SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-22861
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FIRST INTERNATIONAL BANCORP, INC.
---------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1151731
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Commercial Plaza, Hartford, CT 06103
----------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 860-727-0700
------------
Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 of 15(d) or the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. The number of shares of common
stock, par value $.10 per share, outstanding on October 29, 1998 was 7,947,837.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
September 30, December 31,
1998 1997
------------- -------------
(unaudited)
Cash and cash equivalents ........................ $ 30,515 $ 17,394
Investment securities ............................ 21,525 22,271
Loans, net ....................................... 151,273 130,625
Loans held-for-sale .............................. 7,082 9,070
Premises and equipment, net ...................... 3,912 2,694
Receivable from loans sold ....................... 27,557 28,775
Prepaid expenses and other assets ................ 10,422 8,022
------------- -------------
Total assets ................................ $ 252,286 $ 218,851
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
------------- -------------
1998 1997
------------- -------------
(unaudited)
Deposits ......................................... $ 202,848 $ 172,321
Other liabilities ................................ 2,774 4,382
------------- -------------
Total liabilities ........................... 205,622 176,703
Stockholders' equity:
Common stock, 7,932,537 and 7,866,735 shares
issued and outstanding ...................... 793 787
Paid-in capital in excess of par value ........... 32,275 32,083
Stockholder note receivable ...................... (925) (877)
Unrealized holding gain on investments
available-for-sale, net ....................... 359 12
Retained earnings ................................ 14,162 10,143
------------- -------------
Total stockholders' equity ................. 46,664 42,148
------------- -------------
Total liabilities and stockholders' equity . $ 252,286 $ 218,851
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
2
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Interest income:
Loans, including net fees ..................................... $ 3,764 $ 3,293 $ 11,619 $ 9,124
Investment securities ......................................... 339 323 890 802
Federal funds sold ............................................ 742 197 1,214 510
-------- -------- -------- --------
Total interest income ...................................... 4,845 3,813 13,723 10,436
Interest expense:
Deposits ...................................................... 2,149 1,687 5,739 4,679
Other ......................................................... 6 7 21 27
-------- -------- -------- --------
Total interest expense ..................................... 2,155 1,694 5,760 4,706
-------- -------- -------- --------
Net interest income ........................................... 2,690 2,119 7,963 5,730
Provision for possible loan losses ................................ 659 157 2,565 1,116
-------- -------- -------- --------
Net interest income after
provision for possible loan losses ......................... 2,031 1,962 5,398 4,614
Non-interest income:
Gain (loss) on sale of:
Guaranteed commercial loans ................................ 2,011 1,583 7,983 6,403
Unguaranteed portions of commercial loans .................. 433 -- 2,915 370
Other commercial loans ..................................... 90 156 18 384
Residential loan sales ..................................... 9 -- (14) 60
-------- -------- -------- --------
Total gain on loan sales ................................ 2,543 1,739 10,902 7,217
Loan servicing income and other fees .......................... 986 716 2,971 1,837
Service charges and other deposit fees ........................ 106 119 397 323
Other income .................................................. 16 229 251 229
-------- -------- -------- --------
Total non-interest income ............................... 3,651 2,803 14,521 9,606
-------- -------- -------- --------
Total operating income ........................................ 5,682 4,765 19,919 14,220
Non-interest expense:
Salaries and benefits ......................................... 2,604 2,500 7,606 6,452
Occupancy ..................................................... 376 239 1,124 692
Furniture and equipment ....................................... 252 182 720 493
Outside services .............................................. 225 75 523 360
Office expenses ............................................... 223 152 605 372
Marketing ..................................................... 406 199 1,003 597
Loan collection ............................................... 76 40 164 137
Other ......................................................... 161 85 409 279
-------- -------- -------- --------
Total non-interest expense ................................. 4,323 3,472 12,154 9,382
-------- -------- -------- --------
Income before income taxes .................................... 1,359 1,293 7,765 4,838
Provision for income taxes ........................................ 474 542 3,036 2,034
-------- -------- -------- --------
Net income ................................................. $ 885 $ 751 $ 4,729 $ 2,804
======== ======== ======== ========
Basic earnings per common share ................................... $ 0.11 $ 0.13 $ 0.60 $ 0.48
======== ======== ======== ========
Diluted earnings per common share ................................. $ 0.11 $ 0.12 $ 0.58 $ 0.47
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
3
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
For the Nine Months Ended
September 30,
------------------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net cash provided by operating activities ....................................... $ 14,310 $ 4,796
-------- --------
Cash flows from investing activities:
Net increase in loans ........................................................... (30,552) (27,109)
Purchase of investment securities available for sale ............................ (8,468) (12,502)
Proceeds from maturities and principal repayments of
investment securities available for sale ....................................... 4,678 1,463
Proceeds from maturities and principal repayments of
investment securities held to maturity ......................................... 4,714 98
Purchase of equity securities ................................................... (709) (782)
Proceeds from sale of equity securities and investment
securities available for sale ................................................ 1,102 --
Capital expenditures, net ....................................................... (1,903) (1,258)
-------- --------
Net cash used in investing activities ..................................... (31,138) (40,090)
-------- --------
Cash flows from financing activities:
Net increase in deposits ........................................................ 30,527 15,694
Net decrease in other borrowings ................................................ (67) (902)
Proceeds from issuance of common stock .......................................... 199 20,908
Dividends paid .................................................................. (710) (494)
-------- --------
Net cash provided by financing activities ................................. 29,949 35,206
Net increase (decrease) in cash and cash equivalents ..................................... 13,121 (88)
Cash and cash equivalents at beginning of period ......................................... 17,394 18,867
-------- --------
Cash and cash equivalents at end of period ............................................... $ 30,515 $ 18,779
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
General
- -------
The consolidated financial statements include the accounts of First
International Bancorp, Inc. (the "Company") and its wholly-owned subsidiary,
First National Bank of New England (the "Bank") as well as those of a special
purpose, bankruptcy remote subsidiary established in June 1998 to facilitate the
completion of loan securitizations. Intercompany accounts and transactions have
been eliminated in consolidation. The Bank operates a full service branch at its
headquarters in Hartford, Connecticut and representative offices which are
responsible for regional loan origination efforts, in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Rochester, New
York; Pittsburgh and Philadelphia, Pennsylvania; 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. All adjustments (consisting of only normal
recurring adjustments) that are necessary, in the opinion of management, for a
fair presentation of the interim financial statements, have been included. The
results of operations for the interim periods shown are not necessarily
indicative of the results to be expected for the entire fiscal year or any
interim period. The interim financial information should be read in conjunction
with the Company's Annual Report for the year ended December 31, 1997.
Certain 1997 amounts have been reclassified to conform with the 1998
presentation. These reclassifications had no impact on net income.
Public Offering
- ---------------
The Company sold a total of 1,955,000 shares of its common stock in an
underwritten public offering that commenced in September 1997 (the "Offering").
The Company received net proceeds, after underwriting commissions and expenses,
of approximately $23,800,000 from the Offering. The Company's common stock began
trading on The NASDAQ Stock Market (sm) under the symbol FNCE on September 23,
1997.
5
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation, continued
Earnings Per Share
- ------------------
Earnings per share for all periods presented have been calculated in accordance
with SFAS No. 128 "Earnings Per Share," which requires the presentation of basic
and diluted earnings per share. Basic earnings per share is determined based on
the weighted average shares outstanding, while diluted earnings per share
reflects the potential dilution that could occur if all outstanding options to
purchase common stock were exercised.
Comprehensive Income
- --------------------
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income,"
which established standards for reporting and display of comprehensive income,
defined as the change in equity of a business enterprise during a period from
nonowner sources. SFAS No. 130 is effective for years beginning after December
15, 1997 and requires reclassification of financial statements for all years
presented. The adoption of SFAS No. 130 requires the Company to present the
impact of any change in the market value of the "available for sale" investment
portfolio or other components of comprehensive income. For the nine month
periods ended September 30, 1998 and 1997 such components of comprehensive
income totaled $347,000 and $76,000, after income taxes, respectively. All
amounts were comprised only of changes in the valuation allowance for the
investment portfolio.
2. Recent Accounting Pronouncements
SFAS No. 131
- ------------
In June 1997, the FASB also issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires public companies
to report financial and descriptive information about operating segments in
annual financial statements and requires selected information about operating
segments to be reported in interim financial reports issued to shareholders.
Operating segment financial information is required to be reported on the basis
that it is used internally for evaluating segment performance and allocation of
resources. The Company is currently reviewing this pronouncement, and will adopt
it for the December 31, 1998 annual reporting period. As permitted under SFAS
No. 131, the Company has elected not to utilize this presentation for interim
financial statements issued in this year of adoption.
SFAS No. 132
- ------------
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement, which is effective
for the Company's year ending December 31, 1998, changes employers' disclosures
related to pension and other postretirement plans. This statement will not
impact the Company's disclosures related to its defined contribution plan.
6
SFAS No. 133
- ------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which is effective for all statements
issued after December 31, 2000. This statement establishes accounting and
reporting standards for derivative instruments and for hedging activities, and
requires that all derivatives be recognized as either assets or liabilities in
the entity's balance sheet and be measured at fair value. Changes in the fair
value of the derivative instruments are to be recognized depending on the
intended use of the derivative and whether or not it has been designated as a
hedge. This statement will not impact the Company's financial statements, since
the Company does not currently hold any derivative instruments or engage in any
hedging activities.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results of operations may differ materially
from those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, without limitation, (i) the
continuation in their present form of the government guarantee loan programs of
the SBA, USDA and Ex-Im Bank, upon which a significant portion of the Company's
business depends, (ii) the Company's ability to continue its recent growth by
following a non-traditional operating strategy of deriving a significant portion
of its revenues from non-interest income, principally gains on the sale of
domestic and international commercial loans and related servicing income, in an
increasingly competitive market for loan originations, (iii) the Company's
ability to accurately estimate the allowance and provision for possible loan
losses and the factors underlying its calculation of the value of its servicing
assets, including related interest-only strips, and (iv) the Company's lending
concentration in the Northeast United States, which has certain economic risks,
including higher "embedded" costs of doing business, such as fluctuating real
estate values and the declining importance of manufacturing as the key industry
in the region. Additional information concerning certain risks and uncertainties
that would cause actual results to differ materially from those projected or
suggested in the forward-looking statements is contained in the Company's
filings with the Securities and Exchange Commission, including those risks and
uncertainties discussed in the Company's Final Prospectus, dated September 22,
1997, in the section entitled "Risk Factors." The forward-looking statements
contained herein represent the Company's judgment as of the date of this Form
10-Q, and the Company cautions readers not to place undue reliance on such
statements.
7
General
The Company's earnings are derived from (i) the origination and sale of
government guaranteed and other commercial loans, (ii) net interest income,
which is the difference between interest earned on interest-earning assets
(principally loans) and interest-bearing liabilities (principally deposits), and
(iii) fee income on loans serviced for others.
The Company completed an underwritten public stock offering in September 1997
and received net proceeds of $23.8 million upon the issuance of 1,955,000 shares
of common stock.
Results of Operations
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 % Change 1998 1997 % Change
---------- ---------- ---------- ---------- ---------- ----------
(amounts in thousands, except per share amounts)
Net interest income................................. $ 2,690 $ 2,119 27% $ 7,963 $ 5,730 39%
Provision for loan losses........................... 659 157 320% 2,565 1,116 130%
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision............ 2,031 1,962 4% 5,398 4,614 17%
Gain on loan sales.................................. 2,543 1,739 46% 10,902 7,217 51%
Other non-interest income........................... 1,108 1,064 4% 3,619 2,389 51%
Non-interest expense................................ 4,323 3,472 25% 12,154 9,382 30%
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes..................... 1,359 1,293 5% 7,765 4,838 61%
Income taxes........................................ 474 542 (13%) 3,036 2,034 49%
---------- ---------- ---------- ---------- ---------- ----------
Net income................................ $ 885 $ 751 18% $ 4,729 $ 2,804 69%
========== ========== ========== ========== ========== ==========
Basic earnings per share.................... $ 0.11 $ 0.13 $ 0.60 $ 0.48
========== ========== ========== ==========
Diluted earnings per share.................. $ 0.11 $ 0.12 $ 0.58 $ 0.47
========== ========== ========== ==========
Weighted average shares - basic............. 7,916 5,930 7,897 5,826
========== ========== ========== ==========
Weighted average shares - diluted........... 8,180 6,159 8,198 6,025
========== ========== ========== ==========
Comparison of the Nine Months Ended September 30, 1998 and 1997:
Net Income. Net income increased 69% or $1.9 million for the nine month period
ended September 30, 1998 when compared to the nine month period ended September
30, 1997, as increases in net interest income, gain on loan sales and loan
servicing income were offset by increases in the provision for loan losses and
non-interest expense. The increases in both income and expense are reflective of
the increases in the Company's on and off-balance sheet loan serviced
portfolios.
Diluted earnings per share increased 23% or $.11 to $.58 per share for the nine
month period ended September 30, 1998 from $.47 per share for the nine month
period ended September 30, 1997. Average weighted shares outstanding increased
36%, reflecting the impact of the Company's September 1997 public offering of
1,955,000 shares of common stock.
8
Net Interest Income. Net interest income increased 39% or $2.2 million for the
nine month period ending September 30, 1998 when compared to the same period
ending September 30, 1997, due to a 34% or $50.5 million increase in average
earning assets, with only a 22% or $26.7 million increase in average earning
liabilities due to deployment of the $23.8 million net proceeds from the
Company's 1997 public stock offering. The net interest spread for the nine month
period ending September 30, 1998 decreased 23 basis points when compared to the
net interest spread for the same period ending September 30, 1997, as a greater
amount of funds were held in liquid federal funds sold to fund loan and letter
of credit commitments.
9
Average Balances, Interest, Yields and Rates
The following table presents daily average statements of condition, which
include nonaccrual loans, the components of net interest income and selected
statistical data on a fully taxable equivalent basis (1).
For The Nine Months Ended For The Nine Months Ended 1998 Compared to 1997
September 30, 1998 September 30, 1997 Changes Due to (3):
-------------------------- -------------------------- ----------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Volume Rate Total
-------- -------- ------ -------- ------- -------- -------- ------ --------
(dollars in thousands)
Assets:
Loans (2):
Commercial ............................ $141,566 $ 11,193 10.54% $107,264 $ 8,548 10.63% $ 2,712 $ (67) $ 2,645
Residential ........................... 5,421 328 8.07% 8,528 463 7.24% (188) 53 (135)
Other consumer ........................ 1,411 98 9.28% 1,577 113 9.58% (11) (4) (15)
-------- -------- ------ -------- ------- ------ -------- ------ --------
Total loans .............................. 148,398 11,619 10.44% 117,369 9,124 10.37% 2,513 (18) 2,495
Investment securities .................... 19,530 890 6.08% 16,659 802 6.42% 131 (43) 88
Federal funds sold ....................... 29,141 1,214 5.57% 12,546 510 5.43% 691 13 704
-------- -------- ------ -------- ------- ------ -------- ------ --------
Total investment securities and
funds sold ............................ 48,671 2,104 5.77% 29,205 1,312 5.99% 822 (30) 792
-------- -------- ------ -------- ------- ------ -------- ------ --------
Total earning assets ..................... 197,069 13,723 9.28% 146,574 10,436 9.49% 3,335 (48) 3,287
Total non-earning assets ................. 33,337 21,264
-------- --------
Total assets ............................. $230,406 $167,838
======== ========
Liabilities:
Deposits:
Interest bearing demand deposits ...... $ 8,567 $ 152 2.37% $ 7,100 $ 132 2.49% $ 26 $ (6) $ 20
Premier money market .................. 89,136 3,582 5.37% 70,969 2,808 5.29% 730 44 774
Other savings ......................... 9,184 205 2.98% 5,688 81 1.90% 78 46 124
Certificates of deposit ............... 32,816 1,399 5.70% 32,067 1,392 5.80% 31 (24) 7
IRA certificates of deposit ........... 9,375 401 5.72% 6,457 266 5.51% 125 10 135
-------- -------- ------ -------- ------- ------ -------- ------ --------
Total deposits ........................... 149,078 5,739 5.15% 122,281 4,679 5.12% 990 70 1,060
Other borrowings ......................... 615 21 4.57% 668 27 5.20% (3) (3) (6)
-------- -------- ------ -------- ------- ------ -------- ------ --------
Total interest bearing liabilities ....... 149,693 5,760 5.14% 122,949 4,706 5.12% 987 67 1,054
-------- -------- ------ -------- ------- ------ -------- ------ --------
Non-interest bearing liabilities:
Demand deposits ....................... 34,486 27,222
Other liabilities ..................... 2,649 2,358
-------- --------
Total non-interest bearing liabilities ... 37,135 29,580
Stockholders' equity ..................... 43,578 15,309
-------- --------
Total liabilities and stockholders' equity $230,406 $167,838
======== ========
Net interest income/net interest spread .. $ 7,963 4.14% $ 5,730 4.37% $ 2,348 $ (115) $ 2,233
======== ====== ======= ====== ======== ====== ========
Net interest margin ...................... 5.38% 5.20%
====== ======
(1) Fully taxable equivalent income was calculated based on statutory federal
and state tax rates.
(2) For purposes of these computations, non-accruing loans are included in the
average balance.
(3) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
10
Interest Income. Interest income increased 32% or $3.3 million to $13.7 million
for the nine month period ended September 30, 1998 from $10.4 million for the
nine month period ended September 30, 1997, due to a 32% or $34.3 million
increase in the average balance of commercial loans. New domestic and
international loan products have contributed to the commercial loan growth as
well as increased production in the Company's existing products due to
geographical expansion in the U. S. The Company opened five regional loan
production offices in 1997, which have contributed to the year to date increases
in commercial loan originations. Total commercial originations totaled $275
million for the nine month period ended September 30, 1998 as compared to $191
million for the same period in 1997. During the past year, the Company has begun
to market privately insured short and medium term loan products to foreign
buyers of U.S. made goods. The products are offered as an alternative to the
Company's Ex-Im Bank guaranteed products. The Company also introduced a
production equipment term loan product to U. S. manufacturers. The average
balance in these loan products has increased $5.6 million to $6.3 million for
the nine month period ended September 30, 1998 from $674,000 for the nine month
period ended September 30, 1997.
The interest income increase also reflects the $17 million or 132% increase in
the average balance of federal funds sold for the nine month period ended
September 30, 1998 as compared to the nine month period ended September 30,
1997.
Interest Expense. Interest expense increased 22% or $1.1 million to $5.8 million
for the nine month period ended September 30, 1998 from $4.7 million for the
nine month period ended September 30, 1997, as the average balance of
interest-bearing deposits increased 22% or $26.8 million. The average balance of
higher costing premier deposit products increased 26% or $18.2 million while the
rate on these deposits remained relatively flat for the periods.
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $2.6 million for the nine month period ended September 30, 1998 as
compared to $1.1 million for the nine month period ended September 30, 1997. The
increase reflects an additional provision made to bring the Allowance for Loan
Losses to $4.2 million at September 30, 1998 from $3.1 million at December 31,
1997. This increase provided for an increasing percentage of unguaranteed
commercial loans, and a general seasoning of the portfolio. See "Allowance for
Loan Losses" for further analysis of the provision and related data.
11
Non-Interest Income. Non-interest income is comprised of the following items:
For the Nine Months Ended
September 30,
-----------------------
Non-Interest Income: 1998 1997
----------- ----------
(dollars in thousands)
Gain (loss) on loan sales:
SBA sales......................................... $ 4,142 $ 3,438
USDA sales........................................ 1,553 1,286
Ex-Im working capital sales....................... 423 178
Ex-Im term sales.................................. 1,865 1,501
Unguaranteed portions of SBA and USDA............ 2,915 370
Other commercial sales............................ 18 384
Residential sales................................. (14) 60
----------- ----------
Total gain on loan sales..................... 10,902 7,217
Loan servicing income and other fees................ 2,971 1,837
Service charges and other deposit fees.............. 397 323
Other income........................................ 251 229
----------- ----------
Total non-interest income........................... $ 14,521 $ 9,606
=========== ==========
The 51% or $5.0 million increase in non-interest income for the nine month
period ended September 30, 1998 as compared to the nine month period ended
September 30, 1997 was due primarily to a 51% or $3.7 million increase in the
gain on the sale of loans and a 62% or $1.1 million increase in loan servicing
income and fees.
Year to date gains at September 30, 1998 on Ex-Im working capital loan sales
increased 138% or $245,000 to $423,000 from $178,000 for the same period last
year. Working Capital line originations increased 58% or $12.8 million for the
period due to increased marketing and cross selling efforts by the Company's
lenders.
Gains on SBA, USDA and Ex-Im term loan sales each increased by more than 20% or
$1.3 million in the aggregate when compared to the same period last year.
Domestic loan originations increased 52% or $67.2 million and domestic loan
sales increased 70% or $55.9 million for the nine month period ended September
30, 1998 as compared to the nine month period ended September 30, 1997. The gain
on loan sales for the nine months ended September 30, 1998 includes a $2.8
million gain on the securitization of the unguaranteed portions of SBA loans
that was recognized in the second quarter. The gain on the securitization
comprises 26% of the nine month period gain on loan sales. Approximately one
half of the $27 million of loans included in the securitization were originated
in 1998.
The remaining increase in gain on loan sales is the result of a 51% increase in
the number of loan officers to 62 at September 30, 1998 from 41 at September 30,
1997, as more staff was added to the Company's newer domestic representative
offices and the Hartford-based international banking business units were
expanded.
12
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 Nine Months Ended
September 30,
--------------------------
1998 1997
----------- ----------
Loan Servicing Income: (dollars in thousands)
SBA loans..................................... $ 1,112 $ 905
USDA guaranteed loans......................... 228 192
Ex-Im working capital loans................... 178 123
Ex-Im term loans.............................. 262 121
Other commercial loans........................ 103 86
Residential and consumer loans................ 45 42
----------- ------------
Total loan servicing income..................... 1,928 1,469
Other fees...................................... 1,043 368
----------- ------------
Total loan servicing income and other fees...... $ 2,971 $ 1,837
=========== ============
Loans Serviced for Others
(at period end)
Outstanding balance............................. $ 540,053 $ 358,620
=========== ============
The 31% or $459,000 increase in loan servicing income reflects the 55% or $172
million increase in the average balance of loans serviced for others to $484.5
million for the nine month period ended September 30, 1998. Servicing income for
Ex-Im term loans, which pay semi-annually and carry a lower servicing fee, has
increased 117% or $141,000 for the nine month period ended September 30, 1998,
as compared to the nine month period ended September 30, 1997. The Company
currently services 153 loans in 13 countries outside the United States. See
"Loans" below for further details of the Serviced for Others Loan Portfolio.
The $675,000 increase in other fees is due partially to a second quarter gain of
$125,000 on the sale of residential mortgage servicing rights as the Company
divested operational functions not directly related to its primary commercial
loan servicing business. Letter of credit fees for the nine month period ended
September 30, 1998 increased $145,000 or 64% due to a greater demand from the
Company's exporting borrowers for letters of credit as compared to the period
ended September 30, 1997. Additionally, for the nine month period ended
September 30, 1998, the Company recognized $215,000 in fees forfeited by
potential borrowers who chose not to close loans with the Company, compared to
$59,000 for the period ended September 30, 1997.
Other income for the nine months ended September 30, 1997 reflects $229,000 of
interest income related to the note receivable from the Company's President that
was issued in June 1994 in conjunction with the purchase of 614,600 shares of
common stock. As discussed below, the accrued interest on this note was forgiven
and the note was converted to a non-interest bearing
13
note in connection with the successful completion of the September 1997 public
offering. The note was then discounted to yield a market rate of interest. For
the nine months ended September 30, 1998 other income reflects $47,000 of
interest income accreted on the discounted note receivable.
Other income for 1998 also includes a second quarter gain of $83,000 on the sale
of the Company's merchant credit card servicing commissions.
Non-Interest Expense. Non-interest expense is comprised of the following items:
For the Nine Months Ended
September 30,
----------------------
Non-Interest Expense: 1998 1997
---------- ---------
(dollars in thousands)
Salaries and benefits................... $ 7,606 $ 6,452
Occupancy............................... 1,124 692
Furniture and equipment................. 720 493
Outside services........................ 523 360
Office expenses......................... 605 372
Marketing expenses...................... 1,003 597
Loan collection......................... 164 137
Other................................... 409 279
---------- ---------
Total non-interest expense $ 12,154 $ 9,382
========== =========
The 30% or $2.8 million increase in non-interest expense for the nine month
period ended September 30, 1998 as compared to the same period ended September
30, 1997 reflects the 37% increase in full time employees to 169 from 123 and
the related costs. Salaries and benefits for the nine month period increased 18%
or $1.2 million from the same period in 1997. The number of loan officers
increased 51% to 62 at September 30, 1998 from 41 at September 30, 1997, as more
staff was added to the Company's newer domestic representative offices and the
Hartford-based international banking business units expanded. Additional staff
was also added to the lending support business units of Credit Administration
and Loan Servicing. Staffing in these areas increased 61% to 37 employees at
September 30, 1998 from 23 at September 30, 1997.
The September 30, 1997 salary expense includes $526,000 associated with bonuses
paid to the Company's President in conjunction with the public offering that was
completed in September 1997. The bonuses were in the form of interest
forgiveness and tax equalization related to the note receivable that was issued
in June 1994 to facilitate the purchase of 614,600 shares of the Company's
common stock, as mentioned above.
The 62% or $432,000 increase in occupancy expense reflects additional
headquarters space leased to house new hires, the move from temporary leased
space in Washington, D. C. and Pittsburgh, Pennsylvania and the opening of new
offices in Rochester, New York and Philadelphia, Pennsylvania in the Spring of
1997, resulting in a full period's expense in 1998. Furniture and equipment
expense increased 46% or $227,000 during this period as the Company's new
facilities were equipped, resulting in an increase in depreciable assets. Office
14
and marketing expenses reflect increases due to the number of lending officers
and their marketing efforts, as reflected in increased telephone, marketing
materials, postage, travel and meals and entertainment. Included in marketing
expense are the pre-approved reimbursements paid to international master agents
who represent the Company in certain foreign countries pursuant to contractual
marketing agreements. Such master agent marketing expenses increased 222% or
$187,000 for the nine month period ended September 30, 1998 as compared to the
nine month period ended September 30, 1997. Other expenses increased 47% or
$130,000 for the nine month period ended September 30, 1997 compared to the nine
month period ended September 30, 1997, reflecting the outsourcing of the
Company's item processing operations.
The Company's efficiency ratios, calculated as the ratio of non-interest expense
to the sum of net interest income and non-interest income were 54% and 61% for
the nine month periods ended September 30, 1998 and 1997, respectively.
Income Taxes. The Company's effective tax rates decreased to 39% for the nine
month period ending September 30, 1998 from 42% for the nine month period ended
September 30, 1997, reflecting a 1% decrease in the State of Connecticut
statutory tax rate, the effect of the blended effective tax rate for the various
states in which the Company operates and a $34,000 State of Connecticut tax
refund that resulted from a statutory change relating to the 1991 through 1995
tax years which was received in September 1998.
Comparison of the Three Months Ended September 30, 1998 and 1997:
Net Income. The 18% or $134,000 increase in earnings for the quarter ended
September 30, 1998 as compared to the quarter ended September 30, 1997 reflects
the increases in the Company's on and off-balance sheet loan serviced portfolios
and resultant interest and non-interest income, offset by increases in the
provision for possible loan losses and operating expenses.
Diluted earnings per share decreased 8% or $.01 to $.11 for the quarter ended
September 30, 1998 from $.12 per share for the quarter ended September 30, 1997
due to a 33% increase in the weighted average shares outstanding following the
1997 public offering.
Net Interest Income. Net interest income increased 27% or $571,000 for the
quarter ended September 30, 1998 as compared to the quarter ended September 30,
1997 due to a $58 million, or 38% increase in average interest earning assets,
reflecting the deployment of $23.8 million in public stock offering proceeds.
The net interest spread decreased 66 basis points due to a 75
15
basis point decrease in the yield on earning assets, partially offset by an 9
basis point decrease in deposit rates as explained below.
Average Balances, Interest, Yields and Rates
- --------------------------------------------
The following table presents daily average statements of condition, which
include nonaccrual loans, the components of net interest income and selected
statistical data on a fully taxable equivalent basis (1).
For The Three Months Ended For The Three Months Ended 1998 Compared to 1997
September 30, 1998 September 30, 1997 Changes Due to (3):
-------------------------- --------------------------- --------------------------
Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Volume Rate Total
-------- -------- ------- --------- -------- ------- -------- ------ -------
(dollars in thousands)
Assets:
Loans (2):
Commercial.............................. $ 134,823 $ 3,670 10.89% $ 114,711 $ 3,121 10.88% $ 547 $ 2 $ 549
Residential............................. 3,344 70 8.37% 6,661 128 7.69% (69) 11 (58)
Other consumer.......................... 982 24 9.69% 1,797 44 9.71% (20) - (20)
--------- ------- ----- --------- ------- ----- ------- ------ -------
Total loans............................... 139,149 3,764 0.82% 123,169 3,293 10.69% 458 13 471
Investment securities..................... 21,476 339 6.31% 17,510 323 7.38% 63 (47) 16
Federal funds sold........................ 52,084 742 5.65% 13,963 197 5.60% 543 2 545
--------- ------- ----- --------- ------- ----- ------- ------ -------
Total investment securities and
funds sold.............................. 73,560 1,081 5.85% 31,473 520 6.59% 606 (45) 561
--------- ------- ----- --------- ------- ----- ------- ------ -------
Total earning assets...................... 212,709 4,845 9.11% 154,642 3,813 9.86% 1,064 (32) 1,032
Total non-earning assets.................. 37,200 23,526
--------- ---------
Total assets.............................. $ 249,909 178,168
========= =========
Liabilities:
Deposits:
Interest bearing demand deposits........ $ 9,390 $ 53 2.24% 7,387 $ 45 2.42% $ 11 $(3) $ 8
Premier money market.................... 100,705 1,360 5.36% 75,953 1,037 5.42% 334 (11) 323
Other savings........................... 10,344 82 3.15% 7,405 37 1.98% 23 22 45
Certificates of deposit................. 38,243 521 5.40% 32,433 476 5.82% 79 (34) 45
IRA certificates of deposit............. 9,295 133 5.68% 6,457 92 5.65% 41 0 41
--------- ------- ----- --------- ------- ----- ------- ------ -------
Total deposits............................ 167,977 2,149 5.08% 129,635 1,687 5.16% 488 (26) 462
Other borrowings.......................... 545 6 4.37% 510 7 5.45% 0 (1) (1)
--------- ------- ----- --------- ------- ----- ------- ------ -------
Total interest bearing liabilities........ 168,522 2,155 5.07% 130,145 1,694 5.16% 488 (27) 461
--------- ------- ----- --------- ------- ----- ------- ------ -------
Non-interest bearing liabilities:
Demand deposits......................... 32,753 29,048
Other liabilities....................... 2,997 2,565
--------- ---------
Total non-interest bearing liabilities.... 35,750 31,613
Stockholders' equity...................... 45,637 16,410
--------- ---------
Total liabilities and stockholders' equity $ 249,909 178,168
========= =========
Net interest income/net interest spread... $ 2,690 4.04% $ 2,119 4.70% $ 576 $(5) $ 571
======= ===== ======= ===== ======= ====== =======
Net interest margin....................... 5.09% 5.47%
===== =====
(1) Fully taxable equivalent income was calculated based on statutory federal
and state tax rates.
(2) For purposes of these computations, non-accruing loans are included in the
average balance.
(3) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
Interest Income. Interest income increased 27% or $1.0 million for the quarter
ended September 30, 1998 as compared to the quarter ended September 30, 1997 due
to a $20.0 million or 18% increase in the average balance of commercial loans
and a $38 million increase in the average balance of federal funds sold.
Commercial originations increased 41% or $27.3 million for the quarter ended
September 30, 1998 to $93.6 million from $66.3 million for the same quarter last
year. The yield on loans increased 13 basis points reflecting the Company's
continuing emphasis on commercial loan origination and sale of loans, such as
residential mortgages, not directly related to this business. The effect of such
increase was partially offset by a 75 basis point decrease in the yield on
assets as a greater percentage of funds were held in liquid investments. The
average balance of federal funds sold increased to $52.1 million or 273% for the
period ended September 30, 1998, as compared to $14.0 million for the period
ended September 30, 1997. This increase reflects the proceeds of $27 million
loan securitization completed in June 1998. This liquidity was maintained to
fund loan and line of credit commitments.
Interest Expense. Interest expense increased 27% or $461,000 for the quarter
ended September 30, 1998 when compared to the quarter ended September 30, 1997,
due to a 29% or $38.4 million increase in the average balance of interest
bearing deposits. The average balance of higher priced premier savings deposits
increased 33% or $24.8 million for the quarter ended September 30, 1998 from
September 30, 1997, resulting in an increase in interest expense on these
products of $334,000 for the quarter. An overall decrease in the rates on
premier savings and certificates of deposit of 8 basis points offset the balance
increase by $27,000.
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $659,000 for the quarter ended September 30, 1998 as compared to
$157,000 for the quarter ended September 30, 1997 to provide for an increasing
percentage of unguaranteed commercial loans and a general seasoning of the
portfolio. See "Allowance for Loan Losses" for further analysis of the provision
and related data.
Non-Interest Income. Non-interest income is comprised of the following items:
For the Three Months Ended
September 30,
---------------------
Non-Interest Income: 1998 1997
--------- ----------
(dollars in thousands)
Gain on loan sales:
SBA sales................................ $ 1,144 $ 878
USDA sales............................... 417 81
Ex-Im working capital sales.............. 145 89
Ex-Im term sales......................... 305 535
Unguaranteed SBA securitization.......... 433 -
Other commercial sales................... 90 156
Residential sales........................ 9 -
--------- ----------
Total gain on loan sales.................. 2,543 1,739
Loan servicing income and other fees....... 986 716
Service charges and other deposit fees..... 106 119
Other income............................... 16 229
--------- ----------
Total non-interest income.................. $ 3,651 $ 2,803
========= ==========
The 30% or $848,000 increase in non-interest income for the three month period
ended September 30, 1998 as compared to the three month period ended September
30, 1997 was due primarily to a 46% or $804,000 increase in gain on loan sales
and a 38% or $270,000 increase in loan servicing and other fee income.
The 46% increase in gain on loan sales was primarily from the sale of government
guaranteed domestic loans and reflects the increased contribution from the
Company's U. S. representative offices opened within the past year. Domestic
loan originations increased 46% or $19.6 million for the period ended September
30, 1998. Domestic loan sales increased 41% or $9.3 million for the period.
Additionally, $433,000 of income related to the Company's delivery of
approximately $5 million of loans, representing the final portion of the $27
million unguaranteed SBA loans securitized during the prior quarter.
The 38% or $270,000 increase in loan servicing income and other fee income as
detailed below, includes a 39% or $214,000 increase in loan servicing income,
reflecting an increase in the balance of commercial loans serviced for others,
which totaled $540.1 million at September 30, 1998 an increase of 51% or $181.4
million from the balance at September 30, 1997.
Other income for the period ended September 30, 1997 reflects $229,000 of
interest income related to the note receivable from the Company's President that
was issued in June 1994 in conjunction with the purchase of 614,600 shares of
common stock, as mentioned above. For the three months ended September 30, 1998
other income reflects $16,000 of interest income accreted on the discounted note
receivable.
18
Loan Servicing Income and Fees For the Three Months Ended
September 30,
---------------------------------
1998 1997
--------------- ---------------
Loan Servicing Income: (dollars in thousands)
SBA loans................................... $ 486 $ 330
USDA guaranteed loans....................... 80 67
Ex-Im working capital loans................. 67 46
Ex-Im term loans............................ 82 64
Other commercial loans...................... 36 28
Residential and consumer loans.............. 13 15
--------------- ---------------
Total loan servicing income 764 550
Other fees.................................... 222 166
--------------- ---------------
Total loan servicing income and other fees.... $ 986 $ 716
=============== ===============
Loans Serviced for Others
(at period end)
Outstanding balance........................... $ 540,053 $ 358,620
=============== ===============
Non-Interest Expense. Non-interest expense is comprised of the following items:
For the Three Months Ended
September 30,
------------------------
1998 1997
------------ ----------
Non-Interest Expense: (dollars in thousands)
Salaries and benefits................ $ 2,604 $ 2,500
Occupancy............................ 376 239
Furniture and equipment.............. 252 182
Outside services..................... 225 75
Office expenses...................... 223 152
Marketing expenses................... 406 199
Loan collection...................... 76 40
Other................................ 161 85
------------ ----------
Total non-interest expense. $ 4,323 $ 3,472
============ ==========
The September 30, 1997 salary expense includes $526,000 associated with bonuses
paid to the Company's President as explained above. Without such expense,
increase in non-interest expense for the quarter ended September 30, 1998 as
compared to the quarter ended September 30, 1997 would have been 47% or $1.4
million, which reflects the 37% increase in full time employees to 169 from 123
over the period and related personnel costs. As mentioned above, significant
growth in the lending and lending support business units has occurred within the
past year. Non-personnel expenses increased 77% for the quarter ended September
30, 1998 due to an increase in occupancy and marketing costs, a portion of which
will support future growth.
The Company's efficiency ratios, calculated as the ratio of non-interest expense
to the sum of net interest income and non-interest income, were 68% and 71% for
the quarters ended September 30, 1998 and 1997, respectively.
19
Income Taxes. The Company's effective tax rates decreased to 35% for the quarter
ended September 30, 1998 from 42% for the quarter ended September 30, 1997,
reflecting a 1% decrease in the State of Connecticut statutory tax rate, the
effect of the blended effective tax rate for the various states in which the
Company operates and a $34,000 State of Connecticut tax refund that resulted
from statutory change relating to the 1991 through 1995 tax years which was
received in September 1998. The 1998 expense also reflects a reduction of the
current liability due to the finalization of the 1997 tax liability when the
Company's tax returns were filed in September.
Discussion of Changes in Financial Condition to September 30, 1998 from December
31, 1997
General. Total assets increased 15% or $33.4 million to $252.3 million at
September 30, 1998 from $218.9 million at December 31, 1997, due to increases
loans and federal funds. This growth was funded by growth in savings and time
deposit accounts.
Investment Securities. Investment securities portfolios totaled $21.5 million at
September 30, 1998, representing a decrease of 3% or $746,000 from the December
31, 1997 balance of $22.3 million.
20
Loans. The Company's loan portfolio and loans serviced portfolio were as
follow:
September 30, December 31,
Loan Portfolio 1998 1997
------------ ------------
(dollars in thousands)
SBA loans...................................... $ 24,400 $ 29,912
USDA loans..................................... 8,309 6,541
Ex-Im working capital loans.................... 4,084 3,858
Ex-Im term loans............................... 857 743
Insured international term loans............... 3,490 -
Import loans................................... 4,503 -
Production equipment........................... 1,893 -
Other commercial loans......................... 90,279 62,616
Owner occupied commercial mortgages............ 9,614 17,860
Investor mortgages............................. 4,105 5,497
Residential and other consumer loans........... 4,208 8,371
------------ ------------
Total loans.................................... 155,742 135,398
Less:
Discount on retained loans................. 1,043 1,782
Net deferred loan origination costs........ (774) (109)
Allowance for loan losses.................. 4,200 3,100
------------ ------------
Loans, net................................ $ 151,273 $ 130,625
============ ============
Loans held for sale........................... $ 7,082 $ 9,070
============ ============
Loans Serviced for Others
Guaranteed Loans
SBA....................................... $ 228,808 $ 195,454
USDA...................................... 61,540 45,806
Ex-Im working capital..................... 14,187 12,183
Ex-Im term................................ 91,057 70,611
FHLMC..................................... 201 17,305
------------ ------------
395,793 341,359
Unguaranteed Portions and Unguaranteed
Loans
SBA....................................... 47,072 51,673
USDA...................................... 5,022 5,326
Securitized unguaranteed SBA loans........ 26,380 -
Other commercial.......................... 63,519 27,235
Home equity lines......................... 2,267 3,484
------------ ------------
144,260 87,718
------------ ------------
Total loans serviced for others............... $ 540,053 $ 429,077
============ ============
Total loans under management.................. $ 702,877 $ 573,545
============ ============
21
Loan originations and line of credit commitments aggregated $274.9 million for
the nine months ended September 30, 1998 while loan sales amounted to $198.1
million for the period. In June 1998 the Company completed a securitization of
the unguaranteed portions of SBA loans, approximately $13 million of which were
included in the Company's loan portfolio at December 31, 1997. The Company also
sold certain owner occupied commercial mortgages and residential mortgages from
portfolio to provide liquidity for current marketing efforts. Additionally, the
servicing rights related to the Company's recent residential sale and its FHLMC
portfolio were sold to enable the servicing personnel to focus on the Company's
core commercial servicing operations.
The increase in net deferred loan origination costs reflects an increase in net
deferred costs due to the volume of loans originated and held in portfolio less
a reduction in fees deferred when certain loans were sold from portfolio and
such fees recognized as income during the period.
Allowance for Loan Losses. The Company reviews the adequacy of the Allowance for
Loan Losses quarterly. At September 30, 1998 the Allowance totaled $4.2 million
and represented 2.7% of total loans. The Allowance totaled $3.1 million and
represented 2.3% loans at December 31, 1997. The overall increase in the
allowance is due to an increasing percentage of unguaranteed commercial loans
and a general seasoning of the commercial loan portfolio as well as the
introduction of new loan products where the Company has limited historical
experience. Management has determined the current level of the Allowance to be
appropriate given the historic loss experience from its core lines of business.
Net charge-offs for the nine month periods ended September 30, 1998 increased
31% or $349,000 compared to the nine month period ended September 30, 1997.
Annualized net charge-offs as a percentage of average loans totaled 1.32% at
September 30, 1998 a slight increase from 1.27% at September 30, 1997. Net
charge-offs from the investor mortgage portfolio declined significantly for the
nine months ended September 30, 1998 to 27% of net charge-offs as compared to
72% of net charge-offs for the nine months ended September 30, 1997 as the
portfolio balance decreased and problems with the underlying properties were
resolved. Management believes that the increase in the dollar amount of
charge-offs from the Company's "core" SBA and commercial portfolios reflects the
seasoning of such portfolios.
22
Activity in the Allowance for Loan Losses
For the Year
For the Three Months For the Nine Months Ended
Ended September 30, Ended September 30, December 31,
------------------------- -------------------------- -------------
1998 1997 1998 1997 1997
------------- ----------- ------------ ------------ -------------
(dollars in thousands)
Balance of allowance for loan losses
at the beginning of the period....... $ 4,000 $ 3,000 $ 3,100 $ 3,000 $ 3,000
Charge-offs:
Investor mortgage.................... 290 4 513 805 1,395
SBA.................................. 179 56 479 130 262
USDA................................. - - - - 68
Commercial........................... - 112 535 129 279
Private.............................. - - 83 1 46
Residential and other consumer....... - 53 8 131 195
------------- ----------- ------------ ------------ -------------
Total charge-offs.................... 469 225 1,618 1,196 2,245
Recoveries:
Investor mortgage.................... - - 123 - 6
SBA.................................. 2 - 2 - 13
USDA................................. - - 17 - -
Commercial........................... 9 66 11 69 77
Residential and other consumer....... - 2 - 11 10
------------- ----------- ------------ ------------ -------------
Total recoveries..................... 11 68 153 80 106
------------- ----------- ------------ ------------ -------------
Net charge-offs.......................... 458 157 1,465 1,116 2,139
Provision for loan losses................ 658 157 2,565 1,116 2,239
------------- ----------- ------------ ------------ -------------
Balance of allowance for loan
losses at end of period.............. $ 4,200 $ 3,000 $ 4,200 $ 3,000 $ 3,100
============= =========== ============ ============ =============
Total loans.............................. $155,742 $134,815 $ 155,742 $134,815 $135,398
============= =========== ============ ============ =============
Allowance to total loans................. 2.7% 2.2% 2.7% 2.2% 2.3%
============= =========== ============ ============ =============
23
As noted below, non-performing loans equal 2.05% of total loans and the
Allowance provides coverage equal to 132% of non-performers at September 30,
1998.
September 30, December 31,
1998 1997
------------- -------------
(dollars in thousands)
Commercial:
Unguaranteed portions of SBA and USDA........... $ 1,557 $ 1,226
Ex-Im working capital........................... 405 -
Commercial mortgage............................. 8 39
Other commercial................................ 961 535
Investor mortgages.............................. 105 415
Consumer........................................ 153 149
------------- -------------
Total non-performing loans.................. $ 3,189 $ 2,364
============= =============
Total non-performing loans to total loans....... 2.05% 1.75%
============= =============
Total non-performing loans to total assets...... 1.26% 1.08%
============= =============
Allowance to total non-performing loans......... 132% 131%
============= =============
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 September 30, 1998 represented less than 3% of total loans. Such loans are
U.S. dollar denominated and either 100% Ex-Im Bank guaranteed and sold at
origination or carry private credit insurance equal to 80-90% of the loan
balance. The Company's private credit insurance policy includes a deductible and
provides that the Company is responsible for the first loss on the uninsured
portion of the loan.
24
September 30, December 31,
1998 1997
------------- ------------
(dollars in thousands)
Allocation of the Allowance by
Category of Loans:
Unguaranteed Portions of:
SBA and USDA................................... $ 863 $ 853
Ex-Im working capital loans.................... 286 145
Other international loans.......................... 74 -
Commercial mortgage................................ 197 250
Other commercial................................... 2,188 1,052
Investor mortgage.................................. 94 269
Residential and other consumer .................... 49 67
Unallocated........................................ 449 464
------------- ------------
Total allowance for loan losses................ $ 4,200 $ 3,100
============= ============
Percent of Loans in Each Category to Total Loans:
Unguaranteed Portions of:
SBA and USDA................................... 21.0% 26.9%
Ex-Im working capital.......................... 2.6 2.8
Other international loans.......................... 5.3 -
Ex-Im medium term.................................. 0.3 0.5
Commercial mortgage................................ 7.1 14.7
Other commercial................................... 58.4 44.8
Investor mortgages................................. 2.6 4.1
Residential and other consumer .................... 2.7 6.2
------------- ------------
Total.......................................... 100% 100%
============= ============
Stockholders' Equity. Stockholders' equity increased $4.5 million during the
nine month period ended September 30, 1998 due to the retention of earnings net
of quarterly dividends of $.03 per share, or an aggregate of $710,000. The
Company also received $198,000 from the exercise of employee and director stock
options during the period.
Liquidity and Capital Resources
The Company's primary sources of liquidity and funding are its deposit base and
loan sales and participations. Secondary sources of liquidity include Federal
Home Bank Loan Advances and the sale of investments.
Management considers scheduled cash flows from existing clients and borrowers
and projected deposit levels, as well as estimated liquidity needs from maturing
and disintermediating deposits, approved extensions of credit, and unadvanced
commitments to existing borrowers, in determining the level and maturity of
deposits necessary to support operations. Historically the Company has increased
the level of deposits to support its planned loan growth. The Company also has
supported its growth by regularly selling commercial loans, generally on a
servicing retained basis. Such loan sales totalled $198.1 million for the nine
month period ended September 30, 1998, and represented 72% of the $274.9 million
total loan originations for the nine month period. While these sales have
traditionally been executed on a single loan basis, the Company completed its
first loan securitization in June 1998 with a securitization of $26.9 million
comprised of the unguaranteed portions of SBA loans.
25
Subsequent to the end of the third quarter, in order to provide additional and
alternative funding for the Company's lending business, the Company accepted
commitments for two warehouse loan facilities (the "Warehouse Loan Facilities")
from Prudential Securities Credit Corporation ("Prudential"). In addition to
using the Warehouse Loan Facilities to provide additional funding for its
lending business, the Company intends to utilize such Warehouse Loan Facilities
to facilitate future securitization transactions.
Under the Warehouse Loan Facilities, the Company will be able to borrow (1) up
to $50 million to fund and warehouse the unguaranteed portions of loans
guaranteed in part by the SBA; and (2) up to $75 million to fund and warehouse
other commercial term loans made by the Bank, in each case up to a specified
percentage of the market value, as determined by Prudential, of the loans
pledged to secure each of the facilities.
The availability of the Warehouse Loan Facilities is subject to various
conditions, including the execution of definitive agreements that are acceptable
to the Company and to Prudential.
As of September 30, 1998 the Company had outstanding commitments to fund loans
and lines of credit of $56.6 million and had issued letters of credit totaling
$24 million.
The Company believes that it will continue to have access to liquidity sources
to provide funding sufficient to support operating activities, loan originations
and commitments, and deposit withdrawals.
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies and maintains a "well-capitalized" status, with a total
capital to risk-weighted assets of 21.99% and a Tier 1 capital to assets or
leverage ratio of 18.51% at September 30, 1998.
As in prior periods, the Company has limited exposure to market risk as it uses
no derivatives, has an investment portfolio with a short duration and has a
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, many existing application software products in the
market place were designed to only accommodate 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 guidance provided by the Federal Institutions Examination Council
("FFIEC") as a framework, the Company has 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
26
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 $130,000. 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 of 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. The Company has received independent
verification from the primary regulators of the software provider of the
Company's financial application software that assesses the provider's Year 2000
efforts as "Satisfactory". A third party report from the item processing
vendor's regulator also indicates that there is "relatively minor" concern over
Year 2000 progress of the vendor. Despite such third party review, the Company's
Workplan includes a full testing protocol for these and other mission critical
third party systems. The majority of all such systems have been tested and the
remainder are scheduled to be completed by December 31, 1998.
The Company will have the formulation of a Business Resumption Contingency Plan
well underway by December 31, 1998, as required by the FFIEC. Although the
Company expects that each mission critical system will be Year 2000 Compliant,
such a plan will be designed to mitigate serious disruptions to the Company's
business flow.
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.
The Company will assess the likelihood of
27
any interruption in such third parties' ability to maintain established
relationships with the Company due to their inability to become Year 2000
compliant. The Company has distributed questionnaires to such third parties and
is currently receiving and evaluating the results of such data. It is expected
that this phase of the Workplan will be completed by December 31, 1998.
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; 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.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant is not involved in any legal proceedings except for
routine litigation incidental to the business of banking, none of
which is expected to have a material adverse effect on the
Registrant's financial position, results of operations or cash flows.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security-Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
3 (i) Amended and Restated Articles of Incorporation of
the Registrant*
(ii) Amended and Restated By-laws of the Registrant*
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K.
The Registrant did not file any Reports on Form 8-K during the
third quarter of 1998.
* Denotes an exhibit which has previously been filed as an exhibit to the
Company's Registration Statement on Form S-1, Commission File No. 333-31339 and
which is incorporated herein by reference.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First International Bancorp, Inc.
--------------------------------------------
(Registrant)
Date: November 13, 1998 By: /s/ Brett N. Silvers
----------------- ----------------------------------------
Brett N. Silvers
Its President
Date: November 13, 1998 By: /s/ Leslie A. Galbraith
----------------- ----------------------------------------
Leslie A. Galbraith
Its Treasurer and Secretary
and Chief Financial Officer
30
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
31