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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________to_______________
Commission file number: 0-20960
HAMILTON BANCORP INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 65-0149935
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3750 N.W. 87TH AVENUE, MIAMI, FLORIDA 33178
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (305) 717 - 5500
---------------------------------------------------------------------
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)
March December 31,
----------- -----------
1999 1998
----------- -----------
(Unaudited) (Audited)
ASSETS
CASH AND DEMAND DEPOSITS WITH OTHER BANKS $ 24,073 $ 24,213
FEDERAL FUNDS SOLD 62,488 87,577
----------- -----------
Total cash and cash equivalents 86,561 111,790
INTEREST EARNING DEPOSITS WITH OTHER BANKS 116,447 200,203
SECURITIES AVAILABLE FOR SALE 133,476 69,725
SECURITIES HELD TO MATURITY 35,471 30,292
OTHER INVESTMENT, AT COST 15,000 15,000
LOANS-NET 1,106,122 1,163,705
DUE FROM CUSTOMERS ON BANKERS ACCEPTANCES 50,757 75,567
DUE FROM CUSTOMERS ON DEFERRED PAYMENT LETTERS OF CREDIT 5,455 6,468
PROPERTY AND EQUIPMENT-NET 4,660 4,775
ACCRUED INTEREST RECEIVABLE 17,462 19,201
GOODWILL-NET 1,789 1,833
OTHER ASSETS 21,899 9,004
----------- -----------
TOTAL $ 1,595,099 $ 1,707,563
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS $ 1,385,715 $ 1,477,052
TRUST PREFERRED SECURITIES 12,650 11,000
OTHER BORROWINGS -- 6,116
BANKERS ACCEPTANCES OUTSTANDING 50,757 75,567
DEFERRED PAYMENT LETTERS OF CREDIT OUTSTANDING 5,455 6,468
OTHER LIABILITIES 10,545 7,814
----------- -----------
Total liabilities 1,465,122 1,584,017
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000 shares authorized, 10,059,479 shares
issued and outstanding at March 31, 1999 and 10,050,062 shares issued
and outstanding at December 31, 1998 101 100
Capital surplus 60,321 60,117
Retained earnings 69,884 63,815
Accumulated other comprehensive loss (329) (486)
----------- -----------
Total stockholders' equity 129,977 123,546
----------- -----------
TOTAL $ 1,595,099 $ 1,707,563
=========== ===========
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 March 31,
----------------------------
1999 1998
----------- -----------
(Unaudited)
INTEREST INCOME:
Loans, including fees $ 25,529 $ 23,406
Deposits with other banks 3,241 2,279
Investment securities 2,756 1,012
Federal funds sold 466 250
----------- -----------
Total 31,992 26,947
INTEREST EXPENSE:
Deposits 18,168 14,737
Trust preferred securities 302 --
Federal funds purchased and other borrowing 105 127
----------- -----------
Total 18,575 14,864
----------- -----------
NET INTEREST INCOME 13,417 12,083
PROVISION FOR CREDIT LOSSES 900 2,315
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES 12,517 9,768
----------- -----------
NON-INTEREST INCOME:
Trade finance fees and commissions 2,990 3,395
Structuring and syndication fees 577 289
Customer service fees 183 145
Gain on sale of loans 188 --
Other 349 136
----------- -----------
Total 4,287 3,965
----------- -----------
OPERATING EXPENSES:
Employee compensation and benefits 3,344 2,995
Occupancy and equipment 960 1,070
Other 2,864 1,871
----------- -----------
Total 7,168 5,936
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 9,636 7,797
PROVISION FOR INCOME TAXES 3,567 2,892
----------- -----------
NET INCOME $ 6,069 $ 4,905
=========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ 0.60 $ 0.50
=========== ===========
DILUTED $ 0.59 $ 0.48
=========== ===========
AVERAGE SHARES OUTSTANDING:
BASIC 10,056,111 9,844,915
=========== ===========
DILUTED 10,283,235 10,208,765
=========== ===========
See accompanying notes to consolidated financial statements.
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HAMILTON BANCORP INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended March
-------------------------
1999 1998
-------- --------
(Unaudited)
NET INCOME $ 6,069 $ 4,905
OTHER COMPREHENSIVE INCOME, Net of tax:
Unrealized appreciation (depreciation) in securities available for sale during period 344 (144)
Less: Reclassification adjustment for write off of a foreign bank stock (187)
------- -------
Total 157 (144)
------- -------
COMPREHENSIVE INCOME $ 6,226 $ 4,761
======= =======
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)
Accumulated
Common Stock Other Total
-------------------------- Capital Retained Comprehensive Stockholders'
Shares Amount Surplus Earnings Loss Equity
---------- ---------- ---------- ---------- ------------- ------------
Balance, December 31, 1998 (audited) 10,050,062 $ 100 $ 60,117 $ 63,815 $ (486) $ 123,546
Issuance of 9,417 shares of common
stock from exercise of options 9,417 1 204 205
Net change in unrealized loss on
securities available for sale, net of taxes 157 157
Net income for the three months ended
March 31, 1999 6,069 6,069
---------- ---------- ---------- ---------- ---------- ----------
Balance as of March 31, 1999
(Unaudited) 10,059,479 $ 101 $ 60,321 $ 69,884 $ (329) $ 129,977
========== ========== ========== ========== ========== ==========
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 Three Months Ended March
---------------------------
1999 1998
----------- ---------
sASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,069 $ 4,905
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 369 280
Provision for credit losses 900 2,315
Deferred tax provision (benefit) 28 (674)
Write off of available for sale security 187 0
Gain on sale of loans (188) 0
Proceeds from the sale of bankers acceptances and
loan participations, net of loan participations purchased 5,715 33,256
Increase in accrued interest receivable and other assets (11,237) (1,338)
Increase in other liabilities 2,638 9,117
--------- ---------
Net cash provided by operating activities 4,481 47,861
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increases in interest-earning deposits with other banks 83,756 22,159
Purchase of securities available for sale (293,385) (75,576)
Purchase of securities held to maturity (6,261) (3,000)
Proceeds from sales and maturities of securities available for sale 229,612 68,662
Proceeds from paydowns of securities held to maturity 1,074 0
Proceeds from sale of loans 11,148 0
Decrease (increase) in loans-net 40,063 (152,622)
Purchases of property and equipment-net (119) (392)
--------- ---------
Net cash provided by (used in) investing activities 65,888 (140,769)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (91,337) 62,462
Proceeds from trust preferred securities offering 1,650 2,388
Payment of other borrowing (6,116) 0
Net proceeds from exercise of common stock options 205 996
Net cash (used in) provided by financing activities (95,598) 65,846
NET DECREASE IN CASH AND CASH EQUIVALENTS (25,229) (27,062)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 111,790 91,434
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 86,561 $ 64,372
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid during the period $ 18,821 $ 14,236
========= =========
Income taxes paid during the period $ 45 $ 220
========= =========
See accompanying notes to consolidated financial statements
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HAMILTON BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1: BASIS OF PRESENTATION
The consolidated statements of condition for Hamilton Bancorp Inc. and
Subsidiary (the "Company") as of March 31, 1999 and December 31, 1998, the
related consolidated statements of income, stockholders' equity and the cash
flows for the three months ended March 31, 1999 and 1998 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, 1998.
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, 1998 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: SALE OF LOANS
During the three months ended March 31, 1999, the Company sold $8.1 million of
its residential mortgage loan portfolio realizing a gain of $106 thousand. This
was due primarily to a status change during 1998 in the Bank's designation to a
wholesale bank for purposes of the Community Reinvestment Act. This designation
is due largely to the Company's focus on trade finance. In addition, the Company
sold a $3.0 million foreign loan realizing a gain of $82 thousand.
NOTE 4: TRUST PREFERRED SECURITIES
On December 28, 1998, the Company issued $11,000,000 of 9.75% Beneficial
Unsecured Securities, Series A (the "Preferred Securities") out of a guarantor
trust. On January 14, 1999, the Trust issued an additional $1,650,000 of
Preferred Securities upon the exercise of an over-allotment by the underwriters.
The Trust holds 9.75% Junior Subordinated Deferrable Interest Debentures, Series
A (the "Subordinated Debentures") of the Company purchased with the proceeds of
the securities issued. Interest from the Subordinated Debentures of the Company
is used to fund the preferred dividends of the Trust. Distributions on the
Preferred Securities are cumulative and are payable quarterly. The Trust must
redeem the Preferred Securities when the Subordinated Debentures are paid at
maturity on or after December 31, 2028, or upon earlier redemption. Subject to
the Company having received any required approval of regulatory agencies, the
Company has the option at any time on or after December 31, 2008 to redeem the
Subordinated Debentures, in whole or in part. Additionally, the Company has the
option at any time prior to December 31, 2008 to redeem the Subordinated
Debentures, in whole but not in part, if certain regulatory or tax events occur
or if there is a change in certain laws that require the Trust to register under
the law. The Preferred Securities are considered to be Tier I capital for
regulatory purposes.
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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 eight FDIC-insured branches with seven Florida locations in
Miami, Sarasota, Tampa, West Palm Beach and Winter Haven, and a branch in
San Juan, Puerto Rico. On March 8, 1999, the Company received regulatory
approval for the opening of an additional branch. This branch is scheduled
to be opened in July 1999.
FINANCIAL CONDITION - MARCH 31, 1999 VS. DECEMBER 31, 1998.
Total consolidated assets decreased $112.5 million, or 6.6 percent, during
the first three months of 1999, which included a decrease of $97.5 million
in interest earning assets and $15.0 million in non-interest earning
assets. As a consequence, total deposits decreased $91.3 million. The
decrease in consolidated assets reflects decreases of $57.6 million in
loans-net, $83.8 million in interest-earning deposits with other banks and
$25.1 million in federal funds sold. During the quarter the Company began
to adjust its asset composition to take advantage of a greater flow of
goods into the U. S. market, due to its strong consumer demand and vibrant
economic environment, while continuing to finance trade between the U. S.
and its global trading partners. As a consequence, the Company's exposure
in the Region was significantly reduced relative to the U. S. The
securities portfolio increased $68.9 million reflecting the temporary
redeployment of maturing loans and interest-earning deposits with other
banks in the Region.
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 $86.6 million at March 31, 1999 compared to $111.8 million at
December 31, 1998.
INTEREST-EARNING DEPOSITS WITH OTHER BANKS AND INVESTMENT SECURITIES
Interest-earning deposits with other banks decreased to $116.4 million at
March 31, 1999 from $200.2 million at December 31, 1998. 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
diminished as the exposure in the Region has decreased during the three
months ended March 31, 1999. The short term nature of these deposits
allows the Company the flexibility to later redeploy assets into a higher
yielding domestic loan component.
Investment securities increased to $183.9 million at March 31, 1999 from
$115.0 million at December 31, 1998. The increase has been primarily in
U.S. government agency securities and to a lesser extent U. S. government
mortgage backed securities classified as held to maturity. The government
agency securities are short term in nature and allow the Company the
flexibility of liquidity and the ability to convert these assets into
higher yielding loans as these become accessible. The mortgage backed
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 gross loan portfolio decreased by $57.4 million, or 4.9 percent,
during the first three months of 1999 in relation to the year ended December 31,
1998. Commercial-domestic loans increased by $53.0 million and domestic
acceptances discounted increased by $13.1 million or 19.1 percent. This was
offset by decreases in loans to banks and other financial institutions - foreign
of $57.7 million and commercial foreign loans of $33.8 million. Details on the
loans by type are shown in the table below. At March 31, 1999 approximately 36.9
percent of the Company's portfolio consisted of loans to domestic borrowers and
63.1 percent of the Company's portfolio consisted of loans to foreign borrowers.
The Company's loan portfolio is relatively short-term, as approximately 57.5 and
66.8 percent of loans at March 31, 1999 were short-term loans with average
maturities 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, 1999 December 31, 1998
---------- ----------
Domestic:
Commercial (1) $ 342,020 $ 289,032
Acceptances discounted 69,777 56,706
Residential mortgages 2,309 10,494
Installment 177 232
---------- ----------
Subtotal Domestic 414,283 356,464
---------- ----------
Foreign:
Banks and other financial institutions 246,331 304,011
Commercial and industrial (1) 371,993 405,819
Acceptances discounted 45,467 72,597
Government and official institutions 44,007 40,639
---------- ----------
Subtotal Foreign 707,798 823,066
---------- ----------
Total Loans $1,122,081 $1,179,530
(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 March 31, 1999 approximately 28.6 percent in principal amount of the
Company's loans were outstanding to borrowers in four countries other than the
United States: Panama (11.5 percent), Brazil (6.3 percent), Guatemala (6.2
percent) and Peru (4.6 percent).
LOANS BY COUNTRY
(Dollars in thousands)
March 31, 1999 December 31, 1998
-------------------------- --------------------------
Percent of Percent of
Country Amount Total Loans Amount Total Loans
---------- ----------- ---------- -----------
United States $ 414,283 36.9% $ 356,464 30.2%
Argentina 39,783 3.5% 38,171 3.2%
Bolivia 18,393 1.6% 20,816 1.8%
Brazil 70,427 6.3% 60,685 5.1%
Colombia 42,016 3.7% 43,793 3.7%
Dominican Republic (1) -- -- 29,563 2.5%
Ecuador 37,555 3.3% 46,917 4.0%
El Salvador 33,087 2.9% 37,196 3.2%
Guatemala 69,098 6.2% 119,227 10.1%
Honduras 43,445 3.9% 59,564 5.0%
Jamaica 17,548 1.6% 29,066 2.5%
Mexico 24,000 2.1% 25,250 2.1%
Panama 129,373 11.5% 119,615 10.1%
Peru 51,778 4.6% 49,382 4.2%
Suriname 17,541 1.6% 21,868 1.9%
Venezuela (1) -- -- 19,756 1.7%
Other (2) 113,754 10.3% 102,197 8.7%
---------- ----- ---------- -----
Total $1,122,081 100.0% $1,179,530 100.0%
(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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At March 31, 1999 approximately 29.7 percent in cross-border outstandings were
outstanding to borrowers in five countries other than the United States: Panama
(8.6 percent), Guatemala (6.8 percent), Brazil (6.5 percent), Peru (3.9
percent), and Honduras (3.9 percent).
TOTAL CROSS-BORDER OUTSTANDINGS BY COUNTRY
(Dollars in millions)
March 31, 1999 December 31, 1998
-------------------- ---------------------
% of Total % of Total
Amount Assets Amount Assets
------ ------ ------ -------
Argentina $ 55 3.4% $ 59 3.5%
Bahamas (1) 37 2.3% -- --
Bolivia 22 1.4% 26 1.5%
Brazil 103 6.5% 100 5.9%
B.W. Indies 45 2.8% 36 2.1%
Colombia 52 3.3% 54 3.2%
Costa Rica 14 0.9% 16 0.9%
Dominican Republic 31 1.9% 48 2.8%
Ecuador 53 3.3% 100 5.9%
El Salvador 50 3.1% 52 3.1%
Guatemala 108 6.8% 131 7.7%
Honduras 62 3.9% 69 4.1%
Jamaica 28 1.8% 40 2.4%
Mexico 24 1.5% 25 1.5%
Nicaragua (1) -- -- 15 0.9%
Panama 137 8.6% 119 7.0%
Peru 63 3.9% 56 3.3%
Suriname 24 1.5% 27 1.6%
Venezuela 14 0.9% 19 1.1%
Other (2) 51 3.2% 83 4.9%
------ ---- ------ ----
Total $ 973 61.0% $1,075 63.4%
====== ==== ====== ====
(1) These countries had outstandings 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 - COMMERCIAL LETTERS OF CREDIT
(in thousands)
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. As shown by the table, the volume of commercial letters of credit
decreased by 47.2 percent to $106.0 million for the three months ended March 31,
1999 when compared to the same period in 1998. This is a result of shifts
towards more on-balance sheet financing and an increase in financing a greater
domestic component.
Three Months Ended March 31, Year Ended
-------------------------------------------------- ----------------------
1999 1998 December 31, 1998
---------------------- ---------------------- ----------------------
Average Average Average
Total Monthly Total Monthly Total Monthly
Volume Volume Volume Volume Volume Volume
-------- -------- -------- -------- -------- --------
Export Letters of Credit (1) $ 45,313 $ 15,104 $107,766 $ 35,922 $397,683 $ 33,140
Import Letters of Credit (1) 60,654 20,218 92,872 30,957 349,099 29,092
-------- -------- -------- -------- -------- --------
Total $105,967 $ 35,322 $200,638 $ 66,879 $746,782 $ 62,232
======== ======== ======== ======== ======== ========
(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 20.7 percent from December 31, 1998 to March 31, 1999. Individual
fluctuations reflect relative changes in the flow of trade or instruments used
in financing such trade.
CONTINGENT LIABILITIES (1)
(in thousands)
March 31, 1999 December 31, 1998
-------- --------
Argentina (2) $ -- $ 1,680
Aruba (2) 1,124 --
Bolivia 2,441 3,890
Costa Rica (2) -- 2,846
Dominican Republic 5,959 7,015
Ecuador 1,333 3,703
El Salvador 2,723 1,995
Guatemala 7,787 26,132
Guyana 2,363 2,374
Haiti 1,991 2,088
Honduras 3,647 2,427
Nicaragua (2) 1,572 --
Panama 6,664 14,538
Paraguay 1,325 1,961
Suriname 3,190 11,690
Switzerland 2,119 1,588
United States 55,597 39,415
Other (3) 2,199 5,374
-------- --------
Total $102,034 $128,716
======== ========
(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 periods presented in 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
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Region and the possibility that serious economic difficulties in a country could
adversely affect all of the Company's loans to borrowers in or doing business
with that country.
Determining the appropriate level of the allowance for credit losses requires
management's judgment, including application of the factors described above to
assumptions and estimates made in the context of changing political and economic
conditions in many of the countries of the Region. Accordingly, there can be no
assurance that the Company's current allowance for credit losses will prove to
be adequate in light of future events and developments. At March 31, 1999 the
allowance for credit losses was approximately $13.6 million.
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)
Three Months Ended Year Ended
March 31, 1999 December 31,1998
------------------ ----------------
Balance of allowance for credit losses at beginning of period $ 12,794 $ 10,317
Charge-offs:
Domestic:
Commercial -- (3,357)
Acceptances -- (100)
Installment (1) --
----------- -----------
Total Domestic (1) (3,457)
----------- -----------
Foreign:
Banks and other financial institutions -- (3,901)
Commerical and industrial (101) --
----------- -----------
Total Foreign (101) (3,901)
----------- -----------
Total charge-offs (102) (7,358)
----------- -----------
Recoveries:
Domestic:
Commercial -- 12
Foreign:
Banks and other financial institutions -- 202
----------- -----------
Total recoveries -- 214
----------- -----------
Net (charge-offs) recoveries (102) (7,144)
Provision for credit losses 900 9,621
----------- -----------
Balance at end of the period $ 13,592 $ 12,794
=========== ===========
Average loans $ 1,162,203 $ 1,168,451
Total loans $ 1,122,081 $ 1,179,530
Net charge-offs to average loans 0.01% 0.61%
Allowance to total loans 1.21% 1.08%
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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
March 31, 1999 December 31, 1998
-------------- ------------------
Allocation of the allowance by category of loans:
Domestic:
Commercial $ 3,983 $ 945
Acceptances 845 211
Residential 28 66
Installment 2 3
Overdraft 160 190
--------- ---------
Total domestic 5,018 1,415
Foreign:
Government and official institutions 533 --
Banks and other financial institutions 2,984 3,033
Commercial and industrial 4,506 8,010
Acceptances discounted 551 336
--------- ---------
Total foreign 8,574 11,379
Total $ 13,592 $ 12,794
========= =========
Percent of loans in each category to total loans:
Domestic:
Commercial 29.3% 23.9%
Acceptances 6.2% 4.8%
Residential 0.2% 0.9%
Installment 0.0% 0.0%
Overdraft 1.2% 0.6%
--------- ---------
Total domestic 36.9% 30.2%
Foreign:
Banks and other financial institutions 22.0% 25.8%
Commercial and industrial 33.1% 34.4%
Acceptances discounted 4.1% 6.2%
Government and official Institutions 3.9% 3.4%
--------- ---------
Total foreign 63.1% 69.8%
Total 100.0% 100.0%
========= =========
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ANALYSIS OF ALLOWANCE FOR CREDIT LOSSES ALLOCATED TO FOREIGN LOANS
(in thousands)
March 31, 1999 December 31, 1998
-------------- -----------------
Balance, beginning of year $ 11,379 $ 7,890
Provision for credit losses (2,704) 7,188
Net charge-offs (101) (3,699)
-------- --------
Balance, end of period $ 8,574 $ 11,379
======== ========
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 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.
NONPERFORMING LOANS
(in thousands)
March 31, 1999 December 31, 1998
-------------- -----------------
Domestic:
Non accrual $ 2,294 $ 2,189
Past due over 90 days and accruing 93 69
------- -------
Total domestic nonperforming loans 2,387 2,258
------- -------
Foreign
Non accrual 7,834 6,396
Past due over 90 days and accruing -- 404
------- -------
Total foreign nonperforming loans 7,834 6,800
------- -------
Total nonperforming loans $10,221 $ 9,058
======= =======
Total nonperforming loans to total loans 0.91% 0.77%
Total nonperforming assets to total assets 0.64% 0.53%
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At March 31, 1999 and December 31, 1998 the Company had no nonaccruing
investment securities
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 $50.8 million and $5.5 million, respectively, at March 31, 1999
compared to $75.6 million and $6.5 million, respectively, at December 31, 1998.
These assets represent a customer's liability to the Company while the
Company's? corresponding liability to third parties is reflected on the balance
sheet as "Bankers Acceptances Outstanding" and "Deferred Payment Letters of
Credit Outstanding".
OTHER ASSETS
Other assets increased by $12.9 million during the three months ended March 31,
1999 primarily due to certain placements that were transferred to other assets.
The Company was in the process of selling these placements and the sale
transactions were completed in the first week of April 1999.
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 other financial institutions in the area.
Total deposits were $1,385.7 million at March 31, 1999 compared to $1,477.1
million at December 31, 1998. The decrease in deposits during the three month
period was largely in certificates of deposits over $100,000 which decreased by
$134.1 million. This decrease was offset by certificates of deposit under
$100,000 which increased by $44.2 million.
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, 1999:
MATURITIES OF AND AMOUNTS OF CERTIFICATES OF DEPOSITS AND OTHER TIME DEPOSITS
$100,000 OR MORE
(in thousands)
Certificates Other Time
of Deposits Deposits
$100,000 or More $100,000 or More Total
---------------- ---------------- --------
Three months or less $129,361 $ 41,698 $171,059
Over 3 through 6 months 88,605 1,148 89,753
Over 6 through 12 months 154,532 -- 154,532
Over 12 months 23,768 -- 23,768
-------- -------- --------
Total $396,266 $ 42,846 $439,112
======== ======== ========
TRUST PREFERRED SECURITIES
The trust preferred securities increased by $1.7 million as a result of the
exercise of the over allotment option by the underwriter. See Note 4 to the
Consolidated Financial Statements for further details.
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STOCKHOLDERS' EQUITY
The Company's stockholders' equity at March 31, 1999 was $130.0 million compared
to $123.5 million at December 31, 1998. During this period stockholders' equity
increased by $6.1 million primarily due to the retention of net income.
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, 1999. The
interest-earning assets and interest-bearing liabilities of the Company and the
related interest rate sensitivity gap given in the following table may not be
reflective of positions in subsequent periods.
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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 $ 165,496 $ 283,083 $ 196,353 $ 104,476 $ 308,644 $ 64,029 $1,122,081
Federal funds sold 62,488 62,488
Investment securities 24,929 99,065 3,000 600 1,700 53,065 182,359
Interest earning deposits with
other banks 6,011 70,990 35,946 3,500 -- 116,447
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 258,924 453,138 235,299 108,576 310,344 117,094 1,483,375
---------- ---------- ---------- ---------- ---------- ---------- ----------
Funding Sources:
Savings and transaction deposits 58,374 49,696 108,070
Certificates of deposits of $100 or more 59,584 69,777 88,605 154,532 23,768 -- 396,266
Certificates of deposits under $100 79,360 167,865 215,001 239,835 14,795 78 716,934
Other time deposits 23,104 18,594 1,148 42,846
Funds overnight 42,200 42,200
Trust preferred securities 12,650 12,650
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 262,622 $ 305,932 $ 304,754 $ 394,367 $ 38,563 $ 12,728 $1,318,966
========== ========== ========== ========== ========== ========== ==========
Interest sensitivity gap $ (3,698) $ 147,206 $ (69,455) $ (285,791) $ 271,781 $ 104,366 $ 164,409
========== ========== ========== ========== ========== ========== ==========
Cumulative gap $ (3,698) $ 143,508 $ 74,053 $ (211,738) $ 60,043 $ 164,409
========== ========== ========== ========== ========== ==========
Cumulative gap as a percentage
of total earning assets -0.25% 9.67% 4.99% -14.27% 4.05% 11.08%
========== ========== ========== ========== ========== ==========
LIQUIDITY
Cash and cash equivalents decreased by $25.2 million from December 31, 1998.
During the first quarter of 1999, net cash provided by operating activities was
$4.5 million, net cash provided by investing activities was $65.9 which was
offset by net cash used by financing activities of $95.6 million. For further
information on cash flows, see the Consolidated Statement of Cash Flows.
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20
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. Consideration in managing the Company's
liquidity position include, but is not limited to, scheduled cash flows from
existing assets, contingencies and liabilities, as well as projected liquidity
needs arising from anticipated extensions of credit. Furthermore the liquidity
position is monitored daily by management to maintain a level of liquidity
conducive to efficient operations and is continuously evaluated as part of the
asset/liability management process.
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, 1999 interest-earning assets maturing within six months
were $947.4 million, representing 63.9 percent of total earning assets and
earning assets maturing within one year were $1.056 billion or 71.2 percent of
total earning assets. The interest bearing liabilities maturing within six
months were $873.3 million or 66.2 percent of total interest bearing liabilities
and maturing within one year were $1.268 billion or 96.1 percent of the total at
March 31, 1999.
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, 1999 were $312 million, 19.6 percent of
total assets, and consisted of cash and cash equivalents, due from banks-time
and U. S. government agency securities that are unpledged. At March 31, 1999 the
Company had been advised of $79 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). Bancorp's and the Bank's actual
capital amounts and ratios are also presented in the table.
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BANCORP CAPITAL RATIOS
(Dollars in thousands)
March 31, 1999 December 31, 1998
-------------------- ---------------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
Tier 1 risk-weighted
Capital:
Actual $140,822 13.4% $133,603 12.0%
Minimum 41,984 4.0% 44,411 4.0%
Total risk-weighted
Capital:
Actual 153,936 14.7% 146,397 13.2%
Minimum 83,968 8.0% 88,822 8.0%
Leverage:
Actual 140,822 8.4% 133,603 8.0%
Minimum 50,198 3.0% 50,204 3.0%
BANK CAPITAL RATIOS
(Dollars in thousands)
March 31, 1999 December 31, 1998
-------------------- --------------------
Amount Ratio Amount Ratio
-------- ---- -------- ----
Tier 1 risk-weighted capital:
Actual $136,648 13.0% $121,886 11.0%
Minimum to be well capitalized 62,951 6.0% 66,461 6.0%
Minimum to be adequately capitalized 41,967 4.0% 44,307 4.0%
Total risk-weighted capital:
Actual 149,757 14.3% 134,680 12.2%
Minimum to be well capitalized 104,918 10.0% 110,768 10.0%
Minimum to be adequately capitalized 34 8.0% 88,614 8.0%
Leverage:
Actual 136,648 8.2% 121,886 7.3%
Minimum to be well capitalized 83,207 5.0% 83,086 5.0%
Minimum to be adequately capitalized 66,566 4.0% 66,649 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
20
22
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, 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. 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, 1999 shows that interest
bearing liabilities maturing or repricing within one year exceed interest
earning assets by $211.7 million. The Company monitors that the assets and
liabilities are closely matched to minimize interest rate risk. On March 31,
1999 the interest rate risk position of the Company was not significant since
the impact of a 100 basis point rise or fall of interest rates over the next 12
months is estimated at 4.7 percent of net income.
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 Senior Vice President of Finance 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
increased to $13.4 million for the three months ended March 31, 1999 from $12.1
million for the same period in 1998, a 10.7 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 $1.552
billion for the three months ended March 31, 1999 from $1.204 billion for the
same period in 1998, a 28.9 percent increase. Average loans and acceptances
discounted increased to $1.162 billion for the three months ended March 31, 1999
from $1.023 billion for the same period in 1998, a 13.6 percent increase.
Average interest earning deposits with other banks increased to $108.7 million
for the three months ended March 31, 1999 from $100.6 million for the same
period in 1998, a 8.1 percent increase. The increase in loans was largely
attributable to trade finance activities within the Region. Net interest margin
decreased to 3.51 percent for the three months ended March 31, 1999 from 4.07
percent for the same period in 1998, a 56 basis point decrease. The primary
reasons for this decrease were (i) the temporary increase of lower yielding
U.S. government agency securities while assets are redeployed into the higher
yielding loan category 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.
21
23
Interest income increased to $32.0 million for the three months ended March 31,
1999 from $26.9 million for the same period in 1998, a 19.0 percent increase,
reflecting an increase in loans in the Region, partially offset by a decrease in
prevailing interest rates, a tightening of loan spreads in the Region as well
as the temporary increase in liquid lower yielding U.S. government agency
securities discussed above. Interest expense increased to $18.6 million for the
three months ended March 31, 1999 from $14.9 million for the same period in
1998, a 25.0 percent increase, reflecting the additional deposits to fund asset
growth. Average interest-bearing deposits increased to $1.367 billion for the
three months ended March 31, 1999 from $1.051 billion for the same period in
1998, a 30.1 percent increase. The growth in deposits was primarily a result of
the Company seeking additional deposits to fund asset growth.
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YIELDS EARNED AND RATE PAID
For the Quarter Ended
March 31, 1999 March 31, 1998
--------------------------------- ---------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate
---------- ---------- ------ ---------- ---------- -------
Total Earning Assets
Loans:
Commercial loans $1,027,760 $ 22,115 8.61% $ 882,519 $ 19,818 8.98%
Acceptances discounted 117,044 2,642 9.03% 116,436 2,836 9.74%
Overdraft 13,667 696 20.37% 11,629 503 17.30%
Mortgage loans 3,514 71 8.08% 11,925 243 8.15%
Installment loans 217 5 9.20% 232 5 8.62%
---------- ---------- ---------- ----------
Total Loans 1,162,203 25,529 8.79% 1,022,741 23,406 9.15%
Time deposits with banks 108,748 3,241 11.92% 100,622 2,279 9.06%
Investments 242,179 2,756 4.55% 62,566 1,012 6.47%
Federal funds sold 38,486 466 4.84% 18,508 250 5.40%
---------- ---------- ---------- ----------
Total investments and time deposits with banks 389,413 6,463 6.64% 181,695 3,541 7.80%
Total interest earning assets 1,551,616 31,992 8.25% 1,204,436 26,947 8.95%
Total non interest earning assets 121,650 131,509
---------- ----------
Total Assets $1,673,266 $1,335,945
========== ==========
Interest Bearing Liabilities
Deposits:
NOW and savings accounts $ 21,654 109 2.01% $ 20,637 109 2.11%
Money Market 45,849 530 4.62% 44,090 504 4.57%
Presidential Money Market 25,673 304 4.74% 3,305 22 2.60%
Certificate of Deposits (including IRA) 1,160,076 15,889 5.48% 829,911 12,069 5.82%
Time Deposits with Banks (IBF) 109,383 1,303 4.76% 152,126 2,028 5.33%
Other 3,923 33 3.36% 475 6 5.05%
---------- ---------- ---------- ----------
Total Deposits 1,366,558 18,168 5.32% 1,050,545 14,737 5.61%
Trust Preferred Securities 12,393 302 9.75% 0 0 0.00%
Other Borrowings 5,498 103 7.49% 133 3 8.06%
Federal Funds Purchased 111 2 7.21% 8,716 124 5.67%
---------- ---------- ---------- ----------
Total interest bearing liabilities 1,384,560 18,575 5.37% 1,059,393 14,864 5.61%
---------- ---------- ---------- ----------
Non interest bearing liabilities
Demand Deposits 75,510 72,710
Other Liabilities 86,875 101,816
---------- ----------
Total non interest bearing liabilities 162,385 174,526
Stockholders equity 126,321 102,026
---------- ----------
Total liabilities and stockholder's equity $1,673,266 $1,335,945
========== ==========
Net Interest income / net interest spread $ 13,417 2.88% $ 12,083 3.34%
========== -==== ========== -====
Margin
Interest income / interest earning assets 8.37% 9.07%
Interest expense / interest earning assets 4.86% 5.00%
----- -----
Net interest margin 3.51% 4.07%
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25
PROVISION FOR CREDIT LOSSES
The Company's provision for credit losses decreased to $900 thousand for the
three months ended March 31, 1999 from $2.3 million for the same period in 1998.
Net loan charge-offs during the first three months of 1998 amounted to $102
thousand compared to $825 thousand for the same period in 1998. The allowance
for credit losses increased from $12.8 million at December 31, 1998 to $13.6
million at March 31, 1999. The ratio of the allowance for credit losses to total
loans was 1.21 percent at March 31, 1999 increasing from approximately 1.08
percent at December 31, 1998. This increase in the ratio is due primarily to the
decrease in loans during the first quarter of 1999 coupled with an increase in
the allowance.
NON-INTEREST INCOME
Non-interest income increased to $4.3 million for the three months ended March
31, 1999 from $4.0 million for the same period in 1998, a 7.5 percent increase.
Structuring and syndication fees increased by $288 thousand. This was offset by
a decrease in trade finance fees and commissions of $405 thousand. Customer
service fees increased by $38 thousand due to HARMONEY(R), the Company's
proprietary internet based cash management services, and also account analysis
fees. In addition, non-interest income included a gain on sale of loans of $188
thousand due largely to the sale of the residential mortgage portfolio.
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,
----------------------------------
1998 to 1999
1998 Percent Change 1999
------ -------------- ------
Trade finance fees and commissions $3,395 -11.9% $2,990
Structuring and syndication fees 289 99.7% 577
Customer service fees 145 26.2% 183
Gain on sale of loans -- 100.0% 188
Other 136 156.6% 349
------ ----- ------
Total non-interest income $3,965 8.1% $4,287
====== ===== ======
OPERATING EXPENSES
Operating expenses increased to $7.2 million for the three months ended March
31, 1999 from $5.9 million for the same period in 1998, a 22.0 percent increase.
The majority of this increase was in other expenses which increased to $2.9
million for the three months ended March 31, 1999 from $1.9 million for the same
period in 1998. This increase was largely due to increased legal expenses. The
increase in legal expenses was the result of an increase in the number of
litigation cases in the ordinary course of business during the period. Also
included in Other operating expenses is a write off of $187 thousand taken on an
investment in a foreign bank stock classified as available for sale which was
intervened by the foreign government. The Company's efficiency ratio increased
to 40.5 percent for the three month period ended March 31, 1999 from 37.0
percent for the same period in 1998.
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26
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,
------------------------------------
1998 to 1999
1998 Percent Change 1999
------ -------------- --------
Employee compensation and benefits $2,995 11.7% $3,344
Occupancy and equipment 1,070 -10.3% 960
Other operating expenses 1,871 53.1% 2,864
------ ----- ------
Total operating expenses $5,936 20.8% $7,168
====== ===== ======
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 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.
The Company has provided compliance certification questionnaires to each of its
customers in order to determine their ability to be Year 2000 compliant. The
Company has amended its Credit Policy Manual to require the Company to terminate
business with a customer unless the Company is assured that such customer is or
will be Year 2000 compliant in the near future, except in such instances where
the customer's failure to be Year 2000 compliant will not, either individually
or in the aggregate, have a material adverse effect on the Company. If a
customer does not respond to the questionnaire or if its response does not
provide the Company with adequate assurance that such customer's failure to be
Year 2000 compliant would not have a material adverse effect on the Company, the
Company will not renew its current relationship with that customer. Since
approximately 70 percent of the loan portfolio matures within 365 days, the
majority of the portfolio would be subject to the amended credit policy. There
can be no assurance that the parties mentioned above will become Year 2000
compliant on a timely basis. The Company believes that the process of modifying
all mission critical applications of the Company will continue as planned and
expects to complete all of the testing, changes and verifications by June 30,
1999 as dictated by FFIEC guidelines.
Research to verify compatibility of counter parties, payment systems, vendors
and others has been conducted. These systems were divided into critical and
non-critical categories. The Company expects to have all testing, changes and
verification on the critical systems completed by June 30, 1999 as dictated by
FFIEC guidelines. The non-critical systems will continue to be reviewed and
tested and management will determine if changes or replacement is deemed
necessary.
Concurrently, the Company is in the process of upgrading its computers systems
to accommodate the growth of the past two years. These new systems when
installed are Year 2000 compliant. The Company believes the total costs relating
exclusively to Year 2000 compliance will be approximately $250,000, which amount
is not material to the Company's financial position or results of operations. To
date, the Company has incurred approximately $100,000
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of these estimated expenses. 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 the Company's best estimates. However, there can be no assurance
that these estimates will be achieved and actual results could differ
EXHIBIT 1
HAMILTON BANCORP INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER SHARE
(Dollars in thousands, except per share data)
Three Months Ended March 31,
----------------------------
1999 1998
----------- -----------
Basic
Weighted average number of common shares outstanding 10,056,111 9,844,915
Net income $ 6,069 $ 4,905
Basic earnings $ 0.60 $ 0.50
Diluted:
Weighted average number of common shares outstanding 10,056,111 9,844,915
Common equivalent shares outstanding - options 227,124 363,850
----------- -----------
Total common and common equivalent shares outstanding 10,283,235 10,208,765
Net income $ 6,069 $ 4,905
Diluted earnings per share $ 0.59 $ 0.48
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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 and
in Registrant's Form 10-K for the period ending December 31, 1998,
US$3,600,000 of the proceeds remained temporarily invested in short term
investments at that date. On March 8, 1999 the entire US$3,600,000
remaining balance was invested in equity stock of Hamilton Bank, N.A.
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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: May 14, 1999 Hamilton Bancorp, Inc.
/s/ Eduardo A. Masferrer
-----------------------------------------------
Eduardo A. Masferrer,
Chairman, President and Chief Executive Officer
/s/ John M. R. Jacobs
-----------------------------------------------
John M. R. Jacobs,
Senior Vice President - Finance and Principal
Financial and Chief Accounting Officer
28