1
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 JUNE 30, 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 August 8, 2000 was
8,267,024.
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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
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
Three and Six Months Ended June 30, 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 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
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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
JUNE 30, DECEMBER 31,
-------- ------------
2000 1999
---- ----
(UNAUDITED)
Cash and cash equivalents $49,283 $48,757
Investment securities 49,382 32,785
Loans, net 143,805 141,435
Premises and equipment, net 4,232 4,326
Receivable from loans sold 30,009 50,980
Investment in unconsolidated subsidiaries. 12,973 15,277
Servicing assets 28,321 24,404
Prepaid expenses and other assets 17,044 10,080
-------- --------
Total assets $335,049 $328,044
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30, DECEMBER 31,
-------- ------------
2000 1999
---- ----
(UNAUDITED)
Deposits $272,057 $266,300
Other liabilities 4,310 6,757
--------- --------
Total liabilities 276,367 273,057
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 (21) 94
Retained earnings 25,061 21,259
--------- --------
Total stockholders' equity 58,682 54,987
--------- --------
Total liabilities and stockholders' equity $335,049 $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 MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
INTEREST INCOME:
Loans, including net fees $4,514 $3,404 $9,026 $6,193
Investment securities 815 816 1,585 1,306
Short term investments/Federal funds sold 419 308 1,012 994
------------- ------------ ------------ ------------
Total interest income 5,748 4,528 11,623 8,493
INTEREST EXPENSE:
Deposits 3,643 2,956 7,206 5,315
Other 185 121 313 344
------------- ------------ ------------ ------------
Total interest expense 3,828 3,077 7,519 5,659
------------- ------------ ------------ ------------
Net interest income 1,920 1,451 4,104 2,834
PROVISION FOR POSSIBLE LOAN LOSSES 874 449 1,432 1,989
------------- ------------ ------------ ------------
Net interest income after
provision for possible loan losses 1,046 1,002 2,672 845
NON-INTEREST INCOME:
Gain on sale of:
Guaranteed loans 2,800 3,085 5,384 5,872
Other loans 305 223 522 257
Loan-backed securitizations 1,338 2,810 3,125 2,957
Loans to commercial paper conduit 275 71 708 153
------------- ------------ ------------ ------------
Total gains on loan sales 4,718 6,189 9,739 9,239
Loan servicing income and fees 2,671 1,633 4,594 2,819
Service charges and other deposit fees - 6 - 74
Income from unconsolidated subsidiaries 472 72 824 127
Gain on sale of branch - - - 8,915
Other income 88 35 125 52
------------- ------------ ------------ ------------
Total non-interest income 7,949 7,935 15,282 21,226
------------- ------------ ------------ ------------
Total operating income 8,995 8,937 17,954 22,071
NON-INTEREST EXPENSE:
Salaries and benefits 3,711 3,552 7,413 10,219
Occupancy 442 422 928 877
Office expenses 250 273 471 483
Marketing 440 526 831 1,012
Furniture and equipment 338 306 673 600
Outside services 342 300 718 618
Other 238 152 399 1,074
------------- ------------ ------------ ------------
Total non-interest expense 5,761 5,531 11,433 14,883
------------- ------------ ------------ ------------
Income before income taxes 3,234 3,406 6,521 7,188
PROVISION FOR INCOME TAXES 1,077 1,349 2,221 2,914
------------- ------------ ------------ ------------
NET INCOME $2,157 $2,057 $4,300 $4,274
============= ============ ============ ============
BASIC EARNINGS PER COMMON SHARE $0.26 $0.26 $0.52 $0.53
============= ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $0.25 $0.25 $0.51 $0.52
============= ============ ============ ============
DIVIDENDS PER COMMON SHARE $0.03 $0.03 $0.06 $0.06
============= ============ ============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
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FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
--------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ 8,503 ($ 8,647)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans (2,371) (14,931)
Purchase of investment securities available for sale (14,008) (61,339)
Purchase of equity securities available for sale -- (177)
Proceeds from maturities and principal repayments of investment
securities available for sale 3,363 56,584
Proceeds from maturities and principal repayments of investment
securities held to maturity 231 503
Proceeds from sale of other real estate owned -- 82
Proceeds from sale of branch premises -- 185
Capital expenditures, net (486) (909)
-------- --------
Net cash provided by (used in) investing activities (13,271) (20,002)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 5,757 (15,284)
Net increase in other borrowings 25 6,563
Proceeds from sale of common stock 8 2,025
Principal payment on stockholder note receivable -- 941
Principal advance on stockholder note receivable -- (1,980)
Dividends paid (496) (483)
-------- --------
Net cash provided by (used in) financing activities 5,294 (8,218)
-------- --------
Net increase (decrease) in cash and cash equivalents 526 (36,867)
Cash and cash equivalents at beginning of period 48,757 58,335
-------- --------
Cash and cash equivalents at end of period $ 49,283 $ 21,468
======== ========
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"), and the other Bank-owned
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, net of taxes, 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 originating
loans in Boston and Springfield, Massachusetts; Cleveland, Ohio; Detroit,
Michigan; Los Angeles, California; Miami, Florida; Morristown, New Jersey;
Philadelphia and Pittsburgh, Pennsylvania; Providence, Rhode Island; Rochester,
New York; Richmond, Virginia; 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.
Since March 2000, the Company established contractual alliances with
business-to-business electronic marketplaces serving ten different global
industrial sectors: ChemIndustry.com (chemicals), CheMatch.com (commodity
chemicals, plastics and fuel products), Enermetrix.com (electricity and natural
gas), e-STEEL.com (steel), ForgeFinder.com (forged metals), Global Food Exchange
(food), MachineTools.com (industrial equipment), Plasticscommerce.com
(plastics), RailNet-USA.com (railroads), and Textrade.com (textiles). 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, servicing
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 six month periods ended June 30, 2000 and 1999, totaled $113,000 and
$190,000 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 was further amended by FASB Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No. 133. The standard is now 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.
In March 2000, the FASB issued FIN 44, "Accounting for Certain Transactions
Involving Stock Compensation Plans An Interpretation of APB 125," with an
effective date of July 1, 2000 to be applied prospectively to new plans or
changes in existing plans. The Statement establishes accounting standards for
the recognition of compensation expense for awards of stock to employees as well
as for changes in the exercise price of existing awarded options. The future
implementation is not expected to have a significant impact upon the Company's
financial position, results of operations, or cash flow.
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3. DIVIDEND PAYMENTS
The Company paid cash dividends in the amount of $0.03 per share on May 18,
2000. On August 1, 2000, the Company declared a dividend of $0.03 per share
payable on August 18, 2000, to shareholders of record as of the close of
business on August 11, 2000.
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 or from historical performance: (i) a general economic slowdown;
(ii) inability of the Company to continue to manage its growth strategy either
domestically or internationally; (iii) 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; (iv) unpredictable delays or
difficulties in the development and introduction of new products and programs;
(v) 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; (vi) 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, or
inability of the Company to continue to accept brokered certificates of deposit
since the Company depends on a mix of these funding sources for its operations;
(vii) the Company's ability to accurately estimate loan losses, prepayment on
loans and to realize the recorded values of retained interests associated with
securitization assets; (viii) changes in the base interest rate such as Prime or
LIBOR which may reduce the excess cash flow available to service the Company's
residual assets from loan sales and securitization and cause the Company to be
unable to realize the recorded values of retained interests associated with
these residual assets; (ix) regulatory, accounting and legislative changes in
rules or interpretations of rules that may occur in the future, including
changes that could (A) require the Company to raise additional capital in order
to continue to meet risk based capital requirements based on possible regulatory
amendments relative to retained interests in securitization and loan sales
and/or (B) result in the need to decrease or eliminate future securitizations
due to the effect on the available terms of such securitizations if the Company
is required to reduce its level of retained interests with respect to such
securitizations; and (x) fluctuations in the quarterly operating results due to
a number of factors, including among others, variations in the volume of loans
originated and changes in the capital markets' pricing of yields on loan sales
and securitizations which may cause variations in the effective interest rates
yielded on loans and retained interests. Additional information
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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, 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, the sale of loans to commercial paper
conduits and other sales facilities and, subject to the effect of pending
regulatory changes, the sale of loans in securitization transactions.
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LOAN ORIGINATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999:
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(DOLLARS IN THOUSANDS, UNAUDITED)
PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE
------- ---------- ------- ----------
LENDING AND SERVICING ACTIVITY:
Loan Originations:
SBA & USDA $ 82,549 37% $ 83,218 37%
Other commercial 57,172 26% 70,613 32%
-------- -------- -------- --------
Domestic 139,721 63% 153,831 69%
Ex-Im 58,374 27% 47,254 21%
Other International 22,128 10% 23,021 10%
-------- -------- -------- --------
International 80,502 37% 70,275 31%
-------- -------- -------- --------
Total Originations $220,223 100% $224,106 100%
======== ======== ======== ========
Total loan originations decreased by 2% or $3.9 million to $220.2 million for
the six-month period ended June 30, 2000 from $224.1 million for the six-month
period ended June 30, 1999 as the Company has de-emphasized the origination of
non-guaranteed domestic and international loans in favor of the higher returns
and more diversified credit risk afforded by use of the government guaranteed
(SBA, USDA and Ex-Im) loan programs. The Company opened its St. Louis, Missouri
representative office in April 1999; Miami, Florida in April 2000; and Los
Angeles, California in May 2000 and plans to continue to open additional offices
in the Mid-West and Southern U.S.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999:
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999 % CHANGE
---- ---- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
Net interest income $ 4,104 $ 2,834 45%
Provision for loan losses 1,432 1,989 (28)
------- ------- -------
Net interest income after provision 2,672 845 216
Gain on loan sales 9,739 9,239 5
Other non-interest income 5,543 3,072 80
Gain on sale of branch -- 8,915 (100)
Non-interest expense 11,433 14,883 (23)
------- ------- -------
Income before income taxes 6,521 7,188 (9)
Income taxes 2,221 2,914 (24)
------- ------- -------
Net income $ 4,300 $ 4,274 1%
======= ======= =======
Basic earnings per share $ 0.52 $ 0.53
======= =======
Diluted earnings per share $ 0.51 $ 0.52
======= =======
Weighted average shares - basic 8,263 8,059
======= =======
Weighted average shares - diluted 8,408 8,266
======= =======
NET INCOME. Net income increased 1% or $26,000 for the six-month period ended
June 30, 2000 when compared to the six-month period ended June 30 1999. Income
from operations increased 72% over the six months ended June 1999, after
excluding $1.8 million ($.22 per share) from net income for the six months ended
June 30, 1999 related to a net non-recurring gain on the sale of the branch less
several one-time expenses. Net interest income through June 30, 2000 increased
as a result of an increase in balance sheet loans and rising interest rates.
Other non-interest income is comprised of loan servicing income and other fees
and income from the retained loan interests held by unconsolidated subsidiaries,
each of which increased in the current year due to the increased loan portfolio
serviced.
NET INTEREST INCOME. Net interest income increased 45% or $1.3 million for the
six-month period ended June 30, 2000 to $4.1 million from $2.8 for the six-month
period ended June 30, 1999. Average earning assets increased 1% or $3.1 million,
while average interest bearing liabilities increased 13.5% or $28.5 million. The
increase in interest bearing liabilities was the result of a 77% or $88.8
million increase in brokered certificates of deposit. Subsequent to the March
1999 sale of its last retail branch facility, the Company has used these
deposits in conjunction with its warehouse lines of credit and commercial paper
and sales facilities to fund loan volume. The net interest spread for the
six-month period ended June 30, 2000 increased 151 basis points when compared to
the six-month period ended June 30, 1999. The increase reflects six Prime Rate
increases totaling 175 basis points which occurred from November 1999 through
May 2000.
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AVERAGE BALANCE, INTEREST, YIELDS, AND RATES
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
INTEREST AVERAGE INTEREST
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/
BALANCE PAID RATE BALANCE PAID
------- ---- ---- ------- ----
(DOLLARS IN THOUSANDS, UNAUDITED)
ASSETS:
Loans (1):
Commercial $174,443 $8,909 10.21% $154,397 $6,067
Residential 1,735 88 10.14% 2,594 98
Other consumer 611 29 9.57% 640 28
-------------- ------------ ---------- ------------- ------------ ---
Total loans 176,789 9,026 10.21% 157,631 6,193
Investment securities 40,287 1,585 7.87% 48,632 1,306
Short term investments/federal funds sold 34,510 1,012 5.91% 42,269 994
-------------- ------------ ---------- ------------- ------------ ---
Total investment securities and funds sold 74,797 2,597 6.97% 90,901 2,300
-------------- ------------ ---------- ------------- ------------ ---
Total earning assets 251,586 11,623 9.24% 248,532 8,493
Total non-earning assets 59,858 32,903
-------------- -------------
Total assets $311,444 $281,435
============== =============
LIABILITIES:
Deposits:
Interest bearing demand deposits $2,842 $15 1.06% $5,187 $60
Premier money market 0 0 0.00% 50,391 1,203
Other savings 0 0 0.00% 5,163 97
Retail and IRA certificates of deposit 30,852 832 5.42% 34,319 902
Brokered certificates of deposit 204,023 6,359 6.27% 115,192 3,053
-------------- ------------ ---------- ------------- ------------ ---
Total deposits 237,717 7,206 6.10% 210,252 5,315
Warehouse borrowings 1,155 305 NM 84 337
Other borrowings 235 8 6.85% 295 7
-------------- ------------ ---------- ------------- ------------ ---
Total interest bearing liabilities 239,107 7,519 6.32% 210,631 5,659
-------------- ------------ ---------- ------------- ------------ ---
Non-interest bearing liabilities:
Demand deposits 9,581 20,079
Other liabilities 6,441 760
-------------- -------------
Total non-interest bearing liabilities 16,022 20,839
Stockholders' equity 56,315 49,965
-------------- -------------
Total liabilities and stockholders' equity $311,444 $281,435
============== =============
Net interest income/net interest spread $4,104 2.92% $2,834
============ ========== ============ ===
Net interest margin 3.23%
========== ===
(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 absolute
dollar amount of the change in each.
FOR THE SIX MONTHS ENDED 2000 COMPARED TO 1999
JUNE 30, 2000 CHANGES DUE TO (2):
------------------------ -------------------
AVERAGE
YIELD/
RATE VOLUME RATE TOTAL
---- ------ ---- -----
(DOLLARS IN THOUSANDS, UNAUDITED)
ASSETS:
Loans (1):
Commercial 7.86% $1,024 $1,818 $2,842
Residential 7.56% (44) 34 (10)
Other consumer 8.82% (1) 2 1
----------- ----------- ---------- ----------
Total loans 7.86% 979 1,854 2,833
Investment securities 5.37% (328) 607 279
Short term investments/federal funds sold 4.74% (228) 246 18
----------- ----------- ---------- ----------
Total investment securities and funds sold 5.08% (556) 853 297
----------- ----------- ---------- ----------
Total earning assets 6.83% 423 2,707 3,130
Total non-earning assets
Total assets
LIABILITIES:
Deposits:
Interest bearing demand deposits 2.33% ($12) ($33) ($45)
Premier money market 4.81% (1,203) 0 (1,203)
Other savings 3.79% (97) 0 (97)
Retail and IRA certificates of deposit 5.30% (91) 21 (70)
Brokered certificates of deposit 5.34% 2,775 531 3,306
----------- ----------- ---------- ----------
Total deposits 5.10% 1,372 519 1,891
Warehouse borrowings NM (32) 0 (32)
Other borrowings 4.79% (2) 3 1
----------- ----------- ---------- ----------
Total interest bearing liabilities 5.42% 1,338 522 1,860
----------- ----------- ---------- ----------
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 1.41% ($915) $2,185 $1,270
=========== =========== ========== ==========
Net interest margin 2.24%
===========
(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 absolute
dollar amount of the change in each.
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INTEREST INCOME. Interest income increased 37% or $3.1 million to $11.6 million
for the six-month period ended June 30, 2000 from $8.5 million for the six-month
period ended June 30, 1999. Loan interest income increased 46% or $2.8 million,
as the average balance of loans increased 12% or $19.2 million and the average
yield on loans increased 235 basis points. Interest income for the period
included $410,000 or 46 basis points of interest collected on loans that had
been placed on nonaccrual. The loan yield was also impacted by six Prime Rate
increases, from 7.75% to 9.50%, during the twelve-month period ended June 30,
2000 specifically in July, August and November 1999 and February, March and May
2000. The yield on loans also benefited from an increase in the pricing of loans
indexed to LIBOR. For the six-month period ended June 30, 2000, these loans were
priced at an average rate of LIBOR plus 278 basis points versus an average price
of LIBOR plus 250 basis points for the six-month period ended June 30, 1999 as
an effort has been made to improve the pricing on the privately insured
international loans.
Investment interest income increased 13% or $297,000 to $2.6 million for the
six-month period ended June 30, 2000 from $2.3 million for the six-month period
ended June 30, 1999. The average balance of investment securities decreased 18%
or $16.1 million to $74.8 million from $90.9 million due to the run-off of
excess cash after the sale of the branch in March 1999. However, the yield on
investments increased 189 basis points to 6.97% for the six-month period ended
June 30, 2000 from 5.08% for the six-month period ended June 30, 1999 due to the
higher yielding assets, including interest-only strips associated with loan
sales and secruitizations. The average balance of federal funds sold and other
liquid investments decreased 18% or $7.8 million for the six-month period ended
June 30, 2000 when compared to the six-month period ended June 30, 1999. During
the six-month period ended June 30, 1999, liquid investments were maintained to
fund the $151 million branch deposit sale and loan closings.
The investment portfolio includes $9.3 million of notes retained by the Company
following completion of loan securitizations. The retained notes are comprised
of subordinated notes with investment grade ratings of BBB and BB totaling $2.7
million and unrated notes aggregating $6.6 million. The notes are indexed to
Prime or LIBOR. The weighted average yield on the retained notes was 10.37% for
the six-month period ended June 30, 2000 versus a weighted yield of 7.86% for
the six-month period ended June 30, 1999, reflecting the Prime Rate increases
which have occurred during the twelve months.
INTEREST EXPENSE. Interest expense increased 33% or $1.9 million to $7.5 million
for the six-month period ended June 30, 2000, from $5.7 million for the
six-month period ended June 30, 1999, as the average balance of interest bearing
liabilities increased 14% or $28.5 million. Brokered certificates of deposit
increased 77% or $88.8 million reflecting the change in the Company's funding
sources subsequent to the sale of the last retail branch facility in March 1999.
These deposits, which mature periodically within the next nine months, are used
in conjunction with lines of credit and commercial paper and sales facilities to
fund loan originations.
Interest expense for the six-month period ended June 30, 2000 includes $305,000
of interest expense related to the $75 million warehouse line of credit that is
used to fund commercial term
13
14
loans. During the six-month period, the average borrowing outstanding on the
line was $1.2 million resulting in $45,000 of interest expense. The remaining
expense relates to the amortization of fees paid at the origination of the
facility in December 1998 that are amortized as interest expense over the term
of the facility.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible losses totaled
$1.4 million for the six-month period ended June 30, 2000 as compared to $2.0
million for the six-month period ended June 30, 1999. See "Allowance for Loan
Losses" for further analysis of the provision and related data.
NON-INTEREST INCOME. Non-interest income is comprised of the following items:
FOR THE SIX MONTHS ENDED
JUNE 30,
--------
NON-INTEREST INCOME: 2000 1999 % CHANGE
---- ---- --------
(DOLLARS IN THOUSANDS, UNAUDITED)
Gain on loan sales:
SBA sales $ 2,388 $ 3,012 (21%)
USDA sales 1,173 1,948 (40)
Ex-Im working capital sales 183 216 (15)
Ex-Im medium term sales 1,585 696 128
Inventory buyer credit 55 -- --
------- ------- -------
Gain on guaranteed loan sales 5,384 5,872 (8)
Other loan sales 522 257 103
Loan sales to sales facility 517 -- --
Loan backed securitizations 3,125 2,957 6
Loans to commercial paper conduit 191 153 25
------- ------- -------
Total gain on loan sales 9,739 9,239 5
Loan servicing income and fees 4,594 2,819 63
Service charges and other deposit fees -- 74 (100)
Income from unconsolidated companies 824 127 549
Gain on sale of branch -- 8,915 (100)
Other income 125 52 140
------- ------- -------
Total non-interest income $15,282 $21,226 (28%)
======= ======= =======
The 28% or $5.9 million decrease in non-interest income for the six-month period
ended June 30, 2000 as compared to the six-month period ended June 30, 1999
reflects the first quarter 1999 gain of $8.9 million from the sale of the
Company's last branch facility and related deposits of $151 million.
Gain on loan sales increased 5.4% or $500,000 to $9.7 million for the six-month
period ended June 30, 2000 from $9.2 million for the six-month period ended June
30, 1999. The average
15
15
gain recognized on SBA loans (measured as gain compared to SBA guaranteed
portion of loan sold) for the six-month period ended June 30, 2000 was 532 basis
points as compared to 677 basis points for the period ended June 30, 1999. The
decrease is reflective of market pricing deterioration observed over the course
of 1999, which the Company believes was the result of accelerated prepayment
assumptions utilized in the marketplace and liquidity pressures in the capital
markets. The market has improved in the first six months of 2000 as compared to
late 1999 levels, but has not recovered to the levels achieved prior to June
1999. The Company's actual prepayment and default experience to date on its SBA
and USDA guaranteed loans, as well as its experience on the securitized pools,
continues to be within the rates assumed in the calculation done at the time of
the sales. The actual performance of each portfolio is monitored monthly.
The relative gain on sale of USDA loans increased to 1000 basis points for the
six-month period ended June 30, 2000 from 928 basis points for the six-month
period ended June 30, 1999 due to increased demand for these notes with longer
maturities.
Gain on Ex-Im medium term loan sales reflects an increase of 128% or $21 million
of loans sold. During 2000, the Company's international lenders have focused on
increasing international originations under the Ex-Im Bank programs. The
relative gain on these loan sales has remained constant at 320 basis points for
the first six-month periods of 2000 and 1999.
During the six-month period ended June 30, 2000 the Company recognized gains
totaling $522,000 on unguaranteed commercial loans sold to investors on an
individual basis as compared to $257,000 in the same period of the prior year as
this one-off market is becoming more established.
In June 2000, the Company completed a $65 million securitization of commercial
term loans which included a $19 million prefunding amount and resulted in a gain
of $726,000.
The securities issued were as follows:
RATINGS
--------------------------------------------------
AMOUNT TYPE MOODY'S INVESTOR SERVICE FITCH
56.55 million Senior Aaa AAA
2.6 million Subordinate A2 A
2.6 million Subordinate Baa2 BBB
3.25 million Subordinate Ba2 BB
The Company sold all of these securities in the quarter. In connection with this
transaction, the Company recorded an interest-only strip totaling $2.98 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 also recorded a servicing asset of $198,000. The
Company has utilized the following assumptions to calculate its retained
interest for the securitization: prepayment of 8%, aggregate expected credit
losses of 4.26% and has valued the retained interests at an effective discount
rate of 11.40%.
15
16
During the quarter ended June 30, 2000, the Company recognized a gain of
$612,000 with the delivery of $10 million of loans funded by the prefunded
portion of the March 2000 securitization of $35.8 million of the unguaranteed
portion of SBA loans. The total gain recognized on this securitization for the
six months ended June 30, 2000 was $2.3 million.
The gain on loan sales for the six months ended June 30, 1999 includes a $2.8
million gain on a $37.4 million securitization of the unguaranteed portions of
SBA loans.
LOAN SERVICING INCOME AND FEES FOR THE SIX MONTHS ENDED
JUNE 30,
--------
2000 1999 % CHANGE
---- ---- --------
Loan Servicing Income: (DOLLARS IN THOUSANDS)
SBA guaranteed loans $ 1,713 $ 1,513 13%
USDA guaranteed loans 825 427 93
Ex-Im working capital loans 194 113 72
Ex-Im medium term loans 446 124 260
Loan securitizations 440 83 430
Other loans 143 247 (42)
----------- ----------- -----------
Loan servicing income 3,761 2,507 50
Servicing asset reduction (163) (239) (32)
----------- ----------- -----------
Net loan servicing income 3,598 2,268 59
Other fees 996 551 81
----------- ----------- -----------
Total loan servicing income and fees $ 4,594 $ 2,819 63%
=========== =========== ===========
LOANS MANAGED FOR OTHERS
Average balance $ 967,303 $ 672,205 44%
=========== =========== ===========
Ending balance $ 1,009,854 $ 735,149 37%
=========== =========== ===========
Loan servicing income increased 50% or $1.3 million as the average balance of
loans managed for others increased 44% or $295 million. Loan sales are completed
on a servicing-retained basis and the loans managed for others also includes
loans sold to the Company's unconsolidated subsidiaries. For the six-month
period ended June 30, 2000, the average balance of these loans was approximately
$92.9 million.
The $163,000 servicing asset reduction for the six-months ended June 30, 2000
relates to an impairment in the carrying value of the servicing asset related to
an Ex-Im Bank medium term loan to a company in the Dominican Republic. Ex-Im
Bank has paid the loan principal in full to the investor under the Ex-Im Bank
guarantee.
For the six-months ended June 30, 1999, the servicing asset reduction of
$239,000 related to an impairment in the carrying value of servicing assets
related to certain Ex-Im Bank insured
16
17
medium term loans made to borrowers in Brazil. That country's macroeconomic
pressures during that year led to payment defaults on the loans underlying the
assets.
Other loan fee income of $996,000 for the period ended June 30, 2000 includes
$446,000 for letter of credit fees, $303,000 of late fees collected, $130,000 of
fees collected in conjunction with the Ex-Im Bank restructure of certain
Brazilian loans, and $182,000 relating to prepayment penalties imposed on USDA
borrowers. This compares to the $551,000 for the period ended June 30, 1999
which included $288,000 for letter of credit fees, $166,000 for late fees on
loans and $97,000 of other loan fee income. The increase in letter of credit
fees reflects increasing amount of export and import activities conducted by
clients, while the increase in late fees collected is the result of a focused
collection effort.
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following items:
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2000 1999 % CHANGE
---- ---- --------
NON-INTEREST EXPENSE: (DOLLARS IN THOUSANDS, UNAUDITED)
Salaries and benefits $ 7,413 $10,219 (27%)
Occupancy 928 877 6
Office expenses 471 483 (2)
Marketing expenses 831 1,012 (18)
Furniture and equipment 673 600 12
Outside services 718 618 16
Loan collection 115 101 14
Other 284 973 (71)
------- ------- -------
Total non-interest expense $11,433 $14,883 (23%)
======= ======= =======
The 23% or $3.5 million decrease in non-interest expense for the six-month
period ended June 30, 2000, as compared with the same period ended June 30,
1999, is primarily attributable to a 27% or $2.8 million decrease in salaries
and benefits.
Salaries and benefits for the six-month period ended June 30, 1999 included a
$1.7 million bonus paid to the Chairman and Chief Executive Officer, which
enabled him to retire a $980,000 note receivable held by the Company and to pay
the related income taxes. The note receivable, which was originated in 1994, was
provided to finance the Chief Executive Officer's purchase of 614,000 shares of
common stock. Salaries and bonuses in 1999 also included $940,000 of cash
bonuses paid to the Chief Executive Officer and six members of senior management
as compensation for the sale of the Company's last retail branch and the related
deposits.
Other expenses for a the six months ended June 30, 2000 include general
insurance expense, miscellaneous operating expenses, and an estimated $75,000
guaranty repair on an Ex-Im Bank guaranteed loan claim currently under review by
the agency.
17
18
Other expenses for the six-month period ended June 30, 1999 included $334,000
for the loss of a government guarantee on a single SBA loan, expenses related to
the conversion by the Company to a Connecticut bank and trust company, and
various other non-recurring expenses.
INCOME TAXES. The Company's effective tax rate decreased to 39% for the
six-month period ended June 30, 2000 from 40.5% for the six-month period ended
June 30, 1999. Income from unconsolidated subsidiaries is reported net of income
taxes, which are also provided for at a 39% rate for the six-month period ended
June 30, 2000. The 1999 rate reflected the non-deductibility of the portion of
the Chief Executive Officer's compensation over $1 million.
LOAN ORIGINATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999:
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
(DOLLARS IN THOUSANDS, UNAUDITED)
PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE
------- ---------- ------- ----------
LENDING AND SERVICING ACTIVITY:
Loan Originations:
SBA & USDA $ 46,812 40% $ 50,752 37%
Other commercial 34,083 29% 43,188 31%
-------- -------- -------- --------
Domestic 80,895 69% 93,940 68%
Ex-Im 27,375 23% 26,680 20%
Other international 9,427 8% 16,669 12%
-------- -------- -------- --------
International 36,802 31% 43,349 32%
-------- -------- -------- --------
Total Originations $117,697 100% $137,289 100%
======== ======== ======== ========
Total commercial loan originations decreased 14% or $19.6 million to $117.7
million for the quarter ended June 30, 2000 from $137.3 million for the quarter
ended June 30, 1999. Originations for USDA loans which are generally larger
individual dollar loans, decreased $7 million although there is a strong
pipeline of USDA loans at June 30, 2000. Other commercial loans and insured
transactions decreased due to the increasing emphasis on higher margin
transactions and diversified credit risk achieved through government guaranteed
loans.
18
19
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30,
1999:
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999 % CHANGE
---- ---- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
Net interest income $1,920 $1,451 32%
Provision for loan losses 874 449 95
------ ------ ------
Net interest income after provision 1,046 1,002 4
Gain on loan sales 4,718 6,189 (24)
Other non-interest income 3,231 1,746 85
Non-interest expense 5,761 5,531 4
------ ------ ------
Income before income taxes 3,234 3,406 (5)
Income taxes 1,077 1,349 (20)
------ ------ ------
Net income $2,157 $2,057 5%
====== ====== ======
Basic earnings per share $ 0.26 $ 0.26
====== ======
Diluted earnings per share $ 0.25 $ 0.25
====== ======
Weighted average shares - basic 8,264 8,160
====== ======
Weighted average shares - diluted 8,384 8,359
====== ======
NET INCOME. The 5% or $100,000 increase in net income for the quarter ended June
30, 2000 as compared to the quarter ended June 30, 1999 is the result of an
increase in the net interest margin partially offset by a decrease in gain on
loan sales.
NET INTEREST INCOME. Net interest income increased 32% or $469,000 for the
quarter ended June 30, 2000 as compared to the quarter ended June 30, 1999. The
increase is attributable to a 27% or $1.2 million increase in interest income
resulting from successive increases in the Prime Rate from July 1999 and through
May 2000. The yield on earning assets increased 30% or 218 basis points as a
result of a 199 basis point increase in the loan yield and a 183 basis point
increase in the investment yield and a change in mix to higher yielding loans.
The investment yield was favorably impacted by the higher yields of the
increased balance of interest-only strips residuals associated with the
Company's loan securitizations and sales. Partially mitigating the effect of the
asset yield increases was a 20% or 108 basis point increase in the cost of
funds, which along with higher average balances resulted in a 24% or $751,000
increase in interest expense.
19
20
AVERAGE BALANCES, INTEREST, YIELDS AND RATES
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
(DOLLARS IN THOUSANDS, UNAUDITED)
ASSETS:
Loans (1):
Commercial $169,663 $ 4,462 10.52% $157,331 $ 3,348 8.51%
Residential 1,782 37 8.31% 2,224 43 7.73%
Other consumer 602 15 9.99% 605 13 8.62%
-------- -------- ----- -------- -------- -----
Total loans 172,047 4,514 10.49% 160,160 3,404 8.50%
Investment securities 45,078 815 7.23% 65,651 816 4.97%
Short term investments/federal funds sold 28,058 419 5.99% 25,674 308 4.81%
-------- -------- ----- -------- -------- -----
Total investment securities and funds sold 73,136 1,234 6.76% 91,325 1,124 4.93%
-------- -------- ----- -------- -------- -----
Total earning assets 245,183 5,748 9.38% 251,485 4,528 7.20%
Total non-earning assets 63,408 38,609
-------- --------
Total assets $308,591 $290,094
======== ========
LIABILITIES:
Deposits:
Interest bearing demand deposits $ 3,219 $ 9 1.12% $ 2,479 $ 13 2.10%
Premier money market 0 0 0.00% 5 0 0.00%
Other savings 0 0 0.00% 4 0 0.00%
Retail and IRA certificates of deposit 26,524 370 5.61% 43,400 566 5.23%
Brokered certificates of deposit 202,022 3,264 6.50% 178,681 2,377 5.34%
-------- -------- ----- -------- -------- -----
Total deposits 231,765 3,643 6.32% 224,569 2,956 5.28%
Warehouse borrowings 2,310 178 NM 167 119 NM
Other borrowings 397 7 7.09% 177 2 4.53%
-------- -------- ----- -------- -------- -----
Total interest bearing liabilities 234,472 3,828 6.57% 224,913 3,077 5.49%
-------- -------- ----- -------- -------- -----
Non-interest bearing liabilities:
Demand deposits 10,474 6,896
Other liabilities 6,333 6,842
-------- --------
Total non-interest bearing liabilities 16,807 13,738
Stockholders' equity 57,312 51,443
-------- --------
Total liabilities and stockholders' equity $308,591 $290,094
======== ========
Net interest income/net interest spread $ 1,920 2.81% $ 1,451 1.71%
======== ===== ======== =====
Net interest margin 3.10% 2.24%
===== =====
(1) For purposes of these computations, non-accruing loans are included in the
average balance.
(2) The changes in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
2000 COMPARED TO 1999
CHANGES DUE TO (2):
VOLUME RATE TOTAL
ASSETS:
Loans (1):
Commercial $ 324 $ 790 $ 1,114
Residential (9) 3 (6)
Other consumer 0 2 2
-------- -------- --------
Total loans 315 795 1,110
Investment securities (372) 371 (1)
Short term investments/federal funds sold 36 75 111
-------- -------- --------
Total investment securities and funds sold (336) 446 110
-------- -------- --------
Total earning assets (21) 1,241 1,220
Total non-earning assets
Total assets
LIABILITIES:
Deposits:
Interest bearing demand deposits $ 2 ($ 6) ($ 4)
Premier money market 0 0 0
Other savings 0 0 0
Retail and IRA certificates of deposit (237) 41 (196)
Brokered certificates of deposit 372 515 887
-------- -------- --------
Total deposits 137 550 687
Warehouse borrowings 59 0 59
Other borrowings 4 1 5
-------- -------- --------
Total interest bearing liabilities 200 551 751
-------- -------- --------
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 ($ 221) $ 690 $ 469
======== ======== ========
Net interest margin
(1) For purposes of these computations, non-accruing loans are included in the
average balance.
(2) The changes in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
20
21
INTEREST INCOME. Interest income increased 27% or $1.2 million to $5.7 million
for the quarter ended June 30, 2000 from $4.5 million for the quarter ended June
30, 1999. The increase was partially the result of changes in the Prime Rate
which cumulatively increased from 7.75% to 9.50% during the past twelve months.
INTEREST EXPENSE. Interest expense increased 24% or $751,000, reflecting a 108
basis point increase in the cost of funds. The brokered certificate of deposit
average cost increased 21.7% or 116 basis points reflecting the rising interest
rate environment. The average balance of these deposits increased 13% or $23.3
million as the Company reduced its excess liquidity. Subsequent to the March
1999 sale of the Company's last retail branch facility and related checking,
savings and money market deposits, the Company has relied on time deposits, in
conjunction with lines of credit and commercial paper and sales facilities to
fund loan volume. The average balance of retail certificates of deposit
decreased by 38.9% or $16.9 million. The balance of these certificates during
the quarter ended June 30, 1999 reflected the results of a marketing campaign
for one-year certificate of deposit undertaken by the Company in March 1999 in
anticipation of the sale of the Bank branch and certain deposits. The Company
did not aggressively seek to retain these deposits by matching market rates as
they matured in the quarter ended June 30, 2000.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
totaled $874,000 for the quarter ended June 30, 2000 as compared to $449,000 for
the quarter ended June 30, 1999. The provision for the quarter ended June 30,
2000 included $100,000 to increase the allowance for loan losses to $4,650,000.
See "Allowance for Loan Losses" for further analysis of the provision and
related data.
21
22
NON-INTEREST INCOME. Non-interest income is comprised of the following items:
FOR THE THREE MONTHS ENDED
JUNE 30,
--------
NON-INTEREST INCOME: 2000 1999 % CHANGE
- -------------------- ---- ---- --------
(DOLLARS IN THOUSANDS, UNAUDITED)
Gain on loan sales:
SBA $ 1,358 $ 1,598 (15%)
USDA 501 981 (49)
Ex-Im working capital 60 131 (54)
Ex-Im medium term 843 375 125
Inventory buyer credit 38 -- --
------- ------- -------
Gain on guaranteed loan sales 2,800 3,085 (9)
Other loans 305 223 37
Loan sales to sales facility 95 -- --
Loan backed securitizations 1,338 2,810 (52)
Loans to commercial paper conduit 180 71 154
------- ------- -------
Total gain on loan sales 4,718 6,189 (24)
Loan servicing income and fees 2,671 1,633 64
Service charges and other deposit fees -- 6 (100)
Income from unconsolidated companies 472 72 556
Other income 88 35 151
------- ------- -------
Total non-interest income $ 7,949 $ 7,935 0%
======= ======= =======
Gain on guaranteed loan sales decreased 9% or $285,000. Although originations
and sales of SBA loans for the quarter ended June 30, 2000 were comparable to
the originations and sales for the quarter ended June 30, 1999, the gain on
these sales decreased 15% or $240,000. The relative gain on SBA loan sales of
516 basis points (measured as gain compared to SBA guaranteed portion of loan
sold) continues to reflect market deterioration which occurred during the last
two quarters of 1999. The Company believes that the deterioration was the result
of accelerated prepayment assumptions utilized in the marketplace and potential
liquidity concerns.
Gain on the sale of USDA loans decreased 49% or $480,000. The relative gain on
USDA loan sales increased to 858 basis points for the quarter ended June 30,
2000 from 638 basis points for the quarter ended June 30, 1999. However,
originations and sales of these loans decreased by 47%. Such variability is
expected for these originations, as the loans are generally larger in size than
the Bank's typical borrowers, more complex to close, and a borrower must meet
specific eligibility requirements to access the program.
The relative gain on Ex-Im term loans decreased to 400 basis points from 443
basis points due to the mix of loans sold. The principal balances of Ex-Im term
loans originated and sold increased
22
23
by 74% and 150%, respectively, for the quarter ended June 30, 2000 as compared
to the quarter ended June 30, 1999.
LOAN SERVICING INCOME AND FEES FOR THE THREE MONTHS ENDED
JUNE 30,
----------------------------------------
2000 1999 % CHANGE
---- ---- --------
Loan Servicing Income: (DOLLARS IN THOUSANDS, UNAUDITED)
SBA guaranteed loans $ 1,080 $ 856 26%
USDA guaranteed loans 438 234 87
Ex-Im working capital loans 119 61 95
Ex-Im medium term loans 288 68 324
Loan securitizations 221 42 426
Other loans 17 186 (91)
---------- ---------- ----------
Net loan servicing income 2,163 1,447 49
Other fees 508 186 173
---------- ---------- ----------
Total loan servicing income and fees $ 2,671 $ 1,633 64%
========== ========== ==========
LOANS MANAGED FOR OTHERS
Average balance $ 977,388 $ 691,107 41%
========== ========== ==========
Ending balance $1,009,854 $ 735,149 37%
========== ========== ==========
The increase in loan servicing and other fee income reflects the mix of the 41%
or $286.3 million increase in the average balance of loans managed for others.
Other fee income for the quarter ended June 30, 2000 includes $175,000 of late
fees collected, $151,000 of prepayment penalty income from USDA borrowers, and
$145,000 of letter of credit fee income. This compares to $83,000 of late fees,
$96,000 of letter of credit income and $8,000 of other loan fee income during
the same period of 1999. The increase in late fees collected is a result of a
focused collection effort while letter of credit fees have increased as
clients increase their trade activities.
23
24
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following items:
FOR THE THREE MONTHS ENDED
JUNE 30,
-------------------------------
2000 1999 % CHANGE
----- ------ --------
NON-INTEREST EXPENSE: (DOLLARS IN THOUSANDS, UNAUDITED)
Salaries and benefits $3,711 $3,552 4%
Occupancy 442 422 5
Office expenses 250 273 (8)
Marketing expenses 440 526 (16)
Furniture and equipment 338 306 10
Outside services 342 300 14
Loan collection 68 30 127
Other 170 122 39
------ ------ ------
Total non-interest expense $5,761 $5,531 4%
====== ====== ======
Non-interest expense for the quarter ended June 30, 2000 increased 4% or
$230,000 when compared to the quarter ended June 30, 1999. Salaries and benefits
expense increased 4% or $159,000, reflecting a 7% increase in the average number
of full time employees for the quarter ended June 30, 2000 as compared to the
quarter ended June 30, 1999 as well as a 3% annual salary increase effective
April 1, 2000.
Non-personnel related non-interest expenses remained relatively flat at $2.0
million for both the quarters ended June 30, 2000 and June 30, 1999, reflecting
increases due to continued expansion offset by ongoing expense controls.
INCOME TAXES. The Company's effective tax rate for the quarter ended June 30,
2000 was 39% as compared to 40% for the quarter ended June 30, 1999.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION TO JUNE 30, 2000 FROM DECEMBER 31,
1999
GENERAL. Total assets increased 2% or $7.0 million to $335.0 million at June 30,
2000 from $328.0 million at December 31, 1999.
INVESTMENT SECURITIES. The increase in the balance of investment securities of
$16.6 million reflects a $14.6 million increase in government securities and
$3.0 million of interest-only strips associated with the March and June 2000
securitizations, net of amortization of existing interest-only strips. In
addition to providing interest income and liquidity, the Company uses certain
securities to collateralize various lines of credit.
RECEIVABLE FROM LOANS SOLD. This decrease in the receivable from loans sold
reflects the settlement of loans sold at the end of the period, which is usually
collected with 30 days.
24
25
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES. Certain of the unconsolidated
subsidiaries put loans into the Company's securitizations. The Company's
investment in the subsidiaries was accordingly reduced when the loans were
securitized.
PREPAID EXPENSES AND OTHER ASSETS. The increase in prepaid and other assets
represents an increase of $3.9 million in claims receivable from the insurer of
three of the Bank's international loan products. These claims are generally
settled in three months. The claims outstanding at June 30, 2000 were filed in
May and June 2000.
SERVICING ASSETS. The increase in servicing asset primarily represents the asset
recognized on the sale of guaranteed SBA, USDA and Ex-Im Bank guaranteed loans.
DEPOSIT LIABILITIES. Deposit liabilities increased by $5.8 million. The
Company's brokered certificates of deposit increased by $17.7 million during the
period while retail certificates of deposit decreased by $13.1 million. The
run-off in retail certificates has been primarily in certificates with a
one-year maturity. These certificates were offered in March 1999 in anticipation
of the Company's sale of its last retail branch facility. The Company generally
obtains certificates with maturities of less than one year.
25
26
LOANS. The Company's loan portfolio and loans managed for others portfolio were
as follows:
JUNE 30, DECEMBER 31,
LOAN PORTFOLIO 2000 1999
- -------------- ---- ----
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SBA & USDA loans $ 13,642 $ 16,433
Other commercial 51,482 45,756
Equipment 160 993
Energy 328 20
Ex-Im 7,192 15,558
Privately insured term 27,542 19,073
Privately insured import 6,222 4,464
----------- -----------
Total commercial loans 106,568 102,297
Residential real estate 1,773 1,828
Other consumer 597 628
----------- -----------
Total loans 108,938 104,753
Loans held for sale 42,687 44,587
Less:
Discount on retained loans 3,290 3,371
Net deferred loan origination costs (120) (16)
Allowance for loan losses 4,650 4,550
----------- -----------
Loans, net $ 143,805 $ 141,435
=========== ===========
LOANS MANAGED FOR OTHERS
Guaranteed Loans
SBA & USDA $ 433,506 $ 406,979
Ex-Im 146,449 129,518
----------- -----------
579,955 536,497
Unguaranteed Portions and Unguaranteed Loans
SBA & USDA 39,478 43,334
Securitized commercial loans 264,861 210,764
Domestic loans sold to commercial paper and sales facilities 37,047 41,529
International loans sold to commercial paper facility 24,408 28,845
Other commercial 62,406 63,836
Home equity lines 1,265 1,504
----------- -----------
429,465 389,812
Residential Real Estate 434 443
----------- -----------
Total loans managed for others $ 1,009,854 $ 926,752
=========== ===========
Total loans under management $ 1,161,479 $ 1,076,092
=========== ===========
26
27
Net loans minimally increased 1.6% or $2.4 million to $143.8 million at June 30,
2000 from $141.4 million at December 31, 1999 after sales and securitizations
were completed during the period. Loan originations, including the origination
of lines of credit, were $220.2 million for the six months ended June 30, 2000.
ALLOWANCE FOR LOAN LOSSES. The Company reviews the adequacy of the Allowance for
Loan Losses quarterly. At June 30, 2000, the Allowance totaled $4.7 million and
represents 3.1% 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 six-month period ended June 30, 2000
decreased $106,000 to $1.3 million from $1.4 million for the three-month period
ended June 30, 1999. The Allowance at June 30, 2000 covered 1999 annual
charge-offs 1.82 times.
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------
FOR THE
YEAR
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31,
-------------- -------------- ------------
2000 1999 2000 1999 1999
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, UNAUDITED)
Balance of allowance for loan losses
at the beginning of the period $ 4,550 $ 4,500 $ 4,550 $ 4,000 $ 4,000
Charge-offs:
SBA/USDA loans 19 64 38 157 292
Ex-Im working capital loans 126 -- 144 188 260
Insured term loans 293 -- 293 113 529
Other commercial loans 208 127 238 749 1,199
Privately insured -- 239 473 265 264
Non-owner occupied commercial mortgages -- -- -- -- 3
Other loans 179 -- 245 -- 2
-------- -------- -------- -------- --------
Total charge-offs 824 430 1,431 1,472 2,549
Recoveries:
SBA loans -- 1 30 2 3
Other commercial loans 50 30 69 31 75
Non-owner occupied commercial mortgages -- -- -- -- 2
-------- -------- -------- -------- --------
Total recoveries 50 31 99 33 80
-------- -------- -------- -------- --------
Net charge-offs 774 399 1,332 1,439 2,469
Provision for loan losses 874 449 1,432 1,989 3,019
-------- -------- -------- -------- --------
Balance of allowance for loan
losses at end of period $ 4,650 $ 4,550 $ 4,650 $ 4,550 $ 4,550
======== ======== ======== ======== ========
Total loans and loans held for sale $151,625 $154,349 $151,624 $154,349 $149,340
======== ======== ======== ======== ========
Allowance to total loans 3.1% 3.0% 3.1% 3.0% 3.0%
======== ======== ======== ======== ========
27
28
Non-performing loans for the six-month period ended June 30, 2000 decreased
$868,000 to $4.1 million from December 31, 1999. Non-performing loans relative
to total loans decreased to 2.70% at June 30, 2000 from 3.32% at December 31,
1999.
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
NON-PERFORMING LOANS JUNE 30, DECEMBER 31,
2000 1999
------- --------
Commercial: (DOLLARS IN THOUSANDS, UNAUDITED)
Unguaranteed portions:
SBA and USDA loans $1,036 $1,264
Ex-Im working capital loans 196 397
Other international loans 1,540 1,759
Commercial mortgage loans -- 49
Other commercial loans 1,318 1,358
Consumer -- 131
------ ------
Total non-performing loans $4,090 $4,958
====== ======
Total non-performing loans to total loans 2.70% 3.32%
====== ======
Total non-performing loans to total assets 1.22% 1.51%
====== ======
Allowance to total non-performing loans 114% 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 June 30, 2000 represented 19% 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 an aggregate deductible which provides that the Company is
responsible for the first loss on the uninsured portion of a loan.
28
29
JUNE 30, DECEMBER 31,
2000 1999
--------------- -----------------
(DOLLARS IN THOUSANDS, UNAUDITED)
ALLOCATION OF THE ALLOWANCE BY
CATEGORY OF LOANS:
Unguaranteed Portions of:
SBA & USDA loans $711 $820
Ex-Im working capital loans 136 202
Other international loans 492 763
Commercial mortgage loans 113 139
Other commercial loans 2,360 1,759
Investor mortgage loans 31 26
Residential and other consumer loans 15 35
Loans held for sale 214 223
Unallocated 578 583
--------------- -----------------
Total allowance for loan losses $4,650 $4,550
=============== =================
PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS:
Unguaranteed Portions of:
SBA & USDA loans 9.0% 11.0%
Ex-Im working capital loans 3.7% 5.9%
Other international loans 23.2% 20.1%
Ex-Im medium term loans 0.0% 0.1%
Commercial mortgage loans 1.3% 5.4%
Other commercial loans 31.9% 25.1%
Investor mortgage loans 1.0% 0.9%
Residential and other consumer loans 1.6% 1.6%
Loans held for sale 28.3% 29.9%
--------------- -----------------
100.0% 100.0%
=============== =================
STOCKHOLDERS' EQUITY. Stockholders' equity increased 6.7% or $3.7 million to
$58.7 million at June 30, 2000 from $55.0 million at December 31, 1999 due to
the retention of earnings net of two quarterly dividends of $.03 per share for a
total of $496,000 during the period.
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. Loan sales
29
30
totaled $220.1 million for the six-month period ended June 30, 2000, and
reflected a comparable dollar amount to loans originated for the period.
As of June 30, 2000 the Company had outstanding commitments to fund loans and
lines of credit of $84.2 million and had issued letters of credit totaling $40.9
million of which $29.1 million reflects issuances under guaranteed programs.
A subsidiary of the Bank has entered into interest rate swaps based on an
aggregate amount of $28 million at June 30, 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
six-month period ended June 30, 2000, $37,000 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 11.28% and a Tier 1 capital to assets
or leverage ratio of 18.55% at June 30, 2000.
There are currently proposed regulatory amendments to risk based capital rules
which are expected to require banks to have additional capital for "retained
interests," as defined in the rules, that are associated with loans sold or
securitized. The regulations are expected to require the Company to (1) reduce
its level of retained interests relative to capital by the sale of these
interests or raise additional capital to support such activities and (2) to
structure certain future loan sales or securitization transactions in a manner
which may be less economically favorable to the Company. Both of these courses
of action may reduce future earnings. Additionally, the Company may be required
to obtain additional capital to finance future securitizations or sales
transactions; if the Company is not able to obtain such additional capital on
terms acceptable to the Company, the Company may be required to reduce or
eliminate securitizations after such regulations take effect because the terms
of available securitizations (i.e., with a decreased level of retained
interests) may not be economically feasible or attractive to the Company. These
regulations are currently open for comment and management will monitor the
impact on the Company as the regulations become more definitive.
The Company believes that, even if it is not able to continue to do
securitizations on an economical basis in the future, 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.
30
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
Over the past twelve months there have been six increases in the Prime Rate
totaling 175 basis points. As depicted in the December 31, 1999 interest rate
gap analysis, the Company is asset sensitive and net interest income generally
increases in a rising rate environment. However, future changes in interest
rates along with prepayments and loan losses may impact the recoverability of
the Company's investment in interest only-strips and junior bonds related to
loans securitized. Each quarter, the Company considers the actual and projected
performance of these three variables, among other factors, in calculating the
net present value of its interest-only strips and other retained interests. To
date, the favorable performance in actual prepayments and loan losses had given
rise to calculated values for the retained interests in excess of the carrying
values. At June 30, 2000 this excess value decreased for two of the Company's
commercial term loan securitizations because they include some fixed rate loans
which have not increased while the coupon paid to investors on the LIBOR-based
bonds has increased. While the Company has determined that the interest-only
strips for these transactions are not currently impaired, impairment could occur
in the future if interest rates continue to increase without adequate decreases
in subsequent periods, or if prepayments or loans losses occur at rates greater
than those currently projected. There have been no other 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 six-month period ended June 30,
2000, the Company noted some favorable improvements in the yields from the
market but not to the levels of the first half of 1999.
31
32
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
At the Annual Meeting of Shareholders of the Company held on
May 2, 2000 at the Hartford Hilton Hotel in Hartford,
Connecticut, the following proposals were approved by the
holders of the Company's common stock voting as indicated:
1. Proposal to elect two Directors of the Company who will
each serve for a three-year term to expire in 2003:
For Withheld
Class III Directors: Arnold L. Chase 6,796,128 44,256
Cheryl A. Chase 6,796,128 44,256
2. Proposal to approve the First International Bancorp, Inc.
2000 Stock Option Plan and reserve 150,000 shares
of the Company's common stock for issuance upon exercise
of stock options granted under the plan:
For 6,670,992
Withheld 117,343
Against 52,049
3. Proposal to ratify the January 27, 1999 sale of 200,000
shares of the Company's common stock to its Chairman,
President and Chief Executive Officer:
For 6,663,138
Withheld 117,377
Against 59,869
32
33
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.*
10.23 Sale and Servicing Agreement among FIB Business Loan
Trust 2000-A, First International Bank and FIB
Holdings, Inc. for the FIB Business Loan Notes,
Series 2000-A.
11.1 Computation of Per Share Earnings.
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 second
quarter of 2000.
33
34
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: August 14, 2000 By: /s/ Brett N. Silvers
--------------------- -----------------------------------
Brett N. Silvers
Its Chief Executive Officer
and Chairman of the Board
Date: August 14, 2000 By: /s/ Leslie A. Galbraith
--------------------- -----------------------------------
Leslie A. Galbraith
Its Chief Operating Officer,
Executive Vice President,
and Secretary
Date: August 14 , 2000 By: /s/ Shaun P. Williams
--------------------- -----------------------------------
Shaun P. Williams
Its Chief Financial Officer,
Executive Vice President,
and Treasurer
34
35
EXHIBIT INDEX
Exhibit No. Description
10.23 Sale and Servicing Agreement among FIB Business Loan Trust
2000-A, First International Bank and FIB Holdings, Inc. for
the FIB Business Loan Notes, Series 2000-A
11.1 Computation of Per Share Earnings
27 Financial Data Schedule