-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DdZHp/kN2n2bgwQNY5+4W5iffuscmwN8CWxsJHm0m1XbXGSke+Tgq5BNVF/E/haW QPctu196togX9L74ERkfyA== 0000927016-01-001541.txt : 20010329 0000927016-01-001541.hdr.sgml : 20010329 ACCESSION NUMBER: 0000927016-01-001541 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL CORP /RI/ CENTRAL INDEX KEY: 0000354948 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 050391383 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27878 FILM NUMBER: 1581861 BUSINESS ADDRESS: STREET 1: 180 WASHINGTON ST CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4014213600 10-K 1 0001.txt FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 Commission File No. 0-027878 First Financial Corp. (Exact name of registrant as specified in its charter) ---------------- Rhode Island 05-0391383 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
180 Washington Street, Providence, Rhode Island 02903 (Address of principal executive offices) (Zip Code) ---------------- (401) 421-3600 (Registrant's telephone number, including area code) ---------------- Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class On Which Registered ------------------- --------------------- None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share ---------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of Common Stock held by nonaffiliates of the Registrant as of March 12, 2001 was $16,385,504 based on the closing sale price of Common Stock as reported on the Nasdaq National Market on such date. At March 12, 2001, there were 1,328,041 shares of the Company's $1.00 par value Common Stock issued, with 1,213,741 shares outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 2001, are incorporated herein by reference into Part III hereof. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORM 10-K TABLE OF CONTENTS
Page Reference --------- PART I Item 1. Business.................................................. 3 Item 2. Properties................................................ 13 Item 3. Legal Proceedings......................................... 14 Item 4. Submission of Matters to a Vote of Security Holders....... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................... 15 Item 6. Selected Consolidated Financial Data...................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 17 Item 7A. Quantitative and Qualitative Disclosure About Market Risk. 33 Item 8. Financial Statements and Supplementary Data............... 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 59 PART III Item 10. Directors and Executive Officers of the Registrant........ 59 Item 11. Executive Compensation.................................... 59 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 59 Item 13. Certain Relationships and Related Transactions............ 59 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 59 Signatures.......................................................... 61
2 PART I ITEM 1. BUSINESS General First Financial Corp. (Company), which elected to become a financial holding company as of February 7, 2001, was organized under Rhode Island law in 1980 for the purposes of owning all of the outstanding capital stock of First Bank and Trust Company (Bank) and providing greater flexibility in helping the Bank achieve its business objectives. The Bank is a Rhode Island chartered commercial bank that was originally chartered and opened for business on February 14, 1972. The Bank provides a broad range of lending and deposit products primarily to individuals and small businesses ($10 million or less in total revenues). Although the Bank has full commercial banking and trust powers, it has not exercised its trust powers and does not, at the current time, provide asset management or trust administration services. The Bank's deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to applicable limits. The Bank offers a variety of commercial and consumer financial products and services designed to satisfy the deposit and loan needs of its customers. The Bank's deposit products include interest-bearing and noninterest-bearing checking accounts, money market accounts, passbook and statement savings accounts, club accounts, and short-term and long-term certificates of deposit. The Bank also offers customary check collection services, wire transfers, safe deposit box rentals, automated teller machine (ATM) cards and debit cards and services. Loan products include commercial, commercial mortgage, residential mortgage, construction, home equity and a variety of consumer loans. The Bank's strategy of managed growth through varied and often challenging economic cycles has been strategically supplemented by both de novo branch expansion and acquisition. The Bank's first expansion beyond its main office occurred in 1981 with the opening of its Cranston, Rhode Island branch. The Bank was presented with a further growth opportunity in 1991 as a result of the Rhode Island "credit union crisis," when 45 privately-insured banks and credit unions were closed by the then Rhode Island Governor. In 1992, the Bank acquired certain assets and assumed certain liabilities of the Chariho-Exeter Credit Union located in the Wyoming section of Richmond, Rhode Island and opened the facility as its Richmond branch. In June 1997, the Bank opened its fourth retail facility with an in-store branch in the Wal-Mart super store located at Wickford Junction in North Kingstown, Rhode Island. The North Kingstown facility is a full service branch offering the same retail products as the Bank's other branch offices. The core of the Bank's business remains its ability to meet the lending and deposit needs of customers in its market area. Most recently, the Bank has experienced growth in business loans to borrowers with favorable cash flow attributes seeking working capital financing. The Bank is designated a "preferred lender" by the Small Business Administration (SBA). As a participant in the SBA's preferred lenders program, the Bank has the sole authority to approve certain SBA guaranteed loans. The preferred lenders program also authorizes the Bank to act as an SBAExpress lender. This program allows the Bank to underwrite lines of credit up to $150,000 with a 50% SBA guarantee using the Bank's documentation. The Bank's ability to attract these new lending relationships and the related deposits is dependent on its willingness and ability to provide service to customers with identified needs. The Company believes that the Bank is particularly well-situated to serve the banking needs of the metropolitan Providence area. The Company believes that the local character of the business environment coupled with the Company's knowledge of its customers and their needs, together with its comprehensive retail and small business products create opportunities that will enable the Bank to effectively compete. Further, the Company believes that the accessibility and responsiveness of the Bank's personnel allow the Bank to compete effectively for certain segments within its market, in particular local professionals and businesses, who demand and receive customized and personalized banking products and services. 3 Market Area Although its main office is located in downtown Providence, the Bank's Cranston branch is its largest office with deposits of $67.5 million at December 31, 2000. The Providence, Richmond and North Kingstown branches had approximately $30.9 million, $22.2 million and $8.4 million, respectively, in deposits at December 31, 2000. Through its branch locations, the Bank provides for the lending and deposit needs of its commercial and consumer customers in its market area and by targeting customers who desire the convenience and personal service not otherwise available as a result of recent major banking consolidations. Lending Activities General. The Bank lends primarily to individuals and small businesses, including partnerships, professional corporations and associations, and limited liability companies. Loans made by the Bank to individuals include owner-occupied residential mortgage loans, unsecured and secured personal lines of credit, home equity loans, mortgage loans on investment (generally non-owner occupied 1-4 family) and vacation properties, installment loans, student loans, and overdraft line of credit protection. Loans made by the Bank to businesses include typical secured loans, commercial real estate loans (loans to individuals secured by residential property of 5 units or more are considered commercial real estate loans) and lines of credit. Within the commercial real estate portfolio, a loan may be secured by real estate although the purpose of the loan is not to finance the purchase or development of real estate nor is the principal source of repayment the sale or operation of the real estate collateral. The Bank will often secure commercial loans for working capital or equipment financing with real estate together with equipment and other assets. The Bank characterizes such loans as "commercial real estate," consistent with bank regulatory requirements. Generally, the Bank lends only to borrowers located in Rhode Island or nearby Southeastern Massachusetts or Connecticut. Occasionally, the Bank will lend to a borrower in its market area where collateral securing obligations is vacation property located outside the market area. During the past few years, the commercial and commercial real estate loan portfolios have increased and remain the largest components of the Bank's loan portfolio. This increase is partially attributable to the Bank's positive response to an increase in those businesses seeking working capital and expansion funds who are frustrated by the consolidation of the banking industry. The Bank has in the past, and continues today, to specifically target such businesses through the hiring of experienced commercial loan officers and by focusing on commercial lending to borrowers, the purpose of which is to help finance small business plant purchases, expansion, working capital and other corporate purposes. The Bank continues to believe that opportunities exist to satisfy the banking and borrowing needs of the small business community. During the past few years, and especially during 2000, the Bank was more active than ever in working with its commercial borrowers and the SBA in obtaining guarantees under a variety of SBA loan programs. Generally, the Bank will sell the guaranteed portion of such loans with servicing retained. According to the SBA, for its fiscal year ended September 30, 2000, the Bank ranked fourth (4th) in Rhode Island out of 31 lenders in volume by number of loans approved and fifth (5th) in dollar volume of loans guaranteed by the SBA. Overall, the Bank was ranked second (2nd) among community banks and was selected as the recipient of the Bronze Lending Award for 2000. In 1999, the Bank was the recipient of the New Markets Lender of the Year Silver Award for lending to women and minorities. The Bank's policy on real estate lending standards establishes certain maximum loan to value ("LTV") ratios for real estate-related loans depending on the type of collateral securing such loans. These maximum LTV ratios range from 50% for those loans secured by undeveloped real estate up to 90% for loans secured by residential real estate. Notwithstanding these maximum LTV ratios, as a general practice, the Bank imposes higher collateralization requirements than the maximum ratios established in its policy on real estate lending standards. Loan Underwriting, Review and Risk Assessment. When considering loan applications, the primary factors taken into consideration by the Bank are: (i) the cash flow and financial condition of the borrower; (ii) the value 4 of any underlying collateral; (iii) the long-term prospects of the borrower, market share and depth of management; and (iv) the character and integrity of the borrower. These factors are evaluated in a number of ways including an analysis of financial statements, credit reviews, trade reviews, and visits to the borrower's place of business. The total indebtedness of the borrower to the Bank determines the maximum limit which a lending officer has the authority to approve with respect to a particular credit. Total indebtedness means the total of all borrowings, including the loan being requested, whether funded or unfunded, to a particular borrower and all related loan accounts. The authority of individual loan officers is limited to the approval of secured loans equal to or less than either $200,000 or $25,000, depending on the individual loan officer, and unsecured loans equal to or less than either $25,000 or $5,000, depending on the individual loan officer. The authority of the chief executive officer is limited to the approval of secured loans equal to or less than $400,000 and unsecured loans equal to or less than $300,000. All loan requests in excess of an individual loan officer's limit must be approved by the Bank's Credit Committee for secured loans equal to or less than $800,000 and for unsecured loans equal to or less than $300,000. Loan requests in excess of the Credit Committee's limit must be presented to the Bank's Board of Directors. Generally, the Bank requires personal guarantees and supporting financial statements from one or more of the principals of any entity borrowing money from the Bank. Loan business is generated primarily through referrals and direct-calling efforts. Referrals of loan business come from the Bank's directors, stockholders of the Company, existing customers of the Bank and professionals such as lawyers, accountants, financial intermediaries and brokers. At December 31, 2000, the Bank's statutory lending limit to any single borrower approximated $2.4 million, subject to certain exceptions provided under applicable law. The Bank also has a policy of extending loans, on terms and conditions no less favorable than the terms and conditions applicable to any other borrower, to directors and executive officers of the Company and the Bank, limiting the aggregate principal amount of such loans to 100% of capital and otherwise complying with applicable regulatory requirements. At December 31, 2000, the aggregate principal amount of all loans to directors and executive officers and related entities was $1.2 million. The following table sets forth the repricing frequency of fixed and variable rate loans included in the Bank's total loan portfolio at December 31, 2000. Loans having no stated schedule of repayments or no stated maturity (due on demand) are reported as due in one year.
Commercial and Home Commercial Equity Residential Real Lines of Real Estate Estate Credit Consumer Total ----------- ---------- -------- -------- -------- (In Thousands) Fixed Rate Amounts Due: One year or Less........ $ 3,022 $ 5,081 $ 2 $362 $ 8,467 After one year through five years............. 7,746 49,764 -- 471 57,981 Beyond five years....... 2,610 14,601 -- 5 17,216 ------- ------- ------ ---- -------- 13,378 69,446 2 838 83,664 ------- ------- ------ ---- -------- Variable Rate Repricing Frequency: Annually or more frequently............. -- 17,036 2,947 93 20,076 Less frequently than annually .............. -- 140 -- -- 140 ------- ------- ------ ---- -------- -- 17,176 2,947 93 20,216 ------- ------- ------ ---- -------- Total................. $13,378 $86,622 $2,949 $931 $103,880 ======= ======= ====== ==== ========
Scheduled contractual principal repayments do not, in many cases, reflect the actual maturities of loans. The average maturity of loans is substantially less than their average contractual terms because of prepayments and, in the case of conventional mortgage loans, due-on-sale clauses, which generally give the Bank the right to 5 declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage. In addition, because many of the Bank's residential and commercial real estate loans are fixed rate loans subject to rate review and/or call option within three to five years, such loans are considered by the Bank to have a stated maturity equal to the rate review period. Prevailing interest rates at the time of scheduled rate reviews may cause the Bank to reset rates on these loans. However, such loans may not actually mature at that time. The average life of mortgage loans tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgages are substantially lower than current mortgage loan rates (due to refinancing at lower rates). Under the latter circumstances, the weighted average yield on loans decreases as higher yielding loans are repaid or refinanced at lower rates. As of December 31, 2000, there were no non-accruing loans in the Bank's portfolio. Residential Real Estate Loans. At December 31, 2000, the Bank's outstanding residential first and second mortgage loans and home equity lines of credit of approximately $16.3 million, represented 15.7% of the Bank's total loan portfolio. Most fixed rate conforming loans originated by the Bank are referred to correspondents, the majority of which are funded by the correspondents. The Bank does not originate Adjustable Rate Mortgages ("ARMS") for its own portfolio. The Bank does, however, originate fixed rate residential first mortgage loans for its own portfolio with a 15 to 30 year amortization period and a rate review and/or call option at three or five year intervals. Consequently, as the Bank attempts to satisfy the needs of its customers, it maintains an element of interest rate sensitivity embedded in the terms of the loan. Commercial Loans and Commercial Real Estate Loans. Subject to federal and state restrictions, the Bank is authorized to make secured or unsecured commercial business loans for general corporate purposes. Commercial loans include working capital loans, equipment financing, standby letters of credit, and secured and unsecured demand, term and time loans. The Bank has committed, and plans to continue to commit, substantial resources to the promotion and development of commercial lending (i.e. small business plant purchases, expansion and working capital) secured by real estate, which loans are characterized as "commercial real estate loans." At December 31, 2000, outstanding commercial and commercial real estate loans approximated $86.6 million or 83.4% of total loans outstanding, including total construction and land development loans of approximately $2.1 million. Commercial and commercial real estate loans are generally priced at a fixed rate and are generally structured with a three-year or five- year rate review and/or call option. If a loan is priced at a floating rate, it is indexed to the Bank's base lending rate or to the Wall Street Prime Rate. At December 31, 2000, 82.6% of all residential, commercial and commercial real estate loans are subject to repricing within five years. At December 31, 2000, the Bank's base lending rate was 11.00% while the Prime Rate was 9.50%. Consumer Loans. At December 31, 2000, the Bank's consumer loan portfolio approximated $.9 million or .9% of total loans outstanding. The Bank offers a full range of consumer lending products including new and used automobile loans, passbook and certificate of deposit loans, and other personal secured and unsecured loans. Although the Bank makes an effort to price these loans competitively, it faces substantial competition including, most significantly, from consumer finance companies and, therefore, the Bank does not view this market as possessing significant growth potential. Investment Activities The investment policy of the Bank is an integral part of the overall asset/liability management of the Bank. The Bank's investment policy is to establish a portfolio of investments permissible for banks, providing the liquidity necessary to facilitate funding of loans and to cover deposit fluctuations while at the same time achieving a satisfactory return on the funds invested. The Bank intends to maximize earnings from its investment portfolio consistent with the safety and liquidity of those investment assets. 6 The following table sets forth the amortized cost and fair value of the Bank's investment portfolio at the dates indicated:
December 31, ----------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ------- --------- ------- --------- ------- (In thousands) Held-to-Maturity: U.S. Government and agency obligations.... $21,836 $21,802 $14,000 $13,769 $10,999 $10,947 Collateralized mortgage obligations........... 653 650 1,691 1,681 2,734 2,727 ------- ------- ------- ------- ------- ------- $22,489 $22,452 $15,691 $15,450 $13,733 $13,674 ======= ======= ======= ======= ======= ======= Available-for-Sale: U.S. Government and agency obligations.... $17,480 $17,536 $14,801 $14,722 $24,402 $24,475 Mortgage-backed securities............ 4,202 4,216 5,198 5,054 7,546 7,662 Trust preferred stock.. 9,433 8,910 -- -- -- -- Marketable equity securities and other.. 1,485 1,262 1,169 1,081 1,022 950 ------- ------- ------- ------- ------- ------- $32,600 $31,924 $21,168 $20,857 $32,970 $33,087 ======= ======= ======= ======= ======= =======
The following table sets forth certain information regarding maturity distribution and weighted average yields of the Bank's investment portfolio at December 31, 2000:
Within One Year One to Five Years Over Five Years Total Securities ----------------- ----------------- ----------------- ----------------- Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Held-to-Maturity: U.S. Government and agency obligations... $10,500 5.32% $11,336 6.84% $ -- -- % $21,836 6.11% Collateralized mortgage obligations(1)....... 538 6.16 115 6.41 -- -- 653 6.20 ------- ---- ------- ---- ------- ---- ------- ---- 11,038 5.36 11,451 6.83 -- -- 22,489 6.11 ------- ---- ------- ---- ------- ---- ------- ---- Available-for-Sale: U.S. Government and agency obligations... 11,994 5.89 5,542 6.36 -- -- 17,536 6.04 Mortgage-backed securities(1)........ 611 7.20 2,332 7.42 1,273 6.57 4,216 7.13 Trust preferred stock. -- -- -- -- 8,910 8.51 8,910 8.51 Marketable equity securities and other. 1,262 -- -- -- -- -- 1,262 -- ------- ---- ------- ---- ------- ---- ------- ---- 13,867 5.41 7,874 6.67 10,183 8.27 31,924 6.63 ------- ---- ------- ---- ------- ---- ------- ---- Total................ $24,905 5.39% $19,325 6.76% $10,183 8.27% $54,413 6.42% ======= ==== ======= ==== ======= ==== ======= ====
(1) Fixed rate collateralized mortgage obligations are presented on a scheduled cash flow basis. The mortgage-backed securities are presented using an assumed constant prepayment rate. 7 Sources of Funds Deposits obtained through the Bank's offices and automated teller machines ("ATM") have traditionally been the principal source of the Bank's funds for use in lending, investing and for other general business purposes. At December 31, 2000, the Bank had a total of approximately 3,363 demand deposit, NOW and money market accounts with an average balance of approximately $7,915 each; 3,510 passbook and statement savings accounts with an average balance of approximately $5,020 each; and 4,166 certificates of deposit with an average balance of approximately $20,362 (including 149 certificates of deposit of $100,000 or more totaling $17.4 million). The Bank's MasterMoney(TM) Debit Card program as well as the Company's ATM card service supplement office and service hours. The Bank's ATM card can be used in the "PLUS", "CIRRUS" and "NYCE" ATM networks as well as the "MAESTRO" point of sale (POS) network. These networks provide the Bank's cardholder with access to ATM's and POS terminals throughout the United States and in 68 foreign countries. By adding the MasterCard(R) logo to the ATM card, the Bank has enhanced it's card program by offering availability for customers at over 15 million acceptance locations in over 220 countries. Over 3 million of the locations are in the United States. The following table sets forth the average balances and average rates paid on the Bank's deposits for the periods indicated:
Years Ended December 31, -------------------------------------------------- 2000 1999 1998 ---------------- ---------------- ---------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------- ------- -------- ------- -------- ------- (In Thousands) Noninterest-bearing deposits................... $ 19,177 $ 17,209 $ 14,067 Interest bearing deposits: NOW and savings accounts.. 20,704 2.08% 21,616 2.04% 20,474 2.51% Money market accounts .... 2,015 2.09 1,835 2.07 1,281 2.42 Certificates of deposit under $100,000........... 67,391 5.72 53,039 4.92 54,300 5.34 Certificates of deposit over $100,000............ 15,647 6.63 12,079 5.34 10,909 5.94 -------- -------- -------- Total................... $124,934 $105,778 $101,031 ======== ======== ========
Time certificates of deposit in denominations of $100,000 or more, at December 31, 2000, had the following schedule of maturities:
Time Remaining to Maturity Amount -------------------------- -------------- (In Thousands) Less than 3 months............................................ $ 3,491 3 to 6 months................................................. 7,273 6 to 12 months................................................ 5,043 More than 12 months........................................... 1,628 ------- Total....................................................... $17,435 =======
For the past several years the Bank has been active in the Securities Sold Under Agreements to Repurchase (REPO) market as a means of using wholesale funds for capital leverage and interest arbitrage purposes. The Bank also uses advances from the Federal Home Loan Bank of Boston to match the funding for selected loans as well as refinance maturing REPO's at more favorable terms. For information regarding these borrowing arrangements refer to "Notes to Consolidated Financial Statements." 8 Community Reinvestment Act The Bank is committed to serving the banking needs of the communities in which its branches are located and surrounding areas, including low and moderate income areas consistent with its obligations under the federal Community Reinvestment Act (CRA). There are several ways in which the Bank attempts to fulfill this commitment, including working with economic development agencies, undertaking special projects, and becoming involved with neighborhood outreach programs. The Bank has undertaken as part of its mission to contribute to the economic and social development of the communities in which it operates. The Bank believes that its obligation is to deliver competitive services that are responsive to the needs of its employees, customers, shareholders, and local communities. At its last CRA-compliance examination, the Bank was given a "satisfactory" ranking which is the second highest rating of the four assigned by the FDIC. In addition to memberships and directorships in a number of civic, charitable and not-for-profit organizations, the Bank meets with specific community-based groups which has provided insight into the credit and housing needs of the local community. The Bank's community outreach efforts rely on the calling activities of the Bank's loan officers and branch managers. These individuals contact the area's under- served small businesses to promote the Bank's services and to gain a better understanding of their business needs. To a lesser extent, loan officers have contacted local realtors to ascertain community credit needs and to inform the realtors of the Bank's residential mortgage and referral program. Loan officers and branch managers are also members of, and routinely contact the Providence and surrounding area's respective Chambers of Commerce. The Bank has identified two primary needs within its communities: small business loans with reduced documentation requirements and unconventional mortgage products with flexible underwriting guidelines. To address the small business lending demand, the Bank participates, as a "preferred lender", in the SBA loan programs; specifically, the 7A and 504 programs, as well as the SBA's Low Doc and SBAExpress programs. As previously mentioned, the Bank was selected as the SBA's 2000 Bronze Lending Award recipient and the 1999 recipient of the New Markets Lender of the Year Silver Award for lending to women and minorities. Competition In attracting deposits and making loans, the Bank encounters competition from other institutions, including larger downtown Providence and suburban- based commercial banking organizations, savings banks, credit unions, other financial institutions and non-bank financial service companies serving Rhode Island. The principal methods of competition include the level of loan interest rates, interest rates paid on deposits, marketing, range of services provided and the quality of these services. These competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Certain of these competitors are not subject to the same regulatory environment as the Bank. Employees As of December 31, 2000, the Company had 46 full-time and 5 part-time employees. The Company's employees are not represented by any collective bargaining unit. The Company maintains a benefit program which includes health insurance, life insurance, a defined benefit pension plan and a matching savings incentive plan. The Company believes that its relations with its employees are good. Regulation and Supervision Banks and bank holding companies are subject to extensive government regulation through federal and state statutes and regulations which are subject to changes that may have significant impact on the way in which such entities may conduct business. The likelihood and potential effects of any such changes cannot be predicted. Legislation enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and nonbanking institutions, including insurance companies, brokerage firms, mutual funds, 9 investment banks and major retailers. The supervision, regulation and examination to which the Company and the Bank are subject are intended primarily for the protection of depositors and the deposit insurance funds that insure the deposits of banks, rather than for the protection of shareholders. Several of the more significant regulatory provisions applicable to banks and financial holding companies to which the Company and the Bank are subject are discussed below. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. The Company Financial Holding Company. The Company elected to become a financial holding company effective on February 7, 2001, and continues to be subject to regulation under the Bank Holding Company Act of 1956, as amended (The "BHCA") and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). Financial and Bank Holding Company Activities. As a holding company that has also elected to become a financial holding company, the Company may affiliate with securities firms and insurance companies and engage in other activities that are "financial in nature." Activities that are "financial in nature" include securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board has determined to be closely related to banking. No Federal Reserve Board approval is required for the Company to acquire a company, other than a bank holding company, bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. Prior Federal Reserve Board approval is required before the Company may acquire the beneficial ownership or control of more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. If the Bank ceases to be "well capitalized" or "well managed" under applicable regulatory standards, the Federal Reserve Board may, among other actions, require that the Company conform its activities to those permissible for a bank holding company that is not also a financial holding company. If the Bank receives a rating under the Community Reinvestment Act of 1977 of less than satisfactory, the Company will be prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations. The Gramm-Leach-Bliley Act which established "financial holding companies", also establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the U.S. Securities and Exchange Commission will regulate their securities activities and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. BHCA--Activities and Other Limitations. The BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or, except where a majority of shares are already owned, increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. No approval under the BHCA is required, however, for a bank holding company already owning or controlling 50% of the voting shares of a bank to acquire additional shares of such bank. Rhode Island Law. Rhode Island law requires the prior approval of the Banking Division in order for a Rhode Island bank or bank holding company to acquire 5% or more of the voting stock, or merge or consolidate with an out- of-state bank or bank holding company. In examining the transaction, the Banking Division must determine whether the transaction is permitted under the law of the state of the out-of-state bank or bank holding company under conditions not substantially more restrictive than those imposed by Rhode Island law. In determining whether to approve the transaction, the Banking Division must determine whether the transaction is in the public interest, will promote the safety and soundness of the Rhode Island institution and needs of the communities served thereby, and will serve the needs of the state generally. In addition, a merger requires the prior approval of two-thirds of the shareholders of the Rhode Island bank and such percentage of the shareholders of the out-of-state bank as required by the laws of such state. 10 Under Rhode Island law, subject to the approval of the Banking Division, an out-of-state bank or bank holding company may acquire direct or indirect control of more than 5% of the voting stock or merge or consolidate with or acquire substantially all of the assets and liabilities of a Rhode Island bank or bank holding company provided that the laws of the state in which the out- of-state bank is located, or in which operations of the bank subsidiaries of an out-of-state bank holding company are principally conducted, expressly authorize, as determined by the Banking Division, under conditions no more restrictive than those imposed by the laws of Rhode Island, the acquisition by a Rhode Island bank or bank holding company of 5% of the voting stock or the merger or consolidation with or acquisition of all of the assets of banks or bank holding companies located in that state. Additionally, under Rhode Island law, no "person" may acquire 25% of the voting stock, or such lesser number of shares as constitutes control, of a Rhode Island depository institution without the prior approval of the Banking Division. Dividends. The Company is a legal entity separate and distinct from the Bank. The revenues of the Company (on a parent company only basis) are derived primarily from interest on investments and dividends paid to the Company by the Bank. The right of the Company, and consequently the right of creditors and stockholders of the Company, to participate in any distribution of the assets or earnings of any subsidiary through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the subsidiary (including depositors, in the case of banking subsidiaries), except to the extent that certain claims of the Company in a creditor capacity may be recognized. It is the policy of the FDIC and the Federal Reserve Board that banks and bank holding companies, respectively, should pay dividends only out of current earnings and only if after paying such dividends, the bank or bank holding company would remain adequately capitalized. Federal banking regulators also have authority to prohibit banks and bank holding companies from paying dividends if they deem such payment to be an unsafe or unsound practice. In addition, it is the position of the Federal Reserve Board that a bank holding company is expected to act as a source of financial strength to its subsidiary banks. The Subsidiary Bank General. The Bank is subject to extensive regulation and examination by the Banking Division and by the FDIC, which insures its deposits to the maximum extent permitted by law, and to certain requirements established by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of, and collateral for, certain loans. The prior approval of the FDIC and the Banking Division is required for the Bank to establish or relocate an additional branch office, assume deposits, or engage in any merger, consolidation or purchase or sale of all or substantially all of the assets of any bank or savings association. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. Examinations and Supervision. The FDIC and the Banking Division regularly examine the operations of the Bank, including (but not limited to) their capital adequacy, reserves, loans, investments, earnings, liquidity, compliance with laws and regulations, record of performance under the Community Reinvestment Act and management practices. In addition, the Bank is required to furnish quarterly and annual reports of income and condition to the FDIC and periodic reports to the Banking Division. The enforcement authority of the FDIC includes the power to impose civil money penalties, terminate insurance coverage, remove officers and directors and issue cease- and-desist orders to prevent unsafe or unsound practices or violations of law or regulations. In addition, under recent federal banking legislation, the FDIC has authority to impose additional restrictions and requirements with respect to banks that do not satisfy applicable regulatory capital requirements. Dividends and Affiliate Transactions. The Bank is subject to certain restrictions on loans to the Company, on investments in the stock or securities thereof, on the taking of stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the Company. The Bank also is 11 subject to certain restrictions on most types of transactions with the Company, requiring that the terms of such transaction be substantially equivalent to terms of similar transactions with non-affiliates. In addition, there are various limitations on the distribution of dividends to the Company by the Bank. Capital Requirements The FDIC has established guidelines with respect to the maintenance of appropriate levels of capital by FDIC-insured banks. At such time, if ever, that the Company exceeds $150 million in consolidated assets or either: (i) engages in any non-bank activity involving significant leverage; or (ii) has a significant amount of outstanding debt that is held by the general public, it will become subject to various capital adequacy requirements of the Federal Reserve Board applicable to all such bank holding companies. Until such time, the Federal Reserve Board applies the following guidelines on a bank only basis. The Federal Reserve Board has adopted substantially identical capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. If a banking organization's capital levels fall below the minimum requirements established by such guidelines, a bank or bank holding company will be expected to develop and implement a plan acceptable to the FDIC or the Federal Reserve Board, respectively, to achieve adequate levels of capital within a reasonable period, and may be denied approval to acquire or establish additional banks or non-bank businesses, merge with other institutions or open branch facilities until such capital levels are achieved. The guidelines generally require banks and bank holding companies to maintain at least half of its total capital comprised of common equity, retained earnings and a limited amount of perpetual preferred stock, less goodwill ("Tier I Capital"). Additionally, these guidelines require banks and bank holding companies to maintain a ratio of Tier I Capital to risk-weighted assets of at least four (4%) percent and a ratio of total capital to risk- weighted assets of at least eight (8%) percent ("Total Risk-Based Capital Ratio"). Hybrid capital instruments, perpetual preferred stock which is not eligible to be included as Tier I Capital, term subordinated debt and intermediate-term preferred stock and, subject to limitations, general allowances for loan losses, is known as "Tier 2 Capital." The sum of Tier 1 and Tier 2 Capital is "Total Risk-Based Capital." Assets are adjusted under the risk-based guidelines to take into account different risk characteristics. Prompt Corrective Action. Under Section 38 of the Federal Deposit Insurance Act (FDIA), as added by the Federal Deposit Insurance Corporation Improvement Act (FDICIA), each federal banking agency has implemented a system of prompt corrective action for institutions which it regulates. Under the regulations, a bank shall be deemed to be (i) "well capitalized" if it has Total Risk-Based Capital Ratio of 10.0% or more, has a Tier Risk-Based Capital Ratio of 6.0% or more, has a Tier I Leverage Capital Ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) "adequately capitalized" if it has a Total Risk-Based Capital Ratio of 8.0% or more, a Tier I Risk-Based Capital Ratio of 4.0% or more and a Tier I Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of "well capitalized," (iii) "undercapitalized" if it has a Total Risk-Based Capital Ratio that is less than 8.0%, a Tier I Risk- Based Capital Ratio that is less than 4.0% or a Tier I Leverage Capital Ratio that is less than 4.0% (3.0% under certain circumstances), (iv) "significantly undercapitalized" if it has a Total Risk-Based Capital Ratio that is less than 6.0%, a Tier I Risk- Based Capital Ratio that is less than 3.0% or a Tier I Leverage Capital Ratio that is less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Section 38 of the FDIA and the regulations also specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). As of December 31, 2000, the Bank was classified as "well capitalized" under these provisions. 12 Interstate Banking Legislation The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the "Interstate Banking Act") generally permits bank holding companies to acquire banks in any state, and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits a bank to merge with an out-of- state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching; permits a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition; and permits banks to establish and operate de novo interstate branches whenever the host state opts-in to de novo branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed. In 1996, Rhode Island adopted legislation pursuant to which Rhode Island "opted in" to interstate banking. The Rhode Island act allows Rhode Island banks to establish and maintain branches through a merger or consolidation with or by the purchase of the whole or any part of the assets or stock of any out-of-state bank or through de novo branch establishment in any state other than Rhode Island. Recent Developments On January 8, 2001, the Company's Board of Directors declared a regular quarterly dividend of $.15 per share to shareholders of record on February 1, 2001. This quarterly dividend represented a 25% increase over the $.12 per share dividend declared in the fourth quarter of 2000. On January 22, 2001, the Company filed an election with the Federal Reserve Bank of Boston to become a financial holding company, pursuant to the Gramm- Leach-Bliley Act of 1999. On February 7, 2001, the Company's election became effective. See "Regulation and Supervision." ITEM 2. PROPERTIES The Bank delivers its products and services through its four branch network system. The Bank owns its main office building which is located at 180 Washington Street, Providence, Rhode Island. This location consists of a two- story masonry and steel frame building containing (with basement storage) approximately 6,800 square feet of space. The ground floor of this building is used for retail banking as the Bank's Providence branch. Attached to this building is a two lane drive-up facility, the only drive-up facility located in downtown Providence. The building also houses a built-in ATM. The second floor of this location is used predominately for executive, administrative, and support staff office space. This building is located on two lots which are owned by the Bank and which have a total area of approximately 10,000 square feet. This land space is also used for customer parking and access and egress through the drive-up facility. The Bank also owns an adjacent lot of approximately 3,300 square feet which is used solely as employee parking. In 1981, the Bank opened a branch office building at the corner of Park and Reservoir Avenues, Cranston, Rhode Island. This one-story masonry and steel frame building (including the lower level) has approximately 7,400 square feet space. The ground floor of this location contains the Cranston branch, the Bank's largest branch as measured by deposits. The building also has a three lane drive-up facility and a drive- up ATM. The basement of this building is used predominately by the Operations Department along with several administrative offices. The building is situated on approximately 21,000 square feet of leased land. The lease has an original noncancellable term of 15 years with four successive renewal options, each for an additional five years ending in the year 2009. The Bank is presently in the third of the four renewal options which expires in the year 2004. Upon the expiration of the lease in the year 2009, the Bank will have the right to renew the lease upon the same terms and conditions, except for the term and annual rent to be paid thereunder which are to be determined by mutual agreement or, if not so determined, by arbitration. In late 1994, the Bank acquired an adjacent parcel of land, which approximates 4,700 square feet, for use as expanded customer parking and access to the facility from Reservoir Avenue. The Bank also owns land across the street from this building. This land, with total area of approximately 3,300 square feet, is used solely for employee parking. 13 In 1992, the Bank purchased a former credit union's land and building and reopened the facility as the Bank's Richmond branch at 1168 Main Street, Richmond, Rhode Island. The facility is located in the Wyoming section in the Town of Richmond. The two story wood frame building has nearly 6,500 square feet space (exclusive of unfinished basement area) on a land area of approximately 40,400 square feet. The branch location has a built-in ATM and a two lane drive-up facility. In June 1997, the Bank opened an in-store branch located in the Wal-Mart super store at Wickford Junction in North Kingstown, Rhode Island. The Bank leases nearly 1,700 square feet under an original lease term of five years with two successive renewal options, each for an additional five years ending in the year 2012. The branch is a full service facility, exclusive of safe deposit boxes, with an ATM. The Company belives that its facilities are adequate for its operations at this time. ITEM 3. LEGAL PROCEEDINGS The Company is involved in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, final disposition of these lawsuits, based upon the advice of legal counsel as to potential outcome, will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of fiscal 2000, the Company did not submit any matter to a vote of its security holders, through a solicitation of proxies or otherwise. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Stock Listing On May 14, 1996, the Company's common stock began trading on the NASDAQ National Market tier of the NASDAQ Stock Market under the symbol: FTFN. High and low sales prices and dividends declared during 2000 and 1999 are as follows:
Quarterly Dividends Sales Prices High Low Declareds ------------ ------ ------ --------- 2000 1st Quarter.......................................... $13.00 $ 9.75 $.12 2nd Quarter.......................................... 11.25 9.75 .12 3rd Quarter.......................................... 11.88 10.44 .12 4th Quarter.......................................... 11.75 11.00 .12 1999 1st Quarter.......................................... 13.63 12.25 .09 2nd Quarter.......................................... 12.88 11.50 .09 3rd Quarter.......................................... 14.50 12.25 .09 4th Quarter.......................................... 13.50 12.38 .09
As of March 12, 2001, there were approximately 158 holders of record of the Company's common stock and approximately 347 shareholders of beneficial ownership who hold their stock in nominee or "street" name through various brokerage firms. 15 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands, Except Per Share Data) FINANCIAL CONDITION DATA: Total assets............ $ 168,372 $ 144,782 $ 141,919 $ 127,310 $ 121,413 Investments, securities purchased under agreements to resell, federal funds sold and interest bearing deposits............... 56,161 40,351 49,544 42,944 44,568 Total loans, net of unearned discount...... 103,880 94,939 86,296 77,680 72,536 Allowance for loan losses................. 1,752 1,556 1,287 1,597 1,942 Total deposits.......... 129,046 104,589 104,372 99,290 93,876 Securities sold under agreements to repurchase............. 9,575 9,411 12,256 10,105 10,778 Federal Home Loan Bank advances .............. 10,869 13,610 6,204 -- -- Senior debenture........ -- -- 2,971 2,947 2,894 Total stockholders' equity................. 16,491 15,482 14,813 13,713 12,570 STATEMENT OF INCOME DATA: Interest income......... 13,394 11,180 10,564 9,969 8,867 Interest expense ....... 6,585 4,934 5,218 4,803 4,214 ---------- ---------- ---------- ---------- ---------- Net interest income .... 6,809 6,246 5,346 5,166 4,653 Provision for loan losses................. 175 275 250 250 455 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses............ 6,634 5,971 5,096 4,916 4,198 Noninterest income...... 1,003 826 616 465 536 Noninterest expense..... 4,578 3,917 3,468 3,341 3,177 Income taxes............ 1,088 1,061 794 728 513 ---------- ---------- ---------- ---------- ---------- Net income.............. $ 1,971 $ 1,819 $ 1,450 $ 1,312 $ 1,044 ========== ========== ========== ========== ========== PER SHARE DATA: Net income: Basic................... $ 1.62 $ 1.47 $ 1.15 $ 1.04 $ 0.99 Diluted................. 1.62 1.47 1.15 1.04 0.98 Book value.............. 13.59 12.63 11.75 10.87 9.89 Cash dividends declared. 0.48 0.36 0.24 0.20 0.12 Dividend payout ratio... 29.56% 24.45% 20.88% 19.23% 12.83% Weighted average common shares outstanding..... 1,214,125 1,233,104 1,261,241 1,261,241 1,049,609 Weighted average common and common stock equivalent shares outstanding............ 1,214,125 1,233,104 1,261,241 1,261,241 1,059,963 OPERATING RATIO DATA: Return on average total assets................. 1.20% 1.26% 1.07% 1.07% 0.96% Return on average stockholders' equity... 12.54 12.04 10.20 10.00 10.02 Net interest margin..... 4.30 4.49 4.12 4.38 4.46 Loans to deposits ratio. 80.50 90.77 82.68 78.24 77.27 Leverage capital ratio.. 10.10 10.71 10.56 10.77 10.32 ASSET QUALITY RATIOS: Nonperforming assets to total assets........... NM 0.12% 0.36% 0.63% 0.91% Nonperforming loans to total loans............ NM 0.19 NM 0.02 0.58 Net loan (recoveries) charge-offs to average loans(1)............... (0.02) 0.01 0.22 0.34 0.19 Allowance for loan losses to total loans(1)............... 1.69 1.64 1.53 1.64 1.78 Allowance for loan losses to nonperforming loans(1)............... NM 861.94 NM 7,333.39 280.35
- -------- (1) Ratios are exclusive of acquired loans, acquired allowance for loan losses, and activity in the acquired allowance for loan losses associated with the 1992 acquisition of certain assets and the assumption of certain liabilities of the former Chariho-Exeter Credit Union. NM- Meaningful 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The results of operations of First Financial Corp. and its wholly-owned subsidiary, First Bank and Trust Company (collectively, the "Company"), depend primarily on its net interest income, which is the difference between interest and dividend income on interest-earning assets and interest expense on its interest-bearing liabilities. Its interest-earning assets consist primarily of loans and investment securities, while its interest-bearing liabilities consist primarily of deposits, securities sold under agreements to repurchase and Federal Home Loan Bank advances. The Company's net income is also affected by its level of noninterest income, including fees and service charges, as well as by its noninterest expenses, such as salary and employee benefits, provisions to the allowance for loan losses, occupancy costs and, when necessary, expenses related to other real estate owned (OREO) and to the administration of nonperforming and other classified assets. The Company reported net income for 2000 of $1,970,719, as compared to $1,818,648 for 1999, or an increase of 8.4%. Diluted earnings per share amounted to $1.62 per share for 2000, based on 1,214,125 weighted average shares outstanding, as compared to $1.47 per share for 1999, based on 1,233,104 weighted average shares outstanding. During 1999, the Company recorded two one-time transactions. The first nonrecurring transaction was the sale of OREO at a gain of $222,452. The second nonrecurring transaction was a $129,362 write-off of a long-lived asset in recognition of its impaired value. The after-tax impact of these two transactions was to increase net income by $61,439, or $.05 per diluted share. Excluding these two nonrecurring transactions, net income would have increased 12.2% in 2000. In 2000, the Company's return on average equity (ROE) improved to 12.54% from 12.04% in 1999. The Company's return on average assets (ROA) was 1.20% in 2000 and 1.26% in 1999. The improvement in net income was primarily the result of an increase in net interest income, noninterest income and a decrease in the provision for loan losses, offset somewhat by an increase in noninterest expense and provision for income taxes. In general, the Company's record performance in 2000 was attributable to (i) balance sheet growth, especially within the loan portfolio, (ii) an increase in the recognition of gains on SBA loan sales, and (iii) continued strength in asset quality. Results of Operations Net Interest Income In 2000, total interest income amounted to $13.4 million compared to $11.2 million in 1999, or an increase of $2.2 million or 19.8%. This increase was attributable to a $19.4 million, or 14.0% increase in average interest-earning assets to $158.5 million in 2000 from $139.0 million in 1999. The increase in interest income was also aided by a rising interest rate environment which contributed to the rise in earning asset yield to 8.45% in 2000 from 8.04% in 1999. Of the $19.4 million increase in average interest-earning assets, $7.9 million went to the loan portfolio which grew on average to $99.9 million in 2000 from $92.0 million in 1999. The remaining $11.5 million was placed in the Company's investment portfolio. During 2000, average loans represented 63.0% of total average earning assets compared to 66.1% during 1999. The growth in earning assets and the rising rate environment accounted for the overall increase in interest income. In terms of volume/rate, earning asset growth (volume) contributed $1,463,000 to the increase in interest income, while the rising rate environment added another $751,000. The funding for the $19.4 million increase in average earning assets came primarily from a $17.9 million increase in retail time deposits. In February 2000, the Company began its promotion of a 14-month certificate of deposit. This promotion resulted in the opening of over 1,000 certificates, raised $23 million in new deposits and resulted in the shifting of $3 million from other deposit products. The promoted rate of 7.00% APY along with a rising rate environment drove up the rate on time deposits to 5.89% from 5.00% in 1999. Total interest expense increased $1.7 million, or 25.8% to $6.6 million in 2000 from $4.9 million in 1999. Total average interest-bearing liabilities increased $17.1 million or 15.4% to $127.8 million in 2000 from $110.7 million in 1999. The 17 increase in average interest-bearing liabilities contributed $1,040,000 to the increase in total interest expense. The 14-month certificate of deposit promotion coupled with a rising rate environment increased the Company's cost of funds to 5.15% in 2000 from 4.46% in 1999, and contributed $611,000 to the increase in interest expense. Overall, net interest income increased $563,000 to $6.8 million from $6.2 million. Of this increase, $423,000 was attributable to balance sheet growth (volume), while $140,000 was attributable to changes in interest rates. The ability to maintain relatively neutral balance sheet exposure to changes in interest rates resulted in a modest impact to the Company's net interest income. For 2000, the Company's net interest spread declined 28 basis points to 3.30% from 3.58% in 1999. However, net interest margin only declined 19 basis points or 4.2% to 4.30% from 4.49% in 1999. During 2000, the Company increased the excess of average interest-earning assets over interest-bearing liabilities by $2.4 million to $30.7 million from $28.3 million during 1999. This improvement helped lower the net interest margin erosion of 19 basis points versus the net interest spread erosion of 28 basis points. 18 The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances. Loans are net of unearned discount. Non-accrual loans are included in the average balances used in calculating this table. AVERAGE BALANCES AND INTEREST RATES (Dollars in Thousands)
Years Ended December 31, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------- -------------------------- -------------------------- Interest Average Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate -------- -------- ------- -------- -------- ------- -------- -------- ------- INTEREST-EARNING ASSETS: Loans................... $ 99,862 $ 9,694 9.71% $ 91,965 $8,688 9.45% $ 80,461 $ 7,797 9.69% Investment securities taxable--AFS........... 30,405 2,050 6.74 28,000 1,509 5.39 32,357 1,823 5.63 Investment securities taxable--HTM........... 21,421 1,289 6.02 14,462 789 5.46 11,748 683 5.81 Securities purchased under agreements to resell................. 5,960 306 5.13 4,048 162 4.00 4,530 221 4.88 Federal Home Loan Bank stock and other........ 819 55 6.72 556 32 5.76 719 40 5.56 -------- ------- ---- -------- ------ ---- -------- ------- ---- TOTAL INTEREST-EARNING ASSETS................. 158,467 13,394 8.45 139,031 11,180 8.04 129,815 10,564 8.14 ------- ---- ------ ---- ------- ---- NONINTEREST-EARNING ASSETS: Cash and due from banks. 2,765 2,702 2,379 Premises and equipment.. 2,075 2,276 2,430 Other real estate owned. 103 231 605 Allowance for loan losses................. (1,696) (1,367) (1,412) Other assets............ 2,280 1,390 1,396 -------- -------- -------- TOTAL NONINTEREST- EARNING ASSETS......... 5,527 5,232 5,398 -------- -------- -------- TOTAL ASSETS............ $163,994 $144,263 $135,213 ======== ======== ======== INTEREST-BEARING LIABILITIES: Deposits: Interest-bearing demand and NOW deposits.............. $ 3,204 47 1.47 $ 3,347 49 1.46 $ 3,479 67 1.93 Savings deposits....... 17,500 383 2.19 18,269 392 2.15 16,995 446 2.62 Money market deposits . 2,015 42 2.09 1,835 38 2.07 1,281 31 2.42 Time deposits ......... 83,038 4,891 5.89 65,118 3,253 5.00 65,209 3,548 5.44 Securities sold under agreements to repurchase............. 9,205 459 4.99 11,311 553 4.89 13,059 712 5.45 Federal Home Loan Bank advances............... 12,790 763 5.97 9,605 564 5.87 2,667 161 6.04 Senior debenture........ -- -- -- 1,204 85 7.06 2,998 253 8.44 -------- ------- ---- -------- ------ ---- -------- ------- ---- TOTAL INTEREST-BEARING LIABILITIES............ 127,752 6,585 5.15 110,689 4,934 4.46 105,688 5,218 4.94 ------- ---- ------ ---- ------- ---- NONINTEREST-BEARING LIABILITIES: Noninterest-bearing deposits............... 19,177 17,209 14,067 Other liabilities....... 1,355 1,262 1,237 -------- -------- -------- TOTAL NONINTEREST- BEARING LIABILITIES.... 20,532 18,471 15,304 STOCKHOLDERS' EQUITY.... 15,710 15,103 14,221 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $163,994 $144,263 $135,213 ======== ======== ======== NET INTEREST INCOME..... $ 6,809 $6,246 $ 5,346 ======= ====== ======= NET INTEREST SPREAD..... 3.30% 3.58% 3.20% ==== ==== ==== NET INTEREST MARGIN..... 4.30% 4.49% 4.12% ==== ==== ====
19 The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest- bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to changes attributable to: (i) changes in volume (changes in volume multiplied by prior rate); and (ii) changes in rate (changes in rate multiplied by prior volume). Changes in rate/volume have been allocated to volume variances throughout this table. Loans are net of unearned discount. Non-accrual loans are included in the average balances used in calculating this table. RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
Year Ended December 31, 1999 Year Ended December 31, 2000 Compared with Year Ended December 31, 1998 Compared with December 31, 1998 Compared with December 31, 1999 Increase Increase (Decrease) December 31, 1997 Increase (Decrease) Due To Due To (Decrease) Due To ----------------------------- ---------------------- ------------------------------- Volume Rate Total Volume Rate Total Volume Rate Total --------- -------- --------- ------ ------ ------ --------- ---------- -------- (Dollars in Thousands) INTEREST-EARNING ASSETS: Loans................. $ 766 $ 240 $ 1,006 $1,084 $ (193) $ 891 $ 457 $ (61) $ 396 Investment securities taxable--AFS......... 162 379 541 (236) (78) (314) 325 (197) 128 Investment securities taxable--HTM......... 419 81 500 147 (41) 106 3 8 11 Securities purchased under agreements to resell, and other.... 116 51 167 ( 28) (39) (67) 66 (6) 60 --------- -------- --------- ------ ------ ------ -------- ---------- -------- TOTAL INTEREST-EARNING ASSETS................. $ 1,463 $ 751 $ 2,214 $ 967 $ (351) $ 616 $ 851 $ (256) $ 595 ========= ======== ========= ====== ====== ====== ======== ========== ======== INTEREST-BEARING LIABILITIES: Interest-bearing demand and NOW deposits............. $ (2) $ -- $ (2) $ (2) $ (16) $ (18) $ 4 $ (1) $ 3 Savings deposits...... (17) 8 (9) 26 ( 80) (54) (19) -- (19) Money market deposits. 3 1 4 11 (4) 7 (5) -- (5) Time deposits......... 1,056 582 1,638 (8) (287) (295) 275 (48) 227 Securities sold under agreements to repurchase........... (105) 11 (94) (86) (73) (159) 135 (70) 65 Federal Home Loan Bank advances ............ 190 9 199 408 (5) 403 161 -- 161 Senior debenture...... (85) -- (85) (127) (41) (168) 4 (21) (17) --------- -------- --------- ------ ------ ------ -------- ---------- -------- TOTAL INTEREST-BEARING LIABILITIES............ $ 1,040 $ 611 $ 1,651 $ 222 $ (506) $ (284) $ 555 $ (140) $ 415 ========= ======== ========= ====== ====== ====== ======== ========== ======== NET CHANGE IN NET INTEREST INCOME........ $ 423 $ 140 $ 563 $ 745 $ 155 $ 900 $ 296 $ (116) $ 180 ========= ======== ========= ====== ====== ====== ======== ========== ========
20 Provision for Loan Losses The provision for loan losses was $175,000 in 2000 and $275,000 in 1999. The following table identifies the significant elements of asset quality embedded within the Company's loan portfolio as of and for the years ended December 31, 2000 and 1999. Refer to "Financial Condition" within this section for a discussion of the methodology used in addressing asset quality and the adequacy of the allowance for loan losses.
2000 1999 ------ ------ (In Thousands) Recorded investment in impaired loans ....................... $1,410 $1,630 Impaired loans requiring a valuation allowance .............. 441 613 Valuation allowance ......................................... 124 148 Net (recoveries) charge-offs ................................ (21) 6 Nonperforming loans ......................................... -0- 181 Loans 30-89 days delinquent ................................. 460 154 Allowance for loan losses to total loans .................... 1.69% 1.64%
Noninterest Income The following table identifies the major sources of noninterest income.
Years Ended December 31, -------------------------- 2000 1999 1998 --------- ---------------- (Dollars in Thousands) Service charges and fees on deposit accounts ..... $ 284 $ 268 $ 279 Safe deposit box rental .......................... 27 25 25 Other service fees ............................... 30 26 35 Gain on sale of loans ............................ 383 340 166 Loan servicing fees .............................. 95 73 41 Residential mortgage program fees ................ 77 10 -- ATM surcharge fees ............................... 69 55 50 Other ............................................ 38 29 20 --------- ------- ------- $ 1,003 $ 826 $ 616 ========= ======= =======
Noninterest income increased $176,859 or 21.4% to $1,002,934 in 2000 from $826,075 in 1999. The single largest contributor to this increase was fees from the residential mortgage program which increased $67,553 to $77,292 in 2000 from $9,739 in 1999. This fee based program, which the Company became involved in during 1999, provides for the Company to act as an originator of conforming residential mortgages on behalf of other institutions. The other major contributor to the increase in noninterest income was a $43,338 increase in gains on SBA loan sales to $383,399 in 2000 compared to $340,061 in 1999. During 2000, the Company sold $7.1 million of the guaranteed portion of SBA loans compared to $5.5 million during 1999. As a result of this SBA activity, at December 31, 2000 the Company was servicing nearly $15.5 million in sold loans compared to $10.9 million at December 31, 1999. This increase in loan servicing accounted for the increase in servicing fee income of $22,035 to $95,453 in 2000. 21 Noninterest Expense The following table identifies the major components of noninterest expense for the respective periods presented:
Years Ended December 31, ---------------------- 2000 1999 1998 ------ ------ ------ (Dollars in Thousands) Salaries and employee benefits....................... $2,644 $2,133 $1,896 Occupancy expense ................................... 460 551 393 Equipment expense.................................... 251 290 270 OREO (gains) losses, write-downs, and carrying costs, net................................................. (14) (209) 42 Other operating expenses: FDIC insurance premium............................. 23 12 12 Computer service fees.............................. 252 252 199 Legal and professional fees........................ 154 214 136 Directors' fees.................................... 128 116 70 Postage............................................ 65 47 47 Advertising........................................ 182 146 75 Office supplies, forms, stationery, printing, etc.. 115 87 76 Miscellaneous...................................... 318 278 252 ------ ------ ------ $4,578 $3,917 $3,468 ====== ====== ======
Total overhead spending for the Company increased 16.9% to $4,578,052 in 2000 from $3,916,893 in 1999. During 2000 the Company's efficiency ratio was 58.60%, compared to 55.39% in 1999. Essentially, it cost the Company $.5860 to generate $1.00 of revenue in 2000. Salaries and wages increased $182,235 or 10.8% to $1,865,192. The primary reason for the increase was due to salary increases, additional staff and increased incentive accruals based on earnings. Benefit costs increased $328,930 or 73.1% during 2000 to $779,165 from $450,235 in 1999. Higher salaries and wages led to an $18,365 increase in related payroll taxes. Also, a 15% increase in premiums led to a $17,304 increase in health insurance costs. However, the single major reason for the increase in benefit costs was the $293,150 increase in pension costs to $423,145 in 2000 compared to $129,995 in 1999. During 1999, the Company's pension plan was fully funded and, consequently, no contribution was required. During 2000, the pension fund's investment performance declined and the Company was required to contribute and expense $131,900. Also, during 2000 the Company amended its Supplemental Executive Retirement Plan to provide for a minimum benefit of 80% of the participant's three highest years' base salary. This amendment increased the net periodic benefit cost by $146,000. Occupancy expense decreased $91,637 or 16.6% to $459,797 in 2000 compared to $551,434 in 1999. This decrease was primarily related to the 1999 write-off of a long-lived asset of $129,362 in recognition of its impaired value. Equipment expense decreased $38,941 or 13.4% to $251,147 in 2000 from $290,088 in 1999. A number of capital assets reached a fully depreciated status during 2000, thereby resulting in a reduction in depreciation expense of $30,646. OREO costs increased $195,471 to a net gain of $13,506 in 2000 compared to a net gain of $208,977 in 1999. During 1999, the Company sold vacant lots at a gain of $222,452. This single nonrecurring transaction was the major reason for the increase in net costs. Overall, foreclosure activity during 2000 was relatively insignificant. The OREO portfolio averaged $103,000 in 2000 compared to $231,000 during 1999. The Company only had four foreclosures during 2000 at a total carrying value of approximately $430,000. At December 31, 2000 and 1999, the Company had no foreclosed property on its books. 22 Other operating expenses increased $73,757 or 8.3% to $960,936 in 2000 from $887,179 in 1999. There were many expense categories which added or subtracted from this net increase. However, most of the net increase was confined to a handful of accounts. First, legal and professional fees decreased $59,829 to $153,791 in 2000 from $213,620 in 1999. This decrease was solely the result of providing $59,000 in 1999 for uninsured costs related to an ongoing legal matter. Second, postage, office supplies, forms, stationery, printing, etc. increased approximately $40,000. This increase related to the costs associated with the delivery of new products and updating of marketing materials and direct mail events to promote these new products. Finally, advertising costs increased $36,010 to $181,797 in 2000 from $145,787 in 1999. The promotion of the residential mortgage program and the new deposit products contributed to this increase. Income Taxes Income tax expense amounted to $1,088,613 in 2000, or an effective tax rate of 35.6%. The effective rate in 1999 was 36.8%. The Company's combined federal and state (net of federal benefit) statutory income tax rate was 39.94% in 2000 and 1999. The Company's effective combined federal and state tax rate was lower than the statutory rate primarily due to the exclusion of, from state taxable income, interest income on U.S. Treasury obligations and certain government agency debt securities in 2000 and 1999. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, assets and liabilities are adjusted through the provision for income taxes. Financial Condition Total Assets The Company's total assets increased $23.6 million, or 16.3%, to $168.4 million at December 31, 2000, from $144.8 million at December 31, 1999. The increase in total assets primarily occurred within the Company's loan portfolio which increased $9.0 million, and in the Company's investment securities portfolio, which increased $17.9 million, offset by a $4.4 million decrease in cash and cash equivalents. While wholesale funding sources decreased $2.6 million, retail deposits increased $24.4 million and stockholders' equity increased $1.0 million. Investment Securities The Company's total investment securities portfolio increased $17.9 million to $54.4 million at December 31, 2000, from $36.5 million at December 31, 1999. At December 31, 2000, securities which were classified as held-to-maturity were carried at an amortized cost of $22,488,801, with a fair value of $22,451,901. Securities classified as available-for-sale were carried at a fair value of $31,923,655, with an amortized cost of $32,600,219. At December 31, 2000, government agency debt securities and collateralized mortgage obligations were classified as held-to- maturity which is consistent with the Company's intent and ability. The available-for-sale segment of investment securities was comprised of U.S. Treasury securities, government agency debt securities, mortgage-backed securities, trust preferred stock, and marketable equity securities. The securities in which the Company may invest are subject to regulation and, for the most part, are limited to securities which are considered investment grade securities. In addition, the Company has an internal investment policy which restricts investments to: (i) United States treasury securities; (ii) obligations of United States government agencies and corporations; (iii) collateralized mortgage obligations, including securities issued by the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA), and the Federal Home Loan Mortgage Corporation (FHLMC); (iv) securities of states and political subdivisions; (v) corporate debt, all of which must be considered investment grade by a recognized rating service; and (vi) corporate stock. In addition to achieving a rate of return which is consistent with the overall risk profile 23 of the investment portfolio, the Company views the principal purpose of its investment securities portfolio as a ready source of liquidity and as a management tool against interest rate risk embedded within the Company's balance sheet. Generally, the Company invests in fixed rate government and agency obligations with a maturity not to exceed three years. Single index floating rate or step-up securities generally have final maturities which do not exceed five years at time of purchase. During 2000 the Company did, however, purchase $10 million par value in investment grade trust preferred stock from five issuers. These fixed rate securities have maturities extending to 2027 with call provisions commencing in 2007. At December 31, 2000, the Company's investment securities had net unrealized losses of $713,464 as compared to net unrealized losses of $550,994 at December 31, 1999. Loans Total loans, net of unearned discount, amounted to $103.9 million at December 31, 2000, up $9.0 million, or 9.4%, from $94.9 million at the end of 1999. The increase in total loans was predominately in the commercial real estate portfolio, which grew $7.7 million. At December 31, 2000, total loans represented 61.7% of total assets and 80.5% of total deposits compared to 65.6% and 90.8%, respectively, at the end of 1999.
At December 31, ------------------------------------------------ 2000 1999 1998 ---------------- --------------- --------------- Amount Percent Amount Percent Amount Percent -------- ------- ------- ------- ------- ------- (Dollars in Thousands) Commercial................. $ 13,099 12.6% $12,249 12.9% $14,763 17.1% Commercial real estate..... 73,523 70.8 65,812 69.3 50,646 58.7 Residential real estate.... 13,378 12.9 13,084 13.8 16,417 19.0 Home equity lines of credit.................... 2,949 2.8 3,051 3.2 3,489 4.0 Consumer................... 939 0.9 766 0.8 1,047 1.2 -------- ----- ------- ----- ------- ----- 103,888 94,962 86,362 Unearned discount.......... 8 23 66 -------- ------- ------- 103,880 100.0% 94,939 100.0% 86,296 100.0% ===== ===== ===== Allowance for loan losses.. 1,752 1,556 1,287 -------- ------- ------- Net loans.................. $102,128 $93,383 $85,009 ======== ======= =======
For the past several years, including 2000, the Company encountered solid loan demand from small businesses. The Company believes a primary reason for this demand was the desire of small business borrowers to obtain banking relationships with banks which are responsive to their needs, and the success of the Company in meeting those needs. The increase in commercial and commercial real estate loans reflected the Company's emphasis on: (i) small business lending; (ii) obtaining loan guarantees from the SBA; and (iii) cash- flow analysis and an overall assessment of the borrower's financial strength and ability to repay with a secondary view towards collateral values. The Bank offers a full range of consumer lending products including residential mortgages and home equity lines of credit, new and used automobile loans, passbook and certificate of deposit loans, and other personal secured and unsecured loans. Although the Bank makes an effort to price these loans competitively, it faces substantial competition from mortgage and consumer finance companies. Nonperforming Assets Nonperforming assets include nonperforming loans and other real estate owned (OREO). The nonperforming loans category includes loans on which the accrual of interest is discontinued when the collectibility of principal or interest is in doubt, or when payments of principal or interest have become 90 days past due and have arrearages that have not been eliminated. In certain instances, nonperforming loans may also 24 include loans that have become 90 days past due but remain on accrual status because the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. OREO consists of real estate acquired through foreclosure proceedings. In addition to the preceding two categories, the Company may, under appropriate circumstances, restructure loans as a concession to a borrower. At December 31, 2000, 1999 and 1998, no troubled debt restructurings were included in the Company's loan portfolio. The following table sets forth information regarding nonperforming assets and delinquent loans 30-89 days past due as to interest or principal, and held by the Company at the dates indicated.
December 31, ------------------- 2000 1999 1998 ----- ----- ----- (Dollars in Thousands) Loans past due 90 days or more but not included in nonaccrual loans..................................... $ -- $ -- $ -- Nonaccrual loans...................................... -- 181 -- ----- ----- ----- Total nonperforming loans ............................ -- 181 -- Other real estate owned............................... -- -- 513 ----- ----- ----- Total nonperforming assets............................ $ -- $ 181 $ 513 ===== ===== ===== Delinquent loans 30-89 days past due.................. $ 460 $ 154 $ 161 ===== ===== ===== Nonperforming loans as a percent of gross loans....... NM 0.19% NM Nonperforming assets as a percent of total assets..... NM 0.12% 0.36% Delinquent loans 30-89 days past due as a percent of gross loans.......................................... 0.44% 0.16% 0.19%
Allowance for Loan Losses The allowance for loan losses is established through provisions charged against income. Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon management's evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing various factors. Among the factors are: (i) the risk characteristics of the loan portfolio generally; (ii) the quality of specific loans; (iii) the level of non-accruing loans; (iv) current economic conditions; (v) trends in delinquencies and prior charge-offs; and (vi) the value of the underlying collateral. Ultimate loan losses may vary significantly from current estimates. The Company reviews nonperforming and performing loans to ascertain whether any impairment exists within the loan portfolio. The Company evaluates these problem loans and estimates the potential loss exposure when assessing the adequacy of the allowance for loan losses. Because the allowance for loan losses is based on various estimates and includes a high degree of judgment, subsequent changes in general economic conditions and the economic prospects of the borrowers may require changes in those estimates. The Bank has a loan peer review function and a loan loss review committee. The loan peer review committee, which meets monthly, is comprised of the Bank's chief executive officer and all loan officers. Every loan of $250,000 or more or a total relationship of $500,000 or more is scheduled to be reviewed not less than once every two years by the loan peer review committee. All loans that undergo loan peer review receive a numerical grade ranging from 1 to 6 based on a number of criteria, including the financial strength of the borrower as determined, in part, by such borrower's liquidity, debt service coverage and historical performance. Any loan rated 4 or worse will automatically be placed on a "watchlist." Certain 3 rated loans for which the committee has identified potential problems may also be placed on the watchlist. The loans on the watchlist are reviewed monthly by the Bank's Credit Committee in order to determine what actions should be taken with respect to such loans, whether any loans should be added or deleted from the watchlist, and to make estimates regarding loan loss exposure to the loan loss review committee. The loan loss review committee, comprised of the Bank's chief executive officer, chief financial officer and all other loan officers, reviews loans on the watchlist on a quarterly basis in order to establish specific loan loss reserve levels. In addition to assessing loss exposure for all loans included on the watchlist (specific allowance), the loan loss review committee also applies a three year moving weighted average, by category, of net charge-offs to 25 each loan type (general allowance) (exclusive of watchlist loans which are specifically reviewed). Finally, the loan loss review committee will take into consideration the above mentioned conditions, the effects of which are not directly measured in determining the general and specific allowances. The evaluation of the inherent loss regarding these conditions involves a higher degree of uncertainty because they are not identified with specific problem loans or loan portfolio types. Thus, an unallocated allowance for loan losses is used to recognize the estimated risk associated with the general and specific allowance calculations and to reflect management's evaluation of various conditions, the effect of which are not directly measurable in determining the general and specific allowance. The following table, exclusive of the acquired allowance for loan losses, represents the distribution of the Bank's allowance for loan losses for the periods ending as indicated:
December 31, ---------------------------------------- 2000 1999 1998 ------------ ------------ ------------ (Dollars in Thousands) Loan Category: Commercial....................... $ 212 12.1% $ 192 12.3% $ 160 12.4% Commercial Real Estate........... 1,182 67.5 1,044 67.1 840 65.3 Residential Real Estate.......... 281 16.0 248 15.9 219 17.0 Home Equity Lines of Credit...... 63 3.6 60 3.9 54 4.2 Consumer......................... 14 0.8 12 0.8 14 1.1 ------ ----- ------ ----- ------ ----- Total.......................... $1,752 100.0% $1,556 100.0% $1,287 100.0% ====== ===== ====== ===== ====== =====
The unallocated portion of the allowance for loan losses is distributed among the various loan categories in the same proportion as the combined specific and general allowance to each loan type. This distribution of the allowance for loan losses reflects management's judgment of the relative risks of the various categories of the Bank's loan portfolio. This distribution should not be considered as an indication of the future amounts or types of loan charge-offs. At December 31, 2000, the Bank classified $1.4 million of loans as impaired based on the rating system adopted by the Bank. Of these amounts, a majority of which are included in the commercial and commercial real estate loan portfolio, the Bank estimates a potential loss exposure of $124,000. 26 The following table is an analysis of the Allowance for Loan Losses over the last three years.
Years Ended December 31, -------------------------- 2000 1999 1998 ------- ------- ------- (Dollars in Thousands) AVERAGE LOANS OUTSTANDING ......................... $99,862 $91,965 $77,302 ======= ======= ======= ALLOWANCE FOR LOAN LOSSES AT BEGINNING OF YEAR..... $ 1,556 $ 1,287 $ 1,208 CHARGED-OFF LOANS: Commercial....................................... 44 52 12 Commercial Real Estate: Non-owner occupied 1-4 family.................. -- -- -- Non-owner occupied multi-family................ -- -- 128 Commercial..................................... 41 -- 27 Residential Real Estate: Owner occupied 1-4 family...................... 4 -- -- Non-owner occupied 1-4 family.................. -- -- 7 Home Equity Lines of Credit...................... -- -- -- Consumer......................................... 1 2 10 ------- ------- ------- Total charged-off loans........................ 90 54 184 ------- ------- ------- RECOVERIES ON LOANS PREVIOUSLY CHARGED-OFF: Commercial ...................................... 21 3 1 Commercial Real Estate: Non-owner occupied 1-4 family.................. -- -- -- Non-owner occupied multi-family ............... -- 19 -- Commercial .................................... -- 23 -- Residential Real Estate: Owner occupied 1-4 family...................... 57 3 -- Non-owner occupied 1-4 family ................. 33 -- -- Home Equity Lines of Credit...................... -- -- -- Consumer......................................... -- -- 12 ------- ------- ------- Total recoveries............................... 111 48 13 ------- ------- ------- NET LOANS (RECOVERED) CHARGED-OFF ................. (21) 6 171 PROVISION FOR LOAN LOSSES ......................... 175 275 250 ------- ------- ------- ALLOWANCE FOR LOAN LOSSES AT END OF YEAR........... $ 1,752 $ 1,556 $ 1,287 ======= ======= ======= Net loans (recovered) charged-off to average loans. (0.02)% 0.01% 0.22% Allowance for loan losses to gross loans at end of year.............................................. 1.69 1.64 1.53 Allowance for loan losses to nonperforming loans... NM 861.94 NM Net loans (recovered) charged-off to allowance for loan losses at beginning of year.................. (1.35) 0.47 14.16 Recoveries to charge-offs.......................... 123.33 88.89 7.07
27 The following table summarizes the gross activity in OREO during the periods indicated:
Years Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Balance at beginning of year ................. $ -- $ 513 $ 782 Property acquired............................. 430 -- 245 Sales and other adjustments, net of gains and losses....................................... (430) (493) (514) Write-downs (charged to operations) .......... -- (20) -- -------- -------- -------- Balance at end of year........................ $ -- $ -- $ 513 ======== ======== ========
Deposits and Borrowings The Company devotes considerable time and resources to gathering deposits through its retail branch network system. Total deposits increased $24.4 million, to $129.0 million at December 31, 2000, from $104.6 million at the end of 1999. During 2000, the Company reported increases in its core transactional type deposit products. Total demand deposits increased $1.7 million, and savings and money market accounts increased $1.3 million. However, time deposits, which are more interest rate sensitive, increased $21.6 million. During February 2000, the Company successfully marketed a 14 month certificate of deposit promotion through its branch network at a slightly above market rate or 6.77% (7.00% annual percentage yield). This promotion raised over $23 million in new deposits and opened over 1,000 new deposit accounts, substantially all of which were from the local community. The purpose of this retail deposit growth activity was to increase the Company's customer base; strengthen the Company's presence in the community; leverage the Company's strong capital position and; solidify the Company's ability to fund future loan portfolio growth. The Company initially invested the proceeds in government agency and corporate debt obligations. Along with its deposit gathering efforts, the Company relied on borrowing from securities sold under agreements to repurchase (REPO) to leverage its capital. At December 31, 2000, securities sold under agreements to repurchase amounted to $9.6 million, compared to $9.4 million at December 31, 1999. During 2000, the Company used wholesale funding sources from the Federal Home Loan Bank of Boston (FHLB). The purpose of these borrowings was to match the funding for selected loans as well as refinance maturing REPO's at more favorable terms. At December 31, 2000, advances from the FHLB amounted to $10.9 million, compared to $13.6 million at December 31, 1999. Asset/Liability Management The principal objective of the Company's asset and liability management is to minimize interest rate risk on net interest income and stockholders' equity. This objective is accomplished by managing the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or repricing dates. The Company's actions in this regard are taken under the guidance of the Asset/ Liability Management Committee which includes members of the Company's senior management and two members of the Company's Board of Directors. The Asset/Liability Management Committee is actively involved in formulating the economic assumptions that the Company uses in its financial planning and budgeting process and establishes policies which control and monitor the Company's sources, uses and pricing of funds. The effect of interest rate changes on assets and liabilities is analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring the interest rate sensitivity "gap." An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity "gap" is defined as the difference between interest-earning assets and interest- bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. 28 During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely. The Company has historically sought to maintain a relatively narrow gap position and has, in some instances, foregone investment in higher yielding assets where such investment, in management's opinion, exposed the Company to undue interest rate risk. However, the Company does not attempt to perfectly match interest rate sensitive assets and liabilities and will selectively mismatch its assets and liabilities to a controlled degree where it considers it both appropriate and prudent to do so. In managing its interest rate risk exposure, the Company does not engage in derivative financial instruments for hedging or speculative purposes. Other than fixed rate loan commitments, the Company is prohibited, by internal policy, from engaging in the use of off- balance sheet financial instruments. There are a number of relevant time periods in which to measure the Company's gap position, such as at the three, six, and twelve month points and beyond in the maturity schedule. Management tends to focus most closely on the gap up to the one year point in making its principal funding and investing decisions. The following table presents the repricing schedule for the Company's interest-earning assets and interest-bearing liabilities at December 31, 2000:
Within Over Three Over One Over Five Three to Twelve Year to Years to Over Fifteen Months Months Five Years Fifteen Years Years Total ------- ---------- ---------- ------------- ------------ -------- (Dollars in Thousands) INTEREST-EARNING ASSETS: Securities purchased under agreements to resell, and other .... $ 1,748 $ -- $ -- $ -- $ -- $ 1,748 Investment securities.. 8,114 16,882 19,318 10,098 -- 54,412 Loans.................. 25,687 11,703 52,940 14,055 -- 104,385 ------- -------- ------- ------- ------- -------- Total interest-earning assets................. 35,549 28,585 72,258 24,153 __ 160,545 INTEREST-BEARING LIABILITIES: Money Market accounts.. 686 1,998 1,303 -- -- 3,987 Savings deposits and NOW accounts.......... 1,736 5,367 13,994 -- -- 21,097 Time deposits.......... 22,505 55,222 7,048 -- -- 84,775 Securities sold under agreements to repurchase............ 9,575 -- -- -- -- 9,575 Federal Home Loan Bank advances ............. 289 866 7,118 2,596 -- 10,869 ------- -------- ------- ------- ------- -------- Total interest-bearing liabilities............ 34,791 63,453 29,463 2,596 -- 130,303 ------- -------- ------- ------- ------- -------- NET INTEREST SENSITIVITY GAP.................... $ 758 $(34,868) $42,795 $21,557 $ -- $ 30,242 ======= ======== ======= ======= ======= ======== CUMULATIVE GAP.......... $ 758 $(34,110) $ 8,685 $30,242 $30,242 $ 30,242 ======= ======== ======= ======= ======= ======== NET INTEREST SENSITIVITY GAP AS A PERCENT OF TOTAL ASSETS........... 0.5% (20.7)% 25.4% 12.8% -- % 18.0% ======= ======== ======= ======= ======= ======== CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS................. 0.5% (20.2)% 5.2% 18.0% 18.0% 18.0% ======= ======== ======= ======= ======= ========
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates both on a short- term basis and over the life of the asset. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the table. 29 By using simulation modeling techniques, the Company is able to measure its interest rate risk exposure as determined by the impact of sudden movements in interest rates on net interest income and equity. This exposure is termed "earnings-at-risk" and "equity-at-risk". At December 31, 2000, the Company's earnings-at-risk under a +/-200 basis point interest rate shock test measured a negative 2.81% in a worst case scenario. Under a similar test, the Company's equity-at-risk measured a negative 15.38% of market value of equity at December 31, 2000. At December 31, 2000, the Company's earnings-at-risk and equity-at-risk fell well within tolerance levels established by internal policy. Liquidity Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers and to earning enhancement opportunities in a changing marketplace. Primary sources of liquidity consist of deposit inflows, loan repayments, securities sold under agreement to repurchase, FHLB advances, maturity of investment securities and sales of securities from the available-for-sale portfolio. These sources fund the Bank's lending and investment activities. At December 31, 2000, cash and due from banks, securities purchased under agreements to resell, and short-term investments (unpledged and maturing within one year) amounted to $21.3 million, or 12.6% of total assets. Management is responsible for establishing and monitoring liquidity targets as well as strategies and tactics to meet these targets. Through membership in the Federal Home Loan Bank of Boston (FHLB), the Company has access to both short and long-term unused borrowings of nearly $30.5 million, which could assist the Company in meeting its liquidity needs and funding its asset mix. At December 31, 2000, the Company held state and municipal demand deposits of $.2 million which it considered highly volatile. Nonetheless, the Company believes that there are no adverse trends in the Company's liquidity or capital reserves, and the Company believes that it maintains adequate liquidity to meet its commitments. Capital Resources Total stockholders' equity of the Company at December 31, 2000, was $16.5 million, as compared to $15.5 million at December 31, 1999. The increase of $1.0 million primarily resulted from $2.0 million in net income; less dividends declared of $.6 million, repurchase of common stock of $.2 million, and unrealized losses on investment securities of $.2 million. The Bank is subject to the leverage and risk-based capital ratio requirements of the FDIC. The Bank is deemed to be "well capitalized" by the FDIC and is classified as such for FDIC insurance- assessment purposes. At December 31, 2000, the Bank's Leverage Capital Ratio was 9.79%, as compared to 10.26% at December 31, 1999. The FDIC's minimum Leverage Capital Ratio for "adequately capitalized" financial institutions is 3%, although this minimum leverage ratio applies only to certain of the most highly-rated banks. Other institutions are subject to higher requirements. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off- balance sheet items to broad risk categories. According to these standards, the Bank had a Tier I Risk-Based Capital Ratio of 14.18% and a Total Risk- Based Capital Ratio of 15.44% at December 31, 2000, as compared to a Tier I Risk-Based Capital Ratio of 16.05% and a Total Risk-Based Capital Ratio of 17.30% at December 31, 1999. The minimum risk-based Tier I and Total Capital Ratios at each of these dates were 4.0% and 8.0%, respectively. The capital structure of the Company is subject to the capital ratio requirements of the Federal Reserve Board, which are similar to the requirements which FDIC imposes on the Bank. 30 At December 31, 2000, the Company's Leverage Capital Ratio was 10.26%, as compared to 10.71% at December 31, 1999. The Company's Tier I Risk- Based Capital Ratio was 16.05% and its Total Risk-Based Capital Ratio was 17.30% at December 31, 2000, and 16.72% and 17.97%, respectively, at December 31, 1999. Comparison of 1999 with 1998 The Company reported net income for 1999 of $1,818,648, as compared to $1,450,048 for 1998, or an increase of 25.4%. Diluted earnings per share amounted to $1.47 per share for 1999, based on 1,233,104 weighted average shares outstanding, as compared to $1.15 per share for 1998, based on 1,261,241 weighted average shares outstanding. During 1999, the Company recorded two one-time transactions. The first nonrecurring transaction was the sale of OREO at a gain of $222,452. The second nonrecurring transaction was a $129,362 write-off of a long-lived asset in recognition of its impaired value. The after-tax impact of these two transactions was to increase net income by $61,439, or $.05 per diluted share. In 1999, the Company's return on average equity (ROE) improved to 12.04% from 10.20% in 1998. The Company's return on average assets (ROA) was 1.26% in 1999 and 1.07% in 1998. The improvement in net income was primarily the result of an increase in net interest income and noninterest income, offset somewhat by an increase in noninterest expense and provision for income taxes. In general, the Company's record performance in 1999 was attributable to (i) an increase in net interest spreads and margins, (ii) balance sheet growth, predominately within the loan portfolio, (iii) an increase in the recognition of gains on SBA loan sales, and (iv) continued strength in asset quality. Net Interest Income In 1999, net interest income rose $899,235 or 16.8%, to $6,245,502 from $5,356,267 in 1998. The primary reason for this increase was due to an increase in average interest-earning assets of $9.2 million, or 7.1% along with a 38 basis point increase in average net interest spread to 3.58% in 1999, as compared to 3.20% in 1998. The increase in average interest-earning assets was funded largely from deposit growth and other borrowings. Increases in average stockholders' equity and an increase in average noninterest-bearing deposits, accounted for an increase in average net interest margin of 37 basis points to 4.49% in 1999. In 1999, total interest income amounted to $11,179,570 compared to $10,564,083 in 1998, or an increase of $615,487 or 5.8%. This increase was attributable to a $9.2 million, or 7.1% increase in average interest-earning assets, offset somewhat by a 10 basis point reduction in earning asset yield. The increase in average interest-earning assets occurred solely within the higher yielding average loan portfolio which increased $11.5 million to $92.0 million. During 1999, average loans represented 66.1% of total average interest-earning assets compared to 62.0% during 1998. This shifting in earning asset mix and the overall growth of earning assets accounted for the increase in interest income and resulted in only a slight decline in earning asset yield to 8.04% from 8.14%. In terms of rate/volume, earning asset growth and the shifting of earning asset mix (volume) increased interest income by nearly $967,000 while the declining rate environment reduced interest income by approximately $351,000. The funding for the increase in average earning assets came from a $1.6 million increase in interest-bearing deposits; a $3.4 million increase in wholesale sources; a $3.1 million increase in noninterest-bearing deposits and; a $.9 million increase in average stockholders' equity. In early 1999, the Company reduced the interest rate paid on transactional deposits by upwards of 50 basis points and implemented a marginal pricing strategy for term deposits. This aggressive approach to pricing deposits helped reduce cost of funds by 48 basis points to 4.46% from 4.94%. This activity resulted in a decrease in interest expense of $283,748 or 5.4% to $4,934,068 in 1999 from $5,217,816 in 1998. In terms of rate/volume, interest expense increased approximately $222,000 due to increases in interest-bearing liabilities, while interest expense decreased nearly $506,000 due to lowering of interest rates. Overall, as a result of aggressive retail deposit pricing and a declining rate environment, net interest income increased approximately $155,000. Also, due to balance sheet growth (volume) predominately within the loan portfolio, net interest income increased approximately $745,000. This rate/volume activity produced an increase of nearly $900,000 in net interest income. 31 Provision for loan Losses The provision for loan losses was $275,000 in 1999 and $250,000 in 1998. At December 31, 1999 and 1998, the Company's recorded investment in impaired loans was $1,630,204 and $1,571,661, respectively, of which $613,074 and $853,221, respectively, was determined to require a valuation allowance of $147,586 and $235,473. The Company's ratio of net loan charge-offs to average loans decreased to .01% from.22%. At December 31, 1999, nonperforming loans were $180,571. At December 31, 1998, there were no nonperforming loans. Loans 30-89 days delinquent decreased to $153,714 from $161,456 at the end of 1999 and 1998, respectively. At December 31, 1999 and 1998, the allowance for loan losses to total loans was 1.64% and 1.53%, respectively. Noninterest Income Noninterest income increased $210,070 or 34.1% to $826,075 in 1999 from $616,005 in 1998. This increase was the result of the recognition of $340,061 in gains on SBA loan sales, an increase of nearly $174,000 over 1998. During 1999, the Company originated for sale nearly $5.8 million of guaranteed portion SBA loans. These originations compare to $3.3 million 1998. As a result of this SBA activity, the Company's servicing fee income increased $32,613 to $73,418. Noninterest Expense Total overhead spending for the Company increased 12.9% to $3,916,893 in 1999 from $3,468,231 in 1998. During 1999 the Company's efficiency ratio improved to 55.39% from 58.17% in 1998. Salaries and wages increased $157,530, to 9.1% to $1,883,572 during 1999. The primary reason for the increase was due to salary increases, additional staff and a larger bonus pool. During 1999 employee benefits increased $84,712 or 22% to $450,235 from $365,523. The increase was primarily related to a $49,547 increase in the Supplemental Executive Retirement Plan contribution; an $18,732, or 23.6% increase in health insurance costs; a $14,147 increase in 401(k) costs and; a $9,475 increase in payroll taxes. Overall, the increase in benefit costs was a combination of both increased unit cost along with a greater number of employees availing themselves to such benefits. Occupancy expense increased $158,245 during 1999. However, this increase includes the $129,362 write-off of a long-lived asset in recognition of its impaired value. Exclusive of this write-off, occupancy expense increased $28,883, or 7.3%. The majority of the increase was related to higher tangible personal property taxes and depreciation charges associated with branch building improvements. Equipment expenses increased $19,805, or 7.3% to $290,088 from $270,282 in 1998. The single largest item contributing to this increase was a $9,353 increase in equipment maintenance costs, much of which was Y2K upgrade related. OREO cost showed the most dramatic swing in performance in 1999 compared to 1998. During 1999, OREO costs showed a net gain of $208,977 as compared to a net loss of $41,593 during 1998. With a smaller OREO portfolio during 1999, the carrying costs of foreclosed property dropped to $6,032 from $27,431. Further, disposition gains, net or writedowns, were $215,008 in 1999, compared to disposition losses of $14,161 during 1998. The single largest contributor to 1999's net gains was the sale of vacant lots at a gain of $222,452. During 1999, the OREO portfolio averaged $231,000 versus $604,786 in 1998. At December, 31, 1999 there was not foreclosed property on the Company's books. Computer services increased $52,658, or 26.4% to $251,964 in 1999 compared to $199,306 in 1998. There were two primary reasons for this increase. First, the Company availed itself of more technological services. Second, as the Company went through the Y2K preparation process, costs incurred in connection with the project were captured in the computer services category. 32 Other operating expenses increased $230,652, or 35% to $887,179 from $656,527. However, most of the overall increase was confined to three expense categories. First, legal and professional fees increased $77,134 to $213,620. Of this increase, $59,000 represented uninsured costs of an ongoing legal matter. Second, Directors' fees increased $46,333 to $116,133 in 1999 versus $69,800 in 1998. This increase reflects the increase in the annual Director retainer of $5,000 from $3,000, and meeting fees to $500 from $300 per meeting. Finally, advertising increased $70,559 to $145,787 from $75,228. This increase was discretionary, and demonstrated the Company's focus on advertising and marketing during 1999. Income Taxes Income tax expense amounted to $1,061,036 in 1999, or an effective tax rate of 36.8%. The effective rate in 1998 was 35.4%. The Company's combined federal and state (net of federal benefit) statutory income tax rate was 39.94% in 1999 and 1998. The Company's effective combined federal and state tax rate was lower than the statutory rate primarily due to the exclusion, from state taxable income, interest income on U.S. Treasury obligations and certain government agency debt securities in 1999 and 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Refer to "Asset/Liability Management" within Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations". 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and the Board of Directors of First Financial Corp.: We have audited the accompanying consolidated balance sheets of First Financial Corp. (a Rhode Island corporation) and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash flows for each of the years in the three year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Financial Corp. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts January 10, 2001 34 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- 2000 1999 ------------ ------------ ASSETS ------ CASH AND DUE FROM BANKS............................ $ 3,055,863 $ 5,441,190 ------------ ------------ SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL.... 1,748,068 3,802,865 ------------ ------------ LOANS HELD FOR SALE ............................... 505,000 942,338 ------------ ------------ INVESTMENT SECURITIES: Held-to-maturity (fair value: $22,451,901 in 2000 and $15,450,453 in 1999).......................... 22,488,801 15,691,004 Available-for-sale................................. 31,923,655 20,857,124 ------------ ------------ Total investment securities........................ 54,412,456 36,548,128 ------------ ------------ FEDERAL HOME LOAN BANK STOCK....................... 716,000 681,500 ------------ ------------ LOANS: Commercial......................................... 13,099,260 12,248,552 Commercial real estate............................. 73,522,872 65,812,129 Residential real estate............................ 13,377,532 13,084,006 Home equity lines of credit........................ 2,948,764 3,051,265 Consumer........................................... 939,063 766,383 ------------ ------------ 103,887,491 94,962,335 Less--Unearned Discount.......................... 7,674 23,221 Allowance for loan losses........................ 1,751,621 1,556,405 ------------ ------------ Net loans........................................ 102,128,196 93,382,709 ------------ ------------ PREMISES AND EQUIPMENT, net........................ 2,003,583 2,167,103 ------------ ------------ OTHER ASSETS....................................... 3,802,341 1,815,822 ------------ ------------ TOTAL ASSETS....................................... $168,371,507 $144,781,655 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ DEPOSITS: Demand........................................... $ 19,187,122 $ 17,522,309 Savings and money market accounts................ 25,084,287 23,838,702 Time deposits.................................... 84,774,840 63,227,494 ------------ ------------ Total deposits................................... 129,046,249 104,588,505 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE .... 9,574,571 9,411,111 FEDERAL HOME LOAN BANK ADVANCES ................... 10,869,241 13,610,400 ACCRUED EXPENSES AND OTHER LIABILITIES............. 2,390,731 1,689,999 ------------ ------------ Total Liabilities................................ 151,880,792 129,300,015 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, $1 par value; Authorized--5,000,000 shares; Issued--1,328,041 shares.................. 1,328,041 1,328,041 Surplus............................................ 4,431,380 4,431,380 Retained earnings................................ 11,892,318 10,504,194 Accumulated other comprehensive loss............. (405,939) (186,265) ------------ ------------ 17,245,800 16,077,350 Less--Treasury stock, at cost, 114,300 shares in 2000 and 101,800 shares in 1999................. 755,085 595,710 ------------ ------------ Total stockholders' equity....................... 16,490,715 15,481,640 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $168,371,507 $144,781,655 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 35 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- INTEREST INCOME: Interest and fees on loans ............... $9,693,958 $8,687,625 $7,796,758 Interest on investment securities-- U.S. Government and agency obligations.. 2,213,320 1,735,195 1,882,529 Collateralized mortgage obligations..... 65,477 129,786 52,398 Mortgage-backed securities.............. 305,300 393,975 537,544 Trust preferred stock .................. 706,498 -- -- Marketable equity securities and other.. 103,989 71,483 74,360 Interest on cash equivalents ............. 305,788 161,506 220,494 ---------- ---------- ---------- Total interest income................... 13,394,330 11,179,570 10,564,083 INTEREST EXPENSE: Interest on deposits...................... 5,362,533 3,732,477 4,091,958 Interest on repurchase agreements......... 459,222 553,342 712,217 Interest on advances...................... 763,125 563,746 160,865 Interest on debenture .................... -- 84,503 252,776 ---------- ---------- ---------- Total interest expense.................. 6,584,880 4,934,068 5,217,816 ---------- ---------- ---------- Net interest income..................... 6,809,450 6,245,502 5,346,267 PROVISION FOR LOAN LOSSES................... 175,000 275,000 250,000 ---------- ---------- ---------- Net interest income after provision for loan losses............................ 6,634,450 5,970,502 5,096,267 ---------- ---------- ---------- NONINTEREST INCOME: Service charges on deposits............... 284,077 267,626 279,185 Gain on loan sales........................ 383,399 340,061 165,620 Other..................................... 335,458 218,388 171,200 ---------- ---------- ---------- Total noninterest income................ 1,002,934 826,075 616,005 ---------- ---------- ---------- NONINTEREST EXPENSE: Salaries and employee benefits ........... 2,644,357 2,133,193 1,895,538 Occupancy expense ........................ 459,797 551,434 393,189 Equipment expense......................... 251,147 290,088 270,283 Other real estate owned net (gains) losses, and expenses..................... (13,506) (208,977) 41,593 Computer services......................... 251,883 251,964 199,306 Deposit insurance assessments............. 23,438 12,012 11,795 Other operating expenses.................. 960,936 887,179 656,527 ---------- ---------- ---------- Total noninterest expense............... 4,578,052 3,916,893 3,468,231 ---------- ---------- ---------- Income before provision for income taxes.................................. 3,059,332 2,879,684 2,244,041 PROVISION FOR INCOME TAXES.................. 1,088,613 1,061,036 793,993 ---------- ---------- ---------- NET INCOME.................................. $1,970,719 $1,818,648 $1,450,048 ========== ========== ========== Earnings per share: Basic................................... $ 1.62 $ 1.47 $ 1.15 ========== ========== ========== Diluted................................. $ 1.62 $ 1.47 $ 1.15 ========== ========== ========== Weighted average common shares outstanding.. 1,214,125 1,233,104 1,261,241 Weighted average equivalent shares.......... -- -- -- ---------- ---------- ---------- Weighted average common and common stock equivalent shares outstanding.............. 1,214,125 1,233,104 1,261,241 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 36 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the Years Ended December 31, 2000, 1999 and 1998
Accumulated Other Total Common Retained Comprehensive Treasury Stockholders' Comprehensive Stock Surplus Earnings (Loss) Income Stock Equity Income ---------- ---------- ----------- ------------- --------- ------------- ------------- Balance, December 31, 1997................... $1,328,041 $4,431,380 $ 7,982,792 $ 117,380 $(146,960) $13,712,633 Net income.............. -- -- 1,450,048 -- -- 1,450,048 $1,450,048 Other comprehensive income, net of tax: Unrealized holding losses, net of reclassification adjustment............ -- -- -- (46,742) -- (46,742) (46,742) ---------- Comprehensive income.... $1,403,306 ========== Dividends declared ($.24 per share)............. -- -- (302,697) -- -- (302,697) ---------- ---------- ----------- --------- --------- ----------- Balance, December 31, 1998................... 1,328,041 4,431,380 9,130,143 70,638 (146,960) 14,813,242 Net income.............. -- -- 1,818,648 -- -- 1,818,648 $1,818,648 Other comprehensive income, net of tax: Unrealized holding losses, net of reclassification adjustment............ -- -- -- (256,903) -- (256,903) (256,903) ---------- ---------- ----------- --------- --------- ----------- ---------- Comprehensive income.... $1,561,745 ========== ========== =========== ========= ========= =========== ========== Dividends declared ($.36 per share) ............ -- -- (444,597) -- -- (444,597) Repurchase of 35,000 shares of common stock ....................... -- -- -- -- (448,750) (448,750) ---------- ---------- ----------- --------- --------- ----------- Balance, December 31, 1999................... 1,328,041 4,431,380 10,504,194 (186,265) (595,710) 15,481,640 Net Income ............. -- -- 1,970,719 -- -- 1,970,719 $1,970,719 Other comprehensive income, net of tax: Unrealized holding losses, net of reclassification adjustment............ -- -- -- (219,674) -- (219,674) (219,674) ---------- ---------- ----------- --------- --------- ----------- ---------- Comprehensive income.... $1,751,045 ========== ========== =========== ========= ========= =========== ========== Dividends declared ($.48 per share)............. -- -- (582,595) -- -- (582,595) Repurchase of 12,500 shares of common stock ....................... -- -- -- -- (159,375) (159,375) ---------- ---------- ----------- --------- --------- ----------- Balance, December 31, 2000................... $1,328,041 $4,431,380 $11,892,318 $(405,939) $(755,085) $16,490,715 ========== ========== =========== ========= ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. 37 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------------------------- 2000 1999 1998 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................... $ 1,970,719 $ 1,818,648 $ 1,450,048 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.. 175,000 275,000 250,000 Depreciation and amortization.............. 278,865 305,694 285,721 Write-off of impaired long- lived asset .............. -- 129,362 -- (Gains) losses on sale of other real estate owned .. (21,544) (215,008) 14,162 Gain on sales of loans..... (383,399) (340,061) (165,620) Proceeds from sales of loans..................... 7,082,463 5,547,975 3,630,231 Loans originated for sale.. (6,261,726) (5,792,759) (3,346,300) Net (decrease) increase in deferred loan fees........ (8,454) 4,535 6,226 Net accretion on investment securities held-to- maturity.................. (12,339) (6,916) (5,203) Net accretion on investment securities available-for- sale...................... (330,756) (370,177) (290,619) Net decrease in unearned discount ................. (15,547) (43,043) (8,843) Net (increase) decrease in other assets.............. (1,660,072) (290,742) 202,805 Deferred income taxes (benefit)................. (180,000) (237,000) (114,000) Amortization of discount on debenture................. -- 15,860 205,983 Net increase (decrease) in accrued expenses and other liabilities............... 700,732 280,385 (136,118) -------------- -------------- -------------- Net cash provided by operating activities...... 1,333,942 1,081,753 1,978,473 -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities held- to-maturity ................ 2,547,151 3,532,387 20,472,802 Proceeds from maturities of investment securities available-for-sale.......... 259,462,848 310,600,674 150,311,185 Purchase of investment securities held-to-maturity ........... (9,332,609) (5,483,082) (21,733,252) Purchase of investment securities available-for- sale........................ (270,564,744) (298,428,506) (156,587,124) Purchase of Federal Home Loan Bank stock.................. (34,500) (233,800) -- Net increase in loans........ (9,326,567) (8,610,414) (9,418,020) Purchase of premises and equipment................... (115,345) (185,369) (243,961) Sales of other real estate owned....................... 451,625 728,135 499,901 -------------- -------------- -------------- Net cash (used in) provided by investing activities..... (26,912,141) 1,920,025 (16,698,469) -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand accounts.................... 1,664,813 1,779,124 2,544,229 Net increase (decrease) in savings and money market accounts.................... 1,245,585 1,898,372 (1,431,027) Net increase (decrease) in time deposits............... 21,547,346 (3,460,919) 3,968,855 Net increase (decrease) in repurchase agreements....... 163,460 (2,844,769) 2,150,880 Net (decrease)increase in Federal Home Loan Bank advances.................... (2,741,159) 7,406,323 6,204,077 Repayment of Senior Debenture................... -- (2,708,777) -- Purchase of common stock for treasury.................... (159,375) (448,750) -- Dividends paid............... (582,595) (444,597) (365,762) -------------- -------------- -------------- Net cash provided by financing activities........ 21,138,075 1,176,007 13,071,252 -------------- -------------- --------------
38 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended December 31, ----------------------------------- 2000 1999 1998 ----------- ---------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.............................. $(4,440,124) $4,177,785 $(1,648,744) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................................... 9,244,055 5,066,270 6,715,014 ----------- ---------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR.... $ 4,803,931 $9,244,055 $ 5,066,270 =========== ========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid........................... $ 6,479,173 $4,907,286 $ 5,211,783 =========== ========== =========== Income taxes paid....................... $ 1,535,000 $1,236,000 $ 1,083,250 =========== ========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Transfer of loans to OREO............... $ 430,081 $ -- $ 245,000 =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 39 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2000 (1) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of First Financial Corp. and its wholly-owned subsidiary First Bank and Trust Company (collectively, "Company"), after elimination of all intercompany transactions and balances. Certain reclassifications have been made to prior year balances to conform with the current year presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, deferred tax assets, servicing rights assets and the valuation of foreclosed real estate. Cash and Cash Equivalents For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and securities purchased under agreements to resell, which represent short-term investments in government treasury and agency securities purchased from another institution. Investment Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at cost, adjusted for the amortization of premium or the accretion of discount. Debt and equity securities with readily determinable fair values which are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are carried at fair value, with unrealized gains and losses included in current earnings. At December 31, 2000 and 1999, the Company had no securities classified as trading. Debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and are carried at fair value, with unrealized after-tax gains and losses reported as a separate component of stockholders' equity. Loans Loans are stated at the principal amount outstanding, net of unamortized deferred loan origination fees and costs. Deferred loan origination fees and costs are amortized as an adjustment to yield over the life of the related loans. Interest on commercial, real estate and consumer loans is accrued based on the principal amounts outstanding. The Company's policy is to discontinue the accrual of interest on loans when scheduled payments become past due in excess of 90 days, and when, in the judgement of management, the ultimate collectibility of principal or interest becomes doubtful. When a loan is placed on nonaccrual status, all interest previously accrued but not collected is generally reversed against interest income in the current period. Interest income is recognized on an accrual basis for impaired loans, until such loans are placed on nonaccrual status. The Company recognizes interest income on these nonaccrual loans on a cash basis when the ultimate collectibility of principal is no longer considered doubtful. Otherwise, cash payments on nonaccrual loans are applied to principal. 40 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 Loans held for sale are carried at the lower of cost or fair value. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the face value of the collateral if the loan is collateral-dependent. Currently, all impaired loans have been measured through the latter method. All loans on nonaccrual status are considered to be impaired. All adversely classified loans at December 31, 2000 and 1999 are also considered to be impaired. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through a valuation allowance. Loans are evaluated for impairment according to the Company's normal loan review process, including overall credit evaluation and rating, nonaccrual status and payment experience. Loans identified as impaired are further evaluated to determine the estimated extent of impairment. For collateral-based loans, the extent of impairment is the shortfall, if any, between the collateral value less costs to dispose of such collateral and the carrying value of the loan. In accordance with Statement of Financial Accounting Standards (SFAS) No. 125 and SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments on Liabilities," the Company capitalizes the rights to service loans for others. The total cost of originated loans that are sold with servicing rights retained is allocated between the servicing rights and the loans without the servicing rights based on their relative fair values. Capitalized servicing rights are included in other assets and are amortized as an offset to other income over the period of estimated net servicing income. They are periodically evaluated for impairment based on their fair value. Impairment is measured on an aggregated basis according to interest rate band and period of origination. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Any impairment is recognized as a charge to earnings through a valuation allowance. Certain disclosure provisions required by SFAS No. 140 were effective immediately and are included in these consolidated financial statements. Additional requirements related to SFAS No. 140 are effective beginning March 31, 2001. The Bank does not expect that these additional requirements will have an effect on the Bank's consolidated financial position or results or operations. Provision and Allowance for Loan Losses The balance of the allowance and the amount of the annual provision charged to expense are estimated amounts based on management's systematic review of past loan loss experience, changes in the character and size of the loan portfolio, current economic conditions, adverse situations that may affect the borrowers ability to repay, and other pertinent factors. Ultimate losses may vary from the current estimates. These estimates are reviewed periodically, and as adjustments become necessary, they are reported as an expense in the periods in which they become known. The allowance is maintained at a level considered by management to be adequate to cover inherent loan losses. Losses are charged against the allowance for loan losses when management believes that the collectibility of principal is unlikely. This evaluation is subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Other Real Estate Owned Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Expenses from operations and changes in valuations are included in other real estate owned (gains) losses and expenses. At December 31, 2000 and 1999, the Company did not own any real estate acquired through, or in lieu of, foreclosure. 41 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight- line method over the estimated useful lives of the assets. The following is a summary of the lives over which the Company computes depreciation: Buildings and Improvements....................................... 10-40 years Leasehold Improvements........................................... 10 years Furniture and Fixtures........................................... 10-20 years Equipment........................................................ 5-10 years
When property is retired or otherwise disposed of, the asset and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in the consolidated statements of income. Costs of major additions and improvements are capitalized, and expenditures for maintenance and repairs are charged to operations as incurred. Impairment of Long-Lived Assets Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an asset being tested for recoverability was acquired in a business combination, the related goodwill is included as part of the asset grouping in determining recoverability. In instances where goodwill is identified with assets that are subject to an impairment loss, the carrying amount of the identified goodwill is eliminated before making any reduction of the carrying amounts of impaired long-lived assets and identifiable intangibles. The Company evaluates the recoverability of its carrying amounts of long- lived assets based on estimated cash flows to be generated by each of such assets as compared to the original estimates used in measuring such assets. To the extent impairment is identified, this Company would reduce the carrying value of such assets. Income Taxes The Company accounts for income taxes using the asset and liability method of accounting under which deferred taxes are recognized for the future tax consequences of the temporary differences between the financial statement and tax basis of assets and liabilities, using the enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. As changes in tax laws or rates are enacted, deferred assets and liabilities will be adjusted accordingly through the provision for income taxes. Earnings Per Share Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is determined by dividing net income by the weighted average number of common shares and common stock equivalent shares outstanding. There were no dilutive shares outstanding during 2000, 1999 and 1998. Comprehensive Income Comprehensive income, which consists of net income and changes in unrealized gains and losses on securities available-for-sale net of income taxes, is disclosed in the consolidated statements of stockholders' equity and comprehensive income. There were no reclassification adjustments to comprehensive income during 2000, 1999 and 1998. 42 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 Recent Pronouncements During 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the consolidated statement of condition as either an asset or liability measured at fair value. This statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the consolidated statement of operations, and requires that an entity must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company adopted this statement effective January 1, 2001. The impact of adopting SFAS No. 133 did not have a material effect on the Bank's consolidated financial position or results of operations. (2) Investment Securities The estimated fair value and amortized cost of investment securities at December 31, 2000 and 1999 are as follows:
December 31, 2000 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- Held-to-maturity-- U.S. Government & agency obligations................... $21,836,272 $ 32,173 $ 66,614 $21,801,831 Collateralized mortgage obligations................... 652,529 -- 2,459 650,070 ----------- -------- -------- ----------- $22,488,801 $ 32,173 $ 69,073 $22,451,901 =========== ======== ======== =========== Available-for-sale-- U.S. Government & agency obligations................... $17,480,446 $ 64,362 $ 9,411 $17,535,397 Mortgage-backed securities..... 4,202,320 24,494 10,856 4,215,958 Trust preferred stock ......... 9,432,439 -- 522,239 8,910,200 Marketable equity securities and other .................... 1,485,014 22,697 245,611 1,262,100 ----------- -------- -------- ----------- $32,600,219 $111,553 $788,117 $31,923,655 =========== ======== ======== =========== December 31, 1999 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- Held-to-maturity-- U.S. Government & agency obligations................... $14,000,000 $ -- $230,568 $13,769,432 Collateralized mortgage obligations................... 1,691,004 -- 9,983 1,681,021 ----------- -------- -------- ----------- $15,691,004 $ -- $240,551 $15,450,453 =========== ======== ======== =========== Available-for-sale-- U.S. Government & agency obligations................... $14,801,041 $ 251 $ 79,350 $14,721,942 Mortgage-backed securities..... 5,197,769 4,600 148,047 5,054,322 Marketable equity securities and other..................... 1,168,757 41,627 129,524 1,080,860 ----------- -------- -------- ----------- $21,167,567 $ 46,478 $356,921 $20,857,124 =========== ======== ======== ===========
43 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 A schedule of the maturity distribution of U.S. Government and agency obligations is as follows:
December 31, 2000 ----------------------------------------------- Held-to-Maturity Available-for-Sale ----------------------- ----------------------- Amortized Amortized Cost Fair Value Cost Fair Value ----------- ----------- ----------- ----------- Within one year................. $10,500,000 $10,439,466 $11,995,365 $11,993,869 Over one year to five years..... 11,336,272 11,362,365 5,485,081 5,541,528 ----------- ----------- ----------- ----------- $21,836,272 $21,801,831 $17,480,446 $17,535,397 =========== =========== =========== ===========
At December 31, 2000, $10,250,000 par value of debt securities maturing in the one-to-five-year period are subject to call provisions within one year. There were no sales of investment securities in 2000, 1999 and 1998. At December 31, 2000, issues of trust preferred stock have maturities extending to 2027 with call provisions commencing in 2007. The call provisions are at a declining premium for 10 years and then at par thereafter. Investment securities with a carrying value of $11,869,188 and $10,995,483, at December 31, 2000 and 1999, respectively, were pledged as collateral for repurchase agreements, public deposits and other purposes, as required by law. (3) Loans and Allowance for Loan Losses In 1992, the Company acquired certain assets and assumed certain deposit liabilities of the former Chariho-Exeter Credit Union ("Chariho"). The Company and the State of Rhode Island Depositors Economic Protection Corporation ("DEPCO") established an allowance for loan losses of $3,850,000 for loans acquired. This allowance was available only for loans of Chariho existing as of the acquisition date. The following analysis summarizes activity for both the acquired allowance and the Company's allowance for loan losses. 44 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 As set forth in the Chariho Acquisition Agreement, the remaining balance, if any, in the acquired allowance at May 1, 1999, less an amount equal to 1% of the remaining acquired loans, must be refunded to DEPCO. Conversely, in the event the allowance is inadequate, additional loan charge- offs were to reduce the amount owed on the debenture (Note 12) issued to DEPCO in connection with the acquisition. On May 31, 1999, the Company repaid the Senior Debenture in the amount of $2,708,777, which represented the original face value of $3,000,000, less $291,223 in net acquired loan losses in excess of the acquired loan loss allowance.
December 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- Company Allowance: Balance at beginning of year............. $1,556,405 $1,287,058 $1,208,322 Provision.............................. 175,000 275,000 250,000 Loan charge-offs....................... (89,994) (53,634) (184,278) Recoveries............................. 110,210 47,981 13,014 ---------- ---------- ---------- Balance at end of year................... 1,751,621 1,556,405 1,287,058 ---------- ---------- ---------- Acquired Allowance: Balance at beginning of year............. -- -- 388,291 Loan charge-offs....................... -- (266,482) (402,404) Recoveries (costs)..................... -- 1,638 (12,266) Reclassification to senior debenture (Note 12)............................. -- 264,844 26,379 ---------- ---------- ---------- Balance at end of year................... -- -- -- ---------- ---------- ---------- Total Allowance...................... $1,751,621 $1,556,405 $1,287,058 ========== ========== ==========
At December 31, 2000 and 1999, the Company's recorded investment in impaired loans was $1,410,398 and $1,630,204, respectively, of which $440,574 and $613,074, respectively, was determined to require a valuation allowance of $123,639 and $147,586. The average recorded investment in impaired loans during 2000 and 1999 was $1,119,027 and $1,473,906, respectively. For the years ended December 31, 2000 and 1999, interest income on impaired loans totaled $169,190 and $186,264, respectively. At December 31, 2000 and 1998, the Company had no nonaccruing loans. At December 31, 1999, nonaccrual loans totaled $180,571. Had nonaccrual loans been accruing, interest income would have increased by $14,742, for the year ended December 31, 1999. Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were $15,522,774 and $10,931,194 at December 31, 2000 and 1999, respectively. The balance of capitalized servicing rights, net of valuation allowances (fair value), included in other assets at December 31, 2000 and 1999, was $464,926 and $174,453, respectively. Amortization of these servicing rights totaled $29,873 and $0 for the years ended December 31, 2000 and 1999, respectively. 45 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 (4) Premises and Equipment Premises and equipment are summarized as follows:
December 31, --------------------- 2000 1999 ---------- ---------- Land and improvements.................................. $ 676,294 $ 676,294 Buildings and improvements............................. 1,435,752 1,431,565 Leasehold improvements................................. 277,824 277,824 Furniture, fixtures and equipment...................... 1,521,450 1,466,506 ---------- ---------- 3,911,320 3,852,189 Less--Accumulated depreciation and amortization ....... 1,907,737 1,685,086 ---------- ---------- $2,003,583 $2,167,103 ========== ==========
In June 1999, the Company recognized impairment in value of one of its long- lived assets and recorded a write-off in value of $129,362. Depreciation and amortization expense related to bank premises and equipment was $278,865, $305,694 and $285,721 in 2000, 1999 and 1998, respectively. (5) Time Deposits At December 31, 2000, scheduled maturities of time deposits are as follows:
$100,000 Maturity Or More Other Total -------- -------- ------- ------- (In Thousands) 2001................................................ $15,807 $56,265 $72,072 2002................................................ 735 6,074 6,809 2003 ............................................... 793 4,236 5,029 2004................................................ 100 470 570 2005................................................ -- 295 295 ------- ------- ------- $17,435 $67,340 $84,775 ======= ======= =======
Included in total time deposits are $11,496,000 of certificates of deposit subject to repricing on a quarterly basis (indexed to the three month yield on U.S. Treasury bills). Of these time deposits, $5,981,000 have remaining maturities of one year or less. (6) Federal Home Loan Bank Advances and Other Borrowings At December 31, 2000, advances from the Federal Home Loan Bank of Boston ("FHLB") have scheduled repayments as follows: 2001............................................................. $ 255,598 2002............................................................. 1,662,490 2003............................................................. 2,764,791 2004............................................................. 279,607 2005............................................................. 298,749 2006 and thereafter.............................................. 5,608,006 ----------- $10,869,241 ===========
46 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 Of the total FHLB advances, $8,369,241 represents amortizing notes with final maturities of 2-14 years and amortization periods of 15-25 years. The remaining $2,500,000 matures at September 17, 2003, with a one time call option exercisable by the FHLB on September 17, 2001. Information relative to the Company's advances from the FHLB during 2000 is as follows: Balance, December 31, 2000...................................... $10,869,241 Average amount outstanding during the year...................... 12,790,198 Maximum amount outstanding at any month end..................... 13,594,693 Weighted average interest rate at December 31, 2000............. 5.97% Weighted average interest rate during the year.................. 5.97%
All borrowings from the FHLB are secured by the Company's stock in the FHLB and a blanket lien on "qualified collateral" defined principally as 90% of the market value of unpledged U.S. government and federal agency obligations and 75% of the carrying value of certain unpledged residential mortgage loans. At December 31, 2000 and 1999, the Company had an unused borrowing capacity of $28,164,000 and $26,290,000 respectively, which excludes an unused overnight line of credit of $2,352,000. The Company also had $9,574,571 and $9,411,111 of other borrowings at December 31, 2000 and 1999, respectively. These borrowings consist of repurchase agreements with customers and securities dealers and are collateralized by mortgage-backed securities and obligations of the U.S. Government and agency obligations. The following table represents scheduled maturities and interest rates of these agreements at December 31, 2000.
Weighted Average Maturity Rate Amount -------- -------- ---------- January 2001............................................ 3.50% $4,474,571 February 2001 .......................................... 5.67 5,100,000 ---- ---------- 4.68% $9,574,571 ==== ==========
At December 31, 2000, the Company's risk with counterparties to securities sold under repurchase agreements was approximately $614,000. The amount at risk with counterparties represents the excess of the greater of the carrying value or estimated market value of underlying collateral plus related accrued interest receivable over the total repurchase borrowing and related accrued interest payable. Securities sold under repurchase agreements averaged $9,204,791 and $11,311,027 during 2000 and 1999, respectively. The maximum amounts outstanding at any month end were $9,574,571 during 2000 and $12,055,000 during 1999. The weighted average interest rate was 4.99% during 2000 and 4.89% during 1999. (7) Commitments and Contingencies Leases The Company leases the land on which its Cranston branch office is located, and building space in which its North Kingstown in-store branch is located. The annual rental expense under these leases is as follows: 2001................................................................. $46,500 2002................................................................. 31,916 2003................................................................. 21,500 2004................................................................. 8,958 2005 and thereafter ................................................. --
47 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 The leases contain renewal options commencing in May 2002 and extending to May 2012. Under the terms of the renewal options, the annual rental expense for both leases will not exceed $63,563. Litigation As of December 31, 2000, the Company was involved in certain lawsuits that arose in the ordinary course of business. Management has reviewed these actions with legal counsel and has taken into consideration the views of legal counsel as to the outcome of the litigation. In management's opinion, final disposition of such lawsuits will not have a materially adverse effect on the Company's financial position or results of operations. Reserve Requirement The Company is required to maintain reserve balances with the Federal Reserve Bank under the Federal Reserve Act and Regulation D. Required balances, including vault cash, were $460,000 and $469,000 as of December 31, 2000 and 1999, respectively. Financial Instruments With Off-balance Sheet Risk and Concentration of Credit Risk In the normal course of business, the Company enters into various commitments, such as commitments to extend credit and guarantees (including standby letters of credit), which are not reflected in the accompanying consolidated financial statements. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the accompanying consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Off-balance sheet instruments, whose contract amounts present credit risk, include the following:
December 31, --------------------- 2000 1999 ---------- ---------- Unused portion of existing lines of credit............ $8,150,000 $7,864,000 Unadvanced construction loans......................... 2,283,000 2,149,000 Firm commitments to extend credit..................... 1,077,000 1,679,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of the credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial real estate. 48 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 The Company originates primarily residential and commercial real estate loans and, to a lesser extent, commercial and installment loans to customers primarily located in the State of Rhode Island and, to a lesser extent, southeastern Massachusetts. The Company operates two branches in the metropolitan Providence area, and two branches in Washington County, Rhode Island. Its primary source of revenue is providing loans to customers who are predominantly small and middle-market businesses and middle-income individuals. (8) Income Taxes The provision for income taxes consists of the following components:
Years Ended December 31, --------------------------------- 2000 1999 1998 ---------- ---------- --------- Federal-- Current.................................... $1,212,863 $1,140,786 $ 832,993 Prepaid.................................... (180,000) (237,000) (114,000) State...................................... 55,750 157,250 75,000 ---------- ---------- --------- $1,088,613 $1,061,036 $ 793,993 ========== ========== =========
The provision for income taxes differs from the amount computed by applying the statutory rate of 34%, as summarized below:
Years Ended December 31, -------------------------------- 2000 1999 1998 ---------- ---------- --------- Provision for income taxes at statutory rate................... $1,040,173 $ 979,093 $ 762,974 State taxes, net of federal benefit........ 36,795 103,785 49,500 Other................... 11,645 (21,842) (18,481) ---------- ---------- --------- $1,088,613 $1,061,036 $ 793,993 ========== ========== =========
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 2000 and 1999 are as follows:
December 31, ----------------- 2000 1999 -------- -------- Gross deferred tax assets: Allowance for loan losses.................................. $509,004 $484,241 Deferred loan origination fees............................. 57,430 60,812 Supplemental executive pension plan........................ 279,336 162,838 Accrued expenses........................................... 118,647 95,106 -------- -------- Gross deferred tax assets.................................... 964,417 802,997 -------- -------- Gross deferred tax liabilities: Depreciation............................................... 156,161 174,728 Installment sales.......................................... 13,256 13,269 -------- -------- Gross deferred tax liabilities............................... 169,417 187,997 -------- -------- Net deferred tax asset....................................... $795,000 $615,000 ======== ========
49 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 A valuation reserve is provided when it is more likely than not that some portion of the gross deferred tax asset will not be realized. No valuation reserve was required as of December 31, 2000 or 1999. (9) Related Party Transactions Certain directors and executive officers of the Company, their immediate families, companies in which they are principal owners, and trusts in which they are involved are borrowers of the Company. These related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and do not involve more than normal risk of collectibility. Related party loan activity was as follows:
2000 1999 ---------- ---------- Balance at beginning of year.......................... $1,604,451 $1,906,279 Originations........................................ 68,620 -- Payments............................................ 440,389 301,828 ---------- ---------- Balance at end of year................................ $1,232,682 $1,604,451 ========== ==========
(10) Employee Benefit Plan The Company is a member of the Financial Institutions Retirement Fund (FIRF), a multiple employer pension plan. As a participant in FIRF, the Company expenses its contributions to this plan, which is accounted for as a defined contribution plan. The Company's pension expense was $131,900 for the year ended December 31, 2000. For the years ended December 31, 1999 and 1998, the plan reached a fully funded status and the Company was not required to make a contribution. Consequently, no pension expense was recorded during 1999 and 1998. Effective January 1, 1995, the Company established a nonqualified retirement plan (Plan) to provide supplemental retirement benefits to designated employees whose pension benefits are otherwise limited by the Internal Revenue Code regulations. During 2000, the Company amended the Plan to provide for a minimum benefit of 80% of the participant's three highest years' base salary. This amendment was accounted for in accordance with SFAS No. 87, "Employer's Accounting for Pensions". A liability and transition asset of $423,633 were recorded. The impact of this amendment was to increase the benefit obligation for prior service cost by $720,000 and to increase net periodic benefit cost by $146,000. 50 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 The following table sets forth a reconciliation of the Plan's projected benefit obligation, a reconciliation of fair value of plan assets, the funded status of the plan, and the components of net periodic benefit cost for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 ---------- --------- -------- Change in benefit obligations: Benefit obligation at beginning of year..... $ 752,754 $ 488,093 $365,941 Service cost................................ 32,164 28,316 19,177 Interest cost............................... 113,871 50,542 32,715 Actuarial loss (gain)....................... 765,529 185,803 70,260 ---------- --------- -------- Benefit obligation at end of year........... 1,664,318 752,754 488,093 ---------- --------- -------- Change in plan assets: Fair value of plan assets at beginning of year....................................... 574,611 412,318 310,091 Actual return on plan assets................ 6,927 32,298 21,779 Employer contributions...................... 291,245 129,995 80,448 ---------- --------- -------- Fair value of plan assets at end of year ... 872,783 574,611 412,318 ---------- --------- -------- Funded status............................... (791,535) (178,143) (75,775) Unrecognized net actuarial loss (gain)...... 234,528 202,879 39,657 Unrecognized prior service cost............. 731,449 142,779 171,335 Unrecognized net asset being recognized over 10 years................................... (514,329) (90,696) (31,638) ---------- --------- -------- Prepaid (accrued) benefit cost.............. $ (339,887) $ 76,819 $103,579 ========== ========= ======== Components of net periodic benefit cost: Service cost................................ $ 32,164 $ 28,316 $ 19,177 Interest cost............................... 113,871 50,542 32,715 Amortization of prior service cost.......... 131,427 28,556 28,556 Amortization of unrecognized loss (gain).... 13,783 22,581 -- ---------- --------- -------- Net periodic benefit cost................... $ 291,245 $ 129,995 $ 80,448 ========== ========= ========
For calculating 2000, 1999 and 1998 pension costs for this nonqualified plan the following assumptions were used: Assumed discount rate............................................... 7.5% Rate of increase in compensation level.............................. 5.0% Amortization period for unrecognized prior service cost............. 10 years
The Company is a member of the Financial Institutions Thrift Plan for the benefit of its employees. This plan, which was effective January 1, 1997, is a qualified savings incentive plan under Internal Revenue Code section 401(k). Under the terms of the Plan, the Company matches 50% of the first 6% of each eligible employee's contribution. The Company's expense under this plan amounted to $41,175, $46,995, and $32,848 for the years ended December 31, 2000, 1999 and 1998. (11) Stockholders' Equity On November 16, 1998, the Company's Board of Directors authorized the repurchase of up to 5%, or 63,062 shares, of the Company's common stock. During 2000 and 1999, the Company repurchased a total of 47,500 51 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 shares under the repurchase program at prices ranging from $12.625 to $12.9375 per share. Total capital used for these repurchases amounted to $608,125. (12) Chariho-Exeter Credit Union Acquisition In May 1992, the Company entered into the Acquisition Agreement with the receiver for Chariho and DEPCO. In connection with the Acquisition Agreement, the Company entered into a Securities Purchase Agreement with DEPCO. Under this agreement, the Company issued the Senior Debenture, a $3 million variable rate debenture to DEPCO. The Company invested the proceeds on the issuance of the debenture as a contribution of capital to the Bank. Under the terms of the debenture, interest began to accrue on the third anniversary of the Senior Debenture and was payable semiannually thereafter. The Senior Debenture bore interest at the average five-year Treasury rate (indexed rate) plus 1% until maturity and at the indexed rate plus 4% during the extension period. A discount of $717,005 was recorded to reduce the carrying value of the Senior Debenture at the date of issuance in recognition of its favorable interest terms. This discount was amortized over the initial term of the Senior Debenture on the level yield method. The discount amortization for the years ended December 31, 2000, 1999 and 1998 amounted to $0, $15,860 and $205,983, respectively, and is classified as interest expense in the accompanying consolidated statements of income. As discussed in (Note 3), the Senior Debenture matured on May 1, 1999 and the Company repaid the obligation. (13) Fair Value Of Financial Instruments The Company is required to disclose fair values for certain of its financial instruments. Financial instruments include such items as loans, securities, deposits, swaps and other instruments, as defined. Quoted market prices are used to estimate fair values where available. Many of the Company's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is the Company's general practice and intent to hold the majority of its financial instruments, such as loans and deposits, to maturity and not engage in trading or sales activities. Therefore, permitted valuation techniques such as present value calculations, were used for the purposes of this disclosure. Management notes that reasonable comparability between financial institutions may not necessarily be made due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. The methods and assumptions used to estimate the fair values of each class of financial instruments are as follows: Cash and Due from Banks, and Securities Purchased Under Agreements to Resell. These items are generally short-term in nature and, accordingly, the carrying amounts reported in the consolidated balance sheet are reasonable approximations of their fair values. Investment Securities Held-to-Maturity and Available-for-Sale. Fair values are based principally on quoted market prices. 52 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 FHLB Stock. The FHLB stock does not have a readily determinable market value. Consequently, the carrying amount is considered to approximate its fair value. Loans. The fair value of accruing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or for classified loans using a discount rate that reflects the risk inherent in the loan. The fair value of nonaccrual loans is based on the estimated market value of the underlying collateral held. Loan Servicing Asset. The fair value is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed and servicing cost. Deposits. The fair value of demand, NOW, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using discounted value of contractual cash flows. The discount rates are the rates currently offered for deposits of similar remaining maturities. Securities sold under agreements to repurchase. The face value is considered to approximate its fair value. FHLB Advances. The fair value of Federal Home Loan Bank advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated expected monthly maturities on FHLB advances. Commitments to Extend Credit and Standby Letters of Credit. The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value amounts are not material. At December 31, 2000 and 1999, the estimated fair value of the Company's financial instruments are as follows:
December 31, --------------------------------------------------- 2000 1999 ------------------------- ------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------------ ------------ ------------ ------------ ASSETS ------ Cash and due from banks and securities purchased under agreement to resell....... $ 4,803,931 $ 4,803,931 $ 9,244,055 $ 9,244,055 Loans held for sale........ 505,000 508,480 942,338 1,008,571 Investment securities: Held-to-maturity......... 22,488,801 22,451,901 15,691,004 15,450,453 Available-for-sale....... 31,923,655 31,923,655 20,857,124 20,857,124 Federal Home Loan Bank stock..................... 716,000 716,000 681,500 681,500 Loans--net................. 102,128,196 104,462,000 93,382,709 94,033,000 Loan servicing asset....... 464,926 464,926 174,453 174,453 LIABILITIES ----------- Deposits................... $129,046,249 $129,617,000 $104,588,505 $104,430,000 Securities sold under agreements to repurchase.. 9,574,571 9,572,000 9,411,111 9,282,000 Federal Home Loan Bank advances.................. 10,869,241 11,028,000 13,610,400 13,479,000
53 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 (14) The Company (Parent Company Only) The condensed separate financial statements of the Company are presented below. CONDENSED BALANCE SHEETS
December 31, ------------------------ 2000 1999 ----------- ----------- ASSETS ------ Cash and due from banks.............................. $ 57,762 $ 79,227 Investment securities: Available-for-sale (amortized cost: $631,779 in 2000 and 1999) ................................... 386,167 502,255 Investment in subsidiary bank........................ 15,949,905 14,827,906 Other assets......................................... 119,882 82,023 ----------- ----------- Total assets..................................... $16,513,716 $15,491,411 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Other liabilities ................................... $ 23,001 $ 9,771 ----------- ----------- Total Liabilities ............................... 23,001 9,771 ----------- ----------- Stockholders' Equity: Common stock ...................................... 1,328,041 1,328,041 Surplus ........................................... 4,431,380 4,431,380 Retained earnings ................................. 11,892,318 10,504,194 Accumulated other comprehensive (loss) income ..... (405,939) (186,265) ----------- ----------- 17,245,800 16,077,350 Less--Treasury stock ................................ 755,085 595,710 ----------- ----------- Total stockholders' equity ...................... 16,490,715 15,481,640 ----------- ----------- Total liabilities and stockholders' equity ...... $16,513,716 $15,491,411 =========== ===========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- Interest and dividend income .............. $ 766,313 $1,028,666 $ 491,446 Interest and other expense ................ 88,000 162,503 338,776 ---------- ---------- ---------- Income before income taxes and equity in undistributed earnings of subsidiary ..... 678,313 866,163 152,670 Applicable income tax benefit ............. (20,387) (28,963) (51,007) ---------- ---------- ---------- Income before equity in undistributed earnings of subsidiary ................... 698,700 895,126 203,677 Equity in undistributed earnings of subsidiary ............................... 1,272,019 923,522 1,246,371 ---------- ---------- ---------- Net income ................................ $1,970,719 $1,818,648 $1,450,048 ========== ========== ==========
54 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------- 2000 1999 1998 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................... $ 1,970,719 $ 1,818,648 $ 1,450,048 Adjustments to reconcile net income to net cash provided by (used in) operating activities-- Equity in undistributed earnings of subsidiary ........................ (1,272,019) (923,522) (1,246,371) Amortization of discount on debenture ......................... -- 15,860 205,983 Net accretion on investment securities ........................ -- (34,904) (44,134) Net increase (decrease) in accrued expenses and other liabilities..... 13,230 12,702 (59,453) Net decrease (increase) in other assets ............................ 8,575 32,692 (12,459) ----------- ----------- ----------- Net cash provided by operating activities ...................... 720,505 921,476 293,614 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities available-for- sale ...... -- 8,825,000 3,600,000 Purchase of investment securities available-for-sale .................. -- (5,876,675) (3,523,036) ----------- ----------- ----------- Net cash provided by investing activities....................... -- 2,948,325 76,964 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of Senior Debenture ........ -- (3,000,000) -- Purchase of common stock for treasury. (159,375) (448,750) -- Dividends paid ....................... (582,595) (444,597) (365,762) ----------- ----------- ----------- Net cash used in financing activities....................... (741,970) (3,893,347) (365,762) ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........................... (21,465) (23,546) 4,816 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................... 79,227 102,773 97,957 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR.. $ 57,762 $ 79,227 $ 102,773 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid ........................ $ -- $ 82,369 $ 201,450 =========== =========== ===========
(15) Regulatory Capital The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to quantitative judgements by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts of ratios (set forth in the table below) of total Tier I capital (as defined in 55 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2000, the Company and the Bank met all capital adequacy requirements to which they are subject and are considered "well capitalized" by the federal banking agencies. The most recent Federal Deposit Insurance Corporation examination categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the Bank's category.
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ----------------- ---------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----- ---------- ----- ----------- ----- As of December 31, 2000: The Company: Total capital (to risk weighted assets)............ $18,338,000 15.94% $9,229,440 8.00% -- -- Tier I capital (to risk weighted assets)............ 16,896,000 14.68 4,614,720 4.00 -- -- Tier I capital (to average assets).... 16,896,000 10.10 5,019,330 3.00 -- -- The Bank: Total capital (to risk weighted assets)............ $17,641,000 15.44% $9,143,200 8.00% $11,429,000 10.00% Tier I capital (to risk weighted assets)............ 16,208,000 14.18 4,571,600 4.00 6,857,400 6.00 Tier I capital (to average assets).... 16,208,000 9.79 4,966,080 3.00 8,276,800 5.00 As of December 31, 1999: The Company: Total capital (to risk weighted assets)............ $16,843,000 17.97% $7,497,920 8.00% -- -- Tier I capital (to risk weighted assets)............ 15,667,000 16.72 3,748,960 4.00 -- -- Tier I capital (to average assets).... 15,667,000 10.71 4,386,930 3.00 -- -- The Bank: Total capital (to risk weighted assets)............ $16,105,000 17.30% $7,446,720 8.00% $ 9,308,400 10.00% Tier I capital (to risk weighted assets)............ 14,937,000 16.05 3,723,360 4.00 5,585,040 6.00 Tier I capital (to average assets).... 14,937,000 10.26 4,367,130 3.00 7,278,550 5.00
(16) Business Segments The Company's chief operating decision maker is the Chairman, President and Chief Executive Officer of the Company. The Company has identified its reportable operating business segment as Community Banking based on how the business is strategically managed. The Company's community banking business segment consists of commercial and retail banking. The community banking business segment is managed as a single strategic unit which derives its revenues from a wide range of banking services, including investing and lending activities and acceptance of demand, savings and time deposits. There is no major customer and the Company operates within a single geographic area (southeastern New England). 56 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 Non reportable operating segments of the Company's operations which do not have similar characteristics to the community banking operations and do not meet the quantitative thresholds requiring disclosure, are included in the Other category in the disclosure of business segments below. These non reportable segments include the Parent Company (Note 14). The accounting policies used in the disclosure of business segments are the same as those described in the summary of significant accounting policies. The consolidation adjustments reflect certain eliminations of intersegment revenue, cash and the Parent Company investments in subsidiary. Reportable segment specific information and reconciliation to consolidated financial information is as follows:
Community Other Adjustments Banking Other and Eliminations Consolidated ------------ ----------- ----------------- ------------ December 31, 2000 Investment Securities. $ 54,026,289 $16,336,072 $(15,949,905) $ 54,412,456 Net Loans............. 102,128,196 -- -- 102,128,196 Total Assets.......... 167,829,981 16,513,716 (15,972,190) 168,371,507 Total Deposits........ 129,068,534 -- (22,285) 129,046,249 Total Liabilities..... 151,880,076 23,001 (22,285) 151,880,792 Net Interest Income... 6,785,108 766,313 (741,971) 6,809,450 Provision for Loan Losses............... 175,000 -- -- 175,000 Total Noninterest Income............... 1,002,934 1,272,019 (1,272,019) 1,002,934 Total Noninterest Expense.............. 4,490,052 88,000 -- 4,578,052 Net Income............ 2,013,990 1,970,719 (2,013,990) 1,970,719 December 31, 1999 Investment Securities. $ 36,045,873 $15,330,161 $(14,827,906) $ 36,548,128 Net Loans............. 93,382,709 -- -- 93,382,709 Total Assets.......... 144,163,948 15,491,411 (14,873,704) 144,781,655 Total Deposits........ 104,634,303 -- (45,798) 104,588,505 Total Liabilities..... 129,336,042 9,771 (45,798) 129,300,015 Net Interest Income... 6,255,500 944,163 (954,161) 6,245,502 Provision for Loan Losses............... 275,000 -- -- 275,000 Total Noninterest Income............... 826,075 923,522 (923,522) 826,075 Total Noninterest Expense.............. 3,838,893 78,000 -- 3,916,893 Net Income............ 1,877,683 1,818,648 (1,877,683) 1,818,648 December 31, 1998 Investment Securities. $ 43,350,685 $17,598,692 $(14,128,694) $ 46,820,683 Net Loans............. 85,008,787 -- -- 85,008,787 Total Assets.......... 138,314,148 17,816,180 (14,211,398) 141,918,930 Total Deposits........ 104,454,631 -- (82,703) 104,371,928 Total Liabilities..... 124,185,453 3,002,938 (82,703) 127,105,688 Net Interest Income... 5,410,294 238,670 (302,697) 5,346,267 Provision for Loan Losses............... 250,000 -- -- 250,000 Total Noninterest Income............... 616,005 1,246,371 (1,246,371) 616,005 Total Noninterest Expense.............. 3,382,231 86,000 -- 3,468,231 Net Income............ 1,549,068 1,450,048 (1,549,068) 1,450,048
57 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Year Ended December 31, 2000 (17) Selected Quarterly Financial Data (unaudited) A summary of selected quarterly financial data for the years ended December 31, 2000 and 1999 is as follows:
2000 Quarter Ended ----------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (In thousands, except per share data) Interest income...................... $3,108 $3,357 $3,460 $3,469 Interest expense..................... 1,491 1,667 1,705 1,722 ------ ------ ------ ------ Net interest income................ 1,617 1,690 1,755 1,747 Provision for loan losses............ 50 75 50 -- ------ ------ ------ ------ Net interest income after provision for loan losse.................... 1,567 1,615 1,705 1,747 Noninterest income................... 199 231 275 298 Noninterest expense.................. 1,071 1,103 1,155 1,249 ------ ------ ------ ------ Income before taxes................ 695 743 825 796 Income taxes......................... 246 264 292 286 ------ ------ ------ ------ Net income......................... $ 449 $ 479 $ 533 $ 510 ====== ====== ====== ====== Basic earnings per share............. $ 0.37 $ 0.39 $ 0.44 $ 0.42 ====== ====== ====== ====== Diluted earnings per share........... $ 0.37 $ 0.39 $ 0.44 $ 0.42 ====== ====== ====== ====== 1999 Quarter Ended ----------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- (In thousands, except per share data) Interest income...................... $2,703 $2,739 $2,873 $2,865 Interest expense..................... 1,233 1,225 1,234 1,242 ------ ------ ------ ------ Net interest income................ 1,470 1,514 1,639 1,623 Provision for loan losses............ 75 50 75 75 ------ ------ ------ ------ Net interest income after provision for loan losse.................... 1,395 1,464 1,564 1,548 Noninterest income................... 218 168 215 225 Noninterest expense.................. 963 869 1,080 1,005 ------ ------ ------ ------ Income before taxes................ 650 763 699 768 Income taxes......................... 243 274 256 288 ------ ------ ------ ------ Net income......................... $ 407 $ 489 $ 443 $ 480 ====== ====== ====== ====== Basic earnings per share............. $ 0.33 $ 0.40 $ 0.36 $ 0.39 ====== ====== ====== ====== Diluted earnings per share........... $ 0.33 $ 0.40 $ 0.36 $ 0.39 ====== ====== ====== ======
58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Items 10 through 13 are incorporated herein by reference to the Company's definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the Company's 2000 fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (1) Exhibits The exhibits listed in the Exhibit Index are filed with this Form 10-K or are incorporated by reference into this Form 10-K. (2) Financial Statements The following financial statements and accountant's report have been filed as Item 8 in Part II of this report: Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements (3) Financial Statement Schedules Certain financial statement schedules are omitted because they are not applicable or because the information is provided in Part II, Item 8, "Financial Statements and Supplementary Data". (4) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 2000. 59 EXHIBIT INDEX
Exhibit Reference Number Description --------- ------- ----------- (1) 3.1 --Amended and Restated Articles of Incorporation of the Registrant. (1) 3.2 --By-Laws of Registrant. (1) 4.1 --Specimen Certificate for Shares of the Registrant's Common Stock, $1.00 par value. (1) 10.1 --Lease Agreement between the Bank and Angelo Archetto regarding Cranston, Rhode Island property dated as of May 14, 1974. (1) 10.2 --Acquisition Agreement between the Registrant, Maurice C. Paradis, receiver for Chariho-Exeter Credit Union, and the Rhode Island Depositors Economic Protection Corporation (DEPCO) dated as of May 1, 1992. (1) 10.3 --Senior Debenture issued by Registrant to DEPCO dated as of May 1, 1992. (4) 10.4 --Second Amended and Restated Employment Agreement between Registrant and Patrick J. Shanahan, Jr. dated as of February 8, 1999. (5) 10.6 --Amended Supplemental Executive Retirement Plan dated November 13, 2000. (1) 10.7 --Financial Institutions Retirement Fund Defined Pension Plan--Summary Plan Description. (1) 10.8 --Form of Deferred Compensation Agreement regarding Directors' Fees. (2) 10.9 --Financial Institutions Thrift Plan--Summary Plan Description. (2) 10.10 --Lease Agreement(s) between Bank and Wal-Mart Stores, Inc., dated as of January 27, 1997. (3) 10.11 --Service Agreement dated as of April 1, 1997 by and between First Bank and Trust Company and BISYS, Inc. (Confidential treatment granted for certain portions of the Exhibit). (1) 21.1 --Subsidiaries of Registrant.
- -------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1654), as amended, which was initially filed with the Securities and Exchange Commission on February 26, 1996. (2) Incorporated by reference to the Registrant's Quarterly Report on Form 10- Q for the quarter ended March 31, 1997. (3) Incorporated by reference to the Registrant's Quarterly Report on Form 10- Q for the quarter ended June 30, 1997. (4) Incorporated by reference to the Registrant's Annual report on Form 10-K for the year ended December 31, 1998. (5) Filed herewith. 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the Undersigned, thereunto duly authorized. FIRST FINANCIAL CORP. /s/ Patrick J. Shanahan, Jr. By: _________________________________ Patrick J. Shanahan, Jr Chairman, President and Chief Executive Officer Date: March 12, 2001 Pursuant to the requirements of the Securities Act of 1934, as amended, this Report has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Patrick J. Shanahan, Jr. Chairman, President and March 12, 2001 ______________________________________ Chief Executive Officer; Patrick J. Shanahan, Jr. Director /s/ Gary R. Alger Director March 12, 2001 ______________________________________ Gary R. Alger /s/ Artin H. Coloian Director March 12, 2001 ______________________________________ Artin H. Coloian /s/ Joseph A. Keough Director March 12, 2001 ______________________________________ Joseph A. Keough /s/ Dr. Peter L. Mathieu, Jr. Director March 12, 2001 ______________________________________ Dr. Peter L. Mathieu, Jr. /s/ Joseph V. Mega Director March 12, 2001 ______________________________________ Joseph V. Mega /s/ John Nazarian, Ph.D. Director March 12, 2001 ______________________________________ John Nazarian, Ph.D. /s/ Fred J. Simon Director March 12, 2001 ______________________________________ Fred J. Simon Director March 12, 2001 ______________________________________ William P. Shields /s/ John A. Macomber Vice President, Treasurer March 12, 2001 ______________________________________ and John A. Macomber Chief Financial Officer
61 EX-10.6 2 0002.txt SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.6 FIRST BANK AND TRUST COMPANY SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Effective as of January 1, 1995 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -------------------------------------- INTRODUCTION ------------ The adoption of this Supplemental Executive Retirement Plan has been authorized by the Board of Directors of First Bank and Trust Company (the "Bank") for the purpose of providing benefits to certain employees of the Bank which supplement those which are payable under the Regulations governing the Comprehensive Retirement Program of the Financial Institutions Retirement Fund, as they may be from time to time amended and as adopted by the Bank. This plan is intended to constitute a nonqualified unfunded supplemental executive retirement plan for a select group of management or highly compensated employees. All benefits payable under this Plan shall be paid solely out of the general assets of the Bank. No benefits under this Plan shall be payable by the Financial Institutions Retirement Fund or from its assets. 1 Article 1. Definitions When used in the Plan, the following terms shall have the following meanings: 1.01 "Actuary" means the independent consulting actuary retained by the Bank to assist the Committee in its administration of the Plan. 1.02 "Bank" means First Bank and Trust Company and each subsidiary or affiliated company thereof which participates in the Plan. 1.03 "Beneficiary" means the Beneficiary or Beneficiaries designated in accordance with Article 5 of the Plan to receive the benefit, if any, payable upon the death of a Member of the Plan. 1.04 "Board of Directors" means the Board of Directors of the Bank. 1.05 "Committee" means the Administrative Committee appointed by the Board of Directors to administer the Plan. 1.06 "Effective Date" means January 1, 1995. 1.07 "Fund" means the Financial Institutions Retirement Fund, a qualified and tax-exempt pension plan and trust under Sections 401(a) and 501 (a) of the IRC. 1.08 "IRC" means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. 1.09 "Member" means any person included in the membership of the Plan as provided in Article 2. 1.10 "Plan" means First Bank and Trust Company Supplemental Executive Retirement Plan, as set forth herein and as amended from time to time. 1.11 "Regulations" means the Regulations governing the Comprehensive Retirement Program of the Fund as from time to time amended, and as adopted by the Bank. 2 Article 2. Membership 2.01 This plan shall cover any individuals designated by the Board of Directors. 2.02 If, on the date that payment of a Member's benefit from the Fund commences, the Member is not entitled under Section 3.01 below to receive a benefit under the Plan, then the individual's membership in the Plan shall terminate on such date. 2.03 A benefit shall be payable under the Plan to or on account of a Member only upon the Member's retirement, death or other termination of employment with the Bank, including, but not limited to, a retirement or termination of employment following a Change in Control, whether such retirement or termination is elective or involuntary. A Change in Control shall be deemed to have occurred: (i) When any "person" (as such term is used in Sections (13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Employer representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of Employer; or (ii) if, as a result of, or in connection with, any tender or exchange offer, merger or other business combination, safe of assets or contested election, or any combination of the foregoing transactions, the persons who were directors of Employer immediately before such transaction shall cease to constitute a majority of the Board of Directors of Employer or of any successor institution. 3 Article 3. Amount and Payment of Benefits 3.01 The amount, if any, of the annual benefit payable to or on account of a Member pursuant to the Plan shall equal the excess of (i) over (ii), as determined by the Committee, where: (i) is the annual benefit (as calculated on the basis of the form of payment elected by the Member) that would otherwise be payable to or on account of the Member by the Fund under the Regulations if the provisions of the Regulations were administered without regard to the limitations imposed by Sections 401(a)(17) and 415 of the INC, and without any reduction if such benefit commences before Normal Retirement, and (ii) is the annual benefit (as calculated by the Fund on the basis of the same form of payment as elected under (i) above by the Member) that would be payable to or on account of the Member by the Fund at the same time as the benefit in (i) above, after giving effect to any reduction of such benefit required by the Regulations of the Fund and the limitations imposed by Sections 401(a)(17) and 415 of the Regulations. In the event that benefits payable from the Plan commence prior to the earliest permissible retirement age under the Regulations of the Fund, the annual benefit determined under paragraph (ii) above shall be assumed to be the annual benefit at the earliest permissible retirement age under the Regulations of the Fund, further reduced by 1.5% for each year that the benefit commencement under the Plan precedes such earliest permissible retirement age under the Regulations of the Fund. For purposes of this Section 3.01, "annual benefit" includes any "Active Service Death Benefit", "Disability Benefit", "Retirement Adjustment Payment", "Annual Increment", and "Single Purchase Fixed Percentage Adjustment" which the Bank elects to provide its employees under the Regulations. 3.02 Unless the Member elects an optional form of payment under the Plan pursuant to Section 3.03 below, the annual benefit, if any, payable to or on account of a Member under Section 3.01 above, shall be converted by the 4 Actuary and shall be payable to or on account of the Member in the "Regular Form" of payment, utilizing for that purpose the same actuarial factors and assumptions then used by the Fund to determine actuarial equivalence under the Regulations. For purposes of the Plan the "Regular Form" of payment means an annual benefit payable for the Member's lifetime and the death benefit described in Section 3.04 below. 3.03 (a) A Member may, with the consent of the Committee, elect in writing to have the annual benefit, if any, payable to or on account of a Member under Section 3.02 above, converted by the Actuary to any optional form of payment then permitted under the Regulations, except that no benefit under the Plan shall be paid in the form of a lump sum settlement. The Actuary shall utilize for the purpose of that conversion the same actuarial factors and assumptions then used by the Fund to determine actuarial equivalence under the Regulations. (b) If a Member who had elected an optional form of payment under this Section 3.03 dies after the date his benefit payments under the plan had commenced, the only death benefit, if any, payable under the plan in respect of said Member shall be the amount, if any, payable under the optional form of payment which the Member had elected under the Plan. If a Member who had elected an optional form of payment under this Section 3.03 dies before the date his benefit payments under the Plan commence, his election of an optional form of benefit shall be inoperative. (c) An Election of an optional form of payment under this Section 3.03 may be made only on a form prescribed by the Committee and filed by the Member with the Committee prior to the commencement of payment of his benefit under Section 4.02 below. 3.04 Upon the death of a Member who had not yet received all of the Member's guaranteed monthly installment payments under the Plan, a death benefit shall be paid to the Member's Beneficiary in a lump sum equal to the commuted value of such unpaid installments. 3.05 If a Member to whom an annual benefit is payable under the Plan dies before commencement of the payment of his benefit, the death benefit 5 payable under Section 3.04 shall be payable to the Member's Beneficiary as if the payment of the Member's benefit had commenced on the first day of the month in which his death occurred. 3.06 If a Member is restored to employment with the Bank after payment of his benefit under the Plan has commenced, all payments under the Plan shall thereupon be discontinued. Upon the Member's subsequent retirement or termination of employment with the Bank, his benefit under the Plan shall be recomputed in accordance with Section 3.01, but shall be reduced by the equivalent value of the amount of any benefit paid by the Plan in respect of his previous retirement or termination of employment, and such reduced benefit shall be paid to such Member in accordance with the provisions of the Plan. For purposes of this Section 3.06, the equivalent value of the benefit paid in respect of a Member's previous retirement or termination of employment shall be determined by the Actuary utilizing for that purpose the same actuarial factors and assumptions then used by the Fund to determine actuarial equivalence under the Regulations. 6 Article 4. Source and Method of Payments 4.01 All payments of benefits under the Plan shall be paid from, and shall only be a general claim upon, the general assets of the Bank, notwithstanding that the Bank, in its discretion, may establish a bookkeeping reserve or a grantor trust (as such term is used in Sections 671 through 677 of the IRC) to reflect or to aid it in meeting its obligations under the Plan with respect to any Member or prospective Member or Beneficiary. No benefit whatever provided by the Plan shall be payable from the assets of the Fund. No Member shall have any right, title or interest whatever in or to any investments which the Bank may make or any specific assets which the Bank may reserve to aid it in meeting its obligations under the Plan. 4.02 All annual benefits under the Plan shall be paid in monthly installments commencing on the first day of the month next following the Member's retirement date under the Regulations, except that no benefit shall be paid prior to the date benefits under the Plan can be definitely determined by the Committee. 7 Article 5. Designation of Beneficiaries 5.01 Each Member of the Plan may file with the Committee a written designation of one or more persons as the Beneficiary who shall be entitled to receive the amount, if any, payable under the Plan upon his death. A Member may, from time to time, revoke or change his Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Committee. The last such designation received by the Committee shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Committee prior to the Member's death, and in no event shall it be effective as of a date prior to such receipt. 5.02 If no such Beneficiary designation is in effect at the time of a Member's death, or if no designated Beneficiary survives the Member, or if, in the opinion of the Committee, such designation conflicts with applicable law, the Member's estate shall be deemed to have been designated his Beneficiary and shall be paid the amount, if any, payable under the Plan upon the Member's death. If the Committee is in doubt as to the right of any person to receive such amount, the Committee may retain such amount, without liability for any interest thereon, until the rights thereto are determined, or the Committee may pay such amount into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Plan and the Bank therefor. 8 Article 6. Administration of the Plan 6.01 The Board of Directors has delegated to the Administrative Committee, subject to those powers which the Board has reserved as described in Article 7 below, general authority over and responsibility for the administration and interpretation of the Plan. The Committee shall have full power and authority to interpret and construe the Plan, to make all determinations considered necessary or advisable for the administration of the Plan and any trust referred to in Article 4 above, and the calculation of the amount of benefits payable thereunder, and to review claims for benefits under the Plan. The Committee's interpretations and constructions of the Plan and its decisions or actions thereunder shall be binding and conclusive on all persons for all purposes. 6.02 If the Committee deems it advisable, it shall arrange for the engagement of the Actuary, and legal counsel and certified public accountants (who may be counsel or accountants for the Bank), and other consultants, and make use of agents and clerical or other personnel, for purposes of the Plan. The Committee may rely upon the written opinions of such Actuary, counsel, accountants and consultants, and upon any information supplied by the Fund for purposes of Section 3.01 of the Plan, and delegate to any agent or to any subcommittee or Committee member its authority to perform any act hereunder, including without limitations those matters involving the exercise of discretion; provided, however, that such delegation shall be subject to revocation at any time at the discretion of the Committee. The Committee shall report to the Board of Directors, or to a committee designated by the Board, at such intervals as shall be specified by the Board or such designated committee, with regard to the matters for which it is responsible under the Plan. 6.03 The Committee shall consist of at least three individuals, each of whom shall be appointed by, shall remain in office at the will of, and may be removed, with or without cause, by the Board of Directors. Any Committee member may resign at any time. No Committee member shall be entitled to act on or decide any matters relating solely to such Member or any of his rights or 9 benefits under the Plan. The Committee member shall not receive any special compensation for serving in such capacity but shall be reimbursed for any reasonable expenses incurred in connection therewith. No bond or other security need be required of the Committee or any Member thereof in any jurisdiction. 6.04 The Committee shall elect or designate its own Chairman, establish its own procedures and the time and place for its meetings and provide for the keeping of minutes of all meetings. Any action of the Committee may be taken upon the affirmative vote of a majority of the Members at a meeting or, at the direction of its Chairman, without a meeting by mail or telephone, provided that all of the Committee members are informed in writing of the vote. 6.05 All claims for benefits under the Plan shall be submitted in writing to the Chairman of the Committee. Written notice of the decision on each such claim shall be furnished with reasonable promptness to the Member or his Beneficiary (the "claimant"). The claimant may request a review by the Committee of any decision denying the claim in whole or in part. Such request shall be made in writing and filed with the Committee within 30 days of such denial. A request for review shall contain all additional information which the claimant wishes the Committee to consider. The Committee may hold any hearing or conduct any independent investigation which it deems desirable to render its decision and the decision on review shall be made as soon as feasible after the Committee's receipt of the request for review. Written purposes under the Plan, such decisions on claims (where no review is requested) and decisions on review (where review is requested) shall be final, binding and conclusive on all interested persons as to all matters relating to the Plan. 6.06 All expenses incurred by the Committee in its administration of the Plan shall be paid by the Bank. 10 Article 7. Amendment and Termination The Board of Directors may amend, suspend or terminate, in whole or in part, the Plan without the consent of the Committee, any Member, Beneficiary or other person, except that no amendment, suspension or termination shall retroactively impair or otherwise adversely affect the rights of any Member, Beneficiary or other person to benefits under the Plan which have accrued prior to the date of such action, as determined by the Committee in its sole discretion. The Committee may adopt any amendment or take any other action which may be necessary or appropriate to facilitate the administration, management and interpretation of the Plan or to conform the Plan thereto, provided any such amendment or action does not have a material effect on the then currently estimated cost to the Bank of maintaining the Plan. 11 Article 8. General Provisions 8.01 The Plan shall be binding upon and inure to the benefit of the Bank and its successors and assigns and the Members, and the successors, assigns, designees, and estates of the Members. The Plan shall also be binding upon and inure to the benefit of any successor organization succeeding to substantially all of the assets and business of the Bank, but nothing in the Plan shall preclude the Bank from merging or consolidating into or with, or transferring all or substantially all of its assets to, another organization which assumes the Plan and all obligations of the Bank hereunder. The Bank agrees that it will make appropriate provision for the preservation of Members' rights under the Plan in any agreement or plan which it may enter into to effect any merger, consolidation, reorganization or transfer of assets, including, but not limited to, a Change in Control as defined in Section 2.03. Upon such a merger, consolidation, reorganization, or transfer of assets and assumption of Plan obligations of the Bank, the term "Bank" shall refer to such other organization and the Plan shall continue in full force and effect. 8.02 Neither the Plan nor any action taken thereunder shall be construed as giving to a Member the right to be retained in the employ of the Bank or as affecting the right of the Bank to dismiss any Member from its employ. 8.03 The Bank shall withhold or cause to be withheld from all benefits payable under the Plan all federal, state, local or other taxes required by applicable law to be withheld with respect to such payments. 8.04 No right or interest of a Member under the Plan may be assigned, sold, encumbered, transferred or otherwise disposed of and any attempted disposition of such right or interest shall be null and void. 8.05 If the Committee shall find that any person to whom any amount is or was payable under the Plan is unable to care for his affairs because of illness or accident, or is a minor, or has died, then any payment, or any part thereof, due to such person or his estate (unless a prior claim therefor has been made by a duly appointed legal representative), may, if the Committee is inclined, 12 be paid to such person's spouse, child or other relative, an institution maintaining or having custody of such person, or any other person deemed by the Committee to be a proper recipient on behalf of such person otherwise entitled to payment. Any such payment shall be in complete discharge of the liability of the Plan and the Bank therefor. 8.06 To the extent that any person acquires a right to receive payments from the Bank under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Bank. 8.07 All elections, designations, requests, notices, instructions, and other communications from a Member, Beneficiary or other person to the Committee required or permitted under the Plan shall be in such form as is prescribed from time to time by the Committee and shall be mailed by first-class mail or delivered to such location as shall be specified by the Committee and shall be deemed to have been given and delivered only upon actual receipt thereof at such location. 8.08 The benefits payable under the Plan shall be in addition to all other benefits provided for employees of the Bank and shall not be deemed salary or other compensation by the Bank for the purpose of computing benefits to which he may be entitled under any other plan or arrangement of the Bank. 8.09 No Committee member shall be personally liable by reason of any instrument executed by him or on his behalf, or action taken by him, in his capacity as a Committee member nor for any mistake of judgment made in good faith. The Bank shall indemnify and hold harmless the Fund and each Committee member and each employee, officer or director of the Bank or the Fund, to whom any duty, power, function or action in respect of the Plan may be delegated or assigned, or from whom any information is requested for Plan purposes, against any cost or expense (including fees of legal counsel) and liability (including any sum paid in settlement of a claim or legal action with the approval of the Bank) arising out of anything done or omitted to be done in connection with the Plan, unless arising out of such person's fraud or bad faith. 8.10 As used in the Plan, the masculine gender shall be deemed to refer to the feminine, and the singular person shall be deemed to refer to the plural, 13 wherever appropriate. 8.11 The captions preceding the sections of the Plan have been inserted solely as a matter of convenience and shall not in any manner define or limit the scope or intent of any provisions of the Plan. 8.12 The Plan shall be construed according to the laws of the State of Rhode Island in effect from time to time. This Supplemental Executive Retirement Plan has been duly adopted this 5 day of March, 1996, to be effective as of the 1st day of January, 1995. First Bank and Trust Company By: /s/ William A. Carroll ---------------------- Attest: /s/ Joseph A. Keough - ----------------------- Secretary 14 Amendment Number One to the First Bank and Trust Company Supplemental Executive Retirement Plan Pursuant to Article 7 of the First Bank and Trust Company Supplemental Executive Retirement Plan (the "Plan"), the Plan is amended as follows: Effective, January 1, 2000, the Plan is amended by revising Section 3.01(i) as follows: is the annual benefit (as calculated on the basis of the form of payment elected by the Member) that is equal to 80% of the Member's High-3 Salary (as defined in the Regulations) as if the provisions of the Regulations were administered without regard to the limitations imposed by Sections 401(a)(17) and 415 of the IRC, and without any reduction if such benefit commences before Normal Retirement, and IN WITNESS WHEREOF, First Bank and Trust Company has caused this amendment to be executed by its duly authorized officer this 13th day of November, 2000. First Bank and Trust Company By: /s/ Joseph V. Mega ------------------------------- Name: Joseph V. Mega ----------------------------- Title: Director/Chairman, Compensation Committee ----------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----