<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended SEPTEMBER 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ -------------
COMMISSION FILE NUMBER 0-22861
FIRST INTERNATIONAL BANCORP, INC.
---------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-1151731
-------- ----------
State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
280 TRUMBULL STREET, HARTFORD, CT 06103
--------------------------------- -----
Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 860-727-0700
------------
Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
-------------- --------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. The number of shares of common
stock, par value $.10 per share, issued and outstanding on November 10, 2000 was
8,270,699. .
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INDEX
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income
Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows
Three and Nine Months Ended September 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 32
Item 3. Defaults upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 32-33
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents ............... $ 34,273 $ 47,532
Investment securities ................... 49,095 34,010
Loans, net .............................. 134,253 141,435
Premises and equipment, net ............. 4,172 4,326
Receivable from loans sold .............. 36,347 50,980
Investment in unconsolidated subsidiaries 16,001 15,277
Servicing assets ........................ 31,020 24,404
Prepaid expenses and other assets ....... 16,885 10,080
-------- --------
Total assets ....................... $322,046 $328,044
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
<S> <C> <C>
Deposits ............................................. $ 256,876 $ 266,300
Other liabilities .................................... 5,266 6,757
----------- -----------
Total liabilities ............................... 262,142 273,057
Stockholders' equity:
Preferred stock ($0.10 par value; 2,000,000 shares
authorized; no shares issued and outstanding) ...... -- --
Common stock ($0.10 par value; 12,000,000 shares
authorized; shares issued and outstanding: 8,267,024
and 8,259,818) ..................................... 826 826
Paid-in capital in excess of par value, net .......... 34,803 34,788
Stockholder note receivable .......................... (1,980) (1,980)
Accumulated other comprehensive income ............... 32 94
Retained earnings .................................... 26,223 21,259
----------- -----------
Total stockholders' equity ..................... 59,904 54,987
----------- -----------
Total liabilities and stockholders' equity ..... $ 322,046 $ 328,044
=========== ===========
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
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FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans, including net fees ................................. $ 4,452 $ 3,889 $ 13,478 $ 10,082
Investment securities ..................................... 1,186 543 2,770 1,849
Short term investments/Federal funds sold ................. 694 137 1,706 1,131
-------- -------- -------- --------
Total interest income ................................. 6,332 4,569 17,954 13,062
INTEREST EXPENSE:
Deposits .................................................. 4,214 2,547 11,421 7,862
Other ..................................................... -- 312 312 656
-------- -------- -------- --------
Total interest expense ................................ 4,214 2,859 11,733 8,518
-------- -------- -------- --------
Net interest income ....................................... 2,118 1,710 6,221 4,544
PROVISION FOR POSSIBLE LOAN LOSSES .............................. 1,160 412 2,592 2,401
-------- -------- -------- --------
Net interest income after
provision for possible loan losses .................... 958 1,298 3,629 2,143
NON-INTEREST INCOME:
Gain on sale of:
Guaranteed loans ...................................... 3,142 2,180 8,527 8,052
Other loans ........................................... 129 131 651 388
Loan-backed securitizations ........................... 114 1,401 3,239 4,358
Loans to commercial paper conduits and sales facilities 1,344 (181) 2,051 (28)
-------- -------- -------- --------
Total gains on loan sales ....................... 4,729 3,531 14,468 12,770
Loan servicing income and fees ............................ 2,250 1,599 6,844 4,492
Income from unconsolidated subsidiaries ................... 152 81 976 208
Gain on sale of branch .................................... -- -- -- 8,915
Other income .............................................. 49 35 174 87
-------- -------- -------- --------
Total non-interest income ............................. 7,180 5,246 22,462 26,472
-------- -------- -------- --------
Total operating income .................................... 8,138 6,544 26,091 28,615
NON-INTEREST EXPENSE:
Salaries and benefits ..................................... 4,113 3,679 11,526 13,898
Occupancy ................................................. 484 449 1,413 1,326
Office expenses ........................................... 237 273 709 755
Marketing ................................................. 407 427 1,237 1,439
Furniture and equipment ................................... 341 317 1,014 917
Outside services .......................................... 99 993 817 1,612
Other ..................................................... 243 219 641 1,292
-------- -------- -------- --------
Total non-interest expense ............................ 5,924 6,357 17,357 21,239
-------- -------- -------- --------
Income before income taxes ................................ 2,214 187 8,734 7,376
PROVISION FOR INCOME TAXES ...................................... 804 44 3,025 2,959
-------- -------- -------- --------
NET INCOME ............................................ $ 1,410 $ 143 $ 5,709 $ 4,417
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE ................................. $ 0.17 $ 0.02 $ 0.69 $ 0.55
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE ............................... $ 0.17 $ 0.02 $ 0.68 $ 0.53
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE ...................................... $ 0.03 $ 0.03 $ 0.09 $ 0.09
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated
financial statements.
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FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities ..................... $ 5,740 $ 17,138
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in loans ......................................... 7,182 12,895
Increase in investment in unconsolidated subsidiaries ......... (724) (6,942)
Purchase of investment securities available for sale .......... (26,050) (80,653)
Purchase of equity securities available for sale .............. -- (177)
Proceeds from maturities and principal repayments of investment
securities available for sale ................................ 10,747 66,815
Proceeds from maturities and principal repayments of investment
securities held to maturity .................................. 308 683
Proceeds from redemption of equity securities ................. -- 934
Proceeds from sale of other real estate owned ................. -- 91
Proceeds from sale of branch premises ......................... -- 185
Capital expenditures, net ..................................... (309) (1,237)
-------- --------
Net cash used in investing activities ................... (8,846) (7,406)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits ...................................... (9,424) (22,031)
Net increase in other borrowings .............................. -- (1,048)
Proceeds from sale of common stock and option exercise ........ 15 2,257
Principal payment on stockholder note receivable .............. -- 941
Principal advance on stockholder note receivable .............. -- (1,980)
Dividends paid ................................................ (744) (730)
-------- --------
Net cash used in financing activities ................... (10,153) (22,591)
-------- --------
Net decrease in cash and cash equivalents .................................. (13,259) (12,859)
Cash and cash equivalents at beginning of period ........................... 47,532 58,335
-------- --------
Cash and cash equivalents at end of period ................................. $ 34,273 $ 45,476
======== ========
</TABLE>
See accompanying notes to unaudited consolidated
financial statements.
5
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FIRST INTERNATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
General
The consolidated financial statements include the accounts of First
International Bancorp, Inc. (the "Company") and the accounts of its wholly-owned
subsidiary, First International Bank (the "Bank"), and the other Bank-owned
subsidiaries described below. The Bank converted from a national bank to a
Connecticut state chartered bank and trust company in July 1999. The Bank has
established six special purpose wholly-owned subsidiaries to facilitate loan
securitizations and sales to commercial paper conduits and other facilities.
Three of these subsidiaries are not consolidated but are accounted for under the
equity method of accounting. Accordingly, the Company's share of the earnings of
these affiliates, net of taxes, is included in net income. The Bank has also
established a wholly-owned subsidiary, First International Capital Corp. of New
Jersey, through which all loan solicitation activities to borrowers located in
New Jersey are conducted. Further, the Bank conducts business under the trade
name, "First International Capital" in certain jurisdictions. Intercompany
accounts and transactions relating to the consolidated subsidiaries have been
eliminated in consolidation.
The Company operates from its headquarters in Hartford, Connecticut and
representative offices, which are responsible for marketing and originating
loans in Boston and Springfield, Massachusetts; Cleveland, Ohio; Detroit,
Michigan; Los Angeles, California; Miami, Florida; Morristown, New Jersey;
Philadelphia and Pittsburgh, Pennsylvania; Providence, Rhode Island; Rochester,
New York; Richmond, Virginia; St. Louis, Missouri; and Washington, D.C. The
Company also has contractual international representatives in Argentina, Brazil,
Central America, Egypt, India, Indonesia, Korea, Mexico, North Africa, the
Philippines, Poland, South Africa, Turkey and West Africa.
Since March 2000, the Company has established contractual alliances with
business-to-business electronic marketplaces serving fifteen different global
industrial sectors: ChemIndustry.com (chemicals), CheMatch.com (commodity
chemicals, plastics and fuel products), EcomTextile.com (textiles),
Enermetrix.com (electricity and natural gas), e-STEEL.com (steel),
ForgeFinder.com (forged metals), Global Food Exchange (food), MachineTools.com
(industrial equipment), OilfieldCapital.com (oilfield financial services),
Plasticscommerce.com (plastics), RailNet-USA.com (railroads), RFQsolutions.com
(custom manufactured parts), Textrade.com (textiles), TradeAir.com (aerospace
parts), and wireConnect.com (wire and cable). Under the alliance agreements, the
Company will seek to finance the settlement of transactions between businesses
buying and selling products and services in the industrial e-commerce
marketplaces, as well as to meet many of their other credit needs.
The Bank's primary revenues are derived from net interest income, servicing
income and the origination and sale, on a servicing retained basis, of
commercial loans. The Bank is a national leader in the use of loan guarantee
programs offered by the U. S. Small Business Administration (the "SBA"), the U.
S. Department of Agriculture (the "USDA"), and the Export-Import Bank of
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the United States ("Ex-Im Bank"). The Company maintains a web site at
www.firstinterbank.com.
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with the instructions for Form 10-Q and, therefore, do
not include all disclosures necessary for a complete presentation of financial
condition, results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments) that are necessary for a fair
presentation of the interim financial statements have been included. The results
of operations for the interim periods shown are not necessarily indicative of
the results to be expected for the entire fiscal year or any interim period.
This unaudited interim financial information should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31, 1999,
which is filed with the Securities and Exchange Commission.
Certain 1999 amounts have been reclassified to conform with the 2000
presentation. These reclassifications had no impact on net income.
Comprehensive Income
The Company's "comprehensive income," defined as the change in the equity of a
business enterprise during a period from nonowner sources, is comprised only of
changes in the valuation allowance for the investment portfolio. The impact of
the change in the market value of the "available for sale" investment portfolio
for the nine month periods ended September 30, 2000 and 1999, totaled ($62,000)
and $23,000, respectively, after income taxes.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which was amended by Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133 and amendment of FASB Statement No.
133," and was further amended by FASB Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - An Amendment of FASB
Statement No. 133. The standard is now effective for the Company's financial
statements issued after December 31, 2000. These statements establish accounting
and reporting standards for derivative instruments and for hedging activities,
and require that all derivatives be recognized as either assets or liabilities
in the entity's balance sheet and be measured at fair value. Changes in the fair
value of the derivative instruments are to be recognized depending on the
intended use of the derivative and whether or not it has been designated as a
hedge. The future implementation is not expected to have a significant impact
upon the Company's financial position, results of operations, or cash flows.
In March 2000, the FASB issued FIN 44, "Accounting for Certain Transactions
Involving Stock Compensation Plans - An Interpretation of APB 125," with an
effective date of July 1, 2000 to be applied prospectively to new plans or
changes in existing plans. The Statement establishes accounting standards for
the recognition of compensation expense for awards of stock to employees as well
as for changes in the exercise price of existing awarded options. There have
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been no changes to the existing stock plan or changes to existing awarded
options that impact the Company's financial position, results of operations, or
cash flow.
In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" which
replaces Statement No. 125. This Statement is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. Disclosures about
securitization and collateral accepted need not be reported for periods ending
on or before December 15, 2000, for which financial statements are presented for
comparative purposes. The Statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier or retroactive application of
its accounting provisions is not permitted. The Statement revises standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of
Statement 125's provisions without reconsideration. The Company is currently
evaluating the expected impact upon the structure and economics of any future
loan sales and securitizations and upon the Company's financial position,
results of operations, or cash flows and financial statement disclosures.
3. DIVIDEND PAYMENTS
The Company paid cash dividends in the amount of $0.03 per share on August 18,
2000. On October 31, 2000, the Company declared a dividend of $0.03 per share
payable on November 17, 2000, to shareholders of record as of the close of
business on November 7, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results of operations may differ materially
from those projected or suggested in any forward-looking statements made by, or
on behalf of, the Company. In addition to the risks and uncertainties of
ordinary business operations, the following include some other, but not all, of
the factors or uncertainties that could cause actual results to differ from
projections or from historical performance: (i) a general economic slowdown;
(ii) inability of the Company to continue to manage its growth strategy either
domestically or internationally; (iii) the continuation in their present form of
the government guarantee loan programs of the U. S. Small Business
Administration ("SBA"), the U. S. Department of Agriculture ("USDA") and the
Export-Import Bank of the United States ("Ex-Im Bank") upon which a significant
portion of the Company's business depends; (iv) unpredictable delays or
difficulties in the development and introduction of new products and programs;
(v) the Company's ability to continue its recent growth by relying
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on non-interest income, principally gains on the sale of domestic and
international commercial loans and related servicing income, in an increasingly
competitive market for loan originations; (vi) a disruption in the U.S. capital
markets which may delay or prevent the Company from receiving funding under its
warehouse lines of credit or completing loan sales or securitizations, or
inability of the Company to continue to accept brokered certificates of deposit
since the Company depends on a mix of these funding sources for its operations;
(vii) the Company's ability to accurately estimate loan losses, prepayment on
loans and to realize the recorded values of retained interests associated with
securitization assets and to realize the recorded values of servicing assets
associated with historical loan sales; (viii) changes in the base interest rate
such as Prime or LIBOR which may reduce the excess cash flow available to
service the Company's residual assets from loan sales and securitization and
cause the Company to be unable to realize the recorded values of retained
interests associated with these residual assets; (ix) regulatory, accounting and
legislative changes in rules or interpretations of rules that may occur in the
future, including changes that could (A) require the Company to raise additional
capital in order to continue to meet risk based capital requirements based on
possible regulatory amendments relative to retained interests in securitizations
and loan sales and/or (B) result in the need to decrease or eliminate future
securitizations due to the effect on the available terms of such securitizations
if the Company is required to reduce its level of retained interests with
respect to such securitizations; and (x) fluctuations in the quarterly operating
results due to a number of factors, including among others, variations in the
volume of loans originated and changes in the capital markets' pricing of yields
on loan sales and securitizations which may cause variations in the effective
interest rates yielded on loans and retained interests. Additional information
concerning certain risks and uncertainties that would cause actual results to
differ materially from those projected or suggested in the forward-looking
statements is contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, which is filed with the Securities and Exchange
Commission. The forward-looking statements contained herein represent the
Company's judgment as of the date of this Form 10-Q, and the Company cautions
readers not to place undue reliance on such statements.
OVERVIEW
First International Bancorp, Inc. (the "Company") is a Delaware corporation
formed in 1985 and serves as the bank holding company for First International
Bank. Established in 1955 as a nationally chartered bank, First International
Bank became a Connecticut bank and trust company on July 1, 1999. The Bank is
headquartered in Hartford, Connecticut. The Company specializes in providing
innovative credit, trade and financial solutions to small and medium size
industrial companies located in the United States and international emerging
markets, and is the nation's largest combined user of loan guarantee programs
made available by the SBA, USDA and Ex-Im Bank.
GENERAL
The Company's earnings have been historically derived from (i) the origination,
sale and securitization of government guaranteed and other commercial loans,
(ii) net interest income,
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which is the difference between interest earned on interest-earning assets
(principally loans) and interest-bearing liabilities (principally deposits), and
(iii) fee income on loans serviced for others. On March 26, 1999, the Company
sold its last retail branch and its checking and savings accounts. The Company
retained its certificates of deposit and continues to issue retail and brokered
certificates of deposit. The Company also expects to continue to obtain funding
for its operations from warehouse lines of credit, the sale of loans on a
loan-by-loan basis, the sale of loans to commercial paper conduits and other
sales facilities and, subject to the effect of proposed regulatory changes, the
sale of loans in securitization transactions.
LOAN ORIGINATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30,
1999:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
LENDING AND SERVICING ACTIVITY:
Loan Originations:
SBA & USDA ............... $131,827 38% $124,663 34%
Other commercial ......... 98,230 28% 112,245 30%
-------- -------- -------- --------
Domestic ............ 230,057 66% 236,908 64%
Ex-Im .................... 95,562 27% 84,323 23%
Other international ...... 25,161 7% 46,618 13%
-------- -------- -------- --------
International ....... 120,723 34% 130,941 36%
-------- -------- -------- --------
Total Originations .. $350,780 100% $367,849 100%
======== ======== ======== ========
</TABLE>
Total loan originations decreased 5% or $17.1 million to $350.8 million for the
nine-month period ended September 30, 2000 from $367.9 for the nine-month period
ended September 30, 1999 as the Company has de-emphasized the origination of
non-guaranteed domestic and international loans in favor of the higher returns
and more diversified credit risk afforded by use of the government guaranteed
(SBA, USDA, Ex-Im) loan programs. Guaranteed loan originations increased 9% or
$18.4 million to $227.4 million for the nine-month period ended September 30,
2000 from $209.0 million for the nine-month period ended September 30, 1999. The
Company opened its St. Louis, Missouri representative office in April 1999;
Miami, Florida in April 2000; Los Angeles, California in May 2000; and Richmond,
Virginia in July 2000 and plans to continue to open additional offices in the
Mid-West and Southern U.S.
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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999 % CHANGE
---- ---- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<S> <C> <C> <C>
Net interest income $ 6,221 $ 4,544 37%
Provision for loan losses 2,592 2,401 8
------- ------- ----
Net interest income after provision 3,629 2,143 69
Gain on loan sales 14,468 12,770 13
Other non-interest income 7,994 4,787 67
Gain on sale of branch - 8,915 (100)
Non-interest expense 17,357 21,239 (18)
------- ------- ----
Income before income taxes 8,734 7,376 18
Income taxes 3,025 2,959 2
------- ------- ----
Net income $ 5,709 $ 4,417 29%
======= ======== ====
Basic earnings per share $ 0.69 $ 0.55
======= ========
Diluted earnings per share $ 0.68 $ 0.53
======= ========
Weighted average shares - basic 8,264 8,115
======= ========
Weighted average shares - diluted 8,419 8,312
======= ========
</TABLE>
NET INCOME. Net income increased 29% or $1.3 million for the nine-month period
ended September 30, 2000 when compared to the nine-month period ended September
30, 1999. Gain on loan sales increased 13% as period over period loan sales
increased 22% or $64.8 million. Net interest income increased 37% for the
nine-month period as a result of an increase in balance sheet loans and rising
interest rates. Other non-interest income, which is primarily comprised of loan
servicing income and other fees and income from the retained loan interests held
by unconsolidated subsidiaries, increased in the current year as a result of an
increase in the loan portfolio serviced.
NET INTEREST INCOME. Net interest income increased 37% or $1.7 million for the
nine-month period ended September 30, 2000 to $6.2 million from $4.5 million for
the nine-month period ended September 30, 1999. Average earning assets increased
5% or $12.9 million while average interest bearing liabilities increased 17% or
$35.3 million. The increase in interest bearing liabilities was the result of a
69% or $86.4 million increase in brokered certificates of deposit. Subsequent to
the March 1999 sale of its last retail branch facility, the Company has used
these deposits in conjunction with its warehouse lines of credit and commercial
paper and sales facilities to fund loan volume. Net interest income for the
nine-month period ended September 30, 2000 increased 123 basis points when
compared to the nine-month period ended September 30, 1999. The increase
reflects four Prime Rate increases totaling 125 basis points which occurred from
November 1999 through May 2000. The Company's assets are more sensitive to
interest rate changes than are liabilities over the short term and, therefore,
the yield on assets increased 219 basis points while the rate paid on
liabilities increased 96 basis points.
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AVERAGE BALANCE, INTEREST, YIELDS, AND RATES
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
------------------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
------------------------------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Loans (1):
Commercial ............................. $172,509 $13,310 10.29%
Residential ........................... 1,786 125 9.33%
Other consumer ........................ 519 43 11.05%
-------------- ------------ ----------
Total loans ............................... 174,814 13,478 10.28%
Investment securities. ..................... 44,988 2,770 8.21%
Short term investments/federal funds sold .. 35,114 1,706 6.48%
-------------- ------------ ----------
Total investment securities and funds sold . 80,102 4,476 7.45%
-------------- ------------ ----------
Total earning assets ....................... 254,916 17,954 9.39%
Total non-earning assets .................. 61,937
--------------
Total assets. ............................. $316,853
==============
LIABILITIES:
Deposits:
Interest bearing demand deposits ...... $2,874 $23 1.07%
Premier money market ................. 0 0 0.00%
Other savings ........................ 0 0 0.00%
Retail and IRA certificates of deposit 28,941 1,204 5.56%
Brokered certificates of deposit ...... 211,306 10,194 6.44%
-------------- ------------ ----------
Total deposits ............................ 243,121 11,421 6.27%
Warehouse borrowings ...................... 773 304 NM
Other borrowings .......................... 156 8 6.85%
-------------- ------------ ----------
Total interest bearing liabilities ....... 244,050 11,733 6.42%
-------------- ------------ ----------
Non-interest bearing liabilities:
Demand deposits ...................... 9,743
Other liabilities .................... 6,302
--------------
Total non-interest bearing liabilities .... 16,045
Stockholders' equity ..................... 56,758
--------------
Total liabilities and stockholders' equity. $316,853
==============
Net interest income/net interest spread .. $6,221 2.97%
============ ==========
Net interest margin ...................... 3.24%
==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED 2000 COMPARED TO 1999
SEPTEMBER 30, 1999 CHANGES DUE TO (2):
------------------------------------------ -------------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE VOLUME RATE TOTAL
------------------------------------------ -------------------------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans (1):
Commercial ............................. $162,477 $9,904 8.13% $774 $2,632 $3,406
Residential ........................... 2,386 136 7.60% (42) 31 (11)
Other consumer ........................ 643 42 8.71% (10) 11 1
------------- ------------ ----------- ----------- ---------- ----------
Total loans ............................... 165,506 10,082 8.12% 722 2,674 3,396
Investment securities ..................... 44,608 1,849 5.53% 23 898 921
Short term investments/federal funds sold .. 31,862 1,131 4.73% 159 416 575
------------- ------------ ----------- ----------- ---------- ----------
Total investment securities and funds sold . 76,470 2,980 5.20% 182 1,314 1,496
------------- ------------ ----------- ----------- ---------- ----------
Total earning assets ....................... 241,976 13,062 7.20% 904 3,988 4,892
Total non-earning assets .................. 36,038
-------------
Total assets ............................. $278,014
=============
LIABILITIES:
Deposits:
Interest bearing demand deposits ...... $4,193 $72 2.30% ($10) ($39) ($49)
Premier money market ................. 33,410 1,203 4.81% (1,203) 0 (1,203)
Other savings ........................ 3,430 98 3.82% (98) 0 (98)
Retail and IRA certificates of deposit 38,885 1,509 5.19% (412) 107 (305)
Brokered certificates of deposit ...... 124,920 4,980 5.33% 4,170 1,044 5,214
------------- ------------ ----------- ----------- ---------- ----------
Total deposits ............................ 204,838 7,862 5.13% 2,447 1,112 3,559
Warehouse borrowings ...................... 3,656 646 NM (342) 0 (342)
Other borrowings .......................... 242 10 5.52% (4) 2 (2)
------------- ------------ ----------- ----------- ---------- ----------
Total interest bearing liabilities ....... 208,736 8,518 5.46% 2,101 1,114 3,215
------------- ------------ ----------- ----------- ---------- ----------
Non-interest bearing liabilities:
Demand deposits ...................... 14,486
Other liabilities .................... 3,615
-------------
Total non-interest bearing liabilities .... 18,101
Stockholders' equity ..................... 51,177
-------------
Total liabilities and stockholders' equity. $278,014
=============
Net interest income/net interest spread .. $4,544 1.74% ($1,197) $2,874 $1,677
============ =========== =========== ========== ==========
Net interest margin ...................... 2.49%
===========
</TABLE>
(1) For purposes of these computations, non-accruing loans are included in
the average balance.
(2) The change in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar
12
<PAGE> 13
INTEREST INCOME. Interest income increased 38% or $4.9 million to $18.0 million
for the nine-month period ended September 30, 2000 from $13.1 million for the
nine-month period ended September 30, 1999. Loan interest income increased 34%
or $3.4 million. The average balance of loans outstanding increased 6% or $9.3
million while the average yield on loans increased 216 basis points. The
increase in the yield is reflective of four Prime Rate increases, from 8.25% to
9.50%, that occurred from October 1, 1999 to September 30, 2000 period ended
September 30, 2000. Interest income for the nine-months ended September 30, 2000
also included the benefit of two Prime Rate changes that occurred in July and
August 1999. The interest income for the nine-month period ended September 30,
1999 would have had only three months benefit from those changes. The yield on
loans also benefited from an increase in the pricing of certain loans to
international borrowers, which are indexed to LIBOR. At September 30, 2000,
these loans are priced at an average rate of LIBOR plus 291 basis points versus
an average price of LIBOR plus 278 basis points at September 30, 1999 reflecting
the Company's effort to improve the pricing on the privately insured
international loans. The improved yield on loans is also the result of a 38% or
$1.5 million increase in the average balance of import loans outstanding. These
short term, fixed rate loans to U.S. importers are discounted notes with an
imputed interest rate of 12% to 16%. Interest income for the nine-month period
ended September 30, 2000 also includes $442,000 or 33 basis points of interest
collected on loans that had been placed on nonaccrual. In the prior year period
interest income had been reduced $210,000 related to the recoverability of
certain accrued interest and deferred cost.
Investment interest income increased 50% or $1.5 million to $4.5 million for the
nine-month period ended September 30, 2000 from $3.0 million for the nine-month
period ended September 30, 1999. While the average balance of investment
securities was relatively flat, the yield on investments increased 268 basis
points to 7.20%. The increase in yield is reflective of the Company's increased
ownership of higher yielding interest-only strips associated with the Company's
loan sales and securitizations, which are reflected as investments. The average
balance of interest-only strips increased 152% or $8.6 million to $14.0 million
for the nine-month period ended September 30, 2000 from $5.4 million for the
nine-month period ended September 30, 1999. The investment portfolio also
includes $9 million of notes retained by the Company subsequent to the
completion of loan securitizations. The retained notes are comprised of
subordinated notes with investment grade ratings of BBB and BB totaling $2.6
million and unrated notes aggregating $6.4 million. The notes are indexed to
Prime or LIBOR. The weighted average yield on the retained notes was 13.61% for
the nine-month period ended September 30, 2000 versus a weighted yield of 9.06%
for the nine-month period ended September 30, 1999. The increase in yield
reflects the Prime and LIBOR Rate and LIBOR increases which have occurred during
the twelve months as well as higher weighted average margins.
The Company's investment in government agency securities increased $15.4 million
to $16.5 million at September 30, 2000 from $1.1 million at September 30, 1999.
The average balance of short term investments and federal funds sold increased
10% or $3.3 million for the nine-month period ended September 30, 2000 when
compared to the nine-month period ended September 30, 1999. The increase
reflects the $4.60 million increase in cash reserve accounts maintained as a
retained interest in the securitized assets. The accounts, which are funded by
an initial deposit and securitized asset cash flow, are pledged and serve as
recourse to bondholders to cover principal and interest losses if needed.
13
<PAGE> 14
INTEREST EXPENSE. Interest expense increased 38% or $3.2 million to $11.7
million for the nine-month period ended September 30, 2000 from $8.5 million for
the nine-month period ended September 30, 1999 as the average balance of
interest bearing liabilities increased 17% or $35.3 million. Brokered
certificates of deposit increased 69% or $86.4 million reflecting the change in
the Company's funding sources subsequent to the sale of the last retail branch
facility in March 1999. These deposits, which mature periodically within the
next six months, are used in conjunction with lines of credit and commercial
paper and sales facilities to fund loan originations. The cost of funds on these
deposits was 111 basis points higher for the nine-months ended September 30,
2000 than the cost of funds for the period ended September 30, 1999 reflecting
the overall increase in the interest rate environment and reliance on
higher-costing certificates of deposit.
Interest expense for the nine-month period ended September 30, 2000 includes
$305,000 of interest expense related to the $75 million warehouse line of credit
that is used to fund commercial term loans. During the nine-month period, the
average borrowing outstanding on the line was $773,000 resulting in $47,000 of
interest expense. The remaining expense relates to the amortization of fees paid
at the origination of the facility in December 1998 that are amortized as
interest expense over the term of the facility.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
totaled $2.6 million for the nine-month period ended September 30, 2000 as
compared to $2.4 million for the nine-month period ended September 30, 1999. The
provision for the nine-month period ended September 30, 2000 included $750,000
to increase the allowance to $5.3 million at September 30, 2000 from $4.5
million at December 31, 1999 to reflect a change in the composition of the
portfolio toward other commercial loans. See "Allowance for Loan Losses" for
further analysis of the provision and related data.
14
<PAGE> 15
NON-INTEREST INCOME. Non-interest income is comprised of the following items.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
NON-INTEREST INCOME: 2000 1999 % CHANGE
-------------------- ---- ---- --------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
Gain on loan sales:
SBA sales .......................... $ 3,702 $ 4,088 (9%)
USDA sales ......................... 2,275 2,605 (13)
Ex-Im working capital sales ........ 295 354 (17)
Ex-Im medium term sales ............ 2,150 1,005 114
Inventory buyer credit ............. 105 -- --
-------- -------- --------
Gain on guaranteed loan sales . 8,527 8,052 6
Other loan sales ................... 651 388 68
Loan sales to sales facility ....... 935 -- --
Loan backed securitizations ........ 3,239 4,358 (26)
Loans to commercial paper conduit .. 1,116 (28) 4,086
-------- -------- --------
Total gain on loan sales ...... 14,468 12,770 13
Loan servicing income and fees ....... 6,844 4,492 52
Income from unconsolidated companies . 976 208 369
Gain on sale of branch ............... -- 8,915 (100)
Other income ......................... 174 87 100
-------- -------- --------
Total non-interest income ............ $ 22,462 $ 26,472 (15%)
======== ======== ========
</TABLE>
The 15% decrease in non-interest income for the nine-month period ended
September 30, 2000 as compared to the nine-month period ended September 30, 1999
reflects the first quarter 1999 gain of $8.9 million from the sale of the
Company's last branch facility and the related deposits of $151 million.
Adjusting for that non-recurring gain, non-interest income would have increased
28% or $4.9 million period to period.
Gain on loan sales increased 13% or $1.7 million to $14.5 million for the
nine-month period ended September 30, 2000 from $12.8 million for the nine-month
period ended September 30, 1999. The average gain recognized on SBA loans
(measured as gain compared to SBA guaranteed portion of loan sold) for the
nine-month period ended September 30, 2000 was 522 basis points as compared to
625 basis points for the period ended September 30, 1999. The decrease is
reflective of market pricing deterioration observed over the course of 1999,
which the Company believes was the result of accelerated prepayment assumptions
utilized in the marketplace and liquidity pressures in the capital markets. The
market has improved in the current year but has not recovered to the levels
achieved prior to June 1999. The Company's actual prepayment and default
experience to date on its SBA and USDA guaranteed loans, as well as its
experience on the securitized pools, continues to be within the rates assumed in
the calculation done at the time of the sales. The actual performance of each
portfolio is monitored monthly.
15
<PAGE> 16
The relative gain on sale of USDA loans increased to 1056 basis points for the
nine-month period ended September 30, 2000 from 845 basis points for the same
period of 1999 due to larger average loan size of the loans originated in 2000.
The relative gain on sale of Ex-Im medium term loans remained relatively flat at
410 basis points for the nine-months ended September 30, 2000 as compared to 413
basis points for the same period of 1999. However, gains from the sale of these
loans increased 114% or $1.2 million to $2.2 million for the nine-months ended
September 30, 2000 from $1.0 million for the nine-months ended September 30,
1999. The increase reflects the 113% or $28.1 million increase in Ex-Im medium
term loans sold. During 2000, the Company's international lenders have focused
on increasing international originations under the Ex-Im Bank programs.
During 2000, the Company has securitized $100.8 million of commercial loans
including the unguaranteed portions of SBA loans. The securitizations have
resulted in gains of $3.2 million. Additionally, the Company has sold $57
million of revolving commercial loans, term commercial loans and the
unguaranteed portions of SBA loans to the Company's commercial paper and sales
facilities resulting in gains of $2.1 million or 368 basis points.
During the nine-month period ended September 30, 2000 the Company recognized
gains totaling $651,000 on unguaranteed commercial loans sold to investors on an
individual basis as compared to $388,000 in the same period of the prior year as
this one-off market is becoming more established.
<TABLE>
<CAPTION>
LOAN SERVICING INCOME AND FEES FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------------
2000 1999 % CHANGE
----------- ----------- -----------
<S> <C> <C> <C>
Loan Servicing Income: (DOLLARS IN THOUSANDS)
SBA guaranteed loans $ 2,695 $ 2,411 12%
USDA guaranteed loans 1,274 677 88
Ex-Im working capital loans 281 160 76
Ex-Im medium term loans 597 182 228
Loan securitizations 663 247 168
Other loans 68 222 (69)
----------- ----------- -----------
Loan servicing income 5,578 3,899 43
Servicing asset reduction (163) (265) (38)
----------- ----------- -----------
Net loan servicing income 5,415 3,634 49
Other fees 1,429 858 67
----------- ----------- -----------
Total loan servicing income and fees $ 6,844 $ 4,492 52%
=========== =========== ===========
LOANS MANAGED FOR OTHERS
Average balance $ 983,536 $ 701,891 40%
=========== =========== ===========
Ending balance $ 1,061,351 $ 850,270 25%
=========== =========== ===========
</TABLE>
16
<PAGE> 17
Loan servicing income increased 49% or $1.8 million as the average balance of
loans managed for others increased 40% or $282 million. Loan sales are completed
on a servicing retained basis and the loans managed for others also includes
loans sold to the Company's unconsolidated subsidiaries. For the nine-month
period ended September 30, 2000, the average balance of these loans was
approximately $92.3 million.
The $163,000 servicing asset reduction for the nine-months ended September 30,
2000 relates to an impairment in the carrying value of the servicing asset
related to an Ex-Im Bank medium term loan to a company in the Dominican
Republic. The Ex-Im Bank has paid the loan principal in full to the investor
under the Ex-Im Bank guarantee.
For the nine-months ended September 30, 1999, the servicing asset reduction of
$265,000 related to an impairment in the carrying value of servicing assets
related to certain Ex-Im Bank insured medium term loans made to borrowers in
Brazil. That country's macroeconomic pressures during that year led to payment
defaults on the loans underlying the assets.
Other loan fee income of $1.4 million for the period ended September 30, 2000
includes $507,000 for letter of credit fees, $509,000 of late fees, $140,000 of
fees collected in conjunction with the Ex-Im Bank restructure of certain
Brazilian loans and $261,000 relating to prepayment penalties imposed on USDA
borrowers. This compares to total other loan fee income of $858,000 for the
period ended September 30, 1999 which included $425,000 of letter of credit
fees, $252,000 of late fees and $107,000 in advisory fees paid by clients to the
Company in conjunction with non-loan related services.
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following items:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999 % CHANGE
---- ---- --------
<S> <C> <C> <C>
NON-INTEREST EXPENSE: (DOLLARS IN THOUSANDS, UNAUDITED)
Salaries and benefits $11,526 $13,898 (17%)
Occupancy 1,413 1,326 7
Office expenses 709 755 (6)
Marketing expenses 1,237 1,439 (14)
Furniture and equipment 1,014 917 11
Outside services 817 1,612 (49)
Loan collection 199 203 (2)
Other 442 1,089 (59)
------- ------- -------
Total non-interest expense $17,357 $21,239 (18%)
======= ======= =======
</TABLE>
The 18% or $3.9 million decrease in non-interest expense for the nine-month
period ended September 30, 2000 as compared to the same period ended September
30, 1999, is primarily attributable to a 17% or $2.4 million decrease in
salaries and benefits and a 49% or $795,000 decrease in outside services.
Salaries and benefits for the nine-month period ended September 30, 1999
included a $1.7 million bonus paid to the Chairman and Chief Executive Officer,
which enabled him to retire a
17
<PAGE> 18
$980,000 note receivable held by the Company and to pay the related income
taxes. The note receivable, which was originated in 1994, was provided to
finance the Chief Executive Officer's purchase of 614,000 shares of common
stock. Salaries and bonuses in 1999 also included $940,000 of cash bonuses paid
to the Chief Executive Officer and six members of senior management as
compensation for the sale of the Company's last retail branch and the related
deposits.
Outside services expense, which includes legal fees, decreased 49% or $795,000
for the nine-month period ended September 30, 2000 when compared to the same
period of 1999. Legal fees in 1999 included fees associated with regulatory
matters; changing the Company's name; conversion from a nationally chartered
Bank to a Connecticut bank and trust company; and other non-recurring corporate
matters.
Other expenses for the nine-months ended September 30, 2000 include general
insurance expense, miscellaneous operating expense and an estimated $60,000
guaranty repair on an SBA guaranteed loan claim.
Other expenses for the nine-month period ended September 30, 1999 included
$334,000 for the loss of a government guarantee on a single SBA loan, expenses
related to the conversion by the Company to a Connecticut bank and trust
company, and various other non-recurring expenses.
INCOME TAXES. The Company's effective tax rate decreased to 39% for the
nine-month period ended September 30, 2000 from 41% for the nine-month period
ended September 30, 1999. Income from unconsolidated subsidiaries is reported
net of income taxes, which are also provided for at a 39% rate for the
nine-month period ended September 30, 2000. The 1999 rate reflected the
non-deductibility of the portion of the Chief Executive Officer's compensation
over $1 million.
LOAN ORIGINATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER
30, 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE
------- ---------- ------- ----------
LENDING AND SERVICING ACTIVITY:
Loan Originations:
<S> <C> <C> <C> <C>
SBA & USDA $ 49,278 38% $ 35,445 26%
Other commercial 40,191 31% 41,632 30%
-------- -------- -------- --------
Domestic 89,469 69% 77,077 56%
Ex-Im 32,872 26% 37,069 27%
Other international 6,374 5% 23,597 17%
-------- -------- -------- --------
International 39,246 31% 60,666 44%
-------- -------- -------- --------
Total Originations $128,715 100% $137,743 100%
======== ======== ======== ========
</TABLE>
18
<PAGE> 19
Total commercial loan originations decreased 7% or $9 million to $128.7 million
for the quarter ended September 30, 2000 from $137.7 million for the quarter
ended September 30, 1999. Origination of SBA and USDA guaranteed loans increased
39% or $13.8 million to $49.3 million from $35.5 million. Other commercial loans
and insured international loan originations were de-emphasized in favor of the
higher returns and more diversified credit risk afforded by the use of the
government guaranteed loans.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999 % CHANGE
---------------- ------------- --------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNAUDITED)
<S> <C> <C> <C>
Net interest income $2,118 $1,710 24%
Provision for loan losses 1,160 412 182
---------------- ------------- --------------
Net interest income after provision 958 1,298 (26)
Gain on loan sales 4,729 3,531 34
Other non-interest income 2,451 1,715 43
Non-interest expense 5,924 6,357 (7)
---------------- ------------- --------------
Income before income taxes 2,214 187 1,084
Income taxes 804 44 1,727
---------------- ------------- --------------
Net income $1,410 $143 886%
================ ============= ==============
Basic earnings per share $0.17 $0.02
================ =============
Diluted earnings per share $0.17 $0.02
================ =============
Weighted average shares - basic 8,267 8,224
================ =============
Weighted average shares - diluted 8,391 8,405
================ =============
</TABLE>
NET INCOME. The 886% or $1.3 million increase in net income for the quarter
ended September 30, 2000 as compared to the quarter ended September 30, 1999 is
the result of an increase in the net interest margin, increased loan sales and
resultant gains and an increase in servicing income derived from an increase in
loans managed for others.
NET INTEREST INCOME. Net interest income increased 24% or $408,000 for the
quarter ended September 30, 2000 as compared to the quarter ended September 30,
1999. The increase is attributable to a $1.8 million or 39% increase in interest
income resulting from increases to the Prime Rate from November 1999 through May
2000. The yield on earning assets increased 151 basis points reflecting a 183
basis point increase in the loan yield and a 206 basis point increase in the
investment yield and a relatively lower ratio of loans to earning assets in
2000.
19
<PAGE> 20
AVERAGE BALANCES, INTEREST, YIELDS AND RATES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
------------------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
------------------------------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
ASSETS:
Loans (1):
<S> <C> <C> <C>
Commercial ............................... $168,670 $4,401 10.44%
Residential .............................. 1,762 37 8.40%
Other consumer ........................... 474 14 11.85%
-------------- ------------ ----------
Total loans .................................. 170,906 4,452 10.42%
Investment securities ........................ 49,420 1,186 9.60%
Short term investments/federal funds sold .... 44,178 694 6.30%
-------------- ------------ ----------
Total investment securities and funds sold ... 93,598 1,880 8.04%
-------------- ------------ ----------
Total earning assets ......................... 264,504 6,332 9.58%
Total non-earning assets ..................... 63,637
--------------
Total assets ................................. $328,141
==============
LIABILITIES:
Deposits:
Interest bearing demand deposits ......... $2,938 $8 1.08%
Premier money market ..................... 0 0 0.00%
Other savings ............................ 0 0 0.00%
Retail and IRA certificates of deposit ... 25,162 373 5.90%
Brokered certificates of deposit ......... 225,712 3,833 6.76%
-------------- ------------ ----------
Total deposits ............................... 253,812 4,214 6.61%
Warehouse borrowings. ........................ 18 0 NM
Other borrowings ............................. 0 0 0.00%
-------------- ------------ ----------
Total interest bearing liabilities ........... 253,830 4,214 6.60%
-------------- ------------ ----------
Non-interest bearing liabilities:
Demand deposits .......................... 10,064
Other liabilities ........................ 5,763
--------------
Total non-interest bearing liabilities.. ..... 15,827
Stockholders' equity ......................... 58,484
--------------
Total liabilities and stockholders' equity... $328,141
==============
Net interest income/net interest spread ...... $2,118 2.98%
============ ==========
Net interest margin .......................... 3.24%
==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED 2000 COMPARED TO 1999
SEPTEMBER 30, 1999 CHANGES DUE TO (2):
----------------------------------------- ------------------------------------
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE VOLUME RATE TOTAL
----------------------------------------- ------------------------------------
(DOLLARS IN THOUSANDS, UNAUDITED)
ASSETS:
Loans (1):
<S> <C> <C> <C> <C> <C> <C>
Commercial .......................... $178,367 $3,836 8.60% ($253) $818 $565
Residential ......................... 1,983 38 7.67% (5) 4 (1)
Other consumer ...................... 653 15 9.21% (5) 4 (1)
------------- ------------ ---------- ----------- --------- ----------
Total loans ............................. 181,003 3,889 8.59% (263) 826 563
Investment securities ................... 34,094 543 6.37% 368 275 643
Short term investments/federal funds sold 11,389 137 4.82% 515 42 557
------------- ------------ ---------- ----------- --------- ----------
Total investment securities and funds sold 45,483 680 5.98% 883 317 1,200
------------- ------------ ---------- ----------- --------- ----------
Total earning assets .................... 226,486 4,569 8.07% 620 1,143 1,763
Total non-earning assets ................ 45,467
-------------
Total assets ............................ $271,953
=============
LIABILITIES:
Deposits:
Interest bearing demand deposits .... $2,238 $13 2.30% $2 ($7) ($5)
Premier money market ................ 1 0 0.00% 0 0 0
Other savings ....................... 27 0 0.00% 0 0 0
Retail and IRA certificates of deposit 47,866 607 5.03% (337) 103 (234)
Brokered certificates of deposit. ... 144,058 1,927 5.31% 1,387 519 1,906
------------- ------------ ---------- ----------- --------- ----------
Total deposits .......................... 194,190 2,547 5.20% 1,052 615 1,667
Warehouse borrowings .................... 10,685 310 NM (309) 0 (309)
Other borrowings ........................ 133 2 5.97% (2) (2) (4)
------------- ------------ ---------- ----------- --------- ----------
Total interest bearing liabilities ...... 205,008 2,859 5.53% 741 613 1,354
------------- ------------ ---------- ----------- --------- ----------
Non-interest bearing liabilities:
Demand deposits ..................... 5,477
Other liabilities ................... 7,909
-------------
Total non-interest bearing liabilities.. 13,386
Stockholders' equity .................... 53,559
-------------
Total liabilities and stockholders' equity.. $271,953
=============
Net interest income/net interest spread.. $1,710 2.54% ($121) $530 $409
============ ========== =========== ========= ==========
Net interest margin ..................... 3.06%
==========
</TABLE>
(1) For purposes of these computations, non-accruing loans are included in
the average balance.
(2) The changes in interest due to both rate and volume has been allocated
to volume and rate changes in proportion to the relationship of the
absolute dollar
20
<PAGE> 21
INTEREST INCOME. Interest income increased 39% or $1.8 million to $6.3 million
for the quarter ended September 30, 2000 from $4.5 million for the quarter ended
September 30, 1999. The increase was partially the result of changes in the
Prime Rate which cumulatively increased from 8.25% to 9.50% during the past
twelve months.
Investment interest income benefited from the increase in the Company's
investment in securitization related interest only strips. The average balance
of these investments increased 112% or $8.6 million to $15.60 million at
September 30, 2000 from $6.9 million at September 30, 1999. Furthermore,
investment in government agencies increased $14.4 million to $17.5 million at
September 30, 2000 from $3.1 million at September 30, 1999. These investments
had a weighted average coupon of 7.81% at September 30, 2000 versus 7.10% at
September 30, 1999.
INTEREST EXPENSE. Interest expense increased 47% or $1.3 million to $4.2 million
at September 30, 2000 from $2.9 million at September 30, 1999. The average
balance of brokered certificates of deposit increased 57% or $81.7 million for
the three-month period ended September 30, 2000 versus the three-month period
ended September 30, 1999. The average cost of these funds increased 145 basis
points period to period. Subsequent to the March 1999 sale of the Company's last
retail branch facility and the related deposits, these deposits, which mature
periodically within the next six months, are used in conjunction with lines of
credit and commercial paper and sales facilities to fund loan originations.
The average balance of retail certificates of deposit decreased by 47% or $22.9
million. The balance of these certificates during the quarter ended September
30, 1999 reflected the results of a marketing campaign for one-year certificates
of deposit which was undertaken by the Company in March 1999 in anticipation of
the sale of the Bank branch and related deposits. The Company did not
aggressively seek to retain these deposits by matching market rates as the
certificates matured in the quarter ended September 30, 2000.
The origination costs associated with the Company's warehouse borrowing
facility were fully amortized at June 30, 2000 and average borrowings for the
quarter totaled just $18,000.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan losses
totaled $1.2 million for the quarter ended September 30, 2000 as compared to
$412,000 for the quarter ended September 30, 1999 to reflect a shift in the mix
of loans to other commercial products. The provision for the quarter ended
September 30, 2000 included $650,000 to increase the allowance for loan losses
to $5,300,000. See "Allowance for Loan Losses" for further analysis of the
provision and related data.
21
<PAGE> 22
NON-INTEREST INCOME. Non-interest income is comprised of the following items:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-------------
NON-INTEREST INCOME: 2000 1999 % CHANGE
---- ---- --------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
Gain on loan sales:
SBA .............................. $ 1,313 $ 1,077 22%
USDA ............................. 1,102 656 68
Ex-Im working capital ............ 112 138 (19)
Ex-Im medium term ................ 565 309 83
Inventory buyer credit ........... 50 -- --
------- ------- -------
Gain on guaranteed loan sales 3,142 2,180 44
Other loans ...................... 129 131 (2)
Loan sales to sales facility ..... 418 -- --
Loan backed securitizations ...... 114 1,401 (92)
Loans to commercial paper conduit 926 (181) (612)
------- ------- -------
Total gain on loan sales .... 4,729 3,531 34
Loan servicing income and fees....... 2,250 1,599 41
Income from unconsolidated companies 152 81 88
Other income ....................... 49 35 40
------- ------- -------
Total non-interest income .......... $ 7,180 $ 5,246 37%
======= ======= =======
</TABLE>
Gain on loan sales increased 34% or $1.2 million to $4.7 million for the quarter
ended September 30, 2000 from $3.5 million for the quarter ended September 30,
1999. Comparing quarter to quarter, the relative gain on SBA loan sales
(measured as gain compared to SBA guaranteed portion of loan sold) increased 20
basis points to 534 basis points for the three-month period ended September 30,
2000 from 514 basis points for the three-month period ended September 30, 1999.
The 1999 return is reflective of market pricing deterioration observed over the
course of 1999, which the Company believes was the result of accelerated
prepayment assumptions utilized in the marketplace and liquidity pressures in
the capital markets. The market has improved in the current year but has not
recovered to the levels achieved prior to June 1999. The Company's actual
prepayment and default experience to date on its SBA and USDA guaranteed loans,
as well as its experience on the securitized pools, continues to be within the
rates assumed in the calculation done at the time of the sales. The actual
performance of each portfolio is monitored monthly.
The relative gain on USDA loans for the three-month period ended September 30,
2000 was 1069 basis points as compared to 866 basis points for the comparable
period of 1999. The increase is attributable to the larger loan size and longer
maturity of the loans originated during the three-month period ended September
30, 2000 versus those originated in the three-month period ended September 30,
1999.
22
<PAGE> 23
The gain on Ex-Im medium term loans increased 83% or $256,000 to $565,000 for
the three-month period ended September 30, 2000 from $309,000 for the
three-month period ended September 30, 1999 as the Company's international
lenders have focused on increasing international originations under the Ex-Im
Bank programs during 2000.
Gain on loan sales for the three-month period ended September 30, 2000 includes
$114,000 which represents the portion of the gain on the Company's June 2000
commercial term loan securitization attributable to the loans delivered during
the third quarter under the prefunding provision of the securitization.
Loans totaling $33.7 million, consisting primarily of revolving lines of credit
and commercial term loans, were sold to the Company's commercial paper
facilities in the quarter ended September 30, 2000 for a gain of $926,000. In
the quarter ended September 30, 1999 the loan sales to such facilities totaled
$33.0 million which included $26.2 million of privately insured international
loans, resulting in a net loss of $181,000 due to the narrow margins on such
loans and the establishment of a reserve for estimated losses for the insured
portion of such loans. The Company has since increased the average rate charged
on its privately insured loans to improve the profitability of this product.
LOAN SERVICING INCOME AND FEES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------------------
2000 1999 % CHANGE
---------- ---------- ----------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
Loan Servicing Income:
SBA guaranteed loans ............. $ 982 $ 899 9%
USDA guaranteed loans ............ 449 250 80
Ex-Im working capital loans ...... 86 48 79
Ex-Im medium term loans .......... 153 58 164
Loan securitizations ............. 118 72 64
Other loans ...................... 30 38 (21)
---------- ---------- ----------
Net loan servicing income ...... 1,818 1,365 33
Other fees ....................... 432 234 85
---------- ---------- ----------
Total loan servicing income and fees $ 2,250 $ 1,599 41%
========== ========== ==========
LOANS MANAGED FOR OTHERS
Average balance .................... $1,022,010 $ 762,158 34%
========== ========== ==========
Ending balance ..................... $1,061,351 $ 850,270 25%
========== ========== ==========
</TABLE>
The 33% increase in loan servicing income reflects the 34% or $259.9 million
increase in average loans managed for others.
The major components of other fee income for the quarter ended September 30,
2000 are: $206,000 of late fee income, $79,000 of prepayment penalty income from
USDA borrowers and $71,000 of letter of credit fee income. This compares to
$86,000 of late fees and $136,000 of letter of credit income during the same
period of 1999.
23
<PAGE> 24
NON-INTEREST EXPENSE. Non-interest expense is comprised of the following
items:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
------------------------------------------
2000 1999 % CHANGE
---- ---- --------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
NON-INTEREST EXPENSE:
Salaries and benefits .......... $4,113 $3,679 12%
Occupancy ...................... 484 449 8
Office expenses ................ 237 273 (13)
Marketing expenses ............. 407 427 (5)
Furniture and equipment ........ 341 317 8
Outside services ............... 99 993 (90)
Loan collection ................ 84 103 (18)
Other .......................... 159 116 37
------ ------ ------
Total non-interest expense $5,924 $6,357 (7%)
====== ====== ======
</TABLE>
Non-interest expense for the quarter ended September 30, 2000 decreased 7% or
$433,000 when compared to the quarter ended September 30, 1999. An increase in
salaries and benefits of 12% or $434,000, which reflects an increase of 13% in
the average number of full time employees for the quarter, was offset by a 90%
or $894,000 decrease in outside services expense. For the quarter ended
September 30, 1999, outside services, which includes legal fees, were above
historical levels as the Company was involved in several non-recurring corporate
matters and projects.
INCOME TAXES. The Company's effective tax rate for the quarter ended September
30, 2000 was 39% as compared to 41.9% for the quarter ended September 30, 1999.
The 1999 rate reflects the non-deductibility of the Chief Executive Officer's
compensation over $1 million.
DISCUSSION OF CHANGES IN FINANCIAL CONDITION TO SEPTEMBER 30, 2000 FROM
DECEMBER 31, 1999
GENERAL. Total assets increased 2% or $6.0 million to $322.0 million at
September 30, 2000 from $328.0 at December 31, 1999.
INVESTMENT SECURITIES. The increase in the balance of investment securities of
$15.1 million reflects a $9.8 million increase in government securities and a
$6.1 million increase in interest-only strips. The interest-only strips arose in
conjunction with the March and June 2000 securitizations and the sale of loans
to the Company's commercial paper and sales facilities. In addition to providing
interest income and liquidity, the Company uses certain securities to
collateralize various lines of credit.
RECEIVABLE FROM LOANS SOLD. The decrease in the receivable from loans sold
reflects the settlement of loans sold at the end of the period. Historically,
the Company's sale of loans is highest during the fourth quarter giving rise to
a significant December 31 receivable balance.
24
<PAGE> 25
INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES. The balance of this investment is
relatively flat as a result of the sale of certain loans to the subsidiaries
offset by the put of certain loans from the subsidiaries into the Company's
securitizations.
PREPAID EXPENSES AND OTHER ASSETS. The increase in prepaid expenses and other
assets represents an increase of $5.1 million in claims receivable from the
insurer of three of the Bank's international loan products. These claims are
generally settled in three to five months.
SERVICING ASSETS. The most significant component of the increase in servicing
assets is the asset recognized on the sale of the guaranteed SBA, USDA and Ex-Im
Bank guaranteed loans.
DEPOSIT LIABILITIES. Deposit liabilities decreased by $9.4 million. The decrease
is the result of run-off in retail certificates of deposit which had a one-year
maturity. These certificates were offered in March 1999 in anticipation of the
Company's sale of its last retail branch.
25
<PAGE> 26
LOANS. The Company's loan portfolio and loans managed for others portfolio
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
LOAN PORTFOLIO
SBA & USDA loans ............................................... $ 12,494 $ 16,433
Other commercial ............................................... 55,743 45,756
Equipment ...................................................... 786 993
Energy ......................................................... 252 20
Ex-Im .......................................................... 6,681 15,558
Privately insured term ......................................... 17,335 19,073
Privately insured import ....................................... 8,498 4,464
----------- -----------
Total commercial loans ..................................... 101,789 102,297
Residential real estate ........................................ 1,753 1,828
Other consumer ................................................. 535 628
----------- -----------
Total loans ................................................ 104,077 104,753
Loans held for sale ............................................ 39,049 44,587
Less:
Discount on retained loans ................................. 3,717 3,371
Net deferred loan origination costs ........................ (144) (16)
Allowance for loan losses .................................. 5,300 4,550
----------- -----------
Loans, net ................................................. $ 134,253 $ 141,435
=========== ===========
LOANS MANAGED FOR OTHERS
Guaranteed Loans
SBA & USDA ................................................. $ 457,347 $ 406,979
Ex-Im ...................................................... 149,494 129,518
----------- -----------
606,841 536,497
Unguaranteed Portions and Unguaranteed Loans
SBA & USDA ................................................. 38,024 43,334
Securitized commercial loans ............................... 200,800 210,764
Domestic loans sold to commercial paper and sales facilities 45,827 41,529
International loans sold to commercial paper facility ...... 18,745 28,845
Other commercial ........................................... 149,454 63,836
Home equity lines .......................................... 1,229 1,504
----------- -----------
454,079 389,812
Residential Real Estate .................................... 431 443
----------- -----------
Total loans managed for others ................................. $ 1,061,351 $ 926,752
=========== ===========
Total loans under management ................................... $ 1,204,477 $ 1,076,092
=========== ===========
</TABLE>
26
<PAGE> 27
Net loans decreased 5% or $7.2 million to $134.2 million at September 30, 2000
from $141.4 million at December 31, 1999. The decrease reflects the completion
of the March and June securitizations as well as the sales to the Company's
commercial paper and sales facilities.
ALLOWANCE FOR LOAN LOSSES. The Company reviews the adequacy of the Allowance for
Loan Losses quarterly. At September 30, 2000, the Allowance totaled $5.3 million
and represented 3.7% of loans and loans held for sale. The Allowance totaled
$4.6 million at December 31, 1999 and represented 3.0% of loans. In establishing
the level of the Allowance, the Company considers the percentage of unguaranteed
commercial loans, the seasoning of the commercial loan portfolio, and the
introduction of new loan products where the Company has limited historical
experience. Net charge-offs for the nine-month periods ended September 30, 2000
and September 30, 1999 were relatively flat at $1.8 million. The Allowance at
September 30, 2000 covered 1999 annual charge-offs 2.08 times.
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
FOR THE YEAR
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, DECEMBER 31
------------------------ ------------------------ -------------
2000 1999 2000 1999 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan losses
at the beginning of the period ................... $ 4,650 $ 4,500 $ 4,550 $ 4,000 $ 4,000
Charge-offs:
SBA /USDA loans .................................. 61 9 99 166 292
Ex-Im working capital loans ...................... 46 25 190 213 260
Insured term loans ............................... -- -- 293 112 529
Other commercial loans ........................... 103 399 341 1,148 1,199
Privately insured................................. 365 -- 838 265 264
Non-owner occupied commercial mortgages .......... -- -- -- -- 3
Other loans ...................................... -- -- 245 -- 2
-------- -------- -------- -------- --------
Total charge-offs .............................. 575 433 2,006 1,904 2,549
Recoveries:
SBA loans ........................................ -- -- 30 2 3
Other commercial loans ........................... 65 20 134 51 75
Non-owner occupied commercial mortgages .......... -- -- -- -- 2
-------- -------- -------- -------- --------
Total recoveries ............................... 65 20 164 53 80
-------- -------- -------- -------- --------
Net charge-offs .................................... 510 413 1,842 1,851 2,469
Provision for loan losses .......................... 1,160 413 2,592 2,401 3,019
-------- -------- -------- -------- --------
Balance of allowance for loan
losses at end of period .......................... $ 5,300 $ 4,550 $ 5,300 $ 4,550 $ 4,550
======== ======== ======== ======== ========
Total loans and loans held for sale ................ $143,126 $111,806 $143,126 $111,806 $149,340
======== ======== ======== ======== ========
Allowance to total loans ........................... 3.7% 4.1% 3.7% 4.1% 3.0%
======== ======== ======== ======== ========
</TABLE>
27
<PAGE> 28
Non-performing loans for the nine-month period ended September 30, 2000
decreased $493,000 to $4.5 million from December 31, 1999. Non-performing loans
relative to total loans decreased to 3.12% at September 30, 2000 from 3.32% at
December 31, 1999.
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
NON-PERFORMING LOANS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------ ------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C>
Commercial:
Unguaranteed portions:
SBA and USDA loans ....................................................... $1,567 $1,264
Ex-Im working capital loans .............................................. 209 397
Other international loans .................................................. 1,222 1,759
Commercial mortgage loans .................................................. -- 49
Other commercial loans ..................................................... 1,467 1,358
Consumer ..................................................................... -- 131
------ ------
Total non-performing loans ............................................... $4,465 $4,958
====== ======
Total non-performing loans to total loans .................................... 3.12% 3.32%
====== ======
Total non-performing loans to total assets ................................... 1.39% 1.51%
====== ======
Allowance to total non-performing loans ...................................... 119% 92%
====== ======
</TABLE>
The following table sets forth the breakdown of the Allowance for Loan Losses by
loan category at the dates indicated. Management believes that the Allowance can
be allocated by category only on an approximate basis, and therefore allocation
of the Allowance to each category is not necessarily indicative of future losses
and does not restrict use of the Allowance to absorb losses in any category. The
unallocated portion of the Allowance represents an amount that is not
specifically allocable to one of the loan portfolios. Loans to foreign entities
at September 30, 2000 represented 14% of total loans. Such loans are U.S. dollar
denominated and either 100% Ex-Im Bank guaranteed and sold at origination or
carry private insurance equal to 80-90% of the loan balance. The Company's
private credit insurance policy includes an aggregate deductible which provides
that the Company is responsible for the first loss on the uninsured portion of
the loan.
28
<PAGE> 29
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- ------
(DOLLARS IN THOUSANDS, UNAUDITED)
<S> <C> <C>
ALLOCATION OF THE ALLOWANCE BY
CATEGORY OF LOANS:
Unguaranteed Portions of:
SBA & USDA loans .............................. $ 850 $ 722
Ex-Im working capital loans ................... 159 157
Other international loans ....................... 556 780
Commercial mortgage loans ....................... 56 109
Other commercial loans .......................... 3,053 1,852
Investor mortgage loans ......................... -- 25
Residential and other consumer loans ............ 14 35
Loans held for sale ............................. 195 166
Unallocated ..................................... 417 704
-------- ------
Total allowance for loan losses ............... $ 5,300 $4,550
======== ======
PERCENT OF LOANS IN EACH CATEGORY TO TOTAL LOANS:
Unguaranteed Portions of:
SBA & USDA loans .............................. 8.7% 5.8%
Ex-Im working capital loans ................... 3.1% 4.6%
Other international loans ....................... 19.5% 28.3%
Ex-Im medium term loans ......................... 0.0% 0.0%
Commercial mortgage loans ....................... 1.5% 3.5%
Other commercial loans .......................... 38.1% 31.8%
Investor mortgage loans ......................... 0.0% 0.9%
Residential and other consumer loans ............ 1.6% 1.7%
Loans held for sale ............................. 27.3% 23.2%
-------- ------
100.0% 100.0%
======== ======
</TABLE>
STOCKHOLDERS' EQUITY. Stockholders' equity increased 9% or $4.9 million to $59.9
million at September 30, 2000 from $55.0 million at December 31, 1999 due to the
retention of earnings net of a quarterly dividend of $.03 per share, or $744,000
for the nine-month period ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of liquidity and
funding are certificates of deposit, a warehouse line of credit, commercial
paper conduits and loan sales and securitizations. Secondary sources of
liquidity include a Federal Home Loan Bank line of credit and federal funds
purchased.
Management considers scheduled cash flows from existing clients and borrowers
and projected deposit levels, estimated liquidity needs for maturing
certificates of deposit, approved extensions of credit, and unadvanced
commitments to existing borrowers in determining the level and maturity of
funding necessary to support operations. The on-going sale of the government
guaranteed portions of loans at origination also provides cash to fund
operations. Such loan sales totaled $364.8 million for the nine-month period
ended September 30, 2000.
29
<PAGE> 30
As of September 30, 2000 the Company had outstanding commitments to fund loans
and lines of credit of $91.8 million and had issued letters of credit totaling
$34.7 million.
The Company received notice from one of its warehouse lenders that such lender
is discontinuing its business of providing warehouse lines of credit to
borrowers such as the Company and that such lender will not be renewing its line
of credit to the Company which expires December 28, 2000. However, the Company
is in discussion with the lender to extend the line and is also in discussion
with another lender to replace the funding. The Company believes, however, that
it will continue to have access to liquidity sources to provide funding
sufficient to support operating activities, loan originations and commitments,
and certificate of deposit maturities.
A subsidiary of the Bank entered into an interest rate swap based on an
aggregate amount of $28 million at September 30, 2000. The intent of the swap is
to mitigate interest rate risk inherent in the sale of revolving commercial
loans to a commercial paper facility. The swap provides for net settlement on a
monthly basis which is recorded as an adjustment to interest income. For the
nine-month period ended September 30, 2000, $49,000 of interest expense had been
recorded related to the swap.
The Bank is subject to various regulatory capital requirements administered by
Federal banking agencies and maintains a "well-capitalized" status with a total
capital to risk-weighted assets ratio of 11.41% and a Tier 1 capital to assets
or leverage ratio of 17.76% at September 30, 2000.
There are currently proposed regulatory amendments to risk based capital rules
which are expected to require banks to have additional capital for "retained
interests," as defined in the rules, that are associated with loans sold or
securitized. The regulations, if passed in their current or substantially
similar form, would likely require the Company to (1) significantly reduce its
level of retained interests relative to capital by the sale of these interests
or raise a significant amount of additional capital to support such activities
and (2) to structure certain future loan sales or securitization transactions in
a manner which may be less economically favorable to the Company. Both of these
courses of action may reduce future earnings. Additionally, the Company may be
required to obtain additional capital to finance future securitizations or sales
transactions; if the Company is not able to obtain such additional capital on
terms acceptable to the Company, the Company may be required to reduce or
eliminate securitizations after such regulations take effect because the terms
of available securitizations (i.e., with a decreased level of retained
interests) may not be economically feasible or attractive to the Company. These
regulations are currently open for comment and management will monitor the
impact on the Company as the regulations become more definitive.
The Company believes that, even if it is not able to continue to do
securitizations on an economical basis in the future, it will continue to have
access to liquidity sources to provide funding sufficient to support operating
activities, loan originations and commitments, and certificate of deposit
maturities.
30
<PAGE> 31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A comprehensive qualitative and quantitative discussion and analysis regarding
market risk was set forth in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 which is filed with the Securities and Exchange
Commission.
Over the past twelve months there have been six increases in the Prime Rate
totaling 175 basis points. As depicted in the December 31, 1999 interest rate
gap analysis, the Company is asset sensitive and net interest income generally
increases in a rising rate environment. However, future changes in interest
rates along with prepayments and loan losses may impact the recoverability of
the Company's investment in interest only-strips and junior bonds related to
loans securitized. Each quarter, the Company considers the actual and projected
performance of these three variables, among other factors, in calculating the
net present value of its interest-only strips and other retained interests. To
date, the favorable performance in actual prepayments and loan losses had given
rise to calculated values for the retained interests in excess of the carrying
values. At September 30, 2000 two of the Company's commercial term loan
securitizations have a carrying value less than calculated values because they
include some fixed rate loans which have not increased while the coupon paid to
investors on the LIBOR-based bonds has increased. While the Company has
determined that the interest-only strips for these transactions are not
permanently impaired, such impairment could occur in the future if such rates do
not decrease in subsequent periods, or if prepayments or loan losses occur at
rates greater than those currently projected. A decrease in the value of the
interest-only strips for these transactions has been recognized as an adjustment
in the Company's available-for-sale allowance, which has decreased Stockholders'
Equity. Should it be determined that this decrease is other than temporary, a
charge to income would be recognized. There have been no other material changes
in the Company's interest rate risk position since December 31, 1999.
Other types of market risk, such as foreign exchange risk and commodity price
risk, do not arise in the normal course of the Company's business activities.
During late 1998 and continuing through 1999, the capital markets experienced
rapid and extreme changes evidenced by a decline of investor demand for certain
asset-backed securities that carried a credit agency rating less than the
highest ratings available and a widening of the spreads between the interest
rates on treasury securities and interest rates on asset-backed securities. The
uncertainties were exacerbated in late 1999 with concerns over Year 2000 market
preparedness. The "flight to quality" by asset-backed investors requires issuers
like the Company to provide a greater level of credit enhancement to attain
higher credit ratings for a larger percentage of the securitization in order to
make the transaction marketable. The widening of spreads in the asset-backed
capital markets reduces the earnings on a securitization and, if such events
were to occur in the future, could limit the amount of borrowings available to
the Company under its warehouse lines of credit and may make future
securitizations economically unfeasible. In the nine-month period ended
September 30, 2000, the Company noted some favorable improvements in the yields
from the market but not to the levels of the first half of 1999.
31
<PAGE> 32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Because the nature of the business of the Registrant involves the
collection of numerous accounts, the validity of liens and
compliance with state and federal lending laws, the Registrant is
subject to claims and legal actions in the ordinary course of its
business. While it is impossible to estimate with certainty the
ultimate legal and financial liability with respect to such claims
and actions, the Registrant believes that the aggregate amount of
such liabilities will not result in monetary damage which in the
aggregate would have a material adverse effect on the financial
position, results of operations or cash flows of the Registrant.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of
the Registrant.*
3.2 Amended and Restated By-laws of the Registrant.*
10.13.2 Amendment No. 2 to Amended and Restated Loan Purchase
and Servicing Agreement among FNBNE Funding Corp.,
First International Bank, Variable Funding Capital
Corporation, First Union Securities, Inc., First
Union Securities, Inc., First Union National Bank and
HSBC Bank USA, dated May 15, 2000.
</TABLE>
32
<PAGE> 33
<TABLE>
<S> <C>
11.1 Computation of Per Share Earnings.
27 Financial Data Schedule.
</TABLE>
* Denotes an exhibit which has previously been filed as an exhibit to the
Company's Registration Statement on Form S-1, Commission File No.
333-31339.
Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the third
quarter of 2000.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First International Bancorp, Inc.
------------------------------------------
(Registrant)
Date: November 13, 2000 By: /s/ Brett N. Silvers
------------------ ------------------------------
Brett N. Silvers
Its Chief Executive Officer
and Chairman of the Board
Date: November 13, 2000 By: /s/ Leslie A. Galbraith
------------------ ------------------------------
Leslie A. Galbraith
Its Chief Operating Officer,
Executive Vice President,
and Secretary
Date: November 13, 2000 By: /s/ Shaun P. Williams
------------------ ------------------------------
Shaun P. Williams
Its Chief Financial Officer,
Executive Vice President,
and Treasurer
34
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <C>
10.13.2 Amendment No. 2 to Amended and Restated Loan Purchase and
Servicing Agreement among FNBNE Funding Corp., First
International Bank, Variable Funding Capital Corporation,
First Union Securities, Inc., First Union National Bank and
HSBC Bank USA, dated May 15, 2000.
11.1 Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
