1
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, 1998
-------------------------
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.
-------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0149935
- ------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S.Employer Identification No.)
Incorporation or Organization)
3750 N.W. 87TH AVENUE, MIAMI, FLORIDA 33178
- -------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (305) 717-5500
------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
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
- --------------------------------------------------------------------------------
(Title of Class)
[COVER PAGE 1 OF 2 PAGES]
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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 22, 1999 was $218,502,422 based
upon the average of the high and low price of a share of Common Stock as
reported by the NASDAQ National Market on such date. As of March 22, 1999,
10,059,479 shares of Registrant's Common Stock were outstanding.
- -------------------------
DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of the following documents (as more specifically identified
elsewhere in this Annual Report) are incorporated by reference herein:
Name of Document Part of Form 10-K into which the
document is incorporated
Portions of the Registrant's Proxy Statement Part III
for 1999 Annual Meeting of Stockholders
[COVER PAGE 2 OF 2 PAGES]
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Item 6 of Part I and Item 7, Item 7a and Item 8 of Part II of the Registrant's
Form 10-K for the year ended December 31, 1998 are hereby amended to read as
follows:
ITEM 6. SELECTED FINANCIAL DATA.
TABLE ONE. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA.
(Dollars in thousands except per share amounts)
The selected consolidated financial data for the five years ended December 31,
1998 have been derived from the Company's audited financial statements. The data
set forth below should be read in conjunction with the consolidated financial
statements and related notes, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere herein.
Year Ended December 31,
--------------------------------------------------------------
As restated(1)
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- -----------
INCOME STATEMENT DATA:
Net interest income $ 53,981 $ 38,962 $ 27,250 $ 23,885 $ 17,201
Provision for credit losses 9,621 6,980 3,040 2,450 2,875
----------- ---------- ---------- ---------- -----------
Net interest income after provision for credit losses 44,360 31,982 24,210 21,435 14,326
Trade finance fees and commissions 13,101 12,768 9,325 9,035 7,422
Structuring and syndication fees 3,352 2,535 138 419 1,410
Customer services fees 556 713 1,252 890 1,044
Net gain (loss) on sale of securities available for sale -- 108 -- 3 (168)
Other income 544 318 270 342 322
----------- ---------- ---------- ---------- -----------
Other non-interest income 17,553 16,442 10,985 10,689 10,030
----------- ---------- ---------- ---------- -----------
Operating expenses 50,286 23,423 19,630 18,949 14,946
----------- ---------- ---------- ---------- -----------
Income before provision for income taxes 11,627 25,001 15,565 13,175 9,410
Provision for income taxes 4,132 9,098 5,855 5,172 3,721
----------- ---------- ---------- ---------- -----------
Net income $ 7,495 $ 15,903 $ 9,710 $ 8,003 $ 5,689
=========== ========== ========== ========== ===========
PER COMMON SHARE DATA:
Net income per common share (2) $ 0.72 $ 1.73 $ 1.79 $ 1.47 $ 1.05
Book value per common share $ 10.87 $ 10.00 $ 8.07 $ 6.41 $ 5.06
Average weighted shares (2) 10,390,884 9,173,680 5,430,030 5,430,030 5,430,030
AVERAGE BALANCE SHEET DATA:
Total assets $ 1,506,918 $1,007,846 $ 687,990 $ 534,726 $ 391,606
Total loans 1,165,225 737,921 485,758 370,568 270,798
Total deposits 1,301,444 842,117 574,388 444,332 317,176
Stockholder's equity 107,915 79,311 39,969 32,358 22,195
PERFORMANCE RATIOS:
Net interest spread 3.31% 3.56% 3.89% 4.20% 4.33%
Net interest margin 3.90% 4.31% 4.56% 4.94% 5.06%
Return on average equity 6.95% 20.05% 24.29% 24.73% 25.63%
Return on average assets 0.50% 1.58% 1.41% 1.50% 1.45%
Efficiency ratio (3) 39.23% 42.28% 51.31% 54.68% 54.89%
ASSET QUALITY RATIOS:
Allowance for credit losses as a percentage of total loans 1.10% 1.07% 1.07% 1.05% 1.31%
Non-performing assets as a percentage of total loans 0.78% 0.65% 0.91% 1.07% 0.59%
Allowance for credit losses as a percentage of non-performing assets 141.20% 166.03% 117.97% 98.56% 221.13%
Net loan charge-offs as a percentage of average outstanding loans 0.61% 0.32% 0.36% 0.58% 0.74%
CAPITAL RATIOS:
Leverage capital ratio 7.27% 7.88% 5.80% 5.68% 5.48%
Tier 1 capital 10.86% 12.43% 10.20% 9.98% 10.30%
Total capital 12.03% 13.78% 11.50% 10.92% 11.47%
Average equity to average assets 7.16% 7.87% 5.81% 6.05% 5.67%
(1) See Note 17 to the consolidated financial statements.
(2) Represents diluted earnings per share and average weighted shares
outstanding respectively.
(3) Amount reflects operating expenses as a percentage of net interest income
plus non-interest income.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1998 COMPARED TO 1997
OVERVIEW
Hamilton Bancorp Inc. ("Bancorp") is a bank holding company which conducts
operations principally through its 99.8 percent owned subsidiary Hamilton Bank,
N.A. (the "Bank") collectively (the "Company"). The Bank is a national bank
which specializes in financing trade flows between domestic and international
companies on a global basis. The Bank has a network of seven FDIC-insured
branches in Florida, with locations in Miami, Sarasota, Tampa, West Palm Beach
and Winter Haven, and an FDIC-insured branch in San Juan, Puerto Rico opened in
the first quarter of 1998.
The Company completed its initial public offering of 2,400,000 shares of common
stock on March 26, 1997. Following the public offering, on April 9, 1997 the
Company issued 360,000 additional shares of common stock upon the exercise of
the over-allotment option granted to Oppenheimer and Company, Inc., and NatWest
Securities Ltd.
On December 28, 1998, a trust formed by the Company issued $11.0 million of 9.75
percent Beneficial Unsecured Securities, Series A (the "Preferred Securities").
These securities are considered to be Tier 1 capital for regulatory purposes.
Net income for the year ended December 31, 1998 was $7.5 million, a 53 percent
decrease in relation to the previous year's net income of $15.9 million. The
decrease in earnings was due to a $22.8 million loss on exchange of assets
offset by a 38.6 percent increase in net interest income due to a 58 percent
increase in average loans to $1,165 million at December 31, 1998 from $738.0
million in the same period in 1997. Net income per share (basic) was reported at
$0.75 from $1.81 and (diluted) reported at $0.72 from $1.73 for the years ended
December 31, 1998 and 1997, respectively.
RESTATEMENT
Subsequent to the filing of the Company's 1998 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 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, (2) the initial recording of the securities
acquired (some of which are classified as loans at December 31, 1998) at fair
value which became their cost basis, and (3) the related income tax effects. See
Note 17 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 year ended December 31, 1998 presented herein have been
adjusted to reflect the restatement described above.
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KEY PERFORMANCE HIGHLIGHTS FOR 1998
During 1998, the Company experienced a 53 percent decline in earnings relative
to the prior year, primarily as a result of a $14.3 million (after tax) loss on
exchanges of assets offset by (i) increases in net interest income of 39 percent
as a result of the growth in average assets of 50 percent fueled in part by the
Company's retention of earnings, (ii) an important increase of 6.8 percent in
non-interest income related to the Company's core trade finance business (iii)
overall favorable credit quality as evidenced by the 0.61 percent net charge
offs to average loans, and (iv) improved operating efficiencies.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
NET INTEREST INCOME
An analysis of the Company's net interest income and average balance sheet for
the last five years is presented in TABLE ONE and TABLE TWO. Net interest income
is the difference between interest and fees earned on loans and investments and
interest paid on deposits and other sources of funds, and it constitutes the
Company's principal source of income. Net interest income increased to $54.0
million for the year ended December 31, 1998 from $39.0 million for the same
period in 1997, a 39 percent increase. The increase was due largely to the
growth in average earning assets offset, to some extent, by a decrease in net
interest margin. Average earning assets increased to $1,383.3 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 $129.0 million for the year ended December 31, 1998 from $128.0
million for the same period in 1997.
An analysis of the Company's yields earned and average loan balances segregating
domestic and foreign earning assets is presented in TABLE THREE. The yields
earned on domestic loans have decreased by three basis points to 10.1 percent
from 10.4 percent.
PROVISION FOR CREDIT LOSSES
The Company's provision for credit-losses increased to $9.6 million for the year
ended December 31, 1998 from $7.0 million for the same period in 1997. This 37
percent increase was largely a function of the 21% percent growth in total
loans. Net loan chargeoffs during the year ended December 31, 1998 amounted to
$7.1 million compared to $2.4 million for the year 1997. The allowance for
credit losses was increased to $12.8 million at December 31, 1998 from $10.3
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 TWENTY.
NON-INTEREST INCOME
Non-interest income increased to approximately $17.6 million for the year ended
December 31, 1998 from $16.4 million for the same period in 1997, a 7 percent
increase. Trade finance fees and commissions increased by $333 thousand due
largely to lending facility fees which increased by $185 thousand during the
year 1998 compared to 1997 as a result of the growth in loans. Structuring and
syndication fees increased by $817 thousand as a result of various structuring
and syndication transactions completed during the year; increasing these fees to
$3.4 million from $2.5 million for the periods ended December 31, 1998 and 1997
respectively. Customer service fees decreased by $157 thousand as a result of
lower overdrafts experienced in the period. The changes in non-interest income
from year to year are analyzed in TABLE SIX.
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TABLE TWO. YIELDS EARNED AND RATES PAID
(Dollars in thousands)
For The Years Ended
---------------------------------------------------------------------
December 31, 1998 December 31, 1997
----------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- --------- -------- ---------- -------- -------
Total Interest Earning Assets
Loans:
Commercial loans
Acceptances discounted $1,010,047 $ 91,439 9.05% $ 611,744 $57,257 9.36%
Overdraft 131,158 12,165 9.27% 107,818 10,733 9.95%
Mortgage loans 12,212 2,306 18.89% 6,890 1,307 18.96%
Installment loans 11,523 949 8.24% 11,144 934 8.38%
285 26 9.22% 325 31 9.56%
Total Loans ---------- -------- ----- ---------- ------- -----
1,165,225 106,885 9.17% 737,921 70,262 9.52%
Time deposits with banks
Investments 122,278 10,989 8.99% 102,360 8,909 8.70%
Federal funds sold 68,541 4,903 7.15% 44,978 2,980 6.63%
27,307 1,484 5.43% 18,186 1,008 5.54%
Total investments and interest earning ---------- -------- ----- ---------- ------- -----
deposits with banks
Total interest earning assets 218,126 17,376 7.97% 165,524 12,897 7.79%
1,383,351 124,261 8.98% 903,445 83,159 9.20%
Total non interest earning assets -------- ----- ------- -----
123,567 104,401
Total Assets ---------- ----------
$1,506,918 $1,007,846
========== ==========
Interest bearing liabilities
Deposits:
Super NOW, NOW
Money Market 15,286 271 1.77% 15,675 300 1.91%
Presidential Money Market 46,342 2,177 4.70% 43,752 2,060 4.71%
Super Savings, Savings 3,284 121 3.68% 3,385 97 2.87%
Certificate of deposits (including IRA) 4,932 153 3.09% 4,426 139 3.14%
Time deposits from banks (IBF) 1,033,030 59,730 5.78% 582,933 34,463 5.91%
Other 128,853 7,266 5.64% 127,964 6,853 5.36%
18 1 2.96% 61 2 2.92%
Total deposits ---------- -------- ----- ---------- ------- -----
1,231,745 69,719 5.66% 778,196 43,913 5.64%
Federal funds purchased
Other borrowings 3,423 197 5.77% 4,975 284 5.70%
4,743 364 8.65% 0 0 0.00%
---------- -------- ----- ---------- ------- -----
Total interest bearing liabilities
1,239,911 70,280 5.67% 783,171 44,197 5.64%
---------- -------- ----- ---------- ------- -----
Non interest bearing liabilities
Demand deposits
Other liabilities 69,699 63,921
89,393 81,443
Total non interest bearing liabilities ---------- ----------
Stockholders' equity 159,092 145,364
107,915 79,311
---------- ----------
Total liabilities and stockholder's equity
$1,506,918 $1,007,846
Net Interest income / net interest spread ========== ==========
$ 53,981 3.31% $38,962 3.56%
Margin: ======== ===== ======= =====
Interest income / interest earning assets
Interest expense / interest earning assets 8.98% 9.20%
5.08% 4.89%
Net interest margin ----- -----
3.90% 4.31%
----- -----
For The Years Ended
--------------------------------
December 31, 1996
--------------------------------
Average
Average Yield/
Balance Interest Rate
---------- --------- ---------
Total Interest Earning Assets
Loans:
Commercial loans $375,054 $36,714 9.79%
Acceptances discounted 93,511 9,395 10.05%
Overdraft 5,704 1,007 17.65%
Mortgage loans 11,089 936 8.44%
Installment loans 400 39 9.74%
-------- ------- -----
Total Loans 485,758 48,090 9.90%
Time deposits with banks 62,404 5,751 9.22%
Investments 25,498 1,551 6.08%
Federal funds sold 23,490 1,274 5.42%
-------- ------- -----
Total investments and interest earning
deposits with banks 111,392 8,576 7.70%
Total interest earning assets 597,150 56,666 9.49%
------- -----
Total non interest earning assets 90,840
--------
Total Assets $687,990
========
Interest bearing liabilities
Deposits:
Super NOW, NOW 16,086 516 3.20%
Money Market 40,779 2,021 4.96%
Presidential Money Market 3,370 127 3.77%
Super Savings, Savings 8,636 281 3.25%
Certificate of deposits (including IRA) 362,724 21,435 5.91%
Time deposits from banks (IBF) 93,670 5,010 5.35%
Other 71 3 3.67%
-------- ------- -----
Total deposits 525,336 29,392 5.59%
Federal funds purchased 240 14 5.68%
Other borrowings 164 10 6.29%
-------- ------- -----
Total interest bearing liabilities 525,740 29,416 5.60%
-------- ------- -----
Non interest bearing liabilities
Demand deposits 49,052
Other liabilities 73,229
--------
Total non interest bearing liabilities 122,281
Stockholders' equity 39,969
--------
Total liabilities and stockholder's equity $687,990
========
Net Interest income / net interest spread $27,250 3.89%
======= =====
Margin:
Interest income / interest earning assets 9.49%
Interest expense / interest earning assets 4.93%
-----
Net interest margin 4.56%
-----
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TABLE THREE. YIELDS EARNED - DOMESTIC AND FOREIGN EARNING ASSETS
(Dollars in thousands)
For The Years Ended
---------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------------------------ --------------------------------------
% of Total % of Total
Average Average Average Average Average Average
Balance Interest Yield/Rate Assets Balance Interest Yield/Rate Assets
---------- -------- ---------- ---------- ------- -------- ---------- ---------
Total Interest Earning Assets
Loans:
Domestic $ 249,027 $ 25,155 10.1% 16.5% $ 175,209 $18,240 10.4% 17.4%
Foreign 916,198 81,730 8.9% 60.8% 562,712 52,022 9.2% 55.8%
---------- -------- ---- ----- ---------- ------- ---- -----
Total Loans $1,165,225 $106,885 9.2% 77.3% $ 737,921 $70,262 9.5% 73.2%
Investment and time deposits with banks
Domestic 71,752 3,924 5.5% 4.8% 45,786 2,487 5.4% 4.5%
Foreign 146,374 13,452 9.2% 9.7% 119,738 10,410 8.7% 11.9%
---------- -------- ---- ----- ---------- ------- ---- -----
Total investments and interest earning with banks 218,126 17,376 8.0% 14.5% 165,524 12,897 7.8% 16.4%
Total interest earning assets $1,383,351 $124,261 9.0% 91.8% $ 903,445 $83,159 9.2% 89.6%
======== ==== ======= ====
Total non interest earning assets 123,567 8.2% 104,401 10.4%
---------- ----- ----------
Total Assets $1,506,918 100.0% $1,007,846 100.0%
========== ===== ========== =====
For The Years Ended
----------------------------------------
December 31, 1996
----------------------------------------
% of Total
Average Average Average
Balance Interest Yield/Rate Assets
-------- -------- ---------- ----------
Total Interest Earning Assets
Loans:
Domestic $156,453 $17,172 11.0% 22.7%
Foreign 329,305 30,918 9.4% 47.9%
-------- ------- ---- -----
Total Loans $485,758 $48,090 9.9% 70.6%
Investment and time deposits with banks
Domestic 44,655 2,416 5.4% 6.5%
Foreign 66,737 6,160 9.2% 9.7%
-------- ------- ---- -----
Total investments and interest earning with banks 111,392 8,576 7.7% 16.2%
Total interest earning assets $597,150 $56,666 9.4% 86.8%
=======
Total non interest earning assets 90,840 13.2%
-----
Total Assets $687,990 100.0%
======== =====
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TABLE FOUR. RATE VOLUME ANALYSIS
(Dollars in thousands)
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to Year Ended Compared to Year Ended
December 31, 1997 December 31, 1996
Changes Due To: Changes Due To:
---------------------------------- ---------------------------------
Increase (decrease) in net interest income due to: Volume Rate Total Volume Rate Total
-------- -------- -------- -------- ------- --------
Loans:
Commercial loans $ 37,280 $ (3,098) $ 34,182 $ 23,169 $(2,625) $ 20,544
Acceptances discounted 2,323 (891) 1,432 1,438 (100) 1,338
Overdrafts 1,009 (10) 999 209 91 300
Mortgage loans 32 (17) 15 5 (6) (1)
Installment loans (4) (1) (5) (7) (1) (8)
Investments:
Time deposits with other banks 1,734 346 2,080 3,682 (524) 3,158
Investment securities 1,561 362 1,923 1,185 244 1,429
Federal funds sold 505 (29) 476 (288) 21 (267)
-------- -------- -------- -------- ------- --------
Total earning assets 44,440 (3,338) 41,102 29,393 (2,900) 26,493
-------- -------- -------- -------- ------- --------
Deposits:
Super NOW, NOW (7) (21) (28) (13) (203) (216)
Money market 122 (5) 117 147 (108) 39
Presidential money market (3) 27 24 1 (31) (30)
Super savings, savings 16 (2) 14 (137) (5) (142)
Certificates of deposits 13,029 12,192 25,221 13,027 -- 13,027
Time deposits with banks (IBF) 48 366 414 1,834 9 1,843
Other (1) -- (1) -- (1) (1)
Federal funds purchased (88) 2 (86) 271 (1) 270
Other borrowings -- 410 410 (10) -- (10)
-------- -------- -------- -------- ------- --------
Total interest-bearing liabilities 13,114 12,969 26,083 15,120 (340) 14,780
-------- -------- -------- -------- ------- --------
Change in net interest income $ 31,326 $(16,307) $ 15,019 $ 14,273 $(2,560) $ 11,713
======== ======== ======== ======== ======= ========
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TABLE FIVE. RATE VOLUME ANALYSIS - DOMESTIC AND FOREIGN
(Dollars in thousands)
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared to Year Ended Compared to Year Ended
December 31, 1997 December 31, 1996
Changes Due To: Changes Due To:
---------------------------------- ----------------------------------
Increase (decrease) in net interest income due to: Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
Loans:
Domestic $ 7,685 $ (770) $ 6,915 $ 2,047 $ (954) $ 1,093
Foreign 32,679 (2,971) 29,708 21,797 (720) 21,077
Investments and time deposits with banks:
Domestic 1,410 27 1,437 61 10 73
Foreign 2,316 726 3,042 4,892 (642) 4,250
------- ------- ------- ------- ------- -------
Total earning assets $44,090 $(2,988) $41,102 $28,797 $(2,306) $26,493
======= ======= ======= ======= ======= =======
TABLE SIX. NON-INTEREST INCOME
(Dollars in thousands)
For the Year Ended December 31,
-----------------------------------------------------------
1998 to 1997 1997 to 1996
1998 % Change 1997 % Change 1996
------- ------------ ------- ------------ --------
Trade finance fees and commissions $13,101 2.6% $12,768 36.9% $ 9,325
Structuring and syndication fees 3,352 32.2% 2,535 1737.0% 138
Customer service fees 556 -22.0% 713 -43.1% 1,252
Other 544 27.7% 426 57.8% 270
------- ---- ------- ------ -------
Total non-interest income $17,553 6.8% $16,442 49.7% $10,985
======= ==== ======= ====== =======
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 36 percent of pretax income. Income tax expense for 1997 was $9.1
million for an effective rate of 36 percent. The decrease in the effective tax
rate is the result of a state income tax refund for prior year filings. The year
to year decrease of income tax expense was the result of the 54 percent decrease
in
8
10
pretax income. As the Company increases its foreign loans and investments in
relation to total assets these activities are not taxable in the State of
Florida thus reducing the overall effective tax rate. NOTE SIX of the
consolidated financial statements includes an analysis of the components of the
provision for income taxes.
TABLE SEVEN. OPERATING EXPENSES
(Dollars in thousands)
For the Year Ended December 31,
---------------------------------------------------------
1998 to 1997 1997 to 1996
1998 % Change 1997 % Change 1996
------- ------------ ------- ------------ -------
Employee compensation and benefits $14,527 10.4% $13,162 20.4% $10,935
Occupancy and equipment 4,229 30.1% 3,251 11.8% 2,907
Loss on exchange and write-down of asset 22,810 100.0% -- -- --
Other operating expenses 7,119 3.1% 6,902 29.2% 5,341
Legal Expense 1,601 1382.4% 108 -75.8% 447
------- ------ ------- ------ -------
Total Operating Expenses $50,286 114.7% $23,423 19.3% $19,630
======= ====== ======= ====== =======
YEAR 2000
The ability of computers, software and other equipment utilizing microprocessors
to recognize and properly process data fields containing a 2-digit year after
1999 is commonly referred to as the "Year 2000" compliance issue. The Year 2000
issue is the result of computer programs and equipment which are dependent on
"embedded chip technology" using two digits rather than four to define the
applicable year. Any of the Company's computer programs or equipment that are
date dependent may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, or a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The Company began the process of assessing and preparing its computer systems
and applications to be functional on January 1, 2000 in June 1996. The Company
has also been communicating with third parties which it interfaces with, such as
customers, counter parties, payment systems, vendors and others to determine
whether they will be functional on or before January 1, 2000.
The Company has provided compliance certification questionnaires to each of its
customers in order to determine their ability to be Year 2000 compliant. The
Company has amended its Credit Policy Manual to require the Company to terminate
business with a customer unless the Company is assured that such customer is or
will be Year 2000 compliant in the near future, except in such instances where
the customer's failure to be Year 2000 compliant will not, either individually
or in the aggregate, have a material adverse effect on the Company. If a
customer does not respond to the questionnaire or if its response does not
provide the Company with adequate assurance that such customer's failure to be
Year 2000 compliant would not have a material adverse effect on the Company, the
Company will not renew its current relationship with that customer. Since 70
percent of the loan portfolio matures within 365 days, the majority of the
portfolio would be subject to the amended credit policy. There can be no
assurance that the parties mentioned above will become Year 2000 compliant on a
timely basis. We believe that the process of modifying all mission critical
applications of the Company will continue as planned and expect all of the
testing, changes and verifications by June 30, 1999 as dictated by FFIEC
guidelines.
Research to verify compatibility of counter parties, payment systems, vendors
and others has been conducted. These systems were divided into critical and
non-critical categories. The Company expects to have all testing, changes and
verification on the critical systems completed by June 30, 1999 as dictated by
FFIEC guidelines. The non-critical systems will continue to be reviewed and
tested and management will determine if changes or replacement is deemed
necessary.
Concurrently, the Company is in the process of upgrading its computers systems
to accommodate the growth of the past two years. These new systems when
installed are Year 2000 compliant. We believe the total costs relating
exclusively to Year 2000 compliance will be approximately $250,000, which amount
is not material to the Company's financial position or results of operations. To
date, the Company has incurred approximately $100,000 of these estimated
expenses. Any purchased hardware or
9
11
software in connection with this process will be capitalized in accordance with
normal Company policy. Personnel and all other costs are being expensed as
incurred
The costs and dates on which the Company plans to complete the Year 2000 process
are based on our best estimates. However, there can be no assurance that these
estimates will be achieved and actual results could differ.
1997 COMPARED TO 1996
NET INTEREST INCOME
Net interest income increased to $39.0 million for the year ended December 31,
1997 from $27.2 million for the same period in 1996, a 43 percent increase. The
increase was due largely to the growth in average earning assets offset, to some
extent, by a decrease in net interest margin. Average earning assets increased
to $903.4 million for the year ended December 31, 1997 from $597.2 million for
the same period in 1996, a 51 percent increase while yields earned on average
assets decreased by 29 basis points comparing the same period. Average loans and
acceptances discounted increased to $737.9 million for the year ended December
31, 1997 from $485.8 million for the same period in 1996, a 52 percent increase,
while average interest earning deposits due from other banks increased to $102.4
million for the year ended December 31, 1997 from $62.4 million for the same
period in 1996, a 64.1 percent increase. Net interest margin decreased to 4.31
percent for the year ended December 31, 1997 from 4.56 percent for the same
period in 1996, a 25 basis point decrease. The primary reasons for this decrease
were (i) loan yields relative to reference rates decreased in certain countries
in the Region as a result of perceived economic stability and lower credit risk,
(ii) loans to larger corporate and bank customers, which command more
competitive pricing and (iii) excess liquidity in the Region.
Interest income increased to $83.2 million for the year ended December 31, 1997
from $56.7 million for the same period in 1996, a 47 percent increase,
reflecting an increase in loans in the Region and the United States, partially
offset by a decrease in prevailing interest rates and a tightening of loan
spreads in the Region as discussed above. Interest expense increased to $44.2
million for the year ended December 31, 1997 from $29.4 million for the same
period in 1996, a 50 percent increase, reflecting the increase in deposits to
fund asset growth and 5 basis points increase in interest rates paid. Average
interest-bearing deposits increased to $778.2 million for the year ended
December 31, 1997 from $525.3 million for the same period in 1996, a 48 percent
increase. The growth in deposits was primarily a result of the Company
increasing its core deposit base from its expanding branch network as well as
its international customers. The Company's time deposits due from banks also
increased to $128.0 million for the year ended December 31, 1997 from $93.7
million for the same period in 1996.
An analysis of the Company's yields earned and average loan balances segregating
domestic and foreign earning assets is presented in TABLE THREE. The yields
earned on domestic loans have decreased by 50 basis points to 10.4 percent from
11 percent.
PROVISION FOR CREDIT LOSSES
The Company's provision for credit-losses increased to $7.0 million for the year
ended December 31, 1997 from $3.0 million for the same period in 1996. This $4.0
million increase was largely to support the 80 percent loan portfolio growth.
Net loan chargeoffs during the year ended December 31, 1997 amounted to $2.4
million compared to $1.8 million for the year 1996. The allowance for credit
losses was increased to $10.3 million at December 31, 1997 from $5.7 million for
the end of the fiscal year 1996, an 81 percent increase. The ratio of the
allowance for credit losses to total loans remained the same at 1.07 percent at
December 31, 1997 and 1996. A more detailed review of the provision for credit
losses is presented in TABLE SEVENTEEN through TABLE TWENTY.
NON-INTEREST INCOME
Non-interest income increased to approximately $16.4 million for the year ended
December 31, 1997 from $11.0 million for the same period in 1996, a 49 percent
increase. Trade finance fees and commissions increased by $3.4 million due
largely to higher letters of credit volume, which registered an increase of 20
percent in overall volume in 1997 relative to 1996. In addition, lending
facility fees increased by $1.2 million during the year ended December 31, 1997
compared to 1996 as a result of the growth in loans. Structuring and syndication
fees increased by $2.4 million as a result of various structuring and
syndication transactions completed during the year compared to almost a flat
year for 1996. The globalization of investments in the region created more
structuring and syndication opportunities. Customer service fees decreased by
$538 thousand as a result of lower overdrafts experienced in the period. The
changes in non-interest income from year to year are analyzed in TABLE SIX.
10
12
OPERATING EXPENSES
Operating expenses increased to $23.4 million for 1997 from $19.6 million for
1996, a 19.3 percent increase. The growth in expenditures was primarily to
support revenue growth. A discussion of the significant components of
noninterest expense in 1997 compared to 1996 is as follows: Employee
compensation and benefits increased to $13.2 million for 1997 from $10.9
million for 1996, a 20.4 percent increase. This was primarily due to an
increase in the number of employees to 250 at December 31, 1997 from 220 at
December 31, 1996, the majority of the employees were added to support the two
branches opened during 1997 as well as salary increases for existing personnel.
Occupancy expenses increased slightly to $3.3 million from $2.9 million as a
result of the two new branches. Other expenses increased to $7.0 million for
1997 from $5.8 million for 1996, primarily due to a loss realized as a result
of a default on a loan in which inventory was acquired in 1996 and fully
liquidated in 1997. As a result of the enactment of the Federal Deposit
Insurance Funds Act of 1996 on September 30, 1996, commercial banks are now
required to pay part of the interest on the Financing Corporation ("FICO")
bonds issued to deal with the savings and loan crisis of the late 1980's. The
Company's efficiency ratio experienced a favorable decrease to 42.3 percent
from 51.3 percent for 1997 and 1996, respectively. The changes in operating
expenses from year to year are analyzed in TABLE SEVEN.
The Company's income tax expense for 1997 was $9.1 million, for an effective
tax rate of 36.4 percent of pretax income. Income tax expense for 1996 was $5.9
million for an effective rate of 37.5 percent. The year to year increase of
income tax expense was the result of the 61 percent increase in pretax income.
As the Company increases its foreign loans and investments in relation to total
assets these activities are not taxable in the State of Florida thus reducing
the overall effective tax rate. NOTE SIX of the consolidated financial
statements includes an analysis of the components of the provision for income
taxes.
BALANCE SHEET REVIEW
The Company manages its balance sheet by monitoring interest rate sensitivity,
credit risk, liquidity risk and capital positions to reduce the potential
adverse impact on net interest income that might result from changes in
interest rates. Control of interest rate risk is conducted through systematic
monitoring of maturity mismatches. The Company's investment decision-making
takes into account not only the rates of return and their underlying degree of
risk, but also liquidity requirements, including minimum cash reserves,
withdrawal and maturity of deposits and additional demand for funds.
Total consolidated assets increased 26 percent, or $351.1 million for the year
ended December 31, 1998, which included an increase of $361.5 million in
interest earning assets and a decrease of $10.4 million in non-interest earning
assets. The increase in consolidated assets reflects increases of $198.5
million in net loans and $86.5 million in interest-earning deposits with other
banks. These increases were principally funded by deposits from the branch
network, time deposits due to banks and deposits due to other financial
institutions as well as increases in retained earnings. The Company opened a
branch in Puerto Rico during the first quarter to further support asset growth.
CASH, DEMAND DEPOSITS WITH OTHER BANKS AND FEDERAL FUNDS SOLD
Cash, demand deposits with other banks and federal funds sold are considered
cash and cash equivalents. Balances of these items fluctuate daily depending on
many factors which include or relate to the particular banks that are clearing
funds, loan payoffs, deposit gathering and reserve requirements. Cash, demand
deposits with other banks and federal funds sold were $111.8 million at
December 31, 1998 compared to $91.4 million at December 31, 1997.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND SECURITIES
Interest-earning deposits with other banks increased to $200.2 million at
December 31, 1998 from $113.7 million at December 31, 1997. As part of its
overall liquidity management process, the Company places funds with foreign
correspondent banks. These placements are typically short-term, typically 180
days or less. The purpose of these placements is to obtain an enhanced return
on high quality short-term instruments and to solidify existing relationships
with correspondent banks. The banks with which placements are made and the
amount placed are currently approved by the Bank's Asset Liability Committee.
In addition, this Committee reviews adherence with internal interbank liability
policies and procedures. As indicated in TABLE EIGHT these interest-earning
deposits with other banks are well-diversified throughout the Region and in
other countries. The level of such deposits has grown as the overall assets of
the Company have increased during the year ended December 31, 1998. The
short-term nature of these deposits allows the Company the flexibility to
redeploy these assets into higher yielding loans which are largely related to
the financing of trade.
11
13
Investment securities increased to $105.6 million at December 31, 1998 from
$54.6 million at December 31, 1997. The increase has been primarily in U.S.
Government Agency Mortgage backed securities classified as held to maturity.
These securities diversify the Company's portfolio, are eligible collateral for
securing public funds and qualify as community Reinvestment Act investment.
These investments further diversify the portfolio and are eligible as
collateral for overnight investments.
NOTE TWO of the consolidated financial statements reports amortized fair value
and maturity information on the securities portfolio.
TABLE EIGHT. INTEREST-EARNING DEPOSITS WITH OTHER BANKS
(Dollars in thousands)
Country December 31, 1998
Ecuador $ 43,394
Brazil 24,741
Bahamas(1) 23,000
Suriname 20,000
Dominican Republic 16,035
Argentina 14,633
Jamaica 12,060
Germany 10,000
Grand Cayman 10,000
Panama 7,900
British West Indies 6,640
Bolivia 5,000
Honduras 5,000
Nicaragua 1,000
United States 800
--------
Total $200,203
========
(1) Consists of placements in the Bahamas branch of a multinational
financial institution.
12
14
LOAN PORTFOLIO
The Company's loan portfolio increased by $201.9 million, or 21 percent, during
the year ended December 31, 1998 in relation to December 31, 1997. This was due
to management's ability to increase lending to its existing customer base. In
addition, the growth also reflected the overall increased economic trade
activity throughout the Region. At December 31, 1998 commercial-domestic loans
increased by $109.6 million, commercial foreign loans increased by $76.1
million and government and official institutions increased by $36.2 million
from the balances at December 31, 1997. Details on the loans by type are shown
in TABLE NINE below. At December 31, 1998 approximately 31 percent of the
Company's portfolio consisted of loans to domestic borrowers and 69 percent of
the Company's portfolio consisted of loans to foreign borrowers. The Company's
loan portfolio is relatively short-term, as approximately 60 percent of loans
at December 31, 1998 were short-term trade finance loans with average
maturities of approximately 180 days as detailed on TABLE TEN.
The Company's loan portfolio is an important source of liquidity since the
Company's predominant business, international trade finance, is self
liquidating in nature and a significant part of the loans and extensions of
credit mature within one year. The term to maturity of the Company's loans at
December 31, 1998 are shown on TABLE TEN.
TABLE NINE. LOANS BY TYPE
(In thousands)
Years Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ----------
Domestic:
Commercial(1) $ 289,032 $ 179,435 $ 110,322 $ 96,511 $ 66,413
Acceptances discounted 56,706 45,153 23,314 33,059 42,764
Residential mortgages 10,494 12,008 10,610 11,363 11,050
Installment 232 238 428 345 334
------------ ---------- ---------- ---------- ----------
Subtotal Domestic 356,464 236,834 144,674 141,278 120,561
Foreign:
Banks and other financial institutions 302,371 349,643 129,376 136,681 96,563
Commercial and industrial(1) 395,987 319,925 179,824 81,433 77,897
Acceptances discounted 72,597 55,301 80,935 62,838 19,962
Government and official institutions 39,309 3,091 750 750 550
------------ ---------- ---------- ---------- ----------
Subtotal Foreign 810,264 727,960 390,885 281,702 194,972
------------ ---------- ---------- ---------- ----------
Total loans $ 1,166,728 $ 964,794 $ 535,559 $ 422,980 $ 315,533
============ ========== ========== ========== ==========
(1) Includes pre-export financing, warehouse receipts and refinancing of
letters of credits.
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15
TABLE TEN. LOAN MATURITIES
(In thousands)
As of December 31, 1998(1)
-----------------------------------------------------------
Mature
Mature After One But Mature
Within Within After Five
One Year Five Years Years Total
--------- ------------- ---------- ------------
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
========= ========= ========= ============
(1) Does not include mortgage loans and installment loans in the aggregate
amount of $10.7 million.
TABLE ELEVEN reflects both the Company's growth and diversification in
financing trade flows between the United States and the Region in terms of
loans by country and cross-border outstanding by country. The aggregate amount
of the Company's crossborder outstandings by primary credit risk includes cash
and demand deposits with other banks, interest earning deposits with other
banks, investment securities, due from customers on bankers acceptances, due
from customers on deferred payment letters of credit and loans-net. Exposure
levels in any given country at the end of each period may be impacted by the
flow of trade between the United States (and to a large extent, Florida) and
the given countries, as well as the price of the underlying goods or
commodities being financed.
At December 31 1998 approximately 34.4 percent in principal amount of the
Company's loans were outstanding to borrowers in five countries other than the
United States: Panama (10.2 percent), Guatemala (10.2 percent), Brazil (4.7
percent), Honduras (5.1 percent) and Peru (4.2 percent).
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16
TABLE ELEVEN. LOANS BY COUNTRY
(Dollars in thousands)
At December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ----------------------- -------------------------
% of % of % of
Total Total Total
Country Amount Loans Amount Loans Amount Loans
------------ ------- --------- ------ --------- --------
United States $ 356,464 30.55% $ 236,834 24.55% $ 144,674 27.01%
Argentina 36,276 3.11% 58,477 6.06% 35,241 6.58%
Bolivia 20,816 1.77% 38,058 3.94% 15,815 2.95%
Brazil 54,862 4.70% 58,040 6.02% 27,255 5.09%
British West Indies(2) -- -- -- 0.00% 14,740 2.75%
Colombia(2) 41,911 3.59% 23,768 2.46% -- 0.00%
Dominican Republic 29,563 2.53% 40,161 4.16% 9,450 1.76%
Ecuador 46,917 4.02% 74,485 7.72% 29,799 5.56%
El Salvador 37,196 3.19% 40,306 4.18% 28,472 5.32%
Guatemala 119,227 10.22% 91,178 9.45% 79,483 14.84%
Honduras 59,564 5.11% 59,439 6.16% 24,277 4.53%
Jamaica(2) 29,066 2.49% -- 0.00% 10,971 2.05%
Mexico 22,983 1.96% -- 0.00%
Panama 118,680 10.17% 77,295 8.01% 50,553 9.44%
Peru 49,382 4.23% 68,094 7.06% 26,658 4.98%
Russia -- -- 17,500 1.81% -- 0.00%
Suriname 21,868 1.87%
Venezuela 19,756 1.69% 16,299 1.69% 10,245 1.91%
Other(1) 102,197 8.78% 64,860 6.72% 27,926 5.21%
------------ ------- --------- ------ --------- --------
Total $ 1,166,728 100.00% $ 964,794 100.00% $ 535,559 100.00%
============ ======= ========= ====== ========= ========
(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.
15
17
At December 31, 1998 approximately 30.3 percent in cross-border outstanding
were due from borrowers in five countries other than the United States:
Guatemala (7.7 percent), Panama (7.0 percent), Brazil (5.6 percent), Ecuador
(5.9 percent) and Honduras (4.1 percent).
TABLE TWELVE. TOTAL CROSS-BORDER OUTSTANDING BY COUNTRY AND TYPE
(Dollars in million)
At December 31, 1998
----------------------------------------------------------------------
% of % of % of
Total Total Total
1998 Assets 1997 Assets 1996 Assets
-------- ------ ------ ------ ------ ------
Argentina $ 57 3.4% $ 69 5.2% $ 58 7.7%
Bolivia 26 1.5% 44 3.3% 27 3.6%
Brazil 94 5.6% 85 6.3% 36 4.7%
British West Indies 36 2.1% 11 0.8% 11 1.5%
Colombia 49 2.9% 24 1.8% 6 0.8%
Costa Rica(2) 16 0.9% -- -- -- --
Dominican Republic 48 2.8% 39 2.9% 6 0.8%
Ecuador 100 5.9% 90 6.7% 35 4.6%
El Salvador 52 3.1% 46 3.4% 32 4.2%
Guatemala 131 7.7% 92 6.9% 96 12.7%
Honduras 69 4.1% 52 3.9% 33 4.4%
Jamaica 40 2.4% 32 2.4% 22 2.9%
Mexico(2) 23 1.4% -- -- -- --
Nicaragua(2) 15 0.9% 12 0.9% -- 0.0%
Panama 118 7.0% 72 5.4% 41 5.4%
Peru 56 3.3% 74 5.5% 26 3.4%
Russia(2) -- -- 17 1.3% -- 0.0%
Suriname(2) 27 1.6% -- -- -- --
Venezuela(2) 19 1.1% -- 0.0% 10 1.3%
Other(1) 76 4.4% 39 2.9% 17 2.3%
-------- ------ ------ ------ ------ ------
Total $ 1,052 62.1% $ 798 59.6% $ 456 60.3%
======== ====== ====== ====== ====== ======
(1) Other consists of cross-border outstanding to countries in which such
cross-border outstanding did not exceed 0.75 percent of the Company's
total assets at any of the period indicated.
(2) These countries had cross-border outstanding which did not exceed .75
percent of total assets at any of the period indicated.
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18
TOTAL CROSS-BORDER OUTSTANDINGS BY TYPE
At December 31,
----------------------------------
1998 1997 1996
-------- ------ ------
Government and official institutions $ 69 $ 25 $ 1
Banks and other financial institutions 489 442 161
Commercial and industrial 408 275 213
Acceptances discounted 86 56 81
-------- ------ ------
Total $ 1,052 $ 798 $ 456
======== ====== ======
DUE FROM CUSTOMERS ON BANKERS' ACCEPTANCES AND DEFERRED PAYMENT LETTERS OF
CREDIT.
Due from customers on bankers' acceptances and deferred payment letters of
credit were $75.6 million and $6.5 million, respectively, at December 31, 1998
compared to $95.3 million and $8.4 million, respectively, at December 31, 1997.
These assets represent a customer's liability to the Company while the
Company's corresponding liability to third parties is reflected on the balance
sheet as "Bankers Acceptances Outstanding" and "Deferred Payment Letters of
Credit Outstanding".
DEPOSITS
The primary sources of Company's domestic time deposits are its seven Bank
branches located in Florida and one in Puerto Rico. The Company has three Bank
branches in Miami, one in Tampa, Winter Haven, Sarasota and West Palm Beach.
The Company has opened a branch in San Juan, Puerto Rico in the first quarter
of fiscal 1998. In pricing its deposits, the Company analyzes the market
carefully, attempting to price its deposits competitively with the larger
financial institutions in the area. TABLE TWO provides information on average
deposit amounts and rates paid to each deposit category. Total deposits were
$1,477.1 million at December 31, 1998 compared to $1,135.0 million at December
31, 1997.
Average interest bearing deposits increased by 58.3 percent to $1,231.7 million
at December 31, 1998 from $778.2 million at December 31, 1997. During the year
the Company also increased deposits from other financial institutions. In
addition, the Company obtained deposits from the State of Florida as the Bank
is a qualified public depository pursuant to Florida law and has also obtained
approximately $75.5 million of brokered deposits participated out by the broker
in denominations of less than $100,000 through a retail certificate of deposit
program. These deposits were used to further diversify the Company's deposit
base and as a cost effective alternative for the short term funding needs of
the Company.
OTHER BORROWINGS
The Company entered into two transactions in which foreign debt securities were
purchased using proceeds from the other borrowings described in Note 7 to the
Consolidated Financial Statements. The securities collaterize the borrowings.
The borrowings and the related securities mature at the same time.
TRUST PREFERRED SECURITIES
Trust Preferred Securities increased by $11 million as a result of the issuance
of Beneficial Unsecured Securities, of Series A (the "Preferred Securities")
out of a guarantor trust at a rate of 9.75 percent. The Preferred Securities
are considered Tier I capital for regulatory purposes.
In addition, on January 14, 1999, the Trust issued an additional $1.7 million
of Preferred Securities upon the exercise of an over-allotment option by the
underwriter. See Note 8 of the Consolidated Financial Statements on page 57 for
further details.
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19
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)
Certificates Other Time
of Deposit Deposits-IBF
$100,000 or More $100,000 or More Total
---------------- ---------------- ----------
Three months or less $ 180,883 $ 55,321 $ 236,204
Over 3 through 6 months 138,528 1,900 140,428
Over 6 through 12 months 185,366 -- 185,366
Over 12 months 25,596 -- 25,596
---------- --------- ----------
Total $ 530,373 $ 57,221 $ 587,594
========== ========= ==========
OFF-BALANCE SHEET
CONTINGENCIES
In the normal course of business, the Company utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers, including commitments to extend credit, commercial letter of credit,
shipping guarantees, standby letters of credit and forward foreign exchange
contracts.
TABLE FOURTEEN reports the total volume and average monthly volume of the
Company's export and import letters of credit for the periods indicated. The
letter of credit volume decreased by 10 percent to $746.8 million from $819.5
million as a result of shifts toward more on-balance sheet financing.
TABLE FOURTEEN. CONTINGENCIES - COMMERCIAL LETTERS OF CREDIT
(In thousands)
Year Ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ ------------------------
Average Average Average
Total Monthly Total Monthly Total Monthly
Volume Volume Volume Volume Volume Volume
---------- --------- ---------- --------- ---------- ---------
Export Letters of Credit(1) $ 397,683 $ 33,140 $ 424,748 $ 35,396 $ 369,367 $ 30,781
Import Letters of Credit(1) 349,099 29,092 394,758 32,897 312,964 26,080
---------- --------- ---------- --------- ---------- ---------
Total $ 746,782 $ 62,232 $ 819,506 $ 68,293 $ 682,331 $ 56,861
========== ========= ========== ========= ========== =========
(1) Represents certain contingent liabilities not reflected on the Company's
balance sheet.
18
20
The Company provides letter of credit services globally. TABLE FIFTEEN sets
forth the distribution of the Company's contingent liabilities by country of
the applicant and issuing bank for import and export letters of credit,
respectively. As shown by the table, contingent liabilities decreased by 35
percent to $128.7 million at December 31, 1998 from December 31, 1997 as a
result of shifts toward more on-balance sheet financing.
TABLE FIFTEEN. CONTINGENT LIABILITIES(1)
(In thousands)
At December 31,
------------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Argentina(3) $ 1,680 $ -- $ 7,095
Bolivia 3,890 3,883 4,401
Brazil -- 4,123 4,770
Colombia(3) -- 3,936 --
Costa Rica(3) 2,846 3,168 --
Dominican Republic 7,015 4,759 2,719
Ecuador 3,703 17,839 1,858
El Salvador 1,995 3,837 5,616
Guatemala 26,132 11,577 13,981
Guayana 2,374 -- --
Haiti(3) 2,088 7,857 --
Honduras 2,427 5,550 8,315
Jamaica(3) -- -- 1,556
Nicaragua -- 3,386 1,414
Panama 14,538 12,439 9,803
Paraguay 1,961 2,395 5,105
Peru -- 5,566 5,864
Suriname 11,690 -- --
Switzerland 1,588 -- --
United States 39,415 94,629 55,991
Venezuela(3) -- -- --
Other(2) 5,374 13,139 3,224
---------- ---------- ----------
Total $ 128,716 $ 198,083 $ 131,712
========== ========== ==========
(1) Includes export and import letters of credit, standby letters of credit and
letters of indemnity.
(2) Other includes those countries in which contingencies represent less
than 1 percent of the Company's total contingencies at each of the above
dates.
(3) These countries had contingencies, which did not exceed 1 percent of the
Company's total contingencies during the period indicated.
19
21
LIQUIDITY
The Company seeks to manage its assets and liabilities to reduce the potential
adverse impact on net interest income that might result from changes in
interest rates through systematic monitoring of maturity mismatches. The
Company's investment decision-making takes into account not only the rates of
return and their underlying degree of risk, but also liquidity requirements,
including minimum cash reserves, withdrawal and maturity of deposits and
additional demand for funds. For any given period, the pricing structure is
matched when an equal amount of assets and liabilities reprice. An excess of
assets or liabilities over these matched items results in a gap or mismatch, as
shown on TABLE SIXTEEN. A positive gap denotes asset sensitivity and normally
means that an increase in interest rates would have a positive effect on net
interest income while a decrease in interest rates would have a negative effect
on net interest income. However, because different types of assets and
liabilities with similar maturities may reprice at different rates or may
otherwise react differently to changes in overall market rates or conditions,
changes in prevailing interest rates may not necessarily have such effects on
net interest income. All of the Company's assets and liabilities are
denominated in dollars and therefore the Company has no material foreign
exchange risk.
Cash and cash equivalents were $111.8 million on December 31, 1998, an increase
from $91.4 million from December 31, 1997. During 1998, net cash provided by
operating activities was $114.2 million, net cash used in investing activities
was $455.0 million and net cash provided by financing activities was $361.2
million. For further information on cash flows, see the Consolidated Statement
of Cash Flows on page 47 in the Consolidated Financial Statements.
The Company's principal sources of liquidity and funding are its diverse
deposit base and the sales of bankers' acceptances as well as loan
participations. The level and maturity of deposits necessary to support the
Company's lending and investment activities is determined through monitoring
loan demand and through its asset/liability management process. The other
borrowings mentioned in the balance sheet review and in Note Seven of the
Financial Statements were a result of a security transaction. The trust
preferred offering completed December 28, 1998 will provide adequate liquidity
for the next year so that management does not consider the request by the
Federal Reserve that was mentioned in Part I Item 1 of this document to have a
material effect on the operations for the remainder of calendar year 1999.
Considerations in managing the Company's liquidity position include, but is not
limited to, scheduled cash flows from existing assets, contingencies and
liabilities, as well as projected liquidity needs arising from anticipated
extensions of credit. Furthermore, the liquidity position is monitored daily by
management to maintain a level of liquidity conducive to efficient operations
and is continuously evaluated as part of the asset/liability management
process.
Historically, the Company has increased its level of deposits to allow for its
planned asset growth. Customer deposits have increased through the branch
network, and private banking customers, as well as deposits related to the
trade activity. The majority of the Company's deposits are short-term and
closely match the short-term nature of the Company's assets. At December 31,
1998 interest-earning assets maturing within 180 days were $1,022 million,
representing 66 percent of total earning assets. The short-term nature of the
loan portfolio and the fact that a portion of the loan portfolio consists of
bankers' acceptances provides additional liquidity to the Company. Liquid
assets at December 31, 1998 were $353 million, 21 percent of total assets, and
consisted of cash and cash equivalents, due from banks-time and foreign
treasury bills. At December 31, 1998 the Company had been advised of $94.5
million in available interbank funding.
TABLE SIXTEEN presents the projected maturities or interest rate adjustments of
the Company's earning assets and interest-bearing funding sources based upon
the contractual maturities or adjustment dates at December 31, 1998. The
interest-earning assets and interest-bearing liabilities of the Company and the
related interest rate sensitivity gap given in the following table may not be
reflective of positions in subsequent periods.
20
22
TABLE SIXTEEN. INTEREST RATE SENSITIVITY REPORT
(Dollars in thousands)
December 31, 1998
-------------------------------------------------------------------------------------
0 to 30 31 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Days Years Years Total
-------- -------- --------- --------- -------- -------- ----------
Earning Assets:
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%
======== ======== ========= ========= ======== ========
21
23
CREDIT QUALITY REVIEW
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment of the level of
allowance adequate to provide for reasonably foreseeable losses, based upon the
following factors: (i) the economic conditions in those countries in the Region
in which the Company conducts trade finance activities; (ii) the credit
condition of its customers and correspondent banks, as well as the underlying
collateral, if any; (iii) historical experience; and (iv) the average maturity
of its loan portfolio.
In addition, although the Company's credit losses have been relatively limited
to date, management believes that the level of the Company's allowance should
reflect the potential for political and economic instability in certain
countries of the Region and the possibility that serious economic difficulties
in a country could adversely affect all of the Company's loans to borrowers in
or doing business with that country.
Determining the appropriate level of the allowance for credit losses requires
management's judgment, including application of the factors described above to
assumptions and estimates made in the context of changing political and economic
conditions in many of the countries of the Region. Accordingly, there can be no
assurance that the Company's current allowance for credit losses will prove to
be adequate in light of future events and developments. At December 31, 1998,
the allowance for credit losses was approximately $12.8 million, an increase of
24 percent from $10.3 million at December 31, 1997. This increase is largely a
function of the loan growth during the year.
22
24
TABLE SEVENTEEN provides certain information with respect to the Company's
allowance for credit losses, provision for credit losses and chargeoff and
recovery activity for the periods shown.
TABLE SEVENTEEN. CREDIT LOSS EXPERIENCE
(In thousands)
For the Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- --------- --------- ---------
Balance of allowance for credit losses at
beginning of period $ 10,317 $ 5,725 $ 4,450 $ 4,133 $ 3,270
Charge-offs:
Domestic:
Commercial (3,357) (1,693) (951) (1,097) (352)
Acceptances (100) -- -- -- --
Residential -- -- -- -- --
Installment -- (3) (8) (3) --
----------- --------- --------- --------- ---------
Total domestic (3,457) (1,696) (959) (1,100) (352)
Foreign:
Government and official institutions -- -- -- -- --
Banks and other financial institutions (3,901) (896) (678) -- --
Commercial and industrial -- -- (146) (1,044)(1) (1,686)(1)
Acceptances discounted -- -- -- -- --
----------- --------- --------- --------- ---------
Total foreign (3,901) (896) (824) (1,044) (1,686)
----------- --------- --------- --------- ---------
Total charge-offs (7,358) (2,592) (1,783) (2,144) (2,038)
Recoveries:
Domestic:
Commercial 12 203 16 10 19
Acceptances -- -- -- -- --
Residential -- -- -- -- --
Installment -- 1 2 1 7
Foreign:
Banks and Other Financial Institutions 202 -- -- -- --
----------- --------- --------- --------- ---------
Total recoveries 214 204 18 11 26
----------- --------- --------- --------- ---------
Net (charge-offs) recoveries (7,144) (2,388) (1,765) (2,133) (2,012)
Provision for credit losses 9,621 6,980 3,040 2,450 2,875
----------- --------- --------- --------- ---------
Balance at end of period $ 12,794 $ 10,317 $ 5,725 $ 4,450 $ 4,133
=========== ========= ========= ========= =========
Average loans $ 1,165,225 $ 737,921 $ 485,758 $ 370,568 $ 270,798
Total loans $ 1,166,728 $ 964,794 $ 535,559 $ 422,980 $ 315,533
Net charge-offs to average loans 0.61% 0.32% 0.36% 0.58% 0.74%
Allowance to total loans 1.10% 1.07% 1.07% 1.05% 1.31%
(1) Related to extension of credit to a domestic-based business operated by
a company organized under the laws of a foreign country.
23
25
TABLE EIGHTEEN SETS forth an analysis of the allocation of the allowance for
credit losses by category of loans and the allowance for credit losses allocated
to foreign loans. The allowance is established to cover potential losses
inherent in the portfolio as a whole or is available to cover potential losses
on any of the Company's loans.
TABLE EIGHTEEN. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
(In thousands)
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- --------- --------- ---------
Allocation of the allowance by category of
loans:
Domestic:
Commercial $ 945 $ 1,896 $ 1,900 $ 639 $ 1,694
Acceptances 211 315 226 333 299
Residential 66 59 54 57 55
Installment 3 3 6 4 4
Overdraft 190 154 58 37 19
----------- --------- --------- --------- ---------
Total domestic 1,415 2,427 2,244 1,070 2,071
Foreign:
Government and official institutions -- -- -- -- --
Banks and other financial institutions 3,033 3,854 2,112 1,900 550
Commercial and industrial 8,010 3,442 920 1,101 1,381
Acceptances discounted 336 594 449 379 131
----------- --------- --------- --------- ---------
Total foreign 11,379 7,890 3,481 3,380 2,062
Total $ 12,794 $ 10,317 $ 5,725 $ 4,450 $ 4,133
=========== ========= ========= ========= =========
Percent of loans in each category to total
loans:
Domestic:
Commercial 24.8% 18.0% 20.1% 21.9% 20.6%
Acceptances 4.9% 4.7% 4.4% 7.8% 13.6%
Residential 0.9% 1.2% 2.0% 2.7% 3.5%
Installment 0.0% 0.0% 0.1% 0.1% 0.1%
Overdraft 0.0% 0.6% 0.4% 0.8% 0.5%
----------- --------- --------- --------- ---------
Total domestic 30.6% 24.5% 27.0% 33.3% 38.3%
Foreign:
Government and official institutions 3.4% 0.1% 0.1% 0.2% 0.2%
Banks and other financial institutions 25.9% 36.5% 24.2% 32.3% 30.5%
Commercial and industrial 33.9% 33.2% 33.6% 19.3% 24.7%
Acceptances discounted 6.2% 5.7% 15.1% 14.9% 6.3%
----------- --------- --------- --------- ---------
Total foreign 69.4% 75.5% 73.0% 66.7% 61.7%
Total 100.0% 100.0% 100.0% 100.0% 100.0%
=========== ========= ========= ========= =========
24
26
TABLE NINETEEN. ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ALLOCATED TO FOREIGN
LOANS (In thousands)
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- --------- --------- --------- ---------
Balance, beginning of year $ 7,890 $ 3,481 $ 3,380 $ 2,062 $ 910
Provision for credit losses 7,188 5,305 925 2,362 2,838
Net charge-offs (3,699) (896) (824) (1,044)(7) (1,686)(7)
----------- --------- --------- --------- ---------
Balance, end of period $ 11,379 $ 7,890 $ 3,481 $ 3,380 $ 2,062
=========== ========= ========= ========= =========
(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 non-accrual 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 non-accrual 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 non-accrual status.
The Company does not have a rigid charge-off policy but instead charges off
loans on a case-by-case basis as determined by management and approved by the
Board of Directors. In some instances, loans may remain in the non-accrual
category for a period of time during which the borrower and the Company
negotiate restructured repayment terms.
The Company attributes its consistent basis of asset quality to the short-term
nature of its loan portfolio, the composition of its borrower base, the
importance that borrowers in the Region attach to maintaining their continuing
access to financing for foreign trade and to the Company's loan underwriting
policies.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan. Under these standards, individually identified impaired
loans are measured based on the present value of payments expected to be
received, using the historical effective loan rate as the discount rate.
Alternatively, measurement may also be based on observable market prices or, for
loans that are solely dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. The Company evaluates commercial
loans individually for impairment, while groups of smaller-balance homogeneous
loans (generally residential mortgage and installment loans) are collectively
evaluated for impairment.
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated. Total nonperforming loans to total
loans remains within the historical levels. However, the non-performing loans to
total assets ratio has improved when compared to prior year results.
25
27
TABLE TWENTY. NONPERFORMING LOANS
(In thousands)
At December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Domestic:
Non accrual $ 2,189 $ 3,100 $ 3,087 $ 1,345 $ 584
Past due over 90 days and accruing 69 -- -- 582 --
------- ------- ------- ------- -------
Total domestic nonperforming loans 2,258 3,100 3,087 1,927 584
Foreign:
Non accrual 6,396 2,949 1,654 2,287 1,285
Past due over 90 days and accruing 404 -- 112 301 --
------- ------- ------- ------- -------
Total foreign nonperforming loans 6,800 2,949 1,766 2,588 1,285
Total nonperforming loans (1) $ 9,058 $ 6,049 $ 4,853 $ 4,515 $ 1,869
======= ======= ======= ======= =======
Total nonperforming loans to total loans 0.78% 0.48% 0.91% 1.07% 0.59%
Total nonperforming assets to total assets 0.53% 0.64% 0.64% 0.73% 0.41%
(1) During such periods the Company did not have any loans which were deemed to
be "troubled debt restructurings" as defined in SFAS No. 15.
At December 31, 1997, and December 31, 1998 the Company had no non-accruing
investment securities.
For the year ended December 31, 1998 the amount of interest income that was
accrued and that would have been accrued on the loans in the previous table in
accordance with their contractual terms were approximately $7 thousand, all of
which represented interest income on domestic loans, and $615 thousand of which
$96 thousand represented interest income on domestic loans and $519 thousand
represented interest income on foreign loans, respectively.
Management does not believe that there is a material amount of loans not
included in the foregoing table where known information about possible credit
problems of the borrowers would cause management to have serious doubts as to
the ability of the borrowers to comply with the present loan repayment terms and
which may result in such loans becoming non-accruing loans.
CAPITAL RESOURCES
Stockholders' equity at December 31, 1998 was $109.2 million compared to $98.3
million at December 31, 1997. This increase was due to $7.5 million of retained
earnings and $2.0 million of common stock issued from exercise of stock options.
During 1997 the Company paid dividends on preferred stock of $319 thousand,
which were within the amounts allowed by banking and holding Company
regulations.
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. The regulations require
the Company and the Bank to meet specific capital adequacy guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital classification is also subject to qualitative
judgments by the regulators about interest rate risk, concentration of credit
risk and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of Tier
I capital (as defined in the regulations) to total average assets (as defined)
and minimum ratios of Tier I and total capital (as defined) to risk-weighted
assets (as defined).
NOTE NINE of the consolidated financial statements reports Company and Bank
capital ratios.
26
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK MANAGEMENT
In the normal course of conducting business activities, the Company is exposed
to market risk which includes both price and liquidity risk. The Company's price
risk arises from fluctuations in interest rates, and foreign exchange rates that
may result in changes in values of financial instruments. The Company does not
have material direct market risk related to commodity and equity prices.
Liquidity risk arises from the possibility that the Company may not be able to
satisfy current and future financial commitments or that the Company may not be
able to liquidate financial instruments at market prices. Risk management
policies and procedures have been established and are utilized to manage the
Company's exposure to market risk. The strategy of the Company is to operate at
an acceptable risk environment while maximizing its earnings.
Market risk is managed by the Asset Liability Committee which formulates and
monitors the performance of the Company based on established levels of market
risk as dictated by policy. In setting the tolerance levels of market risk, the
Committee considers the impact on both earnings and capital potential changes in
the outlook in market rates, global and regional economies, liquidity, business
strategies and other factors.
The Company's asset and liability management process is utilized to manage
interest rate risk through the structuring of balance sheet and off-balance
sheet portfolios. It is the strategy of the Company to maintain as neutral an
interest rate risk position as possible. By utilizing this strategy the Company
"locks in" a spread between interest earning assets and interest-bearing
liabilities. Given the matching strategy of the Company and the fact that it
does not maintain significant medium and/or long-term exposure positions, the
Company's interest rate risk will be measured and quantified through an interest
rate sensitivity report. For any given period, the Company's pricing structure
is matched when an equal amount of assets and liabilities reprice. An excess of
assets or liabilities over these matched items results in a gap or mismatch. A
positive gap denotes asset sensitivity and normally means that an increase in
interest rates would have a positive effect on net interest income. On the other
hand a negative gap denotes liability sensitivity and normally means that a
decline in interest rates would have a positive effect in net interest income.
However, because different types of assets and liabilities with similar
maturities may reprice at different rates or may otherwise react differently to
changes in overall market rates or conditions, changes in prevailing interest
rates may not necessarily have such effects on net interest income.
TABLE SIXTEEN provides the Company's Interest Rate Sensitivity Reports as of
December 31, 1998. This table shows that interest-bearing liabilities maturing
or repricing within one year exceeded interest-earning assets by $191.6 million.
The Company monitors that the assets and liabilities are closely matched to
minimize interest rate risk. On December 31, 1998 the interest rate risk
position of the Company was not significant since the impact of a 100 basis
point rise or fall of interest rates over the next 12 months is estimated at 2
percent of net income.
Substantially all of the Company's assets and liabilities are denominated in
dollars therefore the Company has no material foreign exchange risk. In
addition, the Company has no trading account securities; therefore it is not
exposed to market risk resulting from trading activities.
NOTE FOURTEEN of the consolidated financial statements reports fair value
calculations of financial instruments. As reported in this note, the carrying
values approximate their fair values which generally minimizes the exposure to
market risk resulting from interest from interest rate fluctuations. This
minimal risk is the result of the short-term nature of the Company's interest
earning assets and the matching maturity level of the interest bearing
liabilities.
On a daily basis the Bank's Senior Vice President of Finance and the Bank's
Treasurer are responsible for measuring and managing market risk.
27
29
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Hamilton Bancorp Inc.:
We have audited the accompanying consolidated statements of condition of
Hamilton Bancorp Inc. and its subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial condition of the Company as of December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
As discussed in Note 17, the accompanying 1998 consolidated financial statements
have been restated.
Deloitte & Touche LLP
Miami, Florida
February 5, 1999 (December 26, 2000 as to the effects of the restatement
described in Note 17)
28
30
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
- --------------------------------------------------------------------------------
AS RESTATED,
SEE NOTE 17
ASSETS 1998 1997
------------ -----------
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 24,213 $ 29,434
FEDERAL FUNDS SOLD 87,577 62,000
----------- -----------
Total cash and cash equivalents 111,790 91,434
INTEREST-EARNING DEPOSITS WITH OTHER BANKS 200,203 113,730
SECURITIES AVAILABLE FOR SALE (Amortized cost: $70,509 in 1998
and $54,725 in 1997) 69,725 54,641
SECURITIES HELD TO MATURITY 35,870
LOANS - NET 1,150,903 952,431
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 75,567 95,312
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 6,468 8,352
PROPERTY AND EQUIPMENT - NET 4,775 4,785
ACCRUED INTEREST RECEIVABLE 19,201 14,441
GOODWILL - NET 1,833 2,008
OTHER ASSETS 16,894 5,000
----------- -----------
TOTAL $ 1,693,229 $ 1,342,134
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 1,477,052 $ 1,135,047
OTHER BORROWINGS 6,116
TRUST PREFERRED SECURITIES 11,000
BANKERS ACCEPTANCES OUTSTANDING 75,567 95,312
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 6,468 8,352
OTHER LIABILITIES 7,784 5,096
----------- -----------
Total liabilities 1,583,987 1,243,807
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 4, 13)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares authorized,
10,050,062 shares issued and outstanding at December 31, 1998 and
9,827,949 shares issued and outstanding at December 31, 1997 100 98
Capital surplus 60,117 56,266
Retained earnings 49,511 42,016
Accumulated other comprehensive loss (486) (53)
----------- -----------
Total stockholders' equity 109,242 98,327
----------- -----------
TOTAL $ 1,693,229 $ 1,342,134
=========== ===========
See accompanying notes to consolidated financial statements.
29
31
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
- --------------------------------------------------------------------------------
AS RESTATED,
SEE NOTE 17
1998 1997 1996
------------ ---------- ----------
INTEREST INCOME:
Loans, including fees $ 106,885 $ 70,262 $ 48,090
Deposits with other banks 10,989 8,909 5,751
Investment securities 4,903 2,980 1,551
Federal funds sold 1,484 1,008 1,274
----------- ---------- ----------
Total 124,261 83,159 56,666
----------- ---------- ----------
INTEREST EXPENSE:
Deposits 69,719 43,913 29,392
Federal funds purchased and other borrowing 561 284 24
----------- ---------- ----------
Total 70,280 44,197 29,416
----------- ---------- ----------
NET INTEREST INCOME 53,981 38,962 27,250
PROVISION FOR CREDIT LOSSES 9,621 6,980 3,040
----------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 44,360 31,982 24,210
----------- ---------- ----------
NON-INTEREST INCOME:
Trade finance fees and commissions 13,101 12,768 9,325
Structuring and syndication fees 3,352 2,535 138
Customer service fees 556 713 1,252
Net gain on sale of securities available for sale 108
Other 544 318 270
----------- ---------- ----------
Total 17,553 16,442 10,985
----------- ---------- ----------
OPERATING EXPENSES:
Employee compensation and benefits 14,527 13,162 10,935
Occupancy and equipment 4,229 3,251 2,907
Loss on exchanges and write-down of assets 22,810
Other 8,720 7,010 5,788
----------- ---------- ----------
Total 50,286 23,423 19,630
----------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 11,627 25,001 15,565
PROVISION FOR INCOME TAXES 4,132 9,098 5,855
----------- ---------- ----------
NET INCOME $ 7,495 $ 15,903 $ 9,710
=========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic $ 0.75 $ 1.81 $ 1.87
=========== ========== ==========
Diluted $ 0.72 $ 1.73 $ 1.79
=========== ========== ==========
AVERAGE SHARES OUTSTANDING:
Basic 9,983,208 8,806,379 5,205,030
=========== ========== ==========
Diluted 10,390,884 9,173,680 5,430,030
=========== ========== ==========
See accompanying notes to consolidated financial statements.
30
32
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
AS RESTATED
SEE NOTE 17
1998 1997 1996
--------- ---------- ---------
NET INCOME $ 7,495 $ 15,903 $ 9,710
OTHER COMPREHENSIVE INCOME, Net of tax:
Unrealized (depreciation) appreciation in securities
available for sale during the year (433) 18 (4)
Less: Reclassification adjustment for gains included
in net income (69)
--------- ---------- ---------
Total (433) (51) (4)
--------- ---------- ---------
COMPREHENSIVE INCOME $ 7,062 $ 15,852 $ 9,706
========= ========== =========
31
33
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AS RESTATED. SEE NOTE 17
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
PREFERRED STOCK COMMON STOCK
------------------ ------------------- CAPITAL RETAINED
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS
-------- ------ --------- ------ ---------- ----------
BALANCE, DECEMBER 31, 1995 101,207 $ 1 4,731,804 $ 47 $ 14,410 $ 20,343
Net change in unrealized gain on securities
available for sale, net of taxes
Cash dividends on preferred stock,
net of withholding taxes (708)
Stock dividend (10%) 473,226 5 2,908 (2,913)
Net income 9,710
-------- ----- --------- ------ ---------- ----------
BALANCE, DECEMBER 31, 1996 101,207 1 5,205,030 52 17,318 26,432
Net change in unrealized loss on securities
available for sale, net of taxes
Cash dividends on preferred stock,
net of withholding taxes (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
Net income 15,903
-------- ----- --------- ------ ---------- ----------
BALANCE, DECEMBER 31, 1997 -- -- 9,827,949 98 56,266 42,016
Issuance of 222,113 shares of common
stock from exercise of options 222,113 2 2,048
Reduction of tax liability due to
deductibility of stock options exercised 1,803
Net change in unrealized loss on securities
available for sale, net of taxes
Net Income 7,495
-------- ----- --------- ------ ---------- ----------
BALANCE, DECEMBER 31, 1998 -- $ -- 10,050,062 $ 100 $ 60,117 $ 49,511
======== ===== ========== ====== ========== ==========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
LOSS EQUITY
------------- ------------
BALANCE, DECEMBER 31, 1995 $ 2 $ 34,802
Net change in unrealized gain on securities
available for sale, net of taxes (4) (4)
Cash dividends on preferred stock,
net of withholding taxes (708)
Stock dividend (10%) --
Net income 9,710
-------- -----------
BALANCE, DECEMBER 31, 1996 (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)
Conversion of preferred stock into
common stock with 6.5 to 1 split
Conversion of bank stock and warrants
into common stock with 6.5 to 1 split
Sale of 2,760,000 shares of common
stock in public offering, net 38,993
Net income 15,903
-------- -----------
BALANCE, DECEMBER 31, 1997 (53) 98,327
Issuance of 222,113 shares of common
stock from exercise of options 2,050
Reduction of tax liability due to
deductibility of stock options exercised 1,803
Net change in unrealized loss on securities
available for sale, net of taxes (433) (433)
Net Income 7,495
-------- -----------
BALANCE, DECEMBER 31, 1998 $ (486) $ 109,242
======== ===========
32
34
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
AS RESTATED
SEE NOTE 17
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,495 $ 15,903 $ 9,710
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,173 1,024 1,074
Provision for credit losses 9,621 6,980 3,040
Deferred tax (benefit) provision (8,612) (2,615) 73
Loss on exchange and write down of asset 22,810
Net gain on sales of securities available for sale (108)
Net loss (gain) on sale of loans and other real estate owned 220 (8)
Proceeds from the sale of bankers acceptances and loan
participations, net of loan participations purchased 84,939 80,007 102,353
Increase in accrued interest receivable and other assets (7,963) (5,248) (3,923)
Increase in other liabilities 4,524 107 794
----------- ----------- -----------
Net cash provided by operating activities 114,207 96,050 113,113
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest-earning deposits with other banks (86,473) (33,253) (42,058)
Purchase of securities available for sale (230,442) (201,448) (59,431)
Purchase of securities held to maturity (46,299)
Proceeds from maturities of securities held to maturity 989 20,946
Proceeds from sales and maturities of securities available for sale 214,037 176,203 38,375
Increase in loans - net (327,696) (512,139) (216,711)
Purchases of property and equipment - net (936) (2,166) (640)
Proceeds from sale of loans and other real estate owned 21,798 56
----------- ----------- -----------
Net cash used in investing activities (455,022) (572,803) (259,463)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net 342,005 496,407 133,575
Proceeds from trust preferred securities offering 11,000
Proceeds from other borrowing 6,116
Net proceeds from issuance of common stock 2,050 38,993
Cash dividends on preferred stock (319) (708)
----------- ----------- -----------
Net cash provided by financing activities 361,171 535,081 132,867
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 20,356 58,328 (13,483)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 91,434 33,106 46,589
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 111,790 $ 91,434 $ 33,106
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 68,665 $ 42,555 $ 29,551
=========== =========== ===========
Income taxes paid during the year $ 12,717 $ 9,077 $ 5,540
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Other real estate owned acquired through foreclosure $ 165
===========
See accompanying notes to consolidated financial statements.
33
35
HAMILTON BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hamilton Bancorp Inc. (the "Company") is a holding company formed in
1988 primarily to acquire ownership in Hamilton Bank, N.A. (the
"Bank"), a national Federal Reserve member bank which commenced
operations in February 1983. As of December 31, 1998, the Company
owned 99.78% of the outstanding common stock of the Bank. The Bank's
business is focused primarily on trade and providing innovative
services for its financial correspondents and exporting/importing
firms. The Bank offers these services through its main office and
three branches in Miami, Florida, and a branch in Tampa, Winter Haven,
Sarasota, West Palm Beach, Florida and San Juan, Puerto Rico.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practices
within the banking industry. The following summarizes the more
significant of these policies:
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company, Bank and Hamilton
Capital Trust I (the "Trust", see Note 8). All significant
intercompany amounts have been eliminated in consolidation.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - For purposes of the consolidated
statements of cash flows, the Company considers cash, demand deposits
with other banks, and federal funds sold as cash and cash equivalents.
Generally, federal funds are sold for one-day periods.
The Federal Reserve requires banks to maintain certain average reserve
balances, in the form of vault cash or funds on deposit with the
Federal Reserve, based upon the total of a bank's net transaction
accounts. At December 31, 1998 and 1997, the Bank met its average
reserve requirement.
INVESTMENT SECURITIES - Investment securities are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
Under SFAS No. 115, investment securities must be classified and
accounted for under the following conditions:
TRADING ACCOUNT SECURITIES - Trading account securities are
held in anticipation of short-term sales or market movements.
Trading account securities are stated at fair value. Gains or
losses on the sale of trading account securities, as well as
unrealized fair value adjustments, are included in operating
income. At December 31, 1998 and 1997, the Company held no
trading account securities.
34
36
SECURITIES AVAILABLE FOR SALE - Securities to be held for
unspecified periods of time including securities that
management intends to use as part of its asset/liability
strategy, or that may be sold in response to changes in
interest rates, changes in prepayment risk, or other similar
factors are classified as available for sale and are carried
at fair value. Unrealized gains or losses are reported as a
net amount in a separate component of stockholders' equity
until realized. Gains and losses are recognized using the
specific identification method upon realization.
SECURITIES HELD TO MATURITY - Securities that management has
a positive intent and the ability to hold to maturity are
carried at cost, adjusted for amortization of premiums and
accretions of discounts over the life of the securities using
a method which approximates the level-yield method. At
December 31, 1997, the Company held no securities classified
as securities held to maturity.
ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is
established through a provision for credit losses charged to expense
based on management's evaluation of the potential losses in its loan
portfolio. Such evaluation, which includes a review of all loans for
which full collectability may not be reasonably assured, considers,
among other matters, historical loss experience, net realizable value
of collateral, current economic conditions and trends, geographical
considerations, and such other factors as in management's judgment
deserve recognition. Many of these factors involve a significant
degree of estimation and are beyond management's control or are
subject to changes which may be unforeseen. Although management
believes the allowance is adequate to absorb losses on existing loans
that may become uncollectible, the ultimate losses may vary
significantly from the current estimates.
IMPAIRED LOANS - A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan
agreement. A loan is not impaired during a period of delay in payment
if the creditor expects to collect all amounts due including interest
accrued at the contractual interest rate for the period of delay.
Individually indentified 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:
Building 30 years
Leasehold improvements 5 - 10 years
Furniture and equipment 5 - 7 years
Automobiles 5 years
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.
35
37
FEDERAL FUNDS PURCHASED - Federal funds purchased generally mature
within one to four days from the transaction date. At December 31,
1998 and 1997, there were no federal funds purchased outstanding.
INCOME RECOGNITION - Interest income on loans is recognized based upon
the principal amounts outstanding. Loans over 90 days past due may not
be placed on nonaccrual if they are in the process of collection and
are either secured by property having a realizable value at least
equal to the outstanding debt and accrued interest or are fully
guaranteed by a financially responsible party whom the Bank believes
is willing and able to discharge the debt, including accrued interest.
Loans are placed on a nonaccruing status when management believes that
interest on such loans may not be collected in the normal course of
business.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan.
Trade finance fees and commissions include fees for letters of credit
and acceptances. Nonrefundable fees on letters of credit and
acceptances are recognized at execution date.
Structuring and syndication fees are earned in connection with the
purchase, participation and placement, without recourse or future
obligation, of trade finance obligations and for arranging financing
for domestic and foreign customers. Nonrefundable fees earned for such
transactions are fully recognized in income at the time the
transaction is consummated.
INCOME TAXES - The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities. The Company provides for
deferred taxes under the liability method. Under such method, deferred
taxes are adjusted for tax rate changes as they occur. Deferred income
tax assets and liabilities are computed annually for differences
between the financial statements and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods
in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
RECLASSIFICATIONS - Certain amounts in the 1997 and 1996 financial
statements have been reclassified for comparative purposes.
NET INCOME PER COMMON SHARE - Basic earnings per share is computed
based on the average number of common shares outstanding and diluted
earnings per share is computed based on the average number of common
and potential common shares (consisting of stock options, see Note 10)
outstanding under the treasury stock method.
STOCK SPLIT - On January 21, 1997, the Company's Board of Directors
(the "Board") approved a 6.5 for 1 common stock split (see Note 9).
Retroactive restatement has been made to all share amounts to reflect
the stock split.
36
38
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.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1996, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,
which is effective for transactions occurring after December 31, 1996.
SFAS No. 125 provides guidance for determining whether a transfer of a
financial asset is treated as a sale versus a financing. Additionally,
if a transfer qualifies as a financing transaction, the statement
contains provisions that may require the recognition of collateral
received or provided, in addition to the financing balance.
In December 1996, the FASB issued SFAS No. 127, Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125, which
defers for one year the effective date of the collateral provisions
for all transactions and the sale provisions for repurchase agreement,
securities lending, and similar transactions. These provisions will be
applied prospectively to transactions entered into after December 31,
1997. The adoption of such provisions is not expected to have a
significant impact on the Company's results of operations.
In June 1997. the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 changes the way
public companies report information about segments of their business
in their annual financial statement and requires them to report
selected segment information in their quarterly reports issued to
shareholders. SFAS No. 131 also requires entitywide disclosures about
the products and services an entity provides, the foreign countries in
which it holds assets and reports revenues, and its major customers.
SFAS No. 131 was adopted as of January 1, 1998 and did not have a
material impact on the Company's consolidated financial statement
presentation.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1").
SOP 98-1 provides guidance for capitalizing and expensing the costs of
computer software developed or obtained for internal use. SOP 98-1 is
effective for financial statements for fiscal years beginning after
December 15, 1998. Management does not expect the adoption of SOP 98-1
to have a significant impact on the Company's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133. Accounting for Derivative
Instruments and Hedging Activities. Among other provisions, SFAS No.
133 established accounting and reporting standards for derivative
instruments and for hedging activities. It also requires that an
entity recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at
fair value. SFAS No. 133 is effective for financial statements for
fiscal years beginning after June 15, 1999. Management has not
determined what effects, if any, the adoption of SFAS No. 133 will
have on the Company's consolidated financial statements.
37
39
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires that all components of comprehensive
income be reported on one of the following: (1) the statement of
income, (2) the statement of changes in stockholders' equity, or (3) a
separate statement of comprehensive income. Comprehensive income is
comprised of net income and all changes to stockholders' equity,
except those due to investments by owners (changes in paid-in capital)
and distributions to owners (dividends). SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of SFAS
No. 130 is not expected to have a material impact on the Company's
financial statement presentation.
2. INVESTMENT SECURITIES
A comparison of the amortized cost and fair value of investment
securities at December 31, 1998 and 1997 is as follows (dollars in
thousands):
1998
-----------------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- -------- ---------- --------
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
======== ======== ======== ========
1997
-----------------------------------------------------------
AMORTIZED GROSS UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ------ ---------- --------
AVAILABLE FOR SALE:
U.S. Government and agency securities $ 29,716 $ -- $ 5 $ 29,711
Foreign debt securities 20,179 15 -- 20,194
Federal Reserve Bank stock 1,262 -- -- 1,262
Foreign bank stocks 1,881 -- 99 1,782
Mutual funds 1,687 95 90 1,692
-------- ------ ------ --------
Total $ 54,725 $ 110 $ 194 $ 54,641
======== ====== ====== ========
38
40
There were no sales of securities available for sale during the years
ended December 31, 1998 and 1996. During the year ended December 31,
1997, gross realized gains on the sale of securities available for
sale were approximately $109,000 and gross realized losses were
approximately $1,000.
Investment securities with an amortized cost and fair value of
approximately $38,031,000 and $37,896,000, respectively, at December
31, 1998, were pledged as collateral for public deposits. In addition,
investment securities with amortized cost and fair value of
approximately $7,920,000 and $7,889,000, respectively, at December 31,
1998, were pledged as collateral for other borrowings (see Note 7).
39
41
The following table shows the amortized cost and the fair value by
maturity distribution of the securities portfolio at December 31,
1998, (dollars in thousands):
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- ---------- ----------
Within one year $ 62,949 $ 62,938
One to five years 4,170 3,822
Over five years -- -- $ 27,511 $ 28,109
--------- --------- ---------- ----------
Total 67,119 66,760 27,511 28,109
Federal Reserve Bank stock 1,262 1,262 -- --
Foreign bank stocks 1,028 752 -- --
Perpetual subordinated -- -- 8,359 10,090
euronotes
Other 1,100 951 -- --
--------- --------- ---------- ----------
Total Securities $ 70,509 $ 69,725 $ 35,870 $ 38,199
========= ========= ========== ==========
3. LOANS
Loans consist of the following at December 31, 1998 and 1997, (dollars
in thousands):
1998 1997
------------ ----------
Commercial (primarily trade related):
Domestic $ 289,032 $ 179,435
Foreign 737,667 672,659
Acceptances discounted - trade related:
Domestic 56,706 45,153
Foreign 72,597 55,301
Residential mortgages 10,494 12,008
Installment 232 238
------------ ----------
Total 1,166,728 964,794
Less:
Unearned income:
Acceptances discounted 2,814 1,809
Other 217 237
Allowance for credit losses 12,794 10,317
------------ ----------
Loans - net $ 1,150,903 $ 952,431
============ ==========
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
40
42
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 115.
A summary of the activity in the allowance for credit losses for the
years ended December 31, 1998, 1997 and 1996 is as follows (dollars in
thousands):
1998 1997 1996
--------- --------- ---------
Balance at the beginning of year $ 10,317 $ 5,725 $ 4,450
Provision charged to operations 9,621 6,980 3,040
Loan charge-offs, net of recoveries (7,144) (2,388) (1,765)
--------- --------- ---------
Balance at the end of year $ 12,794 $ 10,317 $ 5,725
========= ========= =========
At December 31, 1998 and 1997, the recorded investment in impaired
loans was approximately $8,586,000 and $6,049,000, respectively. These
impaired loans required an allowance for credit losses of
approximately $2,786,000 and $2,294,000, respectively. The average
recorded investment in impaired loans during the years ended December
31, 1998 and 1997 was approximately $8,562,000 and $5,743,000,
respectively. For the years ended December 31, 1998 and 1997, the Bank
recognized interest income on these impaired loans prior to their
classification as impaired of approximately $412,000 and $65,000,
respectively.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31,
1998 and 1997 (dollars in thousands):
1998 1997
--------- --------
Land $ 811 $ 811
Building and improvements 1,530 1,448
Leasehold improvements 2,553 2,437
Furniture and equipment 5,691 5,065
Automobiles 80 80
--------- --------
Total 10,665 9,841
Less accumulated depreciation and amortization 5,890 5,056
--------- --------
Property and equipment - net $ 4,775 $ 4,785
========= ========
Depreciation and amortization expense related to property and
equipment for the years ended December 31, 1998, 1997 and 1996 was
approximately $944,000, $841,000 and $899,000, respectively.
The Bank owns the land and the building for one of its Miami
branches, the Winter Haven and Sarasota branches and leases its
main facilities, five branches and certain equipment under
noncancelable agreements (accounted for as operating leases). The
leases have renewal periods of five to ten years, available to the
Bank under the same terms and conditions as the initial leases and
one subject to annual rent adjustments based upon the Consumer
Price Index.
41
43
The approximate future minimum payments, by year and in the aggregate, on
these leases at December 31, 1998 are as follows, (dollars in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
---------------------------- -------
1999 $ 1,967
2000 1,924
2001 1,716
2002 1,612
2003 1,559
Thereafter 4,616
-------
Total minimum lease payments $13,394
=======
Rent expense was approximately $1,726,000, $1,381,000 and $1,006,000, for
the years ended December 31, 1998, 1997 and 1996, respectively.
5. DEPOSITS
Deposits consist of the following at December 31, 1998 and 1997, (dollars
in thousands):
1998 1997
---------- ----------
Noninterest-bearing $ 76,895 $ 78,508
---------- ----------
Interest-bearing:
NOW, money market and savings 90,477 69,970
Time, under $100,000 672,736 475,161
Time, $100,000 and over 530,373 348,651
International Banking Facility (IBF) deposits 106,571 162,757
---------- ----------
Total interest-bearing 1,400,157 1,056,539
---------- ----------
Total $1,477,052 $1,135,047
========== ==========
Time deposits in amounts of $100,000 and over at December 31, 1998 mature
as follows, (dollars in thousands):
AMOUNT
--------
Three months or less $180,883
Three months to twelve months 323,894
One year to five years 25,596
--------
Total $530,373
========
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44
6. INCOME TAXES
The components of the provision for income taxes are as follows for the
years ended December 31, 1998, 1997 and 1996 (dollars in thousands):
1998 1997 1996
-------- -------- --------
Current income taxes:
Federal $ 11,503 $ 10,352 $ 4,629
State 149 481 263
Foreign 1,092 880 890
-------- -------- --------
12,744 11,713 5,782
-------- -------- --------
Deferred income taxes:
Federal (8,136) (2,515) 70
State (476) (100) 3
-------- -------- --------
(8,612) (2,615) 73
-------- -------- --------
Total $ 4,132 $ 9,098 $ 5,855
======== ======== ========
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:
1998 1997 1996
------ ------ ------
Federal statutory rate 35.0% 35.0% 35.0%
Increase in taxes:
State income tax, net of federal income tax benefit 0.1 1.0 1.7
Other, net 0.4 0.4 0.9
------ ------ -----
Effective income tax rate 35.5% 36.4% 37.6%
====== ====== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for tax purposes. The tax effects
of significant items comprising the Company's net deferred tax asset as of
December 31, 1997 and 1997 are as follows, (dollars in thousands):
43
45
1998 1997
------- -------
Deferred tax assets:
Difference between book and tax basis
of allowance for credit losses $ 4,734 $ 3,551
Difference between book and tax basis property 63 293
Loss on exchange 7,889 --
Securities available for sale 298 --
------- -------
Total deferred tax assets 12,984 3,844
------- -------
Deferred tax liabilities:
Other 230 --
Securities available for sale -- 3
------- -------
Total deferred tax liabilities 230 3
------- -------
Net deferred tax assets $12,754 $ 3,841
======= =======
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with certain
temporary differences and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is more
likely than not that realization will not occur. No valuation allowances
have been recorded at December 31, 1998 and 1997.
44
46
7. OTHER BORROWINGS
Other borrowings consist of the following at December 31, 1998 (dollars in
thousands):
AMOUNT
------
7.13% loan secured by a foreign treasury
bill , interest and principal due at
maturity (March 1999) $3,728
8.04% loan secured by a foreign corporate
security, interest and principal due at
maturity (March 1999) 2,388
------
Total $6,116
======
8. TRUST PREFERRED SECURITIES
On December 28, 1998, the Company issued $11,000,000 of 9.75% Beneficial
Unsecured Securities, Series A (the "Preferred Securities") out of a
guarantor trust. The Trust holds 9.75% Junior Subordinated Deferrable
Interest Debentures, Series A (the "Subordinated Debentures") of the
Company purchased with the proceeds of the securities issued. Interest
from the Subordinated Debentures of the Company is used to fund the
preferred dividends of the Trust. Distributions on the Preferred
Securities are cumulative and are payable quarterly. The Trust must redeem
the Preferred Securities when the Subordinated Debentures are paid at
maturity on or after December 31, 2028 or upon earlier redemption. Subject
to the Company having received any required approval of regulatory
agencies, the Company has the option at any time on or after December 31,
2008 to redeem the Subordinated Debentures, in whole or in part.
Additionally, the Company has the option at any time prior to December 31,
2008 to redeem the Subordinated Debentures, in whole but not in part, if
certain regulatory or tax events occur or if there is a change in certain
laws that require the Trust to register under the law. The Preferred
Securities are considered to be Tier I capital for regulatory purposes.
On January 14, 1999, the Trust issued an additional $1,650,000 of
Preferred Securities upon the exercise of an over-allotment by the
underwriters.
9. STOCKHOLDERS' EQUITY
REGULATORY MATTERS - The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined)
to average assets (as defined). Management believes, as of December 31,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
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47
As of December 31, 1998 and 1997, the most recent notification from the
Office of the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.
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48
The Company's consolidated and the Bank's actual capital amounts and
ratios are also presented in the table, (dollars in thousands).
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- --------- -------- --------- --------
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) $108,410 9.9% $43,787 4.0% $ 65,680 6.0%
======== ====== ======= ===== ======== =====
Tier I Capital (to Average Assets) $108,410 6.6% $65,485 4.0% $ 81,856 5.0%
======== ====== ======= ===== ======== =====
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- --------- -------- --------- --------
AS OF DECEMBER 31, 1997:
COMPANY
Total Capital (to Risk Weighted Assets) $106,093 13.7% $62,053 8.0%
======== ===== ======= ===
Tier I Capital (to Risk Weighted Assets) $ 96,405 12.4% $31,027 4.0%
======== ===== ======= ===
Tier I Capital (to Average Assets) $ 96,405 7.9% $36,858 3.0%
======== ===== ======= ===
BANK
Total Capital (to Risk Weighted Assets) $ 96,217 12.4% $61,917 8.0% $77,396 10.0%
======== ====== ======= === ======= ====
Tier I Capital (to Risk Weighted Assets) $ 86,551 11.2% $30,959 4.0% $46,438 6.0%
======== ====== ======= === ======= ====
Tier I Capital (to Average Assets) $ 86,551 7.1% $48,785 4.0% $60,982 5.0%
======== ====== ======= === ======= ====
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
1998, approximately $29,463,000 of retained earnings were available for
dividend declaration without prior regulatory approval. During 1998 and
1997, approximately $2,252,000 and $1,104,000 of dividends were paid by
the bank, respectively, which are within the amounts allowed by
regulations.
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The Company has recently placed and expects to continue to place more
emphasis on financing import of goods into the United States and thereby
increase the relative size of its assets employed in the United States as
compared to its exposure in the Region (as defined in Note 15). In
addition, prudent risk management, in particular with regard to emerging
market countries, calls for avoidance of high concentrations of risk in
these countries in relation to a bank's capital. Currently, United States
bank regulatory agencies consider that exposure in these markets should be
limited to levels that would not impair the safety and soundness of a
banking institution. As a consequence, the Company's exposure in the
Region was significantly reduced at December 31, 1998 and will be further
reduced in 1999. While the Company is well capitalized for the purposes of
the "prompt corrective action" provisions, to date it has not paid any
dividends and does not anticipate doing so. Nevertheless, due to economic
difficulties being experienced by various countries in the Region, the
Federal Reserve has requested that the Company not pay any dividends or
incur any debt (excluding "trust preferred securities") without the
consent of the Federal Reserve.
PUBLIC OFFERING - On March 26, 1997 the Company completed its initial
public offering issuing an aggregate of 2,760,000 shares at $15.50 per
share with net proceeds of approximately $38,994,000. In connection with
the initial public offering, the Board amended and restated the articles
of incorporation of the Company authorizing 75,000,000 shares of common
stock and 10,000,000 shares of "blank check" preferred stock. In addition,
the Board approved a 6.5 for 1 common stock split and reorganization of
the capital structure of the Company consisting of (i) the conversion of
all outstanding shares of the Company's Preferred Shares (Series B and C)
into 466,160 shares (post-stock split) of common stock and (ii) the
issuance of an aggregate of 1,396,759 shares (post-stock split) of common
stock for all outstanding warrants to purchase shares of common stock of
the Bank.
PREFERRED STOCK - During June 1994, the Company's Board amended and
restated the Company's articles of incorporation providing for the
issuance of shares of Series B and Series C ("Preferred Shares"), 14%
fixed rate, non-cumulative, non-voting, perpetual preferred stock.
The Company, on June 30, 1994, issued an aggregate of 60,207 shares of
Series B Preferred Shares at $50 per share and on December 31, 1994 issued
41,000 shares of Series C Preferred Shares at $50 per share. In connection
with the public offering and reorganization, the preferred shares were
converted into 466,160 shares (post-stock split) of common stock.
WARRANTS - In connection with the stock purchase and sale agreement dated
March 21, 1988, stock warrants were issued which granted an option to
acquire additional common shares of the Bank in an amount equal to twenty
percent of the outstanding common shares of the Bank at the time of
exercise, at $.01 per share. The option was for a period of ten years that
commenced on May 28, 1988. In connection with the public offering and
reorganization, the warrants (and bank stock resulting from exercise of
warrants) were converted into 1,396,759 shares (post-stock split) of
common stock.
10. STOCK OPTION PLAN
In December 1993, the Company adopted the 1993 Stock Option Plan (the
"1993 Plan"), pursuant to which 877,500 shares of Common Stock (post-stock
split) were reserved for issuance upon exercise of options. The 1993 Plan
is designed as a means to retain and motivate key employees and directors.
The Company's Compensation Committee, or in the absence thereof, the
Board, administers and interprets the 1993 Plan and is authorized to grant
options thereunder to all eligible employees of the Company, including
executive officers and directors (whether or not they are employees) of
the Company or affiliated companies. Options granted under the 1993 Plan
are on such terms and at such prices as determined by the Compensation
Committee, except that the per share exercise price of incentive stock
48
50
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.
Options outstanding and the activity for 1998 and 1997 are presented
below:
NUMBER OPTION FAIR
1998 OF SHARES PRICE VALUE
---- ------------ ------------------ -----------
Beginning balance 776,875 $ 9.23 - 29.125
Granted (3) 173,388 25.00 - 25.47 7.64 -7.50
Exercised (222,113) 9.230
Forfeited
Canceled (16,931) 9.23 - 29.125
------------
Ending Balance 711,219 $ 9.23 - $29.125
============
Options which became exercisable
during the year 649,500
Options exercisable at December 31, 427,387
Weighted average exercise price $12.24
NUMBER OPTION FAIR
1997 OF SHARES PRICE VALUE
---- ------------ ---------------- -----------
Beginning balance 585,000 $ 9.230
Granted (3) 193,500 29.125 $ 6.55
Exercised -- --
Forfeited (1,625) 9.230
Canceled -- --
----------
Ending Balance 776,875 $9.23 - $29.125
==========
Options which became exercisable
during the year --
Options exercisable at December 31, --
NUMBER OPTION FAIR
1996 OF SHARES PRICE VALUE
---- ------------ ---------------- -----------
Beginning balance
Granted (2) 585,000 (1) $ 9.23 $ 1.69
Exercised -- --
Canceled -- --
-- --
-------- ------
Ending Balance 585,000 $ 9.23
======== ======
Options which became exercisable during the year --
Options exercisable at December 31, --
(1) - Shares reflect 6.5 to 1 stock split.
(2) - The grants vest immediately as to 50% of the grant with the remaining
50% vesting fifteen months after grant or upon the death of the option
holder if earlier.
(3) - The grants vest twelve (12) months after the grant as to 33.3% of the
grant, 33.3% vesting (18) months after grant and the remaining 33.4%
vesting twenty-four (24) months after grant or upon the death of the
option holder if earlier.
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The following table summarizes information about all stock options
outstanding at December 31, 1998:
OPTIONS OUTSTANDING
-----------------------------------------------------------
OPTIONS REMAINING
OUTSTANDING CONTRACTED LIFE EXERCISE PRICE
----------- --------------- ------------------
351,500 7.8 years $ 9.230
186,331 9 years $ 29.125
173,388 10 years $ 25.00 - $ 25.47
The Company applies APB No. 25 and related interpretations in accounting
for its stock options plan to employees and non-employee members of the
Board as described in Note 1. Accordingly, no compensation expense has
been recognized in the years ended December 31, 1998, 1997 and 1996
related to this plan.
For purposes of the following proforma disclosures, the fair F 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. The fair value of the options
granted in 1996 was estimated using the minimum value method prescribed by
SFAS No. 123 for nonpublic entities. Had compensation cost been determined
based on the fair value at the date of grant consistent with requirement
of SFAS 123 the Company's net income and per common share would have been
reduced to the proforma amounts indicated below (dollars in thousands,
except share information).
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------- ------- -------
Net income:
As reported $ 7,495 $15,903 $ 9,710
Proforma 6,881 15,762 9,516
Net income per common share:
Basic:
As reported 0.75 1.81 1.87
Proforma 0.69 1.79 1.83
Diluted:
As reported 0.72 1.73 1.79
Proforma 0.67 1.72 1.75
11. 401(K) PLAN
The Company maintains a 401(k) plan, which was initiated in 1993, for its
executive officers and other employees. Under the terms of the 401(k)
plan, for each dollar contributed by an employee, the Company intends to
contribute a discretionary amount on behalf of participants (the "Matching
Contribution"). In addition, at the end of the plan year, the Company may
make an additional contribution (the "Additional Contributions") on behalf
of participants. Additional Contributions are allocated in the same
proportion that the Matching Contribution made on the participant's behalf
bears to the Matching Contribution made on behalf of all participants
during the year. The amount that the Company contributes to the 401(k)
plan has historically varied from year to year. During the years
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52
ended December 31, 1998, 1997 and 1996, the Company's matching and
additional contributions amounted to approximately $155,000, $128,000 and
$52,000, respectively.
12. RELATED PARTY TRANSACTIONS
Directors, officers and their related entities have borrower and depositor
relationships with the Bank in the ordinary course of business. Loan
balances to these individuals and their related entities approximated
$324,000 and $4,936,000 at December 31, 1998 and 1997, respectively, and
the balance of deposit accounts approximated $1,722,000 and $2,154,000 at
December 31, 1998 and 1997, respectively. At December 31, 1998 there were
approximately $100,000 of outstanding commercial and standby letters of
credit transactions with these individuals and their related entities.
There were no outstanding commercial and letter of credit transactions
outstanding with these individuals at December 31, 1997.
13. OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank utilizes various financial
instruments with off-balance sheet risk to meet the financing needs of its
customers, including commitments to extend credit, commercial letters of
credit, shipping guarantees, standby letters of credit and forward foreign
exchange contracts. These financial instruments involve, to varying
degrees, elements of credit risk. The credit risk associated with these
financial instruments, as further discussed herein, is not recorded in the
statement of condition. The contractual or notional amounts of such
instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments. The credit risks associated with
financial instruments are generally managed in conjunction with the Bank's
statements of condition activities and are subject to normal credit
policies, financial controls, and risk limiting and monitoring procedures.
Credit losses are incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Bank's exposure to credit
loss is represented by the contractual or notional amount of the
commercial letters of credit, shipping guarantees, and standby letters of
credit. This is the maximum potential loss of principal in the event the
commitment is drawn upon and the counterparty defaults.
A summary of the Bank's contractual or notional amounts for financial
instruments with off-balance sheet risk as of December 31, 1998 and 1997
along with a further discussion of these instruments, is as follows
(dollars in thousands):
CONTRACTUAL OR
NOTIONAL AMOUNT
----------------------
1998 1997
-------- --------
Commercial letters of credit $116,078 $187,320
Standby letters of credit 12,566 10,763
Shipping guarantees (indemnity letters) 72
Commitments to purchase foreign currency 2,850 7,712
Commitments to sell foreign currency 4,303 7,488
Commitments to extend credit 47,636 47,433
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.
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Standby letters of credit are commitments issued to guarantee the
performance of a customer to a third party. The Bank issues standby
letters of credit to ensure contract performance or assure payment by its
customers. The guarantees extend for periods up to 12 months. The risk
involved in issuing standby letters of credit is the same as the credit
risk involved in extending loan facilities to customers and they are
subject to the same credit approvals and monitoring procedures. The Bank
holds certificates of deposit and guarantees from other banks as
collateral supporting those commitments for which collateral is deemed
necessary. The extent of collateral held for standby letters of credit
commitments at December 31, 1998 varies from zero percent to 100 percent.
Shipping guarantees (also known as indemnity letters) are letters of
guarantee issued by the Bank on behalf of its customer in favor of
shipping agents. Normally, such facility is extended in instances where
goods purchased under letters of credit have arrived at the port of
destination and the shipping documents necessary for the release of the
goods have not been received by the Bank. The purpose of the shipping
guarantee is to indemnify the transportation company for any loss that
might arise from the release of goods to the Bank's customer in the
absence of the shipping documents.
The Bank enters into forward foreign exchange contracts with its customers
for the delayed exchange of foreign currency for U.S. dollars on behalf of
such customers. These contracts provide a vehicle for the Bank's customers
to hedge their future obligations in foreign currency. Upon entering such
contracts with its customers, the Bank meets these foreign currency
commitments by entering into equivalent contracts with other banks to
purchase or sell equal amounts of the foreign currency to be delivered or
received. Risks arise from the possible inability of the Bank's
counterparties to meet the terms of their contracts and from movements in
foreign currency exchange rates. However, the full notional amount of the
contract is not at risk, as the Bank has the ability to settle these
contracts in the foreign exchange market.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank, upon
extension of credit, is based on management's credit evaluation of the
counterparty.
On January 31, 1998, Development Specialists, Inc., the Liquidating
Trustee of the Model Imperial Liquidating Trust established under the Plan
of Reorganization in the Model Imperial, Inc. Chapter 11 Bankruptcy
proceeding, filed an action against the Bank in the United States
Bankruptcy Court for the Southern District of Florida objecting to the
Bank's proof of claim in the Chapter 11 proceeding and affirmatively
seeking damages against the Bank in excess of $34 million for alleged
involvement with former officers and directors of Model Imperial, Inc. in
a scheme to defraud Model Imperial, Inc. and its bank lenders. The action
is one of several similar actions filed by the Trustee against other
defendants that were involved with Model Imperial seeking the same damages
as in the action against the Bank. The Bank believes the claims are
without merit either as matter of law or fact and intends to vigorously
defend the action.
From time to time the Bank is engaged in additional litigation incidental
to its operations.
While any litigation contains an element of uncertainty, the Bank, after
considering the advice of legal counsel, believes the outcome of all
aforementioned litigation will not have a material adverse effect on the
Bank's financial position, results of operations or liquidity.
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14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have
not been comprehensively revalued for purposes of these financial
statements since December 31, 1998 and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein
(dollars in thousands).
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Assets:
Cash and cash equivalents $ 111,790 $ 111,790 $ 91,434 $ 91,434
Interest-earning deposits
with other banks 200,203 200,203 113,730 113,730
Securities available for sale 69,725 69,725 54,641 54,641
Securities held to maturity 35,870 38,199
Loans, net 1,150,903 1,147,973 952,431 951,624
Liabilities:
Demand deposits 167,372 167,372 148,478 148,478
Time deposits 1,309,680 1,314,000 986,569 986,445
Other borrowing 6,116 6,116
Trust preferred securities 11,000 11,000
Contingent assets and liabilities:
Bankers acceptances 75,567 567 95,312 477
Deferred payment letters of credit 6,468 29 8,352 30
Off-balance sheet instruments -
unrealized gains (losses):
Commitments to extend credit 90 210
Commercial letters of credit 273 251
Standby letters of credit 188 108
Indemnity letters of credit 1
Commitments to purchase foreign currency (8) 147
Commitments to sell foreign currency 29 137
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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 ON MATURITY AND TRUST
PREFERRED SECURITIES - The fair values are based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOANS - The interest rates for commercial loans and acceptances discounted
are based on the prime lending rate. The Bank updates these interest rates
on a monthly basis. Thus, the carrying amount of commercial loans and
acceptances discounted is a reasonable estimate of fair value. The fair
value of other types of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
DEMAND DEPOSITS AND TIME DEPOSITS - The fair value of demand deposits,
savings accounts, and certain money market deposits is the amount payable
on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits or 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.
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15. FOREIGN ACTIVITIES
The Company's foreign activities primarily consist of providing global
trade finance, with particular emphasis on trade finance, with and between
South America, Central America, the Caribbean (the "Region") and the
United States or otherwise involving the Region. The Company considers
assets and revenues as associated with foreign activities on the basis of
the country of domicile of the customer. The nature of the Company's
operations make it difficult to determine precisely foreign activities
profitability since it involves the use of certain judgmental allocations.
Rates used to determine charges or credits for funds used or generated by
foreign activities are based on actual costs during the period for
selected interest-bearing sources of funds. Other operating income and
expenses are determined based upon internal allocations appropriate to the
individual activities. 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, 1998, 1997 and 1996
is as follows (dollars in thousands):
Income Before
Operating Provision for Net Total
Income Income Taxes Income Assets
------------ ------------- ------------ -------------
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
============ ============ ============ ============
1996
Domestic $ 13,639 $ 5,809 $ 3,623 $ 279,283
Foreign 24,596 9,756 6,087 476,287
------------ ------------ ------------ ------------
Total $ 38,235 $ 15,565 $ 9,710 $ 755,570
============ ============ ============ ============
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16. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Hamilton Bancorp Inc. (Parent Company
only) is as follows (dollars in thousands):
STATEMENTS OF CONDITION
DECEMBER 31,
ASSETS 1998 1997
-------- --------
Demand deposit with subsidiary $ 190 $ 8,195
Securities available for sale 9,763 1,447
Goodwill, net 404 447
Other assets 960 301
Investment in subsidiaries 79,240 73,187
Investment in Bank's preferred stock 30,050 14,750
-------- --------
Total $120,607 $ 98,327
======== ========
Liabilities and Stockholders' Equity
Subordinated debentures held the Trust $ 11,340 $ --
Other liabilities 25 --
Stockholders' equity 109,242 98,327
-------- --------
Total $120,607 $ 98,327
======== ========
STATEMENTS OF INCOME YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1997
-------- -------- --------
Interest income $ 530 $ 339 $ 8
Dividend from Bank and other income 2,258 1,105 712
-------- -------- --------
Total income 2,788 1,444 720
Interest expense 12
Operating expenses 1,539 294 43
-------- -------- --------
Total expenses 1,551 294 43
-------- -------- --------
Income before equity in undistributed income of subsidiaries 1,237 1,150 677
Equity in undistributed income of subsidiaries 6,087 14,787 9,033
-------- -------- --------
Income before income tax (benefit) provision 7,324 15,937 9,710
Income tax (benefit) provision (171) 34 --
-------- -------- --------
Net income $ 7,495 $ 15,903 $ 9,710
======== ======== ========
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58
Statements of Cash Flows
Years Ended December 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 7,495 $ 15,903 $ 9,710
Adjustments to reconcile net income to
net cash provided by operations:
Equity in undistributed income of subsidiaries (6,087) (14,787) (9,033)
Write down on security available for sale 587
Amortization of goodwill 43 43 43
Other 1,198 (269) --
----------- ----------- -----------
Net cash provided by operating activities 3,236 890 720
----------- ----------- -----------
Cash flows from investing activities:
Purchase of securities available for sale (140,163) (96,504) (249)
Proceeds from maturities of securities available for sale 131,172 95,216 --
Payment for investment in Bank's common stock (20,237) --
Payment for investment in the Bank's preferred stock (15,300) (10,000) --
Payment for investment in the Trust's common stock (340) -- --
----------- ----------- -----------
Net cash used in investing activities (24,631) (31,525) (249)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,050 38,994 --
Proceeds from issuance of trust preferred securities 11,340 -- --
Cash dividends on preferred stock (319) (708)
----------- ----------- -----------
Net cash provided by (used in) financing activities 13,390 38,675 (708)
----------- ----------- -----------
Net (decrease) increase in cash (8,005) 8,040 (237)
Cash at beginning of year 8,195 155 392
----------- ----------- -----------
Cash at end of year $ 190 $ 8,195 $ 155
=========== =========== ===========
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17. RESTATEMENT
Subsequent to the filing of the Company's 1998 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 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, (2) the initial recording of the securities acquired (some of which
are classified as loans at December 31, 1998) at fair value which became their
cost basis, and (3) the related income tax effects. The following table
summarizes the significant effects of the restatement:
AS PREVIOUSLY AS
REPORTED RESTATED
------------- ----------
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
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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
59