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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended MARCH 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-22861
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
Indicate by a check 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 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. The number of shares of common
stock, par value $.10 per share, issued and outstanding on April 30, 2000 was
8,264,318.
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INDEX
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION PAGE
- ------- --------------------- ----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements
6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25-26
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
March 31 December 31,
2000 1999
---- ----
(unaudited)
Cash and cash equivalents ............... $ 42,379 $ 48,757
Investment securities ................... 38,604 32,785
Loans, net .............................. 135,841 141,435
Premises and equipment, net ............. 4,320 4,326
Receivable from loans sold .............. 35,782 50,980
Investment in unconsolidated subsidiaries 18,206 15,277
Servicing assets ........................ 25,958 24,404
Prepaid expenses and other assets ....... 12,152 10,080
-------- --------
Total assets ....................... $313,242 $328,044
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
--------- ------------
2000 1999
---- ----
(unaudited)
Deposits ............................................. $ 249,932 $ 266,300
Other liabilities .................................... 6,372 6,757
--------- ---------
Total liabilities ............................... 256,304 273,057
--------- ---------
Stockholders' equity:
Preferred stock ($0.10 par value; 2,000,000 shares
authorized; no shares issued and outstanding) ...... -- --
Common stock ($0.10 par value; 12,000,000 shares
authorized; shares issued and outstanding: 8,264,318
and 8,259,818) ..................................... 826 826
Paid-in capital in excess of par value, net .......... 34,796 34,788
Stockholder note receivable .......................... (1,980) (1,980)
Accumulated other comprehensive income ............... 144 94
Retained earnings .................................... 23,152 21,259
--------- ---------
Total stockholders' equity ..................... 56,938 54,987
--------- ---------
Total liabilities and stockholders' equity ..... $ 313,242 $ 328,044
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Month Period Ended
March 31,
------------------------
2000 1999
---- ----
INTEREST INCOME:
Loans, including net fees ............... $ 4,512 $ 2,789
Investment securities ................... 770 661
Federal funds sold ...................... 593 686
------- -------
Total interest income .............. 5,875 4,136
INTEREST EXPENSE:
Deposits ................................ 3,563 2,359
Other ................................... 128 223
------- -------
Total interest expense .............. 3,691 2,582
------- -------
Net interest income ..................... 2,184 1,554
PROVISION FOR POSSIBLE LOAN LOSSES ............ 558 1,539
------- -------
Net interest income after
provision for possible loan losses 1,626 15
NON-INTEREST INCOME:
Gain on sale of:
Guaranteed and insured loans ........ 2,584 2,787
Other loans ......................... 217 34
Loan-backed securitizations ......... 2,209 147
Loans to commercial paper conduits .. 11 82
------- -------
Total gains on loan sales ... 5,021 3,050
Loan servicing income and fees .......... 1,923 1,055
Service charges and other deposit fees .. -- 68
Income from unconsolidated subsidiaries . 352 55
Gain on sale of branch................... -- 8,915
Other income............................. 36 17
------- -------
Total non-interest income ........... 7,332 13,160
------- -------
Total operating income................... 8,958 13,175
NON-INTEREST EXPENSE:
Salaries and benefits.................... 3,702 6,667
Occupancy................................ 486 455
Office expenses ......................... 222 210
Marketing................................ 391 486
Furniture and equipment ................. 334 294
Outside services......................... 376 318
Other ................................... 161 922
------- -------
Total non-interest expense........... 5,672 9,352
------- -------
Income before income taxes .............. 3,286 3,823
PROVISION FOR INCOME TAXES .................... 1,144 1,606
======= =======
NET INCOME........................... $ 2,142 $ 2,217
======= =======
BASIC EARNINGS PER COMMON SHARE ............... $ 0.26 $ 0.28
======= =======
DILUTED EARNINGS PER COMMON SHARE ............. $ 0.26 $ 0.27
======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
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FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities ........... $ 10,012 ($ 2,414)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans ......................................... 5,594 5,669
Increase in investment in unconsolidated subsidiaries ......... (25) --
Purchase of investment securities available for sale .......... (9,194) (2,674)
Purchase of equity securities available for sale ............. -- (177)
Proceeds from sales of investment securities available for sale 4,068 --
Proceeds from maturities and principal repayments of investment
securities available for sale ............................ 108 793
Proceeds from maturities and principal repayments of investment
securities held to maturity .............................. -- 237
Proceeds from sale of other real estate owned ................. -- 82
Capital expenditures, net ..................................... (306) (173)
Proceeds from sale of branch premises ......................... -- 185
-------- --------
Net cash provided by investing activities ............... 245 3,942
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits ........................... (16,368) 2,877
Net increase (decrease) in other borrowings ................... -- (717)
Proceeds from issuance of common stock ........................ 8 2,017
Principal payment on stockholder note receivable .............. -- 941
Principal advance on stockholder note receivable .............. -- (1,980)
Dividends paid ................................................ (275) (239)
-------- --------
Net cash provided by (used in) financing activities ..... (16,635) 2,899
-------- --------
Net increase (decrease) in cash and cash equivalents ....................... (6,378) 4,427
Cash and cash equivalents at beginning of period ........................... 48,757 58,335
-------- --------
Cash and cash equivalents at end of period ................................. $ 42,379 $ 62,762
======== ========
See accompanying notes to unaudited consolidated financial statements.
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FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
General
The consolidated financial statements include the accounts of First
International Bancorp, Inc. (the "Company") and the accounts of its wholly-owned
subsidiary, First International Bank (the "Bank"), formerly known as First
National Bank of New England, and the other Bank consolidated subsidiaries
described below. The Bank converted from a national bank to a Connecticut
state chartered bank and trust company in July 1999. The Bank has established
six special purpose wholly-owned subsidiaries to facilitate loan securitizations
and sales to commercial paper conduits and other facilities. Three of these
subsidiaries are not consolidated but are accounted for under the equity method
of accounting. Accordingly, the Company's share of the earnings of these
affiliates is included in net income. The Bank has also established a
wholly-owned subsidiary, First International Capital Corp. of New Jersey,
through which all loan solicitation activities to borrowers located in New
Jersey are conducted. Further, the Bank conducts business under the trade name
First International Capital in certain jurisdictions. Intercompany accounts and
transactions relating to the consolidated subsidiaries have been eliminated in
consolidation.
The Company operates from its headquarters in Hartford, Connecticut and
representative offices, which are responsible for marketing and regional loan
origination efforts, in Boston, Massachusetts; Cleveland, Ohio; Detroit,
Michigan; Miami, Florida; Morristown, New Jersey; Philadelphia and Pittsburgh,
Pennsylvania; Providence, Rhode Island; Rochester, New York; Springfield,
Massachusetts; St. Louis, Missouri; and Washington, D.C. The Company also has
contractual international representatives in Argentina, Brazil, Central America,
Egypt, India, Indonesia, Korea, Mexico, North Africa, the Philippines, Poland,
South Africa, Turkey and West Africa.
In March and April 2000, the Company established contractual alliances with
business-to-business electronic marketplaces serving seven different global
industrial sectors: e-STEEL.com (steel), MachineTools.com (industrial
equipment), Textrade.com (textiles), RailNet-USA.com (railroads), Enermetrix.com
(electricity and natural gas), Plasticscommerce.com (plastics) and
ChemIndustry.com (chemicals). These and other alliances currently under
discussion are aimed at increasing volume of quality loans to the Company's
established niche of small industrial companies worldwide. Under the alliance
agreements, the Company will seek to finance the settlement of transactions
between businesses buying and selling products and services in industrial
e-commerce marketplaces, as well as to meet many of their other credit needs.
The Bank's primary revenues are derived from net interest income and the
origination and sale, on a servicing retained basis, of commercial loans. The
Bank is a national leader in the use of loan guarantee programs offered by the
U.S. Small Business Administration (the "SBA"), the U. S. Department of
Agriculture (the "USDA") and the Export-Import Bank of the United States ("Ex-Im
Bank"). The Company maintains a web site at www.firstinterbank.com.
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The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments) that are necessary for a fair
presentation of the interim financial statements have been included. The results
of operations for the interim periods shown are not necessarily indicative of
the results to be expected for the entire fiscal year or any interim period.
This unaudited interim financial information should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 1999
which is filed with the Securities and Exchange Commission.
Certain 1999 amounts have been reclassified to conform with the 2000
presentation. These reclassifications had no impact on net income.
Comprehensive Income
The Company's "comprehensive income," defined as the change in the equity of a
business enterprise during a period from nonowner sources, is comprised only of
changes in the valuation allowance for the investment portfolio. The impact of
the change in the market value of the "available for sale" investment portfolio
for the three month periods ended March 31, 2000 and 1999, totaled $50,000 and
$32,000 after income taxes, respectively.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which was amended by Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 and amendment of FASB Statement No.
133," and is effective for the Company's financial statements issued after
December 31, 2000. These statements establish accounting and reporting standards
for derivative instruments and for hedging activities, and require that all
derivatives be recognized as either assets or liabilities in the entity's
balance sheet and be measured at fair value. Changes in the fair value of the
derivative instruments are to be recognized depending on the intended use of the
derivative and whether or not it has been designated as a hedge. The future
implementation is not expected to have a significant impact upon the Company's
financial position, results of operations or cash flows.
3. DIVIDEND PAYMENTS
The Company paid cash dividends in the amount of $0.03 per share on February 11,
2000. On May 2, 2000, the Company declared a dividend of $0.03 per share payable
on May 19, 2000 to shareholders of record as of the close of business on May 12,
2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results of operations may differ materially
from those projected or suggested in any forward-looking statements made by or,
on behalf of, the Company. In addition to the risks and uncertainties of
ordinary business operations, the following include some other, but not all, of
the factors or uncertainties that could cause actual results to differ from
projections: (i) the continuation in their present form of the government
guarantee loan programs of the U. S. Small Business Administration ("SBA"), the
U. S. Department of Agriculture ("USDA") and the Export-Import Bank of the
United States ("Ex-Im Bank") upon which a significant portion of the Company's
business depends, (ii) the Company's ability to continue its recent growth by
relying on non-interest income, principally gains on the sale of domestic and
international commercial loans and related servicing income, in an increasingly
competitive market for loan originations, (iii) a disruption in the U.S. capital
markets which may delay or prevent the Company from receiving funding under its
warehouse lines of credit or completing loan sales or securitizations, and (iv)
the Company's ability to accurately estimate loan losses and realize the
recorded values of retained interests associated with securitization assets.
Additional information concerning certain risks and uncertainties that would
cause actual results to differ materially from those projected or suggested in
the forward-looking statements is contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, which is filed with the
Securities and Exchange Commission. The forward-looking statements contained
herein represent the Company's judgment as of the date of this Form 10-Q, and
the Company cautions readers not to place undue reliance on such statements.
OVERVIEW
First International Bancorp, Inc. (the "Company") is a Delaware corporation
formed in 1985 and serves as the bank holding company for First International
Bank. Established in 1955 as a nationally chartered bank, First International
Bank became a Connecticut bank and trust company on July 1, 1999. The Bank is
headquartered in Hartford, Connecticut. The Company specializes in providing
innovative credit, trade and financial solutions to small and medium size
industrial companies located in the United States and international emerging
markets, and is the nation's largest combined user of loan guarantee programs
made available by the SBA, USDA and Ex-Im Bank.
GENERAL
The Company's earnings have been historically derived from (i) the origination,
sale and securitization of government guaranteed and other commercial loans,
(ii) net interest income,
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which is the difference between interest earned on interest-earning assets
(principally loans) and interest-bearing liabilities (principally deposits), and
(iii) fee income on loans serviced for others. On March 26, 1999, the Company
sold its last retail branch and its checking and savings accounts. The Company
retained its certificates of deposit and continues to issue retail and brokered
certificates of deposit. The Company also expects to continue to obtain funding
for its operations from warehouse lines of credit, the sale of loans on a
loan-by-loan basis, private placement securitizations and from the sale of loans
to commercial paper conduits and other sales facilities.
LOAN ORIGINATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999:
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(DOLLARS IN THOUSANDS, UNAUDITED)
PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE
------- ---------- ------- ----------
LENDING AND SERVICING ACTIVITY:
Loan Originations:
SBA & USDA ............... $ 35,736 35% $ 38,467 41%
Other commercial.......... 23,090 23% 27,424 30%
-------- -------- -------- --------
Domestic ............ 58,826 57% 65,891 71%
Exim ..................... 30,999 30% 20,574 22%
Other international ...... 12,701 12% 6,352 7%
-------- -------- -------- --------
International ....... 43,700 43% 26,926 29%
======== ======== ======== ========
Total Originations .. $102,526 100% $ 92,817 100%
======== ======== ======== ========
Commercial loan originations increased 11% or $9.7 million to $102.5 million for
the quarter ended March 31, 2000 from the $92.8 million in the quarter ended
March 31, 1999.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND
MARCH 31, 1999:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------------
2000 1999 % CHANGE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income $2,184 $1,554 41%
Provision for loan losses 558 1,539 (64%)
------ ------ -----
Net interest income after provision 1,626 15 10740%
Gain on loan sales 5,021 3,050 65%
Other non-interest income 2,311 1,195 93%
Gain on sale of branch -- 8,915 (100%)
Non-interest expense 5,672 9,352 (39%)
------ ------ -----
Income before income taxes 3,286 3,823 (14%)
Income taxes 1,144 1,606 (29%)
------ ------ -----
Net income $2,142 $2,217 (3%)
====== ====== =====
Basic earnings per share $0.26 $0.28
====== ======
Diluted earnings per share $0.26 $0.27
====== ======
Weighted average shares - basic 8,261 7,957
====== ======
Weighted average shares - diluted 8,384 8,215
====== ======
NET INCOME. Net income decreased 3.3% or $75,000 for the three-month period
ended March 31, 2000 when compared to the three-month period ended March 31,
1999. A gain of $8.9 million was reflected in the quarter ended March 31, 1999
on the sale of the Company's last retail branch and its checking, savings and
money market deposit accounts. For the quarter ended March 31, 2000, the Company
had increases in interest income of $630,000, a $2.0 million increase in gains
from loans sold and securitized, an increase in loan servicing income and fees
of $868,000 The Company reported a net reduction in non-interest expense of $3.7
million for the quarter ended March 31, 2000 as compared to the prior year due
to the elimination of various one-time expenses incurred in the quarter ended
March 31, 1999, principally in the area of officer bonuses as explained below.
Increases in gain on loan sales resulted primarily from the $35 million
securitization of the unguaranteed portion of SBA loans completed in March 2000.
The increase in non-interest income, primarily loan servicing income, resulted
from the increased balance of loans managed for others and is also due to actual
prepayments on such loans being less than originally assumed.
Diluted earnings per share decreased 3.7% or $.01 to $.26 per share for the
three-month period ended March 31, 2000 from $.27 for the three-month period
ended March 31, 1999.
NET INTEREST INCOME. Net interest income increased $631,000 or 41% to $2.2
million for the three-month period ended March 31, 2000 compared to the $1.5
million for the same period ended March 31, 1999. Average earning assets
increased 8% or $19.3 million while average interest-bearing liabilities
increased 24% or $47.6 million. The increase in interest-bearing
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liabilities reflects the shift in funding sources to brokered certificates of
deposit and short term warehouse borrowings used to fund operations and the loss
of $32.8 million in average outstanding non-interest bearing demand accounts as
compared to the prior year quarter following the branch sale.
The net interest spread improved for the three-month period ended March 31, 2000
by 109 basis points over the period ended March 31, 1999. The increase is
primarily attributable to the 275 basis point improvement in the yield on
commercial loans. Five prime rate increases, totaling 125 basis points, which
occurred in July, August and November 1999 and February and March 2000, along
with a lower average balance of lower-yielding privately insured loans in the
Company's on-balance sheet loan portfolio, have contributed to this improvement.
Further, interest income for the quarter ended March 31, 1999 includes a charge
of $210,000 related to the recoverability of accrued interest and deferred
costs. Increased funding costs associated with the replacement of the Bank's
core deposits with brokered certificates of deposit and warehouse borrowings
contributed to an 82 basis points increase in the cost of funds.
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AVERAGE BALANCES, INTEREST, YIELDS AND RATES
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------- ---- ---- ------- ---- ----
(DOLLARS IN THOUSANDS)
ASSETS:
Loans (1):
Commercial ............................ $179,099 $ 4,446 9.93% $151,421 $ 2,719 7.18%
Residential ........................... 1,813 51 11.25% 2,960 55 7.43%
Other consumer ........................ 617 15 9.89% 693 15 8.78%
-------- -------- ----- -------- -------- -----
Total loans ............................... 181,529 4,512 9.94% 155,074 2,789 7.19%
Investment securities ..................... 52,100 968 7.43% 28,155 661 9.39%
Federal funds sold ........................ 27,986 395 5.74% 59,048 686 4.71%
-------- -------- ----- -------- -------- -----
Total investment securities and funds sold 80,086 1,363 6.84% 87,203 1,347 6.22%
-------- -------- ----- -------- -------- -----
Total earning assets ...................... 261,615 5,875 8.98% 242,277 4,136 6.83%
Total non-earning assets .................. 56,980 39,028
-------- --------
Total assets .............................. $318,595 $281,305
======== ========
Liabilities:
Deposits:
Interest bearing demand deposits ...... $ 2,465 $ 7 1.15% $ 7,924 $ 46 2.35%
Premier money market .................. 0 0 0.00% 101,337 1,202 4.81%
Other savings ......................... 0 0 0.00% 10,372 101 3.95%
Retail and IRA certificates of deposit 35,179 461 5.33% 25,138 335 5.40%
Brokered certificates of deposit ...... 206,024 3,095 6.11% 51,000 675 5.37%
-------- -------- ----- -------- -------- -----
Total deposits ............................ 243,668 3,563 5.95% 195,771 2,359 4.89%
Warehouse borrowings ...................... 0 127 0.00% 0 218 0.00%
Other borrowings .......................... 72 1 5.65% 419 5 4.84%
-------- -------- ----- -------- -------- -----
Total interest bearing liabilities ........ 243,740 3,691 6.16% 196,190 2,582 5.34%
-------- -------- ----- -------- -------- -----
Non-interest bearing liabilities:
Demand deposits ....................... 9,870 32,776
Other liabilities ..................... 11,310 3,913
Total non-interest bearing liabilities .... 21,180 36,689
Stockholders' equity ...................... 53,675 48,426
-------- --------
Total liabilities and stockholders' equity $318,595 $281,305
======== ========
Net interest income/net interest spread ... $ 2,184 2.82% $ 1,554 1.49%
===== ======== ======== =====
Net interest margin ....................... 3.25% 2.51%
2000 Compared
to 1999
Changes Due to
(2):
-------------------
Volume Rate Total
------ ---- -----
Assets:
Loans (1):
Commercial ............................ $ 686 $ 1,040 $ 1,726
Residential ........................... (32) 28 (4)
Other consumer ........................ (2) 2 0
-------- -------- --------
Total loans ............................... 652 1,070 1,722
Investment securities ..................... 445 (138) 307
Federal funds sold ........................ (443) 151 (292)
-------- -------- --------
Total investment securities and funds sold 2 13 15
-------- -------- --------
Total earning assets ...................... 654 1,083 1,737
Total non-earning assets ..................
Total assets ..............................
Liabilities:
Deposits:
Interest bearing demand deposits ...... ($ 16) ($ 24) ($ 40)
Premier money market .................. (1,202) 0 (1,202)
Other savings ......................... (101) 0 (101)
Retail and IRA certificates of deposit 133 (5) 128
Brokered certificates of deposit ...... 2,355 94 2,449
-------- -------- --------
Total deposits ............................ 1,169 65 1,234
Warehouse borrowings ...................... 0 0 0
Other borrowings .......................... (5) 1 (4)
-------- -------- --------
Total interest bearing liabilities ........ 1,164 66 1,230
-------- -------- --------
Non-interest bearing liabilities:
Demand deposits .......................
Other liabilities .....................
Total non-interest bearing liabilities ....
Stockholders' equity ......................
Total liabilities and stockholders' equity
Net interest income/net interest spread ... ($ 510) $ 1,017 $ 507
======== ======== ========
Net interest margin .......................
(1) For purposes of these computations, non-accruing loans are included in
the average balance.
(2) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
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INTEREST INCOME. Interest income increased 42% or $1.7 million to $5.9 million
for the three-month period ended March 31, 2000 from $4.1 million for the
three-month period ended March 31, 1999. The yield on earning assets increased
191 basis points due to the prime rate increases and shift in portfolio
composition as noted above. The average balance of loans increased by 17% or
$26.5 million to $181.5 million from $155.1 million year over year as the
Company has moderately increased its on balance sheet loan portfolio over the
course of 1999 and through the first quarter of 2000. The yield on investment
securities and federal funds sold increased by 62 basis points due to the
increased market rates, offset by lower yielding investment securities including
investments related to securitized assets which earned a lower yield for the
quarter.
Commercial loan originations increased 11% or $9.7 million to $102.5 million for
the quarter ended March 31, 2000 from the $92.8 million in the quarter ended
March 31, 1999.
INTEREST EXPENSE. Interest expense increased 42% or $1.1 million to $3.7 million
for the three-month period ended March 31, 2000 from $2.6 million for the
three-month period ended March 31, 1999 as the average balance of interest
bearing liabilities increased 24% or $47.6 million. The increase in the expense
reflects the change in funding sources following the sale of the Company's
checking, savings and money market deposit accounts in March 1999 which, along
with an increase in the rate environment, resulted in a 106 basis point increase
in the cost of deposits. The Company's funding needs increased due to greater
loan activity and growth in the loan-related assets held on balance sheet.
The average balance of brokered certificates of deposit increased by $155.0
million for the quarter ended March 31, 2000 over the prior year as the Company
has shifted to this source of funds for its core funding needs and supplements
on balance sheet funding requirements with warehouse line borrowings.
Additionally, interest expense included $127,000 of loan fee amortization
expense related to a $75 million warehouse line of credit which is available to
fund qualifying commercial term loans.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses of
$558,000 for the quarter ended March 31, 2000 reflected a significant decrease
of $1.0 million less than the provision required for the quarter ended March 31,
1999. The lower provision reflects improved performance in the credit quality of
the portfolio. The Allowance for Loan Losses of $4.6 remains flat from December
31, 1999. See "Allowance for Loan Losses" for further discussion.
13
14
NON-INTEREST INCOME. Non-interest income is comprised of the following items:
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------------
NON-INTEREST INCOME: 2000 1999 % CHANGE
------- ------- --------
(DOLLARS IN THOUSANDS)
Gain on loan sales:
SBA sales ......................................................................... $ 1,031 $ 1,414 (27%)
USDA sales ........................................................................ 671 967 (31)
Ex-Im working capital sales ....................................................... 123 85 45
Ex-Im term sales .................................................................. 759 321 136
------- ------- -------
Gain on guaranteed loan sales ................................................ 2,584 2,787 (7)
Other loan sales .................................................................. 217 34 538
Loan backed securitizations ....................................................... 2,209 147 1,403
Loans to commercial paper conduits ................................................ 11 82 (87)
------- ------- -------
Total gain on loan sales ..................................................... 5,021 3,050 65
Loan servicing income and fees ...................................................... 1,923 1,055 82
Service charges and other deposit fees .............................................. -- 68 (100)
Income from unconsolidated subsidiaries ............................................. 352 55 540
Gain on sale of branch .............................................................. -- 8,915 (100)
Other income ........................................................................ 36 17 112
------- ------- -------
Total non-interest income ........................................................... $ 7,332 $13,160 (44%)
======= ======= =======
The 44% or $5.8 million decrease in non-interest income for the three-month
period ended March 31, 2000 as compared to the three-month period ended March
31, 1999 reflects the first quarter 1999 gain of $8.9 million recognized on the
sale of the Company's last branch facility and the related $151 million of
checking, savings and money market deposit accounts. The Company sold the branch
as part of its overall shift in focus to core commercial lending operations and
the development of its strategic plan for further commercial lending growth
nationally and internationally. The Company is cognizant that its funding costs
are higher than without core deposits, but believes that the costs can be offset
by utilizing more efficient funding sources without the associated cost of a
branch operation. This reduction in non-recurring income for the quarter ended
March 31, 2000 was offset in part by an increase of $2.0 million or 65% in gain
on loan sales, primarily due to securitization of unguaranteed SBA loans in
March 2000, and also by an increase of $868,000 or 82% in servicing income from
loans managed for others.
The average gain on SBA loan sales (measured as gain compared to SBA guaranteed
portion of loan sold) for the quarter ended March 31, 2000 decreased by 174
basis points to 555 basis points from 729 basis points for the same period in
1999. The decrease is reflective of market pricing deterioration observed during
the second and third quarters of 1999 which the Company believes to be a result
of accelerated prepayment assumptions utilized in the marketplace and liquidity
pressures in the capital markets. The market did improve in the first quarter of
2000 over the late 1999 levels, but did not recover to the levels achieved prior
to June 1999. The Company's prepayment and default experience on its SBA and
USDA guaranteed loans, as well as its experience on the securitized pools,
continues to be favorable compared to the rates assumed in the original
calculations at the time of sale. The actual performance of each portfolio is
monitored quarterly.
14
15
The relative gain on sale of USDA loans decreased to 1,141 basis points for the
period ended March 31, 2000 compared to 1,240 basis points for the period ended
March 31, 1999, due primarily to the rates and term on the loans sold.
The return on Ex-Im Bank medium term loan sales decreased moderately to 308
basis points for the three-month period ended March 31, 2000 from 347 basis
points for the same period of 1999 due to the term and prepayment assumptions on
the loans. Gains from these loan sales increased 117% or $476,000. The Company
has focused on increasing international originations under the Ex-Im Bank
programs and increased the volume 51% or $10.4 million over the prior year's
quarter. Originations of privately insured loans were $12.4 million for the
quarter ended March 31, 2000, an increase of $6.3 million from the quarter ended
March 31, 1999.
During the quarter ended March 31, 2000, the Company recognized a gain of
$217,000 on individual loans sold to investors.
In March 2000, the Company completed a $35.8 million securitization of
commercial term loans which included a $10 million pre-funding amount and
resulted in a gain of $1.8 million.
The securities issued were as follows:
RATINGS
AMOUNT TYPE MOODY'S INVESTOR SERVICE/DUFF & PHELPS
$32.3 million Senior Aaa/AAA
$2.8 million Subordinate A2/A
$750,000 Subordinate unrated
The Company retained the $750,000 security in its investment portfolio as
required by the SBA. In connection with this transaction, the Company recorded
an interest-only strip totaling $2.1 million which represents the net present
value of estimated cash flows due to the Company as servicer, after providing
for estimated losses and prepayments on the underlying loans. The Company has
utilized the following assumptions to calculate its retained interest for the
securitization: prepayment of 8%, aggregate expected credit losses of 6.98% and
discount rate of 10.47.
15
16
LOAN SERVICING INCOME AND FEES FOR THE THREE MONTHS ENDED
MARCH 31
-----------------------------------------
2000 1999 % CHANGE
---- ---- --------
(DOLLARS IN THOUSANDS)
Loan Servicing Income:
SBA guaranteed loans ............. $ 632 $ 572 10%
USDA guaranteed loans ............ 386 193 100
Ex-Im working capital loans ...... 75 51 47
Ex-Im medium term loans .......... 156 56 179
Loan securitizations ............. 211 32 559
Other loans ...................... 138 46 200
--------- --------- ---------
Loan servicing income ...... 1,598 950 68
Servicing asset reduction - Ex-Im .. (163) (238) (32)
--------- --------- ---------
Net loan servicing income .. 1,435 712 102
Other fees ......................... 488 343 42
--------- --------- ---------
Total loan servicing income and fees $ 1,923 $ 1,055 82%
========= ========= =========
Loans Managed for Others
Average balance .................... $ 946,922 $ 668,199 42%
========= ========= =========
Ending balance ..................... $ 967,093 $ 685,201 41%
========= ========= =========
Loan servicing income is comprised of the servicing fees received on loans sold
on a servicing-retained basis, net of amortization of the servicing asset. The
amount of the servicing fee varies in accordance with the terms of the loan sale
and as actual results are different from those assumed at the time of the sale
of the loans. The Company has generally continued to experience more favorable
actual performance on its sold loans which give rise to positive variance over
initial assumed income.
The 82% increase in loan servicing income and fees reflects the 42% or $278.7
million increase in the average balance of loans serviced for others to $946.9
million as of March 31, 2000. The Company continues to benefit from the
favorable prepayment performance of the loans originated relative to original
prepayment assumptions. Accordingly, servicing cash flows and servicing income
net of amoritization are higher than anticipated. The continuation of such
performance cannot be projected to future periods.
During the quarter ended March 31, 2000, the Company recognized an impairment of
$163,000 equal to the carrying value of the servicing asset related to one Ex-Im
Bank medium term loan to a company located in the Dominican Republic. Ex-Im Bank
has paid a claim in full to the investor under the Ex-Im Bank guarantee. A
reduction in the Ex-Im servicing asset of $238,000 was recognized in March 31,
1999 related to certain loans made to borrowers in Brazil, a country which
experienced macro economic pressures in 1999. For the year ended December 31,
1999, a total reduction of $265,000 was recognized on the Ex-Im servicing asset.
Management does assume a certain level of prepayments in recognizing the asset
and continues to monitor the actual and projected defaults and prepayments,
which could result in a reduction of the remaining life of the servicing asset
for other loans and which would warrant a further write down of the asset if
such impairment is expected.
16
17
Other loan fee income of $488,000 for the period ended March 31, 2000 is
comprised of $289,000 of letter of credit fees which increased $96,000 over the
prior year's quarter, $128,000 of late fees collected and $71,000 in other fees.
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following items:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
2000 1999 % CHANGE
---- ---- --------
NON-INTEREST EXPENSE: (DOLLARS IN THOUSANDS)
Salaries and benefits .............. $3,702 $6,667 (44%)
Occupancy .......................... 486 455 7
Office expenses .................... 222 210 6
Marketing expenses ................. 391 486 (20)
Furniture and equipment ............ 334 294 14
Outside services ................... 376 318 18
Loan collection .................... 47 71 (34)
Other .............................. 114 851 (87)
------ ------ ------
Total non-interest expense $5,672 $9,352 (39%)
====== ====== ======
The 39% or $3.7 million decrease in non-interest expense for the three-month
period ended March 31, 2000 as compared to the same period ended March 31, 1999
is primarily attributable to a net $3.0 million reduction in salaries and
benefits. In the quarter ended March 31, 1999, in connection with the
re-negotiation of the employment agreement between the Company and its Chairman
and Chief Executive Officer, a $1.7 million bonus was paid in March 1999 to
enable the Chief Executive Officer to retire the $980,000 note receivable held
by the Company and to pay the income taxes associated with the bonus. The note
receivable was provided in 1994 to finance the Chief Executive Officer's
purchase of 614,000 shares of common stock. Additionally, in March 1999, as
compensation for the sale of the Company's last retail branch and deposits,
seven members of senior management received cash bonuses totaling $940,000.
The average number of full time equivalent employees for the three-month period
ended March 31, 2000 2000 was 201 compared to 182 at the end of March 31, 1999.
The expense for the quarter ended March 31, 2000 reflects the opening of a
representative office in St. Louis and is net of five bank personnel who were
hired by the institution which purchased the branch in March of 1999. Growth in
the domestic representative offices and the addition of staff to the credit
administration, loan servicing and information technology areas resulted in the
head count increase. For the three-month period ended March 31, 2000, benefit
expense including the Company's portion of 401K contributions increased 25% or
$74,000 when compared to the same period in 1999.
The 7% or $31,000 increase in occupancy expense primarily reflects the addition
of the St. Louis office in April 1999. The increase of 6% or $12,000 in office
expenses and 14% or $40,000 in furniture and equipment reflects the increase in
personnel and the St. Louis office opening.
The 20% or $95,000 decrease in marketing expense primarily reflects $30,000 of
advertising expense related to a retail certificate of deposit campaign
undertaken in the quarter ended March 1999, prior to the
17
18
sale of the branch and the effects of the Company's cost containment efforts.
Included in marketing expense is $120,000 of domestic and international travel
expenses and $107,000 of master agent expenses reflecting a continuing and
increased presence throughout the United States and international markets.
The 18% or $58,000 increase in outside service expense reflects increases in
legal fees associated with various regulatory matters and with the establishment
of agent relationships and/or representative office status in several of the
Company's international markets, as well as documentation of seven contractual
alliances with business-to-business electronic marketplaces. Outside service
expense also includes expenses incurred in the use of outside contractors to
prepare files for the securitization and sale of loans.
INCOME TAXES. The Company's effective tax rate decreased to 39.0% for the
three-month period ended March 31, 2000 from 42.6% for the three-month period
ended March 31, 1999 due to the non-deductibility of the portion of the Chief
Executive Officer's compensation over $1 million for the quarter ended March 31,
1999. Income from unconsolidated subsidiaries is reported net of income taxes,
which are also provided for at 39.0% for the quarter ended March 31, 2000.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION TO MARCH 31, 2000 FROM DECEMBER 31,
1999
GENERAL. Total assets decreased 4% or $14.8 million from December 31, 1999 to
March 31, 2000, reflecting the Company's management to a stable asset level
through the ongoing sale of loans originated.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased 13% or $6.4
million to $42.4 million at March 31, 2000 from the December 31, 1999 balance of
$48.8 million. The decrease reflects the use of excess liquidity to fund loan
originations, the assets securitized in March, as well as the reduction in
brokered certificates of deposits. Cash and cash equivalents includes $12.2
million of restricted cash accounts pledged as credit enhancements for the
Company's securitizations.
INVESTMENT SECURITIES. Investment securities includes the subordinated interests
in loans securitized retained by the Company in the form of investment
securities, which is either in the form of a subordinated certificate of an
interest only strip. The balance in such investment securities increased $5.8
million at March 31, 2000 from the December 31, 1999 balance of $32.8 million
due to an increase of $3 million in securities associated with the March 2000
securitization, which included $725,000 relating to a subordinated bond and $2.1
million associated with an interest only strip as well as other investment
securities purchased to utilize as collateral under letter of credit and FHLB
lines.
SERVICING ASSETS. The servicing asset has increased to $26.0 million from the
December 31, 1999 balance of $24.4 million as a result of the sale and
securitization of loans totaling $103.3 million during the three-month period
ended March 31, 2000. This servicing asset generally relates to the guaranteed
loans sold and does not represent a credit enhancement for such sales. As
discussed above, a valuation of the servicing asset, which includes monitoring
the actual and projected prepayment and default experience of each servicing
portfolio, is performed quarterly. Any impairment deemed to be permanent would
result in a write down of the asset.
PREPAID EXPENSES AND OTHER ASSETS. Prepaid expenses and other assets increased
21% or $2.1 million to $12.2 million at March 31, 2000 from $10.1 million at
December 31, 1999. The increase is primarily attributable to the increase in
deposits associated with the Company's general ledger and loan system
conversions currently underway.
18
19
MARCH 31, DECEMBER 31,
LOAN PORTFOLIO 2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
SBA & USDA .......................................................................... $ 9,167 $ 16,433
Other commercial .................................................................... 50,200 45,756
Equipment ........................................................................... 944 993
Energy .............................................................................. 75 20
Ex-Im ............................................................................... 9,802 15,558
Privately insured ................................................................... 32,270 19,073
Import .............................................................................. 5,289 4,464
----------- -----------
Total commercial loans ........................................................... 107,747 102,297
Residential real estate ............................................................. 1,796 1,828
Other consumer ...................................................................... 609 629
----------- -----------
Total loans .................................................................... 110,152 104,754
Loans held for sale ................................................................. 33,272 44,586
Less:
Discount on retained loans ..................................................... 3,080 3,371
Net deferred loan origination costs ............................................ (15) (16)
Allowance for loan losses ...................................................... 4,550 4,550
----------- -----------
Loans, net ..................................................................... $ 135,809 $ 141,435
=========== ===========
Loans Managed for Others
Guaranteed Loans
SBA & USDA ..................................................................... $ 415,230 $ 406,979
Ex-Im .......................................................................... 139,098 129,518
Residential real estate ........................................................ 438 443
----------- -----------
554,766 536,940
Unguaranteed Portions and Unguaranteed Loans
SBA & USDA ..................................................................... 40,895 43,334
Securitized commercial loans ................................................... 175,429 210,764
Domestic loans sold to commercial paper facility and sales facility............. 73,464 41,529
International loans sold to commercial paper facility .......................... 22,559 28,845
Other commercial ............................................................... 98,610 63,836
Home equity lines .............................................................. 1,370 1,504
----------- -----------
412,327 389,812
----------- -----------
Total loans managed for others ...................................................... $ 967,093 $ 926,752
=========== ===========
Total loans under management ........................................................ $ 1,110,517 $ 1,076,092
=========== ===========
19
20
Loans net decreased $5.6 million to $135.8 million at March 31, 2000 from $141.4
million at December 31, 1999. The decrease is the result of the sale and
securitization of $103.3 million of loans during the quarter. Loan originations,
including the origination of lines of credit, were $102.5 million for the
quarter.
ALLOWANCE FOR LOAN LOSSES. The Company reviews the adequacy of the Allowance for
Loan Losses quarterly. At March 31, 2000, the Allowance totaled $4.6 million and
represents 3.2% of loans and loans held for sale. The Allowance totaled $4.6
million at December 31, 1999 and represented 3.0% of loans. In establishing the
level of the Allowance, the Company considers the percentage of unguaranteed
commercial loans, the seasoning of the commercial loan portfolio, and the
introduction of new loan products where the Company has limited historical
experience. Net charge-offs for the three-month period ended March 31, 2000
decreased $481,000 to $558,000 from $1.0 million for the three-month period
ended March 31, 1999. For the quarter ended March 31, 1999, the Company
increased the allowance by $500,000. The Allowance at March 31, 2000 covered
1999 annual charge-offs 1.78 times.
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE YEAR
FOR THE THREE MONTHS ENDED
ENDED MARCH 31, DECEMBER 31,
----------------------- -------------
2000 1999 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses
at the beginning of the period ................................................. $ 4,550 $ 4,000 $ 4,000
Charge-offs:
SBA loans ...................................................................... 38 93 166
USDA loans ..................................................................... 66 -- 126
Ex-Im working capital loans .................................................... -- 188 260
Privately Insured loans ........................................................ 473 112 529
Other commercial loans ......................................................... 30 622 1,199
Import loans ................................................................... -- 26 264
Non-owner occupied commercial mortgages ........................................ -- -- 3
Other loans .................................................................... -- -- 2
-------- -------- --------
Total charge-offs ......................................................... 607 1,041 2,549
Recoveries:
SBA loans ...................................................................... 30 1 3
Other commercial loans ......................................................... 19 1 75
Non-owner occupied commercial mortgages ........................................ -- -- 2
-------- -------- --------
Total recoveries .......................................................... 49 2 80
-------- -------- --------
Net charge-offs ..................................................................... 558 1,039 2,469
Provision for loan losses ........................................................... 558 1,539 3,019
-------- -------- --------
Balance of allowance for loan
losses at end of period ........................................................ $ 4,550 $ 4,500 $ 4,550
======== ======== ========
Total loans and loans held for sale ................................................. $143,455 $137,901 $149,340
======== ======== ========
Allowance to total loans ............................................................ 3.2% 3.3% 3.0%
======== ======== ========
20
21
Non-performing loans for the three-month period ended March 31, 2000 decreased
$375,000 to $4.6 million from December 31, 1999. Non-performing loans relative
to total loans decreased to 3.20% at March 31, 2000 from 3.32% at December 31,
1999. Included in non performing loans are $1.5 million of privately insured
loans.
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
NON-PERFORMING LOANS MARCH 31, DECEMBER 31,
2000 1999
---- ----
COMMERCIAL: (DOLLARS IN THOUSANDS)
Unguaranteed portions:
SBA and USDA loans ............ $ 937 $1,264
Ex-Im working capital loans ... 430 397
Ex-Im term loans .............. -- 57
Insured term loans .................. 1,581 1,659
Other commercial loans .............. 1,592 1,538
Import loans ........................ 43 43
------ ------
Total non-performing loans .... $4,583 $4,958
====== ======
Total non-performing loans to total loans 3.20% 3.32%
====== ======
Total non-performing loans to total assets 1.46% 1.51%
====== ======
Allowance to total non-performing loans .. 99% 92%
====== ======
The following table sets forth the breakdown of the Allowance for Loan Losses by
loan category at the dates indicated. Management believes that the Allowance can
be allocated by category only on an approximate basis, and therefore allocation
of the Allowance to each category is not necessarily indicative of future losses
and does not restrict use of the Allowance to absorb losses in any category. The
unallocated portion of the Allowance represents an amount that is not
specifically allocable to one of the loan portfolios. Loans to foreign entities
at March 31, 2000 represented 25% of total loans. Such loans are U.S. dollar
denominated and either 100% Ex-Im Bank guaranteed or carry private insurance
equal to 80-90% of the loan balance. The Company's private credit insurance
policies include a deductible which provides that the Company is responsible for
the first loss on the uninsured portion of the loan.
21
22
MARCH 31, DECEMBER 31,
2000 1999
------ ------
(DOLLARS IN THOUSANDS)
ALLOCATION OF THE ALLOWANCE BY
CATEGORY OF LOANS:
Unguaranteed Portions of:
SBA & USDA loans ......................................... $ 731 $ 820
Ex-Im loans .............................................. 210 242
Privately insured ............................................. 534 611
Import loans .................................................. 116 111
Equipment finance loans ....................................... 12 13
Other commercial loans ........................................ 2,307 1,912
Other loans ................................................... 16 35
Loans held for sale ........................................... 166 223
Unallocated ................................................... 458 583
------ ------
Total allowance for loan losses .......................... $4,550 $4,550
====== ======
PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS:
SBA & USDA Loans .............................................. 6.4% 11.0%
Ex-Im loans ................................................... 6.8% 10.4%
Privately insured ............................................. 22.5% 12.8%
Import loans .................................................. 3.7% 3.0%
Equipment finance loans ....................................... 70.0% 0.7%
Other commercial loans ........................................ 35.0% 30.7%
Other loans ................................................... 1.7% 1.6%
Loans held for sale ........................................... 23.2% 29.9%
------ ------
Total .................................................... 100% 100%
====== ======
STOCKHOLDERS' EQUITY. Stockholders' equity increased 3.5% or $2.0 million to
$56.9 million at March 31, 2000 from $55.0 million at December 31, 1999 due to
the retention of earnings net of a quarterly dividend of $.03 per share or
$275,000.
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of liquidity and
funding are certificates of deposit, a warehouse line of credit, commercial
paper conduits and loan sales and securitizations. Secondary sources of
liquidity include a Federal Home Loan Bank line of credit and federal funds
purchased.
Management considers scheduled cash flows from existing clients and borrowers
and projected deposit levels, estimated liquidity needs for maturing
certificates of deposit, approved extensions of credit, and unadvanced
commitments to existing borrowers in determining the level and maturity of
funding necessary to support operations. The on-going sale of the government
guaranteed portions of loans at origination also provides cash to fund
operations. Total loan sales totaled $103.3 million for the three-month period
ended March 31, 2000, and reflected a comparable dollar amount to loans
originated for the period.
22
23
As of March 31, 2000 the Company had outstanding commitments to fund loans and
lines of credit of $132.6 million and had issued letters of credit totaling
$41.1 million of which $30.8 million reflects issuances under guaranteed
programs.
The Company believes that it will continue to have access to liquidity sources
to provide funding sufficient to support operating activities, loan originations
and commitments, and certificate of deposit maturities.
A subsidiary of the Bank has entered into interest rate swaps based on an
aggregate amount of $28 million at March 31, 2000. The intent of the swap is to
mitigate interest rate risk inherent in the sale of revolving commercial loans
to a commercial paper facility. The swap provides for net settlement on a
monthly basis which is recorded as an adjustment to interest income. For the
three-month period ended March 31, 2000, $10,000 of interest expense had been
recorded related to the swap.
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies and maintains a "well-capitalized" status with a total
capital to risk-weighted assets ratio of 11.32% and a Tier 1 capital to assets
or leverage ratio of 17.22% at March 31, 2000.
There are currently proposed regulatory amendments which may require banks to
set aside additional risk based capital for retained interests associated with
loans sold or securitized. These proposed regulations may require the Company to
structure certain loan sales or securitization transactions in a manner which
may be less favorable to the Company and may reduce future reported earnings.
These regulations are currently open for comment and management will monitor the
impact on the Company as the regulations become more definitive.
23
24
YEAR 2000 COMPLIANCE
A critical business issue emerged regarding how existing application software
programs and operating systems can accommodate the year 2000 dates. The Company,
utilizing the guidance provided by the Federal Financial Institutions
Examination Council ("FFIEC") as a framework, developed and executed a Year 2000
Compliance Program which included the review, renovation and testing of mission
critical systems, and development of business resumption contingency plans.
The Company has executed its Compliance Program and, to date, has not
experienced any processing issues. To date the Company has spent approximately
$110,000 on Year 2000 compliance issues, including products and processes. As
required by its regulators, the Company will continue to monitor processing
during future key trigger dates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's interest rate risk position
since December 31, 1999. Other types of market risk, such as foreign exchange
risk and commodity price risk, do not arise in the normal course of the
Company's business activities. During late 1998 and continuing through 1999, the
capital markets experienced rapid and extreme changes evidenced by a decline of
investor demand for certain asset-backed securities that carried a credit agency
rating less than the highest ratings available and a widening of the spreads
between the interest rates on treasury securities and interest rates on
asset-backed securities. The uncertainties were exacerbated in late 1999 with
concerns over Year 2000 market preparedness. The "flight to quality" by
asset-backed investors requires issuers like the Company to provide a greater
level of credit enhancement to attain higher credit ratings for a larger
percentage of the securitization in order to make the transaction marketable.
The widening of spreads in the asset-backed capital markets reduces the earnings
on a securitization and, if such events were to occur in the future, could limit
the amount of borrowings available to the Company under its warehouse lines of
credit and may make future securitizations economically unfeasible. In the
quarter ended March 31, 2000, the Company noted some favorable improvements in
the yields from the market but not to the levels of the first quarter of 1999. A
comprehensive qualitative and quantitative discussion and analysis regarding
market risk was set forth in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 which is filed with the Securities and Exchange
Commission.
24
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Because the nature of the business of the Registrant involves
the collection of numerous accounts, the validity of liens and
compliance with state and federal lending laws, the Registrant
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 such claims and actions, the Registrant believes
that the aggregate amount of such liabilities will not result
in monetary damage which in the aggregate would have a
material adverse effect on the financial position, results of
operations or cash flows of the Registrant.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of
the Registrant.*
3.2 Amended and Restated By-laws of the Registrant.*
10.22 Pooling and Servicing Agreement between HSBC Bank
USA, First International Bank and FIB Funding Trust
for the SBA Loan- Backed Series 2000-1
11.1 Computation of Per Share Earnings.
25
26
27 Financial Data Schedule.
* 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.
Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the first
quarter of 2000.
26
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First International Bancorp, Inc.
(Registrant)
Date: May 15, 2000 By: /s/ Brett N. Silvers
------------ ----------------------------------
Brett N. Silvers
Its Chief Executive Officer
and Chairman of the Board
Date: May 15, 2000 By: /s/ Leslie A. Galbraith
------------ ----------------------------------
Leslie A. Galbraith
Its Chief Operating Officer,
Executive Vice President,
and Secretary
Date: May 15, 2000 By: /s/ Shaun P. Williams
------------ ---------------------------------
Shaun P. Williams
Its Chief Financial Officer,
Executive Vice President,
and Treasurer
27
28
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.22 Pooling and Servicing Agreement between HSBC Bank USA, First
International Bank and FIB Funding Trust for the SBA Loan
Backed Series 2000-1
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
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EXHIBIT 11.1 COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE MONTHS ENDED
MARCH 31,
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2000 1999
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Weighted average common stock ............... 8,261,203 7,957,342
Weighted average common stock equivalents ... 122,972 206,898
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Weighted average common stock and equivalents 8,384,175 8,164,240
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Net income .................................. $2,141,828 $2,217,202
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Net income per share - Basic ................ $ 0.26 $ 0.28
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Net income per share - Diluted .............. $ 0.26 $ 0.27
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