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, 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, issued and outstanding on August 3, 1999 was
8,164,187.
1
INDEX
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
2
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,
-------------------- --------------------
1999 1998
-------------------- --------------------
(unaudited)
Cash and cash equivalents............................. $ 21,468 $ 58,335
Investment securities................................. 39,912 35,619
Loans, net............................................ 123,450 108,958
Loans held-for-sale................................... 24,613 8,577
Premises and equipment, net........................... 4,347 3,815
Receivable from loans sold............................ 33,504 43,610
Prepaid expenses and other assets..................... 23,945 14,812
------------------- --------------------
Total assets....................................... $271,239 $273,726
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, December 31,
------------------- ---------------------
1999 1998
------------------- ---------------------
(unaudited)
Deposits.............................................. $204,590 $219,874
Other liabilities..................................... 12,610 4,781
-------------------- ---------------------
Total liabilities..................................... 217,200 224,655
Stockholders' equity:
Preferred stock ($0.10 par value; 2,000,000 shares
authorized; no shares issued and outstanding)......... - -
Common stock ($0.10 par value; 12,000,000 shares
authorized; shares issued and outstanding: 8,164,187
at June 30, 1999 and 7,952,637 at December 31, 1998). 816 795
Paid-in capital in excess of par value, net........... 34,565 32,561
Stockholder note receivable........................... (1,980) (941)
Accumulated other comprehensive income, net 618 428
Retained earnings..................................... 20,020 16,228
-------------------- ---------------------
Total stockholders' equity........................ 54,039 49,071
-------------------- ---------------------
Total liabilities and stockholders' equity........ $271,239 $273,726
==================== =====================
See accompanying notes to unaudited condensed financial statements.
3
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,
------------------ ----------------
1999 1998 1999 1998
-------- -------- ------- -------
Interest income:
Loans, including net fees................................. $ 3,404 $ 3,859 $ 6,193 $ 7,855
Investment securities..................................... 946 235 1,522 551
Federal funds sold........................................ 308 310 994 472
-------- -------- ------- -------
Total interest income.................................. 4,658 4,404 8,709 8,878
Interest expense:
Deposits.................................................. 2,956 1,920 5,315 3,590
Other..................................................... 121 3 344 15
-------- -------- ------- -------
Total interest expense.................................. 3,077 1,923 5,659 3,605
-------- -------- ------- -------
Net interest income....................................... 1,581 2,481 3,050 5,273
Provision for possible loan losses........................... 449 1,125 1,988 1,906
-------- -------- ------- -------
Net interest income after
provision for possible loan losses...................... 1,132 1,356 1,062 3,367
Non-interest income:
Gain on sale of:
Guaranteed loans........................................ 3,085 3,276 5,872 5,972
Other loans............................................. 223 (104) 257 22
Loan-backed securitizations............................. 2,810 2,365 2,957 2,365
Loans to commercial paper conduit....................... 71 - 153 -
-------- -------- ------- -------
Total gains on loan sales........................... 6,189 5,537 9,239 8,359
Loan servicing income and fees............................ 1,626 1,059 2,822 1,985
Service charges and other deposit fees.................... 6 146 74 291
Gain on sale of branch.................................... - - 8,915 -
Other income.............................................. 35 220 51 235
-------- -------- ------- -------
Total non-interest income........................... 7,856 6,962 21,101 10,870
-------- -------- ------- -------
Total operating income.................................... 8,988 8,318 22,163 14,237
Non-interest expense:
Salaries and benefits..................................... 3,552 2,765 10,219 5,002
Occupancy................................................. 422 377 877 748
Office expenses........................................... 273 198 483 382
Marketing................................................. 526 258 1,012 455
Furniture and equipment................................... 306 243 600 468
Outside services.......................................... 300 198 618 298
Loan collection........................................... 30 30 101 88
Other..................................................... 122 221 973 390
-------- -------- ------- -------
Total non-interest expense.......................... 5,531 4,290 14,883 7,831
-------- -------- ------- -------
Income before income taxes................................ 3,457 4,028 7,280 6,406
Provision for income taxes................................... 1,400 1,587 3,006 2,562
-------- -------- ------- -------
Net income.......................................... $ 2,057 $ 2,441 $ 4,274 $ 3,844
======== ======== ======= =======
Basic earnings per common share.............................. $ 0.25 $ 0.31 $ 0.53 $ 0.49
======== ======== ======= =======
Diluted earnings per common share............................ $ 0.25 $ 0.30 $ 0.52 $ 0.47
======== ======== ======= =======
See accompanying notes to unaudited condensed financial statements.
4
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Six Months Ended
June 30,
------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net cash provided by (used in) operating activities............ $ (8,647) $ 5,628
-------- --------
Cash flows from investing activities:
Net increase in loans.......................................... (14,931) (5,890)
Purchase of investment securities available for sale........... (61,339) (8,693)
Purchase of equity securities available for sale............... (177) -
Proceeds from maturities and principal repayments of
investment securities available for sale..................... 56,584 4,669
Proceeds from maturities and principal repayments of
investment securities held to maturity....................... 503 4,564
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...................................... (909) (1,627)
-------- --------
Net cash provided by (used in) investing activities........ (20,002) (5,875)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits............................ (15,284) 27,880
Net increase (decrease) in other borrowings.................... 6,563 (104)
Proceeds from sale of common stock............................. 2,025 151
Principal payment on stockholder note receivable............... 941 -
Principal advance on stockholder note receivable............... (1,980) -
Dividends paid................................................. (483) (473)
-------- --------
Net cash provided by (used in) financing activities........ (8,218) 27,454
-------- --------
Net increase (decrease) in cash and cash equivalents................ (36,867) 27,207
Cash and cash equivalents at beginning of period.................... 58,335 17,394
-------- --------
Cash and cash equivalents at end of period.......................... $ 21,468 $ 44,601
======== ========
See accompanying notes to unaudited consolidated financial statements.
5
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
General
- -------
The condensed consolidated financial statements included herein are unaudited
and represent the accounts of First International Bancorp, Inc. (the "Company")
and its wholly-owned subsidiary, First International Bank (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 Hartford, Connecticut; Boston and Springfield,
Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Rochester, New
York; Pittsburgh and Philadelphia, Pennsylvania; Detroit, Michigan; Cleveland,
Ohio; St. Louis, Missouri; and Washington, D. C. The Bank also has international
representatives in Argentina, Brazil, Central America, Egypt, India, Indonesia,
Korea, Mexico, the Philippines, Poland, South Africa, Turkey and West Africa.
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 Company maintains a web site at www.FirstInterBank.com.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments) that are necessary for a fair
presentation of the interim financial statements have been included. The results
of operations for the interim periods shown are not necessarily indicative of
the results to be expected for the entire fiscal year or any interim period.
This unaudited interim financial information should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
which is filed with the Securities and Exchange Commission.
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 six-month periods ended June 30, 1999 and 1998,
such comprehensive income totaled $190,000 and $337,000 after income taxes,
respectively. All amounts are comprised only of changes in the valuation
allowance for the investment portfolio.
6
2. Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which was amended by Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 and amendment of FASB Statement No.
133," which is effective for the Company's financial 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
is not expected to have a significant impact upon the Company's financial
position, results of operations or cash flows.
3. Dividend Policy
The Company paid a cash dividend in the amount of $0.03 per share on May 12,
1999. On July 27, 1999, the Company declared a dividend of $0.03 per share
payable on August 13, 1999 to shareholders of record as of the close of business
on August 6, 1999.
7
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 U. S. Small Business Administration ("SBA"), the U. S. Department of
Agriculture ("USDA") and the Export-Import Bank of the United States ("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) a disruption in the U.S. capital markets which delay or
prevent 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 Annual Report on Form 10-K for the year ended
December 31, 1998, which is filed 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.
Overview
First International Bancorp, Inc. (the "Company") is a Delaware corporation
formed in 1985 and serves as the bank holding company for First International
Bank. Established in 1955 as a nationally chartered bank, First International
Bank became a Connecticut bank and trust company on July 1, 1999. The Bank is
headquartered in Hartford, Connecticut. The Company specializes in providing
innovative credit, trade and financial solutions to small and medium size
manufacturing companies located in the United States and international emerging
markets, and is the nation's largest combined user of loan guarantee programs
made available by the SBA, USDA and Ex-Im Bank.
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.
8
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 issue retail and brokered certificates of deposit. 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 commercial paper conduits.
Results of Operations for the Six Months Ended June 30, 1999 and June 30, 1998:
For the Six Months Ended June 30,
--------------------------------------------------------
1999 1998 % Change
--------------- --------------- --------------
(amounts in thousands, except per share amounts)
Net interest income.......................... $ 3,050 $5,273 (42%)
Provision for loan losses.................... 1,988 1,906 4
--------------- --------------- --------------
Net interest income after provision..... 1,062 3,367 (68)
Gain on loan sales........................... 9,239 8,359 11
Other non-interest income.................... 2,947 2,511 17
Gain on sale of branch....................... 8,915 - NM
Non-interest expense......................... 14,883 7,831 90
--------------- --------------- --------------
Income before income taxes.............. 7,280 6,406 14
Income taxes................................. 3,006 2,562 17
--------------- --------------- --------------
Net income......................... $ 4,274 $3,844 11%
=============== =============== ==============
Basic earnings per share............. $ 0.53 $ 0.49
=============== ===============
Diluted earnings per share........... $ 0.52 $ 0.47
=============== ===============
Weighted average shares - basic...... 8,059 7,887
=============== ===============
Weighted average shares - diluted.... 8,266 8,206
=============== ===============
Net Income. Net income increased 11% or $430,000 for the six-month period
ended June 30, 1999 when compared to the six-month period ended June 30, 1998.
The increase was primarily the result of the March 1999 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
first quarter to fund the sale of the deposits. Increases in gains on loan
sales and loan servicing income resulted from increased loan originations and an
increase in the balance of loans managed for others.
Diluted earnings per share increased 11% or $.05 to $.52 per share for the six-
month period ended June 30, 1999 from $.47 per share for the six-month period
ended June 30, 1998.
Net Interest Income. Net interest income decreased 42% or $2.2 million for the
six-month period ended June 30, 1999 when compared to the same period ended June
30, 1998. Average earning assets increased 26% or $50.8 million while average
interest-bearing liabilities increased 50% or $70.5 million. The increase in
interest-bearing liabilities was the result of the increase in
9
brokered certificates of deposit. These deposits were used by the Company to
fund loan volume and the first quarter branch sale.
The net interest spread for the six-month period ended June 30, 1999 decreased
220 basis points when compared to the period ended June 30, 1998. The decrease
reflects the relative increase in LIBOR-based loans included in the June 30,
1999 balance sheet, a 75 basis point decrease in the prime rate during the
second half of 1998, and increased funding costs associated with the replacement
of the Bank's core deposits with brokered certificates of deposit.
10
For The Six Months Ended For The Six Months Ended
June 30, 1999 June 30, 1998
------------------------------------ ------------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------------------------------ ------------------------------------
(dollars in thousands)
Assets:
Loans (1):
Commercial............................ $154,397 $ 6,067 7.86% $153,276 $ 7,523 9.82%
Residential........................... 2,594 98 7.55% 6,494 258 7.95%
Other consumer........................ 640 28 8.82% 1,624 74 9.19%
---------- ---------- --------- --------- ---------- ---------
Total loans................................. 157,631 6,193 7.86% 161,394 7,855 9.73%
Investment securities....................... 48,632 1,522 6.26% 18,810 551 5.86%
Federal funds sold.......................... 42,269 994 4.74% 17,479 472 5.45%
---------- ---------- --------- --------- ---------- ---------
Total investment securities and funds sold.. 90,901 2,516 5.55% 36,289 1,023 5.66%
---------- ---------- --------- --------- ---------- ---------
Total earning assets........................ 248,532 8,709 7.01% 197,683 8,878 8.98%
Total non-earning assets.................... 32,903 22,372
---------- ---------
Total assets................................ $281,435 $220,055
========== =========
Liabilities:
Deposits:
Interest bearing demand deposits...... $ 5,187 $ 60 2.33% $ 8,149 $ 99 2.45%
Premier money market.................. 50,391 1,203 4.81% 83,256 2,222 5.38%
Other savings......................... 5,163 97 3.79% 8,593 123 2.89%
Retail and IRA certificates of deposit 34,319 902 5.30% 31,323 888 5.72%
Brokered certificates of deposit...... 115,192 3,053 5.34% 8,148 258 6.39%
---------- ---------- --------- --------- ---------- ---------
Total deposits............................. 210,252 5,315 5.10% 139,469 3,590 5.19%
Warehouse borrowings....................... 84 337 NM 0 0 0.00%
Other borrowings........................... 295 7 4.79% 651 15 4.65%
---------- ---------- --------- --------- ---------- ---------
Total interest bearing liabilities......... 210,631 5,659 5.42% 140,120 3,605 5.19%
---------- --------- --------- --------- ---------- ---------
Non-interest bearing liabilities:
Demand deposits....................... 20,079 34,933
Other liabilities..................... 760 2,470
---------- ---------
Total non-interest bearing liabilities..... 20,839 37,403
Stockholders' equity....................... 49,965 42,532
---------- ---------
Total liabilities and stockholders' equity. $281,435 $220,055
========== =========
Net interest income/net interest spread.... $ 3,050 1.59% $ 5,273 3.79%
======== ========= ========== =========
Net interest margin........................ 2.42% 5.30%
========= =========
1999 Compared to 1998
Changes Due to (2):
----------------------------------
Volume Rate Total
---------------------------------
Assets:
Loans (1):
Commercial............................ $ 44 ($1,500) ($1,456)
Residential........................... (147) (13) (160)
Other consumer........................ (43) (3) (46)
------- --------- ---------
Total loans................................ (146) (1,516) (1,662)
Investment securities...................... 933 38 971
Federal funds sold......................... 583 (61) 522
------- --------- ---------
Total investment securities and funds sold.. 1,516 (23) 1,493
-------- --------- ---------
Total earning assets........................ 1,370 (1,539) (169)
Total non-earning assets....................
Total assets................................
Liabilities:
Deposits:
Interest bearing demand deposits...... ($34) ($5) ($39)
Premier money market.................. (785) (234) (1,019)
Other savings......................... (64) 38 (26)
Retail and IRA certificates of deposit 79 (65) 14
Brokered certificates of deposit...... 2,837 (42) 2,795
-------- --------- ---------
Total deposits............................. 2,033 (308) 1,725
Warehouse borrowings....................... 337 0 337
Other borrowings........................... (8) 0 (8)
-------- --------- ---------
Total interest bearing liabilities......... 2,362 (308) 2,054
-------- --------- ---------
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.... ($992) ($1,231) ($2,223)
======== ========= =========
Net interest margin........................
(1) For purpose of these computations, non-accruing loans are included in the
average balance.
(2) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
11
Interest Income. Interest income decreased 2% or $169,000 to $8.7 million for
the six-month period ended June 30, 1999 from $8.9 million for the six-month
period ended June 30, 1998. Loan interest income decreased 21% or $1.7 million
as the average balance of loans decreased 2% or $3.8 million and the average
yield on loans decreased 187 basis points. The average balance decrease
reflects the second quarter 1998 sale of the Company's $5 million residential
mortgage portfolio and the continued sale and securitization of commercial loan
originations. Interest income for the six-months ended June 30, 1999 was
reduced by $210,000 related to the recoverability of certain accrued interest
and deferred costs.
Commercial loan originations increased 18% or $42.5 million to $230 million for
the six-month period ended June 30, 1999. However, 16% or $36.7 million of the
originations were LIBOR-based international loans including $17.2 million of
privately insured balance sheet loans. LIBOR based loans comprised 23% of
balance sheet loans at June 30, 1999 versus 1% of balance sheet loans at June
30, 1998. Loans indexed to LIBOR are priced, on average, at LIBOR plus 250
basis points, which for the six-month period is approximately 10 basis points
lower than the prime rate. Prime based loans are priced, on average, at prime
plus 144 basis points. Additionally, the loan yield was impacted by three prime
rate decreases totaling 75 basis points which occurred in the second half of
1998.
The decrease in loan interest income was mitigated by an increase in interest
income from investment and federal funds sold of 146% or $1.5 million to $2.5
million for the six-month period ended June 30, 1999 from $1.0 million for the
six-month period ended June 30, 1998. The average balance of federal funds sold
increased 142% or $25 million for the six-month period as liquid investments
were maintained to fund the first quarter $151 million branch deposit sale and
first and second quarter loan closings. The average balance of investment
securities increased 159% or $29.8 million reflecting the investment of excess
liquidity and the retention of certain notes by the Company upon completion of
loan securitizations in 1998 and 1999. The retained notes are comprised of
subordinated notes with investment grade ratings of BBB to AA as well as $3.3
million of unrated notes. The weighted average yield on all such retained notes
was 7.86% for the six-month period ended June 30, 1999.
Interest Expense. Interest expense increased 57% or $2.1 million to $5.7
million for the six-month period ended June 30, 1999 from $3.6 million for the
six-month period ended June 30, 1998 as the average balance of interest bearing
deposits increased 50% or $70.5 million. The average balance in brokered
certificates of deposit increased $107.0 million. These deposits, which mature
periodically within the next nine months, were used to fund the $151.0 million
sale of the checking, savings and money market deposit accounts.
Interest expense for the six-month period ended June 30, 1999 also includes
$337,000 of expense related to the $75 million warehouse line of credit, which
is available to fund qualifying commercial term loans. During the quarter an
advance of $7.6 million was drawn for 2 days resulting in $4,000 of interest
expense. The remaining expense relates to the amortization of fees paid at
origination of the line in December 1998 which are amortized as interest expense
over the term of the facility.
12
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $2 million for the six-month period ended June 30, 1999 compared to $1.9
million for the six-month period ended June 30, 1998. The increase reflects an
overall increase in the Allowance for Loan Losses to $4.6 million at June 30,
1999 from $4.0 million at December 31, 1998 due to 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 Six Months Ended
June 30,
---------- ---------- ----------
Non-Interest Income: 1999 1998 % Change
---------- ---------- ----------
(dollars in thousands)
Gain on loan sales:
SBA sales............................... $ 3,012 $ 2,998 0%
USDA sales.............................. 1,948 1,136 71
Ex-Im working capital sales............. 216 279 (23)
Ex-Im medium term sales................. 696 1,559 (55)
---------- ---------- ----------
Gain on guaranteed loan sales...... 5,872 5,972 (2)
Other loan sales........................ 257 22 NM
Loan backed securitizations............. 2,957 2,365 25
Loans to commercial paper conduit....... 153 - -
---------- ---------- ----------
Total gain on loan sales........... 9,239 8,359 11
Loan servicing income and fees............ 2,822 1,985 42
Service charges and other deposit fees.... 74 291 (75)
Gain on sale of branch.................... 8,915 - -
Other income.............................. 51 235 (78)
---------- ---------- ----------
Total non-interest income................. $21,101 $10,870 94%
========== ========== ==========
The $10.2 million increase in non-interest income for the six-month period ended
June 30, 1999 as compared to the six-month period ended June 30, 1998 was due
primarily to the first quarter gain of $8.9 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 11% or $880,000 to $9.2 million for the six-month
period ended June 30, 1999 from $8.4 million for the six-month period ended June
30, 1998. The average gains on SBA loan sales decreased to 486 basis points for
the six-month period ended June 30, 1999 from 542 basis points for the same
period 1998. The decrease is reflective of market pricing that has deteriorated
during the second quarter as a result of accelerated prepayment assumptions
utilized in the marketplace. The Company's prepayment and default experience on
its SBA and USDA guaranteed loans, as well as its experience on the securitized
pools,
13
continues to be favorable and is at or below the rates assumed in the original
calculations at the time of sale. The actual performance of each portfolio is
monitored quarterly.
The relative average gain on sale on USDA loans increased to 736 basis points
for the period ended June 30, 1999 from 639 basis points for the period ended
June 30, 1998. The increase is the result of higher loan interest rates and
longer terms of the underlying loans, which determines the gain recognized. 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 55% or $863,000
for the period ended June 30, 1999 reflecting a 24% or $6.2 million decrease in
the origination of Ex-Im Bank medium term loans. During 1999, the Company's
international lenders have begun originating loans under privately insured short
and medium term loan programs, which are attractive to borrowers because they
allow financing of non-U. S. made goods and provide the Company with greater
discretionary authority to approve and close these loans.
In June 1999 the Company completed a securitization of the unguaranteed portions
of SBA loans totaling $37.4 million, which included a $4.5 million pre-funding
amount and resulted in a gain of $2.8 million. The $33.7 million senior
security issued as part of the securitization was rated Aaa by Moody's Investors
Service. As required by SBA regulations, the Company retained a $750,000
subordinated certificate. The Company also retained a $3.0 million A rated
subordinated certificate. In connection with this transaction, the Company has
recorded an interest-only strip totaling $1.9 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.
The gain on loan sales for the six-months ended June 30, 1998 includes a $2.8
million gain on a $27 million securitization of the unguaranteed portions of SBA
loans.
The $153,000 gain on the sale of loans to the commercial paper conduit is the
result of two sales totaling $12.3 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.
14
Detailed below are the components of this servicing income:
Loan Servicing Income and Fees For the Six Months Ended
- ------------------------------
June 30,
--------
1999 1998 % Change
---------- ---------- ----------
Loan Servicing Income: (dollars in thousands)
SBA guaranteed loans.................. $ 1,512 $ 626 142%
USDA guaranteed loans................. 427 148 189
Ex-Im working capital loans........... 112 111 1
Ex-Im medium term loans............... 124 180 (31)
Loan securitizations.................. 178 - -
Other loans........................... 156 99 58
---------- ---------- ----------
Loan servicing income.............. 2,509 1,164 116
Servicing asset reduction............... (238) - -
---------- ---------- ----------
Net loan servicing income.......... 2,271 1,164 95
Other fees.............................. 551 821 (33)
---------- ---------- ----------
Total loan servicing income and fees.... $ 2,822 $ 1,985 42%
========== ========== ==========
Loans Managed for Others
- ------------------------
Average balance......................... $672,205 $457,822 47%
========== ========== ==========
Ending balance.......................... $735,149 $537,498 37%
========== ========== ==========
The 42% or $837,000 increase in loan servicing income reflects the 47% or $214
million increase in the average balance of loans serviced for others to $672
million for the six-month period ended June 30, 1999.
During the first quarter of 1999, the Bank recognized an impairment equal to
$238,000 in the carrying value of the servicing asset related to certain Ex-Im
Bank medium term loans made to borrowers in Brazil, a country subject to
macroeconomic pressures, following payment defaults on the underlying loans.
Ex-Im Bank has paid the claims in full to the investors under the Ex-Im Bank
guarantee. Management will continue to monitor the 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.
Other loan fee income of $551,000 for the period ended June 30, 1999 is
comprised primarily of $107,000 in advisory fees paid by clients to the Company
in conjunction with non-loan related services, $288,000 in letter of credit fees
and $142,000 of late fees collected and other loan related fees.
15
Non-Interest Expense. Non-interest expense is comprised of the following items:
For the Six Months Ended
June 30,
--------------------------------------
1999 1998 (%) Change
---------- ---------- ------------
Non-Interest Expense: (dollars in thousands)
Salaries and benefits.............. $10,219 $5,002 104%
Occupancy.......................... 877 748 17
Office expenses.................... 483 382 26
Marketing expenses................. 1,012 455 122
Furniture and equipment............ 600 468 28
Outside services................... 618 298 107
Loan collection.................... 101 88 15
Other.............................. 973 390 149
---------- ---------- ------------
Total non-interest expense.... $14,883 $7,831 90%
========== ========== ============
The 90% or $7.1 million increase in non-interest expense for the six-month
period ended June 30, 1999 as compared to the same period ended June 30, 1998 is
primarily attributable to a $5.2 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 in 1994 to finance the Chief
Executive Officer's purchase of 614,000 shares of common stock. The stock
purchased 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.
In March 1999, as compensation for the sale of the Company's last retail branch
and deposits, the Chief Executive Officer and six members of senior management
received cash bonuses totaling $940,000.
The number of employees increased to 191 at June 30, 1999 from 157 at June 30,
1998 and 131 at December 31, 1997. The increase reflects the opening of
representative offices in Detroit, Cleveland and St. Louis, the addition of
Energy Finance and Equipment Finance business units, additional staffing of
existing domestic representative offices, and additional staffing of the credit
administration, loan servicing and information technologies areas.
The 17% or $129,000 increase in occupancy expense reflects the addition of new
offices in late 1998 in Detroit and Cleveland and in 1999 in St. Louis and an
increase in the leased square footage in the Company's Hartford headquarters
building to accommodate new hires. The increase of 26% or $101,000 in office
expenses and 28% or $132,000 in furniture and equipment reflects the increase in
personnel.
The 122% or $557,000 increase in marketing expense includes $70,000 of
advertising expense related to a retail certificate of deposit campaign
undertaken in March 1999 and a general increase in marketing related to new
representative offices and new product lines. Included in
16
marketing expense is $259,000 of domestic and international travel expenses and
$193,000 of master agent expenses reflecting the Company's continuing expansion
in the United States and abroad.
The 107% or $320,000 increase in outside service expense reflects increases in
legal fees related to the establishment of agent relationships and/or
representative offices status in several of the Company's international markets,
as well as the use of outside contractors to prepare files for the
securitization and sale of loans.
Other expenses increased $583,000 and include a $334,000 expense for the
estimated loss of a government guarantee on a single SBA loan managed for
investors. Excluding this claim, since 1990, the Company has made repairs on
government guaranteed loans totaling less than $100,000. At June 30, 1999, the
Company services guaranteed loans totaling $467.9 million.
For the six-month period ended June 30, 1999, other expenses included legal and
related expenses associated with various projects, including: changing the
Company's name; conversion from a nationally chartered Bank to a Connecticut
bank and trust company; and the establishment of a business relationship with
CIGNA Financial Services, Inc. and Connecticut General Life Insurance Company
with respect to the referrals for 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 ended September 30, 1999.
Income Taxes. The Company's effective tax rate increased to 41.3% for the six-
month period ended June 30, 1999 from 40% for the six-month period ended June
30, 1998 due to the non-deductibility of the portion of the Chief Executive
Officer's compensation over $1 million.
17
Results of Operations for the Three Months Ended June 30, 1999 and June 30, 1998
For the Three Months Ended June 30,
----------------------------------------
1999 1998 % Change
-------- -------- ----------
(amounts in thousands, except per share amounts)
Net interest income.......................
Provision for loan losses................. $1,581 $2,481 (36%)
449 1,125 (60)
Net interest income after provision..... -------- -------- ----------
Gain on loan sales........................ 1,132 1,356 (17)
Other non-interest income................. 6,189 5,537 12
Non-interest expense...................... 1,667 1,425 17
5,531 4,290 29
Income before income taxes.............. -------- -------- ----------
Income taxes.............................. 3,457 4,028 (14)
1,400 1,587 (12)
-------- -------- ----------
Net income...........................
$2,057 $2,441 (16%)
======== ======== ==========
Basic earnings per share.............
$ 0.25 $ 0.31
Diluted earnings per share........... ======== ========
$ 0.25 $ 0.30
======== ========
Weighted average shares - basic......
8,160 7,903
Weighted average shares - diluted.... ======== ========
8,359 8,214
======== ========
Net Income. The 16% or $384,000 decrease in net income for the quarter ended
June 30, 1999 as compared to the quarter ended June 30, 1998 is the result of a
decrease in the net interest margin and an increase in non-interest expenses
partially mitigated by an increase in gains on loan sales and non-interest
income.
Diluted earnings per share decreased 17% or $.05 to $.25 for the quarter ended
June 30, 1999 from $.30 per share for the quarter ended June 30, 1998.
Net Interest Income. Net interest income decreased 36% or $900,000 for the
quarter ended June 30, 1999 as compared to the quarter ended June 30, 1998 as a
result of a 53% or $78 million increase in average interest bearing liabilities.
The increase in interest-bearing liabilities was the result of the increase in
brokered certificates of deposit which were used by the Company to fund loan
volume and the first quarter branch sale. The net interest spread decreased 160
basis points as a result of a 107 basis point reduction in the loan yield and a
24 basis point increase in the cost of funds.
18
Average Balances, Interest, Yields and Rates
- --------------------------------------------
For The Three Months Ended For The Three Months Ended
June 30, 1999 June 30, 1998
------------------------------- -------------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------------------------- -------------------------------
(dollars in thousands)
Assets:
Loans (1):
Commercial................................ $157,331 $3,348 8.51% $154,473 $3,708 9.60%
Residential............................... 2,224 43 7.74% 5,339 118 8.84%
Other consumer............................ 605 13 8.61% 1,460 33 9.07%
-------- ------ ----- -------- ------ -----
Total loans.................................. 160,160 3,404 8.50% 161,272 3,859 9.57%
Investment securities........................ 65,651 946 5.76% 16,195 235 5.80%
Federal funds sold........................... 25,674 308 4.81% 23,289 310 5.34%
-------- ------ ----- -------- ------ -----
Total investment securities and funds sold... 91,325 1,254 5.50% 39,484 545 5.53%
-------- ------ ----- -------- ------ -----
Total earning assets......................... 251,485 4,658 7.41% 200,756 4,404 8.77%
Total non-earning ssets...................... 38,609 25,391
-------- --------
Total assets................................. $290,094 $226,147
======== ========
Liabilities:
Deposits:
Interest bearing demand deposits.......... $ 2,479 $ 13 2.10% $ 8,643 $ 54 2.51%
Premier money market...................... 5 0 4.17% 83,400 1,114 5.36%
Other savings............................. 4 0 0.00% 9,007 81 3.61%
Retail and IRA certificates of deposit.... 43,400 566 5.23% 29,805 422 5.68%
Brokered certificates of deposit.......... 178,681 2,377 5.34% 15,383 249 6.49%
-------- ------ ----- -------- ------ -----
Total deposits............................... 224,569 2,956 5.28% 146,238 1,920 5.27%
Warehouse borrowings......................... 167 119 NM 0 0 0.00%
Other borrowings............................. 177 2 4.53% 692 3 1.74%
-------- ------ ----- -------- ------ -----
Total interest bearing liabilities........... 224,913 3,077 5.49% 146,930 1,923 5.25%
-------- ------ ----- -------- ------ -----
Non-interest bearing liabilities:
Demand deposits........................... 6,896 34,070
Other liabilities......................... 6,842 1,981
-------- --------
Total non-interest bearing liabilities....... 13,738 36,051
Stockholders' equity......................... 51,443 43,166
-------- --------
Total liabilities and stockholders' equity... $290,094 $226,147
======== ========
Net interest income/net interest spread...... $1,581 1.92% $2,481 3.52%
====== ===== ====== =====
Net interest margin.......................... 2.45% 4.93%
===== =====
1999 Compared to 1998
Changes Due to (2):
-----------------------------------
Volume Rate Total
-----------------------------------
Assets:
Loans (1):
Commercial................................ $ 61 $(421) $ (360)
Residential............................... (60) (15) (75)
Other consumer............................ (18) (2) (20)
------- ------ --------
Total loans.................................. (17) (438) (455)
Investment securities........................ 713 (2) 711
Federal funds sold........................... 29 (31) (2)
------- ------ --------
Total investment securities and funds sold... 742 (33) 709
------- ------ --------
Total earning assets......................... 725 (471) 254
Total non-earning ssets......................
Total assets.................................
Liabilities:
Deposits:
Interest bearing demand deposits.......... $ (32) $ (9) $ (41)
Premier money market...................... (867) (247) (1,114)
Other savings............................. 0 (81) (81)
Retail and IRA certificates of deposit.... 177 (33) 144
Brokered certificates of deposit.......... 2,172 (44) 2,128
------- ------ --------
Total deposits............................... 1,450 (414) 1,036
Warehouse borrowings......................... 119 0 119
Other borrowings............................. (6) 5 (1)
------- ------ --------
Total interest bearing liabilities........... 1,563 (409) 1,154
------- ------ --------
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...... $ (838) $ (62) $ (900)
======= ====== ========
Net interest margin..........................
(1) For purposes of these computations, non-accruing loans are included in the
average balance.
(2) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
19
Interest Income. Interest income decreased 6% or $254,000 for the quarter ended
June 30, 1999 as compared to the quarter ended June 30, 1998 due to 107 basis
point reduction in the loan yield. The reduction in the yield was the result of
three prime rate decreases totaling 75 basis points in the last six-months of
1998 and an increase in the relative amount of LIBOR based loans included in the
Company's loan portfolio. LIBOR based loans are priced on average at LIBOR plus
250 basis points which, on average, approximates prime. However, prime based
loans are priced, on average, at prime plus 144 basis points. The loan yield
reduction was partially mitigated by an increase in investment interest income.
Average investment securities and federal funds sold were 131% or $52 million
higher for the three-month period ended June 30, 1999 as compared to the three-
month period ended June 30, 1998. The increase reflects the investment of
excess liquidity and the retention of certain notes by the Company upon
completion of loan securitizations in 1998 and 1999.
Interest Expense. Interest expense increased 60% or $1.2 million for the
quarter ended June 30, 1999 when compared to the quarter ended June 30, 1998 due
to a 53% or $78 million increase in the average balance of interest bearing
deposits. The average balance in brokered certificates of deposit increased
$163 million. These deposits, which mature periodically within the next nine
months, were used to fund the $151 million sale of the checking, savings and
money market deposits.
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $449,000 for the quarter ended June 30, 1999 as compared to $1.1 million
for the quarter ended June 30, 1998. See "Allowance for Loan Losses" for
further analysis of the provision and related data.
20
Non-Interest Income. Non-interest income is comprised of the following items:
For the Three Months Ended
June 30,
-------- -------- --------
Non-Interest Income: 1999 1998 % Change
-------- -------- --------
(dollars in thousands)
Gain on loan sales:
SBA sales............................. $ 1,598 $ 1,690 (5)%
USDA sales............................ 981 568 73
Ex-Im working capital sales 131 200 (35)
Ex-Im medium term sales............... 375 818 (54)
-------- -------- --------
Gain on guaranteed loan sales.... 3,085 3,276 (6)
Other loan sales...................... 223 (104) (314)
Loan backed securitizations........... 2,810 2,365 19
Loans to commercial paper conduit .... 71 - -
-------- -------- --------
Total gain on loan sales......... 6,189 5,537 12
Loan servicing income and fees.......... 1,626 1,059 54
Service charges and other deposit fees.. 6 146 (96)
Other income............................ 35 220 (84)
-------- -------- --------
Total non-interest income............... $ 7,856 $ 6,962 13%
======== ======== ========
The 13% or $894,000 increase in non-interest income for the three-month period
ended June 30, 1999 as compared to the three-month period ended June 30, 1998
was primarily due to a 12% or $652,000 increase in gains on loan sales and a 54%
or $567,000 increased in loan servicing and other fee income.
The increase in gains on loan sales was attributable to a 19% or $445,000
increase in gain on loan backed securitizations which, as explained earlier,
resulted from the June securitization of the unguaranteed portions of SBA loans.
The increase in loan servicing and other fee income includes a 136% or $833,000
increase in loan servicing income which reflects the 43% or $207 million
increase in the average balance of loans managed for others.
Other fee income for the three-month period ended June 30, 1998 included a
$125,000 gain on the sale of the Company's residential mortgage servicing rights
and an $83,000 gain on the sale of merchant credit card servicing commissions.
These transactions were undertaken to divest the Company of operations functions
not directly related to its primary commercial loan servicing business.
21
Loan Servicing Income and Fees For the Three Months Ended
- ------------------------------
June 30,
---------------------------------------------
1999 1998 % Change
--------- --------- ----------
(dollars in thousands)
Loan Servicing Income:
SBA guaranteed loans............................... $ 855 $ 345 148%
USDA guaranteed loans.............................. 234 72 225
Ex-Im working capital loans........................ 61 55 11
Ex-Im medium term loans............................ 68 85 (20)
Loan securitizations............................... 146 - -
Other loans........................................ 80 54 48
--------- --------- ---------
Loan servicing income........................ 1,444 611 136
Other fees........................................... 182 448 (59)
--------- --------- ---------
Total loan servicing income and fees................. $ 1,626 $ 1,059 54%
========= ========= =========
Loans Managed for Others
- ---------------------------
Average balance...................................... $691,107 $484,564 43%
========= ========= =========
Ending balance....................................... $735,149 $537,498 37%
========= ========= =========
Non Interest Expense. Non-interest expense is comprised of the following items:
For the Three Months Ended
June 30,
-------------------------------------------
1999 1998 % Change
--------- --------- ---------
(dollars in thousands)
Non-Interest Expense:
Salaries and benefits........................... $ 3,552 $ 2,765 28%
Occupancy....................................... 422 377 12
Office expenses................................. 273 198 38
Marketing expenses.............................. 526 258 104
Furniture and equipment......................... 306 243 26
Outside services................................ 300 198 52
Loan collection................................. 30 30 0
Other........................................... 122 221 (45)
--------- --------- ---------
Total non-interest expense............ $ 5,531 $ 4,290 29%
========= ========= =========
The 29% increase in non-interest expense for the quarter ended June 30, 1999 as
compared to the quarter ended June 30, 1998 reflected the 24% increase in the
average number of full time employees for the periods and the annual increase in
salaries as of January 1999. The number of full time employees increased to 191
at June 30, 1999 from 157 at June 30, 1998. Non-personnel expenses increased
30% for the quarter ended June 30, 1999 due to an increase in occupancy,
marketing and related expense which support the Company's growth.
22
Income Taxes. The Company's effective tax rate for the quarter ended June 30,
1999 increased to 41% from 40% for the quarter ended June 30, 1998 reflecting
the non-deductibility of the portion of the Chief Executive Officer's
compensation over $1 million.
Discussion of Changes in Financial Condition to June 30, 1999 from December 31,
1998
General. Total assets remained relatively flat at $271.2 million at June 30,
1999 as compared to $273.7 million at December 31, 1998.
Cash and cash equivalents. Cash and cash equivalents decreased 63% or $36.8
million to $21.5 million at June 30, 1999 from the December 31, 1998 balance of
$58.3 million. The decrease reflects the investment of excess liquidity in
investment vehicles and the funding of loan growth.
Prepaid expenses and other assets. Prepaid expenses and other assets increased
38% or $9.1 million to $23.9 million at June 30, 1999 from $14.8 million at
December 31, 1998. The increase is primarily attributable to the increase in
servicing assets to $18 million at June 30, 1999 from $13.7 million at December
31, 1998. The servicing asset has increased as a result of the sale and
securitization of loans totaling $158.7 million dollars during the six-month
period ended June 30, 1999. As discussed above, a valuation of the servicing
asset, which includes monitoring the prepayment and default experience of each
servicing portfolio, is performed quarterly. Any impairment deemed to be
permanent would result in a write down of the asset.
23
Loans. The Company's loan portfolio and loans managed for others portfolio were
as follows:
June 30, December 31,
Loan Portfolio 1999 1998
- -------------- ----------- ------------
(dollars in thousands)
SBA loans................................................. $ 6,479 $ 22,774
USDA loans................................................ 17,987 14,017
Ex-Im working capital loans............................... 3,078 4,796
Ex-Im term loans.......................................... 1,922 62
Insured term loans........................................ 28,422 14,210
Import loans.............................................. 4,809 4,681
Equipment finance loans................................... 7,050 4,020
Other commercial loans.................................... 39,089 35,785
Owner occupied commercial mortgages....................... 15,425 6,917
Non-owner occupied commercial mortgages................... 2,774 3,139
Other loans............................................... 2,701 3,545
----------- ------------
Total loans............................................ 129,736 113,946
Loans held for sale....................................... 24,613 8,577
Less:
Discount on 1retained loans............................ 1,940 1,419
Net deferred loan origination costs.................... (204) (431)
Allowance for loan losses.............................. 4,550 4,000
----------- ------------
Loans, net............................................. $ 148,063 $ 117,535
=========== ============
Loans Managed for Others
- ------------------------
Guaranteed Loans
SBA.................................................... $ 262,370 $ 245,073
USDA................................................... 91,917 75,526
Ex-Im working capital.................................. 13,763 14,788
Ex-Im term............................................. 96,829 102,638
Inventory buyer credit................................. 2,534 300
FHLMC.................................................. 449 455
----------- ------------
467,862 438,780
Unguaranteed Portions and Unguaranteed Loans
SBA.................................................... 97,687 74,033
USDA................................................... 5,859 6,173
Other commercial....................................... 162,102 135,380
Home equity lines...................................... 1,639 2,166
----------- ------------
267,287 217,752
----------- ------------
Total loans managed for others............................ $ 735,149 $ 656,532
=========== ============
Total loans under management.............................. $ 889,498 $ 779,055
24
Loans and loans held for sale increased $31.8 million to $154.3 million at June
30, 1999 from $122.5 million at December, 31, 1998. Loan originations and line
of credit commitments were $230.1 million for the six-month period ended June
30, 1999 and loan sales were $158.7 million.
Allowance for Loan Losses. The Company reviews the adequacy of the Allowance
for Loan Losses quarterly. At June 30, 1999, the Allowance totaled $4.6 million
and represented 2.95% of loans including loans held for sale. The Allowance
totaled $4.0 million at December 31, 1998 and represented 3.3% of loans. In
establishing the level of the Allowance the Company considers the percentage of
unguaranteed commercial loans, the seasoning of the commercial loan portfolio,
and the introduction of new loan products where the Company has limited
historical experience. Net charge-offs for the six-month period ended June 30,
1999 increased $432,000 to $1.4 million from $1.0 million for the six-month
period ended June 30, 1998. The Allowance at June 30, 1999 covered 1998 annual
charge-offs 2.10 times.
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,
---------------------- -------------------- ------------
1999 1998 1999 1998 1998
----------- --------- -------- -------- ------------
(dollars in thousands)
Balance of allowance for loan losses
at the beginning of the period.......................... $ 4,500 $ 3,650 $ 4,000 $ 3,100 $ 3,100
Charge-offs:
SBA loans............................................... 64 300 157 300 775
Ex-Im working capital loans............................. - - 188 - -
Insured term loans...................................... - - 112 - -
Other commercial loans.................................. 127 383 749 617 959
Import loans............................................ 239 - 265 - -
Non-owner occupied commercial mortgages................. - 223 - 223 582
Other loans............................................. - - - 8 8
----------- --------- -------- -------- ------------
Total charge-offs..................................... 430 906 1,471 1,148 2,324
Recoveries:
SBA loans............................................... 1 - 2 - -
Other commercial loans.................................. 30 18 31 20 30
Non-owner occupied commercial mortgages................. - 113 - 122 123
----------- --------- -------- -------- ------------
Total recoveries...................................... 31 131 33 142 153
----------- --------- -------- -------- ------------
Net charge-offs............................................ 399 775 1,438 1,006 2,171
Provision for loan losses.................................. 449 1,125 1,988 1,906 3,071
----------- --------- -------- -------- ------------
Balance of allowance for loan
losses at end of period............................... $ 4,550 $ 4,000 $ 4,550 $ 4,000 $ 4,000
=========== ========= ======== ======== ============
Total loans and loans held for sale........................ $ 154,349 $ 141,755 $154,349 $141,755 $ 122,523
=========== ========= ======== ======== ============
Allowance to total loans................................... 2.95% 2.82% 2.95% 2.82% 3.26%
=========== ========= ======== ======== ============
25
Non-performing loans for the six-month period ended June 30, 1999 increased
$260,000 to $3.4 million from December 31, 1998. Non-performing loans relative
to total loans decreased from 2.53% at December 31, 1998 to 2.18% at June 30,
1999.
The following table sets forth information regarding the Company's non-
performing loans at the dates indicated:
Non-Performing Loans June 30, December 31,
1999 1998
--------- ------------
Commercial: (dollars in thousands)
Unguaranteed portions:
SBA and USDA loans............................................ $ 1,518 $ 1,533
Ex-Im working capital loans................................... 385 418
Insured term loans.................................................. 93 112
Other commercial loans.............................................. 622 890
Import loans........................................................ 455 -
Owner occupied commercial mortgages................................. - 6
Non-owner occupied commercial mortgages............................. 150 -
Consumer loans...................................................... 141 145
-------- --------
Total non-performing loans.................................... $ 3,364 $ 3,104
======== ========
Total non-performing loans to total loans................................ 2.18% 2.53%
======== ========
Total non-performing loans to total assets............................... 1.24% 1.13%
======== ========
Allowance to total non-performing loans.................................. 135% 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 June 30, 1999 represented 20% 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's
private credit insurance policy includes a deductible which provides that the
Company is responsible for the first loss on the uninsured portion of the loan.
The deductible currently in place on the policy is $1.4 million.
26
June 30, December 31,
1999 1998
-------- ------------
Allocation of the Allowance by
Category of Loans:
Unguaranteed Portions of:
SBA loans...................................................... $ 246 $ 841
USDA loans..................................................... 487 209
Ex-Im working capital loans.................................... 120 245
Ex-Im term loans............................................... 33 2
Insured term loans.................................................. 948 479
Import loans........................................................ 314 94
Equipment finance loans............................................. 92 55
Other commercial loans.............................................. 1,436 1,311
Owner occupied commercial mortgages................................. 262 128
Non-owner occupied commercial mortgages............................. 56 63
Other loans......................................................... 39 43
Loans held for sale................................................. 123 43
Unallocated......................................................... 394 487
-------- --------
Total allowance for loan losses................................ $ 4,550 $ 4,000
======== ========
Percent of Loans in Each Category to Total Loans:
Unguaranteed Portions of:
SBA loans...................................................... 4.2% 18.6%
USDA loans..................................................... 11.7 11.4
Ex-Im working capital loans.................................... 2.0 3.9
Ex-Im term loans............................................... 1.2 0.1
Insured term loans.................................................. 18.4 11.6
Import loans........................................................ 3.1 3.8
Equipment finance................................................... 4.6 3.3
Other commercial.................................................... 24.8 29.2
Owner occupied commercial mortgages................................. 10.5 5.6
Non-owner occupied commercial mortgages............................. 1.8 2.6
Other loans......................................................... 1.7 2.9
Loans held for sale................................................. 16.0 7.0
-------- --------
Total.......................................................... 100% 100%
========= ========
Stockholders' Equity. Stockholders' equity increased 10% or $5 million to $54.0
million at June 30, 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 $484,000
for the six-month period ended June 30, 1999.
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 at fair
market value 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
27
agreement that such shares may be registered for sale in the future. The Company
received a cash payment of $20,000 and a promissory note in the amount of
$1,980,000 for the shares. 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 a reduction to stockholders' equity since it is collateralized by the
stock of the Company. For the six-month period ended June 30, 1999, the Company
has accrued $35,000 of interest income related to this note.
Liquidity and Capital Resources. The Company's primary sources of liquidity and
funding are certificates of deposit, a warehouse line of credit, a commercial
paper conduit and loan sales and securitizations. Secondary sources of liquidity
include a Federal Home Loan Bank line of credit and federal funds purchased.
Management considers scheduled cash flows from existing clients and borrowers
and projected deposit levels, estimated liquidity needs for maturing
certificates of deposit, approved extensions of credit, and unadvanced
commitments to existing borrowers in determining the level and maturity of
funding necessary to support operations. The on-going sale of the government
guaranteed portions of loans at origination also provides cash to fund
operations. Such loan sales totaled $158.7 million for the six-month period
ended June 30, 1999, and represented 69% of the $230.1 million total loan
originations for the six-month period.
As of June 30, 1999 the Company had outstanding commitments to fund loans and
lines of credit of $78.0 million and had issued letters of credit totaling $33.4
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 certificate of deposit maturities.
A subsidiary of the Bank entered into an interest rate swap with a notional
amount of $28 million in December 1998. The intent of the swap is 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 six-month
period ended June 30, 1999, $4,000 of interest expense had been recorded related
to the swap.
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 ratio of 20.65% and a Tier 1 capital to assets
or leverage ratio of 17.99% at June 30, 1999.
28
Year 2000 Compliance
As the Year 2000 approaches, a critical business issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. In brief, many existing application software products in the
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 banking regulators perform 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 an 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.
29
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.
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 has been tested by an independent third
party 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 inability of the Company to access wholesale funds providers or
other borrowing facilities; or 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's interest rate risk position
since December 31, 1998. Other types of market risk, such as foreign exchange
risk and commodity price risk, do not arise in the normal course of the
Company's business activities. A comprehensive qualitative and quantitative
discussion and analysis regarding market risk was disclosed in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 which is filed
with the Securities and Exchange Commission.
30
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Because the nature of the business of the Registrant involves the
collection of numerous accounts, the validity of liens and compliance
with state and federal lending laws, the Registrant is subject to
claims and legal actions in the ordinary course of its business.
While it is impossible to estimate with certainty the ultimate legal
and financial liability with respect to such claims and actions, the
Registrant believes that the aggregate amount of such liabilities will
not result in monetary damage which in the aggregate would have a
material adverse effect on the financial position, results of
operations or cash flows of the Registrant.
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
At the Annual Meeting of Shareholders of the Company held on April 27,
1999 at the Hartford Hilton Hotel in Hartford, Connecticut, the
following proposal was approved by the holders of the Company's common
stock voting as indicated:
1. Proposal to elect one Director of the Company who will serve for a
three-year term to expire in 2002:
FOR WITHHELD
--- --------
Class II Director: Brett N. Silvers 7,198,643 11,375
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.*
31
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule.
* 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.
Reports on Form 8-K
-------------------
The registrant did not file any reports on Form 8-K during the second
quarter of 1999.
32
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 16, 1999 By: /s/ Brett N. Silvers
--------------- --------------------
Brett N. Silvers
Its Chief Executive Officer
and President
Date: August 16, 1999 By: /s/ Leslie A. Galbraith
--------------- -----------------------
Leslie A. Galbraith
Its Treasurer and Secretary
and Chief Financial Officer
33
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
34