MATERIAL LOSS REVIEW 

OF 

HAMILTON BANK, NA 

OIG-03-032 December 17, 2002 

Office of Inspector General

******* 

The Department of the Treasury 
Contents 

Audit Report................................................................................................... 3 

 Results in Brief...............................................................................................4 

 

 Background ................................................................................................. 7 

Findings and Recommendations .....................................................................11 

 Finding 1 Causes of Hamilton’s Closure......................................................11 

 

 Finding 2 OCC’s Supervision of Hamilton....................................................24 

 

 Finding 3 Other Matters............................................................................36 

 

Recommendations.............................................................................................40 

Appendices

 Appendix 1: Objectives, Scope, and Methodology .......................................43 

 Appendix 2: Loan Concentrations in Foreign Markets ...................................46 

 Appendix 3: Chronology of Significant Events .............................................47 

 Appendix 4: OCC’s Lessons Learned Review Conclusions.............................57 

 Appendix 5: Management Comments.........................................................61 

 Appendix 6: Major Contributors To This Report...........................................63 

 Appendix 7: Report Distribution.................................................................64 

Abbreviations

ALLL Allowance for Loan and Lease Losses 

 ATRR Allocated Transfer Risk Reserve 

 BIF Bank Insurance Fund 

 BSA Bank Secrecy Act 

 C&D Cease and Desist 

 CEO Chief Executive Officer 

 CMP Civil Money Penalty 

 CRP Capital Restoration Plan 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 1 
Contents 

 DOF Division of Finance 

 DOS Division of Supervision 

DRR Division of Resolutions and Receiverships 

 EIC Examiner-in-Charge 

 FDIA Federal Deposit Insurance Act 

 FDIC Federal Deposit Insurance Corporation 

 FIRREA Financial Institutions Reform, Recovery, and Enforcement Act 

 IPO Initial Public Offering 

 LLR Lessons Learned Review 

OCC Office of the Comptroller of the Currency

OECD Organization for Economic Cooperation and Development 

 OIG Office of Inspector General 

 OOI Order of Investigations 

 PBSC Problem Bank Subcommittee 

 PCA Prompt Corrective Action 

 ROE Report of Examination 

 SEC Securities and Exchange Commission 

 SMS Supervisory Monitoring System 

 SSN Safety and Soundness Notice 

 SSP Safety and Soundness Plan 

 TPS Trust Preferred Stock 

 UBPR Uniform Bank Performance Report 

 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 2 
OIG Audit 

Report

The Department of the Treasury 

Office of Inspector General 

 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 3 

 December 17, 2002 

 John D. Hawke, Jr. 

 Comptroller 

 Comptroller of the Currency 

 

As mandated under section 38(k) of the Federal Deposit Insurance 

Act (FDIA), we reviewed the closure of Hamilton Bank, N.A. 

(Hamilton) of Miami, Florida. On January 11, 2002, the Office of 

the Comptroller of the Currency (OCC) closed Hamilton after 

finding that the bank was undercapitalized and suffered from 

deteriorating asset quality, poor earnings, a high level of 

non-performing loans, and sharply declining capital levels. As of 

March 31, 2002, the Federal Deposit Insurance Corporation (FDIC) 

estimated that Hamilton’s closure would cost the Bank Insurance 

Fund (BIF) between $350 and $500 million. As of June 30, 2002, 

FDIC adjusted the estimated cost of Hamilton’s closure to between 

$175 and $225 million, taking into account the recovery of 

international loans and asset sales. 

An FDIA-mandated material loss review requires us to: (1) ascertain 

why the institution’s problems resulted in a material loss to the 

insurance fund; (2) assess the regulator’s supervision of the 

institution and (3) where applicable, recommend how such losses 

might be avoided in the future. We conducted fieldwork at OCC 

Headquarters in Washington, D.C.; the OCC District Office in 

Atlanta, Georgia; the FDIC Regional Office in Atlanta, Georgia; the 

OCC Field Office in Miami, Florida; the OCC Ombudsman Office in 

Houston, Texas; the FDIC Division of Supervision (DOS) in 

Plantation, Florida; and the FDIC Division of Resolutions and 

Receiverships (DRR) and Division of Finance (DOF) in Dallas, Texas. 
 

We obtained information from the Federal Reserve Board Office of 

Inspector General in Washington, D.C., regarding Hamilton’s 

holding company. We reviewed the supervisory files and 

interviewed key supervisory officials, such as examiners and others 

involved in regulatory enforcement matters. We also interviewed 

staff from the Securities and Exchange Commission (SEC). We did 

not review the independent public accountants’ workpapers 

because the workpapers were under review by another agency. A 

detailed discussion of the review objectives, scope, and 

methodology is provided in Appendix 1. 

During our review, Federal regulators and officials were 

investigating potential fraud activities at Hamilton. Until these 

investigations are completed, it is difficult to fully assess OCC’s 

supervision of Hamilton and all of the underlying causes that led to 

its closure. 

Results in Brief

Hamilton was initially chartered as Alliance National Bank (Alliance) 

on February 7, 1983. In 1988, a group of investors, which 

included Hamilton’s Chairman of the Board (Chairman)/Chief 

Executive Officer (CEO), purchased through a holding company the 

failing Alliance, changing its name to Hamilton. Hamilton operated 

nine FDIC-insured branches, eight in Florida and one in San Juan, 

Puerto Rico. At the time of Hamilton’s closing in January 2002, 

Hamilton had $1.3 billion in recorded assets. 

Hamilton’s initial core business was trade finance in emerging 

markets in the Caribbean Basin and in Central and Latin America. 

During the mid-1990s, senior management saw the potential for 

rapid growth and high earnings. To fund planned growth, the 

bank’s parent holding company issued an initial public offering 

(IPO) in 1997. After the IPO, the holding company was required to 

make periodic public disclosures of financial results as required by 

SEC for publicly traded companies. To satisfy the demands of its 

shareholders, the bank was under pressure to show strong 

earnings. The IPO and resulting pressures led to a change in the 

bank’s mission and credit philosophy for which the bank did not 

have the supporting expertise or infrastructure. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 4 
 

The bank grew significantly over the years from $22 million in 

assets in 1988 to $1.7 billion in 2000. The greatest asset growth 

occurred between 1996 and 1998, from $755 million to 

$1.7 billion. 

Causes of Hamilton’s Closure 

Hamilton’s closure in January 2002 occurred after the OCC found 

that Hamilton was undercapitalized and suffered from deteriorating 

asset quality, poor earnings, a high level of non-performing loans, 

and sharply declining capital levels. The board of directors (board) 

and management failed to adequately respond to OCC’s 

supervisory and enforcement actions to rehabilitate the bank. 

While the immediate cause of Hamilton’s closure was due to

unsafe and unsound practices, the root causes of the bank’s 

closure can be attributed to the following: (1) aggressive growth 

and asset concentrations in foreign markets; (2) increased credit 

risk due to weak underwriting; (3) inadequate risk management

systems and controls; and (4) an ineffective board and 

nonresponsive management. 

OCC’s Supervision of Hamilton

OCC’s on-site examinations and resulting enforcement actions 

could have been more forceful between 1992 and 1997. OCC did 

not fully identify or address the bank’s management weaknesses or 

unsafe lending practices until the bank had already established a 

base of problem loans. OCC’s 1998 examination identified 

significant accounting issues but OCC did not follow-up on these 

matters until 10 months later. In addition, the OCC issued a Safety 

and Soundness Notice (SSN) following the 1998 examination. The 

OCC did not adhere to its policies regarding the follow-up 

procedures to determine compliance with the notice. 

From September 1999 to the January 2002 closing, we concluded 

that OCC’s supervision and enforcement actions of Hamilton were 

generally adequate, but by then it was too late given the issues 

identified in the earlier years, including the buildup of problem loans 

and a well-established pattern of nonresponsiveness by 

management. If these management and lending problems had been 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 5 
 

fully addressed sooner, OCC’s ratings of Hamilton may have been 

different and may have resulted in earlier, more forceful supervision 

and enforcement actions. 

Recommendations

OCC completed an internal quality assurance review, (Lessons 

Learned Review) of Hamilton prior to this report. We believe many 

of the review‘s recommendations for improvement address most of 

our findings. However, our report contains four recommendations 

aimed at enhancing the supervisory and examination process. 

OCC Response and Office of Inspector General (OIG) Comments 

In its December 17, 2002, written response to the OIG’s draft 

report, OCC concurred with the reported findings and agreed to 

implement the recommendations. Over the next few weeks, OCC 

plans to formulate action plans detailing the steps it will take to

implement the recommendations. The actions will be formally 

reported and monitored through the Department’s Joint Audit 

Management Enterprise System. 

We believe OCC’s planned actions are responsive to the intent of 

the recommendations. The OIG will also continue to monitor 

OCC’s progress in addressing the reported findings and 

recommendations. The full text of OCC’s response is included in 

Appendix 5. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 6 
 

 

Background

The OCC fulfills its supervisory mission to promote and ensure the 

safety and soundness of the national banking system principally

through its program of continual examination. Supervision involves 

on-site examinations that result in a Report of Examination (ROE) 

and monitoring and following up on bank problems. In large banks, 

examination activity can occur for much of the 12-month 

supervisory cycle. In smaller national bank affiliates and 

community banks, most examination activities take place during 

intervals of 12- or 18-month supervisory cycles. To assist 

monitoring, and in the planning and examination, examiners use 

information collected from the (1) Uniform Bank Performance 

Report (UBPR)1

 which highlights rapid changes in major categories 

during the previous quarter and provides annual comparisons, and 

(2) the Consolidated Reports of Condition and Income, also known 

as call reports.2

 

The OCC, like other bank regulatory agencies, uses the Uniform 

Financial Institutions Rating System, commonly called the CAMELS 

ratings.3

 The CAMELS rating system provides a general framework 

for assimilating and evaluating all significant financial, operational, 

and compliance factors inherent in a bank. It enables the regulator 

1 The Uniform Bank Performance Report is an analytical tool created for bank supervisory, examination,

and management purposes. It shows the impact of management decisions and economic conditions on 

a bank’s performance and balance sheet composition. The performance and composition data can be 

used in evaluating the adequacy of earnings, liquidity, capital, asset and liability management, and 

growth management. The source of the bank’s financial data contained in the UBPR is the call report

filed quarterly by each insured bank. 

2

The FDIC collects, corrects, updates and stores the call report submitted by banks on a quarterly basis. 

The call report collects basic financial data from commercial banks in the form of a balance sheet, an

income statement, and supporting schedules. The Report of Condition schedules provide details on

asset, liability, and capital accounts. The Report of Income schedules provide details on income and 

expenses. The call report is a primary source of financial data used for the supervision and regulation of

banks, and is used as an editing benchmark for many other reports. 

3

 Financial institution regulators use the Uniform Financial Institutions Rating System to evaluate an 

institution’s performance. CAMELS is an acronym for the performance rating components: Capital 

adequacy, Asset quality, Management administration, Earnings, Liquidity, and Sensitivity to market risk. 

The Sensitivity component was added effective January 1997. Numerical values range from 1 to 5, 

with 1 being the highest rating and 5 representing the worst rated banks. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 7 
 

 

to assign each banking organization individual CAMELS component 

ratings and an overall composite rating that indicates the 

institution’s overall condition. 

Hamilton was initially chartered as Alliance on February 7, 1983. 

In 1988, a group of investors, which included Hamilton’s 

Chairman/CEO, purchased through a holding company4 the failing 

Alliance. Its name was changed to Hamilton on August 19, 1988. 

Hamilton operated nine FDIC-insured branches, eight in Florida and 

one in San Juan, Puerto Rico. 

The bank’s initial core business was trade finance5

 in emerging 

markets6 in the Caribbean Basin, and in Central and Latin America. 

Historically, Hamilton’s trade finance was low risk and focused in 

fee-based services. Trade finance was considered low risk due, in 

part, to the importance that countries assigned to maintaining 

access to trade credits. In a currency crisis, countries traditionally 

designated their trade liabilities for repayment before most other 

types of credits. According to 2000 ROE, during the mid-1990s, 

Hamilton’s senior management saw the potential for rapid growth 

and high earnings. To fund planned growth, the bank’s parent 

holding company issued an IPO in 1997.7

 To satisfy the demands 

of its shareholders, the bank was under pressure to show strong 

earnings. This resulted in the need to expand the asset base to 

generate new sources of revenue. The IPO and resulting pressures 

led to a change in the bank’s mission and credit philosophy, for 

4

 The holding company was Southern Bancorp (later renamed Hamilton Bancorp), which was regulated 

by the Federal Reserve Board. 

5

 Trade finance consists of providing financial services related to the importation and exportation of

goods. These services may include activities such as making loans during the pre-export period, issuing 

letters of credit, discounting checks or other financial instruments, and offering fee-based services such

as providing credit or country information on purchasers of exported goods. Most trade financing 

involves short-term transactions of less than a year. 

6

 Emerging markets are generally considered to be less developed countries that are not members of the 

Organization for Economic Cooperation and Development (OECD) or that have non-investment grade 

sovereign debt ratings. OECD primarily consists of European countries, Turkey, the United States, 

Canada, Japan, Australia, and New Zealand. 

7

 After the IPO, the holding company was required to make periodic public disclosures of financial 

results as required by SEC for publicly traded companies. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 8 
 

 

which the bank did not have the supporting expertise or 

infrastructure. 

While the bank did not formally develop a new strategy, it became 

much more aggressive in its risk selection. It concentrated on 

what it determined to be underserved markets, such as Panama, 

El Salvador, and Guatemala. The underserved countries had 

economies that were much less developed. In addition to lending 

for trade transactions, the bank began direct lending to marginally 

capitalized companies for working capital, and according to an OCC 

internal memorandum, in some cases, for “apparent venture 

capital.” The bank often lent to the buyers, sellers, and 

intermediaries in trade transactions. 

The bank also increased its lending to correspondent banks8

 in 

those countries. Very often, these correspondent banks also lent 

to Hamilton’s customers. Not only did Hamilton create large 

concentrations9

 in these emerging markets, it also greatly increased 

concentration risk by lending to many of the parties taking part in 

the trade transactions. A large portion of the bank’s domestic 

portfolio of loans was also considered as a risk concentration due 

to its connection with the bank’s international lending. The loans 

were connected because many of the domestic borrowers were 

dependent on the economies in which the bank’s international 

borrowers were located. The bank also expanded into areas of the 

world where it had no previous experience, such as Russia. 

Additionally, the bank expanded its foreign correspondent banking 

relationship from facilitating trade finance to more risky wire and 

8

 Correspondent banking is an arrangement under which one bank provides payment and other services 

to another bank. 

9

A concentration is a significantly large volume of economically-related assets that an institution has 

advanced or committed to one person, entity, or affiliated group. These assets may in the aggregate 

present a substantial risk to the safety and soundness of the institution. A concentration schedule may 

be included in the OCC Report of Examination. As a general rule, concentrations are listed by category 

according to their aggregate total and are reflected as a percentage of Tier 1 Capital plus Allowance for 

Loan and Lease Losses (ALLL). ALLL is a valuation reserve established and maintained by charges 

against a bank’s operating income. As a valuation reserve, it is an estimate of uncollectible amounts 

that is used to reduce the book value of loans and leases to the amount that is expected to be 

collected. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 9 
 

 

“pouch”10 activities. According to the 2000 ROE and OCC 

supervisory memorandum, pouch activity presents a significant 

potential risk for money laundering schemes, which, in turn, could 

subject a bank to additional risks, such as monetary losses, 

criminal prosecution, civil lawsuits, and reputation damage. 

The bank grew significantly over the years, from $22 million in 

assets in 1988 to $1.7 billion in 2000. The greatest asset growth 

occurred between 1996 and 1998, when the asset base expanded 

from $755 million to $1.7 billion, an increase of 125 percent. At 

the time of its closing in January 2002, Hamilton had $1.3 billion 

in assets. According to an OCC internal supervisory memorandum, 

the significant growth in just 2 years increased the potential for 

additional adversely classified assets.11 With the increase in asset 

size came a commensurate increase in adversely classified assets. 

For example, from the 1996 to the 1997 examinations, adversely 

classified assets increased approximately 139 percent. Between 

the 1997 and 1998 examinations, adversely classified assets 

increased approximately 98 percent. 

Hamilton’s country risk12 exposure at the end of 2000 placed the 

bank in the top 10 financial institutions nationally both in terms of 

dollar volume of exposure and as a percentage of capital. Much of 

this exposure was highly concentrated in countries suffering 

economic instability and in emerging markets. 

10 Pouch activity refers to the practice of receiving pouches from various couriers containing deposits 

from bank customers outside the United States. 

11 Substandard, doubtful, and loss loans are collectively referred to as “adversely classified assets.” 

“Substandard” loans have one or more well defined weaknesses that jeopardize full collection of that 

loan, and have a high probability of payment default. “Doubtful” loans have all weaknesses inherent in

those classified as substandard with the added characteristic that the weaknesses make collection or

liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable 

and improbable. “Loss” loans are considered uncollectible and of such little value that their continuance 

as bank assets is not warranted. Any recovery is likely to occur only after lengthy recovery efforts such 

as litigation. 

 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 10 

12 Country risk is the risk that economic, social, and political conditions and events in foreign countries 

will adversely affect an institution’s financial interests. Those effects are not limited to the impact on 

borrowers in that country, but also include the possibility of expropriation of assets, government 

repudiation of debt, exchange controls that limit the funds leaving a country, and fluctuations in the 

value of currency. 
 

 

Hamilton was closed with $63 million in Tier 1 Capital,13

representing 4.44 percent of total assets, and was not insolvent or 

“critically undercapitalized,” as OCC acted to prevent further losses 

to the BIF. OCC appointed FDIC receiver on January 11, 2002, 

after OCC determined that the bank operated in an unsafe and 

unsound manner.

As of March 31, 2002, FDIC initially estimated Hamilton’s closure 

would cost the BIF between $350 and $500 million. However, as 

of March 31, 2002, the FDIC lowered the estimated cost of 

Hamilton’s closure to $175 to $225 million by factoring in the 

FDIC’s recovery of international loans and asset sales.

Findings and Recommendations

Finding 1 Causes of Hamilton’s Closure

Hamilton’s rapid growth coupled with unsafe and unsound banking 

practices were the primary contributing factors that led to its 

closure. Hamilton’s concentrated growth in emerging markets in 

the Caribbean Basin and in Central and Latin America and its 

change in business strategy from primarily trade financing to 

commercial lending after the holding company’s IPO in 1997, 

occurred without adequate fundamental management oversight, 

systems and controls. Economic instability and the bank’s poor 

underwriting practices in these emerging markets increased 

Hamilton’s credit risk and eventual losses. Further, the board and 

management failed to adequately respond to OCC’s supervisory 

and enforcement actions to rehabilitate the bank. 

13 Tier 1 Capital consists of common stockholders equity, noncumulative perpetual preferred stock and 

related surplus and minority interests in equity accounts of consolidated subsidiaries. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 11 
 

By 2001, Hamilton’s capital levels were deficient given its poor 

asset quality14 and earnings, as well as the high volume of 

non-performing loans. Because of the loan and operating losses, 

Hamilton depleted approximately 41 percent of its Tier 1 Capital 

between September 30, 2000, and September 30, 2001. 

Capital Infusions Provided Funds for Hamilton’s Growth 

When the holding company formed the new institution, it inherited 

the numerous problems facing the former failing bank. Despite 

these problems, the holding company was able to generate capital 

funds from both internal and external sources to fund Hamilton’s 

growth. The following table shows Hamilton’s asset growth rates 

each year for the period 1991 to 2000. 

Table 1: Asset Growth Rates 

12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 

49.77 54.12 29.16 45.83 34.36 22.86 77.46 25.45 1.00 3.07 

Source: Uniform Bank Performance Reports 

In 1994, a private offering of $4.75 million in non-voting, 

non-cumulative, perpetual preferred stock was issued to the

holding company shareholders. This additional capital infusion 

provided the support to enable Hamilton to expand its asset base 

by approximately 46 percent during that year. Management 

anticipated continuing this growing trend as evidenced by the 1995 

board-approved capital plan, which addressed the major sources of 

capital needed to effectively manage growth. Based on this plan, 

management projected assets to increase to $1.3 billion by 1999. 

Between 1994 and the early part of 1997, the bank continued to 

expand; retained earnings primarily funded the growth. 

In March 1997, the holding company completed an IPO raising a 

total of $38 million of which $30 million was injected into 

 

14 Asset Quality is the quantity of existing and potential credit risk assigned by OCC associated with a 

bank’s loan and investment portfolios, other real estate owned, and other assets, as well as off-balance 

sheet transactions. The evaluation of asset quality considers the adequacy of the ALLL and weighs the 

exposure to counter-party, issuer, or borrower default under actual or implied contractual agreements. 

All other risks that may affect the value or marketability of an institution's assets, including, but not 

limited to, operating, market, reputation, strategic, or compliance risks, are also considered. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 12 
 

 

Hamilton. The express purpose of the stock offering was to 

provide funds to support Hamilton’s asset growth. The other $8 

million in funds generated by the offering remained at the holding 

company to support its operations. The funds were available, if 

needed, to provide for additional expansion of the bank. The 1997 

OCC examination report indicated that management developed a 

comprehensive capital plan that showed moderate growth for the 

institution at approximately 15 percent per year. The increase in 

assets during the first six months of 1997 was approximately 38 

percent; assets increased by 52 percent for the nine month period 

ending September 30, 1997. Hamilton’s December 31, 1997, 

UBPR reflected an asset growth rate of 77 percent during 1997. 

OCC’s 1997 examination rated the institution a composite “1” with 

ratings of “1” for each CAMELS component. 

As a result of an off-site review of the institution, OCC notified the 

bank on March 3, 1998, of its downgrade to a CAMELS composite 

“2” due to its rapid growth, declining capital ratios, and substantial 

concentrations of risk in emerging markets. During OCC’s next

on-site examination of Hamilton, which began in June 1998 and 

was completed in November 1998, the examiners determined that 

the capital base was not sufficient to support Hamilton’s level of 

growth. This report of examination noted that the asset size of the 

institution more than doubled since the IPO. The OCC lowered the 

capital component as well as the overall CAMELS composite rating 

to “3.” 

The holding company again demonstrated its ability to raise capital 

in the financial markets. A Trust Preferred Stock Offering15 was

issued in 1998 and raised approximately $12.6 million. As a result 

of this transaction, an additional $15 million was injected into the 

bank, and in 1999 the holding company provided another infusion 

of $8.6 million. These injections enabled the capital base to remain 

15 Trust Preferred Stock (TPS) is cumulative preferred stock issued by a business trust that is wholly 

owned by a bank holding company. It is a hybrid instrument that possesses characteristics typically 

associated with debt obligations. TPS can only be issued by holding companies; banks cannot issue 

TPS. In exchange for the stock that the trust sells to investors, the holding company issues a 

subordinated debenture to the trust in the same amount and with the same terms as the preferred 

stock. The company’s payments on the debenture are used by the trust to pay dividends to the 

investors who purchased the preferred stock. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 13 
 

at a level where the OCC accorded a component rating of “3” for 

capital adequacy; however, the overall CAMELS composite was 

downgraded to a “4” as a result of the 1999 examination which 

began in August and was completed in December. In an attempt 

to abate the dissolution of capital due to excessive loan losses, the 

holding company injected another $5 million as of 

September 30, 2000. However, the capital injections were not

sufficient to offset the deterioration in the bank’s asset structure. 

The capital adequacy rating was lowered once again by OCC, this 

time to a “4” as a result of OCC’s 2000 examination, which began 

in August 2000 and was completed in February 2001. Chart 1 

shows the relationship between the equity growth and the 

corresponding increase in assets. 

Chart 1: Equity Capital to Total Assets (in millions) 

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1992 1993 1994 1995 1996 1997 1998 1999 2000

Equity Capital

Total Assets

 Source: OIG Analysis from FDIC’s Institution Directory Internet Website 

Even though the holding company was able to raise equity capital, 

it was never enough to provide sufficient capital support 

commensurate with its increasing growth and credit risk in its 

emerging markets loan portfolio. 

 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 14 
 

Aggressive Growth and Asset Concentrations in Foreign Markets 

Hamilton grew its assets throughout the 1990s. Total assets 

increased from $157 million to $1.3 billion in just six years—from 

the beginning of 1992 to the end of 1997. Growth rates during 

that time ranged from a low of 23 percent in 1996 to a high of 77 

percent in 1997, the year of the bank’s IPO. The rapid expansion 

of the loan portfolio in relation to the total assets is indicated in 

Chart 2. 

 Chart 2: Comparison of Hamilton’s Gross Loans to Total Assets (in millions) 

0

2 0 0

4 0 0

6 0 0

8 0 0

1, 0 0 0

1, 2 0 0

1, 4 0 0

1, 6 0 0

1, 8 0 0

19 9 1 19 9 2 19 9 3 19 9 4 19 9 5 19 9 6 19 9 7 19 9 8 19 9 9 2 0 0 0

Gross Loans

Tot al Asset s

 Source: Hamilton’s Uniform Bank Performance Reports

Asset growth rates were consistently high through 1998. Much of 

Hamilton’s exposure was concentrated in countries suffering 

economic instability and also in emerging markets. Deterioration in 

the economies of Latin American, Central America, and Caribbean 

countries adversely impacted Hamilton. For example, in 1998 

Ecuador suffered a deep recession, a large fiscal deficit, inflation, 

high unemployment and widespread bank insolvency. The high-risk 

profile and aggressive growth strategy pursued by Hamilton began 

to have an impact on the bank’s profits in 1998. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 15 
 

Beginning in 1998, Hamilton’s capital adequacy appeared strained 

by its on-going rapid growth, high levels of exposure to volatile 

emerging markets, and high concentrations of credit in emerging 

markets. According to the OCC, concentrations of credit in some 

emerging market countries were excessive in relation to the bank’s 

capital structure. These concentrations as a percent of Hamilton’s 

capital for the years 1997 through 2001 are shown in Appendix 2. 

The concentrations were a heightened concern to the OCC due to 

the economic conditions in many of the countries. Hamilton’s risk 

in emerging markets, as a percent of capital, was among the 

highest of any U. S. chartered financial institution. As noted in the 

1998 examination report and in the Lessons Learned Review (LLR), 

most banks were reducing their risk to emerging markets in light of 

market conditions at that time. According to our interviews, there 

were several Miami banks with high concentrations. OCC told 

them to reduce their concentrations, but Hamilton was the only

one that did not reduce its concentration at the time. As of OCC’s 

1998 examination, Hamilton had not reduced the bank’s risk. OCC 

recommended that management reduce the concentrations by 

providing more capital and/or by better diversifying the bank’s

assets. Hamilton began action to reduce concentrations by 1999. 

Reductions in concentrations from 1999 compared to 2001 totaled 

$266 million, which represented approximately a 38 percent

decrease. 

Increased Credit Risk Due to Weak Underwriting Practices 

As early as 1991, OCC examiners reported deficiencies with 

Hamilton’s underwriting practices and continued to report these 

weaknesses in subsequent examinations. Examiners reported, for 

example, that Hamilton lacked sufficient credit analysis, had credit 

administration weaknesses, and maintained inadequate file 

documentation. 

In 1992, OCC reported that adherence to sound underwriting 

standards needed to be monitored by Hamilton to avoid loan quality 

problems. In 1995, the OCC reported that there were repeat 

instances of missing information in the credit files. The most 

prevalent deficiencies reported were missing copies of loan reviews 

and credit analyses/annual reviews. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 16 
 

 

Hamilton’s weak credit administration led to the bank 

continuously having high numbers of poor quality loans and 

increasing losses. The bank had a record of making loans that 

quickly migrated to a “loss” category. Hamilton also had poor 

management, workout, and disposition strategies for chronic 

problem loans, according to an OCC internal memorandum. 

During 1998, OCC noted that concentrations of credit to emerging 

markets, in relation to Hamilton’s capital base, were significant and 

the credit risk was increasing in these loans. Latin America and 

other emerging markets had been exhibiting a greater degree of 

instability and turmoil as a result of the Asian and Russian 

economic problems.16

OCC examiners found that credit risk was not properly graded by 

Hamilton, and downgrades were not timely. In this regard, the 

most significant issues appeared in connection with a series of 

loans made to customers in Ecuador, primarily during the summer 

of 1999. In 1998, Ecuador’s economy faltered and several 

Ecuadorian banks were intervened or taken over by the 

government. At that time Hamilton had one of the largest 

exposures to Ecuador of any national bank in the country. 

In 2000, past due loans significantly increased and Hamilton loan 

officers failed to rate the credit risks of loans in a timely manner. 

Unlike the 1999 examination, where a large proportion of classified 

assets consisted of Ecuadorian credits subject to transfer risk as 

well as credit risk, the composition of problem assets noted by 

OCC in its 2000 examination was much more broadly based and 

was excessive from a pure credit risk perspective. 

As shown in Table 2, adversely classified assets remained at a 

modest level compared to capital until 1999 when the adversely 

classified assets increased to 84 percent of capital and then to 120 

percent in 2000 and to 187 percent in 2001. The 1999 ROE

noted that the largest portion of adversely classified assets was 

comprised of Ecuadorian exposures subject to transfer risk and/or 

credit risk. In 2000, the composition of adversely classified assets 

16 In the fall of 1998, economic problems in Asia and Russia appeared to be spreading to Latin America 

(also known as “contagion risk”). 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 17 
 

was much broader-based including domestic credits, and the level 

included excessive risks based on credit considerations, according 

to OCC’s 2000 examination report. The majority of the assets 

adversely classified in OCC’s 2001 ROE were due to credit risk. 

Table 2: OCC Adversely Classified Assets (in thousands) 

Adversely Classified Assets 

Year 

Substandard Doubtful Loss Total 

Percent

of 

Capital 

Total 

*Capital 

1992 $1,948 $23 $8 $1,979 21% $9,425

1993 $2,338 $1,096 $87 $3,521 27% $12,944

1994 $6,230 $447 $453 $7,130 37% $19,362

1995 $4,951 $1,183 $100 $6,234 22% $28,706

1996 $1,979 $2,355 $528 $4,862 12% $41,292

1997 $8,629 $991 $1,996 $11,616 14% $83,987

1998 $13,720 $2,897 $6,349 $22,966 21% $108,879

1999 $56,023 $53,822 $28,922 $138,767 84% $165,562

2000 $137,169 $25,831 $14,660 $177,660 120% $147,824

2001 $138,351 $45,094 $37,041 $220,486 187% $117,896

Source: OCC’s Supervisory Monitoring System 

* Tier 1 Capital Plus ALLL 

Inadequate Risk Management Systems and Controls 

Themes common to all OCC enforcement actions17 taken against 

Hamilton were the absence of adequate risk management systems 

and controls. This was particularly evident in the lending-related 

function. As previously discussed, loan review and underwriting 

had chronic deficiencies throughout Hamilton’s history. For 

example, credit risk was not properly graded and loan officers did 

not timely downgrade their loans. Due to the aforementioned 

deficiencies, Hamilton’s internal grading process created inaccurate 

results. 

 

17 OCC uses a variety of enforcement actions to communicate problems or weaknesses, and to prompt 

or require corrective measures by banks. Enforcement actions fall into two broad categories, informal 

and formal and can include, for example, Commitment Letters, Memorandums of Understanding, 

Temporary Cease and Desist (C&D) Orders, and Safety and Soundness Orders. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 18 
 

Risk management systems vary from institution to institution 

depending on the nature of the business, the complexity of the 

transactions, and the overall asset size and exposures. However, 

all adequate risk management systems should be able to identify, 

measure, monitor, and control the risks. OCC continually reported 

that Hamilton’s written policies and procedures were deficient. 

Additionally, Hamilton’s internal controls were inadequate as 

demonstrated by the repeated criticisms in OCC’s ROEs for errors 

pertaining to books, records, and call reports.

Ineffective Board of Directors and Nonresponsive Management

The decisions and practices of Hamilton’s management and the 

board were, in our opinion, contributing factors to the bank’s 

closure. For example, management and the board disregarded the 

risks associated with the emerging markets and failed to establish 

adequate methods to control those risks. Additionally, 

management and the board ignored or failed to recognize problems, 

losses, and supervisory recommendations including enforcement 

actions when they developed. According to an OCC supervisory 

memorandum, chronically inaccurate call reports demonstrated that 

the board and management either did not know or were attempting 

to conceal the true condition of the bank. 

Despite the serious management deficiencies described above, the 

board did not hold senior management accountable. According to 

OCC examiners and officials, Hamilton’s passive board allowed the 

Chairman/CEO to dominate the bank’s activities. The 

Chairman/CEO had a history of exerting a strong influence on and 

exercising direct supervision over bank operations. 

The bank filed numerous appeals with the OCC Ombudsman’s 

office. During 2000, the bank appealed OCC’s CAMELS composite 

rating of “4” and criticism of Hamilton’s action regarding the 

Ecuadorian loans and investment practices cited in the 1999 

examination report. The bank continued to challenge OCC’s efforts 

to supervise Hamilton by filing additional appeals. For example, on 

June 30, 2000, Hamilton appealed examiner findings regarding the 

restructured Ecuadorian debt for Allocated Transfer Risk Reserve 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 19 
 

(ATRR)18 purposes. According to an OCC supervisory 

memorandum, Hamilton appeared to have attempted to manipulate 

the Ombudsman and the OCC supervisory office by providing them 

with inconsistent information regarding the restructured Ecuadorian 

debt. When the Ombudsman concluded that bank management 

was not truthful in the presentation of its appeals, the Ombudsman 

notified bank management that he would no longer entertain their 

requests for appeal. 

Accounting Adjustments and Asset Write-downs

During the 1999 examination, examiners determined that the 

earnings level was deficient and did not support Hamilton’s 

operations, capital, or allowance levels. According to the 1999 

ROE, prior to this examination, earnings performance was good. 

However, the good earnings performance was attained by not 

providing for an adequate ALLL, ATRR, and by not recognizing 

losses from investment securities purchased in 1998 and 1999. 

During the 1999 examination, OCC identified high risk in the loan 

portfolio that required significant reserves and found that various 

investment securities were purchased and booked above fair value 

at the time of purchase. OCC required adjustments to earnings 

totaling $63 million. These adjustments included: (1) a $24 million 

write-down of investment securities; (2) a $32 million increase to 

the ATRR for the Ecuadorian loans;19 (3) an additional $6 million 

provision to the ALLL; and (4) a $578,000 charge-off of accrued 

interest. As a result, in 1999, OCC downgraded Hamilton from 

“well capitalized” to “adequately capitalized” for purposes of 

 

18 Allocated Transfer Risk Reserve—under the International Lending Supervision Act of 1983, 12 U.S.C. 

§ 3901 et seq., banks must, in certain circumstances, establish an allocated reserve for each asset 

subject to severe transfer risk. Transfer risk, in this context, means the possibility that the borrower 

will be unable to make payments in the appropriate currency because sufficient foreign exchange is not 

available in the home country of the borrower. The implementing regulations require that each affected 

bank charge off or maintain an ATRR for each asset with impaired value due to transfer risk. The ATRR 

is a specific reserve that is created by a charge to current income. The ATRR, which is not counted in

the bank’s capital, is separate from the ALLL and is deducted from gross loans and leases. 

19 The International Country Exposure Review Committee assigned a “value impaired” rating to Ecuador, 

and mandated a 90 percent ATRR for all non-performing (i.e. 30 days or more past due) Ecuadorian 

debts held by U.S. banks. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 20 
 

 

Prompt Corrective Action (PCA).20 The combination of these 

adjustments caused the bank to have operating losses of 

approximately $50 million as of September 30, 1999. 

 

• Investment Securities 

The investment securities adjustments of $24 million were 

necessary after the examiners found during the 1999 

examination that the bank had engaged in unusual 

transactions21 (referred to as Russian exposures in the 1999 

ROE). The Russian exposures are discussed in the

Supervisory section of this report. OCC examiners 

discovered that Hamilton had paid par value for investment 

securities when substantial market information indicated that 

the investments were actually worth much less than par. 

OCC learned that Hamilton had concurrently sold distressed 

assets at par at about the same time, and in some cases, to 

the same parties from which the bank had purchased assets. 

Furthermore, the counterparties in the transactions profited 

at Hamilton’s expense because losses incurred in the assets 

they purchased from Hamilton were less than the losses in 

the assets they sold to Hamilton. According to OCC, in 

many cases, the counterparties had completely written off 

20 PCA is a framework of supervisory actions for insured banks, which are not adequately capitalized. 

These actions become increasingly severe as a bank falls into lower capital categories. The capital 

categories are: Well Capitalized, Adequately Capitalized, Undercapitalized, Significantly 

Undercapitalized, and Critically Undercapitalized (12 USC § 1831o). Actions can be taken under PCA 

for both quantitative and qualitative reasons. There are numerical parameters in the regulations 

governing the specific ratios of capital to total assets that a bank must maintain. The regulations also 

provide other measures by which banking agencies can determine an institution’s compliance that do 

not include the use of ratios. 

21The unusual transactions were considered as an unsafe and unsound banking practice because two 

parties sold assets with imbedded losses to each other without recognizing those losses. For instance, 

Party A sold assets to Party B at an artificially inflated price when the fair value of the assets sold for 

less than that inflated price. Simultaneously, Party B sold other assets to Party A at an artificially 

inflated price, similarly exceeding the fair value of those assets. Ordinarily, the two parties then carry 

the assets on their books at the purposefully inflated purchase price and do not record losses on the

purchase or sale of the assets, even though the losses do exist. The OCC was able to determine 

through information obtained from banking regulators and the bank’s counterparties that those 

counterparties did record losses on their end of the transaction. Thus, Hamilton was the only party, 

which did not record losses in these transactions. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 21 
 

the assets that they purchased. Hamilton management 

denied that the purchases and sales were related. Hamilton 

did not take the write-offs as directed in the 1999 ROE until 

OCC imposed an April 2000 Temporary Cease and Desist 

Order and required the bank to do so. 

Also, in connection with the unusual transactions, OCC 

found that Hamilton prepaid for the investments it purchased 

which further exposed the bank to unnecessary risk and loss 

of income. In addition, Hamilton did not make timely general 

ledger entries, back-dated numerous entries, and booked a 

placement that never existed. The true condition of the 

bank was not accurately reflected and thus OCC required 

management to write down the securities by $24 million. 

• ATRR Provisions 

During the 1999 examination, OCC reviewed Hamilton’s 

credit exposure to several intervened Ecuadorian banks. 

Hamilton took actions, apparently to avoid establishing 

90 percent ATRRs on loans to Ecuadorian banks. Hamilton’s 

credit files indicated that some of its credit exposure to each 

of those banks had defaulted, and Hamilton had sold the 

credit exposure to other Ecuadorian banks. OCC found that 

the bank moved matured or past due Ecuadorian loans into 

accounts receivable to avoid showing the loans as past due 

and concluded the transactions constituted an unsafe and 

unsound practice. Hamilton failed to timely record the 

expense associated with the ATRRs, and as a result 

Hamilton was required by OCC to increase the ATRR for the 

Ecuadorian exposure by $32 million. In addition, in October 

2000, during the on-site examination, the examiners 

discovered a $10 million Ecuadorian exposure that should 

have triggered ATRRs in the first and third quarters of 2000 

as well. According to an OCC internal memorandum, 

Hamilton should have established ATRRs at that time. 

• Allowance for Loan and Lease Losses 

During the 1999 examination, the examiners determined that 

the ALLL was inadequate because of insufficient credit risk 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 22 
 

grading and specific reserves for Watch List credits. 

Additionally, management established an inadequate and 

untimely ALLL provision for Ecuador given the economic 

difficulties Ecuador had been experiencing. During the 

examination, OCC performed an analysis, which required an 

additional $6 million in provisions to bring the ALLL to an 

adequate level. 

Significant Events at the 2001 Examination 

As a result of OCC’s 2001 examination conducted between May 

and November, the bank received a composite CAMELS rating of 

“5” and also component ratings of “5” in the asset quality, 

management, and earnings components. The bank also received a 

rating of “4” in the capital and liquidity components. Major 

deficiencies noted by the examination included: 

• Asset Quality remained poor and had deteriorated; 

• The ALLL was inadequate; 

• Earnings were severely deficient; 

• Capital had been depleted by approximately 30 percent 

since the prior examination; 

• The holding company was no longer a viable source of 

capital; 

• Violation associated with a “golden parachute” payment 

was approved by the board; and 

• The board and management failed to comply with OCC 

enforcement documents and failed to implement many of 

the corrective measures from prior reports of 

examination. 

Management’s unwillingness to recognize problems, patterns of 

resistance, and failure to comply with laws and regulations, or to 

take corrective action, contributed to Hamilton’s losses and were 

significant factors in OCC’s decision to place Hamilton in 

receivership. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 23 
 

Finding 2 OCC’s Supervision of Hamilton 

 

OCC conducted annual examinations of Hamilton Bank from 1991 

until its closure.22 In addition, OCC maintained surveillance of the 

institution through its off-site review process. Following 

Hamilton’s closure, we conducted an independent review of the 

OCC’s supervision as part of the material loss review process. The 

following section outlines the examination history of the bank and 

the results of our review. 

 

Examination History 

From inception of the institution through 1991, Hamilton’s 

management was attempting to improve the loans inherited from 

Alliance. During this time, OCC continued to rate the institution a 

composite “3”, which indicated that the institution was still 

experiencing problems. 

The Early Years (1991-1996)

Even though management was able to rectify the deficiencies from 

the former problem loans, beginning with the 1991 OCC 

examination and continuing through the 1996 examination, other 

symptomatic conditions began to surface. Specific details 

pertaining to the examinations for this period, including the

component and composite ratings and specific examination 

criticisms are detailed in Table 3. Also, see Appendix 3 for a 

detailed chronology of significant events regarding Hamilton. 

 

22 FDIC requested to join OCC in the 2000 examination because of (1) serious concerns with the bank’s 

large concentrations in emerging markets, (2) certain unusual transactions, and (3) management’s 

reluctance to acknowledge problems noted in the August 23, 1999 examination. FDIC participated in 

both the 2000 and 2001 examinations. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 24 
 

Table 3: OCC Safety and Soundness Examination and Enforcement Actions 1991-1996

Date 

Started

CAMELS 

Ratings 

Assets 

In

millions 

Significant Safety and Soundness and Other Issues Enforcement 

Actions 

3/7/91 3/23232 $133 • Loan review function needed to be independent and adequately staffed 

• Ineffective officer loan grading system 

NONE 

1/6/92 2/22312 $157 • Risk management systems were deficient 

• Adherence to sound underwriting standards needed to be monitored 

• Loan administration needed improvement 

• ALLL process was incomplete 

• Country exposure management system was deficient 

NONE 

7/23/92 • Letter sent to Hamilton indicating OCC’s consideration of Civil Money Penalties 

(CMPs) against the bank for violations of law 

10/14/92 • Letter sent to Hamilton waiving the imposition of CMPs providing the board

instituted efforts to ensure non-recurrence of the violations 

1/4/93 2/22312 $243 • Inadequate recordkeeping and internal controls in loan operations 

• Violations of Law: legal lending limits;23 insider transactions; and call reports 

• Material recordkeeping deficiencies, which required refiling of financial statements 

and the Country Exposure Report 

NONE 

2/14/94 2/22212 $314 • Internal problem loan identification system and loan administration needed

improvement 

• Concentrations of credit over 25% of capital are significant and the bank should 

continue to track industry concentrations on an ongoing basis 

NONE 

1/30/95 2/22211 $457 • Inadequate credit files 

• Concentration of credit risk identification, tracking, and monitoring needed

improvement. Risk grading had improved but was not consistently applied 

NONE 

4/15/96 2/21111 $635 • Internal Loan Review did not keep pace with bank growth

• Asset Quality-the bank continued to experience relatively high loan losses 

• Large concentrations in volatile emerging markets 

• Weaknesses in supervision and analysis of correspondent banks 

• ALLL continued to have loan losses well above peer banks 

NONE 

Source: OCC Reports of Examination and OCC Correspondence 

As detailed in the above table, problems involving loan 

underwriting, loan administration, material recordkeeping 

deficiencies, and concentrations of credit materialized in the early 

years. 

OCC examiners repeatedly cited these deficiencies in their ROEs. 

Although management agreed to take corrective actions and 

implement corrective measures, subsequent examinations revealed 

a perpetuation of these deficiencies. Furthermore, even though the 

ROEs continued to criticize these areas in ensuing examinations, no 

sustained corrective measures, informal or formal enforcement 

actions, were implemented during the period of 1991 through 

1996. Various options were available to the OCC, including 

 

23 Legal lending limits establish the maximum loan amount that an institution can extend to one person, 

or to related persons that are financially dependent.

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 25 
 

downgrading the management component or initiating informal or 

formal actions against the institution. 

The 1992 and 1993 ROEs rated the management component a “3” 

while the other components were rated “1” or “2.” The reports 

did not expressly state the reason(s) for the management 

component downgrade. Since the prior year, 1991, and the 

following three years, 1994–1996, reflected management 

component ratings of “2” or better, it is difficult to determine the 

exact cause for the “3” management ratings in 1992 and 1993. 

However, from the information in the reports, we surmise that the 

basis for the downgrade was associated with reported violations of 

laws and regulations.24 The component ratings were not disclosed 

to the board at that time; therefore, it is questionable if the board 

was even aware of the root causes in the management rating 

downgrade since the overall composite rating remained a “2.” 

Also, during this same period, 1991 through 1996, we were told 

and the LLR supports that the OCC’s supervisory structure and 

culture were undergoing a transformation. The demeanor of the

OCC changed and the regulators focused their attention on 

establishing a good relationship with the banks and reducing the 

regulatory burden. It is not clear from the examination files why

stronger action was not taken against Hamilton for repeat findings 

during this period. 

The Later Years (1997-2002)

A pivotal mark for Hamilton was in 1997. Prior to the 

commencement of the 1997 OCC examination, the holding 

company obtained $38 million from an IPO and downstreamed 

$30 million to Hamilton. The additional capital cushion provided 

 

24In 1992, the bank was in violation of the legal investment limit. In 1993, the violations of law 

included Corporate Powers of Association; Investment Security Regulation; Legal Lending Limits; 

Reports to the Comptroller of the Currency; Loans to Executive Officers of Banks including preferential 

treatment and current financial statements; Prohibitions Respecting Loans to Executive Officers and 

Directors of Banks; Rate of Interest Paid to Directors; Other Real Estate Owned; Security Procedures; 

Community Reinvestment Act (CRA) Public Notice; Information Required for Home Loan Applications;

Additional Information Required in the Loan File; Equal Credit Opportunity Act (ECOA) Notice; Retention 

of Prohibited Information; and Regulation O- Reporting Requirements for Credit Secured by Certain Bank 

Stock. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 26 
 

the necessary funds for expansion. According to an OCC internal 

supervisory memorandum, since the holding company was now 

publicly traded, there were additional performance pressures. An 

example of an enhanced performance measure is achieving a high 

return on assets in order to satisfy a return to stockholders. In

order to comply with market expectations and generate sizeable 

profits, Hamilton began branching into other business avenues. It 

ultimately expanded its lending activities to include commercial 

loans both domestically and in Central and South America. 

From the onset of Hamilton Bank, management indicated its 

intention of increasing the institution’s asset size. In 1989, the 

OCC was aware that management planned a rapid expansion of 

services and offices, both locally and in Latin America. The bank’s 

capital plans indicated various target numbers that management 

hoped to attain by specific dates. The June 2, 1997, examination 

listed an asset growth rate from the capital plan of 15 percent a 

year. Information in the ROEs and SMS was limited to asset 

growth listed in dollar amounts covering a broad period rather than 

annual projections. Since asset growth rate percentages compared 

to projected growth objectives were not listed in the earlier reports, 

it is not possible to determine if the bank exceeded its goals. 

However, as noted in Table 1, the 1997 and 1998 asset growth 

rates far exceeded the rate projected in the capital plan. 

Although the ROEs and SMS data elaborate on the growth of the 

institution, the increasing capital levels mitigated many concerns 

that the OCC had with the rapid expansion. We believe that the 

regulators should have taken a more aggressive stance concerning 

the rapid expansion, particularly since many of management’s 

promises affecting correction of previous criticisms in ROEs never 

came to fruition. ` 

 

The 1997 OCC examination rated Hamilton a composite “1” based 

on the increased capitalization from the IPO as well as the OCC’s 

perception that management “implemented good risk management 

processes that have resulted in high quality growth and effective 

supervision over bank operations.” Despite the accolades 

contained in the 1997 ROE, Hamilton was still experiencing large 

concentrations in emerging markets, and weaknesses in loan 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 27 
 

grading, internal loan review, and the methodology for determining 

the adequacy of the ALLL. 

As indicated in Table 1, Hamilton’s asset growth rate exceeded 

77 percent for 1997. As part of the supervisory process, the OCC 

conducted periodic reviews of Hamilton. Monthly monitoring and 

quarterly off-site analysis of the bank’s performance was 

conducted between the 1997 and 1998 examinations. The 

March 1998 off-site review resulted in a downgrade to a composite 

“2” because of the rapid growth, the large concentrations of credit 

and the declining capital ratios. The next OCC on-site examination 

conducted between June and November 1998, specifically 

targeted foreign concentrations and exposures in new emerging 

markets. This examination resulted in a further downgrade to a 

composite “3” to “reflect the bank’s vulnerability to economic

conditions in emerging markets and weaknesses in management’s 

supervision of this risk.” 

In addition to the overall weaknesses identified in the report, the 

bank was engaged in problematic Russian exposures. Information 

concerning specific transactions associated with the Russian 

exposures that occurred during 1998 is detailed in next section of 

this report titled, Delayed Supervisory Actions. At the conclusion 

of the 1998 examination, an SSN was issued to Hamilton. This 

action required the bank to formulate a plan to address and correct 

the deficiencies outlined in the notice. Although an action plan 

was submitted within the required timeframes, compliance with the 

plan was never fully achieved. 

Table 4 below summarizes the results of OCC’s annual safety and 

soundness examinations, enforcement actions, and other 

significant events from the 1997 examination through the 2001 

examination. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 28 
 

Table 4: OCC Safety and Soundness Examination Issues and Enforcement Actions 1997-2001 

Date 

Started

CAMELS 

Ratings 

Assets 

In

millions 

Significant Safety and Soundness and Other Issues Enforcement 

Actions 

6/2/97 1/111111 $841 • Weaknesses in loan grading, internal loan review and ALLL methodology 

• Large concentrations to borrowers exceeded 25% of capital in riskier or new 

markets 

NONE 

2/22/98 2/221111

Off-site 

review 

Not 

available 

• Composite rating changed due to rapid growth, declining capital ratios, and 

substantial concentrations of risk in emerging markets 

NONE 

6/29/98 3/333211 $1,390 • Deficiencies in internal grading, concentrations in emerging markets, and capital 

adequacy 

• Inadequate ALLL 

• Watch List did not accurately reflect the risk in the bank’s loan portfolio 

• Total assets doubled in 18 months 

• Violation of the legal lending limit 

12/14/98 

S/S Notice 

8/23/99 4/344422 $1,674 • Risk identification & monitoring-failed to appropriately grade asset risk on a timely 

 basis and to establish appropriate ALLL 

• Asset Quality deteriorated significantly 

• Country Risk Management remained deficient 

• Violation of legal lending limit and inaccurate call reports 

2/23/00 Notice of 

Charges for Cease 

and Desist Order

issued to bank;

4/25/00 Amended 

notice of Charges & 

Temporary C&D;

9/8/00 Consent 

C&D 

8/28/00 4/445432 $1,704 • Credit risk was high and virtually all credit risk processes remained deficient 

• Loan grading improperly and untimely 

• Credit risk classifications were 105% of capital 

• Inadequate reserves for ALLL and ATRR 

• Call reports contained material inaccuracies 

• The Bank was in non-compliance of the Bank Secrecy Act (BSA) 

• Inadequate capital to support high level of credit, reputation, and litigation risks 

• Compensation paid to the Chairman/CEO and directors is too high given the

condition of the bank

11/2/00 OCC sent 

“15 day letters” to 

insiders informing 

them of the 

possible

assessment of 

CMPs for failure to

recognize ATRRs;

3/22/01 CMP

notices of 

assessment issued

to insiders; 

3/28/01 Notice of 

Charges for 

amended C&D and 

Temporary C&D 

issued; 

3/28/01 PCA 

Notice to reclassify 

“Undercapitalized” 

issued 

5/7/01 5/455543 $1,535 • Credit analysis remained an area of significant concern

• Lack of transparency in understanding the risks in loans reviewed 

• The ALLL methodology remained deficient and inadequate to cover inherent

losses 

• Asset Quality significantly deteriorated and was not considered stable

• Large concentrations in volatile emerging markets 

• Management has not achieved compliance with either enforcement documents 

• Violations of Law: Inaccurate call reports, brokered deposits, and “golden

parachute” payment to a former executive vice president (spouse of

Chairman/CEO) 

• Capital had declined and was inadequate

• Management compensation is excessive 

11/20/01 

Undercapitalized by

PCA; capital 

restoration plan

required by 

12/04/01 

Source: OCC Reports of Examination and OCC Supervisory Memorandum 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 29 
 

As indicated by Table 4, Hamilton’s ratings began a downward 

spiral in 1998. Problems with loan administration, concentrations, 

violations of law, call report errors, as well as a host of other

deficiencies continued to mount. Refer to Appendix 2 for a 

detailed listing of the concentrations in emerging markets that 

existed at Hamilton. Although management appeared to attempt to 

correct the loan administration deficiencies, the efforts were not 

sufficient to prevent a recurrence of the problem. 

Although Hamilton’s business strategy was altered to include a 

more diverse loan selection, the underlying problems associated

with the credit underwriting and loan administration functions were 

never satisfactorily corrected. As noted in Table 3, there were

deficiencies noted with the credit functions as early as 1991. 

Since these critical areas were never fully rectified, we believe that 

it was doubtful that any loan expansion, regardless of the type, 

could have been undertaken without exposing the bank to greater 

credit risk. 

In addition to the proliferation of underwriting and loan 

administration deficiencies, violations of laws and regulations were 

noted at each safety and soundness examination from 1998 

through 2001. The perpetuation of the violations further evidences 

management’s total disregard for the regulatory framework in 

which it operated. The supervision of the institution was 

transferred to the Special Supervision/Fraud Division in 1999. The 

OCC used various enforcement actions, primarily the Cease and 

Desist Orders, to effect correction. However, none of these efforts 

was able to abate the effects of the asset structure. Despite 

regulatory efforts to curb Hamilton’s unsafe and unsound practices, 

problems associated with the lending function, declining capital 

ratios, and deteriorating earnings continued until the OCC closed 

the institution in 2002. 

Delayed Supervisory Actions 

During our review, there were two specific instances involving 

Hamilton’s unusual transactions associated with the Russian loans 

and non-compliance with a Safety and Soundness Plan (SSP) 

where we believe that the OCC did not take timely action. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 30 
 

Unusual Transactions Associated with Russian Loans

According to the 1999 ROE, OCC informed Hamilton management 

in September 1998 that it needed to take significant loss 

provisions for its problematic Russian exposure. However, 

management sold most of the Russian exposure “at par” (for full 

value) before the quarter ended September 30, 1998. The fact 

that the bank received par for these assets was unusual because at 

that time virtually all Russian exposures were trading at severe 

discounts. After OCC first learned of these transactions and 

became concerned about them, it did not fully investigate them 

until 10 months later. 

At the exit meeting for the 1998 on-site safety and soundness

examination held on September 9, 1998, OCC directed Hamilton to 

downgrade a Russian loan to “loss,” the remainder of its Russian 

exposure to “substandard”, and to provide a 25 percent reserve 

allocation for four Russian loans. Also, OCC informed management 

that they needed to take significant loss provisions for the bank’s 

problematic Russian exposure. However, a few days later, 

Hamilton informed the examiners that it had sold the approximately 

$20 million of the Russian exposure at par value. 

After the conclusion of the 1998 examination, OCC remained 

concerned about Hamilton’s ability to sell the distressed Russian 

debt at par value. Therefore, in a letter dated 

September 29, 1998, the examiners requested that Hamilton 

provide details regarding the purchaser, price, and recourse 

agreements for the Russian debt sales. In a letter dated 

October 2, 1998, Hamilton provided information regarding the 

purchasers and prices and informed OCC that the sales were on a 

non-recourse basis. The bank did not indicate in the letter that the 

sales were in any way linked to other transactions. 

While OCC requested the documentation in September 1998, it did 

not fully investigate the sale and Hamilton’s accounting for the 

transactions until the August 1999 examination, 10 months later. 

OCC’s examiners-in-charge in the South Florida Field Office told us 

that examination resources were not available to perform the 

review of the transactions sooner. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 31 
 

The August 1999 examination noted that Hamilton sold distressed 

assets at par and purchased discounted assets at par without

reflecting a loss on either the sold or purchased assets. In some 

cases, the sales/purchases were with the same broker, which 

heightened OCC’s concerns. Also, in all cases, Hamilton prepaid 

for the obligations it purchased, which exposed the bank to 

unnecessary risk and loss of income. In our opinion, OCC should 

have more promptly reviewed the circumstances surrounding the 

sale of the Russian loans, given the examiners’ concerns with 

these transactions. Had it done so, the April 2000 Temporary C&D 

which in part, directed Hamilton to cease engaging in the unusual 

transactions, may have been issued sooner. Also, OCC may have 

acted to transfer the supervision of Hamilton to the Special 

Supervision/Fraud Division in Washington, D.C. sooner. 

During our exit conference, OCC officials informed us that 

Hamilton’ s Russian loan transactions were still under investigation. 

Review of Compliance with the Safety and Soundness Notice

On December 14, 1998, in an effort to address problems identified 

in the 1998 examination, OCC sent a SSN to Hamilton. The notice 

directed the bank to file a SSP within 30 days from the date of the 

notice. The bank filed a SSP with the Southeastern District Office 

on January 15, 1999. On March 4, 1999, OCC approved the SSP 

as amended by the bank to revise the projections on exposure by 

country. 

OCC’s Policies and Procedures Manual 5310-3 (REV) Supplement 

2, “Enforcement Action Tracking System and Compliance 

Assessment”, dated January 31, 1997, requires examiners to 

conduct an on-site follow-up assessment of compliance with a new 

enforcement action within 60 days of the latest due date in the 

action. However, OCC did not conduct an on-site follow up of 

compliance with the SSP until the August 1999 examination. 

The examination, which was completed in December 1999 

uncovered that the bank had demonstrated material noncompliance with the SSP because it failed to establish adequate 

practices to identify and monitor risk. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 32 
 

According to the Assistant Deputy Comptroller, the South Florida 

Field Office’s ability to follow up and document corrective action 

was impeded by limited resources and a heavy burden of 

supervising nine problem banks. In September 1999, the bank was 

turned over to OCC’s Special Supervision/ Fraud Division in 

Washington, D.C., which devoted extensive resources to supervise 

the bank. 

Prompt Corrective Action 

OCC took supervisory action under Prompt Corrective Action to 

reclassify Hamilton’s capital level from “adequately capitalized” to 

“undercapitalized.” By treating the bank as if it were 

“undercapitalized.” the bank was forced to comply with certain 

mandatory or discretionary supervisory actions, such as restricting 

asset growth and requiring prior approval of certain expansion 

proposals. 

According to 12 U.S.C. § 1831o(a)(1) and 12 C.F.R. § 6.1 (a) and 

(b), the purpose of the PCA legislation is to resolve the problems of 

insured depository institutions at the least possible long-term loss 

to the deposit insurance fund. As a general matter, PCA provides 

the Federal banking agencies with the authority to take certain 

actions with respect to insured depository institutions when an

institution’s capital drops to a certain level. However, in 

establishing a system of Prompt Corrective Action based primarily 

on the capital level of each institution, Congress recognized that 

factors other than capital should in certain circumstances be used 

to assess the financial condition of an institution. Therefore, PCA 

gives regulators flexibility to discipline institutions based on criteria 

other than capital, to help reduce deposit insurance losses caused 

by unsafe and unsound practices. 

On March 28, 2001, OCC notified Hamilton of its intent to 

reclassify its capital level from “adequately capitalized” to 

“undercapitalized” for purposes of PCA. PCA provides that OCC 

may deem an institution to be engaging in an unsafe and unsound 

practice if the institution receives a less than-satisfactory rating for 

CAMELS components related to asset quality, management, 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 33 
 

earnings, or liquidity in its most recent report of examination (if the 

deficiency is not corrected). The OCC examiners concluded in the 

2000 examination that the bank’s aforementioned CAMELS 

components were in fact less than satisfactory and the bank had 

engaged in unsafe and unsound practices. Thus, OCC was 

authorized as a matter of law to reclassify the bank as 

“undercapitalized.” 

The bank requested a hearing, and on May 11, 2001, OCC and the 

bank management met at OCC headquarters. The presiding officer 

agreed with OCC regarding the reclassification and recommended 

that the Comptroller reclassify the institution. As a result, OCC 

sent the bank an “undercapitalized” letter on June 13, 2001. 

Other Supervisory Matters 

Executive Compensation 

As part of the Chairman/CEO’s compensation package, he was 

given a bonus based on Hamilton’s profitability before taxes. The 

following table shows the Chairman/CEO’s compensation and 

bonuses for 1995 through 2000. 

 TABLE 5: Compensation Paid to Hamilton’s Chairman/CEO 

 

 Source: Hamilton 10 K reports, SEC 

Year Salary Bonus Other 

Compensation Total

Compensation

1995 $395,000 $755,891 $83,1551 $1,234,046 

1996 $550,000 $891,410 $102,7751 $1,544,185

1997 $705,400 $798,058 $13,9001 $1,517,358

1998 $775,900 $1,103,591 $4,621 $1,884,112

1999 $853,534 $662,000 $2,500 $1,518,034

2000 $896,210 $0 $2,483 $898,693 

 Note 1: Principally, represents bank director fees paid during 1995, 1996 and the 

 first 3 months of 1997. 

OCC notified Hamilton management in the August 2000 ROE that 

compensation paid to the Chairman/CEO was too high given the 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 34 
 

condition of the bank. OCC informed the bank that compensation 

was a significant issue that needed to be addressed. However, the 

report did not elaborate on recommendations to ensure that the 

board addressed this issue and that corrective measures were 

implemented. As a result of the examination comments, the OCC 

included a provision in the proposed March 28, 2001, Amended 

Consent Order that required the bank to conduct a study and 

provide recommendations regarding its compensation program. 

However, the bank did not sign the Amended Consent Order, and 

the OCC issued a Notice of Charges for Issuance of an Amended 

Order to Cease and Desist and a Temporary C&D on March 28, 

2001. The Temporary C&D did not include a provision requiring a 

review of the bank’s compensation program. Staff from the OCC’s 

Enforcement and Compliance Division informed us that a 

Temporary C&D was not the correct enforcement vehicle in which 

to include this provision. Hamilton was closed before a hearing 

concerning the Notice of Charges could be conducted. 

The 2001 ROE again reported that the board had not dealt with the 

management compensation issues in the bank, despite the 

repeated indications by OCC that compensation was excessive. As 

noted above, Hamilton was closed prior to the implementation of 

any enforcement actions by the OCC pertaining to the 

compensation issue. 

“Golden Parachute” Payment

In April 2001, the bank also paid a former executive officer, the 

Chairman/CEO’s spouse, a severance payment of $592,208 in 

violation of a regulation prohibiting “golden parachute” payments25

without OCC and FDIC approval, which was required due to the

bank’s condition. In the 2001 ROE OCC advised the board that it 

should seek restitution for the payment. In a letter to the board

dated September 24, 2001, OCC and FDIC advised that restitution 

for the severance payment should be made to Hamilton 

immediately. Currently, restitution is being pursued. 

 

25 12 C.F.R. Part 359 generally prohibits the payment of “golden parachutes”, or payments contingent

on the termination of employment by a bank, if the bank has a composite rating of 4 or 5. Such 

payments may be made only upon approval by the bank’s primary regulator (in the case of the bank, the 

OCC) with the concurrence of FDIC. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 35 

 
 

 

Finding 3 Other Matters 

Following the failure of the First National Bank of Keystone26 the 

Comptroller organized a group of senior deputy comptrollers for the 

purpose of gleaning lessons learned from that experience and 

developing a plan to prevent a recurrence. The action plan they 

developed included the initiation of formal LLRs to be conducted by 

the OCC’s Quality Assurance Division in Bank Supervision 

Operations. A companion recommendation was that the division 

be separated from bank supervision to provide an appropriate level 

of independence. The division is now the Quality Management 

Unit with the Program and Management Accountability Division. 

The Hamilton LLR project team issued its report to OCC's Problem 

Bank Subcommittee (PBSC) in July 2002. 

In our opinion, the LLR process provided OCC with useful 

information to improve its supervisory process. The LLR report 

documents several key issues, the lessons learned from these 

issues, a description of actions the OCC has taken, and 

recommendations for additional action. The conclusions in the LLR 

report are provided as Appendix 4. However, we also noted 

several areas where improvement could be made for future LLRs. 

Specifically, the report stated that personnel from the legal 

division, while interviewed, were not included as part of the LLR 

project team. We believe that the inclusion of a legal 

representative would have been beneficial to review the various 

enforcement actions and also to review enforcement actions that 

were considered but ultimately were not taken. Also, the basis for 

several conclusions in the LLR was not evident. Examples include 

cultural issues with the “kinder, gentler regulator” during the early 

years of Hamilton's supervision and a recommendation that the 

Examiner-in-Charge (EIC) for community banks be periodically 

rotated. 

After the LLR report was issued, the PBSC asked the project team 

to identify the most critical issues requiring corrective action, and 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 36 

26 We conducted a material loss review of Keystone and issued a report in March 2000, Material Loss 

Review of The First National Bank of Keystone, OIG-00-067. At the time of our Keystone audit, the 

estimated loss of the failure was between $750 and $850 million. 
 

the team's recommendations to address these issues. In response, 

the team identified four findings, as follows: 

• OCC's early warning tools did not identify many of Hamilton's 

longstanding deficiencies and red flags, nor was the use of 

information provided by OCC's early warning systems 

consistent. Examples of these deficiencies and red flags include 

loan review, risk identification, ALLL adequacy, country risk 

concentrations/exposure management, and investment 

securities analysis and reporting. One classic red flag that 

existed throughout the 1990s was the bank's extraordinary 

growth rate. 

 

• Earlier allocation of specialized examiner and EIC expertise was 

warranted. This is based on Hamilton's dominant, untruthful, and 

uncooperative management and the bank's change to a higher

risk strategic focus and rapid growth in exotic products despite 

appearing financially sound. The complexities of the types of 

growth and new products/services exceeded local staff depth of 

experience and physical capacity. Also, the lack of a formal EIC 

rotation policy allowed the same EIC to conduct six consecutive 

examinations of Hamilton from 1994 to 1999. 

• Hamilton bank management provided misleading and deceptive 

information. This hindered OCC's supervisory efforts by 

delaying the timeliness and reducing the frequency of 

communications of feedback and conclusions. It also added 

burden and duplication to the OCC. In the bank's view, this 

contributed to the deterioration in the OCC's relationship with 

bank management. OCC's trust in bank management's 

truthfulness was also lost. A single point of focus for 

correspondence with Hamilton was not in place to coordinate the 

actions, activities, and responses of all OCC areas including legal 

and corporate divisions, the Ombudsman, and headquarters and 

field supervisory offices. The SMS documentation of bank 

correspondence was incomplete. Hamilton appeared to have 

attempted to manipulate the Ombudsman and the supervisory 

office by providing them with inconsistent information. 

• Hamilton was excluded from OCC's bank supervision quality 

assurance program, thus preventing an independent review of 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 37 
 

the quality and effectiveness of OCC supervisory efforts. The 

bank was always excluded from the district's community bank 

sample at the request of district management. District 

management made this request because OCC examinations of 

the bank and/or gathering of documentation for CMP referrals 

were in process at the time the quality assurance review was 

scheduled. Hamilton was also excluded from review once the 

bank was transferred to Special Supervision/Fraud. The Quality 

Assurance Division was directed by OCC executive 

management to exclude this bank from review to ensure that 

ongoing litigation was not compromised. 

The LLR project team made six recommendations to the PBSC. The 

recommendations, PBSC's decision on the recommendations, and their 

status as of October 8, 2002, were as follows: 

• OCC should back-test banks prior to their problem status to validate 

the ongoing value of early warning tools in providing an earlier warning 

of problems to come. 

The PBSC accepted the recommendation; however, an implementation 

date had not been determined. 

 

• An improved process should be developed for determining and 

allocating specialized expertise for situations such as emerging 

problem community banks, banks with recent changes in control, 

banks experiencing significant exotic growth, and banks with difficult 

management. Resources should be committed for the tenure of the 

project. The early identification of specialists and availability of those 

individuals for special assignments for district-supervised community 

banks (prior to the banks designated problem status and/or transfer to 

Headquarters' Special Supervision/Fraud Division) is critical in complex 

situations such as Hamilton. 

The PBSC responded that no additional actions were needed due to 

the efforts and process that were already underway. Specifically, 

these efforts include the "clean-the-plate" initiatives, designed to

refocus OCC’s resources on supervisory issues; further enhancements 

to OCC’s supervision-by-risk program, including its extension to the 

specialty areas; and the implementation of a supervisory risk 

assessment and staffing process that will integrate information from 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 38 
 

OCC's various management information systems with staffing plans 

and supervisory strategies and objectives. At the exit meeting we 

were apprised that a process is also in place where the Deputy 

Comptroller for Special Supervision is frequently called upon to

coordinate resource requirements with District and Large Bank Deputy 

Comptrollers, District Lead Experts, and Large Bank EICs in order to 

obtain resource funding for high priority problem banks on a national 

basis. No specific implementation date was provided by the PBSC as 

these efforts will be ongoing. 

 

• As part of the resource allocation process, OCC management should 

review current practice with regard to EIC and resident staff rotation 

and determine if written policy guidance is warranted. Such a review 

could ensure that current practice recognizes the need to match 

personalities and styles of EICs and examiners in key roles with those 

of bank management to maintain ongoing productive relationships and 

appropriate degrees of independence. 

The PBSC members agreed, as a general matter, that there should be 

periodic rotation of EICs, especially in problem bank situations. 

However, they believe that the current, informal process was more 

appropriate and provided needed flexibility for the community bank 

program. They noted the logistical difficulties of implementing strict, 

formal rotation policies given the size of the community bank 

population. No further action was planned for this recommendation.

 

• The project team recommends a process to enhance communications 

between OCC's lawyers, examiners, and supervisory offices, as well 

as between the OCC and bankers. A coordinated process addressing 

responsiveness to and documentation of bank correspondence

received by all OCC divisions could enhance internal OCC 

communications, aid in providing timely feedback to bankers, and 

reduce burdens on OCC caused by deceptive bank management. 

 

The PBSC rejected the recommendation. It concluded that existing 

OCC guidance and processes are sufficient, if followed. 

 

• An amendment to OCC Appeals Bulletin (OCC 2002-9) should be 

considered to reflect the implied understanding that ongoing 

communications during the appellate process are expected to be 

conducted truthfully and in good faith. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 39 
 

The PBSC rejected the recommendation, concluding that further 

revision to the bulletin was not needed. They noted that the revised 

bulletin addresses one of the issues that recalcitrant or dishonest bank 

management tried to exploit in the past, namely whether supervisory 

actions will be held in abeyance during an appeal. 

 

• A written policy should be established for quality assurance bank 

selection, detailing exclusionary factors and the approval process for 

exclusion. Quality assurance should sample banks with high growth, 

banks with a recent change in control, and banks with red flags 

identified in the LLRs. Quality assurance reviews should include 

assessments of the adequacy of testing, the sufficiency of numbers 

and expertise of resources assigned, and sufficiency of follow-up on 

conditions, matters requiring attention, commitments and/or 

enforcement actions. 

 

The PBSC concluded that specific corrective action was not needed as 

the current quality assurance process was being revamped and, going 

forward, these types of banks would be picked up. 

 

Recommendations

In Finding 3, we identified the recommendations noted in OCC’s 

Lessons Learned Review Report. We recommend that the 

Comptroller of the Currency: 

1. Ensure that the recommendations contained in the Lessons 

Learned Review Report are implemented as planned. 

2. Reassess the Lessons Learned Review process to ensure that 

details to support conclusions reached and related 

recommendations are included, and expand the scope to include 

all pertinent information relating to the supervision of the 

institution. In this regard, the Hamilton Lessons Learned 

Review Report noted that the project team did not possess 

sufficient legal expertise to make judgments about the quality 

and effectiveness of decisions related to legal actions taken or 

underway. Consideration should be given to assigning staff 

with legal expertise on future Lessons Learned Reviews to 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 40 
 

review both legal actions taken and legal actions considered, 

but not taken. 

In Finding 2, we also noted additional concerns over OCC’s 

supervision and examination coverage after the IPO. Accordingly, 

we recommend that the Comptroller of the Currency:

3. Develop or revise policies and procedures to ensure examiners 

promptly review significant capital injections to determine 

whether the capital resources are managed and invested in 

accordance with the financial institution’s business plan and in a 

safe and sound business manner. On-site verification should be

done as appropriate. 

As discussed in Finding 2, we noted several instances in which 

OCC delayed supervision actions. For example, OCC took 10 

months to investigate the sales and accounting transactions related 

to the Russian exposures. Also, examiners did not timely follow up 

for Hamilton’s compliance with the Safety and Soundness Plan. 

Accordingly, we recommend that the Comptroller of the Currency: 

4. Reassess examination guidance regarding actions to be taken 

when examiners encounter unusual accounting transactions that 

warrant further investigation. 

5. Establish controls to ensure examiner follow-up on bank 

 compliance with enforcement actions in a timely manner. 

Management Response and OIG Comments 

In its December 17, 2002 written response to the OIG’s draft 

report, OCC concurred with the reported findings and agreed to 

implement the recommendations. Over the next few weeks, OCC 

plans to formulate action plans detailing the steps it will take to

implement the recommendations. The actions will be formally 

reported and monitored through the Department’s Joint Audit 

Management Enterprise System. 

 

We believe OCC’s planned actions are responsive to the intent of 

the recommendations. The OIG will also continue to monitor 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 41 
 

OCC’s progress in addressing the reported findings and 

recommendations. The full text of OCC’s response is included in 

Appendix 5. 

******* 

We would like to extend our appreciation to OCC for the 

cooperation and courtesies extended to our staff during the audit. 

If you have questions, please call me at (202) 927-6512. Major 

contributors to the report are listed in Appendix 6. 

Donald R. Kassel /s/ 

National Director, Banking and Fiscal Service Audits 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 42 
Appendix 1 

Objectives, Scope, and Methodology 

We conducted this material loss review of Hamilton Bank in 

response to our mandate under Section 38(k) of FDIA, 12 USC § 

1831o(k). This section provides that if a deposit insurance fund 

incurs a material loss with respect to an insured depository 

institution on or after July 1, 1993, the inspector general for the 

appropriate Federal banking agency shall prepare a report to the 

agency, which shall: 

• ascertain why the institution’s problems resulted in a 

material loss to the insurance fund; 

• review the agency’s supervision of the institution; and 

• make recommendations for preventing any such loss in the 

future. 

As defined by Section 38(k) FDIA, a loss occurring after 

June 30, 1997, is considered material if it exceeds $25 million or 

2 percent of the institution’s total assets. FDIA also requires the 

inspector general to complete the report within 6 months after it 

becomes apparent a material loss has been incurred. 

We initiated a material loss review of Hamilton based on the loss 

estimate provided by FDIC. As of March 31, 2002, FDIC 

estimated that Hamilton’s closure would cost the BIF between 

$350 and $500 million. As of June 31, 2002, FDIC adjusted the 

estimated cost of Hamilton’s closure to a range of $175 to $225 

million, after factoring in the recovery of the international loan and 

asset sales. 

To accomplish our review, we conducted fieldwork at OCC 

Headquarters in Washington, D.C.; the OCC District Office in 

Atlanta, Georgia; the OCC Field Office in Miami, Florida; and the 

OCC Ombudsman Office in Houston, Texas. We also visited the 

FDIC Regional Office in Atlanta, Georgia; the FDIC Division of 

Supervision (DOS) in Plantation, Florida (in 2002 FDIC reorganized 

and DOS was merged into the new Division of Supervision and 

Consumer Protection); and the FDIC Division of Resolutions and 

Receiverships (DRR) and Division of Finance (DOF) in Dallas, Texas. 

We obtained information from the Federal Reserve Board OIG in 

Washington, D.C. regarding Hamilton’s holding company, Hamilton 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 43 
Appendix 1 

Objectives, Scope, and Methodology 

• 

• 

Bancorp. Furthermore, we interviewed staff from the Securities 

and Exchange Commission. 

Our review covered the period from 1988 until Hamilton’s closure 

on January 11, 2002. We conducted our on-site fieldwork from 

April 2002 through August 2002. 

To assess the adequacy of OCC’s supervision of Hamilton, we

performed interviews and reviews to determine (1) when OCC first 

identified Hamilton’s safety and soundness problems, (2) the 

gravity of the problems, and (3) the supervisory response OCC 

took to get the bank to correct the problems. We also performed 

interviews and reviews to determine whether OCC (1) might have 

discovered problems earlier, (2) identified and reported all the 

problems, and (3) issued comprehensive, timely, and effective 

enforcement actions that dealt with any unsafe or unsound 

activities. Specifically, we: 

Assessed OCC actions based on its internal guidance and 

legislative guidance provided by the Financial Institutions 

Reform, Recovery, and Enforcement Act of 1989 (FIRREA) 

and FDIA. 

Reviewed OCC supervisory and enforcement files and 

records for Hamilton from 1988 through 2002. We analyzed 

examination reports, supporting workpapers, and related 

supervisory and enforcement correspondence. We 

performed these analyses to gain an understanding of the 

problems identified, the approach and methodology OCC 

used to assess the bank’s condition, and the regulatory 

action used by OCC to compel bank management to address 

the deficient conditions. We did not conduct an independent 

or separate detailed review of the external auditor’s work or 

associated workpapers other than those incidentally available 

through the supervisory files. 

• Reviewed files, workpapers, and examination reports 

maintained by FDIC DOS to determine the nature, scope, 

and conclusions regarding its reviews of Hamilton. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 44 
Appendix 1 

Objectives, Scope, and Methodology 

• Interviewed and discussed various aspects of the 

supervision of Hamilton with OCC officials, examiners, 

attorneys, and analysts, to obtain their perspective on the 

bank’s condition and the scope of the examinations. We 

also interviewed FDIC officials and DOS examiners who 

either participated with OCC on the 2000 and 2001 

examinations at Hamilton or were responsible for monitoring 

Hamilton for Federal deposit insurance purposes. 

• Interviewed FDIC DRR and DOF personnel who were 

involved in the receivership process, which was conducted 

before and after Hamilton’s closure and appointment of 

receiver. 

• Discussed the progress of investigative efforts related to 

Hamilton with an FDIC DRR investigator; Securities and 

Exchange Commission attorneys in Miami, Florida; and 

Treasury OIG special agents that were working with the U.S. 

Attorney’s Office. 

We conducted our review in accordance with generally accepted 

government auditing standards. At the time of our review, Federal 

regulators and officials were still investigating alleged fraud at 

Hamilton.

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 45 
Appendix 2 

Loan Concentrations in Foreign Markets 

 

Table 6: Loan Concentrations in Foreign Markets 

Loan Concentrations in Foreign Markets by Year 

(Concentrations of credit over 25% of capital indicate increased risk) 

1997 1998 1999 2000 2001 

Country Amount

In millions

*Percent

of

Capital 

Amount

In millions

*Percent

of

Capital 

Amount

In millions 

*Percent

of

Capital 

Amount

In millions

*Percent

of

Capital 

Amount

In millions

*Percent

of

Capital 

Argentina $48 58% $63 54% $118 71% $54 37%

Bolivia $20 25% $46 39%

Brazil $55 65% $113 97% $192 116% $99 67%

Colombia $34 30% $50 30% $45 31%

Dom. Rep. $24 29% $53 46% $45 30% $42 36%

Ecuador $70 83% $120 104% $80 48% $50 34% $34 29%

El Salvador $45 55% $61 53% $58 39% $75 64%

Great Britain $40 34%

Guatemala $106 127% $142 122% $61 37% $89 60% $81 69%

Honduras $42 50% $68 59% $39 26%

Jamaica $32 38% $40 35% $49 30% $62 42%

Panama $54 65% $134 116% $98 59% $146 99% $134 113%

Peru $43 53% $75 65% $57 34% $40 27% $33 28%

**Other $120 103%

TOTALS $539 $1,069 $705 $727 $439

Source: OCC Reports of Examination 

*Tier 1 Capital Plus ALLL 

**Loans to foreign markets under 25% of capital include: China-1%, Costa Rica-8%, Guyana-7%, Haiti-4%, 

Kazakhstan-4%, Nicaragua-7%, Paraguay–8%, Russia-24%, Suriname-16%, Turkey-4%, Uruguay-4%, and 

Venezuela-16% 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 46 
Appendix 3 

Chronology of Significant Events

 

The following chronology describes significant events in Hamilton’s history including 

examinations conducted, major problems identified, and enforcement actions taken by 

OCC. 

2/7/83 Alliance National Bank received its national banking charter #17675. 

5/25/88 Southern Bancorp, later renamed Hamilton Bancorp, Inc. (Hamilton 

Bancorp), bought the bank for $1.5 million. 

8/19/88 Alliance changed its name to Hamilton Bank, N.A. (Hamilton) through a 

change in bank control. 

10/5/88 OCC started an on-site examination. The exam was completed 

October 28, 1988, and resulted in composite and CAMEL ratings of 

3/33242. 

2/14/89 The Hamilton board signed a Commitment Letter replacing the existing 

February 20, 1987, Formal Agreement with OCC that had been initiated 

with the prior bank management. Based on the findings of the 

October 1988 examination, OCC determined that the Formal Agreement 

should be replaced with a Commitment Letter that more closely 

addressed current concerns. Under the Commitment Letter, Hamilton 

was to: (1) develop written policies/procedures for lending and 

international activity; (2) establish controls for lending and letter of 

credit documentation; (3) reduce problem assets and criticized 

off-balance sheet items; (4) improve earnings and budgeting; and (5) 

develop formal process to introduce new products. 

7/10/89 OCC started an on-site examination. The exam was completed 

September 22, 1989, and resulted in composite and CAMEL ratings of 

3/23232. 

3/7/91 OCC started an on-site examination. The exam was completed 

June 7, 1991, and resulted in composite and CAMEL ratings of 

3/23232. 

7/19/91 OCC revised the March 7, 1991, Report of Examination to reflect data 

received during the exit meeting. The revision was completed 

September 9, 1991, and resulted in composite and CAMEL ratings of 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 47 
Appendix 3 

Chronology of Significant Events

 

3/22222. Both asset and earning ratings were upgraded to a “2.” 

However, the field manager determined that the bank would remain a 

composite “3” until OCC was able to conduct a more extensive on-site 

test of the progress of the bank. 

1/6/92 OCC started a limited examination based on financial information and 

management reports as of December 31, 1991. The examination was 

completed February 3, 1992 and resulted in composite and CAMEL 

ratings of 2/22312. 

1/4/93 OCC started a full scope on-site examination. The exam was completed 

March 31, 1993, and resulted in composite and CAMEL ratings of 

2/22312. 

2/14/94 OCC started a full scope on-site examination. The exam was completed 

April 25, 1994, and resulted in composite and CAMEL ratings of 

2/22212. 

1/30/95 OCC started a full scope on-site examination. The exam was completed 

April 5, 1995, and resulted in composite and CAMEL ratings of 

2/22211. 

4/15/96 OCC started full scope on-site examination. The exam was completed 

June 5, 1996, and resulted in composite and CAMEL ratings of 

2/21111. 

3/31/97 Hamilton Bancorp, the bank’s holding company, raised approximately 

$38 million from an IPO. Hamilton Bancorp subsequently infused 

$30 million into Hamilton to fund planned growth. 

6/2/97 OCC started a full scope on-site examination. The exam was completed 

July 21, 1997, and resulted in composite and CAMELS ratings of 

1/111111. 

10/97 OCC’s Washington Supervisory Review Committee authorized an Order 

of Investigation (OOI) based on allegations presented at the indictment 

in Puerto Rico concerning the Southern Bank and Trust Company, Ltd., 

of Montserrat, West Indies (Southern Bank and Trust) account at

Hamilton. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 48 
Appendix 3 

Chronology of Significant Events

 

11/97 Two Hamilton directors resigned after they were indicted along with 

other persons not related to the bank. The indictment alleged numerous 

violations of customs law, as well as various instances of tax evasion. 

They later pled guilty to misdemeanors but did not return to the bank.

2/5/98 OCC’s Enforcement and Compliance Division submitted a written 

request to OCC’s Washington Supervisory Review Committee to expand 

and amend the original OOI. New information for expanding the OOI 

involved allegations of loan fraud, false entries, and concealment of loan 

losses as well as additional allegations concerning an account at the 

bank in the name of Southern Bank and Trust. 

3/3/98 OCC issued a letter to Hamilton informing it that the bank’s composite 

CAMELS rating was downgraded to “2” based on an off-site 

examination which started on February 22, 1998. The change in rating

was based on the increased concentrations of bank assets in emerging 

markets as a percentage of capital. Some of these concentrations 

occurred in countries with higher than normal transfer risk. 

6/29/98 OCC started a full scope on-site examination. The exam was completed 

November 7, 1998, and resulted in composite and CAMELS ratings of 

3/333211. 

11/16/98 OCC started a BSA examination. The exam was completed 

March 15, 2000. OCC noted weaknesses in the following areas: 

(1) significant internal control deficiencies existed in the administration 

of the Southern Bank and Trust account; (2) operating policies and 

procedures did not include the minimum elements identified in OCC’s 

BSA Handbook and identification of high-risk 

activities/businesses/countries; and (3) Hamilton’s BSA training program

was informal, and it was not evident whether all pertinent employees of 

the bank received periodic/tailored training. 

 

12/14/98 OCC issued a SSN to Hamilton directing the bank to file a SSP within 

30 days. The SSP was to address, at a minimum: (1) provisions 

addressing credit exposure in high-risk countries and emerging markets, 

(2) implementation of an appropriate risk grading system, 

(3) reassessment of the adequacy of the ALLL, and (4) implementation 

of a loan review program based on risk assessment. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 49 
Appendix 3 

Chronology of Significant Events

 

1/15/99 Hamilton submitted an SSP to OCC’s Southeastern District Office in 

Atlanta, Georgia. OCC determined that the plan did not provide 

sufficient detail, and requested that Hamilton provide a revised plan that

included projections reflecting the amount of emerging market exposure 

expected to be outstanding at each month end in 1999 and a detailed 

discussion as to how Hamilton would meet the requirements of the 

SSN. 

3/4/99 OCC approved the revised version of the SSP. 

8/23/99 OCC started a full scope on-site examination. The exam was completed 

December 17, 1999, and resulted in composite and CAMELS ratings of 

4/344422. The scope focused on safety and soundness issues with 

emphasis on testing compliance with the approved SSP. The bank 

demonstrated material non-compliance with the SSP because it failed to 

establish adequate practices to identify and monitor risk. The bank 

revised its internal risk grading systems but did not adequately 

implement those systems. 

9/30/99 The supervision of Hamilton was transferred to OCC’s Special 

Supervision/Fraud Division in Washington, D.C. Preliminary findings 

from the August 1999 examination disclosed several areas of increased 

risk, particularly in Hamilton’s international lending and trade finance 

activities. In order to ensure the highest level of expert supervision and 

coordination with other regulatory agencies, OCC determined that direct 

supervision of the bank from Headquarters was appropriate. 

12/28/99 OCC notified the bank that it had been reclassified from “Well 

Capitalized” to “Adequately Capitalized.” 

2/23/00 OCC presented Hamilton a Consent Order because of the bank’s 

deteriorating condition. On the same day, OCC issued a Notice of 

Charges to commence administrative litigation because the bank 

declined to consent to the Order. 

3/23/00 Hamilton appealed certain findings in the August 1999 examination to 

the OCC Ombudsman. In that appeal, the bank took exception to the 

following: (1) the composite CAMELS rating of 4; (2) OCC criticism of 

the bank’s actions with respect to its loan portfolio in Ecuador, 

particularly with respect to the timely recognition of potential losses and 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 50 
Appendix 3 

Chronology of Significant Events

 

the actions taken by the bank to enhance its position; (3) OCC criticism 

of the bank’s investment practices of purchasing certain securities and 

loans and booking at par instead of at the fair market value which was 

below par, prepaying purchases, and making untimely and backdated 

entries and booking a placement that never existed; and (4) a $7.2 

million lending limit violation cited by OCC involving an Ecuadorian 

corporation. 

4/25/00 OCC imposed a Temporary C&D Order based on OCC’s 

August 23, 1999, Report of Examination. 

5/19/00 Hamilton appealed certain findings and conclusions of OCC’s BSA 

examination to the OCC Ombudsman. In the appeal letter, the bank 

also stated that OCC’s approach to the examination was in direct 

contravention of well-established OCC policy and that OCC 

misunderstood the requirements imposed on the bank with respect to 

the recordkeeping requirements of BSA. 

6/30/00 Hamilton appealed to the OCC Ombudsman findings from the 

August 1999 examination that certain Ecuadorian loans constituted 

restructured debt for ATRR purposes and, therefore, were subject to 

ATRR’s 90 percent reserve requirement. 

8/3/00 The OCC Ombudsman found that the Southern Bank and Trust account 

was at issue in a pending formal enforcement action against the bank, 

namely the Temporary C&D Order. The OCC Ombudsman noted that he

had no authority to accept appeals of enforcement-related actions or 

decisions. Therefore, he declined to accept an appeal on that issue. 

8/15/00 The OCC Ombudsman found that the restructuring of the Ecuadorian 

loans had benefited the bank. However, the borrowers’ debts had not 

been eliminated, and no new money was involved in the transactions. 

For those reasons, the OCC Ombudsman found that the examiners’ 

treatment of the loans was appropriate. 

8/28/00 OCC started a full scope on-site examination that included BSA, 

information technology, and compliance with the September 8, 2000, 

Consent Order. FDIC participated in the examination. The exam was 

completed February 13, 2001, and resulted in composite and CAMELS 

ratings of 4/445432. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 51 
Appendix 3 

Chronology of Significant Events

 

9/8/00 Hamilton’s board signed a comprehensive Consent Order. The Consent 

Order included a capital article, so even though capital ratios were 

 “well- capitalized” by the numbers, the bank was notified that it was 

only considered “adequately capitalized.” 

 

9/18/00 The OCC Ombudsman reaffirmed the decision he made on 

August 15, 2000. In addition, the OCC Ombudsman noted in response 

to Hamilton that the OCC Ombudsman appeal process was intended to 

be an exceptional event, not a routine action or otherwise a substitute 

for the normal, everyday supervisory process. 

10/3/00 Hamilton Bancorp publicly announced that its national bank subsidiary, 

Hamilton, reached an agreement with OCC and settled its administrative 

proceeding with OCC. Because of the Consent Order being entered into 

by the bank and OCC, the Temporary C&D Order was terminated. 

10/30/00 Hamilton raised issues to the OCC Ombudsman concerning the ATRRs, 

the necessity to establish ATRRs on interest earned but not yet 

collected, and the need to recognize downgrades and provisions in the 

third quarter of 2000 when the bank believed that recognition in the 

fourth quarter would be more appropriate. 

11/2/00 OCC sent “15-day letters” to several officers and directors informing 

them of the possible assessment of CMPs against them for their failure 

to recognize ATRRs. 

11/22/00 Various Hamilton officers and directors sent OCC a letter in response to 

the “15-day letters.” The letter provided reasons why they felt the 

CMPs should not be imposed. 

12/12/00 In a letter to Hamilton, the OCC Ombudsman advised that the bank’s 

routine appeals to his office had become an impediment to OCC’s 

supervision of the bank and requested that future appeals be addressed 

to OCC personnel in charge of the office responsible for that 

supervision. 

12/22/00 Hamilton Bancorp publicly announced that it would restate its earnings 

for 1998 and 1999. As a result, the 1998 and 1999 consolidated 

financial statements were restated to appropriately account for (1) the 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 52 
Appendix 3 

Chronology of Significant Events

 

purchases of securities and sales of certain loans as an exchange 

instead of as separate transactions and the resulting losses of $22.2 

million ($14.3 million after tax) in 1998, (2) the initial recording of the 

securities acquired at fair value which became their cost basis, 

(3) changes in unrealized gains and losses in 1999 relating to the 

securities acquired in the exchange transaction, and (4) the related 

income tax effects. 

1/01 &

2/01 

Shareholders filed lawsuits against Hamilton Bancorp for filing false and 

misleading financial statements. 

 

3/8/01 OCC held a meeting with FDIC and Federal Reserve representatives to 

brief them about Hamilton’s condition and to discuss contingency plans. 

3/21/01 OCC commenced administrative CMP actions against various Hamilton 

senior officers and directors. The penalties were based on Hamilton’s 

failure to establish required ATRRs on the September 30, 2000, call 

report after being directed to do so by OCC. As a result, the call report 

was inaccurate. 

3/28/01 OCC requested in an amended regulatory notice that Hamilton increase 

its capital to a Tier 1 risk-based capital ratio of 12 percent (tier 1 

capital/risk-weighted assets), total risk-based capital ratio of 14 percent 

(qualifying total capital/risk-weighted assets), and leverage ratio of 

9 percent (tier 1 capital/ adjusted total assets). OCC advised the bank 

that it planned to reclassify the bank’s capital level from “Adequately 

Capitalized” to “Undercapitalized” for purposes of PCA. 

OCC commenced administrative action against the bank to amend the

September 2000 Consent Order. The proposed amended C&D Order 

required Hamilton to take seventeen steps. The bank’s board refused to 

stipulate to the amended C&D Order; so, on the same day, OCC issued 

another Temporary C&D Order against the bank. 

4/5/01 Hamilton brought suit against OCC in Federal District Court seeking a 

temporary restraining order to prohibit enforcement of the 

March 28, 2001, Temporary C&D Order. 

4/13/01 A Federal District Court judge issued an order denying the temporary 

restraining order. The judge found that OCC’s allegations of unsafe and 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 53 
Appendix 3 

Chronology of Significant Events

 

unsound practices were extremely well supported and could not be 

taken lightly by the court. 

4/26/01 Hamilton Bancorp publicly announced that it was subject to delisting 

from the NASDAQ National Market until it filed its Annual Report on 

Form 10-K to the SEC for the period ended December 31, 2000. 

4/30/01 Hamilton made a $592,208 “golden parachute” payment to the 

Chairman/CEO’s spouse, a former executive vice president of Hamilton. 

5/4/01 Hamilton’s Chairman/CEO sent a letter to OCC advising the appointment 

of an “Oversight Director.” Shortly thereafter, this director became 

“Managing Director” and then “Chief Operating Officer.” The director 

resigned as “Chief Operating Officer” on September 30, 2001, and as a 

director effective October 31, 2001. 

5/7/01 OCC started a full scope on-site examination. The exam was completed 

in February 2002 and resulted in composite and CAMELS ratings of 

5/455543. 

5/16/01 Hamilton Bancorp publicly announced that its operating results for the 

year ended December 31, 1999, and the first 9 months of 2000 would 

be restated primarily to record provisions for ATRRs similar to amounts 

recorded in Hamilton’s regulatory call reports. The reported net income 

of $18.4 million for year ended December 31, 1999, was revised to a 

net loss of $2.2 million. The reported net incomes/loss of $8.4 million, 

$7.6 million and $(5.6) million for the first three quarters of 2000 were 

revised to $5.4 million, $7.1 million, and $(17.9) million, respectively. 

6/8/01 Hamilton Bancorp filed its 2000 annual 10-K and March 2001 first 

quarter 10-Q with SEC. On April 19 and May 22, 2001, the holding

company had received NASDAQ Staff Determinations indicating that it 

was subject to delisting unless and until it filed its 2000 10-K and its 

March 2001 10-Q. 

6/13/01 OCC sent the Hamilton an “undercapitalized” letter. 

8/8/01 OCC met with Hamilton regarding the sale of the bank. The holding 

company hired Canadian Imperial Bank of Commerce to sell both 

Hamilton Bank and Hamilton Bancorp. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 54 
Appendix 3 

Chronology of Significant Events

 

8/24/01 Fitch, a rating firm, lowered its rating for Hamilton Bancorp and 

Hamilton due to their precarious financial positions following a 

$24 million after-tax loss for the second Quarter of 2001, which 

depleted the bank’s capital by nearly 24 percent. 

9/21/01 Hamilton concluded the sale of $38.3 million in loans and bank 

placements to borrowers in Ecuador, reducing its Ecuadorian cross 

border exposure by 66 percent. 

9/30/01 Hamilton’s call report showed approximately $1.4 billion in assets as of 

September 30, 2001, and approximately $26.8 million in losses 

year-to-date. 

10/10/01 Hamilton’s external auditors resigned. 

10/19/01 OCC filed a motion to dismiss the April 5, 2001, lawsuit. In its motion, 

OCC argued that the court no longer had authority to hear the matter. 

10/22/01 Hamilton proposed a global settlement to the pending administrative 

actions and other outstanding issues. That proposal included 

incorporating some, but not all, of the proposed amendments to the 

Consent Order and dismissing with prejudice the CMP proceeding. The 

bank proposed to develop a business plan acceptable to OCC if OCC 

would agree to forbear from imposing additional capital requirements as 

long as the bank remained in compliance with the business plan. 

10/31/01 Hamilton’s Tier 1 capital was approximately 4.44 percent of total 

assets. 

11/1/01 Hamilton Bancorp publicly announced that it had appointed another 

independent auditor. 

11/19/01 Hamilton Bancorp publicly announced that Hamilton management 

agreed to increase ALLL by $4.2 million for the 3-month period ended 

September 30, 2001, as directed by OCC. Planning an appeal, the bank 

took no action on ALLL for the June 30, 2001, period. 

11/20/01 OCC rejected the bank’s proposed global settlement. OCC found that 

the bank’s business plan was inadequate because major elements of the 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 55 
Appendix 3 

Chronology of Significant Events

 

plan were unrealistic. In particular, the bank’s proposed capital levels 

did not reflect either the bank’s high level of problem assets or the 

capital levels required by the Consent Order. 

OCC informed Hamilton that the bank was “Undercapitalized” for 

purposes of PCA. This action was based entirely on the bank’s capital 

ratios according to the bank’s balance sheet as of October 31, 2001, 

and not on the reclassification process. The bank was required to file a 

Capital Restoration Plan (CRP) by December 4, 2001. 

12/01 Hamilton Bancorp was under investigation by the SEC for accounting 

problems related to its loan loss reserves and disclosures to 

shareholders. Hamilton Bancorp restated its financial results for 1998, 

1999, and most of 2000 to reflect Hamilton’s higher losses. 

12/19/01 Hamilton Bancorp publicly announced that SEC had issued a formal 

order of investigation of the company and individuals currently or 

formerly associated with the company, concerning accounting matters, 

financial reports, and other public disclosures. 

12/26/01 OCC informed Hamilton that the CRP was not acceptable because: 

(1) the bank did not identify the assets that would be sold or any 

potential buyers, (2) the CRP provided that the bank would become 

adequately capitalized by the end of the first quarter of 2002 without a

capital injection, but its assumptions left little margin for error, (3) the 

bank’s plan to reach and maintain profitability did not provide for the 

distinct possibility of a material deterioration in credit quality that would 

require an increase in the ALLL, and (4) the bank based its 2002 capital 

ratios on inaccurate 2001 ratios. 

1/11/02 OCC appointed FDIC as receiver for Hamilton. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 56 
Appendix 4 

OCC’s Lessons Learned Review Conclusions 

 

 

The LLR concluded the following with respect to the quality of 

OCC’s supervision of Hamilton. The LLR determined that: 

• OCC appropriately closed the bank before it was critically 

undercapitalized. FDICIA permits the OCC more supervisory 

flexibility in closing institutions since it permits early 

resolution by the regulator. The early resolution of Hamilton 

was appropriate and may have reduced the ultimate loss to 

the FDIC insurance fund and helped the OCC avoid additional

unnecessary supervisory expenses. To date, there is no 

information indicating that Hamilton’s problems would have 

been resolved had it been allowed to continue to operate. 

• During the mid to late 1990’s, which coincided with the 

emergence of Hamilton’s problems, the OCC’s supervisory 

structure and culture may have had an adverse impact on 

the effectiveness of OCC’s supervision. OCC could have 

taken stronger action. However, when OCC recognized the 

severity of problems and issues, a more experienced and 

strong-willed EIC, with a specialized supporting staff to 

effectively supervise Hamilton, was placed in the bank. 

• In 1997, supervisory attention may have been 

inappropriately relaxed shortly after a significant capital 

injection resulting from the IPO. OCC was slow to test and 

verify the quality of the bank’s assets during this growth 

period. While classified asset numbers remained at a modest 

level until 1999, the risk profile of the bank steadily 

increased. 

• Even though the composite and CAMELS ratings indicated 

that the institution was in a satisfactory to good condition, 

the OCC examiners appropriately assigned risk assessments 

to reflect a moderate level of risk in key management and 

credit areas. Higher risk profiles were properly reflected in 

the assigned risk assessments as the composite and 

CAMELS ratings declined. Even when the bank’s capital 

position improved significantly in 1997 due to the sizeable 

injection, the OCC examiners recognized the increase in the 

credit risk profile. However, in 1997, a stable rating was 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 57 
Appendix 4 

OCC’s Lessons Learned Review Conclusions 

 

 

 

assigned to strategic risk even though additional capital 

altered the business plan and included more high-risk 

business activities. 

• OCC asked bank management to reduce the emerging 

countries concentrations and the bank’s assets in the 

months prior to the closing the bank. The reduction of 

several areas of concentrations as well as the volume of 

bank assets was achieved. 

• Supervision of the bank’s early efforts to comply with the 

initial Safety and Soundness Notice did not conform to OCC 

policy. The lack of timely, substantive feedback, such as 

the absence of substantive Supervisory Monitoring System 

(SMS)27 documentation supporting the monthly offsite 

monitoring, the minimal documentation of compliance during 

the quarterly reviews, and the failure to verify the 

information obtained from the quarterly reviews, allowed 

uncorrected deficiencies to remain. Additionally, bank 

management provided misleading and deceptive information, 

which contributed to a deteriorating relationship between the 

regulators and management, and hindered OCC’s efforts to 

provide feedback or conclusions. 

• Some of the deficiencies that contributed to the demise of 

the institution existed in varying degrees in the years prior to 

the decline in the bank’s CAMELS ratings. OCC must

continue to hold the board and management accountable and 

take prompt action if noted deficiencies are not corrected 

within the applicable timeframe. Since 1997, the OCC has 

implemented supervision tools to identify institutions with 

increasing levels of risk. 

• The bank filed numerous appeals to the Ombudsman, which 

created additional administrative burdens. However, the 

appeals did not materially impact OCC’s supervisory and 

enforcement initiatives. If anything, the appeals caused 

27 SMS is an automated system used by OCC to record and communicate narrative and statistical 

information on institutions of supervisory interest to the OCC. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 58 
Appendix 4 

OCC’s Lessons Learned Review Conclusions 

 

 

OCC examiners to document their findings more thoroughly. 

The Chairman/CEO manipulated the OCC supervisors in 

several ways. He withheld information, provided misleading 

information, and provided inconsistent information between 

the Ombudsman and the supervisory office. The bank 

demonstrated a well thought out pattern of resistance to 

OCC supervisory efforts, as evidenced by the numerous 

Ombudsman appeals demonstrating bank management’s 

unwillingness to comply and to take needed action. 

 

Regarding bank accountability, including the causes for failure, the 

LLR found: 

• Hamilton’s board consisted of a core group of directors 

throughout its history. The Chairman/CEO’s domination of

the board and its failure to institute corrective measures 

were key reasons for the bank’s failure. 

• Management’s attempts to cover up problems and to

mislead and undermine OCC’s efforts hampered the 

supervision process. 

Regarding “red flags” at Hamilton, the LLR found: 

• The common theme in all enforcement actions taken against 

Hamilton was the absence of risk management systems and 

controls. The absence of adequate risk management 

systems and controls was particularly evident in the 

lending-related functions. 

• In 1998, the high-risk profile and aggressive growth strategy 

began to have an impact on profitability. 

• Asset growth rates were consistently high until 1999. 

• Hamilton’s country risk exposure at year-end 2000 placed it 

in the top ten financial institutions nationally. Much of this 

exposure was concentrated in countries suffering economic

instability and in emerging markets. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 59 
Appendix 4 

OCC’s Lessons Learned Review Conclusions 

 

 

• Bank management was not willing to recognize problems and 

strongly resisted OCC efforts. The greatest impediment to 

OCC examiners was dealing with untruthful and 

uncooperative bank management. Management’s 

questionable practices and activities were evident 

throughout OCC’s supervisory history with Hamilton. 

However, OCC believed that the evidence was not clear 

enough to take action in many cases. 

The LLR project team also concluded that: 

• The supervisory activities associated with Hamilton 

represented an unprecedented example of regulatory 

cooperation. 

• OCC incurred significant supervisory costs and losses 

against assessments during Hamilton’s decline to composite 

“4” and “5” ratings. 

• The supervision of Hamilton required a resource-intensive 

and highly coordinated/cooperative effort by everyone 

involved. OCC has taken actions that were responsive to 

issues raised during the supervision of Hamilton and in 

response to some conclusions described in the LLR report. 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 60 
Appendix 5 

Management Comments 

 

 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 61 
Appendix 5 

Management Comments 

 

 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 62 
Appendix 6 

Major Contributors To This Report

Office of Inspector General, Office of Audit

Donald R. Kassel, Director, Banking and Fiscal Service Audits 

Delores V. Dabney, Audit Manager 

Aldon K. Hedman, Auditor-in-Charge 

Leslye Burgess, Auditor 

Elizabeth Garcia, Auditor 

Maryann Pereira, Auditor 

Ronda R. Richardson, Auditor 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 63 
Appendix 7 

Report Distribution 

U.S. Department of the Treasury

Office of the Under Secretary for Domestic Finance 

Office of the Assistant Secretary for Public Affairs 

Office of the Assistant Secretary for Financial Institutions Policy 

Office of Strategic Planning and Evaluations, Departmental Offices 

Office of Accounting and Internal Control, Departmental Offices 

Office of The Comptroller of the Currency

Comptroller 

First Senior Deputy Comptroller and Chief Counsel 

Chief National Bank Examiner 

Senior Deputy Comptroller-Large Bank Supervision 

Senior Deputy Comptroller-Mid Size/Community Banks 

Office of Management and Budget

OIG Budget Examiner 

U.S. General Accounting Office

Comptroller General of the United States 

Federal Deposit Insurance Corporation

Chairman 

Material Loss Review of Hamilton Bank, NA (OIG-03-032) Page 64