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 SEPTEMBER 30, 1997
------------------
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
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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.)
One Commercial Plaza, Hartford, CT 06103
---------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 860-241-2529
------------
Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 of 15(d) or 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_________ No___X_____
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, outstanding on October 30, 1997 was 7,864,985.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
1997 1996
------------ --------------
(unaudited)
ASSETS
Cash and due from banks.................................... $ 10,779 $ 5,867
Federal funds sold......................................... 8,000 13,000
----- ------
Cash and cash equivalents......................... 18,779 18,867
Investment securities:
Available for sale at fair value...................... 22,687 11,524
Held to maturity at amortized cost (fair value $2,958
and $3,056) ....................................... 2,965 3,063
U.S. Agency stocks at cost............................ 2,069 1,287
----- -----
Investment securities............................. 27,721 15,874
Loans, net................................................. 129,091 109,453
Accrued interest receivable................................ 1,197 823
Premises and equipment, net................................ 2,312 1,515
Receivable from loans sold................................. 15,049 10,341
Prepaid expenses and other assets.......................... 6,516 4,769
----- -----
Total assets...................................... $200,665 $161,642
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .................................................. $160,011 $144,316
U.S. Treasury demand note.................................. 159 1,061
Accrued interest payable................................... 724 622
Other liabilities.......................................... 2,171 1,427
----- -----
Total liabilities................................. 163,065 147,426
------- -------
Stockholders' equity:
Common stock, $.10 par value, 12,000,000 shares
authorized; 7,598,985 and 5,766,385 shares issued
and outstanding.................................... 760 577
Preferred stock, $.10 par value, 2,000,000 shares
authorized, no shares issued and outstanding....... - -
Paid-in capital in excess of par value................ 28,946 8,222
Stockholder note receivable........................... (863) (954)
Unrealized holding gain(loss) on investments
available-for-sale, net......................... 2 (74)
Retained earnings..................................... 8,755 6,445
----- -----
Total stockholders' equity........................ 37,600 14,216
------ ------
Total liabilities and stockholders' equity........ $200,665 $161,642
======== ========
See accompanying notes to unaudited consolidated financial statements.
2
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
Interest income:
Loans, including net fees............. $3,293 $3,070 $9,124 $9,091
Investment securities................. 323 129 802 450
Federal funds sold.................... 197 246 510 468
--- --- --- ---
Total interest income............ 3,813 3,445 10,436 10,009
Interest expense:
Deposits.............................. 1,687 1,470 4,679 4,292
Other................................. 7 6 27 21
- - -- --
Total interest expense........... 1,694 1,476 4,706 4,313
----- ----- ----- -----
Net interest income.............. 2,119 1,969 5,730 5,696
Provision for possible loan losses.......... 157 1,511 1,116 2,064
--- ----- ----- -----
Net interest income after
provision for possible loan
losses........................ 1,962 458 4,614 3,632
Non-interest income:
Gain on sale of:
Guaranteed commercial loans........ 1,583 1,047 6,403 3,432
Unguaranteed portions of
commercial loans................. - 352 370 627
Other commercial loans............. 156 226 384 259
Residential loan sales............. - 1 60 3
- - -- -
Total gains on loan sales........ 1,739 1,626 7,217 4,321
----- ----- ----- -----
Service charges and other deposit
fees............................... 119 100 323 329
Loan servicing income and fees........ 716 377 1,837 983
Income on stockholder note
receivable............................ 229 - 229 -
Gain on branch sale................... - 1,895 - 1,895
- ----- - -----
Total non-interest income........ 2,803 3,998 9,606 7,528
----- ----- ----- -----
Total operating income........... 4,765 4,456 14,220 11,160
----- ----- ------ ------
Non-interest expense:
Salaries and benefits................. 2,442 1,321 6,287 3,457
Occupancy............................. 239 208 692 575
Office expenses....................... 235 181 625 530
Marketing............................. 200 195 586 445
Furniture and equipment............... 182 121 493 346
Outside services...................... 68 25 296 144
Loan collection, net.................. 11 39 108 344
Other ................................ 95 68 295 217
-- -- --- ---
Total non-interest expense...... 3,472 2,158 9,382 6,058
----- ----- ----- -----
Income before income taxes............ 1,293 2,298 4,838 5,102
Provision for income taxes ................. 542 966 2,034 2,145
--- --- ----- -----
Net income.................................. $751 $1,332 $2,804 $2,957
==== ====== ====== ======
Earnings per share.......................... $0.11 $0.22 $0.44 $0.48
===== ===== ===== =====
See accompanying notes to unaudited consolidated financial statements.
3
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Nine Months Ended
September 30,
------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net cash provided by operating activities.................................. $4,796 $12,352
------- -----
Cash flows from investing activities:
Net increase in loans...................................................... (27,109) (7,984)
Purchase of investment securities available for sale....................... (12,502) (1,496)
Purchase of equity securities.............................................. (782) (415)
Proceeds from maturities and principal repayments of investment
securities available for sale.......................................... 1,463 3,328
Proceeds from maturities and principal repayments of investment
securities held to maturity............................................ 98 1,496
Proceeds from sale of branch premises...................................... - 275
Capital expenditures, net.................................................. (1,258) (765)
------- -----
Net cash used in investing activities.................................. (40,090) (5,561)
Cash flows from financing activities:
Net increase (decrease) in deposits........................................ 15,694 (467)
Net increase (decrease) in other borrowings................................ (902) 56
Proceeds from sale of common stock......................................... 20,908 41
Repurchase of common stock................................................. - (20)
Dividends paid............................................................. (494) (494)
Principal payment on stockholder note receivable........................... - 40
------- -----
Net cash provided by (used in) financing activities.................... 35,206 (844)
------- -----
Net increase (decrease) in cash and cash equivalents............................ (88) 5,947
Cash and cash equivalents at beginning of year.................................. 18,867 10,051
------- -----
Cash and cash equivalents at end of period...................................... $18,779 $15,998
======= =====
See accompanying notes to unaudited consolidated financial statements.
4
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation
The consolidated financial statements include the accounts of First
International Bancorp, Inc. (the "Company") and its wholly-owned subsidiary,
First National Bank of New England. Intercompany accounts and transactions have
been eliminated in consolidation. First National Bank of New England (the
"Bank") sold its last retail branch facility and certain deposits in 1996. The
Bank operates a full service branch at its headquarters in Hartford, Connecticut
and representative offices which are responsible for regional loan origination
efforts, in Boston and Springfield, Massachusetts; Providence, Rhode Island;
Morristown, New Jersey; Rochester, New York; Pittsburgh and Philadelphia,
Pennsylvania; and Washington, D.C. The Bank's primary revenues are derived from
net interest income and the origination and sale, on a servicing retained basis,
of commercial loans. The Bank is a national leader in the use of loan guarantee
programs offered by the U.S. Small Business Administration (the "SBA"), the U.S.
Department of Agriculture (the "USDA") and the Export-Import Bank of the United
States ("Ex-Im Bank").
The 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. All adjustments (consisting of only normal
recurring adjustments) that are necessary, in the opinion of management, 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.
The interim financial information should be read in conjunction with the
Consolidated Financial Statements and Notes for the year ended December 31, 1996
included in the Company's Registration Statement on Form S-1 as amended (No.
333-31339), declared effective by the Securities and Exchange Commission on
September 22, 1997.
Certain 1996 amounts have been reclassified to conform with the 1997
presentation. These reclassifications had no impact on net income.
5
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
2. Investment Securities
Securities classified as available for sale (carried at fair value) and as held
to maturity (carried at amortized cost) as of September 30, 1997 and December
31, 1996 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 1997 (unaudited) Cost Gains Losses Value
---- ----- ------ -----
Available for Sale
U.S. Treasury obligations............................ $12,014 $9 $(13) $12,010
U.S. government mortgage-backed securities........... 670 7 - 677
Mutual funds......................................... 7,000 - - 7,000
Variable rate preferred stock........................ 3,000 - - 3,000
----- - - -----
$22,684 $16 $(13) $22,687
======= === ===== =======
Held to Maturity
U.S. government mortgage-backed securities........... $ 1,815 $4 $(11) $1,808
Debt securities of foreign governments............... 1,150 - - $1,150
------- - - ------
$ 2,965 $4 $(11) $2,958
======= == ===== ======
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
---- ----- ------ -----
Available for Sale
U.S. Treasury obligations............................ $10,516 $2 $(63) $10,455
U.S. government mortgage-backed securities........... 1,134 8 (73) 1,069
----- - ---- -----
$11,650 $10 $(136) $11,524
======= === ====== =======
Held to Maturity
U.S. government mortgage-backed securities........... $1,913 $14 $(21) $1,906
Debt securities of foreign governments............... 1,150 - - 1,150
----- - - -----
$3,063 $14 $(21) $3,056
====== === ===== ======
September 30, December 31,
1997 1996
------------------ ----------------
(unaudited)
Stock Securities
Federal Reserve Bank................................. $224 $224
Federal Home Loan Bank of Boston..................... 1,246 648
Private Export Funding 599 415
Corporation.......................................... --- ---
$2,069 $1,287
====== ======
6
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
3. Stockholders' Equity
The Company commenced the sale of 1,700,000 shares of common stock on September
23, 1997 in an underwritten public offering and received $20,900,000 after
commissions and closing costs (the "Offering"). The underwriting agreement also
provided for an additional 255,000 shares to be sold to the underwriters at
their option and such sale was completed on October 17, 1997 whereupon the
Company received an additional $3,200,000, after underwriting commissions and
closing costs.
In June 1994 the Company took a note receivable from the Company's President in
connection with his purchase of 614,600 shares of common stock. The note
provided for interest at the rate of 7% per annum. The President's amended
employment agreement provided that, upon completion of the Offering, the
interest accrued to date on the note would be forgiven and that the interest
rate under the note would be set to 0%. A market interest rate was therefore
imputed on the note and a $91,000 discount recognized. The President's
employment agreement also provided that he receive a tax equalization bonus on
the above items. No interest had been accrued by the Company since inception of
the note due to various other provisions which might have resulted in the
forgiveness of such interest. The net after tax effect of the interest income
note discount and bonus expense was a charge to net income of approximately
$165,000 for the quarter ended September 30, 1997.
4. Recent Accounting Pronouncements
SFAS No. 125
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 requires that, after a transfer of
financial assets, an entity recognize the financial and servicing assets it
controls and the liabilities it has incurred, derecognize financial assets when
control has been surrended, and derecognize liabilities when extinguished. SFAS
No. 125 is intended to provide consistent standards by which a company may
distinguish transfers of financial assets that are sales from transfers that are
secured borrowings. SFAS No. 125 applies to transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996, and
is to be applied prospectively; earlier or retroactive application is not
permitted. Implementation of SFAS No. 125, beginning on January 1, 1997, did not
have a significant effect on the financial condition or results of operations of
the Company.
7
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
4. Recent Accounting Pronouncements, continued
SFAS No. 128
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which (i)
replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS; (ii) requires dual presentation of basic and diluted
EPS on the face of the consolidated statements of income regardless of whether
basic and diluted EPS are the same; and (iii) requires a reconciliation of the
numerator and denominator used in computing basic and diluted EPS. Basic EPS
excludes dilution of common stock equivalents and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Accounting Principles Board Opinion
No. 15. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. SFAS No. 128 requires restatement of all prior period EPS data
presented.
SFAS No. 129
In February 1997, the FASB also issued SFAS No. 129 "Disclosure of Information
about Capital Structure." This pronouncement established standards for the
disclosure of information about an entity's capital structure and is effective
for financial statements issued for periods ending after December 15, 1997. The
adoption of this pronouncement is expected to have no impact on the financial
statements of the Company.
SFAS No. 130
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income,"
SFAS No. 130 established standards for reporting and display of comprehensive
income which is defined as the change in equity of a business enterprise during
a period from nonowner sources. SFAS No. 130 is effective for years beginning
after December 15, 1997 and requires reclassification of financial statements
for all prior years presented. The adoption of SFAS No. 130 is expected to
impact the presentation of financial information only.
8
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
4. Recent Accounting Pronouncements, continued
SFAS No. 131
In June 1997, the FASB also issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 requires public
companies to report financial and descriptive information about operating
segments in annual financial statements and requires selected information about
operating segments to be reported in interim financial reports issued to
shareholders. Operating segment financial information is required to be reported
on the basis that it is used internally for evaluating segment performance and
allocation of resources. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997 and requires presentation of
comparative information for prior periods presented. The adoption of SFAS No.
131 is expected to impact the way the Company reports information about its
operations.
9
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 the forward-looking statements due to
certain risks and uncertainties, including, without limitation, (i) the
Company's dependency on the continuation of various government guarantee loan
programs, such as the SBA, USDA and Ex-Im Bank, from which the Company derives a
significant portion of its loan business, (ii) the Company's ability to continue
its recent growth on a non-traditional operating strategy of deriving a
significant portion of its revenues from non-interest income, principally gains
on the sale of commercial and international loans and related servicing income,
in an increasingly competitive market for loan originations, and (iii) the
Company's lending concentration in the Northeast United States, a region which
has emerged more slowly from the 1989-1992 recession and which has certain
economic risks, including higher "embedded" costs of doing business, including
higher taxes, fluctuating real estate values and the declining importance of
manufacturing as the key industry in the region. 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 filings with the Securities and
Exchange Commission, including those risks and uncertainties discussed in the
Company's Final Prospectus, dated September 22, 1997, in the section entitled
"Risk Factors." 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 are derived from (i) the origination and sale 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. Net income for the quarter ended
September 30, 1996 also benefited from a $1.9 million gain realized on the sale
of the Company's last suburban branch facility, as explained below.
The Company completed an underwritten public stock offering of 1,700,000 shares
in September 1997. The offering resulted in net proceeds to the Company of $20.9
million. Stockholders' equity increased from $14.2 million at December 31, 1996
to $37.6 million at September 30, 1997 due to the offering and the retention of
earnings.
10
Results of Operations
For the Three Months For the Nine Months
-------------------- -------------------
Ended September 30, Ended September 30,
------------------- -------------------
(dollars in thousands, except per share amounts)
1997 1996 1997 1996
---- ---- ---- ----
Net interest income........................ $2,119 $1,969 $5,730 $5,696
Provision for loan losses.................. 157 1,511 1,116 2,064
--- ----- ----- -----
Net interest income after provision.... 1,962 458 4,614 3,632
Gain on loan sales......................... 1,739 1,626 7,217 4,321
Gain on branch sale........................ - 1,895 - 1,895
Other non-interest income.................. 1,064 477 2,389 1,312
Non-interest expense....................... 3,472 2,158 9,382 6,058
----- ----- ----- -----
Income before income taxes.... 1,293 2,298 4,838 5,102
Income taxes............................... 542 966 2,034 2,145
--- --- ----- -----
Net income.... $751 $1,332 $2,804 $2,957
==== ====== ====== ======
Earnings per share.... $0.11 $0.22 $0.44 $0.48
===== ===== ===== =====
Comparison of the Nine Months Ended September 30, 1997 and 1996:
Net Income. Net income decreased 5% or $153,000 from the nine month period ended
September 30, 1996 to the nine month period ended September 30, 1997 due to the
$1.9 million gain on the sale of the Company's last suburban branch facility in
the quarter ended September 30, 1996. Without this gain, net income would have
increased $946,000 or 51% due to a $2.9 million or 67% increase in gain on loan
sales, an $854,000 or 87% increase in loan servicing income and a $948,000
decrease in the provision for loan losses, offset by a $3.3 million or 55%
increase in non-interest expenses.
Net Interest Income. Net interest income remained flat for the nine month period
September 30, 1997 when compared to the same period ending September 30, 1996 as
the $7.6 million or 6% increase in average earning assets was offset by the
effects of a shift in the deposit mix toward the higher costing premier money
market savings and time deposit accounts in 1997 following the branch sale.
11
Average Balances, Interest, Yields and Rates (Fully Taxable Equivalent Basis)
- -----------------------------------------------------------------------------
The following table presents daily average statements of condition, which
include nonaccrual loans, the components of net interest income and selected
statistical data on a fully taxable equivalent basis (1).
Nine Months Ended September 30,
Nine Months Ended Nine Months Ended 1997 Compared to 1996
September 30, 1997 September 30, 1996 Changes Due to (3):
----------------------------- ----------------------------- ---------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Volume Rate Total
------- ---- ---- ------- ---- ---- ------ ---- -----
(dollars in thousands)
Total Earning Assets
Loans(2):
Commercial............... $107,264 $8,548 10.63% $103,135 $8,227 10.64% $329 $ (8) $321
Residential.............. 8,528 463 7.24% 12,827 802 8.34% (233) (106) (339)
Other consumer........... 1,577 113 9.58% 839 62 9.87% 53 (2) 51
----- --- ----- --- -- ----- -- --- --
Total loans............ 117,369 9,124 10.37% 116,801 9,091 10.38% 149 (116) 33
Investment securities.... 16,659 802 6.42% 10,136 450 5.92% 314 38 352
Federal funds sold....... 12,546 510 5.43% 12,015 468 5.20% 22 20 42
------ --- ----- ------ --- ----- -- -- --
Total investment
securities and federal
funds sold........... 29,205 1,312 5.99% 22,151 918 5.53% 336 58 394
------ ----- ----- ------ --- ----- --- -- ---
Total earning assets....... 146,574 10,436 9.49% 138,952 10,009 9.60% 485 (58) 427
--- ---- ---
Total non-earning assets... 21,264 19,021
------ ------
Total assets............... $167,838 $157,973
======== ========
Interest-Bearing
Liabilities
Deposits:
Interest-bearing demand
deposits............... $7,100 $132 2.49% $9,309 $193 2.77% $ (41) $(20) $(61)
Premier money market..... 70,969 2,808 5.29% 60,815 2,348 5.16% 402 58 460
Other savings............ 5,688 81 1.90% 15,717 372 3.16% (143) (148) (291)
Certificates of deposit.. 32,067 1,392 5.80% 27,310 1,118 5.47% 206 68 274
IRA CD's................. 6,457 266 5.51% 6,443 261 5.41% 1 4 5
----- --- ----- ----- --- ----- - - -
Total deposits......... 122,281 4,679 5.12% 119,594 4,292 4.79% 425 (38) 387
Other borrowings......... 668 27 5.20% 611 21 4.59% 3 3 6
--- -- ----- --- -- ----- - - -
Total interest bearing
liabilities.......... 122,949 4,706 5.12% 120,205 4,313 4.79% 428 (35) 393
------- ----- ----- ------- ----- ----- --- ---- ---
Non-interest-bearing
liabilities:
Demand deposits.......... 27,222 24,023
Other liabilities........ 2,358 1,409
----- -----
Total non-interest-
bearing liabilities.. 29,580 25,432
Stockholders' equity..... 15,309 12,336
------ ------
Total liabilities and
stockholders' equity. $167,838 $157,973
======== ========
Net interest income/Net
interest spread.......... $5,730 4.37% $5,696 4.81% $57 $ (23) $34
====== ===== ====== ===== === ===== ===
Net interest margin........ 5.20% 5.45%
===== =====
(1) Fully taxable equivalent income was calculated based on statutory federal
and state tax rates.
(2) For purposes of these computations, non-accruing loans are included in the
average balances.
(3) 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 amounts of the change in each.
12
Interest Income. Interest income increased $427,000 or 4% from $10.0 million for
the nine month period ended September 30, 1996 to $10.4 million for the nine
month period ended September 30, 1997 due to a 4% or $4.1 million increase in
average balance on commercial loans as the loan mix shifted from lower yielding
residential loans toward commercial loans following a $6.9 million bulk sale of
residential loans in March 1997. The average balance of investment securities,
principally U.S. Treasuries, increased $6.5 million or 64% and the yield on such
assets increased 50 basis points.
Interest Expense. Interest expense increased $393,000 or 9% from $4.3 million
for the nine month period ended September 30, 1996 to $4.7 million for the nine
month period ended September 30, 1997 as the average balance of interest-bearing
deposits increased $2.7 million or 2% and deposits shifted to higher costing
deposit products.
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $1.1 million for the nine month period ended September 30, 1997 as
compared to $2.1 million for the nine month period ended September 30, 1996. 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:
Nine Months Ended
-------------------------------
September 30,
-------------------------------
Non-Interest Income: 1997 1996
------ ------
(dollars in thousands)
Gain on loan sales:
SBA sales............................... $3,438 $2,428
USDA sales.............................. 1,286 773
Ex-Im working capital sales............. 178 85
Ex-Im medium term sales................. 1,496 146
Inventory buyer credit.................. 5 -
Unguaranteed portions of SBA and USDA.. 370 627
Other commercial sales.................. 384 259
Residential sales....................... 60 3
------ ------
Gain on loan sales... 7,217 4,321
Loan servicing income and fees............ 1,837 983
Other non-interest income................. 323 329
Income on stockholder note receivable..... 229 -
Gain on branch sale....................... - 1,895
------ ------
Total non-interest income... $9,606 $7,528
====== ======
The 28% or $2.1 million increase in non-interest income for the nine month
period ended September 30, 1997 as compared to the nine month period ended
September 30, 1996 was due to a $2.9 million or 67% increase in the gain on the
sale of loans and an $854,000 or 87% increase in loan servicing income and fees.
13
In September 1996, the Company sold checking and savings accounts totaling $24
million from its last suburban branch facility for a deposit premium of
approximately 9%. A gain of $1.9 million was recognized in the quarter ended
September 30, 1996 and $307,000 was recognized in the quarter ended December 31,
1996 based on the buyer's retention of certain accounts 90 days after the sale.
The Company's sale of the retail branch was part of its strategy of targeting
commercial depository accounts of middle market manufacturers and the consumer
accounts of their owners and principals.
As explained in Note 3 to the Unaudited Consolidated Financial Statements, the
Company holds a note receivable from its President which was issued in
conjunction with the sale of 614,600 shares of common stock in June 1994.
Interest was due at maturity, but was not recognized by the Company due to
various provisions which might have resulted in the forgiveness of such amounts.
The Company's amended employment agreement with the President provided that upon
the successful completion of the Company's 1997 underwritten public stock
offering, the $229,000 interest accrued to date was to be forgiven, the interest
on the note was to be set to 0% and a tax equalization bonus was to be provided
to compensate the President for the income tax effects of these transactions. As
a result of the completion of the public offering, non-interest income includes
income of $229,000 for the interest for the quarter ended September 30, 1997.
The salaries and benefits includes a charge of $526,000 attributable to the
compensation expense for the interest rate adjustments and tax bonus. The net
effect of such adjustments was a reduction of net income of approximately
$165,000 for the quarter ended September 30, 1997.
The increase on the gain on loan sales was attributable to greater SBA and USDA
loan originations and sales, as the regional representative offices began to
more significantly contribute to the loan volume. Year to date gains on Ex-Im
medium term loan sales increased to $1.5 million from $146,000 for the same
period last year, as the Company's international marketing efforts and
contractual marketing representative referrals were converted to loan closings.
The Company has found that this international marketing and origination process
averages 6 to 9 months. The Company also closed and sold its first Inventory
Buyer Credit loan, a 98% Ex-Im guaranteed short-term loan. This product, which
carries a 90-98% guarantee, enables the Company to finance purchases of exported
U.S. made components, parts, raw materials and commodities. The Inventory Buyer
Credit loan product supplements the medium-term financing currently offered to
buyers of U.S. capital goods and the Company believes that it provides a
competitive advantage in the international marketplace.
The Company undertakes the bulk sale of unguaranteed portions of SBA and USDA
loans on a non-recourse, servicing retained basis from time-to-time to provide
liquidity and diversify credit risk. The Company completed its first bulk-sale
of these loans in 1996, many of which had been originated prior to 1996.
The gain on other commercial loan sales represents the sale of non-guaranteed
commercial loans on a non-recourse, servicing retained basis. The Company's
Capital Markets Department devotes a significant amount of its resources to the
identification of
14
buyers for these loan types on the desired terms and conditions. The 48% or
$125,000 increase in the gain on other commercial loan sales from the nine
months ended September 30, 1996 to September 30, 1997 reflects Capital Markets
Department's success in more systematically completing such loan sales
concurrent with the origination of the loans.
The 64% increase in loan servicing income corresponds to the 67% or $110.0
million increase in the average balance of commercial loans serviced for others
to $274.5 million for the nine month period ended September 30, 1997. See
"Loans" below for further details of the Serviced For Others Loan Portfolio.
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.
Nine Months Ended
-----------------
Loan Servicing Income and Fees September 30,
- ------------------------------ -------------
1997 1996
-------- --------
Loan Servicing Income: (dollars in thousands)
SBA guaranteed loans.......................... $905 $656
USDA guaranteed loans......................... 192 99
Ex-Im working capital loans................... 123 25
Ex-Im medium term loans....................... 119 32
Inventory buyer credit........................ 2 -
Other commercial loans........................ 86 43
Residential and consumer loans................ 42 42
-------- --------
Total loan servicing income... 1,469 897
Other loan fees................................. 368 86
-------- --------
Total loan servicing income and fees... $1,837 $983
======== ========
Loans Serviced for Others
- -------------------------
(at period end)
Outstanding balance............................. $358,620 $237,260
======== ========
The increases in loan servicing income reflect the growth of the respective
portfolios. Loan servicing income as percentage of loans serviced for others was
55 basis points and 50 basis points, on an annualized basis, for the nine month
period ended September 30, 1997 and 1996, respectively. The $282,000 increase in
other loan fees is due primarily to a $198,000 increase in letter of credit fees
due to a greater demand from the Company's borrowers for letters of credit.
Data with respect to the retained portions of SBA and USDA loans are set forth
in the tables below:
15
September 30,
-----------------------
Portfolio Balance 1997 1996
----------------- ------- -------
(dollars in thousands)
Unguaranteed portions of:
SBA loans.............................. $43,985 $28,957
USDA loans............................. 6,449 3,561
------- -------
Total SBA and USDA... 50,434 32,518
Less:
Discount.............................. 2,868 2,373
------- -------
Net carrying value... $47,566 $30,145
======= =======
The servicing asset for all loans sold is as follows:
September 30,
---------------------
Servicing Asset 1997 1996
--------------- ------ ------
(dollars in thousands)
Servicing on other loan sales:
Ex-Im medium term.................... $1,338 $242
Other commercial..................... 122 171
Other consumer....................... 4 11
------ ------
Total other servicing... 1,464 424
Servicing on SBA and USDA loan sales:
SBA loans.............................. 3,555 3,011
USDA loans............................. 394 505
------ ------
Total SBA and USDA servicing... 3,949 3,516
------ ------
Total servicing asset... $5,413 $3,940
====== ======
Non-Interest Expense. The increases in non-interest expense reflect the
Company's growth over the periods as indicated below:
For the Nine Months Ended
--------------------------
September 30,
--------------------------
Non-Interest Expenses: 1997 1996 % Change
------ ------ --------
(dollars in thousands)
Salaries and benefits..................... $6,287 $3,457 82%
Occupancy expense......................... 692 575 20%
Office expenses........................... 625 530 18%
Marketing expenses........................ 586 445 32%
Furniture and equipment................... 493 346 42%
Outside services.......................... 296 144 106%
Loan collection, net...................... 108 344 (69%)
Other..................................... 295 217 36%
------ ------ -------
Total Non-Interest Expenses $9,382 $6,058 55%
====== ====== =======
16
September 30,
------------------------
Selected Data 1997 1996
------------- -------- --------
(dollars in thousands)
Total servicing portfolio.............. $493,435 $343,993
======== ========
Number of loans serviced............... 1,758 1,440
======== ========
Number of total personnel.............. 123 88
======== ========
Number of domestic loan officers....... 30 18
======== ========
Number of international loan officers.. 11 5
======== ========
The 55% or $3.3 million increase in non-interest expense for the nine month
period ended September 30, 1997 as compared to the same period ended September
30, 1996 reflects the increase in full time employees and related costs as well
as a shift to more professionals, due to the elimination of 8 clerical branch
positions after the September 1996 branch sale. Salaries and benefits also
includes a $526,000 charge attributable to the compensation expense associated
with the forgiveness of interest on the stockholder note receivable as discussed
above under non-interest income.
The 20% or $117,000 increase in Occupancy expense reflects additional
headquarters space leased to house the new hires, and the inclusion for part of
the nine month period ended September 30, 1997 of rental expense for the
Morristown, New Jersey; Rochester, New York; Pittsburgh and Philadelphia,
Pennsylvania; and Washington, DC representative offices which opened in 1997,
partially offset by a 30% reduction in the rental rate for the Hartford
headquarters facility due to a renewal of the lease at a lower rate effective
June 30, 1997. Office and marketing expenses reflect increases due to the number
of lending officers and their marketing efforts, as reflected in increased
telephone, postage, travel and meals and entertainment.
The 106% or $152,000 increase in Outside Services is due primarily to a $107,000
increase in legal fees related to the establishment of representative offices in
various states and the development of new products. Loan collection, net
decreased 69% or $236,000 due to a significant amount of expenses incurred in
1996 on the resolution of non-owner occupied commercial mortgages.
The Company's efficiency ratios, calculated as the ratio of non-interest expense
to the sum of net interest income and non-interest income, excluding the 1996
gain on branch sale, were 61% and 54% for the nine month period ended September
30, 1997 and 1996, respectively.
Income Taxes. The Company's effective tax rates remained constant at 42% for the
nine month periods ended September 30, 1997 and 1996.
17
Comparison of the Three Months Ended September 30, 1997 and 1996:
Net Income. The 43% or $581,000 decrease in earnings for the quarter ended
September 30, 1997 as compared to the quarter ended September 30, 1996 was due
to the $1.9 million gain on branch sale in 1996. Net income would have increased
$518,000 without the effect of the branch sale due to a reduction in the
provision for loan losses from $1.5 million in the quarter ended September 30,
1996 to $157,000 for the quarter ended September 30, 1997 and a $339,000 or 90%
increase in loan servicing income for the quarter ended September 30, 1997
offset by a $1.3 million or 61% increase in non-interest expenses for the
quarter ended September 30, 1997.
Gains on the sale of loans increased only $114,000 or 7% for the quarter ended
September 30, 1997 due to the bulk sale of the unguaranteed portions of SBA and
USDA loans completed in the quarter ended September 30, 1996 for a gain of
$352,000 which was undertaken to provide funding for the deposit liabilities
included in the sold branch.
Net Interest Income. Net interest income increased 7% or $150,000 for the
quarter ended September 30, 1997 as compared to the quarter ended September 30,
1996 due to an increase on the yield on loans and investments and $6.8 million
or 5% increase in average interest earning assets which more than offset the 3%
or $4.1 million increase in interest bearing deposits, resulting in a 16 basis
point increase in the net interest margin. The quarter also benefited from a 15%
or $3.8 million increase in non-interest bearing deposits.
18
Average Balances, Interest, Yields and Rates (Fully Taxable Equivalent Basis)
- ----------------------------------------------------------------------------
The following table presents daily average statements of condition, which
include nonaccrual loans, the components of net interest income and selected
statistical data on a fully taxable equivalent basis (1).
Three months ended September 30
Three months ended Three months ended 1997 Compared to 1996
September 30, 1997 September 30, 1996 Changes Due to (3):
---------------------------------- --------------------------------- -------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Volume Rate Total
------- ---- ---- ------- ---- ---- ------ ---- -----
(dollars in thousands)
Total Earning Assets
Loans (2):
Commercial............... $114,711 $3,121 10.88% $105,693 $2,791 10.56% $245 $85 $330
Residential.............. 6,661 128 7.69% 12,882 252 7.82% (120) (4) (124)
Other consumer........... 1,797 44 9.71% 1,155 27 9.30% 16 1 17
----- -- ----- ----- -- ----- -- - --
Total loans............ 123,169 3,293 10.69% 119,730 3,070 10.26% 141 82 223
Investment securities.... 17,510 323 7.38% 9,262 129 5.57% 152 42 194
Federal funds sold....... 13,963 197 5.60% 18,858 246 5.19% (69) 20 (49)
------ --- ----- ------ --- ----- ---- -- ----
Total investment
securities and
federal
funds sold........... 31,473 527 6.59% 28,120 375 5.32% 83 62 145
------ --- ----- ------ --- ----- -- -- ---
Total earning assets....... 154,642 3,820 9.86% 147,850 3,445 9.32% 224 144 368
--- --- ---
Total non-earning assets... 23,526 17,984
------ ------
Total assets............... $178,168 $165,834
======== ========
Interest-Bearing Liabilities
Deposits:
Interest-bearing demand
deposits............... $7,387 $45 2.42% $8,719 $55 2.51% $(8) $(2) $(10)
Premier money market..... 75,953 1,037 5.42% 60,489 772 5.08% 211 54 265
Other savings............ 7,405 37 1.98% 19,593 143 2.90% (61) (45) (106)
Certificates of deposit.. 32,433 476 5.82% 30,095 413 5.46% 34 29 63
IRA CD's................. 6,457 92 5.65% 6,574 87 5.26% (2) 7 5
----- -- ----- ----- -- ----- --- - -
Total deposits......... 129,635 1,687 5.16% 125,470 1,470 4.66% 174 43 217
Other borrowings......... 510 7 5.45% 589 6 4.05% (1) 2 1
--- - ----- --- - ----- --- - -
Total interest bearing
liabilities.......... 130,145 1,694 5.16% 126,059 1,476 4.66% 173 45 218
------- ----- ----- ------- ----- ----- --- -- ---
Non-interest-bearing
liabilities:
Demand deposits.......... 29,048 25,289
Other liabilities........ 2,565 1,638
----- -----
Total non-interest-
bearing liabilities.. 31,613 26,927
Stockholders' equity..... 16,410 12,848
------ ------
Total liabilities and
stockholders' equity. $178,168 $165,834
======== ========
Net interest income/Net
interest spread.......... $2,119 4.72% $1,969 4.66% $51 $99 $150
====== ===== ====== ===== === === ====
Net interest margin........ 5.51% 5.35%
===== =====
(1) Fully taxable equivalent income was calculated based on statutory federal
and state tax rates.
(2) For purposes of these computations, non-accruing loans are included in the
average balances.
(3) 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 amounts of the change in each.
19
Interest Income. Interest income increased 11% or $368,000 for the quarter ended
September 30, 1997 as compared to the quarter ended September 30, 1996 due to an
increase in the yield on commercial loans and a shift in the mix of assets
toward higher yielding commercial loans following a reduction in the residential
loan portfolio, and an increase in the yield on non-loan assets as funds were
moved from lower yielding federal funds sold into the investment portfolio.
Interest Expense. Interest expense increased 15% or $218,000 for the quarter
ended September 30, 1997 when compared to the quarter ended September 30, 1996
as the average balance of interest bearing deposits increased 3% or $4.3 million
and deposits shifted to higher costing deposit products. This growth was
principally funded with premier money market savings accounts.
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $157,000 in the quarter ended September 30, 1997 as compared to $1.5
million in the quarter ended September 30, 1996. 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:
Three Months Ended
-------------------
September 30,
------------
Non-Interest Income: 1997 1996
---- ----
(dollars in thousands)
Gain on loan sales:
SBA sales............................... $879 $625
USDA sales.............................. 81 315
Ex-Im working capital sales............. 89 34
Ex-Im medium term sales................. 529 73
Inventory buyer credit.................. 5 -
Unguaranteed portions of SBA and USDA... - 352
Other commercial sales.................. 156 227
--- ---
Gain on loan sales... 1,739 1,626
Loan servicing income and fees............ 716 377
Other non-interest income................. 119 100
Income on stockholder note receivable..... 229 -
Gain on branch sale....................... - 1,895
------ ------
Total non-interest income... $2,803 $3,998
====== ======
20
The 30% or $1.2 million decrease in non-interest income for the three month
period ended September 30, 1997 as compared to the three month period ended
September 30, 1996 was due to the $1.9 million 1996 gain on branch sale offset
by a $339,000 increase in loan servicing income and $229,000 interest income on
the shareholder note receivable from the Company's President as previously
discussed.
The increase in gain on loan sales was attributable to increases in Ex-Im medium
term loan originations as the Company's international marketing efforts and
contractual marketing representative referrals were converted to loan closings
and sold.
Gains on the sale of USDA loans were limited in the quarter ended September 30,
1997 as the USDA experienced a funding shortfall for the guarantee of Business
and Industry loans in September 1997, the last month of its fiscal year. Such
shortfalls are not unusual in the last month of an agency's fiscal year. The
Company routinely manages around such shortfalls by timing the closing of loans
for the subsequent quarter.
The gain on the unguaranteed portions of SBA and USDA loans for the quarter
ended September 30, 1996 reflects the bulk sale of a $20 million loan portfolio
to provide funding for the September 1996 branch sale.
The 90% or $339,000 increase in loan servicing income corresponds to the 63% or
$133 million increase in the average balance of commercial loans serviced for
others to $343 million for the quarter ended September 30, 1997.
Three Months Ended
Loan Servicing Income and Fees ----------------------------
- ------------------------------ September 30,
----------------------------
1997 1996
---- ----
Loan Servicing Income: (dollars in thousands)
SBA guaranteed loans...................... $330 $231
USDA guaranteed loans..................... 67 42
Ex-Im working capital loans............... 46 12
Ex-Im medium term loans................... 62 15
Inventory buyer credit.................... 2 -
Other commercial loans.................... 28 16
Residential and consumer loans............ 15 15
-- --
Total loan servicing income... 550 331
Other loan fees............................. 166 46
--- --
Total loan servicing income and fees... $716 $377
==== ====
The increases in loan servicing income reflect the growth of the respective
portfolios. Loan servicing income as percentage of loans serviced for others was
62 basis points and
21
56 basis points, on an annualized basis, for the quarters ended September 30,
1997 and 1996, respectively. The $120,000 increase in other loan fees is due
primarily to an increase in letter of credit fees.
Non-Interest Expense.
For the Three Months Ended
--------------------------
September 30,
-------------
Non-Interest Expenses: 1997 1996
---- ----
(dollars in thousands)
Salaries and benefits................... $2,442 $1,321
Occupancy expense....................... 239 208
Office expenses......................... 235 181
Marketing expenses...................... 200 195
Furniture and equipment................. 182 121
Outside services........................ 68 25
Loan collection, net.................... 11 39
Other................................... 95 68
-- --
Total non-interest expenses... $3,472 $2,158
====== ======
The 61% or $1.3 million increase in non-interest expense for the three month
period ended September 30, 1997 as compared to the same period ended September
30, 1996 reflects the increase in full time employees and related costs as well
as a shift to more professionals. Also included in salaries and benefits are
expenses of $526,000 associated with bonuses paid to the Company's President.
The Company's efficiency ratios, calculated as the ratio of non-interest expense
to the sum of net interest income and non-interest income, excluding the 1996
gain on branch sale, were 71% and 53% for the quarters ended September 30, 1997
and 1996, respectively.
Income Taxes. The Company's effective tax rates remained constant at 42% for the
quarters ended September 30, 1997 and 1996.
Discussion of Changes in Financial Condition from December 31, 1996 to September
30, 1997
General. Total assets increased 24% or $39 million from $161.6 million at
December 31, 1996 to $200.7 million at September 30, 1997, due to the completion
of a public stock offering in September 1997 whereby 1.7 million common shares
were issued, resulting in net proceeds of $20.9 million to the Company.
Approximately $10 million of such proceeds were downstreamed to the Bank, with
the remainder being invested by First International Bancorp, Inc. Deposits also
provided additional funding, increasing $15.7
22
million or 11%. On a consolidated basis, this funding was utilized to increase
loans $19.6 million or 18% and the investment portfolio by $11.8 million.
Investment Securities. Investment securities portfolios totaled $27.7 million at
September 30, 1997 representing an increase of $11.8 million from the December
31, 1996 balance of $15.9 million. The increase was comprised principally of
short-term investments in a money market mutual fund and variable rate preferred
stocks carrying a rating of A or better, pending deployment into loans and other
longer term strategic investments. The $598,000 increase in the investment in
Federal Home Loan Bank of Boston common stock was made to support short-term
borrowings undertaken from time to time over the nine month period.
23
Loans. The loan portfolio and serviced portfolio were as follow:
Loan Portfolio September 30, 1997 December 31, 1996
- -------------- ------------------ ------------------
(dollars in thousands)
SBA loans ......................................... $43,985 $31,692
USDA loans......................................... 6,449 3,211
Ex-Im working capital loans........................ 2,414 3,419
Ex-Im medium term loans............................ 4,783 2,067
Inventory buyer credit............................. 20 -
Other commercial loans............................. 46,231 33,713
Owner occupied commercial mortgage................. 16,255 18,808
Non-owner occupied commercial mortgage............. 6,107 7,620
Residential and other consumer loans............... 8,571 14,097
----- ------
Total loans ... 134,815 114,627
Less:
Discount on retained loans......................... 2,869 2,241
Net deferred loan origination costs................ (144) (67)
Reserve for loan losses............................ 3,000 3,000
----- -----
Loans, net... $129,090 $109,453
======== ========
Loans Serviced for Others
- -------------------------
Guaranteed Loans
SBA.............................................. $180,379 $145,620
USDA............................................. 41,685 26,901
Ex-Im working capital............................ 11,417 10,472
Ex-Im medium term................................ 48,928 16,198
Inventory buyer credit........................... 980 -
FHLMC............................................ 17,285 17,731
------ ------
300,674 216,921
Unguaranteed Portions and Unguaranteed Loans
SBA.............................................. 32,574 28,814
USDA............................................. 3,944 3,191
Other commercial................................. 17,470 12,896
Home equity lines................................ 3,958 3,982
----- -----
57,946 48,883
------ ------
Total loans serviced for others... $358,620 $265,805
======== ========
Total loans under management... $493,435 $380,432
======== ========
24
For the Three Months Ended For the Nine Months Ended
September 30, 1997 September 30, 1997
--------------------------------- ----------------------------
Principal Principal
Balance Percentage Balance Percentage
------- ---------- ------- ----------
Loan Originations by Department
Domestic:
SBA loans................................. $22,031 33% $69,333 36%
USDA loans................................ 1,650 3% 19,329 10%
Other commercial loans.................... 19,062 29% 40,662 21%
------ --- ------ ---
Total domestic banking........... 42,743 65% 129,324 67%
------ --- ------- ---
International:
Ex-Im working capital lines............... 11,462 17% 22,087 12%
Ex-Im medium term loans................... 12,086 18% 39,383 21%
------ --- ------ ---
Total international banking...... 23,548 35% 61,470 33%
------ --- ------ ---
Total commercial loans .......... $66,291 100% $190,794 100%
======= ==== ======== ====
Allowance for Loan Losses. The Company reviews the adequacy of the Allowance for
Loan Losses quarterly. At September 30, 1996, the Allowance totaled $2.5
million. During the quarter ended September 30, 1996, the Allowance was
increased to include a specific allocation for certain non-owner occupied
commercial mortgages (a line of business that the Company abandoned in 1991).
This increase raised the ratio of the Allowance to Total Loans from 1.6% at June
30, 1996, to 2.2% at September 30, 1996.
The Allowance was subsequently increased to $3 million at December 31, 1996, to
reflect a general allocation to the commercial loan portfolios due to increases
in the outstanding loan balances. This increase raised the ratio of the
Allowance to Total Loans to 2.6%.
The Allowance remained at $3 million at September 30, 1997. The ratio of the
Allowance to Total Loans is at 2.2%, a level which management has determined to
be appropriate given the historic loss experience from its core lines of
business. For the period January 1, 1994 through September 30, 1997, annualized
net charge-offs from the core business of SBA/USDA/Ex-Im/Other Commercial loans
has ranged from 17 basis points to 72 basis points of gross loans.
The provision for loan losses decreased from $2.1 million for the nine month
period ended September 30, 1996 to $1.1 million for the same period ended
September 30, 1997 and from $1.5 million for the quarter ended September 30,
1996 to $157,000 for the quarter ended September 30, 1997 due to the significant
provisions required in the third quarter 1996 on the non-owner occupied
commercial mortgages as discussed above.
25
Activity in the Allowance for Loan Losses
For the Nine Months Ended
------------------------- For the Year Ended
September 30, 1997 September 30, 1996 December 31, 1996
------------------ ------------------ -----------------
(dollars in thousands)
Balance of allowance for loan
losses at the beginning of the
period............................... $3,000 $2,000 $2,000
Non-owner occupied
commercial mortgage................ 805 1,252 1,730
SBA................................ 130 247 478
USDA............................... - - -
Commercial......................... 129 60 168
Private............................ 1 - 27
Ex-Im working capital.............. - - -
Ex-Im medium term.................. - - -
Construction....................... - - -
Residential and other
consumer........................... 131 43 124
--- -- ---
Total charge-offs......... 1,196 1,602 2,527
Recoveries:
Non-owner occupied
commercial mortgage................ - 13 13
Commercial......................... 69 15 16
Private............................ - 10 10
Residential and other consumer..... 11 - 1
-- - -
Total recoveries......... 80 38 40
-- -- --
Provision for loan losses............ 1,116 2,064 3,487
----- ----- -----
Balance of allowance for loan
losses at end of period.............. $3,000 $2,500 $3,000
====== ====== ======
Total loans......... $134,815 $110,285 $114,627
======== ======== ========
Allowance to total loans......... 2.2% 2.2% 2.6%
==== ==== ====
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. (All of the loans included
in the Company's portfolio are to domestic companies. Any loans to foreign
entities are U.S. dollar denominated, 100% Ex-Im Bank guaranteed and sold at
origination.)
26
September 30, December 31,
------------- ------------
1997 1996
---- ----
(dollars in thousands)
Allocation of the Allowance
by Category of Loans:
Unguaranteed Portions of:
SBA and USDA...................... $1,011 $491
Ex-Im working capital loans....... 106 44
Commercial mortgage.................. 208 271
Other commercial..................... 627 475
Non-owner occupied commercial
mortgage............................. 702 1,061
Residential and other consumer....... 123 113
Unallocated.......................... 223 545
--- ---
Total Allowance for Loan
Losses........ $3,000 $3,000
====== ======
Percent of Loans in Each
Category to Total Loans:
Unguaranteed Portions of:
SBA and USDA..................... 37% 30%
Ex-Im working capital............ 2 5
Ex-Im medium term.................... 4 2
Commercial mortgage.................. 12 16
Other commercial..................... 34 29
Non-owner occupied
commercial mortgage.................. 5 6
Residential and other consumer....... 6 12
- --
Total........ 100% 100%
====== ======
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
September 30, 1997 December 31, 1996
------------------ -----------------
(dollars in thousands)
Commercial:
Unguaranteed Portions:
SBA and USDA *.................................... $1,142 $188
Ex-Im working capital............................. - -
Commercial mortgage............................... 40 -
Other commercial.................................. 143 132
Non-owner occupied commercial mortgage............ 1,002 1,853
Consumer.......................................... 317 79
--- --
Total non-performing loans........................ $2,644 $2,252
====== ======
Total non-performing loans to total loans......... 1.96% 1.96%
======= =======
Total non-performing loans to total assets........ 1.32% 1.39%
======= =======
Allowance to total non-performing loans........... 114% 133%
======= =======
27
* Excludes the Company's only guaranteed USDA loan not sold of $345,000 which is
fully guaranteed as to the collection of principal and interest.
Stockholders' Equity. Stockholders' equity increased from $14.2 million at
December 31, 1996 to $37.6 million at September 30, 1997 due to the completion
of the stock offering resulting in net proceeds to the Company of $20.9 million
and the retention of earnings. The Company has paid quarterly dividends of $.03
per share during the period. As explained above, in conjunction with the
completion of the stock offering, the Company reduced the interest rate on the
stockholder note receivable to 0% and therefore, discounted the note $91,000 to
$863,000 to reflect a market rate of interest.
Liquidity and Capital Resources
The Company's primary sources of liquidity and funding are its diverse deposit
base and loan sales and participations. Secondary sources of liquidity include
Federal Home Loan Bank Advances and the sale of investments. As an FDIC-insured
institution, the Bank has access to traditional business and consumer depository
products, including checking, savings and time deposit accounts.
Management considers scheduled cash flows from existing clients and borrowers
and projected deposit levels as well as estimated liquidity needs from maturing
and disintermediating deposits, approved extensions of credit and unadvanced
commitments to existing borrowers, in determining the level and maturity of
deposits necessary to support operations. Historically the Company has increased
the level of deposits to support its planned loan growth. Marketing efforts are
generally focused on externally indexed "core accounts" of checking and savings
deposits, which have proven to be generally less interest rate sensitive than
time deposits. In addition to its primary solicitation efforts, the Company may
seek to target time deposit campaigns to the general public in conjunction with
anticipated liquidity needs in order to better allow an appropriate matching of
its funding sources to its funding needs.
As of September 30, 1997 the Company had outstanding commitments to fund loans
and lines of credit of $42.6 million and had issued letters of credit totaling
$14.1 million.
The Company believes that its liquidity sources will continue to provide funding
sufficient to support operating activities, loan originations and commitments,
and deposit withdrawals.
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 of 16.8% and a Tier 1 capital to assets or
leverage ratio of 14.3% at September 30, 1997.
28
Year 2000 Compliance
As the year 2000 approaches, a critical business issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. In brief, many existing application software products in the
marketplace were designed to only accommodate a two digit date position which
represents the year (e.g., '95 is stored on system and represents the year
1995). As a result, the year 1999 (i.e., '99) could be the maximum date value
these systems will be able to accurately process. Management is in the process
of working with its software vendors to assure that the Company is prepared for
the year 2000. Management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in computer
system improvements to be year 2000 compliant.
29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant is not involved in any legal proceedings except
for routine litigation incidental to the business of banking,
none of which is expected to have a material adverse effect on
the Registrant's financial position, results of operations or
cash flows.
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
Use of Proceeds
The Company contributed approximately 40% of the net proceeds
of its underwritten public offering, completed in September
1997, to the Bank to be used for its general purposes, such as
the origination of loans. The remainder of the net proceeds
remain invested in interest-bearing securities.
Other
On October 14, 1997, the Company was notified by the
Underwriters of the Company's public offering that the
Underwriters were exercising their option to purchase an
additional 255,000 shares of Company common stock pursuant to
the Underwriting Agreement. On October 17, 1997, the Company
completed the sale of 255,000 additional shares and received
$3,200,000 in net proceeds in connection therewith.
30
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K.
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Registrant did not file any Reports on Form 8-K during
the third quarter of 1997.
31
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: November 13 , 1997 By: /S/ BRETT N. SILVERS
------------------ ---------------------
Brett N. Silvers
Its President
Date: November 13 , 1997 By: /S/ LESLIE A. GALBRAITH
------------------ ------------------------
Leslie A. Galbraith
Its Treasurer and Secretary
and Chief Financial
Officer
32
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
33