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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, 2001
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 May 11, 2001 was
8,048,477.
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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, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 5
Condensed Consolidated Statement of Stockholders Equity for 6
the Three Months Ended March 31, 2001
Notes to Unaudited Condensed Consolidated Financial Statements
7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27 - 28
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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,
-------- -----------
2001 2000
-------- --------
(UNAUDITED)
Cash and cash equivalents ............... $ 10,106 $ 29,365
Investment securities ................... 58,533 59,201
Loans, net .............................. 150,623 142,225
Premises and equipment, net ............. 4,352 4,548
Receivable from loans sold .............. 46,496 56,097
Investment in unconsolidated subsidiaries 18,189 19,758
Servicing assets ........................ 40,145 35,962
Prepaid expenses and other assets ....... 16,205 15,072
-------- --------
Total assets ....................... $344,649 $362,228
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
--------- -----------
2001 2000
--------- ---------
(UNAUDITED)
Deposits ........................................ $ 262,373 $ 297,187
Commercial paper conduit borrowing .............. 13,505 --
Other liabilities ............................... 6,853 5,484
--------- ---------
Total liabilities .......................... 282,731 302,671
--------- ---------
Stockholders' equity:
Preferred stock ($010 par value; 2,000,000 shares
authorized; no shares issued and outstanding) . -- --
Common stock ($010 par value; 12,000,000 shares
authorized; shares issued and outstanding:
8,042,019 and 8,279,574) ...................... 804 828
Paid-in capital in excess of par value, net ..... 32,640 34,826
Stockholder note receivable ..................... -- (1,980)
Accumulated other comprehensive income .......... 2,384 (145)
Retained earnings ............................... 26,090 26,028
--------- ---------
Total stockholders' equity ................ 61,918 59,557
--------- ---------
Total liabilities and stockholders' equity $ 344,649 $ 362,228
========= =========
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,
--------------------
2001 2000
------- -------
INTEREST INCOME:
Loans, including net fees ............. $ 4,614 $ 4,512
Investment securities ................. 1,545 770
Federal funds sold .................... 546 593
------- -------
Total interest income .............. 6,705 5,875
INTEREST EXPENSE:
Deposits .............................. 4,599 3,563
Other ................................. 61 128
------- -------
Total interest expense ............. 4,660 3,691
------- -------
Net interest income ................... 2,045 2,184
PROVISION FOR POSSIBLE LOAN LOSSES ........... 1,023 558
------- -------
Net interest income after
provision for possible loan losses . 1,022 1,626
NON-INTEREST INCOME:
Gain on sale of:
Guaranteed and insured loans ....... 4,144 2,584
Other loans ........................ 232 217
Loan-backed securitizations ........ 602 2,209
Loans to commercial paper conduits . -- 11
------- -------
Total gains on loan sales .... 4,978 5,021
Loan servicing income and fees ....... 2,504 1,923
Impairment on retained interests ...... (776) --
Income from unconsolidated subsidiaries 32 352
Other income .......................... 25 36
------- -------
Total non-interest income .......... 6,763 7,332
------- -------
Total operating income ................ 7,785 8,958
NON-INTEREST EXPENSE:
Salaries and benefits ................. 4,235 3,702
Occupancy ............................. 531 486
Office expenses ....................... 225 222
Marketing ............................. 424 391
Furniture and equipment ............... 388 334
Outside services ...................... 997 376
Other ................................. 178 161
------- -------
Total non-interest expense ......... 6,978 5,672
------- -------
Income before income taxes ............ 807 3,286
PROVISION FOR INCOME TAXES ................... 504 1,144
------- -------
NET INCOME ......................... $ 303 $ 2,142
======= =======
BASIC EARNINGS PER COMMON SHARE .............. $ 0.04 $ 0.26
======= =======
DILUTED EARNINGS PER COMMON SHARE ............ $ 0.04 $ 0.26
======= =======
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,
--------------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities ...................... $ 4,531 $ 9,985
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in loans ............................... (8,883) 5,594
Decrease (increase) in investment in unconsolidated subsidiaries 1,569 (25)
Purchase of investment securities available for sale ........... (4,199) (9,819)
Proceeds from sales of investment securities available for sale -- 4,068
Proceeds from maturities and principal repayments of investment
securities available for sale ............................. 9,136 108
Capital expenditures, net ...................................... (133) (306)
-------- --------
Net cash used in investing activities .................... (2,510) (380)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits ....................................... (34,554) (16,368)
Net increase in other borrowings ............................... 13,505 --
Cash proceeds from issuance (repurchase) of common stock ....... 10 8
Dividends paid ................................................. (241) (248)
-------- --------
Net cash used in financing activities .................... (21,280) (16,608)
-------- --------
Net decrease in cash and cash equivalents ................................... (19,259) (7,003)
Cash and cash equivalents at beginning of period ............................ 29,365 37,137
-------- --------
Cash and cash equivalents at end of period .................................. $ 10,106 $ 30,134
======== ========
See accompanying notes to unaudited consolidated financial statements.
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FIRST INTERNATIONAL BANCORP, INC AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2001
(dollars in thousands)
(unaudited)
Comprehensive
Income
------------------
Paid In Unrealized
Capital in Stockholder Holding Gain (Loss)
Common Excess of Note on Investments Retained
Stock Par Value Receivable Available-for-Sale Earnings Total
-------- ---------- ----------- ------------------ -------- --------
Balance at December 31, 2000 ................ $ 828 $ 34,826 $ (1,980) $ (145) $ 26,028 $ 59,557
Issuance of 4,045 shares of common stock under
option plan ................................. -- 10 -- -- -- 10
Dividends on common stock ($03/share) ............ -- -- -- -- (241) (241)
Repayment of stockholder note receivable ......... (24) (2,196) 1,980 -- -- (240)
Other comprehensive income, increase in unrealized
holding gain, net of income taxes ........... -- -- -- 2,529 -- 2,529
Net income ....................................... -- -- -- -- 303 303
--------
Comprehensive income ............................. -- -- -- -- -- 2,832
-------- -------- -------- -------- -------- --------
Balance at March 31, 2001 ................... $ 804 $ 32,640 $ -- $ 2,384 $ 26,090 $ 61,918
======== ======== ======== ======== ======== ========
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FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DEFINITIVE MERGER AGREEMENT, DEPOSIT SALE AND RELATED MATTERS
On January 15, 2001, First International Bancorp, Inc. (the "Company") entered
into a definitive Agreement and Plan of Merger with United Parcel Service, Inc.
("UPS"), pursuant to which at the effective time of the transactions described
in the merger agreement, a wholly-owned subsidiary of UPS will be merged with
and into the Company (the "Merger"). The Company will be the surviving
corporation of the Merger and will become a wholly-owned subsidiary of UPS.
Under the terms of the merger agreement, the Company's stockholders will receive
shares of UPS Class B common stock in exchange for shares of the Company's
common stock, based on a conversion ratio described in the merger agreement,
subject to a number of potential adjustments. Further, approximately 10% of the
stock to be issued in the Merger will be placed in escrow pending the
performance of the Company's loan portfolio during the 12 months following the
closing and the resolution of any indemnification claims with respect to the
Company's representations, warranties and covenants in the merger agreement. The
conversion ratio and the other terms of the Merger are described in the
Company's proxy statement in connection with the Company's Special Meeting of
Stockholders to be held June 1, 2001, which proxy statement is contained in the
Registration Statement on Form S-4 filed by UPS with the Securities and Exchange
Commission on April 27, 2001 and was subsequently mailed to stockholders of the
Company on May 1, 2001.
The Merger is subject to the approval of the Company's stockholders and other
customary closing conditions. In connection with the execution of the merger
agreement, key Company stockholders, controlling approximately 52% of the
Company's outstanding shares, have agreed to vote their shares of the Company's
common stock in favor of the Merger. The Merger is expected to close in the
third quarter of 2001.
As a condition to the completion of the Merger, a note receivable from the
Company's Chief Executive Officer has been retired. This note receivable was
related to the sale of 200,000 shares of the Company's common stock in March
1999 and was reflected as a separate component of stockholders' equity. On
January 24, 2001, pursuant to a written agreement, the Company repurchased
241,600 shares, at market value on the date of purchase, from the Chief
Executive Officer and his wife; applied the proceeds to the full repayment of
the note and the interest accrued thereon; and retired the shares.
In addition, in connection with the Merger and as required by the Merger
Agreement, on May 1, 2001, First International Bank (the "Bank") entered into a
Purchase and Assumption Agreement with Hudson United Bank whereby, subject to
regulatory approval, all FDIC-insured deposit liabilities of the Bank would be
sold for a discount of $450,000 subject to certain adjustments not to exceed 10%
of such discount. Upon the closing of such transaction, which is intended to be
immediately prior to the closing of the Merger, subject to the receipt of all
required regulatory approvals, the Bank will cease to be a federally insured
depository institution regulated by the
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FDIC and the Company will cease to be a bank holding company regulated by the
Board of Governors of the Federal Reserve System. Following the Merger, the Bank
will operate as a non-depository bank chartered by the Connecticut Department of
Banking, and will continue to be subject to Connecticut's state banking laws and
regulations, as it is today.
2. BASIS OF PRESENTATION
General
The consolidated financial statements include the accounts of First
International Bancorp, Inc., the accounts of the Bank, and the Bank's
consolidated subsidiaries described below. Since 1998, the Bank has established
six special purpose wholly-owned entities to facilitate loan securitizations and
sales to commercial paper conduits. Certain of these entities are not
consolidated but are accounted for under the equity method of accounting. The
Bank has 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. The Bank has also established a
wholly-owned subsidiary through which commercial paper and the unguaranteed
portion of SBA loans are financed through commercial paper conduit facilities
beginning in 2001. These financings are treated as on-balance sheet financings
and the entity is consolidated in these financial statements. 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 and Springfield, Massachusetts; Cleveland, Ohio;
Detroit, Michigan; Los Angeles, California; Miami, Florida; Morristown, New
Jersey; Philadelphia and Pittsburgh, Pennsylvania; Providence, Rhode Island;
Richmond, Virginia; Rochester, New York; St. Louis, Missouri; and Washington,
D.C. The Company also has international representatives in Argentina, Brazil,
Central America, Egypt, India, Indonesia, Korea, Mexico, North Africa, the
Philippines, Poland, South Africa, Turkey and West Africa.
The Company has entered into marketing alliances with twenty-two
business-to-business electronic marketplaces serving different global industrial
sectors. These alliances are aimed at increasing the volume of quality loans to
the Company's established niche of small industrial companies worldwide. Under
the alliance agreements, the Company seeks 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, loan 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, 2000
which is filed with the Securities and Exchange Commission.
Certain 2000 amounts have been reclassified to conform with the 2001
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, 2001 and 2000, totaled $2.5 million
and $50,000 after income taxes, respectively. The increase in other
comprehensive income for the quarter ended March 31, 2001 reflects an increase
in the fair value of investment securities, primarily the securitization-related
retained interests, following the general decline in interest rates over the
quarter.
3. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133/137/138
In June 1998, the FASB issued No. 133 "Accounting for Derivative Instruments and
Hedging Activities," which implementation date was extended by SFAS No. 137 and
details clarified by SFAS No. 138. These statements, which were adopted at
January 1, 2001, 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 recognized depending on the intended use of the derivative and whether or
not it has been designated as a hedge. The implementation of this statement had
no impact upon the Company's financial position, results of operations or cash
flows.
SFAS No. 140
In September 2000, the FASB issued No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" and replaces
SFAS No. 125. The guidance in SFAS No. 140, while not changing most of the
guidance originally issued in SFAS No. 125, revises the standards for accounting
for securitizations and other transfers of financial assets and collateral and
requires certain additional disclosures related to transferred assets.
Certain provisions of the statement related to disclosure of collateral and
securitization transactions became effective for the Company's December 31, 2000
year end reporting and had
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no impact on the financial statements. Other provisions related to the transfer
and servicing of financial assets and extinguishments of liabilities are
effective for transactions occurring after March 31, 2001. The Company entered
into amended and restated agreements for certain of its commercial paper
facilities prior to March 31, 2001 to conform the facilities to the provisions
of SFAS 140 and, therefore, the new accounting standard will have no impact on
the Company's results of operations, financial position or cash flows. The new
rules do not impact the Company's existing term securitizations, which were all
completed prior to March 31, 2001. As discussed more fully in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000, the Company
does not currently plan to sponsor future loan securitizations.
4. COMMERCIAL PAPER CONDUIT BORROWING
In March 2001, the Company obtained two commercial paper conduit borrowings
under each of its on-balance sheet commercial paper facilities. The Company,
through one of the Bank's special purpose subsidiaries which is consolidated
with the accounts of the Bank, is able to pledge certain commercial loans and
the unguaranteed portion of SBA loans to collateralize such borrowings.
Borrowings under these facilities bear interest at the variable rate of LIBOR
+.75%, per annum. Any borrowings outstanding under these facilities are
aggregated with the amounts outstanding under the similar existing off-balance
commercial paper facilities for purposes of measuring the aggregate credit
limits which are $120 million for the commercial loan facility and $60 million
for the unguaranteed SBA loan facility.
5. DIVIDEND PAYMENTS
The Company paid cash dividends in the amount of $0.03 per share on March 1,
2001.
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) 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 SBA, USDA and Ex-Im Bank upon which a significant portion of the
Company's business depends, (iv) 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
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originations, (v) a disruption in the U.S. capital markets which may delay or
prevent the Company from receiving funding under its commercial paper facilities
or gaining access to alternative sources of funding, (vi) the Company's ability
to realize recorded values of servicing assets and other retained interests
associated with the portfolio of loans managed for others, (vii) the fact that
the Company is regulated by the FDIC and the Connecticut Department of Banking
and that such regulation is intended to be for the benefit of depositors and not
stockholders, and (viii) the Company's ability to accurately estimate loan
losses. 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, 2000, which has been filed
with the Securities and Exchange Commission. In addition, additional information
concerning risks and uncertainties associated with the Merger may be found in
the Company's proxy statement for its June 1, 2001 Special Meeting of
Stockholders, which is included in UPS' Registration Statement on S-4 filed with
the SEC on April 27, 2001. 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.
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.
The Company issues retail and brokered certificates of deposit. As described
above, on May 1, 2001, the Company entered into a definitive agreement to sell
all of its deposits to Hudson United Bank. In the event that the Merger is
terminated, the Company will not sell all of its deposits to Hudson United Bank
and will seek to continue to issue retail certificates of deposit and, if
permitted, brokered certificates of deposit. The Company also obtains funding
for its operations from commercial paper facilities and the sale of loans on a
loan-by-loan basis.
LOAN ORIGINATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000:
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
---------------------- --------------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE
--------- ---------- --------- ----------
Lending and Servicing Activity:
Loan Originations:
SBA & USDA ............... $ 64,030 56% $ 35,736 35%
Other commercial ......... 12,526 11% 23,090 23%
-------- -------- -------- --------
Domestic ............ 76,556 67% 58,826 58%
Ex-Im .................... 29,923 26% 30,999 30%
Other international ...... 7,574 7% 12,701 12%
-------- -------- -------- --------
International ....... 37,497 33% 43,700 42%
-------- -------- -------- --------
Total Originations .. $114,053 100% $102,526 100%
======== ======== ======== ========
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Commercial loan originations increased 11% or $11.5 million to $114.1 million
for the quarter ended March 31, 2001 from $102.5 million in the quarter ended
March 31, 2000. The mix of loans originated reflected an increase in government
guaranteed loans to 82% of total loans originated for the quarter ended March
31, 2001 compared to 65% for the quarter ended March 31, 2000. Such government
guaranteed loans are more liquid, as the guaranteed portions are sold at
origination to various well-established outlets, and also mitigate the Company's
credit risk.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31,
2000:
FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2001 2000 % CHANGE
------ ------ --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income ..................... $2,045 $2,184 (6%)
Provision for loan losses ............... 1,023 558 83%
------ ------ ------
Net interest income after provision 1,022 1,626 (37%)
Gain on loan sales ...................... 4,978 5,021 (1%)
Other non-interest income ............... 1,785 2,311 (23%)
Non-interest expense .................... 6,978 5,672 23%
------ ------ ------
Income before income taxes ......... 807 3,286 (75%)
Income taxes ............................ 504 1,144 (56%)
------ ------ ------
Net income .................... $ 303 $2,142 (86%)
====== ====== ======
Basic earnings per share ........ $ 0.04 $ 0.26
====== ======
Diluted earnings per share ...... $ 0.04 $ 0.26
====== ======
Weighted average shares - basic . 8,108 8,261
====== ======
Weighted average shares - diluted 8,219 8,384
====== ======
NET INCOME. Net income decreased 86% or $1.8 million for the three-month period
ended March 31, 2001 when compared to the three-month period ended March 31,
2000 due principally to an increase in the required loan loss provision, an
impairment on an interest-only strip from one unguaranteed SBA loan
securitization and costs associated with the Merger, a portion of which costs
are not tax deductible.
For the quarter ended March 31, 2001, the Company reported a reduction in
interest income of $139,000, a $465,000 increase in the provision for loan
losses, a $43,000 reduction in gains from loans sold and securitized, a $776,000
impairment on an interest-only strip held from an unguaranteed SBA loan
securitization, and an increase in loan servicing income and fees of $581,000.
The increase in non-interest income, primarily loan servicing income, resulted
from the increased balance of loans managed for others and actual prepayments on
such loans being less than originally assumed. The Company reported an increase
in non-interest expense of $1.3 million for the quarter ended March 31, 2001 as
compared to the prior year due to salary increases and $625,000 of costs
associated with the Merger. Also, the prior years results do not include the
costs associated with the Miami, Los Angeles and Richmond representative offices
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which were opened after April 1, 2000. Gain on loan sales includes $602,000 of
gains associated with the prefunding of loans from the $30 million
securitization of the unguaranteed portions of SBA loans completed in the fourth
quarter of 2000.
Diluted earnings per share decreased 85% or $.22 to $.04 per share for the
quarter ended March 31, 2001 from $.26 for the quarter ended March 31, 2000.
NET INTEREST INCOME. Net interest income decreased $139,000 or 6% to $2.0
million for the quarter ended March 31, 2001 compared to $2.2 million for the
same period ended March 31, 2000. Average earning assets increased 7% or $18.6
million while average interest-bearing liabilities increased 15% or $37.7
million.
The net interest spread of 2.95% for the three-month period ended March 31, 2001
was increased slightly over the 2.82% for the period ended March 31, 2000. The
increase in the average yield on assets of 59 basis points due to an increase in
the yield of securitization-related retained interests was partially offset by a
46 basis point increase in the cost of deposits.
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AVERAGE BALANCES, INTEREST, YIELDS AND RATES
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
MARCH 31, 2001 MARCH 31, 2000
------------------------------- ---------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------------------------------- ---------------------------------------
(DOLLARS IN THOUSANDS)
Assets:
Loans (1):
Commercial ................................. $180,955 $4,568 10.10% $179,099 $4,446 9.93%
Residential ................................ 1,707 37 8.67% 1,813 51 11.25%
Other consumer ............................. 330 9 11.06% 617 15 9.89%
-------- ------ ----- -------- ------ ----
Total loans ................................... 182,992 4,614 10.09% 181,529 4,512 9.94%
Investment securities ......................... 56,663 1,545 10.91% 52,100 770 5.91%
Federal funds sold ............................ 40,551 546 5.46% 27,986 593 8.62%
-------- ------ ----- -------- ------ ----
Total investment securities and funds sold .... 97,214 2,091 8.63% 80,086 1,363 6.86%
-------- ------ ----- -------- ------ ----
Total earning assets .......................... 280,206 6,705 9.57% 261,615 5,875 8.98%
Total non-earning assets ...................... 81,544 56,980
-------- --------
Total assets .................................. $361,750 $318,595
======== ========
LIABILITIES:
Deposits:
Interest bearing demand deposits ........... $2,866 $8 1.12% $2,465 $7 1.15%
Retail and IRA certificates of deposit ..... 22,718 331 5.83% 35,179 461 5.33%
Brokered certificates of deposit ........... 255,750 4,260 6.66% 206,024 3,095 6.11%
-------- ------ ----- -------- ------ ----
Total deposits ................................ 281,334 4,599 6.54% 243,668 3,563 5.95%
Warehouse borrowings .......................... 150 61 162.67% -- 127 0.00%
Other borrowings .............................. -- -- 0.00% 72 1 5.65%
-------- ------ ----- -------- ------ ----
Total interest bearing liabilities ............ 281,484 4,660 6.62% 243,740 3,691 6.16%
-------- ------ ----- -------- ------ ----
Non-interest bearing liabilities:
Demand deposits ............................ 8,051 9,870
Other liabilities .......................... 12,961 11,310
-------- --------
Total non-interest bearing liabilities ........ 21,012 21,180
Stockholders' equity .......................... 59,254 53,675
-------- --------
Total liabilities and stockholders' equity .... $361,750 $318,595
======== ========
Net interest income/net interest spread ....... $2,045 2.95% $2,184 2.82%
====== ==== ====== ====
Net interest margin ........................... 2.92% 3.25%
==== ====
2001 COMPARED TO 2000
CHANGES DUE TO (2):
--------------------------------
VOLUME RATE TOTAL
-------------------------------
Assets:
Loans (1):
Commercial ................................. $46 $75 $121
Residential ................................ (2) (12) (14)
Other consumer ............................. (8) 2 (6)
--- --- ----
Total loans ................................... 36 65 101
Investment securities ......................... 124 651 775
Federal funds sold ............................ 171 (220) (49)
--- --- ----
Total investment securities and funds sold .... 295 431 726
--- --- ----
Total earning assets .......................... 331 496 827
Total non-earning assets ......................
Total assets ..................................
LIABILITIES:
Deposits:
Interest bearing demand deposits ........... $1 $0 $1
Retail and IRA certificates of deposit ..... (181) 44 (137)
Brokered certificates of deposit ........... 824 284 1,108
--- --- ----
Total deposits ................................ 644 328 972
Warehouse borrowings .......................... 0 (67) (67)
Other borrowings .............................. 0 (1) (1)
--- --- ----
Total interest bearing liabilities ............ 644 260 904
--- --- ----
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 ....... ($313) $236 ($77)
==== ==== ===
(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
INTEREST INCOME. Interest income increased 14% or $830,000 to $6.7 million for
the three-month period ended March 31, 2001 from $5.9 million for the
three-month period ended March 31, 2000. The yield on earning assets increased
59 basis points due primarily to an increased yield on the
securitization-related retained interests. The average balance of loans of
$183.0 million was relatively flat compared to the $181.5 million in the prior
year.
14
15
INTEREST EXPENSE. Interest expense increased 26% or $969,000 to $4.7 million for
the three-month period ended March 31, 2001 from $3.7 million for the
three-month period ended March 31, 2000 as the average balance of interest
bearing liabilities increased 15% or $37.7 million. The increase in the expense
reflects the increase in the rate environment over the course of 2000 during
which period the deposits currently outstanding were received, resulting in a 46
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 $49.7
million for the quarter ended March 31, 2001 over the prior year to fund balance
sheet growth.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses of
$1.0 million for the quarter ended March 31, 2001 reflected a $465,000 increase
over the $558,000 provision required for the quarter ended March 31, 2000. The
increased provision reflects the growth in loans retained on balance sheet and a
heightened risk environment. The Allowance for Loan Losses of $5.8 million
reflects an increase of $250,000 from December 31, 2000. See "Allowance for Loan
Losses" for further discussion.
NON-INTEREST INCOME. Non-interest income is comprised of the following items:
FOR THE THREE MONTHS ENDED
March 31,
--------------------------------
NON-INTEREST INCOME: 2001 2000 % CHANGE
------- ------- -------
(DOLLARS IN THOUSANDS)
Gain on loan sales:
SBA sales ........................... $ 2,270 $ 1,031 120%
USDA sales .......................... 1,174 671 75
Ex-Im working capital sales ......... 86 123 (30)
Ex-Im term sales .................... 614 759 (19)
------- ------- -------
Gain on guaranteed loan sales .. 4,144 2,584 60
Other loan sales .................... 232 217 7
Loan-backed securitizations ......... 602 2,209 (73)
Loans to commercial paper conduits .. -- 11 --
------- ------- -------
Total gain on loan sales ....... 4,978 5,021 (1)
Loan servicing income and fees ........ 2,504 1,923 30
Impairment on retained interests ...... (776) -- --
Income from unconsolidated subsidiaries 32 352 (91)
Other income .......................... 25 36 (31)
------- ------- -------
Total non-interest income ............. $ 6,763 $ 7,332 (8%)
======= ======= =======
The 8% or $569,000 decrease in non-interest income for the three-month period
ended March 31, 2001 as compared to the three-month period ended March 31, 2000
reflects the increase in loan servicing income due to the continued increase in
total loans under management offset by a reduction in earnings from
unconsolidated entities due to a lower level of loans outstanding in
15
16
the unconsolidated entities and a charge for impairment in the carrying value of
an interest-only strip related to one unguaranteed SBA loan securitization. The
Company's focus on increasing the amount of government guaranteed loans is
reflected in the 60% or $1.6 million increase in gain on guaranteed loan sales.
The Company did not sponsor a securitization in the quarter, and has decided to
suspend such activities prior to completion of the Merger and, therefore, gains
on securitizations decreased $1.6 million as compared to the prior quarter.
Gains on guaranteed SBA loan sales increased $1.2 million or 120% due to a 79%
increase in the volume of loans sold and an increase in the return on such
sales. Gains on guaranteed USDA loans increased $503,000 or 75% due to a 91% or
$5.3 million increase in the amount of loans sold offset by a slight decrease in
the return realized.
The volume of Ex-Im Bank term loans sold decreased by 2% while the gain
decreased by $145,000 or 19%, as a greater percentage of these loans were
shorter term inventory buyer loans that generate lower gains.
During the quarter ended March 31, 2001, the Company recognized a gain of
$232,000 on individual loans sold to investors compared to $217,000 in the prior
year quarter.
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. In March 2001, the Company completed the
$5.3 million prefunding of a $30 million securitization executed in the fourth
quarter of 2000, recognizing a gain of $602,000.
With the exception of one securitization of the unguaranteed portions of SBA
loans for which an impairment charge of $776,000 was recognized in the quarter
due to higher than anticipated projected losses from two loans collateralizing
the securitization, the Company's prepayment and default experience on its SBA
and USDA guaranteed loans, as well as its experience on the securitized pools,
generally continues to be within expectations. The actual performance of each
portfolio and securitization is monitored quarterly. There can be no assurance
that future impairments will not be recognized.
16
17
LOAN SERVICING INCOME AND FEES FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2001 2000 % CHANGE
---------- ---------- ----------
Loan Servicing Income: (DOLLARS IN THOUSANDS)
SBA guaranteed loans ............. $ 1,045 $ 632 65%
USDA guaranteed loans ............ 563 386 46
Ex-Im working capital loans ...... 74 75 (1)
Ex-Im medium term loans .......... 183 156 17
Loan securitizations ............. 189 211 (10)
Other loans ...................... 73 138 (47)
---------- ---------- ----------
Loan servicing income ...... 2,127 1,598 33
Servicing asset reduction - Ex-Im .. -- (163) (100)
---------- ---------- ----------
Net loan servicing income .. 2,127 1,435 48
Other fees ......................... 377 488 (23)
---------- ---------- ----------
Total loan servicing income and fees $ 2,504 $ 1,923 30%
========== ========== ==========
LOANS MANAGED FOR OTHERS
Average balance .................... $1,131,784 $ 946,922 20%
========== ========== ==========
Ending balance ..................... $1,150,400 $ 967,093 19%
========== ========== ==========
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 is adjusted in the event actual results differ from those assumed at the
time of the sale of the loans.
The 30% increase in loan servicing income and fees reflects the 20% or $184.9
million increase in the average balance of loans serviced for others to $1.1
billion as of March 31, 2001. The Company continues to benefit from the
generally favorable prepayment performance of the loans originated relative to
original prepayment assumptions. Accordingly, servicing cash flows and servicing
income net of amortization 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. Management
assumes a certain level of prepayments in recognizing such servicing assets 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.
Other loan fee income of $377,000 for the period ended March 31, 2001 is
comprised of $130,000 of letter of credit fees which decreased $161,000 over the
prior year's quarter due to a decrease in the volume of transactions, $210,000
of late fees collected, and $37,000 in other fees.
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18
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following items:
FOR THE THREE MONTHS ENDED
March 31,
-----------------------------
2001 2000 % CHANGE
------ ------ --------
Non-Interest Expense: (dollars in thousands)
Salaries and benefits .............. $4,235 $3,702 14%
Occupancy .......................... 531 486 9
Office expenses .................... 225 222 1
Marketing expenses ................. 424 391 8
Furniture and equipment ............ 388 334 16
Outside services ................... 997 376 165
Loan collection .................... 41 47 (13)
Other .............................. 137 114 20
------ ------ ------
Total non-interest expense $6,978 $5,672 23%
====== ====== ======
The 23% or $1.3 million increase in non-interest expense for the three-month
period ended March 31, 2001 as compared to the same period ended March 31, 2000
is primarily attributable to a $533,000 increase in salaries and benefits and
$625,000 of Merger-related costs incurred in the quarter.
Full time equivalent employees at March 31, 2001 were 220 as compared to 201 at
March 31, 2000. Non-interest expense for the quarter ended March 31, 2001
reflects the opening of representative offices in Miami, Los Angeles and
Richmond. Growth in the domestic representative offices and the addition of
staff to the loan servicing and information technology areas resulted in the
head count increase. For the three-month period ended March 31, 2001, benefit
expense, including the Company's portion of 401K contributions, increased 14% or
$107,000 when compared to the same period in 2000.
The 9% or $45,000 increase in occupancy expense primarily reflects the addition
of the Miami, Los Angeles and Richmond offices since April 2000. The relatively
small increases in office expenses and in furniture and equipment reflects the
increase in personnel and the office openings offset by overall cost control
efforts instituted by the Company in 2000.
The 8% or $33,000 increase in marketing expense reflects the additional offices
and increased loan solicitation activities. The 165% or $621,000 increase in
outside service expense reflects accounting and legal costs associated with the
Merger.
INCOME TAXES. The Company's effective tax rate increased to 62% for the
three-month period ended March 31, 2001 from 39% for the three-month period
ended March 31, 2000 due to the non-deductibility of certain expenses associated
with the pending merger. Income from unconsolidated subsidiaries is reported net
of income taxes, which are provided for at a rate of 36% for the quarter ended
March 31, 2001.
18
19
DISCUSSION OF CHANGES IN FINANCIAL CONDITION TO MARCH 31, 2001 FROM DECEMBER 31,
2000
GENERAL. Total assets decreased 5% or $17.6 million from December 31, 2000 to
March 31, 2001, reflecting the collection of receivables from loans sold and a
reduction of excess liquidity.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased 66% or $19.3
million to $10.1 million at March 31, 2001 from the December 31, 2000 balance of
$29.4 million. The decrease reflects the use of excess liquidity to fund loan
originations, as well as the reduction in brokered certificates of deposits.
INVESTMENT SECURITIES. Investment securities includes the retained interests in
loans securitized by the Company which are in the form of a subordinated
certificate, interest-only strip or cash spread account. The balance in such
investment securities increased $3.5 million at March 31, 2001 to $44.0 million
from the December 31, 2000 balance of $40.5 million due to interest accreted on
such investments and an increase in the fair value of investment securities
following the decline in interest rates, net of the $776,000 impairment taken in
the quarter ended March 31, 2001 on the interest-only strip associated with one
of the Company's seven securitizations. The aggregate increase in the fair value
of investment securities was $4.0 million, of which $3.9 million was
attributable to the increase in fair value of securitization residuals.
RECEIVABLE FROM LOANS SOLD. The $9.6 million reduction in the receivable from
loans sold to $46.5 million at March 31, 2001 reflects the collection of the
year-end receivable which reflected a higher amount due to higher volume of
transactions as of the end of the year.
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES. The $1.6 million reduction in
investment in unconsolidated subsidiaries is due to the pay-down of loans and
reflects that no additional sales were made to the facilities in the quarter due
to the Company's decision not to sell loans to the sales facilities prior to the
closing of the Merger.
SERVICING ASSETS. The servicing asset increased to $40.1 million from the
December 31, 2000 balance of $36.0 million as a result of the sale of loans
totaling $79.5 million during the three-month period ended March 31, 2001, net
of servicing asset amortization. This servicing asset generally relates to the
guaranteed loans sold and does not represent a credit enhancement for such
sales. 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 other than temporary would
result in a write down of the asset.
PREPAID EXPENSES AND OTHER ASSETS. Prepaid expenses and other assets increased
8% or $1.1 million to $16.2 million at March 31, 2001 from $15.1 million at
December 31, 2000. The increase is primarily attributable to the capitalization
of costs associated with the Company's loan system conversion completed in April
2001.
LOANS. Loans, net increased $8.4 million to $150.6 million at March 31, 2001
from $142.2 million at December 31, 2000. The composition of loans held and
managed for others is detailed
19
20
in the table below. Loans held in portfolio increased to $131.5 million from
$96.1 million or 37% due to the Company's decision not to securitize loans prior
to closing the Merger. The majority of this increase is attributable to
retention of the unguaranteed portions of SBA and USDA loans.
20
21
MARCH 31, DECEMBER 31,
LOAN PORTFOLIO 2001 2000
----------- ------------
(DOLLARS IN THOUSANDS)
SBA & USDA ............................................................. $ 35,631 $ 15,733
Other commercial ....................................................... 67,956 47,693
Ex-Im .................................................................. 6,786 9,943
Privately insured term ................................................. 10,628 14,097
Privately insured import ............................................... 8,420 6,538
----------- -----------
Total commercial loans .............................................. 129,421 94,004
Residential real estate ................................................ 1,696 1,720
Other consumer ......................................................... 407 413
----------- -----------
Total loans ....................................................... 131,524 96,137
Loans held for sale .................................................... 29,563 55,379
Less:
Discount on retained loans ........................................ 4,902 3,897
Net deferred loan origination costs ............................... (238) (156)
Allowance for loan losses ......................................... 5,800 5,550
----------- -----------
Loans, net ........................................................ $ 150,623 $ 142,225
=========== ===========
LOANS MANAGED FOR OTHERS
Guaranteed Loans
SBA & USDA ........................................................ $ 526,888 $ 482,063
Ex-Im ............................................................. 151,162 147,867
Residential real estate ........................................... 424 428
----------- -----------
678,474 630,358
Unguaranteed Portions and Unguaranteed Loans
SBA & USDA ........................................................ 31,032 35,373
Securitized commercial loans ...................................... 229,971 265,122
Domestic loans sold to commercial paper facility and sales facility 44,728 46,330
International loans sold to commercial paper facility ............. 11,292 13,844
Other commercial .................................................. 154,084 121,095
Home equity lines ................................................. 819 1,002
----------- -----------
471,926 482,766
----------- -----------
Total loans managed for others ......................................... $ 1,150,400 $ 1,113,124
=========== ===========
Total loans under management ........................................... $ 1,311,487 $ 1,264,640
=========== ===========
ALLOWANCE FOR LOAN LOSSES. The Company reviews the adequacy of the Allowance for
Loan Losses quarterly. At March 31, 2001, the Allowance totaled $5.8 million and
represented 3.6%
21
22
of loans and loans held for sale. The Allowance totaled $5.6 million at December
31, 2000 and represented 3.7% 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, the introduction of new
loan products where the Company has limited historical experience, the actual
and expected performance of the portfolio, economic conditions and various other
factors. The provision for the three-month period ended March 31, 2001 increased
$465,000 to $1,023,000 from $558,000 for the three-month period ended March 31,
2000. The Allowance was increased $250,000 in the quarter to $5.8 million and
covered 2000 annual charge-offs 2.23 times at March 31, 2001.
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE YEAR
FOR THE THREE MONTHS ENDED
ENDED MARCH 31, DECEMBER 31,
---------------------- ------------
2001 2000 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses
at the beginning of the period .. $ 5,550 $ 4,550 $ 4,550
Charge-offs:
SBA loans ....................... 8 38 253
USDA loans ...................... -- 66 415
Ex-Im loans ..................... 267 -- 202
Privately insured term and import 226 473 1,366
Other commercial ................ 351 30 604
-------- -------- --------
Total charge-offs .......... 852 607 2,840
Recoveries:
SBA loans ....................... 1 30 1
Other commercial loans .......... 78 19 244
-------- -------- --------
Total recoveries ........... 79 49 245
-------- -------- --------
Net charge-offs ........................... 773 558 2,595
Provision for loan losses ................. 1,023 558 3,595
-------- -------- --------
Balance of allowance for loan
losses at end of period ......... $ 5,800 $ 4,550 $ 5,550
======== ======== ========
Total loans and loans held for sale ....... $161,087 $143,424 $151,516
======== ======== ========
Allowance to total loans .................. 3.6% 3.2% 3.7%
======== ======== ========
Non-performing loans at March 31, 2001 increased $1.1 million
to $5.3 million from December 31, 2000. Non-performing loans relative to total
loans increased to 3.3% at March 31, 2001 from 2.7% at December 31, 2000.
22
23
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
NON-PERFORMING LOANS MARCH 31, DECEMBER 31,
2001 2000
--------- -----------
Commercial: (DOLLARS IN THOUSANDS)
Unguaranteed portions:
SBA and USDA loans .............. $1,305 $1,257
Ex-Im working capital loans ..... 576 --
Privately insured term and import loans 1,084 1,112
Other commercial loans ................ 2,307 1,793
------ ------
Total non-performing loans ...... $5,272 $4,162
====== ======
Total non-performing loans to total loans .. 3.3% 2.7%
====== ======
Total non-performing loans to total assets . 1.5% 1.1%
====== ======
Allowance to total non-performing loans .... 110% 133%
====== ======
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, 2001 represented 8% 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 and a co-pay.
23
24
MARCH 31, DECEMBER 31,
2001 2000
-------- -----------
(DOLLARS IN THOUSANDS)
ALLOCATION OF THE ALLOWANCE BY
CATEGORY OF LOANS:
Unguaranteed Portions of:
SBA & USDA loans ........................ $ 842 $ 559
Ex-Im loans ............................. 209 170
Privately insured term and import loans ......... 620 495
Commercial mortgage loans ....................... 292 125
Other commercial loans .......................... 3,210 3,431
Investor mortgage loans ......................... 22 20
Residential and other consumer loans ............ 13 13
Loans held for sale ............................. 148 277
Unallocated ..................................... 444 460
------ ------
Total allowance for loan losses ......... $5,800 $5,550
====== ======
PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS:
SBA & USDA Loans ................................ 22.2% 10.4%
Ex-Im loans ..................................... 3.3% 5.5%
Privately insured term and import loans ......... 12.6% 14.6%
Commercial mortgage loans ....................... 3.4% 1.6%
Other commercial loans .......................... 38.1% 29.1%
Investor mortgage loans ......................... 0.7% 0.7%
Residential and other consumer loans ............ 1.3% 1.4%
Loans held for sale ............................. 18.4% 36.5%
------ ------
Total ................................... 100% 100%
====== ======
STOCKHOLDERS' EQUITY. Stockholders' equity increased 4% or $2.4 million to $61.9
million at March 31, 2001 from $59.6 million at December 31, 2000 due to the
retention of earnings, net of a quarterly dividend of $.03 per share or
$241,000, and a $2.5 million increase in other comprehensive income, net of
taxes, related to the available for sale investment portfolio. The increase in
other comprehensive income reflects an increase in the fair value of investment
securities, primarily the securitization-related retained interests, following
the general decline in interest rates over the quarter. At December 31, 2000,
the Company held a note receivable from the Company's Chief Executive Officer
related to the sale of 200,000 shares of common stock in March 1999, which was
reflected as a separate component of stockholders' equity. As described above,
on January 24, 2001, pursuant to a written agreement, the Company repurchased
241,600 shares at market value on the date of purchase from the Chief Executive
Officer and his wife, applied the proceeds to the full repayment of the note and
the interest accrued thereon, and retired the purchased shares. The retirement
of this note is a condition to completing the Merger.
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of liquidity and
funding are certificates of deposit, commercial paper facilities and loan sales.
Secondary sources of liquidity include a Federal Home Loan Bank line of credit
and federal funds purchased.
24
25
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 $79.5 million for the three-month period
ended March 31, 2001 or approximately 70% of the loans originated for the
period.
As of March 31, 2001, the Company had outstanding commitments to fund loans and
lines of credit of $99.8 million and had issued letters of credit totaling $28.5
million, of which $16.8 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, loan commitments, and certificate of deposit maturities.
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
result in certain mandatory and discretionary actions by regulators that, if
undertaken, could have a direct material adverse effect on the Company's
financial condition. The regulations require that the Bank meet specific capital
adequacy guidelines as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about interest rate risk, concentration of credit risk, asset quality
and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Tier I capital to
total average assets, and minimum ratios of Tier I and total capital to risk
weighted assets. As of March 31, 2001, the Bank's capital ratios are in excess
of the quantitative regulatory minimum requirements with a total capital to
risk-weighted assets ratio of 10.57% and a Tier 1 capital to assets or leverage
ratio of 11.88%.
Federal bank regulatory authorities proposed regulatory amendments to the risk
based capital rules in September 2000 which would require FDIC-insured banks to
hold additional capital for "retained interests" that are associated with loans
sold or securitized. The regulations, if passed in their current or a
substantially similar form, would likely require the Bank to (i) significantly
reduce the level of such retained interests relative to capital by selling these
assets or raising a significant amount of additional capital to support the
Bank's lending activities, and (ii) structure certain future loan sales or
securitization transactions in a manner which may be less economically favorable
to the Bank, or refrain completely from loan securitizations.
The comment period on these regulations closed December 26, 2000. These
regulations would not apply to the Bank or the Company following the Merger
since the Bank will not have FDIC-insured deposits.
It is possible that, due to the high level of securitization-related retained
interests or other factors, the FDIC would no longer classify the Bank as
"well-capitalized." Such an action would
25
26
require the Bank to request approval from the FDIC to continue to access the
brokered CD market unless, and until, well-capitalized status is again achieved.
In addition, SBA regulations require that in order to fund the unguaranteed
portions of SBA loans under the Company's commercial paper facility, the Bank
must be well-capitalized and must maintain a minimum currency rate (i.e. loans
paying in accordance with their terms). If the Bank is not able to meet these
requirements, or if the Bank were to receive a regulatory enforcement action
from the FDIC, funding under the commercial paper facilities may not be
available for these loans and alternative financing would have to be obtained.
Any of these actions may reduce future earnings. Further, if the Company or the
Bank were not able to obtain additional capital on acceptable terms, its
business strategy may have to be altered.
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, 2000. 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. 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, 2000 which is filed
with the Securities and Exchange Commission.
26
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Because the nature of the business of the Company involves the
collection of numerous accounts, the validity of liens and
compliance with state and federal lending laws, the Company is
subject to claims and legal actions in the ordinary course of its
business. While it is impossible to estimate with certainty the
ultimate legal and financial liability with respect to such
claims and actions, the Company 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 Company.
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
- ------- -----------
10.13 Second Amended and Restated Loan Purchase and Servicing Agreement among
FNBNE Funding Corp, First International Bank, the Investors, Variable
Funding Capital Corporation, First Union Securities, Inc., First Union
National Bank, HSBC Bank USA and First Union National Bank dated as of
March 29, 2001.
10.13.1 Loan Purchase and Servicing Agreement among FIB Holdings, Inc., First
International Bank, the Investors, Variable Funding Capital
Corporation, First Union Securities, Inc., First Union National Bank,
HSBC Bank USA, and First Union National Bank dated as of March 29,
2001.
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10.20.2 Sale and Servicing Agreement between FIB Funding Trust II and First
International Bank dated as of March 1, 2001.
10.20.3 Note Purchase Agreement among FIB Funding Trust II, First International
Bank, the Liquidity Purchasers, Variable Funding Capital Corporation,
First Union Securities, Inc. and First Union National Bank dated as of
March 1, 2001.
11.1 Computation of Per Share Earnings.
99 Purchase and Assumption Agreement by and between Hudson United Bank and
First International Bank dated as of May 1, 2001.
Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 16, 2001 to report the
execution of the Agreement and Plan of Merger and the issuance of a press
release in connection therewith.
The Company filed a Current Report on Form 8-K on January 19, 2001, which
included the definitive Agreement and Plan of Merger.
The Company filed a Current Report on Form 8-K on May 3, 2001 to report the
execution of a Purchase and Assumption Agreement with Hudson United Bank and the
issuance of a press release in connection therewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First International Bancorp, Inc.
(Registrant)
Date: May 15, 2001 By: /s/ Brett N. Silvers
-----------------------------------
Brett N. Silvers
Its Chief Executive Officer
and Chairman of the Board
Date: May 15, 2001 By: /s/ Leslie A. Galbraith
-----------------------------------
Leslie A. Galbraith
Its Chief Operating Officer,
Executive Vice President,
and Secretary
Date: May 15, 2001 By: /s/ Shaun P. Williams
-----------------------------------
Shaun P. Williams
Its Chief Financial Officer,
Executive Vice President,
and Treasurer
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EXHIBIT INDEX
Exhibit No. Description
- ---------- -----------
10.13 Second Amended and Restated Loan Purchase and Servicing
Agreement among FNBNE Funding Corp, First International Bank,
the Investors, Variable Funding Capital Corporation, First
Union Securities, Inc., First Union National Bank, HSBC Bank
USA and First Union National Bank dated as of March 29, 2001.
10.13.1 Loan Purchase and Servicing Agreement among FIB Holdings,
Inc., First International Bank, the Investors, Variable
Funding Capital Corporation, First Union Securities, Inc.,
First Union National Bank, HSBC Bank USA, and First Union
National Bank dated as of March 29, 2001.
10.20.2 Sale and Servicing Agreement between FIB Funding Trust II and
First International Bank dated as of March 1, 2001.
10.20.3 Note Purchase Agreement among FIB Funding Trust II, First
International Bank, the Liquidity Purchasers, Variable Funding
Capital Corporation, First Union Securities, Inc. and First
Union National Bank dated as of March 1, 2001.
11.1 Computation of Per Share Earnings
99 Purchase and Assumption Agreement by and between Hudson United
Bank and First International Bank dated as of May 1, 2001.
30