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, 1999
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-22861
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FIRST INTERNATIONAL BANCORP, INC.
---------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1151731
- -------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
280 Trumbull Street, Hartford, CT 06103
- --------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 860-727-0700
------------
Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. The number of shares of common
stock, par value $.10 per share, outstanding on April 30, 1999 was 8,159,687.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
------
March 31, December 31,
----------- ------------
1999 1998
----------- ------------
(unaudited)
Cash and cash equivalents.......................... $ 62,762 $ 58,335
Investment securities.............................. 36,545 35,619
Loans, net......................................... 102,525 108,958
Loans held-for-sale................................ 28,597 8,577
Premises and equipment, net........................ 3,544 3,815
Receivable from loans sold......................... 25,797 43,610
Prepaid expenses and other assets.................. 19,406 14,812
---------- ------------
Total assets................................... $279,176 $273,726
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, December 31,
----------- ------------
1999 1998
----------- ------------
(unaudited)
Deposits........................................... $222,751 $219,874
Other liabilities.................................. 4,365 4,781
---------- -----------
Total liabilities.............................. 227,116 224,655
Stockholders' equity;
Common stock, 8,159,687 and 7,952,637
shares issued and outstanding..................... 816 795
Paid-in capital in excess of par value, net........ 34,557 32,561
Stockholder note receivable........................ (1,980) (941)
Accumulated other comprehensive income............. 460 428
Retained earnings.................................. 18,207 16,228
---------- -----------
Total stockholders' equity..................... 52,060 49,071
---------- -----------
Total liabilities and stockholders' equity..... $279,176 $273,726
========== ===========
See accompanying notes to unaudited condensed financial statements.
2
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
(unaudited)
Three Month Ended
March 31,
------------------
1999 1998
-------- -------
Interest income:
Loans, including net fees............................ $ 2,789 $3,996
Investment securities................................ 576 316
Federal funds sold................................... 686 162
-------- ------
Total interest income............................. 4,051 4,474
Interest expense:
Deposits............................................. 2,359 1,670
Other................................................ 223 12
-------- ------
Total interest expense............................ 2,582 1,682
-------- ------
Net interest income.................................. 1,469 2,792
Provision for possible loan losses........................ 1,539 781
-------- ------
Net interest income after provision
for possible loan losses.......................... (70) 2,011
Non-interest income:
Gain on sale of:
Guaranteed loans.................................. 2,787 2,696
Other loans....................................... 34 126
Loan-backed securitizations....................... 147 -
Loans to commercial paper conduit................. 82 -
-------- ------
Total gains on loan sales................. 3,050 2,822
Loan servicing income and fees....................... 1,196 927
Service charges and other deposit fees............... 68 145
Gain on sale of branch............................... 8,915 -
Other income......................................... 16 15
-------- ------
Total non-interest income......................... 13,245 3,909
-------- ------
Total operating income............................... 13,175 5,920
Non-interest expense:
Salaries and benefits................................ 6,667 2,237
Occupancy............................................ 455 371
Office expenses...................................... 210 184
Marketing............................................ 486 260
Furniture and equipment.............................. 294 225
Outside services..................................... 318 100
Loan collection...................................... 71 58
Other................................................ 851 106
-------- ------
Total non-interest expense........................ 9,352 3,541
-------- ------
Income before income taxes........................... 3,823 2,379
Provision for income taxes................................ 1,606 976
-------- ------
Net income........................................ $ 2,217 $1,403
======== ======
Basic earnings per common share........................... $ 0.28 $ 0.18
======== ======
Diluted earnings per common share......................... $ 0.27 $ 0.17
======== ======
See accompanying notes to unaudited condensed financial statements.
3
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Three Months Ended
March 31,
---------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net cash provided by (used in) operating activities................ ($ 2,414) $ 738
---------- ----------
Cash flows from investing activities:
Net decrease (increase) in loans................................... 5,669 (22,088)
Purchase of investment securities available for sale............... (2,674) -
Purchase of equity securities available for sale................... (177) -
Proceeds from maturities and principal repayments of investment
securities available for sale..................................... 793 592
Proceeds from maturities and principal repayments of investment
securities held to maturity....................................... 237 4,030
Proceeds from sale of investment securities........................ - 1,102
Proceeds from sale of other real estate owned...................... 82 -
Proceeds from sale of branch premises.............................. 185 -
Capital expenditures, net.......................................... (173) (1,134)
---------- ----------
Net cash provided by (used in) investing activities........ 3,942 (17,498)
---------- ----------
Cash flows from financing activities:
Net increase in deposits........................................... 2,877 9,952
Net increase (decrease) in other borrowings........................ (717) 409
Proceeds from sale of common stock................................ 2,017 19
Principal payment on stockholder note receivable................... 941 -
Principal advance on stockholder note receivable................... (1,980) -
Dividends paid..................................................... (239) (236)
---------- ----------
Net cash provided by financing activities.................. 2,899 10,144
---------- ----------
Net increase (decrease) in cash and cash equivalents....................... 4,427 (6,616)
Cash and cash equivalents at beginning of period........................... 58,335 17,394
---------- ----------
Cash and cash equivalents at end of period................................. $62,762 $10,778
========== ==========
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 International Bank, National Association (the "Bank"). In 1998, the Bank
established three special purpose subsidiaries to facilitate loan
securitizations and the sale of loans to a commercial paper conduit.
Intercompany accounts and transactions have been eliminated in consolidation.
The Bank has 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; Detroit, Michigan; Cleveland, Ohio; 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. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments) that are necessary for a fair
presentation of the interim financial statements have been included. The results
of operations for the interim periods shown are not necessarily indicative of
the results to be expected for the entire fiscal year or any interim period. The
interim financial information should be read in conjunction with the Company's
Annual Report for the year ended December 31, 1998.
Certain 1998 amounts have been reclassified to conform with the 1999
presentation. These reclassifications had no impact on net income.
Comprehensive Income
- --------------------
SFAS No. 130 "Reporting Comprehensive Income," which is effective for years
beginning after December 15, 1997, established standards for the reporting and
display of comprehensive income, defined as the change in equity of a business
enterprise during a period from nonowner sources. The adoption of SFAS No. 130
requires the Company to present the impact of any change in the market value of
the "available for sale" investment portfolio or other components of
comprehensive income. For the three month periods ended March 31, 1999 and 1998
such comprehensive income totaled $32,000 and $2,000, after income taxes,
respectively. All amounts are comprised only of changes in the valuation
allowance for the investment portfolio.
5
2. Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which is effective for the Company's
financial statements issued after December 31, 1999. 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 is not expected to have a significant impact upon the
Company's financial position, results of operations or cash flows.
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
relying on non-interest income, principally gains on the sale of domestic and
international commercial loans and related servicing income, in an increasingly
competitive market for loan originations, (iii) disruption in the U.S. capital
markets delaying or preventing the Company from receiving funding under
warehouse lines of credit or completing loan sales or securitizations, and (iv)
the Company's ability to accurately estimate loan losses and calculate the value
of its servicing assets, including related interest-only strips. 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 December 1998 Form 10-K
filing with the Securities and Exchange Commission. The forward-looking
statements contained herein represent the Company's judgment as of the date of
this Form 10-Q, and the Company cautions readers not to place undue reliance on
such statements.
General
The Company's earnings have been historically derived from (i) the origination,
sale and securitization of government guaranteed and other commercial loans,
(ii) net interest income, which is the difference between interest earned on
interest-earning assets (principally loans) and interest-bearing liabilities
(principally deposits), and (iii) fee income on loans serviced for others.
On March 26, 1999, the Company sold its last retail branch and its checking and
savings accounts. The Company retained its certificates of deposit and continues
to offer certificates of deposit to retail and brokered depositors. The Company
also expects to obtain funding for its operations from warehouse lines of
credit, the sale of loans on a loan-by-loan basis, private placement
securitizations and from the sale of loans to a commercial paper conduit.
7
Results of Operations
For the Three Months Ended March 31,
------------------------------------------------
1999 1998 % Change
--------------- ------------- ----------------
(amounts in thousands, except per share amounts)
Net interest income........................................ $1,469 $2,792 (47%)
Provision for loan losses.................................. 1,539 781 97
--------------- ------------- ----------------
Net interest income after provision...................... (70) 2,011 (103)
Gain on loan sales......................................... 3,050 2,822 8
Other non-interest income.................................. 1,280 1,087 18
Gain on sale of branch..................................... 8,915 - -
Non-interest expense....................................... 9,352 3,541 164
--------------- ------------- ----------------
Income before income taxes............................... 3,823 2,379 61
Income taxes............................................... 1,606 976 65
--------------- ------------- ----------------
Net Income............................................. $2,217 $1,403 58%
=============== ============= ================
Basic earnings per share................................. $0.28 $0.18
=============== =============
Diluted earnings per share................................ $0.27 $0.17
=============== =============
Weighted average shares - basic......................... 7,957 7,876
=============== =============
Weighted average shares - diluted........................ 8,164 8,215
=============== =============
Comparison of the Three Months Ended March 31, 1999 and 1998:
Net Income. Net income increased 58% or $814,000 for the three month period
ended March 31, 1999 when compared to the three month period ended March 31,
1998. The increase was primarily the result of the sale of the Company's retail
branch facility and its checking, savings and money market deposit accounts,
which was partially offset by sale-related and certain non-recurring expenses,
the loan loss provision and the cost of the liquidity held during the quarter to
fund the sale of deposits as discussed below. Increases in gain on loan sales
and loan servicing income were attributable to an increase in loans originated
and the increase in the balance of loans managed for others, respectively.
Diluted earnings per share increased 59% or $.10 to $.27 per share for the three
month period ended March 31, 1999 from $.17 per share for the three month period
ended March 31, 1998.
Net Interest Income. Net interest income decreased 47% or $1.3 million for the
three month period ending March 31, 1999 when compared to the same period ending
March 31, 1998. Average earning assets increased 26% or $51 million while
interest-bearing liabilities increased 47% or $63 million. The net interest
spread for the three month period ended March 31, 1999 decreased 282 basis
points reflecting a relative increase in the percentage of lower yielding
LIBOR-based loans that were included in the balance sheet at March 31, 1999 and
a 75 basis point decrease in the prime rate during the third quarter of 1998.
Approximately 45 basis points of the compression in the spread is due to the
amortization costs of the Company's warehouse funding line, which are amortized
over the term of the facility.
8
Average Balances, Interest, Yields and Rates
- --------------------------------------------
For The Three Months Ended For The Three Months Ended 1999 Compared to 1998
March 31, 1999 March 31, 1998 Change Due to (Z):
------------------------------ ----------------------------- ---------------------------
Interest Average Interest Average
Average Earned Yield/ Average Earned Yield/
Balance Paid Rate Balance Paid Rate Volume Rate Total
------------------------------ ----------------------------- --------------------------
(dollars in thousands)
Assets:
Loans (1):
Commercial $151,421 $2,719 7.18% $152,110 $3,815 10.03% ($12) ($1,084) ($1,096)
Residential 2,960 55 7.43% 7,626 140 7.34% (87) 2 (85)
Other customer 693 15 8.78% 1,782 41 9.33% (24) (2) (26)
-------- ------ ---- -------- ------ ------- ----- ------- -------
Total loans 155,074 2,789 7.19% 161,518 3,996 9.90% (123) (1,084) (1,207)
Investment securities 31,536 576 7.31% 21,453 316 5.89% 184 76 260
Federal funds sold 59,048 686 4.71% 11,605 162 5.66% 551 (27) 524
-------- ------ ---- -------- ------ ------- ----- ------- -------
Total investment securities and
funds sold 90,584 1,262 5.61% 33,058 478 5.81% 735 49 784
-------- ------ ---- -------- ------ ------- ----- ------- -------
Total earnings assets 245,658 4,051 6.60% 194,576 4,474 9.20% 612 (1,035) (423)
Total non-earning assets 35,647 19,407
-------- --------
Total assets $281,305 $213,983
======== ========
Liabilities:
Deposits:
Interest bearing demand deposits $ 7,924 $ 46 2.35% $ 7,649 $ 46 2.44% $ 2 ($2) $ 0
Premier money market 101,337 1,202 4.81% 83,110 1,108 5.41% 216 (122) 94
Other savings 10,372 101 3.95% 8,175 41 2.03% 21 39 60
Retail and IRA certificates of
deposit 25,138 335 5.40% 32,858 464 5.73% (103) (26) (129)
Brokered certificates of deposit 51,000 675 5.37% 833 11 5.36% 664 0 664
-------- ------ ---- -------- ------ ------- ----- ------- -------
Total deposits 195,771 2,359 4.89% 132,625 1,670 5.11% 800 (111) 689
Warehouse borrowings 0 218 0.00% 0 0 0.00% 0 0 0
Other borrowings 419 5 4.84% 609 12 7.99% (2) (5) (7)
-------- ------ ---- -------- ------ ------- ----- ------- -------
Total interest bearing liabilities 196,190 2,582 5.34% 133,234 1,682 5.12% 798 (116) 682
-------- ------ ---- -------- ------ ------- ----- ------- -------
Non-interest bearing liabilities:
Demand deposits 32,776 35,807
Other liabilities 3,913 3,052
-------- --------
Total non-interest bearing
liabilities 36,689 38,859
Stockholders' equity 48,426 41,890
-------- --------
Total liabilities and stockholders'
equity $281,305 $213,983
======== ========
Net interest income/net interest
spread $1,469 1.26% $2,792 4.08% ($186) ($919) ($1,105)
====== ==== ====== ===== ===== ===== =======
Net interest margin 2.33% 5.69%
==== =====
(1) For purposes of these computations, non-accruing loans are included in the
average balance.
(2) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar.
9
Interest Income. Interest income decreased 9% or $423,000 to $4.1 million for
the three month period ended March 31, 1999 from $4.5 million for the three
month period ended March 31, 1998. Loan interest income decreased 30% or $1.2
million as the average balance of loans decreased 4% or $6.4 million and the
average yield on loans decreased 271 basis points. Although commercial
originations totaled $93 million for the three month period ended March 31, 1999
as compared to $78 million for the same period 1998, the majority of the loan
closings occurred in the last few weeks of the quarter, contributing little
interest income. The average balance decrease reflects the sale of the Company's
$5 million residential mortgage portfolio in the second quarter of 1998 and the
continued sale and securitization of commercial loan originations. Interest
income includes $210,000 of adjustments related to the recoverability of certain
accrued interest and deferred costs. The decrease in the yield is also the
result of three prime rate decreases totaling 75 basis points which occurred in
the third quarter of 1998 and an increase in the portfolio of lower priced LIBOR
based loans. Privately insured loans indexed to LIBOR increased 100% or $16.6
million for the three month period ended March 31, 1999 compared to the same
period in 1998. These loans are priced on average at LIBOR plus 250 basis
points, which currently approximates the prime rate. However, prime based loans
are priced on average at prime plus 100 basis points.
The decrease in loan interest income was mitigated by an increase in investment
interest income of 164% or $784,000 to $1.3 million for the three month period
ended March 31, 1999 from $478,000 for the three month period ended March 31,
1998. The average balance of federal funds sold increased by $47 million for the
period as liquid investments were maintained to fund both loan closings and the
$151 million sale of the Company's checking, savings and money market deposits.
The average balance of investment securities increased 47% or $10 million
reflecting the retention of certain notes by the Company upon completion of loan
securitizations in 1998. The retained notes are comprised of subordinated notes
with investment grade ratings of AA to BBB as well as $3.3 million in unrated
notes. The average yield on all such retained notes was 7.83% for the quarter
ended March 31, 1999.
Interest Expense. Interest expense increased 53% or $900,000 to $2.6 million for
the three month period ended March 31, 1999 from $1.7 million for the three
month period ended March 31, 1998 as the average balance of interest bearing
deposits increased 47% or $63 million. The average balance of certificates of
deposit increased 126% or $42.4 million reflecting a $50 million increase in
average brokered certificates of deposit. The brokered certificates, which
mature periodically within one year, were used to fund the $151 million sale of
the checking, savings and money market deposit accounts.
Interest expense for the three month period ended March 31, 1999 also includes
$223,000 of expense related to the $75 million warehouse line of credit, which
is available to fund qualifying commercial term loans. Although the line was
unused during the quarter, fees paid at origination of the line in December 1998
are amortized over the term of the facility.
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $1.5 million for the three month period ended March 31, 1999 compared to
$781,000 for the three month period ended March 31, 1998. The increase reflects
an overall increase in the Allowance for Loan Losses to $4.5 million at March
31, 1999 from $4.0 million at December 31, 1998 due to
10
an increasing percentage of unguaranteed commercial loans, the seasoning of the
commercial portfolio, and the introduction of new loan products where the
Company has limited historical experience. See Allowance for Loan Losses for
further discussion.
Non-Interest Income. Non-interest income is comprised of the following items:
For the Three Months Ended
March 31,
-------------- -------------- ---------------
Non-Interest Income: 1999 1998 Change (%)
-------------- -------------- ---------------
(dollars in thousands)
Gain on loan sales:
SBA sales $1,414 $1,308 8%
USDA sales 967 568 70
Ex-Im working capital sales 85 79 8
Ex-Im medium term sales 321 741 (57)
-------------- -------------- ---------------
Gain on guaranteed loan sales 2,787 2,696 3
Other loan sales 34 126 (73)
Loan backed securitizations 147 - -
Loans to commercial paper conduit 82 - -
-------------- -------------- ---------------
Total gain on loan sales 3,050 2,822 8
Loan servicing income and fees 1,196 927 29
Service charges and other deposit fees 68 145 (53)
Gain on sale of branch 8,915 - -
Other income 16 15 7
-------------- -------------- ---------------
Total Non-interest income $13,245 $3,909 239%
============== ============== ===============
The $9.3 million increase in non-interest income for the three month period
ended March 31, 1999 as compared to the three month period ended March 31, 1998
was due primarily to the gain of $8.9 million recognized on the sale of the
Company's only branch facility and the related $151 million of checking, savings
and money market accounts.
Gains on loan sales increased 8% or $228,000 to $3.1 million for the three month
period ended March 31, 1999 from $2.8 million for the three month period ended
March 31, 1998. The aggregate rate of return on SBA and Ex-Im Bank loans sold
during the quarter ended March 31, 1999 increased to 585 basis points from 548
basis points for the same period last year. The relative rate of return on the
USDA loans was significantly higher in the quarter ended March 1999 due to the
overall higher loan rates and longer terms of the underlying loans. The gains as
a percentage of the principal sold will vary in relation to such loan
characteristics.
Gains on the sale of Ex-Im Bank medium term loans decreased by 57% or $420,000
for the period ended March 31, 1999 compared to the same period 1998, because
approximately $6 million or 35% of the Ex-Im Bank medium term loans sold in the
first quarter of 1998 were
11
originated in December 1997. Ex-Im Bank medium term loans originated decreased
only 3% for the quarter ended March 31, 1999 as compared to the prior year's
quarter.
For the three months ended March 31, 1999, the gain on loan-backed
securitizations of $147,000 is the portion of gain related to the final
prefunded amount of the $65 million Business Loan Trust 1998-A commercial term
loan securitization completed in December 1998. The gain on sale of loans to the
commercial paper conduit is the result of a sale of $10 million of revolving
commercial loans.
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 Three Months Ended
- ------------------------------
March 31,
-------------------------
1999 1998
-------- --------
Loan Servicing Income: (dollars in thousands)
SBA guaranteed loans...................... $ 657 $ 281
USDA guaranteed loans..................... 193 76
Ex-Im working capital loans............... 51 56
Ex-Im medium term loans................... 56 96
Loan securitizations...................... 32 -
Other loans............................... 76 45
-------- --------
Loan servicing income................... 1,065 554
Servicing asset reduction................... (238) -
-------- --------
Net loan servicing income............... 827 554
Other fees.................................. 369 373
-------- --------
Total loan servicing income and fees........ $ 1,196 $ 927
======== ========
Loans Managed for Others
- ------------------------
Average balance............................. $668,199 $431,871
======== ========
Ending balance.............................. $685,201 $470,786
======== ========
The 92% or $511,000 increase in loan servicing income reflects the 55% or $236
million increase in the average balance of loans serviced for others to $668
million for the three month period ended March 31, 1999.
An impairment equal to $238,000 in the carrying value of the servicing asset
related to the Ex-Im Bank medium term loans made to borrowers in Brazil, a
country subject to macroeconomic pressures, was recognized in the quarter ended
March 31, 1999 following payment defaults on the underlying loans. Ex-Im Bank
has paid the claims in full or is in the process of full disbursement of
interest and principal to the investors under the Ex-Im Bank guarantee.
12
The Company has historically assumed that Ex-Im Bank loans would amortize over
the 3-5 year contractual term of the loans and recognizes any impairment when it
becomes probable and estimable. Management will continue to monitor defaults and
prepayments which could result in a reduction of the remaining life of the
servicing asset and which would warrant a write down of the asset.
The Company's prepayment and default experience on the SBA and USDA guaranteed
loans, as well as the experience on the securitized pools, continues to be at
rates less than those assumed in the original calculations of the gain on sale.
The actual performance of each portfolio is monitored quarterly.
Other loan fee income of $369,000 for the period ended March 31, 1999 is
comprised primarily of $107,000 in advisory fees paid by clients to the Company
in conjunction with non-loan related services and $193,000 in letter of credit
fees. Letter of credit fees increased 72% or $81,000 for the three month ended
March 31, 1999 from $112,000 for the three month period ended March 31, 1998 due
to greater demand for this product from the Company's exporting borrowers. Such
fees are recognized over the term of the letter of credit.
Non-Interest Expense. Non-interest expense is comprised of the following items:
For the Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
Non-Interest Expense: (dollars in thousands)
Salaries and benefits....................... $6,667 $2,237
Occupancy................................... 455 371
Office expenses............................. 210 184
Marketing expenses.......................... 486 260
Furniture and equipment..................... 294 225
Outside services............................ 318 100
Loan collection............................. 71 58
Other....................................... 851 106
----------- -----------
Total non-interest expense............... $9,352 $3,541
=========== ===========
The 164% or $5.8 million increase in non-interest expense for the three month
period ended March 31, 1999 as compared to the same period ended March 31, 1998
is primarily attributable to a $4.4 million increase in salaries and benefits.
In connection with the re-negotiation of the employment agreement between the
Company and its Chairman and Chief Executive Officer, a $1.7 million bonus was
paid in March 1999 to enable the Chief Executive Officer to retire the $980,000
note receivable held by the Company and to pay the income taxes associated with
the bonus. The note receivable was provided to finance the Chief Executive
Officer's purchase of 614,000 shares of common stock in 1994. The stock
purchased by the Chief Executive Officer is currently restricted, although the
Company has agreed pursuant to a registration rights agreement that such shares
may be registered for sale in the future.
13
As compensation for the sale of the Company's last retail branch and deposits,
the Chief Executive Officer and another six members of senior management
received cash bonuses totaling $940,000.
The average number of employees increased by 27% or 43 people for the period
ended March 31, 1999 compared to the same period of 1998. The headcount increase
reflects the opening of representative offices in Detroit, Michigan and
Cleveland, Ohio, the full staffing of existing domestic representative offices,
and the addition of staff to the credit administration and loan servicing areas
to effectively support increased loan volume.
The 23% or $84,000 increase in occupancy expense reflects the addition of new
offices in the third and fourth quarters of 1998 in Detroit and Cleveland and
increased monthly common area and maintenance charges in the Company's Hartford
headquarters building. Additional personnel contributed to increases of 14% or
$26,000 in office expense, 31% or $69,000 in furniture and equipment expense.
Marketing expense includes $51,000 of advertising expense related to a retail
certificate of deposit campaign that was undertaken in March 1999 and a general
increase in marketing related to new representative offices.
The $218,000 increase in outside service expense reflects increases in legal
fees related to the establishment of agent relationships and/or representative
office status in several of the Company's international markets, as well as
outside contractors utilized to prepare files for the on-going securitization
and sale of loans.
Other expenses increased $745,000, including the accrual of a $340,000 liability
for the potential of loss of a government guarantee on a single SBA loan managed
for investors. The Company is currently appealing this matter, which is
technical and loan-specific. Since 1990, the Company has made repairs on
government guaranteed loans totaling less than $100,000. The Company services
guaranteed loans totaling $448.2 million at March 31, 1999.
Other expenses included legal and related expenses associated with various
projects, including the establishment of a business relationship with CIGNA
Financial Services, Inc. and Connecticut General Life Insurance Company with
respect to providing investment, discount brokerage, cash management and
retirement account services. Due to various corporate matters and projects
underway, the Company expects that legal expenses will be above historical
levels in the quarter ending June 30, 1999.
Income Taxes. The Company's effective tax rate increased to 42% for the three
month period ended March 31, 1999 from 41% for the three month period ended
March 31, 1998 due to the non-deductibility of the portion of the Chief
Executive Officer's compensation over $1 million.
14
Discussion of Changes in Financial Condition to March 31, 1999 from December 31,
1998.
General. Total assets increased 1.7% or $4.7 million to $278.4 million from
$273.7 million at December 31, 1998 due to increases in loans held for sale and
federal funds. The growth was funded by retained earnings and an increase in
brokered certificates of deposit to fund the sale of the Company's checking and
savings accounts.
Cash and cash equivalents. The average balance of cash and cash equivalents
increased $44.4 million to $63.3 million for the three month period ended March
31, 1999 from $18.9 million for the period ended March 31, 1998. The average
balance of federal funds sold by the Company increased $47.4 million as
additional liquidity, in the form of overnight investments, was maintained to
fund loan closings and the sale of the Company's checking, savings and money
market accounts.
Investment Securities. Investment securities portfolios totaled $35.2 million, a
decrease of 1.1% or $400,000 from the December 31, 1998 balance of $35.6 million
due to scheduled amortization of the portfolio securities.
15
Loans. The Company's loan portfolio and loans managed for others portfolio were
as follows:
March 31, December 31,
Loans Portfolio 1999 1998
- --------------- --------- ------------
(dollars in thousands)
SBA loans............................................ $ 5,589 $ 22,774
USDA loans........................................... 15,669 14,017
Ex-Im working capital loans.......................... 3,639 4,796
Ex-Im term loans..................................... 341 62
Insured term loans................................... 19,846 14,210
Import loans......................................... 3,943 4,681
Equipment finance loans.............................. 4,906 4,020
Other commercial loans............................... 34,885 35,785
Owner occupied commercial mortgages.................. 14,084 6,917
Non-owner occupied commercial mortgages.............. 2,788 3,139
Other loans.......................................... 3,614 3,545
-------- --------
Total loans..................................... 109,304 113,946
Loans held for sale.................................. 28,597 8,577
Less:
Discount on retained loans...................... 2,621 1,419
Net deferred loan origination costs............. (342) (431)
Allowance for loan losses....................... 4,500 4,000
-------- --------
Loans, net...................................... $131,122 $117,535
======== ========
Loans Managed for Others
- ------------------------
Guaranteed Loans
SBA............................................. $251,685 $245,073
USDA............................................ 81,584 75,526
Ex-Im working capital........................... 11,634 14,788
Ex-Im term...................................... 100,256 102,638
Inventory buyer credit.......................... 2,534 300
FHLMC........................................... 452 455
-------- --------
448,145 438,780
Unguaranteed Portions and Unguaranteed Loans
SBA............................................. 69,664 74,033
USDA............................................ 5,878 6,173
Other commercial................................ 159,714 135,380
Home equity lines............................... 1,800 2,166
-------- --------
237,056 217,752
-------- --------
Total loans managed for others....................... $685,201 $656,532
======== ========
Total loans under management......................... $823,102 $779,055
======== ========
16
Loan originations and line of credit commitments were $92.8 million for the
three months ended March 31, 1999 and loan sales totaled $60.3 million for the
period. However, net loans decreased by 5.7% or $6.4 million to $102.5 million
at March 31, 1999 from $108.9 million at December 31, 1998 as approximately $23
million of the retained portions of SBA loans were reclassified from the loan
category to loans held for sale in advance of a securitization planned for the
quarter ending June 30, 1999.
Allowance for Loan Losses. The Company reviews the adequacy of the Allowance for
Loan Losses quarterly. At March 31, 1999 the Allowance totaled $4.5 million and
represented 3.3% of loans including loans held for sale. The Allowance totaled
$4.0 million at December 31, 1998 and represented 3.3% of loans. The overall
increase in the Allowance is due to an increasing percentage of unguaranteed
commercial loans, the seasoning of the commercial loan portfolio, and the
introduction of new loan products where the Company has limited historical
experience.
Net charge-offs for the three month period ended March 31, 1999 increased
$808,000 to $1.0 million from $231,000 for the three month period ending March
31, 1999. The Allowance at March 31, 1999 covered 1998 annual charge-offs 2.07
times.
17
Activity in the Allowance for Loan Losses
- -----------------------------------------
For the Year
For the Three Months Ended
Ended March 31, December 31,
---------------------------- ------------
1999 1998 1998
----------- ----------- ------------
(dollars in thousands)
Balance of allowance for loan losses
at the beginning of the period................... $ 4,000 $ 3,100 $ 3,100
Charge offs:
SBA loans........................................ 93 - 775
Ex-Im working capital loans...................... 188 - -
Insured term loans............................... 112 - -
Other commercial loans........................... 622 234 959
Import loans..................................... 26 - -
Non-owner occupied commercial mortgages.......... - - 582
Other loans...................................... - 8 8
----------- ----------- ------------
Total charge-offs............................. 1,041 242 2,324
Recoveries:
SBA loans........................................ 1 - -
Other commercial loans........................... 1 2 30
Non-owner occupied commercial mortgages.......... - 9 123
----------- ----------- ------------
Total recoveries.............................. 2 11 153
----------- ----------- ------------
Net charge-offs..................................... 1,039 231 2,171
Provision for loan losses........................... 1,539 781 3,071
----------- ----------- ------------
Balance of allowance for loan
losses at end of period.......................... $ 4,500 $ 3,650 $ 4,000
=========== =========== ============
Total loans and loans held for sale................. $137,901 $171,534 $122,523
=========== =========== ============
Allowance to total loans............................ 3.3% 2.1% 3.3%
=========== =========== ============
Non-performing loans for the three month period ended March 31, 1999 increased
$937,000 to $4.0 million. Although non-accrual loans have increased, at March
31, 1999 approximately 35% of these loans were current for principal and
interest under the contractual terms. The majority of the increase at March 31,
1999 is attributable to two loans, both of which were current for principal and
interest under the existing contractual terms.
18
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
Non-Performing Loans March 31, December 31,
1999 1998
----------- ------------
(dollars in thousands)
Commercial:
Unguaranteed portions:
SBA and USDA loans......................... $1,593 $1,533
Ex-Im working capital loans................ 469 418
Other international loans..................... 605 112
Other commercial loans........................ 1,060 890
Owner occupied commercial mortgages........... - 6
Non-owner occupied commercial mortgages....... 169 -
Consumer loans.................................. 145 145
----------- ------------
Total non-performing loans................. $4,041 $3,104
=========== ============
Total non-performing loans to total loans....... 2.93% 2.53%
=========== ============
Total non-performing loans to total assets...... 1.45% 1.13%
=========== ============
Allowance to total non-performing loans......... 111% 129%
=========== ============
The following table sets forth the breakdown of the Allowance for Loan Losses by
loan category at the dates indicated. Management believes that the Allowance can
be allocated by category only on an approximate basis, and therefore allocation
of the Allowance to each category is not necessarily indicative of future losses
and does not restrict use of the Allowance to absorb losses in any category. The
unallocated portion of the Allowance represents an amount that is not
specifically allocable to one of the loan portfolios. Loans to foreign entities
at March 31, 1999 represented 15% of total loans. Such loans are U.S. dollar
denominated and either 100% Ex-Im Bank guaranteed and sold at origination or
carry private insurance equal to 80-90% of the loan balance. The Company
currently has two private credit insurance policies issued by a Standard & Poors
AAA-rated company. The policies provide that the Company is responsible for a
deductible and for the first loss on the uninsured portion of the loan. The
aggregate deductible on the policies is $2 million.
19
March 31, December 31,
1999 1998
----------- ------------
(dollars in thousands)
Allocation of the Allowance by
Category of Loans:
Unguaranteed Portions of:
SBA loans..................................... $ 443 $ 841
USDA loans.................................... 250 209
Ex-Im working capital loans................... 268 245
Ex-Im term loans.............................. 10 2
Insured term loans............................... 650 479
Import loans..................................... 370 94
Equipment finance................................ 64 55
Other commercial loans........................... 1,350 1,311
Owner occupied commercial mortgages.............. 192 128
Non-owner occupied commercial mortgages.......... 56 63
Other loans...................................... 43 43
Loans held for sale.............................. 143 43
Unallocated...................................... 661 487
----------- ------------
Total allowance for loan losses............... $4,500 $4,000
=========== ============
Percent of Loans in Each Category to Total Loans:
Unguaranteed Portions of:
SBA loans..................................... 4.1% 18.6%
USDA loans.................................... 11.4 11.4
Ex-Im working capital loans................... 2.6 3.9
Ex-Im term loans.............................. 0.2 0.1
Insured term loans............................... 14.4 11.6
Import loans..................................... 2.9 3.8
Equipment finance................................ 3.6 3.3
Other commercial................................. 25.3 29.2
Owner occupied commercial mortgages.............. 10.2 5.6
Non-owner occupied commercial mortgages.......... 2.0 2.6
Other loans...................................... 2.6 2.9
Loans held for sale.............................. 20.7 7.0
----------- ------------
Total......................................... 100% 100%
=========== ============
Stockholders' Equity. Stockholders' equity increased 4.6% or $2.2 million to
$51.3 million at March 31, 1999 from $49.0 million at December 31, 1998 due to
the retention of earnings net of a quarterly dividend of $.03 per share, or
$239,000.
Following the award of a bonus specifically for this purpose, the Company's
Chief Executive Officer repaid the promissory note that was issued in 1994 in
connection with his purchase of 614,600 shares of common stock. On March 31,
1999, the Company sold an additional 200,000 shares of common stock to the Chief
Executive Officer for an aggregate purchase price of $2,000,000, or $10 per
share. The stock purchased by the Chief Executive Officer is currently
restricted, although the Company has agreed, pursuant to a registration rights
agreement that such shares may be registered for sale in the future. The Company
received a cash payment of
20
$20,000 and a promissory note in the amount of $1,980,000 for this transaction.
Principal plus interest, accruing at a rate of 7% compounded annually, is
payable on the note to the Company at the April 1, 2002 maturity date. The
interest and principal may be forgiven by the Company in certain circumstances.
The sale of the stock will increase stockholders' equity only when principal
payments are received as such stockholder note receivable is carried as part of
stockholders' equity since it is collateralized by stock of the Company.
Liquidity and Capital Resources.
The Company's primary sources of liquidity and funding are certificates of
deposit, warehouse lines of credit and loan sales and securitizations. Secondary
sources of liquidity include a Federal Home Loan Bank line of credit and federal
funds purchased.
Management considers cash flows related to scheduled payments by borrowers,
projected deposit levels, estimated liquidity needs for maturing certificates of
deposit, approved extensions of credit and unadvanced commitments to existing
borrowers in determining the level and maturity of funding necessary to support
operations. The on-going sales of the government guaranteed portions of loans at
origination also provides cash to fund operations. Such loan sales totaled $60.3
million for the three month period ended March 31, 1999, representing 65% of the
$92.8 million total loans originations for the three month period.
As of March 31, 1999 the Company had outstanding commitments to fund loans and
lines of credit of $65.6 million and had issued letters of credit totaling $32.1
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 certificate of deposit maturities.
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 21.94% and a Tier 1 capital to assets or
leverage ratio of 18.44% at March 31, 1999.
A subsidiary of the Bank entered into an interest rate swap with a notional
amount of $19 million in December 1998 in order to mitigate interest rate risk
inherent in the sale of revolving commercial loans to a commercial paper
facility. The swap provides for net settlement on a monthly basis which is
recorded as an adjustment to interest income. For the three month period ended
March 31, 1999, interest income totaling $16,000 was recorded related to the
swap.
As in prior periods, the Company has limited exposure to market risk as it has
an investment portfolio with a short duration and moderate 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,
21
many existing application software products in the market place were designed to
accommodate only a two digit 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.
Utilizing the framework provided by the Federal Financial Institutions
Examination Council ("FFIEC"), the Company developed a Year 2000 Compliance
Program as discussed below. The Company's Year 2000 Compliance Workplan
("Workplan") includes the following broad components:
1. Review of Mission Critical Systems for Year 2000 Readiness
2. Renovation of Internal Mission Critical Systems
3. Renovation of External Mission Critical Systems
4. Testing of Mission Critical Systems
5. Development of Business Resumption Contingency Plan
6. Assessment of Customer Risk
7. Remediation Contingency Plan
Senior management and the Technology Committee of the Board of Directors are
responsible for monitoring compliance with the Workplan. In addition, the
Company's primary regulator, the Office of the Comptroller of the Currency,
performs periodic off-site inquiries and on-site visitations to assess the
status of the Company's Year 2000 readiness and progress against the Workplan
and federal regulations. While the Company has devoted a significant amount of
human resources to address its Year 2000 readiness, management does not believe
that the resultant deferral of other information technology (IT) projects has
had a material impact on the Company's financial condition or results of
operations.
The Company has reviewed all mission critical systems, prioritized the details
of the plan and its resources, and has established deadlines for each of the
components of the Workplan. The Company's primary internal mission critical
systems included a deposit item processing system, wide area network which
supports word processing and spreadsheet applications as well as other external
software systems, and a AS/400 operating system. The Company determined that the
deposit item processing system could not be readily made Year 2000 compliant
and, therefore, outsourced this function in the first quarter of 1998. Total
annual costs for this third party service are estimated at $36,000. The
Company's word processing and spreadsheet software applications and the AS/400
operating system were upgraded to Year 2000 compliant versions in the first half
of 1998. Total costs of such software upgrades approximated $55,000. Certain
hardware components were also upgraded in conjunction with these software
initiatives at an estimated cost of $20,000. Management estimates that
additional costs to be incurred to execute the Workplan will not exceed $20,000.
Third party vendors support the Company's other mission critical IT and non-IT
systems. The Company has developed a plan to monitor and test all such systems.
Non-IT systems include the Company's facility-related operating systems and are
included in the Company's Workplan.
22
As required by the FFIEC, the Business Resumption Contingency Plan has been
developed. Although the Company expects that each mission critical system will
be Year 2000 Compliant, the Plan was designed to mitigate serious disruptions to
the Company's business flow. The Plan is currently being validated in
preparation for independent third party testing which will be substantially
complete by June 30, 1999 in accordance with FFIEC guidelines.
The Company's Workplan also requires that the Year 2000 readiness of major
borrowers, wholesale time deposit brokers, investment bankers providing
borrowing facilities to the Company, and primary loan purchasers be evaluated.
Documentation has been received from these parties and it appears to meet the
FFIEC standards for determining Year 2000 preparedness and provides information
to assess any potential risk to the Company. The Company has reviewed the
documentation and it appears that the parties have adequately assessed Year 2000
risks and undertaken efforts to mitigate potential problems.
The above expectations are subject to uncertainties. If for example, the Company
fails to identify and address all Year 2000 problems in the mission critical
operations, fails to develop a comprehensive contingency plan, or is affected by
the inability of critical third parties to continue operations due to such
problems, the results of the Company's operations or financial condition could
be materially impacted. Such impact might result from operational difficulties
of the Company's borrowers and their resultant inability to repay their loans to
the Company; an ability of the Company to access wholesale funds providers or
other borrowing facilities; and an inability of the Company to normally process
deposit, loan or loan investor transactions.
Based on the current information and the efforts to date, however, it is not
expected that Year 2000 problems will have a material effect on the Company's
results of operations or financial condition. It also does not appear that a
Remediation Contingency Plan will be required. If it is subsequently determined
that such a plan is required, it will be developed pursuant to the applicable
FFIEC guidance.
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
On March 31, 1999, pursuant to the exemption provided by Section 4(2)
of the Securities Act of 1933, the Company sold 200,000 shares of its
Common Stock to Brett N. Silvers, the Chairman and Chief Executive
Officer of the Company, for $10 per share, or a total of $2,000,000.
Such purchase price was paid $20,000 in cash and $1,980,000 by Mr.
Silvers' promissory note. Such interest and principal may be forgiven
by the Company in certain circumstances as described in the letter
amending the employment agreement between Mr. Silvers and the Company
attached hereto as an exhibit. The proceeds from such sale of common
stock to Mr. Silvers will be used by the Company as additional working
capital.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable.
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation of
the Registrant.*
3.2 Amended and Restated By-laws of the Registrant.*
10.1 Second Amendment of Lease between Cambridge One
Commercial Plaza, LLC and the Bank dated as of
March 26, 1999.***
24
10.2 Letter dated March 31, 1999 to Amend the Employment Agreement among
the Registrant, First International Bank, N.A. and Brett N. Silvers.
10.3 Registration Rights Agreement by and among First International
Bancorp, Inc. and Nancy W. Silvers and The Silvers Family Trust, dated
March 31, 1999.
10.4 Agreement for Purchase and Sale of Assets and Assumption of
Liabilities between First National Bank of New England and Hudson
United Bank, dated as of December 31, 1998.**
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule for the Quarter Ended March 31, 1999.
* 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.
** Denotes an exhibit which has previously been filed as an exhibit to the
Company's Report on Form 8-K, Commission File No. 0-22861.
*** Denotes an exhibit which has previously been filed as an exhibit to the
Company's Report on Form 10-K, Commission File No. 0-22861.
Reports on Form 8-K
- -------------------
The Company filed a report on Form 8-K dated January 8, 1999 to report the
signing of the Agreement for Purchase and Sale of Assets and Assumption of
Liabilities between First National Bank of New England (now known as First
International Bank, N.A.) and Hudson United Bank, dated December 31, 1998.
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: May 14, 1999 By: /s/ Brett N. Silvers
------------ ----------------------------------
Brett N. Silvers
Its Chief Executive Officer
and President
Date: May 14, 1999 By: /s/ Leslie A. Galbraith
------------ ----------------------------------
Leslie A. Galbraith
Its Treasurer and Secretary
and Chief Financial Officer
26
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.2 Letter dated March 31, 1999 to Amend the Employment Agreement
among the Registrant, First International Bank, N.A. and Brett
N. Silvers
10.3 Registration Rights Agreement by and among First International
Bancorp, Inc. and Nancy W. Silvers and The Silvers Family Trust,
dated March 31, 1999
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
27