SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 July 31, 1998 was 7,912,037.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
------
JUNE 30, DECEMBER 31,
------------- ----------------
1998 1997
(UNAUDITED)
Cash and cash equivalents................................ $ 44,601 $ 17,394
Investment securities.................................... 21,090 22,271
Loans, net .............................................. 129,169 130,625
Loans held-for-sale...................................... 7,847 9,070
Premises and equipment, net ............................. 3,886 2,694
Receivable from loans sold .............................. 34,555 28,775
Prepaid expenses and other assets ....................... 9,622 8,022
------------- ----------------
Total assets........................................ $ 250,770 $ 218,851
============= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
JUNE 30, DECEMBER 31,
------------- ----------------
1998 1997
(UNAUDITED)
Deposits ................................................ $ 200,201 $ 172,321
Other liabilities........................................ 4,595 4,382
------------- ----------------
Total liabilities................................... 204,796 176,703
Stockholders' equity:
Common stock, 7,910,537 and 7,866,735
shares issued and outstanding.......................... 791 787
Paid-in capital in excess of par value................... 32,229 32,083
Stockholder note receivable.............................. (909) (877)
Unrealized holding gain on investments
available-for-sale, net............................... 349 12
Retained earnings........................................ 13,514 10,143
------------- ----------------
Total stockholders' equity......................... 45,974 42,148
------------- ----------------
Total liabilities and stockholders' equity......... $ 250,770 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME:
Loans, including net fees.............................. $ 3,859 $ 2,972 $ 7,855 $ 5,830
Investment securities.................................. 235 244 551 479
Federal funds sold..................................... 310 147 472 313
--------- --------- ---------- ----------
Total interest income.......................... 4,404 3,363 8,878 6,622
INTEREST EXPENSE:
Deposits............................................... 1,920 1,539 3,590 2,992
Other.................................................. 3 12 15 19
--------- --------- --------- ---------
Total interest expense......................... 1,923 1,551 3,605 3,011
--------- --------- --------- ---------
Net interest income.................................... 2,481 1,812 5,273 3,611
PROVISION FOR POSSIBLE LOAN LOSSES.......................... 1,125 591 1,906 959
--------- --------- --------- ---------
Net interest income after
provision for possible loan losses............. 1,356 1,221 3,367 2,652
NON-INTEREST INCOME:
Gain (loss) on sale of:
Guaranteed commercial loans.................... 3,276 2,716 5,972 4,821
Unguaranteed portions of commercial loans...... 2,365 370 2,482 370
Other commercial loans......................... (77) 167 (72) 228
Residential loan sales......................... (27) 3 (23) 59
--------- --------- --------- ---------
Total gain on loan sales.................... 5,537 3,256 8,359 5,478
Loan servicing income and other fees................... 1,059 593 1,985 1,121
Service charges and other deposit fees................. 146 114 291 204
Other income........................................... 220 - 235 -
--------- --------- --------- ---------
Total non-interest income................... 6,962 3,963 10,870 6,803
--------- --------- --------- ---------
Total operating income................................. 8,318 5,184 14,237 9,455
NON-INTEREST EXPENSE:
Salaries and benefits.................................. 2,765 2,226 5,002 3,952
Occupancy.............................................. 377 242 748 453
Furniture and equipment................................ 243 163 468 311
Outside services....................................... 198 201 298 285
Office expenses........................................ 198 135 382 220
Marketing.............................................. 258 186 455 341
Loan collection........................................ 30 103 88 97
Other.................................................. 221 158 390 251
--------- --------- --------- ---------
Total non-interest expense..................... 4,290 3,414 7,831 5,910
--------- --------- --------- ---------
Income before income taxes............................ 4,028 1,770 6,406 3,545
PROVISION FOR INCOME TAXES ................................. 1,587 729 2,562 1,492
--------- --------- --------- ---------
NET INCOME..................................... $ 2,441 $ 1,041 $ 3,844 $ 2,053
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE............................. $ 0.31 $ 0.18 $ 0.49 $ 0.35
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE........................... $ 0.30 $ 0.18 $ 0.47 $ 0.35
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
3
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities.................. $ 5,628 $ (5,306)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans................................................ (5,890) (9,358)
Purchase of investment securities available for sale................. (8,693) (1,280)
Proceeds from maturities and principal repayments of
investment securities available for sale............................ 4,669 1,417
Proceeds from maturities and principal repayments of
investment securities held to maturity.............................. 4,564 41
Proceeds from sale of investment securities.......................... 1,102 -
Capital expenditures, net............................................ (1,627) (951)
----------- -----------
Net cash used in investing activities.......................... (5,875) (10,131)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits............................................. 27,880 14,331
Net decrease in other borrowings..................................... (104) (1,003)
Proceeds from issuance of common stock............................... 151 12
Dividends paid....................................................... (473) (330)
----------- -----------
Net cash provided by financing activities...................... 27,454 13,010
Net increase in cash and cash equivalents............................... 27,207 (2,427)
Cash and cash equivalents at beginning of period........................ 17,394 18,867
----------- -----------
Cash and cash equivalents at end of period.............................. $ 44,601 $ 16,440
=========== ===========
See accompanying notes to unaudited condensed 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 as well as those of a special purpose,
bankruptcy remote subsidiary established in June 1998 to facilitate the
completion of loan securitizations. 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,"
which 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 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 six
month periods ended June 30, 1998 and 1997 such components of comprehensive
income totaled $337,000 and $44,000, after income taxes, respectively. All
amounts were comprised only of changes in the valuation allowance for the
investment portfolio.
2. RECENT ACCOUNTING PRONOUNCEMENTS
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.
SFAS No. 132
- ------------
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement, which is effective
for the Company's year ending December 31, 1998, changes employers' disclosures
related to pension and other postretirement plans. This statement will not
impact the Company's disclosures related to its defined contribution plan.
6
SFAS No. 133
- ------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which is effective for all statements
issued after December 31, 2000. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities, and
requires that all derivatives be recognized as either assets or liabilities in
the entity's balance sheet and be measured at fair value. Changes in the fair
value of the derivative instruments are to be recognized depending on the
intended use of the derivative and whether or not it has been designated as a
hedge. This statement will not impact the Company's financial statements, since
the Company does not currently hold any derivative instruments or engage in any
hedging activities.
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, including related interest-only strips, and (iv)
the Company's lending concentration in the Northeast United States, which 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.
7
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.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR JUNE 30, THE SIX MONTHS ENDED JUNE 30,
--------------------------------------- -----------------------------
1998 1997 % CHANGE 1998 1997 % CHANGE
---- ---- -------- ---- ---- --------
(amounts in thousands, except per share amounts)
Net interest income.......................... $ 2,481 $ 1,812 37% $ 5,273 $ 3,611 46%
Provision for loan losses.................... 1,125 591 90% 1,906 959 99%
--------- --------- -------- --------- -------- --------
Net interest income after provision..... 1,356 1,221 11% 3,367 2,652 27%
Gain on loan sales........................... 5,537 3,256 70% 8,359 5,478 53%
Other non-interest income.................... 1,425 707 102% 2,511 1,325 90%
Non-interest expense......................... 4,290 3,414 26% 7,831 5,910 33%
--------- --------- -------- --------- -------- --------
Income before income taxes.............. 4,028 1,770 128% 6,406 3,545 81%
Income taxes................................. 1,587 729 118% 2,562 1,492 72%
--------- --------- -------- --------- -------- --------
Net income......................... $ 2,441 $ 1,041 134% $ 3,844 $ 2,053 87%
========= ========= ======== ========= ======== ========
Basic earnings per share ............ $ 0.31 $ 0.18 $ 0.49 $ 0.35
========= ========= ========= ========
Diluted earnings per share........... $ 0.30 $ 0.18 $ 0.47 $ 0.35
========= ========= ========= ========
Weighted average shares - basic...... 7,903 5,774 7,887 5,773
========= ========= ========= ========
Weighted average shares - diluted.... 8,214 5,870 8,206 5,871
========= ========= ========= ========
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997:
NET INCOME. Net income increased 87% or $1.8 million for the six month period
ended June 30, 1998 when compared to the six month period ended June 30, 1997
due to increases in net interest income, gain on loan sales and loan servicing
income net of a 33% increase in non-interest expense, which is reflective of the
increases in the Company's on and off-balance sheet loan serviced portfolios.
Diluted earnings per share increased 34% or $.12 to $.47 per share for the six
month period ended June 30, 1998 from $.35 per share for the six month period
ended June 30, 1997 and reflects a 40% increase in the number of shares
outstanding due to the Company's September 1997 offering.
NET INTEREST INCOME. Net interest income increased 46% for the six month period
June 30, 1998 when compared to the same period ending June 30, 1997 due to a 33%
or $46.9 million increase in average earning assets with only a 17% or $20.8
million increase in average earning liabilities due to deployment of the $23.8
million net proceeds from the Company's September 1997 public offering. The net
interest spread remained relatively flat for each period.
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 SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
June 30, 1998 June 30, 1997
---------------------------------- ---------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED/ YIELD/ AVERAGE EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
---------------------------------- ---------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS:
Loans (2):
Commercial......................................... $144,980 $ 7,523 10.38% $103,553 $ 5,426 10.48%
Residential........................................ 6,494 258 7.95% 9,402 335 7.13%
Other consumer..................................... 1,624 74 9.19% 1,465 69 9.50%
-------- ------- ------- ------- ------- ------
Total loans......................................... 153,098 7,855 10.26% 114,420 5,830 10.19%
Investment securities............................... 18,810 551 5.86% 16,226 479 5.90%
Federal funds sold.................................. 17,479 472 5.45% 11,826 313 5.34%
-------- ------- ------- ------- ------- ------
Total investment securities and funds sold.......... 36,289 1,023 5.66% 28,052 792 5.67%
-------- ------- ------- ------- ------- ------
Total earning assets................................ 189,387 8,878 9.38% 142,472 6,622 9.30%
Total non-earning assets............................ 30,668 20,115
-------- -------
Total assets........................................ $220,055 $162,587
======== ========
LIABILITIES:
Deposits:
Interest bearing demand deposits................... 8,149 $ 99 2.45% $6,955 $ 87 2.52%
Premier money market............................... 83,256 2,222 5.38% 68,586 1,771 5.21%
Other savings...................................... 8,593 123 2.89% 4,665 44 1.90%
Certificates of deposit............................ 30,055 878 5.89% 31,882 916 5.79%
IRA certificates of deposit........................ 9,416 268 5.74% 6,456 174 5.44%
-------- ------- ------ ------- ------- ------
Total deposits...................................... 139,469 3,590 5.19% 118,544 2,992 5.09%
Other borrowings.................................... 651 15 4.65% 749 19 5.12%
-------- ------- ------ ------- ------- ------
Total interest bearing liabilities.................. 140,120 3,605 5.19% 119,293 3,011 5.09%
-------- ------- ------ ------- ------- ------
Non-interest bearing liabilities:
Demand deposits.................................... 34,933 26,292
Other liabilities.................................. 2,470 2,250
-------- -------
Total non-interest bearing liabilities.............. 37,403 28,542
Stockholders' equity................................ 42,532 14,752
-------- -------
Total liabilities and stockholders' equity........... $220,055 $162,587
======== ========
Net interest income/net interest spread............. $ 5,273 4.19% $ 3,611 4.21%
======= ====== ======= ======
Net interest margin................................. 5.54% 5.04%
======
1998 COMPARED TO 1997
CHANGES DUE TO (3):
-----------------------------------
VOLUME RATE TOTAL
-----------------------------------
ASSETS:
Loans (2):
Commercial............................................... $ 2,150 $ (53) $ 2,097
Residential.............................................. (116) 39 (77)
Other consumer........................................... 7 (2) 5
------- ------ -------
Total loans............................................... 2,041 (16) 2,025
Investment securities..................................... 76 (4) 72
Federal funds sold........................................ 153 6 159
------- ------ -------
Total investment securities and funds sold................ 229 2 231
------- ------ -------
Total earning assets...................................... 2,270 (14) 2,256
Total non-earning assets..................................
Total assets..............................................
LIABILITIES:
Deposits:
Interest bearing demand deposits......................... $ 15 $ (3) $ 12
Premier money market..................................... 392 59 451
Other savings............................................ 56 23 79
Certificates of deposit.................................. (53) 15 (38)
IRA certificates of deposit.............................. 84 10 94
------- ------ -------
Total deposits............................................ 494 104 598
Other borrowings.......................................... (2) (2) (4)
------- ------ -------
Total interest bearing liabilities........................ 492 102 594
------- ------ -------
Non-interest bearing liabilities:
Demand deposits..........................................
Other liabilities........................................
Total non-interest bearing liabilities....................
Stockholders' equity......................................
Total liabilities and stockholders' equity.................
Net interest income/net interest spread................... $ 1,778 $ (116) $ 1,662
======= ====== =======
Net interest margin.......................................
(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 34% or $2.3 million to $8.9 million
for the six month period ended June 30, 1998 from $6.6 million for the six month
period ended June 30, 1997 due to a 40% or $41.4 million increase in the average
balance of commercial loans, reflecting strong unguaranteed commercial loan
originations in the first six months of 1998. The average balance of federal
funds sold increased $5.7 million, or 48% to fund loan and line of credit
commitments for the six month period ended June 30, 1998 when compared to the
six month period ended June 30, 1997.
INTEREST EXPENSE. Interest expense increased 20% or $594,000, to $3.6 million
for the six month period ended June 30, 1998 from $3.0 million for the six month
period ended June 30, 1997 as the average balance of interest-bearing deposits
increased 18% or $20.9 million. The average balance of higher costing premier
deposit products increased 21% or $14.7 million while the rate on these deposits
increased 17 basis points for the six month period ended June 30, 1998 when
compared to the six month period ended June 30, 1997 reflecting an increase in
the external index as well as a shift to higher balance accounts.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
totaled $1.9 million for the six month period ended June 30, 1998 as compared to
$959,000 for the six month period ended June 30, 1997. The increase reflects an
additional provision made to bring the Allowance for Loan Losses to $4.0 million
at June 30, 1998 from $3.1 million at December 31, 1997 to provide for an
increasing percentage of unguaranteed commercial loans, and a general seasoning
of the portfolio. See "Allowance for Loan Losses" for further analysis of the
provision and related data.
10
NON-INTEREST INCOME. Non-interest income is comprised of the following items:
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
NON-INTEREST INCOME: 1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Gain (loss) on loan sales:
SBA sales................................. $ 2,998 $ 2,560
USDA sales................................ 1,136 1,205
Ex-Im working capital sales............... 279 89
Ex-Im medium term sales................... 1,559 967
Unguranteed portions of SBA and USDA...... 2,482 370
Other commercial sales.................... (72) 228
Residential sales......................... (23) 59
---------- ----------
Total gain on loan sales............... 8,359 5,478
Loan servicing income and other fees....... 1,985 1,121
Service charges and other deposit fees..... 291 204
Other income............................... 235 -
---------- ----------
Total non-interest income.................. $ 10,870 $ 6,803
========== ==========
The 60% or $4.1 million increase in non-interest income for the six month period
ended June 30, 1998 as compared to the six month period ended June 30, 1997 was
due primarily to a 53% or $2.9 million increase in the gain on the sale of loans
and a 77% or $864,000 increase in loan servicing income and fees.
In June 1998, the Company completed its first securitization of unguaranteed
portions of SBA loans totaling $27 million, which included a prefunding account
of $7 million and resulted in a gain of $2.4 million. Approximately one half of
the loans included in the securitization were originated in 1998. The Company
obtained a Aa3 rating from Moody's Investor Service for the senior security and,
as required by SBA regulations, retained the $2.7 million subordinated
certificate. This subordinated certificate, along with a cash reserve or
"spread" account provided the credit enhancement necessary to obtain the Aa3
rating on the senior security. The balance of the spread account totaled
$807,000 at June 30, 1998 and is included as restricted cash in the consolidated
balance sheet. In connection with this transaction, the Company has recorded an
interest-only strip totaling $2.4 million which represents the net present value
of estimated cash flows due to the Company as servicer, after providing for
estimated losses and prepayments on the underlying loans.
Year to date gains at June 30, 1998 on Ex-Im medium term loan sales increased
65% to $1.6 million from $967,000 for the same period last year, as the
Company's international marketing efforts and contractual marketing
representative referrals continue to be converted to loan closings. The Company
also introduced privately insured short and medium term loan products
11
which provide an alternative to the Company's Ex-Im Bank guaranteed loans to
foreign buyers of U. S. made goods. This insurance, which covers 95% of the
commercial risk, is provided by a major triple A rated private company.
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.
Detailed below are the components of this servicing income:
LOAN SERVICING INCOME AND FEES FOR THE SIX MONTHS ENDED
- ------------------------------
JUNE 30,
------------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Loan Servicing Income:
SBA guaranteed loans......................... $ 626 $ 574
USDA guranteed loans......................... 148 125
Ex-Im working capital loans.................. 111 77
Ex-Im term loans............................. 180 56
Other commercial loans....................... 67 58
Residential and consumer loans............... 32 26
---------- ----------
Total loan servicing income................... 1,164 916
Other fees.................................... 821 205
---------- ----------
Total loan servicing income and other fees.... $ 1,985 $ 1,121
========== ==========
LOANS SERVICED FOR OTHERS
- -------------------------
(AT PERIOD END)
Outstanding balance........................... $ 537,498 $ 344,898
========== ==========
The 27% or $248,000 increase in loan servicing income reflects the 58% or $178
million increase in the average balance of loans serviced for others to $483.3
million for the six month period ended June 30, 1998 and reflects an increasing
amount of Ex-Im terms loans which are semi-annual pay and carry a lower
servicing fee. See "Loans" below for further details of the Serviced for Others
Loan Portfolio.
The $616,000 increase in other fees is due to a gain of $125,000 on the sale of
residential mortgage servicing rights and an $83,000 gain on the sale of the
Company's merchant credit card servicing commissions as the Company divested
operational functions not directly related to its primary commercial loan
servicing business. Additionally, letter of credit fees increased $118,000 or
98% due to a greater demand from the Company's exporting borrowers for letters
of credit and fees forfeited by potential borrowers who chose not to close loans
with the Company also increased during the period.
12
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following items:
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
---- ----
NON-INTEREST EXPENSE: (DOLLARS IN THOUSANDS)
Salaries and benefits..................... $ 5,002 $ 3,952
Occupancy................................. 748 453
Furniture and equipment................... 468 311
Outside services.......................... 298 285
Office expenses........................... 382 220
Marketing expenses........................ 455 341
Loan collection........................... 88 97
Other..................................... 390 251
---------- ----------
Total non-interest expense......... $ 7,831 $ 5,910
========== ==========
The 33% or $1.9 million increase in non-interest expense for the six month
period ended June 30, 1998 as compared to the same period ended June 30, 1997
reflects the 38% increase in full time employees to 157 from 114 and related
costs, as well as a shift to more professionals. The number of loan officers
increased 97% to 57 at June 30, 1998 from 29 at June 30, 1997 as more staff was
added to the Company's newer domestic representative offices and the Hartford-
based international banking business units expanded.
The 65% or $295,000 increase in occupancy expense reflects additional
headquarters space leased to house new hires, the move from temporary leased
space in Washington, D. C. and Pittsburgh, Pennsylvania and the opening of new
offices in Rochester, New York and Philadelphia, Pennsylvania in the Spring of
1997, resulting in a full period's expense in 1998. Furniture and equipment
expense increased 51% or $157,000 during this period as the Company's new
facilities were equipped, resulting in an increase in depreciable assets.
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. Certain of these expenditures 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 49% and 57% for
the six month periods ended June 30, 1998 and 1997, respectively.
INCOME TAXES. The Company's effective tax rates decreased to 40% for the six
month period ending June 30, 1998 from 42% for the six month period ended June
30, 1997 reflecting a 1% decrease in the State of Connecticut statutory tax
rate, the effect of the blended effective tax rate for the various states in
which the Company operates and the benefit of a dividend received deduction on
certain investments.
13
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997:
NET INCOME. The 135% or $1.4 million increase in earnings for the quarter
ended June 30, 1998 as compared to the quarter ended June 30, 1997 also reflects
the increases in the Company's on and off-balance sheet loan serviced
portfolios.
Diluted earnings per share increased 67% or $.12 to $.30 for the quarter ended
June 30, 1998 from $.18 per share for the quarter ended June 30, 1997, and
reflects a 40% increase in the weighted average shares outstanding.
NET INTEREST INCOME. Net interest income increased 37% or $669,000 for the
quarter ended June 30, 1998 as compared to the quarter ended June 30, 1997 due
to a $50 million, or 35% increase in average interest earning assets, reflecting
the deployment of $23.8 million in public stock offering proceeds. The net
interest spread decreased 48 basis points, due to a 27 basis point decrease in
the yield on commercial loans and a 21 basis point increase in deposit rates as
explained below.
14
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
JUNE 30, 1998 JUNE 30, 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.................................... $ 147,305 $ 3,708 10.07% $ 108,228 $ 2,810 10.39% $ 984 $ (86) $ 898
Residential................................... 5,339 118 8.84% 6,482 122 7.53% (25) 21 (4)
Other consumer................................ 1,460 33 9.07% 1,667 40 9.63% (5) (2) (7)
---------- -------- -------- --------- -------- --------- ------ ------- -------
Total loans..................................... 154,104 3,859 10.02% 116,377 2,972 10.22% 954 (67) 887
Investment securities........................... 16,195 235 5.80% 16,604 244 5.88% (6) (3) (9)
Federal funds sold.............................. 23,289 310 5.34% 10,589 147 5.57% 169 (6) 163
---------- -------- -------- --------- -------- -------- ------- ------- -------
Total investment securities and funds sold...... 39,484 545 5.53% 27,193 391 5.76% 163 (9) 154
---------- -------- -------- --------- -------- -------- ------- ------- -------
Total earning assets............................ 193,588 4,404 9.10% 143,570 3,363 9.37% 1,117 (76) 1,041
Total non-earning assets........................ 32,559 21,264
---------- ---------
Total assets.................................... $ 226,147 $ 164,834
========== =========
Liabilities:
Deposits:
Interest bearing demand deposits.............. $ 8,643 $ 54 2.51% $ 7,024 $ 45 2.57% $ 10 $ (1) $ 9
Premier money market.......................... 83,400 1,114 5.36% 70,061 909 5.20% 178 27 205
Other savings................................. 9,007 81 3.61% 5,453 29 2.13% 32 20 52
Certificates of deposit....................... 35,822 538 6.02% 31,947 466 5.85% 58 14 72
IRA certificates of deposit................... 9,366 133 5.70% 6,422 90 5.62% 42 1 43
Total deposits.................................. ---------- -------- -------- --------- -------- -------- ------ -------- -------
146,238 1,920 5.27% 120,907 1,539 5.11% 320 61 381
Other borrowings................................ 692 3 1.74% 967 12 4.98% (1) (8) (9)
Total interest bearing liabilities.............. ---------- -------- -------- --------- -------- -------- ------- ------- -------
146,930 1,923 5.31% 121,874 1,551 5,10% 319 53 372
---------- -------- -------- --------- -------- -------- ------- ------- -------
Non-interest bearing liabilities:
Demand deposits............................... 34,070 25,426
Other liabilities............................. 1,981 2,323
Total non-interest bearing liabilities.......... ---------- ---------
36,051 27,749
Stockholders' equity............................ 43,166 15,211
Total liabilities and stockholders' equity...... ---------- ---------
$ 226,147 $ 164,834
========== =========
Net interest income/net interest spread......... $ 2,481 3.79% $ 1,812 4.27% $ 798 $(129) $ 669
======== ======== ======== ======== ======= ======= =======
Net interest margin............................. 5.12% 5.04%
======== ========
(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.
INTEREST INCOME. Interest income increased 31% or $1.0 million for the quarter
ended June 30, 1998 as compared to the quarter ended June 30, 1997 due to a
$39.0 million increase in the average balance of commercial loans, as commercial
originations increased for the quarter. The effect of such increase was
partially offset by a 27 basis point decrease in the yield on assets as certain
higher yielding commercial loans were sold from the portfolio in 1998 and a
greater percentage of funds were held in liquid investments.
15
INTEREST EXPENSE. Interest expense increased 24% or $372,000 for the quarter
ended June 30, 1998 when compared to the quarter ended June 30, 1997 due to a
21% or $25 million increase in the average balance of interest bearing
deposits. The average balance of higher priced premier savings deposits
increased 19% or $13.3 million for the quarter ended June 30, 1998 from June 30,
1997 resulting in an increase in interest expense of $178,000 for the quarter.
Increases in rates on premier savings and other deposits accounted for a further
increase of $61,000.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
totaled $1.1 million for the quarter ended June 30, 1998 as compared to $591,000
for the quarter ended June 30, 1997 to provide for an increasing percentage of
unguaranteed commercial loans, and a general seasoning of the portfolio. 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
JUNE 30,
--------------------------
NON-INTEREST INCOME: 1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Gain (loss) on loan sales:
SBA sales................................ $ 1,690 $ 1,461
USDA sales............................... 568 673
Ex-Im working capital sales.............. 199 68
Ex-Im medium term sales.................. 818 514
Unguaranteed portions of SBA and USDA.... 2,365 370
Other commercial sales................... (77) 167
Residential sales........................ (26) 3
----------- ---------
Total gain on loan sales.................. 5,537 3,256
Loan servicing income and other fees...... 1,059 593
Service charges and other deposit fees.... 146 114
Other income.............................. 220 -
----------- ---------
Total non-interest income................. $ 6,962 $ 3,963
=========== =========
The 76% or $3.0 million increase in non-interest income for the three month
period ended June 30, 1998 as compared to the three month period ended June 30,
1997 was due primarily to a $2.3 million increase in gain on loan sales and a
$466,000 increase in loan servicing and other fee income.
The 70% increase in gain on loan sales was attributable to a securitization of
the unguaranteed portions of SBA loans as explained earlier, which resulted in a
gain of $2.4 million, as well as a 59% or $304,000 increase in gains on Ex-Im
medium term loan sales due to an increase in the volume of such loans sold in
the quarter ended June 30, 1998 over the same quarter last year.
16
The 79% or $466,000 increase in loan servicing income and other fee income as
detailed below, includes a 21% or $108,000 increase in loan servicing income,
reflecting an increase in the balance of commercial loans serviced for others,
which totaled $537.5 million at June 30, 1998, as well as a $358,000 increase in
other fees. During the period, the Company sold its residential mortgage
servicing rights for a gain of $125,000 and its merchant credit card servicing
commissions for $83,000 to divest of operational functions not directly related
to its primary commercial loan servicing business. Additionally, letter of
credit fee income and fees forfeited by potential borrowers who chose not to
close loans with the Company increased during the period.
LOAN SERVICING INCOME AND FEES FOR THE THREE MONTHS ENDED
- ------------------------------
JUNE 30,
--------------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Loan Servicing Income:
SBA guaranteed loans......................... $ 345 $ 295
USDA guaranteed loans........................ 72 76
Ex-Im working capital loans.................. 55 39
Ex-Im terms loans............................ 85 43
Other commercial loans....................... 38 37
Residential and consumer loans............... 16 13
--------- ----------
Total loan servicing income................. 611 503
Other fees.................................... 448 90
--------- ----------
Total loan servicing income and other fees.... $ 1,059 $ 593
========= ==========
LOANS SERVICED FOR OTHERS
- -------------------------
(AT PERIOD END)
Outstanding balance........................... $ 537,498 $ 344,898
========= ==========
17
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following items:
FOR THE THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
---- ----
NON-INTEREST EXPENSES: (DOLLARS IN THOUSAND)
Salaries and benefits................... $ 2,765 $ 2,226
Occupancy............................... 377 242
Furniture and equipment................. 243 163
Outside services........................ 198 201
Office expenses......................... 198 135
Marketing expenses...................... 258 186
Loan collection......................... 30 103
Other................................... 221 158
-------- --------
Total non-interest expense........... $ 4,290 $ 3,414
======== ========
The 26% or $876,000 increase in non-interest expense for the quarter ended June
30, 1998 as compared to the quarter ended June 30, 1997 reflected the 38%
increase in full time employees to 157 from 114 over the period and related
personnel costs, as well as a shift to more highly compensated employees. Non-
personnel expenses increased 38% for the quarter ended June 30, 1998 due to an
increase in occupancy and marketing 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 45% and 59% for
the quarters ended June 30, 1998 and 1997, respectively.
INCOME TAXES. The Company's effective tax rates decreased to 40% for the
quarter ended June 30, 1998 from 41% for the quarter ended June 30, 1997
reflecting a 1% decrease in the State of Connecticut statutory tax rate, the
effect of the blended effective tax rate for the various states in which the
Company operates and the benefit of a dividend received deduction on certain
investments.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION TO JUNE 30, 1998 FROM DECEMBER 31,
1997
GENERAL. Total assets increased 15% or $31.9 million to $250.8 million at June
30, 1998 from $218.9 million at December 31, 1997, due to increases in federal
funds sold and a 20% or $5.8 million increase in receivable from loans sold.
This growth was funded by growth in savings and time deposit accounts.
INVESTMENT SECURITIES. Investment securities portfolios totaled $21.1 million
at June 30, 1998, representing a decrease of 5% or $1.2 million from the
December 31, 1997 balance of $22.3 million.
18
LOANS. The loan portfolio and loan serviced portfolio were as follow:
JUNE 30, DECEMBER 31,
LOAN PORTFOLIO 1998 1997
- -------------- ------------- ---------------
(DOLLARS IN THOUSANDS)
SBA loans......................................... $ 14,391 $ 29,912
USDA loans........................................ 7,661 6,541
Ex-Im working capital loans....................... 3,429 3,858
Ex-Im term loans.................................. 1,644 743
Insured international term loans.................. 259 -
Import loans...................................... 3,263 -
Production equipment.............................. 544 -
Other commercial loans............................ 85,246 62,616
Owner occupied commercial mortgages............... 8,511 17,860
Investor mortgages................................ 4,647 5,497
Residential and other consumer loans.............. 4,313 8,371
------------- ---------------
Total loans....................................... 133,908 135,398
Less:
Discount on retained loans..................... 1,335 1,782
Net deferred loan origination costs............ (596) (109)
Allowance for loan losses...................... 4,000 3,100
------------- ---------------
Loans, net..................................... $ 129,169 $ 130,625
============= ===============
Loans held for sale............................... $ 7,847 $ 9,070
============= ===============
LOANS SERVICED FOR OTHERS
Guaranteed Loans
SBA............................................ $ 227,426 $ 195,454
USDA........................................... 59,848 45,806
Ex-Im working capital.......................... 13,904 12,183
Ex-Im term..................................... 92,993 70,611
FHLMC......................................... - 17,305
------------- ---------------
394,171 341,359
Unguaranteed Portions and Unguaranteed Loans
SBA............................................ 50,255 51,673
USDA........................................... 5,352 5,326
Securitized unguaranteed SBA loans............. 21,883 -
Other commercial............................... 63,272 27,235
Home equity lines.............................. 2,565 3,484
------------- ---------------
143,327 87,718
------------- ---------------
Total loans serviced for others................... $ 537,498 $ 429,077
============= ===============
Total loans under management...................... $ 679,253 $ 573,545
============= ===============
19
Originations aggregated $181.3 million for the six months ended June 30, 1998
while loan sales amounted to $157.1 million for the period. The Company
completed a securitization of the unguaranteed portions of SBA loans,
approximately $13 million of which were included in the Company's loan portfolio
at December 31, 1997. The Company also sold certain owner occupied commercial
mortgages and residential mortgages from portfolio to provide liquidity for
current marketing efforts. Additionally, the servicing rights related to the
Company's recent residential sale and its FHLMC portfolio were sold to enable
the servicing personnel to focus on the core commercial servicing operations.
The increase in net deferred loan origination costs reflects an increase in net
deferred costs due to the volume of loans originated and held in portfolio less
a reduction in fees deferred when certain loans were sold from portfolio and
such fees recognized as income during the period.
ALLOWANCE FOR LOAN LOSSES. The Company reviews the adequacy of the Allowance
for Loan Losses quarterly. At June 30, 1998 the Allowance totaled $4.0 million
and represented 3.0% of total loans. The Allowance totaled $3.1 million and
represented 2.3% loans at December 31, 1997. The overall increase in the
allowance is due to an increasing percentage of unguaranteed commercial loans
and a general seasoning of the commercial loan portfolio as well as the
introduction of new loan products where the Company had limited historical
experience. Management has determined the current level of the Allowance to be
appropriate given the historic loss experience from its core lines of business.
Net charge-offs for the six month periods ended June 30, 1998 remained
relatively flat at $1 million as compared to the same period in the prior year.
Annualized net charge-offs as a percentage of average loans totaled 1.29% at
June 30, 1998 down from 1.64% at June 30, 1997. Net charge-offs from the
investor mortgage portfolio declined significantly for the six months ended June
30, 1998 to 10% of net charge-offs compared to 84% of net charge-offs for the
six months ended June 30, 1997 as the portfolio balance decreased and problems
with the underlying properties were resolved. Management believes that the
increase in the dollar amount of charge-offs from the Company's "core" SBA and
commercial portfolios reflects the seasoning of such portfolios.
20
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE YEAR
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31,
-----------------------------------------------------------
1998 1997 1998 1997 1997
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses
at the beginning of the period........... $ 3,650 $ 2,750 $ 3,100 $ 3,000 $ 3,000
Charge-offs:
Investor mortgage........................ 223 190 223 801 1,395
SBA...................................... 299 74 299 74 262
USDA..................................... - - - - 68
Commercial............................... 335 - 535 17 279
Private.................................. 49 - 83 1 46
Residential and other consumer........... - 78 8 78 195
--------- -------- -------- -------- ---------
Total charge-offs........................ 906 342 1,148 971 2,245
Recoveries:
Investor mortgage........................ 113 - 123 - 6
SBA...................................... - - - - 13
Commercial............................... 18 1 19 3 77
Residential and other consumer........... - - - 9 10
--------- -------- -------- -------- ---------
Total recoveries......................... 131 1 142 12 106
--------- -------- -------- -------- ---------
Net charge-offs............................. 775 341 1,006 959 2,139
Provision for loan losses................... 1,125 591 1,906 959 2,239
--------- -------- -------- -------- ---------
Balance of allowance for loan
losses at end of period.................. $ 4,000 $ 3,000 $ 4,000 $ 3,000 $ 3,100
========= ======== ======== ======== =========
Total loans................................. $ 133,908 $118,189 $133,908 $118,189 $ 135,398
========= ======== ======== ======== =========
Allowance to total loans.................... 3.0% 2.5% 3.0% 2.5% 2.3%
========= ======== ======== ======== =========
As noted below, total non-performers remain under 2% and the Allowance provides
coverage equal to 156% of non-performers at June 30, 1998.
JUNE 30, DECEMBER 31,
-------- ------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
Commercial:
Unguaranteed portions of SBA and USDA.......... $ 1,757 $ 1,226
Commercial mortgage............................ 10 39
Other commercial............................... 744 535
Investor mortgages............................. 38 415
Consumer....................................... 8 149
-------- --------
Total non-performing loans.................. $ 2,557 $ 2,364
======== ========
Total non-performing loans to total loans...... 1.91% 1.75%
======== ========
Total non-performig loans to total assets...... 1.02% 1.08%
======== ========
Allowance to total non-performing loans........ 156% 131%
======== ========
21
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 June 30, 1998 are U.S. dollar denominated, 100% Ex-Im Bank
guaranteed and sold at origination.)
JUNE 30, DECEMBER 31,
-------- ------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
ALLOCATION OF THE ALLOWANCE BY
CATEGORY OF LOANS:
Unguaranteed Portions of:
SBA and USDA............................................ $ 858 $ 853
Ex-Im working capital loans............................. 120 145
Other international loans.................................... 15 -
Commercial mortgage.......................................... 144 250
Other commercial............................................. 1,824 1,052
Investor mortgage............................................ 131 269
Residential and other consumer............................... 30 67
Unallocated.................................................. 878 464
------------- ------------
Total allowance for loan losses......................... $ 4,000 $ 3,100
============= ============
PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS:
Unguaranteed Portions of:
SBA and USDA............................................ 16.5% 26.9%
Ex-Im working capital................................... 2.6 2.8
Other international loans.................................... 2.5 -
Ex-Im medium term............................................ 1.2 0.5
Commercial mortgage.......................................... 6.9 14.7
Other commercial............................................. 63.6 44.8
Investor mortgages........................................... 3.5 4.1
Residential and other consumer............................... 3.2 6.2
------------- ------------
Total................................................... 100% 100%
============= ============
STOCKHOLDERS' EQUITY. Stockholders' equity increased $3.8 million during the
six month period ended June 30, 1998 due to the retention of earnings net of
quarterly dividends of $.03 per share, or an aggregate of $473,000. The Company
also received $151,000 from the exercise of employee and director stock options
during the period.
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.
22
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. The Company intends
to continue to use alternative funding sources such as securitizations and other
bulk loan sales and to pursue the use of liquidity or "warehouse funding" lines
from third parties to supplement its historical sources of liquidity.
As of June 30, 1998 the Company had outstanding commitments to fund loans and
lines of credit of $65.6 million and had issued letters of credit totaling $24.4
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 22.6% and a Tier 1 capital to assets or
leverage ratio of 19.5% at June 30, 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 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. The
Company has developed a plan to address all other major systems which are
supported by third party vendors and the issues raised by the Federal Financial
Institutions Examination Council. The Company is in the process of working with
all of its service providers and software vendors to prepare 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.
23
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
The annual meeting of the Registrant's stockholders was held on April
28, 1998. At such meeting, Michael R. Carter and Frank P. Longobardi
were reelected as directors of the Registrant, and an amendment of the
Registrant's Amended and Restated 1996 Stock Option Plans was
approved. Of the shares present in person or by proxy at the meeting
(i) 7,073,554 and 7,074,734 shares were voted in favor of Mr. Carter
and Mr. Longobardi, respectively; 10,430 and 9,250 shares were voted
against or were the subject of proxies in which authority to vote for
them was withheld from Mr. Carter and Mr. Longobardi, respectively;
and (ii) 6,743,869 shares were voted for the amendment to the Stock
Option Plans; 223,607 shares were voted against the amendment to the
Stock Option Plans; 57,708 shares abstained; and 58,800 shares were
the subject of broker non-votes.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
3 (i) Amended and Restated Articles 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
24
(b) Reports on Form 8-K.
The Registrant did not file any Reports on Form 8-K during the
second quarter of 1998.
* Denotes an exhibit which has previously been filed as an exhibit to the
Company's Registration Statement on Form S-1, Commission File No. 333-31339 and
which is incorporated herein by reference.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First International Bancorp, Inc.
----------------------------------------
(Registrant)
Date: August 13, 1998 By: /s/ Brett N. Silvers
--------------- -----------------------------------
Brett N. Silvers
Its President
Date: August 13, 1998 By: /s/ Leslie A. Galbraith
--------------- -----------------------------------
Leslie A. Galbraith
Its Treasurer and Secretary
and Chief Financial Officer
26
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
27