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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________
Commission file number 0-20960
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Hamilton Bancorp Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0149935
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3750 N.W. 87th Avenue, Miami, Florida 33178
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (305) 717-5500
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
9.75% Beneficial Unsecured Securities, Series A
(Liquidation Amount $10 per Capital Security) of Hamilton Capital Trust I
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(Title of Class)
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Indicate by check mark _ 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. [X]
The aggregate market value of Registrant's Common Stock held by
non-affiliates of the Registrant as of May 17, 2001 was $82,827,261 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 May 17, 2001, 10,081,147 shares
of Registrant's Common Stock were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of the following documents (as more specifically
identified elsewhere in this Annual Report) are incorporated by reference
herein:
None
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FORWARD-LOOKING STATEMENTS
Information contained (or incorporated by reference) in this Annual
Report may constitute "forward-looking statements." Statements used (or
incorporated by reference) in this Annual Report which use words such as
"believes," "expects," "may," "will," "should," "projected," "contemplates" or
"anticipates" or the negative of such terms or other variations may constitute
forward-looking statements. Forward-looking statements are inherently uncertain,
and there is no assurance that such forward-looking statements will be accurate.
Such forward-looking statements include, without limitation, the Company's
expectations and estimates as to domestic and international business and
economic conditions and its business operations, including increases or
decreases in net interest income and net income and allocations of country
exposures. Other factors, such as the general state of the United States
economy, as well as the economic and political conditions of the countries in
which the Company conducts business operations, could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
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 profitable growth 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 300 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 the 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 and Nicaragua. Historically, 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.
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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 overall economy in the Region has grown and stabilized over
recent years 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 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, 2000, approximately 57% of the Company's loan
portfolio consisted of short-term principally trade related loans maturing
within 180 days and approximately 68% 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, Peru and Venezuela, have been characterized by frequent and
occasionally drastic intervention by the governments and volatile economic
cycles. Governments have often changed monetary, credit, tariff and other
policies to influence the course of their respective economies. The actions of
the Brazilian, Ecuadorian, Peruvian 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, Peruvian 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
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and securities of issuers in other countries. Over the years developments in
other countries or regions of the world have adversely affected the securities
and other financial markets in many emerging markets, including Brazil, Ecuador,
Peru and Venezuela. A result of these difficulties has been the closing,
intervention or forced consolidation of numerous banks in some countries in the
Region, especially in Ecuador and Peru. To date the Ecuadorian government has
guaranteed the deposits and trade obligations of the closed banks in Ecuador.
These systemic collapses have a significant adverse economic effect on the
economies of the countries involved. There can be no assurance that the various
financial and securities markets in the Region, including Brazil, Ecuador, Peru
and Venezuela, will not continue to be adversely affected by events elsewhere,
especially in other emerging markets and in other countries in the Region.
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'
relatively 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
attempted to capitalize on export opportunities as a way to increase production,
stimulate revenues and thereby "export out" of their economic difficulties.
While much of the 1999 decrease in imports into the Region was reversed in 2000,
the Company in 2000 continued 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 continued to be
significantly reduced in 2000 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 1980s, 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
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Region has grown significantly during the five year period ended December 31,
2000. Recent treaties and agreements relating to trade are expected to eliminate
certain trade barriers and open up certain economic sectors to competition, as
well as to liberalize trade between the United States and many countries with
respect to a variety of goods and services. A high and increasing percentage of
this trade requires financing. The growth and importance of trade in the United
States and the Region also increases the number of small and medium-sized firms
engaged in trade and in need of trade finance services. Many financial
institutions in the United States in general and Florida in particular are not
adequately staffed to handle such financing on a large scale, or to judge the
creditworthiness of companies or banks in the Region and, accordingly, eschew
trade financing or limit the scope of their trade financing activity. This has
been partially responsible for the expanding market for the Company's trade
financing services.
Management believes that the Company has carved out a niche for itself
as the only Florida financial institution the business of which is focused
predominantly on financing foreign trade in the Region. The Company initially
focused on providing services and products to smaller banks and corporate
customers in the Region and smaller companies in Florida doing business in the
Region, as well as financial institutions and customers in smaller countries in
the Region where a more limited number of large, multinational banks conduct
business. The Company's willingness to provide trade financing in these
situations frequently results in it obtaining business from the same customers
involving larger countries in the Region, as well. A significant percentage of
the Company's trade financing business now involves such larger countries. The
Company does not, however, have a significant share of the overall market in
larger countries in the Region, such as Brazil and Argentina, where it competes
more frequently with larger, multinational financial institutions. The Company
also provides products and services for multinational corporations, such as
major commodities houses, and purchases participation interests in the trade
financing of multinational financial institutions to companies in the Region.
The Company's trade financing allows for the movement of commodities such as
sugar, grain and steel, and consumer goods such as textiles and appliances, as
well as computer hardware, capital equipment and other items.
TRADE FINANCE SERVICES AND PRODUCTS
The manufacture or production and distribution of any product or good
generally results in a number of trade transactions which, together, make up a
trade cycle. For example, a seller of shirts purchases buttons and materials,
arranges for manufacture and often contracts with a distributor who sells the
products to retailers. The Company attempts to become involved in and to finance
as many stages of a trade cycle as possible. Since the Company's primary focus
is on trade finance, the Company offers a wider array of trade finance products
and services than most institutions it competes with, although some of the
Company's products and services, such as import and export letters of credit,
are offered by almost all financial institutions engaged in trade finance, and
most of the Company's products are offered by some financial institutions. The
principal trade related products and services which the Company offers include:
o 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
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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."
o 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.
o 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.
o 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.
o 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
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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.
o 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.
o 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.
o 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.
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.
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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 smaller 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, 2000 the Company had 272 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.
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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, 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.
In 1999 the Gramm-Leach-Bliley Act ( "G-L-B Act") was enacted. The
G-L-B Act is a major financial services modernization law that, among other
things, facilitates broad new affiliations among securities firms, insurance
firms and bank holding companies by repealing the 66-year old provisions of the
Glass-Steagall Act. The major provisions of the G-L-B Act became effective March
11, 2000. The G-L-B Act permits the formation of financial holding companies
("FHCs") - I.E., bank holding companies with substantially expanded powers -
under which affiliations among bank holding companies, securities firms and
insurance firms may occur, subject to a blend of umbrella supervision and
regulation of the newly formed consolidated entity by the Federal Reserve,
oversight of the FHC's bank and thrift subsidiaries by their primary federal and
state banking regulators and functional regulation of the FHC's nonbank
subsidiaries - such as broker-dealers and insurance affiliates - by their
respective specialized regulators.
The United States Bank Holding Company Act requires, among other
things, the prior approval of the Federal Reserve in any case where a bank
holding company proposes to (i) acquire all or substantially all of the assets
of a bank, (ii) acquire direct or indirect ownership or control of more than 5%
of the outstanding voting stock of any bank (unless it already owns a majority
of such bank's voting shares), (iii) merge or consolidate with any other bank
holding company or (iv) establish, or become, a FHC.
Hamilton Bancorp is required by the Federal Reserve to act as a source
of financial strength and to take measures to preserve and protect Hamilton
Bank. As a result, Hamilton Bancorp may be required to inject capital in
Hamilton Bank if Hamilton Bank at any time lacks such capital and requires it.
The Federal Reserve may charge a bank holding company such as Hamilton Bancorp
with unsafe and unsound practices for failure to commit resources to a
subsidiary bank when required. Any loans from Hamilton Bancorp to Hamilton Bank
which would count as capital of Hamilton Bank must be on terms subordinate in
right of payment to deposits and to most other indebtedness of Hamilton Bank.
The Federal Reserve, the Office of the Comptroller of the Currency
("OCC") and the Federal Deposit Insurance Corporation collectively have
extensive enforcement authority over bank holding companies and national banks
in the United States. This enforcement authority, initiated generally for
violations of law and unsafe or unsound practices, includes, among other things,
the ability to assess civil money penalties, to initiate injunctive actions, to
issue orders prohibiting or removing a bank holding company's or a bank's
officers, directors and employees from participating in the institution and, in
rare cases, to terminate deposit insurance.
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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.
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, 2000 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
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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,
2000 and 1999 are discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources."
Failure to meet applicable capital guidelines could subject a bank or
bank holding company to a variety of "prompt corrective action" enforcement
remedies available to the federal bank regulatory authorities, including
limitation on the ability to pay dividends, the issuance of a capital directive
to increase capital and, in the case of a bank, the issuance of a cease and
desist order, the imposition of civil money penalties, the termination of
deposit insurance by the Federal Deposit Insurance Corporation or (in severe
cases) the appointment of a conservator or receiver. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital Resources."
See Recent Regulatory Developments on page 14.
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.
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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.
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.
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See Recent Regulatory Developments on page 14.
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 by law 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. Under the September 8, 2000 Order discussed below in Recent Regulatory
Developments, Hamilton Bank also may not pay dividends without the prior
approval of the OCC. See Recent Regulatory Developments on page 14.
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.
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 to Hamilton
Bancorp or any other future affiliate generally are limited in amount to 10% of
Hamilton Bank's capital and surplus, or 20% in the aggregate to Hamilton Bancorp
and all such affiliates. 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
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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." Since September 8, 2000, 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
6%, 10% and 5%, respectively.") See Recent Regulatory Developments on page 14.
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
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issued to deal with the savings and loan crisis of the late 1980's. As a result,
commercial bank deposits are now also subject to assessment by the Financing
Corporation upon the approval by the Federal Deposit Insurance Corporation of
such assessment. Beginning in 1997 and until the earlier of December 31, 1999 or
the date on which the last saving association ceases to exist, the assessment
rate the Financing Corporation imposes on a commercial bank must be at a rate
equal to one-fifth the assessment rate applicable to deposits assessable by the
Savings Association Insurance Fund.
RESERVE REQUIREMENTS
Hamilton Bank is required to maintain reserves against its transaction
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, 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 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
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, 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 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.
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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.
Hamilton Bank has not agreed to the allegations in the Notice of
Charges or the Proposed Amended Order, and Hamilton Bank is appealing and
disputing the Notice of Charges and the Proposed Amended Order in
appropriate administrative actions within the OCC through Hamilton Bank's
Washington, D.C. outside regulatory counsel.
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. (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 6%, 10% and 5%, respectively.)
The regulatory requirements the OCC may impose should Hamilton Bank be
reclassified under the PCA proceeding 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.
Hamilton Bank has not agreed to the PCA Notice and requested an
administrative hearing on the PCA Notice within the OCC. The hearing was held on
May 11, 2001 and to date the hearing officer has not rendered a decision.
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.
ITEM 2. PROPERTIES.
The Company's operations are currently managed from their corporate
headquarters located in Miami, Florida, where a branch office is also located.
Hamilton Bank's other branch offices are located in Tampa, Winter Haven,
Sarasota, West Palm Beach, Weston and Miami, Florida, and in San Juan, Puerto
Rico. Three of the facilities are owned by the Company and six are leased
(including the Company's headquarters).
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The table below summarizes the Company's owned and leased facilities.
Approximate
Location Type of Facility Square Feet Leased or Owned
---------------------- ----------- ---------------
Miami, Florida Corporate headquarters 75,500 Leased
and branch
Miami, Florida Branch 3,000 Leased
Miami, Florida Branch 3,000 Owned
San Juan, Puerto Rico Branch 3,500 Leased
Sarasota, Florida Branch 2,000 Owned
Tampa, Florida Branch 3,000 Leased
West Palm Beach, Florida Branch 5,000 Leased
Weston, Florida Branch 3,500 Leased
Winter Haven, Florida Branch 4,500 Owned
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
in February 2001 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.
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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 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.
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) The Company's Common Stock is traded on the NASDAQ National Market
(Symbol HABK). The following table sets forth the high and low sales prices of a
share of Common Stock as reported by the NASDAQ National Market for the last two
calendar years.
Quarter High Low
------- ------- -------
Fourth Quarter 2000 $17.938 $ 5.875
Third Quarter 2000 18.438 14.00
Second Quarter 2000 20.50 13.875
First Quarter 2000 18.50 13.50
Fourth Quarter 1999 21.75 17.814
Third Quarter 1999 27.25 21.25
Second Quarter 1999 26.25 20.00
First Quarter 1999 29.00 22.375
The Company received a Nasdaq Staff Determination on April 19, 2001
indicating that the Company is subject to delisting, pursuant to Marketplace
Rule 4310(c)(14), from the Nasdaq National Market until it files its Annual
Report on Form 10-K for the period ended December 31, 2000. The trading
symbol(s) for the Company's securities were changed from HABK to HABKE and HABKP
to HABPE effective at the opening of business on April 23, 2001. By letter
dated the May 22, 2001 Nasdaq Staff indicated that the Company is also subject
to delisting, pursuant to Marketplace Rule 4310(c)(14), from the Nasdaq National
Market until it files its Quarterly Report on Form 10-Q for the period ended
March 31, 2001. In accordance with the Nasdaq Code of Procedures, the Company
requested a hearing before a Nasdaq Listing Qualifications Panel to review the
Nasdaq Staff Determination and a hearing is set for May 31, 2001. The Company
expects to file its Form 10-K and first quarter Form 10-Q with the Securities
and Exchange Commission prior to the hearing before the Nasdaq Listing
Qualification Panel, thereby fully complying with Nasdaq rules to remain listed
on the Nasdaq National Market. No assurance can be given regarding the expected
filing date or the results of any review if the hearing is held.
As of March 30, 2001 there were approximately 50 holders of record of
the Company's Common Stock and the closing price of Common Stock as reported by
the NASDAQ National Market for such date was $7.688. The Company has not paid
any cash dividends to date on its Common Stock and does not intend to pay any
such cash dividends in the foreseeable future. As stated in Part I above, the
Federal Reserve has requested that Hamilton Bancorp not pay any dividends
without the consent of the Federal Reserve.
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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,
2000 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,
--------------------------------------------------------------------------------
2000 1999(4) 1998 1997 1996
------------ ------------ ------------ ------------ -------------
INCOME STATEMENT DATA:
Net interest income $ 64,275 $ 67,142 $ 53,981 $ 38,962 $ 27,250
Provision for credit losses 45,749 20,300 9,621 6,980 3,040
Provision for transfer risks 4,188 32,720 -- -- --
------------ ------------ ------------ ------------ -------------
Net interest income after provisions 14,338 14,122 44,360 31,982 24,210
Trade finance fees and commissions 8,417 9,593 13,101 12,768 9,325
Structuring and syndication fees 143 1,923 3,352 2,535 138
Customer services fees 1,607 1,528 1,149 934 1,379
Net gain (loss) on securities transactions 6,535 (187) (587) 108 --
Other income, net 206 861 (49) 97 143
------------ ------------ ------------ ------------ -------------
Non-interest income 16,908 13,718 16,966 16,442 10,985
------------ ------------ ------------ ------------ -------------
Loss on exchange -- -- 22,223 -- --
Operating expenses 40,903 31,872 27,476 23,423 19,630
------------ ------------ ------------ ------------ -------------
Income (loss) before income taxes (9,657) (4,032) 11,627 25,001 15,565
Provision for (benefit from) income taxes (4,506) (1,823) 4,132 9,098 5,855
------------ ------------ ------------ ------------ -------------
Net income (loss) $ (5,151) $ (2,209) $ 7,495 $ 15,903 $ 9,710
============ ============ ============ ============ =============
PER COMMON SHARE DATA:
Net income (loss) per common share (1) $ (0.51) $ (0.22) $ 0.72 $ 1.73 $ 1.79
Book value per common share $ 10.17 $ 11.24 $ 10.87 $ 10.00 $ 8.07
Average weighted shares (1) 10,081,147 10,069,898 10,390,884 9,173,680 5,430,030
AVERAGE BALANCE SHEET DATA:
Total assets $ 1,701,238 $ 1,620,036 $ 1,506,918 $ 1,007,846 $ 687,990
Total loans 1,183,613 1,181,865 1,165,225 737,921 485,758
Total deposits 1,522,674 1,435,272 1,301,444 842,117 574,388
Stockholders' equity 111,810 109,334 107,915 79,311 39,969
PERFORMANCE RATIOS:
Net interest spread 3.15% 3.85% 3.31% 3.56% 3.89%
Net interest margin 3.88% 4.39% 3.90% 4.31% 4.56%
Return on average equity (4.61)% (2.02)% 6.95% 20.05% 24.29%
Return on average assets (0.30)% (0.14)% 0.50% 1.58% 1.41%
Efficiency ratio (2) 50.38% 39.42% 38.73% 42.28% 51.31%
ASSET QUALITY RATIOS:
Allowance for credit losses as a percentage
of total loans 3.49% 1.88% 1.10% 1.07% 1.07%
Allowance for credit losses and ATRR as
a % of loans 6.46% 4.76% 1.10% 1.07% 1.07%
NPA's as a percentage of total loans 4.43% 1.67% 0.78% 0.48% 0.91%
Allowance for credit losses as a % of NPA's 78.83% 115.27% 141.20% 166.03% 117.97%
Allowance for credit losses and ATRR as
a % of NPA's 145.83% 291.42% 141.20% 166.03% 117.97%
Net loan charge-offs as a % of average
outstanding loans 2.04% 0.99% 0.61% 0.32% 0.36%
COMPANY CAPITAL RATIOS:
Leverage capital ratio 6.65% 7.13% 7.27% 7.88% 5.80%
Tier 1 capital 9.78% 10.30% 10.86% 12.43% 10.20%
Total capital 11.10% 11.59% 12.03% 13.78% 11.50%
Average equity to average assets 6.57% 6.75% 7.16% 7.87% 5.81%
(1) Represents diluted earnings per share and average weighted shares
outstanding, respectively.
(2) Amount reflects operating expenses as a percentage of net interest
income plus non-interest income.
(3) "NPA's" is the abbreviation for nonperforming assets.
(4) Certain amounts in 1999 have been reclassified for comparative purposes.
Such reclassifications relate primarily to the inclusion of certain trade
finance fees, commissions, structuring and syndications fees in net interest
income. The amounts were not significant in the earlier periods.
20
23
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.
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.
GOING CONCERN
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 Bank to maintain Tier 1, Total and leverage capital
ratios of 10%, 12% and 7%, respectively. As of December 31, 2000, the Bank had
Tier 1, Total and leverage capital ratios of 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
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 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"). Among other
things, the Proposed Amended Order would require the Bank to maintain Tier 1,
Total and leverage capita ratios of 12%, 14% and 9%, respectively.
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.
The 2000 consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The matters
discussed above and the uncertainty of what actions the regulators might take
related to them, raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include the
adjustments, if any, that might have been required had the outcome of the above
mentioned uncertainties been known, or any adjustments relating to the
recoverability of recorded asset amounts or the amounts of liabilities that may
be necessary should the Company be unable to continue as a going concern.
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 1, 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.
The Company's continuation as a going concern is dependent on (i)
the Bank's ability to comply with the terms of regulatory orders and its
prescribed capital requirement and (ii) the severity of the actions that might
be taken by regulators as a result of non-compliance. However, there can be no
assurance that the Bank will be able to comply with such terms and achieve these
objectives.
KEY PERFORMANCE HIGHLIGHTS FOR 2000
For the year ended December 31, 2000, the Company reported a net loss of $(5.2)
million, $(0.51) per diluted share, compared to a net loss of $(2.2) million,
$(0.22) per diluted share for the year ended December 31, 1999 and net income of
$7.5 million, $0.72 per diluted share for the year ended December 31, 1998. The
return on average assets was (0.30%), (0.14% and .50% for the years ended
December 31, 2000, 1999 and 1998, respectively. The return on average equity was
(4.61%), (2.02%) and 6.95% for the years ended December 31, 2000, 1999 and 1998,
respectively. Provisions for credit losses and transfer risks recorded against
the Company's loan portfolio negatively impacted operating results for 2000 and
1999.
The Company recorded provisions for credit losses of $45.7 million, $20.3
million and $9.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The higher level of provisions is directly related to the higher
level of nonperforming loans. At December 31, 2000 nonperforming loans totaled
$54.6 million, compared to a total of $18.6 million at December 31, 1999. The
majority of the increase is attributable to two loans aggregating $30 million,
which were placed on nonaccrual status in the fourth quarter of 2000.
Provisions for transfer risks were $4.2 million in 2000, $32.7 million in 1999
and none in 1998. Provisions for transfer risks are made to establish allocated
transfer risk reserves ("ATRR"). ATRR are required in certain circumstances as
set forth in guidelines established by Federal banking regulators to provide for
the possibility that asset can not be serviced in the currency of payment (U.S.
dollars for substantially all of the Company's assets) because of a lack of, or
restraint s on the availability of, needed foreign exchange in the country of
the obligor.
During 1999, as a result of economic events in Ecuador, some of the Company's
Ecuadorian borrowers experienced financial difficulties and became subject to
the requirements for ATRR. The ATRR requirement for Ecuador is currently 90% of
the exposure amount that is subject to ATRR. As a result, the Company recorded
provisions for transfer of $32.7 million in 1999. During 2000, additional
exposure became subject to ATRR, requiring $4.2 million in provisions for
transfer risk. At December 31, 2000, approximately $41 million of Ecuadorian
exposure is subject to ATRR. The Company's total Ecuadorian exposure at December
31, 2000 was $64 million.
See "Credit Quality Review" for more discussion of the allowance for credit
losses and ATRR.
During 2000, as a result of capital management strategies, the Company sold, or
did not replace at maturity approximately $115 million in foreign debt
securities held in the available for sale category. These securities generally
had a greater risk weight for regulatory capital purposes than securities issued
by the U.S. Government or its agencies. As a consequence, foreign debt
securities decreased from $171 million at December 31, 1999 to $44
21
24
million at December 31, 2000. In connection with these sales, the Company
realized gains of sales of $10.8 million. The Company also determined that
declines in value of certain other foreign debt and equity securities were other
than temporary. As a result, these securities were written down by $4.3 million,
resulting in net gains from securities transactions of $6.5 million.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
NET INTEREST INCOME
An analysis of the Company's net interest income and average
balance sheet for the last three 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
decreased to $64.3 million for the year ended December 31, 2000 from $67.1
million for the same period in 1999, a 4.3 percent decrease. The decrease was
due largely to a higher cost of liabilities. The average rate paid on interest
bearing liabilities increased from 5.36% in 1999 to 6.12% in 2000, while
interest expense as a percentage of average earning assets rose from 4.82% to
5.39%. Average earning assets increased to $1,655.9 million for the year ended
December 31, 2000 from $1,528.5 million for the same period in 1999, a 8.3
percent increase. This increase included growth in average investment
securities, which increased approximately $149.9 million during 2000. Yields
earned on average assets increased by 6 basis points compared to the same
period. Average loans was $1,183.6 million for the year ended December 31, 2000
compared to $1,181.9 million for in 1999, while average interest-earning
deposits due from other banks decreased to $136.4 million for the year ended
December 31, 2000 from $175.9 million for the same period in 1999, a 22.5
percent decrease. Net interest margin decreased to 3.88 percent for the year
ended December 31, 2000 from 4.39 percent in the prior year.
Interest income increased to $153.5 million for the year ended
December 31, 2000 from $140.8 million for the same period in 1999, a 9.0 percent
increase, reflecting largely an increase in earning assets other than loans.
Interest expense increased to $89.2 million for the year ended December 31, 2000
from $73.6 million for the same period in 1999, a 21.2 percent increase,
reflecting the increase in deposits to fund asset growth. Average
interest-bearing deposits increased to $1,445.6 million for the year ended
December 31, 2000 from $1,358.3 million for the same period in 1999, a 6.4
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.
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 was 10.0% in 2000, unchanged from
1999. Yields earned on domestic loans increased to 9.6 percent from 8.5 percent,
reflecting the growth in higher yielding commercial real estate loans.
PROVISION FOR CREDIT LOSSES AND TRANSFER RISK
The Company's provision for credit losses increased to $45.7 million for
the year ended December 31, 2000 from $20.3 million for the same period in 1999.
This increase was due largely to loan charge-offs against the allowance for
credit losses of approximately $24 million during 2000, and an increase in
nonaccrual loans from $16.5 million as of December 31, 1999 to $54.2 million as
of December 31,2000. 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 problem-graded assets. During 2000,
management revised certain percentages used in its methodologies, increasing the
formula percentage used for problem-graded assets. In addition, the level of
problem graded assets increased in 2000 compared to 1999. See "Allowance for
Credit Losses" beginning on page 43 for more discussion.
The provision for transfer risk was $4.2 million in 2000 compared to $32.7
million in 1999. During 1999, approximately $36 million of the Company's
Ecuadorian exposure became initially subject to ATRR requirements, which is
currently 90%. As a result the provision for transfer risk in 1999 was $32.7
million. During 2000, an additional $10 million of Ecuadorian exposure subject
to ATRR became initially subject to ATRR, requiring a gross provision of
approximately $9 million. Offsetting this provision were paydowns on certain
Ecuadorian exposures, which resulted in a reduction of the gross provision of
approximately $5 million. See "Allocated Transfer Risk Reserves" beginning on
page 44 for a more detailed discussion of ATRR.
22
25
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 $16.9 million for the year ended
December 31, 2000 from $13.7 million for the same period in 1999, a 23.3 percent
increase. Trade finance fees and commissions decreased by $1.2 million due
largely to a change in the mix of letter of credit transactions. Structuring and
syndication fees decreased from $1.8 million to $143,000 due to a substantial
decrease in structuring and syndication activities as the company sought to
alter the geographic mix of assets by increasing the relative portion of
domestic exposure.
During 2000, the Company sold approximately $83 million in foreign debt
securities as part of its capital management strategies. These securities
generally require greater capital for regulatory purposes than securities issued
by the U.S. Government or its agencies. In connection with these sales, the
Company realized gains of approximately $10.8 million. The Company also
determined that declines in the value of certain other foreign debt and equity
securities were other than temporary. As a result, these securities were written
down by an aggregate of $4.3 million, which is included in net gains from
securities transactions for the year ended December 31, 2000.
Customer service fees increased 5.2% to $1.6 million reflecting the low
level of growth in demand deposits, which have a significant impact on the level
of customer service fee income. The changes in non-interest income from year to
year are analyzed in TABLE SIX.
23
26
TABLE TWO. YIELDS EARNED AND RATES PAID
(Dollars in thousands)
For The Years Ended
---------------------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1998
-------------------------------- ------------------------------ -------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- ---------- ------ ---------- ---------- ----- ---------- ---------- -----
Total interest earning
assets
Loans:
Commercial loans $1,036,643 $ 101,140 9.7% $1,061,056 $ 101,027 9.52% $1,010,332 $ 91,465 9.05%
Acceptances discounted 117,308 11,815 10.0% 110,505 10,016 9.06% 131,158 12,165 9.27%
Commercial real estate
loans 19,147 1,918 10.02%
Overdraft 8,490 1,634 19.25% 7,372 1,659 22.50% 12,212 2,306 18.89%
Mortgage loans 2,025 161 7.95% 2,932 203 6.92% 11,523 949 8.24%
---------- ---------- ----- ---------- ---------- ----- ---------- ---------- -----
Total Loans 1,183,613 116,668 9.86% 1,181,865 112,905 9.55% 1,165,225 106,885 9.17%
---------- ---------- ----- ---------- ---------- ----- ---------- ---------- -----
Time deposits with banks 136,416 12,616 9.25% 175,925 17,440 9.91% 122,278 10,989 8.99%
Investments 289,285 21,282 7.36% 139,383 8,787 6.30% 68,541 4,903 7.15%
Federal funds sold 46,569 2,924 6.28% 31,370 1,647 5.25% 27,307 1,484 5.43%
---------- ---------- ----- ---------- ---------- ----- ---------- ---------- -----
Total investments and
interest earning
deposits with banks 472,270 36,822 7.80% 346,678 27,874 8.04% 218,126 17,376 7.97%
---------- ---------- ----- ---------- ---------- ----- ---------- ---------- -----
Total interest earning assets 1,655,883 153,490 9.27% 1,528,543 140,779 9.21% 1,383,351 124,261 8.98%
---------- ----- ---------- ----- ---------- -----
Total non interest earning
assets 45,355 91,493 123,567
---------- ---------- ----------
Total assets $1,701,238 $1,620,036 $1,506,918
========== ========== ==========
Interest bearing liabilities
Deposits:
NOW and Savings accounts $ 21,238 522 2.46% 23,255 566 2.43% 20,218 424 2.10%
Money market 44,811 2,733 6.10% 43,850 2,116 4.83% 46,342 2,177 4.70%
Presidential money market 70,227 4,020 5.72% 44,749 2,159 4.82% 3,284 121 3.68%
Certificate of deposits
(including IRA) 1,208,494 74,910 6.20% 1,154,974 63,090 5.46% 1,033,030 59,730 5.78%
Time deposits from banks
(IBF) 100,859 5,791 5.74% 91,507 4,293 4.69% 128,871 7,267 5.64%
---------- ---------- ----- ---------- ---------- ----- ---------- ---------- -----
Total interest bearing deposits 1,445,629 87,976 6.09% 1,358,335 72,224 5.32% 1,231,745 69,719 5.66%
Trust preferred securities 12,650 1,233 9.75% 12,650 1,232 9.74%
Federal funds purchased 90 6 6.67% 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 1,458,369 89,215 6.12% 1,373,802 73,637 5.36% 1,239,911 70,280 5.67%
---------- ---------- ----- ---------- ---------- ----- ---------- ---------- -----
Non interest bearing
liabilities
Demand deposits 77,045 76,937 69,699
Other liabilities 54,014 59,963 89,393
---------- ---------- ----------
Total non interest bearing
liabilities 131,059 136,900 159,092
Stockholders' equity 111,810 109,334 107,915
---------- ---------- ----------
Total liabilities and
stockholder's equity $1,701,238 $1,620,036 $1,506,918
========== ========== ==========
Net interest income/
net interest spread $ 64,275 3.15% $ 67,142 3.85% $ 53,981 3.31%
========== ===== ========== ===== ========== =====
Margin:
Interest income/interest
earning assets 9.27% 9.21% 8.98%
Interest expense/interest
earning assets 5.39% 4.82% 5.08%
----- ----- -----
Net interest margin 3.88% 4.39% 3.90%
===== ===== =====
At December 31, 2000, 1999 and 1998, the average balance of loans that are
currently non-performing and not accruing was $16.2 million, $16.6 million, and
$8.6 million, respectively. The interest column does not include an amount for
these loans since they were in non-accrual status.
24
27
TABLE THREE. YIELDS EARNED - DOMESTIC AND FOREIGN EARNING ASSETS
(Dollars in thousands)
For The Years Ended
---------------------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999
------------------------------------------------- ------------------------------------------------
% of Total % of Total
Average Average Average Average Average Average
Balance Interest Yield/Rate Assets Balance Interest Yield/Rate Assets
---------- ---------- ---------- ---------- ---------- ---------- ----------- -----
Total interest earning assets
Loans:
Domestic $ 499,246 $ 48,096 9.6% 29.3% $ 350,000 $ 29,918 8.5% 21.6%
Foreign 684,367 68,572 10.0% 40.2% 831,865 82,987 10.0% 51.3%
---------- ---------- ----- ----- ---------- ---------- -----
Total Loans 1,183,613 116,668 9.9% 69.6% 1,181,865 112,905 9.6% 73.0%
Investment and time deposits
with banks
Domestic 237,723 14,971 6.3% 14.0% 140,890 7,924 5.6% 8.7%
Foreign 234,547 21,851 9.3% 13.8% 205,788 19,950 9.7% 12.7%
---------- ---------- ----- ----- ---------- ---------- -----
Total investments and time
deposits banks 472,270 36,822 7.8% 27.8% 346,678 27,874 8.0% 21.4%
Total interest earning assets 1,655,883 $ 153,490 9.3% 97.3% 1,528,543 $ 140,779 9.2% 94.4%
---------- ----- --------- -----
Total non interest earning
assets 45,355 2.7% 91,493 5.6%
---------- ----- ---------- -----
Total Assets $1,701,238 100.0% $1,620,036 100.0%
========== ===== ========== =====
For the Year Ended December 31, 1998
--------------------------------------------------
% of Total
Average Average Average
Balance Interest Yield/Rate Assets
---------- ---------- ---------- ----------
Total interest earning assets
Loans:
Domestic $ 249,027 $ 25,155 10.1% 16.5%
Foreign 919,424 81,730 8.9% 60.8%
---------- ---------- ----- -----
Total Loans 1,168,451 106,885 9.1% 77.3%
Investment and time deposits
with banks
Domestic 71,751 3,924 5.5% 4.8%
Foreign 148,750 13,452 9.0% 9.7%
---------- ---------- ----- -----
Total investments and time
deposits with banks 220,501 17,376 7.9% 14.5%
Total interest earning assets 1,388,952 124,261 8.9% 91.8%
---------- ---------- ----- -----
Total non interest earning
assets 123,567 8.2%
---------- -----
Total Assets $1,506,918 100.0%
========== =====
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TABLE FOUR. RATE VOLUME ANALYSIS
(Dollars in thousands)
Year Ended December 31, 2000 Year Ended December 31, 1999
Compared to Year Ended Compared to Year Ended
December 31, 1999 December 31, 1998
-------------------------------------- --------------------------------------
Changes Due To: Changes Due To:
Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest
income due to:
Loans:
Commercial loans $ (2,324) $ 2,437 $ 113 $ 4,592 $ 4,970 $ 9,562
Acceptances discounted 617 1,182 1,799 (1,915) (234) (2,149)
Commercial real estate loans 1,918 -- 1,918
Overdrafts 252 (277) (25) (914) 267 (647)
Mortgage loans (63) 21 (42) (708) (38) (746)
Investments and time deposits
with banks:
Time deposits with other banks (3,917) (907) (4,824) 4,821 1,630 6,451
Investment securities 9,450 3,045 12,495 5,068 (1,184) 3,884
Federal funds sold 798 479 1,277 221 (58) 163
-------- -------- -------- -------- -------- --------
Total earning assets 6,731 5,980 12,711 11,165 5,353 16,518
-------- -------- -------- -------- -------- --------
Deposits:
NOW and savings (49) 5 (44) 64 78 142
Money market 46 571 617 (117) 56 (61)
Presidential money market 1,229 632 1,861 1,528 510 2,038
Certificates of deposits 2,924 8,896 11,820 7,051 (3,691) 3,360
Time deposits with banks (IBF) 439 1,059 1,498 (2,112) (862) (2,974)
Trust preferred securities -- 1 1 1,232 -- 1,232
Federal funds purchased (73) 1 (72) (113) (6) (119)
Other borrowings (103) -- (103) (260) (1) (261)
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 4,413 11,165 15,578 7,273 (3,916) 3,357
-------- -------- -------- -------- -------- --------
Change in net interest income $ 2,318 $ (5,185) $ (2,867) $ 3,892 $ 9,269 $ 13,161
======== ======== ======== ======== ======== ========
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TABLE FIVE. RATE VOLUME ANALYSIS - DOMESTIC AND FOREIGN
(Dollars in thousands)
Year Ended December 31, 2000 Year Ended December 31, 1999
Compared to Year Ended Compared to Year Ended
December 31, 1999 December 31, 1998
---------------------------------- ----------------------------------
Changes Due To: Changes Due To:
Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest income due to:
Loans:
Domestic $ 12,758 $ 5,420 $ 18,178 $ 10,200 $ (5,437) $ 4,763
Foreign (14,714) 299 (14,415) (7,783) 9,040 1,257
Investments and time deposits with banks:
Domestic 5,446 1,601 7,047 3,781 219 4,000
Foreign 2,788 (887) 1,901 5,158 1,340 6,498
-------- -------- -------- -------- -------- --------
Total earning assets $ 6,278 $ 6,433 $ 12,711 $ 11,356 $ 5,162 $ 16,518
======== ======== ======== ======== ======== ========
TABLE SIX. NON-INTEREST INCOME
(Dollars in thousands)
For the Year Ended December 31,
---------------------------------------------------------------
2000 % Change 1999 % Change 1998
-------- -------- -------- -------- --------
Trade finance fees and commissions $ 8,417 (12.3)% $ 9,593 (26.8)% $ 13,101
Structuring and syndication fees 143 (92.6)% 1,923 (42.6)% 3,352
Customer service fees 1,607 5.2 % 1,528 33.0 % 1,149
Net gain (loss) on securities transactions 6,535 (3,594.7)% (187) (68.1)% (587)
Net gain (loss) on sale of assets (251) (144.7)% 562 (355.5)% (220)
Other 457 52.8 % 299 74.9 % 171
-------- -------- -------- ------ --------
Total non-interest income $ 16,908 23.3 % $ 13,718 (19.1)% $ 16,966
======== ======== ======== ====== ========
OPERATING EXPENSES
Operating expenses increased to $41.2 million for the year ended
December 31, 2000 from $31.9 million for the same period in 1999, a 29.4 percent
increase. The Company incurred litigation losses of $5.9 million in 2000
compared to none in 1999. The most significant case involved a settlement
payment in connection with the bankruptcy of a former customer in the amount of
$3.9 million which was fully included in 2000 operating results. The changes in
operating expenses from year to year are analyzed in TABLE SEVEN.
The Company's income benefit from taxes was $4.5 million in 2000,
compared to $1.8 million for 1999, resulting from a higher loss before taxes in
2000. The income tax benefit in 2000 included $1.4 million in state tax benefit
due to refunds received. The effective tax rate was 45% in 1999 compared to 47%
in 2000. NOTE SIX of the consolidated financial statements includes an analysis
of the components of the provision for income taxes.
27
30
TABLE SEVEN. OPERATING EXPENSES
Dollars in thousands)
For the Year Ended December 31,
--------------------------------------------------------------------
1999 to 2000 1998 to 1999
2000 % change 1999 % change 1998
-------- -------- -------- -------- --------
Employee Compensation and Benefits $ 14,110 (3.1)% $ 14,556 0.2 % $ 14,527
Occupancy and Equipment 4,841 13.3 % 4,273 1.0 % 4,229
Loss on Exchange N.A. -- (100.0)% 22,223
Litigation settlements 5,891 N.A. -- N.A. --
Legal Expense 3,149 (13.2)% 3,627 126.5 % 1,601
Other Operating Expenses 12,912 37.1 % 9,416 32.3 % 7,119
-------- ----- -------- ------ --------
Total Operating Expenses $ 40,903 29.3% $ 31,872 (36.6)% $ 49,699
======== ===== ======== ====== ========
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 three 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 $67.1 million for the year ended December 31, 1999 from $54.0
million for the same period in 1998, a 24.4 percent increase. The increase was
due largely to the growth in average earning assets coupled with an increase in
the net interest margin. The net interest margin was positively impacted by both
the higher yield on assets and a lower cost of liabilities. Average earning
assets increased to $1,528.5 million for the year ended December 31, 1999 from
$1,383.3 million for the same period in 1998, a 10.5 percent increase, while
yields earned on average assets decreased by 23 basis points compared to the
same period. Average loans 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 1.4
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 43.9 percent increase. Net interest
margin increased to 4.39 percent for the year ended December 31, 1999 from 3.90
percent for the same period in the prior year.
Interest income increased to $140.8 million for the year ended December 31, 1999
from $124.3 million for the same period in 1998, a 1.33 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 4.8 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 10.3 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 $91.5 million for the year ended December 31, 1999 from
$128.9 million for the same period in 1998 or a 29.0 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 110 basis points to 10.0 percent while yields
earned on domestic loans have decreased by 160 basis points to 8.5 percent from
10.1 percent.
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31
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 $11.9 million during 1999, b) the downgrading
of a significant amount of the Bank's loans to borrowers in Ecuador resulted in
an approximate $5 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 $8.0 million to
$16.6 million in nonaccrual loans as of December 31, 1999 resulted in allocated
specific reserves of $6.2 million. 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.
The provision for transfer risk was $32.7 million in 1999 compared to none
for 1998. During 1999, approximately $36 million of the Company's Ecuadorian
exposure became subject to ATRR requirements, which is currently 90%. See
"Allocated Transfer Risk Reserves" beginning on page 44 for a more detailed
discussion of ATRR.
A more detailed review of the provision for credit losses and transfer risk is
presented in TABLE SEVENTEEN through TABLE NINETEEN.
NON-INTEREST INCOME
Non-interest income decreased to $13.7 million for the year ended December 31,
1999 from $17.6 million for the same period in 1998, a 21.8 percent decrease.
Trade finance fees and commissions decreased by $3.5 million due largely to
lower letter of credit volume which is related to slow economic conditions in
the Region. Structuring and syndication fees decreased by $1.4 million as a
result of fewer structuring and syndication transactions completed during the
year; decreasing these fees to $1.9 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.
OPERATING EXPENSES
Operating expenses decreased to $31.8 million for the year ended December 31,
1999 from $50.3 million for the same period in 1998, a 36.6 percent decrease.
The most significant component of the decrease was the loss on exchange recorded
in 1998, as discussed below. Legal expense increased 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.
During 1998, the Company sold certain loans from Russian borrowers for aggregate
proceeds of $20 million, and purchased certain securities issued by Latin
American parties at an aggregate cost of $94 million. These transactions were
originally accounted for as separate unrelated transactions and no gain or loss
was recorded. During 2000, the Company determined that they should have been
accounted for as one related exchange transaction. In connection therewith, a
loss of $22.2 million was recorded in 1998 to write down the securities acquired
to their estimated fair value at the time of acquisition.
The Company's income tax benefit was $1.8 million in 1999, compared to a
provision of $4.1 million for 1998. NOTE SIX of the consolidated financial
statements includes an analysis of the components of the provision for income
taxes.
29
32
BALANCE SHEET REVIEW
OVERVIEW
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, repayments and funding of loans and other assets.
Total consolidated assets increased 2.4 percent, or $41.0 million for the year
ended December 31, 2000, which included a decrease of $39.4 million in gross
interest-earning assets, an increase of $29.0 million in allowances and unearned
income, and an increase of $108.8 million in non-interest earning assets. The
decrease in interest earning assets includes an increase in loans of $96.0
million, offset by a decrease in federal funds sold, deposits with other banks
and securities aggregating $133.8 million. The overall increase in consolidated
assets was principally funded by deposits from the branch network.
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 $129.6 million at December
31, 2000 compared to $85.1 million at December 31, 1999.
At December 31, 2000, the Company did not invest all available liquid assets in
the overnight funds markets. As a result, cash and demand deposits with other
banks increased $103.6 million compared to the prior year-end, while federal
funds sold decreased $59.1 million over the same period. The level of uninvested
cash at December 31, 2000 was temporary.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND SECURITIES
Interest-earning deposits with other banks decreased to $110.0 million at
December 31, 2000 from $165.7 million at December 31, 1999. 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. TABLE EIGHT presents the geographic distribution of interest-earning
deposits with other banks. The level of such deposits has decreased, principally
related to reductions in Ecuador, Bahamas and the Dominican Republic. The
short-term nature of these deposits allows the Company the flexibility to
redeploy these assets into higher yielding loans which are largely related to
the financing of trade.
Investment securities decreased to $255.3 million at December 31, 2000 from
$274.3 million at December 31, 1999. Foreign debt securities decreased $127.1
during 2000, to $44.1 million. Sales and maturities of foreign securities during
2000 totaled $148.2, offset by purchases of $33.0 million. In late 1999, the
Company made a decision to reclassify all foreign debt securities to available
for sale. During 2000 in connection with capital management strategies a
significant amount of the securities were sold, or not replaced at maturity. The
proceeds from these sales and maturities were primarily used to purchase U.S.
government and agency securities, which increased from $54.7 million at December
31, 1999 to $168.6 million at December 31, 2000.
30
33
NOTE TWO to the consolidated financial statements reports amortized
fair value and maturity information on the securities portfolio.
TABLE EIGHT. INTEREST-EARNING DEPOSITS WITH OTHER BANKS (1)
(In thousands of U.S. dollars)
Country December 31, 2000
- ------- -----------------
Argentina $ 36,771
Suriname 24,868
Panama 15,850
Ecuador 6,000
Dominican Republic 9,000
British West Indies 8,000
El Salvador 5,000
Jamaica 3,500
Bolivia 1,000
---------
Total $ 109,989
=========
LOAN PORTFOLIO
The Company's gross loans increased by $96.0 million during the year ended
December 31, 2000 compared to December 31, 1999. The increase was primarily
attributable to growth in U.S. lending activities, which represented 90% of the
total growth. At December 31, 2000, U.S. loans represented 44% of the total loan
portfolio, compared to 40% at December 31, 1999. This trend reflects the
Company's efforts to increase geographic diversification of its lending by
increasing U.S. exposure. 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 62 percent of loans had maturities of less
than one year as of December 31, 2000, compared to 69% as of December 31, 1999.
The decrease in this percentage reflects the Company's increased domestic
lending activity, which primarily involves longer-term real estate loans.
Nevertheless, 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,
2000 and 1999 are shown on TABLE TEN.
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34
TABLE NINE. LOANS BY TYPE
(In thousands)
Years Ended December 31,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Domestic:
Commercial and industrial (1) $ 380,926 $ 394,841 $ 289,264 $ 179,673 $ 110,750
Commercial Real Estate 83,082 -- -- -- --
Acceptances discounted 76,148 59,040 56,706 45,153 23,314
Residential mortgages 1,812 2,140 10,494 12,008 10,610
---------- ---------- ---------- ---------- ----------
Subtotal Domestic 541,968 456,021 356,464 236,834 144,674
Foreign:
Banks and other financial institutions 153,119 246,155 302,371 349,643 129,376
Commercial and industrial (1) 405,152 338,411 395,987 319,925 179,824
Acceptances discounted 64,100 59,256 72,597 55,301 80,935
Government and official institutions 69,841 38,358 39,309 3,091 750
---------- ---------- ---------- ---------- ----------
Subtotal Foreign 692,212 682,180 810,264 727,960 390,885
---------- ---------- ---------- ---------- ----------
Total loans $1,234,180 $1,138,201 $1,166,728 $ 964,794 $ 535,559
========== ========== ========== ========== ==========
(1) Includes pre-export financing, warehouse receipts and refinancing of letters
of credits.
32
35
TABLE TEN. LOAN MATURITIES
(In thousands)
As of December 31, 2000 (1)
-----------------------------
Mature After
Mature One But Mature
Within Within After Five
One Year Five Years Years Total
---------- ------------ ---------- ----------
Domestic loans:
Commercial and Industrial $ 238,835 $ 189,827 $ 35,093 $ 463,755
Acceptances discounted 76,148 -- -- 76,148
Foreign loans:
Commercial and Industrial 393,552 173,672 60,888 628,112
Acceptances discounted 63,419 681 -- 64,100
---------- ---------- ---------- ----------
Total $ 771,954 $ 364,180 $ 95,981 $1,232,115
========== ========== ========== ==========
Fixed $ 414,637 $ 216,649 $ 65,940 $ 697,226
Adjustable 357,317 147,531 30,041 534,889
---------- ---------- ---------- ----------
Total fixed and adjustable $ 771,954 $ 364,180 $ 95,981 $1,232,115
========== ========== ========== ==========
As of December 31, 1999 (1)
-----------------------------
Mature After
Mature 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
========== ========== ========== ==========
(1) Does not include mortgage loans and installment loans in the aggregate
amount of $2.1 million in 2000 and $2.3 million in 1999.
TABLES ELEVEN AND TWELVE reflect the Company's 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
33
36
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, 2000 approximately 32.7 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 (8.6 percent), El Salvador (4.5
percent), Ecuador (4.4 percent) and Jamaica (4.0 percent). The United States
exposure grew $85.9 million representing 43.9 percent of the loan portfolio
compared to 30.6 percent in 1998.
Panamanian loan exposure is over 10 percent of loans and has decreased to 11.2
percent at December 31, 2000. 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.
TABLE ELEVEN. LOANS BY COUNTRY
(Dollars in thousands)
At December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- -------------------------
% of % of % of
Total Total Total
Country Amount Loans Amount Loans Amount Loans
- ------- ---------- ----- ---------- ----- ---------- -----
United States $ 541,968 43.9% $ 456,021 40.1% $ 356,464 30.6%
Argentina (2) -- -- 35,494 3.1% 36,276 3.1%
Bolivia (2) -- -- -- -- 20,816 1.8%
Brazil (2) -- -- 49,214 4.3% 54,862 4.7%
British West Indies 24,115 2.0% 22,082 1.9% -- --
Colombia 21,176 1.7% 28,437 2.5% 41,911 3.6%
Dominican Republic 36,374 3.0% 41,604 3.7% 29,563 2.5%
Ecuador 53,688 4.4% 65,622 5.8% 46,917 4.0%
El Salvador 55,871 4.5% 45,847 4.0% 37,196 3.2%
Guatemala 105,945 8.6% 66,531 5.8% 119,227 10.2%
Honduras 38,232 3.1% 42,352 3.7% 59,564 5.1%
Jamaica 49,346 4.0% 28,628 2.5% 29,066 2.5%
Mexico (2) -- -- -- -- 22,983 2.0%
Nicaragua (2) 22,527 1.8% -- -- -- --
Panama 138,425 11.2% 127,419 11.2% 118,680 10.2%
Peru 37,494 3.0% 29,648 2.6% 49,382 4.2%
Suriname (2) -- -- -- -- 21,868 1.9%
Venezuela (2) -- -- 17,842 1.6% 19,756 1.7%
Other (1) 109,018 8.8% 81,460 7.2% 102,197 8.8%
---------- ----- ---------- ----- ---------- -----
Total $1,234,179 100.0% $1,138,201 100.0% $1,166,728 100.0%
========== ===== ========== ===== ========== =====
(1) Other consists of loans to borrowers in countries in which loans did not
exceed 1 percent of total assets.
(2) These countries had loans which did not exceed 1 percent of total assets in
the periods indicated.
34
37
At December 31, 2000 approximately 24.2 percent in cross-border outstanding were
due from borrowers in five countries other than the United States: Panama (8.0
percent), Guatemala (6.0 percent), Ecuador (3.6 percent), El Salvador (3.4
percent) and Argentina (3.2 percent).
Brazil cross-border exposure outstandings decreased to 1.1 percent of total
cross border outstandings as of December 31, 2000 from 10.1 percent as December
31, 1999 as a result of the maturity of inter-bank placements or deposits with
foreign-owned multinational banks doing business in this country. These deposits
were placed in 1999 and were short-term in nature (one year or less).
TABLE TWELVE. TOTAL CROSS-BORDER OUTSTANDING BY COUNTRY AND TYPE (3)
(Dollars in millions)
At December 31,
----------------------------------------------------------------------------
% of % of % of
Total Total Total
2000 Assets 1999 Assets 1998 Assets
------ ------ ------ ------ ------ ------
Argentina $ 55 3.2% $ 113 6.6% $ 57 3.4%
Bahamas (2) -- -- 21 1.2% -- --
Bolivia (2) -- -- 18 1.0% 26 1.5%
Brazil 20 1.1% 173 10.1% 94 5.6%
British West Indies (2) 18 1.0% -- -- 36 2.1%
Colombia 22 1.3% 48 2.8% 49 2.9%
Costa Rica (2) -- -- -- -- 16 0.9%
Dominican Republic 41 2.4% 55 3.2% 48 2.8%
Ecuador 63 3.6% 78 4.5% 100 5.9%
El Salvador 60 3.4% 44 2.6% 52 3.1%
Guatemala 105 6.0% 68 4.0% 131 7.7%
Honduras 29 1.7% 43 2.5% 69 4.1%
Jamaica 50 2.9% 35 2.0% 40 2.4%
Mexico (2) -- -- 20 1.2% 23 1.4%
Nicaragua (2) 20 1.1% -- -- 15 0.9%
Panama 139 8.0% 116 6.7% 118 7.0%
Peru 38 2.2% 42 2.4% 56 3.3%
Suriname 31 1.8% 32 1.9% 27 1.6%
United Kingdom (2) -- -- 15 0.9% -- --
Venezuela 17 1.0% 17 1.0% 19 1.1%
Other (1) 80 4.5% 75 4.4% 76 4.4%
------ ---- ------ ---- ------ ----
Total $ 788 45.2% $1,013 59.0% $1,052 62.1%
====== ==== ====== ==== ====== ====
(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:
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38
Amounts in millions:
Aggregate Outstandings at December 31, 1999 $ 79.3 (1)
Changes in Other Outstandings:
Additional Outstandings 5.3
Interest Income Accrued 6.5
Collections of: Principal (19.2)
Collections of: Interest (6.6)
-----------
Aggregate Outstandings at December 31, 2000 $ 65.3 (2)
===========
(1) Includes interest accrued and not paid of $1.7 million.
(2) Includes interest accrued and not paid of $1.5 million.
TOTAL CROSS-BORDER OUTSTANDINGS BY TYPE
At December 31,
--------------------------------
2000 1999 1998
----- ------- -------
Government and official institutions $ 200 $ 114 $ 69
Banks and other financial institutions 112 451 489
Commercial and industrial 414 384 408
Acceptances discounted 62 64 86
----- ------- -------
Total $ 788 $ 1,013 $ 1,052
===== ======= =======
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 $31.5 million and $997 thousand, respectively, at December 31, 2000
compared to $27.8 million and $5.8 million, respectively, at December 31, 1999.
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
branches located in Florida and one in Puerto Rico. The Company has three
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 financial institutions in
the area. TABLE TWO provides information on average deposit amounts and rates
paid to each deposit category. Total deposits were $1,582.3 million at December
31, 2000 compared to $1,535.6 million at December 31, 1999.
Average interest-bearing deposits increased by 6.4 percent to $1,445.6 million
at December 31, 2000 from $1,358.3 million at December 31, 1999. The Company
expanded its Presidential Money Market deposits over the year which increased to
an average of $70.2 million for 2000 compared to an average of $44.7 million for
1999. 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. The remainder of the growth in
deposits occurred in certificates of deposits due to the higher rates offered on
the Company's products as compared to competing institutions.
36
39
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 AT DECEMBER 31, 2000
(In thousands)
Certificates Other Time
of Deposit Deposits-IBF
$100,000 or More $100,000 or More Total
---------------- ---------------- ----------
Three months or less $ 112,030 $ 13,267 $ 125,297
Over 3 through 6 months 141,239 360 141,599
Over 6 through 12 months 130,715 1,269 131,984
Over 12 months 116,105 - 116,105
---------- --------- ----------
Total $ 500,089 $ 14,896 $ 514,985
========== ========= ==========
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. Trust Preferred Securities increased by $1.7 million
upon the exercise of an over-allotment option by the underwriter in January
1999. The Trust Preferred Securities are considered Tier I capital for
regulatory purposes. See NOTE SEVEN to the Consolidated Financial Statements for
further details.
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 increased by 10 percent during 2000 to $577.5 million
from $524.8 million as a result of greater domestic volume involving the
importation of goods into the U.S.
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TABLE FOURTEEN. CONTINGENCIES - COMMERCIAL LETTERS OF CREDIT
(In thousands)
Year Ended December 31,
----------------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Average Average Average
Total Monthly Total Monthly Total Monthly
Volume Volume Volume Volume Volume Volume
-------- -------- -------- -------- -------- --------
Export Letters of Credit(1) $224,168 $ 18,681 $227,904 $ 18,992 $397,683 $ 33,140
Import Letters of Credit(1) 353,361 29,447 296,943 24,745 349,099 29,092
-------- -------- -------- -------- -------- --------
Total $577,529 $ 48,128 $524,847 $ 43,737 $746,782 $ 62,232
======== ======== ======== ======== ======== ========
(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 credits as of
December 31, 2000, 1999 and 1998, respectively. As shown by the table,
contingent liabilities increased by 5.5 percent to $159.8 million at December
31, 2000 from $151.4 million at December 31, 1999 as a result of increased
letters of credit related to domestic corporate names.
38
41
TABLE FIFTEEN. CONTINGENT LIABILITIES (1)
(In thousands)
At December 31,
----------------------------------------
2000 1999 1998
-------- -------- --------
Argentina (3) $ -- $ -- $ 1,680
Aruba (3) -- 3,720 --
Bolivia (3) -- -- 3,890
Costa Rica (3) -- 9,893 2,846
Dominican Republic 23,880 4,707 7,015
Ecuador (3) 2,305 -- 3,703
El Salvador 1,651 2,734 1,995
Guatemala 12,347 9,475 26,132
Guyana 2,107 4,165 2,374
Haiti (3) -- 5,705 2,088
Honduras 1,957 4,174 2,427
Jamaica (3) 10,194 -- --
Panama 7,564 14,242 14,538
Paraguay (3) 2,398 -- 1,961
Peru (3) 2,337 3,573 --
Suriname 2,248 5,677 11,690
Switzerland (3) -- -- 1,588
United States 85,617 74,643 39,415
Venezuela (3) -- 2,593 --
Other (2) 5,179 6,143 5,374
-------- -------- --------
Total $159,784 $151,444 $128,716
======== ======== ========
(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 repayments and
funding of loans and other assets. 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. Substantially all of the Company's assets and liabilities
are denominated in dollars and therefore the Company has no material foreign
exchange risk.
39
42
Cash and cash equivalents were $129.6 million on December 31, 2000, an
increase of $44.5 million from $85.1 million on December 31, 1999. During 2000,
net cash provided by operating activities was $42.3 million, net cash used in
investing activities was $44.6 million and net cash provided by financing
activities was $46.7 million. For further information on cash flows, see the
Consolidated Statement of Cash Flows in the Consolidated Financial Statements.
The Company's principal sources of liquidity and funding are its
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,
2000 interest-earning assets maturing or repricing within 180 days were $1.171
billion, representing 73.3 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, net of assets pledged to secure public deposits, at December 31,
2000 were approximately $442 million, 25 percent of total assets, and consisted
primarily of cash and cash equivalents, due from banks-time and available for
sale securities 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.
40
43
TABLE SIXTEEN. INTEREST RATE SENSITIVITY
(Dollars in thousands)
December 31, 2000
-------------------------------------------------------------------------------------------
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 $ 633,284 $ 118,409 $ 129,931 $ 71,269 $ 214,452 $ 66,835 $1,234,180
Federal funds sold 4,266 0 0 0 0 0 4,266
Investment securities 15,501 154,974 20,436 10,167 15,654 33,505 250,237
Interest earning deposits with
other banks 36,979 36,760 20,750 15,500 0 0 109,989
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 690,030 310,143 171,117 96,936 230,106 100,340 1,598,672
---------- ---------- ---------- ---------- ---------- ---------- ----------
Funding Sources:
Savings and transaction deposits 156,568 0 0 0 0 0 156,568
Certificates of deposits of $100k
or more 46,919 109,821 112,901 114,343 116,002 103 500,089
Certificates of deposits under
$100k 42,135 122,840 148,900 197,024 254,730 47 765,676
Other time deposits 12,457 811 360 1,269 0 0 14,897
Funds overnight 54,300 0 0 0 0 0 54,300
Trust preferred securities 0 0 0 0 0 12,650 12,650
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 312,379 $ 233,472 $ 262,161 $ 312,636 $ 370,732 $ 12,800 $1,504,180
---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest sensitivity gap $ 377,651 $ 76,671 ($ 91,044) ($ 215,700) ($ 140,626) $ 87,540 $ 94,492
========== ========== ========== ========== ========== ========== ==========
Cumulative gap $ 377,651 $ 454,322 $ 363,278 $ 147,578 $ 6,952 $ 94,492
========== ========== ========== ========== ========== ==========
Cumulative gap as a percentage
of total earning assets 23.62% 28.42% 22.72% 9.23% 0.43% 5.91%
========== ========== ========== ========== ========== ==========
41
44
TABLE SIXTEEN. INTEREST RATE SENSITIVITY (continued)
December 31, 2000
-------------------------------------------------------------------------------------------
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 $ 223,001 $ 215,045 $ 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 19,800 31,250 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%
========== ========== ========== ========== ========== ==========
42
45
CREDIT QUALITY REVIEW
ALLOWANCE FOR CREDIT LOSSES AND ALLOCATED TRANSFER RISK RESERVES
Allowances are established against the loan portfolio to provide for
credit losses 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 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 potential 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 lending activities; (ii) the credit
condition of its customers and correspondent banks, as well as the underlying
collateral, if any; (iii) historical experience and (iv) the average maturity of
its loan portfolio 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 the Company's historical
loss experience or on loss percentages used by the Company's 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:
o Problem-graded loan loss factors are derived from loss percentages
required by the Company's 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.
o 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 formula 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:
o General economic and business conditions affecting the Region;
43
46
o Loan volumes and concentrations;
o Credit quality trends;
o Collateral values;
o Bank regulatory examination results; and
o 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.
The Company's 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 0.1% and 0.2% of gross loans at December 31, 2000 and 1999,
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 counterparties 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 or 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 to 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, 2000 and 1999, the Company
had aggregate exposure to borrowers located in Ecuador of approximately $63
million and $78 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 Ecuadorian exposure at December
31, 1999 was subject to the 90% ATRR
44
47
requirement. During 2000, an additional $10 million of Ecuadorian exposure
became subject to ATRR because it experienced a delinquency of more than 30
days, requiring an increase of approximately $9.0 million in the ATRR. Paydowns
on certain loans during 2000 resulted in a net provision for the year of $4.2
million. At December 31, 2000, approximately $680,000 of the Company's
Ecuadorian exposure was on nonaccrual status, and the remainder was in
compliance with their contractual terms.
The following table sets forth the composition of the allowance for
credit losses and ATRR as of December 31, 2000, 1999 and 1998, respectively (in
thousands):
2000 1999 1998
--------- -------- ---------
Allocated:
Specific (Impaired loans) $ 17,816 $ 6,173 $ 2,786
Formula 24,144 12,033 7,108
Unallocated 1,107 3,205 2,900
--------- -------- ---------
Total allowance for credit losses 43,067 21,411 12,794
Allocated transfer risk reserve 36,607 32,720 --
--------- -------- ---------
Total allowance and reserves $ 79,674 $ 54,131 $ 12,794
========= ======== =========
The specific allowances increased from $6.2 million at December 31,
1999 to $17.8 million at December 31, 2000 due to a significant increase in
impaired loans. Impaired loans increased from $16.6 million at December 31, 1999
to $54.2 million at December 31, 2000 (see additional discussion below). At
December 31, 2000, approximately $24.0 million of impaired loans were to U.S.
borrowers, and approximately $30.3 million were to foreign borrowers. The
increase in the allocated formula allowance is due to an increase in
problem-graded loans in the portfolio. Management has not noted any trends or
common characteristics associated with the increase in impaired and
problem-graded loans. 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. During 1998, none of the Company's
Ecuadorian exposure was subject to ATRR.
The increase in impaired loans included $30 million associated with two
loans. One loan to a Central American borrower is supported by a collection of
assets including real estate, promissory notes, securities and other assets.
Interest on this loan is payable annually, and principal is due in full in 2006.
Due to the unique nature of the repayment terms and collateral, the loan was
placed on nonaccrual status pending demonstrated ability of the borrower to
comply with the contractual terms. The second loan is to a U.S. borrower and is
secured by a group of retail convenience stores primarily located in the
Southeastern U.S. The borrower is experiencing significant cash flow problems
and has been unable to service the debt. The balance of this loan is $15
million, after a partial writedown of approximately $6.7 million in the fourth
quarter of 2000. The Company is continuing to actively pursue collection from
both borrowers.
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 the
Company's allowance for credit losses and ATRR activity for the periods shown.
45
48
TABLE SEVENTEEN. CREDIT LOSS AND TRANSFER RISK EXPERIENCE
(In thousands)
For the Year Ended December 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
Balance of allowance for credit losses at
beginning of period $ 21,411 $ 12,794 $ 10,317 $ 5,725 $ 4,450
Charge-offs:
Domestic:
Commercial (16,420) (3,299) (3,357) (1,693) (951)
Acceptances (297) -- (100) -- --
Installment -- (5) -- (3) (8)
----------- ----------- ----------- ----------- -----------
Total domestic (16,717) (3,304) (3,457) (1,696) (959)
Foreign:
Banks and other financial institutions -- (2,330) (3,901) (896) (678)
Commercial and industrial (7,504) (6,216) -- -- (146)
----------- ----------- ----------- ----------- -----------
Total foreign (7,504) (8,546) (3,901) (896) (824)
----------- ----------- ----------- ----------- -----------
Total charge-offs (24,221) (11,850) (7,358) (2,592) (1,783)
Recoveries:
Domestic:
Commercial 10 1 12 203 16
Installment -- 3 -- 1 2
Foreign:
Commercial 48 -- -- -- --
Banks and other financial institutions 70 163 202 -- --
----------- ----------- ----------- ----------- -----------
Total recoveries 128 167 214 204 18
----------- ----------- ----------- ----------- -----------
Net (charge-offs) recoveries (24,093) (11,683) (7,144) (2,388) (1,765)
Provision for credit losses 45,749 20,300 9,621 6,980 3,040
----------- ----------- ----------- ----------- -----------
Balance at end of period $ 43,067 $ 21,411 $ 12,794 $ 10,317 $ 5,725
=========== =========== =========== =========== ===========
ATRR at beginning of period $ 32,720 $ -- $ -- $ -- $ --
Charge-offs to ATRR (301) -- -- -- --
Provision for ATRR 4,188 32,720 -- -- --
----------- ----------- ----------- ----------- -----------
ATRR at end of period $ 36,607 $ 32,720 $ -- $ -- $ --
=========== =========== =========== =========== ===========
Allowance and ATRR at end of period $ 79,674 $ 54,131 $ 12,794 $ 10,317 $ 5,725
=========== =========== =========== =========== ===========
Average loans $ 1,183,613 $ 1,181,865 $ 1,165,225 $ 737,921 $ 485,758
Total loans $ 1,234,180 $ 1,138,201 $ 1,166,728 $ 964,794 $ 535,559
Net charge-offs to average loans 2.04% 1.00% 0.61% 0.32% 0.36%
Allowance to total loans 3.49% 1.88% 1.10% 1.07% 1.07%
Allowance and ATRR to total loans 6.46% 4.76% 1.10% 1.07% 1.07%
TABLE EIGHTEEN sets forth an analysis of the allocation of the allowance for
credit losses and ATRR by type of loans and the allowance for credit losses and
ATRR allocated to foreign loans. The allowance is established to cover potential
losses inherent in the portfolio as a whole or is available to cover potential
losses on any of the Company's loans.
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49
TABLE EIGHTEEN. ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
(In thousands)
Year End December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Allocation of the allowance by type of loans:
Domestic:
Commercial $ 9,412 $ 3,199 $ 1,138 $ 2,053 $ 1,964
Commercial real estate 1,332
Acceptances 554 269 211 315 226
Residential mortgages 5 10 66 59 54
------- ------- ------- ------- -------
Total domestic 11,303 3,478 1,415 2,427 2,244
------- ------- ------- ------- -------
Foreign Non-ATRR:
Government and official institutions 298 1,496 -- -- --
Banks and other financial institutions 8,063 5,152 3,033 3,854 2,112
Commercial and industrial 23,013 11,015 8,010 3,442 920
Acceptances discounted 390 270 336 594 449
------- ------- ------- ------- -------
Total foreign non-ATRR 31,764 17,933 11,379 7,890 3,481
------- ------- ------- ------- -------
Foreign ATRR
Government and official institutions 7,852 6,035 -- -- --
Banks and other financial institutions 15,282 19,800 -- -- --
Commercial and industrial 13,473 6,885 -- -- --
------- -------
Total foreign ATRR 36,607 32,720 -- -- --
------- -------
Total Foreign 68,371 50,653 11,379 7,890 3,481
------- ------- ------- ------- -------
Total $ 79,674 $ 54,131 $ 12,794 $ 10,317 $ 5,725
======== ======== ======== ======== =======
Percent of loans in each type to total loans:
Domestic:
Commercial 30.9% 35.4% 24.8% 18.6% 20.6%
Commercial real estate 6.7%
Acceptances 6.2% 5.3% 4.9% 4.7% 4.4%
Residential 0.2% 0.2% 0.9% 1.2% 2.0%
------- ------- ------- ------- -------
Total domestic 44.0% 40.9% 30.6% 24.5% 27.0%
------- ------- ------- ------- -------
Foreign Non-ATRR:
Government and official institutions 4.9% 2.8% 3.4% 0.1% 0.1%
Banks and other financial institutions 11.0% 18.1% 25.9% 36.5% 24.2%
Commercial and industrial 31.7% 29.6% 33.9% 33.2% 33.6%
Acceptances discounted 5.2% 5.3% 6.2% 5.7% 15.1%
------- ------- ------- ------- -------
Total foreign non-ATRR 52.8% 55.8% 69.4% 75.5% 73.0%
------- ------- ------- ------- -------
Foreign ATRR
Government and official institutions 0.7% 0.6% -- -- --
Banks and other financial institutions 1.4% 2.0% -- -- --
Commercial and industrial 1.1% 0.7% -- -- --
------- ------- ------- ------- -------
Total foreign ATRR 3.2% 3.3% -- -- --
------- ------- ------- ------- -------
Total Foreign 56.0% 59.1% 69.4% 75.5% 73.0%
------- ------- ------- ------- -------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- ------- -------
47
50
TABLE NINETEEN. ANALYSIS OF ALLOWANCES FOR CREDIT LOSSES AND TRANSFER RISK
ALLOCATED TO FOREIGN LOANS
(In thousands)
Year Ended December 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
Balance, beginning of year $ 50,653 $ 11,379 $ 7,890 $ 3,481 $ 3,380
Provision for credit losses 21,217 14,937 7,188 5,305 925
Provision for ATRR 4,188 32,720 -- -- --
Net charge-offs (7,687) (8,383) (3,699) (896) (824)
-------- -------- -------- ------- -------
Balance, end of period $ 68,371 $ 50,653 $ 11,379 $ 7,890 $ 3,481
======== ======== ======== ======= =======
Composition at end of period:
Allowance for credit losses $ 31,764 $ 17,933 $ 11,379 $ 7,890 $ 3,481
Allowance for transfer risk (ATRR) 36,607 32,720 -- -- --
-------- -------- -------- ------- -------
Total foreign allowances $ 68,371 $ 50,653 $ 11,379 $ 7,890 $ 3,481
======== ======== ======== ======= =======
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.
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 Twenty sets forth information regarding the Company's
nonperforming loans at the dates indicated. Non-performing loans increased from
$18.6 million at December 31, 1999 to $54.6 million at December 31, 2000. The
increase in impaired loans included $30 million associated with two loans. One
loan to a Central American borrower is supported by a collection of assets
including real estate, promissory notes, securities and other assets, all of
which are outside of the U.S. Interest on this loan is payable annually, and
principal is due in full in 2006. Due to the unique nature of the repayment
terms and collateral, the loan was placed on nonaccrual status (cash basis)
pending demonstrated ability of the borrower to comply with the contractual
terms. The second loan is to a U.S. borrower and is secured by a group of retail
convenience stores primarily located in the Southeastern U.S. The borrower is
experiencing significant cash flow problems and has been unable to service the
debt. The balance of this loan is $15 million, after a partial writedown of
approximately $6.7 million in the fourth quarter of 2000. The Company is
continuing to actively pursue collection from both borrowers.
48
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TABLE TWENTY. NONPERFORMING LOANS
(In thousands)
At December 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
Domestic:
Non accrual $23,958 $ 6,995 $ 2,189 $ 3,100 $ 3,087
Past due over 90 days and accruing 105 -- 69 -- --
------- ------- ------- ------- -------
Total domestic nonperforming loans 24,063 6,995 2,258 3,100 3,087
Foreign:
Non accrual 30,250 9,588 6,396 2,949 1,654
Past due over 90 days and accruing 322 1,992 404 -- 112
------- ------- ------- ------- -------
Total foreign nonperforming loans 30,572 11,580 6,800 2,949 1,766
Total nonperforming loans (1) $54,635 $18,575 $ 9,058 $ 6,049 $ 4,853
======= ======= ======= ======= =======
Total nonperforming loans to total loans 4.43% 1.63% 0.78% 0.48% 0.91%
Total nonperforming assets to total assets 3.14% 1.09% 0.53% 0.64% 0.64%
(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, 2000, nonaccruing investment securities amounted to
$480,000, which is foreign. At December 31, 1999 the Company had no nonaccruing
investment securities. For presentation purposes, this amount is included in
Table Twenty.
For the year ended December 31, 2000 the amount of interest income that
was accrued on the loans on the previous table was approximately $457,000. For
the year ended December 31, 2000 the amount of interest income that would have
been accrued on the loans in the previous table in accordance with their
contractual terms was approximately and $2,5 million, of which $1.3 million
represented interest income on foreign loans and $1.2 million on domestic loans.
At December 31, 2000, the Bank had total cross-border exposure to
Ecuador of approximately $63 million, including loans and bank placements
classified as loans of $54 million. Nonaccrual Ecuadorian exposure amounted to
approximately $680,000, and all other Ecuadorian exposure at December 31, 2000
was in compliance with their contractual terms. As a result of several
restructurings involving Ecuadorian borrowers, management established an ATRR
pursuant to regulatory guidelines. See "Credit Quality Review - Allocated
Transfer Risk Reserves" on page 44.
In addition to the loans presented in Table Twenty and discussed above,
management has classified approximately $69 million of loans as substandard
within its internal grading system. Repayment of a substandard asset in the
normal course is in jeopardy due to the existence of well-defined weaknesses. In
these instances, loss of principal is not likely if the weakness is corrected.
Management carefully reviews these substandard loans continuously to correct
such weaknesses and minimize the possibility that losses will be incurred. Based
on these reviews management has concluded that these substandard loans were
properly categorized as accruing at December 31, 2000 and were adequately
considered in the establishment of the level of allowance for credit losses.
Management's review involves the use of estimates, assumptions and judgment
regarding factors which may differ from actual future events. Therefore, no
assurance can be provided that loans classified as substandard will not
deteriorate in the future, resulting in losses.
49
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CAPITAL RESOURCES
Stockholders' equity at December 31, 2000 was $102.5 million compared
to $113.3 million at December 31, 1999. This decrease results from the net loss
for 2000 of $5.2 million and a decrease in the market value of securities
available for sale of $5.7 million, net of applicable taxes.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can result in certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. The regulations
require the Company and the Bank to meet specific capital adequacy guidelines
that involve quantitative measures of their assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and the Bank's capital classification is also subject to qualitative
judgments by the regulators about interest rate risk, concentration of credit
risk and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and ratios
of Tier I capital (as defined in the regulations) to total average assets (as
defined) and minimum ratios of Tier I and total capital (as defined) to
risk-weighted assets (as defined).
As a result of a cease and desist order by consent entered into between
Hamilton Bank and the OCC, Hamilton Bank is required to maintain capital levels
greater than the minimum requirements. NOTE EIGHT to the consolidated financial
statements reports Company and Bank capital ratios and other regulatory matters.
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, 2000 and
1999, assets denominated in foreign currency amounted to approximately
$2.0_million and $2.5 million, respectively. Liabilities denominated in a
foreign currency at December 31, 2000 and 1999 amounted to approximately $4.5
million and $1.3 million, respectively. 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 the Company's credit risk analysis. Credit risks related to the
Company's 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
50
53
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, 2000. This table shows that interest-earning assets maturing
or repricing within one year exceeded interest-bearing liabilities by
$147.6 million. The Company monitors that the assets and liabilities are closely
matched to minimize interest rate risk.
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 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.
51
54
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,
2000 and 1999, and the related consolidated statements of operations,
comprehensive (loss) income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. 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 consolidated financial condition of the Company at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying 2000 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
8 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 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 8, 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. These matters, and the uncertainty of what actions the regulators might
take related to them, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 8. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
May 25, 2001
52
55
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 2000 and 1999
(Dollars in thousands)
2000 1999
----------- -----------
ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 125,330 $ 21,710
FEDERAL FUNDS SOLD 4,266 63,400
----------- -----------
Total cash and cash equivalents 129,596 85,110
INTEREST EARNING DEPOSITS WITH OTHER BANKS 109,989 165,685
SECURITIES AVAILABLE FOR SALE (Amortized cost: $256,070 in 2000 and $266,517 in 1999) 255,337 274,277
LOANS-NET 1,148,206 1,081,256
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 31,544 27,767
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 997 5,835
PROPERTY AND EQUIPMENT-NET 4,471 5,209
ACCRUED INTEREST RECEIVABLE 15,606 19,111
GOODWILL-NET 1,483 1,658
OTHER ASSETS 44,430 34,779
----------- -----------
TOTAL $ 1,741,659 $ 1,700,687
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 1,582,331 $ 1,535,606
TRUST PREFERRED SECURITIES 12,650 12,650
BANKERS ACCEPTANCES OUTSTANDING 31,544 27,767
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 997 5,835
OTHER LIABILITIES 11,642 5,500
----------- -----------
Total liabilities 1,639,164 1,587,358
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 4, 12)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares authorized, 10,081,147 shares
issued and outstanding at December 31, 2000 and 1999 101 101
Capital surplus 60,702 60,708
Retained earnings 42,151 47,302
Accumulated other comprehensive (loss) income (459) 5,218
----------- -----------
Total stockholders' equity 102,495 113,329
----------- -----------
TOTAL $ 1,741,659 $ 1,700,687
=========== ===========
See accompanying notes to consolidated financial statements.
53
56
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2000, 1999 and 1998
(Dollars in Thousands, Except Share Information)
2000 1999 1998
------------ ------------ ------------
INTEREST INCOME:
Loans, including fees $ 116,668 $ 112,905 $ 106,885
Deposits with other banks 12,616 17,440 10,989
Investment securities 21,282 8,787 4,903
Federal funds sold 2,924 1,647 1,484
------------ ------------ ------------
Total 153,490 140,779 124,261
INTEREST EXPENSE:
Deposits 87,976 72,224 69,719
Trust preferred securities 1,233 1,232
Federal funds purchased and other borrowings 6 181 561
------------ ------------ ------------
Total 89,215 73,637 70,280
------------ ------------ ------------
NET INTEREST INCOME 64,275 67,142 53,981
PROVISION FOR CREDIT LOSSES 45,749 20,300 9,621
PROVISION FOR TRANSFER RISK 4,188 32,720 0
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISIONS 14,338 14,122 44,360
NON-INTEREST INCOME:
Trade finance fees and commissions 8,417 9,593 13,101
Structuring and syndication fees 143 1,923 3,352
Customer service fees 1,607 1,528 1,149
Net gain (loss) on securities transactions 6,535 (187) (587)
Net (loss) gain on sale of assets (251) 562 (220)
Other 457 299 171
------------ ------------ ------------
Total 16,908 13,718 16,966
------------ ------------ ------------
OPERATING EXPENSES:
Employee compensation and benefits 14,110 14,556 14,527
Occupancy and equipment 4,841 4,273 4,229
Loss on exchange 22,223
Litigation settlements 5,891
Legal Expenses 3,149 3,627 1,601
Other 12,912 9,416 7,119
------------ ------------ ------------
Total 40,903 31,872 49,699
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (9,657) (4,032) 11,627
PROVISION FOR (BENEFIT FROM) INCOME TAXES (4,506) (1,823) 4,132
------------ ------------ ------------
NET (LOSS) INCOME $ (5,151) $ (2,209) $ 7,495
============ ============ ============
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (0.51) $ (0.22) $ 0.75
============ ============ ============
Diluted $ (0.51) $ (0.22) $ 0.72
============ ============ ============
AVERAGE SHARES OUTSTANDING:
Basic 10,081,147 10,069,898 9,983,208
============ ============ ============
Diluted 10,081,147 10,069,898 10,390,884
============ ============ ============
See accompanying notes to consolidated financial statements
54
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars in Thousands)
2000 1999 1998
-------- -------- --------
NET (LOSS) INCOME $ (5,151) $ (2,209) $ 7,495
Other comprehensive (loss) income (net of taxes (tax benefit) of
$2,816, $(2,840) and $301 in 2000, 1999 and 1998 respectively):
Unrealized appreciation (depreciation) in securities available for sale
during year (1,418) 5,704 (433)
Less: Reclassification adjustment for gains included in net loss (4,259)
-------- -------- --------
Total (5,677) 5,704 (433)
-------- -------- --------
COMPREHENSIVE (LOSS) INCOME $(10,828) $ 3,495 $ 7,062
======== ======== ========
See accompanying notes to consolidated financial statements.
55
58
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(Dollars in Thousands)
Accumulated Total
Common Stock Other Stock-
------------------------ Capital Retained Comprehensive Holders
Shares Amount Surplus Earnings (Loss) Income Equity
---------- ------ -------- -------- ------------- ---------
BALANCE, DECEMBER 31, 1997 9,827,949 $ 98 $ 56,266 $ 42,016 $ (53) $ 98,327
Issuance of 222,113 shares of common
stock from exercise of options 222,113 2 2,048 2,050
Reduction of tax liability due to
deductibility of stock options
exercised 1,803 1,803
Net change in unrealized loss on
securities available for sale,
net of taxes (433) (433)
Net Income 7,495 7,495
---------- ----- -------- -------- ------ ---------
BALANCE, DECEMBER 31, 1998 10,050,062 100 60,117 49,511 (486) 109,242
Issuance of 31,085 shares of
common stock from exercise
of options 31,085 1 286 287
Reduction of tax liability
due to deductibility of
stock options exercised 305 305
Net change in unrealized
loss on securities available
for sale, net of taxes 5,704 5,704
Net loss (2,209) (2,209)
---------- ----- -------- -------- ------ ---------
BALANCE, DECEMBER 31, 1999 10,081,147 101 60,708 47,302 5,218 113,329
Adjustment of tax liability
due to deductibility of
stock options exercised (6) (6)
Net change in unrealized
gain on securities available
for sale, net of taxes (5,677) (5,677)
Net loss (5,151) (5,151)
---------- ----- -------- -------- ------ ---------
BALANCE, DECEMBER 31, 2000 10,081,147 $ 101 $ 60,702 $ 42,151 $ (459) $ 102,495
========== ===== ======== ======== ====== =========
See accompanying notes to consolidated financial statements.
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59
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars in Thousands)
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (5,151) $ (2,209) $ 7,495
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,301 1,283 1,173
Provision for credit losses 45,749 20,300 9,621
Provision for transfer risk 4,188 32,720
Deferred tax benefit (5,526) (3,746) (8,612)
Loss on exchange of assets 22,223
Net (gain) loss on securities transactions (6,535) 187 587
Net (gain) loss on sale of other assets 251 (561) 220
Increase (decrease) in accrued interest receivable and other assets 1,982 (16,918) (7,963)
Increase (decrease) in other liabilities 6,057 (2,008) 4,524
----------- ----------- -----------
Net cash provided by operating activities 42,316 29,048 29,268
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest-earning deposits with other banks 55,695 12,518 (86,473)
Purchase of securities available for sale (997,244) (762,150) (245,442)
Purchase of securities held to maturity (14,703) (31,299)
Proceeds from paydowns of securities held to maturity 3,307 989
Purchase of loan participations (69,414) (17,463)
Proceeds from sales and maturities of securities available for sale 1,014,362 763,180 214,037
Increase in loans - net (116,815) (59,570) (225,294)
Purchases of property and equipment - net (553) (1,495) (936)
Proceeds from sale of loans and other real estate owned 18,224 21,798
----------- ----------- -----------
Net cash used in investing activities (44,555) (110,103) (370,083)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net 46,725 58,554 342,005
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
----------- ----------- -----------
Net cash provided by financing activities 46,725 54,375 361,171
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 44,486 (26,680) 20,356
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 85,110 111,790 91,434
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 129,596 $ 85,110 $ 111,790
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the year $ 90,124 $ 73,536 $ 68,665
=========== =========== ===========
Income taxes paid during the year $ 7,568 $ 14,957 $ 12,717
=========== =========== ===========
See accompanying notes to consolidated financial statements.
57
60
HAMILTON BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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, 2000, 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 ("GAAP") 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
GAAP 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, 2000 and
1999, 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, 2000 and 1999, 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.
At December 31, 2000 and 1999, the Company held no securities held to
maturity.
58
61
TRANSFERS - Transfers of securities between classifications are recorded at
fair value. Unrealized gains (losses) on securities transferred into
available for sale are recorded as accumulated other comprehensive income
(loss) within stockholders' equity, while unrealized gains (losses) on
securities transfers into trading are recognized in income immediately.
Unrealized gains (losses) on securities transferred to held to maturity are
continued to be maintained in accumulated other comprehensive income (loss)
within stockholders' equity, however, such unrealized gains (losses) are
amortized to income over the period until maturity as an adjustment of
yield, using the effective yield method.
ALLOWANCE FOR CREDIT LOSSES 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 SFAS 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 the Company's historical
loss experience or on loss percentages used by the Company's 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.
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:
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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.
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.
Commencing January 1, 2000, loan origination fees and certain direct origination
costs are capitalized and recognized as an adjustment of the yield of the
related loan. Such fees and costs were not material in prior years.
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.
INCOME TAXES - The provision for or benefit from 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 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.
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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.
See Note 9.
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 1999 and 1998 consolidated financial
statements have been reclassified for comparative purposes. Such
reclassifications in 1999 related primarily to the reclassification of certain
trade finance fees, commissions, structuring and syndication fees from
non-interest income to interest income on loans and deposits with other banks.
NEW ACCOUNTING PRONOUNCEMENTS -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. The adoption of SFAS
No. 133 on January 1, 2001 did not have a material impact on the Company's
financial condition or its operations.
In September 2000, FASB issued SFAS No. 140, ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES (a replacement
of SFAS No. 125). SFAS No. 140 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
Those standards are based on consistent application of a financial components
approach that focuses on control. Under that approach, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This statement is effective for
transfers and extinguishments occurring after March 31, 2001. Certain provisions
pertaining to reclassification of collateral and disclosures relating to
securitization and collateral are effective for fiscal years ending after
December 15, 2000. Management does not expect SFAS No. 140 to have a material
impact on its financial condition or its operations.
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2. INVESTMENT SECURITIES
A comparison of the amortized cost and fair value of investment securities at
December 31, 2000 and 1999 is as follows (dollars in thousands):
2000
---------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
--------- -------- ---------- --------
AVAILABLE FOR SALE:
Foreign debt securities $ 43,979 $ 79 $ 3 44,055
U.S. treasury bills 168,696 -- 58 168,638
U.S. Mortgage backed securities 33,180 -- 650 32,530
Foreign bank stocks 4,130 -- -- 4,130
Federal Reserve Bank stock 1,985 -- -- 1,985
Other 4,100 28 129 3,999
-------- -------- -------- --------
Total $256,070 $ 107 $ 840 $255,337
======== ======== ======== ========
1999
---------------------------------------------------
Amortized Gross Unrealized Fair
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
U. S. mortgage backed securities 28,370 -- 1,792 26,578
Perpetual subordinated euronotes 8,359 3,062 -- 11,421
Foreign bank stocks 4,180 -- -- 4,180
Municipal bonds 3,239 -- -- 3,239
Federal Reserve Bank stock 1,985 -- -- 1,985
Other 1,100 28 62 1,066
-------- -------- -------- --------
$266,517 $ 13,955 $ 6,195 $274,277
======== ======== ======== ========
At December 31, 1999, foreign bearer securities originally underwritten as loans
with a cost basis of $123 million and 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, at December 31, 1999, 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.
During the year ended December 31, 2000, gross realized gains on the sale of
securities available for sale were approximately $11.6 million and gross
realized losses were approximately $778,000. There were no sales of securities
available for sale during the years ended December 31, 1999 and 1998. Included
in net gains (losses) on securities transactions are losses deemed other than
temporary of $4.3 million, $187,000 and $587,000 for the years ended December
31, 2000, 1999 and 1998, respectively. Approximately $1.6 million of these
losses were incurred on investments in foreign bank stocks. Substantially all of
the remainder of the securities gains and losses for the year ended December 31,
2000 were related to disposal of certain of the foreign debt securities
transferred to the available for sale category as discussed in the paragraph
above.
Investment securities with an amortized cost and fair value of approximately
$52,464,000 and $51,762,912, respectively, at December 31, 2000, were pledged as
collateral for public deposits.
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The following table shows the amortized cost and the fair value by maturity
distribution of the securities portfolio at December 31, 2000 (dollars in
thousands):
Available for Sale
------------------------
Amortized Fair
Cost Value
--------- --------
Within one year $198,259 $198,163
One to five years 17,416 17,530
Over ten years 33,180 32,530
-------- --------
Total 248,855 248,223
Foreign bank stocks 4,130 4,130
Federal Reserve Bank stock 1,985 1,985
Other 1,100 999
-------- --------
Total securities $256,070 $255,337
======== ========
3. LOANS
Loans consist of the following at December 31, 2000 and 1999 (dollars in
thousands):
2000 1999
---------- ----------
Domestic:
Commercial and industrial (primarily trade related) $ 380,926 $ 394,841
Commercial real estate 83,082
Acceptances discounted - trade related: 76,148 59,040
Residential mortgages 1,812 2,140
---------- ----------
Subtotal domestic 541,968 456,021
---------- ----------
Foreign:
Commercial and industrial (primarily trade related) 405,152 338,411
Banks and other financial institutions 153,119 246,155
Government and official institutions 69,841 38,358
Acceptances discounted - trade related: 64,100 59,256
---------- ----------
Subtotal foreign 692,212 682,180
---------- ----------
Total loans 1,234,180 1,138,201
---------- ----------
Less:
Unearned income 6,300 2,814
Allowance for credit losses 43,067 21,411
Allowance for ATRR 36,607 32,720
---------- ----------
Loans - net $1,148,206 $1,081,256
========== ==========
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 bank
guarantees, 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.
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A summary of the activity in the allowances for credit losses and allocated
transfer risk reserves for the years ended December 31, 2000, 1999 and 1998 is
as follows (dollars in thousands):
2000 1999 1998
-------- -------- --------
Allowance for Credit Losses
Balance at the beginning of year $ 21,411 $ 12,794 $ 10,317
Provision charged to operations 45,749 20,300 9,621
Loan charge-offs, net of recoveries (24,093) (11,683) (7,144)
-------- -------- --------
Balance at the end of year 43,067 21,411 12,794
-------- -------- --------
ALLOCATED TRANSFER RISK RESERVES
Balance at the beginning of year 32,720
Loans charge-offs (301)
Net provision charged to operations 4,188 32,720
-------- -------- --------
Balance at the end of year 36,607 32,720
-------- -------- --------
TOTAL ALLOWANCES $ 79,674 $ 54,131 $ 12,794
======== ======== ========
ATRR amounting to approximately $36.6 million and $32.7 million at December 31,
2000 and 1999, respectively, and representing 90% of the outstanding balances
have been recorded against certain Ecuadorian exposures amounting to
approximately $41 million and $36 million at December 31, 2000 and 1999,
respectively. Total Ecuadorian exposure, including amounts subject to ATRR,
amounted to approximately $63 million, $78 million and $100 million at December
31, 2000, 1999 and 1998, respectively. At December 31, 1998, none of the
Company's Ecuadorian exposure was subject to the requirements for ATRR. As of
December 31, 2000 and 1999, Ecuadorian borrowers that were greater than 30 days
past due amounted to approximately $680,000 and $3.2 million, respectively, all
of which was on nonaccrual status at the respective dates.
At December 31, 2000 and 1999, the recorded investment in impaired loans was
approximately $52.8 million and$16.6 million, respectively. These impaired loans
required an allowance for credit losses of approximately $17.8 million and $6.2
million, respectively. The average recorded investment in impaired loans during
the years ended December 31, 2000 and 1999 was approximately $16.2 million and
$17.9 million, respectively. For the years ended December 31, 2000, 1999 and
1998 the Bank recognized interest income on these impaired loans prior to their
classification as impaired of approximately $457,000, $155,000 and $412,000,
respectively. Had these impaired loans remained on a full accrual basis, the
Company would have recognized approximately $2.5 million, $1.6 million and
$615,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 2000 and
1999 (dollars in thousands):
2000 1999
------- -------
Land $ 811 $ 811
Building and improvements 1,575 1,559
Leasehold improvements 2,134 2,260
Furniture and equipment 5,283 6,965
Automobiles 47 80
------- -------
Total 9,850 11,675
Less accumulated depreciation and amortization 5,379 6,466
------- -------
Property and equipment - net $ 4,471 $ 5,209
======= =======
Depreciation and amortization expense related to property and equipment for the
years ended December 31, 2000, 1999 and 1998 was approximately $1,290,000,
$1,060,000, and $944,000, 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
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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, 2000 are as follows (dollars in thousands):
Year Ending
December 31, Amount
------------ -------
2001 $ 2,336
2002 1,919
2003 1,750
2004 1,705
2005 1,596
Thereafter 1,883
--------
Total minimum lease payments $ 11,189
========
Rent expense was approximately $2,345,000, $2,087,000 and $1,910,000 for the
years ended December 31, 2000,1999 and 1998, respectively.
5. DEPOSITS
Deposits consist of the following at December 31, 2000 and 1999 (dollars
in thousands):
2000 1999
---------- ----------
Noninterest-bearing $ 90,801 $ 77,390
---------- ----------
Interest-bearing:
NOW, money market and savings 156,568 142,790
Time, under $100,000 765,676 816,845
Time, $100,000 and over 500,089 409,425
International Banking Facility (IBF) deposits 69,197 89,156
---------- ----------
Total interest-bearing 1,491,530 1,458,216
---------- ----------
Total $1,582,331 $1,535,606
========== ==========
Time deposits in amounts of $100,000 and over at December 31, 2000 mature as
follows (dollars in thousands):
Amount
---------
Three months or less $ 112,030
Three months to twelve months 271,954
One year to five years 116,105
---------
Total $ 500,089
=========
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6. INCOME TAXES
The components of the provision for income taxes are as follows for the years
ended December 31, 2000, 1999 and 1998 (dollars in thousands):
2000 1999 1998
-------- -------- --------
Current income taxes:
Federal $ 551 $ 1,099 $ 11,503
State 55 34 149
Foreign 414 790 1,092
-------- -------- --------
Total current provision 1,020 1,923 12,744
-------- -------- --------
Deferred income taxes:
Federal (4,858) (3,539) (8,136)
State (668) (207) (476)
-------- -------- --------
Total deferred (benefit) provision (5,526) (3,746) (8,612)
-------- -------- --------
Provision for income taxes $ (4,506) $ (1,823) $ 4,132
======== ======== ========
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:
2000 1999 1998
----- ----- ----
Federal statutory rate (35.0)% (35.0)% 35.0%
Increase in taxes:
State income tax, net of federal income tax benefit (1.2) (0.4) 0.1
State income tax refunds (10.2)
Other, net (0.3) (9.8) 0.4
----- ----- ----
Effective income tax rate (46.7)% (45.2)% 35.5%
===== ===== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax purposes. The tax effects of significant
items comprising the Company's net deferred tax asset (included in other assets
n the accompanying consolidated statements of condition) as of December 31, 2000
and 1999 are as follows (dollars in thousands):
2000 1999
-------- --------
Deferred tax assets:
Difference between book and tax basis
of allowance for credit losses $ 15,612 $ 7,628
Difference between book and tax basis of property 299 193
Loss on exchange and write-down of assets 2,465 7,889
Non-accrual interest 973 492
Legal reserves 787
Deferred fees 925
Other 667
-------- --------
Total deferred tax assets 21,728 16,202
Available for sale securities 274 (2,542)
-------- --------
Total $ 22,002 $ 13,660
======== ========
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, 2000 and 1999, 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.
Subsequent to December 31, 2000, the Company and the Trust were advised by the
Federal Bank of Atlanta ("FRB") that no dividends, distributions or other debt
payments should be paid by the Company or the Trust without the prior approval
of the FRB. Pursuant to the documents governing the Preferred Securities, the
Company and the Trust have the right, under certain conditions, to defer
interest and dividend payments for up to 20 consecutive quarters. Any payments
deferred in this manner will continue to accumulate. See Note 8.
8. REGULATORY MATTERS, GOING CONCERN AND DIVIDEND RESTRICTIONS
REGULATORY MATTERS - Insured depository 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 Office of the Comptroller of the Currency
("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. As discussed below, the Bank is subject to a written agreement to
maintain specific capital levels, and thus can not be categorized as "well
capitalized." 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, 2000 and 1999, the Bank's capital ratios exceeded
the ratios set by the regulatory agencies for "well capitalized" depository
institutions.
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 Bank to maintain by September 30, 2000 Tier 1, Total and
leverage capital ratios of 10%, 12% and 7%, respectively. As of December 31,
2000, the Bank had Tier 1, Total and leverage capital ratios of 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.
The Company's consolidated and the Bank's actual capital amounts and ratios are
presented in the table below (dollars in thousands).
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December 31, 2000 December 31, 1999
---------------------- ----------------------
COMPANY Amount Ratio Amount Ratio
-------- ----- -------- -----
Total capital (to risk-weighted assets):
Actual $129,503 11.1% $134,111 11.6%
Minimum 93,314 8.0% 92,571 8.0%
Tier 1 capital (to risk-weighted assets):
Actual 114,119 9.8% 119,157 10.3%
Minimum 46,657 4.0% 46,286 4.0%
Tier 1 capital (to average assets):
Actual 114,119 6.7% 119,157 7.1%
Minimum 51,468 3.0% 50,106 3.0%
BANK
Total capital (to risk-weighted assets):
Actual $127,004 10.7% $128,936 11.2%
Minimum required by OCC Consent Order 142,697 12.0%
Minimum required to be well capitalized 118,914 10.0% 115,481 10.0%
Minimum required to be adequately capitalized 95,131 8.0% 92,385 8.0%
Tier 1 capital (to risk-weighted assets):
Actual 111,340 9.4% 114,001 9.9%
Minimum required by OCC Consent Order 118,914 10.0%
Minimum required to be well capitalized 71,358 6.0% 69,289 6.0%
Minimum required to be adequately capitalized 47,566 4.0% 46,192 4.0%
Tier 1 capital (to average assets):
Actual 111,340 6.5% 114,001 6.7%
Minimum required by OCC Consent Order 120,114 7.0%
Minimum required to be well capitalized 85,796 5.0% 84,571 5.0%
Minimum required to be adequately capitalized 68,637 4.0% 67,657 4.0%
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. Pursuant to the September 8
Order, the Bank may declare a dividend only if it is in compliance with the
capital levels required by the order and has obtained the prior written approval
of the OCC. During 2000 and 1999, approximately $1,382,000 and $4,614,000 of
dividends were paid by the Bank to the Company, respectively, which were within
the amounts allowed by regulations.
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 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.
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71
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.
GOING CONCERN -- The accompanying 2000 consolidated financial statements have
been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
matters discussed above and the uncertainty of what actions the regulators might
take related to them raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements do not
include the adjustments, if any, that might have been required had the outcome
of the above mentioned uncertainties been known, or any adjustments relating to
the recoverability of recorded asset amounts or the amounts of liabilities that
may be necessary should the Company be unable to continue as a going concern.
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. In addition to the ongoing efforts to bring the Bank into
compliance with the capital requirements of the September 8 Order, the Bank has
taken comprehensive actions to address the matters that have been identified by
the OCC and are subject of the various administrative enforcement proceedings
described herein. Among other things, the Bank has hired a chief financial
officer, appointed a chief operating officer, enhanced its policies and
procedures, conducted extensive Bank Secrecy Act training, revised its capital
plan to include current examination recommendations, enhanced its credit
analysis function, and reduced exposure in emerging markets.
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 1, 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.
The Company's continuation as a going concern is dependent on (i) the Bank's
ability to comply with the terms of regulatory orders and its prescribed capital
requirements and (ii) the severity of the actions that might be taken by
regulators as a result of non-compliance. However, there can be no assurance
that the Bank will be able to comply with such terms and achieve these
objectives.
DIVIDEND RESTRICTIONS -- 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.
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 were reserved for
issuance upon exercise of options. The 1993 Plan is designed as a means to
retain and motivate key employees and directors. The Company's Compensation
Committee, or in the absence thereof, the Board, administers and interprets the
1993 Plan and is authorized to grant options thereunder to all eligible
employees of the Company, including executive officers and directors (whether or
not they are employees) of the Company or affiliated companies. Options granted
under the 1993 Plan are on such terms and at such prices as determined by the
Compensation Committee, except that the per share exercise price of incentive
stock options cannot be less than the fair market value of the Common Stock on
the date of grant. The 1993 Plan will terminate on December 31, 2003, unless
sooner terminated by the Company's Board.
In January of 1998 and September of 2000, the Company adopted the 1998 Stock
Option Plan (the "1998 Plan") and the 2000 Stock Option plan (the 2000 Plan"),
respectively. The 1998 Plan reserved an additional 122,500 shares of common
stock and will terminate on January 1, 2008. The 2000 Plan reserved an
additional 300,000 shares of common stock and will terminate on January 1, 2010.
Both the 1998 Plan and the 2000 Plan are designed with similar terms to the 1993
Plan.
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Option activity for the years ended December 31, 2000, 1999, and 1998 is
presented below:
Number Option Fair
2000 of Shares Price Value
---- --------- ----------------- -------------
Beginning balance 649,021 $ 9.23 - 29.125
Granted(1) 137,760 16.625 - 17.75 $ 3.91 - 4.12
Forfeited (54,298) 17.75 - 29.125
--------
Ending Balance 732,483 $ 9.23 - 29.125
========
Options which became exercisable
during the year 117,592
Options exercisable at December 31, 596,730
Weighted average exercise price $ 17.65
Number Option Fair
1999 of Shares Price Value
---- --------- ----------------- -------------
Beginning balance 711,219 $ 9.23 - 29.125
Exercised (31,085) 9.23
Forfeited (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
(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.
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The following table summarizes information about all stock options outstanding
at December 31, 2000:
Options Outstanding
--------------------------------------------------
Options Remaining
Outstanding Contracted Life Exercise Price
----------- --------------- --------------
320,415 5 years $ 9.230
157,316 7 years $ 29.125
120,638 8 years $25.00 - $ 25.47
134,114 10 years $16.625 - $ 17.75
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, 2000, 1999, and 1998 related to this plan.
For purposes of the following proforma disclosures, the fair value of the
options granted in 2000 and 1998 have been estimated on the date of grant using
the Black-Scholes options pricing model with the following assumptions used for
grants in 2000 and 1998, respectively: no dividend yield; expected volatility of
41% and 48%; risk-free interest rate of 6.20% and 4.5% 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).
2000 1999 1998
--------- --------- ---------
Net income (loss):
As reported $ (5,151) $ (2,209) $ 7,495
Proforma (5,899) (3,268) 6,881
Net income (loss) per common share:
Basic:
As reported (0.51) (0.22) 0.75
Proforma (0.59) (0.32) 0.69
Diluted:
As reported (0.51) (0.22) 0.72
Proforma (0.59) (0.32) 0.67
10. 401(K) PLAN
The Company maintains a 401(k) plan, which was initiated in 1993, for its
executive officers and other employees. Under the terms of the 401(k) plan, for
each dollar contributed by an employee, the Company intends to contribute a
discretionary amount on behalf of participants (the "Matching Contribution"). In
addition, at the end of the plan year, the Company may make an additional
contribution (the "Additional Contributions") on behalf of participants.
Additional Contributions are allocated in the same proportion that the Matching
Contribution made on the participant's behalf bears to the Matching Contribution
made on behalf of all participants during the year. The amount that the Company
contributes to the 401(k) plan has historically varied from year to year. During
the years ended December 31, 2000, 1999 and 1998, the Company's matching and
additional contributions amounted to approximately $83,000, $82,000 and $155,000
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 $148,000 and $544,000
at December 31, 2000 and 1999, respectively, and the balance of deposit accounts
approximated $1,339,000 and $1,897,000 at December 31, 2000 and 1999,
respectively. At December 31, 2000 there were no outstanding commercial and
standby letters of credit transactions outstanding with these individuals.
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12. OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES
OFF-BALANCE SHEET RISK AND COMMITMENTS: In the normal course of business, the
Bank utilizes various financial instruments with off-balance sheet risk to meet
the financing needs of its customers, including commitments to extend credit,
commercial letters of credit, shipping guarantees, standby letters of credit and
forward foreign exchange contracts. These financial instruments involve, to
varying degrees, elements of credit risk. The credit risk associated with these
financial instruments, as further discussed herein, is not recorded in the
statement of condition. The contractual or notional amounts of such instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments. The credit risks associated with financial instruments
are generally managed in conjunction with the Bank's statements of condition
activities and are subject to normal credit policies, financial controls, and
risk limiting and monitoring procedures.
Credit losses are incurred when one of the parties fails to perform in
accordance with the terms of the contract. The Bank's exposure to credit loss is
represented by the contractual or notional amount of the commercial letters of
credit, shipping guarantees, and standby letters of credit. This is the maximum
potential loss of principal in the event the commitment is drawn upon and the
counterparty defaults.
A summary of the Bank's contractual or notional amounts for financial
instruments with off-balance sheet risk as of December 31, 2000 and 1999 along
with a further discussion of these instruments, is as follows (dollars in
thousands):
Contractual or
Notional Amount
------------------------
2000 1999
-------- --------
Commercial letters of credit $131,400 $129,475
Standby letters of credit 28,380 21,340
Shipping guarantees (indemnity letters) 4 629
Commitments to purchase foreign currency 5,277 5,862
Commitments to sell foreign currency 1,168 5,879
Commitments to extend credit 67,455 64,220
A commercial letter of credit is an instrument containing the commitment of the
Bank stating that the Bank will honor drawings under and in full compliance with
the terms of the letter of credit. The letters of credit are usually drawn on
the presentation of certain required documents, such as commercial invoice and
bills of lading. Essentially, letters of credit facilitate the purchase of
merchandise by the Bank's customers by substituting the credit standing of the
Bank for that of the Bank's customer. Commercial letter of credit contracts are
generally for a short commitment period.
Standby letters of credit are commitments issued to guarantee the performance of
a customer to a third party. The Bank issues standby letters of credit to ensure
contract performance or assure payment by its customers. The guarantees extend
for periods up to 12 months. The risk involved in issuing standby letters of
credit is the same as the credit risk involved in extending loan facilities to
customers and they are subject to the same credit approvals and monitoring
procedures. The Bank holds certificates of deposit and guarantees from other
banks as collateral supporting those commitments for which collateral is deemed
necessary. The extent of collateral held for standby letters of credit
commitments at December 31, 2000 varies from zero percent to 100 percent.
Shipping guarantees (also known as indemnity letters) are letters of guarantee
issued by the Bank on behalf of its customer in favor of shipping agents.
Normally, such facility is extended in instances where goods purchased under
letters of credit have arrived at the port of destination and the shipping
documents necessary for the release of the goods have not been received by the
Bank. The purpose of the shipping guarantee is to indemnify the transportation
company for any loss that might arise from the release of goods to the Bank's
customer in the absence of the shipping documents.
The Bank enters into forward foreign exchange contracts with its customers for
the delayed exchange of foreign currency for U.S. dollars on behalf of such
customers. These contracts provide a vehicle for the Bank's customers to hedge
their future obligations in foreign currency. Upon entering such contracts with
its customers, the Bank meets these foreign currency commitments by entering
into equivalent contracts with other banks to purchase or sell equal amounts of
the foreign currency to be delivered or received. Risks arise from the possible
inability of the Bank's counterparties to meet the terms of their contracts and
from movements in foreign currency exchange rates. However, the full notional
amount of the contract is not at risk, as the Bank has the ability to settle
these contracts in the foreign exchange market.
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Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank, upon extension of credit, is based on management's
credit evaluation of the counterparty.
LITIGATION: On January 31, 1998, Development Specialists, Inc., the Liquidating
Trustee of the Model Imperial Liquidating Trust established under the Plan of
Reorganization in the Model Imperial, Inc. Chapter 11 Bankruptcy proceeding,
filed an action against the Bank in the United States Bankruptcy Court for the
Southern District of Florida objecting to the Bank's proof of claim in the
Chapter 11 proceeding and affirmatively seeking damages against the Bank in
excess of $34 million for alleged involvement with former officers and directors
of Model Imperial, Inc. in a scheme to defraud Model Imperial, Inc. and its bank
lenders. A trial on various bankruptcy preference issues was held in November
1999. In May 2000, the judge rendered a decision in the trial. The judge's
decision held that the Bank's proof of claim was subordinate to DSI's and
granted 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 subsequent to
December 31, 2000 of approximately $3.9 million to the Liquidating Trust to
settle the case. The full amount of the settlement is included in operating
results for 2000. 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 OCC
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.
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
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are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
December 31, 2000 and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein (dollars in thousands).
December 31, 2000 December 31, 1999
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Assets:
Cash and cash equivalents $ 129,596 $ 129,596 $ 85,110 $ 85,110
Interest-earning deposits
with other banks 109,989 109,989 165,685 165,685
Securities available for sale 255,337 255,337 274,277 274,277
Loans, net 1,148,206 1,162,738 1,081,256 1,071,869
Liabilities:
Demand deposits 247,369 247,369 220,180 220,180
Time deposits 1,334,962 1,341,060 1,315,426 1,315,434
Trust preferred securities 12,650 9,804 12,650 9,962
Contingent assets and liabilities:
Bankers acceptances 31,544 237 27,767 208
Deferred payment letters of credit 997 5 5,835 26
Off-balance sheet instruments -
unrealized gains (losses):
Commitments to extend credit 132 124
Commercial letters of credit 329 323
Standby letters of credit 426 320
Indemnity letters of credit -- 2
Commitments to purchase foreign currency 56 66
Commitments to sell foreign currency 61 238
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 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.
CONTINGENT ASSETS AND LIABILITIES - The fair values of these assets and
corresponding liabilities are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties.
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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
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements, or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date. The fair values of
commitments to purchase and sell foreign currency are based on quoted market
prices or dealer quotes.
14. FOREIGN ACTIVITIES (Unaudited)
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, 2000 1999 and 1998
is as follows (dollars in thousands):
(Loss) Income
Operating Before Net (Loss) Total
Income Income Taxes Income Assets
---------- ------------ ---------- ----------
2000
Domestic $ 31,936 $ (5,563) $ (3,711) $ 915,785
Foreign 49,247 (4,094) (1,440) 825,874
---------- ---------- ---------- ----------
Total $ 81,183 $ (9,657) $ (5,151) $1,741,659
========== ========== ========== ==========
1999
Domestic $ 27,739 $ 12,789 $ 9,855 $ 653,207
Foreign 53,121 (16,821) (12,064) 1,047,480
---------- ---------- ---------- ----------
Total $ 80,860 $ (4,032) $ (2,209) $1,700,687
========== ========== ========== ==========
1998
Domestic $ 16,708 $ 8,789 $ 6,897 $ 610,834
Foreign 54,239 2,838 598 1,082,395
---------- ---------- ---------- ----------
Total $ 70,947 $ 11,627 $ 7,495 $1,693,229
========== ========== ========== ==========
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15. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Hamilton Bancorp Inc. (Parent Company only)
is as follows (dollars in thousands):
STATEMENTS OF CONDITION
December 31,
------------------------
2000 1999
-------- --------
Assets
Demand deposit with the Bank $ 577 $ 5,536
Securities available for sale 821 888
Goodwill, net 318 361
Other assets 1,458 1,351
Investment in subsidiaries 68,712 79,584
Investment in the Bank's preferred stock 43,650 38,650
-------- --------
Total $115,536 $126,370
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debentures held by the Trust $ 13,041 $ 13,041
Stockholders' equity 102,495 113,329
-------- --------
Total $115,536 $126,370
======== ========
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Years Ended December 31,
---------------------------------------------
2000 1999 1998
--------- --------- ---------
STATEMENTS OF OPERATIONS
Interest income $ 344 $ 313 $ 530
Dividends from Bank and other income 1,706 4,708 2,258
--------- --------- ---------
Total income 2,050 5,021 2,788
Interest expense 1,272 1,270 12
Operating expenses 1,231 1,290 1,539
--------- --------- ---------
Total expenses 2,503 2,560 1,551
--------- --------- ---------
(Loss) income before equity in undistributed income of subsidiary (453) 2,461 1,237
Equity in undistributed (loss) income of subsidiaries (5,237) (5,340) 6,087
--------- --------- ---------
(Loss) income before income tax (5,690) (2,879) 7,324
Income tax (benefit) provision (539) (670) (171)
--------- --------- ---------
Net (loss) income $ (5,151) $ (2,209) $ 7,495
========= ========= =========
STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net (loss) income $ (5,151) $ (2,209) $ 7,495
Adjustments to reconcile net (loss) income to
net cash provided by operations:
Equity in undistributed income of subsidiary 5,237 5,340 (6,087)
Write down on security available for sale 587
Amortization of goodwill 43 43 43
Other (38) (517) 1,198
--------- --------- ---------
Net cash provided by operating activities 91 2,657 3,236
--------- --------- ---------
Cash flows from investing activities:
Purchase of securities available for sale (83,134) (80,307) (140,163)
Proceeds from maturities of securities available for sale 83,084 89,354 131,172
Purchase of Bank's preferred stock (5,000) (8,600) (15,300)
Purchase of Trust's common stock (51) (340)
--------- --------- ---------
Net cash (used in) provided by investing activities (5,050) 396 (24,631)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 592 2,050
Proceeds from issuance of trust preferred securities 1,701 11,340
--------- --------- ---------
Net cash provided by financing activities 2,293 13,390
--------- --------- ---------
Net (decrease) increase in cash (4,959) 5,346 (8,005)
Cash at beginning of year 5,536 190 8,195
--------- --------- ---------
Cash at end of year $ 577 $ 5,536 $ 190
========= ========= =========
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16. QUARTERLY FINANCIAL INFORMATION (Unaudited)
Selected financial information for the quarterly periods of 2000 and
1999 is presented below.
2000 QUARTERS
-------------
FIRST SECOND THIRD FOURTH
------- ------- -------- -------
Net Interest Income $16,728 $16,199 $ 16,406 $14,942
Provision for Credit Losses 750 -- 32,500 12,499
Provisions for Transfer Risk 3,248 363 4,768 (4,191)
Net Interest Income (Loss) After Provisions 12,730 15,836 (20,862) 6,634
Non-Interest Income 4,063 3,945 3,485 5,415
Operating Expenses 8,686 8,449 13,209 10,559
Net Income (Loss) 5,417 7,120 (17,874) 186
Net Income (Loss) Per Common Share:
Basic 0.54 0.71 (1.77) 0.02
Diluted 0.53 0.70 (1.77) 0.02
1999 QUARTERS
-------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
Net Interest Income $14,009 $15,932 $17,405 $19,796
Provision for Credit Losses 900 1,746 15,019 2,635
Provision for Transfer Risk 9,900 21,317 803 700
Net Interest Income (Loss) After Provisions 3,209 (7,131) 1,583 16,461
Non-Interest Income 3,696 3,458 3,774 2,790
Operating Expenses 7,156 7,431 7,308 9,977
Net (Loss) Income (155) (6,968) (1,240) 6,154
Net (Loss) Income Per Common Share:
Basic (0.02) (0.69) (0.12) 0.61
Diluted (0.02) (0.69) (0.12) 0.60
Since there are no changes in the weighted average number of shares outstanding
each quarter, the sum of net (loss) income per common share by quarter may not
equal the total net (loss) income per common share for the applicable year.
17. 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 of $22.2 million in 1998 to write down the securities
acquired to 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.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
INFORMATION AS TO DIRECTORS AND EXECUTIVE OFFICERS
Listed below are the names of the seven directors of Hamilton Bancorp,
together with their ages, their principal occupations during the past five
years, any other directorships they hold with companies having securities
registered under the Securities Exchange Act of 1934 and the years during which
their current consecutive terms as directors of Hamilton Bancorp first
commenced. Each director's current term of office is until the next Annual
Meeting of Shareholders of Hamilton Bancorp, which is expected to be held in the
Summer or early Fall of 2001, and until their respective successors are duly
elected by shareholders and qualify. As of May 7, 2001, no director beneficially
owned more than 5% of the outstanding shares of Common Stock except for Mr.
Masferrer who reports beneficial ownership of 8.0% of the outstanding shares of
Common Stock. Also listed below are the other Executive Officers of Hamilton
Bancorp together with their ages, their principal occupations during the past
five years and any other directorships they hold with companies having
securities registered under the Securities Exchange Act of 1934.
DIRECTORS' NAME, AGE, PRINCIPAL OCCUPATION AND CERTAIN OTHER DIRECTORSHIPS
Eduardo A. Masferrer, age 52 Director Since 1988
MR. MASFERRER has served as Hamilton Bancorp's Chairman of the Board since
1988 and as its President and Chief Executive Officer since 1990. Mr.
Masferrer has also served as a director of Hamilton Bank, N.A. since his
election in 1988, as Chief Executive Officer of Hamilton Bank since 1990 and
as President of Hamilton Bank from 1990 to 1997.
William Alexander, age 77 Director Since 1997
MR. ALEXANDER has served as a director and Vice Chairman of Hamilton Bank
since his election in 1988.
Juan Carlos Bernace, age 40 Director Since 1999
MR. BERNACE has served as an Executive Vice President of Hamilton Bancorp
since 1997 and as President, Senior Lending Officer and a Director of
Hamilton Bank since November 1997. Mr. Bernace served as Executive Vice
President of Hamilton Bank from 1996 to 1997.
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Ronald E. Frazier, age 58 Director Since 1999
MR. FRAZIER has served as a director of Hamilton Bank since his election in
1982. Mr. Frazier is the founder and, since its establishment 1973, has
served as the President of Ronald E. Frazier & Associates, P.A., a
consulting firm specializing in architecture and urban design and planning.
Ronald A. Lacayo, age 45 Director Since 1999
MR. LACAYO has served as a director of Hamilton Bank since his election in
1988. Since 1996, Mr. Lacayo also has served as the President and Chief
Executive Officer of Crugerwets Capital Partners, Ltd., a financial
consulting firm in Miami, Florida, and from prior to 1995 as the Secretary
of The Record Companies Group, an El Salvadorian manufacturer of automotive
batteries. In 1999 Mr. Lacayo served as Chairman and Chief Executive Officer
of Banco Nicaraguense de Industria y Comercio, S.A., a commercial bank in
Nicaragua. From prior to 1995 to 1997 Mr. Lacayo was the President and Chief
Executive Officer of Raymel Corporation, a sportswear manufacturer in Miami,
Florida.
George A. Lyall, age 76 Director Since 1999
MR. LYALL has served as a director of Hamilton Bank since his election in
1988. From 1991 to 2000 Mr. Lyall served as the Chairman of the Board of
Miami Air International, a charter air carrier.
Benton L. Moyer, age 59 Director Since 1999
MR. MOYER has served as a director of Hamilton Bank since his election in
January 1999. From 1968 until his retirement in 1996, Mr. Moyer was employed
by the Bank of Boston, principally as a General Manager, in Latin America,
Australia, Taiwan and Boston. Since 1996 Mr. Moyer has served as a senior
consultant for H. C. Wainwright, a financial consulting firm in Boston,
Massachusetts. Since 1999 Mr. Moyer has also served as a director and Vice
Chairman of Banco Bisa, a Bolivian bank.
OTHER EXECUTIVE OFFICERS' NAME, AGE, PRINCIPAL OCCUPATION AND CERTAIN OTHER
DIRECTORSHIPS
J. Reid Bingham, age 55
MR. BINGHAM has served as General Counsel and Secretary of Hamilton Bancorp
and Hamilton Bank since 1996.
Felix M. Garcia, age 51
MR. GARCIA has served as an Executive Vice President of Hamilton Bank since
2000. From 1999 to 2000, Mr. Garcia served as Executive Vice President and
Head of Corporate Lending of Union Planters Bank. From 1985 to 1999, Mr.
Garcia held various positions with Republic National Bank of Miami,
including Executive Vice President and Chief Credit Officer from 1993 to
1999.
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James J. Gartner, age 59
MR. GARTNER has served as Executive Vice President - Risk Management of
Hamilton Bank since March 2000. From 1998 to 2000 Mr. Gartner was Executive
Vice President and a Director of First National Bank of Nevada and First
Bank Arizona, N.A., Scottsdale, Arizona. From 1996 to 1998 Mr. Gartner was
Executive Vice President and Director of Bank of Arizona, Scottsdale,
Arizona, and Executive Vice President of The Bank of New Mexico,
Albuquerque, New Mexico.
Lucious T. Harris, age 45
MR. HARRIS has served as an Executive Vice President and Chief Financial
Officer of Hamilton Bancorp and Hamilton Bank since March 2001. From 1987 to
1999 Mr. Harris held various positions with Capital Bank, Miami, Florida,
including Executive Vice President and Chief Financial Officer from 1993 to
1997. From 1997 to 1999, Mr. Harris was Executive Vice President and Chief
Financial Officer of Union Planters Bank, N.A. in Florida. From August 1999
to April 2000 Mr. Harris was Senior Vice President and Chief Financial
Officer of Crescent Heights of America, a real estate development firm in
Miami, Florida. From August 2000 to March 2001 Mr. Harris was Executive Vice
President and Chief Financial Officer of ALeNet, Inc., computer application
services provider in Coral Gables, Florida.
Maria Justo, age 42
MS. JUSTO has served as an Executive Vice President of Hamilton Bank since
October 2000 and as a Senior Vice President from July 1999 to October 2000.
From 1996 to 1999, Ms. Justo was President and Chief Executive Officer of
Eagle National Bank, N.A., Miami, Florida.
John F. Stumpff, age 53
MR. STUMPFF has served as an Executive Vice President of Hamilton Bancorp
and Hamilton Bank since January 2001 and as a Senior Vice President of
Hamilton Bancorp from 1998 to 2000. From prior to 1995 to 1998, Mr. Stumpff
served as Senior Vice President-Administration of Hamilton Bank.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Hamilton
Bancorp's directors, executive officers and holders of more than 10% of Hamilton
Bancorp's Common Stock to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of Hamilton Bancorp. Based solely upon its review of
Section 16(a) reports furnished to Hamilton Bancorp and upon representations
made to Hamilton Bancorp, Hamilton Bancorp believes that during or with respect
to 2000 its directors, executive officers and holders of more than 10% of its
Common Stock complied with all Section 16(a) filing requirements.
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ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid by Hamilton
Bancorp for services rendered during the fiscal year ended December 31, 2000 to
the five most highly compensated executive officers (the "Named Officers") of
Hamilton Bancorp and/or Hamilton Bank.
SUMMARY COMPENSATION TABLE
Long-term
Compensation
Annual Compensation Awards
----------------------------------------- -------------
Securities
Other Annual Underlying All Other
Name and Salary Bonus Compensation Options Compensation
Principal Position Year ($) ($) ($) # ($)
------------------ ---- ------- ------ ------------ ----------- ------------
Eduardo A. Masferrer............... 2000 896,210 -0- -(1) 19,325 2,483(2)
Chairman of the Board, 1999 853,534 662,000 -(1) -0- 2,500(2)
President and Chief 1998 775,900 1,103,591 -(1) -0- 4,621(2)
Executive Officer
Juan Carlos Bernace.................. 2000 242,000 -0- -(1) 13,117 2,483(2)
Executive Vice President 1999 220,000 70,000 -(1) -0- 2,500(2)
1998 200,000 100,000 -(1) 35,576 4,648(2)
Felix M. Garcia...................... 2000 142,423 100,000 -(1) 20,000 -0-
Executive Vice President 1999 --(3) --(3) -(1) --(3) --(3)
Hamilton Bank 1998 --(3) --(3) -(1) --(3) --(3)
Maura A. Acosta....................... 2000 209,090 -0- -(1) 7,468 2,483(2)
Executive Vice President 1999 203,000 49,000 -(1) -0- 2,500(2)
1998 195,000 70,000 -(1) 20,062 4,664(2)
J. Reid Bingham...................... 2000 176,000 -0- -(1) 4,690 2,189(2)
General Counsel and 1999 170,000 24,500 -(1) -0- 2,431(2)
Secretary 1998 165,000 35,000 -(1) 10,000 4,855(2)
- ------------------------
(1) The aggregate amount of perquisites and other personal benefits
provided to such Named Officer is less than 10% of the total annual
salary and bonus of such officer.
(2) Represents matching and additional contributions made by Hamilton Bank
under its 401(k) plan.
(3) Mr. Garcia joined Hamilton Bank on April 26, 2000.
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CORPORATION BONUS POLICY
Historically, the Company has distributed an aggregate percentage of up
to 11% (approximately 5% in 1999) of the Company's pre-tax net income, after the
deduction of loan loss provisions ("Available Pre-Tax Net Income"), to its
executive officers and other employees as bonuses. Up to five percent (5%) of
the Available Pre-Tax Net Income has historically been distributed to Eduardo A.
Masferrer, the Company's Chairman of the Board, President and Chief Executive
Officer, although in 1998 and 1999 the amount was 3% and 2%, respectively. Due
to the pre-tax loss experienced by the Company in 2000, no senior officers
received a bonus in 2000 (other than signing bonuses paid to two newly hired
officers). Bonuses were paid to other employees based upon and in accordance
with the following criteria: (i) each employee whose job performance was
satisfactory or better, as determined by an appropriate department head,
received a bonus equal to two weeks' salary, (ii) each employee whose quarterly
job performance is significantly above average, as determined by an appropriate
department head, received an additional bonus equal to one week's salary for
each quarter in which such a review is received and (iii) an additional amount
was paid to those employees who have made superior contributions to the Company
during the year as determined by the Company's Personnel Management Committee.
The Company may also make an additional contribution from the Available Pre-Tax
Net Income to the 401(k) plan for its executive officers and other employees on
behalf of all participants in the 401(k) plan at the end of the year. Due to the
pre-tax loss experienced by the Company in 2000, no such additional contribution
was paid in 2000. During the year ended December 31, 2000, $341,197 was
distributed in bonuses as discussed above.
401 (k) PLAN
The Company maintains a 401(k) plan 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 the participant (the "Matching Contribution"). In addition, at the end
of the plan year, the Company may make an additional contribution from the
Available Pre-Tax Net Income bonus pool on behalf of all participants at the end
of the year ("Additional Contribution"). The amount that the Company contributes
to the 401(k) plan has historically varied from year to year. During the year
ended December 31, 2000, the Company made a $0.25 Matching Contribution and no
Additional Contribution on behalf of each participant in the aggregate amount of
$82,738.
EMPLOYMENT AGREEMENTS
Each of the Named Officers entered into employment agreements with the
Company, each dated October 1, 1999 for Messrs. Masferrer, Bernace and Bingham
and Ms. Acosta and April 26, 2000 for Mr. Garcia. The agreements for Messrs.
Masferrer, Bernace and Bingham and Ms. Acosta provide that the Named Officers'
compensation will not be reduced below his/her 1999 salary as reflected in the
Summary Compensation Table and are for a term of three years (5 years in the
case of Mr. Masferrer). The agreements for Mr. Garcia provides that the Named
Officer' compensation will not be reduced below $210,000 and is for an initial
term of three years. Each contract (other than Mr. Masferrer's) also provides
for a performance bonus in the event of a change in control of the Company. The
performance bonus for Messrs. Bernace and Bingham and Ms. Acosta will be equal
to the Named Officer's compensation for the year preceding the change in
control. The performance bonus for Mr. Garcia will be equal to twice the Named
Officer's compensation for the year preceding the change in control if within
ninety (90) days following the
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consummation of the change in control (a) the Named Officer voluntarily
terminates his employment with Hamilton Bank (or its successors) or (b) Hamilton
Bank (or its successors) notifies the Named Officer that it elects to terminate
the Named Officer's employment with Hamilton Bank. Mr. Masferrer's contract
provides for a payment to him if he is terminated as a result of the change in
control equal to 2.99 times his average annualized compensation in the preceding
5 years. Each December 31 the term of each employment contract is extended for
an additional year (commencing December 31, 2000 for Messrs. Masferrer, Bernace
and Bingham and Ms. Acosta and April 26, 2002 for Mr. Garcia) unless the company
or the Named Officer affirmatively elects not to so extend the employment
agreement. Mr. Masferrer's employment agreement also provides for a supplemental
retirement benefit of not less than $650,000 per year beginning at age 65 and
paid annually for 15 years. Each agreement provides that if the employee leaves
the Company such employee will not attempt to influence any customers of the
Company to curtail any business they may transact with the Company or attempt to
influence any employee of the Company to terminate his/her employment with the
Company. Mr. Masferrer's agreement also provides that through the second
anniversary after the expiration of his agreement that he will not engage in
business in competition with the Company.
DIRECTORS' COMPENSATION
Any Directors of Hamilton Bancorp who are not executive officers or
directors of Hamilton Bank would receive a quarterly retainer of $4,000 and a
fee of $1,000 for each meeting of the Board or committee attended in excess of
regular quarterly meetings of the Board and one meeting of each committee per
year. All current Directors of Hamilton Bancorp are directors of Hamilton Bank.
The Directors of Hamilton Bank, other than executive officers, receive from
Hamilton Bank a monthly retainer of $6,900, a fee of $1,500 for each meeting
attended of the Board of Directors of Hamilton Bank and a fee of $1,000 for each
meeting attended of a Board committee of Hamilton Bank. Hamilton Bancorp also
reimburses all directors of Hamilton Bancorp for all travel-related expenses
incurred in connection with their activities as directors.
CORPORATION STOCK OPTION PLANS
In December 1993, Hamilton Bancorp adopted the 1993 Stock Option Plan
for Key Employees and Directors, pursuant to which 624,302 shares of Common
Stock are currently reserved for issuance upon exercise of options. In June
1998, Hamilton Bancorp adopted the 1998 Executive Incentive Compensation Plan,
pursuant to which 122,500 shares of Common Stock are currently reserved for
issuance upon exercise of options. In October 2000, Hamilton Bancorp adopted the
2000 Executive Incentive Compensation Plan, pursuant to which 300,000 shares of
Common Stock are currently reserved for issuance upon exercise of options. The
1993 Stock Option Plan, the 1998 Executive Incentive Compensation Plan and the
2000 Executive Incentive Compensation Plan(collectively, the "Stock Option
Plans") are designed as a means to retain and motivate key employees and
directors. Hamilton Bancorp's Compensation Committee, or in the absence thereof,
the Board of Directors, administers and interprets the Stock Option Plans and is
authorized to grant options thereunder to all eligible employees of the Company
including executive officers and directors (whether or not they are employees)
of Hamilton Bancorp or affiliated companies. Options granted under the Stock
Option Plans 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. Each option is exercisable after the period or periods
specified in the option
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agreement, but no option may be exercisable after the expiration of ten years
from the date of grant. The 1993 Stock Option Plan will terminate on December 3,
2003, the 1998 Stock Option Plan will terminate on June 15, 2008 and the 2000
Executive Incentive Compensation Plan will terminate on September 1, 2010,
unless either is sooner terminated by Hamilton Bancorp's Board of Directors.
Incentive stock options granted to an individual who owns (or is deemed to own)
at least 10% of the total combined voting power of all classes of stock of
Hamilton Bancorp or its subsidiary must have an exercise price of at least 110%
of the fair market value of the Common Stock on the date of grant, and a term of
no more than five years. The Stock Option Plans also authorize Hamilton Bancorp
to make or guarantee loans to optionees to enable them to exercise their
options. Such loans must (i) provide for recourse to the optionee, (ii) bear
interest at a rate not less than the prime rate of interest and (iii) be secured
by the shares of Common Stock purchased. The Board of Directors has the
authority to amend or terminate the Stock Option Plans, provided that no such
amendment may impair the rights of the holder of any outstanding option without
the written consent of such holder, and provided further that certain amendments
of the Stock Option Plans are subject to stockholder approval.
No options to purchase shares of Common Stock were granted under the
Stock Option Plans to the Named Officers during the year ended December 31,
1999.
The following table sets forth certain information with respect to
options to purchase shares of Common Stock granted under Hamilton Bancorp's
Stock Option Plans to the Named Officers during the year ended December 31,
2000, and represents all options granted by Hamilton Bancorp to such Named
Officers for the period. In accordance with rules of the Securities and Exchange
Commission, the table also describes the hypothetical gains that would exist for
the respective options granted based on assumed rates of annual compounded stock
appreciation of 5% and 10% from the date of grant to the end of the option term.
These hypothetical gains are based on assumed rates of appreciation and,
therefore, the actual gains, if any, on stock option exercises are dependent on
the future performance of the Common Stock, overall stock market conditions and
the Named Officer's continued employment with the Company. As a result, the
amounts reflected in this table may not necessarily be achieved.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable
---------------------------------------------------------- Value At Assumed Annual
Number of Rates of Stock Price
Securities % of Total Options Appreciation for
Underlying Granted to Exercise Option Term
Options Employees in Price Expiration ----------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5% 10%
- ---- ----------- ------------------ --------- ---------- -------- --------
Eduardo A. Masferrer ..... 19,325 16.6% $17.75 1/3/10 $215,723 $546,684
Juan Carlos Bernace....... 13,117 11.2% 17.75 1/3/10 $146,423 $371,066
Felix M. Garcia........... 20,000 17.1% 17.50 4/26/10 $220,113 $557,810
Maura A. Acosta .......... 7,468 6.4% 17.75 1/3/10 $83,364 $211,262
J. Reid Bingham .......... 4,690 4.0% 17.75 1/3/10 $52,376 $132,732
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The following table shows information concerning the exercise of stock
options during fiscal year 2000 by each of the Named Officers and the fiscal
year-end value of their unexercised options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Value of Unexercised
Number of Unexercised In-the-money Options
Shares Value Options At Fy-End (#) At Fy-End ($)(1)
Acquired Realized ------------------------- -------------------------
Name On Exercise ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
Eduardo A. Masferrer.... -0- -0- 48,750 /19,325 $-0-/-0-
Juan Carlos Bernace...... -0- -0- 132,722 /13,117 $-0-/-0-
Felix M. Garcia.............. -0- -0- -0- /20,000 $-0-/-0-
Maura A. Acosta........... -0- -0- 87,975 /7,468 $-0-/-0-
J. Reid Bingham............ -0- -0- -0- /15,000 $-0-/-0-
- ------------------------
(1) Represents the difference between the closing price of Hamilton
Bancorp's common stock on December 29, 2000 ($9.00) and the exercise
price of the options multiplied by the number of shares represented by
such options.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF EQUITY SECURITIES
The following table sets forth information concerning the beneficial
ownership of the Common Stock of Hamilton Bancorp as of May 15, 2001 by (i) each
director, (ii) each person known to Hamilton Bancorp to be the beneficial owner
of more than 5% of its outstanding Common Stock, (iii) the Chief Executive
Officer and the other officers listed in the summary compensation table and (iv)
all directors and executive officers of Hamilton Bancorp as a group.
Amount and Nature of Percentage of Outstanding
Name of Beneficial Owner Beneficial Ownership Shares Owned
- ------------------------- -------------------- -------------------------
Eduardo A. Masferrer....................... 816,981(1) 8.1%
William Alexander ......................... 29,019(2) *
Juan Carlos Bernace........................ 142,094(3) 1.4%
Ronald E. Frazier.......................... 51,750(4) *
Ronald A. Lacayo........................... 102,685(5) 1.0%
George A. Lyall............................ 57,740(6) *
Ben L. Moyer............................... 6,000(7) *
Felix M. Garcia............................ 4,000(8) *
Maura A. Acosta............................ 108,651(9) 1.1%
J. Reid Bingham............................ 51,816(10) *
All Directors and executive officers of
Hamilton Bancorp as a group (13 persons)... 1,357,321(11) 12.85%
FMR Corp. ................................. 619,000(12) 6.1%
Edward C. Johnson 3rd
Fidelity Management & Research Company
Fidelity Low Priced Stock Fund
82 Devonshire Street
Boston, Massachusetts 02109
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- ------------------------
* Less than 1%
(1) Includes (i) 17,687 shares of Common Stock held by Mr. Masferrer and
his wife, Maura A. Acosta, as joint tenants with rights of survivorship
and (ii) 55,192 shares of Common Stock issuable upon the exercise of
options granted to Mr. Masferrer under the Stock Option Plans. Does not
include 90,964 of the shares of Common Stock reported as beneficially
owned by Maura A. Acosta or 12,883 of Common Stock issuable upon the
exercise of options granted to Mr. Masferrer under the Stock Option
Plans, which options are not currently exercisable.
(2) Includes 21,415 shares of Common Stock issuable upon the exercise of
options granted to Mr. Alexander under the Stock Option Plans. Does not
include 2,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Alexander under the Stock Option Plans, which
options are not currently exercisable.
(3) Includes 137,094 shares of Common Stock issuable upon the exercise of
options granted to Mr. Bernace under the Stock Option Plans. Does not
include 8,745 shares of Common Stock issuable upon the exercise of
options granted to Mr. Bernace under the Stock Option Plans, which
options are not currently exercisable.
(4) Includes 51,750 shares of Common Stock issuable upon the exercise of
options granted to Mr. Frazier under the Stock Option Plans. Does not
include 2,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Frazier under the Stock Option Plans, which
options are not currently exercisable.
(5) Includes 28,750 shares of Common Stock issuable upon the exercise of
options granted to Mr. Lacayo under the Stock Option Plans. Does not
include 2,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Lacayo under the Stock Option Plans, which
options are not currently exercisable
(6) Includes 51,750 shares of Common Stock issuable upon the exercise of
options granted to Mr. Lyall under the Stock Option Plans. Does not
include 2,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Lyall under the Stock Option Plans, which
options are not currently exercisable.
(7) Includes 1,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Moyer under the Stock Option Plans. Does not
include 5,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Moyer under the Stock Option Plans, which
options are not currently exercisable.
(8) Does not include 20,000 shares of Common Stock issuable upon the
exercise of options granted to Mr. Garcia under the Stock Option Plans,
which options are not currently exercisable.
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(9) Includes (i) 17,687 shares of Common Stock held by Ms. Acosta and her
husband, Eduardo A. Masferrer, as joint tenants with rights of
survivorship and (ii) 90,464 shares of Common Stock issuable upon the
exercise of options granted to Ms. Acosta under the Stock Option Plans.
Does not include 799,294 of the shares of Common Stock reported as
beneficially owned by Eduardo A. Masferrer or 4,979 shares of Common
Stock issuable upon the exercise of options granted to Ms. Acosta under
the Stock Option Plans, which options are not currently exercisable.
(10) Includes 43,316 shares of Common Stock issuable upon the exercise of
options granted to Mr. Bingham under the Stock Option Plans. Does not
include 3,127 shares of Common Stock issuable upon the exercise of
options granted to Mr. Bingham under the Stock Option Plans, which
options are not currently exercisable.
(11) Includes an aggregate of 461,124 shares of Common Stock issuable upon
the exercise of options granted under the Stock Option Plans. Does not
include an aggregate of 156,675 of Common Stock issuable upon the
exercise of options granted under the Stock Option Plans, which options
are not currently exercisable. See footnotes (1) - (11) above.
(12) According to a Schedule 13G filed with the Securities and Exchange
Commission on February 14, 2001, FMR Corp., its controlling
shareholder, Edward C. Johnson 3rd, its wholly-owned subsidiary,
Fidelity Management & Research Company ("Fidelity"), and a stock fund
for which Fidelity is the investment adviser, Fidelity Low Priced Stock
Fund, were the beneficial owners of 619,000 shares of Common Stock as
of December 31, 2000 and had the sole power to dispose of such shares.
The Schedule 13G also states that the Board of Trustees of the Fund had
the sole power to vote such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CERTAIN TRANSACTIONS WITH MANAGEMENT
From time to time, Hamilton Bank makes loans and extends credit to
certain of Hamilton Bancorp's and/or Hamilton Bank's officers and directors and
to certain companies affiliated with such persons. In the opinion of Hamilton
Bancorp all of such loans and extensions of credit were made in the ordinary
course of business, on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other third parties. At December 31, 2000, an aggregate of $147,500 of loans and
extensions of credit were outstanding to executive officers and directors of
Hamilton Bancorp and/or Hamilton Bank and to companies affiliated with such
persons.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. The following financial statements and financial
statement schedules are contained herein or are incorporated herein by
reference:
Page in
Form 10-K
Independent Auditors' Report 52
Consolidated Statements of Condition as of December 31, 2000
and 1999. 53
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 54
Consolidated Statements of Comprehensive (Loss) Income for the
years ended December 31, 2000, 1999 and 1998 55
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000 56
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 57
Notes to Consolidated Financial Statements 58
All Schedules are omitted because they are either not required or the
information is otherwise included in the consolidated financial statements or
notes thereto.
2. Exhibits. The following exhibits are contained herein or are
incorporated herein by reference:
DESCRIPTION OF EXHIBIT
3.1 Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, Registration No. 333-20435)
3.2 Amended and Restated Bylaws of the Company as amended March 21, 2000
(incorporated by reference to Exhibit 3.2 of the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999)
4.1 Form of Common Stock certificate (incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-1, Registration
No. 333-20435)
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10.1 Company's 1993 Stock Option Plan, as amended (incorporated by reference
to Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Registration No. 333-20435)
10.2 Company's 1998 Stock Option Plan (incorporated by reference to Exhibit
4.3 of the Company's Registration Statement on Form S-8, Registration
No. 333-39944)
10.3 Lease Agreement, dated December 20, 1997, by and between Hamilton Bank,
N.A. and System Realty Twelve, Inc. regarding the Company's corporate
headquarters (incorporated by reference to Exhibit 10.2 of the
Company's Registration Statement on Form S-1, Registration No.
333-20435)
10.4 Employment Agreement dated October 1, 1999 with Mr. Eduardo A.
Masferrer (incorporated by reference to Exhibit 10.4 of the Company's
Annual Report on Form 10-K for its fiscal year ended December 31, 1999)
10.5 Employment Agreement dated October 1, 1999 with Mr. Juan Carlos Bernace
(incorporated by reference to Exhibit 10.5 of the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999)
10.5.1 Amendment to Employment Agreement with Mr. Juan Carlos Bernace
10.6 Employment Agreement dated October 1, 1999 with Ms. Maura Acosta
(incorporated by reference to Exhibit 10.6 of the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999)
10.6.1 Amendment to Employment Agreement with Ms. Maura Acosta
10.7 Employment Agreement dated October 1, 1999 with Mr. J. Reid Bingham
(incorporated by reference to Exhibit 10.7 of the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999)
10.7.1 Amendment to Employment Agreement with Mr. J. Reid Bingham
10.8 Employment Agreement dated March 13, 2000 with Mr. James J. Gartner
(incorporated by reference to Exhibit 10.8 of the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999)
10.8.1 Amendment to Employment Agreement with Mr. James J. Gartner
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10.9 Employment Agreement dated October 1, 1999 with Ms. Maria Justo
(incorporated by reference to Exhibit 10.10 of the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1999)
10.9.1 Amendment to Employment Agreement with Ms. Maria Justo
10.10 Employment Agreement dated September 1, 2000 with Mr. John F. Stumpff
(incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ended September 30, 2000)
10.10.1 Amendment to Employment Agreement with Mr. John F. Stumpff
10.11 Employment Agreement dated September 1, 2000 with Mr. Felix M. Garcia
(incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for its fiscal quarter ended June 30, 2000)
10.12 Employment Agreement dated February 1, 2001 with Mr. Lucious T. Harris
10.13 Company's 2000 Stock Option Plan
11.1 Earnings Per Share Computation
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP.
(b) No reports on Form 8-K were filed during the fourth quarter of
2000.
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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 Report 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 of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on April 13, 2001 on
behalf of the Registrant and in the capacities indicated.
/s/ Eduardo A. Masferrer /s/ William Alexander
- ------------------------------ -----------------------------------
Eduardo A. Masferrer William Alexander
Director Director
/s/ Juan Carlos Bernace /s/ Ronald Frazier
- ------------------------------ -----------------------------------
Juan Carlos Bernace Ronald Frazier
Director Director
/s/ Ronald A. Lacayo /s/ George Lyall
- ------------------------------ -----------------------------------
Ronald A. Lacayo George Lyall
Director Director
/s/ Ben L. Moyer /s/ Lucious T. Harris
- ------------------------------ -----------------------------------
Ben L. Moyer Lucious T. Harris, Executive Vice
Director President, Chief Financial Officer,
Principal Financial and Accounting
Officer
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