1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
--------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________________
Commission file number 0-20960
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Hamilton Bancorp Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Florida 65-0149935
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(State or Other Jurisdiction of Incorporation or Organization (I.R.S. Employer 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
----------------------------
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
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 X No
---- -----
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
PART I. FINANCIAL INFORMATION
HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands)
June 30, December 31,
---------------------------- ----------------------------
1998 1997
---------------------------- ----------------------------
(Unaudited) (Audited)
ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 25,947 $ 29,434
FEDERAL FUNDS SOLD 43,500 62,000
------------ ------------
Total cash and cash equivalents 69,447 91,434
INTEREST EARNING DEPOSITS WITH OTHER BANKS 122,088 113,730
SECURITIES AVAILABLE FOR SALE 54,779 54,641
SECURITIES HELD TO MATURITY 13,084 0
LOANS-NET 1,175,165 952,431
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 65,389 95,312
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 4,780 8,352
PROPERTY AND EQUIPMENT-NET 5,031 4,784
ACCRUED INTEREST RECEIVABLE 18,690 14,441
GOODWILL-NET 1,921 2,008
OTHER ASSETS 9,059 5,001
------------ ------------
TOTAL $1,539,433 $1,342,134
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS 1,346,568 1,135,047
OTHER BORROWING 6,116 0
BANKERS ACCEPTANCES OUTSTANDING 65,389 95,312
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 4,780 8,352
OTHER LIABILITIES 6,030 5,096
------------ ------------
Total liabilities 1,428,883 1,243,807
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares
authorized, 10,028,802 shares issued and outstanding
at June 30, 1998 and 9,827,949 shares issued
and outstanding at December 31, 1997. 100 98
Capital surplus 58,118 56,266
Retained earnings 52,475 42,016
Net unrealized loss on securities available for sale,
net of taxes (143) (53)
------------ ------------
Total stockholders' equity 110,550 98,327
------------ ------------
TOTAL $1,539,433 $1,342,134
============ ============
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- -------- -------
INTEREST INCOME:
Loans, including fees $26,406 $15,995 $49,813 $29,186
Deposits with other banks 2,260 2,738 4,538 4,621
Securities 1,120 638 2,130 931
Federal funds sold 280 206 532 434
------- ------- ------- -------
Total 30,066 19,577 57,013 35,172
INTEREST EXPENSE:
Deposits 16,842 9,954 31,579 18,191
Federal funds purchased and other borrowing 157 60 283 109
------- ------- ------- -------
Total 16,999 10,014 31,862 18,300
------- ------- ------- -------
NET INTEREST INCOME 13,067 9,563 25,151 16,872
PROVISION FOR CREDIT LOSSES 1,766 2,191 4,081 2,939
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES 11,301 7,372 21,070 13,933
NON-INTEREST INCOME:
Trade finance fees and commissions 3,228 3,148 6,623 5,906
Structuring and syndication fees 454 478 743 564
Customer service fees 166 165 311 421
Other 114 180 250 249
------- ------- ------- -------
Total 3,962 3,971 7,927 7,140
------- ------- ------- -------
OPERATING EXPENSES:
Employee compensation and benefits 3,053 2,826 6,048 5,529
Occupancy and equipment 1,066 796 2,136 1,478
Other 2,317 1,933 4,188 3,871
------- ------- ------- -------
Total 6,436 5,555 12,372 10,878
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES 8,827 5,788 16,625 10,195
PROVISION FOR INCOME TAXES 3,273 2,047 6,166 3,632
------- ------- ------- -------
NET INCOME $ 5,554 $ 3,741 $10,459 $ 6,563
======= ======= ======= =======
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARES:
BASIC $ 0.56 $ 0.38 $ 1.05 $ 0.84
======= ======= ======= =======
DILUTED $ 0.53 $ 0.37 $ 1.02 $ 0.81
======= ======= ======= =======
AVERAGE WEIGHTED SHARES OUTSTANDING:
BASIC 9,988,481 9,796,301 9,917,070 7,767,877
========== ========== ========== =========
DILUTED 10,403,951 10,179,449 10,279,270 8,151,025
========== ========== ========== =========
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Net Unrealized
Loss on
Securities
Common Stock Available Total
------------------ Capital Retained for Sale Stockholders'
Shares Amount Surplus Earnings Net of Taxes Equity
--------- ------ ------- -------- ------------ --------
Balance, December 31, 1997 (audited) 9,827,949 $ 98 $56,266 $42,016 $ (53) $ 98,327
Issuance of 200,853 shares of common
stock from exercise of options 200,853 2 1,852 1,854
Net change in unrealized loss on
securities available for sale, net of taxes (90) (90)
Net income for the six months ended
June 30, 1998 10,459 10,459
---------- ---- ------- ------- ----- --------
Balance as of June 30, 1998 10,028,802 $100 $58,118 $52,475 $(143) $110,550
========== ==== ======= ======= ===== ========
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For Six Months Ended June 30,
----------------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,459 $ 6,563
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 567 509
Provision for credit losses 4,081 2,939
Deferred tax benefit (831) (479)
Net loss on sale of other real estate owned 34
Proceeds from the sale of bankers acceptances and
loan participations, net of loan participations purchased 60,749 25,173
Increase in accrued interest receivable and other assets (7,557) (1,351)
Increase in other liabilities 914 2,017
--------- ---------
Net cash provided by operating activities 68,416 35,371
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increases in interest-earning deposits with other banks (8,358) (48,174)
Purchase of securities available for sale (127,516) (92,859)
Purchase of securities held to maturity (13,084) 0
Proceeds from sales and maturities of securities available for sale 127,218 49,444
Increase in loans-net (287,564) (210,503)
Purchases of property and equipment-net (712) (1,446)
Proceeds from sale of other real estate owned 122 0
--------- ---------
Net cash used in investing activities (309,894) (303,538)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits-net 211,521 238,236
Proceeds from other borrowing 6,116 0
Net proceeds from exercise of common stock options 1,854 0
Net proceeds from initial public offering 0 38,886
Cash dividend on preferred stock 0 (319)
--------- ---------
Net cash provided by financing activities 219,491 276,803
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (21,987) 8,636
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD 91,434 33,106
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 69,447 $ 41,742
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the period $ 29,670 $ 17,563
Income taxes paid during the period 7,027 3,827
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
NOTE 1: Basis of Presentation
The consolidated statements of condition for Hamilton Bancorp and Subsidiary
(the "Company") as of June 30, 1998 and December 31, 1997, the related
consolidated statements of income, stockholders' equity and the cash flows for
the six months ended June 30, 1998 and 1997 included in the Form 10Q have been
prepared by the Company in conformity with the instructions to Form 10Q 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, 1997.
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 10K for the year
ended December 31, 1997 as filed with the Securities and Exchange Commission.
NOTE 2: 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.
NOTE 3: New Accounting Pronouncements
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which
requires companies to report, as comprehensive income all changes in equity
during a period, except those resulting from investment by owners and
distribution to owners. Comprehensive income totaled $10.4 million for the six
months ended June 30, 1998, which is comprised of net income of $10.5 million
and net unrealized losses on securities available for sale of $90 thousand.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". Among other
provisions, SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It also requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management does not expect the adoption of SFAS No. 133 to have any significant
impact on the Company's consolidated financial statements.
NOTE 4: Other Borrowings
Other borrowings consist of the following at June 30, 1998:
7.13 percent loan secured by a foreign treasury bill in the amount of
$4,600,000, interest payable monthly and principal
due at maturity (March 1999) $3,728
8.04 percent loan secured by a foreign corporate security in
the amount of $3,000,000, interest payable monthly
and principal due at maturity (March 1999) $2,388
------
Total $6,116
======
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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 seven
FDIC-insured branches in Florida, with locations in Miami, Sarasota, Tampa, West
Palm Beach and Winter Haven and a branch in San Juan, Puerto Rico.
FINANCIAL CONDITION - June 30, 1998 vs. December 31, 1997.
Total consolidated assets increased $197.3 million, or 14.7 percent, during the
first six months of 1998, which included an increase of $229.4 million in
interest earning assets and a decrease of $28.6 million in non-interest earning
assets. The increase in consolidated assets reflects increases of $222.7 million
in loans-net and $8.4 million in interest-earning deposits with other banks. The
increase in loans was led by growth in trade finance activities primarily in the
region. These increases were principally funded by increases in retained
earnings, deposits from the branch network, time deposits from banks and
deposits from other financial institutions.
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 $69.4 million at June 30,
1998 compared to $91.4 million at December 31, 1997. The decrease of 24.1
percent reflects the deployment of liquid assets into higher yielding loans.
Investment Securities and Interest-Earning Deposits with Other Banks
Interest-earning deposits with other banks increased to $122.1 million at June
30, 1998 from $113.7 million at December 31, 1997. These deposits are placed
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 grown as the overall assets
of the Company have increased during the six months ended June 30, 1998. The
short term nature of these deposits allows the Company the flexibility to
redeploy the assets into higher yielding loans which are largely related to the
financing of trade.
Investment securities increased to $68.0 million at June 30, 1998 from $54.6
million at December 31, 1997. The increase has been primarily in U.S. government
agency mortgage backed securities classified as held to maturity. These
securities diversify the Company's portfolio, are eligible collateral for
securing public funds and qualify as a Community Reinvestment Act investment.
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Loans
The Company's loan portfolio increased by $226.3 million, or 23.5 percent,
during the first six months of 1998 in relation to the year ended December 31,
1997. This growth has been related largely to the Bank's trade finance
activities in its traditional Latin American and Caribbean markets. Trade
activity continues to increase in the Region despite economic pressures from
outside the Region, and the smaller markets continue to experience stable
political and economic situations. Commercial-domestic loans increased by $58.1
million and loans to banks and other financial institutions - foreign increased
by $75.9 million. Details on the loans by type are shown in the table below. At
June 30, 1998 approximately 24.2 percent of the Company's portfolio consisted of
loans to domestic borrowers and 75.8 percent of the Company's portfolio
consisted of loans to foreign borrowers. The Company's loan portfolio is
relatively short-term, as approximately 66.5 and 80.7 percent of loans at June
30, 1998 were short-term loans with average maturities of less than 180 and 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)
June 30, December 31,
1998 1997
-------- -----------
Domestic:
Commercial (1) $ 237,556 $ 179,435
Acceptances discounted 38,278 45,153
Residential mortgages 11,568 12,008
Installment 325 238
---------- ----------
Subtotal Domestic 287,727 236,834
Foreign:
Banks and other financial institutions 428,781 351,862
Commercial and industrial (1) 383,844 319,925
Acceptances discounted 89,908 55,301
Government and official institutions 872 872
---------- ----------
Subtotal Foreign 903,405 727,960
---------- ----------
Total loans $1,191,132 $ 964,794
========== ==========
- ---------------
(1) Includes pre-export financing, warehouse receipts and refinancing of letter
of credits.
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The following tables reflect largely both the Company's growth and
diversification in financing trade flows between the United States and the
Region in terms of loans by country and cross-border outstandings by country.
The aggregate amount of the Company's crossborder 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-net. Exposure levels in any given country at the end of each period may be
impacted by the flow of trade between the United States (and to a large extent
Florida) and the given countries, as well as the price of the underlying goods
or commodities being financed.
At June 30, 1998 approximately 41.8 percent in principal amount of the Company's
loans were outstanding to borrowers in five countries other than the United
States: Guatemala (10.2 percent), Panama (9.9 percent), Ecuador (7.7 percent),
Brazil (7.5 percent) and Peru (6.5 percent).
Loans by Country
(Dollars in thousands)
June 30, Percent of December 31, Percent of
1998 Total 1997 Total
Country Amount Loans Amount Loans
-------- ---------- ------------ -----------
United States $287,727 24.16% $236,834 24.55%
Argentina 48,020 4.03 58,477 6.06
Bolivia 34,947 2.93 38,058 3.94
Brazil 89,238 7.49 58,040 6.02
Colombia 33,707 2.83 23,768 2.46
Dominican Republic 41,297 3.47 40,161 4.16
Ecuador 91,142 7.65 74,485 7.72
El Salvador 61,702 5.18 40,306 4.18
Guatemala 121,637 10.21 91,178 9.45
Honduras 66,792 5.61 59,439 6.16
Jamaica (1) 18,955 1.59 - -
Panama 117,632 9.88 77,295 8.01
Peru 77,817 6.53 68,094 7.06
Russia 23,000 1.93 17,500 1.81
Venezuela 17,482 1.47 16,299 1.69
Other (2) 60,037 5.04 64,860 6.73
---------- ------ -------- ------
Total $1,191,132 100.00% $964,794 100.00%
========== ====== ======== ======
- ---------------
(1) These countries had loans in periods presented which did not exceed 1
percent of total assets.
(2) Other consists of loans to borrowers in countries in which loans did not
exceed 1 percent of total assets.
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10
At June 30, 1998 approximately 33.5 percent in cross-border outstandings were
outstanding to borrowers in five countries other than the United States: Panama
(7.7 percent), Guatemala (7.2 percent), Brazil (7.0 percent), Ecuador (6.9
percent) and Peru (4.7 percent).
Total Cross-Border Outstandings by Country
(Dollars in millions)
% of % of
June 30, Total December 31, Total
1998 Assets 1997 Assets
------- ------ ----------- -------
Argentina $ 63 4.1% $69 5.2%
Bolivia 41 2.7 44 3.3
Brazil 108 7.0 85 6.3
B. W. Indies 18 1.2 11 0.8
Colombia 34 2.2 24 1.8
Dominican Republic 41 2.7 39 2.9
Ecuador 106 6.9 90 6.7
El Salvador 61 4.0 46 3.4
Guatemala 110 7.2 92 6.9
Honduras 62 4.0 52 3.9
Jamaica 38 2.5 32 2.4
Nicaragua (1) - - 12 0.9
Panama 118 7.7 72 5.4
Peru 72 4.7 74 5.5
Russia 23 1.5 17 1.3
Venezuela (1) 18 1.2 - -
Other (2) 53 3.4 39 2.8
---- ----- ---- -----
Total $966 63.0% $798 59.5%
==== ===== ==== =====
- ---------------
(1) These countries had loans in periods presented which did not exceed 1
percent of total assets.
(2) Other consists of cross-border outstandings to countries in which such
cross-border outstandings did not exceed 0.75 percent of the Company's total
assets at any of the dates shown.
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Contingencies
The following table sets forth the total volume and average monthly volume of
the Company's export and import letters of credit for each of the periods
indicated.
Contingencies - Commercial Letters of Credit
(in thousands)
Six Months Ended Year Ended
------------------------------------------------- --------------------
June 30, 1998 June 30, 1997 December 31, 1997
-------------------- ---------------------- --------------------
Average Average Average
Total Monthly Total Monthly Total Monthly
Volume Volume Volume Volume Volume Volume
-------- ------- -------- ------- -------- -------
Export Letters of Credit (1) $226,106 $37,684 $176,708 $29,451 $424,748 $35,396
Import Letters of Credit (1) 180,083 30,014 191,443 31,907 394,758 32,897
-------- ------- -------- ------- -------- -------
Total $406,189 $67,698 $368,151 $61,358 $819,506 $68,293
======== ======= ======== ======= ======== =======
- ---------------
(1) Represents certain contingent liabilities not reflected on the Company's
balance sheet.
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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 6 percent from December 31, 1997 to June 30, 1998. Individual
fluctuations reflect relative changes in the flow of trade.
Contingent Liabilities (1)
(in thousands)
June 30, 1998 December 31, 1997
------------- -----------------
Argentina (2) $2,627 -
Aruba (2) 2,845 -
Bolivia (2) - $3,883
Brazil 2,626 4,123
British W. Indies (2) 3,082 -
Colombia (2) - 3,936
Costa Rica (2) - 3,168
Dominican Republic 15,774 4,759
Ecuador 16,141 17,839
El Salvador 4,075 3,837
Guatemala 11,763 11,577
Haiti 1,956 7,857
Honduras 6,840 5,550
Nicaragua (2) - 3,386
Panama 12,776 12,439
Paraguay 7,424 2,395
Peru (2) - 5,566
Suriname (2) 7,218 -
United States 78,468 94,629
Other (3) 12,579 13,139
-------- --------
Total $186,194 $198,083
======== ========
- ---------------
(1) Includes export and import letters of credit, standby letters of credit and
letters of indemnity.
(2) These countries had contingencies which represented less than 1 percent of
the Company's total contingencies at each of the above dates.
(3) Other includes those countries in which contingencies represent less than 1
percent of the Company's total contingencies at each of the above dates.
Allowance for Credit Losses
The allowance for credit losses reflects management's judgment of the level of
allowance adequate to provide for reasonably foreseeable losses, based upon the
following factors: (i) the economic conditions in those countries in the Region
in which the Company conducts trade finance activities; (ii) the credit
condition of its customers and correspondent banks, as well as the underlying
collateral, if any; (iii) historical experience; and (iv) the average maturity
of its loan portfolio.
In addition, although the Company's credit losses have been relatively limited
to date, management believes that the level of the Company's allowance should
reflect the potential for political and economic instability in certain
countries of the Region and the possibility that serious economic difficulties
in a country could adversely affect all of the Company's loans to borrowers in
or doing business with that country.
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Determining the appropriate level of the allowance for credit losses requires
management's judgment, including application of the factors described above to
assumptions and estimates made in the context of changing political and economic
conditions in many of the countries of the Region. Accordingly, there can be no
assurance that the Company's current allowance for credit losses will prove to
be adequate in light of future events and developments. At June 30, 1998 the
allowance for credit losses was approximately $13.4 million, an increase of 30.1
percent from $10.3 million at December 31, 1997. This increase was primarily to
support a 23 percent increase in the loan portfolio and to provide adequate
coverage over non-performing loans.
The following table provides certain information with respect to the Company's
allowance for credit losses, provision for credit losses, charge-off and
recovery activity for the periods shown.
Credit Loss Experience
(in thousands)
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
---------------- -----------------
Balance of allowance for credit losses at
beginning of period $ 10,317 $ 5,725
Charge-offs:
Domestic:
Commercial (93) (1,693)
Acceptances 0 0
Residential 0 0
Installment 0 (3)
---------- --------
Total domestic (93) (1,696)
Foreign:
Government and official institutions 0 0
Banks and other financial institutions (901) (896)
Commercial and industrial 0 0
Acceptances discounted 0 0
---------- --------
Total foreign (901) (896)
---------- --------
Total charge-offs (994) (2,592)
---------- --------
Recoveries:
Domestic
Commercial 3 203
Acceptances 0 0
Residential 0 0
Installment 0 1
Foreign 0 0
---------- --------
Total recoveries 3 204
---------- --------
Net (charge-offs) recoveries (991) (2,388)
Provision for credit losses 4,081 6,980
---------- --------
Balance at end of the period $ 13,407 $ 10,317
========== ========
Average loans $1,091,830 $735,735
Total loans $1,191,132 $964,794
Net charge-offs to average loans 0.09% 0.32%
Allowance to total loans 1.13% 1.07%
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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.
Allocation of Allowance for Credit Losses
(in thousands)
As of As of
June 30, 1998 December 31, 1997
------------- -----------------
Allocation of the allowance by category
of loans:
Domestic:
Commercial $ 2,257 $ 1,896
Acceptances 272 315
Residential 88 59
Installment 4 3
Overdraft 208 154
------- -------
Total domestic 2,829 2,427
Foreign:
Government and official institutions 0 0
Banks and other financial institutions 3,491 3,854
Commercial and industrial 6,558 3,442
Acceptances discounted 529 594
------- -------
Total foreign 10,578 7,890
Total $13,407 $10,317
======= =======
Percent of loans in each category to total loans:
Domestic:
Commercial 19.2% 18.0%
Acceptances 3.2% 4.7%
Residential 1.0% 1.2%
Installment 0.0% 0.0%
Overdraft 0,8% 0.6%
------- -------
Total domestic 24.2% 25.5%
Foreign:
Government and official institutions 0.1% 0.1%
Banks and other financial institutions 36.0% 36.5%
Commercial and industrial 32.2% 33.2%
Acceptances discounted 7.5% 5.7%
------- -------
Total foreign 75.8% 75.5%
Total 100.0% 100.0%
======= =======
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Analysis of Allowance for Credit Losses Allocated to Foreign Loans
(in thousands)
At At
June 30, 1998 December 31, 1997
-------------- -----------------
Balance, beginning of year $ 7,890 $3,481
Provision for credit losses 3,589 5,302
Net charge-offs (901) (893)
------ -----
Balance, end of period $10,578 $7,890
======= ======
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 to the Company's loan underwriting policies.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan. Under these standards, individually identified impaired
loans are measured based on the present value of payments expected to be
received, using the historical effective loan rate as the discount rate.
Alternatively, measurement may also be based on observable market prices or, for
loans that are solely dependent on the collateral for repayment, measurement may
be based on the fair value of the collateral. The Company evaluates commercial
loans individually for impairment, while groups of smaller-balance homogeneous
loans (generally residential mortgage and installment loans) are collectively
evaluated for impairment.
The following table sets forth information regarding the Company's nonperforming
loans at the dates indicated. There was an increase in nonperforming loans from
December 31, 1997 to June 30, 1998 as a result of two loan transactions which
are collaterized by a mortgage on plant and equipment and a corporate guarantee,
respectively. The increase in non-performing loans resulted in the increase in
the ratio of non-performing loans to total loans from 0.48 percent at December
31, 1997 to 0.96 percent at June 30, 1998.
Nonperforming Loans
(in thousands)
June 30, December 31,
1998 1997
-------- ------------
Domestic:
Non accrual $ 5,041 $3,100
Past due over 90 days and accruing 166 0
------- ------
Total domestic nonperforming loans 5,207 3,100
------- ------
Foreign
Non accrual 6,250 2,949
Past due over 90 days and accruing 0 0
------- ------
Total foreign nonperforming loans 6,250 2,949
------- ------
Total nonperforming loans $11,457 $6,049
======= ======
Total nonperforming loans to total loans 0.96% 0.48%
Total nonperforming assets to total assets 0.74% 0.64%
At December 31, 1997, and June 30, 1998 the Company had no nonaccruing
investment securities.
14
16
Due from Customers on Bankers' Acceptances and Deferred Payment Letters of
Credit.
Due from customers on bankers' acceptances and deferred payment letters of
credit were $65.4 million and $4.8 million, respectively, at June 30, 1998
compared to $95.3 million and $8.4 million, respectively, at December 31, 1997.
These assets represent a customers liability to the Company while the Company's
corresponding liability to third parties is reflected on the balance sheet as
"Bankers Acceptances Outstanding" and "Deferred Payment Letters of Credit
Outstanding".
Deposits
The primary sources of the Company's domestic time deposits are its eight Bank
branches located in Florida and Puerto Rico. In pricing its deposits, the
Company analyzes the market carefully, attempting to price its deposits
competitively with the larger financial institutions in the area.
Total deposits were $1,346.6 million at June 30, 1998 compared to $1,135.0
million at December 31, 1997. Average interest bearing deposits increased by
44.0 percent to $1,120.7 million as of June 30, 1998 from $778.2 million as of
December 31, 1997. Average deposit information can be found in the yields earned
and rates paid schedule incorporated herein. The increase in deposits during the
six month period was largely in certificates of deposits under $100,000 which
increased by $165 million. These include approximately $94.1 million of brokered
deposits participated out by the broker in denominations of less than $100,000
through a retail certificate of deposit program. These deposits were used to
further diversify the Company's deposit base and as a cost effective alternative
for the short-term funding needs of the Company.
Borrowings
The Company entered into two transactions in which foreign debt securities were
purchased using proceeds from the other borrowings described in Note 4 to the
Consolidated Financial Statements. The securities collaterlize the borrowings.
The borrowings and the related securities mature at the same time.
15
17
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 June 30, 1998:
Maturities of and Amounts of Certificates of Deposits and Other Time Deposits
$100,000 or More
(in thousands)
Certificates Other Time
of Deposit Deposits
$100,000 or More $100,000 or More Total
---------------- ---------------- -----
Three months or less $127,743 $81,605 $209,348
Over 3 through 6 months 99,531 2,455 101,986
Over 6 through 12 months 159,805 180 159,985
Over 12 months 48,638 0 48,638
-------- ------- --------
Total $435,717 $84,240 $519,957
======== ======= ========
Stockholders' Equity
The Company's stockholders' equity at June 30, 1998 was $110.6 million compared
to $98.3 million at December 31, 1997. During this period stockholders equity
increased by $12.3 million due to the retention of net income of $10.5 million
as well as approximately $1.9 million from exercise of stock options.
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 June 30, 1998. The
interest-earning assets and interest-bearing liabilities of the Company and the
related interest rate sensitivity gap given in the following table may not be
reflective of positions in subsequent periods.
16
18
INTEREST RATE SENSITIVITY REPORT
(Dollars in thousands)
June 30, 1998
-------------------------------------------------------------------------------------
0 to 30 31 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Days Years Years Total
-------------------------------------------------------------------------------------
Earning Assets:
Loans $237,258 $304,884 $250,181 $ 169,308 $198,045 $ 31,456 $1,191,132
Federal funds sold 43,500 43,500
Investment securities 3,988 11,913 13,374 15,272 5,638 17,678 67,863
Interest earning deposits
with other banks 24,100 23,729 29,553 44,706 0 122,088
-------- -------- -------- --------- -------- -------- ----------
Total 308,846 304,526 393,108 229,286 203,683 49,134 1,424,583
-------- -------- -------- --------- -------- -------- ----------
Funding Sources:
Savings and transaction
deposits 39,449 28,895 68,344
Certificates of deposits
of $100 or more 51,731 76,012 99,531 159,805 48,525 113 435,717
Certificates of deposits
under $100 60,972 125,926 173,711 365,905 13,824 0 640,338
Other time deposits 54,558 27,047 2,455 180 84,240
Funds overnight 46,300 46,300
Other borrowing 6,116 6,116
-------- -------- -------- --------- -------- -------- ----------
Total $253,010 $257,880 $275,697 $ 432,006 $ 62,349 $ 113 $1,281,055
======== ======== ======== ========= ======== ======== ==========
Interest sensitivity gap $ 55,836 $ 82,646 $ 17,411 $(202,720) $141,334 $ 49,021 $ 143,528
======== ======== ======== ========= ======== ======== ==========
Cumulative gap $ 55,836 $138,482 $155,893 $ (46,827) $ 94,507 $143,528
======== ======== ======== ========= ======== ========
Cumulative gap as a
percentage of total
earning assets 3.92% 9.72% 10.94% -3.29% 6.63% 10.08%
======== ======== ======== ========= ======== ========
17
19
Liquidity
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 scheduled cash flows from existing assets,
contingencies and liabilities, as well as projected liquidity needs arising from
anticipated extensions of credit. Furthermore, the liquidity position is
monitored daily by management to maintain a level of liquidity conducive to
efficient operations and is continuously evaluated as part of the
asset/liability management process.
Historically, the Company has increased its level of deposits to allow for its
planned asset growth. Customer deposits have increased through the branch
network, as well as deposits related to trade activity. The level of deposits is
also influenced by general interest rates, economic conditions and competition,
among other things.
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 June 30, 1998 interest-earning assets maturing within six months
were $942.5 million, representing 66.2 percent of total earning assets and
earning assets maturing within one year were $1,171.8 million or 82.3 percent of
total earning assets. The short-term nature of the loan portfolio and the fact
that a portion of the loan portfolio consists of bankers' acceptances provides
additional liquidity to the Company. Liquid assets at June 30, 1998 were $205.2
million, 13.2 percent of total assets, and consisted of cash and cash
equivalents, due from banks-time and foreign treasury bills. At June 30, 1998
the Company had been advised of $107 million in available interbank funding.
Capital Resources
Bancorp and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can result in certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. The regulations require
Bancorp and the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. Bancorp's and the
Bank's capital classification are also subject to qualitative judgments by the
regulators about interest rate risk, concentration of credit risk and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bancorp and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier I capital (as defined in the regulations) to
total averages assets (as defined) and minimum ratios of Tier I and total
capital (as defined) to risk-weighted assets (as defined). The Bancorp's and the
Bank's actual capital amounts and ratios are also presented in the table.
Bancorp Capital Ratios
(Dollars in thousands)
June 30, 1998 December 31, 1997
----------------------------- --------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 risk-weighted
capital:
Actual $108,859 11.6% $ 96,405 12.4%
Minimum 37,599 4.0% 31,027 4.0%
Total risk-weighted
capital:
Actual 120,588 12.8% 106,093 13.7%
Minimum 75,198 8.0% 62,053 8.0%
Leverage:
Actual 108,859 7.8% 96,405 7.9%
Minimum 41,994 3.0% 36,858 3.0%
18
20
Bank Capital Ratios
(Dollars in thousands)
June 30, 1998 December 31, 1997
----------------------- -----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
Tier 1 risk-weighted capital:
Actual $102,523 10.9% $86,551 11.2%
Minimum to be well capitalized 56,499 6.0% 46,438 6.0%
Minimum to be adequately capitalized 37,666 4.0% 30,959 4.0%
Total risk-weighted capital:
Actual 114,273 12.1% 96,217 12.4%
Minimum to be well capitalized 94,166 10.0% 77,396 10.0%
Minimum to be adequately capitalized 75,332 8.0% 61,917 8.0%
Leverage:
Actual 102,523 7.6% 86,551 7.1%
Minimum to be well capitalized 72,649 5.0% 60,982 5.0%
Minimum to be adequately capitalized 58,119 4.0% 48,785 4.0%
Market Risk Management
In the normal course of conducting business activities, the Company is exposed
to market risk which includes both price and liquidity risk. The Company's price
risk arises from fluctuations in interest rates, and foreign exchange rates that
may result in changes in values of financial instruments. The Company does not
have material direct market risk related to commodity and equity prices.
Liquidity risk arises from the possibility that the Company may not be able to
satisfy current and future financial commitments or that the Company may not be
able to liquidate financial instruments at market prices. Risk management
policies and procedures have been established and are utilized to manage the
Company's exposure to market risk. The strategy of the Company is to operate at
an acceptable risk environment while maximizing its earnings.
Market risk is managed by the Asset Liability Committee which formulates and
monitors the performance of the Company based on established levels of market
risk as dictated by policy. In setting the tolerance levels of market risk, the
Committee considers the impact on both earnings and capital potential changes in
the outlook in market rates, global and regional economies, liquidity, business
strategies and other factors.
The Company's asset and liability management process is utilized to manage
interest rate risk through the structuring of balance sheet and off-balance
sheet portfolios. It is the strategy of the Company to maintain as neutral an
interest rate risk position as possible. By utilizing this strategy the Company
"locks in" a spread between interest earning assets and interest-bearing
liabilities. Given the matching strategy of the Company and the fact that it
does not maintain significant medium and/or long-term exposure positions, the
Company's interest rate risk will be measured and quantified through an interest
rate sensitivity report. 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 June 30, 1998 shows that interest bearing
liabilities maturing or repricing within one year exceed interest earning assets
by $46.8 million. The Company monitors that the assets and liabilities are
closely matched to minimize interest rate risk. On June 30, 1998 the interest
rate risk position of the Company was not significant since the impact of a 100
basis point rise or fall of interest rates over the next 12 months is estimated
at 8.75 percent of net income.
19
21
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.
The level of imbalance between the repricing of rate sensitive assets and rate
sensitive liabilities will be measured through 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 Senior Vice President of Finance and the Bank's
Treasurer are responsible for measuring and managing market risk.
20
22
YIELDS EARNED AND RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
For The Six Months Ended For The Six Months Ended
June 30, 1998 June 30, 1997
------------------------------------- -----------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
====================================== =========================================
Total Earning Assets
Loans:
Commercial loans $ 943,288 $42,500 (1) 8.96% $489,617 $23,002 (1) 9.34%
Acceptances Discounted 125,176 5,820 9.25% 104,190 5,100 9.74%
Overdraft 11,305 994 17.49% 5,518 611 22.02%
Mortgage loans 11,787 486 8.20% 10,758 454 8.39%
Installment loans 274 13 9.44% 398 19 9.49%
---------- ------- ----- -------- ------- -----
Total Loans (1) 1,091,830 49,813 9.07% 610,481 29,186 9.51%
Time Deposit with Banks 100,225 4,538 9.01% 109,455 4,621 8.40%
Investments 65,262 2,130 6.49% 31,825 931 5.82%
Federal funds sold 19,258 532 5,49% 16,022 434 5.39%
---------- ------- ----- -------- ------- -----
Total Investments and Time
Deposit with Banks 184,745 7,200 7.75% 157,302 5,986 7.57%
Total Interest Earning assets 1,276,575 57,013 8.88% 767,783 35,172 9.11%
------- ----- ------- -----
Total non interest earning assets 123,212 92,100
---------- --------
Total Assets $1,399,787 $859,883
========== ========
Interest Bearing Liabilities
Deposits:
Super NOW, NOW $ 15,509 $ 139 1.78% $ 15,735 $ 161 2.04%
Money Market 45,046 1,016 4.49% 43,923 1,030 4.66%
Presidential Market 2,769 38 2.73% 3,161 45 2.83%
Super Savings, Savings 4,721 72 3.03% 4,354 68 3.11%
Certificate of Deposits
(including IRA) 900,038 26,244 5.80% 474,644 13,828 5.79%
Time Deposits with Banks (IBF) 152,108 4,069 5.32% 117,373 3,059 5.18%
Other 606 1 0.17% 0 0 0.00%
---------- ------- ----- -------- ------- -----
Total Deposits 1,120,707 31,579 5.60% 659,190 18,191 5.49%
Federal Funds Purchased 5,837 166 5.66% 3,903 109 5.55%
Other Borrowings 3,100 117 7.51% 0 0 0.00%
---------- ------- ----- -------- ------- -----
Total interest bearing liabilities $1,129,644 $31,862 5.61% $663,093 $18,300 5.49%
---------- ------- ----- -------- ------- -----
Non interest bearing liabilities
Demand Deposits 69,428 60,499
Other Liabilities 95,351 67,710
---------- --------
Total non interest bearing liabilities 164,779 128,209
Stockholders equity 164,779 68,581
---------- --------
Total liabilities and stockholder's equity $1,399,787 $859,883
========== ========
Net Interest income / net interest spread $25,151 3.27% $16,872 3.62%
======= ===== ======= =====
Margin
Interest income / interest earning assets 9.01% 9.11%
Interest expense / interest earning assets 5.03% 4.74%
---- -----
Net interest margin 3.97% 4.37%
==== =====
- ---------------
(1) Interest income for calculating yields includes $256 and $142 thousand of
loan fees for the six months ended June 30, 1998 and 1997 respectively.
21
23
Results of Operations-Six Months
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
increased to $25.2 million for the six months ended June 30, 1998 from $16.9
million for the same period in 1997, a 49.1 percent increase. The increase was
due largely to an increase in average earning assets offset, to some extent, by
a decrease in net interest margin. Average earning assets increased to $1,276.6
million for the six months ended June 30, 1998 from $767.8 million for the same
period in 1997, a 66.3 percent increase. Average loans and acceptances
discounted increased to $1,091.8 million for the six months ended June 30, 1998
from $610.5 million for the same period in 1997, a 78.8 percent increase, while
average interest earning deposits with other banks decreased to $100.2 million
for the six months ended June 30, 1998 from $109.5 million for the same period
in 1997, an 8.5 percent decrease. The increase in loans was largely attributable
to trade finance activities within the Region. Net interest margin decreased to
3.97 percent for the six months ended June 30, 1998 from 4.37 percent for the
same period in 1997, a 40 basis point decrease. The primary reasons for this
decrease were (i) loan yields relative to reference rates decreased in certain
countries in the Region as a result of perceived economic stability and lower
credit risk and (ii) transactions with larger customers and transactions with
multi-national companies which command more competitive pricing, but in turn
tend to be stronger in terms of credit quality.
Interest income increased to $57.0 million for the six months ended June 30,
1998 from $35.2 million for the same period in 1997, a 62.1 percent increase,
reflecting an increase in loans in the Region, partially offset by a decrease in
prevailing interest rates and a tightening of loan spreads in the Region as
discussed above. Interest expense increased to $31.9 million for the six months
ended June 30, 1998 from $18.3 million for the same period in 1997, a 74.3
percent increase, reflecting the additional deposits to fund asset growth.
Average interest-bearing deposits increased to $1,120.7 million for the six
months ended June 30, 1998 from $659.2 million for the same period in 1997, a
70.0 percent increase. The growth in deposits was primarily a result of the
Company seeking additional deposits to fund asset growth. The Company's time
deposits from banks also increased to $152.0 million for the six months ended
June 30, 1998 from $117.4 million for the same period in 1997.
Provision for Credit Losses
The Company's provision for credit-losses increased to $4.1 million for the six
months ended June 30, 1998 from $2.9 million for the same period in 1997, a 41.3
percent increase. Net loan charge-offs during the first six months of 1998
amounted to $991 thousand compared to $2.4 million for the year 1997. The
allowance for credit losses was increased to $13.4 million at June 30, 1998 from
$10.3 million for the end of the fiscal year 1997, a 30.0 percent increase. The
increase was primarily a function of the growth in the Company's loan portfolio.
The ratio of the allowance for credit losses to total loans was 1.13 percent at
June 30, 1998 increasing from approximately 1.07 percent at December 31, 1997.
Non-Interest Income
Non-interest income increased to $7.9 million for the six months ended June 30,
1998 from $7.1 million for the same period in 1997, an 11.3 percent increase.
Trade finance fees and commissions increased by $717 thousand due largely to
increased facility fees and higher letter of credit volume during the first six
months of 1998 compared to 1997. Structuring and syndication fees increased by
$179 thousand as a result of various transactions which have been completed
during the six month period. Customer service fees decreased by $110 thousand as
a result of a decrease in fees charged on overdrafts and uncollected funds.
22
24
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 Six Months Ended June 30,
---------------------------------------------------------
1997 to 1998
1997 Percent Change 1998
------ -------------- ------
Trade finance fees and commissions $5,906 12.1% $6,623
Structuring and syndication fees, net 564 31.7 743
Customer service fees 421 (26.1) 311
Other 249 0.4 250
------ ----- ------
Total non-interest income $7,140 11.0% $7,927
====== ===== ======
Operating Expenses
Operating expenses increased to $12.4 million for the six months ended June 30,
1998 from $10.9 million for the same period in 1997, a 13.8 percent increase.
Employee compensation and benefits increased to $6.0 million for the six months
ended June 30, 1998 from $5.5 million for the same period in 1997, a 9.1 percent
increase. This was primarily due to an increase in the number of employees to
260 at June 30, 1998 from 240 for the same period in 1997. The increase in
personnel has been primarily as a result of the new branches; Sarasota, West
Palm Beach and San Juan, Puerto Rico; as well as additional personnel to support
asset growth. Occupancy expenses increased to $2.1 million for the six months
ended June 30, 1998 from $1.5 million for the same period in 1997. The increase
in occupancy expenses is primarily a result of new branches and the expansion of
the headquarters which is reflected in the first six months of 1998 and not
in 1997.
Other expenses increased slightly to $3.6 million for the six months ended June
30, 1998 from $3.3 million for the same period in 1997. Directors fees decreased
by 22.4 percent during the six months ended June 30, 1998. Insurance and
examination fees (FDIC and OCC) increased to $191 thousand for the six months
ended June 30, 1998 from $175 thousand for the same period in 1997. The
Company's efficiency ratio improved to 37.3 percent for the six month period
ended June 30, 1998 from 44.8 percent for the same period in 1997.
The following table sets forth details regarding the components of operating
expenses for the periods indicated.
Operating Expenses
(Dollars in thousands)
For the Six Months Ended June 30,
--------------------------------------------------------
1997 to 1998
1997 Percent Change 1998
------ -------------- -----
Employee compensation and benefits $ 5,529 9.4% $ 6,048
Occupancy and equipment 1,478 44.5 2,136
Other operating expenses 3,272 12.1 3,668
Directors' fees 424 (22.4) 329
Insurance and examination fees (FDIC and
OCC) 175 9.1 191
------- ----- -------
Total operating expenses $10,878 13.7% $12,372
======= ===== =======
23
25
YEAR 2000
The Company began the process in June 1996 of assessing and preparing its
computer systems and applications to be functional on January 1, 2000. The
Company has also been communicating with third parties which interface with the
Company, such as customers, counter parties, payment systems, vendors and
others, to determine whether they will be functional. The Company can give no
guarantee that these parties will be converted on a timely basis. Management
believes that the process of modifying all mission critical applications of the
Company continues as planned and expects to have substantially all of the
testing and changes completed by December 31, 1998. In addition, non mission
critical applications are scheduled to have substantially all the testing and
updates completed by June 30, 1999. The Company has incorporated year 2000 as
part of its credit policy process and addresses the issues in each new loan and
as part of its credit renewals.
Management believes that the total costs to be Year 2000 compliant are not
material to its financial position or results or operations. Any purchased
hardware or software in connection with this process will be capitalized in
accordance with normal Company policy. Personnel and all other costs are being
expensed as incurred.
The costs and dates on which the Company plans to complete the Year 2000 process
are based on management's best estimates. However, there can be no guarantees
that these estimates will be achieved and actual results could differ.
24
26
YIELDS EARNED AND RATE PAID
- -----------------------------------------------------------------------------------------------------------------------------------
For The Quarter Ended For The Quarter Ended
June 30, 1998 June 30, 1997
------------------------------------- -----------------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
====================================== =========================================
Total Earning Assets
Loans:
Commercial loans $1,003,498 $22,681 (1) 8.94% $534,776 $12,702 (1) 9.40%
Acceptances Discounted 133,748 2,984 8.83% 105,831 2,624 9.81%
Overdraft 10,986 491 17.67% 6,972 432 24.51%
Mortgage loans 11,653 242 8.23% 10,793 228 8.36%
Installment loans 315 7 9.19% 360 9 9.89%
---------- ------- ----- -------- ------- -----
Total Loans (1) 1,160,200 26,406 9.00% 658,732 15,995 9.61%
Time Deposit with Banks 99,833 2,260 8.95% 127,121 2,738 8.52%
Investments 67,927 1,120 6.52% 42,255 637 5.96%
Federal funds sold 20,028 281 5.55% 14,877 206 5.48%
---------- ------- ----- -------- ------- -----
Total Investments and Time
Deposit with Banks 187,788 3,661 7.71% 184,253 3,581 7.69%
Total Interest Earning assets 1,347,988 $30,066 8.82% 842,985 $19,576 9.19%
------- ----- ------- -----
Total non interest earning assets 114,949 101,056
---------- --------
Total Assets $1,462,937 $944,041
========== ========
Interest Bearing Liabilities
Deposits:
Super NOW, NOW $ 15,074 $ 66 1.74% $ 15,940 $ 74 1.84%
Money Market 45,979 511 4.40% 43,556 513 4.66%
Presidential Market 2,236 17 2.96% 2,793 20 2.83%
Super Savings, Savings 4,761 37 3.05% 4,144 33 3.15%
Certificate of Deposits
(including IRA) 969,388 14,172 5.78% 522,328 7,668 5.81%
Time Deposits with Banks (IBF) 151,925 2,039 5.31% 123,610 1,646 5.27%
Other 548 0 0.08%
---------- ------- ----- -------- ------- -----
Total Deposits 1,189,911 16,842 5.60% 712,371 9,954 5.53%
Federal Funds Purchased 2,989 43 5.66% 4,125 59 5.66%
Other Borrowings 6,034 114 7.49% 0 0 0.00%
---------- ------- ----- -------- ------- -----
Total interest bearing liabilities $1,198,934 $16,999 5.61% $716,496 $10,013 5.53%
---------- ------- ----- -------- ------- -----
Non interest bearing liabilities
Demand Deposits 66,284 63,561
Other Liabilities 89,148 78,780
---------- --------
Total non interest bearing liabilities 155,432 142,341
Stockholders equity 108,571 85,204
---------- --------
Total liabilities and stockholder's equity $1,462,937 $944,041
========== ========
Net Interest income / net interest spread $13,067 3.21% $ 9,563 3.66%
======= ===== ======= =====
Margin
Interest income / interest earning assets 8.95% 9.19%
Interest expense / interest earning assets 5.06% 4.70%
---- -----
Net interest margin 3.89% 4.49%
==== =====
- ---------------
(1) Interest income for calculating yields includes $225 and $85 thousand of
loan fees for the quarters ended June 30, 1998 and 1997 respectively.
25
27
Results of Operation-Quarter
Net Interest Income
Net interest income increased to $13.1 million for the quarter ended June 30,
1998 from $9.6 million for the same period in 1997, a 36.5 percent increase. The
increase was in average earning assets offset, to some extent, by a decrease in
net interest margin. Average earning assets increased to $1,348 million for the
quarter ended June 30, 1998 from $843 million for the same period in 1997, a
59.9 percent increase. Average loans and acceptances discounted increased to
$1,160.2 million for the quarter ended June 30, 1998 from $658.7 million for the
same period in 1997, a 76.1 percent increase. Average interest earning deposits
with other banks decreased to $99.8 million for the quarter ended June 30, 1998
from $127.1 million for the same period in 1997, a 21.5 percent decrease. The
increase in average loan and acceptances has been led by the growth in trade
financing activities and the Company's ability to provide credit facilities
through its higher legal lending limit. Net interest margin decreased to 3.89
percent for the quarter ended June 30, 1998 from 4.49 percent for the same
period in 1997, a decrease of 60 basis points. The primary reasons for the
decrease were (i) loan yields relative to reference rates decreased in certain
countries in the Region as a result of perceived economic stability and lower
credit risk; (ii) transactions with larger corporate customers which command
more competitive pricing, and (iii) the margin at June 30, 1997 was positively
impacted by the Initial Public Offering proceeds which were used for loan growth
without incurring a liability funding cost.
Interest income increased to $30.1 million for the quarter ended June 30, 1998
from $19.6 million for the same period in 1997, a 53.6 percent increase.
Interest expense increased to $17.0 million for the quarter ended June 30, 1998
from $10.0 million for the same period in 1997, a 70.0 percent increase. Average
interest-bearing deposits increased to $1,189.9 million for the quarter ended
June 30, 1998 from $712.4 for the same period in 1997, a 67.0 percent increase.
The growth in deposits was primarily a result of the Company seeking deposits to
fund asset growth. The Company's time deposits from banks also increased to
$151.9 million for the quarter ended June 30, 1998 from $123.6 million for the
same period in 1997.
Provision for Credit Losses
The Company's provision for credit-losses decreased to $1.8 million for the
quarter ended June 30, 1998 from $2.2 million for the same period in 1997, a
18.2 percent decrease. Net loan charge-offs during the second quarter in 1998
amounted to $166 thousand compared to $1.1 million for second quarter 1997. The
allowance for credit losses was increased to $13.4 million at June 30, 1998 from
$10.3 million at the end of the fiscal year 1997, a 30.0 percent increase to
provide for the increase in average loans. The ratio of the allowance for credit
losses to total loans increased slightly to approximately 1.13 percent at June
30, 1998 from approximately 1.07 percent at December 31, 1997.
Non-Interest Income
Non-interest income remained consistent at $4.0 million for the quarters ended
June 30, 1998 and 1997. 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 Quarter Ended June 30,
------------------------------------------------
1997 to 1998
1997 Percent Change 1998
------ -------------- ------
Trade finance fees and commissions $3,148 2.5% $3,228
Capital market fees, net 478 (4.8) 455
Customer service fees 165 0.6 166
Other 180 (36.7) 114
------ ------ ------
Total non-interest income $3,971 (0.2%) $3,963
====== ====== ======
26
28
Operating Expenses
Operating expenses increased to $6.4 million for the quarter ended June 30, 1998
from $5.6 million for the same period in 1997, a 14.3 percent increase. Employee
compensation and benefits increased to $3.1 million for the quarter ended June
30, 1998 from $2.8 million for the same period in 1997, an 10.7 percent
increase. This was primarily due to an increase in the number of employees to
260 at June 30, 1998 from 240 for the same period in 1997. This increase was due
to additional personnel to support the growth in operations as well as salary
increases for existing personnel. Occupancy expenses increased slightly to $1.1
million in the second quarter of 1998, a 34.1 percent increase when compared to
the second quarter in 1997 as a result of new branches and the addition of new
space to the corporate headquarters. Other expenses increased to $2.0 million
for the quarter ended June 30, 1998 from $1.7 million for the same period in
1997 as a result of an increase in legal expenses and expenses related to an
additional regional advisor in Latin America. The increase in legal expenses
were the result of an increase in the number of litigation cases in the ordinary
course of business as opposed to very few litigation cases in the comparable
period in 1997.
The following table sets forth detail regarding the components of operating
expenses for the periods indicated.
Operating Expenses
(Dollars in thousands)
For the Quarter Ended June 30,
-------------------------------------------------
1997 to 1998
1997 Percent Change 1998
------ -------------- ------
Employee compensation and benefits $2,826 8.0% $3,052
Occupancy and equipment 796 34.1 1,067
Other operating expenses 1,678 21.0 2,030
Directors' fees 194 (8.2) 178
Insurance and examination fees (FDIC and
OCC) 61 80.0 110
------ ----- ------
Total operating expenses $5,555 15.9% $6,437
====== ===== ======
Year 2000
The Company began the process in June 1996 of assessing and preparing its
computer systems and applications to be functional on January 1, 2000. The
Company has also been communicating with third parties which interface with the
Company, such as customers, counter parties, payment systems, vendor and others,
to determine whether they will be functional. The Company can give no guarantee
that these parties will be converted on a timely basis. Management believes that
the process of modifying all mission critical applications of the Company
continues as planned and expects to have substantially all of the testing and
changes completed by December 31, 1998. In addition, non mission critical
applications are scheduled to have substantially all the testing and updates
completed by June 30, 1999. The Company has incorporated year 2000 as part of
its credit policy process and addresses the issues in each new loan and as part
of its credit renewals.
Management believes that the total costs to be Year 2000 compliant are not
material to its financial position or results or operations. Any purchased
hardware or software in connection with this process will be capitalized in
accordance with normal Company policy. Personnel and all other costs are being
expensed as incurred.
The costs and dates on which the Company plans to complete the Year 2000 process
are based on management's best estimates. However, there can be no guarantees
that these estimates will be achieved and actual results could differ.
27
29
HAMILTON BANCORP, INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER SHARE
(Dollars in thousands, except per share data)
EXHIBIT 1
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Basic
Weighted average number of
common shares outstanding 9,988,481 9,796,301 9,917,070 7,767,877
Net income $5,554 $3,741 $10,459 $6,563
Basic earnings $0.56 $0.38 $1.05 $0.84
Diluted:
Weighted average number of
common shares outstanding 9,988,481 9,796,301 9,917,069 7,767,877
Common equivalent shares
outstanding - options 415,470 383,148 362,200 383,148
---------- ---------- ---------- ---------
Total common and common
eqivalent shares outstanding 10,403,951 10,179,449 10,279,270 8,151,025
Net income $5,554 $3,741 $10,459 $6,563
Diluted earnings per share $0.53 $0.37 $1.02 $0.81
28
30
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(d) As reported in Registrant's Form SR for the period ending June 25, 1997
relating to the use of proceeds from the sale of common stock pursuant
to Registrant's Registration Statement No. 2-20960 effective March 25,
1997, US$8,600,000 of the proceeds were temporarily invested at that
date. On June 24, 1998 US$5,000,000 were invested in equity stock of
Hamilton Bank, N.A. The balance of such proceeds, US$3,600,000 remains
temporarily invested in short term investments.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Registrant's 1998 Annual Meeting of Shareholders was held on June 12,
1998.
(c) The two matters voted upon at the meeting were the election of the six
nominees named in the proxy statement as directors of the Registrant
and a proposal to approve the Registrant's 1998 Executive Incentive
Compensation Plan. The holders of 7,997,933 (80.44%) of the outstanding
Common Shares of the Registrant voted in person or by proxy at the
meeting as follows (there were no broker non-votes at the meeting):
Election of Directors:
For Withheld
--- --------
Maura A. Acosta 7,988,253 9,680
William Alexander 7,988,253 9,680
William Bickford 7,997,653 280
Thomas F. Gaffney 7,997,653 280
Eduardo A. Masferrer 7,988,253 9,680
Virgilio E. Sosa, Jr. 7,997,653 280
Approval of the 1998 Executive Incentive Compensation Plan:
For Against Withheld
--- ------- --------
7,401,139 596,454 340
Item 6
Exhibits
27 Financial Data Schedule (for SEC use only).
29
31
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: August 14, 1998 Hamilton Bancorp Inc.
/s/ Eduardo A. Masferrer
-----------------------------------------------
Eduardo A. Masferrer,
Chairman, President and Chief Executive Officer
/s/ Maria Ferrer-Diaz
-----------------------------------------------
Maria Ferrer-Diaz,
Senior Vice President - Finance and Principal
Financial and Chief Accounting Officer
30