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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A-2
(MARK ONE)
[X] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934:
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-20960
HAMILTON BANCORP INC.
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0149935
(State or Other Jurisdiction of (I.R.S. Employer 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
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None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
9.75% BENEFICIAL UNSECURED SECURITIES, SERIES A
(LIQUIDATION AMOUNT $10 PER CAPITAL SECURITY) OF HAMILTON CAPITAL TRUST I
(Title of Class)
Indicate by check mark [X] whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this From 10-K.
The aggregate market value of Registrant's Common Stock held by
non-affiliates of the Registrant as of March 23, 2000 was $153,682,346 based
upon the average of the high and low price of a share of Common Stock as
reported by the NASDAQ National Market on such date. As of March 23, 2000,
10,081,147 shares of Registrant's Common Stock were outstanding.
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ITEMS 1, 3 AND 6 OF PART I AND ITEMS 7, 7A AND 8 OF PART II OF THE REGISTRANT'S
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 ARE HEREBY AMENDED TO READ AS
FOLLOWS:
PART I
ITEM 1. BUSINESS.
GENERAL
Hamilton Bancorp Inc. ("Hamilton Bancorp"), through its subsidiary,
Hamilton Bank, N.A. ("Hamilton Bank"), (Hamilton Bancorp and Hamilton Bank are
collectively referred to herein as the "Company"), is engaged in providing
global trade finance with particular emphasis on trade with and between South
America, Central America and the Caribbean (collectively, the "Region") and the
United States or otherwise involving the Region. Management believes that trade
finance provides the Company with the opportunity for substantial and profitable
growth, primarily with moderate credit risk, and that Hamilton Bank is the only
domestic financial institution in the State of Florida focusing primarily on
financing foreign trade. Through its relationships with approximately 500
correspondent banks and with importers and exporters in the United States and
the Region, as well as its location in South Florida, which is becoming a focal
point for trade in the Region, the Company has been able to take advantage of
substantial growth in this trade. Much of this growth has been associated with
the adoption of economic stabilization policies in the major countries of the
Region.
The Company operates in all major countries throughout the Region and
has been particularly active in several smaller markets, such as Guatemala,
Ecuador, Panama and Peru. Management believes that these smaller markets are not
primary markets for the larger, multinational financial institutions and,
therefore, customers in such markets do not receive a similar level of service
from such institutions as that provided by the Company. To enhance its position
in certain markets, the Company has made minority investments in indigenous
financial institutions in Guyana, El Salvador, Peru and Nicaragua. The Company
has also strengthened its relationships with correspondent financial
institutions in the Region by acting as placement agent, from time to time, for
debt instruments or certificates of deposit issued by many of such institutions.
The Company seeks to generate income by participating in multiple
aspects of trade transactions that generate both fee and interest income. The
Company earns fees primarily from opening and confirming letters of credit and
discounting acceptances and earns interest on credit extended, primarily in the
form of commercial loans, for pre- and post-export financing, such as
refinancing of letters of credit, and to a lesser extent, from discounted
acceptances. As the economy in the Region has grown and stabilized and the
Company has begun to service larger customers, the balance of the Company's
trade financing activities has shifted somewhat from letters of credit to the
discounting of commercial trade paper and the granting of loans, resulting in
relatively less fee income but increased interest income. Virtually all of the
Company's business is conducted in United States dollars. Management believes
that the Company's primary focus on trade finance, its wide correspondent
banking network in the Region, broad range of services offered, management
experience, reputation and prompt decision-making and processing capabilities
provide it with important competitive advantages in the trade finance business.
The Company seeks to mitigate its credit risk through its knowledge and analysis
of the markets it serves, by obtaining third-party guarantees of both local
banks and importers on many transactions, by often obtaining security interests
in goods being financed and by the short-term, self-liquidating nature of trade
transactions. At December 31, 1999, approximately 56% of the Company's loan
portfolio consisted of short-term principally trade related loans maturing
within 180 days and approximately 69% maturing within 365 days. Credit is
generally extended under specific credit lines for each customer and country.
These credit lines are reviewed at least annually.
Lending activities are funded primarily through domestic consumer
deposits gathered through a network of eight branches in Florida and one branch
in San Juan, Puerto Rico as well as deposits received from correspondent banks,
corporate customers and private banking customers within the Region. The
Company's branches are strategically located in markets where it believes there
is both a concentration of retail deposits and foreign trade activity. The
Company also participates in various community lending activities, and under
several United States and Florida laws and regulations Hamilton Bank is
considered a minority bank and is able to participate in certain beneficial
minority programs involving both deposits and loans.
DEVELOPMENTS IN CERTAIN EMERGING MARKET COUNTRIES
The economies of various countries in the Region, including Brazil,
Ecuador and Venezuela, have been characterized by frequent and occasionally
drastic intervention by the governments and volatile economic cycles.
Governments have often
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changed monetary, credit, tariff and other policies to influence the course of
their respective economies. The actions of the Brazilian, Ecuadorian and
Venezuelan Governments to control inflation and effect other policies have often
involved wage and price controls as well as other interventionist measures, such
as Ecuador's freezing of bank accounts early in 1999. Changes in policies in
other countries in the Region involving tariffs, exchange controls, regulations
and taxation could significantly increase the likelihood of causing restrictions
on transfers of Dollars out of such countries, as could inflation, devaluation,
social instability and other political, economic or diplomatic developments.
Brazilian, Ecuadorian and Venezuelan financial and securities markets,
as well as other financial and securities markets in the Region, are, to varying
degrees, influenced by economic and market conditions in other emerging market
countries and other countries in the Region. Although economic conditions are
different in each country, investor reaction to developments in one country can
have significant effects on the financial markets and securities of issuers in
other countries. These developments have adversely affected the securities and
other financial markets in many emerging markets, including Brazil, Ecuador and
Venezuela. One result of these difficulties has been the closing of numerous
banks in some countries in the Region, especially in Ecuador. To date, however,
the Ecuadorian government has guaranteed the obligations of such closed banks in
Ecuador. The ensuing increased market volatility in these securities and other
financial markets have also been attributed, at least in part, to the effect of
these and other similar events. There can be no assurance that the various
financial and securities markets in the Region, including Brazil, Ecuador and
Venezuela, will not continue to be adversely affected by events elsewhere,
especially in other emerging markets and in other countries in the Region.
The Company will continue to take advantage of the United States and
international economic environment by emphasizing the financing of trade from
the Region into the United States. As a result of the deterioration of economic
conditions in some countries in the Region, trade flows into the Region on a
relative basis diminished in 1999 compared to recent years. In light of the
United States' strong economy, government budget surplus, relatively low
interest rates, strong stock market, high employment levels and strong consumer
demand, trade flows from the Region into the United States increased as such
countries attempt to capitalize on export opportunities as a way to increase
production, stimulate revenues and thereby "export out" of their economic
difficulties. The Company in 1999 placed, and expects to continue to place, more
emphasis on financing imports of goods into the United States and thereby
increase the relative size of its assets employed in the United Sates as
compared to its exposure in the Region. In addition, prudent risk management, in
particular with regard to emerging market countries, calls for avoidance of high
concentrations of risk in these countries in relation to a bank's capital.
Currently, United States bank regulatory agencies consider that exposure in
these markets should be limited to levels that would not impair the safety and
soundness of a banking institution. As a consequence, the Company's exposure in
the Region was significantly reduced in 1999 in relation to the Company's
capital.
BACKGROUND OF THE COMPANY
Hamilton Bancorp was formed as a bank holding company in 1988 in Miami,
Florida, to acquire 99.7% of the issued and outstanding shares of Hamilton Bank.
Hamilton Bank was acquired by Hamilton Bancorp to take advantage of perceived
opportunities to finance foreign trade between United States corporate customers
and companies in the Region, as the area emerged from the Latin American debt
crisis of the early 1980's, particularly since most non-Regional financial
institutions had limited interest in financing trade with the Region at that
time. Members of the Company's management, who had extensive experience in trade
finance in the Region, re-established contacts in the Region, primarily with
banks. Hamilton Bank initially offered its services confirming letters of credit
for banks in the Region. Hamilton Bank then began to market its other trade
related services and products to beneficiaries of its letters of credit. As
Hamilton Bank's relationships with correspondent banks developed and as it
developed corporate clients in the United States, Hamilton Bank's trade finance
activity continued to increase. Hamilton Bank's business expanded into its other
products and services, which primarily included other types of trade financing
instruments.
MARKET FOR COMPANY SERVICES
International trade between the United States and the Region as well as
between the State of Florida and the Region has grown significantly during the
five year period ended December 31, 1999. Recent treaties and agreements
relating to trade are expected to eliminate certain trade barriers and open up
certain economic sectors to competition, as well as to liberalize trade between
the United States and many countries with respect to a variety of goods and
services. A high and increasing percentage of this trade requires financing. The
growth and importance of trade in the United States and the Region also
increases the number of small and medium-sized firms engaged in trade and in
need of trade finance services. Many financial institutions in the United States
in general and Florida in particular are not adequately staffed to handle such
financing on a large scale, or to judge the creditworthiness of companies or
banks in the Region and, accordingly, eschew
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trade financing or limit the scope of their trade financing activity. This has
been partially responsible for the expanding market for the Company's trade
financing services.
Management believes that the Company has carved out a niche for itself
as the only Florida financial institution the business of which is focused
predominantly on financing foreign trade in the Region. The Company initially
focused on providing services and products to smaller banks and corporate
customers in the Region and smaller companies in Florida doing business in the
Region, as well as financial institutions and customers in smaller countries in
the Region where a more limited number of large, multinational banks conduct
business. The Company's willingness to provide trade financing in these
situations frequently results in it obtaining business from the same customers
involving larger countries in the Region, as well. A significant percentage of
the Company's trade financing business now involves such larger countries. The
Company does not, however, have a significant share of the overall market in
larger countries in the Region, such as Brazil and Argentina, where it competes
more frequently with larger, multinational financial institutions. The Company
also provides products and services for multinational corporations, such as
major commodities houses, and purchases participation interests in the trade
financing of multinational financial institutions to companies in the Region.
The Company's trade financing allows for the movement of commodities such as
sugar, grain and steel, and consumer goods such as textiles and appliances, as
well as computer hardware, capital equipment and other items.
Trade Finance Services and Products
The manufacture or production and distribution of any product or good
generally result in a number of trade transactions, which, together, make up a
trade cycle. For example, a seller of shirts purchases buttons and materials,
arranges for manufacture and often contracts with a distributor who sells the
products to retailers. The Company attempts to become involved in and to finance
as many stages of a trade cycle as possible. Since the Company's primary focus
is on trade finance, the Company offers a wider array of trade finance products
and services than most institutions it competes with, although some of the
Company's products and services, such as import and export letters of credit,
are offered by almost all financial institutions engaged in trade finance, and
most of the Company's products are offered by some financial institutions. The
principal trade related products and services, which the Company offers,
include:
- Commercial Documentary Letters of Credit. Commercial
documentary letters of credit are obligations issued by a
financial institution in connection with trade transactions
where the financial institution's credit is effectively
substituted for that of its customer, who is buying goods or
services from the beneficiaries of those letters of credit.
When the bank issuing a letter of credit is not well known or
is an unacceptable risk to the beneficiary, the issuing bank
must obtain a guarantee or confirmation of the letter of
credit by an acceptable bank in the beneficiary's market. When
the Company confirms a letter of credit it assumes the credit
risk of the issuing bank and generally takes a security
interest in the goods being financed. These obligations, which
are governed by their own special set of legal rules, call for
payment by the financial institution against presentation of
certain documents showing that the purchased goods or services
have been provided or are forthcoming. From time to time, a
financial institution issues a commercial documentary letter
of credit ("back-to-back") against receipt of a letter of
credit from another bank in order to finance the purchase of
goods. The Company commenced its trade financing activities by
confirming letters of credit for correspondent financial
institutions in the Region and then began to sell other
products and services to the beneficiaries of such letters of
credit. Commercial letters of credit are contingent
liabilities of the Company that are not recorded on the
Company's balance sheet and which generate fee income. Upon
payment of a letter of credit, the Company may refinance the
obligation through a loan, which will be reflected on the
Company's balance sheet as "Loans-net."
- Bankers' Acceptances. A bankers' acceptance is a time draft
drawn on a bank and accepted by it. Acceptance of the draft
obligates the bank to unconditionally pay the face value to
whomever presents it at maturity. Drafts accepted by the
Company are reflected on the asset side of the Company's
balance sheet as "Due from Customers on Bankers' Acceptances"
and on the liability side as "Bankers' Acceptances
Outstanding." The Company receives a fee upon acceptance of a
draft. Discounted bankers' acceptances represent the purchase
by a financial institution of a draft at a discount. This
assists an exporter in providing terms to an importer under a
letter of credit and also provides liquidity to the exporter.
Discounted bankers' acceptances are discounts of forward
maturity items and are included on the Company's balance sheet
under "Loans-net." The Company receives both fee and interest
income from discounted bankers' acceptances.
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- Discounted Trade Acceptances. Discounted trade acceptances
represent an obligation of an importer to pay money on a
certain date in the future, which obligation has been accepted
by the importer as payable to the exporter, then sold by the
exporter at a discount to a financial institution. If with
recourse, the financial institution as holder of this
instrument has recourse at maturity of the acceptance to the
exporter as well as the accepting importer. If without
recourse, the financial institution holding the acceptance has
no recourse to the exporter, but only to the accepting
importer. Discounted trade acceptances are discounts of
forward maturity items and are included on the Company's
balance sheet under "Loans-net." The Company receives
primarily interest income from discounted trade acceptances.
- Pre-export Financing. Pre-export financing is provided by a
financial institution, either directly or indirectly through a
second bank, to an exporter who has a definitive international
contract for the sale of certain goods or services. Such
financing funds the exporter's manufacture, assembly and sale
of these goods or services to the purchaser abroad. Pre-export
financing is reflected on the balance sheet as "Loans-net".
The Company receives primarily interest income from pre-export
financing.
- Warehouse Receipt Financing. Warehouse receipt financing
provides temporary financing, usually at a significant loan to
collateral discount, for goods temporarily held in an
independent warehouse pending their sale and/or delivery in a
trade transaction. The goods are evidenced by a receipt issued
by the independent warehouse where the goods are stored.
Possession of that receipt gives the financial institution a
perfected security interest in those goods to collateralize
the credit that it is providing. Warehouse receipt financing
is reflected on the balance sheet as "Loans-net". The Company
receives primarily interest income from warehouse receipt
financing.
- Documentary Collections. For a fee, a United States financial
institution will assist financial institutions to collect at
maturity various drafts, acceptances or other obligations
which have come due and which are owed by parties abroad or in
the United States. Documentary collections are not reflected
on the balance sheet and are not contingent obligations of the
Company. The Company receives fee income from documentary
collections.
- Foreign Exchange Transactions. Foreign exchange services
consist of the purchase of foreign currency on behalf of a
customer. This service includes both spot and forward
transactions. Such transactions may be conducted in both hard
and soft currencies (i.e., those which are widely accepted
internationally and those that are not). The Company conducts
such transactions in both types of currencies. Foreign
exchange transactions are not reflected on the balance sheet
and represent contingent liabilities of the Company. The
Company receives fee income from foreign exchange
transactions.
- Standby Letters of Credit. Standby letters of credit
effectively represent a guarantee of payment to a third party
by a financial institution, usually not in connection with an
individual trade transaction. The Company does not favor
standby letters of credit. They are only issued by the Company
in situations where the Company believes it is adequately and
properly secured or that the customer is in very strong
financial condition. Standby letters of credit are not
reflected on the balance sheet and represent contingent
liabilities of the Company. The Company receives fee income
from standby letters of credit.
- International Cash Management. The Company assists
corporations and banks in the Region with the clearing of
checks drawn on United States financial institutions. As a
United States financial institution and a member of the
Federal Reserve System, Hamilton Bank is able to provide quick
and efficient clearing of these items. The provision of these
services often leads to the Company providing other products
and services to corporations and banks.
- Structuring and Syndication Fees. The Company also offers
structured credit facilities to match medium-term financing
needs with medium term assets; to syndicated transactions to
maximize the Bank's capabilities within the international
banking markets; to provide alternatives to lease transactions
as well as portfolio and/or capital equipment financing; and
to assist in a consolidation and/or buy-out environment. These
services generate fee income. During 1999, approximately 32%
was related to domestic transactions and 68% was international
transactions.
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Most of the Company's customers are serviced through its International
Banking and Domestic Corporate Trade Departments. The International Banking
Department services the Company's international corporate and correspondent
banking customers. The Domestic Corporate Trade Department services United
States-based relationships, primarily with domestic corporate clients. Each
corporate customer's account is coordinated by a specific officer at the
Company. Each such customer will also generally do business with the Company
officers responsible for the countries involved in a particular transaction.
Company officers meet in person with key officials from each of the
correspondent banks and corporate customers each year. In addition, the Company
communicates with its correspondent banks and corporate customers in a variety
of other ways.
Competition
International trade financing is a highly competitive industry that is
dominated by large, multinational financial institutions such as Citibank, N.A.,
ABN-AMRO Bank and Barclays Bank PLC, among others. With respect to trade finance
in or relating to larger countries in the Region, primarily in South America,
these larger institutions are the Company's primary competition. The Company has
less competition from these multinational financial institutions providing trade
finance services with or in smaller countries in the Region, primarily in
Central America and the Caribbean, because the volume of trade financing in such
smaller countries has not been as attractive to these larger institutions. With
respect to Central American and Caribbean countries, as well as United States
domestic customers, the Company also competes with regional United States and
smaller local financial institutions engaged in trade finance. Many of the
Company's competitors, particularly multinational financial institutions, have
substantially greater financial and other resources than the Company. In
general, the Company competes on the basis of the range of services offered,
convenience and speed of service, correspondent banking relationships and on the
basis of the rates of fees and commissions charged. Management believes that
none of the Company's significant United States competitors have the focus on
trade finance and offer the range of services that the Company offers.
Management further believes that the Company's strong trade culture, range of
services offered, liquid portfolio, management experience, reputation and prompt
decision-making and processing capabilities provide it with a competitive
advantage that allows it to compete favorably with its competitors for the trade
finance business in the Region. The Company also has adjusted to its competition
by often participating in transactions with certain of its competitors,
particularly the larger, multinational financial institutions.
Although to date the Company has competed successfully, on a limited
basis, in those countries in the Region which have high trade volumes, such as
Brazil and Argentina, there can be no assurance that the Company will be able to
continue competing successfully in those countries with either large,
multinational financial institutions or regional United States or local
financial institutions. Any significant decrease in the Company's trade volume
in such large-volume countries could adversely affect the Company's result of
operations. Although the Company faces less competition from multinational
financial institutions in those countries in the Region, particularly countries
in Central America and the Caribbean, where the trading volume has not been
large enough to be meaningful for multinational financial institutions, there
can be no assurance that such financial institutions will not seek to finance
greater volumes of trade in those countries or that the Company would be able to
successfully compete with such financial institutions in the event of increased
competition. In addition, there is no assurance that the Company will be able to
continue to compete successfully in smaller countries with the regional United
States financial institutions and smaller local financial institutions engaged
in trade finance in such countries. Continued political stability and
improvement in economic conditions in such countries are likely to result in
increased competition.
Employees
At December 31, 1999 the Company had 259 full-time employees. The
Company's employees are not represented by a collective bargaining group, and
the Company considers its overall relations with its employees to be good.
HAMILTON BANCORP REGULATION
GENERAL
As a result of its ownership of Hamilton Bank, Hamilton Bancorp is
registered as a bank holding company and is regulated and subject to periodic
examination by the Board of Governors of the Federal Reserve System ("Federal
Reserve") under the United States Bank Holding Company Act.
Pursuant to the United States Bank Holding Company Act and the Federal
Reserve's regulations, Hamilton Bancorp is limited to the business of owning,
managing or controlling banks and engaging in certain other financial related
activities,
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including those activities that the Federal Reserve determines from time to time
to be so closely related to the business of banking as to be a proper incident
thereto.
On November 12, 1999 the Gramm-Leach-Bliley Act ("G-L-B Act") was
enacted. The G-L-B Act is a major financial services modernization law that,
among other things, facilitates broad new affiliations among securities firms,
insurance firms and bank holding companies by repealing the 66-year old
provisions of the Glass-Steagall Act. The major provisions of the G-L-B Act
became effective March 11, 2000. The G-L-B Act permits the formation of
financial holding companies ("FHCs") - i.e., bank holding companies with
substantially expanded powers - under which affiliations among bank holding
companies, securities firms and insurance firms may occur, subject to a blend of
umbrella supervision and regulation of the newly formed consolidated entity by
the Federal Reserve, oversight of the FHC's bank and thrift subsidiaries by
their primary federal and state banking regulators and functional regulation of
the FHC's nonbank subsidiaries - such as broker-dealers and insurance affiliates
- - by their respective specialized regulators.
The United States Bank Holding Company Act requires, among other
things, the prior approval of the Federal Reserve in any case where a bank
holding company proposes to (i) acquire all or substantially all of the assets
of a bank, (ii) acquire direct or indirect ownership or control of more than 5%
of the outstanding voting stock of any bank (unless it already owns a majority
of such bank's voting shares), (iii) merge or consolidate with any other bank
holding company or (iv) establish, or become, a FHC.
Hamilton Bancorp is required by the Federal Reserve to act as a source
of financial strength and to take measures to preserve and protect Hamilton
Bank. As a result, Hamilton Bancorp may be required to inject capital in
Hamilton Bank if Hamilton Bank at any time lacks such capital and requires it.
The Federal Reserve may charge a bank holding company such as Hamilton Bancorp
with unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. Any loans from Hamilton Bancorp to Hamilton Bank
which would count, as capital of Hamilton Bank must be on terms subordinate in
right of payment to deposits and to most other indebtedness of Hamilton Bank.
The Federal Reserve, the Office of the Comptroller of the Currency
("OCC") and the Federal Deposit Insurance Corporation collectively has extensive
enforcement authority over bank holding companies and national banks in the
United States. This enforcement authority, initiated generally for violations of
law and unsafe or unsound practices, includes, among other things, the ability
to assess civil money penalties, to initiate injunctive actions, to issue orders
prohibiting or removing a bank holding company's or a bank's officers, directors
and employees from participating in the institution and, in rare cases, to
terminate deposit insurance.
The Federal Reserve's, the OCC's and the Federal Deposit Insurance
Corporation's enforcement authority was enhanced substantially by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA
significantly increased the amount and the grounds for civil money penalties.
Also, under FIRREA, should a failure of Hamilton Bank cause a loss to the
Federal Deposit Insurance Corporation, any other Federal Deposit Insurance
Corporation-insured subsidiaries of Hamilton Bancorp could be required to
compensate the Federal Deposit Insurance Corporation for the estimated amount of
the loss (Hamilton Bancorp does not currently have any such subsidiaries).
Additionally, pursuant to FDICIA, Hamilton Bancorp in the future could have the
potential obligation to guarantee the capital restoration plans of any
undercapitalized Federal Deposit Insurance Corporation insured depository
institution subsidiaries it may control.
CAPITAL ADEQUACY
The federal bank regulatory authorities have adopted risk-based capital
guidelines to which Hamilton Bancorp and Hamilton Bank are each subject. The
guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profile among banking
organizations, takes off-balance sheet exposures into explicit account in
assessing capital adequacy and minimizes disincentives to holding liquid,
low-risk assets. These risk-based capital ratios are determined by allocating
assets and specified off-balance sheet financial instruments into four weighting
categories, with higher levels of capital being required for the categories
perceived as representing greater risk.
Under these guidelines a banking organization's capital is divided into
two tiers. The first tier (Tier 1) includes common equity, perpetual preferred
stock (excluding auction rate issues) and minority interests that are held by
others in a consolidated subsidiary, less goodwill and any disallowed
intangibles. Supplementary (Tier 2) capital includes, among other items,
cumulative and limited-life preferred stock, mandatory convertible securities,
subordinated debt and the allowance for loan and lease losses, subject to
certain limitations and less required deductions as provided by regulation.
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Banking organizations are required to maintain a risk-based capital
ratio of total capital (Tier 1 plus Tier 2) to risk-weighted assets of 8% of
which at least 4% must be Tier 1 capital. The federal bank regulatory
authorities may, however, set higher capital requirements when a banking
organization's particular circumstances warrant. As a practical matter, banking
organizations are expected to maintain capital ratios well above the regulatory
minimums. The risk-based capital ratios of Hamilton Bancorp and Hamilton Bank as
of December 31, 1998 and 1999 are discussed under "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Capital Resources."
In addition, the federal bank regulatory authorities have established
guidelines for a minimum leverage ratio (Tier 1 capital to average total
assets). These guidelines provide for a minimum leverage ratio of 3% for banking
organizations that meet certain specified criteria, including excellent asset
quality, high liquidity, low interest rate exposure and the highest regulatory
rating. Banking organizations not meeting these criteria or which are
experiencing or anticipating significant growth are required to maintain a
leverage ratio which exceeds the 3% minimum by at least 100 to 200 basis points.
The leverage ratios of Hamilton Bancorp and Hamilton Bank as of December 31,
1998 and 1999 are discussed in Note 8 to the consolidated financial statements.
Failure to meet applicable capital guidelines could subject a bank or
bank holding company to a variety of "prompt corrective action" enforcement
remedies available to the federal bank regulatory authorities, including
limitation on the ability to pay dividends, the issuance of a capital directive
to increase capital and, in the case of a bank, the issuance of a cease and
desist order, the imposition of civil money penalties, the termination of
deposit insurance by the Federal Deposit Insurance Corporation or (in severe
cases) the appointment of a conservator or receiver.
See Recent Regulatory Developments on page 10.
INTERSTATE BANKING
As of September 29, 1995, the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 permitted adequately capitalized and managed
bank holding companies to acquire control of banks in any state. Although
individual states could authorize interstate branches earlier, beginning on June
1, 1997, the Interstate Banking Act allows banks to branch across state lines,
unless a state elects to opt-out entirely. Florida did not so opt-out and allows
out-of-state banks to enter Florida by merger with an existing Florida-based
bank and to branch throughout the state. This has further increased competition
for Hamilton Bank by allowing large banks from other parts of the United States
to operate directly in Florida.
REGULATION OF HAMILTON BANK
GENERAL
Hamilton Bank, as a Federal Deposit Insurance Corporation-insured
national bank, is subject to regulation primarily by the OCC and secondarily by
the Federal Deposit Insurance Corporation. Also, as a national bank Hamilton
Bank is a member of the Federal Reserve System and its operations are therefore
also subject to certain Federal Reserve regulations. Various other federal and
state consumer laws and regulations also affect the operations of Hamilton Bank.
As a national bank, Hamilton Bank may be able to engage in certain
activities approved by the OCC which the Federal Reserve would not necessarily
approve for Hamilton Bancorp or its non-national bank "operating subsidiaries."
The OCC has been particularly aggressive in recent years in allowing national
banks to undertake an ever-increasing range of securities and insurance
activities through their operating subsidiaries. Along these lines, national
banks, among other things, are permitted on a case-by-case basis to operate
subsidiaries that may engage in activities some of which are not permissible for
the bank itself. Although the applicable OCC regulations do not authorize any
new activities per se, national banks have used them to expand further into the
businesses of insurance and securities underwriting.
The applicable OCC regulations contain "fire walls" intended to protect
a national bank from the risks taken by its subsidiary, including a 10% cap on
the amount of bank capital that may be invested in the new subsidiary, as well
as requirements that extensions of credit to the operating subsidiary be
fully-collateralized and that transactions between the bank and the subsidiary
be conducted at arm's-length. Also, other safeguards are that the parent
national bank's exposure to any losses the subsidiary may incur be limited to
the bank's equity investment in the subsidiary, and that the parent national
bank be well-capitalized both before and after the investment is made.
7
9
Effective March 11, 2000, the G-L-B Act authorizes the formation of
"financial subsidiaries" of national banks and allows them to engage in the same
types of activities permissible for nonbank subsidiaries of FHCs (including
securities underwriting and dealing), with the exception of insurance
underwriting, real estate investment and real estate development.
Hamilton Bank does not own or control an operating subsidiary or a
financial subsidiary.
As a national bank, Hamilton Bank may not ordinarily lend more than 15%
of its capital unsecured to any one borrower, and may lend up to an additional
10% of its capital to that same borrower on a fully secured basis involving
readily marketable collateral having a market value, as determined by reliable
and continuously available price quotations, equal at least to the amount
borrowed. In addition, there are various other circumstances in which Hamilton
Bank may lend in excess of such limits, including authority to lend up to 35% of
capital and surplus when the loan is secured by documents of title to readily
marketable staples and certain other exceptions relevant to international trade
finance.
Federal law also imposes additional restrictions on Hamilton Bank with
respect to loans and extensions of credit to certain related parties and
purchases from and other transactions with Hamilton Bancorp's principal
shareholders, officers, directors and affiliates. Such loans and extensions of
credit (i) must be made on substantially the same terms (including interest
rates and collateral) as, and follow credit underwriting procedures that are not
less stringent than, those prevailing at the time for comparable transactions
with members of the general public or otherwise available to any employee of
Hamilton Bank and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features. In addition, extensions of credit to each
such person beyond certain limits set by applicable law must be approved by
Hamilton Bank's Board of Directors, with the individual who is applying for the
credit abstaining from participation in the decision. Hamilton Bank also is
subject to certain lending limits and restrictions on overdrafts to such
persons. A violation of these restrictions may result in the assessment of
substantial civil monetary penalties against Hamilton Bank or any officer,
director, employee, agent or other person participating in the conduct of the
affairs of Hamilton Bank or the imposition by the Federal Reserve of a cease and
desist order.
See Recent Regulatory Developments on page 10.
DIVIDENDS
Hamilton Bank is subject to legal limitations on the frequency and
amount of cash dividends that can be paid to Hamilton Bancorp. The OCC, in
general, also has the ability to prohibit cash dividends by Hamilton Bank, which
would otherwise be permitted under applicable regulations if the OCC determines
that such distribution would constitute an unsafe or unsound practice.
For Hamilton Bank, the approval of the OCC is required for the payment
of cash dividends in any calendar year if the total of all cash dividends
declared by Hamilton Bank in that year exceeds the current year's net income
combined with the retained net income of the two preceding years. "Retained net
income," means the net income of a specified period less any common or preferred
stock cash dividends declared for that period. Moreover, no cash dividends may
be paid by a national bank in excess of its undivided profits account.
In addition, the Federal Reserve and the Federal Deposit Insurance
Corporation have issued policy statements, which provide that, as a general
matter, insured banks and bank holding companies may pay cash dividends only out
of current operating earnings.
In accordance with the above regulatory restrictions, Hamilton Bank had
the ability to pay cash dividends, and on December 31, 1999 an aggregate of
$33.8 million was available for the payment of dividends to Hamilton Bancorp
without prior regulatory approval. In accordance with the above regulatory
restrictions, Hamilton Bank had the ability to pay cash dividends, and on
December 31, 1999 an aggregate of $33.8 million was available for the payment of
dividends to Hamilton Bancorp without prior regulatory approval. Notwithstanding
the foregoing, under the September 8, 2000 Order discussed below in Recent
Regulatory Developments Hamilton Bank may not pay dividends without the approval
of the OCC. See Recent Regulatory Developments on page 10.
There are also statutory limits on other transfer of funds to Hamilton
Bancorp and any other future non-banking subsidiaries of Hamilton Bancorp by
Hamilton Bank, whether in the form of loans or other extensions of credit,
investments or asset purchases. Such transfers by Hamilton Bank generally are
limited in amount to 10% of Hamilton Bank's capital and surplus, to Hamilton
Bancorp or any such future Hamilton Bancorp subsidiary, or 20% in the aggregate
to Hamilton Bancorp
8
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and all such subsidiaries. Furthermore, such loans and extensions of credit are
required to be fully collateralized in specified amounts depending on the nature
of the collateral involved.
FDICIA
FDICIA was enacted on December 19, 1991. It substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance Act and
made significant revisions to other federal banking statutes. FDICIA provided
for, among other things, (i) a recapitalization of the Bank Insurance Fund of
the Federal Deposit Insurance Corporation (the "BIF") by increasing the Federal
Deposit Insurance Corporation's borrowing authority and providing for
adjustments in its assessments rates; (ii) annual on-site examinations of
federally-insured depository institutions by banking regulators; (iii) publicly
available annual financial condition and management reports for financial
institutions, including audits by independent accountants; (iv) the
establishment of uniform accounting standards by federal banking agencies; (v)
the establishment of a "prompt corrective action" system of regulatory
supervision and intervention, based on capitalization levels, with more scrutiny
and restrictions placed on depository institutions with lower levels of capital;
(vi) additional grounds for the appointment of a conservator or receiver; (vii)
a requirement that the Federal Deposit Insurance Corporation use the least-cost
method of resolving cases of troubled institutions in order to keep the costs to
insurance funds at a minimum; (viii) more comprehensive regulation and
examination of foreign banks; (ix) consumer protection provisions, including a
Truth-in-Savings Act; (x) a requirement that the Federal Deposit Insurance
Corporation establish a risk-based deposit insurance assessment system; (xi)
restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements; and (xii)
certain additional limits on deposit insurance coverage.
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions they
supervise. Under these regulations, a depository institution is classified in
one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically under-capitalized." At December 31, 1999 Hamilton Bancorp believes
that Hamilton Bank's capital position exceeds the highest classification of
"well capitalized." Since September 8, 2000, however, the Bank's capital
category for Prompt Corrective Action ("PCA") purposes has been "adequately
capitalized. On March 28, 2001, the OCC notified the Bank of its intent to
reclassify the Bank to "undercapitalized" for PCA purposes based on the findings
in its most recent examination. (In fact, but for the September 8 Order
requiring Hamilton Bank to achieve and maintain higher capital levels, Hamilton
Bank's capital category as of December 31, 2000 would be "well capitalized",
which requires that Tier 1, Total and leverage capital ratios equal or exceed
8%, 10% and 6%, respectively.) See Recent Regulatory Developments on page 10.
FDICIA generally prohibits Hamilton Bank from making any capital
distribution (including payment of a cash dividend) or paying any management
fees to Hamilton Bancorp if Hamilton Bank would thereafter be undercapitalized.
Undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans acceptable to the federal
banking agencies. If a depository institution fails to submit an acceptable
plan, it is treated as if it is "significantly undercapitalized."
Significantly undercapitalized depository institutions may be subject
to a number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, and requirements to
reduce total assets and to stop accepting deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator, generally within 90 days of the date such institution
is determined to be critically undercapitalized.
FDICIA also provided for increased funding of the Federal Deposit
Insurance Corporation insurance funds. Under the Federal Deposit Insurance
Corporation's risk-based insurance premium assessment system, each bank whose
deposits are insured by the BIF is assigned one of the nine risk classifications
based upon certain capital and supervisory measures and, depending upon its
classification, is assessed premiums. On November 14, 1995, the Federal Deposit
Insurance Corporation board of directors voted to lower the BIF premium range to
zero from .27% effective January 1996. The rate schedule is subject to future
adjustments by the Federal Deposit Insurance Corporation. In addition, the
Federal Deposit Insurance Corporation has authority to impose special
assessments from time to time. As a result of the enactment of the Federal
Deposit Insurance Funds Act of 1996 on September 30, 1996, commercial banks are
now required to pay part of the interest on the Financing Corporation's bonds
issued to deal with the savings and loan crisis of the late 1980's. As a result,
commercial bank deposits are now also subject to assessment by the Financing
Corporation upon the approval by the
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Federal Deposit Insurance Corporation of such assessment. Beginning in 1997 and
until the earlier of December 31, 1999 or the date on which the last saving
association ceases to exist, the assessment rate the Financing Corporation
imposes on a commercial bank must be at a rate equal to one-fifth the assessment
rate applicable to deposits assessable by the Savings Association Insurance
Fund.
RESERVE REQUIREMENTS
Hamilton Bank is required to maintain reserves against its transaction
accounts. The reserves must be maintained in an interest-free account at the
Federal Reserve Bank of Atlanta. Reserve requirements and the amount of required
reserves are subject to adjustment by the Federal Reserve from time to time. The
current rate for reserves is 3% of a depository institution's transaction
accounts (less certain permissible deductions) up to $52 million, plus 10% of
the amount over $52 million.
RECENT REGULATORY DEVELOPMENTS
In February 2000, the OCC initiated a formal administrative action
against Hamilton Bank alleging various unsafe and unsound practices discovered
through an Examination of Hamilton Bank as of August 23, 1999. On September 8,
2000, the OCC and Hamilton Bank settled the administrative action by entering
into a cease and desist order by consent (the "September 8 Order"). The
September 8 Order required Hamilton Bank to comply with, among other things,
certain accounting and capital requirements and to make specified reports and
filings. The September 8 Order also required Hamilton Bank to maintain Tier 1,
Total and leverage capital ratios of 10%, 12% and 7%, respectively, and to not
pay dividends without prior written approval of the OCC. As of December 31,
2000, Hamilton Bank's Tier 1, Total and leverage capital ratios were 9.36%,
10.68% and 6.49%, respectively.
On March 28, 2001, the OCC issued a Notice of Charges for Issuance of
an Amended Order to Cease and Desist (the "Notice of Charges") against Hamilton
Bank. The Notice of Charges alleged that Hamilton Bank has violated certain
federal banking laws and regulations by, among other things, (i) making loans in
1999 in violation of applicable lending limits; (ii) failing to file accurate
Call Reports; (iii) failing to file Suspicious Activity Reports ("SARs") with
respect to certain transactions; (iv) failing to provide a system of internal
controls to ensure ongoing compliance with the Bank Secrecy Act (the "BSA") and
(v) engaging in unsafe and unsound practices. The Notice of Charges also alleged
that Hamilton Bank has violated the September 8 Order by approving certain
overdrafts and making certain loans. Under the Notice of Charges, the OCC seeks
the issuance of an Amended Order to Cease and Desist (the "Proposed Amended
Order"). In connection with the issuance of the Notice of Charges, the OCC
issued a Temporary Order to Cease and Desist (the "Temporary Order") also on
March 28, 2001. The Temporary Order requires Hamilton Bank to, among other
things, (i) comply with specified internal procedures in connection with the
making of loans and overdrafts and the placement of funds; (ii) develop,
implement and adhere to a written program acceptable to the OCC to ensure
compliance with the BSA; (iii) comply with specified procedures with respect to
pouches received by the Bank and existing foreign correspondent accounts; and
(iv) develop, implement and adhere to a written program acceptable to the OCC to
ensure compliance with the requirements to file SARs. In addition, the Temporary
Order prohibits the Bank from engaging in transactions with certain named
persons and entities, or with any parties who provide funding to such persons
and entities.
The Proposed Amended Order contains provisions which are substantially
the same as those contained in the Temporary Order, as well as additional
requirements. The additional provisions contained in the Proposed Amended Order
would also require Hamilton Bank to, among other things, (i) achieve and
maintain Tier 1, Total and leverage capital ratios of 12%, 14% and 9%,
respectively; (ii) develop, implement and adhere to a three year capital plan
acceptable to the OCC; and (iii) obtain the approval of the OCC with respect to
the appointment of new directors and senior officers.
In addition, by letter dated March 28, 2001 (the "PCA Notice"), the OCC
notified the Company of its intent to "reclassify" the capital category of
Hamilton Bank to "undercapitalized" for purposes of Prompt Corrective Action
("PCA") based on the OCC's determination that Hamilton Bank is engaging in
unsafe and unsound banking practices. Should the OCC be successful in
reclassifying Hamilton Bank, the OCC may require that Hamilton Bank comply with
certain regulatory requirements as if it were truly undercapitalized, even
though under OCC regulations, Hamilton Bank is classified as "adequately
capitalized" because of the existence of the September 8 Order.
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The regulatory requirements the OCC may impose should Hamilton Bank be
reclassified as "undercapitalized" include (i) restrictions on capital
distributions, the payment of management fees, and/or asset growth, (ii)
requiring OCC monitoring of the Bank, and (iii) requiring that Hamilton Bank
obtain the OCC's prior approval with regards to acquisitions, branching and
engaging in new lines of business.
With respect to the above, Management of the Company believes the
Company has several means by which to achieve compliance with the prescribed
capital requirements of the September 8 Order. Such plans initially provide for
reducing the Bank's size through selected asset run-off; the sale of credit
risk which effectively decreases the Bank's regulatory capital requirements;
targeted loan sales, including the sale of the Ecuador portfolio subject to
ATRR, and loan participations to other banks; and shifting assets to liquid
investments which decreases regulatory capital requirements. Additionally, the
Bank is working to reach compliance with the other requirements of the
September 8 Order.
But for the September 8 Order requiring the Bank to achieve and
maintain higher capital levels, the Bank's capital category as of December 31,
2000 would have been "well capitalized," which required that Tier I, Total and
leverage capital ratios equal or exceed 6%, 10% and 5%, respectively.
Further, management of the Company does not believe that the ratios in
the Proposed Amended Order are appropriate or warranted and Management does not
intend to agree to such ratios voluntarily. In addition. Management believes
the timeframes for achieving such ratios set forth in the Proposed Amended
Order are commercially unreasonable.
However, assuming that the ratios were in fact lawfully imposed and
that the Bank was given a reasonable time to achieve such ratios, management
believes and anticipates that the Bank would continue to take the actions
outlined above in an orderly manner to meet required ratios.
On March 30, 2001, the Company was advised by the Federal Reserve Bank
of Atlanta (the "FRB"), its primary regulator, that the Company and Hamilton
Capital Trust should not pay any dividends, distributions or debt payments
without the prior approval of the FRB. The Company obtained approval from the
FRB to pay the dividend payable on April 2, 2001, amounting to approximately
$309,000, on the Series A Beneficial Unsecured Securities (the "Trust
Preferred") issued by Hamilton Capital Trust I. There can be no assurance that
the FRB will approve any future payments. The Company will not seek such
approval and will not pay dividends on the Trust Preferred until the Company's
financial condition improves. Pursuant to the documents governing the Trust
Preferred, the Company and Hamilton Capital Trust I have the right, under
certain conditions, to defer dividend payments for up to 20 consecutive
quarters. Any payments deferred in this manner will continue to accumulate.
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ITEM 3. LEGAL PROCEEDINGS.
On January 13, 1998 Development Specialists, Inc., the Liquidating
Trustee of the Model Imperial Liquidating Trust established under the Plan of
Reorganization in the Model Imperial, Inc. Chapter 11 Bankruptcy proceeding,
filed an action against Hamilton Bank in the United States Bankruptcy Court for
the Southern District of Florida objecting to Hamilton Bank's proof of claim in
the Chapter 11 proceeding and affirmatively seeking damages against Hamilton
Bank in excess of $34 million for alleged involvement with former officers and
directors of Model Imperial, Inc. in a scheme to defraud Model Imperial, Inc.
and its bank lenders. The action was one of several similar actions that were
filed by the Trustee against other defendants that were involved with Model
Imperial seeking essentially the same amount of damages as in the action against
Hamilton Bank. A trial of various bankruptcy preference claims in excess of
$12,000,000 was held in November 1999. The Judge rendered a decision on May 16,
2000 holding that Hamilton Bank's proof of claim was subordinate to DSI's and
granting monetary bankruptcy preference damages against Hamilton Bank in the
amount of $2,448,148. Both Hamilton Bank and DSI appealed this decision. In
December 2000 an agreement was reached in which Hamilton Bank made a net payment
of approximately $3.9 million to the Liquidating Trust to settle the case. In
his March 28, 2001 Order approving the settlement, the Judge specifically found
that the Court had not been presented with any evidence that Hamilton Bank had
actual knowledge of any transactions lacking in economic substance. The Judge
also found that Hamilton Bank was unaware of Model Imperial's deteriorating
financial condition and that Hamilton Bank was instead a victim of Model
Imperial's inappropriate transactions.
Six class action lawsuits were filed against the Company in the Federal
District Court for the Southern District of Florida between January 12 and
March 9, 2001. These cases are styled:
1. Andris Indriksons v. Hamilton Bancorp, Inc., Case No. 01-156;
2. Joe Feldman v. Hamilton Bancorp, Inc., Case No. 01-420;
3. Malcolm K. Smith v. Hamilton Bancorp, Inc., Case No. 01-0669;
4. Zorba Lieberman v. Hamilton Bancorp, Inc., Case No. 01-0938;
5. Herbert Silverman v. Hamilton Bancorp, Inc., Case No. 01-932;
and
6. Trust Advisory Equity Plus, LLC v. Hamilton Bancorp, Inc.,
Case No. 01-0375.
The class actions have been brought purportedly on behalf of all
purchasers of common stock of the Company between April 21, 1998 and
December 22, 2000, except that the Silverman action is brought purportedly on
behalf of all purchasers of Hamilton Capital Trust I, series A shares between
December 23, 1998 and December 22, 2000. These cases seek to pursue remedies
under the Securities Exchange Act of 1934 and, in the Silverman case, under the
Securities Act of 1933. The cases have been consolidated as In re Hamilton
Bancorp, Inc. Securities Litigation, Case No. 01-156 in the United States
District Court for the Southern District of Florida, and the lead plaintiffs
appointed by the Court are in the process of preparing a consolidated amended
complaint. The discovery process has not yet begun.
The allegations of the six actions are similar in all material
respects. The Indriksons, Feldman, and Smith complaints allege that the
defendants made false and misleading statements and omissions between April 21,
1998 and December 22, 2000 with respect to, inter alia, the Company's financial
condition, net income, earnings per share, internal controls, underwriting of
transactions of loans, accounting for certain financial transactions as
independent transactions, the credit quality of the Company's loan portfolio,
credit loss reserves, inquiries and orders by the Office of the Comptroller of
the Currency, and reporting in accordance with GAAP and related standards, in
press releases, Forms 10-Q filed on May 14, 1998, August 14, 1998, November 16,
1998, November 10, 1999, May 16, 2000, August 14, 2000, and Forms 10-K filed on
March 31, 1999 and April 14, 2000. Each complaint contains two counts: Count I
is a claim against all defendants (the Company, Eduardo A. Masferrer, John M.R.
Jacobs and Maria Ferrer-Diaz) under section 10(b) of the Exchange Act, and Count
II asserts that the individual defendants are also liable as controlling persons
of the Company pursuant to Section 20(a) of the Exchange Act.
The Trust Advisory Equity Plus and Lieberman complaints allege that the
defendants made false and misleading statements and omissions between April 21,
1998 and December 22, 2000 with respect to, inter alia, the Company's financial
condition, net income, internal controls, recording of securities purchases and
loan sale transactions, credit loss reserves, inquiries and orders by the Office
of the Comptroller of the Currency, and reporting in accordance with GAAP and
related standards, in press releases, Forms 10-Q filed on May 14, 1998, August
14, 1998, November 16, 1998, May 17, 1999, August 16, 1999, November 10, 1999,
March 31, 2000, May 16, 2000, August 14, 2000, and November 28, 2000, and Forms
10-K filed on March 31, 1999 and April 14, 2000. Each complaint contains two
counts: Count I is a claim
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against all defendants (the Company, Eduardo A. Masferrer, John M.R. Jacobs and
Maria Ferrer-Diaz) under section 10(b) of the Exchange Act, and Count II asserts
that the individual defendants are also liable as controlling persons of the
Company pursuant to Section 20(a) of the Exchange Act.
Finally, the Silverman complaint alleges that the defendants made false
and misleading statements and omissions between April 21, 1998 and December 22,
2000 with respect to, inter alia, the Company's financial condition, net income,
earnings per share, internal controls, underwriting of transactions of loans,
accounting for certain financial transactions as independent transactions, the
credit quality of the Company's loan portfolio, credit loss reserves, inquiries
and orders by the Office of the Comptroller of the Currency, and reporting in
accordance with GAAP and related standards, in press releases; Forms 10-Q filed
on May 14, 1998, August 14, 1998, November 16, 1998, November 10, 1999, May 16,
2000, August 14, 2000; Forms 10-K filed on March 31, 1999 and April 14, 2000;
and a December 1998 Registration Statement for series A shares of Hamilton
Capital Trust I. The complaint contains three counts: Count I is a claim against
all defendants (the Company, Eduardo A. Masferrer and John M.R. Jacobs) under
section 11 of the Securities Act, Count II is a claim against all defendants
under section 10(b) of the Exchange Act, and Count III asserts that the
individual defendants are also liable as controlling persons of the Company
pursuant to Section 20(a) of the Exchange Act.
Edie Rolando Pinto Lemus v. Hamilton Bank, N.A., Case No. 00-3397 was
filed in the Federal District Court for the Southern District of Florida on
September 12, 2000. The complaint alleges counts for civil conspiracy,
conversion, unjust enrichment, money had and received, breach of fiduciary duty,
constructive trust, breach of contract and civil theft. Plaintiff alleges that
he is a resident of Guatemala and that he was a customer of the Bank through two
other individuals, who he also alleges were directors of the Bank. The plaintiff
alleges that US$9,970,000 was stolen from him and deposited into "his" account
at the Bank, which money was "not returned to him" and thereby converted by the
Bank. Plaintiff claims that this action also constitutes civil theft under
Florida statutes and that, therefore, he is entitled to treble damages.
The plaintiff was a customer of the Bank for a short period of time
(less than three months) in 1995. The allegations in the complaint, however, do
not appear to bear any relation to that account.
The plaintiff had previously sued the other two persons in Guatemala
making virtually identical claims. The plaintiff lost that action. The Company
is seeking to have the case dismissed based upon forum non conveniens. On May 2,
2001, the motion was denied. Exceptions will be filed with the District Court
with a petition for certification for an appeal to the Eleventh Circuit Court of
Appeals in the alternative.
As indicated in "Item 1 - Recent Regulatory Developments," Hamilton
Bank is engaged in administrative proceedings within the OCC.
Neither Hamilton Bancorp nor Hamilton Bank is involved in any other
legal proceedings except for routine litigation incidental to the business of
banking, none of which is expected to have a material adverse effect on the
Company.
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ITEM 6. SELECTED FINANCIAL DATA.
TABLE ONE. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA.
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The selected consolidated financial data for the five years ended
December 31, 1999 have been derived from the Company's audited financial
statements. The data set forth below should be read in conjunction with the
consolidated financial statements and related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere herein.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 AS RESTATED (1) 1998 1997
-------------------- ------------ -----------
INCOME STATEMENT DATA:
Net interest income ........................................ $ 60,357 $ 53,981 $ 38,962
Provision for credit losses ................................ 20,300 9,621 6,980
Provision for transfer risk ................................ 32,720
------------ ------------ -----------
Net interest income after provisions ....................... 7,337 44,360 31,982
Trade finance fees and commissions ......................... 12,035 13,101 12,768
Structuring and syndication fees ........................... 6,266 3,352 2,535
Customer services fees ..................................... 1,528 1,149 934
Net gain (loss) on sale of assets .......................... 562 (220) 108
Other income ............................................... 299 171 97
------------ ------------ -----------
Non-interest income ........................................ 20,690 17,553 16,442
------------ ------------ -----------
Operating expenses ......................................... 32,059 50,286 23,423
------------ ------------ -----------
Income (loss) before income taxes .......................... (4,032) 11,627 25,001
Provision for (benefit from) income taxes .................. (1,823) 4,132 9,098
------------ ------------ -----------
Net income (loss) .......................................... $ (2,209) $ 7,495 $ 15,903
============ ============ ===========
PER COMMON SHARE DATA:
Net income (loss) per common share (2) ..................... $ (.22) $ 0.72 $ 1.73
Book value per common share ................................ $ 11.24 $ 10.87 $ 10.00
Average weighted shares (2) ................................ 10,069,898 10,390,884 9,173,680
AVERAGE BALANCE SHEET DATA (3):
Total assets ............................................... 1,620,036 $ 1,506,918 $ 1,007,846
Total loans ................................................ 1,181,865 1,165,225 737,921
Total deposits ............................................. 1,435,272 1,301,444 842,117
Stockholder's equity ....................................... 109,334 107,915 79,311
PERFORMANCE RATIOS (3):
Net interest spread ........................................ 3.85% 3.31% 3.56%
Net interest margin ........................................ 4.39% 3.90% 4.31%
Return on average equity ................................... -2.02% 6.95% 20.05%
Return on average assets ................................... .-0.14% 0.50% 1.58%
Efficiency ratio (4) ....................................... 39.56% 39.23% 42.28%
ASSET QUALITY RATIOS:
Allowance for credit losses as a percentage of
total loans .............................................. 1.92% 1.10% 1.07%
Allowance for credit losses and ATRR (5)
as a percentage of loans ................................. 4.86% 1.10% 1.07%
Non-performing assets as a percentage of total loans ....... 1.67% 0.78% 0.65%
Allowance for credit losses as a
percentage of non-performing assets ...................... 115.27% 141.20% 166.03%
Allowance for credit losses and ATRR (5)
as a percentage of non-performing assets ................. 291.42% 141.20% 166.03%
Net loan charge-offs as a percentage
of average outstanding loans ............................. 0.99% 0.61% 0.32%
HAMILTON BANCORP CAPITAL RATIOS:
Leverage capital ratio ..................................... 7.13% 7.27% 7.88%
Tier 1 capital ............................................. 10.30% 10.86% 12.43%
Total capital .............................................. 11.59% 12.03% 13.78%
Average equity to average assets ........................... 6.75% 7.16% 7.87%
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YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995
----------- -----------
INCOME STATEMENT DATA:
Net interest income ........................................ $ 27,250 $ 23,885
Provision for credit losses ................................ 3,040 2,450
Provision for transfer risks................................
----------- -----------
Net interest income after provisions ....................... 24,210 21,435
Trade finance fees and commissions ......................... 9,325 9,035
Structuring and syndication fees ........................... 138 419
Customer services fees ..................................... 1,379 995
Net gain (loss) on sale of assets .......................... -- 3
Other income ............................................... 143 237
----------- -----------
Non-interest income ........................................ 10,985 10,689
----------- -----------
Operating expenses ......................................... 19,630 18,949
----------- -----------
Income before income taxes ................................. 15,565 13,175
Provision for income taxes ................................. 5,855 5,172
----------- -----------
Net income ................................................. $ 9,710 $ 8,003
=========== ===========
PER COMMON SHARE DATA:
Net income per common share (2) ............................ $ 1.79 $ 1.47
Book value per common share ................................ $ 8.07 $ 6.41
Average weighted shares (2) ................................ 5,430,030 5,430,030
AVERAGE BALANCE SHEET DATA:
Total assets ............................................... $ 687,990 $ 534,726
Total loans ................................................ 485,758 370,568
Total deposits ............................................. 574,388 444,332
Stockholder's equity ....................................... 39,969 32,358
PERFORMANCE RATIOS (3):
Net interest spread ........................................ 3.89% 4.20%
Net interest margin ........................................ 4.56% 4.94%
Return on average equity ................................... 24.29% 24.73%
Return on average assets ................................... 1.41% 1.50%
Efficiency ratio (4) ....................................... 51.31% 54.68%
ASSET QUALITY RATIOS:
Allowance for credit losses as a percentage of
total loans .............................................. 1.07% 1.05%
Allowance for credit losses and ATRR (5)
as a percentage of loans .................................. 1.07% 1.05%
Non-performing assets as a percentage of total loans ....... 0.91% 1.07%
Allowance for credit losses as a percentage
of non-performing assets ................................. 117.97% 98.56%
Allowance for credit losses and ATRR (5)
as a percentage of non-performing assets .................. 117.97% 98.56%
Net loan charge-offs as a percentage of
average outstanding loans ................................ 0.36% 0.58%
HAMILTON BANCORP CAPITAL RATIOS:
Leverage capital ratio ..................................... 5.80% 5.68%
Tier 1 capital ............................................. 10.20% 9.98%
Total capital .............................................. 11.50% 10.92%
Average equity to average assets ........................... 5.81% 6.05%
(1) See Note 18 to the consolidated financial statements.
(2) Represents diluted earnings per share and average weighted shares
outstanding, respectively.
(3) The 1999 average balance sheet data and performance ratios are as
restated (1).
(4) Amount reflects operating expenses as a percentage of net interest
income plus non-interest income.
(5) Allocated transfer risk reserve.
15
17
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Hamilton Bancorp Inc. ("Bancorp") is a bank holding company, which
conducts operations principally through its 99.8 percent-owned subsidiary,
Hamilton Bank, N.A. (the "Bank") (collectively the "Company"). The Bank is a
national bank, which specializes in financing trade flows between domestic and
international companies on a global basis. The Bank has a network of nine
FDIC-insured branches, eight in Florida, with locations in Miami, Sarasota,
Tampa, West Palm Beach, Winter Haven and Weston, and one in San Juan, Puerto
Rico.
The Company completed its initial public offering of 2,400,000 shares
of common stock on March 26, 1997. Following the public offering, on April 9,
1997 the Company issued 360,000 additional shares of common stock upon the
exercise of the over-allotment option granted to Oppenheimer and Company, Inc.
and NatWest Securities Ltd.
On December 28, 1998, a trust formed by the Company issued $11.0
million of 9.75 percent Beneficial Unsecured Securities, Series A (the
"Preferred Securities"). On January 14, 1999, the Trust issued an additional
$1.7 million of Preferred Securities upon the exercise of an over-allotment by
the underwriters. These securities are considered to be Tier 1 capital for
regulatory purposes.
RESTATEMENT
Subsequent to the filing of the Company's amended 1999 Annual Report on
Form 10-K/A and after extensive communications with the staff of the Securities
and Exchange Commission ("SEC") in connection with a review by the SEC staff of
the Company's 1999 Annual Report on Form 10K and 10K/A and the staff's comments
thereon, management determined that the Company should record approximately
$32.7 million of Allocated Transfer Risk Reserves ("ATRR") on certain Ecuadorian
exposure in its 1999 consolidated financial statements. Additionally, the
Company determined that it should reclassify as of December 31, 1999
approximately $22 million in foreign interbank placements from interest earning
deposits with other banks, which are subject to ATRR requirements, to loans.
Accordingly, the Company has restated its 1999 consolidated financial statements
from amounts previously reported to record the ATRR and the reclassification of
certain interbank placements to loans. The ATRR are required for exposures with
respect to any country rated "value impaired" by the Interagency Country
Exposure Review Committee ("ICERC"). The ICERC recommends an appropriate
percentage level for ATRR, 90% in the case of Ecuador, for exposures rated
"value impaired." ATRR is a specific reserve which is triggered when an
obligation is more than 30 days past due and/or has been restructured to avoid
delinquency. For purposes of ATRR, a credit is considered to be current if it
would not be reported as "past due" or "non-accrual," as those terms are defined
in the instructions for schedule RC-N of the Call Report.
The restated consolidated financial statements for 1999 include amounts
for the allowances for credit losses and ATRR consistent with the amounts the
Company recorded in its 1999 Call Reports. The ATRR had been previously
disclosed in Note 8 to the Company's consolidated financial statements presented
in the Company's 1999 Annual Report on Form 10K and 10K/A as a reconciling item
between stockholders' equity pursuant to accounting principles generally
accepted in the United States of America ("GAAP") and Tier 1 Capital determined
under regulatory accounting principles. The recording of ATRR for GAAP has no
impact on regulatory capital and capital ratios of the Company, since the ATRR
has been deducted for such purposes since initially being recorded in the Call
Reports.
In accordance with Staff Accounting Bulletin No. 56, Reporting of An
Allocated Transfer Risk Reserve in Filings Under the Federal Securities Law, the
Company has disclosed the ATRR as a separate allowance, see "Credit Quality
Review" beginning on page 39. See Note 18 to the Company's consolidated
financial statements for a summary of the significant effects of the
restatement.
Management's Discussion and Analysis of Financial Condition and Results
of Operations presented herein has been revised to reflect the restatement
described above.
16
18
LOSS ON EXCHANGE
During 1998 the Company purchased certain securities at an aggregate
cost of approximately $94 million and sold certain loans for aggregate proceeds
of $20 million. These transactions were originally accounted for 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 2000, the Company's Audit Committee, with the
assistance of independent counsel, conducted an investigation into these
transactions. After evaluating the results of the investigation, including the
consideration of certain additional information that the Company received from
the OCC, 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. In accordance with
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," the Company recorded a loss on the exchange of
$22.2 million for the year ended December 31, 1998 to record the securities
acquired at their estimated fair value at the time of acquisition. The
conclusion to record the $22.2 million as a loss on exchange was based upon the
fact that at the date of the exchange: (1) the loans sold were performing in
accordance with all original contractual terms and had a carrying value of $20
million, (2) the securities purchased had a fair value of $71.8 million and (3)
the net cash transferred by the Company was approximately $74 million. All of
the securities acquired in the transactions, some of which are classified as
loans at December 31, 1998, were subsequently designated as available for sale
securities during the fourth quarter of 1999 and marked to market.
KEY PERFORMANCE HIGHLIGHTS FOR 1999
The Company's asset growth of approximately 27 percent from
December 31, 1997 to December 31, 1999 was primarily the result of the Company's
ability to deploy the increase in capital from the Company's initial public
offering. The increased capital allowed the Bank to almost double its legal
lending limit and take advantage of trade financing activities throughout Latin
America, as well as Florida. The increase in loans was targeted toward the same
historical markets and utilized the same products as in previous years.
The deposit growth during the period from December 31, 1997 to
December 31, 1999 came primarily from three sources, the Company's branch
network, deposits from financial institutions, brokered deposits and deposits
from the State of Florida. The Company also expanded its branch network in 1998
and 1999 with the addition of branches in Puerto Rico and Weston, Florida,
respectively.
Foreign debt securities increased from $19.9 million at December 31,
1998 to $171.1 million at December 31, 1999. This increase of approximately
$151.2 million was the result of the transfer of unrated bearer securities from
loans to available for sale securities. These securities were initially
underwritten and classified as loans due to their unrated nature and common
banking practice. The Company purchased these securities with the intent to hold
them to maturity and they were accounted for as held to maturity securities as
required by SFAS No. 115. Included in the foreign debt securities transferred to
available for sale securities were amounts previously classified as loans with
an estimated fair market value of $45.5 million and a cost basis of $44.3
million, and amounts previously classified as held to maturity securities with
an estimated fair market value of $8.2 million and a cost basis of $7.3 million
which were acquired in 1998 in connection with the exchange of certain assets
(see "Loss on Exchange" above). In late 1999, management considered the disposal
of certain bearer securities acquired in 1998. As a result, management changed
its intent with respect to these securities and reclassified them as available
for sale. Due to the change in intent, all similar bearer securities (not
acquired in connection with the exchange) with a fair market value of $77.0
million and a cost basis of $78.5 million were also reclassified from loans to
available for sale securities. The remainder of the increase in available for
sale foreign debt securities, amounting to approximately $20.5 million, includes
purchases made during 1999. As of December 31, 1999, all these assets were
performing assets with 50 percent maturing within one year, 18 percent maturing
within one to five years and 32 percent maturing in over five years.
During 1999, several events occurred in Ecuador, which culminated with
the Bank increasing the level of its allowance for credit losses during the
third quarter for Ecuadorian exposures which were not subject to ATRR. These
events included but were not limited to the following: a) Certain banks were
intervened by the Ecuadorian banking authorities early in the year, b) Passage
of a decree in March 1999 freezing deposits in the banking system, however,
trade obligations continued to be paid and convertibility was guaranteed by the
government. In addition, the "Agencia Garantia de Deposito" (AGD) guaranteed all
deposits and trade obligations of the banks in Ecuador, which is a government
agency similar to the FDIC in the United States. c) In March 1999, the Bank
internally downgraded Ecuador to "C", d) In April 1999, a process of auditing
all the banks in Ecuador begins by recognized international accounting firms, e)
In July 1999, the Bank internally downgraded Ecuador to "D" and the audit of the
banks in Ecuador by the internationally recognized accounting firms are
concluded, f) In
17
19
August 1999, the results of these audits conducted by these accounting firms is
released resulting in one bank closure, four banks given a period of time to
recapitalize and the remaining banks passing the rigorous audits and qualified
as viable, g) In September 1999, Ecuador defaults on its Brady debt after a 30
day grace period.
These events contributed to the Bank provisioning $15 million for
credit losses during the third quarter of 1999 and $20 million for the entire
year. This increase in the allowance for credit losses was taken after carefully
reviewing the Bank's loan exposure with a particular emphasis on Ecuador and the
third quarter downgrading of the country. This also triggered the downgrade of
several loans.
RESULTS OF OPERATIONS 1999 COMPARED TO 1998
NET INTEREST INCOME
An analysis of the Company's net interest income and average balance
sheet for the last five years is presented in TABLE ONE and TABLE TWO. Net
interest income is the difference between interest and fees earned on loans and
investments and interest paid on deposits and other sources of funds, and it
constitutes the Company's principal source of income. Net interest income
increased to $60.4 million for the year ended December 31, 1999 from $54.0
million for the same period in 1998, an 11.9 percent increase. The increase was
due largely to the growth in average earning assets coupled with an increase in
the net interest margin. Average earning assets increased to $1,528.5 million
for the year ended December 31, 1999 from $1,383.4 million for the same period
in 1998, a 10 percent increase, while yields earned on average assets decreased
by 18 basis points compared to the same period. Average loans and acceptances
discounted increased to $1,181.9 million for the year ended December 31, 1999
from $1,165.2 million for the same period in 1998, a 1 percent increase, while
average interest-earning deposits due from other banks increased to $175.9
million for the year ended December 31, 1999 from $122.3 million for the same
period in 1998, a 44 percent increase. Net interest margin increased to 3.95
percent for the year ended December 31, 1999 from 3.89 percent for the same
period in the prior year, representing the first time in seven years that the
net interest margin has not decreased.
Interest income increased to $134.0 million for the year ended
December 31, 1999 from $124.3 million for the same period in 1998, an 8 percent
increase, reflecting largely an increase in loans in the United States. Interest
expense increased to $73.6 million for the year ended December 31, 1999 from
$70.3 million for the same period in 1998, a 5 percent increase, reflecting the
increase in deposits to fund asset growth offset by a 31 basis point decrease in
interest rates paid. Average interest-bearing deposits increased to $1,358.3
million for the year ended December 31, 1999 from $1,231.7 million for the same
period in 1998, a 10 percent increase. The growth in deposits was primarily a
result of the Company increasing its core deposit base through its expanding
branch network, as well as its international customers. Average time deposits
from banks decreased to $85.7 million for the year ended December 31, 1999 from
$128.9 million for the same period in 1998 or a 34 percent decrease, due largely
to the Company's reduced activities in the Region.
An analysis of the Company's yields earned and average loan balances
segregating domestic and foreign earning assets is presented in TABLE THREE. The
yields earned on foreign loans increased 40 basis points to 9.3 percent while
yields earned on domestic loans have decreased by 160 basis points to 8.5
percent from 10.1 percent.
PROVISION FOR CREDIT LOSSES AND TRANSFER RISK
The Company's provision for credit losses increased to $20.3 million
for the year ended December 31, 1999 from $9.6 million for the same period in
1998. This increase was due largely to the following factors: a) loan
charge-offs against the allowance for loan losses of $11.7 million during 1999,
b) the downgrading of a significant amount of the Bank's loans to borrowers in
Ecuador resulted in an approximate $8 million increase to the allowance for
credit losses, c) changes to the Bank's internal watch list or criticized loan
list, as well as the underlying security on these loans, and d) an increase of
$7.5 million to $16.5 million in nonaccrual loans as of December 31, 1999
resulted in specific allowances of $6.2 million at December 31, 1999, compared
to $2.8 million at December 31, 1998. As a result of these factors, the Bank
provided $20.3 million during 1999. Together with the relatively flat loan
growth, the ratio of the allowance for credit losses to total loans increased
from 1.10% to 1.92% for the periods ended December 31, 1998 and 1999,
respectively. The Bank continued to utilize various methodologies in calculating
its allowance for credit losses, as in previous years. These methodologies are
affected by charge-offs, loan growth, changes in loan portfolio composition and
the level of criticized assets. Changes in cross border outstandings affected
the allowance for credit losses to the extent of the amount of loans included in
the cross border outstandings.
18
20
During 1999, the Company provided $32.7 million for ATRR against
certain Ecuadorian exposures which became subject to ATRR requirements in 1999.
There were no requirements for ATRR in 1998. See "Allocated Transfer Risk
Reserves" beginning on page 40 for a more detailed discussion of ATRR.
A more detailed review of the provision for credit losses is presented
in TABLE SEVENTEEN through TABLE NINETEEN.
NON-INTEREST INCOME
Non-interest income increased to $20.7 million for the year ended
December 31, 1999 from $17.6 million for the same period in 1998, an 18 percent
increase. Trade finance fees and commissions decreased by $1.1 million due
largely to lower letter of credit volume which is related to slow economic
conditions in the Region. Structuring and syndication fees increased by $2.9
million as a result of various structuring and syndication transactions
completed during the year; increasing these fees to $6.3 million from $3.4
million for the years ended December 31, 1999 and 1998, respectively. Customer
service fees increased by $379 thousand due largely to Harmoney(R) related fees
charged during the period. Harmoney(R) is the Bank's remote banking system which
allows customers to access trade finance services and cash management through
the internet. The changes in non-interest income from year to year are analyzed
in TABLE SIX.
19
21
TABLE TWO. YIELDS EARNED AND RATES PAID
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED
-------------------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------------- -------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
----------- -------- ------- ----------- -------- -------
Total interest earning assets Loans:
Commercial loans ......................... $ 1,061,056 $ 95,742 9.02% $ 1,010,332 $ 91,465 9.05%
Acceptances discounted ................... 110,505 10,016 9.06% 131,158 12,165 9.27%
Overdraft ................................ 7,372 1,659 22.50% 12,212 2,306 18.89%
Mortgage loans ........................... 2,932 203 6.92% 11,523 949 8.24%
----------- -------- ----- ----------- -------- -----
Total Loans ................................. 1,181,865 107,620 9.11% 1,165,225 106,885 9.17%
Time deposits with banks .................... 175,925 15,940 9.06% 122,278 10,989 8.99%
Investments ................................. 139,383 8,787 6.30% 68,541 4,903 7.15%
Federal funds sold .......................... 31,370 1,647 5.25% 27,307 1,484 5.43%
----------- -------- ----- ----------- -------- -----
Total investments and interest earning
deposits with banks ...................... 346,678 26,374 7.61% 218,126 17,376 7.97%
Total interest earning assets ............... 1,528,543 133,994 8.77% 1,383,351 124,261 8.98%
----------- -------- ----- ----------- -------- -----
Total non interest earning assets ........... 91,493 123,567
----------- -----------
Total assets ................................ $ 1,620,036 $ 1,506,918
=========== ===========
Interest bearing liabilities
Deposits:
NOW and Savings accounts ................. 23,255 566 2.43% 20,218 424 2.10%
Money market ............................. 43,850 2,116 4.83% 46,342 2,177 4.70%
Presidential money market ................ 44,749 2,159 4.82% 3,284 121 3.68%
Certificate of deposits
(including IRA) ........................ 1,154,974 63,090 5.46% 1,033,030 59,730 5.78%
Time deposits from banks (IBF) ........... 85,746 3,858 4.50% 128,853 7,266 5.64%
Other .................................... 5,761 435 7.55% 18 1 2.96%
----------- -------- ----- ----------- -------- -----
Total deposits .............................. 1,358,335 72,224 5.32% 1,231,745 69,719 5.66%
Trust preferred securities .................. 12,650 1,232 9.74%
Federal funds purchased ..................... 1,461 78 5.34% 3,423 197 5.77%
Other borrowings ............................ 1,356 103 7.60% 4,743 364 8.65%
----------- -------- ----- ----------- -------- -----
Total interest bearing liabilities .......... 1,373,802 73,637 5.36% 1,239,911 70,280 5.67%
----------- -------- ----- ----------- -------- -----
Non interest bearing liabilities
Demand deposits .......................... 76,937 69,699
Other liabilities ........................... 59,963 89,393
----------- -----------
Total non interest bearing liabilities ...... 136,900 159,092
Stockholders' equity ........................ 109,334 107,915
----------- -----------
Total liabilities and
stockholder's equity ...................... $ 1,620,036 $ 1,506,918
=========== ===========
Net interest income/net interest
spread ................................... $ 60,357 3.41% $ 53,981 3.31%
======== ===== ======== =====
Margin:
Interest income/interest earning assets ..... 8.77% 8.98%
Interest expense/interest earning assets .... 4.82% 5.08%
----- -----
Net interest margin ...................... 3.95% 3.90%
===== =====
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22
FOR THE YEARS ENDED
DECEMBER 31, 1997
---------------------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
----------- -------- ------
Total interest earning assets Loans:
Commercial loans .............................. $ 612,069 $ 57,288 9.36%
Acceptances discounted ........................ 107,818 10,733 9.95%
Overdraft ..................................... 6,890 1,307 18.96%
Mortgage loans ................................ 11,144 934 8.38%
----------- -------- -----
Total Loans ...................................... 737,921 70,262 9.52%
Time deposits with banks ......................... 102,360 8,909 8.70%
Investments ...................................... 44,978 2,980 6.63%
Federal funds sold ............................... 18,186 1,008 5.54%
----------- -------- -----
Total investments and interest earning
deposits with banks ........................... 165,524 12,897 7.79%
Total interest earning assets .................... 903,445 83,159 9.20%
----------- -------- -----
Total non interest earning assets ................ 104,401
-----------
Total assets ..................................... $ 1,007,846
===========
Interest bearing liabilities
Deposits:
NOW and Savings accounts ...................... 20,101 439 2.18%
Money market .................................. 43,752 2,060 4.71%
Presidential money market ..................... 3,385 97 2.87%
Certificate of deposits (including IRA) ....... 582,933 34,463 5.91%
Time deposits from banks (IBF) ................ 127,964 6,853 5.36%
Other ......................................... 61 2 2.92%
----------- -------- -----
Total deposits ................................... 778,196 43,913 5.64%
Trust preferred securities
Federal funds purchased .......................... 4,975 284 5.70%
Other borrowings ................................. 0 0 0.00%
----------- -------- -----
Total interest bearing liabilities ............... 783,171 44,197 5.64%
----------- -------- -----
Non interest bearing liabilities
Demand deposits ............................... 63,921
Other liabilities ............................. 81,443
-----------
Total non interest bearing liabilities ........... 145,364
Stockholders' equity ............................. 79,311
-----------
Total liabilities and stockholder's equity ....... $ 1,007,846
===========
Net interest income/net interest spread .......... $ 38,962 3.56%
======== =====
Margin:
Interest income/interest earning assets .......... 9.20%
Interest expense/interest earning assets ......... 4.89%
-----
Net interest margin ........................... 4.31%
=====
At December 31, 1999, 1998 and 1997, the average balance of loans that
are currently non-performing and not accruing was $16.6 million, $8.6 million,
and $6.0 million, respectively. The interest column does not include an amount
for these loans since they were in non-accrual status.
21
23
TABLE THREE. YIELDS EARNED - DOMESTIC AND FOREIGN EARNING ASSETS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED
----------------------------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------------------ --------------------------------------------
AVERAGE % OF TOTAL AVERAGE % OF TOTAL
AVERAGE YIELD/ AVERAGE AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE ASSETS BALANCE INTEREST RATE ASSETS
---------- -------- ------ ---------- --------- -------- ------ ----------
Total interest earning assets Loans:
Domestic ............................ $ 350,000 $ 29,918 8.5% 21.5% $ 249,027 $ 25,155 10.1% 16.5%
Foreign ............................. 831,865 77,702 9.3% 50.9% 916,198 81,730 8.9% 60.8%
---------- -------- ----- ----- ---------- ---------- ----- -----
Total Loans ........................... 1,181,865 107,620 9.1% 72.4% 1,165,225 106,885 9.2% 77.3%
Investment and time
deposits with banks
Domestic ............................ 140,890 7,924 5.6% 8.5% 71,751 3,924 5.5% 4.8%
Foreign ............................. 205,788 18,450 9.0% 12.6% 146,375 13,452 9.2% 9.7%
---------- -------- ----- ----- ---------- ---------- ----- -----
Total investments and
interest earning with banks ......... 346,678 26,374 7.6% 21.2% 218,126 17,376 8.0% 14.5%
Total interest earning assets ......... 1,528,543 $133,994 8.8% 93.7% 1,383,351 $ 124,261 9.0% 91.8%
======== ===== ----- ---------- ---------- ===== -----
Total non interest earning assets ..... 103,012 6.3% 123,567 8.2%
---------- ----- ---------- -----
Total Assets .......................... $1,631,555 100.0% $1,506,918 100.0%
========== ===== ========== =====
FOR THE YEARS ENDED
DECEMBER 31, 1997
------------------------------------------------------------------
% OF TOTAL
AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE ASSETS
---------- -------- ----------- -------
Total interest earning assets Loans:
Domestic ................................... $ 175,209 $ 18,240 10.4% 17.4%
Foreign .................................... 562,712 52,022 9.2% 55.8%
---------- -------- ----- -----
Total Loans ................................... 737,921 70,262 9.5% 73.2%
Investment and time deposits with banks
Domestic ...................................... 45,786 2,487 5.4% 4.5%
Foreign ....................................... 119,738 10,410 8.7% 11.9%
---------- -------- ----- -----
Total investments and interest earning with banks 165,524 12,897 7.8% 16.4%
Total interest earning assets .................... 903,445 $ 83,159 9.2% 89.6%
======== =====
Total non interest earning assets ............. 104,401 10.4%
---------- -----
Total Assets .................................. $1,007,846 100.0%
========== =====
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TABLE FOUR. RATE VOLUME ANALYSIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------------- ---------------------------------------
CHANGES DUE TO: CHANGES DUE TO:
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest
income due to:
Loans:
Commercial loans ......................... $ 4,592 $ (315) $ 4,277 $ 37,276 $ (3,099) $ 34,177
Acceptances discounted ................... (1,915) (233) (2,148) 2,323 (891) 1,432
Overdrafts ............................... (914) 267 (647) 1,009 (10) 999
Mortgage loans ........................... (708) (38) (746) 32 (17) 15
Investments:
Time deposits with other banks ........... 4,821 129 4,950 1,734 346 2,080
Investment securities .................... 5,067 (1,182) 3,885 1,561 362 1,923
Federal funds sold ....................... 221 (59) 162 505 (29) 476
--------- --------- --------- --------- --------- ---------
Total earning assets ........................ 11,164 (1,431) 9,733 44,440 (3,338) 41,102
--------- --------- --------- --------- --------- ---------
Deposits:
NOW and savings .......................... 64 78 142 9 (24) (15)
Money market ............................. (117) 56 (61) 122 (5) 117
Presidential money market ................ 1,528 510 2,038 (3) 27 24
Certificates of deposits ................. 7,051 (3,691) 3,360 13,028 12,240 25,268
Time deposits with banks (IBF) ........... (2,431) (977) (3,408) 48 365 413
Other .................................... 319 115 434 (1) -- (1)
Trust preferred securities ............... 1,232 -- 1,232 -- -- --
Federal funds purchased .................. (113) (6) (119) (88) 2 (86)
Other borrowings ......................... (260) (1) (261) 364 -- 364
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities .......... 7,273 (3,916) 3,357 13,479 12,605 26,084
--------- --------- --------- --------- --------- ---------
Change in net interest income ............... $ 3,891 $ 2,485 $ 6,376 $ 30,961 $ (15,943) $ 15,018
========= ========= ========= ========= ========= =========
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TABLE FIVE. RATE VOLUME ANALYSIS - DOMESTIC AND FOREIGN
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
CHANGES DUE TO: CHANGES DUE TO:
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest
income due to:
Loans:
Domestic.......................... $ 10,200 $ (5,437) $ 4,763 $ 7,685 $ (770) $ 6,915
Foreign........................... (7,523) 3,495 (4,028) 32,679 (2,971) 29,708
Investments and time deposits
with banks:
Domestic.......................... 3,781 219 4,000 1,410 27 1,437
Foreign........................... 5,460 (463) 4,997 2,316 726 3,042
-------- -------- -------- -------- -------- --------
Total earning assets................. $ 11,918 $ (2,186) $ 9,732 $ 44,090 $ (2,988) $ 41,102
======== ======== ======== ======== ======== ========
TABLE SIX. NON-INTEREST INCOME
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 % CHANGE 1998 % CHANGE 1997
-------- -------- -------- -------- --------
Trade finance fees and commissions ..... $ 12,035 -8.1% $ 13,101 2.6% $ 12,768
Structuring and syndication fees ....... 6,266 86.9% 3,352 32.2% 2,535
Customer service fees .................. 1,528 33.0% 1,149 23.0% 934
Net gain (loss) on sale of assets ...... 562 -355.5% (220) -303.7% 108
Other .................................. 299 74.9% 171 76.3% 97
-------- -------- -------- -------- --------
Total non-interest income .............. $ 20,690 17.9% $ 17,553 6.8% $ 16,442
-------- -------- -------- -------- --------
OPERATING EXPENSES
Operating expenses decreased to $32.1 million for the year ended
December 31, 1999 from $50.3 million for the same period in 1998, a 36 percent
decrease. A discussion of the significant components of noninterest expense in
1999 compared to 1998 is as follows: A decrease of $22.6 million in loss on
exchange and write down of assets from December 31, 1998 compared to December
31, 1999. Employee compensation and benefits remained at $14.5 million for the
year ended December 31, 1999 and 1998. Occupancy expenses remained stable at
$4.2 million for the years ended December 31, 1999 and 1998. Legal expense
increased from $1.6 million in 1998 to $3.6 million in 1999 as a result of
various litigation actions commenced by or against the Company in 1998, which
continued in 1999. The changes in operating expenses from year to year are
analyzed in TABLE SEVEN.
The Company had an income tax credit of $1,823,000 for 1999. The
Company's income tax expense was $4.1 million for 1998. NOTE SIX of the
consolidated financial statements includes an analysis of the components of the
provision for income taxes.
24
26
TABLE SEVEN. OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 TO 1999 1997 TO 1998
1999 % CHANGE 1998 % CHANGE 1997
-------- -------- -------- -------- --------
Employee Compensation and Benefits .......... $ 14,556 0.2% $ 14,527 10.4% $ 13,162
Occupancy and Equipment ..................... 4,273 1.0% 4,229 30.1% 3,251
Other Operating Expenses .................... 9,416 35.5% 7,119 6.0% 6,902
Loss on Exchange and Write Down of Assets ... 187 -100.0% 22,810 100%
Legal Expense ............................... 3,627 126.5% 1,601 1382.4% 108
-------- -------- -------- -------- --------
Total Operating Expenses .................... $ 32,059 -36.2% $ 50,286 114.7% $ 23,423
======== ======== ======== ======== ========
YEAR 2000
Since June 1997 the Company assessed and prepared its computer systems
and applications to be functional on January 1, 2000. Due to these efforts, the
Company did not experience any material system errors or failures as a result of
Year 2000 issues. Concurrently, the Company upgraded its computer systems during
1999 to accommodate the growth of the past two years. These new systems were
Year 2000 compliant. Consequently, the total costs relating exclusively to Year
2000 compliance were approximately $100,000, which was funded from normal
operations.
1998 COMPARED TO 1997
NET INTEREST INCOME
An analysis of the Company's net interest income and average balance
sheet for the last five years is presented in TABLE ONE and TABLE TWO. Net
interest income increased to $54.0 million for the year ended December 31, 1998
from $39.0 million for the same period in 1997, a 39 percent increase. The
increase was due largely to the growth in average earning assets offset, to some
extent, by a decrease in net interest margin. Average earning assets increased
to $1,383.3 million for the year ended December 31, 1998 from $903.4 million for
the same period in 1997, a 53 percent increase while yields earned on average
assets decreased by 22 basis points compared to the same period. Average loans
and acceptances discounted increased to $1,165.2 million for the year ended
December 31, 1998 from $737.9 million for the same period in 1997, a 58 percent
increase, while average interest-earning deposits due from other banks increased
to $122.3 million for the year ended December 31, 1998 from $102.4 million for
the same period in 1997, a 19 percent increase. Net interest margin decreased to
3.90 percent for the year ended December 31, 1998 from 4.31 percent for the same
period in 1997, a 41 basis point decrease. The primary reasons for this decrease
were (i) loan yields relative to reference rates decreased in certain countries
in the Region and (ii) transactions with larger customers and transactions with
multi-national customers, which command more competitive pricing.
Interest income increased to $124.3 million for the year ended December
31, 1998 from $83.2 million for the same period in 1997, a 49 percent increase,
reflecting an increase in loans in the Region and the United States, partially
offset by a decrease in prevailing interest rates and a tightening of loan
spreads in the Region as discussed above. Interest expense increased to $70.3
million for the year ended December 31, 1998 from $44.2 million for the same
period in 1997, a 59 percent increase, reflecting the increase in deposits to
fund asset growth and a two basis point increase in interest rates paid. Average
interest-bearing deposits increased to $1,231.7 million for the year ended
December 31, 1998 from $778.2 million for the same period in 1997, a 58 percent
increase. The growth in deposits was primarily a result of the Company
increasing its core deposit base from its expanding branch network, as well as
its international customers. The Company's time deposits due from banks also
increased to $128.9 million for the year ended December 31, 1998 from $128.0
million for the same period in 1997.
An analysis of the Company's yields earned and average loan balances
segregating domestic and foreign earning assets is presented in TABLE THREE. The
yields earned on domestic loans have decreased by three basis points to 10.1
percent from 10.4 percent.
25
27
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses increased to $9.6 million for
the year ended December 31, 1998 from $7.0 million for the same period in 1997.
This 37 percent increase was largely a function of the 22 percent growth in
total loans. Net loan charge offs during the year ended December 31, 1998
amounted to $7.1 million compared to $2.4 million for the year ended December
31, 1997. The allowance for credit losses was increased to $12.8 million at
December 31, 1998 from $10.3 million at December 31, 1997, a 24 percent
increase. The ratio of the allowance for credit losses to total loans was 1.10
percent at December 31, 1998 from 1.07 percent for the same period in 1997. A
more detailed review of the provision for credit losses is presented in TABLE
SEVENTEEN through TABLE NINETEEN.
NON-INTEREST INCOME
Non-interest income increased to approximately $17.6 million for the
year ended December 31, 1998 from $16.4 million for the same period in 1997, a 7
percent increase. Trade finance fees and commissions increased by $333 thousand
due largely to lending facility fees which increased by $185 thousand during
1998 compared to 1997 as a result of the growth in loans. Structuring and
syndication fees increased by $817 thousand as a result of various structuring
and syndication transactions completed during the year increasing these fees to
$3.4 million from $2.5 million for the years ended December 31, 1998 and 1997
respectively. Customer service fees increased by $215 thousand. The changes in
non-interest income from year to year are analyzed in TABLE SIX.
OPERATING EXPENSES
Operating expenses increased to $50.3 million for the year ended
December 31, 1998 from $23.4 million for the same period in 1997, a 115 percent
increase. The increase was primarily due to a loss on exchange of assets and
growth in expenditures, primarily to support revenue growth. A discussion of the
significant components of non-interest expense in 1998 compared to 1997 is as
follows: employee compensation and benefits increased to $14.5 million for the
year ended December 31, 1998 from $13.2 million for the same period in 1997, a
10 percent increase. This was primarily due to an increase in the number of
employees to 264 at December 31, 1998 from 250 at the same period in 1997. The
majority of the employees were added to support the Puerto Rico branch and other
areas within the bank. There were also salary increases for existing personnel.
Occupancy expenses increased to $4.2 million for the year ended December 31,
1998 from $3.3 million for the same period in 1997, a 27 percent increase as a
result of the additional branches. Other expenses increased to $8.7 million for
the year ended December 31, 1998 from $7.0 million for the same period in 1997,
primarily due to the increase in legal expense as a result of various litigation
actions commenced by or against the Company in 1998. The Company's efficiency
ratio experienced a favorable decrease to 39 percent in 1998 from 42.3 percent
in 1997. The changes in operating expenses from year to year are analyzed in
TABLE SEVEN.
The Company's income tax expense for 1998 was $4.1 million, for an
effective tax rate of 35.5 percent of pretax income. Income tax expense for 1997
was $9.1 million for an effective rate of 36.4 percent of pretax income. The
decrease in the effective tax rate is the result of a state income tax refund
for prior year filings. The decrease of income tax expense was the result of the
54 percent decrease in pretax income. As the Company increases its foreign loans
and investments in relation to total assets these activities are not taxable in
the State of Florida, thus reducing the overall effective tax rate. NOTE SIX of
the consolidated financial statements includes an analysis of the components of
the provision for income taxes.
BALANCE SHEET REVIEW
1999 COMPARED TO 1998
The Company manages its balance sheet by monitoring interest rate
sensitivity, credit risk, liquidity risk and capital positions to reduce the
potential adverse impact on net interest income that might result from changes
in interest rates. Control of interest rate risk is conducted through systematic
monitoring of maturity mismatches. The Company's investment decision-making
takes into account not only the rates of return and their underlying degree of
risk, but also liquidity requirements, including minimum cash reserves,
withdrawal and maturity of deposits and additional demand for funds.
Total consolidated assets increased $7.5 million for the year ended
December 31, 1999, which included an increase of $81.5 million in gross
interest-earning assets, an increase of $41.1 million in the allowance for
credit losses, ATRR and unearned income, and a decrease of $32.9 million in
non-interest earning assets.
26
28
Securities available for sale increased $204.6 million during the year,
including approximately $122 million of transfers from loans (see "Key
Performance Highlights for 1999" on page 17), and purchases made with proceeds
from deposit growth and repayments of loans and other assets.
CASH, DEMAND DEPOSITS WITH OTHER BANKS AND FEDERAL FUNDS SOLD
Cash, demand deposits with other banks and federal funds sold are
considered cash and cash equivalents. Balances of these items fluctuate daily
depending on many factors, which include or relate to the particular banks that
are clearing funds, loan payoffs, deposit gathering and reserve requirements.
Cash, demand deposits with other banks and federal funds sold were $85.1 million
at December 31, 1999 compared to $111.8 million at December 31, 1998.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND SECURITIES
Interest-earning deposits with other banks decreased to $165.7 million
at December 31, 1999 from $200.2 million at December 31, 1998. As part of its
overall liquidity management process, the Company places funds with foreign
correspondent banks. These placements are primarily short-term, typically 180
days or less. The purpose of these placements is to obtain an enhanced return on
high quality short-term instruments and to solidify existing relationships with
correspondent banks. The banks with which placements are made and the amount
placed are approved by the Bank's Asset Liability Committee. In addition, this
Committee reviews adherence with internal interbank liability policies and
procedures. As indicated in TABLE EIGHT these interest-earning deposits with
other banks are well-diversified throughout the Region and in other countries.
The 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. As of December 31, 1999, approximately $22 million in
interbank placements which became subject to ATRR during 1999 were reclassified
to loans.
Investment securities increased to $274.3 million at December 31, 1999
from $105.6 million at December 31, 1998. The increase has been primarily in
foreign debt securities classified as available for sale. Foreign debt
securities increased from $19.9 million at December 31, 1998 to $171.1 million
at December 31, 1999. This increase of approximately $151.2 million was the
result of the transfer of unrated bearer securities from loans to available for
sale securities. These securities were initially underwritten and classified as
loans due to their unrated nature and common banking practice. The Company
purchased these securities with the intent to hold them to maturity and they
were accounted for as held to maturity securities with the intent to hold them
to maturity and they were accounted for as held to maturity securities as
required by SFAS No. 115. Included in the foreign debt securities transferred to
available for sale securities were amounts previously classified as loans with
an estimated fair market value of $45.5 million and a cost basis of $44.3
million, and amounts previously classified as held to maturity securities with
an estimated fair market value of $8.2 million and a cost basis of $7.3 million
which were acquired in 1998 in connection with the exchange of certain assets.
In late 1999, management considered the disposal of certain bearer securities
acquired in 1998. As a result, management changed its intent with respect to
these securities and reclassified them as available for sale. Due to the change
in intent, all similar bearer securities (not acquired in connection with the
exchange) with a fair market value of $77.0 million and a cost basis of $78.5
million were also reclassified from loans to available for sale securities. The
remainder of the increase in available for sale foreign debt securities,
amounting to approximately $20.5 million, includes purchases made during 1999.
As of December 31, 1999, all these assets were performing assets with 50 percent
maturing within one year, 18 percent maturing within one to five years and 32
percent maturing in over five years.
As part of its examination process, the OCC has directed Hamilton Bank,
among other things, to take substantial transfer risk reserves related to
Hamilton Bank's exposure in Ecuador and write-down certain assets based upon the
OCC's interpretation of regulatory accounting rules. As a result of the OCC's
actions, management changed its intent and transferred all held to maturity
securities to available for sale, thereby recording these assets at market value
under SFAS 115. Under SFAS 115 "unrealized holding gains and losses for
available-for-sale securities shall be excluded from earning and reported as a
net amount in a separate component of shareholders' equity until realized".
However, a write-down is where the cost basis of the individual security is
written down to fair value as a new cost basis and the amount of the write-down
shall be included in earnings (that is, accounted for as a realized loss)."
27
29
At December 31, 1999, the Company had certain foreign debt securities
that exceeded 10% of stockholders' equity. The issuers of these securities as
well as the book value and market value of these securities were as follows:
NAME AMORTIZED COST MARKET VALUE
---- -------------- -------------
Petroleos Mexicanos............................. $ 15,732,000 $ 16,814,025
Republic of Colombia............................ $ 11,874,000 $ 12,968,743
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 (2)
(DOLLARS IN THOUSANDS)
COUNTRY DECEMBER 31, 1999
------- -----------------
Argentina................................... $ 47,000
Brazil...................................... 37,635
Suriname.................................... 25,000
Panama...................................... 10,250
Bahamas(1).................................. 10,000
Jamaica..................................... 8,500
Ecuador..................................... 6,000
British West Indies......................... 5,000
Dominican Republic.......................... 5,000
Bolivia..................................... 3,500
Guyana...................................... 3,000
Nicaragua................................... 2,000
Paraguay.................................... 2,000
United States............................... 800
---------
$ 165,685
=========
(1) Consists of placements in the Bahamas branch of a multinational
financial institution.
(2) All balances reflected on this schedule are denominated in U.S.
dollars.
LOAN PORTFOLIO
The Company's gross loan portfolio decreased by $28.5 million during
the year ended December 31, 1999 in relation to December 31, 1998. This decrease
was due primarily to the transfer of approximately $123 million of bearer debt
securities classified as loans to securities available for sale discussed in
"Key Performance Highlights for 1999" on page 17. At December 31, 1999,
commercial-domestic loans increased by $105.6 million which resulted from
management's ability to increase lending in the U. S. market. Additionally,
approximately $22 million of interbank placements which became subject to ATRR
requirements in 1999 were reclassified to loans from interest-earning deposits
with other banks. At December 31, 1999 approximately 40 percent of the Company's
portfolio consisted of loans to domestic borrowers and 60 percent of the
Company's portfolio consisted of loans to foreign borrowers. This represents an
increase of 27.9 percent in U. S. exposure as the Company concentrated its
efforts on this market due to slow economic conditions in the Region. Details on
the loans by type are shown in TABLE NINE below.
The Company's loan portfolio is largely trade related in nature and is
relatively short-term. Approximately 69 percent of loans had maturities of less
than one year. Additionally, the loan portfolio is an important source of
liquidity since the Company's predominant business, international trade finance,
is self-liquidating in nature and a significant part of the loans and extensions
of credit mature within one year. The term to maturity of the Company's loans at
December 31, 1999 are shown on TABLE TEN.
28
30
TABLE NINE. LOANS BY TYPE
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Domestic:
Commercial and industrial(1) .............. $ 394,841 $ 289,264 $ 179,673 $ 110,750 $ 96,856
Acceptances discounted .................... 59,040 56,706 45,153 23,314 33,059
Residential mortgages ..................... 2,140 10,494 12,008 10,610 11,363
---------- ---------- ---------- ---------- ----------
Subtotal Domestic ......................... 456,021 356,464 236,834 144,674 141,278
Foreign:
Banks and other financial institutions .... 246,155 302,371 349,643 129,376 136,681
Commercial and industrial(1) .............. 338,411 395,987 319,925 179,824 81,433
Acceptances discounted .................... 59,256 72,597 55,301 80,935 62,838
Government and official institutions ...... 38,358 39,309 3,091 750 750
---------- ---------- ---------- ---------- ----------
Subtotal Foreign .......................... 682,180 810,264 727,960 390,885 281,702
---------- ---------- ---------- ---------- ----------
Total loans ............................... $1,138,201 $1,166,728 $ 964,794 $ 535,559 $ 422,980
========== ========== ========== ========== ==========
(1) Includes pre-export financing, warehouse receipts and refinancing of
letters of credits.
TABLE TEN. LOAN MATURITIES
(IN THOUSANDS)
AS OF DECEMBER 31, 1999(1)
-----------------------------------------------------------
MATURE
MATURE AFTER ONE BUT MATURE
WITHIN WITHIN AFTER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
---------- ------------- ---------- -------------
Domestic loans:
Commercial and Industrial................. $ 242,717 $ 132,416 $ 19,492 $ 394,625
Acceptances discounted.................... 59,040 -- -- 59,040
Foreign loans:
Commercial and Industrial................. 434,781 172,830 15,314 622,925
Acceptances discounted.................... 58,161 1,095 -- 59,256
---------- ----------- ---------- -------------
Total........................................ $ 794,699 $ 306,341 $ 34,806 $ 1,135,846
========== =========== ========== =============
Fixed........................................ $ 496,518 $ 207,850 $ 27,518 $ 731,886
Adjustable................................... 298,181 98,491 7,288 403,960
---------- ----------- ---------- -------------
Total fixed and adjustable................... $ 794,699 $ 306,341 $ 34,806 $ 1,135,846
========== =========== ========== =============
29
31
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 $2.3 million in 1999 and $10.7 million in 1998.
TABLES ELEVEN AND TWELVE reflects both the Company's growth and
diversification in financing trade flows between the United States and the
Region in terms of loans by country and cross-border outstanding by country. The
aggregate amount of the Company's cross-border outstandings by primary credit
risk includes cash and demand deposits with other banks, interest earning
deposits with other banks, investment securities, due from customers on bankers
acceptances, due from customers on deferred payment letters of credit and net
loans. Exposure levels in any given country at the end of each period may be
impacted by the flow of trade between the United States (and to a large extent,
Florida) and the given countries, the price of the underlying goods or
commodities being financed and the overall economic conditions in a given
country.
At December 31, 1999 approximately 31.1 percent in principal amount of
the Company's loans were outstanding to borrowers in five countries other than
the United States: Panama (11.2 percent), Guatemala (5.8 percent), Ecuador (5.8
percent), Brazil (4.3 percent) and El Salvador (4.0 percent). The United States
exposure grew $100.0 million representing 40.1 percent of the loan portfolio
compared to 30.6 percent in 1998.
Panamanian loan exposure is over 10 percent of loans and has increased
to 11.2 percent at December 31, 1999. The bulk of the credit relationships in
Panama relate to the financing of short-term trade transactions with companies
operating out of the Colon Free Zone. The latter represents the second largest
free trading zone in the world after Hong Kong. The companies operate largely as
importers and exporters of consumer goods, such as electronic goods and
clothing.
30
32
TABLE ELEVEN. LOANS BY COUNTRY
(DOLLARS IN THOUSANDS)
AT DECEMBER 31,
---------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------- ----------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
COUNTRY AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------- ------------ --------- ------------- -------- ---------- --------
United States.................... $ 456,021 40.1% $ 356,464 30.6% $ 236,834 24.5%
Argentina........................ 35,494 3.1% 36,276 3.1% 58,477 6.0%
Bolivia (2)...................... -.- -.- 20,816 1.8% 38,058 3.9%
Brazil........................... 49,214 4.3% 54,862 4.7% 58,040 6.0%
British West Indies (2).......... 22,082 1.9% -.- -.- -.- -.-
Colombia......................... 28,437 2.5% 41,911 3.6% 23,768 2.5%
Dominican Republic............... 41,604 3.7% 29,563 2.5% 40,161 4.2%
Ecuador.......................... 65,622 5.8% 46,917 4.0% 74,485 7.7%
El Salvador...................... 45,847 4.0% 37,196 3.2% 40,306 4.2%
Guatemala........................ 66,531 5.8% 119,227 10.2% 91,178 9.5%
Honduras......................... 42,352 3.7% 59,564 5.1% 59,439 6.2%
Jamaica (2)...................... 28,628 2.5% 29,066 2.5% -.- -.-
Mexico (2)....................... -.- -.- 22,983 2.0% -.- -.-
Panama........................... 127,419 11.2% 118,680 10.2% 77,295 8.0%
Peru............................. 29,648 2.6% 49,382 4.2% 68,094 7.1%
Russia (2)....................... -.- -.- -.- -.- 17,500 1.8%
Suriname (2)..................... -.- -.- 21,868 1.9% -.- -.-
Venezuela........................ 17,842 1.6% 19,756 1.7% 16,299 1.7%
Other (1)........................ 81,460 7.2% 102,197 8.8% 64,860 6.7%
------------ --------- ------------- -------- ---------- --------
Total............................ $ 1,138,201 100.0% $ 1,166,728 100.0% $ 964,794 100.0%
============ ========= ============= ======== ========== ========
(1) Other consists of loans to borrowers in countries in which loans did
not exceed 1 percent of total loans.
(2) These countries had loans, which did not exceed 1 percent of total
loans in the periods indicated.
At December 31, 1999 approximately 31.9 percent in cross-border
outstanding were due from borrowers in five countries other than the United
States: Brazil (10.1 percent), Panama (6.7 percent), Argentina (6.6 percent),
Ecuador (4.5 percent) and Guatemala (4.0 percent).
Brazil cross-border exposure outstandings increased to 10 percent of
total cross border outstandings as of December 31, 1999. This increase was due
largely to inter-bank placements or deposits with foreign-owned multinational
banks doing business in this country. These deposits were generally of a
short-term nature (one year or less).
31
33
TABLE TWELVE. TOTAL CROSS-BORDER OUTSTANDING BY COUNTRY AND TYPE (3)
(DOLLARS IN MILLIONS)
AT DECEMBER 31,
---------------------------------------------------------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
1999 ASSETS 1998 ASSETS 1997 ASSETS
------- ------ ------- ------ ------ ------
Argentina.............................. $ 113 6.6% $ 57 3.4% $ 69 5.2%
Bahamas (2)............................ 21 1.2% -.- -.- -.- -.-
Bolivia................................ 18 1.0% 26 1.5% 44 3.3%
Brazil................................. 173 10.1% 94 5.6% 85 6.3%
British West Indies (2)................ -.- -.- 36 2.1% 11 0.8%
Colombia............................... 48 2.8% 49 2.9% 24 1.8%
Costa Rica (2)......................... -.- -.- 16 0.9% -.- -.-
Dominican Republic..................... 55 3.2% 48 2.8% 39 2.9%
Ecuador................................ 78 4.5% 100 5.9% 90 6.7%
El Salvador............................ 44 2.6% 52 3.1% 46 3.4%
Guatemala.............................. 68 4.0% 131 7.7% 92 6.9%
Honduras............................... 43 2.5% 69 4.1% 52 3.9%
Jamaica................................ 35 2.0% 40 2.4% 32 2.4%
Mexico (2)............................. 20 1.2% 23 1.4% -.- -.-
Nicaragua (2).......................... -.- -.- 15 0.9% 12 0.9%
Panama................................. 116 6.7% 118 7.0% 72 5.4%
Peru................................... 42 2.4% 56 3.3% 74 5.5%
Russia (2)............................. -.- -.- -.- -.- 17 1.3%
Suriname (2)........................... 32 1.9% 27 1.6% -.- -.-
United Kingdom (2)..................... 15 0.9% -.- -.- -.- -.-
Venezuela (2).......................... 17 1.0% 19 1.1% -.- -.-
Other (1).............................. 75 4.4% 76 4.4% 39 2.9%
------- ------ ------- ------ ------ ------
Total.................................. $ 1,013 59.0% $ 1,052 62.1% $ 798 59.6%
======= ====== ======= ====== ====== ======
(1) Other consists of cross-border outstanding to countries in which such
cross-border outstanding did not exceed 0.75 percent of the Company's
total assets at any of the periods indicated.
(2) These countries had cross-border outstanding, which did not exceed 0.75
percent of total assets in the periods indicated.
(3) Cross-border outstandings could be less than loans by country since
cross-border outstandings may be netted against legally enforceable,
written guarantees of principal or interest by domestic or other
non-local third parties. In addition, balances of any tangible, liquid
collateral may also be netted against cross-border outstandings of a
country if they are held and realizable by the lender outside of the
borrower's country.
As a result of the economic problems in Ecuador that resulted in the
closure of several banks and culminated with the country defaulting on its
external debt, the following selective disclosure is provided on Ecuador:
32
34
Amounts in millions:
Aggregate Outstandings at December 31, 1998.................. $ 101.6(1)
Net Change in Short-term Outstandings:....................... (34.5)
Changes in Other Outstandings:
Additional Outstandings.................................. 19.8
Interest Income Accrued.................................. 6.8
Collections of: Principal................................ (7.6)
Collections of: Interest................................. (6.7)
---------
Aggregate Outstandings at December 31, 1999.................. $ 79.3(2)
=========
(1) Includes interest accrued and not paid of $1.6 million.
(2) Includes interest accrued and not paid of $1.7 million.
TOTAL CROSS-BORDER OUTSTANDINGS BY TYPE
AT DECEMBER 31,
----------------------------------------
1999 1998 1997
--------- --------- ---------
Government and official institutions................. $ 114 $ 69 $ 25
Banks and other financial institutions............... 451 489 442
Commercial and industrial............................ 384 408 275
Acceptances discounted............................... 64 86 56
--------- --------- ---------
Total................................................ $ 1,013 $ 1,052 $ 798
========= ========= =========
DUE FROM CUSTOMERS ON BANKERS' ACCEPTANCES AND DEFERRED PAYMENT LETTERS OF
CREDIT.
Due from customers on bankers' acceptances and deferred payment letters
of credit were $27.8 million and $5.8 million, respectively, at December 31,
1999 compared to $75.6 million and $6.5 million, respectively, at December 31,
1998. This decrease reflects the reduction in letter of credit activity in the
Region largely as a result of slow economic conditions. These assets represent a
customer's liability to the Company while the Company's corresponding liability
to third parties is reflected on the balance sheet as "Bankers Acceptances
Outstanding" and "Deferred Payment Letters of Credit Outstanding."
DEPOSITS
The primary sources of the Company's domestic time deposits are its
eight Bank branches located in Florida and one in Puerto Rico. The Company has
three Bank branches in Miami, one each in Tampa, Winter Haven, Sarasota, West
Palm Beach and Weston. In pricing its deposits, the Company analyzes the market
carefully, attempting to price its deposits competitively with the larger
financial institutions in the area. TABLE TWO provides information on average
deposit amounts and rates paid to each deposit category. Total deposits were
$1,535.6 million at December 31, 1999 compared to $1,477.1 million at December
31, 1998.
Average interest-bearing deposits increased by 10.2 percent to $1,358.3
million at December 31, 1999 from $1,231.7 million at December 31, 1998. The
Company was successful in expanding its deposit base in time deposits and
certificates of deposit in denominations of less than $100,000, which increased
23.3 percent to $630 million at December 31, 1999 from $511.4 million at
December 31, 1998. In the summer of 1999, the Company opened its newest branch
in Weston, which positively contributed to the deposit growth achieved in all
markets. Additionally, the Company expanded Presidential Money Market deposits
over the year, which grew to $44.7 million at December 31, 1999 from $3.3
million at December 31, 1998. The Presidential Money Market account has the same
characteristics as a money market account, except that the Presidential account
has a higher minimum balance requirement and offers a higher yield.
33
35
TRUST PREFERRED SECURITIES
In December 1998, the Company issued $11 million in Beneficial
Unsecured Securities, of Series A ("Trust Preferred Securities") out of a
guarantor trust at a rate of 9.75 percent. The Trust Preferred Securities are
considered Tier I capital for regulatory purposes. Trust Preferred Securities
increased by $1.7 million upon the exercise of an over-allotment option by the
underwriter in January 1999. See NOTE SEVEN of the Consolidated Financial
Statements for further details.
TABLE THIRTEEN reports maturity periods of certificate of deposits of
$100,000 and greater.
TABLE THIRTEEN. MATURITIES OF AND AMOUNTS OF CERTIFICATES OF DEPOSITS AND OTHER
TIME DEPOSITS $100,000 OR MORE
(IN THOUSANDS)
CERTIFICATES OTHER TIME
OF DEPOSIT DEPOSITS-IBF
$100,000 $100,000
OR MORE OR MORE TOTAL
----------- ------------ ---------
Three months or less................ $ 87,410 $ 24,025 $ 111,435
Over 3 through 6 months............. 109,583 7,531 117,114
Over 6 through 12 months............ 136,999 2,750 139,749
Over 12 months...................... 75,433 -- 75,433
--------- --------- ---------
Total............................... $ 409,425 $ 34,306 $ 443,731
========= ========= =========
OFF-BALANCE SHEET
CONTINGENCIES
In the normal course of business, the Company utilizes various
financial instruments with off-balance sheet risk to meet the financing needs of
its customers, including commitments to extend credit, commercial letters of
credit, shipping guarantees, standby letters of credit and forward foreign
exchange contracts.
TABLE FOURTEEN reports the total volume and average monthly volume of
the Company's export and import letters of credit for the periods indicated. The
letter of credit volume decreased by 30 percent to $524.8 million from $746.8
million as a result of shifts toward more on-balance sheet financing and slower
economic conditions throughout the Region.
TABLE FOURTEEN. CONTINGENCIES - COMMERCIAL LETTERS OF CREDIT
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- ------------------------
AVERAGE AVERAGE AVERAGE
TOTAL MONTHLY TOTAL MONTHLY TOTAL MONTHLY
VOLUME VOLUME VOLUME VOLUME VOLUME VOLUME
---------- ---------- ---------- ----------- ----------- -----------
Export Letters of Credit (1)................ $ 227,904 $ 18,992 $ 397,683 $ 33,140 $ 424,748 $ 35,396
Import Letters of Credit (1)................ 296,943 24,745 349,099 29,092 394,758 32,897
---------- ---------- ---------- ----------- ----------- -----------
Total....................................... $ 524,847 $ 43,737 $ 746,782 $ 62,232 $ 819,506 $ 68,293
========== ========== ========== =========== =========== ===========
(1) Represents certain contingent liabilities not reflected on the
Company's balance sheet.
The Company provides letter of credit services globally. TABLE FIFTEEN
sets forth the distribution of the Company's contingent liabilities by country
of the applicant and issuing bank for import and export letters of credit,
respectively. As shown by the table, contingent liabilities increased by 17
percent to $151.4 million at December 31, 1999 from December 31, 1998 as a
result of increased letters of credit related to domestic corporate names.
34
36
TABLE FIFTEEN. CONTINGENT LIABILITIES (1)
(IN THOUSANDS)
AT DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Argentina (3) .......... $ -- $ 1,680 $ --
Aruba (3) .............. 3,720 -- --
Bolivia (3) ............ -- 3,890 3,883
Brazil (3) ............. -- -- 4,123
Colombia (3) ........... -- -- 3,936
Costa Rica ............. 9,893 2,846 3,168
Dominican Republic ..... 4,707 7,015 4,759
Ecuador (3) ............ -- 3,703 17,839
El Salvador ............ 2,734 1,995 3,837
Guatemala .............. 9,475 26,132 11,577
Guyana (3) ............. 4,165 2,374 --
Haiti .................. 5,705 2,088 7,857
Honduras ............... 4,174 2,427 5,550
Nicaragua (3) .......... -- -- 3,386
Panama ................. 14,242 14,538 12,439
Paraguay (3) ........... -- 1,961 2,395
Peru (3) ............... 3,573 -- 5,566
Suriname (3) ........... 5,677 11,690 --
Switzerland (3) ........ -- 1,588 --
United States .......... 74,643 39,415 94,629
Venezuela (3) .......... 2,593 -- --
Other (2) .............. 6,143 5,374 13,139
-------- -------- --------
Total .................. $151,444 $128,716 $198,083
======== ======== ========
(1) Includes export and import letters of credit, standby letters of credit
and letters of indemnity.
(2) Other includes those countries in which contingencies represent less
than 1 percent of the Company's total contingencies at each of the
above dates.
(3) These countries had contingencies, which did not exceed 1 percent of
the Company's total contingencies as of the period indicated.
LIQUIDITY
The Company seeks to manage its assets and liabilities to reduce the
potential adverse impact on net interest income that might result from changes
in interest rates through systematic monitoring of maturity mismatches. The
Company's investment decision-making takes into account not only the rates of
return and their underlying degree of risk, but also liquidity requirements,
including minimum cash reserves, withdrawal and maturity of deposits and
additional demand for funds. For any given period, the pricing structure is
matched when an equal amount of assets and liabilities reprice. An excess of
assets or liabilities over these matched items results in a gap or mismatch, as
shown on TABLE SIXTEEN. A positive gap denotes asset sensitivity and normally
means that an increase in interest rates would have a positive effect on net
interest income while a decrease in interest rates would have a negative effect
on net interest income. However, because different types of assets and
liabilities with similar maturities may reprice at different rates or may
otherwise react differently to changes in overall market rates or conditions,
changes in prevailing interest rates may not necessarily have such effects on
net interest income. All of the Company's assets and liabilities are denominated
in dollars and therefore the Company has no material foreign exchange risk.
Cash and cash equivalents were $85.1 million on December 31, 1999, a
decrease from $111.8 million from December 31, 1998. During 1999, net cash
provided by operating activities was $54.3 million, net cash used in investing
activities was $135.3 million and net cash provided by financing activities was
$54.4 million. For further information on cash flows, see the Consolidated
Statement of Cash Flows in the Consolidated Financial Statements.
35
37
The Company's principal sources of liquidity and funding are its
deposit base and the sales of bankers' acceptances as well as loan
participations. The level and maturity of deposits necessary to support the
Company's lending and investment activities is determined through monitoring
loan demand and through its asset/liability management process. Considerations
in managing the Company's liquidity position include, but are not limited to,
scheduled cash flows from existing assets, contingencies and liabilities, as
well as projected liquidity needs arising from anticipated extensions of credit.
Furthermore, the liquidity position is monitored daily by management to maintain
a level of liquidity conducive to efficient operations and is continuously
evaluated as part of the asset/liability management process.
Historically, the Company has increased its level of deposits to allow
for its planned asset growth. Customer deposits have increased through the
branch network, and private banking customers, as well as deposits related to
the trade activity. The majority of the Company's deposits are short-term and
closely match the short-term nature of the Company's assets. At December 31,
1999 interest-earning assets maturing within 180 days were $909 million,
representing 55 percent of total earning assets. The short-term nature of the
loan portfolio and the fact that a portion of the loan portfolio consists of
bankers' acceptances provides additional liquidity to the Company. Liquid assets
at December 31, 1999 were $375 million, 22 percent of total assets, and
consisted primarily of cash and cash equivalents, due from banks-time and
foreign debt securities. At December 31, 1999 the Company had been advised of
$52 million in available interbank funding.
TABLE SIXTEEN presents the projected maturities or interest rate
adjustments of the Company's earning assets and interest-bearing funding sources
based upon the contractual maturities or adjustment dates at December 31, 1999.
The interest-earning assets and interest-bearing liabilities of the Company and
the related interest rate sensitivity gap given in the following table may not
be reflective of positions in subsequent periods.
36
38
TABLE SIXTEEN. INTEREST RATE SENSITIVITY
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1999
-------------------------------------------------------------------------------
0 TO 30 31 TO 90 91 TO 180 181 TO 365 1 TO 5 OVER 5
DAYS DAYS DAYS DAYS YEARS YEARS TOTAL
-------- -------- --------- --------- -------- -------- ----------
Earning Assets:
Loans ................... $215,001 $223,045 $ 220,886 $ 135,581 $307,825 $ 35,863 $1,138,201
Federal funds sold ...... 63,400 -- -- -- -- -- 63,400
Investment securities ... 20,942 26,461 43,343 49,310 24,726 106,040 270,822
Interest earning deposits
with other banks ...... 27,800 23,250 44,477 45,158 25,000 -- 165,685
-------- -------- --------- --------- -------- -------- ----------
Total ...................... 327,143 272,756 308,706 230,049 357,551 141,903 1,638,108
-------- -------- --------- --------- -------- -------- ----------
Funding Sources:
Savings and transaction
deposits ................. 37,699 28,663 67,828 -- -- -- 134,190
Certificates of deposits of
$100k or more ........... 46,687 40,723 109,583 136,999 75,433 -- 409,425
Certificates of deposits
under $100k ............. 62,476 130,588 203,792 329,633 90,356 -- 816,845
Other time deposits ........ 21,695 2,330 7,531 2,750 -- -- 34,306
Funds overnight ............ 63,450 -- -- -- -- -- 63,450
Trust preferred securities . -- -- -- -- -- 12,650 12,650
-------- -------- --------- --------- -------- -------- ----------
Total ...................... $232,007 $202,304 $ 388,734 $ 469,382 $165,789 $ 12,650 $1,470,866
======== ======== ========= ========= ======== ======== ==========
Interest sensitivity gap ... $ 95,136 $ 70,452 $ (80,028) $(239,333) $191,762 $129,253 $ 167,242
======== ======== ========= ========= ======== ======== ==========
Cumulative gap ............. $ 95,136 $165,588 $ 85,560 $(153,773) $ 37,989 $167,242
======== ======== ========= ========= ======== ========
Cumulative gap as a
percentage of total
earning assets .......... 5.81% 10.11% 5.22% -9.39% 2.32% 10.21%
======== ======== ========= ========= ======== ========
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39
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%
======== ======== ========= ========= ======== ========
38
40
CREDIT QUALITY REVIEW
ALLOWANCE FOR CREDIT LOSSES AND ALLOCATED TRANSFER RISK RESERVES
Allowances are established against the loan portfolio to provide for
credit and transfer risk. Transfer risk, defined by Federal banking regulators
as allocated transfer risk reserves ("ATRR") is associated with certain portions
of the Company's foreign exposure. The level of ATRR is determined by Federal
banking regulators and represents a minimum allowance required for the related
foreign exposure. The Company assesses the probable losses associated with that
portion of the loan portfolio that is subject to the ATRR, and if an additional
allowance is needed it is included in the allowance for credit losses.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses reflects management's judgment of the
level of allowance adequate to provide for probable losses inherent in the loan
portfolio as of the balance sheet date. The allowance takes into consideration
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 loss experience; (iv) the average maturity
of its loan portfolio and (v) political and economic conditions in certain
countries of the Region.
On a quarterly basis, the Bank assesses the overall adequacy of the
allowance for credit losses, utilizing a disciplined and systematic approach
which includes the application of a specific allowance for identified impaired
loans, an allocated formula allowance for identified graded loans and all other
portfolio segments, and an unallocated allowance.
Specific allowances are established for impaired loans in accordance
with Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan." A loan is considered impaired when, based
on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due
according to the original contractual terms of the loan agreement. Factors
considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired. Impairment is
measured on a loan by loan basis for non-homogenous loans by either the present
value of expected future cash flows discounted at the loans effective interest
rate, the loans obtainable market price, or the fair value of the collateral if
the loan is collateral dependent.
The allocated formula allowance is calculated by applying loss factors
to outstanding loans based on the internal risk grade of such loans. Changes in
risk grades of both performing and nonperforming loans affect the amount of the
allocated formula allowance. Loss factors are based on our historical loss
experience or on loss percentages used by our regulators for similarly graded
loans and may be adjusted upward for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Loss factors are described as follows:
- - Problem-graded loan loss factors are derived from loss percentages required
by our banking regulators for similarly graded loans. Loss factors of 2 to
5%, 15% and 50% are applied to the outstanding balance of loans internally
classified as special mention, substandard and doubtful, respectively.
- - Pass-graded loan loss factors are based on net charge-offs (i.e.,
charge-off less recoveries) to average loans. The Company's current
methodologies incorporate prior year net charge-offs, three year average
net charge-offs and five year average net charge-offs and are used to
compute a range of probable losses.
The unallocated allowance is established based upon management's
evaluation of various conditions, the effects of which are not directly measured
in the determination of the allocated allowances. The evaluation of the inherent
loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with the unallocated
allowance include, but are not limited to, the following factors which existed
at the balance sheet date:
- - General economic and business conditions affecting the Region;
- - Loan volumes and concentrations;
- - Credit quality trends;
- - Collateral values;
39
41
- - Bank regulatory examination results; and
- - Findings of our internal credit examiners
Management reviews these conditions quarterly with our senior credit
officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit as of the evaluation date, management's
estimate of the effect of such condition may be reflected as a specific
allowance applicable to such credit. Where any of these conditions is not
evidenced by a specifically identifiable problem credit or reflected in the
formula allowance as of the evaluation date, management's evaluation of the
probable loss related to such condition is reflected in the unallocated
allowance.
Our methodologies include several features that are intended to reduce
the difference between estimated and actual losses. The loss factors that are
used to establish the allowance for pass-graded loans is designed to be
self-correcting by taking into account changes in loan classification and
permitting adjustments based on management's judgment of significant qualitative
factors as of the evaluation date. Similarly, by basing the pass-graded loan
loss factors on loss experience over the prior year and the last three or five
years, the methodology is designed to take our recent loss experience into
account. The Bank generally operates a commercial banking business, which does
not include significant amounts of pooled loans or loans that are homogeneous in
nature such as residential mortgages or consumer installment loans (these
represent 0.2% and 0.9% of gross loans at December 31, 1999 and 1998,
respectively).
ALLOCATED TRANSFER RISK RESERVES
Management determines the level of ATRR utilizing the guidelines of the
Interagency Country Exposure Review Committee ("ICERC"). The ICERC was formed by
the OCC, FDIC and FRB to ensure consistent treatment of the transfer risk
associated with banks' foreign exposures. Transfer risk is defined as the
possibility that an asset cannot be serviced in the currency of payment because
of a lack of, or restraints on the availability of, needed foreign exchange in
the country of the obligor. The ICERC guidelines state that transfer risk is one
facet of the more broadly defined concept of country risk. Country risk, which
has an overarching effect on the realization of an institution's foreign assets,
encompasses all of the uncertainties arising from the economic, social, and
political conditions in a country. The ATRR ratings assigned by ICERC focus
narrowly on the availability of foreign exchange to service a country's foreign
debt, and represent the minimum required reserves for exposures that are subject
to the ATRR provisions. ICERC meets several times a year to assess transfer risk
in various countries, based largely on the level of aggregate exposure held by
U.S. banks. Based on these assessments, ratings are established for individual
countries. In establishing the ratings, ICERC does not consider the credit risk
associated with individual counter parties in a country.
A country may be rated "value impaired" based on ICERC's assessment of
transfer risk. A value impaired country is one which has protracted arrearages
in debt service, as indicated by one or more of the following: i) the country
has not fully paid its interest in six months, ii) the country has not complied
with International Monetary Fund programs and there is no immediate prospect for
compliance, iii) the country has not met rescheduling terms for more than one
year, iv) the country shows no definite prospects for an orderly restoration of
debt service in the near future. Once a country has been rated value impaired,
the requirements for ATRR are applicable for exposures to borrowers in that
country. Generally, any obligation of a borrower in such a country will be
subject to ATRR if the obligation becomes more than 30 days past due, or if it
is restructured at any time to avoid delinquency. Once the ATRR is applicable,
it can only be eliminated by charge-off of the asset, collection of the asset,
or removal of the ATRR requirement by ICERC. Changes in the level of ATRR
recorded by the Company, including increases resulting from higher requirements
or applicable loans, and decreases resulting from lower requirements or
collections of loans, are charged or credited to current income. Charge-offs of
loans subject to ATRR requirements are charged against the ATRR to the extent of
the ATRR applicable to that loan, and any excess is charged to the general
allowance for credit losses.
Currently, Ecuador is rated value impaired by ICERC, with a 90% ATTR
requirement for applicable exposures. At December 31, 1999 and 1998, the Company
had aggregate exposure to borrowers located in Ecuador of approximately $78
million and $100 million, respectively. During 1999, as a result of economic
deterioration in Ecuador, the Company restructured exposures with certain
borrowers to improve collectibility prospects. Primarily as a result of these
restructurings, approximately $36.4 million of the Company's Ecuadorian exposure
at December 31, 1999 was subject to the 90% ATRR requirement. Accordingly, ATRR
reserves of $32.7 million have been provided at December 31, 1999. No ATRR
reserves were required at December 31, 1998. At December 31, 1999, approximately
96% of these loans were in compliance with their contractual terms.
40
42
The following table sets forth the composition of the allowance for
credit losses and ATRR as of December 31, 1999 and 1998 (in thousands):
1999 1998
--------- --------
Allocated:
Specific (Impaired loans) $ 6,173 $ 2,786
Formula 12,033 7,108
Unallocated 3,205 2,900
--------- --------
Total allowance for credit losses 21,411 12,794
Allocated transfer risk reserve 32,720 --
--------- --------
Total allowance and reserves $ 54,131 $ 12,794
========= ========
The specific allowances increased from $2.8 million at December 31,
1998 to $6.2 million at December 31, 1999 due to the specific allowances
associated with the increased amount of impaired loans. The amount of impaired
loans increased from $8.6 million at December 31, 1998 to $16.6 million at
December 31, 1999. The increase in the allocated formula allowance is due to an
increase in classified loans from borrowers in Ecuador, which required
approximately $5.4 million in provisioning for the year. These Ecuadorian
exposures were not subject to ATRR.
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.
TABLE SEVENTEEN provides certain information with respect to activity in the
Company's allowance for credit losses and allocated transfer risk reserve:
41
43
TABLE SEVENTEEN. CREDIT LOSS AND TRANSFER RISK EXPERIENCE
(IN THOUSANDS)
For the Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- --------- --------- ---------
Balance of allowance for credit losses at
beginning of period .................. $ 12,794 $ 10,317 $ 5,725 $ 4,450 $ 4,133
Charge-offs:
Domestic:
Commercial ........................... (3,299) (3,357) (1,693) (951) (1,097)
Acceptances .......................... -- (100) -- -- --
Residential .......................... -- -- -- -- --
Installment .......................... (5) -- (3) (8) (3)
----------- ----------- --------- --------- ---------
Total domestic ....................... (3,304) (3,457) (1,696) (959) (1,100)
Foreign:
Government and official institutions . -- -- -- -- --
Banks and other financial institutions (2,330) (3,901) (896) (678) --
Commercial and industrial ............ (6,216) -- -- (146) (1,044)(1)
Acceptances discounted ............... -- -- -- -- --
----------- ----------- --------- --------- ---------
Total foreign ........................ (8,546) (3,901) (896) (824) (1,044)
----------- ----------- --------- --------- ---------
Total charge-offs ...................... (11,850) (7,358) (2,592) (1,783) (2,144)
Recoveries:
Domestic:
Commercial ........................... 1 12 203 16 10
Acceptances .......................... -- -- -- -- --
Residential .......................... -- -- -- -- --
Installment .......................... 3 -- 1 2 1
Foreign:
Commercial
Banks and other financial institutions 163 202 -- -- --
----------- ----------- --------- --------- ---------
Total recoveries ..................... 167 214 204 18 11
----------- ----------- --------- --------- ---------
Net (charge-offs) recoveries ........... (11,683) (7,144) (2,388) (1,765) (2,133)
Provision for credit losses ............ 20,300 9,621 6,980 3,040 2,450
----------- ----------- --------- --------- ---------
Balance at end of period ................ $ 21,411 $ 12,794 $ 10,317 $ 5,725 $ 4,450
=========== =========== ========= ========= =========
ATRR at beginning of period ............. $ -- $ -- $ -- $ -- $ --
Charge-offs to ATRR ..................... -- -- -- -- --
Recoveries to ATRR ...................... -- -- -- -- --
Provision for transfer risk.............. 32,720 -- -- -- --
----------- ----------- --------- --------- ---------
ATRR at end of period ................... $ 32,720 $ -- $ -- $ -- $ --
=========== =========== ========= ========= =========
Total allowances at end of period ....... $ 54,131 $ 12,794 $ 10,317 $ 5,725 $ 4,450
=========== =========== ========= ========= =========
Average loans ........................... $ 1,181,865 $ 1,165,224 $ 737,921 $ 485,758 $ 370,568
Total loans ............................. $ 1,138,201 $ 1,166,728 $ 964,794 $ 535,559 $ 422,980
Net charge-offs to average loans ........ 1.00% 0.61% 0.32% 0.36% 0.58%
Allowance for credit losses to total
loans ................................. 1.88% 1.10% 1.07% 1.07% 1.05%
Allowance for credit losses and ATRR
to total loans ........................ 4.76% 1.10% 1.07% 1.07% 1.05%
(1) Related to extension of credit to a domestic-based business operated by
a company organized under the laws of a foreign country.
42
44
The Company does not have a rigid charge-off policy but instead charges
off loans on a case-by-case basis as determined by management and approved by
the Board of Directors. In some instances, loans may remain in the nonaccrual
category for a period of time during which the borrower and the Company
negotiate restructured repayment terms.
TABLE EIGHTEEN sets forth an analysis of the allocation of the
allowance for credit losses and ATRR by category of loans and the allowance for
credit losses and ATRR allocated to foreign loans. The allowance is established
to cover probable losses inherent in the portfolio as of the latest balance
sheet date.
TABLE EIGHTEEN. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES AND ALLOCATED TRANSFER
RISK RESERVES
(In thousands)
Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Allocation of the allowance by category of
loans:
Domestic:
Commercial $ 3,199 $ 1,138 $ 2,053 $ 1,964 $ 680
Acceptances 269 211 315 226 333
Residential mortgages 10 66 59 54 57
--------- --------- --------- --------- ---------
Total domestic 3,478 1,415 2,427 2,244 1,070
--------- --------- --------- --------- ---------
Foreign:
Non-ATRR
Government and official institutions 1,496 -- -- -- --
Banks and other financial institutions 5,152 3,033 3,854 2,112 1,900
Commercial and industrial 11,015 8,010 3,442 920 1,101
Acceptances discounted 270 336 594 449 379
--------- --------- --------- --------- ---------
Total foreign non-ATRR 17,933 11,379 7,890 3,481 3,380
--------- --------- --------- --------- ---------
Foreign ATRR
Government and official institutions 6,035 -- -- -- --
Banks and other financial institutions 19,800 -- -- -- --
Commercial and industrial 6,885 -- -- -- --
--------- --------- --------- --------- ---------
Total foreign ATRR 32,720 -- -- -- --
--------- --------- --------- --------- ---------
Total Foreign 50,653 11,379 7,890 3,481 3,380
--------- --------- --------- --------- ---------
Total $ 54,131 $ 12,794 $ 10,317 $ 5,725 $ 4,450
========= ========= ========= ========= =========
Percent of loans in each category to total
loans:
Domestic:
Commercial 35.4% 24.8% 18.6% 20.6% 22.8%
Acceptances 5.3% 4.9% 4.7% 4.4% 7.8%
Residential 0.2% 0.9% 1.2% 2.0% 2.7%
--------- --------- --------- --------- ---------
Total domestic 40.9% 30.6% 24.5% 27.0% 33.3%
--------- --------- --------- --------- ---------
Foreign:
Government and official institutions 2.8% 3.4% 0.1% 0.1% 0.2%
Banks and other financial institutions 18.1% 25.9% 36.5% 24.2% 32.3%
Commercial and industrial 29.6% 33.9% 33.2% 33.6% 19.3%
Acceptances discounted 5.3% 6.2% 5.7% 15.1% 14.9%
--------- --------- --------- --------- ---------
Total foreign non-ATRR 55.8% 69.4% 75.5% 73.0% 66.7%
--------- --------- --------- --------- ---------
Foreign ATRR
Government and official institutions 0.6% -- -- -- --
Banks and other financial institutions 2.0% -- -- -- --
Commercial and industrial 0.7% -- -- -- --
--------- --------- --------- --------- ---------
Total foreign ATRR 3.3% -- -- -- --
--------- --------- --------- --------- ---------
Total Foreign 59.1% 69.4% 75.5% 73.0% 66.7%
--------- --------- --------- --------- ---------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= =========
43
45
TABLE NINETEEN. ANALYSIS OF ALLOWANCES FOR CREDIT LOSSES AND ALLOCATED TRANSFER
RISK RESERVES ALLOCATED TO FOREIGN LOANS
(In thousands)
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
Balance, beginning of year $ 11,379 $ 7,890 $ 3,481 $ 3,380 $ 2,062
Provision for credit losses 14,937 7,188 5,305 925 2,362
Provision for transfer risk 32,720
Net charge-offs (8,383) (3,699) (896) (824) (1,044)(1)
-------- -------- ------- ------- -------
Balance, end of period $ 50,653 $ 11,379 $ 7,890 $ 3,481 $ 3,380
======== ======== ======= ======= =======
Composition at end of period:
Allowance for credit losses $ 17,933 $ 11,379 $ 7,890 $ 3,481 $ 3,380
Allowance for transfer risk (ATRR) 32,720 -- --
-------- -------- ------- ------- -------
Total foreign allowances $ 50,653 $ 11,379 $ 7,890 $ 3,481 $ 3,380
======== ======== ======= ======= =======
(1) Related to extensions of credit to a domestic-based business operated
by a company organized under the laws of a foreign country.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans and foreclosed assets.
The Company usually places an asset on nonaccrual status when any payment of
principal or interest is over 90 days past due or earlier if management
determines the collection of principal or interest to be unlikely. Loans over 90
days past due may not be placed on nonaccrual if they are in the process of
collection and are either secured by property having a realizable value at least
equal to the outstanding debt and accrued interest or are fully guaranteed by a
financially responsible party whom the Company believes is willing and able to
discharge the debt, including accrued interest. In most cases, if a borrower has
more than one loan outstanding with the Company and any of its individual loans
becomes over 90 days past due, the Company places all outstanding loans to that
borrower on nonaccrual status.
Table Twenty sets forth information regarding the Company's
nonperforming loans at the dates indicated. Non-performing loans increased from
$9.1 million at December 31, 1998 to $18.6 million at December 31, 1999. This
increase was due to an increase of $4.7 million in domestic nonperforming loans
and $4.8 million in foreign nonperforming loans. The increase in domestic
nonperforming loans was due largely to one credit relationship in the amount of
$6.4 million that was offset by charge-offs during the year. The increase of
$4.8 million in foreign nonperforming loans was due to several nonperforming
loans, one of which accounted for approximately 78% of the increase. Management
monitors these loans very closely.
44
46
TABLE TWENTY. NONPERFORMING LOANS
(In thousands)
At December 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Domestic:
Non accrual $ 6,995 $ 2,189 $ 3,100 $ 3,087 $ 1,345
Past due over 90 days and accruing -- 69 -- -- 582
-------- -------- -------- -------- --------
Total domestic nonperforming loans 6,995 2,258 3,100 3,087 1,927
Foreign:
Non accrual 9,588 6,396 2,949 1,654 2,287
Past due over 90 days and accruing 1,992 404 -- 112 301
-------- -------- -------- -------- --------
Total foreign nonperforming loans 11,580 6,800 2,949 1,766 2,588
Total nonperforming loans(1) $ 18,575 $ 9,058 $ 6,049 $ 4,853 $ 4,515
======== ======== ======== ======== ========
Total nonperforming loans to total loans 1.66% 0.78% 0.48% 0.91% 1.07%
Total nonperforming assets to total assets 1.08% 0.53% 0.64% 0.64% 0.73%
(1) During such periods the Company did not have any loans, which were
deemed to be "troubled debt restructurings" as defined in SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings.
At December 31, 1999 the Company had no nonaccruing investment
securities.
For the year ended December 31, 1999 the amount of interest income that
was accrued on the loans on the previous table was approximately $155 thousand.
For the year ended December 31, 1999 the amount of interest income that would
have been accrued on the loans in the previous table in accordance with their
contractual terms was approximately $1.6 million, of which $1.5 million
represented interest income on foreign loans and $68 thousand on domestic loans.
Management does not believe that there is a material amount of loans
not included in the foregoing table where known information about possible
credit problems of the borrowers would cause management to have serious doubts
as to the ability of the borrowers to comply with the present loan repayment
terms and which may result in such loans becoming non-accruing loans. At
December 31, 1999, the Bank had total cross-border exposure to Ecuador of
approximately $78 million, including loans of $43.6 million. Approximately 96%
of these items were performing in compliance with their contractual terms as of
December 31, 1999.
CAPITAL RESOURCES
Stockholders' equity at December 31, 1999 was $113.3 million compared
to $109.2 million at December 31, 1998. This increase was due primarily to a
$5.7 million change in unrealized gain on available for sale securities offset
by the net loss of $2.2 million. 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.
45
47
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 EIGHT of the consolidated financial statements reports
Company and Bank capital ratios.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK MANAGEMENT
In the normal course of conducting business activities, the Company is
exposed to market risk, which includes both price and liquidity risk. The
Company's price risk arises from fluctuations in interest rates, and foreign
exchange rates that may result in changes in values of financial instruments if
the instrument is payable in a currency other than dollars. The Company
generally does not hold a substantial amount of instruments denominated in
currency other than U.S. dollars. When it does, however, it mitigates this risk
by hedging the currency through forward contracts. As of December 31, 1999 and
1998, assets denominated in foreign currency amounted to approximately $2.5
million and $440,000, respectively. Liabilities denominated in a foreign
currency at December 31, 1999 and 1998 amounted to approximately $1.3 million
and $847,000 million, respectively. The Company holds substantially all of its
assets in U.S. dollars. Accordingly, the risk related to changes in foreign
exchange rates is minimal. Changes in exchange rates in the Region would not
expose the assets to foreign exchange risk, since the obligations are to be
repaid in dollars. However, the change in foreign exchange rates could affect
the ability of the borrower to repay its obligation, which would be addressed in
our credit risk analysis. Credit risks related to our assets are discussed in
the "Allowance for Credit Loss." The Company does not have material direct
market risk related to commodity and equity prices. Liquidity risk arises from
the possibility that the Company may not be able to satisfy current and future
financial commitments or that the Company may not be able to liquidate financial
instruments at market prices. Risk management policies and procedures have been
established and are utilized to manage the Company's exposure to market risk.
The strategy of the Company is to operate at an acceptable risk environment
while maximizing its earnings.
Market risk is managed by the Asset Liability Committee, which
formulates and monitors the performance of the Company based on established
levels of market risk as dictated by policy. In setting the tolerance levels of
market risk, the Committee considers the impact on both earnings and capital
potential changes in the outlook in market rates, global and regional economies,
liquidity, business strategies and other factors.
The Company's asset and liability management process is utilized to
manage interest rate risk through the structuring of balance sheet and
off-balance sheet portfolios. It is the strategy of the Company to maintain as
neutral an interest rate risk position as possible. By utilizing this strategy
the Company "locks in" a spread between interest-earning assets and
interest-bearing liabilities. Given the matching strategy of the Company and the
fact that it does not maintain significant medium and/or long-term exposure
positions, the Company's interest rate risk will be measured and quantified
through an interest rate sensitivity report. For any given period, the Company's
pricing structure is matched when an equal amount of assets and liabilities
reprice. An excess of assets or liabilities over these matched items results in
a gap or mismatch. A positive gap denotes asset sensitivity and normally means
that an increase in interest rates would have a positive effect on net interest
income. On the other hand a negative gap denotes liability sensitivity and
normally means that a decline in interest rates would have a positive effect in
net interest income. However, because different types of assets and liabilities
with similar maturities may reprice at different rates or may otherwise react
differently to changes in overall market rates or conditions, changes in
prevailing interest rates may not necessarily have such effects on net interest
income.
TABLE SIXTEEN provides the Company's Interest Rate Sensitivity Reports
as of December 31, 1999. This table shows that interest-bearing liabilities
maturing or repricing within one year exceeded interest-earning assets by $153.8
million. The Company monitors that the assets and liabilities are closely
matched to minimize interest rate risk. On December 31, 1999 the interest rate
risk position of the Company was not significant since the impact of a 100 basis
point rise or fall of interest rates over the next 12 months is estimated at 3
percent of net income.
Substantially all of the Company's assets and liabilities are
denominated in dollars, therefore the Company has no material foreign exchange
risk. In addition, the Company has no trading account securities; therefore it
is not exposed to market risk resulting from trading activities.
NOTE THIRTEEN of the consolidated financial statements reports fair
value of financial instruments. As reported in this note, the carrying values
approximate their fair values which generally minimizes the exposure to market
risk resulting
46
48
from interest rate fluctuations. This minimal risk is the result of the
short-term nature of the Company's interest-earning assets and the matching
maturity level of the interest-bearing liabilities.
On a daily basis the Bank's Chief Financial Officer and the Bank's
Treasurer are responsible for measuring and managing market risk.
47
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Hamilton Bancorp Inc.:
We have audited the accompanying consolidated statements of condition
of Hamilton Bancorp Inc. and its subsidiaries (the "Company") as of December 31,
1999 and 1998, and the related consolidated statements of operations,
comprehensive income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial condition of the Company as of December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 17 to the consolidated financial statements, at
December 31, 2000, Hamilton Bank, N.A. (the "Bank"), a 99.78% owned subsidiary
of the Company, did not meet the minimum capital requirements prescribed by the
Office of the Comptroller of the Currency (the "OCC"). The Bank is currently
operating under a cease and desist order by consent (the "September 8 Order")
with the OCC that, among other things, requires it to meet prescribed capital
requirements by no later than September 30, 2000. Failure of the Bank to comply
with the terms of the September 8 Order could result in the assessment of civil
money penalties, the issuance of an order by a District Court requiring
compliance with the September 8 Order, the placing of restrictions on the source
of deposits or, in certain circumstances, the appointment of a conservator or
receiver. In addition, the Federal Deposit Insurance Corporation may initiate a
termination of insurance proceeding where there has been a violation of an
order. Also, as discussed in Note 17, on March 28, 2001, the OCC (i) issued a
Notice of Charges which seeks the issuance of an Amended Order to Cease and
Desist, (ii) issued a Temporary Order to Cease and Desist, and (iii) notified
the Company of its intent to "reclassify" the capital category of the Bank to
"undercapitalized" for purposes of Prompt Corrective Action. Management's plans
concerning these matters are also described in Note 17.
As discussed in Note 18, the accompanying 1999 financial statements
have been restated.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 24, 2000 (December 26, 2000 as to Note 16
and May 25, 2001 as to Note 17 and the
effects of the restatement described in Note 18)
48
50
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
AS RESTATED,
SEE NOTE 18
1999 1998
------------ ------------
ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS ................................. $ 21,710 $ 24,213
FEDERAL FUNDS SOLD ........................................................ 63,400 87,577
------------ ------------
Total cash and cash equivalents ..................................... 85,110 111,790
INTEREST-EARNING DEPOSITS WITH OTHER BANKS ................................ 165,685 200,203
SECURITIES AVAILABLE FOR SALE (Amortized cost: $266,517
in 1999 and $70,509 in 1998) ........................................... 274,277 69,725
SECURITIES HELD TO MATURITY (Fair value: $38,199 in 1998) ................. 0 35,870
LOANS - NET ............................................................... 1,081,256 1,150,903
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES ................................. 27,767 75,567
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS
OF CREDIT .............................................................. 5,835 6,468
PROPERTY AND EQUIPMENT - NET .............................................. 5,209 4,775
ACCRUED INTEREST RECEIVABLE ............................................... 19,111 19,201
GOODWILL - NET ............................................................ 1,658 1,833
OTHER ASSETS .............................................................. 34,779 16,894
------------ ------------
TOTAL ..................................................................... $ 1,700,687 $ 1,693,229
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS .................................................................. $ 1,535,606 $ 1,477,052
OTHER BORROWINGS .......................................................... 6,116
TRUST PREFERRED SECURITIES ................................................ 12,650 11,000
BANKERS ACCEPTANCES OUTSTANDING ........................................... 27,767 75,567
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING ............................ 5,835 6,468
OTHER LIABILITIES ......................................................... 5,500 7,784
------------ ------------
Total liabilities ................................................... 1,587,358 1,583,987
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4, 12, 17)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares
authorized, 10,081,147 shares
issued and outstanding at December 31, 1999 and
10,050,062 shares issued and outstanding at December 31, 1998 ....... 101 100
Capital surplus ........................................................ 60,708 60,117
Retained earnings ...................................................... 47,302 49,511
Accumulated other comprehensive income (loss) .......................... 5,218 (486)
------------ ------------
Total stockholders' equity .......................................... 113,329 109,242
------------ ------------
TOTAL ..................................................................... $ 1,700,687 $ 1,693,229
============ ============
See accompanying notes to consolidated financial statements.
49
51
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
AS RESTATED, SEE
NOTE 18
1999 1998 1997
---------------- ------------ ------------
INTEREST INCOME:
Loans, including fees ............................ $ 107,620 $ 106,885 $ 70,262
Deposits with other banks ........................ 15,940 10,989 8,909
Investment securities ............................ 8,787 4,903 2,980
Federal funds sold ............................... 1,647 1,484 1,008
------------ ------------ ------------
Total ......................................... 133,994 124,261 83,159
------------ ------------ ------------
INTEREST EXPENSE:
Deposits ......................................... 72,224 69,719 43,913
Trust preferred securities ....................... 1,232
Federal funds purchased and other borrowings ..... 181 561 284
------------ ------------ ------------
Total ......................................... 73,637 70,280 44,197
------------ ------------ ------------
NET INTEREST INCOME ................................. 60,357 53,981 38,962
PROVISION FOR CREDIT LOSSES ......................... 20,300 9,621 6,980
PROVISION FOR TRANSFER RISK ......................... 32,720
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISIONS ................ 7,337 44,360 31,982
------------ ------------ ------------
NON-INTEREST INCOME:
Trade finance fees and commissions ............... 12,035 13,101 12,768
Syndication and structuring fees ................. 6,266 3,352 2,535
Customer service fees ............................ 1,528 1,149 934
Net gain (loss) on sale of assets ................ 562 (220) 108
Other ............................................ 299 171 97
------------ ------------ ------------
Total ......................................... 20,690 17,553 16,442
------------ ------------ ------------
OPERATING EXPENSES:
Employee compensation and benefits ............... 14,556 14,527 13,162
Occupancy and equipment .......................... 4,273 4,229 3,251
Loss on exchanges and write-down of assets ....... 187 22,810
Legal Expenses ................................... 3,627 1,601 108
Other ............................................ 9,416 7,119 6,902
------------ ------------ ------------
Total ......................................... 32,059 50,286 23,423
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ................... (4,032) 11,627 25,001
PROVISION FOR (BENEFIT FROM) FOR INCOME TAXES ....... (1,823) 4,132 9,098
------------ ------------ ------------
NET INCOME (LOSS) ................................... $ (2,209) $ 7,495 $ 15,903
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic ............................................ $ (.22) $ 0.75 $ 1.81
============ ============ ============
Diluted .......................................... $ (.22) $ 0.72 $ 1.73
============ ============ ============
AVERAGE SHARES OUTSTANDING:
Basic ............................................ 10,069,898 9,983,208 8,806,379
============ ============ ============
Diluted .......................................... 10,069,898 10,390,884 9,173,680
============ ============ ============
See accompanying notes to consolidated financial statements.
50
52
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
AS RESTATED
SEE NOTE 18
1999 1998 1997
----------- -------- --------
NET INCOME (LOSS) .......................................... $ (2,209) $ 7,495 $ 15,903
OTHER COMPREHENSIVE (LOSS) INCOME, Net of tax:
Unrealized (depreciation) appreciation
in securities available for sale during year ......... 5,704 (433) 18
Less: Reclassification adjustment for gains
included in net income ............................... (69)
--------- -------- --------
Total ................................................ 5,704 (433) (51)
--------- -------- --------
COMPREHENSIVE INCOME ....................................... $ 3,495 $ 7,062 $ 15,852
========= ======== ========
See accompanying notes to consolidated financial statements.
51
53
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (AS RESTATED, SEE NOTE 18)
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
PREFERRED STOCK COMMON STOCK
----------------- ------------------------ CAPITAL RETAINED
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS(LOSS)
------- ------ ---------- --------- -------- --------------
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 ................
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 ................................
------- --- ---------- --------- -------- ---------
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
Issuance of 31,085 shares of common
stock from exercise of options .......... 31,085 1 286
Reduction of tax liability due to
deductibility of stock options
exercised ............................... 305
Net change in unrealized loss on
securities available for sale,
net of taxes ............................
Net loss .................................. (2,209)
------- --- ---------- --------- -------- ---------
BALANCE, DECEMBER 31, 1999 .................. -- $-- 10,081,147 $ 101 $ 60,708 $ 47,302
------- --- ---------- --------- -------- ---------
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
------------- -------------
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) (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 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
Issuance of 31,085 shares of common
stock from exercise of options .......... 287
Reduction of tax liability due to
deductibility of stock options
exercised ............................... 305
Net change in unrealized loss on
securities available for sale,
net of taxes ............................ 5,704 5,704
Net loss .................................. (2,209)
-------- ---------
BALANCE, DECEMBER 31, 1999 .................. $ 5,218 $ 113,329
-------- ---------
See accompanying notes to consolidated financial statements.
52
54
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
AS RESTATED,
SEE NOTE 18
1999 1998 1997
------------ ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $ (2,209) $ 7,495 $ 15,903
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................................. 1,283 1,173 1,024
Provision for credit losses .................................... 20,300 9,621 6,980
Provision for transfer risk .................................... 32,720
Deferred tax benefit ........................................... (3,746) (8,612) (2,615)
Loss on exchanges and write down on assets ..................... 187 22,810
Net gain on sale of securities available for sale .............. (108)
Net loss (gain) on sale of loans and other real estate owned ... (561) 220
Proceeds from the sale of bankers acceptances
and loan participations ...................................... 25,238 102,402 80,007
Increase in accrued interest receivable and other assets ....... (16,918) (7,963) (5,248)
(Decrease) increase in other liabilities ....................... (2,008) 4,524 107
---------- ---------- ----------
Net cash provided by operating activities .................... 54,286 131,670 96,050
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest-earning
deposits with other banks ...................................... 34,518 (86,473) (33,253)
Purchase of securities available for sale ......................... (762,150) (245,442) (201,448)
Purchase of securities held to maturity ........................... (14,703) (31,299)
Proceeds from pay downs of securities held to maturity ............ 3,307 989
Purchase of loan participations ................................... (69,414) (17,463)
Proceeds from sales and maturities of
securities available for sale .................................. 763,180 214,037 176,203
Increase in loans - net ........................................... (106,808) (327,696) (512,139)
Purchases of property and equipment - net ......................... (1,495) (936) (2,166)
Proceeds from sale of loans and other real estate owned ........... 18,224 21,798
---------- ---------- ----------
Net cash used in investing activities .......................... (135,341) (472,485) (572,803)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net ........................................ 58,554 342,005 496,407
Proceeds from trust preferred securities offering ................. 1,650 11,000
(Repayment of) proceeds from other borrowing ...................... (6,116) 6,116
Net proceeds from issuance of common stock ........................ 287 2,050 38,993
Cash dividends on preferred stock ................................ (319)
---------- ---------- ----------
Net cash provided by financing activities ...................... 54,375 361,171 535,081
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .................................................. (26,680) 20,356 58,328
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ........................................................... 111,790 91,434 33,106
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................. $ 85,110 $ 111,790 $ 91,434
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the year ..................................... $ 73,536 $ 68,665 $ 42,555
========== ========== ==========
Income taxes paid during the year ................................. $ 14,957 $ 12,717 $ 9,077
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Other real estate owned acquired through foreclosure .............. $ 165
==========
See accompanying notes to consolidated financial statements.
53
55
HAMILTON BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hamilton Bancorp Inc. (the "Company") is a holding company formed in
1988 primarily to acquire ownership in Hamilton Bank, N.A. (the
"Bank"), a national Federal Reserve member bank which commenced
operations in February 1983. As of December 31, 1999, the Company owned
99.78% of the outstanding common stock of the Bank. The Bank's business
is focused primarily on foreign trade and providing innovative services
for its financial correspondents and exporting/importing firms. The
Bank offers these services through its main office and three branches
in Miami, Florida, and a branch in Tampa, Winter Haven, Sarasota, West
Palm Beach, Weston, Florida and San Juan, Puerto Rico.
The accounting and reporting policies of the Company conform to
accounting principles generally accepted in the United States of
America and to general practices within the banking industry. The
following summarizes the more significant of these policies:
Basis of Presentation - The accompanying consolidated financial
statements include the accounts of the Company, the Bank and Hamilton
Capital Trust I (the "Trust", see Note 7). All significant intercompany
amounts have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents - For purposes of the consolidated statements
of cash flows, the Company considers cash, demand deposits with other
banks, and federal funds sold as cash and cash equivalents. Generally,
federal funds are sold for one-day periods.
The Federal Reserve requires banks to maintain certain average reserve
balances, in the form of vault cash or funds on deposit with the
Federal Reserve, based upon the total of a bank's net transaction
accounts. At December 31, 1999 and 1998, the Bank met its average
reserve requirement.
Investment Securities - Investment securities are accounted for under
Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Under
SFAS No. 115, investment securities must be classified and accounted
for under the following conditions:
Trading Account Securities - Trading account securities are held in
anticipation of short-term sales or market movements. Trading account
securities are stated at fair value. Gains or losses on the sale of
trading account securities, as well as unrealized fair value
adjustments, are included in operating income. At December 31, 1999 and
1998, the Company held no trading account securities.
Securities Available for Sale - Securities to be held for
unspecified periods of time including securities that
management intends to use as part of its asset/liability
strategy, or that may be sold in response to changes in
interest rates, changes in prepayment risk, or other similar
factors are classified as available for sale and are carried
at fair value. Unrealized gains or losses are reported as a
net amount in accumulated other comprehensive income (loss)
within stockholders' equity until realized. Gains and losses
are recognized using the specific identification method upon
realization.
Securities Held To Maturity - Securities that management has a
positive intent and the ability to hold to maturity are
carried at cost, adjusted for amortization of premiums and
accretions of discounts over the life of the securities using
a method which approximates the level-yield method.
54
56
Transfers - Transfers of securities between classifications
are recorded at fair value. Unrealized gains (losses) on
securities transferred into available for sale are recorded as
accumulated other comprehensive income (loss) within
stockholders' equity, while unrealized gains (losses) on
securities transfers into trading are recognized in income
immediately. Unrealized gains (losses) on securities
transferred to held to maturity are continued to be maintained
in accumulated other comprehensive income (loss) within
stockholders' equity, however, such unrealized gains (losses)
are amortized to income over the period until maturity as an
adjustment of yield, using the effective yield method.
Allowances for Credit Losses and Allocated Transfer Risk Reserves - The
allowance for credit losses is established through a provision for
credit losses charged to expense based on management's evaluation of
probable losses inherent in its loan portfolio. On a quarterly basis,
the management assesses the overall adequacy of the allowance for
credit losses, utilizing a disciplined and systematic approach which
includes the application of a specific allowance for identified
impaired loans, an allocated formula allowance for identified graded
loans and all other portfolio segments, and an unallocated allowance.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit
that management believes indicate the probability that a loss has been
incurred. A specific allowance is established on an individual loan
basis and is determined by a method prescribed by Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan." 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 original contractual terms
of the loan agreement. A loan is not impaired during a period of delay
in payment if the creditor expects to collect all amounts due including
interest accrued at the contractual interest rate for the period of
delay. Individually identified impaired loans are measured based on the
present value of payments expected to be received, using the historical
effective loan rate as the discount rate. Alternatively, measurement
may also be based on observable market prices, or for loans that are
solely dependent on the collateral for repayment, measurement may be
based on the fair value of the collateral. The Company evaluates
commercial loans individually for impairment, while groups of
smaller-balance homogeneous loans (generally residential mortgage and
installment loans) are collectively evaluated for impairment. The
Company has classified all non-accrual loans as impaired.
The allocated formula allowance is calculated by applying loss factors
to outstanding loans based on the internal risk grade of such loans.
Changes in risk grades of both performing and nonperforming loans
affect the amount of the allocated formula allowance. Loss factors are
based on our historical loss experience or on loss percentages used by
our regulators for similarly graded loans and may be adjusted upward
for significant factors that, in management's judgment, affect the
collectibility of the portfolio as of the evaluation date
The unallocated allowance is established based upon management's
evaluation of various conditions, the effects of which are not directly
measured in the determination of the allocated allowances. The
evaluation of the inherent loss with respect to these conditions is
subject to a higher degree of uncertainty because they are not
identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance
include, but are not limited to, general economic and business
conditions, loan volumes and concentrations, credit quality trends,
collateral values, regulatory examination results and internal credit
reviews.
The allowance for transfer risks ("allocated transfer risk reserves" or
"ATRR") is established through a provision for transfer risks charged
to expense based on guidelines of Federal banking regulators. Transfer
risk is the possibility that an asset cannot be serviced in the
currency of payment because of a lack of, or restraints on the
availability of, needed foreign exchange in the country of the obligor.
The required amount of ATRR represents a minimum level of allowance and
is required for credit exposures with respect to any country rated
"value impaired" by the Interagency Country Exposure Review Committee
("ICERC"), which was created by the Office of the Comptroller of the
Currency ("OCC"), the Federal Reserve Board ("FRB") and the Federal
Deposit Insurance Corporation ("FDIC") to ensure consistent treatment
of the transfer risk associated with bank's foreign exposures to both
public and private sector entities. The ICERC requires a specific
percentage level for ATRR for exposures rated value impaired. ATRR is a
specific allowance which is applicable when an obligation becomes 30
days past due and/or is restructured to avoid delinquency.
Many of the factors considered in assessing the adequacy of the
allowances for credit losses and transfer risks 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
allowances are adequate to absorb losses on existing loans that may
become uncollectible due to credit or transfer risk, ultimate losses
may vary significantly from current estimates.
55
57
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.
Federal Funds Purchased - Federal funds purchased generally mature
within one to four days from the transaction date. At December 31, 1999
and 1998, there were no federal funds purchased outstanding.
Income Recognition - Interest income on loans is recognized based upon
the principal amounts outstanding. Loans over 90 days past due may not
be placed on nonaccrual if they are in the process of collection and
are either secured by property having a realizable value at least equal
to the outstanding debt and accrued interest or are fully guaranteed by
a financially responsible party whom the Bank believes is willing and
able to discharge the debt, including accrued interest. Loans are
placed on a nonaccruing status when management believes that interest
on such loans may not be collected in the normal course of business.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
Trade finance fees and commissions include fees for letters of credit,
acceptances and fees earned in connection with the granting of credit
facilities to customers for the purpose of issuance, acceptance and
refinancing of letters of credit. Fees and commissions from the
issuance of commercial letters of credit are deferred and amortized
over the letter of credit guarantee period. Fees and commissions from
acceptances are recognized upon presentation of the accepted time draft
by the holder. Fees for granting and direct cost of originating credit
facilities are deferred and recognized over the term of the related
facility.
Syndication and structuring fees are earned in connection with the
purchase, participation and placement, without recourse or future
obligation, of trade finance obligations and for arranging financing
for domestic and foreign customers. Nonrefundable fees earned and
direct origination costs for such transactions are recognized over the
term of the related facility, if the Company participates in the
funding of the facility. Nonrefundable fees earned for services other
than funding are recognized immediately at the time the transaction is
consummated, which is coincident with the time the services are
provided.
Transfers of Financial Assets - Transfers of loans and securities for
which the Company has surrendered control over those assets are
accounted for as sales to the extent that consideration other than
beneficial interests in the transferred assets is received in exchange.
If a sale, the Company recognizes and initially measures assets
controlled and liabilities incurred at fair value and gain or loss is
recognized immediately into income. All financial asset transfers not
meeting the sale criteria are required to be accounted for as secured
borrowing with collateral (or other security interest) pledged. During
1999 and 1997, the Company recorded no gains or losses on exchanges of
loans and securities. During 1998, the Company recorded approximately
$22,223,000 ($14,304,000 after tax) in losses on exchanges of loans and
securities.
56
58
Income Taxes - The provision for income taxes is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities. The Company provides for deferred
taxes under the liability method. Under such method, deferred taxes are
adjusted for tax rate changes as they occur. Deferred income tax assets
and liabilities are computed annually for differences between the
financial statements and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
Net Income (Loss) Per Common Share - Basic earnings (loss) 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 the diluted impact of potential common shares (consisting of
stock options, see Note 9) outstanding under the treasury stock method.
Stock Split - On January 21, 1997, the Company's Board of Directors
(the "Board") approved a 6.5 for 1 common stock split (see Note 9).
Retroactive restatement has been made to all share amounts to reflect
the stock split.
Stock - Based Compensation - SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee and non-employee members of
the Board compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation to employees and
non-employee members of the Board using the intrinsic value method as
prescribed by Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, compensation cost for stock options issued to employees
and non-employee members of the Board are measured as the excess, if
any, of the fair value of the Company's stock at the date of grant over
the amount an employee or non-employee member of the Board must pay for
the stock.
Segment Information - The Company operates in one reportable segment,
focused primarily on foreign trade and providing innovative services
for its financial correspondents and exporting/importing firms.
Reclassifications - Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified for comparative purposes.
New Accounting Pronouncement - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Among other provisions, SFAS No.
133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It also requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. In June 1999, the FASB issued SFAS 137, Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of SFAS Statement No. 133, which changes the effective date of
SFAS 133 for financial statements for fiscal years beginning after June
15, 2000. Management has not determined what effects, if any, the
adoption of SFAS No. 133 will have on the Company's consolidated
financial statements.
57
59
2. INVESTMENT SECURITIES
A comparison of the amortized cost and fair value of investment
securities at December 31, 1999 and 1998 is as follows (dollars in
thousands):
1999
-----------------------------------------------------------------
GROSS UNREALIZEDFAIR
AMORTIZED ----------------------------
COST GAINS LOSSES VALUE
------------ ----------- ------------ -------------
AVAILABLE FOR SALE:
Foreign debt securities........................ $ 164,586 $ 10,860 $ 4,336 $ 171,110
U.S. Government and agency securities.......... 54,698 5 5 54,698
Mortgage backed securities..................... 28,370 -- 1,792 26,578
Perpetual subordinated euro notes.............. 8,359 3,062 -- 11,421
Foreign bank stocks............................ 4,180 -- -- 4,180
Municipal bonds................................ 3,239 -- -- 3,239
Federal Reserve Bank stock..................... 1,985 -- -- 1,985
Other.......................................... 1,100 28 62 1,066
------------ ----------- ------------ -------------
Total.......................................... $ 266,517 $ 13,955 $ 6,195 $ 274,277
============ =========== ============ =============
1998
-----------------------------------------------------------------
GROSS UNREALIZEDFAIR
AMORTIZED ----------------------------
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 euro notes.............. 8,359 1,731 10,090
Foreign government debt securities............. 7,269 771 8,040
------------ ----------- ------------ -------------
Total.......................................... $ 35,870 $ 2,532 $ 203 $ 38,199
============ =========== ============ =============
At December 31, 1999, foreign bearer securities originally underwritten
as loans with a cost basis of $123 million and a fair market value of
$122 million were transferred to securities available for sale due to a
change in management's intent with respect to all bearer securities.
Included in the transfer were bearer securities with a cost basis of
$44.3 million, and a fair market value of $45.5 million, which were
acquired in 1998 in connection with the exchange of certain assets.
Also, certain foreign securities previously classified as held to
maturity with a cost basis of $15.6 million and a fair market value of
$19.6 million, were reclassified to securities available for sale.
These securities were also acquired in 1998 in connection with the
exchange transaction. See Notes 3 and 16 for additional information.
There were no sales of securities available for sale during the years
ended December 31, 1999 and 1998. During the year ended December 31,
1997, gross realized gains on the sale of securities available for sale
were approximately $109,000 and gross realized losses were
approximately $1,000.
Investment securities with an amortized cost and fair value of
approximately $79,896,000 and $78,207,000, respectively, at December
31, 1999, were pledged as collateral for public deposits.
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60
The following table shows the amortized cost and the fair value by maturity
distribution of the securities portfolio at December 31, 1999 (dollars in
thousands):
AVAILABLE FOR SALE
-----------------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
Within one year................................................................ $ 141,984 $ 140,057
One to five years.............................................................. 23,934 24,726
Five to ten years.............................................................. 48,275 55,029
Over ten years................................................................. 36,700 35,813
---------- ----------
Total.......................................................................... 250,893 255,625
Federal Reserve Bank stock..................................................... 1,985 1,985
Foreign bank stocks............................................................ 4,180 4,180
Perpetual subordinated euro notes.............................................. 8,359 11,421
Other.......................................................................... 1,100 1,066
---------- ----------
Total securities............................................................... $ 266,517 $ 274,277
========== ==========
3. LOANS
Loans consist of the following at December 31, 1999 and 1998 (dollars
in thousands):
1999 1998
---------- ----------
Commercial (primarily trade related):
Domestic.................................................................... $ 394,625 $ 289,032
Foreign..................................................................... 600,924 737,667
Acceptances discounted - trade related:
Domestic.................................................................... 59,040 56,706
Foreign..................................................................... 59,256 72,597
Interbank placements - Foreign................................................. 22,000 --
Residential mortgages.......................................................... 2,140 10,494
Installment.................................................................... 216 232
---------- ----------
Total.......................................................................... 1,138,201 1,166,728
Less: Unearned income:
Acceptances discounted................................................ 2,669 2,814
Other................................................................. 145 217
Allowance for credit losses.............................................. 21,411 12,794
Allocated transfer risk reserves......................................... 32,720 --
---------- ----------
Loans - net.................................................................... $1,081,256 $1,150,903
========== ==========
The Bank's business activity is mostly with customers and correspondent
banks located in South Florida, Central America, South America, and the
Caribbean. The majority of the credits are for the finance of imports
and exports and have maturities of up to 180 days. These credits are
secured either by banks, factored receivables, cash, or the underlying
goods. Management closely monitors its credit concentrations by
industry, geographic locations, and type of collateral as well as
individual customers.
As of December 31, 1998, the Company had approximately $123 million in
bearer debt securities, which were classified as loans and were
accounted for as held to maturity securities under SFAS No. 115. During
1999, all held to maturity securities were transferred to and are being
accounted for as available for sale securities under SFAS No. 115.
A summary of the activity in the allowances for credit losses and
transfer risks for the years ended December 31, 1999, 1998 and 1997 is
as follows (dollars in thousands):
59
61
1999 1998 1997
---------- ---------- ----------
ALLOWANCE FOR CREDIT LOSSES
Balance at the beginning of year ................. $ 12,794 $ 10,317 $ 5,725
Provision charged to operations .................. 20,300 9,621 6,980
Loan charge-offs, net of recoveries .............. (11,683) (7,144) (2,388)
---------- ---------- ----------
Balance at the end of year ....................... 21,411 12,794 10,317
---------- ---------- ----------
ALLOWANCE FOR TRANSFER RISKS
Balance at the beginning of year ................. -- -- --
Net provision charged to operations .............. 32,720 -- --
---------- ---------- ----------
Balance at the end of year ....................... 32,720 -- --
---------- ---------- ----------
TOTAL ALLOWANCES ................................. $ 54,131 $ 12,794 $ 10,317
========== ========== ==========
An ATRR amounting to approximately $32.7 million at December 31, 1999
and representing 90% of the outstanding balances has been recorded
against certain Ecuadorian exposures amounting to approximately $36.4
million at December 31, 1999. Total Ecuadorian exposure, including
amounts subject to ATRR, amounted to $78 million, $100 million and $90
million at December 31, 1999, 1998 and 1997, respectively. At December
31, 1998 and 1997, none of the Company's Ecuadorian exposure was
subject to the requirements for ATRR. As of December 31, 1999,
Ecuadorian borrowers that were greater than 30 days past due amounted
to approximately $3.2 million. Ecuadorian borrowers on nonaccrual
status amounted to approximately $3.2 million as of December 31, 1999.
See Note 18.
At December 31, 1999 and 1998, the recorded investment in impaired
loans was approximately $16,583,000 and $8,586,000, respectively. These
impaired loans required an allowance for credit losses of approximately
$6,173,000 and $2,786,000, respectively. The average recorded
investment in impaired loans during the years ended December 31, 1999
and 1998 was approximately $17,884,000 and $8,562,000, respectively.
For the years ended December 31, 1999, 1998 and 1997 the Bank
recognized interest income on these impaired loans prior to their
classification as impaired of approximately $155,000, $412,000 and
$65,000, respectively.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31,
1999 and 1998 (dollars in thousands):
1999 1998
---------- ---------
Land............................................................................. $ 811 $ 811
Building and improvements......................................................... 1,559 1,530
Leasehold improvements............................................................ 2,260 2,553
Furniture and equipment........................................................... 6,965 5,691
Automobiles....................................................................... 80 80
---------- ---------
Total............................................................................. 11,675 10,665
Less accumulated depreciation and amortization.................................... 6,466 5,890
---------- ---------
Property and equipment - net...................................................... $ 5,209 $ 4,775
========== =========
Depreciation and amortization expense related to property and equipment
for the years ended December 31, 1999, 1998 and 1997 was approximately
$1,060,000, $944,000, and $841,000, respectively.
The Bank owns the land and the building for one of its Miami branches,
the Winter Haven and Sarasota branches and leases its main facilities,
five branches and certain equipment under noncancelable agreements
(accounted for as operating leases). The leases have renewal periods of
five to ten years, available to the Bank under the same terms and
conditions as the initial leases and one subject to annual rent
adjustments based upon the Consumer Price Index.
The approximate future minimum payments, by year and in the aggregate,
on these leases at December 31, 1999 are as follows (dollars in
thousands):
60
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YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
2000.................................................................................... $ 2,345
2001.................................................................................... 2,174
2002.................................................................................... 1,860
2003.................................................................................... 1,776
2004.................................................................................... 1,761
Thereafter.............................................................................. 3,654
--------
Total minimum lease payments............................................................ $ 13,570
========
Rent expense was approximately $1,802,000, $1,726,000, and $1,381,000
for the years ended December 31, 1999, 1998 and 1997, respectively.
5. DEPOSITS
Deposits consist of the following at December 31, 1999 and 1998
(dollars in thousands):
1999 1998
---------- ----------
Noninterest-bearing ........................................ $ 77,390 $ 76,895
---------- ----------
Interest-bearing:
NOW, money market and savings .......................... 142,790 90,477
Time, under $100,000 ................................... 816,845 672,736
Time, $100,000 and over ................................ 409,425 530,373
International Banking Facility (IBF) deposits .......... 89,156 106,571
Total interest-bearing ..................................... 1,458,216 1,400,157
---------- ----------
Total ...................................................... $1,535,606 $1,477,052
========== ==========
Time deposits in amounts of $100,000 and over at December 31, 1999
mature as follows (dollars in thousands):
AMOUNT
---------
Three months or less................................................................................ $ 87,410
Three months to twelve months....................................................................... 246,582
One year to five years.............................................................................. 75,433
---------
Total............................................................................................... $ 409,425
=========
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6. INCOME TAXES
The components of the provision for income taxes are as follows for the
years ended December 31, 1999, 1998 and 1997 (dollars in thousands):
1999 1998 1997
---------- ---------- ----------
Current income taxes:
Federal ................................................ $ 1,099 $ 11,503 $ 10,352
State .................................................. 34 149 481
Foreign ................................................ 790 1,092 880
---------- ---------- ----------
Total current provision ........................... 1,923 12,744 11,713
---------- ---------- ----------
Deferred income taxes:
Federal ................................................ (3,539) (8,136) (2,515)
State .................................................. (207) (476) (100)
---------- ---------- ----------
Total deferred (benefit) provision ................ (3,746) (8,612) (2,615)
---------- ---------- ----------
Provision for (benefit from) income taxes .................. $ (1,823) $ 4,132 $ 9,098
========== ========== ==========
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:
1999 1998 1997
---------- ---------- ----------
Federal statutory rate ..................................... (35.0%) 35.0% 35.0%
Increase in taxes:
State income tax, net of federal income tax benefit .... (0.4) 0.1 1.0
Other, net ............................................. (9.8) 0.4 0.4
---------- ---------- ----------
Effective income tax rate .................................. 45.2% 35.5% 36.4%
========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes. The
tax effects of significant items comprising the Company's net deferred
tax asset (included in other assets in the accompanying consolidated
statements of condition) as of December 31, 1999 and 1998 are as
follows (dollars in thousands):
1999 1998
-------- --------
Deferred tax assets:
Difference between book and tax basis of allowance for credit losses .......... $ 7,628 $ 4,734
Difference between book and tax basis of property ............................. 193 63
Loss on exchange and write-down of assets ..................................... 7,889 7,889
Non-accrual interest .......................................................... 492
-------- --------
Total deferred tax assets .................................................. 16,202 12,686
-------- --------
Deferred tax liabilities-other ...................................................... 230
-------- --------
Net deferred tax asset .............................................................. 16,202 12,456
Available for sale securities ....................................................... (2,542) 298
-------- --------
Total ............................................................................... $ 13,660 $ 12,754
======== ========
Recognition of deferred tax assets is based on management's belief that
it is more likely than not that the tax benefit associated with certain
temporary differences and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is more
likely than not that realization will not occur. No valuation
allowances have been recorded at December 31, 1999 and 1998,
respectively.
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7. TRUST PREFERRED SECURITIES
On December 28, 1998, the Company issued $11,000,000 of 9.75%
Beneficial Unsecured Securities, Series A (the "Preferred Securities")
out of a guarantor trust. On January 14, 1999, the Trust issued an
additional $1,650,000 of Preferred Securities upon the exercise of an
over-allotment by the underwriters. The Trust holds 9.75% Junior
Subordinated Deferrable Interest Debentures, Series A (the
"Subordinated Debentures") of the Company purchased with the proceeds
of the securities issued. Interest from the Subordinated Debentures of
the Company is used to fund the preferred dividends of the Trust.
Distributions on the Preferred Securities are cumulative and are
payable quarterly. The Trust must redeem the Preferred Securities when
the Subordinated Debentures are paid at maturity on or after December
31, 2028, or upon earlier redemption. Subject to the Company having
received any required approval of regulatory agencies, the Company has
the option at any time on or after December 31, 2008 to redeem the
Subordinated Debentures, in whole or in part. Additionally, the Company
has the option at any time prior to December 31, 2008 to redeem the
Subordinated Debentures, in whole but not in part, if certain
regulatory or tax events occur or if there is a change in certain laws
that require the Trust to register under the law. The Preferred
Securities are considered to be Tier I capital for regulatory purposes.
See Note 17, "Subsequent Events," for legal developments subsequent to
December 31, 1999.
8. STOCKHOLDERS' EQUITY
Regulatory Matters - See Note 17,"Subsequent Events," for regulatory
developments subsequent to December 31, 1999.
Insured depositary institutions and their holding companies must meet
applicable capital guidelines or be subject to a variety of enforcement
remedies, including dividend restrictions, the issuance of capital
directives, the issuance of cease and desist orders, the imposition of
civil money penalties, the termination of deposit insurance by the
Federal Deposit Insurance Corporation ("FDIC") or the appointment of a
conservator or receiver. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The Company is subject to risk-based capital and leverage guidelines
issued by the Board of Governors of the Federal Reserve System and the
Bank is subject to similar guidelines issued by the OCC. These
guidelines are used to evaluate capital adequacy and include the
required minimums shown in the following table.
To be "well capitalized" under federal bank regulatory agency
definitions, a depository institution must have a Tier 1 ratio of at
least 6%, a Total ratio of at least 10% and a leverage ratio of at
least 5% and not be subject to a directive, order or written agreement
to meet and maintain specific capital levels. The regulatory agencies
are required by law to take specific prompt actions with respect to
institutions that do not meet minimum capital standards. As of December
31, 1999 and 1998, the Bank's capital ratios exceeded the ratios set by
the regulatory agencies for "well capitalized" depository institutions.
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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
REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- -----
AS OF DECEMBER 31, 1999:
COMPANY
Total Capital (to Risk Weighted Assets) ...... $134,111 11.6% $92,571 8.0%
======== ==== ======= ====
Tier I Capital (to Risk Weighted Assets) ..... $119,157 10.3% $46,286 4.0%
======== ==== ======= ====
Tier I Capital (to Average Assets) ........... $119,157 7.1% $50,106 3.0%
======== ==== ======= ====
BANK
Total Capital (to Risk Weighted Assets) ...... $128,936 11.2% $92,385 8.0% $115,481 10.0%
======== ==== ======= ==== ======== ====
Tier I Capital (to Risk Weighted Assets) ..... $114,011 9.9% $46,192 4.0% $ 69,289 6.0%
======== ==== ======= ==== ======== ====
Tier I Capital (to Average Assets) ........... $114,011 6.7% $67,657 4.0% $ 84,571 5.0%
======== ==== ======= ==== ======== ====
AS OF DECEMBER 31, 1998:
COMPANY
Total Capital (to Risk Weighted Assets) ...... $131,758 12.0% $87,633 8.0%
======== ==== ======= ====
Tier I Capital (to Risk Weighted Assets) ..... $118,964 10.9% $43,816 4.0%
======== ==== ======= ====
Tier I Capital (to Average Assets) ........... $118,964 7.3% $49,102 3.0%
======== ==== ======= ====
BANK
Total Capital (to Risk Weighted Assets) ...... $121,204 11.1% $87,574 8.0% $109,467 10.0%
======== ==== ======= ==== ======== ====
Tier I Capital (to Risk Weighted Assets) ..... $108,411 9.9% $43,787 4.0% $ 65,680 6.0%
======== ==== ======= ==== ======== ====
Tier I Capital (to Average Assets) ........... $108,411 6.6% $65,485 4.0% $ 81,856 5.0%
======== ==== ======= ==== ======== ====
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
1999, approximately $33,812,000 of retained earnings were available for
dividend declaration without prior regulatory approval. During 1999 and
1998, approximately $4,614,000 and $2,252,000 of dividends were paid by
the Bank to the Company, respectively, which are within the amounts
allowed by regulations.
The Company has placed more emphasis on financing imports of goods into
the United States and thereby increased the relative size of its assets
employed in the domestic market as compared to its exposure in the
Region (as defined in Note 14). The Company will also focus on the
Hispanic business community in light of the bank consolidations in
recent months, which has resulted in the absorption of several Hispanic
banks in the South Florida area. In addition, prudent risk management,
in particular with regard to emerging market countries, calls for
avoidance of high concentrations of risk in these countries in relation
to a bank's capital. Currently, United States bank regulatory agencies
consider that exposure in these markets should be limited to levels
that would not impair the safety and soundness of a banking
institution. As a consequence, the Company's exposure in the Region was
significantly reduced at December 31, 1998 and was further reduced in
1999. The Company expects the 1999 levels will be maintained in 2000.
While the Company is well capitalized for the purposes of the "prompt
corrective action" provisions, to date it has not paid any dividends
and does not anticipate doing so. Nevertheless, due to economic
difficulties being experienced by various countries in the Region, the
Federal Reserve has requested that the Company not pay any dividends or
incur any debt (excluding "trust preferred securities") without the
consent of the Federal Reserve.
Public Offering - On March 26, 1997 the Company completed its initial
public offering issuing an aggregate of 2,760,000 shares at $15.50 per
share with net proceeds of approximately $38,994,000. In connection
with the initial public offering, the Board amended and restated the
articles of incorporation of the Company authorizing 75,000,000 shares
of common stock and 10,000,000 shares of "blank check" preferred stock.
In addition, the Board approved a 6.5 for 1 common stock split and
reorganization of the capital structure of the Company consisting of
(i) the conversion of all outstanding shares of the Company's Preferred
Shares (Series B and C) into 466,160 shares (post-stock split) of
common stock and (ii) the issuance of an aggregate of 1,396,759 shares
(post-stock split) of common stock for all outstanding warrants to
purchase shares of common stock of the Bank.
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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.
9. STOCK OPTION PLAN
In December 1993, the Company adopted the 1993 Stock Option Plan (the
"1993 Plan"), pursuant to which 877,500 shares of Common Stock
(post-stock split) were reserved for issuance upon exercise of
options. The 1993 Plan is designed as a means to retain and motivate
key employees and directors. The Company's Compensation Committee, or
in the absence thereof, the Board, administers and interprets the 1993
Plan and is authorized to grant options there under to all eligible
employees of the Company, including executive officers and directors
(whether or not they are employees) of the Company or affiliated
companies. Options granted under the 1993 Plan are on such terms and
at such prices as determined by the Compensation Committee, except
that the per share exercise price of incentive stock options cannot be
less than the fair market value of the Common Stock on the date of
grant. The 1993 Plan will terminate on December 31, 2003, unless
sooner terminated by the Company's Board.
Option activity for the years ended December 31, 1999, 1998 and 1997
are presented below:
NUMBER OPTION
1999 OF SHARES PRICE
---- --------- ------
Beginning balance............................................ 711,219 $ 9.23 - 29.125
Exercised.................................................... (31,085) 9.23
Canceled..................................................... (31,113) 25.00 - 29.125
-------
Ending Balance............................................... 649,021 $ 9.23 - $29.125
=======
Options which became exercisable during the year............. 186,803
Options exercisable at December 31,.......................... 533,436
Weighted average exercise price.............................. $ 16.01
NUMBER OPTION FAIR
1998 OF SHARES PRICE VALUE
---- --------- ------ -----
Beginning balance............................................ 776,875 $ 9.23 - 29.125
Granted (1).................................................. 173,388 25.00 - 25.47 $7.64 - 7.50
Exercised.................................................... (222,113) 9.23
Canceled..................................................... (16,931) 9.23 - 29.125
--------
Ending Balance............................................... 711,219 $ 9.23 - $29.125
========
Options which became exercisable during the year............. 649,500
Options exercisable at December 31,.......................... 427,387
Weighted average exercise price.............................. $ 12.24
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NUMBER OPTION FAIR
1997 OF SHARES PRICE VALUE
---- --------- ------ -----
Beginning balance............................................ 585,000 $ 9.23
Granted (1).................................................. 193,500 29.125 $6.55
Canceled..................................................... (1,625) 9.23
---------
Ending Balance............................................... 776,875 $ 9.23 - $29.125
=========
Options, which became exercisable during the year............ --
Options exercisable at December 31,.......................... --
(1) The grants vest twelve months after the grant as to 33.3% of the grant,
33.3% vesting eighteen months after grant and the remaining 33.4%
vesting twenty-four months after grant or upon the death of the option
holder if earlier.
The following table summarizes information about all stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING
OPTIONS REMAINING
OUTSTANDING CONTRACTED LIFE EXERCISE PRICE
----------- --------------- ----------------
320,415 6 years $ 9.230
176,768 8 years $ 29.125
151,838 9 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, 1999, 1998 and 1997, related to this plan.
For purposes of the following proforma disclosures, the fair value of
the options granted in 1998 and 1997 have been estimated on the date of
grant using the Black-Scholes options pricing model with the following
assumptions used for grants in 1998 and 1997, respectively: no dividend
yield; expected volatility of 48% and 32%; risk-free interest rate of
4.5% and 5.68% and an expected term of two years. Had compensation cost
been determined based on the fair value at the date of grant consistent
with requirement of SFAS 123 the Company's net income and net income
per common share would have been reduced to the proforma amounts
indicated below (dollars in thousands, except share information).
1999 1998 1997
-------- ------ --------
Net income (loss):
As reported................................................. $ (2,209) $7,495 $ 15,903
Proforma.................................................... (3,268) 6,881 15,762
Net income (loss) per common share:
Basic:
As reported............................................ (.22) 0.75 1.81
Proforma............................................... (.32) 0.69 1.79
Diluted:
As reported............................................ (.22) 0.72 1.73
Proforma............................................... (.32) 0.67 1.72
10. 401(K) PLAN
The Company maintains a 401(k) plan, which was initiated in 1993, for
its executive officers and other employees. Under the terms of the
401(k) plan, for each dollar contributed by an employee, the Company
intends to contribute a discretionary amount on behalf of participants
(the "Matching Contribution"). In addition, at the end of the plan
year,
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the Company may make an additional contribution (the "Additional
Contributions") on behalf of participants. Additional Contributions are
allocated in the same proportion that the Matching Contribution made on
the participant's behalf bears to the Matching Contribution made on
behalf of all participants during the year. The amount that the Company
contributes to the 401(k) plan has historically varied from year to
year. During the years ended December 31, 1999, 1998 and 1997, the
Company's matching and additional contributions amounted to
approximately $82,000, $155,000 and $128,000 respectively.
11. RELATED PARTY TRANSACTIONS
Directors, officers and their related entities have borrower and
depositor relationships with the Bank in the ordinary course of
business. Loan balances to these individuals and their related entities
approximated $544,000 and $324,000 at December 31, 1999 and 1998,
respectively, and the balance of deposit accounts approximated
$1,897,000 and $1,722,000 at December 31, 1999 and 1998, respectively.
At December 31, 1999 there were no outstanding commercial and standby
letters of credit transactions outstanding with these individuals. At
December 31, 1998 there were approximately $100,000 of outstanding
commercial and standby letters of credit transactions with these
individuals and their related entities
12. OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet Risk and Commitments: In the normal course of
business, the Bank utilizes various financial instruments with
off-balance sheet risk to meet the financing needs of its customers,
including commitments to extend credit, commercial letters of credit,
shipping guarantees, standby letters of credit and forward foreign
exchange contracts. These financial instruments involve, to varying
degrees, elements of credit risk. The credit risk associated with these
financial instruments, as further discussed herein, is not recorded in
the statement of condition. The contractual or notional amounts of such
instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments. The credit risks
associated with financial instruments are generally managed in
conjunction with the Bank's statements of condition activities and are
subject to normal credit policies, financial controls, and risk
limiting and monitoring procedures.
Credit losses are incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Bank's exposure to
credit loss is represented by the contractual or notional amount of the
commercial letters of credit, shipping guarantees, and standby letters
of credit. This is the maximum potential loss of principal in the event
the commitment is drawn upon and the counter party defaults.
Asummary of the Bank's contractual or notional amounts for financial
instruments with off-balance sheet risk as of December 31, 1999 and
1998 along with a further discussion of these instruments, is as
follows (dollars in thousands):
CONTRACTUAL OR
NOTIONAL AMOUNT
---------------------
1999 1998
-------- --------
Commercial letters of credit.............................. $129,475 $116,078
Standby letters of credit................................. 21,340 12,566
Shipping guarantees (indemnity letters)................... 629 72
Commitments to purchase foreign currency.................. 5,862 2,850
Commitments to sell foreign currency...................... 5,879 4,303
Commitments to extend credit.............................. 64,220 47,636
Acommercial letter of credit is an instrument containing the commitment
of the Bank stating that the Bank will honor drawings under and in full
compliance with the terms of the letter of credit. The letters of
credit are usually drawn on the presentation of certain required
documents, such as commercial invoice and bills of lading. Essentially,
letters of credit facilitate the purchase of merchandise by the Bank's
customers by substituting the credit standing of the Bank for that of
the Bank's customer. Commercial letter of credit contracts are
generally for a short commitment period.
Standby letters of credit are commitments issued to guarantee the
performance of a customer to a third party. The Bank issues standby
letters of credit to ensure contract performance or assure payment by
its customers. The
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guarantees extend for periods up to 12 months. The risk involved in
issuing standby letters of credit is the same as the credit risk
involved in extending loan facilities to customers and they are subject
to the same credit approvals and monitoring procedures. The Bank holds
certificates of deposit and guarantees from other banks as collateral
supporting those commitments for which collateral is deemed necessary.
The extent of collateral held for standby letters of credit commitments
at December 31, 1999 varies from zero percent to 100 percent.
Shipping guarantees (also known as indemnity letters) are letters of
guarantee issued by the Bank on behalf of its customer in favor of
shipping agents. Normally, such facility is extended in instances where
goods purchased under letters of credit have arrived at the port of
destination and the shipping documents necessary for the release of the
goods have not been received by the Bank. The purpose of 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 counter parties 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 counter party.
Litigation: See Note 17, "Subsequent Events," for legal developments
subsequent to December 31, 1999.
On January 31, 1998, Development Specialists, Inc., the Liquidating
Trustee of the Model Imperial Liquidating Trust established under the
Plan of Reorganization in the Model Imperial, Inc. Chapter 11
Bankruptcy proceeding, filed an action against the Bank in the United
States Bankruptcy Court for the Southern District of Florida objecting
to the Bank's proof of claim in the Chapter 11 proceeding and
affirmatively seeking damages against the Bank in excess of $34 million
for alleged involvement with former officers and directors of Model
Imperial, Inc. in a scheme to defraud Model Imperial, Inc. and its bank
lenders. The action is one of several similar actions filed by the
Trustee against other defendants that were involved with Model Imperial
seeking the same damages as in the action against the Bank. The Company
believes the claims are without merit, and the Bank is vigorously
defending the action. A trial on various bankruptcy preference issues
was held in November 1999, and the parties are awaiting the judge's
ruling.
From time to time the Bank is engaged in additional litigation
incidental to its operations.
While any litigation contains an element of uncertainty, the Bank,
after considering the advice of legal counsel, believes the outcome of
all aforementioned litigation will not have a material adverse effect
on the Bank's financial position, results of operations or liquidity.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, Disclosures About Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company using
available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required to interpret
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the
amounts the Company could realize in a current market exchange. The use
of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
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comprehensively revalued for purposes of these financial statements
since December 31, 1999 and, therefore, current estimates of fair value
may differ significantly from the amounts presented herein (dollars in
thousands).
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents .......................... $ 85,110 $ 85,110 $ 111,790 $ 111,790
Interest-earning deposits with other banks ......... 165,685 165,685 200,203 200,203
Securities available for sale ...................... 274,277 274,277 69,725 69,725
Securities held to maturity ........................ 35,870 38,199
Loans, net ......................................... 1,081,256 1,071,869 1,150,903 1,147,973
Liabilities:
Demand deposits .................................... 220,180 220,180 167,372 167,372
Time deposits ...................................... 1,315,426 1,315,434 1,309,680 1,314,000
Other borrowings ................................... 6,116 6,116
Trust preferred securities ......................... 12,650 9,962 11,000 11,000
Contingent assets and liabilities:
Bankers acceptances ................................ 27,767 208 75,567 567
Deferred payment letters of credit ................. 5,835 26 6,468 29
Off-balance sheet instruments -
unrealized gains (losses):
Commitments to extend credit ....................... 124 90
Commercial letters of credit ....................... 323 273
Standby letters of credit .......................... 320 188
Indemnity letters of credit ........................ 2 1
Commitments to purchase foreign currency ........... 66 (8)
Commitments to sell foreign currency ............... 238 29
Cash and Cash Equivalents - The carrying amount of cash on hand, demand
deposits with other banks, and federal funds sold is a reasonable
estimate of fair value.
Interest-Earning Deposits with Other Banks - The fair value of time
deposits with other banks (several of which are foreign) is estimated
using the rates currently offered for deposits of similar remaining
maturities and taking into account the creditworthiness of the other
bank.
Securities Available for Sale, Securities Held to Maturity and Trust
Preferred Securities - The fair values are based on quoted market
prices or dealer quotes. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar
securities.
Loans - The interest rates for commercial loans and acceptances
discounted are based on the prime lending rate. The Bank updates these
interest rates on a monthly basis. Thus, the carrying amount of
commercial loans and acceptances discounted is a reasonable estimate of
fair value. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities.
Demand Deposits and Time Deposits - The fair value of demand deposits,
savings accounts, and certain money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed-
maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Other Borrowings - The carrying amount of other borrowings is a
reasonable estimate of fair value.
Contingent Assets and Liabilities - The fair values of these assets and
corresponding liabilities are estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counter parties.
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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 counter parties. For fixed-rate
loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for
similar agreements, or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the
reporting date. The fair values of commitments to purchase and sell
foreign currency are based on quoted market prices or dealer quotes.
14. FOREIGN ACTIVITIES
The Company's foreign activities primarily consist of providing global
trade finance, with particular emphasis on trade finance, with and
between South America, Central America, the Caribbean (the "Region")
and the United States or otherwise involving the Region. The Company
considers assets and revenues as associated with foreign activities on
the basis of the country of domicile of the customer. The nature of the
Company's operations make it difficult to determine precisely foreign
activities profitability since it involves the use of certain
judgmental allocations. Rates used to determine charges or credits for
funds used or generated by foreign activities are based on actual costs
during the period for selected interest-bearing sources of funds. Other
operating income and expenses are determined based upon internal
allocations appropriate to the individual activities. Operating income
represents net interest income plus non-interest income. A summary of
the Company's domestic and foreign activities as of and for the years
ended December 31, 1999, 1998 and 1997 is as follows (dollars in
thousands):
INCOME (LOSS) BEFORE
OPERATING PROVISION FOR NET TOTAL
INCOME INCOME TAXES INCOME (LOSS) ASSETS
---------- -------------------- ------------- ----------
1999
Domestic ................... $ 27,739 $ 12,789 $ 9,855 $ 653,206
Foreign .................... 53,308 (16,821) (12,064) 1,047,481
---------- ---------- ---------- ----------
Total ...................... $ 81,047 $ (4,032) $ (2,209) $1,700,687
========== ========== ========== ==========
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
========== ========== ========== ==========
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15. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Hamilton Bancorp Inc. (Parent
Company only), as restated for the matters described in Note 18 is as
follows (dollars in thousands):
STATEMENTS OF CONDITION
DECEMBER 31,
------------------------------
1999 1998
---------- ----------
AS RESTATED
ASSETS
Demand deposit with the Bank .......................... $ 5,536 $ 190
Securities available for sale ......................... 888 9,763
Goodwill, net ......................................... 361 404
Other assets .......................................... 1,351 960
Investment in subsidiaries ............................ 79,584 79,239
Investment in the Bank's preferred stock .............. 38,650 30,050
---------- ----------
Total ................................................. $ 126,370 $ 120,606
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debentures held by the Trust ............. $ 13,041 $ 11,340
Other liabilities ..................................... -- 24
Stockholders' equity .................................. 113,329 109,242
---------- ----------
Total ................................................. $ 126,370 $ 120,606
========== ==========
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
-------- -------- --------
AS RESTATED
STATEMENTS OF OPERATIONS
Interest income ..................................................... $ 313 $ 530 $ 339
Dividends from Bank and other income ................................ 4,708 2,258 1,105
-------- -------- --------
Total income ................................................ 5,021 2,788 1,444
Interest expense .................................................... 1,270 12
Operating expenses .................................................. 1,290 1,539 294
-------- -------- --------
Total expenses .............................................. 2,560 1,551 294
Income before equity in undistributed income (loss) of subsidiary ... 2,461 1,237 1,150
Equity in undistributed income (loss) of subsidiaries ............... (5,340) 6,087 14,787
-------- -------- --------
Income before income tax (benefit) provision ........................ (2,879) 7,324 15,937
Income tax (benefit) provision ...................................... (670) (171) 34
-------- -------- --------
Net income .......................................................... $ (2,209) $ 7,495 $ 15,903
======== ======== ========
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YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
---------- ---------- ----------
AS RESTATED
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income (loss) ........................................... $ (2,209) $ 7,495 $ 15,903
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Equity in undistributed (loss) income of subsidiary .... 5,340 (6,087) (14,787)
Write down on security available for sale .............. 587
Amortization of goodwill ............................... 43 43 43
Other .................................................. (517) 1,198 (269)
---------- ---------- ----------
Net cash provided by operating activities ............ 2,657 3,236 890
---------- ---------- ----------
Cash flows from investing activities:
Purchase of securities available for sale ................... (80,307) (140,163) (96,504)
Proceeds from maturities of securities available for sale ... 89,354 131,172 95,216
Payment for investment in Bank's common stock ............... (20,237)
Payment for investment in the Bank's preferred stock ........ (8,600) (15,300) (10,000)
Payment for investment in the Trust's common stock .......... (51) (340)
---------- ---------- ----------
Net cash provided by (used in) investing activities .... 396 (24,631) (31,525)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock ...................... 592 2,050 38,994
Proceeds from issuance of trust preferred securities ........ 1,701 11,340
Cash dividends on preferred stock ........................... (319)
---------- ---------- ----------
Net cash provided by financing activities ...................... 2,293 13,390 38,675
---------- ---------- ----------
Net increase (decrease) in cash ................................ 5,346 (8,005) 8,040
Cash at beginning of year ...................................... 190 8,195 155
---------- ---------- ----------
Cash at end of year ............................................ $ 5,536 $ 190 $ 8,195
========== ========== ==========
16. LOSS ON EXCHANGE
During 1998 the Company purchased certain securities at an aggregate
cost of approximately $94 million and sold certain loans for aggregate
proceeds of $20 million. These transactions were originally accounted
for 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 2000, the
Company's Audit Committee, with the assistance of independent counsel,
conducted an investigation into these transactions. After evaluating
the results of the investigation, including the consideration of
certain additional information that the Company received from the OCC,
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. In
accordance with SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities, the Company
recorded a loss on the exchange of $22.2 million for the year ended
December 31, 1998 to record the securities acquired at their estimated
fair value at the time of acquisition. The conclusion to record the
$22.2 million as a loss on exchange was based upon the fact that at the
date of the exchange: (1) the loans sold were performing in accordance
with all original contractual terms and had a carrying value of $20
million, (2) the securities purchased had a fair value of $71.8 million
and (3) the net cash transferred by the Company was approximately $74
million. All of the securities acquired in the transactions, some of
which are classified as loans at December 31, 1998, were subsequently
designated as available for sale securities during the fourth quarter
of 1999 and marked to market.
17. SUBSEQUENT EVENTS
Regulatory Developments Subsequent to December 31, 1999 - In February
2000, the OCC initiated a formal administrative action against the Bank
alleging various unsafe and unsound practices discovered through an
Examination of the Bank as of August 23, 1999. On September 8, 2000,
the OCC and the Bank settled the administrative action by entering into
a cease and desist order by consent (the "September 8 Order"). The
September 8 Order required the Bank to comply with, among other things,
certain accounting and capital requirements and to make specified
reports and filings. The September 8 Order also required the
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Bank to maintain by September 30, 2000 Tier 1, Total and leverage
capital ratios of 10%, 12% and 7%, respectively, and to not pay
dividends without the prior written approval of the OCC. As of December
31, 2000, the Bank's Tier 1, Total and leverage capital ratios were
9.4%, 10.7% and 6.5%, respectively, and as a result, the Bank was not
in compliance with the capital requirements of the September 8 Order.
Failure of the Bank to comply with the terms of the September 8 Order
could result in the assessment of civil money penalties, the issuance
of an order by a District Court requiring compliance with the September
8 Order, the placing of restrictions on the source of deposits or, in
certain circumstances, the appointment of a conservator or receiver. In
addition, the FDIC may initiate a termination of insurance proceeding
where there has been a violation of an order.
On March 28, 2001, the OCC issued a Notice of Charges for Issuance of
an Amended Order to Cease and Desist (the "Notice of Charges") against
the Bank. The Notice of Charges alleged that the Bank has violated
certain federal banking laws and regulations by, among other things,
(i) making loans in 1999 in violation of applicable lending limits;
(ii) failing to file accurate Call Reports; (iii) failing to file
Suspicious Activity Reports ("SARs") with respect to certain
transactions; (iv) failing to provide a system of internal controls to
ensure ongoing compliance with the Bank Secrecy Act (the "BSA") and (v)
engaging in unsafe and unsound practices. The Notice of Charges also
alleged that the Bank has violated the September 8 Order by approving
certain overdrafts and making certain loans, and has not complied with
certain other provisions of the September 8 Order. Under the Notice of
Charges, the OCC seeks the issuance of an Amended Order to Cease and
Desist (the "Proposed Amended Order").
In connection with the issuance of the Notice of Charges, the OCC
issued a Temporary Order to Cease and Desist (the "Temporary Order")
also on March 28, 2001. The Temporary Order requires the Bank to, among
other things, (i) comply with specified internal procedures in
connection with the making of loans and overdrafts and the placement of
funds; (ii) develop, implement and adhere to a written program
acceptable to the OCC to ensure compliance with the BSA; (iii) comply
with specified procedures with respect to pouches received by the Bank
and existing foreign correspondent accounts; and (iv) develop,
implement and adhere to a written program acceptable to the OCC to
ensure compliance with the requirements to file SARs. In addition, the
Temporary Order prohibits the Bank from engaging in transactions with
certain named persons and entities, or with any parties who provide
funding to such persons and entities.
The Proposed Amended Order contains provisions which are substantially
the same as those contained in the Temporary Order, as well as
additional requirements. The additional provisions contained in the
Proposed Amended Order would also require the Bank to, among other
things, (i) achieve and maintain Tier 1, Total and leverage capital
ratios of 12%, 14% and 9%, respectively; (ii) develop, implement and
adhere to a three year capital plan acceptable to the OCC; and (iii)
obtain the approval of the OCC with respect to the appointment of new
directors and senior officers.
In addition, by letter dated March 28, 2001 (the "PCA Notice"), the OCC
notified the Company of its intent to "reclassify" the capital category
of the Bank to "undercapitalized" for purposes of Prompt Corrective
Action ("PCA") based on the OCC's determination that the Bank is
engaging in unsafe and unsound banking practices. Should the OCC be
successful in reclassifying the Bank, the OCC may require that the Bank
comply with certain regulatory requirements as if it were truly
undercapitalized, even though under OCC regulations, the Bank is
classified as "adequately capitalized" because of the existence of the
September 8 Order.
The regulatory requirements the OCC may impose should the Bank be
reclassified as "undercapitalized" include (i) restrictions on capital
distributions, the payment of management fees, and/or asset growth,
(ii) requiring OCC monitoring of the Bank, and (iii) requiring that the
Bank obtain the OCC's prior approval with regards to acquisitions,
branching and engaging in new lines of business.
With respect to the above, Management of the Company believes the
Company has several means by which to achieve compliance with the
prescribed capital requirements of the September 8 Order. Such plans
initially provide for reducing the Bank's size through selected asset
run-off; the sale of credit risk which effectively decreases the Bank's
regulatory capital requirements; targeted loan sales, including the
sale of the Ecuador portfolio subject to ATRR, and loan participations
to other banks; and shifting assets to liquid investments which
decreases regulatory capital requirements. Additionally, the Bank is
working to reach compliance with the other requirements of the
September 8 Order.
But for the September 8 Order requiring the Bank to achieve and
maintain higher capital levels, the Bank's capital category as of
December 31, 2000 would have been "well capitalized," which required
that Tier I, Total and leverage capital ratios equal or exceed 6%, 10%
and 5%, respectively.
Further, management of the Company does not believe that the ratios in
the Proposed Amended Order are appropriate or warranted and Management
does not intend to agree to such ratios voluntarily. In addition.
Management believes the timeframes for achieving such ratios set forth
in the Proposed Amended Order are commercially unreasonable.
However, assuming that the ratios were in fact lawfully imposed and
that the Bank was given a reasonable time to achieve such ratios,
management believes and anticipates that the Bank would continue to
take the actions outlined above in an orderly manner to meet required
ratios.
On March 30, 2001, the Company was advised by the Federal Reserve Bank
of Atlanta (the "FRB"), its primary regulator, that the Company and
Hamilton Capital Trust should not pay any dividends, distributions or
debt payments without the prior approval of the FRB. The Company
obtained approval from the FRB to pay the dividend payable on April 2,
2001, amounting to approximately $309,000, on the Series A Beneficial
Unsecured Securities (the "Trust Preferred") issued by Hamilton Capital
Trust I. There can be no assurance that the FRB will approve any future
payments. The Company will not seek such approval and will not pay
dividends on the Trust Preferred until the Company's financial
condition improves. Pursuant to the documents governing the Trust
Preferred, the Company and Hamilton Capital Trust I have the right,
under certain conditions, to defer dividend payments for up to 20
consecutive quarters. Any payments deferred in this manner will
continue to accumulate.
Legal Developments Subsequent to December 31, 1999 - In May 2000, the
judge rendered a decision in the trial of various bankruptcy claims
involving Development Specialists, Inc., the liquidating trustee of the
Model Imperial Liquidating Trust. See the "Litigation" section of Note
12. The judge's decision held that Hamilton Bank's proof of
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claim was subordinate to DSI's and granting monetary bankruptcy
preference damages against the Bank in the amount of $2,448,148. Both
the Bank and DSI appealed this decision. In December 2000 an agreement
was reached in which the Bank made a net payment of approximately $3.9
million to the Liquidating Trust to settle the case. In his March 28,
2001 Order approving the settlement, the Judge specifically found that
the Court had not been presented with any evidence that the Bank had
actual knowledge of any transactions lacking in economic substance. The
Judge also found that the Bank was unaware of Model Imperial's
deteriorating financial condition and that the Bank was instead a
victim of Model Imperial's inappropriate transactions.
Six class action lawsuits were filed against the Company and certain
officers in the Federal District Court for the Southern District of
Florida between January 12 and March 9, 2001. The class actions have
been brought purportedly on behalf of (i) all purchasers of common
stock of the Company between April 21, 1998 and December 22, 2000, or
(ii) all purchasers of Hamilton Capital Trust I, series A shares
between December 23, 1998 and December 22, 2000. These cases seek to
pursue remedies under the Securities Exchange Act of 1934 or the
Securities Act of 1933. The cases have been consolidated as In re
Hamilton Bancorp, Inc. Securities Litigation, Case No. 01-156 in the
United States District Court for the Southern District of Florida, and
the lead plaintiffs appointed by the Court are in the process of
preparing a consolidated amended complaint. The discovery process has
not yet begun.
The allegations of the six actions are similar in all material
respects. Generally, the complaints allege that the defendants made
false and misleading statements and omissions between April 21, 1998
and December 22, 2000 with respect to the Company's financial
condition, net income, earnings per share, internal controls,
underwriting of transactions of loans, recording of securities
purchases and loan sale transactions, accounting for certain financial
transactions as independent transactions, the credit quality of the
Company's loan portfolio, credit loss reserves, inquiries and orders by
the Office of the Comptroller of the Currency, and reporting in
accordance with GAAP and related standards, in press releases, Forms
10-Q filed on May 14, 1998, August 14, 1998, November 16, 1998,
November 10, 1999, May 16, 2000, August 14, 2000, and Forms 10-K filed
on March 31, 1999 and April 14, 2000.
Edie Rolando Pinto Lemus v. Hamilton Bank, N.A., was filed in the
Federal District Court for the Southern District of Florida on
September 12, 2000. The complaint alleges counts for civil conspiracy,
conversion, unjust enrichment, money had and received, breach of
fiduciary duty, constructive trust, breach of contract and civil theft.
Plaintiff alleges that he is a resident of Guatemala and that he was a
customer of the Bank through two other individuals, who he also alleges
were directors of the Bank. The plaintiff alleges that US$9,970,000 was
stolen from him and deposited into "his" account at the Bank, which
money was "not returned to him" and thereby converted by the Bank.
Plaintiff claims that this action also constitutes civil theft under
Florida statutes and that, therefore, he is entitled to treble damages.
The plaintiff was a customer of the Bank for a short period of time
(less than three months) in 1995. The allegations in the complaint,
however, do not appear to bear any relation to that account.
The plaintiff had previously sued the other two persons in Guatemala
making virtually identical claims. The plaintiff lost that action. The
Company is seeking to have the case dismissed based upon forum non
conveniens. On May 2, 2001, the motion was denied. Exceptions will be
filed with the District Court with a petition for certification for an
appeal to the Eleventh Circuit Court of Appeals in the alternative.
18. RESTATEMENT
Subsequent to the filing of the Company's amended 1999 Annual Report on
Form 10-K/A and after extensive communications with the staff of the
Securities and Exchange Commission in connection with a review by the
staff of the Company's 1999 Annual Report on Form 10-K and 10-K/A and
the staff's comments thereon, management determined that the Company
should record approximately $32.7 million of ATRR on certain Ecuadorian
exposure in its 1999 consolidated financial statements. Additionally,
the Company determined that it should reclassify as of December 31,
1999, approximately $22 million in foreign interbank placements from
interest earning deposits with other banks, which are subject to ATRR
requirements, to loans. Accordingly, the Company has restated its 1999
consolidated financial statements from amounts previously reported to
record the ATRR and the reclassification of
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certain interbank placements to loans. The ATRR are required for
exposures with respect to any country rated "value impaired" by the
ICERC. The ICERC recommends an appropriate percentage level for ATRR,
90% in the case of Ecuador, for exposures rated "value impaired". ATRR
is a specific reserve which is triggered when an obligation is more
than 30 days past due and/or has been restructured to avoid
delinquency. For purposes of ATRR, a credit is considered to be current
if it would not be reported as "past due" or "non-accrual", as those
terms are defined in the instructions for schedule RC-N of the Call
Report.
The restated consolidated financial statements for 1999 include amounts
for the allowances for credit losses and ATRR consistent with the
amounts the Company recorded in its 1999 Call Reports. The ATRR had
been previously disclosed in Note 8 to the Company's consolidated
financial statements presented in the Company's 1999 Annual Report on
Form 10K and 10K/A as a reconciling item between stockholders' equity
pursuant to accounting principles generally accepted in the United
States of America ("GAAP") and Tier 1 Capital determined under
regulatory accounting principles. The recording of ATRR for GAAP has no
impact on regulatory capital and capital ratios of the Company, since
the ATRR has been deducted for such purposes since initially being
recorded in the Call Reports.
In accordance with Staff Accounting Bulletin No. 56, Reporting of An
Allocated Transfer Risk Reserve in Filings Under the Federal Securities
Law, the Company has disclosed the ATRR as a separate allowance, see
Note 3.
The following table summarizes the significant effects of the
restatement:
As Previously
REPORTED AS RESTATED
AS OF DECEMBER 31, 1999
Interest Earning Deposits With Other Banks ............ $ 187,685 $ 165,685
Loans - Net ........................................... 1,091,976 1,081,256
Other Assets .......................................... 22,672 34,779
Other Liabilities ..................................... 5,544 5,500
Retained Earnings ..................................... 67,871 47,302
Total Stockholders' Equity ............................ 133,898 113,329
FOR THE YEAR ENDED DECEMBER 31, 1999
Provision for Transfer Risk ........................... -- 32,720
Net Interest Income After Provisions .................. 40,057 7,337
Other Operating Expenses .............................. 9,461 9,416
Income (Loss) before Income Taxes ..................... 28,643 (4,032)
Provision For (Benefit From) Income Taxes ............. 10,283 (1,823)
Net Income (Loss) ..................................... 18,360 (2,209)
Net Income (Loss) Per Common Share:
Basic ................................................. $ 1.82 $ (.22)
Diluted ............................................... $ 1.79 $ (.22)
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Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
2. Exhibits. The following exhibits were added or amended as indicated
and are incorporated herein:
DESCRIPTION OF EXHIBIT
11.1 Computation of Earnings Per Share has been added
23.1 Consent of Deloitte & Touche LLP has been amended
27 Financial Data Schedule (for SEC use only) has been amended
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized, this 30th
day of May, 2001.
HAMILTON BANCORP INC.
/s/ EDUARDO A. MASFERRER
---------------------------------------
Eduardo A. Masferrer
Chairman and Chief Executive Officer
/s/ LUCIOUS T. HARRIS
---------------------------------------
Lucious T. Harris
Executive Vice President and Chief
Financial Officer
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