Yahoo Finance

Throughout the quarter and the full year, the Company continued to execute successfully its strategy of generating organic growth in the loan portfolio that was funded principally by an increase in retail deposits.

In addition to the Bank's long-standing program of originating and selling residential loans to Fannie Mae on a flow basis, servicing retained, in 2016 the Bank began selling, servicing retained, some of its portfolio residential loans to third parties. During 2016, the Bank sold $106.4 million of loans to Fannie Mae for a pre-tax gain on sale of $2.0 million, compared to $84.1 million of loans sold for a pre-tax gain of $1.7 million in 2015. In 2016 the Bank also sold $36.9 million of portfolio residential loans to third parties for a pre-tax gain of $1.1 million.

"I am very pleased with the significant improvement in our 2016 financial performance. This is the result of many factors, including building the breadth and depth of our employee base, continued increases in quality earning assets, being a significant niche player in New York's Chinese-American community and controlling expenses. In 2016, the Bank also successfully initiated a program to sell residential loans that it used to hold in portfolio. While I am hopeful we can continue to improve our financial performance, my enthusiasm is tempered by the overall continued challenging operating environment," said Mark Ricca, President and Chief Executive Officer.

Net Interest Income
Net interest income for the three months ended December 31, 2016, before provision for loan losses, was $6.5 million, an increase of $1.2 million, or 21.9%, from the prior year.

The increase in net interest income is attributable principally to an increase in average interest earning assets, driven by growth in the loan portfolio, of $194.4 million, or 33.0%, from $589.6 million in the fourth quarter of 2015 to $784.0 million in the same period in 2016, partially offset by an increase in interest expense from an increase in average interest bearing liabilities of $171.5 million, or 41.9%, from $409.3 million in the 2015 quarter to $580.9 million in 2016. Net interest income was also negatively impacted by tighter pricing on loans due to greater competition, combined with a rising deposit rate environment during the quarter which resulted in a 14 basis point decrease in net interest margin, from 3.46% for the three months ended December 31, 2015 to 3.32% for the same period in 2016.

Interest income increased by $1.8 million, or 28.1%, to $8.2 million in the fourth quarter of 2016 from $6.4 million in the same quarter in 2015. The yield earned on loans declined 32 basis points to 4.60% for the fourth quarter of 2016 from 4.92% in 2015. The decrease was principally due to the continued low interest rate environment and greater competition, resulting in the Bank originating new loans at lower rates than the existing portfolio. Average commercial real estate loans outstanding increased $123.5 million, or 82.0%, and average residential loans outstanding increased $91.1 million, or 31.7%, when compared to the prior year quarter.

The average volume of securities decreased from $87.9 million in the fourth quarter of 2015 to $67.4 million in the fourth quarter of 2016. In the third quarter of 2016, the Bank sold securities with a book value of $11.3 million, resulting in a $292,000 pre-tax gain. Proceeds from this sale, as well as security repayments, were redeployed into loans. The average yield on securities increased by 24 basis points to 2.48%, largely due to the remaining securities in the Bank's investment portfolio being more intermediate term securities, while management allowed lower yielding municipal bonds to roll off. The net effect of the decrease in volume and the increase in yield was a $74,000 decrease in interest and dividends earned on securities to $418,000 during the fourth quarter of 2016 compared to the fourth quarter of 2015.

Interest expense increased during the fourth quarter of 2016 compared to 2015 by $0.6 million, or 59.6%, to $1.7 million. The average cost of interest bearing deposits increased 14 basis points to 0.90% in the fourth quarter of 2016 compared to the same quarter of 2015. This was primarily due to an increase in both the volume and cost of certificates of deposit, resulting from the combination of strong retail demand and more competitive market conditions. The average balance of certificates of deposit, our highest cost deposit category, increased by $67.4 million, from $195.5 million in the fourth quarter of 2015 to $263.0 million in the same quarter in 2016. The average rate paid on certificates of deposit increased by 11 basis points from 1.07% in the fourth quarter of 2015 to 1.18% in the same quarter in 2016. The average balance of money market deposit accounts and savings increased by $24.8 million, from $125.5 million in the fourth quarter of 2015 to $150.3 million in the same quarter in 2016, and the average rate paid increased from 0.29% to 0.43%.

Net interest income for the twelve months ended December 31, 2016, before provision for loan losses, was $24.4 million, an increase of $3.4 million, or 16.2%, from the prior year. The year-over-year increase in net interest income is primarily due to an increase in average interest earning assets of $160.6 million, or 28.7%, largely driven by loan growth, from $560.3 million in 2015 to $720.9 million in 2016. This was partially offset by an increase in interest expense resulting from an increase in average interest bearing liabilities to support the growth in the loan portfolio of $124.0 million, or 30.8%, from $402.1 million in 2015 to $526.1 million in 2016. Net interest income was also negatively impacted by increased competitive pressure on loan pricing, combined with a rising deposit rate environment year-over-year which resulted in a 36 basis point decrease in net interest margin from 3.74% for the twelve months ended December 31, 2015 to 3.38% for the twelve months ended December 31, 2016.

Provision for Loan Losses
The Company made no provision for loan losses in the fourth quarter of 2016 compared to a provision of $628,000 in the fourth quarter of 2015. The prior quarter provision was largely due to the purchase of $49.0 million of participating interests in multi-family mortgage loans in December 2015; these loans generated approximately $936,000 of net interest income in 2016. Management believes the existing $9.2 million allowance at December 31, 2016 is appropriate. The allowance as a percentage of loans was 1.36% at December 31, 2016 compared to 1.69% at December 31, 2015. The 33 basis point decrease in the allowance was primarily due to continued improvement in asset quality, as non-performing loans decreased by $1.7 million, or 35%, year-over-year.

Non-interest Income
Non-interest income was $3.4 million for the quarter ended December 31, 2016, an increase of $2.3 million, or 204.1%, compared to the quarter ended December 31, 2015. The quarter-over-quarter increase was largely due to a volume-driven $1.3 million increase in gains on sales of loans to third parties; an increase in the value of the Bank's mortgage servicing rights of $830,000; and increased volume-driven deposit account fees of $98,000, partially offset by a $162,000 reduction in the Bank Enterprise Award ("BEA"). The BEA program is a U.S. Government-sponsored program to support lending activities for Community Development Financial Institutions, which includes the Bank; in 2016, the federal government suspended the payment of awards for administrative reasons, which we believe will be made in 2017.

For full year 2016, non-interest income was $8.3 million, an increase of $0.2 million, or 2.2% compared to the prior year. This increase was primarily due to increased gains on sales of loans of $1.4 million, excluding changes in the valuation of mortgage servicing rights; an increase in gains on sales of securities of $510,000 and higher volume-driven loan servicing fee income of $201,000. These increases were partially offset by the year-over-year decrease of $509,000 in income we recognized pertaining to the sale in 2015 of real property at 135 Bowery, New York, NY (the Bank recognized $1.3 million in 2015 compared to $740,000 in 2016), a $505,000 decrease in investment and insurance product sales fees, a $371,000 decrease in the value of the Bank's mortgage servicing rights and a $162,000 reduction in the Bank Enterprise Award as discussed above. The change in the value of mortgage servicing rights is the net of a decrease in mortgage servicing value due to the year-over-year reduction in long-term interest rates, ($887,000) (as lower long-term interest rates tend to drive a higher volume of mortgage prepayments which has a negative impact on the value of mortgage servicing rights), which was partially offset by a $516,000 increase in mortgage servicing rights due primarily to the retention of servicing rights when the Bank sold $36.9 million of portfolio residential loans to third parties.

Non-interest Expenses
Non-interest expenses were $6.5 million for the quarter ended December 31, 2016, essentially flat compared to the same period in 2015. Total compensation and benefits costs decreased by $150,000, largely due to the impact of select staffing reductions earlier in 2016, and occupancy costs declined by $125,000 due to the Forest Hills branch closing in 2015; these reductions were offset by higher loan-related expenses of $181,000. The increase in loan-related expenses was largely due to the re-capture of $234,000 in the fourth quarter of 2015 from the Bank's reserve for unused lines of credit and contingent liabilities on loans sold without recourse.

For full year 2016, non-interest expenses were $24.0 million, a decrease of $2.3 million, or 8.9% compared to the prior year. This decrease was primarily due to lower compensation and benefits costs of $394,000 associated with select staff reductions in early 2016, lower occupancy costs of $641,000 due primarily to the Forest Hill branch closing in 2015, lower data processing and communications costs of $190,000 due to greater operating efficiencies, lower professional fees of $538,000, lower office expenses of $158,000, and other cost-cutting measures implemented by management, $257,000.

Balance Sheet Highlights

Assets
Total assets at December 31, 2016 were $816.3 million, an increase of $173.6 million, or 27.0%, versus December 31, 2015. Total loans receivable were $676.4 million at December 31, 2016, an increase of $161.1 million, or 31.3%, compared to the prior year. The increase is comprised principally of a $94.1 million, or 30.6%, increase in adjustable rate 1-4 family mortgage loans, at an average yield of 4.67%, and an increase of $68.3 million, or 33.0%, of commercial mortgage loans at an average yield of 4.58%.

Overnight investments increased by $29.2 million, or 107.9%, to $56.2 million, while investment securities decreased by $16.2 million, or 22.2%, to $56.6 million. In the third quarter of 2016, the Bank sold securities with a book value of $11.3 million and used the proceeds to fund loan growth.

Asset Quality
At December 31, 2016, nonperforming loans totaled $3.2 million, or 0.48% of total loans, compared to $4.9 million, or 0.95% of total loans one year earlier. Total delinquent loans increased to $11.8 million or 1.74% of total loans at December 31, 2016, compared to $1.9 million or 0.37% of total loans at December 31, 2015. The year-over-year increase is entirely due to one loan in the amount of $10.1 million that was past due less than 90 days at December 31, 2016, due to the borrower's administrative oversight. The borrower cured the delinquency on January 5, 2017 and the loan has remained current. Excluding this loan, delinquent loans at December 31, 2016 would have decreased by $0.3 million to $1.6 million, or 0.24% of total loans, an improvement versus the prior year. The allowance for loan losses was $9.2 million, or 1.36% of total loans at December 31, 2016, compared to $8.7 million, or 1.69%, at December 31, 2015.

Deposits
Total deposits at December 31, 2016 were $572.7 million, an increase of $127.2 million, or 28.6%, versus December 31, 2015. The increase in deposits was utilized principally to fund loan portfolio growth. Certificates of deposit were $267.7 million, an increase of $75.2 million, or 39.1%, as a result of targeted promotions. Demand deposits increased $14.7 million, or 12.1%, compared to December 31, 2015. NOW accounts increased $1.9 million, or 56.9%, while savings and money market accounts increased $35.5 million, or 27.7%.

Borrowings
Federal Home Loan Bank of New York ("FHLBNY") borrowings increased by $39.0 million, or 33.3%, to $156.0 million at December 31, 2016 at a cost of 1.76% per annum. Total FHLBNY borrowings at December 31, 2016 primarily consist of borrowings with remaining average terms of two to four years. Recent borrowings have been at slightly higher rates than deposits to provide a cost-effective, relatively longer-term source of funding and to help the Bank manage interest rate risk.

Junior subordinated debentures
The subordinated debentures of $7.2 million consist of the Company's trust preferred securities transaction originated in 2004.

Stockholders' Equity
Stockholders' equity was $72.7 million, or 8.9% of total assets, at December 31, 2016, a $5.1 million, or 7.6%, increase from December 31, 2015. The increase was due mainly to the retention of net income.

Subsequent Material Events

On January 17, 2017, the Bank entered into an informal agreement with the Bank's primary federal regulator, the Federal Deposit Insurance Corporation. In accordance with the informal agreement, the Bank is taking steps to (a) enhance its Bank Secrecy Act/Anti-Money Laundering internal control environment, (b) enhance core earnings, (c) enhance interest rate risk management, and (d) enhance the internal audit program. The Board and management are committed to fully complying with the terms of the informal agreement, and have taken significant steps toward implementing the items required by the informal agreement. Despite the Bank's efforts, a finding by the Bank's primary federal regulator that the Bank failed to comply with the informal agreement could result in additional regulatory scrutiny, constraints on our business, or formal enforcement action. Any of those events could have a material adverse effect on our future operations, financial condition, growth or other aspects of our business.

In view of the disclosure of the informal agreement, the Company expects a trading window to open for insiders of the Company in connection with the release of first quarter earnings, and, in a sign of confidence in the long term prospects of the Company, several directors have indicated an ongoing interest in purchasing additional shares of Company common stock on the open market.

About First American International Corp.

First American International Corp. is the holding company for First American International Bank, a Community Development Financial Institution ("CDFI") and a Minority Depository Institution ("MDI") with eight full service branches, offering consumer and business banking and loan products and services, and non-deposit insured investment products and services, serving principally the Chinese-American communities in Manhattan, Queens and Brooklyn in New York City.

See accompanying unaudited financial data tables for additional information.

The information contained herein is intended to provide the reader with historical information about the financial results of First American International Corp. It is not intended to provide forward looking statements or projections of future results. A variety of factors could cause actual results and experiences to differ materially from historical results and anticipated results based on historical results.