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, 1998
--------------
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.)
ONE COMMERCIAL PLAZA, 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 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 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, outstanding on April 25, 1998 was 7,891,025.
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
------
MARCH 31, DECEMBER 31,
------------ ---------------
1998 1997
---- ----
(UNAUDITED)
Cash and cash equivalents..................... $ 10,788 $ 17,394
Investment securities......................... 16,540 22,271
Loans, net.................................... 150,658 130,625
Loans held-for-sale........................... 15,442 9,070
Premises and equipment, net................... 3,628 2,694
Receivable from loans sold.................... 23,500 28,775
Prepaid expenses and other assets............. 8,950 8,022
------------ ---------------
Total assets............................. $ 229,496 $ 218,851
============ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
MARCH 31, DECEMBER 31,
------------ ---------------
1998 1997
---- ----
(UNAUDITED)
Deposits...................................... $ 182,273 $ 172,321
Other liabilities............................. 3,908 4,382
------------ ---------------
Total liabilities........................ 186,181 176,703
Stockholders' equity:
Common stock, 7,876,209 and 7,866,735
shares issued and outstanding................ 788 787
Paid-in capital in excess of par value........ 32,101 32,083
Stockholder note receivable................... (893) (877)
Unrealized holding gain on investments
available-for-sale, net...................... 9 12
Retained earnings............................. 11,310 10,143
------------ ---------------
Total stockholders' equity................. 43,315 42,148
------------ ---------------
Total liabilities and stockholders' equity. $ 229,496 $ 218,851
============ ===============
See accompanying notes to unaudited condensed consolidated financial statements.
2
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1998 1997
---- ----
INTEREST INCOME:
Loans, including net fees....................... $ 3,996 $ 2,858
Investment securities........................... 316 235
Federal funds sold.............................. 162 167
--------- ---------
Total interest income......................... 4,474 3,260
INTEREST EXPENSE
Deposits........................................ 1,670 1,453
Other........................................... 12 7
--------- ---------
Total interest expense........................ 1,682 1,460
--------- ---------
Net interest income............................. 2,792 1,800
PROVISION FOR POSSIBLE LOAN LOSSES................. 781 368
--------- ---------
Net interest income after
provision for possible loan losses............ 2,011 1,432
NON-INTEREST INCOME:
Gain on sale of:
Guaranteed commercial loans................... 2,696 2,045
Unguaranteed portions of
commercial loans............................. 117 -
Other commercial loans........................ 5 121
Residential loan sales........................ 4 56
--------- ---------
Total gains on loan sales....................... 2,822 2,222
Loan servicing income and fees.................. 927 527
Service charges and other deposit fees.......... 145 90
Income on stockholder note receivable........... 15 -
--------- ---------
Total non-interest income..................... 3,909 2,839
--------- ---------
Total operating income.......................... 5,920 4,271
NON-INTEREST EXPENSE:
Salaries and benefits........................... 2,237 1,726
Occupancy....................................... 371 211
Furniture and equipment......................... 225 148
Outside services................................ 100 84
Office expenses................................. 184 85
Marketing....................................... 197 155
Other........................................... 227 87
--------- ---------
Total non-interest expense.................... 3,541 2,496
--------- ---------
Income before income taxes...................... 2,379 1,775
PROVISION FOR INCOME TAXES......................... 976 763
--------- ---------
NET INCOME.................................... $ 1,403 $ 1,012
========= =========
BASIC EARNINGS PER COMMON SHARE.................... $ 0.18 $ 0.18
========= =========
DILUTED EARNINGS PER COMMON SHARE.................. $ 0.17 $ 0.17
========= =========
See accompanying notes to unaudited condensed consolidated financial
statements.
3
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities....................... $ 738 $ 1,343
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans........................................... (22,088) (7,887)
Purchase of investment securities available for sale............ - (497)
Proceeds from maturities and principal repayments of investment
securities available for sale.................................. 592 198
Proceeds from maturities and principal repayments of investment
securities held to maturity.................................... 4,030 27
Proceeds from sale of investment securities..................... 1,102 -
Capital expenditures, net....................................... (1,134) (320)
--------- ---------
Net cash used in investing activities......................... (17,498) (8,479)
--------- ---------
CASH FLOWS FROM FINANCIAL ACTIVITIES:
Net increase (decrease) in deposits............................. 9,952 (577)
Net increase in other borrowings................................ 409 73
Proceeds from sale of common stock.............................. 19 12
Dividends paid.................................................. (236) (165)
--------- ---------
Net cash provided by (used in) financial activities........... 10,144 (657)
--------- ---------
Net decrease in cash and cash equivalents........................... (6,616) (7,793)
Cash and cash equivalents at beginning of period.................... $ 17,394 $ 18,867
--------- ---------
Cash and equivalents at end of period............................... $ 10,778 $ 11,074
========= =========
See accompanying notes to unaudited consolidated financial statements.
4
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
General
- -------
The consolidated financial statements include the accounts of First
International Bancorp, Inc. (the "Company") and its wholly-owned subsidiary,
First National Bank of New England. Intercompany accounts and transactions have
been eliminated in consolidation. 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 Company's Annual Report for the year ended December 31, 1997.
Certain 1997 amounts have been reclassified to conform with the 1998
presentation. These reclassifications had no impact on net income.
Public Offering
- ---------------
The Company sold a total of 1,955,000 shares of its common stock in an
underwritten public offering that commenced in September, 1997 (the "Offering").
The Company received net proceeds, after underwriting commissions and expenses,
of approximately $23,800,000 from the Offering. The Company's common stock
began trading on The Nasdaq Stock Market(sm) under the symbol FNCE on September
23, 1997.
5
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, CONTINUED
Earnings Per Share
- ------------------
Earnings per share for all periods presented have been calculated in accordance
with SFAS No. 128 "Earnings Per Share," which requires the presentation of basic
and diluted earnings per share. Basic earnings per share is determined based on
the weighted average shares outstanding, while diluted earnings per share
reflects the potential dilution that could occur if all outstanding options to
purchase common stock were exercised.
Comprehensive Income
- --------------------
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income,"
SFAS No. 130 established standards for reporting and display of comprehensive
income, 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
years presented. The adoption of SFAS No. 130 requires the Company to expand
the financial statements to present the impact of any change in the valuation
allowance for the "available for sale" investment portfolio or other components
of comprehensive income. For the quarters ended March 31, 1998 and 1997 such
components of comprehensive income totalled $2,000 and $8,000, after income
taxes, respectively and were comprised only of changes in the valuation
allowance for the investment portfolio.
2. RECENT ACCOUNTING PRONOUNCEMENT
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. The Company is currently reviewing this pronouncement, and will
adopt it for the December 31, 1998 annual reporting period. As permitted under
SFAS No. 131, the Company has elected not to utilize this presentation for
interim financial statements issued in this year of adoption.
6
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
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, (ii) the Company's ability to continue its recent growth by
following a non-traditional operating strategy of deriving a significant portion
of its revenues from non-interest income, principally gains on the sale of
domestic and international commercial loans and related servicing income, in an
increasingly competitive market for loan originations, (iii) the Company's
ability to accurately estimate the factors underlying its calculation of the
value of its servicing assets, and (iv) the Company's lending concentration in
the Northeast United States, certain parts of which region have emerged more
slowly from the 1989-1992 recession and which region has certain economic risks,
including higher "embedded" costs of doing business, such as 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.
The Company completed an underwritten public stock offering in September 1997
and received net proceeds of $23.8 million upon the issuance of 1,955,000 shares
of common stock.
7
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------------------------
1998 1997 % CHANGE
---- ---- ------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net interest income............................. $ 2,792 $ 1,800 55%
Provision for loan losses....................... 781 368 112%
---------- ---------- --------
Net interest income after provision........ 2,011 1,432 40%
Gain on loan sales.............................. 2,822 2,222 27%
Other non-interest income....................... 1,087 617 76%
Non-interest expense............................ 3,541 2,496 42%
---------- ---------- --------
Income before income taxes................. 2,379 $ 1,775 34%
Income taxes.................................... $ 976 763 28%
========== ========== ========
Net income............................... $ 1,403 $ 1,012 39%
========== ========== ========
Basic earnings per share................. $ 0.18 $ 0.18
========== ==========
Diluted earnings per share............... $ 0.17 $ 0.17
========== ==========
Weighted average shares - basic.......... 7,876 5,772
========== ==========
Weighted average shares - diluted........ 8,215 5,871
========== ==========
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997:
NET INCOME. The 39% or $391,000 increase in earnings for the quarter ended March
31, 1998 as compared to the quarter ended March 31, 1997 was attributable to
increases in net interest income, gains on loan sales and loan servicing income,
offset by an increase in the provision for loan losses and in non-interest
expenses, each of which are reflective of the increases in the Company's on and
off-balance sheet loan serviced portfolios.
Basic earnings per share remained unchanged for the quarter ended March 31, 1998
as compared to the quarter ended March 31, 1997 because the increase in net
income was offset by an increase in the number of shares outstanding due to the
Company's September 1997 Offering.
NET INTEREST INCOME. Net interest income increased 55% or $992,000 for the
quarter ended March 31, 1998 as compared to the quarter ended March 31, 1997 due
to a 35 basis point increase on the yield on loans and $43.8 million or 31%
increase in average interest earning assets. These increases, due principally to
the proceeds of the stock offering, more than offset the 14% or $16.5 million
increase in interest bearing deposits, resulting in a 96 basis point increase in
the net interest margin. The results for the quarter also benefited from a 32%
or $8.7 million increase in the average balance of non-interest bearing
deposits.
8
AVERAGE BALANCES, INTEREST, YIELDS AND RATES.
- ---------------------------------------------
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).
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED 1998 COMPARED TO 1997
MARCH 31, 1998 MARCH 31, 1997 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)
ASSETS:
Loans (2):
Commercial................ $142,673 $ 3,815 10.70% $ 98,687 $ 2,579 10.45% $1,176 $ 60 $1,236
Residential............... 7,626 140 7.34% 12,482 250 8.01% (89) (21) (110)
Other consumer............ 1,782 41 9.33% 1,272 29 9.25% 12 - 12
-------- -------- ------ -------- -------- ------ ------ ---- ------
Total loans................ 152,081 3,996 10.51% 112,441 2,858 10.17% 1,099 39 1,138
Investment securities...... 21,453 316 5.89% 15,844 235 5.93% 83 (2) 81
Federal funds sold......... 11,605 162 5.66% 13,076 167 5.18% (21) 16 (5)
-------- -------- ------ -------- -------- ------ ------ ---- ------
Total investment securities
and funds sold............ 33,058 478 5.81% 28,920 402 5.59% 62 14 76
------- -------- ------ -------- -------- ------ ------ ---- ------
Total earning assets 185,139 4,474 9.67% 141,361 3,260 9.22% 1,161 53 1,214
Total non-earning assets... 28,844 18,954
-------- --------
Total assets. $213,983 $160,315
======== ========
LIABILITIES:
Deposits:
Interest bearing demand
deposits................. $ 7,649 $ 46 2.44% $ 6,885 $ 42 2.47% $ 5 $ (1) $ 4
Premier money market...... 83,110 1,108 5.41% 67,096 862 5.21% 213 33 246
Other savings............. 8,175 41 2.03% 3,868 15 1.57% 22 4 26
Certificates of deposit... 24,225 340 5.69% 31,815 450 5.74% (107) (3) (110)
IRA certificates of
deposit.................. 9,466 135 5.78% 6,491 84 5.25% 42 9 51
------- -------- ------ -------- -------- ------ ------ ---- ------
Total deposits............. 132,625 1,670 5.11% 116,155 1,453 5.07% 175 42 217
------- -------- ------ -------- -------- ------ ------ ---- ------
Other borrowings........... 609 12 7.99% 528 7 5.38% 2 3 5
------- -------- ------ -------- -------- ------ ------ ---- ------
Total interest
bearing liabilities....... 133,234 1,682 5.12% 116,683 1,460 5.07% 177 45 222
------- -------- ------ -------- -------- ------ ------ ---- ------
Non-interest
bearing liabilities:
Demand deposits........... 35,807 27,140
Other liabilities......... 3,052 2,177
-------- --------
Total non-interest
bearing liabilities....... 38,859 29,317
Stockholders' equity....... 41,890 14,315
-------- --------
Total liabilities and
stockholders' equity...... $213,983 $160,315
======== ========
Net interest income/net
interest spread........... $ 2,792 4.55% $ 1,800 4.15% $ 984 $ 8 $ 992
======== ====== ======== ====== ====== ==== ======
Net interest margin........ 5.98% 5.03%
====== ======
(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 balance.
(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 amount of the change in each.
9
INTEREST INCOME. Interest income increased 37% or $1.2 million for the quarter
ended March 31, 1998 as compared to the quarter ended March 31, 1997 due to a 25
basis point increase in the yield on commercial loans and a $44.0 million
increase in the average balance of commercial loans, as commercial originations
increased for the quarter. These increases were partially offset by a decrease
in residential mortgage loans, due to the June 1997 residential mortgage bulk
loan sale.
INTEREST EXPENSE. Interest expense increased 15% or $222,000 for the quarter
ended March 31, 1998 when compared to the quarter ended March 31, 1997 due to a
14% or $16.5 million increase in the average balance of interest bearing
deposits.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
totaled $781,000 for the quarter ended March 31, 1998 as compared to $368,000
for the quarter ended March 31, 1997. See "Allowance for Loan Losses" for
further analysis of the provision and related data.
NON-INTEREST INCOME. Non-interest income is comprised of the following items:
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------
NON-INTEREST INCOME: 1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Gain on loan sales:
SBA sales......................................... $ 1,308 $ 1,099
USDA sales........................................ 568 532
Ex-Im working capital sales....................... 79 21
Ex-Im medium term sales........................... 741 453
Unguaranteed portions of SBA and USDA............. 117 -
Other commercial sales............................ 5 61
Residential sales................................. 4 56
------------ ------------
Total gain on loan sales........................... 2,822 2,222
Loan servicing income and fees...................... 927 527
Other non-interest income........................... 145 90
Income on stockholder note receivable............... 15 -
------------ ------------
Total non-interest income........................... $ 3,909 $ 2,839
============ ============
The 38% or $1.1 million increase in non-interest income for the three month
period ended March 31, 1998 as compared to the three month period ended March
31, 1997 was due to a $600,000 increase in gain on loan sales and a $400,000
increase in loan servicing and other fee income.
10
The increase in gain on loan sales was attributable to a 19% or $209,000
increase in gain on SBA loan sales, as the return on the sales increased due
to improved market conditions and more attractive loan terms, as well as a 64%
or $288,000 increase in gain on Ex-Im medium term loan sales due to a 50%
increase in the origination of such loans in the quarter ended March 31, 1998
over the same quarter last year.
The gain on the unguaranteed portions of SBA and USDA loans for the quarter
ended March 31, 1998 reflects the sale of a $2.2 million loan portfolio which
had been primarily accumulated over the prior two quarters.
The 76% or $400,000 increase in loan servicing and other fee income includes a
35% or $142,000 increase in loan servicing income, commensurate with the
increase in the balance of commercial loans serviced for others, which totaled
$470.8 million at March 31, 1998, as well as a $258,000 increase in other loan
fees. The increase in other loan fees is due to an increase in the issuance
of letters of credit as well as recognition of forfeited loan application
fees.
LOAN SERVICING INCOME AND FEES FOR THE THREE MONTHS ENDED
- ------------------------------
MARCH 31,
--------------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Loan Servicing Income:
SBA guaranteed loans.......................... $ 281 $ 278
USDA guaranteed loans......................... 76 49
Ex-Im working capital loans................... 56 38
Ex-Im medium term loans....................... 96 13
Other commercial loans........................ 29 21
Residential and consumer loans................ 16 13
-------- --------
Total loan servicing income..................... 544 412
Other loan fees................................. 373 115
-------- --------
Total loan servicing income and fees............ $ 927 $ 527
======== ========
LOANS SERVICED FOR OTHERS
- -------------------------
(AT PERIOD END)
Outstanding balance............................. $470,786 $290,823
======== ========
11
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following
items:
FOR THE THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
---- ----
(DOLLARS IN THOUSAND)
NON-INTEREST EXPENSE:
Salaries and benefits.......................... $ 2,237 $ 1,726
Occupancy...................................... 371 211
Furniture and equipment........................ 225 148
Outside service................................ 100 84
Office expenses................................ 184 85
Marketing expenses............................. 197 155
Loan collection................................ 58 (6)
Other.......................................... 169 93
--------- ---------
Total non-interest expense................. $ 3,541 $ 2,496
========= =========
The 42% or $1.1 million increase in non-interest expense for the three month
period ended March 31, 1998 as compared to the same period ended March 31, 1997
reflected the 45% increase in full time employees to 146 from 101 over the
period and related personnel costs, as well as a shift to more highly
compensated employees. Non-personnel expenses increased 69% for the quarter
ended March 31, 1998 due to an increase in occupancy costs, a portion of which
will support future growth.
The Company's efficiency ratios, calculated as the ratio of non-interest
expense to the sum of net interest income and non-interest income, were 53%
and 54% for the quarters ended March 31, 1998 and 1997, respectively.
INCOME TAXES. The Company's effective tax rates decreased to 41.0% for the
quarter ended March 31, 1998 from 43.0% for the quarter ended March 31, 1997,
due primarily to the effects of a dividend received deduction and the blended
effective tax rate for the various states in which the Company operates.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION TO MARCH 31, 1998 FROM DECEMBER
31, 1997
GENERAL. Total assets increased 5% or $10.6 million to $229.5 million at March
31, 1998 from $218.9 million at December 31, 1997, due to an increase in the
amount of commercial loans originated and held on the balance sheet for the
quarter ended March 31, 1998. This growth was funded by savings and time deposit
accounts.
INVESTMENT SECURITIES. Investment securities portfolios totaled $16.5 million
at March 31, 1998, representing a decrease of 26% or $5.7 million from the
December 31, 1997 balance of $22.3 million. During the quarter ended March 31,
1998 the remaining proceeds of approximately $11.1 million from the Company's
September 1997 public
12
offering were downstreamed to the Bank, a portion of which were used for the
origination of commercial loans.
LOANS. The loan portfolio and loan serviced portfolio were as follows:
MARCH 31, DECEMBER 31,
LOAN PORTFOLIO 1998 1997
- -------------- ------------------------ -------------------------
(DOLLARS IN THOUSANDS)
SBA loans........................................................ $ 32,356 $ 29,912
USDA loans....................................................... 8,152 6,541
Ex-Im working capital loans...................................... 4,016 3,858
Ex-Im term loans................................................. 97 743
Import loans..................................................... 1,107 -
Other commercial loans........................................... 76,312 62,616
Owner occupied commercial mortgages.............................. 18,657 17,860
Investor mortgages............................................... 5,496 5,497
Residential and other consumer loans............................. 9,899 8,371
------------------------ -------------------------
Total loans...................................................... 156,092 135,398
Less:
Discount on retained loans................................... 2,144 1,782
Net deferred loan origination costs.......................... (360) (109)
Allowance for loan losses.................................... 3,650 3,100
------------------------ -------------------------
Loans, net................................................... $ 150,658 $ 130,625
======================== =========================
Loans held for sale.............................................. $ 15,442 $ 9,070
======================== =========================
LOANS SERVICED FOR OTHERS
- -------------------------
Guaranteed Loans
SBA.......................................................... $ 208,003 $ 195,454
USDA......................................................... 51,950 45,806
Ex-Im working capital........................................ 15,276 12,183
Ex-Im term................................................... 83,990 70,611
FHLMC........................................................ 17,023 17,305
------------------------ -------------------------
376,242 341,359
Unguaranteed Portions and Unguaranteed Loans
SBA.......................................................... 52,664 51,673
USDA......................................................... 5,397 5,326
Other commercial............................................. 33,361 27,235
Home equity lines............................................ 3,122 3,484
------------------------ -------------------------
94,544 87,718
------------------------ -------------------------
Total loans serviced for others.................................. $ 470,786 $ 429,077
======================== =========================
Total loans under management..................................... $ 642,320 $ 573,545
======================== =========================
13
ALLOWANCE FOR LOAN LOSSES. The Company reviews the adequacy of the Allowance for
Loan Losses quarterly. At March 31, 1997 the Allowance totaled $2.75 million and
represented 2.2% of total loans. At March 31, 1998 the Allowance was increased
to $3.65 million from $3.1 million at December 31, 1997 to reflect the increase
in commercial loans retained on the balance sheet. The Allowance represents 2.3%
of total loans at March 31, 1998 and December 31, 1997, a level which management
has determined to be appropriate given the historic loss experience from its
core lines of business.
For the years January 1, 1994 through December 31, 1997 and the annualized
quarter ended March 31, 1998, net charge-offs from the core business of
SBA/USDA/Ex-Im/Other Commercial loans have ranged from 17 basis points to 72
basis points of gross loans.
The provision for loan losses increased to $781,000 for the quarter ended March
31, 1998 from $368,000 for the quarter ended March 31, 1997 due to a $550,000
increase in the Allowance from December 31, 1997 to March 31, 1998 to support
balance sheet growth as noted above. Net charge-offs decreased $387,000 in the
quarter ended March 31, 1998 to $231,000 from $618,000 for the quarter ended
March 31, 1997. Such net charge-offs represent 61 and 220 basis points on an
annualized basis, as a percentage of the average loan balance for the quarters
ended March 31, 1998 and 1997, respectively. As detailed below, the charge-offs
for the quarter ended March 31, 1997 are comprised principally of losses in the
investor mortgage portfolio, the majority of which were originated in the early
1990's.
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE YEAR
FOR THE THREE MONTHS ENDED
ENDED MARCH 31, DECEMBER 31,
------------------------------ ----------------
1998 1997 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses
at the beginning of the period.............. $ 3,100 $ 3,000 $ 3,000
Charge-offs:
Investor mortgage........................... - 610 1,395
SBA......................................... - - 262
USDA........................................ - - 68
Commercial.................................. 200 17 279
Private..................................... 34 - 46
Residential and other consumer.............. 8 - 195
-------- -------- --------
Total charge-offs........................... 242 627 2,245
Recoveries:
Investor mortgage........................... 9 - 6
SBA......................................... - - 13
Commercial.................................. 2 - 77
Residential and other consumer.............. - 9 10
Total recoveries............................ 11 9 106
-------- -------- --------
Net charge-offs................................ 231 618 2,139
Provision for loan losses...................... 781 368 2,239
-------- -------- --------
Balance of allowance for loan
losses at end of period...................... 3,650 2,750 $ 3,100
======== ======== ========
Total loans.................................... $156,092 $122,409 $135,398
======== ======== ========
Allowance to total loans....................... 2.3% 2.2% 2.3%
======== ======== ========
14
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 at March 31, 1998 are U.S. dollar denominated, 100% Ex-Im Bank
guaranteed and sold at origination.)
MARCH 31, DECEMBER 31,
--------- ------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
ALLOCATION OF THE ALLOWANCE BY
CATEGORY OF LOANS:
Unguaranteed Portions of:
SBA and USDA............................................. $ 999 $ 853
Ex-Im working capital loans.............................. 157 145
Commercial mortgage......................................... 289 250
Other commercial............................................ 1,463 1,052
Investor mortgage........................................... 280 269
Residential and other consumer.............................. 74 67
Unallocated................................................. 388 464
-------- --------
Total allowance for loan losses....................... $ 3,650 $ 3,100
======== ========
PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS:
Unguaranteed Portions of:
SBA and USDA............................................. 26.0% 26.9%
Ex-Im working capital.................................... 2.6 2.8
Other international loans................................ 0.7 -
Ex-Im medium term........................................... - 0.5
Commercial mortgage......................................... 12.4 14.7
Other commercial............................................ 48.5 44.8
Investor mortgages.......................................... 3.5 4.1
Residential and other consumer.............................. 6.3 6.2
-------- --------
Total................................................. 100% 100%
======== ========
15
The following table sets forth information regarding the Company's non-
performing loans at the dates indicated:
MARCH 31, DECEMBER 31,
-------- ------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Commerical:
Unguaranteed Portions:
SBA and USDA*................................. $ 1,674 $ 1,226
Ex-Im working capital......................... 81 -
Commerical mortgage................................ 39 39
Other commercial................................... 887 535
Investor mortgages.. .............................. 415 415
Consumer........................................... 148 149
-------- --------
Total non-performing loans.................... $ 3,244 $ 2,364
======== ========
Total non-performing loans to total loans.......... 2.08% 1.75%
======== ========
Total non-performing loans to total assets......... 1.41% 1.08%
======== ========
Allowance to total non-performing loans............ 113% 131%
======== ========
* 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.
The Company believes that the increase in SBA and USDA non-performing loans
reflects a seasoning of the portfolio, which has an average age of less than two
years at March 31, 1998.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $1.2 million during the
quarter ended March 31, 1998 due to the retention of earnings. The Company paid
a quarterly dividend of $.03 per share, or an aggregate of $236,000 during the
quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and funding are its deposit base and
loan sales and participations. Secondary sources of liquidity include Federal
Home Bank Loan Advances and the sale of investments.
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. Management believes
that if its sources of liquidity and funding set forth above are not sufficient,
the
16
Company would be able to obtain alternative funding sources, such as bulk loan
sales and liquidity or "warehouse funding" lines from third parties.
As of March 31, 1998 the Company had outstanding commitments to fund loans and
lines of credit of $49.9 million and had issued letters of credit totaling $26.2
million.
The Company believes that it will continue to have access to liquidity sources
to provide funding sufficient to support operating activities, loan originations
and commitments, and 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 19.7% and a Tier 1 capital to assets or
leverage ratio of 20.9% at March 31, 1998.
As in prior periods, the Company has limited exposure to market risk as it uses
no derivatives, has an investment portfolio with a short duration and has a
tolerable level of interest rate risk.
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 the 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. The Company has determined
that its deposit item processing system could not be readily made to be year
2000 compliant and outsourced this function in the first quarter of 1998. All
other major systems are supported by third party vendors. The Company has
developed a plan to address the issues raised by the Federal Financial
Institutions Examination Council and is in the process of working with all of
its service providers and software vendors to assure that the Company is
prepared for the year 2000. Management does not anticipate that the Company
will incur significant operating expense or be required to invest heavily in
computer system improvements to be year 2000 compliant.
17
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 the remaining net proceeds of its underwritten
public offering, which had an effective date of September 22, 1997, to
the Bank to be used for its general purposes, including the
origination of loans.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
3 (i) Amended and Restated Exhibits of Incorporation of the
Registrant*
(ii) Amended and Restated By-laws of the Registrant"
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
first quarter of 1998.
18
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 12, 1998 By: /s/ Brett N. Silvers
------------ ----------------------------------
Brett N. Silvers
Its President
Date: May 12, 1998 By: /s/ Leslie A. Galbraith
------------ ------------------------------------
Leslie A. Galbraith
Its Treasurer and Secretary
and Chief Financial Officer
19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
20