1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------
For the fiscal year ended December 31, 1999
Commission file no. 0-22861
------------
FIRST INTERNATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1151731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Trumbull Street
Hartford, CT 06103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 727-0700
------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
(Title of each class)
Common Stock, par value $.10 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 23, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of the common stock
as reported by the Nasdaq Stock Market of $7.0625 was approximately $24,197,100.
As of March 23, 2000, the Registrant had 8,264,318 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II, items 5, 6, 7, 7A and 8 are incorporated by reference to First
International Bancorp's, Inc. 1999 Annual Report to Shareholders which is
included as an exhibit hereto.
Part III, items 10, 11, 12 and 13 are incorporated by reference to First
International Bancorp, Inc.'s definitive proxy statement to stockholders which
will be filed with the Securities and Exchange Commission no later than 120 days
after December 31, 1999.
2
TABLE OF CONTENTS
PART 1 Page No.
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 25
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 25
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 27
ITEM 11. EXECUTIVE COMPENSATION 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
3
REPORTS ON FORM 8-K 27
4
PART 1
ITEM 1: BUSINESS
GENERAL
Overview
First International Bancorp, Inc., a Delaware corporation, is a one bank holding
company incorporated in 1985 and regulated by the Board of Governors of the
Federal Reserve System. Its principal asset and subsidiary is First
International Bank (the "Bank"), a Connecticut state bank and trust company. The
Bank was established in 1955 as a national bank and converted to a state bank in
July 1999. The Bank is regulated by the State of Connecticut Department of
Banking ("CDB") and the Federal Deposit Insurance Corporation ("FDIC"). The Bank
changed its name from First National Bank of New England on February 1, 1999 to
more closely reflect the markets it serves. Since 1998, the Bank has established
six special purpose subsidiaries to facilitate loan securitizations and sales to
commercial paper conduits.
The Bank solicits commercial loans in New Jersey through its wholly-owned
subsidiary, First International Capital Corp. of New Jersey and operates in
various other states under the trade name First International Capital.
In September 1997, the Company completed an underwritten public offering whereby
1,955,000 shares of common stock were issued for net proceeds of $23.8 million.
On March 26, 1999, the Company sold its last retail branch and its checking,
savings and money market accounts. The Company retained its certificates of
deposit and continues to offer certificates of deposit to retail and brokered
depositors. (See "Changes in Funding Sources" for further discussion of the
funding sources used by the Company.)
The Company specializes in providing credit, trade and financial solutions to
small and medium size industrial companies located in the United States and in
international emerging markets. The Company serves its target market by offering
flexible and attractive terms to borrowers and manages its credit risk through
the combined utilization of commercial loan guarantee programs made available by
three U.S. federal agencies: the U.S. Small Business Administration (the "SBA"),
the U.S. Department of Agriculture (the "USDA"), and the Export-Import Bank of
the U.S. ("Ex-Im Bank"), as well as through the use of private credit insurance
policies.
For the federal fiscal year ending September 30, 1999, the Company was the
country's largest Ex-Im Bank lender measured by number of transactions; the
largest USDA Business and Industry lender measured by dollar volume; and the
tenth largest SBA 7(a) lender measured by dollar volume (and the largest in New
England). The Company maintains preferred status for government guaranteed
lending programs in several jurisdictions.
1
5
Changes in Funding Sources
During 1999 and 1998, the Company completed transactions that effected changes
in the manner in which the Company obtains funding for its lending business.
These transactions included:
* the sale of the Company's last branch in March 1999, including checking,
savings and money market accounts which requires the Company to provide funding
by alternative sources;
* establishment of two warehouse loan and sale facilities pursuant to which up
to an aggregate of $75 million is available to the Company (based upon the
contractual advance rates against the qualifying principal balance of the loans
pledged to secure the facilities; the pledged loans consist of equipment loans,
working capital term loans and loans secured by mortgages on commercial real
estate);
* establishment of a commercial paper conduit facility pursuant to which up to
$60 million is available to the Company (based upon the contractual advance
rates against the qualifying principal balance of the loans pledged to secure
the facility; the pledged loans consist of the unguaranteed portion of loans
guaranteed by the SBA);
* the increase from $65 million to $95 million of availability of a second
commercial paper conduit facility, pursuant to which the Company has the right
to sell up to $95 million in commercial revolving lines of credit and other
qualifying loans during the term of the facility;
* loan securitization and sales transactions pursuant to which the Company
securitized and sold in the aggregate approximately $140 million of asset backed
loans, including $49 million of the unguaranteed portions of loans originated by
the Company that were guaranteed in part by the SBA; and
* establishment of agreements with five national brokers which provide a source
for brokered certificates of deposits used for fundings of one year or less.
The Company expects to continue to obtain funding for its operations
from retail and brokered certificates of deposit, warehouse lines of credit, the
sale of loans on a loan-by-loan basis, through private placement securitizations
and from the sale of loans to commercial paper conduits and sale facilities.
Loan Originations
Management believes that the specialized market knowledge and experience of the
Company's lending officers, combined with a broad range of commercial and
international financing products, enable the Company to satisfy the needs of its
small and medium size industrial clients. Brand recognition for the Company is
maintained by incorporating the servicemark Financing Manufacturers
Worldwide(R) in its logos. The Company's domestic and international lending
relationships generally range from $150,000 to $5.0 million.
2
6
The Company's Commercial business units underwrite lines of credit, term loans,
industrial mortgages and trade financing for businesses primarily located in the
Northeast, Mid-atlantic, and Midwest regions of the United States. Commercial
lenders operate from the Company's Hartford, Connecticut headquarters, as well
as from regional representative offices located in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Pittsburgh and
Philadelphia, Pennsylvania; Rochester, New York; Washington D.C.; Detroit,
Michigan; St. Louis, Missouri; and Cleveland, Ohio. The Company plans to
continue its U. S. expansion in 2000 by opening additional representative
offices in the Southern and Western regions of the U. S. The Company's domestic
loan officers are trained to understand the specific financial needs of small
and medium size industrial companies, and to use government guaranteed and other
commercial loan products to respond to those needs. Domestic loan officers
participate in industrial trade organizations representing the Company's target
market and conduct other marketing activities to reach potential borrowers.
The Company's International business units underwrite Ex-Im Bank guaranteed and
insured and private sector insured short and medium term loans to small and
medium size industrial companies located in various international emerging
markets. The International business units also underwrite Ex-Im Bank guaranteed
revolving lines of credit to U.S. manufacturers and, in 1998, began offering
privately insured loans to U.S. importers of foreign-made goods. See
"International Lending Services and Products." International lending activities
support trade flows between the United States and emerging markets. The
Company's International business units operate from its Hartford, Connecticut
headquarters and are assisted in their efforts by contractual international
marketing representatives, or "master agents", many of whom are actively
involved in providing financial, accounting, consulting and/or engineering
services to industrial companies in their home countries. Contractual marketing
arrangements have been established with professionals in Argentina, Brazil,
Central America, Egypt, India, Indonesia, Korea, Mexico, North Africa,
Philippines, Poland, South Africa, Turkey and West Africa. The Company has
formally established "representative offices" in certain countries in accordance
with local regulations. The Company began lending internationally in 1994 and
has increased these loan originations to $60.9 million in 1997, $110.4 million
in 1998 and $182.1 million in 1999.
Underwriting
The Company's underwriting activities are initiated from each of its lending
offices and supported and approved at the Hartford, Connecticut headquarters.
Commercial lending officers analyze the creditworthiness of proposed borrowers
and evaluate each borrower's financial statements, credit reports, business
plans and other data to determine if the credit and proposed collateral satisfy
the Company's specific lending standards and policies. All credit memoranda are
reviewed by an independent credit officer and may require additional approval
depending on the particular circumstances of the financing package. Domestic and
international loans undergo a substantially identical approval process.
3
7
Loan Sales and Securitizations
The Company seeks to achieve high returns while meeting the growing credit needs
of its target market by selling a portion of its commercial and international
loans on a non-recourse, servicing-retained basis. A separate Capital Markets
business unit directs its resources toward identifying secondary loan markets to
sell loans originated by the Company to generate non-interest income and as a
further means of mitigating credit risk, leveraging capital and replenishing
liquidity.
In 1998, the Company began securitizing and selling certain whole loans and the
unguaranteed portions of certain government guaranteed loans that it originates,
and selling commercial revolving lines of credit, other commercial loans and the
unguaranteed portions of SBA loans to commercial paper conduits. In these
securitization and commercial paper transactions, the Company sells a pool of
loans to a trust, which in turn issues certificates representing beneficial
ownership interests in the trust or which issues notes and sells these
securities through private placement transactions. In order to provide credit
enhancement for the certificates or notes, the Company generally retains
subordinated certificates or notes and establishes a cash reserve account. The
Company also records an interest-only strip in connection with the transactions.
For all securitizations and sales, the Company is the servicer of the underlying
loans.
BUSINESS STRATEGY
The Company's strategy is to serve small and medium size industrial companies
through the following key activities:
Domestic Loan Origination Activities. Commercial business units currently
operate from the Hartford, Connecticut headquarters, as well as from regional
loan production or "representative" offices located in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Pittsburgh and Philadelphia,
Pennsylvania; Morristown, New Jersey; Rochester, New York; Washington D.C.;
Detroit, Michigan; St. Louis, Missouri; and Cleveland, Ohio. The Company intends
to continue to expand into new markets by opening additional representative
offices throughout the U.S. as marketing diligence is completed.
Financing Trade with International Emerging Markets. The International business
units operating from the Hartford, Connecticut headquarters are assisted in
their efforts abroad by contractual relationships with international master
agents in Argentina, Brazil, Central America, Egypt, India, Indonesia, Korea,
Mexico, North Africa, Philippines, Poland, South Africa, Turkey and West Africa.
The master agents are actively involved in providing professional financial
services to small and medium size industrial companies in their home countries.
The Company also provides working capital to U.S. manufacturers who export to,
and in 1998 the Company began financing U.S. imports from, international
emerging markets.
4
8
LENDING ACTIVITIES AND POLICIES
The Company's distribution of domestic and international commercial loan
originations are detailed below:
FOR THE YEARS ENDED
-------------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------- --------------------------------
Loan Originations Principal Percentage Principal Percentage
-------------- -------------- -------------- --------------
Domestic:
SBA loans................................ $142,089 26% $122,178 31%
USDA loans............................... 53,723 10% 45,162 12%
Other commercial loans................... 172,964 31% 113,888 29%
-------------- -------------- -------------- --------------
Total domestic banking................ 368,776 67% 281,228 72%
International:
Ex-Im working capital lines.............. 64,035 12% 37,276 10%
Ex-Im medium term loans.................. 46,874 8% 48,248 12%
Other international loans................ 71,175 13% 24,925 6%
-------------- -------------- -------------- --------------
Total international banking........... 182,084 33% 110,449 28%
-------------- -------------- -------------- --------------
Total commercial loan originations.... $550,860 100% $391,677 100%
============== ============== ============== ==============
MARKETING
Domestic Lending
The Company originates domestic loans through its 56 commercial lenders in
twelve offices who seek to establish long-term relationships with their clients.
The Company believes it is uniquely positioned to serve its domestic market
through an ability to provide clients with a flexible combination of lines of
credit, term loans and mortgages for industrial property and trade financing.
The Company generally utilizes the SBA, USDA, Ex-Im Bank and/or privately
insured loan guarantee and insurance programs as a part of a financing package
in light of an applicant's particular situation. The Company's participation in
these programs enables it to provide clients with longer loan terms than are
typically available to small and medium size industrial companies.
Commercial loan officers are responsible for marketing, underwriting, servicing,
monitoring and collecting payments on their portfolio of loans. The Company
believes that this broad range of responsibilities enables the commercial loan
officers to establish strong working relationships with both existing and
prospective clients and promotes strong client service and prudent loan
portfolio management. Commercial loan officers are encouraged to keep apprised
of market conditions through frequent contact with clients and potential
borrowers, to develop specific knowledge of their clients' businesses, and to
offer flexible structuring of loan products. In consultation with the borrower,
a commercial loan officer will evaluate the financing needs of the business and
then recommend the best way to structure the lending transaction to fit the
client's unique needs.
5
9
The marketing efforts by commercial loan officers include participation in trade
associations serving the needs of small and medium size industrial companies;
contacting accountants, attorneys and other professionals known by the Company
to have contact with businesses in need of financing; personal visits; direct
mail solicitations; and referrals from existing clients. Since the target client
of both domestic and international loan officers is often the same, there is an
active cross-selling effort between these two areas.
Strategic Alliances
In addition to the marketing efforts of the Bank's domestic lending officers,
the Bank seeks to market its domestic loan products through marketing agreements
with various trade and cooperative associations. In 1998, the Bank entered into
such agreements ("Strategic Alliances") with the National Rural Utilities
Cooperative Finance Corporation, and with various regional chapters of the
National Tooling & Machining Association. The Marketing Agreements provide,
among other things, for the applicable trade or cooperative association to
develop and implement a marketing plan pursuant to which the Bank has
implemented an expedited and streamlined credit application and approval process
for association members who desire commercial term loans from the Bank. The Bank
retains the sole discretion as to the credit standards to be applied and as to
whether or not to make any particular loan. The Marketing Agreements further
provide for the Bank to pay quarterly and annual compensation to such trade and
cooperative associations based upon the amount of loans made by the Bank to the
members of the associations.
International Lending
The Company has six international lenders in the Trade Finance business unit who
target U.S. exporters eligible for trade financing programs, including those
supported by Ex-Im Bank. These loan officers market pre-export working capital
lines of credit. This International business unit also targets U. S. buyers of
goods from certain international emerging markets. As with the domestic lending
relationships, the Trade Finance business unit is responsible for marketing,
underwriting, servicing, monitoring and collecting payments on its portfolio of
loans.
The Company has sixteen international lenders in its Americas and
Asia/Africa/Europe business units who target foreign purchasers of U. S. goods
eligible for short and medium term financing supported by Ex-Im Bank guarantees
and insurance and by private sector insurance. These International business
units are also responsible for marketing, underwriting, servicing, monitoring
and collecting payments on their portfolios of loans.
Internationally, the Company has established contractual marketing relationships
with professional firms in twelve emerging markets who, in the course of
conducting their primary business, have frequent contact with local industrial
companies who require financing to purchase U.S. goods or are manufacturing or
distributing goods for export to the U. S. Prior to entering into relationships
with these "Master Agents," the Company conducts due diligence, including
visiting the prospective representative and conducting local diligence
concerning their business reputation and legal status. The Company also requires
that each Master Agent be
6
10
trained on the Company's products and services at the Hartford, Connecticut
headquarters. Each Master Agent markets, on behalf of the Company, Ex-Im Bank
guaranteed and insured short and medium terms loans and privately insured export
loans in its respective market. The Master Agent will develop a lead with a
potential borrower and may aid in the transaction by obtaining required
financial or operational data from borrowers and providing assistance in the
loan origination and closing process. The Master Agents work with the Company's
U.S.-based loan officer who completes the application underwriting and closing
process. The Master Agent receives a negotiated fee when a loan referral made to
the Company has been underwritten and closed. The Master Agent assists the loan
officer in obtaining certain information from the applicant and in responding to
inquiries of the applicant, but does not have any direct underwriting
responsibilities. All decisions with respect to referrals of Master Agents are
made by the Company, which retains full control over international loan
originations.
The Company's Import Finance Business Unit has two lenders who seek to finance
goods imported by U. S. industrial companies throughout the country under a
private sector insurance policy and to cross sell SBA guaranteed and other
commercial loans to the companies.
Marketing efforts of these International business units include visits to, and
direct mail solicitation of, U.S.-based exporters and importers of capital
goods, direct mail solicitation of foreign-based manufacturers and industrial
trade organizations, and in-country marketing by the Company's network of Master
Agents. The Company has also entered into contractual strategic alliances with
Panalpina, Inc., a leading international freight forwarding company, the
Association for Manufacturing Technology, and the Korean Federation of Small
Business to provide access to additional trade finance opportunities.
DOMESTIC LENDING SERVICES AND PRODUCTS
Loan Products and the Origination Process
The commercial loans originated by the Company include industrial mortgage loans
(i.e., loans to businesses collateralized by industrial real property),
equipment term loans and revolving lines of credit to manufacturers, wholesalers
and distributors, many of which are exporters. The typical commercial borrower
is a privately owned and operated company with annual sales of $1 million to $50
million, employing 10-500 workers, which has been in business for at least three
years. A number of the Company's borrowers have a proprietary product line,
export their products and/or have a geographically diverse client base. The
Company is typically the borrower's primary lender and provides loans which are
collateralized by assets of the borrower.
The Company originates loans to a variety of industries; however, in the future
based upon its loss experience and economic forecasts, the Company may decide to
de-emphasize certain industries from time to time.
The interest rates accruing on the Company's commercial loans are typically
Prime-based, changing monthly or quarterly when the Prime Rate changes. The
Company also makes fixed rate loans from time to time. The Company originates
certain loans for sale through loan
7
11
purchase programs pre-established with investors. The term of a loan depends
upon whether the loan is guaranteed or is underwritten for a loan purchase
program. Government guarantee programs give clients access to longer term
financing and slower amortization than otherwise available. A government
guaranteed mortgage loan has a maximum term and amortization of up to 30 years,
while the term and amortization of an unguaranteed mortgage loan typically does
not exceed 15 years. Equipment loans are underwritten to correspond to the
useful life of the equipment and generally range from 5-15 years. SBA guaranteed
working capital term loans range from 7-10 years, while unguaranteed working
capital revolving lines of credit have one-year terms. Medium term loans are
generally fully amortizing.
The primary collateral sought by the Company for commercial loans consists of
liens which are generally first liens, on owner-occupied industrial real estate,
equipment, inventory and/or accounts receivable, although additional collateral
may include junior liens on residential properties. The Company generally
requests the personal guarantee of the principals of a business because the
Company believes this induces the guarantor to facilitate repayment of the loan.
In striving to meet the credit needs of its clients, the Company utilizes
government guarantee loan programs which allow it to offer longer-term loans
while mitigating the credit risk to the Company through the government
guarantee. The two government guarantee loan programs utilized by the Company's
Commercial business units to provide financing to its niche market are discussed
below.
SBA Guaranteed Loan Originations
The Company utilizes the SBA's 7(a) loan program for eligible borrowers. The
Company has Preferred Lender status in twenty-one SBA "districts." Preferred
Lender status allows the Bank to approve loans on behalf of the SBA, with the
national SBA processing center's concurrence that the applicant meets the SBA
eligibility requirements. The SBA generally completes its eligibility review
within 24 hours of submission. The Company has Certified Lender status in
twenty-two districts. Certified Lender status entitles the Bank to 72-hour
turnaround from local SBA district offices for approval of loan applications. In
other districts where the Company does not have either Preferred or Certified
Lender Status, applications may be submitted with a 7-day turnaround from the
local SBA district office.
The SBA's 7(a) loan program provides for a guarantee equal to 75% of the
principal balance, up to a maximum guarantee of $750,000 per borrower.
The Company makes SBA loans to businesses which qualify under agency regulations
as a "small business." The primary operative SBA eligibility criterion for the
Bank's targeted market are privately-owned manufacturers employing fewer than
500 workers. Loans may generally be used for the acquisition or refinancing of
plant and equipment, working capital and debt consolidation.
8
12
In the event of default, the SBA and Company share in any collections or
collateral on a pari passu basis. For example, if a loan carries a 75%
guarantee, the SBA receives 75% of all collections while the Company receives
25% of such amounts, beginning with the initial recovery. The SBA also
reimburses the Company's collection costs on a similar basis.
If the SBA establishes that any resulting loss is attributable to a failure by
the Company to comply with SBA policies and procedures in connection with the
origination, documentation or funding of a loan, the SBA may decline to pay the
guaranteed amount, or if the guaranty has already been paid, may seek recovery
of funds from the Company. With respect to guaranteed SBA loan participations
which have been sold, the SBA will first honor its guarantee and then seek
compensation from the Company in the event that a loss is deemed to be
attributable to a failure to comply with SBA policies and procedures.
USDA Guaranteed Loan Originations
The Company utilizes the Business and Industry Program ("B&I Program") of the
USDA when applicable based on an applicant's geographical location and other
characteristics. The B&I Program generally provides for 80% guarantees on loans
with principal balances up to $5 million and 70% guarantees on loans with
principal balances up to $10 million and, therefore, enables the Company to
provide to eligible borrowers a greater amount of financing than the Company
would otherwise be able to provide under the SBA program and on an unguaranteed
basis due to legal lending limits. The stated purpose of this program is to
support industry, employment and general economic and environmental conditions
in rural communities, which are defined as towns with fewer than 50,000
inhabitants. These loans may be utilized for acquisition, improvement or
refinancing of plant, equipment, working capital and debt consolidation
purposes.
Loans to be guaranteed under the B&I Program are submitted to the USDA district
office and, depending on that office's loan authority, may be required to be
forwarded to the national USDA for approval. The USDA approved the Company as a
Certified Lender in 1997, making it one of the first USDA Certified Lenders
nationally. As a Certified Lender, the Company is recognized as a "Subject
Matter Expert" and is able to reserve funds, which facilitates the processing of
USDA loans.
The guarantee of the USDA also provides for pari passu recovery of collection
proceeds, and for recourse to the Company similar to that discussed above for
SBA loans in the event the Company is found to have been negligent in the
origination, documentation or funding of USDA loans.
DOMESTIC UNDERWRITING
For the Company's domestic underwriting process, the Company's staff seeks to:
(i) analyze borrowers' credit profiles; (ii) assess the collateral underlying a
loan; (iii) assure compliance with eligibility requirements for inclusion under
any applicable guarantee programs; and (iv) obtain or provide appropriate
documentation for the transaction.
9
13
Domestic lending officers receive and assemble initial applications, analyze the
creditworthiness of proposed borrowers, prepare credit memoranda and, aided by
staff, prepare any required government guarantee loan application forms and
conduct credit and trade reference checks. In the course of analyzing the
creditworthiness of prospective borrowers, commercial lending officers evaluate
each applicant's and any guarantors' financial statements, credit reports,
appraisals and other information regarding the value of collateral, the
experience, strength and continuity of the borrower's management business plans
and other data to determine if the credit and collateral satisfy the Company's
standards and compliance with any applicable government guaranteed loan program
requirements. These standards may include debt service coverage ratios, or other
financial ratios, reasonableness of the borrower's projections (when submitted),
the experience, strength and continuity of the borrower's management, the
financial condition of individual guarantors, the value of collateral, and
compliance with government guarantee loan program requirements. The originating
officer performs on-site inspections to determine the condition of a borrower's
facility, the manner in which business is being conducted, the condition and
maintenance of assets, the existence of environmental issues, and other market
conditions.
Originating lending officers have no authority to approve a loan on their own.
Subject to approval by the Credit Policy Officer, the business manager of each
commercial business unit and the Company's Division Executives have lending
authority in accordance with their experience. Loans above certain levels
require the additional approval of the Chief Credit Officer and any loan
requests above $6 million must be further approved by the Company's Chief
Executive Officer. All loans to a borrower and its affiliates are aggregated to
determine whether they are within an individual's lending authority.
Upon initial approval by a business manager, the credit memorandum must be
approved by the Credit Policy Officer, who reports to the Chief Credit Officer.
The Credit Policy Officer reviews the memorandum and supporting file for
compliance with internal Company policy as well as applicable government
guarantee requirements. If additional approvals are required, the credit
memorandum is forwarded to the appropriate parties as noted above. If the
financing package includes a government guaranteed loan, the application is
forwarded to the applicable government agency as required.
The Company performs a credit analysis on all applications, considering the type
and value of the assets collateralizing a loan, the characteristics of the
borrower, the borrower's industry, and the anticipated debt service ratio. The
Company generally requires that a borrower's most recently completed fiscal year
financial statements demonstrate historical debt service coverage ratio of at
least 1.25 to 1. If requested funding is for plant or line of business
expansions, consideration may also be given to projected results and, therefore,
certain loans may be granted when historical debt service coverage is less than
1.25 to 1.
Real property taken as primary collateral for a loan is valued by an independent
appraiser in accordance with federal banking regulations, and the appraisal is
then subject to an internal review in accordance with these regulations.
Equipment serving as primary collateral for a loan
10
14
is generally valued by an independent equipment appraiser. The Company will
generally obtain a Phase I environmental report completed in accordance with the
standards of the American Society for Testing and Materials on any commercial
real property to be mortgaged. Additional environmental reporting and
remediation are required prior to closing if environmental issues either exist
or are suspected.
The Company's standard underwriting criteria details the maximum advance rates
which are utilized for each type of collateral. Commercial property is generally
given a collateral value for underwriting purposes equal to 80% of the appraised
value; finished goods and raw material are generally valued at 50% of book
value; trade accounts receivable under 90 days are generally valued at 75% of
book value.
Although the maximum prescribed collateral values are generally utilized in the
Company's analyses, there may be instances where the maximum values are reduced
or, due to the borrower's situation, special consideration may be given to
applications exceeding the general standards. Proposed exceptions to the
Company's loan policy are reviewed by the approving officers. Decisions to
approve these loans are made on a case-by-case basis and depend upon the overall
creditworthiness of the applicant. The overall trends in underwriting exceptions
are monitored by the Chief Credit Officer and the Company's Loan Committee.
INTERNATIONAL LENDING SERVICES AND PRODUCTS
The Company's International business units underwrite revolving lines of credit
to U.S. manufacturers, short and medium term loans to foreign buyers of U.S.
goods, short term loans to U.S. buyers of foreign goods, and letters of credit
issued in connection with such facilities.
The International lending business units include the following:
BUSINESS UNITS/TERRITORY PRODUCTS USED DESCRIPTION
- ------------------------ ------------- -----------
TRADE FINANCE (principally the Working capital line of credit; 90% One year revolving line of credit
Northeast, Mid-atlantic and Midwest Ex-Im guaranteed; indexed to U.S. to U.S. manufacturers
U.S.) Prime, variable daily; U.S. dollar collateralized by export accounts
denomination receivable and inventory
IMPORT FINANCE (entire U.S.) 90-360 day U.S. import term loan; Financing of accounts receivable
discount note; 95% privately insured due from U.S. manufacturer
purchasing goods from international
emerging markets; unsecured
11
15
AMERICAS (principally Short and medium term loan; 1 to 5-year term loans to
Argentina, Brazil, Central 100% guaranteed by Ex-Im Bank foreign purchasers of quali-
America, Mexico) or privately insured (generally fied U.S. made inventory and
ASIA/AFRICA/EUROPE 95%); indexed to 6-month equipment; unsecured or
(principally Egypt, India, LIBOR, variable semi-annually; secured by equipment
Indonesia, Korea, North U.S. dollar denominated
Africa, Philippines, Poland,
South Africa, Turkey and
West Africa)
Ex-Im Bank is an independent agency of the U.S. whose mission is to facilitate
export financing of U.S. goods and services by neutralizing the effect of export
credit subsidies from other governments and absorbing credit risks that the
private sector will not accept. The Company utilizes the Ex-Im Bank's loan
guarantee and insurance programs designed to support small and medium size U.S.
exporters. In 1997 the Company received Ex-Im Bank's annual "Small Business Bank
of the Year" award.
International Lending - United States
Export Working Capital and U.S. Import Loan Products and the Origination Process
The typical U.S. client for the Company's international products is a U.S.-based
manufacturer with sales of $1 million to $50 million and export or import
financing needs. The Trade Finance business unit handles clients who are
exporting while the Import Finance Business Unit handles U.S. importers. The
target profile of these clients is generally the same as for the Company's other
domestic clients.
The one-year revolving Ex-Im Bank working capital lines of credit are indexed to
WSJ Prime and adjust daily. The primary collateral for these loans includes
export-related accounts receivable and inventory. The accounts receivable are
generally insured under an Ex-Im Bank insurance policy, a private export credit
insurance policy or an acceptable letter of credit. Open accounts receivable may
qualify as collateral if approved in advance by the Company and Ex-Im Bank.
Borrowers must submit borrowing base certificates to the Company to evidence the
availability of acceptable collateral when an advance is requested, and monthly
thereafter.
The Company is a "AA Level Delegated Authority" lender with respect to Ex-Im
Bank's working capital loan guarantee program and, therefore, has authority to
approve working capital lines up to $5 million per borrower, up to an aggregate
portfolio of $75 million, without Ex-Im Bank approval.
In the event of a loan default, the Company and Ex-Im Bank share in all loan
recovery proceeds on a pari passu basis in accordance with the 90%
guaranteed/10% unguaranteed ratio. The Company also has the responsibility to
ensure that loans are underwritten, documented and funded in accordance with
Ex-Im Bank polices and procedures in order to avoid loss of the guarantee.
12
16
The loans made by the Company to finance the purchase by U.S. manufacturers of
goods from international emerging markets are unsecured loans which are
discounted at origination to yield a market rate. The Company has obtained a
credit risk policy from a private sector insurance company to insure loans made
under this program. In the event of a loan default, the insurance company will
pay the Company, subject to certain deductibles, 95% of the principal balance,
plus accrued interest. The Company has the responsibility to ensure that loans
are underwritten, documented and funded in accordance with the insurance policy
in order to avoid loss of the insurance.
International Lending - Emerging Markets
Short and Medium Term Loan Products and the Origination Process
Emerging market-based clients of the Company's Americas and Asia/Africa/Europe
business units are typically small and medium size industrial companies
requiring financing to purchase equipment, components and raw materials from the
U.S.
The Company primarily uses Ex-Im Bank guarantee and insurance programs to
mitigate its credit risk to the borrower. In 1998, as an alternative to the
Ex-Im Bank product, the Company obtained a credit risk insurance policy for
short and medium term loans to industrial companies in certain international
emerging markets from a private sector insurance company. The underwriting
criteria is substantially the same under both the Ex-Im Bank and privately
insured programs, although Ex-Im Bank imposes U.S. content measurements.
The Ex-Im Bank guarantee or insurance provides 100% coverage on the medium term
loans and generally 95% coverage on the short-term loans. The private sector
insurance policy generally insures 95% of the short and medium term loans. With
the private sector insurance policy, the Company has discretionary credit
approval authority for loans up to $750,000 which meet the underlying criteria
of the private sector insurance policy. The Company tends to utilize the private
sector insurance policy for smaller dollar requests to facilitate approval time.
Medium term loans are generally 3-5 years in term, and finance the acquisition
of qualified U.S.-made capital goods. The Ex-Im Bank program allows the
financing of up to the lower of 85% of purchase price or 100% of U.S. content.
Certain other U.S. content and product requirements must also be met. The loans
range in size from $150,000 to $10 million and are U.S. dollar-denominated.
Although the purchase of the equipment is being financed, the Ex-Im Bank loans
are unsecured; the Company relies on the borrower's cash flow and the 100% Ex-Im
Bank guarantee or Ex-Im Bank insurance. The Company does obtain a security
interest in the equipment being underwritten pursuant to the private sector
insurance policy.
International lending officers are responsible for marketing, underwriting,
servicing, monitoring and collecting their portfolios of loans. Because the
medium term loans are fully amortizing with semi-annual payments, there is less
post-closing analysis required for performing loans than for other types of
loans made by the Company.
13
17
In the event of default, the Company will work with Ex-Im Bank to handle the
workout and collection of Ex-Im Bank guaranteed medium and short term loans and,
in the event a claim is filed, Ex-Im Bank will pay the Company 100% of the
guaranteed or insured principal balance, plus accrued interest. See "Delinquency
and Collection Activities."
INTERNATIONAL UNDERWRITING
International lending officers receive and assemble initial applications,
analyze the creditworthiness of proposed borrowers, prepare memoranda and, aided
by staff, prepare the required Ex-Im Bank and private sector insurance loan
application forms and conduct credit and trade reference checks. For short and
medium term loans, in-country Master Agents, where applicable, aid in the
transaction by obtaining required financial or operational data from borrowers
and by providing general assistance in the loan origination and closing process.
The Company's international lending officers will often visit the prospective
U.S. borrower's place of business and perform on-site inspections. The Company
will generally instruct its in-country Master Agents to make these inspections
of foreign prospective borrowers. Although certain of the international loans
are unsecured, site inspections are conducted in most cases because this
information is helpful in assessing a borrower's operations.
The approval process is substantially similar to that followed by the commercial
lending officers. The Credit Policy Officer reviews the memorandum and
supporting file for compliance with internal Company policies as well as
applicable Ex-Im Bank or private insurer program parameters. As with the
domestic lending, exceptions to the Company's and Ex-Im Bank's loan policies are
entertained on a case-by-case basis by the approving loan officers, and
acceptance of exceptions depends upon the overall creditworthiness of the
applicant.
Working capital lines of credit are collateralized by export-related inventory
and accounts receivable less than 90 days old; this collateral has maximum
prescribed collateral values of 75% and 90%, respectively. As is the case with
respect to domestic loans, the collateral value required to support a loan is
based on the borrower's individual circumstances, and applications exceeding the
Company's general standards may receive special consideration.
For short and medium term loans, debt service coverage and operating history are
reviewed in the underwriting process. The lending officer also considers the
availability to the borrower of U.S. dollars and other "hard" currency revenue
sources from sales to the U.S. and other stable currency markets.
While most working capital lines of credit are within the Company's "AA
Delegated Authority", applications which do not comply with and/or are above the
Company's authority, and all Ex-Im Bank short and medium term loans, require
Ex-Im Bank approval. U.S. import loans in excess of $500,000, and short and
medium term loans in excess of $750,000, require approval from the private
sector insurance company if they are to carry that insurance.
14
18
CAPITAL MARKETS AND LOAN SERVICING
Capital Markets Activities
The Capital Markets business unit was established in July 1996 to assume
responsibility for the non-recourse, servicing-retained sale of SBA, USDA and
Ex-Im Bank government guaranteed loans and to identify markets for the sale of
non-guaranteed mortgage, term and revolving loans on a non-recourse,
servicing-retained basis. Since 1998, the Capital Markets business unit has
completed four securitizations of the unguaranteed portions of SBA loans and
certain whole commercial loans, and has sold revolving lines of credit to
commercial paper conduits. These capital markets activities allow the Company to
leverage capital, replenish liquidity and mitigate the risk of balance sheet
exposure to any single borrower.
The guaranteed portions of SBA and USDA loans are generally sold during the
quarter of origination on a single loan basis to established brokers. Brokers
generally pool the SBA guaranteed portions. USDA loans are individually sold.
The guaranteed portions of Ex-Im Bank loans and lines of credit are sold to
various parties, including the Private Funding Export Funding Corporation
("PEFCO"). PEFCO is a private corporation established with the support of the
United States Treasury and Ex-Im Bank to assist in financing exports of U.S.
goods and services by making direct loans to foreign importers of U.S. made
goods, and to provide liquidity support for private sector lending utilizing
Ex-Im Bank programs. The Company is a 1% shareholder and one of among
approximately 50 PEFCO shareholders, with a common stock investment of $987,000
at December 31, 1999.
SBA and USDA regulations permit the Company to sell or participate,
respectively, a portion of the unguaranteed amount of loans originated under
their respective programs. In accordance with SBA and USDA regulations, the
Company is required to retain a 5% interest in the unguaranteed portion of the
loan. Current SBA regulations require that the Company hold retained interests
in the unguaranteed portion of securitized loans equal to a minimum of 2% of the
transaction. Upon the sale of any guaranteed portions, the Company, if holding
an unguaranteed portion, shares in the payment stream and collateral on a pari
passu basis with all (guaranteed and unguaranteed) investors, beginning with the
initial recovery. If the Company is holding an investment in a subordinated
interest following a securitization, the application of the cash flows is
determined in accordance with the applicable pooling and servicing agreement.
The Capital Markets business unit has developed a list of potential buyers of
non-guaranteed mortgage loans, term loans and revolving lines of credit and
devotes substantial resources to the identification of these and other buyers. A
primary objective in the negotiation and sale of these loans is the Company's
retention of sole responsibility for borrower contact. Investors meet with
borrowers only in rare circumstances, and generally rely on the Company to
prudently service and monitor lending relationships. The Company believes that
this is important to maintain client relationships and also reflects investor
confidence in its servicing ability and reputation.
15
19
Loan Servicing Activities
At December 31, 1999, the total loan portfolio managed by the Company was $1.1
billion as compared to $779.1 million at December 31, 1998.
The Company services substantially all of the loans it originates, whether
securitized, sold individually to investors or held in portfolio. Servicing
includes collecting payments from borrowers and remitting applicable payments
and required reports to any investors; accounting for principal, interest and
any real estate taxes or other escrow receipts and payments; contacting
delinquent borrowers; supervising foreclosures; and liquidating collateral when
required. Other than tasks performed by the assigned lending officers, loan
servicing functions are centralized in the Hartford, Connecticut headquarters.
The Company receives servicing fees on loans serviced for others in varying
amounts, as determined under the particular terms of the sale. Management
believes that servicing most loans originated enhances the Company's
relationship with borrowers. This contact allows the Company to continue to
offer its loan products to clients who may need additional financing. Further,
these servicing arrangements provide an additional and profitable revenue stream
that is less cyclical than the business of originating and selling loans
themselves.
After a loan is closed, the Loan Servicing business unit reviews the loan files
to confirm that loans were originated in accordance with any applicable
government guarantee program guidelines and Company policies. Thereafter, the
loan officers and the Loan Review business unit conduct periodic reviews of the
borrower's financial condition.
DELINQUENCY AND COLLECTION ACTIVITIES
The assigned loan officer retains responsibility for routine collection of loans
in his or her portfolio. The Company attempts to collect all loans on a 30-day
basis. An officer's initial collection efforts generally begin when an account
is 15 days past due. At 20 days past due, a reminder notice is sent to the
borrower and the officer again attempts to contact the borrower to determine the
reason for the delinquency and if the account will be brought current.
If a borrower is unable to make a payment within 30 days of the due date as of
month-end, and has not made acceptable alternative arrangements with the
Company, the officer issues a past due letter requiring the borrower to make the
required payment within 10 business days by certified or cashiers check. If
payment is not remitted on time, the account is transferred to the Company's
Asset Recovery business unit for consideration of additional collection
procedures, including issuance of a demand letter and possible liquidation of
collateral.
The Asset Recovery business unit is responsible for contacting the borrower and
analyzing its current and projected financial condition, the reasons leading to
the delinquency and the value of the collateral available to the Company. The
Asset Recovery Officer then proposes a workout plan to the Chief Credit Officer
and other involved members of senior management. The Asset
16
20
Recovery business unit will also provide any required notices and generally seek
to comply with applicable government guarantee program or investor requirements.
If a modification of loan terms or other acceptable workout cannot be achieved
within a reasonable time frame, the Company will liquidate the collateral
securing the loan. The Company prefers not to take title to real property or
equipment unless required to facilitate the collection process. The Company
solicits assistance from the principals of the delinquent borrower to effect the
liquidation of any property, with title remaining in the borrower's name,
thereby avoiding a lengthy foreclosure or repossession process and exposure to
the Company regarding environmental or other liability issues. The Company has
generally found principals of borrowers to be cooperative in assisting the
Company in liquidating collateral efficiently. The Company follows the same
general workout procedures for substantially all of the loans serviced.
If a loan carries an SBA guarantee, the responsible SBA District Office will be
notified of the delinquency and will be presented with a liquidation plan within
60-90 days of such delinquency. Unless the SBA objects, the Company will carry
out the terms of the liquidation plan. As a Preferred Lender, the Bank has
responsibility and authority over liquidation procedures on all SBA guaranteed
loans serviced. Any loss after liquidation of collateral is allocated pro rata
between the guaranteed and unguaranteed portions of an SBA Loan. After an SBA
loan becomes 60-90 days past due, the SBA, at the Company's request, will
repurchase the guaranteed portion of the principal balance of the loan at par
from the secondary market investor, together with accrued interest covering a
period of up to 120 days.
USDA procedures require that the Company file a liquidation plan when it is
believed action should be taken on a delinquent loan, which is generally when
the loan is 60-90 days delinquent. The USDA has 30 days to review the plan. The
Company will then execute the approved plan or work with the USDA to arrive at a
mutually acceptable plan. Any loss after liquidation of collateral is allocated
pro rata between the guaranteed and unguaranteed portions of the USDA loan. The
holder of the guaranteed portion may request that the USDA repurchase the
guaranteed portion at any time, or the Company will request repayment on that
holder's behalf when liquidation is complete. The USDA does not impose any
restrictions on the number of days for which interest will be paid on the
guaranteed portions.
The liquidation of delinquent working capital and medium and short term Ex-Im
Bank loans is handled in conjunction with Ex-Im Bank. If deemed appropriate, the
Company may submit a plan to Ex-Im Bank to approve a workout plan to provide
additional time for the borrower to repay the loan. The Company may submit a
claim for repurchase at any time between 30 and 120 days after a delinquency
occurs, but at no time may such claim be made more than 150 days after the
delinquency unless properly extended in the event of a workout plan. Ex-Im Bank
will make payment under its guarantee within 30 days after acceptance of the
Company's request.
In the event of default on a private sector insured loan, the Company handles
the liquidation of the loan during a 150-day waiting period. At the end of the
waiting period, subject to certain deductibles being satisfied, the private
sector insurance company pays the Company 95% of the principal balance, plus
accrued interest and may ask the Company to continue to handle the
17
21
liquidation of the loan. The Company may also seek approval of a workout plan
from the insurance company if deemed appropriate.
The Company retains responsibility for the proper documentation and servicing of
all loans serviced for others, and may incur losses related to these loans if it
is found to be negligent by a guaranteeing agency, insurer or investor in
carrying out these duties.
Unguaranteed and uninsured loans or unguaranteed and uninsured portions of loans
held by investors are subject to negotiated servicing agreements, which in some
cases, provide investors with the option of assuming responsibility for all
collection efforts after a loan becomes 60-90 days delinquent. If the Company is
contractually responsible for collection efforts, the servicing agreements
generally require that the investor pre-approve liquidation actions.
CREDIT RISK MANAGEMENT
The Chief Credit Officer has primary responsibility for credit risk management,
ensuring the appropriateness of underwriting criteria and application thereof,
the implementation of RISCOPE(sm) (the Company's proprietary commercial credit
scoring and risk assessment model), and the independent analyses of loans by the
Loan Review business unit.
The Credit Policy Officer, who reports to the Chief Credit Officer, reviews all
credit memoranda for compliance with the requirements of government guarantee
programs and Company credit policies. If, based on particular facts and
circumstances, policy exceptions are proposed by lending officers, the Credit
Policy Officer will ensure that all appropriate policy exceptions are documented
and approved by the authorized party. The Company's management Asset Quality
Committee evaluates the nature and trends of these exceptions monthly. The Chief
Credit Officer reports these exceptions to the Board of Directors' Loan
Committee quarterly.
The Bank "risk rates" its loan portfolio by monitoring changes in the financial
condition of borrowers, assessing overall economic trends, and assigning
numerical ratings to individual loans. The Company applies a nine tiered risk
rating system. The rating system, in conjunction with other available
quantitative and qualitative data, is utilized to assist management in its
quarterly evaluation of the adequacy of the Allowance for Loan Losses.
The assigned lending officer has primary responsibility for risk ratings, and
that officer's decisions are periodically reviewed by the Loan Review business
unit. Risk ratings are based on the borrower's operating cash flow, industry,
product line, earnings, assets, liability, management experience, debt capacity,
and prior credit history with the Company.
The Company has developed a proprietary credit scoring and risk analysis model,
RISCOPE(sm), used in the initial underwriting, post-closing loan monitoring and
on-going rating process by lending officers and the Loan Review business unit.
RISCOPE(sm) assists the Company in quantifying the credit risk of commercial
clients. The model takes into account quantitative and qualitative factors and
is designed to analyze the Company's primary client base: small and
18
22
medium size industrial companies. Additionally, the model facilitates an
efficient completion of the underwriting process and, once loans are originated,
helps management identify weaknesses in loans earlier than might otherwise be
done if payment default were their only manifestation.
The Loan Review business unit reviews the loan portfolio to evaluate the
appropriateness of officer risk ratings and overall trends in the portfolio.
Loan Review results are reported to the Loan Committee of the Board quarterly.
COMMUNITY FINANCE
The Company's Community Finance business unit, formerly named "Private Banking,"
provided funding for the Company by managing its deposit base, which consisted
of demand deposits, money market accounts and time certificates of deposits, by
targeting the commercial depository accounts of small and medium size industrial
companies, as well as the personal accounts of their principals, and by offering
a full array of financial products. Subsequent to the sale of the Company's
checking, savings and money market accounts in March 1999, the unit solicited
retail certificates of deposit. Currently, retail certificates of deposit are
solicited by an officer in the Finance business unit.
In November 1999, the efforts of the Community Finance officers were directed to
the solicitation of loans to businesses located in the greater Hartford area. As
a federally-insured depository, the Bank must comply with the Community
Reinvestment Act ("CRA") regulations by offering lending, investment and other
financial services to its "assessment area" as determined under the CRA. The
Company believes that the lending to be offered by the Community Finance
business unit in conjunction with other loans offered by the Hartford-based
Commercial lenders will enable it to meet its obligations under the CRA.
COMPETITION
The Company competes for clients with other commercial and savings banks,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms and certain other nonfinancial institutions, many of whom are able
to devote far greater resources than the Company to market, underwrite and
service loans to the same client base. The Company competes by emphasizing its
expertise and knowledge of its clients' businesses, commitment to service, and
flexibility in structuring financial transactions. Through the combined
utilization of government guaranteed loan programs, the Company is able to
provide flexible longer-term financing than would otherwise be available to
borrowers.
REGULATION AND SUPERVISION
Financial Services Modernization
On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley
Act ("Gramm-Leach") which significantly altered banking laws in the United
States. Gramm-Leach enables combinations among banks, securities firms and
insurance companies beginning
19
23
March 11, 2000. As a result of Gramm-Leach, many of the depression-era laws
which restricted these affiliations and other activities which may be engaged in
by banks and bank holding companies, were repealed. Under Gramm-Leach, bank
holding companies are permitted to offer their customers virtually any type of
financial service that is financial in nature or incidental thereto, including
banking, securities underwriting, insurance (both underwriting and agency) and
merchant banking.
In order to engage in these new financial activities, a bank holding company
must qualify and register with the Federal Reserve Board as a "financial holding
company" by demonstrating that each of its bank subsidiaries is "well
capitalized," "well managed," and has at least a "satisfactory" rating under the
CRA.
These new financial activities authorized by Gramm-Leach may also be engaged in
by a "financial subsidiary" of a national or state bank, except for insurance or
annuity underwriting, insurance company portfolio investments, real estate
investment and development and merchant banking, which must be conducted in a
financial holding company. In order for the new financial activities to be
engaged in by a financial subsidiary of a national or state bank, Gramm-Leach
requires each of the parent bank (and its sister-bank affiliates) to be well
capitalized and well managed; the aggregate consolidated assets of all of that
bank's financial subsidiaries may not exceed the lesser of 45% of its
consolidated total assets or $50 billion; the bank must have at least a
satisfactory CRA rating; and, if that bank is one of the 100 largest national
banks, it must meet certain financial rating or other comparable requirements.
Gramm-Leach establishes a system of functional regulation, under which the
federal banking agencies will regulate the banking activities of financial
holding companies and banks' financial subsidiaries, the U.S. Securities and
Exchange Commission will regulate their securities activities and state
insurance regulators will regulate their insurance activities. Gramm-Leach also
provides new protections against the transfer and use by financial institutions
of consumers' nonpublic, personal information.
Holding Company Regulation
The Company is registered as a bank holding company and regulated and subject to
periodic examination, by the Board of Governors of the Federal Reserve System
("FRB") under the Bank Holding Company Act ("BHCA").
Although the Company may meet the qualifications for electing to become a
financial holding company under Gramm-Leach, the Company has elected to retain
its pre-Gramm-Leach status for the present time under the BHCA.
The Company is currently limited to the business of owning, managing or
controlling banks and engaging in certain other bank-related activities,
including those activities that the FRB determines from time to time to be
closely related to banking. The BHCA requires, among other things, the prior
approval of the FRB if a bank holding company proposes to (i) acquire all or
substantially all of the assets of a bank, (ii) acquire direct or indirect
ownership or control of
20
24
more than 5% of the outstanding voting stock of any bank (unless it already owns
a majority of such bank's voting shares) or (iii) merge or consolidate with any
other bank holding company.
As a bank holding company, the Company is required by the FRB to act as a source
of financial strength and to take measures to preserve and protect the Bank. As
a result, the Company may be required to inject capital in the Bank if that need
arises. The FRB may charge a bank holding company such as the Company with
unsafe and unsound practices for failure to commit resources to a subsidiary
bank when required.
To be considered regulatory capital, loans from the Company to the Bank must be
on terms subordinate in right of payment to deposits and to most other
indebtedness of the Bank.
The FRB, FDIC and, in the case of a Connecticut state bank and trust company,
the CDB, collectively have extensive enforcement authority over bank holding
companies and Connecticut state banks. This enforcement authority, initiated
generally for violations of law and unsafe and unsound practices, includes,
among other things, the ability to assess civil money penalties, to initiate
injunctive actions and to terminate deposit insurance in extreme cases.
INTERSTATE BANKING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as
amended (the "Interstate Banking Act") generally permits bank holding companies
to acquire banks in any state, and preempts all state laws restricting the
ownership by a bank holding company of banks in more than one state. The
Interstate Banking Act also permits a bank to merge with an out-of-state bank
and convert any offices into branches of the resulting bank if both states have
not opted out of interstate branching; permits a bank to acquire branches from
an out-of-state bank if the law of the state where the branches are located
permits the interstate branch acquisition; and permits banks to establish and
operate de novo interstate branches whenever the host state opts-in to de novo
branching. Bank holding companies and banks seeking to engage in transactions
authorized by the Interstate Banking Act must be adequately capitalized and
managed.
Connecticut has allowed interstate mergers and acquisitions, the establishment
of Connecticut-chartered banks by foreign bank holding companies and interstate
de novo branching since 1995, subject to certain reciprocity requirements.
Connecticut law also places a minimum permissible age of five years on the
target bank and a 30% limit on concentration of deposits in both interstate and
intrastate acquisitions. Legislation was enacted in 1996 which expressly permits
an out-of-state bank to merge or consolidate with or acquire a branch of another
out-of-state bank which has a branch in Connecticut.
REGULATION OF THE BANK
General
As a Connecticut-chartered bank and trust company, the deposits of which are
insured by the FDIC, the Bank is subject to regulation and supervision by both
the Connecticut Department of
21
25
Banking and the FDIC. This regulation and supervision is intended primarily to
protect depositors and the FDIC's Bank Insurance Fund, not stockholders.
The Connecticut Department of Banking regulates the Bank's internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner (the "Commissioner") is required for the
establishment of branch offices and business combination transactions. The CDB,
through its Bank Examination Division, conducts periodic examinations of the
Bank. The FDIC also regulates many of the areas regulated by the Department.
Under Connecticut banking law, no person may acquire beneficial ownership of
more than 10% of any class of voting securities of a Connecticut-chartered bank,
or any bank holding company of such a bank, without prior notification of, and
lack of disapproval by, the Commissioner. Similar restrictions apply to any
person who holds in excess of 10% of any such class and desires to increase
these holdings to 25% or more of such class.
Connecticut banking laws grant banks broad lending authority. Subject to certain
limited exceptions, however, total secured and unsecured loans made to any one
obligor pursuant to this statutory authority may not exceed 25% of the Bank's
equity capital and the allowance for loan losses.
Federal law also imposes additional restrictions on the Bank with respect to
loans and credit to certain related parties and transactions with the Company's
principal stockholders, officers, directors and affiliates. Extensions of credit
to such persons (i) must be made on substantially the same terms (including
interest rates and collateral) as, and follow credit underwriting procedures not
less stringent than, those prevailing for comparable transactions with members
of the general public, and (ii) must not involve more than the normal risk of
repayment or present other unfavorable features.
Capital Adequacy
The federal bank regulatory authorities have adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
framework that makes regulatory capital requirements more sensitive to
differences in risk profile among banking organizations, takes off-balance sheet
exposures into explicit account in assessing capital adequacy, and minimizes
disincentives to holding liquid, low-risk assets. These risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
financial instruments into four weighting categories, with higher levels of
capital required for the categories perceived as representing greater risk.
Under these guidelines, a banking organization's capital is divided into two
tiers. The first tier ("Tier 1") includes common equity, perpetual preferred
stock (excluding auction rate, money market or remarketable issues) and minority
interests held by others in a consolidated subsidiary, less goodwill and any
disallowed intangibles. Supplementary ("Tier 2") capital includes, among other
items, cumulative and limited-life preferred stock, mandatory convertible
securities,
22
26
subordinated debt and the allowance for loan and lease losses, subject to
certain limitations and less required deductions as provided by regulation.
Banking organizations are required to maintain a risk-based capital ratio of
total capital (Tier 1 plus Tier 2) to risk-weighted assets of 8%, of which at
least 4% must be Tier 1 capital. Federal bank regulatory authorities may,
however, set higher capital requirements when a banking organization's
particular circumstances warrant. As a general matter, banking organizations are
expected to maintain capital ratios well above the regulatory minimums.
In addition, federal bank regulatory authorities have established guidelines for
a minimum leverage ratio (Tier 1 capital to average total assets). These
guidelines provide for a minimum leverage ratio of 3% for banking organizations
that meet certain specified criteria, including excellent asset quality, high
liquidity, low interest rate exposure and the highest regulatory rating. Banking
organizations not meeting these criteria or which are experiencing or
anticipating significant growth are required to maintain a leverage ratio which
exceeds the 3% minimum by a least 100 to 200 basis points. The risk based
capital and leverage ratios of the Bank as of December 31, 1999 and December 31,
1998 are set forth in Note 8 to the Company's Consolidated Financial Statements.
Federal banking agencies must take "prompt corrective action" with respect to
depository institutions that do not meet minimum capital requirements. Federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions they
supervise. Under these regulations, a depository institution is classified in
one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Based on the Bank's current regulatory capital
position, management believes that the Bank is "well capitalized."
The Bank is generally prohibited from making any capital distribution (including
payment of a cash dividend) or paying any management fees to the Company if the
Bank would thereafter be undercapitalized. Undercapitalized depository
institutions are subject to growth limitations and are required to submit a
capital restoration plan acceptable to federal banking agencies. If a depository
institution fails to submit an acceptable plan, it is treated as if it is
"significantly undercapitalized."
Failure to meet applicable capital guidelines could subject a bank or bank
holding company to a variety of enforcement remedies available to the federal
bank regulatory authorities, including limitation on the ability to pay
dividends, the issuance of a capital directive to increase capital and, in the
case of a bank, the termination of deposit insurance by the FDIC or (in severe
cases) the appointment of a conservator or receiver.
Federal bank regulatory authorities have recently proposed amendments to current
risk based capital regulations that may require the Company to set aside
additional risk based capital for loans securitized or sold that meet certain
criteria. The Company is currently evaluating the implications of such proposal.
23
27
Dividends
The Bank is subject to legal limitations on the frequency and amount of
dividends that can be paid to the Company. The FDIC and CDB, in general, also
have the power to prohibit the payment of dividends by the Bank which would
otherwise be permitted under applicable regulations if the agencies determine
that these dividends would constitute an unsafe or unsound practice.
CDB approval is required for the payment of dividends by the Bank in any
calendar year if the total of all dividends declared by the Bank in that year
exceeds the current year's net income combined with the retained net income of
the two preceding years. "Retained net income" means the net income of a
specified period less any common or preferred stock dividends declared for that
period. Moreover, no dividends may be paid by a state bank in excess of its
undivided profits account. In addition, the FRB and the FDIC have issued policy
statements which provide that, as a general matter, insured banks and bank
holding companies may pay dividends only out of current operating earnings.
There are also statutory limits on other transfers of funds to the Company and
any other future non-banking subsidiaries of the Company by the Bank, whether in
the form of loans or other extensions of credit, investments or asset purchases.
These transfers by the Bank generally are limited in amount to 10% of the Bank's
capital and surplus to the Company and any such future subsidiary of the
Company, or 20% in the aggregate to the Company and all such subsidiaries.
Furthermore, these loans and extensions of credit are required to be fully
collateralized in specified amounts depending on the nature of the collateral
involved.
Community Reinvestment Act
The Federal and State of Connecticut Community Reinvestment Acts require the
FDIC and CDB to evaluate the Bank's performance in helping to meet the credit
needs of the community. The Bank defines its CRA marketplace as Hartford County.
This definition is not intended to restrict the availability of credit services
throughout the Bank's general service area, but represents a special commitment
the Bank has made to provide lending and depository services to the community.
As a part of the CRA program, the Bank is subject to periodic examinations by
the FDIC and CDB and maintains comprehensive records of its CRA activities for
this purpose. Following its most recent examination in March 1998 by its former
primary regulator, the Comptroller of the Currency, the Bank received a rating
of "Satisfactory." The Bank has recently filed a CRA Strategic Plan with the
FDIC and CDB. The Plan details the manner and level of performance to be
achieved to obtain a satisfactory or an outstanding rating in each of the
lending, investment and service categories as specified in the CRA. The
Company's CRA Strategic Plan has been approved by the FDIC and is still under
consideration by the CDB.
24
28
The Bank is specifically interested in making financing available to small and
medium size businesses in its defined lending area. The Bank evaluates credit
applications without regard to race, color, religion, national origin, gender,
marital status or age, and does not discriminate against any loan applicant
whose income may come entirely or in part from any public assistance program, or
against any applicant who has exercised in good faith any right under the
Consumer Protection Act. The Company maintains preferred status with the SBA,
USDA and Ex-Im Bank which enables it to provide access to credit products that
might otherwise be unavailable.
ITEM 2. PROPERTIES
The Company leases approximately 50,000 square feet in Hartford, Connecticut to
house its headquarters and lending and support staff. The Company maintains
leased space for representative offices in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Rochester, New
York; Philadelphia and Pittsburgh, Pennsylvania; Washington, D.C.; Detroit,
Michigan; St. Louis, Missouri; and Cleveland, Ohio. The Company's leases
generally provide for two five-year renewal options and options on additional
space. Management believes that its existing facilities are adequate for their
present and proposed uses and that suitable facilities will be available on
reasonable terms for any additional space required.
ITEM 3. LEGAL PROCEEDINGS
Because the nature of the business of the Company involves the collection of
numerous accounts, the validity of liens and compliance with state and federal
laws, the Company is subject to claims and legal actions in the ordinary course
of its business. While it is impossible to estimate with certainty the ultimate
legal and financial liability with respect to these claims and actions, the
Company believes that the ultimate resolution of these actions is unlikely to
have a material adverse effect on the financial position, results of operations
or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1999 to a vote of
security holders through solicitation of proxies or otherwise.
25
29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required by this item may be found on the inside back cover of the
Company's 1999 Annual Report to Shareholders, which is incorporated herein by
reference and is filed as Exhibit 13.1 hereto.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this item may be found on page 4 of the Company's 1999
Annual Report to Shareholders, which is incorporated herein by reference and is
filed as Exhibit 13.1 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information required by this item may be found on pages 5 through 22. of the
Company's 1999 Annual Report to Shareholders, which is incorporated herein by
reference and is filed as Exhibit 13.1 hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item may be found on pages 19 through 21 of the
Company's 1999 Annual Report to Shareholders, which is incorporated herein by
reference and is filed as Exhibit 13.1 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item may be found on pages 23 through 46 of the
Company's 1999 Annual Report to Shareholders, which is incorporated herein by
reference and is filed as Exhibit 13.1 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
30
PART III
ITEMS 10 - 13
Information required by these items may be found in the Company's proxy
statement for its Annual Meeting of Shareholders, which will be filed by the
Company within 120 days of the end of its most recent fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements set forth on pages 23 through 46 of the
1999 Annual Report to Shareholders which is filed herewith as
Exhibit 13.1.
(i) Report of Independent Accountants
(ii) Consolidated Balance Sheets as of December 31, 1999
and 1998
(iii) Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997
(iv) Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1999, 1998
and 1997
(v) Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997
2. Financial Schedules:
None required.
3. Exhibits:
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation of
the Registrant.*
3.2 Amended and Restated By-laws of the Registrant.*
10.1 Employment Agreement among Registrant, First National
Bank of New England and Brett N. Silvers dated April
15, 1994; as amended by Letter Agreement dated July
3, 1997.*
10.1.1 Letter dated March 31, 1999, to amend the Employment
Agreement among the Registrant, First International
Bank, N.A. and Brett N. Silvers.***
27
31
10.1.2 Letter dated March 15, 2000, to amend the Employment
Agreement among the Registrant, First International
Bank and Brett N. Silvers.
10.1.3 Registration Rights Agreement by and among First
International Bancorp, Inc. and Nancy W. Silvers and
The Silvers Family Trust, dated March 31, 1999.***
10.1.4 Letter Agreement dated October 27, 1999, between
Brett N. Silvers and First International Bancorp,
Inc. regarding temporary restrictions on the transfer
and voting of 200,000 shares sold to Mr. Silvers.
10.2 Promissory Note of Brett N. Silvers, payable to the
Registrant, dated June 30, 1994, as amended.*
10.2.1 Promissory Note of Brett N. Silvers, payable to the
Registrant dated March 31, 1999.
10.3 Stock Pledge Agreement, dated June 30, 1994, between
the Registrant and Brett N. Silvers, as amended.*
10.3.1 Stock Pledge Agreement dated March 31, 1999, between
the Registrant and Brett N. Silvers.
10.4 Amended and Restated 1996 Stock Option Plans.
10.5 1994 Incentive Stock Option Plan, as amended.*
10.6 401(k) Plan.
10.7 Lease between Cambridge One Commercial Plaza, LLC
and the Bank dated June 1, 1997.*
10.8 First Amendment of Lease between Cambridge One
Commercial Plaza, LLC and the Bank dated November 30,
1998.****
10.9 Second Amendment of Lease between Cambridge One
Commercial Plaza, LLC and the Bank dated as of March
26, 1999.****
10.10 Employment Agreement between the Bank and Leslie A.
Galbraith dated March 15, 2000.
10.11 Employment Agreement between the Bank and Shaun P.
Williams dated March 6, 2000.
10.12 Revolving Commercial Loan Warehouse and Security
Agreement among Prudential Securities Credit
Corporation, First National Bank of New England and
First International Bancorp, Inc., dated as of
December 4, 1998.****
10.12.1 First Amendment among Prudential Securities Credit
Corporation, First International Bank and First
International Bancorp, Inc., dated as of June 30,
1999.
10.12.2 Second Amendment among Prudential Securities Credit
Corporation, First International Bank and First
International Bancorp, Inc., dated as of January 12,
2000.
10.13 Amended and Restated Loan Purchase and Servicing
Agreement among FNBNE Funding Corp., First
International Bank, Variable
28
32
Funding Capital Corporation, First Union Capital
Markets Corp., First Union National Bank and HSBC
Bank USA, dated September 24, 1999.
10.13.1 Amendment No. 1 to Amended and Restated Purchase and
Servicing Agreement among FNBNE Funding Corp., First
International Bank, Variable Funding Capital
Corporation, First Union Securities, Inc., First
Union National Bank and HSBC Bank USA, dated November
23, 1999.
10.14 Pooling and Servicing Agreement between Marine
Midland Bank and First National Bank of New England,
dated as of May 31, 1998.****
10.15 Sale and Servicing Agreement between FNBNE Business
Loan Trust 1998-A and First National Bank of New
England, dated as of December 1, 1998.****
10.15.1 Pooling and Servicing Agreement between HSBC Bank USA
and First International Bank, National Association
for the SBA Loan-Backed Series 1999-1 dated as of May
31, 1999.
10.15.2 Sale and Servicing Agreement between FIB Business
Loan Trust 1999-A and First International Bank, dated
as of September 1, 1999.
10.16 Revolving Commercial Loan Warehouse and Security
Agreement between Prudential Securities Credit
Corporation and FIB Holdings, Inc., dated as of
December 1, 1999.
10.17 Commercial Loan Sale Agreement between First
International Bank and FIB Holdings, Inc., dated as
of December 1, 1999.
10.18 Guaranty from First International Bancorp, Inc. in
favor of Prudential Securities Credit Corporation,
dated as of December 1, 1999.
10.19 Sale and Servicing Agreement between FIB Funding
Trust and First International Bank dated as of
October 1, 1999
10.20 Note Purchase Agreement among FIB Funding Trust,
First International Bank, Variable Funding Capital
Corporation, First Union Securities, Inc. and First
Union National Bank dated as of October 1, 1999
10.21 Guaranty from First International Bank in favor of
First Union Securities, Inc. dated as of October 1,
1999
13.1 1999 Annual Report to Shareholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for the Year Ended December
31, 1999.
99 Agreement for Purchase and Sale of Assets and
Assumption of Liabilities between First National Bank
of New England and Hudson United Bank, dated as of
December 31, 1998.**
29
33
* Denotes an exhibit which has previously been filed as an
exhibit to the Company's Registration Statement on Form S-1, Commission File No.
333-31339.
** Denotes an exhibit which has previously been filed as an
exhibit to the Company's Report on Form 8-K, Commission File No. 0-22861.
*** Denotes an exhibit which has previously been filed as an
exhibit to the Company's Report on Form 10-Q, Commission File No. 0-22861.
**** Denotes an exhibit which has previously been filed as an
exhibit to the Company's Report on Form 10-K, Commission File No. 0-22861.
B. Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
quarter ended December 31, 1999.
30
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000
First International Bancorp, Inc.
By:/s/ Brett N. Silvers
-----------------------
Brett N. Silvers
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Brett N. Silvers Director and March 29, 2000
- --------------------------------- Chief Executive Officer
Brett N. Silvers
/s/ Michael R. Carter Director March 29, 2000
- ---------------------------------
Michael R. Carter
/s/ Arnold L. Chase Director March 29, 2000
- ---------------------------------
Arnold L. Chase
/s/ Cheryl A. Chase Director March 29, 2000
- ---------------------------------
Cheryl A. Chase
/s/ Frank P. Longobardi Director March 29, 2000
- ---------------------------------
Frank P. Longobardi
/s/ Leslie A. Galbraith Executive Vice President March 29, 2000
- --------------------------------- and Secretary
Leslie A. Galbraith
/s/ Shaun P. Williams Executive Vice President, Chief March 29, 2000
- --------------------------------- Financial Officer and Treasurer
Shaun P. Williams
31