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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
-------------- ---------------
COMMISSION FILE NUMBER: 0-20960
HAMILTON BANCORP INC.
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0149935
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3750 N.W. 87TH AVENUE, MIAMI, FLORIDA 33178
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 717-5500
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Indicate by check [X] whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
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Item 1 and Item 2 of Part I of the Registrant's Form 10-Q for the quarterly
period ended March 31, 2001 are hereby amended to read as follows:
ITEM 1
PART I. FINANCIAL INFORMATION
HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
UNAUDITED
(In thousands)
March 31, 2001 December 31, 2000
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ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 52,465 $ 125,330
FEDERAL FUNDS SOLD 2,221 4,266
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Total cash and cash equivalents 54,686 129,596
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INTEREST EARNING DEPOSITS WITH OTHER BANKS 54,825 109,989
------------ ------------
SECURITIES AVAILABLE FOR SALE 389,677 255,337
------------ ------------
LOANS-NET OF UNEARNED INCOME 1,213,893 1,227,880
LESS: ALLOWANCE FOR CREDIT LOSSES (44,134) (43,067)
LESS: ALLOWANCE FOR TRANSFER RISK (35,384) (36,607)
------------ ------------
LOANS-NET 1,134,375 1,148,206
------------ ------------
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 28,958 31,544
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 1,014 997
PROPERTY AND EQUIPMENT-NET 4,224 4,471
ACCRUED INTEREST RECEIVABLE 15,553 15,606
GOODWILL-NET 1,439 1,483
OTHER ASSETS 44,492 44,430
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TOTAL $ 1,729,243 $ 1,741,659
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 1,573,297 $ 1,582,331
TRUST PREFERRED SECURITIES 12,650 12,650
BANKERS ACCEPTANCES OUTSTANDING 28,958 31,544
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 1,014 997
OTHER LIABILITIES 7,874 11,642
------------ ------------
Total liabilities 1,623,793 1,639,164
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares authorized, 10,081,147 shares
issued and outstanding at March 31, 2001 and December 31, 2000 101 101
Capital surplus 60,702 60,702
Retained earnings 44,690 42,151
Accumulated other comprehensive loss (43) (459)
------------ ------------
Total stockholders' equity 105,450 102,495
------------ ------------
TOTAL $ 1,729,243 $ 1,741,659
============ ============
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(Dollars in thousands except per share data)
Three Months Ended March 31,
-------------------------------------
2001 2000
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INTEREST INCOME:
Loans, including fees $ 28,422 $ 29,607
Deposits with other banks 1,956 3,841
Investment securities 5,374 3,052
Federal funds sold 676 703
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Total 36,428 37,203
INTEREST EXPENSE:
Deposits 24,000 20,166
Trust preferred securities 308 308
Federal funds purchased and other borrowing 1 1
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Total 24,309 20,475
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NET INTEREST INCOME 12,119 16,728
PROVISION FOR CREDIT LOSSES 3,000 750
PROVISION FOR (RECOVERY OF) TRANSFER RISK (1,223) 3,248
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NET INTEREST INCOME AFTER PROVISIONS 10,342 12,730
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NON-INTEREST INCOME:
Trade finance fees and commissions 1,925 2,217
Customer service fees 379 400
Net gain on securities transactions 351 1,349
Other 45 97
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Total 2,700 4,063
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OPERATING EXPENSES:
Employee compensation and benefits 3,821 2,963
Occupancy and equipment 1,190 1,298
Other 4,049 4,425
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Total 9,060 8,686
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INCOME BEFORE INCOME TAXES 3,982 8,107
PROVISION FOR INCOME TAXES 1,443 2,690
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NET INCOME $ 2,539 $ 5,417
============= =============
NET INCOME PER COMMON SHARE:
BASIC $ 0.25 $ 0.54
============= =============
DILUTED $ 0.25 $ 0.53
============= =============
AVERAGE SHARES OUTSTANDING:
BASIC 10,081,147 10,081,147
============= =============
DILUTED 10,081,147 10,221,121
============= =============
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
(In thousands)
Three Months Ended March 31,
2001 2000
------------ ------------
NET INCOME $ 2,539 $ 5,417
OTHER COMPREHENSIVE INCOME, Net of tax:
Net change in unrealized loss on securities available for sale during period 416 1,618
Less: Reclassification adjustment on realized gain on sale of assets 0 (672)
------------ ------------
Total 416 946
------------ ------------
COMPREHENSIVE INCOME $ 2,955 $ 6,363
============ ============
See accompanying notes to consolidated financial statements
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
Accumulated
Common Stock Other Total
-------------------- Capital Retained Comprehensive Stockholders'
Shares Amount Surplus Earnings Loss Equity
---------- ------ --------- --------- ------------- -------------
Balance, December 31, 2000 10,081,147 $ 101 $ 60,702 $ 42,151 $ (459) $ 102,495
Net change in unrealized loss on
securities available for sale, net of taxes 416 416
Net income for the three months ended
March 31, 2001 2,539 2,539
---------- ------ --------- --------- ------- ----------
Balance as of March 31, 2001 10,081,147 $ 101 $ 60,702 $ 44,690 $ (43) $ 105,450
========== ====== ========= ========= ======= ==========
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Ended March 31,
--------------------------------
2001 2000
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,539 $ 5,417
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 240 429
Provision for credit losses 3,000 750
Provision for transfer risk (1,223) 3,248
Deferred tax benefit (1,025) 725
Net gain on securities transactions (351) (1,118)
Increase in accrued interest receivable and other assets 1,020 3,230
Increase (decrease) in other liabilities (3,763) 7,483
---------- -----------
Net cash provided by operating activities 437 20,164
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in interest-earning deposits with other banks 55,164 32,786
Purchase of securities available for sale (606,859) (105,105)
Proceeds from sales and maturities of securities available for sale 472,173 86,949
Decrease (increase) in loans - net 13,251 (4,784)
Purchases of property and equipment - net (42) (239)
---------- -----------
Net cash (used in) provided by investing activities (66,313) 9,607
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits - net (9,034) 15,345
---------- -----------
Net cash (used in) provided by financing activities (9,034) 15,345
---------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (74,910) 45,116
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 129,596 85,110
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,686 $ 130,226
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 4,870 $ 10,686
========== ===========
Income taxes paid during the period $ 1,188 $ 9
========== ===========
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
NOTE 1: BASIS OF PRESENTATION
The consolidated statements of condition for Hamilton Bancorp Inc. and
Subsidiaries (the "Company") as of March 31, 2001 and December 31, 2000, the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the three months ended March 31, 2001 and 2000
included in the Form 10-Q have been prepared by the Company in conformity with
the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore,
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The statements
are unaudited except for the consolidated statement of condition as of December
31, 2000.
The accounting policies followed for interim financial reporting are consistent
with the accounting policies set forth in Note 1 to the consolidated financial
statements appearing in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 as filed with the Securities and Exchange Commission.
NOTE 2: 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 Company's 99.8% owned subsidiary, Hamilton Bank, N.A.
(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
required minimums.
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. Further, 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. 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 and March 31, 2001, the Bank had Tier 1,
Total and leverage capital ratios of 9.4%, 10.7% and 6.5%, respectively, and
9.5%, 10.8% and 6.5%, respectively. 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.
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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.
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. On June 13, 2001, following an informal hearing on the OCC's intent
to reclassify, the Bank was notified that the OCC rendered a decision and
reclassified the Bank's capital category to "undercapitalized" for purposes of
PCA (the "Reclassification to Undercapitalized"). Prior to this reclassification
the Bank's capital category for PCA was "adequately capitalized." As a result of
the reclassification, the Bank is subject to restrictions on its ability to pay
dividends and management fees, and restrictions on asset growth and expansion.
Under the September 8 Order, the Bank was previously required to obtain prior
approval from the OCC for the payment of any dividends. Additionally, the Bank's
waiver from the Federal Deposit Insurance Corporation ("FDIC") authorizing it to
accept brokered deposits is no longer applicable, and a new waiver must be
obtained from the FDIC prior to the acceptance or renewal of any brokered
deposits subsequent to the date of the reclassification. As of March 31, 2001,
the Bank did not have any brokered deposits outstanding. As of June 13, 2001,
the Bank held $10 million of brokered deposits, all of which were acquired prior
to receipt of the notification from the OCC.
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In addition, under PCA the OCC may impose additional discretionary restrictions
by the issuance of a PCA directive, and after the opportunity for a hearing, if
the OCC determines that such actions are necessary to help resolve the problems
of the Bank at the least possible long term cost to the FDIC. Such additional
discretionary restrictions include requiring recapitalization, restricting
transactions with affiliates, restricting interest rates paid, further
restricting asset growth, restricting activities, improving management and the
board by requiring new members or dismissal of existing members, prohibiting
deposits from correspondent banks, requiring divestiture of subsidiaries of the
Bank (currently the Bank has no subsidiaries) and any other actions the OCC
determines will better resolve the problems of the Bank at the least possible
long term cost to the deposit insurance fund. Additionally, the Federal
Reserve Board (the "FRB Board") may impose restrictions including requiring
prior approval of the FRB Board for any capital distributions by the Company
(the FRB has notified the Company that prior approval is required for any such
distributions), requiring divestiture of any affiliate other than an insured
depository institution and requiring divestiture of the Bank if the FRB Board
determines that divestiture would improve the Bank's financial condition and
future prospects.
GOING CONCERN -- The accompanying 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 and the Reclassification to Undercapitalized, the Bank's capital
category as of March 31, 2001 and 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.
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In addition, In June 2001, the Company engaged CIBC World Markets, an investment
bank, to advise the Company in exploring and evaluating strategic alternatives
to enhance shareholder value. Such alternatives could include but are not
limited to a possible sale or other transfer of all or a significant portion of
the assets or securities of the Company or some other corporate transaction
involving a change in control of the Company. There is no assurance that any of
the foregoing transactions will be consummated.
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 Securities") issued by Hamilton Capital Trust I (the "Trust").
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 Securities, the Company and the Trust
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. Pursuant to this right, the Company and the Trust have deferred
payment of the dividend otherwise payable on July 2, 2001 and, until further
notice, expect to defer future payments.
NOTE 3: LITIGATION
On January 31, 1998, Development Specialists, Inc. ("DSI"), 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.
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.
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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.
NOTE 4: NET INCOME PER COMMON SHARE
Basic earnings per share is computed by dividing the Company's net income by the
weighted average number of shares outstanding during the period.
Diluted earnings per share is computed by dividing the Company's net income by
the weighted average number of shares outstanding and the dilutive impact of
potential common stock, primarily stock options. The dilutive impact of common
stock is determined by applying the treasury stock method.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Hamilton Bancorp Inc. ("Bancorp") is a bank holding company which conducts
operations principally through its 99.8 percent subsidiary, Hamilton Bank, N.A.
(the "Bank" and, collectively with Bancorp, the "Company"). The Bank is a
national bank which specializes in financing trade flows between domestic and
international companies on a global basis, with particular emphasis on trade
with and between South America, Central America, the Caribbean (collectively,
the "Region") and the United States. The Bank has a network of nine FDIC-insured
branches with eight Florida locations in Miami, Sarasota, Tampa, West Palm
Beach, Winter Haven and Weston, and a branch in San Juan, Puerto Rico.
FINANCIAL CONDITION - MARCH 31, 2001 VS. DECEMBER 31, 2000
Total consolidated assets decreased $12.4 million during the first three months
of 2001, which included an increase of $63.1 million in interest earning assets
offset by a decrease of $75.7 million in non-interest earning assets. The
increase in interest earning assets is primarily in securities available for
sale, which increased $134.3 million. The decrease in non-interest earning
assets is primarily in cash and cash equivalents which decreased $74.9 million.
This shift in asset composition reflects the investment of excess cash which was
temporarily uninvested at December 31, 2000.
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 $54.7 million at March 31,
2001 compared to $129.6 million at December 31, 2000. The balance at December
31, 2000 reflected temporarily uninvested cash.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND INVESTMENT SECURITIES
Interest-earning deposits with other banks decreased to $54.8 million at March
31, 2001 from $110.0 million at December 31, 2000. These deposits are placed
primarily with correspondent banks in the Region, generally on a short-term
basis (less than 365 days), to increase yields and enhance relationships with
the correspondent banks. The level of such deposits has diminished as the
exposure in the Region has decreased during the three months ended March 31,
2001. Additionally, in connection with capital management strategies, the
Company has been increasing the level of U.S. Government securities in place of
interest-earning deposits. The short-term nature of these deposits allows the
Company the flexibility to later redeploy assets into a higher yielding domestic
loan component or other alternative assets.
Investment securities increased to $389.7 million at March 31, 2001 from $255.3
million at December 31, 2000. The increase has been primarily in U.S. treasury
securities. The treasury securities are short term in nature and allow the
Company the flexibility of liquidity. In addition, the treasury securities are
considered lower risk and thus contribute to improving the risk based capital
ratios.
11
12
LOANS
The Company's gross loan portfolio decreased by $13.4 million or 1.1 percent,
during the first three months of 2001 in relation to the year ended December 31,
2000. Domestic commercial real estate increased by $31.9 million or 38.4
percent. This increase was offset by a decrease in foreign loans of $44.3
million or 6.4 percent. In connection with Management's plans to achieve
compliance with required capital ratios (see "Capital Resources"), total loans
are expected to continue to decrease for the remainder of 2001.
Details on the loans by type are shown in the table below. At March 31, 2001
approximately 46.9 percent of the Company's portfolio consisted of loans to
domestic borrowers compared to 43.9 percent at December 31, 2000 and 40.1
percent at December 31, 1999, reflecting the increasing emphasis on domestic
activities. The Company's loan portfolio is relatively short-term, as
approximately 70.9 and 77.3 percent of loans at March 31, 2001 were short-term
loans with average maturities or repricing of less than 180 and less than 365
days, respectively. See "Interest Rate Sensitivity Report".
The following table sets forth the loans by type in the Company's loan portfolio
at the dates indicated.
LOANS BY TYPE
(IN THOUSANDS)
March 31, 2001 December 31, 2000
-------------- -----------------
Domestic:
Commercial and industrial (1) $ 385,239 $ 380,926
Commercial real estate 114,946 83,082
Acceptances discounted 71,006 76,148
Residential mortgages 1,655 1,812
------------ ------------
Subtotal Domestic 572,846 541,968
------------ ------------
Foreign:
Banks and other financial institutions 129,196 153,119
Commercial and industrial (1) 415,916 405,152
Acceptances discounted 67,005 64,100
Government and official institutions 35,841 69,841
------------ ------------
Subtotal Foreign 647,958 692,212
------------ ------------
Total Loans 1,220,804 1,234,180
Less unearned income 6,911 6,300
------------ ------------
Loans - net of unearned income $ 1,213,893 $ 1,227,880
============ ============
(1) Includes pre-export financing, warehouse receipts and
refinancing of letter of credits.
The following tables present the Company's loans by country and cross-border
outstandings by country. The aggregate amount of the Company's cross border
outstandings by primary credit risk include cash and demand deposits with other
banks, interest earning deposits with other banks, investment securities, due
from customers on bankers acceptances, due from customers on deferred payment
letters of credit and loans. Exposure levels in any given country at the end of
each period may be impacted by the flow of trade between the United States (and
to a large extent Florida) and the given countries, as well as the price of the
underlying goods or commodities being financed.
12
13
At March 31, 2001 approximately 27.1 percent in principal amount of the
Company's loans were outstanding to borrowers in four countries other than the
United States: Panama (10.8 percent), Guatemala (7.6 percent), El Salvador (4.4
percent) and Ecuador (4.3 percent).
Panama loan exposure continues to be over 10 percent of loans and has decreased
to 10.8 percent of total loans at March 31, 2001. The bulk of the credit
relationships in Panama are related to financing 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.
LOANS BY COUNTRY
(Dollars in thousands)
March 31, 2001 December 31, 2000
------------------------------ ------------------------------
Percent of Percent of
Country Amount Total Loans Amount Total Loans
------------ ----------- ------------ -----------
United States $ 572,846 46.9% $ 541,968 43.9%
Argentina 20,297 1.7% 13,943 1.1%
British West Indies 19,450 1.6% 24,115 2.0%
Colombia 19,611 1.6% 21,176 1.7%
Dominican Republic 33,431 2.7% 36,374 3.0%
Ecuador 52,374 4.3% 53,688 4.4%
El Salvador 53,216 4.4% 55,871 4.5%
Guatemala 93,073 7.6% 105,945 8.6%
Honduras 37,324 3.1% 38,232 3.1%
Jamaica 33,956 2.8% 49,346 4.0%
Nicaragua 17,402 1.4% 22,527 1.8%
Panama 131,913 10.8% 138,425 11.2%
Peru 26,923 2.2% 37,494 3.0%
Other (1) 108,988 8.9% 95,076 7.7%
------------ ----- ------------ -----
Total $ 1,220,804 100.0% $ 1,234,180 100.0%
============ ===== ============ =====
(1) Other consists of loans to borrowers in countries in which loans did
not exceed 1 percent of total assets
13
14
At March 31, 2001 approximately 23.0 percent in cross-border outstandings were
outstanding to borrowers in five countries other than the United States: Panama
(8.0 percent), Guatemala (5.4 percent), Ecuador (3.8 percent), El Salvador (3.1
percent), and Dominican Republic (2.7 percent).
TOTAL CROSS-BORDER OUTSTANDINGS BY COUNTRY (3)
(Dollars in millions)
March 31, 2001 December 31, 2000
------------------------ -----------------------
% of Total % of Total
Amount Assets Amount Assets
------ ---------- ------ ----------
Argentina $ 26 1.5% $ 55 3.2%
Brazil 15 0.9% 20 1.1%
B.W. Indies (2) -- -- 18 1.0%
Colombia 25 1.4% 22 1.3%
Dominican Republic 46 2.7% 41 2.4%
Ecuador 66 3.8% 63 3.6%
El Salvador 54 3.1% 60 3.4%
Guatemala 94 5.4% 105 6.0%
Honduras 32 1.9% 29 1.7%
Jamaica 34 2.0% 50 2.9%
Mexico 16 0.9% -- --
Nicaragua 23 1.3% 20 1.1%
Panama 139 8.0% 139 8.0%
Peru 31 1.8% 38 2.2%
Suriname 31 1.8% 31 1.8%
Venezuela 19 1.1% 17 1.0%
Other (1) 43 2.5% 80 4.5%
------ ----- ------ -----
Total $ 694 40.1% $ 788 45.2%
====== ===== ====== =====
(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 in periods presented which did not
exceed 1 percent of total assets.
(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.
14
15
CONTINGENCIES
The following table sets forth the distribution of the Company's contingent
liabilities by country of the applicant and issuing bank for import and export
letters of credit, respectively. As shown by the table, contingent liabilities
decreased by 3.1 percent from December 31, 2000 to March 31, 2001. Individual
fluctuations reflect relative changes in the flow of trade or instruments used
in financing such trade as well as the cyclical nature of certain trade
activities.
CONTINGENT LIABILITIES (1)
(in thousands)
March 31, 2001 December 31, 2000
-------------- -----------------
Bolivia (3) $ 1,563 $ --
Dominican Republic 14,742 23,880
Ecuador 5,217 2,305
El Salvador (3) 8,855 1,651
Guatemala 9,313 12,347
Guyana 1,511 2,107
Honduras 1,953 1,957
Jamaica 10,296 10,194
Panama 3,755 7,564
Paraguay (3) -- 2,398
Peru 2,547 2,337
Suriname 2,771 2,248
United States 87,534 85,617
Other (2) 4,792 5,179
---------- ----------
Total $ 154,849 $ 159,784
========== ==========
(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 represented less than 1 percent
of the Company's total contingencies as each of the above dates.
CREDIT QUALITY REVIEW
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.
15
16
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 contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Impairment is measured on a loan by
loan basis for non-homogenous loans by either the present value of expected
future cash flows discounted at the loans effective interest rate, the loans
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
The allocated formula allowance is calculated by applying loss factors to
outstanding loans based on the internal risk grade of such loans. Changes in
risk grades of both performing and nonperforming loans affect the amount of the
allocated formula allowance. Loss factors are based on our historical loss
experience or on loss percentages used by our regulators for similarly graded
loans and may be adjusted upward for significant factors that, in management's
judgment, affect the collectibility of the portfolio as of the evaluation date.
Loss factors are described as follows:
- - Problem-graded loan loss factors are derived from loss percentages
required by our banking regulators for similarly graded loans. Loss
factors of 2 to 5%, 15% and 50% are applied to the outstanding balance
of loans internally classified as special mention, substandard and
doubtful, respectively.
- - Pass-graded loan loss factors are based on net charge-offs (i.e.,
charge-off less recoveries) to average loans. The Company's current
methodologies incorporate prior year net charge-offs, three year
average net charge-offs and five year average net charge-offs and are
used to compute a range of probable losses.
The unallocated allowance is established based upon management's evaluation of
various conditions, the effects of which are not directly measured in the
determination of the 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:
- - General economic and business conditions affecting the Region;
- - Loan volumes and concentrations;
- - Credit quality trends;
- - Collateral values;
- - Bank regulatory examination results; and
- - Findings of our internal credit examiners
Management reviews these conditions quarterly with our senior credit officers.
To the extent that any of these conditions is evidenced by a specifically
identifiable problem credit as of the evaluation date, management's estimate of
the effect of such condition may be reflected as a specific allowance applicable
to such credit. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or reflected in the formula allowance as of the
evaluation date, management's evaluation of the probable loss related to such
condition is reflected in the unallocated allowance.
Our methodologies include several features that are intended to reduce the
difference between estimated and actual losses. The loss factors that are used
to establish the allowance for pass-graded loans is designed to be
self-correcting by taking into account changes in loan classification and
permitting adjustments based on management's judgment of significant qualitative
factors as of the evaluation date. Similarly, by basing the pass-graded loan
loss factors on loss experience over the prior year and the last three or five
years, the methodology is designed to take our recent loss experience into
account. The Bank generally operates a commercial banking business, which does
not include significant amounts of pooled loans or loans that are homogeneous in
nature such as residential mortgages or consumer installment loans (these
represent 0.1% of gross loans at both March 31, 2001 and December 31, 2000).
16
17
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, 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 March 31, 2001 and December 31, 2000, the Company
had aggregate exposure to borrowers located in Ecuador of approximately $66
million and $63 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 requirement. Subsequent to 1999, additional
Ecuadorian exposures became subject to ATRR, and payments on various exposures
have been received. At March 31, 2001, approximately $39.3 million of the
Company's Ecuadorian exposure was subject to ATRR, requiring an ATRR of
approximately $35.4 million. During the first quarter of 2001, payments resulted
in recoveries of ATRR of $1.2 million, which is included in current operating
results. At March 31, 2001, approximately $778,000 of the Company's Ecuadorian
exposure was on nonaccrual status, and the remainder was in compliance with
their contractual terms.
17
18
The following table sets forth the composition of the allowance for credit
losses and ATRR as of March 31, 2001 and December 31, 2000 (in thousands):
MARCH 31, 2001 DECEMBER 31, 2000
-------------- -----------------
Allocated:
Specific (Impaired loans) $ 21,129 $ 17,816
Formula 19,723 24,144
Unallocated 3,282 1,107
-------- --------
Total allowance for credit losses 44,134 43,067
Allocated transfer risk reserve 35,384 36,607
-------- --------
Total allowance and reserves $ 79,518 $ 79,674
======== ========
The specific allowances increased from $17.8 million at December 31,
2000 to $21.1 million at March 31, 2001 due to an increase in impaired loans.
Impaired loans increased from $54.2 million at December 31, 2000 to $65.8
million at March 31, 2001. At March 31, 2001, approximately $23.5 million of
impaired loans were to U.S. borrowers, and approximately $42.4 million were to
foreign borrowers. The decrease in the allocated formula allowance reflects the
shift of certain loans to impaired loans. Management has not noted any trends or
common characteristics associated with the increase in impaired and
problem-graded loans.
The increase in impaired loans included $13.1 million associated with
several short-term loans to two Panamanian borrowers. The Company is attempting
to restructure the loans with both borrowers. Management considered the
circumstances involved in the increase in impaired loans and downgraded these
loans during the first quarter. The amount of allowance for credit losses
allocated to these loans was increased to a level deemed adequate by management
as of March 31, 2001.
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.
18
19
The following table provides certain information with respect to the Company's
allowance for credit losses and ATRR activity for the periods shown.
CREDIT LOSS AND TRANSFER RISK EXPERIENCE
(in thousands)
Three Months Ended Year Ended
March 31, 2001 December 31, 2000
------------------ -----------------
Balance of allowance for credit losses at beginning of period $ 43,067 $ 21,411
Charge-offs:
Domestic:
Commercial (2,630) (16,420)
Acceptances -- (297)
Installment -- --
------------- -------------
Total Domestic (2,630) (16,717)
------------- -------------
Foreign:
Banks and other financial institutions -- --
Commercial and industrial (1,181) (7,504)
------------- -------------
Total Foreign (1,181) (7,504)
------------- -------------
Total charge-offs (3,811) (24,221)
------------- -------------
Recoveries:
Domestic:
Commercial 1,878 10
Foreign:
Commercial -- 48
Banks and other financial institutions -- 70
------------- -------------
Total recoveries 1,878 128
------------- -------------
Net (charge-offs) recoveries (1,933) (24,093)
Provision for credit losses 3,000 45,749
------------- -------------
Balance of allowance for credit losses at end of the period $ 44,134 $ 43,067
============= =============
ATRR at beginning of period $ 36,607 $ 32,720
Charge-offs to ATRR -- (301)
Provision for (recovery of) ATRR (1,223) 4,188
------------- -------------
ATRR at end of period $ 35,384 $ 36,607
============= =============
------------- -------------
Allowance for credit losses and ATRR at end of period $ 79,518 $ 79,674
============= =============
Average loans $ 1,229,903 $ 1,183,613
Total loans $ 1,220,804 $ 1,234,180
Net charge-offs to average loans 0.16% 2.04%
Allowance for credit losses to total loans 3.62% 3.49%
Allowance for credit losses and ATRR to total loans 6.51% 6.46%
The following tables set forth an analysis of the allocation of the allowance
for credit losses by category of loans and the allowance for credit losses
allocated to foreign loans. The allowance is established to cover potential
losses inherent in the portfolio as a whole or is available to cover potential
losses on any of the Company's loans.
19
20
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
(in thousands)
As of As of
March 31, 2001 December 31, 2000
-------------- -----------------
Allocation of the allowance by category of loans:
Domestic:
Commercial $ 10,315 $ 9,412
Commercial real estate 1,031 1,332
Acceptances 593 554
Residential 6 5
------------ ------------
Total domestic 11,945 11,303
------------ ------------
Foreign Non ATRR:
Government and official institutions 183 298
Banks and other financial institutions 5,950 8,063
Commercial and industrial 25,577 23,013
Acceptances discounted 479 390
------------ ------------
Total foreign non ATRR 32,189 31,764
------------ ------------
Foreign Non ATRR:
Government and official institutions 6,820 7,852
Banks and other financial institutions 14,400 15,282
Commercial and industrial 14,164 13,473
------------ ------------
Total foreign ATRR 35,384 36,607
------------ ------------
Total foreign 67,573 68,371
------------ ------------
Total $ 79,518 $ 79,674
============ ============
Percent of loans in each category to total loans:
Domestic:
Commercial and industrial 31.5% 30.9%
Commercial real estate 9.4% 6.7%
Acceptances 5.8% 6.2%
Residential 0.2% 0.2%
------------ ------------
Total domestic 46.9% 44.0%
------------ ------------
Foreign Non ATRR:
Banks and other financial institutions 9.2% 11.0%
Commercial and industrial 32.9% 31.7%
Acceptances discounted 5.5% 5.2%
Government and official Institutions 2.3% 4.9%
------------ ------------
Total foreign non ATRR 49.9% 52.8%
------------ ------------
Foreign ATRR:
Government and official institutions 0.6% 0.7%
Banks and other financial institutions 1.4% 1.4%
Commercial and industrial 1.2% 1.1%
------------ ------------
Total foreign ATRR 3.2% 3.2%
------------ ------------
Total foreign 53.1% 56.0%
------------ ------------
Total 100.0% 100.0%
============ ============
20
21
ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ALLOCATED TO FOREIGN LOANS
(in thousands)
March 31, 2001 December 31, 2000
-------------- -----------------
Balance, beginning of period $ 68,371 $ 50,653
Provision for credit losses 1,606 21,217
Provision for (recovery of) transfer risk (1,223) 4,188
Net charge-offs (1,181) (7,687)
---------- ----------
Balance, end of period $ 67,573 $ 68,371
========== ==========
Composition at end of period:
Allowance for credit losses $ 32,189 $ 31,764
Allowance for transfer risk (ATRR) 35,384 36,607
---------- ----------
$ 67,573 $ 68,371
========== ==========
The Company does not have a rigid charge-off policy but instead charges off
loans on a case-by-case basis as determined by management and approved by the
Board of Directors. In some instances, loans may remain in the nonaccrual
category for a period of time during which the borrower and the Company
negotiate restructured repayment terms.
The Company attributes its favorable asset quality to the short-term nature of
its loan portfolio, the composition of its borrower base, the importance that
borrowers in the Region attach to maintaining their continuing access to
financing for foreign trade and the Company's loan underwriting policies.
The following table sets forth information regarding the Company's nonperforming
loans at the dates indicated.
NONPERFORMING LOANS
(in thousands)
March 31, 2001 December 31, 2000
-------------- -----------------
Domestic:
Non accrual $ 23,463 $ 23,958
Past due over 90 days and accruing -- 105
-------- --------
Total domestic nonperforming loans 23,463 24,063
-------- --------
Foreign
Non accrual 42,397 30,250
Past due over 90 days and accruing 26,997 322
-------- --------
Total foreign nonperforming loans 69,394 30,572
-------- --------
Total nonperforming loans (1) $ 92,857 $ 54,635
======== ========
Total nonperforming loans to total loans 7.61% 4.43%
Total nonperforming assets to total assets 5.37% 3.14%
(1) During such periods the Company did not have any loans not included in
the table above which were deemed to be "troubled debt restructurings"
as defined in SFAS No. 15 Accounting by Debtors and Creditors for
Troubled Debt Restructurings.
Nonaccrual loans increased from $54.2 million at December 31, 2000 to $65.8
million at March 31, 2001. The increase during the first quarter is attributable
to several short-term loans to two Panamanian borrowers. The Company is
attempting to restructure the loans with both borrowers. In connection with the
transfer of these loans to impaired status, management downgraded these loans
for purposes of assessing the adequacy of the allowance for credit losses, and
increased the amount of the allowance allocated to these loans to a level deemed
adequate at March 31, 2001.
Loans past due 90 days or more and still accruing include aggregate outstandings
of five foreign borrowers, all of which are well secured and in the process of
collection at March 31, 2001. Loans to three of the borrowers, aggregating $9.6
million, were brought current subsequent to March 31, 2001. Included in the
remaining past due loans are loans to two borrowers, aggregating $17.4 million,
which are supported by third-party receivables with an aggregate estimated value
of $22 million.
21
22
Management considered the circumstances involved in the increase in
nonperforming loans as of March 31, 2001 compared to December 31, 2000,
including the availability of collateral and other sources of repayment, in
connection with its assessment of the adequacy of the allowance for credit
losses as of March 31, 2001. The factors management considers in establishing
the amount of the allowance for credit losses are discussed under "Credit
Quality Review." Many of these factors require management's use of its judgment,
assumptions and estimates. Accordingly there can be no assurance that the
Company's current allowance for credit losses will prove to be adequate in light
of future events and developments.
At March 31, 2001, the Company had $240,000 in nonperforming investment
securities compared to $480,000 at December 31, 2000. This represents a foreign
security which was written down during the first quarter.
Deposits
The primary sources of the Company's domestic time deposits are its eight Bank
branches located in Florida and one in Puerto Rico. In pricing its deposits, the
Company analyzes the market carefully, attempting to price its deposits
competitively with the other financial institutions in the area.
Total deposits were $1.57 billion at March 31, 2001 compared to $1.58 billion at
December 31, 2000. The decrease in deposits during the three month period was
largely in certificates of deposits over $100,000, which decreased by $21.9
million during the period, offset by increases in other categories. Management
believes deposits will continue to decrease during the remainder of 2001 as the
Company lowers the rates it offers on its products as compared to competing
financial institutions and reduces its funding needs in connection with efforts
to achieve compliance with capital ratio requirements as discussed in "Capital
Resources."
The following table indicates the maturities and amounts of certificates of
deposit and other time deposits issued in denominations of $100,000 or more as
of March 31, 2001:
MATURITIES OF AND AMOUNTS OF CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS
$100,000 OR MORE
(in thousands)
Certificates of Deposit Other Time Deposits
$100,000 or More $100,000 or More Total
----------------------- ------------------- ---------
Three months or less $ 156,919 $ 1,518 $ 158,437
Over 3 through 6 months 110,859 360 111,219
Over 6 through 12 months 100,275 1,732 102,007
Over 12 months 110,175 529 110,704
--------- ------- ---------
Total $ 478,228 $ 4,139 $ 482,367
========= ======= =========
STOCKHOLDERS' EQUITY
The Company's stockholders' equity at March 31, 2001 was $105.4 million compared
to $102.5 million at December 31, 2000. During this period stockholders' equity
increased by $2.9 million primarily due to the retention of net income of $2.5
million.
22
23
INTEREST RATE SENSITIVITY
The following table presents the projected maturities or interest rate
adjustments of the Company's earning assets and interest-bearing funding sources
based upon the contractual maturities or adjustment dates at March 31, 2001. 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.
INTEREST RATE SENSITIVITY REPORT
(Dollars in thousands)
-------------------------------------------------------------------------------------
0 to 30 31 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Days Years Years Total
-------------------------------------------------------------------------------------
Earning Assets:
Loans $ 659,919 $ 123,078 $ 82,980 $ 78,105 $218,678 $ 58,044 $ 1,220,804
Federal funds sold 2,221 -- -- -- -- -- 2,221
Investment securities 114,993 149,220 64,326 4,487 17,528 32,269 382,823
Interest earning deposits with
other banks 11,000 14,750 24,075 5,000 -- -- 54,825
------------------------------------------------------------------------------------
Total 788,133 287,048 171,381 87,592 236,206 90,313 1,660,673
------------------------------------------------------------------------------------
Funding Sources:
Savings and transaction deposits 137,217 -- -- -- -- -- 137,217
Certificates of deposits of $100 or more 53,002 103,917 110,859 100,275 110,175 -- 478,228
Certificates of deposits under $100 51,548 116,836 163,565 244,797 240,100 47 816,893
Other time deposits 1,518 360 1,732 529 -- -- 4,139
Funds overnight 45,450 -- -- -- -- -- 45,450
Trust preferred securities -- -- -- -- -- 12,650 12,650
------------------------------------------------------------------------------------
Total $ 288,735 $ 221,113 $ 276,156 $ 345,601 $ 350,275 $ 12,697 $ 1,494,577
====================================================================================
Interest sensitivity gap $ 499,398 $ 65,935 $(104,775) $(258,009) $(114,069) $ 77,616 $ 166,096
====================================================================================
Cumulative gap $ 499,398 $ 565,333 $ 460,558 $ 202,549 $ 88,480 $ 166,096
=======================================================================
Cumulative gap as a percentage
of total earning assets 30.07% 34.04% 27.73% 12.20% 5.33% 10.00%
=======================================================================
23
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LIQUIDITY
Cash and cash equivalents decreased by $74.9 million from December 31, 2000 to
March 31, 2001. During the first quarter of 2000, net cash provided by operating
activities was $437,000, net cash used in investing activities was $66.3 million
and net cash used in financing activities was $9.0 million. For further
information on cash flows, see the Consolidated Statement of Cash Flows.
The Company's principal sources of liquidity and funding are its diverse deposit
base and the sales of bankers' acceptances as well as loan participations. The
level and maturity of deposits necessary to support the Company's lending and
investment activities is determined through monitoring loan demand and through
its asset/liability management process. Considerations in managing the Company's
liquidity position include, but 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.
The majority of the Company's deposits are short-term and closely match the
short-term nature of the Company's assets. See "Interest Rate Sensitivity
Report." At March 31, 2001 interest-earning assets maturing or repricing within
six months were $1.247 billion, representing 75.1 percent of total earning
assets, and earning assets maturing within one year were $1.334 billion or 80.3
percent of total earning assets. The interest bearing liabilities maturing
within six months were $786.0 million or 52.6 percent of total interest-bearing
liabilities and the interest-bearing liabilities maturing within one year were
$1.132 billion or 75.7 percent of the total at March 31, 2001.
The short-term nature of the loan portfolio and the fact that a portion of the
loan portfolio consists of bankers' acceptances provides additional liquidity to
the Company. Liquid assets at March 31, 2001 were $499 million, 28.9 percent of
total assets, and consisted of cash and cash equivalents, due from banks-time
and available for sale investment securities maturing within one year or less.
CAPITAL RESOURCES, 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 March 31, 2001 and December 31, 2000, 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. Further, 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. 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 and March 31, 2001, the Bank had Tier 1,
Total and leverage capital ratios of 9.4%, 10.7% and 6.5%, respectively, and
9.5%, 10.8% and 6.5%, respectively. As a result, the Bank was not in compliance
with the capital requirements of the September 8 Order as reflected in the
following table. 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.
24
25
BANCORP CAPITAL RATIOS
(Dollars in thousands)
March 31, 2001 December 31, 2000
--------------------------- --------------------------
Amount Ratio Amount Ratio
--------------------------- ---------------------------
Tier 1 risk-weighted
Capital:
Actual $ 116,294 9.7% $ 114,119 9.8%
Minimum 48,014 4.0% 46,657 4.0%
Total risk-weighted
Capital:
Actual 132,095 11.0% 129,503 11.1%
Minimum 96,027 8.0% 93,314 8.0%
Leverage:
Actual 116,294 6.6% 114,119 6.7%
Minimum 52,961 3.0% 51,468 3.0%
BANK CAPITAL RATIOS
(Dollars in thousands)
March 31, 2001 December 31, 2000
--------------------------- --------------------------
Amount Ratio Amount Ratio
--------------------------- ---------------------------
Tier 1 risk-weighted capital:
Actual $ 114,128 9.5% $ 111,340 9.4%
Minimum required by consent order 119,780 10.0% $ 118,914 10.0%
Minimum to be well capitalized 47,912 6.0% 71,358 6.0%
Minimum to be adequately capitalized 71,868 4.0% 47,566 4.0%
Total risk-weighted capital:
Actual 129,897 10.8% 127,004 10.7%
Minimum required by consent order 143,736 12.0% 142,697 12.0%
Minimum to be well capitalized 119,780 10.0% 118,914 10.0%
Minimum to be adequately capitalized 95,824 8.0% 95,131 8.0%
Leverage:
Actual 114,128 6.5% 111,340 6.5%
Minimum required by consent order 123,425 7.0% 120,114 7.0%
Minimum to be well capitalized 88,161 5.0% 85,796 5.0%
Minimum to be adequately capitalized 70,529 4.0% 68,637 4.0%
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.
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. On June 13, 2001, following an informal hearing on the OCC's intent
to reclassify, the Bank was notified that the OCC rendered a decision and
reclassified the Bank's capital category to "undercapitalized" for purposes of
PCA (the "Reclassification to Undercapitalized"). Prior to this reclassification
the Bank's capital category for PCA was "adequately capitalized." As a result of
the reclassification, the Bank is subject to restrictions on its ability to pay
dividends and management fees, and restrictions on asset growth and expansion.
Under the September 8 Order, the Bank was previously required to obtain prior
approval from the OCC for the payment of any dividends. Additionally, the Bank's
waiver from the Federal Deposit Insurance Corporation ("FDIC") authorizing it to
accept brokered deposits is no longer applicable, and a new waiver must be
obtained from the FDIC prior to the acceptance or renewal of any brokered
deposits subsequent to the date of the reclassification. As of March 31, 2001,
the Bank did not have any brokered deposits outstanding. As of June 13, 2001,
the Bank held $10 million of brokered deposits, all of which were acquired prior
to receipt of the notification from the OCC.
In addition, under PCA the OCC may impose additional discretionary restrictions
by the issuance of a PCA directive, and after the opportunity for a hearing, if
the OCC determines that such actions are necessary to help resolve the problems
of the Bank at the least possible long term cost to the FDIC. Such additional
discretionary restrictions include requiring recapitalization, restricting
transactions with affiliates, restricting interest rates paid, further
restricting asset growth, restricting activities, improving management and the
board by requiring new members or dismissal of existing members, prohibiting
deposits from correspondent banks, requiring divestiture of subsidiaries of the
Bank (currently the Bank has no subsidiaries) and any other actions the OCC
determines will better resolve the problems of the Bank at the least possible
long term cost to the deposit insurance fund. Additionally, the Federal
Reserve Board (the "FRB Board") may impose restrictions including requiring
prior approval of the FRB Board for any capital distributions by the Company
(the FRB has notified the Company that prior approval is required for any such
distributions), requiring divestiture of any affiliate other than an insured
depository institution and requiring divestiture of the Bank if the FRB Board
determines that divestiture would improve the Bank's financial condition and
future prospects.
GOING CONCERN -- The accompanying 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 and the Reclassification to Undercapitalized, the Bank's capital
category as of March 31, 2001 and 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.
In addition, In June 2001, the Company engaged CIBC World Markets, an investment
bank, to advise the Company in exploring and evaluating strategic alternatives
to enhance shareholder value. Such alternatives could include but are not
limited to a possible sale or other transfer of all or a significant portion of
the assets or securities of the Company or some other corporate transaction
involving a change in control of the Company. There is no assurance that any of
the foregoing transactions will be consummated.
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 Securities") issued by Hamilton Capital Trust I (the "Trust").
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 Securities, the Company and the Trust
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. Pursuant to this right, the Company and the Trust have deferred
payment of the dividend otherwise payable on July 2, 2001 and, until further
notice, expect to defer future payments.
MARKET RISK MANAGEMENT
In the normal course of conducting business activities, the Company is exposed
to market risk which includes both price and liquidity risk. The Company's price
risk arises from fluctuations in interest rates, and foreign exchange rates that
may result in changes in values of financial instruments. The Company does not
have material direct market risk related to commodity and equity prices.
Liquidity risk arises from the possibility that the Company may not be able to
satisfy current and future financial commitments or that the Company may not be
able to liquidate financial instruments at market prices. Risk management
policies and procedures have been established and are utilized to manage the
Company's exposure to market risk. The strategy of the Company is to operate at
an acceptable risk environment while maximizing its earnings.
Market risk is managed by the Asset Liability Committee which formulates and
monitors the performance of the Company based on established levels of market
risk as dictated by policy. In setting the tolerance levels of market risk, the
Committee
25
26
considers the impact on both earnings and capital, based on potential changes in
the outlook in market rates, global and regional economies, liquidity, business
strategies and other factors.
The Company's asset and liability management process is utilized to manage
interest rate risk through the structuring of balance sheet and off-balance
sheet portfolios. It is the strategy of the Company to maintain as neutral an
interest rate risk position as possible (however, the Company has traditionally
maintained a positive gap, as described below, due to its use of fixed rate and
term time deposits for a significant portion of its funding). By utilizing this
strategy the Company "locks in" a spread between interest earning assets and
interest-bearing liabilities. Given the matching strategy of the Company and the
fact that it does not maintain significant medium and/or long-term exposure
positions, the Company's interest rate risk will be measured and quantified
through an interest rate sensitivity report. An excess of assets or liabilities
over these matched items results in a gap or mismatch. A positive gap denotes
asset sensitivity and normally means that an increase in interest rates would
have a positive effect on net interest income. On the other hand a negative gap
denotes liability sensitivity and normally means that a decline in interest
rates would have a positive effect in net interest income. However, because
different types of assets and liabilities with similar maturities may reprice at
different rates or may otherwise react differently to changes in overall market
rates or conditions, changes in prevailing interest rates may not necessarily
have such effects on net interest income.
Interest Rate Sensitivity Report as of March 31, 2001 shows that interest
earning assets maturing or repricing within one year exceed interest bearing
liabilities by $202.5 million. The Company monitors that the assets and
liabilities are closely matched to minimize interest rate risk. During the first
quarter of 2001, the Company's net interest income was negatively impacted by
the positive gap position. As market interest rates decreased, the Company's
asset yields also decreased. The Company's fixed rate and term time deposits did
not reprice as quickly, resulting in a decline in the net interest margin. See
"Yields Earned and Rates Paid" on the following page.
The level of imbalance between the repricing of rate sensitive assets and rate
sensitive liabilities will be measured through a series of ratios. Substantially
all of the Company's assets and liabilities are denominated in dollars,
therefore the Company has no material foreign exchange risk. In addition, the
Company has no trading account securities, therefore it is not exposed to market
risk resulting from trading activities.
On a daily basis the Bank's Chief Financial Officer and the Bank's Treasurer are
responsible for measuring and managing market risk.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned on loans
and investments and interest paid on deposits and other sources of funds, and it
constitutes the Company's principal source of income. Net interest income
decreased to $12.1 million for the three months ended March 31, 2001 from $16.7
million for the same period in 2000, a 27.6 percent decrease. The decrease was
due largely to a decrease in net interest margin resulting primarily from lower
yields on assets. The average yield on assets declined from 9.14 percent in the
2000 period to 8.50 percent in the 2001 period. The decline in yield more than
offset the increase in average earning assets, resulting in a decline in
interest income. The average cost of interest bearing liabilities increased from
5.63 percent to 6.40 percent, reflecting the cost of time deposits within the
Company's market area. As a percentage of earning assets, interest cost
increased from 5.05 percent in 2000 to 5.67 percent in 2001. The higher cost of
interest bearing liabilities reflects the impact of certificates of deposit
acquired in late 2000, prior to recent decreases in market interest rates.
Interest income decreased to $36.4 million for the three months ended March 31,
2001 from $37.2 million for the same period in 2000, a 2.1 percent decrease,
reflecting the increase in lower yielding investment securities and time
deposits, average loan balances substantially the same as in the prior period,
and a decrease in loan yields. Interest expense increased to $24.3 million for
the three months ended March 31, 2001 from $20.5 million for the same period in
1999, an 18.7 percent increase, reflecting the additional deposits to fund asset
growth, as well as higher costs associated with those deposits.
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27
YIELDS EARNED AND RATE PAID
FOR THE QUARTER ENDED
MARCH 31, 2001 MARCH 31, 2000
---------------------------------- ----------------------------------
AVERAGE REVENUE/ YIELD/ AVERAGE REVENUE/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------------------------------- ----------------------------------
TOTAL EARNING ASSETS
LOANS:
Commercial loans $1,077,158 $ 24,364 9.05% $1,109,374 $ 26,457 9.43%
Acceptances discounted 141,772 3,620 10.21% 114,564 2,722 9.40%
Overdraft 9,208 403 17.51% 5,759 386 26.52%
Mortgage loans 1,765 35 7.93% 2,127 42 7.81%
---------------------- --------- ---------------------- ----------
TOTAL LOANS 1,229,903 28,422 9.24% 1,231,824 29,607 9.51%
---------------------- --------- ---------------------- ----------
Time deposits with banks 81,779 1,956 9.57% 162,107 3,841 9.37%
Investments 355,351 5,374 6.05% 165,860 3,052 7.28%
Federal funds sold 47,601 676 5.68% 49,888 703 5.57%
---------------------- --------- ---------------------- ----------
Total investments and time deposits with banks 484,731 8,006 6.61% 377,855 7,596 7.95%
---------------------- --------- ---------------------- ----------
Total interest earning assets 1,714,634 36,428 8.50% 1,609,679 37,203 9.14%
---------- --------- ---------- ----------
Total non interest earning assets 40,615 81,020
---------- ----------
TOTAL ASSETS $1,755,249 $1,690,699
========== ==========
INTEREST BEARING LIABILITIES
DEPOSITS:
NOW and savings accounts $ 19,726 119 2.41% $ 22,168 132 2.36%
Money Market 46,840 675 5.76% 44,054 630 5.66%
Presidential Money Market 68,519 930 5.43% 65,579 906 5.47%
Certificate of Deposits (including IRA) 1,306,203 21,499 6.58% 1,216,335 17,495 5.69%
Time Deposits with Banks (IBF) 54,042 647 4.79% 68,463 862 4.98%
Other 10,461 130 4.97% 8,786 141 6.35%
---------------------- --------- ---------------------- ----------
TOTAL DEPOSITS 1,505,791 24,000 6.38% 1,425,385 20,166 5.60%
Trust Preferred Securities 12,650 308 9.74% 12,650 308 9.63%
Other Borrowings 56 1 7.14% 0 0 0.00%
Federal Funds Purchased 0 0 0.00% 55 1 7.19%
---------------------- --------- ---------------------- ----------
Total interest bearing liabilities 1,518,497 24,309 6.40% 1,438,090 20,475 5.63%
---------------------- --------- ---------------------- ----------
Non interest bearing liabilities
Demand Deposits 85,368 81,171
Other Liabilities 47,411 54,930
---------- ----------
Total non interest bearing liabilities 132,779 136,101
Stockholders equity 103,973 116,508
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,755,249 $1,690,699
========== ==========
NET INTEREST INCOME/NET INTEREST SPREAD MARGIN $ 12,119 2.09% $ 16,728 3.51%
========== ========= ========== ==========
INTEREST INCOME/INTEREST EARNING ASSETS 8.50% 9.14%
INTEREST EXPENSE/INTEREST EARNING ASSETS 5.67% 5.05%
--------- ----------
NET INTEREST MARGIN 2.83% 4.09%
========= ==========
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28
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses was $3.0 million in the first quarter
of 2001, compared to $750,000 for the first quarter of 2000. The provision for
the periods represents the amount management deemed necessary to maintain the
allowance for credit losses at an adequate level. In establishing the amount of
provision for credit losses, management considers various factors, as discussed
under "Credit Quality Review."
During the first quarter of 2000, the provision for transfer risk was $3.2
million, as a result of loans initially becoming subject to ATRR. In the first
quarter of 2001, no new loans became subject to ATRR, and repayments on existing
loans subject to ATRR resulted in a reduction of the ATRR of $1.2 million. This
recovery is included in current operating results.
See "Credit Quality Review" for more discussion of the allowance for credit
losses and ATRR.
NON-INTEREST INCOME
Non interest income was $2.7 million for the first quarter of 2001, reflecting a
33.5 percent decline from $4.1 million in the first quarter of 2000. During the
first quarter of 2000, the Company realized net gains on sales of foreign debt
securities of $1.3 million, compared to net gains of $351,000 in 2001. In
addition to this decline, trade finance fees and commissions decreased $292,000
(13.2%) compared to the previous year period.
The following table sets forth details regarding the components of non-interest
income for the periods indicated.
NON-INTEREST INCOME
(Dollars in thousands)
For the Three Months Ended March 31,
------------------------------------
2001 to 2000
2001 Percent Change 2000
-------- -------------- --------
Trade finance fees and commissions $ 1,925 (13.2)% $ 2,217
Customer service fees 379 (5.3)% 400
Net gain on securities transactions 351 (74.0)% 1,349
Other 45 (53.6)% 97
-------- ------ -------
Total non-interest income $ 2,700 (33.5)% $ 4,063
======== ====== =======
OPERATING EXPENSES
Operating expenses increased 4.3% for the three months ended March 31, 2001,
compared to the same period of 2000. The 2000 period included the write off of
an uncollectible receivable of $1.0 million arising from structuring and
syndication services. Excluding this item, operating expenses increased 17.9%
over the prior year, or approximately $1.4 million.
Employee compensation and benefits increased approximately 29 percent due to new
staff, primarily at the management level. In addition, direct lending costs
deferred was lower in 2001 compared to 2000 due to changes in the mix and volume
of lending activities. Legal and audit and examination costs increased
approximately 113% combined due to cost incurred to address litigation,
regulatory and financial reporting matters. Additionally, as a result of the OCC
consent order, Hamilton Bank's capital category dropped for deposit insurance
purposes, resulting in higher deposit insurance assessments.
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29
The following table sets forth details regarding the components of operating
expenses for the periods indicated.
OPERATING EXPENSES
(Dollars in thousands)
For the Three Months Ended March 31,
-----------------------------------
2001 to 2000
2001 Percent Change 2000
------- -------------- -------
Employee compensation and benefits $ 3,821 29.0% $ 2,963
Occupancy and equipment 1,190 (8.3)% 1,298
Legal expenses 1,051 114.1% 491
Audits and examinations 496 109.3% 237
Other losses & charge-offs 257 (84.8)% 1,689
FDIC Insurance 666 263.9% 183
Other operating expenses 1,579 (13.5)% 1,825
------- ------ -------
Total operating expenses $ 9,060 4.3% $ 8,686
======= ====== =======
OTHER MATTERS -- NASDAQ LISTING STATUS
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 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, a hearing before a Nasdaq
Listing Qualifications Panel to review the Nasdaq Staff Determination was held
on May 31, 2001, and no decision has been made on the listing or delisting of
the Company's securities. The Company filed its Form 10-K and first quarter Form
10-Q with the Securities and Exchange Commission on June 8, 2001. The March 31,
2001 Form 10-Q was filed without a review by the Company's independent
accountants, which is required in accordance with the rules of the Securities
and Exchange Commission. On June 15, 2001, the Company received a Notification
of Additional Delinquency and Additional Concern from Nasdaq. The additional
delinquency relates to the lack of review of the March 31, 2001 Form 10-Q by an
independent accountant. The additional concern relates to a "going concern"
reference in the December 31, 2000 Form 10-K. Nasdaq has requested that the
Company make a written submission by the close of business on Friday June 22,
2001 addressing the filing deficiency and going concern. The Company expects to
make this submission on June 22, 2001. No assurance can be given regarding the
results of Nasdaq's review of the Company's submission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 22, 2001 Hamilton Bancorp Inc.
/s/ J. Carlos Bernace
----------------------------------------------------
J. Carlos Bernace,
Executive Vice President
/s/ Lucious T. Harris
----------------------------------------------------
Lucious T Harris,
Executive Vice President and Chief Financial Officer
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