational financial institutions or regional United States or local
financial institutions. Any significant decrease in the Company's trade volume
in such large-volume countries could adversely affect the Company's result of
operations. Although the Company faces less competition from multinational
financial institutions in those countries in the Region, particularly countries
in Central America and the Caribbean, where the trading volume has not been
large enough to be meaningful for multinational financial institutions, there
can be no assurance that such financial institutions will not seek to finance
greater volumes of trade in those countries or that the Company would be able
to successfully compete with such financial institutions in the event of
increased competition. In addition, there is no assurance that the Company will
be able to continue to compete successfully in smaller countries with the
regional United States financial institutions and smaller local financial
institutions engaged in trade finance in such countries. Continued political
stability and improvement in economic conditions in such countries are likely
to result in increased competition.
EMPLOYEES
At December 31, 1999 the Company had 259 full-time employees. The
Company's employees are not represented by a collective bargaining group, and
the Company considers its overall relations with its employees to be good.
HAMILTON BANCORP REGULATION
GENERAL
As a result of its ownership of Hamilton Bank, Hamilton Bancorp is
registered as a bank holding company and is regulated and subject to periodic
examination by the Board of Governors of the Federal Reserve System ("Federal
Reserve") under the United States Bank Holding Company Act.
Pursuant to the United States Bank Holding Company Act and the Federal
Reserve's regulations, Hamilton Bancorp is limited to the business of owning,
managing or controlling banks and engaging in certain other financial related
activities,
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including those activities that the Federal Reserve determines from time to
time to be so closely related to the business of banking as to be a proper
incident thereto.
On November 12, 1999 the Gramm-Leach-Bliley Act ("G-L-B Act") was
enacted. The G-L-B Act is a major financial services modernization law that,
among other things, facilitates broad new affiliations among securities firms,
insurance firms and bank holding companies by repealing the 66-year old
provisions of the Glass-Steagall Act. The major provisions of the G-L-B Act
became effective March 11, 2000. The G-L-B Act permits the formation of
financial holding companies ("FHCs") - i.e., bank holding companies with
substantially expanded powers - under which affiliations among bank holding
companies, securities firms and insurance firms may occur, subject to a blend
of umbrella supervision and regulation of the newly formed consolidated entity
by the Federal Reserve, oversight of the FHC's bank and thrift subsidiaries by
their primary federal and state banking regulators and functional regulation of
the FHC's nonbank subsidiaries - such as broker-dealers and insurance
affiliates - by their respective specialized regulators.
The United States Bank Holding Company Act requires, among other
things, the prior approval of the Federal Reserve in any case where a bank
holding company proposes to (i) acquire all or substantially all of the assets
of a bank, (ii) acquire direct or indirect ownership or control of more than 5%
of the outstanding voting stock of any bank (unless it already owns a majority
of such bank's voting shares), (iii) merge or consolidate with any other bank
holding company or (iv) establish, or become, a FHC.
Hamilton Bancorp is required by the Federal Reserve to act as a source
of financial strength and to take measures to preserve and protect Hamilton
Bank. As a result, Hamilton Bancorp may be required to inject capital in
Hamilton Bank if Hamilton Bank at any time lacks such capital and requires it.
The Federal Reserve may charge a bank holding company such as Hamilton Bancorp
with unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. Any loans from Hamilton Bancorp to Hamilton Bank
which would count as capital of Hamilton Bank must be on terms subordinate in
right of payment to deposits and to most other indebtedness of Hamilton Bank.
The Federal Reserve, the Office of the Comptroller of the Currency
("OCC") and the Federal Deposit Insurance Corporation collectively have
extensive enforcement authority over bank holding companies and national banks
in the United States. This enforcement authority, initiated generally for
violations of law and unsafe or unsound practices, includes, among other
things, the ability to assess civil money penalties, to initiate injunctive
actions, to issue orders prohibiting or removing a bank holding company's or a
bank's officers, directors and employees from participating in the institution
and, in rare cases, to terminate deposit insurance.
The Federal Reserve's, the OCC's and the Federal Deposit Insurance
Corporation's enforcement authority was enhanced substantially by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
FIRREA significantly increased the amount and the grounds for civil money
penalties. Also, under FIRREA, should a failure of Hamilton Bank cause a loss
to the Federal Deposit Insurance Corporation, any other Federal Deposit
Insurance Corporation-insured subsidiaries of Hamilton Bancorp could be
required to compensate the Federal Deposit Insurance Corporation for the
estimated amount of the loss (Hamilton Bancorp does not currently have any such
subsidiaries). Additionally, pursuant to FDICIA, Hamilton Bancorp in the future
could have the potential obligation to guarantee the capital restoration plans
of any undercapitalized Federal Deposit Insurance Corporation insured
depository institution subsidiaries it may control.
CAPITAL ADEQUACY
The federal bank regulatory authorities have adopted risk-based
capital guidelines to which Hamilton Bancorp and Hamilton Bank are each
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profile
among banking organizations, takes off-balance sheet exposures into explicit
account in assessing capital adequacy and minimizes disincentives to holding
liquid, low-risk assets. These risk-based capital ratios are determined by
allocating assets and specified off-balance sheet financial instruments into
four weighting categories, with higher levels of capital being required for the
categories perceived as representing greater risk.
Under these guidelines a banking organization's capital is divided
into two tiers. The first tier (Tier 1) includes common equity, perpetual
preferred stock (excluding auction rate issues) and minority interests that are
held by others in a consolidated subsidiary, less goodwill and any disallowed
intangibles. Supplementary (Tier 2) capital includes, among other items,
cumulative and limited-life preferred stock, mandatory convertible securities,
subordinated debt and the allowance for loan and lease losses, subject to
certain limitations and less required deductions as provided by regulation.
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Banking organizations are required to maintain a risk-based capital
ratio of total capital (Tier 1 plus Tier 2) to risk-weighted assets of 8% of
which at least 4% must be Tier 1 capital. The federal bank regulatory
authorities may, however, set higher capital requirements when a banking
organization's particular circumstances warrant. As a practical matter, banking
organizations are expected to maintain capital ratios well above the regulatory
minimums. The risk-based capital ratios of Hamilton Bancorp and Hamilton Bank
as of December 31, 1998 and 1999 are discussed under "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Capital
Resources."
In addition, the federal bank regulatory authorities have established
guidelines for a minimum leverage ratio (Tier 1 capital to average total
assets). These guidelines provide for a minimum leverage ratio of 3% for
banking organizations that meet certain specified criteria, including excellent
asset quality, high liquidity, low interest rate exposure and the highest
regulatory rating. Banking organizations not meeting these criteria or which
are experiencing or anticipating significant growth are required to maintain a
leverage ratio which exceeds the 3% minimum by at least 100 to 200 basis
points. The leverage ratios of Hamilton Bancorp and Hamilton Bank as of
December 31, 1998 and 1999 are discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources."
Failure to meet applicable capital guidelines could subject a bank or
bank holding company to a variety of "prompt corrective action" enforcement
remedies available to the federal bank regulatory authorities, including
limitation on the ability to pay dividends, the issuance of a capital directive
to increase capital and, in the case of a bank, the issuance of a cease and
desist order, the imposition of civil money penalties, the termination of
deposit insurance by the Federal Deposit Insurance Corporation or (in severe
cases) the appointment of a conservator or receiver.
While Hamilton Bancorp is well capitalized for the purposes of the
"prompt corrective action" provisions of FDICIA, to date it has not paid any
dividends and does not anticipate doing so. Nevertheless, due to economic
difficulties being experienced by various countries in the Region, the Federal
Reserve has requested that Hamilton Bancorp not pay any dividends or incur any
debt (excluding existing "trust preferred" securities) without the consent of
the Federal Reserve.
INTERSTATE BANKING
As of September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 permitted adequately capitalized and managed
bank holding companies to acquire control of banks in any state. Although
individual states could authorize interstate branches earlier, beginning on
June 1, 1997, the Interstate Banking Act allows banks to branch across state
lines, unless a state elects to opt-out entirely. Florida did not so opt-out
and allows out-of-state banks to enter Florida by merger with an existing
Florida-based bank and to branch throughout the state. This has further
increased competition for Hamilton Bank by allowing large banks from other
parts of the United States to operate directly in Florida.
REGULATION OF HAMILTON BANK
GENERAL
Hamilton Bank, as a Federal Deposit Insurance Corporation-insured
national bank, is subject to regulation primarily by the OCC and secondarily by
the Federal Deposit Insurance Corporation. Also, as a national bank Hamilton
Bank is a member of the Federal Reserve System and its operations are therefore
also subject to certain Federal Reserve regulations. Various other federal and
state consumer laws and regulations also affect the operations of Hamilton
Bank.
As a national bank, Hamilton Bank may be able to engage in certain
activities approved by the OCC which the Federal Reserve would not necessarily
approve for Hamilton Bancorp or its non-national bank "operating subsidiaries."
The OCC has been particularly aggressive in recent years in allowing national
banks to undertake an ever-increasing range of securities and insurance
activities through their operating subsidiaries. Along these lines, national
banks, among other things, are permitted on a case-by-case basis to operate
subsidiaries that may engage in activities some of which are not permissible
for the bank itself. Although the applicable OCC regulations do not authorize
any new activities per se, national banks have used them to expand further into
the businesses of insurance and securities underwriting.
The applicable OCC regulations contain "fire walls" intended to
protect a national bank from the risks taken by its subsidiary, including a 10%
cap on the amount of bank capital that may be invested in the new subsidiary,
as well as requirements that extensions of credit to the operating subsidiary
be fully-collateralized and that transactions between the bank and the
subsidiary be conducted at arm's-length. Also, other safeguards are that the
parent national bank's exposure to any losses the subsidiary may incur be
limited to the bank's equity investment in the subsidiary, and that the parent
national bank be well-capitalized both before and after the investment is made.
7
<PAGE> 11
Effective March 11, 2000, the G-L-B Act authorizes the formation of
"financial subsidiaries" of national banks and allows them to engage in the
same types of activities permissible for nonbank subsidiaries of FHCs
(including securities underwriting and dealing), with the exception of
insurance underwriting, real estate investment and real estate development.
Hamilton Bank does not own or control an operating subsidiary or a
financial subsidiary.
As a national bank, Hamilton Bank may not ordinarily lend more than
15% of its capital unsecured to any one borrower, and may lend up to an
additional 10% of its capital to that same borrower on a fully secured basis
involving readily marketable collateral having a market value, as determined by
reliable and continuously available price quotations, equal at least to the
amount borrowed. In addition, there are various other circumstances in which
Hamilton Bank may lend in excess of such limits, including authority to lend up
to 35% of capital and surplus when the loan is secured by documents of title to
readily marketable staples and certain other exceptions relevant to
international trade finance.
Federal law also imposes additional restrictions on Hamilton Bank with
respect to loans and extensions of credit to certain related parties and
purchases from and other transactions with Hamilton Bancorp's principal
shareholders, officers, directors and affiliates. Such loans and extensions of
credit (i) must be made on substantially the same terms (including interest
rates and collateral) as, and follow credit underwriting procedures that are
not less stringent than, those prevailing at the time for comparable
transactions with members of the general public or otherwise available to any
employee of Hamilton Bank and (ii) must not involve more than the normal risk
of repayment or present other unfavorable features. In addition, extensions of
credit to each such person beyond certain limits set by applicable law must be
approved by Hamilton Bank's Board of Directors, with the individual who is
applying for the credit abstaining from participation in the decision. Hamilton
Bank also is subject to certain lending limits and restrictions on overdrafts
to such persons. A violation of these restrictions may result in the assessment
of substantial civil monetary penalties against Hamilton Bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of Hamilton Bank or the imposition by the Federal Reserve of a cease
and desist order.
As part of its examination process, the OCC has directed Hamilton
Bank, among other things, to take substantial transfer risk reserves related to
Hamilton Bank's exposure in Ecuador. While Hamilton Bank has taken the actions
directed by the OCC, it disagrees with the OCC's interpretations of the
regulatory accounting rules and is appealing such directions within the OCC.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources and Interest Earning Deposits with Other Banks
and Securities." In this connection, the OCC has initiated formal
administrative action under Section 8 of the Federal Deposit Insurance Act
which Hamilton Bank has not agree to and which Hamilton Bank is appealing and
disputing in appropriate administrative actions within the OCC. As a result of
these proceedings and directions, however, Hamilton Bank may not accept new, or
renew, "brokered deposits" without the prior approval of the Federal Deposit
Insurance Corporation or appoint new directors or senior officers without the
prior approval of the OCC. Hamilton Bank does not anticipate that either of
such restrictions will have any material adverse effect on its business or
operations. The transfer risk reserves taken by Hamilton Bank at the direction
of the OCC are for regulatory accounting purposes only, and do not materially
adversely affect its financial statements included in this Form 10-K/A and
prepared in accordance with Generally Accepted Accounting Principles ("GAAP").
Hamilton Bank is satisfied that the reserves it took in the third quarter of
1999 relating to its Ecuador and other Latin American exposures are adequate
and in accordance with GAAP.
DIVIDENDS
Hamilton Bank is subject to legal limitations on the frequency and
amount of cash dividends that can be paid to Hamilton Bancorp. The OCC, in
general, also has the ability to prohibit cash dividends by Hamilton Bank which
would otherwise be permitted under applicable regulations if the OCC determines
that such distribution would constitute an unsafe or unsound practice.
For Hamilton Bank, the approval of the OCC is required for the payment
of cash dividends in any calendar year if the total of all cash dividends
declared by Hamilton Bank in that year exceeds the current year's net income
combined with the retained net income of the two preceding years. "Retained net
income" means the net income of a specified period less any common or preferred
stock cash dividends declared for that period. Moreover, no cash dividends may
be paid by a national bank in excess of its undivided profits account.
In addition, the Federal Reserve and the Federal Deposit Insurance
Corporation have issued policy statements which provide that, as a general
matter, insured banks and bank holding companies may pay cash dividends only
out of current
8
<PAGE> 12
operating earnings.
In accordance with the above regulatory restrictions, Hamilton Bank
currently has the ability to pay cash dividends, and on December 31, 1999 an
aggregate of $33.8 million was available for the payment of dividends to
Hamilton Bancorp without prior regulatory approval.
There are also statutory limits on other transfer of funds to Hamilton
Bancorp and any other future non-banking subsidiaries of Hamilton Bancorp by
Hamilton Bank, whether in the form of loans or other extensions of credit,
investments or asset purchases. Such transfers by Hamilton Bank generally are
limited in amount to 10% of Hamilton Bank's capital and surplus, to Hamilton
Bancorp or any such future Hamilton Bancorp subsidiary, or 20% in the aggregate
to Hamilton Bancorp and all such subsidiaries. Furthermore, such loans and
extensions of credit are required to be fully collateralized in specified
amounts depending on the nature of the collateral involved.
FDICIA
FDICIA was enacted on December 19, 1991. It substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to other federal banking statutes. FDICIA provided
for, among other things, (i) a recapitalization of the Bank Insurance Fund of
the Federal Deposit Insurance Corporation (the "BIF") by increasing the Federal
Deposit Insurance Corporation's borrowing authority and providing for
adjustments in its assessments rates; (ii) annual on-site examinations of
federally-insured depository institutions by banking regulators; (iii) publicly
available annual financial condition and management reports for financial
institutions, including audits by independent accountants; (iv) the
establishment of uniform accounting standards by federal banking agencies; (v)
the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more
scrutiny and restrictions placed on depository institutions with lower levels
of capital; (vi) additional grounds for the appointment of a conservator or
receiver; (vii) a requirement that the Federal Deposit Insurance Corporation
use the least-cost method of resolving cases of troubled institutions in order
to keep the costs to insurance funds at a minimum; (viii) more comprehensive
regulation and examination of foreign banks; (ix) consumer protection
provisions, including a Truth-in-Savings Act; (x) a requirement that the
Federal Deposit Insurance Corporation establish a risk-based deposit insurance
assessment system; (xi) restrictions or prohibitions on accepting brokered
deposits, except for institutions which significantly exceed minimum capital
requirements; and (xii) certain additional limits on deposit insurance
coverage.
A central feature of FDICIA is the requirement that the federal
banking agencies take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements. Pursuant to FDICIA,
the federal bank regulatory authorities have adopted regulations setting forth
a five-tiered system for measuring the capital adequacy of the depository
institutions they supervise. Under these regulations, a depository institution
is classified in one of the following capital categories: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically under-capitalized." Based on the current regulatory capital
position of Hamilton Bank, Hamilton Bancorp believes that Hamilton Bank's
capital position exceeds the highest classification of "well capitalized."
FDICIA generally prohibits Hamilton Bank from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to Hamilton Bancorp if Hamilton Bank would thereafter be undercapitalized.
Undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans acceptable to the federal
banking agencies. If a depository institution fails to submit an acceptable
plan, it is treated as if it is "significantly undercapitalized."
Significantly undercapitalized depository institutions may be subject
to a number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, and requirements to
reduce total assets and to stop accepting deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator, generally within 90 days of the date such institution
is determined to be critically undercapitalized.
FDICIA also provided for increased funding of the Federal Deposit
Insurance Corporation insurance funds. Under the Federal Deposit Insurance
Corporation's risk-based insurance premium assessment system, each bank whose
deposits are insured by the BIF is assigned one of the nine risk
classifications based upon certain capital and supervisory measures and,
depending upon its classification, is assessed premiums. On November 14, 1995,
the Federal Deposit Insurance Corporation board of directors voted to lower the
BIF premium range to zero from .27% effective January 1996. The rate schedule
is subject to future adjustments by the Federal Deposit Insurance Corporation.
In addition, the Federal Deposit Insurance Corporation has authority to impose
special assessments from time to time. As a result of the enactment of the
Federal Deposit
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<PAGE> 13
Insurance Funds Act of 1996 on September 30, 1996, commercial banks are now
required to pay part of the interest on the Financing Corporation's bonds
issued to deal with the savings and loan crisis of the late 1980's. As a
result, commercial bank deposits are now also subject to assessment by the
Financing Corporation upon the approval by the Federal Deposit Insurance
Corporation of such assessment. Beginning in 1997 and until the earlier of
December 31, 1999 or the date on which the last saving association ceases to
exist, the assessment rate the Financing Corporation imposes on a commercial
bank must be at a rate equal to one-fifth the assessment rate applicable to
deposits assessable by the Savings Association Insurance Fund.
RESERVE REQUIREMENTS
Hamilton Bank is required to maintain reserves against its transaction account.
The reserves must be maintained in an interest-free account at the Federal
Reserve Bank of Atlanta. Reserve requirements and the amount of required
reserves is subject to adjustment by the Federal Reserve from time to time. The
current rate for reserves is 3% of a depository institution's transaction
accounts (less certain permissible deductions) up to $52 million, plus 10% of
the amount over $52 million.
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA.
TABLE ONE. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA.
(Dollars in thousands except per share amounts)
The selected consolidated financial data for the five years ended December 31,
1999 have been derived from the Company's audited financial statements. The
data set forth below should be read in conjunction with the consolidated
financial statements and related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
herein.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 as restated(1) 1997
------------ ------------------- ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income $ 60,357 $ 53,981 $ 38,962
Provision for credit losses 20,300 9,621 6,980
------------ -------------- ------------
Net interest income after provision for credit losses 40,057 44,360 31,982
Trade finance fees and commissions 12,035 13,101 12,768
Structuring and syndication fees 6,266 3,352 2,535
Customer services fees 1,528 1,149 934
Net gain (loss) on sale of assets 562 (220) 108
Other income 299 171 97
------------ -------------- ------------
Other non-interest income 20,690 17,553 16,442
------------ -------------- ------------
Operating expenses 32,104 50,286 23,423
------------ -------------- ------------
Income before provision for income taxes 28,643 11,627 25,001
Provision for income taxes 10,283 4,132 9,098
------------ -------------- ------------
Net income $ 18,360 $ 7,495 $ 15,903
============ ============== ============
PER COMMON SHARE DATA:
Net income per common share (2) $ 1.79 $ 0.72 $ 1.73
Book value per common share $ 13.28 $ 10.87 $ 10.00
Average weighted shares (2) 10,275,223 10,390,884 9,173,680
AVERAGE BALANCE SHEET DATA(3):
Total assets 1,631,555 $ 1,506,918 $ 1,007,846
Total loans 1,181,865 1,165,225 737,921
Total deposits 1,435,272 1,301,444 842,117
Stockholder's equity 120,853 107,915 79,311
PERFORMANCE RATIOS(3):
Net interest spread 3.41% 3.31% 3.56%
Net interest margin 3.95% 3.90% 4.31%
Return on average equity 15.19% 6.95% 20.05%
Return on average assets 1.13% 0.50% 1.58%
Efficiency ratio (4) 39.61% 39.23% 42.28%
ASSET QUALITY RATIOS:
Allowance for credit losses as a percentage of total loans 1.92% 1.10% 1.07%
Non-performing assets as a percentage of total loans 1.49% 0.78% 0.65%
Allowance for credit losses as a percentage of non-performing assets 115.27% 141.20% 166.03%
Net loan charge-offs as a percentage of average outstanding loans 1.00% 0.61% 0.32%
CAPITAL RATIOS:
Leverage capital ratio 7.30% 7.27% 7.88%
Tier 1 capital 10.90% 10.86% 12.43%
Total capital 12.00% 12.03% 13.78%
Average equity to average assets 7.41% 7.16% 7.87%
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income $ 27,250 $ 23,885
Provision for credit losses 3,040 2,450
------------ ------------
Net interest income after provision for credit losses 24,210 21,435
Trade finance fees and commissions 9,325 9,035
Structuring and syndication fees 138 419
Customer services fees 1,379 995
Net gain (loss) on sale of assets -- 3
Other income 143 237
------------ ------------
Other non-interest income 10,985 10,689
------------ ------------
Operating expenses 19,630 18,949
------------ ------------
Income before provision for income taxes 15,565 13,175
Provision for income taxes 5,855 5,172
------------ ------------
Net income $ 9,710 $ 8,003
============ ============
PER COMMON SHARE DATA:
Net income per common share (1) $ 1.79 $ 1.47
Book value per common share $ 8.07 $ 6.41
Average weighted shares (1) 5,430,030 5,430,030
AVERAGE BALANCE SHEET DATA:
Total assets $ 687,990 $ 534,726
Total loans 485,758 370,568
Total deposits 574,388 444,332
Stockholder's equity 39,969 32,358
PERFORMANCE RATIOS:
Net interest spread 3.89% 4.20%
Net interest margin 4.56% 4.94%
Return on average equity 24.29% 24.73%
Return on average assets 1.41% 1.50%
Efficiency ratio (2) 51.31% 54.68%
ASSET QUALITY RATIOS:
Allowance for credit losses as a percentage of total loans 1.07% 1.05%
Non-performing assets as a percentage of total loans 0.91% 1.07%
Allowance for credit losses as a percentage of non-performing assets 117.97% 98.56%
Net loan charge-offs as a percentage of average outstanding loans 0.36% 0.58%
CAPITAL RATIOS:
Leverage capital ratio 5.80% 5.68%
Tier 1 capital 10.20% 9.98%
Total capital 11.50% 10.92%
Average equity to average assets 5.81% 6.05%
</TABLE>
(1) See Note 16 to the consolidated financial statements.
(2) Represents diluted earnings per share and average weighted shares
outstanding, respectively.
(3) The 1999 average balance sheet data and performance ratios are as
restated(1).
(4) Amount reflects operating expenses as a percentage of net interest income
plus non-interest income.
11
<PAGE> 15
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Hamilton Bancorp Inc. ("Bancorp") is a bank holding company which conducts
operations principally through its 99.8 percent owned subsidiary Hamilton Bank,
N.A. (the "Bank") collectively (the "Company"). The Bank is a national bank
which specializes in financing trade flows between domestic and international
companies on a global basis. The Bank has a network of nine FDIC-insured
branches, eight in Florida, with locations in Miami, Sarasota, Tampa, West Palm
Beach, Winter Haven and Weston, and one in San Juan, Puerto Rico.
The Company completed its initial public offering of 2,400,000 shares of common
stock on March 26, 1997. Following the public offering, on April 9, 1997 the
Company issued 360,000 additional shares of common stock upon the exercise of
the over-allotment option granted to Oppenheimer and Company, Inc. and NatWest
Securities Ltd.
On December 28, 1998, a trust formed by the Company issued $11.0 million of
9.75 percent Beneficial Unsecured Securities, Series A (the "Preferred
Securities"). On January 14, 1999, the Trust issued an additional $1.7 million
of Preferred Securities upon the exercise of an over-allotment by the
underwriters. These securities are considered to be Tier 1 capital for
regulatory purposes.
RESTATEMENT
Subsequent to the filing of the Company's 1999 Annual Report on Form 10-K, the
Company determined that the purchases of certain securities and the sales 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 EXTINGUISHMENTS OF LIABILITIES
and that a loss of $22,223,000 ($14,304,000 after tax) should have been 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 tranactions 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 1999 and 1998 consolidated financial statements
have been restated from amounts previously reported to appropriately account for
(1) the purchases of securities and sales of loans referred to above as an
exchange, and recognize a loss on the exchange in 1998, (2) the initial
recording of the securities acquired at fair value which became their cost
basis, (3) the changes in unrealized gains and losses in 1999 relating to the
securities acquired in the exchange transaction, and (4) the related income tax
effects. All of the securities acquired in the transaction, some of which are
classified as loans at December 31, 1998, were subsequently designated as
available for sale securities during the fourth quarter of 1999 and marked to
market. As a result, the restatement does not affect total stockholders' equity
at December 31, 1999. See Note 16 of the notes to the 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 years ended December 31, 1999 and 1998 presented herein have
been adjusted to reflect the restatement described above.
KEY PERFORMANCE HIGHLIGHTS FOR 1999
The Company's strong asset growth of approximately 28 percent from December 31,
1997 to December 31, 1999 was primarily the result of the Company's ability to
deploy the increase in capital from the Company's initial public offering. The
increased capital allowed the Bank to almost double its legal lending limit and
take advantage of trade financing activities throughout Latin America,
12
<PAGE> 16
as well as Florida. The increase in loans was targeted toward the same
historical markets and utilized the same products as in previous years.
The deposit growth during the period from December 31, 1997 to December 31,
1999 came primarily from three sources, the Company's branch network, deposits
from financial institutions, brokered deposits and deposits from the State of
Florida. The Company also expanded its branch network in 1998 and 1999 with the
addition of branches in Puerto Rico and Weston, Florida, respectively.
Foreign debt securities increased by approximately $151 million from $19.9
million at December 31, 1998 to $171.1 million at December 31, 1999. This
increase was the result of the transfer of bearer securities which had
originally been underwritten and classified as loans and accounted for as held
to maturity securities under (SFAS) No. 115. On December 31, 1999, management
changed its original intent and reclassified these securities as available for
sale. As of December 31, 1999, all these assets were performing assets with 50
percent maturing within one year, 18 percent maturing within one to five years
and 32 percent maturing in over five years.
During 1999, several events occurred in Ecuador, which culminated with the Bank
increasing the level of its allowance for credit losses during the third
quarter. These events included but were not limited to the following: a)
Certain banks were intervened by the Ecuadorian banking authorities early in
the year, b) Passage of a decree in March 1999 freezing deposits in the banking
system, however, trade obligations continued to be paid and convertibility was
guaranteed by the government. In addition, the "Agencia Garantia de Deposito"
(AGD) guaranteed all deposits and trade obligations of the banks in Ecuador,
which is a government agency similar to the FDIC in the United States. c) In
March 1999, the Bank internally downgraded Ecuador to "C", d) In April 1999, a
process of auditing all the banks in Ecuador begins by recognized international
accounting firms, e) In July 1999, the Bank internally downgraded Ecuador to
"D" and the audit of the banks in Ecuador by the internationally recognized
accounting firms are concluded, f) In August 1999, the results of these audits
conducted by these accounting firms is released resulting in one bank closure,
four banks given a period of time to recapitalize and the remaining banks
passing the rigorous audits and qualified as viable, g) In September 1999,
Ecuador defaults on its Brady debt after a 30 day grace period.
These events contributed to the Bank provisioning $15 million for credit losses
during the third quarter of 1999 and $20 million for the entire year. This
increase in the allowance for credit losses was taken after carefully reviewing
the Bank's loan exposure with a particular emphasis on Ecuador and the third
quarter downgrading of the country. This also triggered the downgrade of
several loans.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
NET INTEREST INCOME
An analysis of the Company's net interest income and average balance sheet for
the last five years is presented in TABLE ONE and TABLE TWO. Net interest
income is the difference between interest and fees earned on loans and
investments and interest paid on deposits and other sources of funds, and it
constitutes the Company's principal source of income. Net interest income
increased to $60.4 million for the year ended December 31, 1999 from $54.0
million for the same period in 1998, a 11.9 percent increase. The increase was
due largely to the growth in average earning assets coupled with an increase in
the net interest margin. Average earning assets increased to $1,528.5 million
for the year ended December 31, 1999 from $1,383.3 million for the same period
in 1998, a 10 percent increase, while yields earned on average assets decreased
by 18 basis points compared to the same period. Average loans and acceptances
discounted increased to $1,181.9 million for the year ended December 31, 1999
from $1,165.2 million for the same period in 1998, a 1 percent increase, while
average interest-earning deposits due from other banks increased to $175.9
million for the year ended December 31, 1999 from $122.3 million for the same
period in 1998, a 44 percent increase. Net interest margin increased to 3.95
percent for the year ended December 31, 1999 from 3.89 percent for the same
period in the prior year, representing the first time in seven years that the
net interest margin has not decreased.
Interest income increased to $134.0 million for the year ended December 31,
1999 from $124.3 million for the same period in 1998, an 8 percent increase,
reflecting largely an increase in loans in the United States. Interest expense
increased to $73.6 million for the year ended December 31, 1999 from $70.3
million for the same period in 1998, a 5 percent increase, reflecting the
increase in deposits to fund asset growth offset by a 31 basis point decrease
in interest rates paid. Average interest-bearing deposits increased to $1,358.3
million for the year ended December 31, 1999 from $1,231.7 million for the same
period in 1998, a 10 percent increase. The growth in deposits was primarily a
result of the Company increasing its core deposit base through its expanding
branch network, as well as its international customers. Average time deposits
from banks decreased to $85.7 million for the year ended December
13
<PAGE> 17
31, 1999 from $128.9 million for the same period in 1998 or a 34 percent
decrease, due largely to the Company's reduced activities in the Region.
An analysis of the Company's yields earned and average loan balances
segregating domestic and foreign earning assets is presented in TABLE THREE.
The yields earned on foreign loans increased 40 basis points to 9.3 percent
while yields earned on domestic loans have decreased by 160 basis points to 8.5
percent from 10.1 percent.
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses increased to $20.3 million for the
year ended December 31, 1999 from $9.6 million for the same period in 1998.
This increase was due largely to the following factors: a) loan charge-offs
against the allowance for loan losses of $11.7 million during 1999, b) the
downgrading of a significant amount of the Bank's loans to borrowers in Ecuador
resulted in an approximate $8 million increase to the allowance for credit
losses, c) changes to the Bank's internal watch list or criticized loan list,
as well as the underlying security on these loans, and d) an increase of $7.5
million to $16.5 million in nonaccrual loans as of December 31, 1999 resulted
in allocated reserves of $6.2 million. As a result of these factors, the Bank
reserved $20.3 million during 1999. Together with the relatively flat loan
growth, the ratio of the allowance for credit losses to total loans increased
from 1.10% to 1.92% for the periods ended December 31, 1998 and 1999,
respectively. The Bank continued to utilize various methodologies in
calculating its allowance for credit losses, as in previous years. These
methodologies are affected by charge-offs, loan growth, changes in loan
portfolio composition and the level of criticized assets. Changes in cross
border outstandings affected the allowance for credit losses to the extent of
the amount of loans included in the cross border outstandings.
A more detailed review of the provision for credit losses is presented in TABLE
SEVENTEEN through TABLE NINETEEN.
NON-INTEREST INCOME
Non-interest income increased to $20.7 million for the year ended December 31,
1999 from $17.6 million for the same period in 1998, an 18 percent increase.
Trade finance fees and commissions decreased by $1.1 million due largely to
lower letter of credit volume which is related to slow economic conditions in
the Region. Structuring and syndication fees increased by $2.9 million as a
result of various structuring and syndication transactions completed during the
year; increasing these fees to $6.3 million from $3.4 million for the years
ended December 31, 1999 and 1998, respectively. Customer service fees increased
by $379 thousand due largely to Harmoney(R) related fees charged during the
period. Harmoney(R) is the Bank's remote banking system which allows customers
to access trade finance services and cash management through the internet. The
changes in non-interest income from year to year are analyzed in TABLE SIX.
14
<PAGE> 18
TABLE TWO. YIELDS EARNED AND RATES PAID
(Dollars in thousands)
<TABLE>
<CAPTION>
For The Years Ended
---------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
--------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Total interest earning assets Loans:
Commercial loans $1,061,056 $ 95,742 9.02% $1,010,332 $ 91,465 9.05%
Acceptances discounted 110,505 10,016 9.06% 131,158 12,165 9.27%
Overdraft 7,372 1,659 22.50% 12,212 2,306 18.89%
Mortgage loans 2,932 203 6.92% 11,523 949 8.24%
---------- -------- ------ ---------- -------- ------
Total Loans 1,181,865 107,620 9.11% 1,165,225 106,885 9.17%
Time deposits with banks 175,925 15,940 9.06% 122,278 10,989 8.99%
Investments 139,383 8,787 6.30% 68,541 4,903 7.15%
Federal funds sold 31,370 1,647 5.25% 27,307 1,484 5.43%
---------- -------- ------ ---------- -------- ------
Total investments and interest earning
deposits with banks 346,678 26,374 7.61% 218,126 17,376 7.97%
Total interest earning assets 1,528,543 133,994 8.77% 1,383,351 124,261 8.98%
-------- ------ -------- ------
Total non interest earning assets 103,012 123,567
---------- ----------
Total assets $1,631,555 $1,506,918
========== ==========
Interest bearing liabilities
Deposits:
NOW and Savings accounts 23,255 566 2.43% 20,218 424 2.10%
Money market 43,850 2,116 4.83% 46,342 2,177 4.70%
Presidential money market 44,749 2,159 4.82% 3,284 121 3.68%
Certificate of deposits (including IRA) 1,154,974 63,090 5.46% 1,033,030 59,730 5.78%
Time deposits from banks (IBF) 85,746 3,858 4.50% 128,853 7,266 5.64%
Other 5,761 435 7.55% 18 1 2.96%
---------- -------- ------ ---------- -------- ------
Total deposits 1,358,335 72,224 5.32% 1,231,745 69,719 5.66%
Trust preferred securities 12,650 1,232 9.74%
Federal funds purchased 1,461 78 5.34% 3,423 197 5.77%
Other borrowings 1,356 103 7.60% 4,743 364 8.65%
---------- -------- ------ ---------- -------- ------
Total interest bearing liabilities 1,373,802 73,637 5.36% 1,239,911 70,280 5.67%
---------- -------- ---------- -------- ------
Non interest bearing liabilities
Demand deposits 76,937 69,699
Other liabilities 59,963 89,393
---------- ----------
Total non interest bearing liabilities 136,900 159,092
Stockholders' equity 120,853 107,915
---------- ----------
Total liabilities and stockholder's equity $1,631,555 $1,506,918
========== ==========
Net interest income/net interest spread $ 60,357 3.41% $ 53,981 3.31%
======== ====== ======== ======
Margin:
Interest income/interest earning assets 8.77% 8.98%
Interest expense/interest earning assets 4.82% 5.08%
------ ------
Net interest margin 3.95% 3.90%
====== ======
<CAPTION>
For The Years Ended
---------------------------------------------------
December 31, 1997
----------------------------------------------------
Average
Average Yield/
Balance Interest Rate
---------- --------- -------
<S> <C> <C> <C>
Total interest earning assets Loans:
Commercial loans $ 612,069 $ 57,288 9.36%
Acceptances discounted 107,818 10,733 9.95%
Overdraft 6,890 1,307 18.96%
Mortgage loans 11,144 934 8.38%
---------- --------- -----
Total Loans 737,921 70,262 9.52%
Time deposits with banks 102,360 8,909 8.70%
Investments 44,978 2,980 6.63%
Federal funds sold 18,186 1,008 5.54%
---------- --------- -----
Total investments and interest earning
deposits with banks 165,524 12,897 7.79%
Total interest earning assets 903,445 83,159 9.20%
--------- -----
Total non interest earning assets 104,401
----------
Total assets $1,007,846
==========
Interest bearing liabilities
Deposits:
NOW and Savings accounts 20,101 439 2.18%
Money market 43,752 2,060 4.71%
Presidential money market 3,385 97 2.87%
Certificate of deposits (including IRA) 582,933 34,463 5.91%
Time deposits from banks (IBF) 127,964 6,853 5.36%
Other 61 2 2.92%
---------- --------- -----
Total deposits 778,196 43,913 5.64%
Trust preferred securities
Federal funds purchased 4,975 284 5.70%
Other borrowings 0 0 0.00%
---------- --------- -----
Total interest bearing liabilities 783,171 44,197 5.64%
---------- --------- -----
Non interest bearing liabilities
Demand deposits 63,921
Other liabilities 81,443
----------
Total non interest bearing liabilities 145,364
Stockholders' equity 79,311
----------
Total liabilities and stockholder's equity $1,007,846
==========
Net interest income/net interest spread $ 38,962 3.56%
========= =====
Margin:
Interest income/interest earning assets 9.20%
Interest expense/interest earning assets 4.89%
-----
Net interest margin 4.31%
=====
</TABLE>
At December 31, 1999, 1998 and 1997, the average balance of loans that are
currently non-performing and not accuring was $16.6 million, $8.6 million, and
$6.0 million, respectively. The interest column does not include an amount for
these loans since they were in non-accural status.
15
<PAGE> 19
TABLE THREE. YIELDS EARNED - DOMESTIC AND FOREIGN EARNING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
For The Years Ended
-------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
----------------------------------------------- ------------------------------------------
Average % of Total Average % of Total
Average Yield/ Average Average Yield/ Average
Balance Interest Rate Assets Balance Interest Rate Assets
---------- -------- ------- ---------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest earning assets Loans:
Domestic $ 350,000 $ 29,918 8.5% 21.5% $ 249,027 $ 25,155 10.1% 16.5%
Foreign 831,865 77,702 9.3% 50.9% 916,198 81,730 8.9% 60.8%
----------- -------- ----- ------ ---------- -------- ----- -----
Total Loans 1,181,865 107,620 9.1% 72.4% 1,165,225 106,885 9.2% 77.3%
Investment and time deposits with banks
Domestic 140,890 7,924 5.6% 8.5% 71,751 3,924 5.5% 4.8%
Foreign 205,788 18,450 9.0% 12.6% 146,375 13,452 9.2% 9.7%
----------- -------- ----- ------ ---------- -------- ----- -----
Total investments and interest earning
with banks 346,678 26,374 7.6% 21.2% 218,126 17,376 8.0% 14.5%
Total interest earning assets 1,528,543 $133,994 8.8% 93.7% 1,383,351 $124,261 9.0% 91.8%
======== ===== ======== ====
Total non interest earning assets 103,012 6.3% 123,567 8.2%
----------- ------ ----------- ------
Total Assets $ 1,631,555 100.0% $ 1,506,918 100.0%
=========== ====== =========== ======
<CAPTION>
For The Years Ended
--------------------------------------------------------------------------
December 31, 1997
--------------------------------------------------------------------------
% of Total
Average Yield/ Average
Balance Interest Rate Assets
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Total interest earning assets Loans:
Domestic $ 175,209 $ 18,240 10.4% 17.4%
Foreign 562,712 52,022 9.2% 55.8%
----------- -------- ----- ------
Total Loans 737,921 70,262 9.5% 73.2%
Investment and time deposits with banks
Domestic 45,786 2,487 5.4% 4.5%
Foreign 119,738 10,410 8.7% 11.9%
----------- -------- ----- ------
Total investments and interest earning
with banks 165,524 12,897 7.8% 16.4%
Total interest earning assets 903,445 $ 83,159 9.2% 89.6%
======== =====
Total non interest earning assets 104,401 10.4%
----------- ------
Total Assets $ 1,007,846 100.0%
=========== ======
</TABLE>
16
<PAGE> 20
TABLE FOUR. RATE VOLUME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared to Year Ended Compared to Year Ended
December 31, 1998 December 31, 1997
-------------------------------------- ----------------------------------------
Changes Due To: Changes Due To:
Volume Rate Total Volume Rate Total
-------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net interest
income due to:
Loans:
Commercial loans $ 4,592 $ (315) $ 4,277 $ 37,276 $ (3,099) $ 34,177
Acceptances discounted (1,915) (233) (2,148) 2,323 (891) 1,432
Overdrafts (914) 267 (647) 1,009 (10) 999
Mortgage loans (708) (38) (746) 32 (17) 15
Investments:
Time deposits with other banks 4,821 129 4,950 1,734 346 2,080
Investment securities 5,067 (1,182) 3,885 1,561 362 1,923
Federal funds sold 221 (59) 162 505 (29) 476
-------- ------- ------- -------- -------- --------
Total earning assets 11,164 (1,431) 9,733 44,440 (3,338) 41,102
-------- ------- ------- -------- -------- --------
Deposits:
NOW and savings 64 78 142 9 (24) (15)
Money market (117) 56 (61) 122 (5) 117
Presidential money market 1,528 510 2,038 (3) 27 24
Certificates of deposits 7,051 (3,691) 3,360 13,028 12,240 25,268
Time deposits with banks (IBF) (2,431) (977) (3,408) 48 365 413
Other 319 115 434 (1) -- (1)
Trust preferred securities 1,232 -- 1,232 -- -- --
Federal funds purchased (113) (6) (119) (88) 2 (86)
Other borrowings (260) (1) (261) 364 -- 364
-------- ------- ------- -------- -------- --------
Total interest-bearing liabilities 7,273 (3,916) 3,357 13,479 12,605 26,084
-------- ------- ------- -------- -------- --------
Change in net interest income $ 3,891 $ 2,485 $ 6,376 $ 30,961 $(15,943) $ 15,018
======== ======= ======= ======== ======== ========
</TABLE>
17
<PAGE> 21
TABLE FIVE. RATE VOLUME ANALYSIS - DOMESTIC AND FOREIGN
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared to Year Ended Compared to Year Ended
December 31, 1998 December 31, 1997
-------------------------------------- -------------------------------------
Changes Due To: Changes Due To:
Volume Rate Total Volume Rate Total
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net interest income
due to:
Loans:
Domestic $ 10,200 $(5,437) $ 4,763 $ 7,685 $ (770) $ 6,915
Foreign (7,523) 3,495 (4,028) 32,679 (2,971) 29,708
Investments and time deposits with banks:
Domestic 3,781 219 4,000 1,410 27 1,437
Foreign 5,460 (463) 4,997 2,316 726 3,042
-------- ------- ------- ------- ------- -------
Total earning assets $ 11,918 $(2,186) $ 9,732 $44,090 $(2,988) $41,102
======== ======= ======= ======= ======= =======
</TABLE>
TABLE SIX. NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1999 % Change 1998 % Change 1997
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Trade finance fees and commissions $12,035 -8.1% $ 13,101 2.6% $12,768
Structuring and syndication fees 6,266 86.9% 3,352 32.2% 2,535
Customer service fees 1,528 33.0% 1,149 23.0% 934
Gain (loss) on sale of assets 562 -355.5% (220) -303.7% 108
Other 299 74.9% 171 76.3% 97
------- ------ -------- ------ -------
Total non-interest income $20,690 17.9% $ 17,553 6.8% $16,442
------- ------ -------- ------ -------
</TABLE>
OPERATING EXPENSES
Operating expenses increased to $32.1 million for the year ended December 31,
1999 from $50.3 million for the same period in 1998, a 36 percent decrease. A
discussion of the significant components of noninterest expense in 1999 compared
to 1998 is as follows: A decrease of $22.6 million in loss on exchange and write
down of assets from December 31, 1998 compared to December 31, 1999. Employee
compensation and benefits remained at $14.5 million for the year ended December
31, 1999 and 1998. Occupancy expenses remained stable at $4.2 million for the
years ended December 31, 1999 and 1998. Legal expense increased as a result of
various litigation actions commenced by or against the Company in 1998 which
continued in 1999. The Company's efficiency ratio, without considering the
effect of the loss on exchange and write down in 1998. The changes in operating
expenses from year to year are analyzed in TABLE SEVEN.
The Company's income tax expense was $10.3 million and $4.1 million for 1999 and
1998, respectively. The effective tax rate was 36 percent of pretax income for
both years. NOTE SIX of the consolidated financial statements includes an
analysis of the components of the provision for income taxes.
18
<PAGE> 22
TABLE SEVEN. OPERATING EXPENSES
Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------
1998 to 1999 1997 to 1998
1999 % change 1998 % change 1997
------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Employee Compensation and Benefits $14,556 0.2% $14,527 10.4% $13,162
Occupancy and Equipment 4,273 1.0% 4,229 30.1% 3,251
Other Operating Expenses 9,648 35.5% 7,119 6.0% 6,715
Loss on Exchange and Write Down of Assets -- -100.0% 22,810 12097.9% 187
Legal Expense 3,627 126.5% 1,601 1382.4% 108
------- ------- ------- ------- -------
Total Operating Expenses $32,104 -36.2% $50,286 114.7% $23,423
======= ======= ======= ======= =======
</TABLE>
YEAR 2000
Since June 1997 the Company assessed and prepared its computer systems and
applications to be functional on January 1, 2000. Due to these efforts, the
Company did not experience any material system errors or failures as a result of
Year 2000 issues. Concurrently, the Company upgraded its computer systems during
1999 to accommodate the growth of the past two years. These new systems were
Year 2000 compliant. Consequently, the total costs relating exclusively to Year
2000 compliance were approximately $100,000, which was funded from normal
operations.
1998 COMPARED TO 1997
NET INTEREST INCOME
An analysis of the Company's net interest income and average balance sheet for
the last five years is presented in TABLE ONE and TABLE TWO. Net interest income
increased to $54.0 million for the year ended December 31, 1998 from $39.0
million for the same period in 1997, a 39 percent increase. The increase was due
largely to the growth in average earning assets offset, to some extent, by a
decrease in net interest margin. Average earning assets increased to $1,383.3
million for the year ended December 31, 1998 from $903.4 million for the same
period in 1997, a 53 percent increase while yields earned on average assets
decreased by 22 basis points compared to the same period. Average loans and
acceptances discounted increased to $1,165.2 million for the year ended December
31, 1998 from $737.9 million for the same period in 1997, a 58 percent increase,
while average interest-earning deposits due from other banks increased to $122.3
million for the year ended December 31, 1998 from $102.4 million for the same
period in 1997, a 19 percent increase. Net interest margin decreased to 3.90
percent for the year ended December 31, 1998 from 4.31 percent for the same
period in 1997, a 41 basis point decrease. The primary reasons for this decrease
were (i) loan yields relative to reference rates decreased in certain countries
in the Region and (ii) transactions with larger customers and transactions with
multi-national customers, which command more competitive pricing.
Interest income increased to $124.3 million for the year ended December 31, 1998
from $83.2 million for the same period in 1997, a 49 percent increase,
reflecting an increase in loans in the Region and the United States, partially
offset by a decrease in prevailing interest rates and a tightening of loan
spreads in the Region as discussed above. Interest expense increased to $70.3
million for the year ended December 31, 1998 from $44.2 million for the same
period in 1997, a 59 percent increase, reflecting the increase in deposits to
fund asset growth and a two basis point increase in interest rates paid. Average
interest-bearing deposits increased to $1,231.7 million for the year ended
December 31, 1998 from $778.2 million for the same period in 1997, a 58 percent
increase. The growth in deposits was primarily a result of the Company
increasing its core deposit base from its expanding branch network, as well as
its international customers. The Company's time deposits due from banks also
increased to $128.9 million for the year ended December 31, 1998 from $128.0
million for the same period in 1997.
An analysis of the Company's yields earned and average loan balances segregating
domestic and foreign earning assets is presented in TABLE THREE. The yields
earned on domestic loans have decreased by three basis points to 10.1 percent
from 10.4 percent.
19
<PAGE> 23
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses increased to $9.6 million for the year
ended December 31, 1998 from $7.0 million for the same period in 1997. This 37
percent increase was largely a function of the 22 percent growth in total loans.
Net loan chargeoffs during the year ended December 31, 1998 amounted to $7.1
million compared to $2.4 million for the year ended December 31, 1997. The
allowance for credit losses was increased to $12.8 million at December 31, 1998
from $10.3 million at December 31, 1997, a 24 percent increase. The ratio of the
allowance for credit losses to total loans was 1.10 percent at December 31, 1998
from 1.07 percent for the same period in 1997. A more detailed review of the
provision for credit losses is presented in TABLE SEVENTEEN through TABLE
NINETEEN.
NON-INTEREST INCOME
Non-interest income increased to approximately $17.6 million for the year ended
December 31, 1998 from $16.4 million for the same period in 1997, a 7 percent
increase. Trade finance fees and commissions increased by $333 thousand due
largely to lending facility fees which increased by $185 thousand during 1998
compared to 1997 as a result of the growth in loans. Structuring and syndication
fees increased by $817 thousand as a result of various structuring and
syndication transactions completed during the year increasing these fees to $3.4
million from $2.5 million for the years ended December 31, 1998 and 1997
respectively. Customer service fees increased by $215 thousand. The changes in
non-interest income from year to year are analyzed in TABLE SIX.
OPERATING EXPENSES
Operating expenses increased to $50.3 million for the year ended December 31,
1998 from $23.4 million for the same period in 1997, a 115 percent increase. The
increase was primarily due to a loss on exchange of assets and growth in
expenditures, primarily to support revenue growth. A discussion of the
significant components of non-interest expense in 1998 compared to 1997 is as
follows: employee compensation and benefits increased to $14.5 million for the
year ended December 31, 1998 from $13.2 million for the same period in 1997, a
10 percent increase. This was primarily due to an increase in the number of
employees to 264 at December 31, 1998 from 250 at the same period in 1997. The
majority of the employees were added to support the Puerto Rico branch and other
areas within the bank. There were also salary increases for existing personnel.
Occupancy expenses increased to $4.2 million for the year ended December 31,
1998 from $3.3 million for the same period in 1997, a 27 percent increase as a
result of the additional branches. Other expenses increased to $8.7 million for
the year ended December 31, 1998 from $7.0 million for the same period in 1997,
primarily due to the increase in legal expense as a result of various litigation
actions commenced by or against the Company in 1998. The Company's efficiency
ratio experienced a favorable decrease to 39 percent in 1998 from 42.3 percent
in 1997. The changes in operating expenses from year to year are analyzed in
TABLE SEVEN.
The Company's income tax expense for 1998 was $4.1 million, for an effective tax
rate of 35.5 percent of pretax income. Income tax expense for 1997 was $9.1
million for an effective rate of 36.4 percent of pretax income. The decrease in
the effective tax rate is the result of a state income tax refund for prior year
filings. The decrease of income tax expense was the result of the 54 percent
decrease in pretax income. As the Company increases its foreign loans and
investments in relation to total assets these activities are not taxable in the
State of Florida, thus reducing the overall effective tax rate. NOTE SIX of the
consolidated financial statements includes an analysis of the components of the
provision for income taxes.
BALANCE SHEET REVIEW
1999 COMPARED TO 1998
The Company manages its balance sheet by monitoring interest rate sensitivity,
credit risk, liquidity risk and capital positions to reduce the potential
adverse impact on net interest income that might result from changes in interest
rates. Control of interest rate risk is conducted through systematic monitoring
of maturity mismatches. The Company's investment decision-making takes into
account not only the rates of return and their underlying degree of risk, but
also liquidity requirements, including minimum cash reserves, withdrawal and
maturity of deposits and additional demand for funds.
20
<PAGE> 24
Total consolidated assets increased 1.7 percent, or $28.1 million for the year
ended December 31, 1999, which included an increase of $75.1 million in
interest-earning assets and a decrease of $47.0 million in non-interest earning
assets. The increase in consolidated assets reflects an increase of $204.6
million in securities available for sale offset by a decrease in net loans of
$58.9 million. The overall increase in consolidated assets was principally
funded by deposits from the branch network and increases in retained earnings.
CASH, DEMAND DEPOSITS WITH OTHER BANKS AND FEDERAL FUNDS SOLD
Cash, demand deposits with other banks and federal funds sold are considered
cash and cash equivalents. Balances of these items fluctuate daily depending on
many factors which include or relate to the particular banks that are clearing
funds, loan payoffs, deposit gathering and reserve requirements. Cash, demand
deposits with other banks and federal funds sold were $85.1 million at December
31, 1999 compared to $111.8 million at December 31, 1998.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND SECURITIES
Interest-earning deposits with other banks decreased to $187.7 million at
December 31, 1999 from $200.2 million at December 31, 1998. As part of its
overall liquidity management process, the Company places funds with foreign
correspondent banks. These placements are primarily short-term, typically 180
days or less. The purpose of these placements is to obtain an enhanced return on
high quality short-term instruments and to solidify existing relationships with
correspondent banks. The banks with which placements are made and the amount
placed are approved by the Bank's Asset Liability Committee. In addition, this
Committee reviews adherence with internal interbank liability policies and
procedures. As indicated in TABLE EIGHT these interest-earning deposits with
other banks are well-diversified throughout the Region and in other countries.
The level of such deposits has decreased, principally related to reductions in
Ecuador, Bahamas and the Dominican Republic. The short-term nature of these
deposits allows the Company the flexibility to redeploy these assets into higher
yielding loans which are largely related to the financing of trade.
Investment securities increased to $274.3 million at December 31, 1999 from
$105.6 million at December 31, 1998. The increase has been primarily in foreign
debt securities classified as available for sale. On December 31, 1999
management changed its original intent with respect to approximately $166
million in bearer debt securities which were classified as loans and accounted
for as held to maturity securities under Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities. These securities, along with all other securities classified
as held to maturity, were transferred to and are being accounted for as
securities available for sale at fair market value under SFAS No. 115.
At December 31, 1999, the Company had certain foreign debt securities that
exceeded 10% of stockholders' equity. The issuers of these securities as well as
the book value and market value of these securities were as follows:
<TABLE>
<CAPTION>
Name Amortized Cost Market Value
----- -------------- ------------
<S> <C> <C>
Petroleos Mexicanos $15,732,000 $16,814,025
Republic of Colombia $11,874,000 $12,968,743
</TABLE>
NOTE TWO of the consolidated financial statements reports amortized fair value
and maturity information on the securities portfolio.
21
<PAGE> 25
TABLE EIGHT. INTEREST-EARNING DEPOSITS WITH OTHER BANKS
(Dollars in thousands)
<TABLE>
<CAPTION>
Country December 31, 1999
<S> <C>
Argentina $ 47,000
Brazil 37,635
Ecuador 28,000
Suriname 25,000
Panama 10,250
Bahamas (1) 10,000
Jamaica 8,500
British West Indies 5,000
Dominican Republic 5,000
Bolivia 3,500
Guyana 3,000
Nicaragua 2,000
Paraguay 2,000
United States 800
--------
$187,685
========
</TABLE>
(1) Consists of placements in the Bahamas branch of a multinational
financial institution.
(2) All balances reflected on this schedule are denominated in U.S.
dollars.
LOAN PORTFOLIO
The Company's loan portfolio decreased by $50.5 million during the year ended
December 31, 1999 in relation to December 31, 1998. This decrease was due
primarily to the transfer of bearer debt securities classified as loans to
securities available for sale discussed earlier. At December 31, 1999,
commercial-domestic loans increased by $105.6 million which resulted from
management's ability to increase lending in the U. S. market. At December 31,
1999 approximately 41 percent of the Company's portfolio consisted of loans to
domestic borrowers and 59 percent of the Company's portfolio consisted of loans
to foreign borrowers. This represents an increase of 27.9 percent in U. S.
exposure as the Company concentrated its efforts on this market due to slow
economic conditions in the Region. Details on the loans by type are shown in
TABLE NINE below.
The Company's loan portfolio is largely trade related in nature and is
relatively short-term. Approximately 69 percent of loans had maturities of less
than one year. Additionally, the loan portfolio is an important source of
liquidity since the Company's predominant business, international trade finance,
is self liquidating in nature and a significant part of the loans and extensions
of credit mature within one year. The term to maturity of the Company's loans at
December 31, 1999 are shown on TABLE TEN.
22
<PAGE> 26
TABLE NINE. LOANS BY TYPE
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial and industrial (1) $ 394,841 $ 289,264 $ 179,673 $ 110,750 $ 96,856
Acceptances discounted 59,040 56,706 45,153 23,314 33,059
Residential mortgages 2,140 10,494 12,008 10,610 11,363
----------- ---------- --------- --------- ---------
Subtotal Domestic 456,021 356,464 236,834 144,674 141,278
Foreign:
Banks and other financial institutions 224,155 302,371 349,643 129,376 136,681
Commercial and industrial (1) 338,411 395,987 319,925 179,824 81,433
Acceptances discounted 59,256 72,597 55,301 80,935 62,838
Government and official institutions 38,358 39,309 3,091 750 750
----------- ---------- --------- --------- ---------
Subtotal Foreign 660,180 810,264 727,960 390,885 281,702
----------- ---------- --------- --------- ---------
Total loans $ 1,116,201 $1,166,728 $ 964,794 $ 535,559 $ 422,980
=========== ========== ========= ========= =========
</TABLE>
(1) Includes pre-export financing, warehouse receipts and refinancing of
letters of credits.
23
<PAGE> 27
TABLE TEN. LOAN MATURITIES
(In thousands)
<TABLE>
<CAPTION>
As of December 31, 1999 (1)
-------------------------------------------------------------------------------
Mature
Mature After One But Mature
Within Within After Five
One Year Five Years Years Total
-------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Domestic loans:
Commercial and Industrial $242,717 $132,416 $19,492 $ 394,625
Acceptances discounted 59,040 -- -- 59,040
Foreign loans:
Commercial and Industrial 412,781 172,830 15,314 600,925
Acceptances discounted 58,161 1,095 -- 59,256
-------- -------- ------- ----------
Total $772,699 $306,341 $34,806 $1,113,846
======== ======== ======= ==========
Fixed $474,518 $207,850 $27,518 $ 709,886
Adjustable 298,181 98,491 7,288 403,960
-------- -------- ------- ----------
Total fixed and adjustable $772,699 $306,341 $34,806 $1,113,846
======== ======== ======= ==========
<CAPTION>
As of December 31, 1998 (1)
-------------------------------------------------------------------------------
Mature
Mature After One But Mature
Within Within After Five
One Year Five Years Years Total
-------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Domestic loans:
Commercial and Industrial $210,938 $ 58,751 $19,343 $ 289,032
Acceptances discounted 56,706 -- -- 56,706
Foreign loans:
Commercial and Industrial 458,207 243,362 36,098 737,667
Acceptances discounted 71,061 1,536 -- 72,597
-------- -------- ------- ----------
Total $796,912 $303,649 $55,441 $1,156,002
======== ======== ======= ==========
Fixed $546,552 $236,563 $48,719 $ 831,834
Adjustable 250,360 67,086 6,722 324,168
-------- -------- ------- ----------
Total fixed and adjustable $796,912 $303,649 $55,441 $1,156,002
======== ======== ======= ==========
</TABLE>
(1) Does not include mortgage loans and installment loans in the aggregate
amount of $2.3 million in 1999 and $10.7 million in 1998.
24
<PAGE> 28
TABLES ELEVEN AND TWELVE reflects both the Company's growth and diversification
in financing trade flows between the United States and the Region in terms of
loans by country and cross-border outstanding by country. The aggregate amount
of the Company's cross-border outstandings by primary credit risk includes cash
and demand deposits with other banks, interest earning deposits with other
banks, investment securities, due from customers on bankers acceptances, due
from customers on deferred payment letters of credit and net loans. 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, the price of the underlying goods or commodities being financed
and the overall economic conditions in a given country.
At December 31, 1999 approximately 25.9 percent in principal amount of the
Company's loans were outstanding to borrowers in four countries other than the
United States: Panama (11.4 percent), Guatemala (6.0 percent), Brazil (4.4
percent) and El Salvador (4.1 percent). The United States exposure grew $100.0
million representing 40.9 percent of the loan portfolio compared to 30.2 percent
in 1998.
Panamanian loan exposure is over 10 percent of loans and has increased to 11.4
percent at December 31, 1999. The bulk of the credit relationships in Panama
relate to the financing of short-term trade transactions with companies
operating out of the Colon Free Zone. The latter represents the second largest
free trading zone in the world after Hong Kong. The companies operate largely as
importers and exporters of consumer goods, such as electronic goods and
clothing.
25
<PAGE> 29
TABLE ELEVEN. LOANS BY COUNTRY
(Dollars in thousands)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- --------------------------
% of % of % of
Total Total Total
Country Amount Loans Amount Loans Amount Loans
---------- ------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States $ 456,021 40.9% $ 356,464 30.6% $236,834 24.5%
Argentina 35,494 3.2% 36,276 3.1% 58,477 6.0%
Bolivia (2) -- -- 20,816 1.8% 38,058 3.9%
Brazil 49,214 4.4% 54,862 4.7% 58,040 6.0%
British West Indies (2) 22,082 2.0% -- -- -- --
Colombia 28,437 2.5% 41,911 3.6% 23,768 2.5%
Dominican Republic 41,604 3.7% 29,563 2.5% 40,161 4.2%
Ecuador 43,622 3.9% 46,917 4.0% 74,485 7.7%
El Salvador 45,847 4.1% 37,196 3.2% 40,306 4.2%
Guatemala 66,531 6.0% 119,227 10.2% 91,178 9.5%
Honduras 42,352 3.8% 59,564 5.1% 59,439 6.2%
Jamaica (2) 28,628 2.6% 29,066 2.5% -- --
Mexico (2) -- -- 22,983 2.0% -- --
Panama 127,419 11.4% 118,680 10.2% 77,295 8.0%
Peru 29,648 2.7% 49,382 4.2% 68,094 7.1%
Russia (2) -- -- -- -- 17,500 1.8%
Suriname (2) -- -- 21,868 1.9% -- --
Venezuela 17,842 1.6% 19,756 1.7% 16,299 1.7%
Other (1) 81,460 7.2% 102,197 8.8% 64,860 6.7%
---------- -------- ---------- -------- -------- --------
Total $1,116,201 100.0% $1,166,728 100.0% $964,794 100.0%
========== ======== ========== ======== ======== ========
</TABLE>
(1) Other consists of loans to borrowers in countries in which loans did
not exceed 1 percent of total loans.
(2) These countries had loans which did not exceed 1 percent of total loans
in the periods indicated.
At December 31, 1999 approximately 31.7 percent in cross-border outstanding were
due from borrowers in five countries other than the United States: Brazil (10.1
percent), Panama (6.7 percent), Argentina (6.6 percent), Ecuador (4.5 percent)
and Guatemala (4.0 percent).
Brazil cross-border exposure outstandings increased to 10 percent of total cross
border outstandings as of December 31, 1999. This increase was due largely to
inter-bank placements or deposits with foreign-owned multinational banks doing
business in this country. These deposits were generally of a short-term nature
(one year or less).
26
<PAGE> 30
TABLE TWELVE. TOTAL CROSS-BORDER OUTSTANDING BY COUNTRY AND TYPE
(Dollars in million)
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
% of % of % of
Total Total Total
1999 Assets 1998 Assets 1997 Assets
-------- --------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Argentina $ 113 6.6% $ 57 3.4% $ 69 5.2%
Bahamas (2) 21 1.2% -- -- -- --
Bolivia 18 1.0% 26 1.5% 44 3.3%
Brazil 173 10.1% 94 5.6% 85 6.3%
British West Indies (2) -- -- 36 2.1% 11 0.8%
Colombia 48 2.8% 49 2.9% 24 1.8%
Costa Rica (2) -- -- 16 0.9% -- --
Dominican Republic 55 3.2% 48 2.8% 39 2.9%
Ecuador 78 4.5% 100 5.9% 90 6.7%
El Salvador 44 2.6% 52 3.1% 46 3.4%
Guatemala 68 4.0% 131 7.7% 92 6.9%
Honduras 43 2.5% 69 4.1% 52 3.9%
Jamaica 35 2.0% 40 2.4% 32 2.4%
Mexico (2) 20 1.2% 23 1.4% - -
Nicaragua (2) -- -- 15 0.9% 12 0.9%
Panama 116 6.7% 118 7.0% 72 5.4%
Peru 42 2.4% 56 3.3% 74 5.5%
Russia (2) -- -- -- -- 17 1.3%
Suriname (2) 32 1.9% 27 1.6% -- --
United Kingdom (2) 15 0.9% -- -- -- --
Venezuela (2) 17 1.0% 19 1.1% -- --
Other (1) 75 4.4% 76 4.4% 39 2.9%
------- ------- ------- ------ ------ -------
Total $ 1,013 59.0% $ 1,052 62.1% $ 798 59.6%
======= ======= ======= ====== ====== =======
</TABLE>
(1) Other consists of cross-border outstanding to countries in which such
cross-border outstanding did not exceed 0.75 percent of the Company's
total assets at any of the periods indicated.
(2) These countries had cross-border outstanding which did not exceed 0.75
percent of total assets in the periods indicated.
(3) Cross-border outstandings could be less than loans by country since
cross-border outstandings may be netted against legally enforceable,
written guarantees of principal or interest by domestic or other
non-local third parties. In addition, balances of any tangible, liquid
collateral may also be netted against cross-border outstandings of a
country if they are held and realizable by the lender outside of the
borrower's country.
As a result of the economic problems in Ecuador that resulted in the closure of
several banks and culminated with the country defaulting on its external debt,
the following selective disclosure is provided on Ecuador:
27
<PAGE> 31
Amounts in millions:
<TABLE>
<S> <C>
Aggregate Outstandings at December 31, 1998 $ 101.6(1)
Net Change in Short-term Outstandings: (34.5)
Changes in Other Outstandings:
Additional Outstandings 19.8
Interest Income Accrued 6.8
Collections of: Principal (7.6)
Collections of: Interest (6.7)
Aggregate Outstandings at December 31, 1999 79.3(2)
</TABLE>
(1) Includes interest accrued and not paid of $1.6 million.
(2) Includes interest accrued and not paid of $1.7 million.
TOTAL CROSS-BORDER OUTSTANDINGS BY TYPE
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1999 1998 1997
------- ------- -----
<S> <C> <C> <C>
Government and official institutions $ 114 $ 69 $ 25
Banks and other financial institutions 451 489 442
Commercial and industrial 384 408 275
Acceptances discounted 64 86 56
------ ------ ----
Total $1,013 $1,052 $798
====== ====== ====
</TABLE>
DUE FROM CUSTOMERS ON BANKERS' ACCEPTANCES AND DEFERRED PAYMENT LETTERS OF
CREDIT.
Due from customers on bankers' acceptances and deferred payment letters of
credit were $27.8 million and $5.8 million, respectively, at December 31, 1999
compared to $75.6 million and $6.5 million, respectively, at December 31, 1998.
This decrease reflects the reduction in letter of credit activity in the Region
largely as a result of slow economic conditions. 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 one in Puerto Rico. The Company has three Bank
branches in Miami, one each in Tampa, Winter Haven, Sarasota, West Palm Beach
and Weston. In pricing its deposits, the Company analyzes the market carefully,
attempting to price its deposits competitively with the larger financial
institutions in the area. TABLE TWO provides information on average deposit
amounts and rates paid to each deposit category. Total deposits were $1,535.6
million at December 31, 1999 compared to $1,477.1 million at December 31, 1998.
Average interest-bearing deposits increased by 10.2 percent to $1,358.3 million
at December 31, 1999 from $1,231.7 million at December 31, 1998. The Company was
successful in expanding its deposit base in time deposits and certificates of
deposit in denominations of less than $100,000 which increased 23.3 percent to
$630 million at December 31, 1999 from $511.4 million at December 31, 1998. In
the summer of 1999, the Company opened its newest branch in Weston, which
positively contributed to the deposit growth achieved in all markets.
Additionally, the Company expanded Presidential Money Market deposits over the
year which grew to $44.7 million at December 31, 1999 from $3.3 million at
December 31, 1998. The Presidential Money Market account has the same
characteristics as a money market account, except that the Presidential account
has a higher minimum balance requirement and offers a higher yield.
28
<PAGE> 32
TRUST PREFERRED SECURITIES
In December 1998, the Company issued $11 million in Beneficial Unsecured
Securities, of Series A ("Trust Preferred Securities") out of a guarantor trust
at a rate of 9.75 percent. The Trust Preferred Securities are considered Tier I
capital for regulatory purposes. Trust Preferred Securities increased by $1.7
million upon the exercise of an over-allotment option by the underwriter in
January 1999. See NOTE SEVEN of the Consolidated Financial Statements for
further details.
TABLE THIRTEEN reports maturity periods of certificate of deposits of $100,000
and greater.
TABLE THIRTEEN. MATURITIES OF AND AMOUNTS OF CERTIFICATES OF DEPOSITS AND OTHER
TIME DEPOSITS $100,000 OR MORE (In thousands)
<TABLE>
<CAPTION>
Certificates Other Time
of Deposit Deposits-IBF
$100,000 or More $100,000 or More Total
---------------- ---------------- -----------
<S> <C> <C> <C>
Three months or less $ 87,410 $ 24,025 $111,435
Over 3 through 6 months 109,583 7,531 117,114
Over 6 through 12 months 136,999 2,750 139,749
Over 12 months 75,433 -- 75,433
-------- -------- --------
Total $409,425 $ 34,306 $443,731
======== ======== ========
</TABLE>
OFF-BALANCE SHEET
CONTINGENCIES
In the normal course of business, the Company utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers, including commitments to extend credit, commercial letters of credit,
shipping guarantees, standby letters of credit and forward foreign exchange
contracts.
TABLE FOURTEEN reports the total volume and average monthly volume of the
Company's export and import letters of credit for the periods indicated. The
letter of credit volume decreased by 30 percent to $524.8 million from $746.8
million as a result of shifts toward more on-balance sheet financing and slower
economic conditions throughout the Region.
29
<PAGE> 33
TABLE FOURTEEN. CONTINGENCIES - COMMERCIAL LETTERS OF CREDIT
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997
------------------------ ---------------------- ----------------------
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) $ 227,904 $ 18,992 $ 397,683 $ 33,140 $ 424,748 $ 35,396
Import Letters of Credit (1) 296,943 24,745 349,099 29,092 394,758 32,897
--------- -------- --------- -------- --------- --------
Total $ 524,847 $ 43,737 $ 746,782 $ 62,232 $ 819,506 $ 68,293
========= ======== ========= ======== ========= ========
</TABLE>
(1) Represents certain contingent liabilities not reflected on the
Company's balance sheet.
The Company provides letter of credit services globally. TABLE FIFTEEN sets
forth the distribution of the Company's contingent liabilities by country of the
applicant and issuing bank for import and export letters of credit,
respectively. As shown by the table, contingent liabilities increased by 17
percent to $150.6 million at December 31, 1999 from December 31, 1998 as a
result of increased letters of credit related to domestic corporate names.
30
<PAGE> 34
TABLE FIFTEEN. CONTINGENT LIABILITIES (1)
(In thousands)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Argentina (3) $ -- $ 1,680 $ --
Aruba (3) 3,720 -- --
Bolivia (3) -- 3,890 3,883
Brazil (3) -- -- 4,123
Colombia (3) -- -- 3,936
Costa Rica 9,893 2,846 3,168
Dominican Republic 4,707 7,015 4,759
Ecuador (3) -- 3,703 17,839
El Salvador 2,734 1,995 3,837
Guatemala 9,475 26,132 11,577
Guyana (3) 4,165 2,374 --
Haiti 5,705 2,088 7,857
Honduras 4,174 2,427 5,550
Nicaragua (3) -- -- 3,386
Panama 14,242 14,538 12,439
Paraguay (3) -- 1,961 2,395
Peru (3) 3,573 -- 5,566
Suriname (3) 5,677 11,690 --
Switzerland (3) -- 1,588 --
United States 74,643 39,415 94,629
Venezuela (3) 2,593 -- -
Other (2) 6,143 5,374 13,139
-------- --------- ---------
Total $151,444 $ 128,716 $ 198,083
======== ========= =========
</TABLE>
(1) Includes export and import letters of credit, standby letters of credit
and letters of indemnity.
(2) Other includes those countries in which contingencies represent less
than 1 percent of the Company's total contingencies at each of the
above dates.
(3) These countries had contingencies, which did not exceed 1 percent of
the Company's total contingencies as of the period indicated.
LIQUIDITY
The Company seeks to manage its assets and liabilities to reduce the potential
adverse impact on net interest income that might result from changes in interest
rates through systematic monitoring of maturity mismatches. The Company's
investment decision-making takes into account not only the rates of return and
their underlying degree of risk, but also liquidity requirements, including
minimum cash reserves, withdrawal and maturity of deposits and additional demand
for funds. For any given period, the pricing structure is matched when an equal
amount of assets and liabilities reprice. An excess of assets or liabilities
over these matched items results in a gap or mismatch, as shown on TABLE
SIXTEEN. A positive gap denotes asset sensitivity and normally means that an
increase in interest rates would have a positive effect on net interest income
while a decrease in interest rates would have a negative effect on net
31
<PAGE> 35
interest income. However, because different types of assets and liabilities with
similar maturities may reprice at different rates or may otherwise react
differently to changes in overall market rates or conditions, changes in
prevailing interest rates may not necessarily have such effects on net interest
income. All of the Company's assets and liabilities are denominated in dollars
and therefore the Company has no material foreign exchange risk.
Cash and cash equivalents were $85.1 million on December 31, 1999, a decrease
from $111.8 million from December 31, 1998. During 1999, net cash provided by
operating activities was $54.3 million, net cash used in investing activities
was $135.3 million and net cash provided by financing activities was $54.4
million. For further information on cash flows, see the Consolidated Statement
of Cash Flows in the Consolidated Financial Statements.
The Company's principal sources of liquidity and funding are its diverse deposit
base and the sales of bankers' acceptances as well as loan participations. The
level and maturity of deposits necessary to support the Company's lending and
investment activities is determined through monitoring loan demand and through
its asset/liability management process. Considerations in managing the Company's
liquidity position include, but are not limited to, scheduled cash flows from
existing assets, contingencies and liabilities, as well as projected liquidity
needs arising from anticipated extensions of credit. Furthermore, the liquidity
position is monitored daily by management to maintain a level of liquidity
conducive to efficient operations and is continuously evaluated as part of the
asset/liability management process.
Historically, the Company has increased its level of deposits to allow for its
planned asset growth. Customer deposits have increased through the branch
network, and private banking customers, as well as deposits related to the trade
activity. The majority of the Company's deposits are short-term and closely
match the short-term nature of the Company's assets. At December 31, 1999
interest-earning assets maturing within 180 days were $909 million, representing
55 percent of total earning assets. The short-term nature of the loan portfolio
and the fact that a portion of the loan portfolio consists of bankers'
acceptances provides additional liquidity to the Company. Liquid assets at
December 31, 1999 were $375 million, 22 percent of total assets, and consisted
primarily of cash and cash equivalents, due from banks-time and foreign debt
securities. At December 31, 1999 the Company had been advised of $52 million in
available interbank funding.
TABLE SIXTEEN presents the projected maturities or interest rate adjustments of
the Company's earning assets and interest-bearing funding sources based upon the
contractual maturities or adjustment dates at December 31, 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.
32
<PAGE> 36
TABLE SIXTEEN. INTEREST RATE SENSITIVITY
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------------------------
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 $201,001 $215,045 $ 220,886 $ 135,581 $307,825 $ 35,863 $1,116,201
Federal funds sold 63,400 -- -- -- -- -- 63,400
Investment securities 20,942 26,461 43,343 49,310 24,726 106,040 270,822
Interest earning deposits with
other banks 41,800 31,250 44,477 45,158 25,000 -- 187,685
-------- -------- --------- --------- -------- -------- ----------
Total 327,143 272,756 308,706 230,049 357,551 141,903 1,638,108
-------- -------- --------- --------- -------- -------- ----------
Funding Sources:
Savings and transaction deposits 37,699 28,663 67,828 -- -- -- 134,190
Certificates of deposits of $100k or more 46,687 40,723 109,583 136,999 75,433 -- 409,425
Certificates of deposits under $100k 62,476 130,588 203,792 329,633 90,356 -- 816,845
Other time deposits 21,695 2,330 7,531 2,750 -- -- 34,306
Funds overnight 63,450 -- -- -- -- -- 63,450
Trust preferred securities -- -- -- -- -- 12,650 12,650
-------- -------- --------- --------- -------- -------- ----------
Total $232,007 $202,304 $ 388,734 $ 469,382 $165,789 $ 12,650 $1,470,866
======== ======== ========= ========= ======== ======== ==========
Interest sensitivity gap $ 95,136 $ 70,452 $ (80,028) $(239,333) $191,762 $129,253 $ 167,242
======== ======== ========= ========= ======== ======== ==========
Cumulative gap $ 95,136 $165,588 $ 85,560 $(153,773) $ 37,989 $167,242
======== ======== ========= ========= ======== ========
Cumulative gap as a percentage
of total earning assets 5.81% 10.11% 5.22% -9.39% 2.32% 10.21%
======== ======== ========= ========= ======== ========
</TABLE>
33
<PAGE> 37
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------------------
0 to 30 31 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Days Years Years Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans $181,722 $270,944 $ 244,502 $ 120,970 $283,418 $ 65,172 $ 1,166,728
Federal funds sold 87,577 87,577
Investment securities 32,962 23,854 5,533 600 4,170 38,310 105,429
Interest earning deposits with
other banks 70,410 53,771 50,997 25,025 200,203
-------- -------- --------- --------- -------- -------- ------------
Total 372,671 348,569 301,032 146,595 287,588 103,482 1,559,937
-------- -------- --------- --------- -------- -------- ------------
Funding Sources:
Savings and transaction deposits 55,257 35,220 90,477
Certificates of deposits of $100 or more 64,830 116,053 138,528 185,366 25,596 530,373
Certificates of deposits under $100 54,459 86,325 201,762 309,986 20,111 92 672,735
Other time deposits 28,763 16,558 10,000 1,900 57,221
Funds overnight 49,350 49,350
Other Borrowing 6,116 6,116
Trust preferred securities 11,000 11,000
-------- -------- --------- --------- -------- -------- ----------
Total $252,659 $254,156 $ 356,406 $ 497,252 $ 45,707 $ 11,092 $1,417,272
======== ======== ========= ========= ======== ======== ==========
Interest sensitivity gap $120,012 $ 94,413 $ (55,374) $(350,657) $241,881 $ 92,390 $ 142,665
======== ======== ========= ========= ======== ======== ==========
Cumulative gap $120,012 $214,425 $ 159,051 $(191,606) $ 50,275 $142,665
======== ======== ========= ========= ======== ========
Cumulative gap as a percentage
of total earning assets 7.69% 13.75% 10.20% -12.28% 3.22% 9.15%
======== ======== ========= ========= ======== ========
</TABLE>
34
<PAGE> 38
CREDIT QUALITY REVIEW
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment of the level of
allowance adequate to provide for potential losses in the loan portfolio, 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.
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.
In addition to the factors previously mentioned, as well as management's
ongoing review of the Bank's assets, the Company's senior management meets on a
monthly basis through its Senior Loan Review Committee to assess the overall
credit quality of the loan portfolio. This Committee reviews the following: a)
loans greater than 30 days past due, b) overdrafts greater than 30 days, c) all
classified assets based upon an internal grading system. (This process includes
reviewing the appropriate level of the allowance for any specific loan based on
the underlying collateral and financial strength of each borrower,) and d)
country limits and exposures, as well as a consideration of any downgrades or
upgrades in rating.
On a quarterly basis, the Bank will assess the adequacy of the allowance for
credit losses, utilizing a disciplined and systematic approach which includes
the application of various methodologies for the formula portion of the
allowance that consider historical loss factors such as charge-offs to average
loans, portfolio composition, including borrowers by type as well as security
and duration of the portfolio. Loss factors are generally based on historical
loss experience and may be adjusted for significant factors that in management's
judgment affect the collectibility of the portfolio as of the evaluation date.
The non criticized assets are assigned a loss factor that incorporates the
annual net charge-off rate over several periods of time including the actual
year's charge-offs, three year forward moving average and also a five year
average. All these methodologies are obviously impacted by loan growth, the
level of criticized assets and loan write-offs. These methodologies are designed
to be self-correcting by taking into account our recent loss experience and
permitting adjustments based on management's judgment of significant factors as
of the evaluation date. The Bank does not utilize pooled loan loss factors, due
to the nature of the Bank's wholesale business, which does not include
significant pooled loans or loans that are homogeneous in nature such as
residential mortgages or consumer installment loans (these represent 0.2% and
0.9% of gross loans at December 31, 1999 and 1998, respectively).
In addition to the aforementioned methodologies for the formula portion of the
allowance, management conducts a review of the criticized loans and allocates a
specific allowance on an individual loan basis based upon the underlying
security and financial condition of the borrower. The Bank assigns an allowance
factor to a specific criticized loan and if this loan is downgraded due to
deteriorating conditions, the allowance factor is increased. The grading of
these criticized assets is consistent with regulatory classification systems.
These definitions include special mention, substandard and doubtful
classifications which incorporate higher specific allowance factors as the loans
are downgraded and the potential for loss increases. These specific allowance
amounts are determined by either a method prescribed by Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan", or by a method which identifies certain qualitative factors. As of
December 31, 1999 and 1998, the Bank did not maintain any allocated transfer
risk reserves.
The following table sets forth the allowance for credit
losses as of December 31,:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Specific portion $14,095 $ 2,786
Formula portion 7,316 10,008
------- -------
Total allowance for credit losses $21,411 $12,794
======= =======
</TABLE>
35
<PAGE> 39
The specific reserves increased from $2.8 million at December 31, 1998 to $14.1
million at December 31, 1999 due to an increase in classified loans including
loans from borrowers in Ecuador, which required approximately $8 million in
provisioning for the year. The decrease in formula reserves was due to a
decrease in unclassified loans coupled with management's judgment to establish
additional unallocated reserves in 1998 due to inherent risk factors, largely in
the Region.
Determining the appropriate level of the allowance for credit losses requires
management's judgment, including application of the factors described above to
assumptions and estimates made in the context of changing political and
economic conditions in many of the countries of the Region. Accordingly, there
can be no assurance that the Company's current allowance for credit losses will
prove to be adequate in light of future events and developments. At December
31, 1999, the allowance for credit losses was approximately $21.4 million, an
increase of 67 percent from $12.8 million at December 31, 1998. This increase
relates to the increase in provision for credit losses discussed earlier.
TABLE SEVENTEEN provides certain information with respect to the Company's
allowance for credit losses, provision for credit losses and chargeoff and
recovery activity for the periods shown.
36
<PAGE> 40
TABLE SEVENTEEN. CREDIT LOSS EXPERIENCE
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance of allowance for credit losses at
beginning of period $ 12,794 $ 10,317 $ 5,725 $ 4,450 $ 4,133
Charge-offs:
Domestic:
Commercial (3,299) (3,357) (1,693) (951) (1,097)
Acceptances -- (100) -- -- --
Residential -- -- -- -- --
Installment (5) -- (3) (8) (3)
----------- ----------- --------- --------- ---------
Total domestic (3,304) (3,457) (1,696) (959) (1,100)
Foreign:
Government and official institutions -- -- -- -- --
Banks and other financial institutions (2,330) (3,901) (896) (678) --
Commercial and industrial (6,216) -- -- (146) (1,044)(1)
Acceptances discounted -- -- -- -- --
----------- ----------- --------- --------- ---------
Total foreign (8,546) (3,901) (896) (824) (1,044)
----------- ----------- --------- --------- ---------
Total charge-offs (11,850) (7,358) (2,592) (1,783) (2,144)
Recoveries:
Domestic:
Commercial 1 12 203 16 10
Acceptances -- -- -- -- --
Residential -- -- -- -- --
Installment 3 -- 1 2 1
Foreign:
Banks and other financial institutions 163 202 -- -- --
----------- ----------- --------- --------- ---------
Total recoveries 167 214 204 18 11
----------- ----------- --------- --------- ---------
Net (charge-offs) recoveries (11,683) (7,144) (2,388) (1,765) (2,133)
Provision for credit losses 20,300 9,621 6,980 3,040 2,450
----------- ----------- --------- --------- ---------
Balance at end of period $ 21,411 $ 12,794 $ 10,317 $ 5,725 $ 4,450
=========== =========== ========= ========= =========
Average loans $ 1,181,865 $ 1,165,224 $ 737,921 $ 485,758 $ 370,568
Total loans $ 1,116,201 $ 1,166,728 $ 964,794 $ 535,559 $ 422,980
Net charge-offs to average loans 1.00% 0.61% 0.32% 0.36% 0.58%
Allowance to total loans 1.92% 1.10% 1.07% 1.07% 1.05%
</TABLE>
(1) Related to extension of credit to a domestic-based business operated by a
company organized under the laws of a foreign country.
TABLE EIGHTEEN sets forth an analysis of the allocation of the allowance for
credit losses by category of loans and the allowance for credit losses
allocated to foreign loans. The allowance is established to cover potential
losses inherent in the portfolio as a whole or is available to cover potential
losses on any of the Company's loans.
37
<PAGE> 41
TABLE EIGHTEEN. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allocation of the allowance by category of
loans:
Domestic:
Commercial $ 3,199 $ 1,138 $ 2,053 $ 1,964 $ 680
Acceptances 269 211 315 226 333
Residential mortgages 10 66 59 54 57
----------- ----------- --------- --------- ---------
Total domestic 3,478 1,415 2,427 2,244 1,070
Foreign:
Government and official institutions 1,496 -- -- -- --
Banks and other financial institutions 5,152 3,033 3,854 2,112 1,900
Commercial and industrial 11,015 8,010 3,442 920 1,101
Acceptances discounted 270 336 594 449 379
----------- ----------- --------- --------- ---------
Total foreign 17,933 11,379 7,890 3,481 3,380
Total $ 21,411 $ 12,794 $ 10,317 $ 5,725 $ 4,450
=========== =========== ========= ========= =========
Percent of loans in each category to total
loans:
Domestic:
Commercial 35.4% 24.8% 18.6% 20.6% 22.8%
Acceptances 5.3% 4.9% 4.7% 4.4% 7.8%
Residential 0.2% 0.9% 1.2% 2.0% 2.7%
----------- ----------- --------- --------- ---------
Total domestic 40.9% 30.6% 24.5% 27.0% 33.3%
Foreign:
Government and official institutions 3.4% 3.4% 0.1% 0.1% 0.2%
Banks and other financial institutions 20.1% 25.9% 36.5% 24.2% 32.3%
Commercial and industrial 30.3% 33.9% 33.2% 33.6% 19.3%
Acceptances discounted 5.3% 6.2% 5.7% 15.1% 14.9%
----------- ----------- --------- --------- ---------
Total foreign 59.1% 69.4% 75.5% 73.0% 66.7%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=========== =========== ========= ========= =========
</TABLE>
38
<PAGE> 42
TABLE NINETEEN. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ALLOCATED TO FOREIGN
LOANS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 11,379 $ 7,890 $ 3,481 $ 3,380 $ 2,062
Provision for credit losses 14,937 7,188 5,305 925 2,362
Net charge-offs (8,383) (3,699) (896) (824) (1,044)(1)
---------- ---------- --------- --------- ---------
Balance, end of period $ 17,933 $ 11,379 $ 7,890 $ 3,481 $ 3,380
========== ========== ========= ========= =========
</TABLE>
(1) Related to extensions of credit to a domestic-based business operated by a
company organized under the laws of a foreign country.
The Company usually places an asset on nonaccrual status when any payment of
principal or interest is over 90 days past due or earlier if management
determines the collection of principal or interest to be unlikely. Loans over
90 days past due may not be placed on nonaccrual if they are in the process of
collection and are either secured by property having a realizable value at
least equal to the outstanding debt and accrued interest or are fully
guaranteed by a financially responsible party whom the Company believes is
willing and able to discharge the debt, including accrued interest. In most
cases, if a borrower has more than one loan outstanding under its line with the
Company and any of its individual loans becomes over 90 days past due, the
Company places all outstanding loans to that borrower on nonaccrual status.
The Company does not have a rigid chargeoff policy but instead charges off
loans on a case-by-case basis as determined by management and approved by the
Board of Directors. In some instances, loans may remain in the nonaccrual
category for a period of time during which the borrower and the Company
negotiate restructured repayment terms.
The Company attributes its consistent basis of asset quality to the short-term
nature of its loan portfolio, the composition of its borrower base, the
importance that borrowers in the Region attach to maintaining their continuing
access to financing for foreign trade and to the Company's loan underwriting
policies.
The Company accounts for impaired loans in accordance with 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. Non-performing loans increased from
$9.1 million at December 31, 1998 to $18.6 million at December 31, 1999. This
increase was due to an increase of $4.3 million in domestic nonperforming loans
and $4.6 million in foreign nonperforming loans. The increase in domestic
nonperforming loans was due largely to one credit relationship in the amount of
$6.4 million that was offset by charge-offs during the year. The increase of
$4.6 million in foreign nonperforming loans was due to several nonperforming
loans of which one relationship made up approximately 78%.Management monitors
these loans very closely.
39
<PAGE> 43
TABLE TWENTY. NONPERFORMING LOANS
(In thousands)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Domestic:
Non accrual $ 6,995 $ 2,189 $ 3,100 $ 3,087 $ 1,345
Past due over 90 days and accruing -- 69 -- -- 582
--------- -------- -------- -------- --------
Total domestic nonperforming loans 6,995 2,258 3,100 3,087 1,927
Foreign:
Non accrual 9,588 6,396 2,949 1,654 2,287
Past due over 90 days and accruing 1,992 404 -- 112 301
--------- -------- -------- -------- --------
Total foreign nonperforming loans 11,580 6,800 2,949 1,766 2,588
Total nonperforming loans (1) $ 18,575 $ 9,058 $ 6,049 $ 4,853 $ 4,515
========= ======== ======== ======== ========
Total nonperforming loans to total loans 1.66% 0.78% 0.48% 0.91% 1.07%
Total nonperforming assets to total assets 1.08% 0.53% 0.64% 0.64% 0.73%
</TABLE>
(1) During such periods the Company did not have any loans which were deemed to
be "troubled debt restructurings" as defined in SFAS No. 15, Accounting by
Debtors and Creditors for Troubled Debt Restructurings.
At December 31, 1999 and 1998 the Company had no nonaccruing investment
securities.
For the year ended December 31, 1999 the amount of interest income that was
accrued on the loans on the previous table was approximately $155 thousand. For
the year ended December 31, 1999 the amount of interest income that would have
been accrued on the loans in the previous table in accordance with their
contractual terms was approximately and $1.6 million, of which $1.5 million
represented interest income on foreign loans and $68 thousand on domestic
loans.
Management does not believe that there is a material amount of loans not
included in the foregoing table where known information about possible credit
problems of the borrowers would cause management to have serious doubts as to
the ability of the borrowers to comply with the present loan repayment terms
and which may result in such loans becoming non-accruing loans.
CAPITAL RESOURCES
Stockholders' equity at December 31, 1999 was $134.0 million compared to $109.2
million at December 31, 1998 after adjustments for fair value accounting. This
increase was due primarily to $18.4 million of retained earnings and a $5.4
million change in unrealized gain on available for sale securities. During 1997
the Company paid dividends on preferred stock of $319 thousand, which were
within the amounts allowed by banking and holding company regulations.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. The regulations require
the Company and the Bank to meet specific capital adequacy guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Company's and the Bank's capital classification is also subject to
qualitative judgments by the regulators about interest rate risk, concentration
of credit risk and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital (as defined in the regulations) to total average assets (as defined)
and minimum ratios of Tier I and total capital (as defined) to risk-weighted
assets (as defined).
40
<PAGE> 44
The Company was required by the OCC to record, under protest, a transfer risk
reserve of $32 million related to the Bank's exposure in Ecuador. This reserve
was recorded for regulatory reporting purposes only and not for the Company's
consolidated financial statements prepared in accordance with generally
accepted accounting principles. The Company is appealing, within the OCC, this
requirement. NOTE EIGHT of the consolidated financial statements reports
Company and Bank capital ratios.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK MANAGEMENT
In the normal course of conducting business activities, the Company is exposed
to market risk which includes both price and liquidity risk. The Company's
price risk arises from fluctuations in interest rates, and foreign exchange
rates that may result in changes in values of financial instruments if the
instrument is payable in a currency other than dollars. The Company generally
does not hold a substantial amount of instruments denominated in currency other
than U.S. dollars. When it does, however, it mitigates this risk by hedging the
currency through forward contracts. The Company holds substantially all of its
assets in U.S. dollars. Accordingly, the risk related to changes in foreign
exchange rates is minimal. Changes in exchange rates in the Region would not
expose the assets to foreign exchange risk, since the obligations are to be
repaid in dollars. However, the change in foreign exchange rates could affect
the ability of the borrower to repay its obligation, which would be addressed
in our credit risk analysis. Credit risks related to our assets are discussed
in the "Allowance for Credit Loss." The Company does not have material direct
market risk related to commodity and equity prices. Liquidity risk arises from
the possibility that the Company may not be able to satisfy current and future
financial commitments or that the Company may not be able to liquidate
financial instruments at market prices. Risk management policies and procedures
have been established and are utilized to manage the Company's exposure to
market risk. The strategy of the Company is to operate at an acceptable risk
environment while maximizing its earnings.
Market risk is managed by the Asset Liability Committee which formulates and
monitors the performance of the Company based on established levels of market
risk as dictated by policy. In setting the tolerance levels of market risk, the
Committee considers the impact on both earnings and capital potential changes
in the outlook in market rates, global and regional economies, liquidity,
business strategies and other factors.
The Company's asset and liability management process is utilized to manage
interest rate risk through the structuring of balance sheet and off-balance
sheet portfolios. It is the strategy of the Company to maintain as neutral an
interest rate risk position as possible. By utilizing this strategy the Company
"locks in" a spread between interest-earning assets and interest-bearing
liabilities. Given the matching strategy of the Company and the fact that it
does not maintain significant medium and/or long-term exposure positions, the
Company's interest rate risk will be measured and quantified through an
interest rate sensitivity report. For any given period, the Company's pricing
structure is matched when an equal amount of assets and liabilities reprice. An
excess of assets or liabilities over these matched items results in a gap or
mismatch. A positive gap denotes asset sensitivity and normally means that an
increase in interest rates would have a positive effect on net interest income.
On the other hand a negative gap denotes liability sensitivity and normally
means that a decline in interest rates would have a positive effect in net
interest income. However, because different types of assets and liabilities
with similar maturities may reprice at different rates or may otherwise react
differently to changes in overall market rates or conditions, changes in
prevailing interest rates may not necessarily have such effects on net interest
income.
TABLE SIXTEEN provides the Company's Interest Rate Sensitivity Reports as of
December 31, 1999. This table shows that interest-bearing liabilities maturing
or repricing within one year exceeded interest-earning assets by $153.4
million. The Company monitors that the assets and liabilities are closely
matched to minimize interest rate risk. On December 31, 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 3 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.
41
<PAGE> 45
NOTE THIRTEEN of the consolidated financial statements reports fair value of
financial instruments. As reported in this note, the carrying values
approximate their fair values which generally minimizes the exposure to market
risk resulting from interest rate fluctuations. This minimal risk is the result
of the short-term nature of the Company's interest-earning assets and the
matching maturity level of the interest-bearing liabilities.
On a daily basis the Bank's Chief Financial Officer and the Bank's Treasurer
are responsible for measuring and managing market risk.
42
<PAGE> 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Hamilton Bancorp Inc.:
We have audited the accompanying consolidated statements of condition of
Hamilton Bancorp Inc. and its subsidiaries (the "Company") as of December 31,
1999 and 1998, and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial condition of the Company as of December 31,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 16, the accompanying 1999 and 1998 financial statements
have been restated.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 24, 2000 (December 26, 2000 as to the effects of the restatement
described in Note 16)
43
<PAGE> 47
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
AS RESTATED, AS RESTATED,
SEE NOTE 16 SEE NOTE 16
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 21,710 $ 24,213
FEDERAL FUNDS SOLD 63,400 87,577
------------ ------------
Total cash and cash equivalents 85,110 111,790
INTEREST-EARNING DEPOSITS WITH OTHER BANKS 187,685 200,203
SECURITIES AVAILABLE FOR SALE (Amortized cost: $266,517
in 1999 and $70,509 in 1998) 274,277 69,725
SECURITIES HELD TO MATURITY 35,870
LOANS - NET 1,091,976 1,150,903
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 27,767 75,567
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 5,835 6,468
PROPERTY AND EQUIPMENT - NET 5,209 4,775
ACCRUED INTEREST RECEIVABLE 19,111 19,201
GOODWILL - NET 1,658 1,833
OTHER ASSETS 22,672 16,894
------------ ------------
TOTAL $ 1,721,300 $ 1,693,229
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 1,535,606 $ 1,477,052
OTHER BORROWINGS 6,116
TRUST PREFERRED SECURITIES 12,650 11,000
BANKERS ACCEPTANCES OUTSTANDING 27,767 75,567
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 5,835 6,468
OTHER LIABILITIES 5,544 7,784
------------ ------------
Total liabilities 1,587,402 1,583,987
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4, 12)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares authorized, 10,081,147 shares
issued and outstanding at December 31, 1999 and
10,050,062 shares issued and outstanding at December 31, 1998 101 100
Capital surplus 60,708 60,117
Retained earnings 67,871 49,511
Accumulated other comprehensive income (loss) 5,218 (486)
------------ ------------
Total stockholders' equity 133,898 109,242
------------ ------------
TOTAL $ 1,721,300 $ 1,693,229
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
44
<PAGE> 48
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS RESTATED, SEE
NOTE 16
1999 1998 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 107,620 $ 106,885 $ 70,262
Deposits with other banks 15,940 10,989 8,909
Investment securities 8,787 4,903 2,980
Federal funds sold 1,647 1,484 1,008
--------------- --------------- ---------------
Total 133,994 124,261 83,159
INTEREST EXPENSE:
Deposits 72,224 69,719 43,913
Trust preferred securities 1,232
Federal funds purchased and other borrowings 181 561 284
--------------- --------------- ---------------
Total 73,637 70,280 44,197
--------------- --------------- ---------------
NET INTEREST INCOME 60,357 53,981 38,962
PROVISION FOR CREDIT LOSSES 20,300 9,621 6,980
--------------- --------------- ---------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 40,057 44,360 31,982
--------------- --------------- ---------------
NON-INTEREST INCOME:
Trade finance fees and commissions 12,035 13,101 12,768
Syndication and structuring fees 6,266 3,352 2,535
Customer service fees 1,528 1,149 934
Net gain (loss) on sale of assets 562 (220) 108
Other 299 171 97
--------------- --------------- ---------------
Total 20,690 17,553 16,442
--------------- --------------- ---------------
OPERATING EXPENSES:
Employee compensation and benefits 14,556 14,527 13,162
Occupancy and equipment 4,273 4,229 3,251
Loss on exchanges and write-down of assets 187 22,810
Legal Expenses 3,627 1,601 108
Other 9,461 7,119 6,902
--------------- --------------- ---------------
Total 32,104 50,286 23,423
--------------- --------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES 28,643 11,627 25,001
PROVISION FOR INCOME TAXES 10,283 4,132 9,098
--------------- --------------- ---------------
NET INCOME $ 18,360 $ 7,495 $ 15,903
=============== =============== ===============
NET INCOME PER COMMON SHARE:
Basic $ 1.82 $ 0.75 $ 1.81
=============== =============== ===============
Diluted $ 1.79 $ 0.72 $ 1.73
=============== =============== ===============
AVERAGE SHARES OUTSTANDING:
Basic 10,069,898 9,983,208 8,806,379
=============== =============== ===============
Diluted 10,275,223 10,390,884 9,173,680
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
45
<PAGE> 49
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS RESTATED, AS RESTATED,
SEE NOTE 16 SEE NOTE 16
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET INCOME $ 18,360 $ 7,495 $ 15,903
OTHER COMPREHENSIVE (LOSS) INCOME, Net of tax:
Unrealized (depreciation) appreciation in securities available for
sale during year 5,704 (433) 18
Less: Reclassification adjustment for gains included
in net income (69)
----------- ----------- -----------
Total 5,704 (433) (51)
----------- ----------- -----------
COMPREHENSIVE INCOME $ 24,064 $ 7,062 $ 15,852
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE> 50
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (AS RESTATED, SEE NOTE 16)
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER TOTAL
---------------- ----------------- CAPITAL RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS (LOSS) GAIN EQUITY
------- ------ --------- ------ -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 101,207 $ 1 5,205,030 $ 52 $ 17,318 $ 26,432 $ (2) $ 43,800
Net change in unrealized loss on securities
available for sale, net of taxes (51) (51)
Cash dividends on preferred stock,
net of withholding taxes (319) (319)
Conversion of preferred stock into
common stock with 6.5 to 1 split (101,207) (1) 466,160 5 (4)
Conversion of Bank stock and warrants
into common stock with 6.5 to 1 split 1,396,759 14 (14)
Sale of 2,760,000 shares of common
stock in public offering, net 2,760,000 27 38,966 38,993
Net income 15,903 15,903
------- ------ ---------- ------ -------- -------- ------------- -------------
BALANCE, DECEMBER 31, 1997 -- -- 9,827,949 98 56,266 42,016 (53) 98,327
Issuance of 222,113 shares of common
stock from exercise of options 222,113 2 2,048 2,050
Reduction of tax liability due to
deductibility of stock options exercised 1,803 1,803
Net change in unrealized loss on securities
available for sale, net of taxes (433) (433)
Net Income 7,495 7,495
------- ------ ---------- ------ -------- -------- ------------- -------------
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 1 286 287
Reduction of tax liability due to
deductibility of stock options exercised 305 305
Net change in unrealized loss on securities
available for sale, net of taxes 5,704 5,704
Net Income 18,360 18,360
------- ------ ---------- ------ -------- -------- ------------- -------------
BALANCE, DECEMBER 31, 1999 -- $ -- 10,081,147 $ 101 $ 60,708 $ 67,871 $ 5,218 $ 133,898
------- ------ ---------- ------ -------- -------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 51
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS RESTATED,
SEE NOTE 16
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,360 $ 7,495 $ 15,903
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,283 1,173 1,024
Provision for credit losses 20,300 9,621 6,980
Deferred tax benefit (3,746) (8,612) (2,615)
Loss on exchanges and write down on assets 187 22,810
Net gain on sale of securities available for sale (108)
Net loss (gain) on sale of loans and other real estate owned (561) 220
Proceeds from the sale of bankers acceptances and loan
participations 25,238 102,402 80,007
Increase in accrued interest receivable and other assets (4,767) (7,963) (5,248)
(Decrease) increase in other liabilities (2,008) 4,524 107
------------ ------------ ------------
Net cash provided by operating activities 54,286 131,670 96,050
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest-earning deposits with other banks 12,518 (86,473) (33,253)
Purchase of securities available for sale (762,150) (245,442) (201,448)
Purchase of securities held to maturity (14,703) (31,299)
Proceeds from paydowns of securities held to maturity 3,307 989
Purchase of loan participations (69,414) (17,463)
Proceeds from sales and maturities of securities available for sale 763,180 214,037 176,203
Increase in loans - net (84,808) (327,696) (512,139)
Purchases of property and equipment - net (1,495) (936) (2,166)
Proceeds from sale of loans and other real estate owned 18,224 21,798
------------ ------------ ------------
Net cash used in investing activities (135,341) (472,485) (572,803)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net 58,554 342,005 496,407
Proceeds from trust preferred securities offering 1,650 11,000
(Repayment of) proceeds from other borrowing (6,116) 6,116
Net proceeds from issuance of common stock 287 2,050 38,993
Cash dividends on preferred stock (319)
------------ ------------ ------------
Net cash provided by financing activities 54,375 361,171 535,081
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (26,680) 20,356 58,328
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 111,790 91,434 33,106
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 85,110 $ 111,790 $ 91,434
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 73,536 $ 68,665 $ 42,555
============ ============ ============
Income taxes paid during the year $ 14,957 $ 12,717 $ 9,077
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Other real estate owned acquired through foreclosure $ 165
============
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 52
HAMILTON BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hamilton Bancorp Inc. (the "Company") is a holding company formed in 1988
primarily to acquire ownership in Hamilton Bank, N.A. (the "Bank"), a
national Federal Reserve member bank which commenced operations in
February 1983. As of December 31, 1999, the Company owned 99.78% of the
outstanding common stock of the Bank. The Bank's business is focused
primarily on foreign trade and providing innovative services for its
financial correspondents and exporting/importing firms. The Bank offers
these services through its main office and three branches in Miami,
Florida, and a branch in Tampa, Winter Haven, Sarasota, West Palm Beach,
Weston, Florida and San Juan, Puerto Rico.
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry. The following summarizes the more significant of these policies:
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of the Company, the Bank and Hamilton Capital Trust I
(the "Trust", see Note 7). All significant intercompany amounts have been
eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated statements of
cash flows, the Company considers cash, demand deposits with other banks,
and federal funds sold as cash and cash equivalents. Generally, federal
funds are sold for one-day periods.
The Federal Reserve requires banks to maintain certain average reserve
balances, in the form of vault cash or funds on deposit with the Federal
Reserve, based upon the total of a bank's net transaction accounts. At
December 31, 1999 and 1998, the Bank met its average reserve requirement.
INVESTMENT SECURITIES - Investment securities are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities. Under SFAS No. 115,
investment securities must be classified and accounted for under the
following conditions:
TRADING ACCOUNT SECURITIES - Trading account securities are held in
anticipation of short-term sales or market movements. Trading account
securities are stated at fair value. Gains or losses on the sale of
trading account securities, as well as unrealized fair value
adjustments, are included in operating income. At December 31, 1999 and
1998, the Company held no trading account securities.
49
<PAGE> 53
SECURITIES AVAILABLE FOR SALE - Securities to be held for unspecified
periods of time including securities that management intends to use as
part of its asset/liability strategy, or that may be sold in response
to changes in interest rates, changes in prepayment risk, or other
similar factors are classified as available for sale and are carried at
fair value. Unrealized gains or losses are reported as a net amount in
accumulated other comprehensive income (loss) within stockholders'
equity until realized. Gains and losses are recognized using the
specific identification method upon realization.
SECURITIES HELD TO MATURITY - Securities that management has a positive
intent and the ability to hold to maturity are carried at cost,
adjusted for amortization of premiums and accretions of discounts over
the life of the securities using a method which approximates the
level-yield method.
TRANSFERS - Transfers of securities between classifications are
recorded at fair value. Unrealized gains (losses) on securities
transferred into available for sale are recorded as accumulated other
comprehensive income (loss) within stockholders' equity, while
unrealized gains (losses) on securities transfers into trading are
recognized in income immediately. Unrealized gains (losses) on
securities transferred to held to maturity are continued to be
maintained in accumulated other comprehensive income (loss) within
stockholders' equity, however, such unrealized gains (losses) are
amortized to income over the period until maturity as an adjustment of
yield, using the effective yield method.
ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is
established through a provision for credit losses charged to expense based
on management's evaluation of the potential losses in its loan portfolio.
On a quarterly basis, the Bank will assess the adequacy of the allowance
for credit losses, utilizing a disciplined and systematic approach which
includes the application of various methodologies for the formula portion
of the allowance that consider historical loss factors such as charge-offs
to average loans, portfolio composition, including borrowers by type as
well as security and duration of the portfolio. Loss factors are generally
based on historical loss experience and may be adjusted for significant
factors that in management's judgment affect the collectibility of the
portfolio as of the evaluation date. The non criticized assets are
assigned a loss factor that incorporates the annual net charge-off rate
over several periods of time including the actual year's charge-offs,
three year forward moving average and also a five year average. All these
methodologies are obviously impacted by loan growth, the level of
criticized assets and loan write-offs. These methodologies are designed to
be self-correcting by taking into account the Company's recent loss
experience and permitting adjustments based on management's judgment of
significant factors as of the evaluation date. The Bank does not utilize
pooled loan loss factors, due to the nature of the Bank's wholesale
business, which does not include significant pooled loans or loans that
are homogeneous in nature such as residential mortgages or consumer
installment loans (these represent 0.2% and 0.9% of gross loans at
December 31, 1999 and 1998, respectively).
In addition to the aforementioned methodologies for the formula portion of
the allowance, management conducts a review of the criticized loans and
allocates a specific allowance on an individual loan basis based upon the
underlying security and financial condition of the borrower. The Bank
assigns an allowance factor to a specific criticized loan and if this loan
is downgraded due to deteriorating conditions, the allowance factor is
increased. The grading of these criticized assets is consistent with
regulatory classification systems. These definitions include special
mention, substandard and doubtful classifications which incorporate higher
specific allowance factors as the loans are downgraded and the potential
for loss increases.
Many of these factors involve a significant degree of estimation and are
beyond management's control or are subject to changes which may be
unforeseen. Although management believes the allowance is adequate to
absorb losses on existing loans that may become uncollectible, the
ultimate losses may vary significantly from the current estimates.
50
<PAGE> 54
IMPAIRED LOANS - A loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. A
loan is not impaired during a period of delay in payment if the creditor
expects to collect all amounts due including interest accrued at the
contractual interest rate for the period of delay. Individually identified
impaired loans are measured based on the present value of payments
expected to be received, using the historical effective loan rate as the
discount rate. Alternatively, measurement may also be based on observable
market prices, or for loans that are solely dependent on the collateral
for repayment, measurement may be based on the fair value of the
collateral. The Company evaluates commercial loans individually for
impairment, while groups of smaller-balance homogeneous loans (generally
residential mortgage and installment loans) are collectively evaluated for
impairment. The Company has classified all non-accrual loans as impaired.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized by the straight-line method
over the remaining term of the applicable leases or their useful lives,
whichever is shorter. The useful lives used are as follows:
<TABLE>
<S> <C>
Building 30 years
Leasehold improvements 5 - 10 years
Furniture and equipment 5 - 7 years
Automobiles 5 years
</TABLE>
GOODWILL - Goodwill of approximately $861,000 arising from the acquisition
of the Bank during 1988 and of approximately $1,980,000 arising from the
Bank's branch purchase and assumption of deposits during 1994 are being
amortized on a straight-line basis over a period of twenty and fifteen
years, respectively. The Company reviews goodwill periodically for events
or changes in circumstances that may indicate that the carrying amount is
not recoverable on an undiscounted cash flow basis.
FEDERAL FUNDS PURCHASED - Federal funds purchased generally mature within
one to four days from the transaction date. At December 31, 1999 and 1998,
there were no federal funds purchased outstanding.
INCOME RECOGNITION - Interest income on loans is recognized based upon the
principal amounts outstanding. Loans over 90 days past due may not be
placed on nonaccrual if they are in the process of collection and are
either secured by property having a realizable value at least equal to the
outstanding debt and accrued interest or are fully guaranteed by a
financially responsible party whom the Bank believes is willing and able
to discharge the debt, including accrued interest. Loans are placed on a
nonaccruing status when management believes that interest on such loans
may not be collected in the normal course of business.
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield of the related loan.
Trade finance fees and commissions include fees for letters of credit and
acceptances. Nonrefundable fees on letters of credit and acceptances are
recognized at execution date.
Syndication and structuring fees are earned in connection with the
purchase, participation and placement, without recourse or future
obligation, of trade finance obligations and for arranging financing for
domestic and foreign customers. Nonrefundable fees earned for such
transactions are fully recognized in income at the time the transaction is
consummated.
TRANSFERS OF FINANCIAL ASSETS - Transfers of loans and securities for
which the Company has surrendered control over those assets are accounted
for as sales to the extent that consideration other
51
<PAGE> 55
than beneficial interests in the transferred assets is received in
exchange. If a sale, the Company recognizes and initially measures assets
controlled and liabilities incurred at fair value and gain or loss is
recognized immediately into income. All financial asset transfers not
meeting the sale criteria are required to be accounted for as secured
borrowing with collateral (or other security interest) pledged. During
1999 and 1997, the Company recorded no gains or losses on exchanges of
loans and securities. During 1998, the Company recorded approximately
$22,223,000 ($14,304,000 after tax) in losses on exchanges of loans and
securities.
INCOME TAXES - The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. The Company provides for deferred
taxes under the liability method. Under such method, deferred taxes are
adjusted for tax rate changes as they occur. Deferred income tax assets
and liabilities are computed annually for differences between the
financial statements and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
NET INCOME PER COMMON SHARE - Basic earnings per share is computed based
on the average number of common shares outstanding and diluted earnings
per share is computed based on the average number of common and potential
common shares (consisting of stock options, see Note 9) outstanding under
the treasury stock method.
STOCK SPLIT - On January 21, 1997, the Company's Board of Directors (the
"Board") approved a 6.5 for 1 common stock split (see Note 9). Retroactive
restatement has been made to all share amounts to reflect the stock split.
STOCK - BASED COMPENSATION - SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee and non-employee members of the
Board compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation to employees and non-employee
members of the Board using the intrinsic value method as prescribed by
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly,
compensation cost for stock options issued to employees and non-employee
members of the Board are measured as the excess, if any, of the fair value
of the Company's stock at the date of grant over the amount an employee or
non-employee member of the Board must pay for the stock.
SEGMENT INFORMATION - The Company operates in one reportable segment,
focused primarily on foreign trade and providing innovative services for
its financial correspondents and exporting/importing firms.
RECLASSIFICATIONS - Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified for comparative purposes.
NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Among other provisions, SFAS No. 133
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the
FASB issued SFAS 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of SFAS Statement No. 133, which
changes the effective date of SFAS 133 for financial statements for fiscal
years beginning after June 15, 2000. Management has not determined what
effects, if any, the adoption of SFAS No. 133 will have on the Company's
consolidated financial statements.
52
<PAGE> 56
2. INVESTMENT SECURITIES
A comparison of the amortized cost and fair value of investment securities
at December 31, 1999 and 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999
-------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Foreign debt securities $ 164,586 $ 10,860 $ 4,336 $ 171,110
U.S. Government and agency securities 54,698 5 5 54,698
Mortgage backed securities 28,370 -- 1,792 26,578
Perpetual subordinated euronotes 8,359 3,062 -- 11,421
Foreign bank stocks 4,180 -- -- 4,180
Municipal bonds 3,239 -- -- 3,239
Federal Reserve Bank stock 1,985 -- -- 1,985
Other 1,100 28 62 1,066
---------- ---------- ---------- ----------
Total $ 266,517 $ 13,955 $ 6,195 $ 274,277
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Government and agency securities $ 46,835 $ 11 $ 2 $ 46,844
Foreign debt securities 20,284 15 383 19,916
Federal Reserve Bank stock 1,262 -- -- 1,262
Foreign bank stocks 1,028 -- 276 752
Other 1,100 28 177 951
---------- ---------- ---------- ----------
Total $ 70,509 $ 54 $ 838 $ 69,725
========== ========== ========== ==========
HELD TO MATURITY:
Mortgage backed securities $ 17,242 $ 30 $ 203 $ 17,069
Municipal bonds 3,000 3,000
Perpetual subordinated euronotes 8,359 1,731 10,090
Foreign government debt securities 7,269 771 8,040
---------- ---------- ---------- ----------
Total $ 35,870 $ 2,532 $ 203 $ 38,199
========== ========== ========== ==========
</TABLE>
There were no sales of securities available for sale during the years ended
December 31, 1999 and 1998. During the year ended December 31, 1997, gross
realized gains on the sale of securities available for sale were approximately
$109,000 and gross realized losses were approximately $1,000.
Investment securities with an amortized cost and fair value of approximately
$79,896,000 and $78,207,000, respectively, at December 31, 1999, were pledged as
collateral for public deposits.
53
<PAGE> 57
The following table shows the amortized cost and the fair value by
maturity distribution of the securities portfolio at December 31, 1999
(dollars in thousands):
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
----------------------
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Within one year $ 141,984 $ 140,057
One to five years 23,934 24,726
Five to ten years 48,275 55,029
Over ten years 36,700 35,813
--------- ---------
Total 250,893 255,625
Federal Reserve Bank stock 1,985 1,985
Foreign bank stocks 4,180 4,180
Perpetual subordinated euronotes 8,359 11,421
Other 1,100 1,066
--------- ---------
Total securities $ 266,517 $ 274,277
========= =========
</TABLE>
3. LOANS
Loans consist of the following at December 31, 1999 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commercial (primarily trade related):
Domestic $ 394,625 $ 289,032
Foreign 600,924 737,667
Acceptances discounted - trade related:
Domestic 59,040 56,706
Foreign 59,256 72,597
Residential mortgages 2,140 10,494
Installment 216 232
----------- -----------
Total 1,116,201 1,166,728
Less:
Unearned income:
Acceptances discounted 2,669 2,814
Other 145 217
Allowance for credit losses 21,411 12,794
----------- -----------
Loans - net $ 1,091,976 $ 1,150,903
=========== ===========
</TABLE>
The Bank's business activity is mostly with customers and correspondent
banks located in South Florida, Central America, South America, and the
Caribbean. The majority of the credits are for the finance of imports and
exports and have maturities of up to 180 days. These credits are secured
either by banks, factored receivables, cash, or the underlying goods.
Management closely monitors its credit concentrations by industry,
geographic locations, and type of collateral as well as individual
customers.
As of December 31, 1998, the Company had approximately $123 million in
bearer debt securities which were classified as loans and were accounted
for as held to maturity securities under SFAS No. 115. During 1999, all
held to maturity securities were transferred to and are being accounted
for as available for sale securities under SFAS No. 115.
54
<PAGE> 58
A summary of the activity in the allowance for credit losses for the years
ended December 31, 1999, 1998 and 1997 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at the beginning of year $ 12,794 $ 10,317 $ 5,725
Provision charged to operations 20,300 9,621 6,980
Loan charge-offs, net of recoveries (11,683) (7,144) (2,388)
--------- --------- ---------
Balance at the end of year $ 21,411 $ 12,794 $ 10,317
========= ========= =========
</TABLE>
At December 31, 1999 and 1998, the recorded investment in impaired loans
was approximately $16,583,000 and $8,586,000, respectively. These impaired
loans required an allowance for credit losses of approximately $6,173,000
and $2,786,000, respectively. The average recorded investment in impaired
loans during the years ended December 31, 1999 and 1998 was approximately
$17,884,000 and $8,562,000, respectively. For the years ended December 31,
1999, 1998 and 1997 the Bank recognized interest income on these impaired
loans prior to their classification as impaired of approximately $155,000,
$412,000 and $65,000, respectively.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 1999
and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Land $ 811 $ 811
Building and improvements 1,559 1,530
Leasehold improvements 2,260 2,553
Furniture and equipment 6,965 5,691
Automobiles 80 80
------- -------
Total 11,675 10,665
Less accumulated depreciation and amortization 6,466 5,890
------- -------
Property and equipment - net $ 5,209 $ 4,775
======= =======
</TABLE>
Depreciation and amortization expense related to property and equipment
for the years ended December 31, 1999, 1998 and 1997 was approximately
$1,060,000, $944,000, and $841,000, respectively.
The Bank owns the land and the building for one of its Miami branches, the
Winter Haven and Sarasota branches and leases its main facilities, five
branches and certain equipment under noncancelable agreements (accounted
for as operating leases). The leases have renewal periods of five to ten
years, available to the Bank under the same terms and conditions as the
initial leases and one subject to annual rent adjustments based upon the
Consumer Price Index.
55
<PAGE> 59
The approximate future minimum payments, by year and in the aggregate, on
these leases at December 31, 1999 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ --------
<S> <C>
2000 $ 2,345
2001 2,174
2002 1,860
2003 1,776
2004 1,761
Thereafter 3,654
--------
Total minimum lease payments $ 13,570
========
</TABLE>
Rent expense was approximately $1,802,000, $1,726,000, and $1,381,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
5. DEPOSITS
Deposits consist of the following at December 31, 1999 and 1998 (dollars
in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Noninterest-bearing $ 77,390 $ 76,895
----------- -----------
Interest-bearing:
NOW, money market and savings 142,790 90,477
Time, under $100,000 816,845 672,736
Time, $100,000 and over 409,425 530,373
International Banking Facility (IBF) deposits 89,156 106,571
----------- -----------
Total interest-bearing 1,458,216 1,400,157
----------- -----------
Total $ 1,535,606 $ 1,477,052
=========== ===========
</TABLE>
Time deposits in amounts of $100,000 and over at December 31, 1999 mature
as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Three months or less $ 87,410
Three months to twelve months 246,582
One year to five years 75,433
---------
Total $ 409,425
=========
</TABLE>
56
<PAGE> 60
6. INCOME TAXES
The components of the provision for income taxes are as follows for the
years ended December 31, 1999, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current income taxes:
Federal $ 12,844 $ 11,503 $ 10,352
State 395 149 481
Foreign 790 1,092 880
-------- -------- --------
Total current provision 14,029 12,744 11,713
-------- -------- --------
Deferred income taxes:
Federal (3,539) (8,136) (2,515)
State (207) (476) (100)
-------- -------- --------
Total deferred (benefit) provision (3,746) (8,612) (2,615)
-------- -------- --------
Provision for income taxes $ 10,283 $ 4,132 $ 9,098
======== ======== ========
</TABLE>
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate to pretax income for the
following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Increase in taxes:
State income tax, net of federal income tax benefit 0.4 0.1 1.0
Other, net 0.5 0.4 0.4
------ ------ ------
Effective income tax rate 35.9% 35.5% 36.4%
====== ====== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. The tax effects
of significant items comprising the Company's net deferred tax asset
(included in other assets n the accompanying consolidated statements of
condition) as of December 31, 1999 and 1998 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Difference between book and tax basis
of allowance for credit losses $ 7,628 $ 4,734
Difference between book and tax basis of property 193 63
Loss on exchange and write-down of assets 7,889 7,889
Non-accrual interest 492
-------- --------
Total deferred tax assets 16,202 12,686
-------- --------
Deferred tax liabilities-other 230
-------- --------
Net deferred tax asset 16,202 12,456
Available for sale securities (2,542) 298
-------- --------
Total $ 13,660 $ 12,754
======== ========
</TABLE>
57
<PAGE> 61
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with certain
temporary differences and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is more
likely than not that realization will not occur. No valuation allowances
have been recorded at December 31, 1999 and 1998, respectively.
7. 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.
8. STOCKHOLDERS' EQUITY
REGULATORY MATTERS - The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
The components of regulatory capital used to calculate capital ratios are
detailed in the table below:
<TABLE>
<CAPTION>
At December 31,
1999 1998
--------- ---------
<S> <C> <C>
Stockholders' equity per generally accepted accounting principles $ 133,898 $ 109,242
Trust preferred securities 12,650 11,000
Less intangible assets (1,658) (1,833)
Other accumulated comprehensive (income) loss (net of applicable
income taxes) (5,218) 486
Less: transfer risk reserves (net of applicable income taxes) (20,614) --
Other (net of applicable income taxes) (2,289) 69
--------- ---------
Tier 1 Capital 116,769 118,964
Allowance for credit losses 15,085 12,794
--------- ---------
Total Capital $ 131,854 $ 131,758
========= =========
</TABLE>
58
<PAGE> 62
As part of its examination process, the Office of the Comptroller of the
Currency ("OCC") has directed the Bank, among other things, to take $32
million in transfer risk reserves related to the Bank's exposure in
Ecuador. While the Bank has taken the actions directed by the OCC for
regulatory reporting purposes only, it disagrees with the OCC's
interpretations of the regulatory accounting rules and is appealing such
directions within the OCC. In this connection, the OCC has initiated
formal administrative action under Section 8 of the Federal Deposit
Insurance Act which the Bank has not agreed to and which the Bank is
appealing and disputing in appropriate administrative actions within the
OCC. As a result of these proceedings and directions, however, the Bank
may not accept new, or renew, "brokered deposits" without the prior
approval of the Federal Deposit Insurance Corporation or appoint new
directors or senior officers without the prior approval of the OCC. The
Bank does not anticipate that either of such restrictions will have any
material adverse effect on its business or operations. The Company is
satisfied that the reserves it recorded in the third quarter of 1999
relating to its Ecuador and other Latin American exposures are adequate
and in accordance with generally accepted accounting principles.
The Company is subject to risk-based capital and leverage guidelines
issued by the Board of Governors of the Federal Reserve System and the
Bank is subject to similar guidelines issued by the OCC. These guidelines
are used to evaluate capital adequacy and include the required minimums
shown in the following table.
To be "well capitalized" under federal bank regulatory agency definitions,
a depository institution must have a Tier 1 ratio of at least 6%, a
combined Tier 1 and Tier 2 ratio of at least 10% and a leverage ratio of
at least 5% and not be subject to a directive, order or written agreement
to meet and maintain specific capital levels. The regulatory agencies are
required by law to take specific prompt actions with respect to
institutions that do not meet minimum capital standards. As of December
31, 1999 and 1998, the Bank's capital ratios exceeded the ratios set by
the regulatory agencies for "well capitalized" depository institutions.
The Company's consolidated and the Bank's actual capital amounts and
ratios are also presented in the table (dollars in thousands).
<TABLE>
<CAPTION>
TO BE WELL
REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ------------------ --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ --------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
COMPANY
Total Capital (to Risk Weighted Assets) $ 131,854 11.3% $ 93,106 8.0%
========== ===== ========= ====
Tier I Capital (to Risk Weighted Assets) $ 116,769 10.0% $ 46,553 4.0%
========== ===== ========= ====
Tier I Capital (to Average Assets) $ 116,769 6.9% $ 50,685 3.0%
========== ====== ========= =====
BANK
Total Capital (to Risk Weighted Assets) $ 124,209 10.7% $ 92,962 8.0% $ 116,202 10.0%
========== ====== ========= ===== ========== ======
Tier I Capital (to Risk Weighted Assets) $ 109,147 9.4% $ 46,481 4.0% $ 69,721 6.0%
========== ====== ========= ===== ========== ======
Tier I Capital (to Average Assets) $ 109,147 6.5% $ 67,350 4.0% $ 84,187 5.0%
========== ====== ========= ===== ========== ======
</TABLE>
59
<PAGE> 63
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
COMPANY
Total Capital (to Risk Weighted Assets) $ 131,758 12.0% $ 87,633 8.0%
========== ====== ========= =====
Tier I Capital (to Risk Weighted Assets) $ 118,964 10.9% $ 43,816 4.0%
========== ====== ========= =====
Tier I Capital (to Average Assets) $ 118,964 7.3% $ 49,102 3.0%
========== ====== ========= =====
BANK
Total Capital (to Risk Weighted Assets) $ 121,204 11.1% $ 87,574 8.0% $ 109,467 10.0%
========== ====== ========= ===== ========== ======
Tier I Capital (to Risk Weighted Assets) $ 108,411 9.9% $ 43,787 4.0% $ 65,680 6.0%
========== ====== ========= ===== ========== ======
Tier I Capital (to Average Assets) $ 108,411 6.6% $ 65,485 4.0% $ 81,856 5.0%
========== ====== ========= ===== ========== ======
</TABLE>
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
1999, approximately $33,812,000 of retained earnings were available for
dividend declaration without prior regulatory approval. During 1999 and
1998, approximately $4,614,000 and $2,252,000 of dividends were paid by
the Bank to the Company, respectively, which are within the amounts
allowed by regulations.
The Company has placed more emphasis on financing imports of goods into
the United States and thereby increased the relative size of its assets
employed in the domestic market as compared to its exposure in the Region
(as defined in Note 14). The Company will also focus on the Hispanic
business community in light of the bank consolidations in recent months
which has resulted in the absorption of several Hispanic banks in the
South Florida area. In addition, prudent risk management, in particular
with regard to emerging market countries, calls for avoidance of high
concentrations of risk in these countries in relation to a bank's capital.
Currently, United States bank regulatory agencies consider that exposure
in these markets should be limited to levels that would not impair the
safety and soundness of a banking institution. As a consequence, the
Company's exposure in the Region was significantly reduced at December 31,
1998 and was further reduced in 1999. The Company expects the 1999 levels
will be maintained in 2000. While the Company is well capitalized for the
purposes of the "prompt corrective action" provisions, to date it has not
paid any dividends and does not anticipate doing so. Nevertheless, due to
economic difficulties being experienced by various countries in the
Region, the Federal Reserve has requested that the Company not pay any
dividends or incur any debt (excluding "trust preferred securities")
without the consent of the Federal Reserve.
PUBLIC OFFERING - On March 26, 1997 the Company completed its initial
public offering issuing an aggregate of 2,760,000 shares at $15.50 per
share with net proceeds of approximately $38,994,000. In connection with
the initial public offering, the Board amended and restated the articles
of incorporation of the Company authorizing 75,000,000 shares of common
stock and 10,000,000 shares of "blank check" preferred stock. In addition,
the Board approved a 6.5 for 1 common stock split and reorganization of
the capital structure of the Company consisting of (i) the conversion of
all outstanding shares of the Company's Preferred Shares (Series B and C)
into 466,160 shares (post-stock split) of common stock and (ii) the
issuance of an aggregate of 1,396,759 shares (post-stock split) of common
stock for all outstanding warrants to purchase shares of common stock of
the Bank.
PREFERRED STOCK - During June 1994, the Company's Board amended and
restated the Company's articles of incorporation providing for the
issuance of shares of Series B and Series C ("Preferred Shares"), 14%
fixed rate, non-cumulative, non-voting, perpetual preferred stock.
The Company, on June 30, 1994, issued an aggregate of 60,207 shares of
Series B Preferred Shares at $50 per
60
<PAGE> 64
share and on December 31, 1994 issued 41,000 shares of Series C Preferred
Shares at $50 per share. In connection with the public offering and
reorganization the preferred shares were converted into 466,160 shares
(post-stock split) of common stock.
WARRANTS - In connection with the stock purchase and sale agreement dated
March 21, 1988, stock warrants were issued which granted an option to
acquire additional common shares of the Bank in an amount equal to twenty
percent of the outstanding common shares of the Bank at the time of
exercise, at $.01 per share. The option was for a period of ten years that
commenced on May 28, 1988. In connection with the public offering and
reorganization the warrants (and bank stock resulting from exercise of
warrants) were converted into 1,396,759 shares (post-stock split) of
common stock.
9. STOCK OPTION PLAN
In December 1993, the Company adopted the 1993 Stock Option Plan (the
"1993 Plan"), pursuant to which 877,500 shares of Common Stock (post-stock
split) were reserved for issuance upon exercise of options. The 1993 Plan
is designed as a means to retain and motivate key employees and directors.
The Company's Compensation Committee, or in the absence thereof, the
Board, administers and interprets the 1993 Plan and is authorized to grant
options thereunder to all eligible employees of the Company, including
executive officers and directors (whether or not they are employees) of
the Company or affiliated companies. Options granted under the 1993 Plan
are on such terms and at such prices as determined by the Compensation
Committee, except that the per share exercise price of incentive stock
options cannot be less than the fair market value of the Common Stock on
the date of grant. The 1993 Plan will terminate on December 31, 2003,
unless sooner terminated by the Company's Board.
Option activity for the years ended December 31, 1999, 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
NUMBER OPTION FAIR
1999 OF SHARES PRICE VALUE
---- --------- ---------------- -----------
<S> <C> <C> <C>
Beginning balance 711,219 $ 9.23 - 29.125
Exercised (31,085) 9.23
Canceled (31,113) 25.00 - 29.125
---------
Ending Balance 649,021 $ 9.23 - $29.125
=========
Options which became exercisable
during the year 186,803
Options exercisable at December 31, 533,436
Weighted average exercise price $16.01
</TABLE>
<TABLE>
<CAPTION>
NUMBER OPTION FAIR
1998 OF SHARES PRICE VALUE
---- --------- ---------------- -----------
<S> <C> <C> <C>
Beginning balance 776,875 $ 9.23 - 29.125
Granted (1) 173,388 25.00 - 25.47 $7.64 - 7.50
Exercised (222,113) 9.23
Canceled (16,931) 9.23 - 29.125
--------
Ending Balance 711,219 $ 9.23 - $29.125
========
Options which became exercisable
during the year 649,500
Options exercisable at December 31, 427,387
Weighted average exercise price $12.24
</TABLE>
61
<PAGE> 65
<TABLE>
<CAPTION>
NUMBER OPTION FAIR
1997 OF SHARES PRICE VALUE
---- -------- --------------- ------
<S> <C> <C>
Beginning balance 585,000 $ 9.23
Granted (1) 193,500 29.125 $ 6.55
Canceled (1,625) 9.23
--------
Ending Balance 776,875 $9.23 - $29.125
========
Options which became exercisable
during the year -
Options exercisable at December 31, -
</TABLE>
(1) The grants vest twelve months after the grant as to 33.3% of the grant,
33.3% vesting eighteen months after grant and the remaining 33.4% vesting
twenty-four months after grant or upon the death of the option holder if
earlier.
The following table summarizes information about all stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------------
Options Remaining
Outstanding Contracted Life Exercise Price
----------- --------------- -----------------
<S> <C> <C>
320,415 6 years $ 9.230
176,768 8 years $ 29.125
151,838 9 years $ 25.00 - $ 25.47
</TABLE>
The Company applies APB No. 25 and related interpretations in
accounting for its stock options plan to employees and non-employee
members of the Board as described in Note 1. Accordingly, no
compensation expense has been recognized in the years ended December
31, 1999, 1998 and 1997, related to this plan.
For purposes of the following proforma disclosures, the fair value of
the options granted in 1998 and 1997 have been estimated on the date
of grant using the Black-Scholes options pricing model with the
following assumptions used for grants in 1998 and 1997, respectively:
no dividend yield; expected volatility of 48% and 32%; risk-free
interest rate of 4.5% and 5.68% and an expected term of two years. Had
compensation cost been determined based on the fair value at the date
of grant consistent with requirement of SFAS 123 the Company's net
income and net income per common share would have been reduced to the
proforma amounts indicated below (dollars in thousands, except share
information).
62
<PAGE> 66
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net income:
As reported $ 18,360 $ 7,495 $15,903
Proforma 17,301 6,881 15,762
Net income per common share:
Basic:
As reported 1.82 0.75 1.81
Proforma 1.72 0.69 1.79
Diluted:
As reported 1.79 0.72 1.73
Proforma 1.68 0.67 1.72
</TABLE>
10. 401(K) PLAN
The Company maintains a 401(k) plan, which was initiated in 1993, for
its executive officers and other employees. Under the terms of the
401(k) plan, for each dollar contributed by an employee, the Company
intends to contribute a discretionary amount on behalf of participants
(the "Matching Contribution"). In addition, at the end of the plan
year, the Company may make an additional contribution (the "Additional
Contributions") on behalf of participants. Additional Contributions
are allocated in the same proportion that the Matching Contribution
made on the participant's behalf bears to the Matching Contribution
made on behalf of all participants during the year. The amount that
the Company contributes to the 401(k) plan has historically varied
from year to year. During the years ended December 31, 1999, 1998 and
1997, the Company's matching and additional contributions amounted to
approximately $82,000, $155,000 and $128,000 respectively.
11. RELATED PARTY TRANSACTIONS
Directors, officers and their related entities have borrower and
depositor relationships with the Bank in the ordinary course of
business. Loan balances to these individuals and their related
entities approximated $544,000 and $324,000 at December 31, 1999 and
1998, respectively, and the balance of deposit accounts approximated
$1,897,000 and $1,722,000 at December 31, 1999 and 1998, respectively.
At December 31, 1999 there were no outstanding commercial and standby
letters of credit transactions outstanding with these individuals. At
December 31, 1998 there were approximately $100,000 of outstanding
commercial and standby letters of credit transactions with these
individuals and their related entities
63
<PAGE> 67
12. OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET RISK AND COMMITMENTS: In the normal course of
business, the Bank utilizes various financial instruments with
off-balance sheet risk to meet the financing needs of its customers,
including commitments to extend credit, commercial letters of credit,
shipping guarantees, standby letters of credit and forward foreign
exchange contracts. These financial instruments involve, to varying
degrees, elements of credit risk. The credit risk associated with
these financial instruments, as further discussed herein, is not
recorded in the statement of condition. The contractual or notional
amounts of such instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments. The credit risks
associated with financial instruments are generally managed in
conjunction with the Bank's statements of condition activities and are
subject to normal credit policies, financial controls, and risk
limiting and monitoring procedures.
Credit losses are incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Bank's exposure to
credit loss is represented by the contractual or notional amount of
the commercial letters of credit, shipping guarantees, and standby
letters of credit. This is the maximum potential loss of principal in
the event the commitment is drawn upon and the counterparty defaults.
A summary of the Bank's contractual or notional amounts for financial
instruments with off-balance sheet risk as of December 31, 1999 and
1998 along with a further discussion of these instruments, is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
CONTRACTUAL OR
NOTIONAL AMOUNT
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
Commercial letters of credit $ 129,475 $ 116,078
Standby letters of credit 21,340 12,566
Shipping guarantees (indemnity letters) 629 72
Commitments to purchase foreign currency 5,862 2,850
Commitments to sell foreign currency 5,879 4,303
Commitments to extend credit 64,220 47,636
</TABLE>
A commercial letter of credit is an instrument containing the
commitment of the Bank stating that the Bank will honor drawings under
and in full compliance with the terms of the letter of credit. The
letters of credit are usually drawn on the presentation of certain
required documents, such as commercial invoice and bills of lading.
Essentially, letters of credit facilitate the purchase of merchandise
by the Bank's customers by substituting the credit standing of the
Bank for that of the Bank's customer. Commercial letter of credit
contracts are generally for a short commitment period.
Standby letters of credit are commitments issued to guarantee the
performance of a customer to a third party. The Bank issues standby
letters of credit to ensure contract performance or assure payment by
its customers. The guarantees extend for periods up to 12 months. The
risk involved in issuing standby letters of credit is the same as the
credit risk involved in extending loan facilities to customers and
they are subject to the same credit approvals and monitoring
procedures. The Bank holds certificates of deposit and guarantees from
other banks as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for
standby letters of credit commitments at December 31, 1999 varies from
zero percent to 100 percent.
Shipping guarantees (also known as indemnity letters) are letters of
guarantee issued by the Bank on behalf of its customer in favor of
shipping agents. Normally, such facility is extended in instances
where goods purchased under letters of credit have arrived at the port
of destination and the shipping documents necessary for the release of
the goods have not been received by the Bank. The purpose of
64
<PAGE> 68
the shipping guarantee is to indemnify the transportation company for
any loss that might arise from the release of goods to the Bank's
customer in the absence of the shipping documents.
The Bank enters into forward foreign exchange contracts with its
customers for the delayed exchange of foreign currency for U.S.
dollars on behalf of such customers. These contracts provide a vehicle
for the Bank's customers to hedge their future obligations in foreign
currency. Upon entering such contracts with its customers, the Bank
meets these foreign currency commitments by entering into equivalent
contracts with other banks to purchase or sell equal amounts of the
foreign currency to be delivered or received. Risks arise from the
possible inability of the Bank's counterparties to meet the terms of
their contracts and from movements in foreign currency exchange rates.
However, the full notional amount of the contract is not at risk, as
the Bank has the ability to settle these contracts in the foreign
exchange market.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank, upon extension of credit, is based on
management's credit evaluation of the counterparty.
LITIGATION: On January 31, 1998, Development Specialists, Inc., the
Liquidating Trustee of the Model Imperial Liquidating Trust
established under the Plan of Reorganization in the Model Imperial,
Inc. Chapter 11 Bankruptcy proceeding, filed an action against the
Bank in the United States Bankruptcy Court for the Southern District
of Florida objecting to the Bank's proof of claim in the Chapter 11
proceeding and affirmatively seeking damages against the Bank in
excess of $34 million for alleged involvement with former officers and
directors of Model Imperial, Inc. in a scheme to defraud Model
Imperial, Inc. and its bank lenders. The action is one of several
similar actions filed by the Trustee against other defendants that
were involved with Model Imperial seeking the same damages as in the
action against the Bank. The Company believes the claims are without
merit, and the Bank is vigorously defending the action. A trial on
various bankruptcy preference issues was held in November 1999, and
the parties are awaiting the judge's ruling.
From time to time the Bank is engaged in additional litigation
incidental to its operations.
While any litigation contains an element of uncertainty, the Bank,
after considering the advice of legal counsel, believes the outcome of
all aforementioned litigation will not have a material adverse effect
on the Bank's financial position, results of operations or liquidity.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, Disclosures About Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies
may have a material effect on the estimated fair value amounts.
Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since December 31, 1999 and, therefore, current estimates
of fair value may differ significantly from the amounts presented
herein (dollars in thousands).
65
<PAGE> 69
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 85,110 $ 85,110 $ 111,790 $ 111,790
Interest-earning deposits
with other banks 187,685 187,685 200,203 200,203
Securities available for sale 274,277 274,277 69,725 69,725
Securities held to maturity 35,870 38,199
Loans, net 1,091,976 1,082,589 1,150,903 1,147,973
Liabilities:
Demand deposits 220,180 220,180 167,372 167,372
Time deposits 1,315,426 1,315,434 1,309,680 1,314,000
Other borrowings 6,116 6,116
Trust preferred securities 12,650 9,962 11,000 11,000
Contingent assets and liabilities:
Bankers acceptances 27,767 208 75,567 567
Deferred payment letters of credit 5,835 26 6,468 29
Off-balance sheet instruments - unrealized gains (losses):
Commitments to extend credit 124 90
Commercial letters of credit 323 273
Standby letters of credit 320 188
Indemnity letters of credit 2 1
Commitments to purchase foreign currency 66 (8)
Commitments to sell foreign currency 238 29
</TABLE>
CASH AND CASH EQUIVALENTS - The carrying amount of cash on hand,
demand deposits with other banks, and federal funds sold is a
reasonable estimate of fair value.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS - The fair value of time
deposits with other banks (several of which are foreign) is estimated
using the rates currently offered for deposits of similar remaining
maturities and taking into account the creditworthiness of the other
bank.
SECURITIES AVAILABLE FOR SALE, SECURITIES HELD TO MATURITY AND TRUST
PREFERRED SECURITIES - The fair values are based on quoted market
prices or dealer quotes. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities.
LOANS - The interest rates for commercial loans and acceptances
discounted are based on the prime lending rate. The Bank updates these
interest rates on a monthly basis. Thus, the carrying amount of
commercial loans and acceptances discounted is a reasonable estimate
of fair value. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
DEMAND DEPOSITS AND TIME DEPOSITS - The fair value of demand deposits,
savings accounts, and certain money market deposits is the amount
payable on demand at the reporting date. The fair value of
fixed-
66
<PAGE> 70
maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
OTHER BORROWINGS - The carrying amount of other borrowings is a
reasonable estimate of fair value.
CONTINGENT ASSETS AND LIABILITIES - The fair values of these assets
and corresponding liabilities are estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties.
OFF-BALANCE SHEET INSTRUMENTS - The fair value of commitments is
estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate
loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for
similar agreements, or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the
reporting date. The fair values of commitments to purchase and sell
foreign currency are based on quoted market prices or dealer quotes.
14. FOREIGN ACTIVITIES
The Company's foreign activities primarily consist of providing global
trade finance, with particular emphasis on trade finance, with and
between South America, Central America, the Caribbean (the "Region")
and the United States or otherwise involving the Region. The Company
considers assets and revenues as associated with foreign activities on
the basis of the country of domicile of the customer. The nature of the
Company's operations make it difficult to determine precisely foreign
activities profitability since it involves the use of certain
judgmental allocations. Rates used to determine charges or credits for
funds used or generated by foreign activities are based on actual costs
during the period for selected interest-bearing sources of funds. Other
operating income and expenses are determined based upon internal
allocations appropriate to the individual activities. Operating income
represents net interest income plus non-interest income. A summary of
the Company's domestic and foreign activities as of and for the years
ended December 31, 1999, 1998 and 1997 is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
INCOME BEFORE
OPERATING PROVISION FOR NET TOTAL
INCOME INCOME TAXES INCOME ASSETS
--------- ------------- --------- ------------
1999
<S> <C> <C> <C> <C>
Domestic $ 27,739 $ 12,789 $ 9,855 $ 653,206
Foreign 53,308 15,854 8,505 1,068,094
--------- --------- --------- ------------
Total $ 81,047 $ 28,643 $ 18,360 $ 1,721,300
========= ========= ========= ============
1998
Domestic $ 16,708 $ 8,789 $ 6,897 $ 610,834
Foreign 54,826 2,838 598 1,082,395
--------- --------- --------- ------------
Total $ 71,534 $ 11,627 $ 7,495 $ 1,693,229
========= ========= ========= ============
1997
Domestic $ 12,635 $ 5,548 $ 3,529 $ 426,130
Foreign 42,769 19,453 12,374 916,004
--------- --------- --------- ------------
Total $ 55,404 $ 25,001 $ 15,903 $ 1,342,134
========= ========= ========= ============
</TABLE>
67
<PAGE> 71
15. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Hamilton Bancorp Inc. (Parent
Company only) is as follows (dollars in thousands):
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Assets
Demand deposit with the Bank $ 5,536 $ 190
Securities available for sale 888 9,763
Goodwill, net 361 404
Other assets 1,351 960
Investment in subsidiaries 100,153 79,239
Investment in the Bank's preferred stock 38,650 30,050
---------- ----------
Total $ 146,939 $ 120,606
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debentures held by the Trust $ 13,041 $ 11,340
Other liabilities -- 24
Stockholders' equity 133,898 109,242
---------- ----------
Total $ 146,939 $ 120,606
========== ==========
</TABLE>
68
<PAGE> 72
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
STATEMENTS OF INCOME
Interest income $ 313 $ 530 $ 339
Dividends from Bank and other income 4,708 2,258 1,105
--------- --------- ---------
Total income 5,021 2,788 1,444
Interest expense 1,270 12
Operating expenses 1,290 1,539 294
--------- --------- ---------
Total expenses 2,560 1,551 294
--------- --------- ---------
Income before equity in undistributed income of subsidiary 2,461 1,237 1,150
Equity in undistributed income of subsidiaries 15,229 6,087 14,787
--------- --------- ---------
Income before income tax (benefit) provision 17,690 7,324 15,937
Income tax (benefit) provision (670) (171) 34
--------- --------- ---------
Net income $ 18,360 $ 7,495 $ 15,903
========= ========= =========
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
--------- --------- ---------
Statements of Cash Flows
Cash flows from operating activities:
Net income $ 18,360 $ 7,495 $ 15,903
Adjustments to reconcile net income to
net cash provided by operations:
Equity in undistributed income of subsidiary (15,229) (6,087) (14,787)
Write down on security available for sale 587
Amortization of goodwill 43 43 43
Other (517) 1,198 (269)
--------- --------- ---------
Net cash provided by operating activities 2,657 3,236 890
--------- --------- ---------
Cash flows from investing activities:
Purchase of securities available for sale (80,307) (140,163) (96,504)
Proceeds from maturities of securities available for sale 89,354 131,172 95,216
Payment for investment in Bank's common stock (20,237)
Payment for investment in the Bank's preferred stock (8,600) (15,300) (10,000)
Payment for investment in the Trust's common stock (51) (340)
--------- --------- ---------
Net cash provided by (used in) investing activities 396 (24,631) (31,525)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 592 2,050 38,994
Proceeds from issuance of trust preferred securities 1,701 11,340
Cash dividends on preferred stock (319)
--------- --------- ---------
Net cash provided by financing activities 2,293 13,390 38,675
--------- --------- ---------
Net increase (decrease) in cash 5,346 (8,005) 8,040
Cash at beginning of year 190 8,195 155
--------- --------- ---------
Cash at end of year $ 5,536 $ 190 $ 8,195
========= ========= =========
</TABLE>
69
<PAGE> 73
16. RESTATEMENT
Subsequent to the filing of the Company's 1999 Annual Report on Form 10-K, the
Company determined that the purchases of certain securities and the sales 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 EXTINGUISHMENTS OF LIABILITIES,
and that a loss of $22,223,000 ($14,304,000 after tax) should have been 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 1999 and 1998 consolidated financial statements have been restated from
amounts previously reported to appropriately account for (1) the purchases of
securities and sales of loans referred to above as an exchange, and recognize a
loss on the exchange in 1998, (2) the initial recording of the securities
acquired at fair value which became their cost basis, (3) the changes in
unrealized gains and losses in 1999 relating to the securities acquired in the
exchange transaction and (4) the related income tax effects. All of the
securities acquired in the transaction, some of which are classified as loans at
December 31, 1998, were subsequently designated as available for sale securities
during the fourth quarter 1999 and marked to market. As a result the restatement
does not affect total stockholders' equity at December 31, 1999. The following
table summarizes the significant effects of the restatement:
<TABLE>
<CAPTION>
AS PREVIOUSLY REPORTED AS RESTATED
---------------------- -----------
<S> <C> <C>
AS OF DECEMBER 31, 1999
Retained earnings $ 82,175 $ 67,871
Accumulated other comprehensive (loss) income (9,086) 5,218
-------- --------
Total 73,089 73,089
======== ========
FOR THE YEAR ENDED DECEMBER 31, 1999
Net change in unrealized gain (loss) on securities
available for sale, net of taxes (8,600) 5,704
Comprehensive income 9,760 24,064
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
FOR THE YEAR ENDED DECEMBER 31, 1998
Operating Expenses:
Loss on exchange 587 22,810
Income before provision for income taxes 33,820 11,627
Provision for income taxes 12,021 4,132
Net income 21,799 7,495
Net income per common share:
Basic 2.18 0.75
Diluted 2.12 0.72
Comprehensive income 21,366 7,062
</TABLE>
70
<PAGE> 74
The title of Mr. John M.R. Jacobs on the signature page of the Registrant's
Form 10-K for the year ended December 31, 1999 is hereby amended to read as
follows: "John M.R. Jacobs, Senior Vice President, Principal Financial Officer
and Principal Accounting Officer".
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized, this 18th
day of December, 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
71
