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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
____________
For the fiscal year ended December 31, 1997
Commission file no. 0-22861
____________
FIRST INTERNATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1151731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Commercial Plaza
Hartford, CT 06103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 727-0700
____________
Securities Registered Pursuant to Section 12(b) of the Act:
(Title of each class)
Common Stock, par value $.10 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark 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 for 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 by check mark if disclosure of delinquent filers pursuant to Item 405
or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ____
As of March 5, 1998, the aggregate market value of the voting stock held by non-
affiliates of the Registrant, based on the closing price of the common stock as
reported by the Nasdaq Stock Market of $15.375, was approximately $52,828,838.
As of March 5, 1998, the Registrant had 7,876,208 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II, items 5, 6, 7, 7A and 8 are incorporated by reference to First
International Bancorp's, Inc. 1997 Annual Report to Shareholders which is
included as an exhibit hereto.
Part III, items 10, 11, 12 and 13 are incorporated by reference to First
International Bancorp, Inc.'s definitive proxy statement to stockholders which
will be filed with the Securities and Exchange Commission no later than 120 days
after December 31, 1997.
________________________________________________________________________________
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TABLE OF CONTENTS
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PART 1 Page No.
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ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 24
ITEM 3. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 24
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 25
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 25
ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 25
ITEM 11. EXECUTIVE COMPENSATION 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K 26
</TABLE>
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PART 1
ITEM 1: BUSINESS
GENERAL
Overview
First International Bancorp, Inc., a Delaware corporation, is a one bank holding
company incorporated in 1985 and regulated by the Board of Governors of the
Federal Reserve System. Its principal asset and subsidiary is First National
Bank of New England, a national banking association established in 1955 and
regulated by the Office of the Comptroller of the Currency (the "OCC").
The Company specializes in providing credit, trade and depository services to
small and medium size manufacturing companies located in the United States and
in international emerging markets. The Company serves its target market by
offering flexible and attractive terms to borrowers and manages its credit risk
through the combined utilization of commercial loan guarantee programs made
available by three U.S. federal agencies: the U.S. Small Business
Administration (the "SBA"), the U.S. Department of Agriculture (the "USDA"), and
the Export-Import Bank of the U.S. ("Ex-Im Bank").
For the federal fiscal year ending September 30, 1997, the Company was the
country's fourteenth largest SBA 7(a) lender, and the largest SBA lender in New
England, measured by dollar volume; the country's largest USDA Business and
Industry lender measured by dollar volume; and the country's largest Ex-Im Bank
lender measured by number of transactions. The Company maintains preferred
status with the federal agencies for several jurisdictions and programs. In
recognition of the Company's efforts in promoting small business exports and its
high volume of loan originations, the Company received Ex-Im Bank's annual
"Small Business Bank of the Year Award" in May 1997.
Loan Originations
Management believes that the specialized market knowledge and experience of the
Company's lending officers, combined with a broad range of commercial and
international financing products, enable the Company to satisfy the needs of its
small and medium size manufacturing clients. Brand recognition for the Company
is maintained by incorporating the servicemark Financing Manufacturers
Worldwide(R) in its logos. The Company's domestic and international lending
relationships generally range from $150,000 to $2.5 million.
The Company's Commercial business units underwrite lines of credit, term loans,
industrial mortgages and trade financing for businesses located primarily in the
Northeast and Midatlantic regions of the United States. Commercial lenders
operate from the Company's Hartford,
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Connecticut headquarters, as well as from regional representative offices
located in Boston and Springfield, Massachusetts; Providence, Rhode Island;
Morristown, New Jersey; Pittsburgh and Philadelphia, Pennsylvania; Rochester,
New York and Washington D.C. The Company is considering the opening of
additional offices in the Midwest U.S. in 1998. The Company's domestic loan
officers are trained to understand the specific financial needs of small and
medium size manufacturers, and to use government guaranteed and other commercial
loan products to respond to those needs. Domestic loan officers participate in
industrial trade organizations representing the Company's target market and
conduct other marketing activities to reach potential borrowers.
The Company's International business units underwrite Ex-Im Bank guaranteed and
insured loans to small and medium size manufacturers located throughout the
United States and in eleven international emerging markets. In 1998, the
Company's International business units also began offering loans to U.S.
importers of foreign-made goods. See "International Banking Services and
Products." International lending activities support trade flows between the
United States and emerging markets which have grown at a rate of 12% annually
since 1990. The Company's International business units operate from its
Hartford, Connecticut headquarters and are assisted in their efforts by
contractual international marketing representatives, or "master agents", who are
actively involved in providing financial, accounting, consulting and/or
engineering services to manufacturers in their home countries. Contractual
marketing arrangements have been established with professionals in Argentina,
Brazil, Central America, India, Indonesia, Korea, Mexico, Philippines, Poland,
South Africa and Turkey. The Company began lending internationally in 1994 and
has increased its medium term loan originations from $397,000 in 1994 to $1.8
million in 1995, $13.6 million in 1996 and $60.9 million in 1997.
Underwriting
The Company's underwriting activities are initiated from each of its lending
offices and supported and approved at the Hartford, Connecticut headquarters.
Commercial lending officers analyze the creditworthiness of proposed borrowers
and evaluate each borrower's financial statements, credit reports, business
plans and other data to determine if the credit and proposed collateral satisfy
the Company's specific lending standards and policies. All credit memoranda are
reviewed by an independent credit officer and may require additional approval
depending on the particular circumstances of the financing package. Domestic
and international loans undergo a substantially identical approval process.
Loan Sales
The Company seeks to achieve high returns while meeting the growing credit needs
of its target market by selling a portion of its commercial and international
loans on a non-recourse, servicing-retained basis. A separate Capital Markets
business unit was established in 1996 to sell loans, including commercial and
international loans without federal guarantees. The Capital Markets business
unit directs its resources toward identifying non-government guaranteed
secondary loan markets as a further means of mitigating credit risk, leveraging
capital and replenishing liquidity. As of December 31, 1997, $87.7 million, or
20%, of the loan portfolio
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serviced for investors did not have government guarantees or credit enhancements
compared to $48.9 million, or 18%, of such servicing portfolio as of December
31, 1996.
Funding Sources
The Company's lending and investing activities are funded primarily by interest-
bearing deposits from commercial borrowers, their principals and other private
banking clients. The Private Banking business units provide stable, low-cost
funding to the Company by managing the deposit base while offering a full array
of financial products to serve the personal needs of, and facilitate
relationships with, the Company's client base. Private bankers continually seek
to expand the Company's deposit base by soliciting deposits from individuals who
seek highly personalized service and to strengthen existing deposit
relationships by offering new financial products and services to both existing
and prospective clients. In addition to deposits, alternative funding sources
are being developed to support the Company's business strategy.
BUSINESS STRATEGY
The Company's strategy is to serve small and medium size manufacturers through
the following key activities:
Domestic Loan Origination Activities. Commercial business units currently
operate from the Hartford, Connecticut headquarters, as well as from eight
regional loan production or "representative" offices located in Boston and
Springfield, Massachusetts; Providence, Rhode Island; Pittsburgh and
Philadelphia, Pennsylvania; Morristown, New Jersey; Rochester, New York and the
Washington D.C. area. The Company intends to continue to expand in its
established geographic markets by adding additional staff during the next two
years. In addition, the Company will continue to enter new markets by opening
representative offices as marketing diligence is completed, most likely in the
Midwest U.S.
Financing Trade with International Emerging Markets. The International business
units operating from the Hartford, Connecticut headquarters are assisted in
their efforts abroad by its contractual relationships with international master
agents in Argentina, Brazil, Central America, India, Indonesia, Korea, Mexico,
Philippines, Poland, South Africa and Turkey. The master agents are actively
involved in providing professional financial services to small and medium size
manufacturers in their home countries. The Company also provides working
capital to U.S. manufacturers who export to, and in 1998 the Company began
financing U.S. imports from, international emerging markets.
Loan Sales Activities. The Capital Markets business unit was established in
July 1996 to sell the non-recourse, servicing-retained portions of government
guaranteed and non-government guaranteed loans. Sales of the unguaranteed
portions of SBA and USDA loans and unguaranteed commercial loans have increased
as the Capital Markets business unit has developed a network of purchasers. The
Company plans to continue developing this network of
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purchasers as loan origination activities increase and secondary markets, evolve
for all categories of loans.
LENDING ACTIVITIES AND POLICIES
The Company's distribution of domestic and international commercial loan
originations are detailed below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- ---------------------------------
LOAN ORIGINATIONS BY DEPARTMENT PRINCIPAL PERCENTAGE PRINCIPAL PERCENTAGE
--------------- -------------- --------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Domestic:
SBA loans....................................... $100,382 33% 85,303 50%
USDA loans...................................... 30,404 10% 12,700 7%
Other commercial loans.......................... 84,975 28% 37,824 22%
-------------- ------------ ----------- ----------
Total domestic banking........................ 215,761 71% 135,827 79%
International:
Ex-Im working capital lines..................... 30,347 10% 23,300 13%
Ex-Im medium term loans......................... 59,852 19% 13,617 8%
Inventory buyer credit.......................... 1,000 - - -
-------------- ------------ ----------- ----------
Total international banking.................... 91,199 29% 36,917 21%
-------------- ------------ ----------- ----------
Total commercial loan originations............. $306,960 100.00% $172,744 100.00%
============== ============ =========== ==========
</TABLE>
MARKETING
Domestic Banking
The Company originates domestic loans through its network of 31 commercial loan
officers in nine offices who seek to establish long-term relationships with
their clients. The Company believes it is uniquely positioned to serve its
domestic market through an ability to provide clients with a flexible
combination of lines of credit, term loans and mortgages for industrial property
and trade financing. The Company generally utilizes the SBA, USDA and/or Ex-Im
Bank loan guarantee and insurance programs as a part of a financing package in
light of an applicant's particular situation. The Company's participation in
three government guaranteed loan programs enables it to provide clients with
longer loan terms than are typically available to small and medium size
manufacturers.
Commercial loan officers are responsible for marketing, underwriting, servicing,
monitoring and collecting their portfolio of loans. The Company believes that
this broad range of responsibilities enables the commercial loan officers to
establish strong working relationships with both existing and prospective
clients and promotes strong client service and prudent loan portfolio
management. Commercial loan officers are encouraged to keep apprised of market
conditions
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through frequent contact with clients and potential borrowers, to develop
specific knowledge of their clients' businesses, and to offer flexible
structuring of loan products. In consultation with the borrower, a commercial
loan officer will evaluate the financing needs of the business and then
recommend the best way to structure the lending transaction to fit the client's
unique needs.
The marketing efforts by commercial loan officers include participation in trade
associations serving the needs of small and medium size manufacturers;
contacting accountants, attorneys and other professionals known by the Company
to have contact with businesses in need of financing; personal visits; direct
mail solicitations; and referrals from existing clients. Since the target
client of both domestic and international loan officers is often the same, there
is an active cross-selling effort between these two functions.
International Banking
The Company has four international loan officers who target U.S. exporters
eligible for trade financing programs, including those supported by Ex-Im Bank.
These loan officers market pre-export working capital lines of credit. As with
the domestic banking relationships, the Trade Finance business unit is
responsible for marketing, underwriting, servicing, monitoring and collecting
its portfolio of loans. If a borrower has both domestic and international
banking loan facilities, the relationship is evaluated and monitored on an
aggregate basis and each loan officer is responsible for his loan and further
responsible for close coordination with his lending counterpart to ensure proper
maintenance of the entire relationship.
Internationally, the Company has established contractual marketing relationships
with professional firms in eleven emerging markets who, in the course of
conducting their primary business, have frequent contact with local
manufacturers who require financing to purchase U.S. goods. Prior to entering
into relationships with these "Master Agents," the Company conducts due
diligence, including visiting the prospective representative and conducting
local diligence concerning their business reputation and legal status. The
Company also requires that each Master Agent be trained on the Company's
products and services at the Hartford, Connecticut headquarters. Each Master
Agent markets, on behalf of the Company, medium terms loans guaranteed by Ex-Im
Bank in its respective foreign market. Once the Master Agent develops a lead
with a potential borrower, it directs the prospect to a U.S.-based loan officer
who completes the application process. The Master Agent receives a negotiated
fee when a loan referral made to the Company has been underwritten and closed.
The Master Agent assists the loan officer in obtaining certain information from
the applicant and in responding to inquiries of the applicant, but does not have
any direct underwriting responsibilities. All decisions with respect to
referrals of Master Agents are made by the Company, which retains full control
over international loan originations.
Although the Company has contractual marketing relationships with firms in
eleven markets, 90% of the $60.8 in million medium term loan originations during
1997 were loans to borrowers in Brazil, Turkey and Mexico. This concentration
of originations reflects the length of time which the Company has been marketing
in these countries. Loan origination activity does not begin until some months
after the date a Master Agent is established, the Company's in-country
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representatives are trained, marketing plans have been developed and initial
calling efforts are undertaken.
Marketing efforts include visits to and direct mail solicitation of, U.S.-based
exporters of capital goods, direct mail solicitation of foreign-based
manufacturers and industrial trade organizations and in-country marketing by the
Company's network of Master Agents.
DOMESTIC BANKING SERVICES AND PRODUCTS
Loan Products and the Origination Process
The commercial loans originated by the Company include industrial mortgage loans
(i.e., loans to businesses collateralized by industrial real property),
equipment term loans and revolving lines of credit to manufacturers, wholesalers
and distributors, many of which are exporters. The typical commercial borrower
is a privately owned and operated company with annual sales of $2 million to $25
million, employing 10-175 workers, which has been in business for at least three
years. A number of the Company's borrowers have a proprietary product line,
export their products and/or have a geographically diverse client base. The
Company is typically the borrower's primary lender and provides loans which are
collateralized by assets of the borrower. The Company's Private Banking
business units also provide a variety of business and personal financial
services to borrowers and their principals. The Company believes it has a
competitive advantage in the marketplace because it is able to provide a wide
range of lending options, deposit accounts and related services.
The Company originates loans to a variety of industries; however, based upon its
loss experience and economic forecasts, the Company may decide to de-emphasize
industries from time to time.
The interest rates accruing on the Company's commercial loans are typically
Prime-based, changing monthly or quarterly when the Prime Rate changes. The
Company also makes fixed rate loans from time to time. The Company originates
certain loans for sale through loan purchase programs pre-established with
investors. The term of a loan depends upon whether the loan is guaranteed or is
underwritten for a loan purchase program. Government guarantee programs give
clients access to longer term financing and slower amortization than otherwise
available. A government guaranteed mortgage loan has a maximum term and
amortization of up to 30 years, while the term and amortization of an
unguaranteed mortgage loan typically does not exceed 15 years. Equipment loans
are underwritten to correspond to the useful life of the equipment and generally
range from 5-15 years. SBA guaranteed working capital term loans range from 7-
10 years, while unguaranteed working capital revolving lines of credit have one-
year terms. Medium term loans are generally fully amortizing.
The primary collateral sought by the Company for commercial loans consists of
liens which are generally first liens, on owner-occupied industrial real estate,
equipment, inventory and/or accounts receivable, although additional collateral
may include junior liens on residential properties. The Company generally
requests the personal guarantee of the principals of a
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business because the Company believes this induces the guarantor to facilitate
repayment of the loan.
In striving to meet the credit needs of its clients, the Company utilizes
government guarantee loan programs which allow it to offer longer-term loans
while mitigating the credit risk to the Company through the government
guarantee. The two government guarantee loan programs utilized by the Company's
Commercial business units to provide financing to its niche market are discussed
below.
SBA Guaranteed Loan Originations
The Company utilizes the SBA's 7(a) loan program for eligible borrowers. Eight
of the Company's nine offices have Preferred Lender status. Preferred Lender
status allows the Bank to approve loans on behalf of the SBA, with the national
SBA processing center's concurrence that the applicant meets the SBA eligibility
requirements. The SBA generally completes its eligibility review within 24
hours of submission. Eight of the Company's offices also have Certified Lender
status. Certified Lender status entitles the Bank to 72-hour turnaround from
local SBA district offices for approval of loan applications.
The SBA's 7(a) loan program provides for a guarantee equal to 75% of the
principal balance, up to a maximum guarantee of $750,000 per borrower.
The Company makes SBA loans to businesses which qualify under agency regulations
as a "small business." The primary operative SBA eligibility criterion
privately-owned manufacturers employing fewer than 500 workers. Loans may
generally be used for the acquisition or refinancing of plant and equipment,
working capital and debt consolidation.
In the event of default, the SBA and Company share in any collections or
collateral on a pari passu basis. For example, if a loan carries a 75%
guarantee, the SBA receives 75% of all collections while the Company receives
25% of such amounts, beginning with the initial recovery. The SBA also
reimburses the Company's collection costs on a similar basis.
If the SBA establishes that any resulting loss is attributable to a failure by
the Company to comply with SBA policies and procedures in connection with the
origination, documentation or funding of a loan, the SBA may decline to pay the
guaranteed amount, or if the guaranty has already been paid, may seek recovery
of funds from the Company. With respect to guaranteed SBA loan participations
which have been sold, the SBA will first honor its guarantee and then seek
compensation from the Company in the event that a loss is deemed to be
attributable to such failure to comply with SBA policies and procedures.
USDA Guaranteed Loan Originations
The Company utilizes the Business and Industry Program ("B&I Program") of the
USDA when applicable based on an applicant's geographical location and other
characteristics. The B&I Program provides for 80% guarantees on loans with
principal balances up to $5 million and 70%
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guarantees on loans with principal balances up to $10 million and, therefore,
enables the Company to provide financing to borrowers with greater needs than
those eligible for SBA loans and non-guaranteed commercial loans from the
Company, due to legal lending limit constraints. The stated purpose of this
program is to support industry, employment and general economic and
environmental conditions in rural communities, which are defined as towns with
fewer than 50,000 inhabitants. Such loans may be utilized for acquisition,
improvement or refinancing of plant, equipment, working capital and debt
consolidation.
Loans to be guaranteed under the B&I Program are submitted to the USDA district
office and, depending on that office's loan authority, may be required to be
forwarded to the national USDA for approval. The USDA approved the Company as a
Certified Lender in six states in 1997, making it one of the first USDA
Certified Lenders nationally. As a Certified Lender, the Company is recognized
as a "Subject Matter Expert" and is able to reserve funds, which facilitates the
processing of USDA loans.
The guarantee of the USDA also provides for pari passu recovery of collection
proceeds, and for recourse to the Company similar to that discussed above for
SBA loans in the event the Company is found to have been negligent in the
origination, documentation or funding of USDA loans.
DOMESTIC UNDERWRITING
For the Company's domestic underwriting process, the Company's staff seeks to:
(i) analyze borrowers' credit profiles; (ii) assess the collateral underlying a
loan; (iii) assure compliance with eligibility requirements for inclusion under
the guarantee programs; and (iv) obtain or provide documentation.
Commercial lending officers receive and assemble initial applications, analyze
the creditworthiness of proposed borrowers, prepare credit memoranda, and aided
by staff prepare any required government guarantee loan application forms and
conduct credit and trade reference checks. In the course of analyzing the
creditworthiness of prospective borrowers, commercial lending officers evaluate
each applicant's and any guarantors' financial statements, credit reports,
appraisals and other information regarding the value of collateral the
experience, strength and continuity of the borrower's management business plans
and other data to determine if the credit and collateral satisfy the Company's
standards and compliance with any applicable government guaranteed loan program
requirements. Such standards may include debt service coverage ratios, or other
financial ratios, reasonableness of the borrower's projections (when submitted),
the experience, strength and continuity of the borrower's management, the
financial condition of individual guarantors, the value of collateral, and
compliance with government guarantee loan program requirements. An originating
officer and, generally, another senior officer perform on-site inspections to
determine the condition of a borrower's facility, the manner in which business
is being conducted, the condition and maintenance of assets, the existence of
environmental issues, and other market conditions.
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Originating lending officers have no authority to approve a loan on their own.
Subject to compliance with credit policies and program parameters, the business
manager of each commercial business unit has limited lending authority in
accordance with his experience, and loans above his lending authority must be
approved by the Chief Operating Officer ("COO") and the Loan Committee of the
Bank's Board of Directors. All loans to a borrower and its affiliates are
aggregated to determine whether they are within a loan officer's lending
authority.
Upon initial approval by a business manager, the credit memorandum must be
approved by the Credit Policy Officer, who reports to the Chief Credit Officer.
The Credit Policy Officer reviews the memorandum and supporting file for
compliance with internal Company policy as well as applicable government
guarantee requirements. If additional approvals are required, the credit
memorandum is forwarded to the appropriate parties as noted above. If the
financing package includes a government guaranteed loan, the application is
forwarded to the applicable government agency.
The Company performs a credit analysis on all applications, considering the type
and value of the assets collateralizing a loan, the characteristics of the
borrower, the borrower's industry, and the anticipated debt service ratio. The
Company generally requires that a borrower's most recently completed fiscal year
financial statements demonstrate historical debt service coverage ratio of at
least 1.25 to 1. If requested funding is for plant or line of business
expansions, consideration may also be given to projected results and, therefore,
certain loans may be granted when historical debt service coverage is less than
1.25 to 1.
Real property taken as primary collateral for a loan is valued by an independent
appraiser in accordance with federal banking regulations, and the appraisal is
then subject to an internal review in accordance with such regulations.
Equipment serving as primary collateral for a loan is generally valued by an
independent equipment appraiser. The Company will generally obtain a Phase I
environmental report completed in accordance with the standards of the American
Society for Testing and Materials on any commercial real property to be
mortgaged. Additional environmental reporting and remediation are required
prior to closing if environmental issues either exist or are suspected.
INTERNATIONAL BANKING SERVICES AND PRODUCTS
The Company's International Banking business units offer Ex-Im Bank guaranteed
revolving lines of credit to U.S. manufacturers, medium term loans to foreign
buyers of U.S. goods, and letters of credit issued in connection with such
facilities.
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The International banking business units include the following:
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TERRITORY EX-IM PRODUCT USED DESCRIPTION
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<S> <C> <C>
United States (principally Working capital line of credit; One year revolving line of
the Northeast and 90% guaranteed; indexed to U.S. credit to U.S. manufacturers
Mid-atlantic) Prime, variable daily; U.S. collateralized by export
dollar denomination accounts receivable and
inventory
Americas (principally Medium term loan; 100% guaranteed 1- to 5-year term loans to
Argentina, Brazil, Central or insured; indexed to 6-month foreign purchasers of
America, Mexico) and LIBOR, variable semi-annually; qualified U.S. made inventory
Asia/Africa/Europe U.S. dollar denominated and equipment
(principally India,
Indonesia, Korea,
Philippines, Poland, South
Africa and Turkey)
</TABLE>
Ex-Im Bank is an independent agency of the U.S. whose mission is to facilitate
export financing of U.S. goods and services by neutralizing the effect of export
credit subsidies from other governments and absorbing credit risks that the
private sector will not accept. The Company utilizes the Ex-Im Bank's loan
guarantee and insurance programs designed to support small and medium size U.S.
exporters. In 1997 the Company received Ex-Im Bank's annual "Small Business
Bank of the Year" award.
International Banking - United States
Working Capital Loan Products and the Origination Process
The typical U.S. client for the Company's international products is a U.S.-based
manufacturer with sales of $2 million to $25 million and export financing
needs. The Trade Finance business unit handles these clients, which comprise
the same target profile as for the Company's domestic loan officers.
The one-year revolving Ex-Im Bank working capital lines of credit are indexed to
WSJ Prime and adjust daily. The primary collateral for these loans includes
export-related accounts receivable and inventory. The accounts receivable are
generally insured under an Ex-Im Bank insurance policy, private export credit
insurance or an acceptable letter of credit. Open accounts receivable may
qualify as collateral if approved in advance by the Company and Ex-Im Bank.
Borrowers must submit borrowing base certificates to the Company to evidence the
availability of acceptable collateral when an advance is requested, and monthly
thereafter.
The Company is one of ten lenders in the U.S. with "AA Level Delegated
Authority" status with respect to Ex-Im Bank's working capital loan guarantee
program and, therefore, has authority to
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approve working capital lines up to $5 million per borrower, up to an aggregate
portfolio of $75 million without prior Ex-Im Bank approval.
In the event of a loan default, the Company and Ex-Im Bank share in all loan
recovery proceeds on a pari passu basis in accordance with the 90%
guaranteed/10% unguaranteed ratio. The Company also has the responsibility to
ensure that loans are underwritten, documented and funded in accordance with Ex-
Im Bank polices and procedures in order to avoid loss of the guarantee.
International Banking - Emerging Markets
Short and Medium Term Loan Products and Origination Process
Emerging market-based clients of the Company's Americas and Asia/Africa/Europe
business units are typically small and medium size manufacturers requiring
financing to purchase equipment, components and raw materials from the U.S.
Medium term loans are 100% Ex-Im Bank guaranteed or insured, typically 3-5 years
in term, and finance the acquisition of qualified U.S.-made capital goods. Ex-
Im Bank program allows the financing of up to the lower of 85% of purchase price
or 100% of U.S. content. Certain other U.S. content and product requirements
must also be met. The loans range in size from $150,000 to $10 million and are
U.S. dollar-denominated. Although the purchase of the equipment is being
financed, the loans are unsecured; the Company relies on the borrower's cash
flow and the 100% Ex-Im Bank guarantee or insurance.
International lending officers are responsible for marketing, underwriting,
servicing, monitoring and collecting their portfolios of loans. Because the
loans are medium term and fully amortizing with semi-annual payments, there is
less post-closing analysis required for performing loans than for other types of
loans made by the Company.
In the event of default, Ex-Im Bank handles the liquidation of medium term loans
and pays the Company 100% of the principal balance, plus accrued interest. See
"Delinquency and Collection Activities."
INTERNATIONAL BANKING UNDERWRITING
International lending officers receive and assemble initial applications,
analyze the creditworthiness of proposed borrowers, prepare memoranda, and aided
by staff prepare the required Ex-Im Bank loan application forms and conduct
credit and trade reference checks. For medium term loans, in-country Master
Agents, where applicable, aid in the transaction by obtaining required financial
or operational data from borrowers and generally assist in the loan origination
and closing process.
The Company's international lending officers will often visit the prospective
U.S. borrower's place of business and perform on-site inspections. The Company
will generally instruct its in-
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country Master Agents to make such inspections of foreign borrowers. Although
inventory serves as collateral for working capital lines of credit to U.S.
exporters, other tangible assets are generally not taken as collateral under the
Ex-Im Bank loan programs. However, site inspections in most cases are conducted
because such information is helpful in assessing a borrower's operations.
The approval process is substantially similar to that followed by the commercial
lending officers. The Credit Policy Officer reviews the memorandum and
supporting file for compliance with internal Company policies as well as
applicable Ex-Im Bank guarantee program parameters. As with the domestic
lending, exceptions to the Company's and Ex-Im Bank's loan policies are
entertained on a case-by-case basis by the approving loan officers, and
acceptance of exceptions depends upon the overall creditworthiness of the
applicant.
Working capital lines of credit are collateralized by export-related inventory
and accounts receivable less than 90 days old; such collateral has maximum
prescribed collateral values of 75% and 90%, respectively. As is the case with
respect to domestic loans, the collateral value required to support a loan is
based on the borrower's individual circumstances, and applications exceeding the
Company's general standards may receive special consideration.
Medium term loans are unsecured, although debt service coverage and operating
history are reviewed in the underwriting process. The lending officer also
considers the availability to the borrower of U.S. dollars and other "hard"
currency revenue sources from sales to the U.S. and other stable currency
markets.
While most working capital lines of credit are within the Company's "AA
Delegated Authority", applications which do not comply with and/or are above the
Company's authority, and all medium term loans, require Ex-Im Bank approval.
CAPITAL MARKETS AND LOAN SERVICING
Capital Markets Activities
The Capital Markets business unit was established in July 1996 to assume
responsibility for the non-recourse, servicing-retained sale of SBA, USDA and
Ex-Im Bank government guaranteed loans and to identify markets for the sale of
non-guaranteed mortgage, term and revolving loans on a non-recourse, servicing-
retained basis. Capital Markets activities allow the Company to leverage
capital, replenish liquidity, mitigate the risk of balance sheet exposure to any
single borrower, and reduce reliance on government guaranteed loan programs for
revenue.
The guaranteed portions of SBA and USDA loans are generally sold during the
quarter of origination on a single loan basis to established brokers. Brokers
generally pool the SBA guaranteed portions. USDA loans are individually sold.
The guaranteed portions of the Ex-Im Bank loans and lines of credit are sold to
various parties, including Private Funding Export Funding Corporation ("PEFCO").
PEFCO is a private corporation established with the support
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<PAGE>
of the United States Treasury and Ex-Im Bank to assist in financing exports of
U.S. goods and services by making direct loans to foreign importers of U.S. made
goods, and to provide liquidity support for private sector lending utilizing Ex-
Im Bank programs. The Company is a 1% shareholder and one of among approximately
50 PEFCO shareholders, with a common stock investment of $599,000 at December
31, 1997.
SBA and USDA regulations permit the Company to sell a portion of the
unguaranteed amount of loans originated under their respective programs. SBA
regulations require a bank lender to retain an unguaranteed interest equal to
10% of each SBA loan, although in 1997 the Company received permission to reduce
its retained interest in its SBA loans to 5%. The SBA has proposed regulations
which would allow banks to securitize or sell the unguaranteed portions of SBA
loans subject to certain criteria designed to ensure that originators retain a
continuing economic interest in the loans. The regulations would also reduce
the required unguaranteed retention to 5% of the total SBA loan. USDA
regulations permit the Company to sell unguaranteed portions equal to all but 5%
of the total USDA loan. Upon the sale of such unguaranteed portions, the Company
shares in the payment stream and collateral on a pari passu basis with all
(guaranteed and unguaranteed) investors, beginning with the initial recovery.
Sales of unguaranteed portions of SBA Loans and USDA loans totaled approximately
$29.2 million and $33.1 million for the years ended December 31, 1997 and 1996,
respectively. Approximately $7.8 million of the 1997 sales represented the
additional 5% unguaranteed SBA portions held in the Company's portfolio for
which the Company received permission to sell. A significant portion of the
1996 loans sold had been originated in 1994 and 1995. Due to these unique
circumstances, there can be no assurance that this volume of unguaranteed
portion loan sales will be representative of future sales activity.
The Capital Markets business unit has developed a list of potential buyers of
non-guaranteed mortgage loans, term loans and revolving lines of credit and
devotes substantial resources to the identification of such buyers. A primary
objective in the negotiation and sale of such loans is the Company's retention
of sole responsibility for borrower contact. Investors meet with borrowers only
in rare circumstances, and generally rely on the Company to prudently service
and monitor lending relationships. The Company believes that this is important
to maintain client relationships and also reflects investor confidence in its
servicing ability and reputation.
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Loan Servicing Activities
At December 31, 1997, the total loan portfolio serviced by the Company was
comprised of the following:
<TABLE>
<CAPTION>
SERVICED FOR COMPANY TOTAL BALANCE
OTHERS BALANCE SERVICED
------------------- --------------------- -------------------
(dollars in thousands)
Commercial banking portfolio:
<S> <C> <C> <C>
SBA loans....................................... $247,127 $ 29,913 $277,040
USDA loans...................................... 51,132 6,541 57,673
Business loans.................................. 5,059 28,791 33,850
Revolving lines of credit....................... 2,550 30,414 32,964
Commercial mortgages............................ 19,033 19,918 38,951
Investor property mortgages..................... 593 5,497 6,090
Private loans................................... - 1,353 1,353
------------------- --------------------- ---------------------
Total commercial banking.................. 325,494 122,427 447,921
International banking portfolio:
Ex-Im medium term loans......................... 69,631 723 70,354
Ex-Im working capital lines..................... 12,183 3,858 16,041
Inventory buyer credit loans.................... 980 20 1,000
------------------- --------------------- ---------------------
Total international banking............... 82,794 4,601 87,395
Private banking portfolio:
Residential mortgages........................... 17,305 6,515 23,820
Other consumer loans............................ 3,484 1,855 5,339
------------------- --------------------- ---------------------
Total private banking..................... 20,789 8,370 29,159
Loans held for sale................................ - - 9,070
------------------- --------------------- ---------------------
Totals......................................... $429,077 $135,398 $573,545
=================== ===================== =====================
</TABLE>
The Company services substantially all of the loans it originates, whether sold
to investors or held in portfolio. Servicing includes collecting payments from
borrowers and remitting applicable payments and required reports to any
investors; accounting for principal, interest and any real estate taxes or
other escrow receipts and payments; contacting delinquent borrowers; supervising
foreclosures; and liquidating collateral when required. Other than tasks
performed by the assigned lending officers, loan servicing functions are
centralized in the Hartford, Connecticut headquarters.
The Company receives servicing fees on loans serviced for others in varying
amounts, as determined under the particular terms of the sale. Management
believes that servicing most loans originated enhances the Company's
relationship with borrowers. This contact allows the Company to continue to
offer its loan and deposit products to clients who may need additional financing
or retail services. Further, such arrangements provide an additional and
profitable revenue stream that is less cyclical than the business of originating
and selling loans.
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<PAGE>
DELINQUENCY AND COLLECTION ACTIVITIES
The assigned lending officer retains responsibility for routine collection of
his portfolio. The Company attempts to collect all loans on a 30-day basis,
leaving very few loans past due 30 days or more at any month end. An officer's
initial collection efforts generally begin when an account is 15 days past due.
At 20 days past due, a reminder notice is sent to the borrower and the officer
again attempts to contact the borrower to determine the reason for the
delinquency and if the account will be brought current.
If a borrower is unable to make a payment within 30 days of the due date as of
month-end, and has not made acceptable alternative arrangements with the
Company, the account is transferred to the Company's Loan Workout business unit
for consideration of additional collection procedures, including issuance of a
demand letter and possible liquidation of collateral.
The Loan Workout business unit is responsible for contacting the borrower and
analyzing its current and projected financial condition, the reasons leading to
the delinquency and the value of the collateral available to the Company. The
Loan Workout Officer then proposes a workout plan to the Chief Credit Officer
and other involved members of Senior Management. The Loan Workout business unit
will also provide any required notices and generally seek to comply with
applicable government guarantee program or investor requirements.
If a modification of loan terms or other acceptable workout cannot be achieved
within a reasonable time frame, the Company will liquidate the collateral
securing the loan.. The Company prefers not to take title to real property or
equipment unless required to facilitate the collection process. The Company
solicits assistance from the principals of the delinquent borrower to effect the
liquidation of any property, with title remaining in the borrower's name,
thereby avoiding a lengthy foreclosure or repossession process and exposure to
the Company regarding environmental or other liability issues. The Company has
generally found principals of borrowers to be cooperative in assisting the
Company to liquidate collateral efficiently. The Company follows the same
general workout procedures for substantially all of the loans serviced.
If a loan carries an SBA guarantee, the responsible SBA District Office will be
notified of the delinquency and will be presented with a liquidation plan within
60-90 days of such delinquency. Unless the SBA objects, the Company will carry
out the terms of the liquidation plan. As a Preferred Lender, the Bank has
responsibility and authority over liquidation procedures on all SBA guaranteed
loans serviced. Any loss after liquidation of collateral is allocated pro rata
between the guaranteed and unguaranteed portions of an SBA Loan. After an SBA
loan becomes 60-90 days past due, the SBA at the Company's request will
repurchase the guaranteed portion of the principal balance of the loan at par
from the secondary market investor, together with accrued interest covering a
period of up to 120 days.
USDA procedures require that the Company file a liquidation plan when it is
believed action should be taken on a delinquent loan, which is generally when
the loan is 60-90 days delinquent. The USDA has 30 days to review the plan.
The Company will then execute the approved plan or work with the USDA to arrive
at a mutually acceptable plan. Any loss after liquidation of
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<PAGE>
collateral is allocated pro rata between the guaranteed and unguaranteed
portions of the USDA loan. The holder of the guaranteed portion may request
that the USDA repurchase the guaranteed portion at any time, or the Company will
request repayment on such holder's behalf when liquidation is complete. The
USDA does not impose any restrictions on the number of days for which interest
will be paid on the guaranteed portions.
The liquidation of delinquent working capital and medium term Ex-Im Bank loans
is handled by Ex-Im Bank. The Company may submit a claim for repurchase at any
time between 30 and 120 days after a delinquency occurs, but at no time may such
claim be made more than 150 days after the delinquency. Ex-Im Bank will make
payment under its guarantee 30 days after acceptance of the Company's request.
The Company retains responsibility for the proper documentation and servicing of
all loans serviced for others, and may incur losses related to such loans if it
is found to be negligent by a guaranteeing agency or investor in carrying out
these duties.
Unguaranteed loans or unguaranteed portions of loans held by investors are
subject to negotiated servicing agreements, which generally provide investors
with the option of assuming responsibility for all collection efforts after a
loan becomes 60-90 days delinquent. If the Company is contractually responsible
for collection efforts, the servicing agreements generally require that the
investor pre-approve liquidation actions.
CREDIT RISK MANAGEMENT
The Chief Credit Officer has primary responsibility for credit risk management,
ensuring the appropriateness of underwriting criteria and application thereof,
the implementation of RISCOPE/sm/, (the Company's proprietary commercial risk
assessment model), and the independent analyses of loans by the Loan Review
business unit.
The Credit Policy Officer, who reports to the Chief Credit Officer, reviews all
credit memoranda for compliance with the requirements of government guarantee
programs and Company credit policies. If, based on particular facts and
circumstances, policy exceptions are proposed by lending officers, the Credit
Policy Officer will ensure that all appropriate policy exceptions are documented
and approved by the authorized party. The Chief Credit Officer periodically
evaluates the nature and trends of such exceptions, reporting them quarterly to
the Board of Directors' Audit Committee.
As a nationally-chartered bank, the Bank is required to "risk rate" its loan
portfolio by monitoring changes in the financial condition of borrowers,
assessing overall economic trends, and assigning numerical ratings to individual
loans. The Company applies regulatory risk rating definitions and has developed
additional ratings for the "Pass" or uncriticized loan category. Such a rating
system, in conjunction with other available quantitative and qualitative data,
is
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<PAGE>
utilized to assist management in its quarterly evaluation of the Adequacy of the
Allowance for Loan Losses.
The assigned lending officer has primary responsibility for risk ratings, and
such officer's decisions are periodically reviewed by the Loan Review business
unit. Risk ratings are based on the borrower's operating cash flow, industry,
product line, earnings, assets, liability, management experience, debt capacity,
and prior credit history with the Company.
The Company has developed a proprietary risk analysis model, RISCOPE/sm/, used
in the initial underwriting, post-closing loan monitoring and rating process by
lending officers and the Loan Review business unit. RISCOPE/sm/ assists the
Company in quantifying the credit risk of commercial clients. The model takes
into account quantitative and qualitative factors and was designed to analyze
the Company's primary client base: small and medium size manufacturers.
RISCOPE/sm/ is intended to quantify credit risk with respect to the probability
of default and, therefore, assists management in risk rating loans and providing
an Appropriate Allowance for Loan Losses. Additionally, the model helps
management identify weaknessess in credits earlier than might otherwise be done
if payment default were their only manifestation.
The Loan Review business unit reviews the loan portfolio to evaluate the
appropriateness of officer risk ratings and overall trends in the portfolio.
Loan Review results are reported to the Audit Committee of the Board quarterly.
PRIVATE BANKING
The Private Banking business unit seeks to provide stable, low-cost funding for
the Company by managing its deposit base, which consists of demand deposits,
money market savings accounts and time certificates of deposits. The Company
completed its transition from a retail to wholesale financial institution by
selling its last suburban retail branch facility and deposits totaling $24
million in September 1996. The Company operates one depository branch located
on the first floor of its Hartford, Connecticut headquarters. Many of the
Company's commercial clients transact business through electronic funds
transfer, telephone and the mail.
The Private Banking business units target the commercial depository accounts of
small and medium size manufacturers, as well as the personal accounts of their
principals, by offering a full array of financial products. These products
include automatic sweep accounts, merchant and corporate credit cards, payroll
processing, business and individual retirement accounts, international funds
transfer and foreign exchange conversion.
The Private Banking business units seek to expand the Company's deposit base by
strengthening existing relationships and soliciting new ones. Private bankers
are trained to focus on, and respond to, the needs of commercial borrowers which
management believes are often not served effectively by other depository
institutions. Private bankers based in Hartford, Connecticut market the
Company's services through direct mail and telephone in order to reach
businesses,
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<PAGE>
institutions and individuals in the areas where the Company has domestic offices
and international Master Agents. The Company maintains an interactive voice
response and personal computer-based system, First Access/SM/, which enable
clients to obtain information about their loan or deposit accounts. Business
lock box and expanded its foreign exchange services have recently been
introduced to clients as well.
The following table sets forth the Company's deposit structure as noted:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
(dollars in thousands)
<S> <C> <C> <C>
BUSINESS ACCOUNTS:
Non-interest bearing checking..................... $ 37,718 $ 27,485 $ 19,337
Interest bearing checking......................... 4,670 4,567 5,897
Savings........................................... 58,800 46,660 31,453
------------------- ------------------- -------------------
Total business................................ 101,188 78,712 56,687
CONSUMER ACCOUNTS:
Non-interest bearing checking..................... 518 403 3,284
Interest bearing checking......................... 3,197 3,681 4,835
Savings........................................... 33,203 22,618 39,573
------------------- ------------------- -------------------
Total consumer................................ 36,918 26,702 47,692
TIME DEPOSITS ACCOUNTS:
Non-IRA time deposits............................. 25,110 32,372 17,904
IRA time deposits................................. 9,105 6,530 6,078
------------------- ------------------- -------------------
Total time deposits............................ 34,215 38,902 23,982
------------------- ------------------- -------------------
Total deposits........................... $172,321 $144,316 $128,361
=================== =================== ===================
Externally indexed savings accounts
included above...................................... $ 88,539 $ 65,779 $ 57,310
=================== =================== ===================
</TABLE>
The average balances held in checking and savings accounts are higher than
industry norms, which the Company believes is attributable to the Company's
focus of attracting primarily commercial business deposits. Management believes
that such deposits are at least as stable as those obtained from consumers. The
Company does not generally compete with retail branches of other depository
institutions, but rather with mutual and money market funds, yet it retains the
advantage of FDIC insurance. The Company's basic business cash management and
private banking savings accounts are variable rate money market accounts tied to
an external index published daily in The Wall Street Journal and are designed to
-----------------------
compete with non-insured alternatives.
Additional funding for the Company's operations is also available from the on-
going sale of guaranteed and non-guaranteed loans, advances from the Federal
Home Loan Bank of Boston and other sources.
COMPETITION
The Company competes for clients with other commercial and savings banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking firms and certain other
nonfinancial institutions, many of whom are able
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<PAGE>
to devote far greater resources than the Company to market, underwrite and
service loans to the same client base. The Company competes by emphasizing its
expertise and knowledge of its clients' businesses, commitment to service,
flexibility in structuring financial transactions, and strong relationships.
Through the combined utilization of government guaranteed loan programs, the
Company is able to provide flexible longer-term financing than would otherwise
be available to borrowers, and through its Private Banking business units it is
able to offer depository and related products.
REGULATION AND SUPERVISION
Holding Company Regulation
The Company is registered as a bank holding company and regulated and subject to
periodic examination by the Federal Reserve Bank ("FRB") under the Bank Holding
Company Act ("BHCA").
Pursuant to FRB regulations, the Company is limited to the business of owning,
managing or controlling banks and engaging in certain other bank-related
activities, including those activities that the FRB determines from time to time
to be closely related to banking. The BHCA requires, among other things, the
prior approval of the FRB if a bank holding company proposes to (i) acquire all
or substantially all of the assets of a bank, (ii) acquire direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any bank
(unless it already owns a majority of such bank's voting shares) or (iii) merge
or consolidate with any other bank holding company.
As a bank holding company, the Company is required by the FRB to act as a source
of financial strength and to take measures to preserve and protect the Bank. As
a result, the Company may be required to inject capital in the Bank if such a
need arises. The FRB may charge a bank holding company such as the Company with
unsafe and unsound practices for failure to commit resources to a subsidiary
bank when required. The Company expects to downstream approximately $11 million
of capital to the Bank in the first quarter of 1998 in support of the Bank's
ongoing activities. Such amount represents the balance of the Company's
available funds.
To be considered regulatory capital, loans from the Company to the Bank must be
on terms subordinate in right of payment to deposits and to most other
indebtedness of the Bank.
The FRB, OCC and Federal Deposit Insurance Corporation (the "FDIC") collectively
have extensive enforcement authority over bank holding companies and national
banks in the United States. This enforcement authority, initiated generally for
violations of law and unsafe and unsound practices, includes, among other
things, the ability to assess civil money penalties, to initiate injunctive
actions and to terminate deposit insurance in extreme cases.
19
<PAGE>
The bank regulatory agencies' enforcement authority was substantially enhanced
by the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). FIRREA significantly increased the amount of civil money penalties
and expanded the grounds for imposing such penalties. Also, under FIRREA,
should a Bank failure result in a loss to the FDIC, any other FDIC-insured
subsidiaries of the Company could be required to compensate the FDIC for the
estimated amount of the loss. Additionally, pursuant to FDICIA, the Company in
the future could have the potential obligation to guarantee the capital
restoration plans of any undercapitalized FDIC-insured subsidiaries it may
control.
INTERSTATE BANKING
As of September 29, 1995, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "RNA") permitted adequately capitalized and managed
bank holding companies to acquire control of banks in any state. Additionally,
beginning on June 1, 1997, the RNA enabled banks to branch across state lines,
although individual states are authorized to permit interstate branches earlier
or to elect to opt out entirely.
REGULATION OF THE BANK
General
The Bank, as an FDIC-insured national bank, is subject to regulation primarily
by the OCC, and secondarily by the FDIC. As a national bank, the Bank is a
member of the Federal Reserve System and its operations are subject to certain
FRB regulations. Various other federal and state consumer laws and regulations
also affect the operations of the Bank.
As a national bank, the Bank may be able to engage in certain activities
approved by the OCC which the FRB would not necessarily approve for the Company.
The OCC has been particularly aggressive in recent years in allowing national
banks to undertake an ever-increasing range of securities and insurance
activities. Along these lines, pursuant to certain revisions of the OCC's
regulations pertaining to banking activities effective on December 31, 1996,
national banks are permitted on a case-by-case basis to operate subsidiaries
engaging in activities not permissible for the Bank itself. Although the
revised regulations do not authorize any specific new activities, it is expected
that national banks, if eligible and if they obtain the approval of the OCC,
will use these regulations to expand further into the insurance and securities
businesses.
The revised OCC regulations contain "fire walls" intended to protect a national
bank from the risks taken by a subsidiary, including imposing a 10% cap on the
amount of bank capital that may be invested in a new subsidiary, as well as
requirements that extensions of credit to an operating subsidiary be fully-
collateralized and that transactions between the bank and subsidiary be
conducted at arm's-length. The parent national bank's exposure to any losses
the
20
<PAGE>
subsidiary may incur are limited to the bank's equity investment in the
subsidiary. Parent national banks are required to be well-capitalized both
before and after an investment is made.
Since OCC approval is required on a case-by-case basis for an eligible bank to
engage in activities not permissible for the bank to conduct directly, the
effect of these revised regulations on the operations of national banks is
unclear. Further, it is expected that Congress will consider new banking
legislation in the near future addressing these revisions.
As a national bank, the Bank may ordinarily lend up to 15% of its capital on an
unsecured basis to any one borrower, and may lend up to an additional 10% of its
capital to that same borrower on a fully secured basis involving readily liquid
collateral having an established market value as determined by reliable and
continuously available price quotations, and equal at least to the amount
borrowed. In addition, there are various other circumstances in which the Bank
may lend in excess of such limits, including authority to lend up to 35% of
capital and surplus when the loan is secured by documents of title to readily
marketable staples, unlimited authority if loans are guaranteed by a U.S.
government agency, and certain other exceptions relevant to international trade
finance.
Federal law also imposes additional restrictions on the Bank with respect to
loans and credit to certain related parties and transactions with the Company's
principal stockholders, officers, directors and affiliates. Extensions of
credit to such persons (i) must be made on substantially the same terms
(including interest rates and collateral) as, and follow credit underwriting
procedures not less stringent than, those prevailing for comparable transactions
with members of the general public, and (ii) must not involve more than the
normal risk of repayment or present other unfavorable features.
Capital Adequacy
The federal bank regulatory authorities have adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
framework that makes regulatory capital requirements more sensitive to
differences in risk profile among banking organizations, takes off-balance sheet
exposures into explicit account in assessing capital adequacy, and minimizes
disincentives to holding liquid, low-risk assets. These risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
financial instruments into four weighting categories, with higher levels of
capital required for the categories perceived as representing greater risk.
Under these guidelines, a banking organization's capital is divided into two
tiers. The first tier ("Tier 1") includes common equity, perpetual preferred
stock (excluding auction rate, money market or remarketable issues) and minority
interests held by others in a consolidated subsidiary, less goodwill and any
disallowed intangibles. Supplementary ("Tier 2") capital includes, among other
items, cumulative and limited-life preferred stock, mandatory convertible
securities, subordinated debt and the allowance for loan and lease losses,
subject to certain limitations and less required deductions as provided by
regulation.
21
<PAGE>
Banking organizations are required to maintain a risk-based capital ratio of
total capital (Tier 1 plus Tier 2) to risk-weighted assets of 8%, of which at
least 4% must be Tier 1 capital. Federal bank regulatory authorities may,
however, set higher capital requirements when a banking organization's
particular circumstances warrant. As a general matter, banking organizations
are expected to maintain capital ratios well above the regulatory minimums.
In addition, federal bank regulatory authorities have established guidelines for
a minimum leverage ratio (Tier 1 capital to average total assets). These
guidelines provide for a minimum leverage ratio of 3% for banking organizations
that meet certain specified criteria, including excellent asset quality, high
liquidity, low interest rate exposure and the highest regulatory rating.
Banking organizations not meeting these criteria or which are experiencing or
anticipating significant growth are required to maintain a leverage ratio which
exceeds the 3% minimum by a least 100 to 200 basis points. The risk based
capital and leverage ratios of the Bank as of December 31, 1997 and December 31,
1996 are set forth in Note 7 to the Company's Consolidated Financial Statements.
Failure to meet applicable capital guidelines could subject a bank or bank
holding company to a variety of enforcement remedies available to the federal
bank regulatory authorities, including limitation on the ability to pay
dividends, the issuance of a capital directive to increase capital and, in the
case of a bank, the termination of deposit insurance by the FDIC or (in severe
cases) the appointment of a conservator or receiver.
Dividends
The Bank is subject to legal limitations on the frequency and amount of
dividends that can be paid to the Company. The OCC, in general, also has the
power to prohibit the payment of dividends by the Bank which would otherwise be
permitted under applicable regulations if the OCC determines that such dividends
would constitute an unsafe or unsound practice.
OCC approval is required for the payment of dividends by the Bank in any
calendar year if the total of all dividends declared by the Bank in that year
exceeds the current year's net income combined with the retained net income of
the two preceding years. "Retained net income" means the net income of a
specified period less any common or preferred stock dividends declared for that
period. Moreover, no dividends may be paid by a national bank in excess of its
undivided profits account. In addition, the FRB and the FDIC have issued policy
statements which provide that, as a general matter, insured banks and bank
holding companies may pay dividends only out of current operating earnings.
There are also statutory limits on other transfers of funds to the Company and
any other future non-banking subsidiaries of the Company by the Bank, whether in
the form of loans or other extensions of credit, investments or asset purchases.
Such transfers by the Bank generally are limited in amount to 10% of the Bank's
capital and surplus to the Company and any such future subsidiary of the
Company, or 20% in the aggregate to the Company and all such subsidiaries.
Furthermore, such loans and extensions of credit are required to be fully
collateralized in specified amounts depending on the nature of the collateral
involved.
22
<PAGE>
FDICIA
FDICIA was enacted on December 19, 1991. It substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to other federal banking statutes.
A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions they
supervise. Under these regulations, a depository institution is classified in
one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Based on the Bank's current regulatory capital
position, management believes that the Bank is "well capitalized."
FDICIA generally prohibits the Bank from making any capital distribution
(including payment of a cash dividend) or paying any management fees to the
Company if the Bank would thereafter be undercapitalized. Undercapitalized
depository institutions are subject to growth limitations and are required to
submit a capital restoration plan acceptable to federal banking agencies. If a
depository institution fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized."
Significantly undercapitalized depository institutions may be subject to a
number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, reduce total assets,
and stop accepting deposits from correspondent banks. Critically
undercapitalized institutions are subject to the appointment of a receiver or
conservator, generally within 90 days of the date of such institution is
determined to be critically undercapitalized.
COMMUNITY REINVESTMENT ACT
The Federal Community Reinvestment Act (the "CRA") requires the OCC to evaluate
the Bank's performance in helping to meet the credit needs of the community.
The Bank defines its CRA marketplace as Hartford County. This definition is not
intended to restrict the availability of credit services throughout the Bank's
general service area, but represents a special commitment the Bank has made to
provide lending and depository services to the community. As a part of the CRA
program, the Bank is subject to periodic examinations by the OCC and maintains
comprehensive records of its CRA activities for this purpose. Following its
most recent examination in November 1995, the Bank received a rating of
"Outstanding."
The Bank is specifically interested in making financing available to small and
medium size manufacturers in its defined lending area. The Bank evaluates
credit applications without regard to race, color, religion, national origin,
gender, marital status or age, and does not discriminate
23
<PAGE>
against any loan applicant whose income may come entirely or in part from any
public assistance program, or against any applicant who has exercised in good
faith any right under the Consumer Protection Act. The Company maintains
preferred status with the SBA, USDA and Ex-Im Bank which enables it to provide
access to credit products that might otherwise be unavailable.
ITEM 2. PROPERTIES
The Company leases approximately 38,000 square feet in Hartford, Connecticut to
house its headquarters, lending and support staff, and its only full-service
branch. The Company maintains leased space for representative offices in Boston
and Springfield, Massachusetts; Providence, Rhode Island; Morristown, New
Jersey; Rochester, New York; Philadelphia and Pittsburgh, Pennsylvania; and
Washington, D.C. The Company's leases generally provide for two five-year
renewal options and options on additional space. Management believes that its
existing facilities are adequate for their present and proposed uses and that
suitable facilities will be available on reasonable terms for any additional
space required.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is 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 Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1997 to a vote of
security holders through solicitation of proxies or otherwise.
24
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information required by this item may be found on the inside back cover of the
Company's 1997 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this item may be found on page 4 of the Company's 1997
Annual Report to Shareholders, which is incorporated by reference and is filed
as Exhibit 13.1 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Information required by this item may be found on pages 5 through 16 of the
Company's 1997 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item may be found on pages 14 and 15 of the
Company's 1997 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item may be found on pages 17 through 35 of the
Company's 1997 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 - 13
Information required by these items may be found in the Company's Proxy
Statement which is incorporated by reference.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements set forth on pages 17 through 35 of the 1997
Annual Report to Shareholders which is filed herewith as Exhibit 13.1.
(i) Report of Independent Accountants
(ii) Consolidated Balance Sheets as of December 31, 1997 and 1996
(iii) Consolidated Statements of Income for the Years Ended December
31, 1997, 1996 and 1995
(iv) Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995
(v) Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
2. Financial Schedules:
None required.
3. Exhibits:
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation of
the Registrant.*
3.2 Amended and Restated By-laws of the Registrant.*
10.1 Employment Agreement among Registrant, First National
Bank of New England (the "Bank") and Brett N. Silvers
as amended by Letter Agreement, dated July 3, 1997.*
10.2 Promissory Note of Brett N. Silvers, payable to the
Registrant, dated June 30, 1994, as amended.*
10.3 Stock Pledge Agreement, dated June 30, 1994, between
the Registrant and Brett N. Silvers, as amended.*
10.4 Amended and Restated 1996 Stock Option Plan.*
10.5 1994 Incentive Stock Option Plan, as amended.*
10.6 401(k) Plan.*
10.7 Lease between Cambridge One Commercial Plaza, LLC and
the Bank.*
10.8 Employment Agreement between the Bank and Brian J.
Charlebois dated August 25, 1997.*
10.9 Employment Agreement between the Bank and Leslie A.
Galbraith dated August 25, 1997.*
13.1 1997 Annual Report to Shareholders.
21.1 Subsidiaries of Registrant.*
23.1 Consent of Coopers & Lybrand L.L.P.
26
<PAGE>
27.1 Financial Data Schedule for the Year Ended December
31, 1997.
* 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.
B. Reports on Form 8-K.
The Company has not filed any Current Reports on Form 8-K since the
filing of its Registration Statement dated September 22, 1997.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 26, 1998
First International Bancorp, Inc.
By: /s/ Brett N. Silvers
------------------------
Brett N. Silvers
Chairman of the Board and
President
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Brett N. Silvers
- ---------------------------
Brett N. Silvers Chairman of the Board March 26, 1998
and President
/s/ Michael R. Carter
- ---------------------------
Michael R. Carter Director March 26, 1998
/s/ Arnold L. Chase
- ---------------------------
Arnold L. Chase Director March 26, 1998
/s/ Cheryl A. Chase
- ---------------------------
Cheryl A. Chase Director March 26, 1998
/s/ Frank P. Longobardi
- ---------------------------
Frank P. Longobardi Director March 26, 1998
/s/ Bernard M. Waldman
- ---------------------------
Bernard M. Waldman Director March 26, 1998
/s/ Leslie A. Galbraith
- ---------------------------
Leslie A. Galbraith Executive Vice President, March 26, 1998
Secretary and Treasurer
</TABLE>
28
<PAGE>
1 First National Bank
of New England
Financing Manufacturers Worldwide(R)
Corporate Headquarters
Hartford
One Commercial Plaza
Hartford, CT 06103
(860) 727-0700
(860) 525-2083 (fax)
www.fnbne.com
Representative Offices
Boston
175 Federal Street
Boston, MA 02110-2205
(617) 357-0500
(617) 357-0502 (fax)
Providence
55 Dorrance Street
Providence, RI 02903
(401) 553-2400
(401) 553-2402 (fax)
Springfield
One Monarch Place
Springfield, MA 01144
(413) 827-4980
(413) 827-4982 (fax)
Morristown
1776 On The Green
67 Park Place
Morristown, NJ 07960
(201) 682-9900
(201) 682-9944 (fax)
Pittsburgh
301 Grant Street
One Oxford Centre
Suite 1500
Pittsburgh, PA 15219
(412) 255-3744
(412) 255-3745 (fax)
Washington
10202 Sunrise Valley Drive
Suite 270
Reston Place 2
Reston, VA 20191
(703) 391-8020
(703) 301-8480 (fax)
Philadelphia
1 Commerce Square
2005 Market Street
Philadelphia, PA 19103
(215) 587-6486
(215) 587-6497 (fax)
Rochester
710 Bausch & Lomb Place
Rochester, NY 14604
(716) 246-0430
(716) 246-0439 (fax)
International
Representatives
Argentina
Brazil
Central America
India
Indonesia
Korea
Mexico
Philippines
Poland
South Africa
Turkey
- --------------------------------------------------------------------------------
First International
Bancorp, Inc.
First National Bank
of New England
[GRAPHIC APPEARS HERE]
1997 Annual Report
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
[GRAPHIC APPEARS HERE]
[GRAPHIC APPEARS HERE]
[GRAPHIC APPEARS HERE]
Financing
Manufacturers
Worldwide(R)
Member FDIC,
Equal Housing Lender
<PAGE>
First International Bancorp, Inc.
Index to Consolidated Financial Statements
2 Letter to Shareholders and Clients
4 Summary Financial Highlights
5 Management's Discussion and Analysis
of Financial Conditions and Results
of Operations
17 Report of Independent Accountants
18 Consolidated Balance Sheets as of
December 31, 1997 and 1996
19 Consolidated Statements of Income
for the years ended December 31,
1997, 1996 and 1995
20 Consolidated Statements of Changes in
Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
21 Consolidated Statements of Cash Flows
for the years ended December 31, 1997,
1996 and 1995
22 Notes to Consolidated Financial Statements
36 Directors and Officers and General Information
1
<PAGE>
To Our Shareholders and Clients
I am pleased to address you at the close of our first year as a public
company. First International Bancorp, Inc. completed a successful public
offering in September 1997, raising more than $23.8 million in capital, and is
now trading on NASDAQ under the symbol FNCE. This was one of last year's many
significant accomplishments.
For the year ended December 31, 1997, consolidated net income for First
International Bancorp, Inc. and its wholly owned subsidiary, First National Bank
of New England, was $4.4 million or $.67 per share on a diluted basis. This
represented an increase of 37% from 1996's consolidated net income of $3.2
million or $.56 per share. Returns on average equity and assets in 1997 were
20.5% and 2.5%, respectively. We pursued our corporate mission, Financing
Manufacturers Worldwide(R), by expanding both domestic and international
locations last year and now have more than 600 profile clients in 19 states and
10 countries. New representative offices were opened outside the New England
region in Pittsburgh, Philadelphia, Morristown, Rochester and Washington, D.C.,
and these offices contributed 30% of total gains on domestic loan sales in their
first year of operation. Our U.S. expansion will continue in 1998 with the
opening of four additional representative offices in the industrial Midwest. New
financing programs for small and medium size manufacturers are currently being
developed with national and regional strategic partners in the areas of
production equipment financing, power contract financing and energy efficiency
financing.
Master Agency Agreements are in place with international representatives in
11 foreign countries, providing a strong marketing effort for our financial
services throughout Argentina, Brazil, Central America, India, Indonesia, Korea,
Mexico, Philippines, Poland, South Africa and Turkey. The original products
offered by our International Business Units, equipment and inventory financing
for foreign buyers of U.S. made products, have been supplemented by a new
financing program for U.S. importers of products manufactured in these emerging
markets. Our company is now well-positioned to take advantage of two-way
international trade flows.
[PICTURE APPEARS HERE]
Representatives Throughout The World.
2
<PAGE>
[BAR GRAPH APPEARS HERE]
Loan Originations
<TABLE>
<CAPTION>
Category 1997 1996
- -------- ---- ----
<S> <C> <C>
Domestic 216 136
International 91 37
---- ----
Total Loan Originations $307 $173 million
==== ====
</TABLE>
First National Bank of New England continues to be a leader in the use of
federal loan guarantee programs. In 1997 we were named by Ex-Im Bank as their
"Small Business Bank of the Year," we became Ex-Im Bank's first "Medium Term
Priority Lender" and we were the nation's largest user of this agency's programs
measured by number of transactions. In addition, the Bank remained the largest
SBA 7(a) lender in New England and was the fourteenth largest in the nation in
terms of dollar volume. We also finished first in the nation for dollars lent
under the Department of Agriculture's Business & Industry program.
Capital Markets, which is our Business Unit specializing in the
non-recourse, servicing-retained sale of commercial and international loans to
investors, enjoyed a successful year in 1997, with a 71% increase in loan sales
volume to $222 million, bringing the serviced loan portfolio to $574 million.
Especially noteworthy is the fact that $55 million of the 1997 sales were of
loans without credit enhancements, owing to our underwriting expertise,
reputation and niche, as well as to Capital Markets' continuing development of
secondary market relationships.
Our two Private Banking Business Units continue to be the organization's
primary funding source for lending activities. Core deposits represented 80% of
total deposits by December 31, 1997, a significant achievement given the Bank's
limited branch strategy. A business lock box service was introduced for
commercial clients during 1997 and our new PC banking service, First Access/SM/,
was brought on-line this month. These advances will improve the delivery of
financial services to our clients worldwide.
Serviced Loan Portfolio at December 31, 1997
[PIE CHART APPEARS HERE]
Category Percentage
- -------- ----------
Ex-Im Bank 17
SBA/USDA Loans
Guaranteed 42
Consumer 5
Other Commercial 20
SBA/USDA Loans
Unguaranteed 16
Total $574 Million
I would like to thank our old and new shareholders, clients and friends for
their continued support of First International Bancorp, Inc.'s pioneering
efforts on behalf of small and medium size manufacturers, both in the United
States and abroad.
[SIGNATURE APPEARS HERE]
Brett N. Silvers
Chairman and President
March 1998
[PICTURE OF BRETT N. SILVERS APPEARS HERE]
3
<PAGE>
Summary Financial Highlights
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Loans Serviced $573,544 $380,431 $260,842 $193,369 $128,968
Non-Interest Income to Net Revenues 64.7% 50.6% 38.2% 42.7% 49.4%
Return on Average Equity 20.5% 25.5% 19.3% 11.7% 3.6%
Return on Average Assets 2.5% 2.1% 1.5% .9% .3%
Interest Income $14,625 $13,305 $11,601 $7,997 $6,559
Interest Expense $6,371 $5,741 $4,869 $3,150 $2,891
Net Interest Income $8,254 $7,564 $6,732 $4,847 $3,668
Gain on Loan Sales $11,810 $5,844 $2,859 $2,730 $2,411
Loan Servicing Income and Other Fees $3,300 $1,899 $1,294 $878 $1,164
Total Net Revenues $23,364 $17,509 $10,885 $8,455 $7,243
Operating Expenses $13,801 $8,425 $6,128 $5,129 $4,576
Provision for Possible Loan Losses $2,239 $3,487 $1,237 $1,683 $2,225
Net Income $4,429 $3,244 $2,026 $1,060 $305
Basic Earnings Per Share $0.70 $0.56 $0.35 $0.18 $0.06
Diluted Earnings Per Share $0.67 $0.56 $0.35 $0.18 $0.06
Dividend Payout Ratio 16.5% 20.3% 8.1% --- ---
Total Assets $218,851 $161,642 $141,223 $125,609 $109,735
Total Loans $135,398 $114,627 $106,992 $95,118 $71,413
Core Deposits $138,106 $105,414 $104,379 $76,662 $63,719
Total Deposits $172,321 $144,316 $128,361 $111,849 $95,787
Core Deposits to Total Deposits 80.1% 73.0% 81.3% 68.5% 66.5%
Total Capital to Risk Weighted Assets 17.6% 11.6% 10.7% 9.3% 10.8%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
[BAR CHART APPEARS HERE]
Net Income
Year Net Income (Millions)
---- ---------------------
1993 $ 0.3
1994 1.1
1995 2.0
1996 3.2
1997 4.4
[BAR CHART APPEARS HERE]
Total Loans Serviced
Year Total Loans Serviced (Millions)
---- -------------------------------
1993 $ 129
1994 193
1995 261
1996 380
1997 574
4
<PAGE>
Management's Discussion and Analysis of Financial
Conditions and Results of Operations
The following discussion and analysis of the consolidated financial
condition and results of operations of First International Bancorp, Inc. (the
"Company") should be read in conjunction with the Company's consolidated
financial statements, including the related notes thereto, and other
information.
General
First International Bancorp, Inc., a Delaware corporation, is a one bank
holding company incorporated in 1985 and regulated by the Board of Governors of
the Federal Reserve System. Its principal asset and subsidiary is First National
Bank of New England, a national banking association established in 1955 and
regulated by the Office of the Comptroller of the Currency (the "OCC"). The
Company completed an underwritten public offering in September 1997 whereby
1,955,000 shares of common stock were issued for net proceeds of $23.8 million.
The Company specializes in providing credit, trade and depository services
to small and medium size manufacturing companies located in the United States
and in international emerging markets. The Company serves its target market by
offering flexible and attractive terms to borrowers and manages its credit risk
through the combined utilization of commercial loan guarantee programs made
available by three U.S. federal agencies: the U.S. Small Business Administration
(the "SBA"), the U.S. Department of Agriculture (the "USDA"), and the
Export-Import Bank of the U.S. ("Ex-Im Bank").
For the federal fiscal year ending September 30, 1997, the Company was the
country's largest Ex-Im Bank lender measured by number of transactions; the
largest USDA Business and Industry lender measured by dollar volume; and the
fourteenth largest SBA 7(a) lender measured by dollar volume (and the largest in
New England). The Company maintains preferred status for several jurisdictions
and government guaranteed lending programs. In recognition of the Company's
efforts in promoting small business exports and its high volume of loan
originations, the Company received Ex-Im Bank's annual "Small Business Bank of
the Year" award in May 1997 and was designated Ex-Im Bank's first "Medium Term
Priority Lender."
Except for historical information contained herein, certain matters
discussed in this annual report are "forward looking statements" as defined in
the Private Securities Litigation Reform Act (PSLRA) of 1995, which involve risk
and uncertainties that exist in the Company's operations and business
environment, and are subject to change based in various important factors. The
Company wished to take advantage of the "safe harbor" provisions of the PSLRA by
cautioning readers that numerous important factors discussed below, among
others, in some cases have caused, and in the future could cause the Company's
actual results to differ materially form those expressed in any forward-looking
statements made by, or on behalf of , the Company. The following include some,
but not all, of the factors or uncertainties that could cause actual results to
differ from projections:
. A general economic slowdown.
. Inability of the Company to continue its growth strategy either domestically
or internationally.
. Unpredictable delays or difficulties in the development and introduction of
new products and programs.
. Risks associated with government guarantee loan programs since a substantial
portion of the Company's business still depends upon the continuation of the
various government guarantee loan programs as discussed below .
The Company believes that it has the product offerings, facilities, personnel
and competitive and financial resources for continued business success. However,
future revenues, costs, margins and profits are all influenced by a number of
factors, as discussed above.
Recent Growth
In contrast to many of its banking competitors, the Company derives a
majority of its revenues from non-interest income, principally gains on the sale
of commercial and international loans and related loan servicing income. During
the past three years of operations, the Company has achieved significant
earnings growth primarily as a result of increases in the sale of government
guaranteed and other commercial loans, net interest income, which is the
difference between interest earned on interest-earning assets (principally
loans) and interest paid on interest-bearing liabilities (principally deposits),
and fee income on loans serviced for others. The Company has expanded its
domestic loan origination activities into the Northeast and Mid-atlantic regions
of the United States and its international presence in emerging markets. The
Company plans to continue this expansion in 1998 by opening four offices in the
industrial Midwest.
- ---------------------------------------------------------------
December 31,
1997 1996 1995
- ---------------------------------------------------------------
(net income in thousands)
Net income ................ $4,429 $3,244 $2,026
Diluted earnings per share $.67 $.56 $.35
5
<PAGE>
The following discussions make reference to average balances of certain
assets and liabilities as well as volume and rate changes. For further
information with respect to these matters see the tables set forth on pages 10
and 11.
Accounting for Loan Sales
Gains from loan sales and servicing income represented approximately 62% of
the total net interest income and non-interest income for the year ended
December 31, 1997 and, although the Company does carry a servicing asset as
required under generally accepted accounting principles, approximately 90% of
the 1997 gains are comprised of cash received in excess of the carrying value of
the loans sold. Detailed below is a discussion of the relevant accounting
principles governing loan sales and servicing activities.
SBA and USDA Loan Sales
The majority of the Company's SBA and USDA guaranteed loans are variable
rate, indexed to the Prime Rate as quoted in The Wall Street Journal ("Prime").
The Company generally sells, for a premium, the guaranteed portions of these
loans at origination. For example, if the Company sells a 20-year SBA or USDA
guaranteed mortgage loan with an interest rate of Prime plus 1.50%, the Company
generally receives a premium because the market demands a yield of less than
Prime plus 1.50%. Investors of the guaranteed portions demand rates between U.S.
Treasury bills and commercial loans due to prepayment risks and other factors
inherent in the guaranteed loans. After the loan sale, an investor will receive
the pro rata principal and pro rata interest at the note rate less any ongoing
guarantee and Company servicing fees. Sales of the unguaranteed portions of SBA
and USDA loans are generally at or above the carrying value. The Company
continues to retain an unguaranteed participation equal to at least 5% of the
original loan.
Statement of Financial Accounting Standards No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) governs accounting for sales by the Company of a part of a loan
and, as discussed in Note 1 to the consolidated financial statements, requires
that the gain on the sale of a portion of a loan be based on the relative fair
market value of the loan sold, the portion of the loan retained and any other
assets created in the transaction. The Company creates a servicing asset when it
sells loans on a servicing-retained basis with a servicing fee in excess of what
accounting literature defines as "adequate compensation." This servicing asset
is equal to the net present value of the estimated cash flows in excess of such
compensation. The original principal basis of a loan must be allocated between
the guaranteed portion sold, the unguaranteed portion retained and the servicing
asset, resulting in a discount being recognized on the unguaranteed retained
portion of the loan.
In connection with calculating gain on sale, the Company must make certain
assumptions which include (i) the amount of "adequate compensation" used to
determine the amount of the servicing asset that the Company will recognize at
the date of the sale, (ii) the estimated life of the underlying loan used in
projecting the time period over which the Company will receive the servicing fee
and (iii) the discount rate used in the present value calculation of the
servicing asset.
Management has defined adequate compensation as 40 basis points. The
constant prepayment rates utilized by the Company in estimating the lives of the
loans depend on the original term of the loan, industry and Company historical
data. Such constant prepayment rates range from 6% to 12% per annum. The
discount rate utilized in the net present value calculation is equal to 200
basis points above the stated note rate, which for 1997 was approximately
10-12%.
Actual prepayment rates may be affected by a variety of economic and other
factors, including prevailing interest rates and the availability of alternative
financing. The effect of these factors varies depending on the types of loans.
Estimated prepayment rates are based on management's expectations of future
prepayments, and while management believes that the term of amortization and
market interest rate on the variable rate loans somewhat reduce the prepayment
risk, there can be no assurance that management's prepayment estimates are
accurate. If the actual prepayment rate of loans sold is higher than projected
at the time such loans were sold, the carrying value of the servicing asset
would be reduced by a charge to earnings. Because the Company also recognizes a
discount on the retained loan, an adjustment to the discount would be made which
would partially offset the effect of the negative servicing adjustment. If the
actual prepayment rate for loans sold is lower than estimated, the carrying
value is not increased, although the total income would exceed previously
estimated amounts.
The servicing asset is amortized against the servicing fee income received
monthly, on an effective interest method, and the discount on the retained loan
is accreted to interest income on an effective interest method. The servicing
asset is carried at the lower of amortized cost or net realizable value.
Ex-Im Bank and Other Commercial Loan Sales
Sales of 100% of Ex-Im Bank guaranteed medium term loans are generally made
at the carrying value although the Company receives a servicing fee above the
amount defined as "adequate compensation," which ranges from 20-40 basis points,
resulting in the recognition of a gain at the time of the sale equal to the
calculated servicing asset and any net loan origination fees. The Company uses a
discount factor on the estimated cash flows equal to 200 basis points above the
note rate. The Company adjusts for prepayments on these 3-5 year term loans as
they occur, although prepayments are minimal due to the lack of alternative U.S.
dollar financing in the international markets served and the fact that such
Ex-Im Bank financing is unsecured.
The Company also sells 100% of certain other unguaranteed commercial loans
and certain residential and other consumer loans where no portion of the loan is
retained on the Company's balance sheet.
6
<PAGE>
Results of Operations
Comparison of the Years Ended December 31, 1997, 1996 and 1995
Net Income. Net income totaled $4.4 million in 1997, an increase of $1.2
million, or 37%, from 1996 net income of $3.2 million, which had increased $1.2
million or 60% from 1995 net income of $2.0 million.
The increase in 1997 reflects a $6.0 million increase in gain on loan sales
due to an increase in the sales of all types of loans, and a more significant
contribution from Ex-Im Bank medium term guaranteed loans and the unguaranteed
portions of SBA and USDA loans and other non-guaranteed commercial loans. The
results for fiscal 1996 also included a $2.2 million gain on the sale of the
Company's last retail branch facility and related deposits. Operating expenses
in 1997 increased by $5.4 million due to additions to lending and support
personnel.
The increase in 1996 net income from 1995 reflects the geographic expansion
of the Company's U.S. commercial loan origination activities and the initial
stages of the international expansion. Geographic expansion contributed to a
$3.5 million, or 92%, increase in lending-related non-interest income in 1996
from 1995. The loan loss provision increased $2.3 million in 1996 from 1995 due
to a $1.2 million increase in charge-offs attributable to continued poor
performance of the remaining investor mortgage portfolio, a line of business
abandoned in 1990, and a $1 million increase in the allowance for loan losses to
reflect the mix and continued growth of the Company's loan portfolio. See
"Allowance for Loan Losses." The impact on net income for the increase in the
allowance for loan losses was offset by a $2.2 million gain realized on the
branch sale in September 1996.
Net Interest Income. Net interest income increased $690,000, or 9%, to $8.3
million in 1997 from 1996 due to a $16 million or 12% increase in average
interest-bearing assets offset by a 14 basis point decrease in the margin as a
more significant portion of assets were held in investment securities and the
Company's higher rate premier money market savings accounts represented a
greater portion of the interest-bearing liabilities. Average interest-bearing
liabilities increased $6.4 million or 6%.
Net interest income increased $832,000, or 12%, to $7.6 million in 1996
from $6.7 million in 1995 as growth more than offset the net interest margin
decrease of 8 basis points. Average interest-earning assets increased $17.0
million, or 14%, while average interest-bearing liabilities increased $16.1
million, or 16%, in 1996 from 1995. The higher asset growth, however, was offset
by a greater increase in the cost of deposits over the yield on assets as
deposits shifted into the premier money market savings and certificates of
deposit which were used to replace the sold retail deposits.
Interest Income. Interest income increased $1.3 million, or 10%, to $14.6
million in 1997 from $13.3 million in 1996 due to a $6.8 million or 6% increase
in average loans out standing and a $8.6 million or 82% increase in average
investments. The yield on loans remained essentially level for both years, while
the yield on investments decreased by 10 basis points due to the shorter term
investments made in 1997.
Interest income increased by $1.7 million in 1996, or 15%, from $11.6
million in 1995 due primarily to a $19.6 million increase in the average balance
of commercial loans. This increase was partially offset in 1996 by a lower yield
on commercial loans due to a 25 basis point decrease in the Prime Rate in
February 1996. The annual average Prime Rate decreased 50 basis points from 1995
to 1996. The yield on loans also decreased in the fourth quarter of 1996 due to
a bulk-sale of unguaranteed portions of SBA loans. Interest earned on federal
funds sold increased 8% to $632,000 due to a $2.0 million average balance
increase maintained to fund loan demand partially offset by a 25 basis point
decrease in short-term interest rates in February 1996.
Interest Expense. Interest expense increased $630,000, or 11%, to $6.4
million in 1997 from $5.7 million in 1996 due to a 14 basis point increase in
the average rate paid on the Company's premier money market accounts, as the
underlying external index increased during 1997 and greater reliance was placed
on these accounts to fund the balance sheet growth. Total average deposits
increased 5% while the average balance of the money market savings accounts
increased 18% in 1997. An increase in the rates offered for time deposits due to
competitive demands resulted in a 25 basis point increase in the cost of
interest bearing liabilities, although a $4.2 million, or 17%, increase in
non-interest bearing demand deposits held the overall cost of liabilities to
4.14% for 1997 or a total 13 basis point increase for 1997.
Interest expense increased $872,000, or 18%, in 1996 from 1995, due
principally to a $19.7 million increase in the average balance of the money
market accounts to $61.5 million in 1996 from $41.8 million in 1995. The impact
of the increase in these account balances was partially offset by a 25 basis
point reduction in October 1995 of the margin added to the Company's external
index. The reduction in the margin was made after consideration of prevailing
market rates; this action had no discernible effect on the Company's ability to
attract such deposits because the Company was able to maintain competitive
rates.
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $2.2 million in 1997, $3.5 million in 1996 and $1.2 million in 1995. The
provision is affected by net loan charge-offs, changes in the level and mix of
loans, changes in asset quality and general economic conditions. Approximately
69% of the charge-offs for the period from January 1, 1995 to December 31, 1997
are attributable to the Company's investor mortgage portfolio. See "Allowance
for Loan Losses."
7
<PAGE>
Non-Interest Income. The components of non-interest income are detailed
below:
- ------------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------
(dollars in thousands)
Non-interest income:
Gain on loan sales:
SBA sales ......................... $ 5,056 $ 3,558 $ 1,570
USDA sales ........................ 1,901 805 822
Ex-Im working capital sales ....... 251 201 104
Ex-Im medium term sales ........... 2,299 340 248
Inventory buyer credit sales ...... 5 -- --
Unguaranteed portions of
SBA and USDA sales .............. 1,522 842 --
Other commercial sales ............ 705 91 97
Residential sales ................. 71 7 18
------- ------- -------
Gain on loan sales .............. 11,810 5,844 2,859
Loan servicing income and fees ...... 2,618 1,475 896
Other non-interest income ........... 438 424 398
Income on stockholder note
receivable ........................ 244 -- --
Gain on branch sale ................. -- 2,202 --
------- ------- -------
Total non-interest income ....... $15,110 $ 9,945 $ 4,153
------- ------- -------
Non-interest income increased $5.2 million, or 52%, to $15.1 million in
1997 from $9.9 million in 1996 due to a $6.0 million increase in gain on loan
sales and a $1.1 million increase in the loan servicing income, offset by the
$2.2 million non-recurring gain on branch sale in 1996. The increase in gains on
SBA and USDA loan sales reflects increased loan originations from the Company's
four mature New England locations as well as a contribution equal to 30% of
total domestic gains from the five representative offices opened in 1997. The
gain on Ex-Im Bank medium term loans reflects an increase in the volume of these
loans originated as the Company's international Master Agent relationships
continue to result in more significant referrals to the Hartford-based
International Business Units. U.S. dollar loans to companies in Brazil, Mexico
and Turkey represented approximately 90% of the total medium term loan
originations in 1997.
The $680,000, or 81%, increase in gains on the sale of the unguaranteed
portions of SBA and USDA loans ("Unguaranteed Portions") to $1.5 million in 1997
also contributed to the overall increase in gains on loan sales.
The Company began selling the Unguaranteed Portions in 1996 on a
non-recourse, servicing-retained basis and has been able to do so above the
carrying value, thus realizing gains upon the sale. Through 1997 SBA regulations
required that a bank originator retain an Unguaranteed Portion equal to 10% of
the SBA outstanding loan. In 1997, however, the Company received permission from
the SBA to reduce the retained Unguaranteed Portion to 5% of the total loan,
thus providing additional liquidity to meet loan demand. In 1997 a total of
$29.2 million in Unguaranteed Portions were sold, including approximately $7.8
million of loans representing 5% of the Unguaranteed Portions of loans
previously sold by the Company. In 1996, gains from the sale of the Unguaranteed
Portions totaled $842,000 on sales of loans totaling $33.1 million. The Company
is required to retain 5% of all USDA loans originated. Many of the unguaranteed
portions of SBA and USDA loans sold were originated prior to 1996. The Company
can give no assurance that it will have a similar volume of loans available to
sell and therefore that it will attain similar gains in the future.
Gain on the sale of other commercial loans increased to $705,000 realized
on the sale of commercial loans totaling $25.9 million in 1997 from $91,000
realized on the sale of $9.3 million in 1996. All such sales were completed on a
non-recourse, servicing retained basis. This increase reflects the success of
the Company's Capital Markets Business Unit in the development of secondary
markets for unguaranteed commercial loans. The Company plans to continue to
originate such commercial loans to small and medium size manufacturers for sale
in the secondary markets.
The non-interest income increase of $5.8 million in 1996 from 1995 reflects
the non-recurring $2.2 million gain realized on the sale of the Company's
suburban branch facility and its deposits as well as increasing gains on the
sale of the guaranteed and unguaranteed portions of SBA and USDA loans. The
increased loan sales activity reflected the contribution from the representative
offices in Providence, Rhode Island and Springfield, Massachusetts which were
opened in the second half of 1995, and the hiring of nine additional commercial
loan officers.
Loan servicing income comprises the servicing fees received on loans sold
on a servicing retained basis, net of amortization of the servicing asset.
- -------------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------
(dollars in thousands)
Loan Servicing Income and Fees
Loan servicing income:
SBA guaranteed loans .................. $ 1,203 $ 921 $ 766
USDA guaranteed loans ................. 278 151 43
Ex-Im working capital loans ........... 186 56 7
Ex-Im medium term loans ............... 264 43 --
Other commercial loans ................ 123 65 16
Residential and consumer loans ........ 64 59 48
-------- -------- --------
Total loan servicing income ......... 2,118 1,295 880
Other loan fees ......................... 500 180 16
-------- -------- --------
Total loan servicing income and fees. $ 2,618 $ 1,475 $ 896
======== ======== ========
Loans serviced for others (at period end)
Outstanding balance ................. $429,077 $265,805 $153,850
======== ======== ========
The increases in total loan servicing income reflect the growth of the
servicing portfolios. The $823,000 or 64% increase in loan servicing income to
$2.1 million in 1997 reflects the $115.1 million or 62% increase in the average
balance of commercial loans serviced for others to $300.8 million in 1997 from
$185.7 million in 1996 while the 47% increase in loan servicing income in 1996
to $1.3 million from $880,000 in 1995 reflects the 69% increase in the average
balance of loans serviced for others over the period.
Other loan fees are comprised primarily of fees earned on letters of
credit, which have increased $320,000, or 177%, to $500,000 in 1997 from
$180,000 in 1996 as more of the Company's clientele conduct business overseas
and have the need for letters of credit to support their trade activities.
8
<PAGE>
Data with respect to the retained portions of loans of SBA and USDA loan
sales and related accounts are detailed below:
- -------------------------------------------------------------------------
At December 31,
1997 1996 1995
- -------------------------------------------------------------------------
(dollars in thousands)
Portfolio Loans
Unguaranteed portions of:
SBA loans ................ $29,912 $31,691 $37,873
USDA loans ............... 6,541 3,211 3,265
------- ------- -------
Total SBA and USDA loans 36,453 34,902 41,138
Less:
Discount ................. 1,775 2,232 2,300
------- ------- -------
Net carrying value ..... $34,678 $32,670 $38,838
======= ======= =======
- ---------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------
(dollars in thousands)
Discount on Retained SBA
and USDA Loans
Balance at beginning of year $ 2,232 $ 2,300 $ 1,792
Current period sales ..... 2,131 1,510 839
Deletions due to sales ... (1,620) (1,113) --
Accretion ................ (968) (465) (331)
------- ------- -------
Balance at end of year ..... $ 1,775 $ 2,232 $ 2,300
======= ======= =======
The servicing asset for all loans sold is as follows:
- --------------------------------------------------------------------------------
At December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
(dollars in thousands)
Servicing Asset
Servicing on other loan sales:
Ex-Im medium term ................. $2,025 $ 374 $ 161
Other commercial .................. 122 173 140
Other consumer .................... 2 8 16
------ ------ ------
Total other servicing ........... 2,149 555 317
Servicing on SBA and USDA loan sales:
SBA ............................. 3,155 3,100 2,290
USDA ............................ 375 483 202
------ ------ ------
Total SBA and USDA servicing .. 3,530 3,583 2,492
------ ------ ------
Total servicing asset ......... $5,679 $4,138 $2,809
====== ====== ======
The activity in the servicing asset is detailed below:
- -------------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------
(dollars in thousands)
Servicing Asset Activity
Balance at beginning of period. $ 4,138 $ 2,809 $ 2,084
Current period sales ........ 3,172 1,979 1,127
Amortization ................ (1,631) (650) (402)
------- ------- -------
Balance at end of period ...... $ 5,679 $ 4,138 $ 2,809
======= ======= =======
Non-Interest Expense. Increases in non-interest expense reflect the Company's
growth over the periods as indicated below:
- ------------------------------------------------------------------------------
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------
(dollars in thousands)
Non-interest expense:
Salaries and benefits ....... $ 9,302 $ 4,963 $ 3,399
Occupancy ................... 985 774 573
Office expenses ............. 901 702 538
Marketing ................... 840 621 288
Furniture and equipment ..... 692 462 407
Outside services ............ 425 231 210
Loan collection ............. 148 360 311
Other ....................... 508 312 402
-------- -------- --------
Total non-interest expense $ 13,801 $ 8,425 $ 6,128
-------- -------- --------
Selected Data
Total servicing portfolio ... $573,544 $380,432 $260,842
-------- -------- --------
Number of loans serviced .... 1,938 1,519 1,308
-------- -------- --------
Number of total personnel ... 131 92 67
-------- -------- --------
Number of loan officers ..... 46 26 11
-------- -------- --------
Non-interest expenses increased $5.4 million, or 64%, in 1997 from 1996 due
to a 42% increase in personnel. Approximately half of the 1997 personnel
additions were lending officers, as the Company opened five new representative
offices and increased the number of Hartford loan officers in both the domestic
and international business units during the year. The other additions to staff
were primarily in the loan servicing and credit business units. Geographic
expansion and personnel additions resulted in an increase in occupancy and
related expenses, as new offices were leased and the leased headquarters offices
were expanded. Salary and benefits expense for 1997 also included approximately
$636,000 associated with bonuses paid to officers in connection with the
successful completion of the September 1997 public offering.
The $219,000, or 35%, increase in marketing expense primarily reflects
increases associated with international activities. Travel expenses increased as
Company officers visited the majority of the targeted international countries to
finalize Master Agency agreements and remain in contact with Agents and
borrowers abroad, and an increase in the expense reimbursements provided to
Master Agents in accordance with the increase in their referrals to the Company.
The $194,000, or 84%, increase in outside services reflects an increase in legal
fees associated with new product development, international Master Agency
agreements and diligence on state banking laws in each of the new states where
domestic representative offices were opened in 1997.
Loan collection costs decreased $212,000, or 59%, in 1997 from 1996 due to
the ability of the Company to more quickly resolve and/or liquidate the
non-performing loans in 1997, as compared to 1996 when the non-performing loans
were primarily investor mortgages requiring a more protracted workout period.
The $196,000, or 63%, increase in other non-interest expense in 1997 from
1996 reflects an increase in directors and officers insurance obtained in
conjunction with the Company becoming an SEC registrant, as well as increases in
service bureau fees paid for credit reports due to an increase in the volume of
loans underwritten, a greater percentage of which were for foreign companies
which are more expensive.
9
<PAGE>
Non-interest expense increased $2.3 million, or 38%, in 1996 from 1995
reflecting the personnel increases and related occupancy increases as the
Company leased space at its headquarters facility to accommodate additional
lending staff and the support staff hired in 1996. The occupancy, furniture and
equipment expense increase reflects the cost of additional leased space acquired
for three New England representative offices, each of which had twelve months
rental expense in 1996 compared to a partial year's expense in 1995.
The increases in office and marketing expenses in 1996 from 1995 reflect
costs to support the growth of personnel over the periods and the Company's
geographically wider and more formalized marketing efforts. The $164,000, or
30%, increase in office expense in 1996 from 1995 includes increase in telephone
and postage expenses as international loan officers responded to inquiries from
potential borrowers and domestic commercial loan officers expanded their
marketing efforts. The $333,000, or 116%, increase in marketing expense in 1996
from 1995 reflects an investment in the development of international marketing
relationships and marketing literature. The Company also engaged a public
relations firm to create various marketing pieces for use in mass mailing
solicitations and other expanded and regionalized calling efforts. International
development efforts included legal expenses, visits by Company officers to the
locations of prospective international Master Agents and related due diligence,
as well as training in Connecticut of the international agents. The Company's
domestic and international loan officers also incurred greater travel and other
business development costs as they expanded their marketing efforts, and the
number of officers increased to 26 from 11.
Other non-interest expense decreased $90,000, or 22%, due to a $135,000
decrease in FDIC deposit premiums following a decrease in the rate charged for
such deposit insurance. This was partially offset by increases in credit report
fees as loan volume increased.
The Company's efficiency ratios, calculated as the ratio of non-interest
expenses to the sum of net interest income and non-interest income, excluding
the 1996 gain on the branch sale, were 59%, 55% and 56% for the years ended
December 31, 1997, 1996 and 1995, respectively.
Income Taxes. The effective income tax rates for the years ended December
31, 1997, 1996 and 1995 were 39.5%, 42.0% and 42.4%, respectively. The 1997 tax
provision reflects a benefit from the dividend received deduction on certain
investments.
The following table sets forth the components of the Company's net interest
income and yield on average interest earning assets and rate on interest bearing
liabilities:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended
December 31, 1997 December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------------------------- ------------------------ ---------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total earning assets:
Loans (1)
Commercial and commercial real estate . $ 112,386 $ 12,002 10.68% $ 101,656 $10,882 10.70% $ 82,040 $ 8,976 10.94%
Residential ............................ 8,129 595 7.32% 12,848 1,059 8.24% 14,472 1,152 7.96%
Other consumer ......................... 1,668 156 9.35% 874 86 9.84% 1,388 138 9.94%
--------- -------- ------ --------- ------- ------ -------- --------- ------
Total Loans .......................... 122,183 12,753 10.44% 115,378 12,027 10.42% 97,900 10,266 10.49%
Investment securities (2) ................ 19,085 1,156 6.06% 10,495 646 6.16% 12,921 750 5.80%
Federal funds sold ....................... 13,139 716 5.45% 12,153 632 5.20% 10,179 585 5.75%
--------- -------- ------ --------- ------- ------ -------- --------- ------
Total investment securities and
federal funds sold .................. 32,224 1,872 5.81% 22,648 1,278 5.64% 23,100 1,335 5.78%
--------- -------- ------ --------- ------- ------ -------- --------- ------
Total earning assets ................ 154,407 $ 14,625 9.47% 138,026 $13,305 9.64% 121,000 $ 11,601 9.59%
--------- ------ ------- ------ --------- ------
Total non-earning assets ............ 23,484 19,466 12,924
--------- --------- --------
Total assets ........................ $ 177,891 $ 157,492 $133,924
--------- --------- --------
Interest bearing liabilities:
Deposits
Interest bearing demand deposits ....... $ 7,406 $ 183 2.47% $ 8,705 $ 241 2.77% $ 9,970 $ 229 2.30%
Premier money market ................... 72,965 3,869 5.30% 61,519 3,176 5.16% 41,822 2,417 5.78%
Other savings .......................... 6,268 135 2.15% 12,607 386 3.06% 16,462 425 2.58%
Certificates of deposit ................ 30,825 1,786 5.79% 28,384 1,564 5.51% 25,626 1,356 5.29%
IRA certificates of deposit ............ 6,552 364 5.56% 6,436 347 5.39% 6,262 344 5.49%
--------- -------- ------ --------- ------- ------ -------- --------- ------
Total deposits ....................... 124,016 6,337 5.11% 117,651 5,714 4.86% 100,142 4,771 4.76%
Other borrowings ......................... 702 34 4.84% 623 27 4.33% 1,999 98 4.90%
--------- -------- ------ --------- ------- ------ -------- --------- ------
Total interest bearing liabilities ... 124,718 6,371 5.11% 118,274 5,741 4.85% 102,141 4,869 4.77%
--------- -------- ------ --------- ------- ------ -------- --------- ------
Non-interest bearing liabilities
Demand deposits ........................ 29,066 24,862 20,220
Other liabilities ...................... 2,458 1,630 1,068
--------- --------- --------
Total non-interest bearing liabilities 31,524 26,492 21,288
Stockholders' equity ..................... 21,649 12,726 10,495
--------- --------- --------
Total liabilities and stockholders' equity $ 177,891 $ 157,492 $133,924
--------- --------- --------
Net interest income/net interest spread .. $ 8,254 4.36% $ 7,564 4.79% $ 6,732 4.82%
-------- ------ ------- ------ --------- ------
Net interest margin ...................... 5.34% 5.48% 5.56%
------ ------ ------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of these computations, non-accruing loans are included in the
average balances.
(2) The yield does not give effect to changes in fair value that are reflected
as a component of stockholders' equity.
10
<PAGE>
The following rate/volume analysis shows the portions of the net change in net
interest income due to changes in volume or rate. The changes in interest due to
both volume and rate have been allocated proportionally to changes due to volume
and changes due to rate.
<TABLE>
<CAPTION>
==================================================================================================================================
Year Ended December 31, Year Ended December 31,
1997 Compared to 1996 1996 Compared to 1995
Changes due to: Changes due to:
------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
------------------------------- --------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net interest income due to:
Loans
Commercial loans ..................................... $ 1,147 $ (27) $ 1,120 $ 2,100 $ (194) $ 1,906
Residential loans .................................... (346) (118) (464) (134) 41 (93)
Other consumer loans ................................. 74 (4) 70 (51) (1) (52)
------- ------- ------- ------- ------- -------
Total loans ..................................... 875 (149) 726 1,915 (154) 1,761
Investment securities .................................. 520 (10) 510 (149) 45 (104)
Federal funds sold ..................................... 54 30 84 103 (56) 47
------- ------- ------- ------- ------- -------
Total investments and federal funds sold......... 574 20 594 (46) (11) (57)
------- ------- ------- ------- ------- -------
Total interest earning assets ................... 1,449 (129) 1,320 1,869 (165) 1,704
------- ------- ------- ------- ------- -------
Deposits
Interest-bearing demand deposits ..................... (32) (26) (58) (35) 47 12
Premier money market savings ......................... 607 86 693 1,017 (258) 759
Other savings ........................................ (136) (115) (251) (118) 79 (39)
Time deposits ........................................ 141 81 222 152 56 208
IRA time deposits .................................... 6 11 17 9 (6) 3
------- ------- ------- ------- ------- -------
Total deposits .................................. 586 37 623 1,025 (82) 943
FHLB advances .......................................... 4 3 7 (60) (11) (71)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities .............. 590 40 630 965 (93) 872
------- ------- ------- ------- ------- -------
Change in net interest income ................... $ 859 $ (169) $ 690 $ 904 $ (72) $ 832
======= ======= ======= ======= ======= =======
</TABLE>
Financial Condition
General. Total assets increased $57.3 million, or 36%, to $218.9 million at
December 31, 1997 from $161.6 million at December 31, 1996, and $20.4 million,
or 14%, from the December 31, 1995 balance of $141.2 million. These increases
reflect the increasing loan portfolio and related accounts, such as loans held
for sale and receivables from loans sold which were funded by an increase in
deposits and the September 1997 underwritten public stock offering which raised
$23.8 million for the Company.
Cash and Cash Equivalents. Cash and cash equivalents remained fairly flat
at $17.4 million at December 31, 1997 from $18.9 million at December 31, 1996
but increased at December 31, 1996 by $8.8 million from the December 31, 1995
balance of $10.0 million as the Company maintained greater funds on hand as
Federal Funds Sold, providing overnight liquidity for the Company's increased
volume of loan originations.
Investment Securities. The investment securities portfolio increased $6.4
million, or 40%, to $22.3 million at December 31, 1997 from $15.9 million at
December 31, 1996 and increased $4.3 million, or 37%, in 1996 from the December
31, 1995 balance of $11.6 million. The portfolios are managed for liquidity and
security and are comprised primarily of U.S. Treasury and other U.S. government
mortgage-backed securities and collateralized mortgage obligations with average
lives of less than five years. The portfolios are also utilized to collateralize
lines of credit with correspondent banks, providing letter of credit facilities
to supplement the Company's own product offerings. Refer to Note 2 of the
Company's consolidated financial statements for additional information.
Loans. Loans increased $21.2 million, or 19%, to $130.6 million at December
31, 1997 from $109.5 million at December 31, 1996 and increased $6.7 million, or
7%, from $102.7 million at December 31, 1995. The growth in the portfolios
resulted primarily from increases in unguaranteed commercial loans, comprised of
revolving lines of credit and term equipment loans, offset by decreases due to
the sale of loans from portfolio. The 1997 growth in the unguaranteed commercial
loan portfolios totaled $28.3 million while such portfolios increased by $6.4
million in 1996, consistent with the Company's desire to originate and sell a
greater amount of unguaranteed loans as the secondary market for such loans is
developing.
11
<PAGE>
Allowance for Loan Losses. The Company reviews the adequacy of the
allowance for loan losses quarterly. The allowance totaled $3.1 million at
December 31, 1997, a slight increase from the $3.0 million balance at December
31, 1996. The allowance for loan losses was increased by $1.0 million during
1996 from the December 31, 1995 balance of $2.0 million to reflect a specific
allocation for certain investor property mortgage loans and increases in the
commercial loan portfolios.
<TABLE>
<CAPTION>
Activity in the Allowance for Loan Losses
- ---------------------------------------------------------------------------------------------------------------------------------
At December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Balance of allowance for loan losses at the beginning of the period............. $ 3,000 $ 2,000 $ 2,000
Charge-offs:
Investor mortgage ........................................................... 1,395 1,730 1,086
SBA ......................................................................... 262 478 18
USDA ........................................................................ 68 -- --
Commercial .................................................................. 279 168 173
Private ..................................................................... 46 27 8
Ex-Im working capital ....................................................... -- -- --
Ex-Im medium term ........................................................... -- -- --
Construction ................................................................ -- -- 4
Residential and other consumer .............................................. 195 124 32
-------- -------- --------
Total charge-offs ......................................................... 2,245 2,527 1,321
Recoveries:
Investor mortgage ........................................................... 6 13 13
SBA ......................................................................... 13 -- --
Commercial .................................................................. 77 16 6
Private ..................................................................... -- 10 63
Residential and other consumer .............................................. 10 1 2
-------- -------- --------
Total recoveries .......................................................... 106 40 84
-------- -------- --------
Net charge-offs ....................................................... 2,139 2,487 1,237
Provision for loan losses ...................................................... 2,239 3,487 1,237
-------- -------- --------
Balance of allowance for loan losses at end of period .......................... $ 3,100 $ 3,000 $ 2,000
======== ======== ========
Total loans .................................................................... $135,398 $114,627 $106,992
======== ======== ========
Allowance to total loans ....................................................... 2.3% 2.6% 1.9%
======== ======== ========
</TABLE>
Net charge-offs from the investor mortgage portfolio represented 62%, 69%
and 82% of the total charge-offs for the years ended December 31, 1997, 1996 and
1995, respectively. The Company's portfolio of investor mortgages is
collateralized by multi-family urban residential units located in various
Connecticut inner cities. Following the recession in 1990, management determined
that no new loans collateralized by and/or supporting the purchase of urban
residential units would be made as the Company's focus turned toward its current
target market of small and medium size manufacturers. In the early 1990's the
Company worked to resolve investor mortgages related to certain urban
residential loans by facilitating sales of the troubled properties to
experienced property managers who had an interest in acquiring and
rehabilitating them. Due to deteriorating economic conditions in Hartford and
New Haven, Connecticut, many of these properties experienced cash flow
difficulties again in 1995 and 1996. The Company increased the allocated
allowance for loan losses for such properties in 1996. The Company continues to
monitor this portfolio and, based on current information, believes that it
maintains appropriate reserves. The outstanding balance of this portfolio at
December 31, 1997 totaled $5.5 million.
The SBA loan charge-offs for the years ended 1997 and 1996 represented
losses realized on the unguaranteed portions of SBA loans after liquidation of
the collateral, and represent annual loss ratios of 61 and 100 basis points,
respectively, of the average balances of the unguaranteed portion of SBA loans
which were retained in the Company's portfolio.
The provision for loan losses reflects the charge to earnings deemed
appropriate by management to maintain an adequate allowance for loan losses. The
provision totaled $2.2 million in 1997, a decrease of $1.3 million or 37% from
$3.5 million for the year ended December 31, 1996. The 1996 provision had
increased $2.3 million or 192% from 1.2 million for the year ended December 31,
1995.
The $2.3 million increase in the provision for loan losses in 1996 was
necessitated by the continued deterioration of the investor mortgage portfolio
which became evident in the third and fourth quarters of 1996. It was at that
time that management determined that the cash flow difficulties of the
underlying properties were other than temporary. Management also determined that
the unallocated portion of
12
<PAGE>
the allowance should be increased to reflect a broader geographic base of
originations to areas where the Company had no previous experience.
The Company manages charge-offs by relationships and has noted no
appreciable increase in the number of relationships charged-off. For the years
ended December 31, 1997, 1996 and 1995, the charge-offs were comprised of 16, 21
and 19 lending relationships respectively.
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis, and
therefore allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict use of the allowance to absorb
losses in any category. The unallocated portion of the allowance represents an
amount that is not specifically allocable to one of the loan portfolios. All of
the loans included in the Company's portfolio are to domestic companies. Loans
to foreign entities are 100% Ex-Im Bank guaranteed and generally sold at
origination.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
December 31,
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allocation of the allowance by category of loans
Unguaranteed portions of:
SBA and USDA loans ...................................... $ 853 $ 491 $ 563 $ 338 $ 147
Ex-Im Bank working capital loans ........................ 145 44 2 -- --
Commercial mortgage loans .................................. 250 271 483 237 416
Other commercial loans ..................................... 1,052 475 316 353 346
Investor mortgage loans .................................... 269 1,061 399 581 223
Residential and other consumer loans ....................... 67 113 72 106 99
Unallocated ................................................ 464 545 165 385 194
-------- -------- -------- -------- --------
Total allowance for loan losses ....................... $ 3,100 $ 3,000 $ 2,000 $ 2,000 $ 1,425
======== ======== ======== ======== ========
Percent of loans in each category to total loans
Unguaranteed portions of:
SBA and USDA loans ...................................... 26.9% 30.5% 38.5% 32.0% 15.9%
Ex-Im Bank working capital loans ........................ 2.8 3.0 0.2 -- --
Ex-Im Bank medium term loans ............................... 0.5 1.8 0.1 0.2 --
Commercial mortgage loans .................................. 14.7 16.4 14.5 17.1 19.5
Other commercial loans ..................................... 44.8 29.4 26.9 21.6 28.1
Investor mortgage loans .................................... 4.1 6.6 7.2 9.9 13.5
Residential and other consumer loans ....................... 6.2 12.3 12.6 19.2 23.0
-------- -------- -------- -------- --------
Total ................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
</TABLE>
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31,
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-Performing Loans
Commercial:
Unguaranteed portions:
SBA and USDA loans .................................... $1,226 $ 188 $ 419 $ -- $ --
Ex-Im Bank working capital loans ...................... -- -- -- -- --
Commercial mortgage loans ............................... 39 -- -- 703 --
Other commercial loans .................................. 535 132 -- 106 --
Investor mortgages loans ................................ 415 1,853 839 1,437 755
Consumer ................................................... 149 79 -- -- --
-------- -------- -------- -------- --------
Total non-performing loans ................................. $2,364 $2,252 $1,258 $2,246 $ 755
======== ======== ======== ======== ========
Total non-performing loans to total loans................... 1.75% 1.96% 1.18% 2.36% 1.06%
======== ======== ======== ======== ========
Total non-performing loans to total assets.................. 1.08% 1.39% 0.89% 1.79% 0.69%
======== ======== ======== ======== ========
Allowance to total non-performing loans .................... 131% 133% 159% 89% 189%
======== ======== ======== ======== ========
</TABLE>
Although the balance of non-performing SBA/USDA loans has increased in
1997, the Company believes that this reflects a seasoning of the portfolio.
The Company had no loans past due 90 days and accruing interest at any
period end as presented in the above table.
Other Real Estate Owned. It is the Company's policy, whenever possible, not
to take title to real property collateralizing loans, thereby avoiding
management time and any environmental liabilities associated with holding such
properties. From the end of the 1995 to 1997 reporting periods discussed herein,
the highest balance of other real estate owned totaled $300,000.
13
<PAGE>
Receivable From Loans Sold. Receivable from loans sold represents the
balance of loans sold for which funding has not yet been received. Government
guaranteed loans are generally sold within a day of origination and settled
within 30 days of the trade date. During this thirty day period, the Company
reviews and delivers closing documents to the investor. The receivable balance
fluctuates with the month's loan sale activity and tends to be higher at any
quarter end due to increased loan closing activity. The average balance of this
receivable was $8.5 million, $8.0 million and $3.5 million for the fiscal years
ended December 31, 1997, 1996 and 1995, respectively. The Company actively
monitors the settlement of loans to ensure that this source of liquidity is
properly managed.
Prepaid Expenses and Other Assets. Prepaid Expenses and Other Assets is
comprised principally of servicing assets as discussed in "-Accounting for Loan
Sales."
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Other assets
Servicing assets .................... $5,679 $4,138 $2,809
Prepaid expenses and other assets.... 1,143 631 280
------ ------ ------
Total other assets ............. $6,822 $4,769 $3,089
====== ====== ======
Deposits. Deposits are the Company's primary funding source and have
increased to sustain the Company's balance sheet growth.
Federal Home Loan Bank of Boston Advances. Federal Home Loan Bank ("FHLB")
advances were utilized in 1994 to "match fund" certain community reinvestment
initiatives and were repaid in 1995 when alternative, less expensive deposits
became available. Since 1995, these advances have been utilized to provide
short-term liquidity. As of December 31, 1997, the Bank had a $2.9 million
unused line of credit from the FHLB and had the ability to borrow approximately
$3.8 million from the FHLB under various term advance programs.
Stockholders' Equity. Stockholders' equity increased $27.9 million to $42.1
million at December 31, 1997 from $14.2 million at December 31, 1996 due to the
issuance of 1,955,000 shares of common stock in an underwritten public offering
completed in September 1997, resulting in net proceeds to the Company of $23.8
million and the retention of earnings. In 1996, stockholders' equity increased
$2.6 million from $11.6 million at December 31, 1997 due principally to the
retention of earnings. The Company has paid quarterly dividends of $.03 per
share since the fourth quarter of 1995. As explained in Note 7 to the Company's
consolidated financial statements, the Company holds a note receivable from the
Company's Chairman of the Board and President related to the issuance of 614,600
shares of common stock in June 1994, the repayment of which would result in an
increase in stockholders' equity.
Liquidity and Capital Resources
The Company's primary sources of liquidity and funding are its diverse
deposit base and loan sales and participations. Secondary sources of liquidity
include FHLB advances, federal funds purchased under correspondent bank lines of
credit and the sale of investments. As an FDIC-insured institution, the Bank may
make available traditional business and consumer depository products, including
checking, savings and time deposit accounts.
Management considers scheduled cash flows from existing clients and
borrowers, projected deposit levels as well as estimated liquidity needs from
maturing and disintermediating deposits, and 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.
Marketing efforts are focused on externally indexed "core accounts" of checking
and savings deposits, which have proven to be generally less interest rate
sensitive than time deposits. In addition to its primary deposit solicitation
efforts, the Company may occasionally undertake time deposit campaigns to the
general public in conjunction with anticipated liquidity needs in order to
better allow an appropriate matching of its funding sources to its funding
needs.
Average balances of deposits accounts increased $10.6 million to $153.1
million in 1997 from $142.5 million in 1996 which was an increase of $22.1
million from $120.4 million in 1995 with the majority of the increases in
savings account balances.
The Company's liquidity position is monitored daily by management to
maintain a level of liquidity conducive to efficient operations and is
continuously evaluated as part of the asset/liability management process. The
Company believes that its liquidity sources will continue 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. Failure to meet minimum capital requirements can
result in certain mandatory and discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
condition. The regulations require that the Bank meet specific capital adequacy
guidelines as calculated under regulatory accounting practices. The Bank's
capital classification is also subject to qualitative judgments by the
regulators about interest rate risk, concentration of credit risk and other
factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Tier I capital to
total average assets (as defined), and minimum ratios of Tier I and total
capital to risk weighted assets. The Bank's capital ratios are well in excess of
regulatory minimum requirements. As the Company is a small bank holding company,
it is not subject to any additional capital ratio requirements. See Note 7 to
the consolidated financial statements for a table of minimum required and actual
capital ratios.
Quantitative and Qualitative Disclosures About Market Risk and Asset/Liability
Management
An earnings at risk model is one tool utilized by the Company to measure
interest rate risk. Such a model computes the estimated effect on net income
from changes in interest earned on assets and expenses paid on liabilities, as
well as the impact of off-balance sheet items in the event of a range of assumed
changes in market interest rates. This analysis estimates the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained one
hundred to three hundred basis point increase or decrease in the market interest
rates. The Company's Board of Directors has adopted an interest rate risk policy
which establishes maximum decreases in net income and capital in the event of a
sudden and sustained change in market interest rates.
14
<PAGE>
In the event that the Prime Rate, as quoted in The Wall Street Journal,
decreases by 100, 200 or 300 basis points as of December 31, 1997, the Company
estimates that net income will decrease by $520,000, $745,000 and $730,000,
respectively. If the Prime Rate increases by 100, 200 or 300 basis points, the
Company estimates that net income will increase by $520,000, $745,000 and
$315,000, respectively. All of the Company's market risk sensitive instruments
are classified as held to maturity or available for sale. The Company has no
trading securities.
At December 31, 1997 the estimated changes in the Company's net income
based on the hypothetical changes in interest rates were within the limits
established by the Board of Directors.
Such earnings at risk calculation is based on the estimated change in
interest income and interest expense utilizing numerous assumptions, including
historical relationships between various indices utilized by the Company in
setting interest rates and management's judgment as to the expected relationship
of such rates in the current environment. This calculation utilizes such
relative levels of market interest rates as well as assumptions regarding loan
prepayments and deposit decays and should not be relied upon as indicative of
actual results. Importantly, the computations do not contemplate any actions the
Company could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of earnings at risk. Actual results may differ from those
presented should market conditions vary from assumptions used in the
calculation. In the event of a change in interest rates, prepayment and early
withdrawal levels could deviate significantly from those assumed in the earnings
at risk calculation. Finally, the ability of many borrowers to repay their
adjustable rate loans and the value of the underlying collateral may decrease in
the event of interest rate decreases.
The Company does seek to manage its assets and liabilities to reduce the
potential adverse impact on net interest income that might result from changes
in interest rates. Control of interest rate risk is conducted through systematic
monitoring of maturity mismatches. The Company's investment decision-making
takes into account not only the rates of return and their underlying degree of
risk, but also liquidity requirements, including minimum cash reserves,
withdrawal and maturity of deposits and additional demand for funds. For any
given period, the pricing structure is matched when an equal amount of assets
and liabilities reprice. An excess of assets or liabilities over these matched
items results in a gap or mismatch, as shown on the following table. A negative
gap denotes liability sensitivity and normally means that a decline in interest
rates would have a positive effect on net interest income, while an increase in
interest rates would have a negative effect on net interest income. However,
significant variations may exist in the degree of interest rate sensitivity
between individual asset and liability types within the repricing periods
presented due to differences in their repricing elasticity relative to the
change in the general level of interest rates. All of the Company's assets and
liabilities are U.S. dollar-denominated and, therefore, the Company bears no
foreign exchange risk.
The majority of the Company's assets reprice according to contractual
arrangements although the Company has fairly broad discretion over the frequency
and magnitude of interest rate changes on its liabilities which has enabled the
Company to minimize the impact of any general changes in the interest rate
environment.
The Company utilizes the analysis detailed below to generally monitor the
composition of assets and liabilities and focuses on the one-year mismatch. The
Company believes the negative one year cumulative gap $8.1 million, or 5%,
reflects a relatively balanced position.
For purposes of the following analysis, checking and savings accounts are
presented 20% in the 0-90 day period, 20% in the 91-180 day period, and 30% in
the 181-365 day period and 30% in the 1-5 year period. Although the elasticity
of such deposits cannot be tied to any one time period, these are the
assumptions which have been developed by the Company based on historical
experience and are utilized for internal and regulatory reporting purposes.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997
0 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Years Years Total
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans ............................. $ 100,800 $ 1,933 $ 4,486 $ 8,684 $ 11,125 $ 127,028
Residential loans ............................ 574 1,038 1,194 1,975 1,734 6,515
Other consumer loans ......................... 1,389 1 13 401 51 1,855
Investments .................................. 2,335 1,013 5,173 8,133 1,511 18,165
Federal funds sold ........................... 6,450 -- -- -- -- 6,450
--------- --------- --------- --------- --------- ---------
Total interest earning assets ......... $ 111,548 $ 3,985 $ 10,866 $ 19,193 $ 14,421 $ 160,013
========= ========= ========= ========= ========= =========
Checking ..................................... $ 10,687 $ 10,687 $ 16,031 $ 16,031 -- $ 53,436
Money market savings ......................... 16,679 16,679 25,018 25,018 -- 83,394
Other savings ................................ 1,722 1,722 2,583 2,582 -- 8,609
Time deposits ................................ 13,870 7,648 10,075 2,622 -- 34,215
Treasury, tax and loan ....................... 1,085 -- -- -- -- 1,085
--------- --------- --------- --------- --------- ---------
Total interest bearing liabilities..... $ 44,043 $ 36,736 $ 53,707 $ 46,253 -- $ 180,739
========= ========= ========= ========= ========= =========
Interest sensitivity gap ..................... $ 67,505 $ (32,751) $ (42,841) $ (27,060) $ 14,421 $ (20,726)
========= ========= ========= ========= ========= =========
Cumulative gap ............................... $ 67,505 $ 34,754 $ (8,087) $ (35,147) $ (20,726)
========= ========= ========= ========= =========
Cumulative gap as a percentage of
total interest earning assets ............ 42% 22% (5)% (22)% (13)%
========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
Seasonality
The Company's business is somewhat seasonal as the level of domestic loan
originations tend to be lower during the first quarter when many U.S. companies
have not yet produced their fiscal financial statements and during the third
quarter when many U.S. manufacturers shut down for a limited time for summer
vacation.
Impact of Inflation
The consolidated financial statements and related data presented elsewhere
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. Interest rates have a significant impact on the Company's performance.
Increases in interest rates affect the ability of the Company's borrowers to
service their variable rate debt. Furthermore, inflation can directly affect the
value of loan collateral in general, and real estate collateral in particular.
These factors are taken into account in the initial underwriting process and
over the life of the loans. The Company believes that it has the systems in
place to continue to manage the rates, liquidity and interest rate sensitivity
of the Company's assets and liabilities.
Year 2000 Compliance
As the year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., '95 is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., '99) could be the
maximum date value these systems will be able to accurately process. The Company
has determined that its deposit item processing system could not be readily made
to be year 2000 compliant and outsourced this function in the first quarter of
1998. All other major systems are supported by third party vendors. The Company
has developed a plan to address the issues raised by the year 2000 in accordance
with the guidance issued by the Federal Financial Institutions Examination
Council and is in the process of working with all its service providers and
software vendors to assure that the Company is prepared for the year 2000.
Management does not anticipate that the Company will incur significant operating
expenses or be required to invest heavily in computer system improvements to be
year 2000 compliant.
Recent Accounting Pronouncements
SFAS No. 130
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 will require the Company to expand the
financial statements to present the impact of any changes in the valuation
allowance for the available-for-sale investment portfolio, any tax benefits
associated with Company's stock option plans or other components of
comprehensive income.
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. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997 and requires presentation of
comparative information for prior periods presented. The Company is currently
reviewing this pronouncement, and the adoption of SFAS No. 131 is expected to
impact the way the Company reports information about its operations. Specific
determination has not yet been made as to how this Statement will be
implemented.
16
<PAGE>
Report of Independent Accountants
The Board of Directors and Stockholders of First International Bancorp, Inc.
We have audited the consolidated balance sheets of First International
Bancorp, Inc. and Subsidiary (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First International Bancorp, Inc. and Subsidiary as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
January 23, 1998
17
<PAGE>
First International Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks .................................................. $ 10,944 $ 5,867
Federal funds sold ....................................................... 6,450 13,000
--------- ---------
Cash and cash equivalents ........................................ 17,394 18,867
Investment securities (Note 2):
Available for sale at fair value .................................... 12,767 11,524
Held to maturity at amortized cost
(fair value $7,429 and $3,056) ................................... 7,435 3,063
U.S. Agency stocks at cost ............................................... 2,069 1,287
Loans, net (Note 3) ...................................................... 130,625 109,453
Loans held for sale ...................................................... 9,070 --
Receivable from loans sold (Note 1) ...................................... 28,775 10,341
Accrued interest receivable .............................................. 1,200 823
Premises and equipment, net (Note 4) ..................................... 2,694 1,515
Prepaid expenses and other assets (Note 3) ............................... 6,822 4,769
--------- ---------
Total assets ..................................................... $ 218,851 $ 161,642
========= =========
Liabilities and Stockholders' Equity
Deposits (Note 5) ........................................................ $ 172,321 $ 144,316
U.S. Treasury demand note ................................................ 1,085 1,061
Accrued interest payable ................................................. 745 622
Other liabilities ........................................................ 2,552 1,427
--------- ---------
Total liabilities ................................................ 176,703 147,426
Commitments and Contingencies (Notes 3 and 4)
Stockholders' equity (Notes 1, 7, 8, and 9):
Common stock, $.10 par value, 12,000,000 shares authorized;
7,866,735 and 5,766,352 shares issued and outstanding ............... 787 577
Preferred stock, $.10 par value, 2,000,000 shares authorized;
no shares issued and outstanding ................................. -- --
Paid-in capital in excess of par value .............................. 32,083 8,222
Stockholder note receivable ......................................... (877) (954)
Unrealized holding gain/(loss) on investments available-for-sale,
net .............................................................. 12 (74)
Retained earnings ................................................... 10,143 6,445
--------- ---------
Total stockholders' equity ....................................... 42,148 14,216
--------- ---------
Total liabilities and stockholders' equity ....................... $ 218,851 $ 161,642
========= =========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
18
<PAGE>
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
December 31, 1997, 1996 and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including net fees .................. $12,753 $12,027 $10,266
Investment securities ...................... 1,156 646 750
Federal funds sold ......................... 716 632 585
------- ------- -------
Total interest income ................... 14,625 13,305 11,601
------- ------- -------
Interest expense:
Deposits ................................... 6,337 5,714 4,771
Other ...................................... 34 27 98
------- ------- -------
Total interest expense .................. 6,371 5,741 4,869
------- ------- -------
Net interest income ..................... 8,254 7,564 6,732
Provision for possible loan losses .............. 2,239 3,487 1,237
------- ------- -------
Net interest income after
provision for possible loan losses... 6,015 4,077 5,495
Non-interest income:
Service charges and other deposit fees ..... 438 424 398
Loan servicing income and fees ............. 2,618 1,475 896
Income on stockholder note receivable ...... 244 -- --
Gain on sale of guaranteed commercial loans 9,513 4,904 2,744
Gain on sale of commercial loans ........... 2,227 933 97
Gain on residential loan sales ............. 70 7 18
Gain on branch sale ........................ -- 2,202 --
------- ------- -------
Total non-interest income ............... 15,110 9,945 4,153
------- ------- -------
Total operating income .................. 21,125 14,022 9,648
------- ------- -------
Non-interest expense:
Salaries and benefits ...................... 9,302 4,963 3,399
Occupancy .................................. 985 774 573
Furniture and equipment .................... 692 462 407
Outside services ........................... 425 231 210
Office expenses ............................ 901 702 538
Marketing .................................. 840 621 288
Other ...................................... 656 672 713
------- ------- -------
Total non-interest expense .............. 13,801 8,425 6,128
------- ------- -------
Income before income taxes .............. 7,324 5,597 3,520
Provision for income taxes (Note 9) ............. 2,895 2,353 1,494
------- ------- -------
Net income .............................. $ 4,429 $ 3,244 $ 2,026
------- ------- -------
Basic earnings per share (Notes 1 and 7) ....... $ .70 $ .56 $ .35
------- ------- -------
Diluted earnings per share (Notes 1 and 7) ...... $ .67 $ .56 $ .35
------- ------- -------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
19
<PAGE>
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
December 31, 1997, 1996 and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Paid-in Unrealized
Capital in Stockholder Holding Gain (Loss)
Common Excess of Note on Investments Retained
Stock Par Value Receivable Available-for-Sale Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ...................... $ 582 $ 8,299 $ (1,021) $ (182) $ 1,997
Repurchase and retirement of 62,132 shares of
common stock (Note 7) .............................. (6) (103) -- -- --
Issuance of 3,500 shares of common stock under
option plan (Note 8) ............................... -- 6 -- -- --
Dividend on common stock ($.03/share) ................... -- -- -- -- (164)
Principal payment on stockholder note
receivable (Note 7) ................................ -- -- 14 -- --
Reduction in unrealized holding loss, net of income taxes -- -- -- 154 --
Net income .............................................. -- -- -- -- 2,026
-------- -------- -------- -------- --------
Balance at December 31, 1995 .................... 576 8,202 (1,007) (28) 3,859
Repurchase and retirement of 7,875 shares of
common stock (Note 7) .............................. (1) (21) -- -- --
Issuance of 21,000 shares of common stock under
option plan (Note 8) ............................... 2 41 -- -- --
Dividends on common stock ($.11/share) .................. -- -- -- -- (658)
Principal payment on stockholder note
receivable (Note 7) ................................ -- -- 53 -- --
Increase in unrealized holding loss, net of income taxes. -- -- -- (46) --
Net income .............................................. -- -- -- -- 3,244
-------- -------- -------- -------- --------
Balance at December 31, 1996 .................... 577 8,222 (954) (74) 6,445
Issuance of 145,350 shares of common stock under
option plan (Note 8) ............................... 14 249 -- -- --
Issuance of 1,955,000 shares of common stock at public
offering (Note 1) .................................. 196 23,612 -- -- --
Dividends on common stock ($.12/share) .................. -- -- -- -- (731)
Discount on stockholder note receivable (Note 7) ........ -- -- 92 -- --
Accretion on stockholder note receivable (Note 7) ....... -- -- (15) -- --
Reduction in unrealized holding loss, net of income
taxes .............................................. -- -- -- 86 --
Net income .............................................. -- -- -- -- 4,429
-------- -------- -------- -------- --------
Balance at December 31, 1997 ....................... $ 787 $ 32,083 $ (877) $ 12 $ 10,143
======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
20
<PAGE>
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
December 31, 1997, 1996 and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 4,429 $ 3,244 $ 2,026
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................. 644 374 315
Amortization of investment premiums, net ....................... 7 55 93
Accretion of loan discount, net ................................ 1,161 1,042 485
Provision for possible loan losses ............................. 2,239 3,487 1,237
Provision for loss on other real estate owned .................. -- 200 280
Increase in other liabilities .................................. 1,004 686 122
(Increase) decrease in deferred loan costs ..................... (42) (15) 35
(Increase) decrease in accrued interest receivable ............. (377) 54 (194)
Increase (decrease) in accrued interest payable ................ 123 324 (1)
Deferred income tax provision (benefit) ........................ 121 (249) (52)
Gain on sale of loans .......................................... 1,070 (1,018) (353)
(Increase) decrease in receivable from loans sold .............. (18,434) 932 (2,813)
Increase in prepaid expenses and other assets .................. (2,113) (1,395) (1,438)
Discount on stockholder note receivable ........................ 92 -- --
Accretion on stockholder note receivable ....................... (15) -- --
Loans originated for sale ........................................... (232,900) (132,839) (55,686)
Proceeds from sale of loans originated for sale ..................... 231,636 136,742 58,193
--------- --------- ---------
Total adjustments ........................................... (15,784) 8,380 223
--------- --------- ---------
Net cash provided by (used in) operating activities ......... (11,355) 11,624 2,249
Cash flows from investing activities:
Net increase in loans .......................................... (33,406) (14,119) (15,265)
Purchase of investment securities available for sale ........... (13,587) (10,514) (1,498)
Purchase of investment securities held to maturity ............. (8,496) (500) (75)
Purchase of equity securities .................................. (782) (415) (5)
Proceeds from maturities and principal repayments of
investment securities available for sale .................... 11,998 1,500 1,500
Proceeds from maturities of mortgage-backed securities
available for sale ............................................ 486 4,023 1,606
Proceeds from maturities and principal repayments of
investment securities held to maturity ...................... 4,000 -- --
Proceeds from maturities of mortgage-backed securities
held to maturity ............................................. 123 1,526 961
Proceeds from sale of branch premises .......................... -- 275 --
Proceeds from sale of other real estate owned .................. -- 100 --
Capital expenditures, net ...................................... (1,823) (894) (372)
--------- --------- ---------
Net cash used in investing activities ....................... (41,487) (19,018) (13,148)
Cash flows from financing activities:
Net increase in deposits ....................................... 28,005 15,954 16,512
Net increase (decrease) in other borrowings .................... 24 841 (106)
Repayments of FHLBB Advances ................................... -- -- (2,788)
Proceeds from sale of common stock at public offering, net ..... 23,808 -- --
Proceeds from issuance of common stock under option plan ....... 263 43 6
Repurchase of common stock ..................................... -- (22) (109)
Dividends paid ................................................. (731) (658) (164)
Principal payment on stockholder note receivable ............... -- 53 14
--------- --------- ---------
Net cash provided by financing activities ................... 51,369 16,211 13,365
--------- --------- ---------
Net increase (decrease) in cash and equivalents ............. (1,473) 8,817 2,466
Cash and cash equivalents at beginning of year ...................... 18,867 10,050 7,584
--------- --------- ---------
Cash and cash equivalents at end of year ............................ $ 17,394 $ 18,867 $ 10,050
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ....................................................... $ 6,248 $ 5,418 $ 4,869
Income taxes ................................................... $ 2,791 $ 2,664 $ 1,694
Non-cash items:
Real estate acquired in settlement of loans .................... -- -- $ 580
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
21
<PAGE>
First International Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Basis of Presentation
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). 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; Rochester, New York; Morristown, New Jersey; Philadelphia and
Pittsburgh, Pennsylvania; and Washington D.C. The Bank sold its last retail
branch facility and certain deposits in 1996. The Company completed an
underwritten public stock offering of 1,700,000 shares in September 1997 and
issued an additional 255,000 shares in October when the underwriters exercised
their option to purchase such shares. The offering resulted in net proceeds to
the Company of $23.8 million. The Company'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 (SBA), the U.S. Department of
Agriculture (USDA) and the Export-Import Bank of the United States (Ex-Im Bank).
Continued availability of such loan guarantees are dependent upon timely and
adequate federal budget appropriations. Each of these federal programs is funded
through September 1998, but there can be no assurance of sufficient budgetary
allocations to allow a continuation of such programs in substantially their
current form.
In preparing the consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and the results of operations
for the period. Material estimates in these consolidated financial statements
relate to the allowance and provision for possible loan losses, the valuation of
other real estate owned and the estimated lives of loans sold where servicing
has been retained. Market conditions are evaluated and independent appraisals of
significant properties are obtained by management as needed in the process of
setting the estimates. Notwithstanding this, such estimates are particularly
sensitive to the economic environment and can be significantly affected by
changing economic conditions affecting the value of the collateral, interest
rates, borrowers' financial position and other factors. Accordingly, actual
results could differ significantly from the estimates.
Investment Securities
Securities that may be sold as part of the Company's asset/liability or
liquidity management, or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar factors, are
classified as available for sale and carried at fair market value. Unrealized
holding gains and losses on such securities are reported net of related taxes as
a separate component of stockholders' equity. Debt securities that the Company
has the ability and positive intent to hold to maturity are classified as held
to maturity and carried at amortized cost. Realized gains and losses on the
sales of all investment securities are reported in earnings and computed using
the specific identification cost basis. Declines in the market value of
investment securities that are deemed to be other than temporary are charged to
income.
Loans
Loans are stated at their principal amount outstanding. Interest income on
loans is recognized on the simple interest method based upon the principal
amount outstanding.
In May 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," - an amendment of FASB Statement No. 65 (SFAS No. 122), which
the Company adopted on January 1, 1996. SFAS No. 122 amends FASB Statement No.
65, "Accounting for Certain Mortgage Banking Activities," to provide that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. It also
requires the Company to assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. The adoption of this
statement did not have a material impact on the Company's financial condition or
its results of operations.
In June 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. These standards are based
on consistent application of a financial-components approach that focuses on
control.
22
<PAGE>
Under that approach, after a transfer of financial assets, an entity recognizes
the financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS No. 125 also provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. The
adoption of this statement as of January 1, 1997 did not have a material impact
on the Company's financial condition or its results of operations. This
statement generally applies SFAS No. 122 concepts to a variety of assets sold
and the resultant retained servicing. SFAS No. 125 also changed terminology used
to describe the methods and assumptions used to calculate the servicing assets.
The discussion below reflects the concepts and terminology included in SFAS No.
125.
Receivable from loans sold and gain on commercial loan sales are primarily
attributable to the sale of commercial loans which have been at least partially
guaranteed by the SBA, the USDA and Ex-Im Bank. The Company is required to
retain at least 5% of the unguaranteed portions of SBA and USDA loans.
Transactions are generally settled within 30 days of the sale. The gains on the
sale of a portion of a loan are based on the relative fair market values of the
loan sold and the loan retained. A portion of the gain on commercial loan sales
is due to a servicing asset which represents the present value of the
differential between the servicing fee received by the Company and adequate
compensation, defined as the sum of the Company's costs and a normal profit,
after considering the estimated effects of prepayments. The discount rate
utilized in calculating the servicing asset approximates the market rate an
investor would demand on a risk-adjusted basis. The servicing asset is amortized
as a charge to non-interest income over the estimated lives of the underlying
loans on an effective interest method. The servicing asset is analyzed
periodically for impairment based on the term of the serviced loan, the
perceived alternatives for refinancing, the current interest rate environment
and historical default and prepayment patterns and is carried at the lower of
amortized cost or net realizable value.
Unearned interest reflected as a reduction of loans in the consolidated
balance sheet relates primarily to the discount recognized on the retained
portion of the commercial loans sold. The discount is recorded in interest
income over the estimated life of the retained loan on an effective interest
method.
Loans Held for Sale
The Company classifies loans for which it does not have a positive intent
to hold to maturity as loans held for sale and carries them at the lower of cost
or market based on the aggregate value of the portfolio.
Loan Origination Fees (Costs)
Fees for loan originations and commitments, and related origination costs,
are deferred and recognized as a yield adjustment utilizing the interest method
over the contractual life of the related loan, adjusted for prepayment and
sales.
Provision/Allowance For Possible Loan Losses
The Company evaluates the collectibility of impaired loans, as defined
below, based on the present value of expected future cash flows discounted at
the historical effective interest rate, except that all collateral-dependent
loans are measured for collectibility of contractual principal and interest
based on the estimated fair value of the collateral. Smaller-balance homogeneous
loans consisting of residential mortgages and consumer loans are evaluated for
collectibility by the Company based on historical loss experience rather than on
an individual loan-by-loan basis. The Company evaluates all impaired loans,
other than small balance loans, on an individual loan-by-loan basis; it does not
aggregate impaired loans into major risk classifications. The Company considers
a loan to be impaired when, based on current information and events, it is
probable that it will be unable to collect all amounts of contractual interest
and principal as scheduled in the loan agreement. An insignificant delay of
under 60 days or a 10% shortfall in the amount of the payment is not an event
that, when considered in isolation, would automatically cause the Company to
consider a loan to be impaired. The Company places a loan on nonaccrual status
when it is 90 days or more past due or when, in management's assessment, the
full collectibility of principal and interest is uncertain. Except for certain
restructured loans, impaired loans are loans that are on nonaccrual status.
When an impaired loan or a portion of an impaired loan is deemed
uncollectible, the portion deemed uncollectible is charged against the allowance
for loan losses and subsequent recoveries, if any, are credited to the
allowance.
The Company recognizes interest income on impaired loans on a cash basis
and reverses any accrued interest income at the date of determination.
Management determines the adequacy of its allowance for possible loan
losses primarily through periodic reviews of the loan portfolio, loan
delinquencies, collateral on loans and past payment history adjusted for such
factors as known changes in the character of the loan portfolio and current
economic conditions. Consideration is also given to anticipated economic
conditions, as well as other relevant factors in establishing the allowance. The
allowance is increased by provisions for loan losses charged to income and
decreased by charge offs, net of recoveries.
Other Real Estate Owned
Other real estate owned (OREO), representing property acquired by
foreclosure or acceptance of a deed in lieu of foreclosure is carried at the
lower of the unpaid loan balance at the date of acquisition or fair value less
estimated disposal costs. Improvements are capitalized to the extent realizable.
Holding and selling costs are expensed as incurred.
23
<PAGE>
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized over the period of the related lease. Costs of maintenance and repairs
are expensed, while major improvements are capitalized.
Income Taxes
Income taxes are provided based on the asset/liability method of
accounting. Deferred income taxes and tax benefits are recognized for the future
income tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is established when it is more likely than not that some portion of
the deferred tax asset will not be realized.
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 options
to issue common stock were exercised. (See Note 7.)
Stock Option Plans
SFAS No. 123, "Accounting for Stock Based Compensation" (SFAS No. 123)
issued in October 1995 gives companies the option of employing intrinsic value
accounting under the guidelines of Accounting Principles Board (APB) No. 25 or
fair value accounting for stock based compensation. While SFAS No. 123 does not
require the adoption of fair value accounting, it does require certain
disclosures in the financial statements as if fair value accounting had been
adopted, including pro forma net income and earnings per share. The Company
adopted this accounting standard effective January 1, 1996 for disclosure
purposes only and will continue to apply APB 25 in accounting for stock based
compensation.
Common Stock Split
On June 26, 1997, the Company's stockholders approved a 3.5-for-1 stock
split to stockholders of record on July 14, 1997, effective August 7, 1997.
Stockholders' equity has been restated to give retroactive recognition to the
stock split in prior periods by reclassifying from paid-in capital in excess of
par value to common stock an amount equal to the par value of the additional
shares arising from the split. In addition, all references to the number of
shares, per share amounts and stock option data have been restated.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one day periods or terms of less than 30 days.
The Company is required to maintain certain levels of cash reserves at the
Federal Reserve Bank of Boston based on its deposit accounts. Such required
reserves totaled $1,700,000 at December 31, 1997.
Reclassifications
Certain amounts from 1996 and 1995 have been reclassified to conform to the
1997 presentation.
Recent Accounting Pronouncements
SFAS No. 130
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 will require the Company to expand the
financial statements to present the impact of any change in the valuation
allowance for the available for sale investment portfolio and the tax benefit
associated with the Company's stock option plans or other components of
comprehensive income.
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. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997 and requires presentation of
comparative information for prior periods presented. The Company is currently
reviewing this pronouncement, and the adoption of SFAS No. 131 is expected to
impact the way the Company reports information about its operations. Specific
determination has not yet been made as to how this statement will be
implemented.
24
<PAGE>
================================================================================
2. Investment Securities:
Securities classified as available for sale (carried at fair value) and as held
to maturity (carried at amortized cost) as of December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1997
Available for Sale
U.S. Treasury obligations .................. $ 12,013 $ 15 $ (3) $ 12,025
U.S. Government mortgage-backed securities.. 648 9 -- 657
Mutual funds ............................... 85 -- -- 85
-------- -------- -------- --------
$ 12,746 $ 24 $ (3) $ 12,767
======== ======== ======== ========
Held to Maturity
U.S. Government mortgage-backed securities.. $ 2,285 $ 4 $ (10) $ 2,279
Debt securities of foreign governments ..... 1,150 -- -- 1,150
Variable rate preferred stock .............. 4,000 -- -- 4,000
-------- -------- -------- --------
$ 7,435 $ 4 $ (10) $ 7,429
======== ======== ======== ========
December 31, 1996
Available for sale
U.S. Treasury obligations .................. $ 10,516 $ 2 $ (63) $ 10,455
U.S. Government mortgage-backed securities.. 1,134 8 (73) 1,069
-------- -------- -------- --------
$ 11,650 $ 10 $ (136) $ 11,524
======== ======== ======== ========
Held to maturity
U.S. Government mortgage-backed securities.. $ 1,913 $ 14 $ (21) $ 1,906
Debt securities of foreign governments ..... 1,150 -- -- 1,150
-------- -------- -------- --------
$ 3,063 $ 14 $ (21) $ 3,056
======== ======== ========= ========
</TABLE>
Stock securities are carried at cost and are comprised of the following:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
1997 1996
--------------------------------
(dollars in thousands)
Federal Reserve Bank ......................... $224 $224
Federal Home Loan Bank of Boston (FHLBB)...... 1,246 648
Private Export Funding Corporation ........... 599 415
------ ------
$2,069 $1,287
====== ======
The Company is required to hold common stock investments in the Federal
Reserve Bank based on First National Bank of New England's capital and in the
FHLBB based on borrowings from the FHLBB (Note 6).
At December 31, 1997 investments with a carrying value of $14,422,000 were
pledged to collateralize public and government deposits, as required by law, and
certain of the Bank's lines of credit. There were no sales of debt securities in
the three year period ended December 31, 1997.
25
<PAGE>
The contractual maturities of debt securities at December 31, 1997 and 1996 are
as follows:
- --------------------------------------------------------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
- --------------------------------------------------------------------------------
(dollars in thousands)
December 31, 1997
Available for sale
Due in one year or less ....... $ 5,588 $ 5,588 5.65%
Due after one year
through five years ....... 6,510 6,522 5.82%
Mortgage-backed securities..... 648 657 6.22%
------- ------- -------
$12,746 $12,767 5.77%
======= ======= =======
Held to maturity
Due after one year
through five years ....... $ 4,545 $ 4,545 4.43%
Due after five years
through ten years ........ 1,100 1,100 7.88%
Mortgage-backed securities 1,790 1,784 6.09%
------- ------- -------
$ 7,435 $ 7,429 5.34%
======= ======= =======
December 31, 1996
Available for sale
Due in one year or less ....... $ 998 $ 1,001 5.93%
Due after one year
through five years ....... 9,518 9,454 5.70%
Mortgage-backed securities..... 1,134 1,069 6.32%
------- ------- -------
$11,650 $11,524 5.78%
======= ======= =======
Held to maturity
Due after one year
through five years ....... $ 350 $ 350 7.88%
Due after five years
through ten years ........ 800 800 7.59%
Mortgage-backed securities..... 1,913 1,906 5.35%
------- ------- -------
$ 3,063 $ 3,056 6.22%
======= ======= =======
================================================================================
3. Loans:
The outstanding balances of loans originated and held by the Company are as
follows:
- --------------------------------------------------------------------------------
December 31,
1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Commercial and industrial ............... $ 71,836 $ 61,435
Commercial real estate .................. 55,192 39,095
Residential real estate ................. 6,515 12,843
Consumer loans and lines of credit ...... 1,855 1,254
--------- ---------
Total loans ..................... 135,398 114,627
========= =========
Less: Allowance for possible loan losses 3,100 3,000
Discount on retained loans ........ 1,782 2,241
Net deferred loan origination costs (109) (67)
--------- ---------
Loans, net ...................... $ 130,625 $ 109,453
========= =========
At December 31, 1997, the Company had fixed and variable rate loans with
maturities greater than one year totaling $11,486,000 and $89,759,000
respectively.
The scheduled maturities of the Company loan portfolio as of December 31, 1997
are as follows:
- --------------------------------------------------------------------------------
After one
Within One Year Through After Five
Year Five Years Years Total
- --------------------------------------------------------------------------------
Commercial and
industrial ............ $ 32,331 $ 7,324 $ 32,181 $ 71,836
Commercial real estate 1,280 4,063 49,849 55,192
Residential loans ........ 2,806 1,975 1,734 6,515
Consumer loans and
lines of credit ....... 1,403 401 51 1,855
-------- -------- -------- --------
$ 37,820 $ 13,763 $ 83,815 $135,398
======== ======== ======== ========
================================================================================
The outstanding balances of loans originated by the Company and sold to others
on a servicing retained basis are as follows:
- --------------------------------------------------------------------------------
December 31,
1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Guaranteed Loans:
SBA ........................... $195,454 $145,620
USDA .......................... 45,806 26,901
Ex-Im Bank .................... 82,794 26,670
FHLMC ......................... 17,305 17,731
-------- --------
341,359 216,922
======== ========
Unguaranteed Portions
and Unguaranteed Loans:
SBA ........................... 51,673 28,814
USDA .......................... 5,326 3,191
Other commercial .............. 27,235 12,896
Home equity lines ............. 3,484 3,982
-------- --------
87,718 48,883
======== ========
Total loans serviced for others $429,077 $265,805
======== ========
The following amounts are included in Loans, net:
- --------------------------------------------------------------------------------
December 31,
Discount on Retained Loans 1997 1996 1995
- --------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of period ....... $ 2,241 $ 2,312 $ 1,792
Discount on current period sales .. 2,131 1,510 852
Deletions due to sales ............ (1,620) (1,113) --
Accretion ......................... (970) (468) (332)
-------- -------- --------
Balance at end of period ....... $ 1,782 $ 2,241 $ 2,312
======== ======== ========
26
<PAGE>
The following amounts are included in Prepaid expenses and other assets:
- --------------------------------------------------------------------------------
December 31,
Servicing Assets 1997 1996 1995
- --------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of period ......... $ 4,138 $ 2,809 $ 2,084
Net servicing on current period sales .. 3,172 1,979 1,127
Amortization ........................... (1,631) (650) (402)
-------- -------- --------
Balance at end of period .......... $ 5,679 $ 4,138 $ 2,809
======== ======== ========
Changes in the Allowance for possible loan losses were as follows:
- --------------------------------------------------------------------------------
December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
(dollars in thousands)
Balance at beginning of period ........... $ 3,000 $ 2,000 $ 2,000
Provision charged to income .............. 2,239 3,487 1,237
Recoveries on loans previously charged
off ..................................... 106 40 85
Loans charged off ........................ (2,245) (2,527) (1,322)
-------- -------- --------
Balance at end of period ......... $ 3,100 $ 3,000 $ 2,000
======== ======== ========
Certain information with regard to impaired loans is detailed below:
- --------------------------------------------------------------------------------
December 31,
1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Impaired loans ............... $2,215 $2,173
Allocated allowance .......... 644 543
Average recorded investment .. 2,194 1,670
Interest income recognized ... 131 125
The carrying value of the impaired loans has been calculated based on the
estimated fair value of the underlying collateral.
Nonaccrual loans totaled $2,364,000 and $2,252,000 at December 31, 1997 and
1996, respectively. The gross interest income that would have been recorded if
the non-accrual loans had been current in accordance with their original terms
would have been $231,000 for the period ended December 31, 1997. The actual
amount of interest income recognized on those loans was $134,000 for the period
ended December 31, 1997. There were no loans over 90 days and still accruing
interest at each period end presented.
Loans to principal stockholders, directors, companies of which directors
are principal owners, individuals directly related to or affiliated with
directors, and executive officers aggregated $602,000 and $2,570,000 at December
31, 1997 and 1996, respectively. During 1997, repayments and sales amounted to
$1,978,000 while advances under new or existing loans totaled $10,000.
In the normal course of business, the Bank enters into agreements to extend
credit which are not reflected in the accompanying consolidated financial
statements.
Outstanding credit commitments are detailed below:
- --------------------------------------------------------------------------------
December 31,
1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Commercial lines of credit ....... $47,987 $38,922
Consumer lines of credit ......... 530 229
Performance letters of credit .... 18,975 8,204
Financial letters of credit ...... 1,415 1,392
Commercial letters of credit ..... 1,542 --
------- -------
Total credit commitments .... $70,449 $48,747
======= =======
At December 31, 1997 and December 31, 1996, letters of credit totaling
$17,548,000 and $8,161,000, respectively, carry the guarantee of Ex-Im Bank.
Commitments to extend such credit are agreements to lend to a client as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since some of the agreements may expire
without being drawn upon or may be terminated by the Bank, these amounts do not
necessarily represent a future cash requirement of the Bank. Prior to entering
into any agreement to extend credit, the Bank evaluates the client's
creditworthiness in accordance with loan underwriting standards as approved by
the Board of Directors. The amount of collateral obtained, if deemed necessary,
is based on management's credit evaluation of the client. Collateral for
commercial loan commitments varies but may include accounts receivable,
inventory, property, plant and equipment and commercial real estate.
Although the Bank's maximum exposure to credit loss is the total contract
amount of the commitments and letters of credit noted above, management does not
anticipate any material losses as a result of these agreements and does not
consider them to represent an undue level of credit, interest or liquidity risk
for the Bank.
The Bank specializes in lending to small privately owned commercial
enterprises and professional firms throughout southern New England and the
Mid-atlantic U.S., although the majority of the loans outstanding are made to
borrowers located in Connecticut. Such loans and loan commitments are generally
collateralized by real estate or other assets.
The Bank also lends to companies in various international emerging markets.
Such U. S. dollar loans are fully guaranteed by Ex-Im Bank and are generally
sold at origination to various investors on a non-recourse, servicing retained
basis. Gains from the sale of such international loans totaled $2,299,000 for
the year ended December 31, 1997. The majority of these international loans were
made to borrowers in Brazil. Gains from the sale of Brazilian loans totalled
$1,326,000 for 1997 and loan servicing income related to Ex-Im guaranteed loans
to Brazilian companies totaled approximately $95,000 while servicing income from
all other foreign loans was $169,000. No other individual country accounts for a
significant amount of foreign revenue.
27
<PAGE>
================================================================================
4. Premises, Equipment and Leases:
- -------------------------------------------------------------------------------
December 31,
1997 1996
- -------------------------------------------------------------------------------
(dollars in thousands)
Buildings and leasehold improvements.............. $1,590 $1,001
Furniture, fixtures, and equipment................ 3,408 2,174
------ ------
4,998 3,175
Less: Accumulated depreciation and amortization... 2,304 1,660
------ ------
Premises and equipment, net.................. $2,694 $1,515
====== ======
The Company leases its corporate offices in Hartford, Connecticut and other
facilities for its representative offices in the Northeast and Mid-atlantic
United States. Each of the leases provide for minimum and contingent rentals and
include renewal options. Total rental expense for the years ended December 31,
1997, 1996 and 1995 was $833,000, $636,000 and $456,000, respectively. Minimum
future obligations for premises under noncancelable leases are as follows:
- --------------------------------------------------------------------------------
Year End Operating Leases
- --------------------------------------------------------------------------------
(dollars in thousands)
1998 $1,137
1999 1,117
2000 1,077
2001 992
2002 955
Thereafter 8
------
$5,286
======
================================================================================
5. Deposits:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
December 31,
1997 1996
------------------------ ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Transaction Accounts:
Non-interest bearing checking... $ 38,236 - % $ 27,888 - %
Interest bearing checking ...... 7,867 2.51 8,248 2.52
-------- ------ -------- ------
Total checking accounts...... 46,103 0.43 36,136 0.58
Savings accounts .................... 92,003 5.25 69,278 5.09
Time deposits under $100,000 ........ 26,542 5.88 37,085 5.57
Time deposits $100,000 or more ...... 7,673 5.26 1,817 5.06
-------- ------ -------- ------
Total deposits .............. $172,321 4.06% $144,316 4.08%
======== ====== ======== ======
</TABLE>
- --------------------------------------------------------------------------------
December 31,
Time Deposit Maturities 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Time deposits maturing within:
1 year .................................. $31,593 $35,712
2 years ................................. 1,984 2,350
3 years ................................. 245 290
4 years ................................. 219 259
5 years ................................. 174 206
More than 5 years ....................... -- 85
------- -------
Total time deposits $34,215 $38,902
======= =======
- --------------------------------------------------------------------------------
Maturity Period of Time December 31,
Deposits Over $100,000 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Three months or less .................... $3,009
Over three through six months ........... 940
Over six through twelve months .......... 3,009
Over one year ........................... 715
------
Total time deposits over $100,000........ $7,673
======
28
<PAGE>
================================================================================
6. Borrowings:
Federal Home Loan Bank of Boston Advances:
The Bank has a $2,870,000 unused line of credit from the Federal Home Loan
Bank of Boston (FHLBB) and currently has the ability to borrow approximately
$3,800,000 from the FHLBB under various term advance programs. Any outstanding
advances from the FHLBB are collateralized mortgage loans on residential
properties and certain U.S. Treasury and Agency-issued securities.
Other Borrowings:
The Bank also maintains lines of credit at various correspondent banks
which are primarily used for the issuance of letters of credit. At December 31,
1997, these lines aggregated $42,500,000 of which $20,000,000 is required to be
collateralized upon usage. Letters of credit totaling $19,414,000 were
outstanding for the Bank's clients at December 31, 1997 under such lines.
================================================================================
7. Stockholders' Equity:
Stockholder Note Receivable:
In June 1994 the Board of Directors approved the issuance of 614,600 shares
(as adjusted for the common stock split) of the Company's common stock to the
Company's President at a price of $1.69 per share. The terms of the transaction
provided for a cash down payment of $17,560 and a promissory note in the amount
of $1,020,000 for the balance. The note is collateralized by the stock issued.
Principal is due at maturity on December 31, 2000. Interest was to accrue at the
rate of 7% and was due at maturity; however, upon completion of the public
offering, the accrued interest was forgiven and it was converted to a
non-interest bearing note (See Note 1). The note was then discounted to yield a
market rate of interest. The President is legally entitled to any cash dividends
declared, although the promissory note provided that 75% of such cash dividends
must be retained by the Company and applied to the note as a repayment of
principal. This repayment provision was eliminated effective January 1, 1997.
Although the stock is legally outstanding, since a note was accepted in
exchange for a portion of the issue price, the note receivable is presented as a
separate component of stockholders' equity, and only as repayments of principal
are received does this sale of stock serve to increase stockholders' equity.
Because these shares are legally outstanding, they are included in the earnings
per share calculations as of the date of issuance.
Repurchase and Retirement of Common Stock:
The Board of Directors authorized the repurchase and retirement of 8,000
and 62,000 shares of the Company's common stock for average purchase prices of
$2.78 and $1.75 per share in 1996, and 1995, respectively.
Earnings Per Share Calculation:
The table detailed below reconciles the number of shares used in the basic
earnings per share ("EPS") calculation to the number of shares used with diluted
EPS calculation in accordance with SFAS No. 128 (See Note 1). There were no
changes to net income available to common stockholders between the basic and
diluted EPS calculations.
- --------------------------------------------------------------------------------
December 31,
1997 1996 1995
- --------------------------------------------------------------------------------
(shares in thousands)
Common shares outstanding for basic EPS ..... 6,330 5,763 5,753
Dilutive securities from stock option plans 237 72 15
------ ------ ------
Common shares outstanding for diluted EPS ... 6,567 5,835 5,768
====== ====== ======
Options to purchase 222,560 shares of common stock at $8.50 and options to
purchase 15,000 shares of common stock at $13.50 per share were outstanding at
the end of 1997, but were not included in the computation of diluted EPS because
the options' exercise price exceeded the average market price of the common
shares.
Preferred Stock:
The Company has established a class of 2,000,000 shares of preferred stock.
The Board of Directors was granted the power to establish and designate the
different series and voting powers, designations, preferences and other rights,
qualifications, limitations or restrictions to be placed upon any shares of
preferred stock to be issued by the Company.
Dividends:
Dividends payable by First International Bancorp, Inc. are generally
unrestricted (see below), although the ability of the Company to pay dividends
may from time to time be dependent upon the dividends paid to it by the Bank. A
national bank must obtain the approval of the Office of the Comptroller of the
Currency (OCC) if the total of all dividends declared in any calendar year
exceeds the bank's net profits, as defined, for that year combined with its
retained net profits for the preceding two calendar years.
Regulatory Capital Requirements:
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets (as defined in the regulations).
29
<PAGE>
Management believes, as of December 31, 1997 and 1996, that the Bank meets all
capital adequacy requirements to which it is subject and that, under the current
regulations, the Bank will continue to meet its minimum capital requirements in
the foreseeable future.
As of December 31, 1997 and 1996, the most recent notifications from the
Office of the Comptroller of the Currency categorized the Bank as
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized, the Bank must maintain minimum total, Tier I
risk-based and Tier I leverage ratios as set forth in the table below. There are
no conditions or events since the notification that management believes have
changed the Bank's category.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Amounts
Amounts To be Well Capitalized
For Capital Under Prompt Corrective
Actual Amounts Adequacy Purposes Action Provisions
Capital Ratio Capital Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital/Risk Weighted Assets...... $31,415 17.57% $14,348 8.00% $17,935 10.00%
Tier I Capital/Risk Weighted Assets..... 29,170 16.32% 7,174 4.00% 10,761 6.00%
Tier I Capital/Average Assets .......... 29,170 14.74% 8,258 4.00% 10,322 5.00%
As of December 31, 1996:
Total Capital/Risk Weighted Assets...... $14,253 11.62% $ 9,811 8.00% $12,264 10.00%
Tier I Capital/Risk Weighted Assets..... 12,702 10.36% 4,906 4.00% 7,358 6.00%
Tier I Capital/Average Assets .......... 12,702 8.44% 6,017 4.00% 7,522 5.00%
</TABLE>
================================================================================
8. Stock Option Plans:
The Company's 1994 Incentive Stock Option plan allows for the award of
options to officers which vest immediately. As of December 31, 1997, all
reserved shares were subject to option agreements.
The Company adopted an Amended and Restated 1996 Stock Option Plan which
reserved 701,106 shares of common stock for the issuance of options that may be
granted to officers and directors. These options would generally vest ratably
over a four year period beginning one year after the grant date.
Both plans provide that the options may be granted to purchase common stock
at a price not less than the fair market price of the Company's stock at the
date for the granting of such options, and unless otherwise provided, the
options have a ten year term. The plans also provide that options granted and
the related option price are adjusted to reflect changes in the shares
outstanding due to stock splits and dividends, or other adjustments.
The following tables detail the activity of the 1994 Incentive Stock Option
Plan and 1996 Stock Option Plan:
- --------------------------------------------------------------------------------
Average
Option Option
1994 Incentive Stock Option Plan Shares Price
- --------------------------------------------------------------------------------
Outstanding at January 1, 1995 .... 178,500 $ 1.689
Granted ...................... 131,250 1.840
Exercised .................... (3,500) 1.764
Canceled ..................... (1,750) 1.840
------- -------
Outstanding at December 31, 1995 304,500 1.752
Granted ...................... 83,653 2.191
Exercised .................... (21,000) 2.045
Canceled ..................... (37,538) 1.866
-------- -------
Outstanding at December 31, 1996 329,615 1.832
Exercised .................... (144,325) 1.765
Canceled ..................... (5,513) 2.191
-------- -------
Outstanding at December 31, 1997... 179,777 $ 1.875
======== =======
30
<PAGE>
- --------------------------------------------------------------------------------
Average
Option Option
1996 Stock Option Plan Shares Price
- --------------------------------------------------------------------------------
Outstanding at January 1, 1996 ............ -- $ --
Granted .............................. 46,663 2.191
Canceled ............................. (1,568) 2.191
------- -------
Outstanding at December 31, 1996........... 45,095 2.191
Granted .............................. 453,025 5.356
Exercised............................. (1,025) 2.191
Canceled ............................. (44,240) 2.642
------- -------
Outstanding at December 31, 1997........... 452,855 $5.313
======= =======
In July 1997, the Company's Board of Directors approved the grant of
options to purchase 5,000 shares of common stock to each non-employee director
in recognition of their prior service at the price of $8.50 per share. A total
of 40,000 options, which vest 180 days from the date of grant were awarded at
that date. Such options have a remaining contractual life of 9.56 years at
December 31, 1997.
Certain information with regard to options outstanding at December 31, 1997 is
detailed below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Weighted-
Number of Average Weighted-
Options Remaining Average Number
Range of Outstanding at Contractual Life Exercise Exercisable at
Exercise Price December 31, 1997 (years) Price December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 Incentive Stock
Option Plan: $1.689 to 2.191 179,777 7.17 $1.875 179,777
1996 Stock Option Plan: $2.191 to 2.631 255,665 9.03 $2.560 10,051
$8.50 182,190 9.56 $8.500 --
$13.50 15,000 9.89 $13.500 --
----------- ---------- -----------
632,632 $4.336 189,828
=========== ========== ===========
</TABLE>
The weighted average grant date fair value of the options awarded in 1997
was $1.485. There is no compensation expense for any options granted prior to
July 15, 1997, the date of the Company's initial filing with the Securities and
Exchange Commission indicating its intent to complete a public stock offering
(Note 1), based on the minimum value methodology of SFAS No. 123, assuming a
four year expected life and annual dividends ranging from 6.2% to 7.7% of the
exercise prices.
In estimating the compensation which would be attributable to each option
grant since July 15, 1997 under SFAS No. 123, the Company has used the Black
Scholes option pricing model with the following weighted average assumptions:
dividend yield of 1.4%; expected volatility of 30%; risk free interest rate of
6.14%, and; an expected life of 5 years. Had compensation been determined in
accordance with SFAS No. 123, the Company's net income, basic earnings per share
and diluted earnings per share would have been $4,336,000, $.69 and $.66,
respectively, as compared to the actual amounts of $4,429,000, $.70 and $.67,
respectively.
31
<PAGE>
================================================================================
9. Income Taxes:
The components of the income tax provision (benefit) for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Current Provision:
Federal ..................................... $ 2,047 $ 1,883 $ 1,155
State ....................................... 727 719 392
------- ------- -------
2,774 2,602 1,547
------- ------- -------
Deferred Provision (Benefit):
Federal ..................................... 87 (184) (60)
State ....................................... 34 (65) 36
Benefit from state net operating loss
carryforward ............................... -- -- (29)
------- ------- -------
121 (249) (53)
------- ------- -------
Total provision for income taxes ......... $ 2,895 $ 2,353 $ 1,494
======= ======= =======
</TABLE>
The effective tax rates differ from the federal statutory rate due to state
taxes, net of the federal benefit and a dividend received deduction.
The components of the net deferred tax asset and liability at December 31 are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1997 1996
Federal State Federal State
- --------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $123 $ 38 $152 $ 53
Investments mark-to-market ....... -- -- 38 13
Other ............................ 74 23 93 32
------- ------- ------- -------
Total deferred tax assets ..... 197 61 283 98
------- ------- ------- -------
Deferred tax liabilities:
Investments mark-to-market ....... 7 2 -- --
Depreciation ..................... 88 27 56 19
Deferred loan costs .............. 32 10 20 7
Other ............................ 2 1 6 1
------- ------- ------- -------
Total deferred tax liabilities 129 40 82 27
------- ------- ------- -------
Net deferred tax assets ....... $ 68 $ 21 $201 $ 71
------- ------- ------- -------
</TABLE>
The allocation of the deferred tax provision (benefit) involving items charged
to current year income and items charged directly to stockholders' equity for
the year ended December 31, are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996
Federal State Federal State
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Deferred tax provision (benefit) allocated to shareholders' equity $ 46 $ 16 $ (27) $ (10)
Deferred tax provision (benefit) allocated to income ............. 87 34 (184) (65)
-------- -------- -------- --------
Total deferred tax provision (benefit) ...................... $ 133 $ 50 $(211) $ (75)
======== ======== ======== ========
</TABLE>
32
<PAGE>
================================================================================
10. Employee Benefit Plan:
The Company maintains a contributory savings plan which qualifies under
Section 401(k) of the Internal Revenue Code for employees meeting certain
service requirements. Eligible employees may make contributions to the Plan
based on specified percentages of their compensation. Beginning January 1, 1996,
the Company matched 75% of employees' contribution up to 6% of compensation. The
matching contribution was 50% in prior years. The Company's matching
contributions were $139,000, $96,000 and $56,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
================================================================================
11. Estimated Fair Values of Financial Instruments:
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair
Value of Financial Instruments" (SFAS No. 107) requires the Company to disclose
fair value information for certain of its financial instruments, including
loans, securities, deposits, borrowings and other such instruments. Quoted
market prices are not available for a significant portion of the Company's
financial instruments and, as a result, the fair values presented may not be
indicative of net realizable or liquidation values. Fair values are estimates
derived using present value or other valuation techniques and are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics and other factors. In addition, fair value
estimates are based on market conditions and information about the financial
instrument at a specific point in time. Fair value estimates are based on
existing on- and off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. Such items include
loan servicing, core deposit intangibles and other customer relationships,
premises and equipment, foreclosed real estate and income taxes. In addition,
the tax ramifications relating to the realization of the unrealized gains and
losses may have a significant effect on fair value estimates, and have not been
considered in the estimates.
The following is a summary of the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments pursuant to SFAS
No. 107:
Cash, cash equivalents and other: The fair value of cash and due from
banks, federal funds sold, accrued interest receivable and accrued interest
payable, is considered to approximate the book value due to their short-term
nature and negligible credit losses.
Securities: Securities classified as available for sale are carried at fair
value. Fair value for securities available for sale and held to maturity was
determined by secondary market and independent broker quotations.
Loans: The fair values for loans are estimated using discounted cash flow
analyses, and interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Loans held for sale: The fair values for loans held for sale are based on
estimated sales prices derived from the current market conditions.
Deposits: The fair value for demand and savings deposits is equal to the amount
payable on demand at the balance sheet date which is equal to the carrying
value. The fair value of certificates of deposit was estimated by discounting
cash flows using rates currently offered by the Bank for deposits of similar
remaining maturities.
The fair value information of the Company's financial instruments required to
be valued by SFAS No. 107 are as follows:
<TABLE>
<CAPTION>
=========================================================================================================
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks ................. $ 10,944 $ 10,944 $ 5,867 $ 5,867
Federal funds sold ...................... 6,450 6,450 13,000 13,000
Securities available for sale............ 12,767 12,767 11,524 11,524
Securities held to maturity ............. 7,435 7,429 3,063 3,056
Loans ................................... 130,625 130,567 109,453 108,910
Loans held for sale ..................... 9,070 9,207 -- --
Accrued interest receivable ............. 1,200 1,200 823 823
Financial Liabilities
Deposits
Checking ........................... $ 46,103 $ 46,103 $ 36,136 $ 36,136
Savings ............................ 92,003 92,003 69,278 69,278
Time deposits ...................... 34,215 34,402 38,902 39,079
U.S. Treasury demand note ............... 1,085 1,085 1,061 1,061
Accrued interest payable ................ 745 745 622 622
</TABLE>
33
<PAGE>
================================================================================
12. Parent Company Financial Information:
First International Bancorp, Inc. is the parent company of First National Bank
of New England. There have been no loans extended from the Bank to First
International Bancorp, Inc. since inception of the holding company.
<TABLE>
<CAPTION>
Condensed Balance Sheets
- ------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Assets
Cash on deposit with Bank subsidiary .................................... $ 7,334 $ 21
Investment securities:
Available for sale, at fair value .................................. 85 --
Held to maturity, at amortized cost (fair value $4,000) ............ 4,000 --
Investment in the Bank .................................................. 30,622 14,195
Other assets ............................................................ 107 --
------- -------
Total assets ....................................................... $42,148 $14,216
======= =======
Liabilities and Stockholders' Equity
Stockholders' equity .................................................... $42,148 $14,216
------- -------
Total liabilities and stockholders' equity ......................... $42,148 $14,216
======= =======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Operations
- ---------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Dividends from Bank subsidiary ............................. $ 731 $ 415 $ 430
Net interest income from investments ....................... 102 -- --
Equity in undistributed net income of the Bank ............. 3,796 2,829 1,596
Non-interest expenses, net ................................. (284) -- --
------- ------- -------
Income before income taxes ............................ 4,345 3,244 2,026
Benefit for income taxes ........................... (84) -- --
------- ------- -------
Net income ............................................ $ 4,429 $ 3,244 $ 2,026
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Net income ..................................................................... $ 4,429 $ 3,244 $ 2,026
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed net income of subsidiary .......................... (3,796) (2,829) (1,596)
Increase in other assets .................................................. (107) -- --
Stockholder note receivable discount ...................................... 92 -- --
Stockholder note receivable accretion ..................................... (15) -- --
-------- -------- --------
Net cash provided by operations ........................................ 603 415 430
-------- -------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale, net ................. (4,085) -- --
Additional investment in Bank subsidiary .................................. (12,545) -- --
-------- -------- --------
Net cash used in investing activities .................................. (16,630) -- --
======== ======== ========
Cash flows from financing activities:
Proceeds from sale of common stock under option plan ...................... 263 43 6
Proceeds from sale of common stock at public offering, net ................ 23,808 -- --
Repurchase of common stock ................................................ -- (22) (109)
Dividends paid ............................................................ (731) (658) (164)
Principal payment on stockholder note receivable .......................... -- 53 14
-------- -------- --------
Net cash provided by (used in) financing activities .................... 23,340 (584) (253)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................... 7,313 (169) 177
Cash and cash equivalents beginning of year .................................... 21 190 13
-------- -------- --------
Cash and cash equivalents end of year .......................................... $ 7,334 $ 21 $ 190
======== ======== ========
</TABLE>
34
<PAGE>
================================================================================
13. Selected Quarterly Consolidated Financial Information (unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1997 Quarter Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net interest income ................................................... $1,799 $1,812 $2,119 $2,523
Provision for possible loan losses .................................... 368 591 157 1,123
------ ------ ------ ------
Net interest income after provision for possible loan losses...... 1,431 1,221 1,962 1,400
Gain on sale of loans ................................................. 2,222 3,256 1,739 4,593
Other non-interest income ............................................. 618 707 1,064 912
------ ------ ------ ------
Total operating income ........................................... 4,271 5,184 4,765 6,905
Non-interest expense ............................................. 2,496 3,414 3,472 4,419
------ ------ ------ ------
Income before income taxes ....................................... 1,775 1,770 1,293 2,486
Provision for income taxes ............................................ 763 729 542 861
------ ------ ------ ------
Net income ....................................................... $1,012 $1,041 $ 751 $1,625
====== ====== ====== ======
Basic earnings per share .............................................. $ 0.17 $ 0.18 $ 0.13 $ 0.22
====== ====== ====== ======
Diluted earnings per share ............................................ $ 0.17 $ 0.18 $ 0.12 $ 0.20
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1996 Quarter Ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net interest income ................................................... $1,840 $1,888 $1,969 $1,868
Provision for possible loan losses .................................... 349 205 1,511 1,423
------ ------ ------ ------
Net interest income after provision for possible loan losses...... 1,491 1,683 458 445
Gain on sale of loans ................................................. 1,261 1,435 1,625 1,524
Other non-interest income ............................................. 392 442 2,372 894
------ ------ ------ ------
Total operating income ........................................... 3,144 3,560 4,455 2,863
Non-interest expense .................................................. 1,809 2,091 2,158 2,368
------ ------ ------ ------
Income before income taxes ....................................... 1,335 1,469 2,297 495
Provision for income taxes ............................................ 561 618 965 208
------ ------ ------ ------
Net income ....................................................... $ 774 $ 851 $1,332 $ 287
====== ====== ====== ======
Basic earnings per share .............................................. $ 0.13 $ 0.15 $ 0.23 $ 0.05
====== ====== ====== ======
Diluted earnings per share ............................................ $ 0.13 $ 0.15 $ 0.23 $ 0.05
====== ====== ====== ======
</TABLE>
35
<PAGE>
Directors and Officers
- -----------------------------------
First National Bank of New England
Board of Directors
William J. Anderson
* Michael R. Carter
Carter Morse & Company
Brian Charlebois
Executive Vice President
Chief Operating Officer
* Arnold Chase
Chase Enterprises
* Cheryl Chase
Chase Enterprises
Craig M. Cooper
Fairbank Mortgage Company
Leslie A. Galbraith
Executive Vice President
Chief Financial Officer
* Frank P. Longobardi, CPA
Haggett, Longobardi & Company
David G. Sandberg
The Cornerstone Companies
* Brett N. Silvers
Chairman and President
Kenneth R. Sonenclar
Classics Interactive, Inc.
* Bernard Waldman
Windsor Investors Corp.
* Member of First International
Bancorp, Inc. Board of Directors
- -------------------------------------------
First International Bancorp, Inc. Officers
Brett N. Silvers
Chairman and President
Leslie A. Galbraith
Executive Vice President
Secretary and Treasurer
- -----------------------------------
First National Bank of New England
Officers
Chairman and President
Brett N. Silvers
Executive Vice Presidents
Brian J. Charlebois
Chief Operating Officer
David J. Etter
Chief Credit Officer
Leslie A. Galbraith
Chief Financial Officer
Richard W. Bradshaw
Division Executive
Paul J. Falvey
Division Executive
James G. Fortsch
Division Executive
Senior Vice Presidents
Alex Adashev
David M. Baroody
Cynthia D. Bradley
David B. Cook
Tyler T. Foster
Ira J. Gottlieb
Stephen M. Greene
Thomas G. Hollinger
Theodore J. Horan
Timothy Jones
Keith D. Kelly
Michael D. Leonard
Frank MacHugh
Gerald O'Loughlin
Constance E. Perrine
Charles E. Poehnert
Richard M. Rabideau
Leona M. Rapelye
Matthew J. Roach
Gerald R. Tavernier, Jr.
Shaun P. Williams
36
<PAGE>
Corporate Profile
First International Bancorp. Inc. and First National Bank of New England, both
headquartered in Hartford, Connecticut, specialize in providing credit, trade
and depository services to small and medium size manufacturing companies located
in the United States and in international emerging markets. The Company offers
flexible and attractive terms to borrowers and is a national leader in the use
of commercial loan guarantee programs make available by the U.S. Small Business
Administration, the U.S. Department of Agriculture and the Export Import Bank of
the U.S. The Company maintains preferred status in several jurisdictions and
received Ex-Im Bank's "Small Business Bank of the Year" award for 1997.
[LOGO APPEARS HERE]
[LOGO APPEARS HERE]
General Information
- --------------------------------------------------------------------------------
Corporate Headquarters
One Commercial Plaza
Hartford, CT 06103
(860) 727-0700
www.fnbne.com
NASDAQ: FNCE
Transactions Counsel
Updike, Kelly & Spellacy
One State Street
Hartford, CT 06123-1277
General Corporate Counsel
Bingham Dana LLP
100 Pearl Street
Hartford, CT 06103-4507
Independent Accountants
Coopers & Lybrand L.L.P.
100 Pearl Street
Hartford, CT 06103
Transfer Agent
Requests for changes in the registration of stock certificates, replacement of
lost or destroyed certificates, or undeliverable dividend checks should be
referred to the Company's Transfer Agent:
ChaseMellon Shareholder Services
Securities Transfer Services
111 Founders Plaza, Suite 1100
East Hartford, CT 06108
1-800-288-9541
www.chasemellon.com
Annual Meeting
Tuesday, April 28, 1998, 4:00 p.m.
The Sheraton Hotel
315 Trumbull Street
Hartford, CT 06103
Form 10-K
A copy of First International Bancorp, Inc.'s annual report and Form 10-K as
filed with the Securities and Exchange Commission is available upon request to
Leslie Galbraith, Chief Financial Officer at the corporate address or
860-241-2529 or [email protected].
Media representatives, analysts and investors seeking information are invited to
contact Leslie Galbraith.
Investor Relations
Leslie Galbraith
Chief Financial Officer
First International Bancorp, Inc.
One Commercial Plaza
Hartford, CT 06103
- --------------------------------------------------------------------------------
Market for the Company's Common Stock and Related Stockholder Matters
The Company's common stock was listed on The Nasdaq Stock Market/SM/ under
the symbol FNCE on September 23, 1997. The Company's initial public offering was
paid at $13.50 per share. The following table sets forth the range of the high
and low closing sales prices for the Company's common stock on the Nasdaq:
1997 High Low
- --------------------------------------------------------
Third Quarter (from 9/23/97) $18 1/2 $15 1/2
Fourth Quarter $18 1/2 $11 1/4
On March 5, 1998, the Company had approximately 194 stockholders of record.
This number does not include beneficial owners holding shares through nominee or
"street" names. The Company believes the number of beneficial stockholders is in
excess of 1,400.
Holders of the common stock are entitled to receive dividends when, as, and
if declared by the Board of Directors, out of funds legally available for such
purpose. The Company has paid quarterly cash dividends to its stockholders since
October 1995 equal to $.03 per share.
The Company currently plans to continue to declare and pay quarterly cash
dividends on approximately the same basis to the holders of the common stock.
However, there can be no assurance that dividends will be declared and paid in
the future. In determining whether, and to what extent, the Company should
declare and pay dividends, the Company's Board of Directors will consider, among
other factors, the Company's consolidated financial condition and results of
operations, tax considerations, general economic conditions and capital
requirements. Additionally, the Company's ability to declare and pay dividends
may depend upon the receipt of dividends from its wholly owned subsidiary, First
National Bank of New England which is restricted by the requirements of federal
banking law. See Note 7 of the Consolidated Financial Statements.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We consent to the incorporation by reference in the registration statements of
First International Bancorp, Inc. on Form S-8 (File Nos. 333-46149 and 333-
46151) of our report dated January 23, 1998, on our audits of the consolidated
financial statements of First International Bancorp, Inc. as of December 31,
1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, which
report is incorporated by reference in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1997 ANNUAL
REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 10,882 5,643
<INT-BEARING-DEPOSITS> 62 224
<FED-FUNDS-SOLD> 6,450 13,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 14,836 12,811
<INVESTMENTS-CARRYING> 7,435 3,063
<INVESTMENTS-MARKET> 7,429 3,056
<LOANS> 135,398 114,627
<ALLOWANCE> 3,100 3,000
<TOTAL-ASSETS> 218,851 161,642
<DEPOSITS> 172,321 144,316
<SHORT-TERM> 1,085 1,061
<LIABILITIES-OTHER> 3,297 2,049
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0 0
0 0
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<INTEREST-INVEST> 1,156 646
<INTEREST-OTHER> 716 632
<INTEREST-TOTAL> 14,625 13,305
<INTEREST-DEPOSIT> 6,337 5,714
<INTEREST-EXPENSE> 6,371 5,741
<INTEREST-INCOME-NET> 8,254 7,564
<LOAN-LOSSES> 2,239 3,487
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 13,801 8,425
<INCOME-PRETAX> 7,324 5,597
<INCOME-PRE-EXTRAORDINARY> 7,324 5,597
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,429 3,244
<EPS-PRIMARY> 0.70 0.56
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<ALLOWANCE-CLOSE> 3,100 3,000
<ALLOWANCE-DOMESTIC> 2,636 2,455
<ALLOWANCE-FOREIGN> 0 0
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