-----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, Oa2sTHws69kV0RyfqKa4NWBqWUGKueWt1S77Xlnm6T7wIX+V57eC2LxYwsL38YDI TU86fd1/2hU6oUitBVrbBQ== 0000950109-00-001170.txt : 20000329 0000950109-00-001170.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950109-00-001170 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 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: 580480 BUSINESS ADDRESS: STREET 1: 180 WASHINGTON ST CITY: PROVIDENCE STATE: RI ZIP: 02903 BUSINESS PHONE: 4014213600 10-K 1 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, 1999 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 6, 2000, was $12,592,563 based on the closing sale price of Common Stock as reported on the Nasdaq National Market on such date. At March 6, 2000, 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 May 10, 2000, 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................................................ 14 Item 3. Legal Proceedings......................................... 15 Item 4. Submission of Matters to a Vote of Security Holders....... 15 PART II Market for Registrant's Common Equity and Related Item 5. Stockholder Matters....................................... 16 Item 6. Selected Consolidated Financial Data...................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 18 Item 7A. Quantitative and Qualitative Disclosure About Market Risk. 34 Item 8. Financial Statements and Supplementary Data............... 35 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 Security Ownership of Certain Beneficial Owners and Item 12. Management................................................ 59 Item 13. Certain Relationships and Related Transactions............ 59 PART IV Exhibits, Financial Statement Schedules, and Reports on Item 14. Form 8-K.................................................. 59 Signatures.......................................................... 61
2 PART I ITEM 1. BUSINESS General First Financial Corp. (Company) is a bank holding company that 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, and automated teller machine (ATM) 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 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 1992 Acquisition On May 1, 1992, the Bank acquired certain assets and assumed certain liabilities of Chariho-Exeter Credit Union (Acquisition). On May 4, 1992, the Bank reopened the Chariho-Exeter facility as the third branch of the Bank providing the same service to the local community formerly served by Chariho- Exeter as those provided at the Bank's other two branches. Although the Acquisition was accounted for as a purchase, no goodwill or other intangible asset was recorded because the purchase price did not exceed the fair value of the assets acquired. Through the Acquisition, the Bank acquired $33.4 million in assets, which included $19.5 million in loans and an acquired allowance for loan losses of approximately $3.9 million. Under the Acquisition Agreement, the Bank was allowed, through May 1, 1999, to charge-off uncollected acquired loans to this acquired allowance for loan losses. See "Notes to Consolidated Financial Statements", No. (3)--Allowance for Loan Losses. In connection with the Acquisition, the Company issued the Senior Debenture to assist in financing the Acquisition. The proceeds of the Senior Debenture were invested as a contribution of capital to the Bank. See "Notes to Consolidated Financial Statements", No. (12)--Chariho-Exeter Credit Union Acquisition. Market Area Although its main office is located in downtown Providence, the Bank's Cranston branch is its largest office with deposits of $52.8 million at December 31, 1999. The Providence, Richmond and North Kingstown branches had approximately $26.7 million, $22.1 million and $3.0 million, respectively, in deposits at December 31, 1999. 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. 4 During the past few years, and especially during 1999, 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 30,1999, the Bank ranked third (3rd) 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 first (1st) among community banks and was selected as 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 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 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, 1999, the Bank's statutory lending limit to any single borrower approximated $2.2 million, subject to certain exceptions provided under applicable law. The Bank also has a policy of extending loans, under the same 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, 1999, the aggregate principal amount of all loans to directors and executive officers and related entities was $1.6 million. 5 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, 1999. 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......... $ 1,550 $ 5,785 $ 59 $255 $ 7,649 After one year through five years.............. 8,217 43,967 -- 389 52,573 Beyond five years........ 3,317 13,962 -- 23 17,302 ------- ------- ------ ---- ------- 13,084 63,714 59 667 77,524 ------- ------- ------ ---- ------- Variable Rate Repricing Frequency: Quarterly................ -- 14,310 2,992 76 17,378 Annually or less frequently.............. -- 37 -- -- 37 ------- ------- ------ ---- ------- -- 14,347 2,992 76 17,415 ------- ------- ------ ---- ------- Total.................. $13,084 $78,061 $3,051 $743 $94,939 ======= ======= ====== ==== =======
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 Company the right to 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, 1999, approximately $181,000 of loans scheduled to mature within one year or less, were non-accruing. Residential Real Estate Loans. At December 31, 1999, the Bank's outstanding residential first and second mortgage loans and home equity lines of credit of approximately $16.1 million, represented 17.0% of the Bank's total loan portfolio. Most fixed rate conforming loans originated by the Bank are referred to correspondents. The Bank does not fund these loans. 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 Commerical 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. 6 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, 1999, outstanding commercial and commercial real estate loans approximated $78.1 million or 82.3% of total loans outstanding, including total construction and land development loans of approximately $1.5 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, 1999, 81.8% of all residential, commercial and commercial real estate loans are subject to repricing within five years. At December 31, 1999, the Bank's base rate was 10.25% while the Prime Rate was 8.50%. Consumer Loans. At December 31, 1999, the Bank's consumer loan portfolio approximated $.7 million or .8% 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 permissable for banks, which will provide 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. The following table sets forth the amortized cost and fair value of the Bank's investment portfolio at the dates indicated:
December 31, ----------------------------------------------------- 1999 1998 1997 ----------------- ----------------- ----------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value --------- ------- --------- ------- --------- ------- (In thousands) Held-to-Maturity: U.S. Government and agency obligations........... $14,000 $13,769 $10,999 $10,947 $11,750 $11,745 Collateralized mortgage obligations........... 1,691 1,681 2,734 2,727 718 717 ------- ------- ------- ------- ------- ------- $15,691 $15,450 $13,733 $13,674 $12,468 $12,462 ======= ======= ======= ======= ======= ======= Available-for-Sale: U.S. Government and agency obligations........... $14,801 $14,722 $24,402 $24,475 $17,528 $17,559 Mortgage-backed securities ........... 5,198 5,054 7,546 7,662 8,580 8,727 Marketable equity securities and other.. 1,169 1,081 1,022 950 295 313 ------- ------- ------- ------- ------- ------- $21,168 $20,857 $32,970 $33,087 $26,403 $26,599 ======= ======= ======= ======= ======= =======
7 The following table sets forth certain information regarding maturity distribution and weighted average yields of the Bank's investment portfolio at December 31, 1999:
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... $ -- -- % $14,000 5.53% $ -- -- % $14,000 5.53% Collateralized mortgage obligations(1)....... 1,124 5.48 567 6.30 -- -- 1,691 5.75 ------- ---- ------- ---- ------ ---- ------- ---- 1,124 5.48 14,567 5.56 -- -- 15,691 5.55 ------- ---- ------- ---- ------ ---- ------- ---- Available-for-Sale: U.S. Government and agency obligations... 10,261 5.30 4,461 5.47 -- -- 14,722 5.35 Mortgage-backed securities(1)........ 1,453 7.54 2,478 7.27 1,123 6.52 5,054 7.18 Marketable equity securities and other................ 1,081 -- -- -- -- -- 1,081 -- ------- ---- ------- ---- ------ ---- ------- ---- 12,795 5.10 6,939 6.11 1,123 6.52 20,857 5.51 ------- ---- ------- ---- ------ ---- ------- ---- Total............... $13,919 5.13% $21,506 5.74% $1,123 6.52% $36,548 5.53% ======= ==== ======= ==== ====== ==== ======= ====
- -------- (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. 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, 1999, the Bank had a total of approximately 3,192 demand deposit, NOW and money market accounts with an average balance of approximately $7,186 each; 3,397 passbook and statement savings accounts with an average balance of approximately $5,382 each; and 3,158 certificates of deposit with an average balance of approximately $19,989 (including 110 certificates of deposit of $100,000 or more totalling $12.8 million). The Bank's office and service hours are supplemented by the Bank's ATM card service which facilitates various deposit and/or withdrawal transactions. The Bank's ATM card may be used in the "PLUS", "CIRRUS", and "NYCE" ATM networks, and the "Maestro" point-of-sale ("POS") network. These networks provide the Bank's ATM cardholders with access to ATMs and POS machines throughout Rhode Island, New England, the United States and more than 34 foreign countries. 8 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, ------------------------------------------------- 1999 1998 1997 ---------------- ---------------- --------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------- ------- -------- ------- ------- ------- (In Thousands) Non-interest-bearing deposits.................... $ 17,209 $ 14,067 $12,124 Interest bearing deposits: NOW and savings accounts... 21,616 2.04% 20,474 2.51% 21,022 2.52% Money market accounts...... 1,835 2.07 1,281 2.42 1,499 2.40 Certificates of deposit under $100,000............ 53,039 4.92 54,300 5.34 51,006 5.37 Certificates of deposit over $100,000............. 12,079 5.34 10,909 5.94 9,145 6.38 -------- -------- ------- Total.................... $105,778 $101,031 $94,796 ======== ======== =======
Time certificates of deposit in denominations of $100,000 or more, at December 31, 1999, had the following schedule of maturities:
Time Remaining to Maturity Amount -------------------------- -------------- (In Thousands) Less than 3 months............................................ $ 4,425 3 to 6 months................................................. 2,844 6 to 12 months................................................ 3,479 More than 12 months........................................... 2,068 ------- Total....................................................... $12,816 =======
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. During 1999 the Bank also increased its use of advances from the Federal Home Loan Bank of Boston. The purpose of these advances (borrowings) was 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." 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. 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 contribution 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 9 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 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 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, 1999, the Company had 44 full-time and 4 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. 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, investment banks and major retailers. The following summary is qualified in its entirety by the text of the relevant statutes and regulations. The Company General. The Company, as a bank holding company, is subject to regulation and supervision by the Board of Governors of the Federal Reserve System ("Federal Reserve Board") and by the Rhode Island Department of Business Regulation, Division of Banking (the "Banking Division"). The Company is required to file semiannually and annually a report of its operations with, and is subject to examination by, the Federal Reserve Board. Financial Services Modernization. On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act ("Gramm-Leach") which significantly altered banking laws in the United States. Gramm-Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm-Leach, many of the depression-era laws which may be engaged in by banks and bank holding companies, were repealed. Under Gramm- Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking. 10 In order to engage in these new financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a "financial holding company" by demonstrating that each of its bank subsidiaries is "well capitalized," "well managed," and has at least a "satisfactory" rating under the Community Reinvestment Act of 1977 ("CRA"). These new financial activities authorized by Gramm-Leach may also be engaged in by a "financial subsidiary" of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and its sister-bank affiliates) to be well capitalized and well managed; the aggregate consolidated assets of all of that bank's financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements. Gramm-Leach 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. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm- Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Bank Holding Company Act of 1956, as amended (the "BHCA"). 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. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, including greater convenience, increased competition or gains in efficiency, against the adverse effects, including undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. 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. 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 11 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 (see below) 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 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. 12 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 FDIA, as added by the 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, 1999, the Bank was classified as "well capitalized" under these provisions. 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 13 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 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. The Company views the repurchase program as an excellent utilization of capital, and consistent with a solid capital management strategy. During 1999, the Company repurchased a total of 35,000 shares under the repurchase program. On January 11, 2000 and January 13, 2000, the Company repurchased an additional 12,500 shares under the repurchase program at prices ranging from $12.625 to $12.9375 per share. On January 10, 2000, the Company's Board of Directors declared a regular quarterly dividend of $.12 per share to shareholders of record on February 2, 2000. This quarterly dividend represented a 33% increase over the $.09 per share dividend declared in the fourth quarter of 1999. 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 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. As part of the 1992 Acquisition, the Bank purchased the 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 14 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. 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 1999, the Company did not submit any matter to a vote of its security holders, through a solicitation of proxies or otherwise. 15 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 1999 and 1998 are as follows:
Quarterly Dividends Sales Prices High Low Declared ------------ ------ ------ --------- 1999 1st Quarter.......................................... 13 5/8 12 1/4 .09 2nd Quarter.......................................... 12 7/8 11 1/2 .09 3rd Quarter.......................................... 14 1/2 12 1/4 .09 4th Quarter.......................................... 13 1/2 12 3/8 .09 1998 1st Quarter.......................................... 17 15 .06 2nd Quarter.......................................... 20 3/8 16 3/4 .06 3rd Quarter.......................................... 17 3/4 11 1/2 .06 4th Quarter.......................................... 13 7/8 12 1/2 .06
As of March 6, 2000, there were approximately 165 holders of record of the Company's common stock and approximately 340 shareholders of beneficial ownership who hold their stock in nominee or "street" name through various brokerage firms. 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years Ended December 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- -------- (Dollars in Thousands, Except Per Share Data) FINANCIAL CONDITION DATA: Total assets............ $ 144,782 $ 141,919 $ 127,310 $ 121,413 $100,304 Investments, securities purchased under agreements to resell, federal funds sold and interest bearing deposits............... 40,351 49,544 42,944 44,568 30,811 Total loans, net of unearned discount...... 94,939 86,296 77,680 72,536 64,701 Allowance for loan losses................. 1,556 1,287 1,597 1,942 1,828 Total deposits.......... 104,589 104,372 99,290 93,876 89,591 Securities sold under agreements to repurchase............. 9,411 12,256 10,105 10,778 -- Federal Home Loan Bank advances............... 13,610 6,204 -- -- -- Senior debenture........ -- 2,971 2,947 2,894 2,845 Total stockholders' equity................. 15,482 14,813 13,713 12,570 7,192 STATEMENT OF INCOME DATA: Interest income......... 11,180 10,564 9,969 8,867 7,732 Interest expense........ 4,934 5,218 4,803 4,214 3,669 ---------- ---------- ---------- ---------- -------- Net interest income..... 6,246 5,346 5,166 4,653 4,063 Provision for loan losses................. 275 250 250 455 675 ---------- ---------- ---------- ---------- -------- Net interest income after provision for loan losses............ 5,971 5,096 4,916 4,198 3,388 Noninterest income...... 826 616 465 536 474 Noninterest expense..... 3,917 3,468 3,341 3,177 3,093 Income taxes............ 1,061 794 728 513 251 ---------- ---------- ---------- ---------- -------- Net income.............. $ 1,819 $ 1,450 $ 1,312 $ 1,044 $ 518 ========== ========== ========== ========== ======== PER SHARE DATA: Net income: Basic................... $ 1.47 $ 1.15 $ 1.04 $ 0.99 $ 0.76 Diluted................. 1.47 1.15 1.04 0.98 0.71 Book value.............. 12.63 11.75 10.87 9.89 10.35 Cash dividends declared. 0.36 0.24 0.20 0.12 0.11 Dividend payout ratio... 24.45% 20.88% 19.23% 12.83% 14.51% Weighted average common shares outstanding..... 1,233,104 1,261,241 1,261,241 1,049,609 683,200 Weighted average common and common stock equivalent shares outstanding............ 1,233,104 1,261,241 1,261,241 1,059,963 728,708 OPERATING RATIO DATA: Return on average total assets................. 1.26% 1.07% 1.07% 0.96% 0.54% Return on average stockholders' equity... 12.04 10.20 10.00 10.02 7.45 Net interest margin..... 4.49 4.12 4.38 4.46 4.43 Loans to deposits ratio. 90.77 82.68 78.24 77.27 72.22 Leverage capital ratio.. 10.71 10.56 10.77 10.32 6.87 ASSET QUALITY RATIOS: Nonperforming assets to total assets........... 0.12% 0.36% 0.63% 0.91% 2.00% Nonperforming loans to total loans............ 0.19 NM 0.02 0.58 0.83 Net loan charge-offs to average loans(1)....... 0.01 0.22 0.34 0.19 1.01 Allowance for loan losses to total loans(1)............... 1.64 1.53 1.64 1.78 1.47 Allowance for loan losses to nonperforming loans(1)............... 861.94 NM 7,333.39 280.35 160.63
- -------- (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. 17 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, Federal Home Loan Bank advances and the Senior Debenture. 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 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 is 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 is 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. Results of Operations Net Interest Income Net interest income, the difference between interest income and interest expense, is the single largest contributor to the Company's results of operations. 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. 18 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 to net interest income. 19 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, -------------------------------------------------------------------------------- 1999 1998 1997 -------------------------- -------------------------- -------------------------- 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................... $ 91,965 $ 8,688 9.45% $ 80,461 $ 7,797 9.69% $ 75,714 $7,401 9.77% Investment securities taxable--AFS........... 28,000 1,509 5.39 32,357 1,823 5.63 26,608 1,695 6.37 Investment securities taxable--HTM........... 14,462 789 5.46 11,748 683 5.81 11,717 672 5.74 Securities purchased under agreements to resell................. 4,048 162 4.00 4,530 221 4.88 3,496 175 5.01 Federal Home Loan Bank stock and other........ 556 32 5.76 719 40 5.56 423 26 6.15 -------- ------- ---- -------- -------- ---- -------- ------ ---- TOTAL INTEREST-EARNING ASSETS................. 139,031 11,180 8.04 129,815 10,564 8.14 117,958 9,969 8.45 ------- ---- -------- ---- ------ ---- NONINTEREST-EARNING ASSETS: Cash and due from banks. 2,702 2,379 2,238 Premises and equipment.. 2,276 2,430 2,141 Other real estate owned. 231 605 717 Allowance for loan losses................. (1,367) (1,412) (1,903) Other assets............ 1,390 1,396 1,450 -------- -------- -------- TOTAL NONINTEREST- EARNING ASSETS................. 5,232 5,398 4,643 -------- -------- -------- TOTAL ASSETS............ $144,263 $135,213 $122,601 ======== ======== ======== INTEREST-BEARING LIABILITIES: Deposits: Interest-bearing demand and NOW deposits.............. $ 3,347 49 1.46 $ 3,479 67 1.93 $ 3,282 64 1.95 Savings deposits....... 18,269 392 2.15 16,995 446 2.62 17,740 465 2.62 Money market deposits.. 1,835 38 2.07 1,281 31 2.42 1,499 36 2.40 Time deposits.......... 65,118 3,253 5.00 65,209 3,548 5.44 60,151 3,321 5.52 Securities sold under agreements to repurchase............. 11,311 553 4.89 13,059 712 5.45 10,590 647 6.11 Federal Home Loan Bank advances............... 9,605 564 5.87 2,667 161 6.04 Senior debenture 1,204 85 7.06 2,998 253 8.44 2,946 270 9.16 -------- ------- ---- -------- -------- ---- -------- ------ ---- TOTAL INTEREST-BEARING LIABILITIES............ 110,689 4,934 4.46 105,688 5,218 4.94 96,208 4,803 4.99 ------- ---- -------- ---- ------ ---- NONINTEREST-BEARING LIABILITIES: Noninterest-bearing deposits............... 17,209 14,067 12,124 Other liabilities....... 1,262 1,237 1,158 -------- -------- -------- TOTAL NONINTEREST- BEARING LIABILITIES............ 18,471 15,304 13,282 STOCKHOLDERS' EQUITY.... 15,103 14,221 13,111 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $144,263 $135,213 $122,601 ======== ======== ======== NET INTEREST INCOME .... $ 6,246 $ 5,346 $5,166 ======= ======== ====== NET INTEREST SPREAD .... 3.58% 3.20% 3.46% ==== ==== ==== NET INTEREST MARGIN .... 4.49% 4.12% 4.38% ==== ==== ====
20 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 Year Ended December 31, 1999 Year Ended December 31, 1997 Compared with December 31, 1998 Compared Compared with December 31, 1998 with December 31, 1996 Increase December 31, 1997 Increase Increase (Decrease) Due To (Decrease) Due To (Decrease) Due To -------------------- ------------------------------ -------------------- Volume Rate Total Volume Rate Total Volume Rate Total ------ ----- ----- --------- --------- -------- ------ ---- ------ (Dollars in Thousands) INTEREST-EARNING ASSETS: Loans................. $1,084 $(193) $ 891 $ 457 $ (61) $ 396 $ 717 $(55) $ 662 Investment securities taxable--AFS......... (236) (78) (314) 325 (197) 128 537 (7) 530 Investment securities taxable--HTM......... 147 (41) 106 3 8 11 (122) 22 (100) Securities purchased under agreements to resell, and other.... ( 28) (39) (67) 66 (6) 60 6 4 10 ------ ----- ----- -------- --------- -------- ------ ---- ------ TOTAL INTEREST-EARNING ASSETS................. $ 967 $(351) $ 616 $ 851 $ (256) $ 595 $1,138 $(36) $1,102 ====== ===== ===== ======== ========= ======== ====== ==== ====== INTEREST-BEARING LIABILITIES: Interest-bearing demand and NOW deposits............. $ (2) $ (16) $ (18) $ 4 $ (1) $ 3 $ 14 $-- $ 14 Savings deposits...... 26 ( 80) (54) (19) -- (19) (40) (8) (48) Money market deposits. 11 (4) 7 (5) -- (5) (4) -- (4) Time deposits......... (8) (287) (295) 275 (48) 227 197 (40) 157 Securities sold under agreements to repurchase........... (86) (73) (159) 135 (70) 65 459 3 462 Federal Home Loan Bank advances............. 408 (5) 403 161 -- 161 -- -- -- Senior debenture...... (127) (41) (168) 4 (21) (17) 5 3 8 ------ ----- ----- -------- --------- -------- ------ ---- ------ TOTAL INTEREST-BEARING LIABILITIES............ $ 222 $(506) $(284) $ 555 $ (140) $ 415 $ 631 $(42) $ 589 ====== ===== ===== ======== ========= ======== ====== ==== ====== NET CHANGE IN NET INTEREST INCOME........ $ 745 $ 155 $ 900 $ 296 $ (116) $ 180 $ 507 $ 6 $ 513 ====== ===== ===== ======== ========= ======== ====== ==== ======
21 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 The following table identifies the major sources of noninterest income.
Years Ended December 31, -------------- 1999 1998 1997 ---- ---- ---- (Dollars in Thousands) Service charges and fees on deposit accounts................. $268 $279 $317 Safe deposit box rental...................................... 25 25 25 Other service fees........................................... 26 35 32 Gain on sale of loans ....................................... 340 166 46 Loan servicing fees.......................................... 73 41 33 ATM surcharge fees........................................... 55 50 -- Other........................................................ 39 20 12 ---- ---- ---- $826 $616 $465 ==== ==== ====
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 in 1998. As a result of this SBA activity, the Company's servicing fee income increased $32,613 to $73,418. 22 Noninterest Expense The following table identifies the major components of noninterest expense for the respective periods presented:
Years Ended December 31, --------------------- 1999 1998 1997 ------ ------ ------ (Dollars in Thousands) Salaries and employee benefits....................... $2,133 $1,896 $1,802 Occupancy expense.................................... 551 393 375 Equipment expense.................................... 290 270 219 OREO (gains) losses, write-downs, and carrying costs, net................................................. (209) 42 22 Other operating expenses: FDIC insurance premium............................. 12 12 11 Computer service fees.............................. 252 199 193 Legal and professional fees........................ 214 136 158 Directors' fees.................................... 116 70 60 Postage............................................ 47 47 45 Advertising........................................ 146 75 62 Office supplies, forms, stationery, printing, etc.. 87 76 99 Miscellaneous...................................... 278 252 295 ------ ------ ------ $3,917 $3,468 $3,341 ====== ====== ======
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. Essentially, it cost the Company $.5539 to generate $1.00 of revenue. 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 costs 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 of 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 no foreclosed property on the Company's books. 23 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. 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 to $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. 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 $2.9 million, or 2%, from $141.9 million at December 31, 1998, to $144.8 million at December 31, 1999. The increase in total assets primarily occurred within the Company's loan portfolio which increased $8.6 million and a $4.2 million increase in cash and cash equivalents. These increases were offset somewhat by a $10.3 million decrease in investment securities. The primary funding source for the increase in total assets was the wholesale funding market. While retail deposits remained virtually flat at $104.6 million at December 31, 1999, compared to $104.4 million at December 31, 1998, repurchase agreements and Federal Home Loan Bank advances increased $4.6 million. The $3.0 million senior debenture was repaid during 1999 and shareholders' equity increased nearly $.7 million. Investment Securities The Company's total investment securities portfolio decreased $10.3 million to $36.5 million at December 31, 1999, from $46.8 million at December 31, 1998. At December 31, 1999, securities which were classified as held-to-maturity were carried at an amortized cost of $15,691,004, with a fair value of $15,450,453. Securities classified as available-for-sale were carried at a fair value of $20,857,124, with an amortized cost of $21,167,567. At December 31, 1999, 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, 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 24 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 of the investment portfolio, the Company views the principal purpose of its investment securities 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. Consequently, the Company's exposure to significant market swings is somewhat controlled. At December 31, 1999, the Company's investment securities had net unrealized losses of $550,994 as compared to net unrealized gains of $58,012 at December 31, 1998. Loans Total loans, net of unearned discount, amounted to $94.9 million at December 31, 1999, up $8.6 million, or 10.0%, from $86.3 million at the end of 1998. The increase in total loans was predominately in the commercial real estate portfolio, which grew $15.2 million, while commercial, residential real estate, home equity lines of credit and consumer loans declined $6.6 million. At December 31, 1999, total loans represented 65.6% of total assets and 90.8% of total deposits compared to 60.8% and 82.7%, respectively, at the end of 1998.
At December 31, ----------------------------------------------- 1999 1998 1997 --------------- --------------- --------------- Amount Percent Amount Percent Amount Percent ------- ------- ------- ------- ------- ------- (Dollars in Thousands) Commercial.............. $12,249 12.9% $14,763 17.1% $ 6,418 8.3% Commercial real estate.. 65,812 69.3 50,646 58.7 45,977 59.2 Residential real estate. 13,084 13.8 16,417 19.0 21,464 27.6 Home equity lines of credit................. 3,051 3.2 3,489 4.0 2,839 3.7 Consumer................ 766 0.8 1,047 1.2 1,057 1.2 ------- ----- ------- ----- ------- ----- 94,962 86,362 77,755 Unearned discount....... 23 66 75 ------- ------- ------- 94,939 100.0% 86,296 100.0% 77,680 100.0% ===== ===== ===== Allowance for loan losses................. 1,556 1,287 1,597 ------- ------- ------- Net loans............... $93,383 $85,009 $76,083 ======= ======= =======
In 1999, 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 25 past due and have arrearages that have not been eliminated. In certain instances, nonperforming loans may also 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, 1999, 1998 and 1997, 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. The amounts and ratios shown are exclusive of the loans and allowance for loan losses acquired in the Chariho- Exeter Credit Union acquisition.
December 31, ------------------- 1999 1998 1997 ----- ----- ----- (Dollars in Thousands) Loans past due 90 days or more but not included in nonaccrual loans $ -- $ -- $ -- Nonaccrual loans..................................... 181 -- 17 ----- ----- ----- Total nonperforming loans............................ 181 -- 17 Other real estate owned.............................. -- 513 782 ----- ----- ----- Total nonperforming assets........................... $ 181 $ 513 $ 799 ===== ===== ===== Delinquent loans 30-89 days past due................. $ 154 $ 161 $ 490 ===== ===== ===== Nonperforming loans as a percent of gross loans...... 0.19% NM 0.02% Nonperforming assets as a percent of total assets.... 0.12% 0.36% 0.65% Delinquent loans 30-89 days past due as a percent of gross loans......................................... 0.16% 0.19% 0.67%
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 an informal loan peer review function and a loan loss review committee. The loan peer review committee, which meets monthly, is an informal committee 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. 26 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 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 allocation of the Bank's allowance for loan losses for the periods ending as indicated:
December 31, ---------------------------------------- 1999 1998 1997 ------------ ------------ ------------ (Dollars in Thousands) Loan Category: Commercial....................... $ 192 12.3% $ 160 12.4% $ 75 6.2% Commercial Real Estate........... 1,044 67.1 840 65.3 848 70.2 Residential Real Estate.......... 248 15.9 219 17.0 266 22.0 Home Equity Lines of Credit...... 60 3.9 54 4.2 7 0.6 Consumer......................... 12 0.8 14 1.1 12 1.0 ------ ----- ------ ----- ------ ----- Total.......................... $1,556 100.0% $1,287 100.0% $1,208 100.0% ====== ===== ====== ===== ====== =====
This allocation 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 allocation should not be considered as an indication of the future amounts or types of loan charge-offs. At December 31, 1999, the Bank classified $1.6 million of loans as substandard based on the rating system adopted by the Bank. Of these amounts, a majority of which are included in the commercial real estate loan portfolio, the Bank estimates a potential loss exposure of $148,000. 27 The following table is an analysis of the Allowance for Loan Losses over the last three years. This table excludes the acquired loans and related allowance.
Years Ended December 31, -------------------------- 1999 1998 1997 ------- ------- -------- (Dollars in Thousands) AVERAGE LOANS OUTSTANDING.......................... $91,888 $77,302 $ 70,854 ======= ======= ======== ALLOWANCE FOR LOAN LOSSES AT BEGINNING OF YEAR..... $ 1,287 $ 1,208 $ 1,200 CHARGED-OFF LOANS: Commercial....................................... 52 12 -- Commercial Real Estate: Non-owner occupied 1-4 family.................. -- -- -- Non-owner occupied multi-family................ -- 128 -- Commercial..................................... -- 27 25 Residential Real Estate: Owner occupied 1-4 family...................... -- -- 46 Non-owner occupied 1-4 family.................. -- 7 111 Home Equity Lines of Credit...................... -- -- 74 Consumer......................................... 2 10 11 ------- ------- -------- Total charged-off loans........................ 54 184 267 ------- ------- -------- RECOVERIES ON LOANS PREVIOUSLY CHARGED-OFF: Commercial....................................... 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...................... 3 -- 8 Non-owner occupied 1-4 family.................. -- -- -- Home Equity Lines of Credit...................... -- -- -- Consumer......................................... -- 12 17 ------- ------- -------- Total recoveries............................... 48 13 25 ------- ------- -------- NET LOANS CHARGED-OFF.............................. 6 171 242 PROVISION FOR LOAN LOSSES.......................... 275 250 250 ------- ------- -------- ALLOWANCE FOR LOAN LOSSES AT END OF YEAR........... $ 1,556 $ 1,287 $ 1,208 ======= ======= ======== Net loans charged-off to average loans............. 0.01% 0.22% 0.34% Allowance for loan losses to gross loans at end of year.............................................. 1.64 1.53 1.64 Allowance for loan losses to nonperforming loans... 861.94 NM 7332.94 Net loans charged-off to allowance for loan losses at beginning of year.............................. 0.47 14.16 20.17 Recoveries to charge-offs.......................... 88.89 7.07 9.36
28 The following table summarizes the gross activity in OREO during the periods indicated:
Years Ended December 31, ------------------- 1999 1998 1997 ----- ----- ----- (Dollars in Thousands) Balance at beginning of year............................ $ 513 $ 782 $ 676 Property acquired....................................... -- 245 461 Sales and other adjustments............................. (493) (514) (355) Write-downs (charged to operations)..................... (20) -- -- ----- ----- ----- Balance at end of year.................................. $ -- $ 513 $ 782 ===== ===== =====
Deposits and Borrowings The Company devotes considerable time and resources to gathering deposits through its retail branch network system. Total deposits increased $.2 million, to $104.6 million at December 31, 1999, from $104.4 million at the end of 1998. During 1999, the Company reported increases in its core transactional type deposit products. Total demand deposits increased $1.8 million, and savings and money market accounts increased $1.9 million. However, time deposits, which are more interest rate sensitive, decreased $3.5 million. The Company adopted a marginal pricing strategy during 1998 and carried the strategy forward into 1999. The strategy, which was for the purpose of reducing the Company's overall funding costs set time deposit rates at the low end of competitive market rates with replacement funds provided, if necessary, from wholesale funding sources. During 1999, the Company's overall cost of funds declined 48 basis points to 4.46%, and its cost of funds for time deposits declined 44 basis points to 5.00%. 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, 1999, securities sold under agreements to repurchase amounted to $9.4 million, compared to $12.3 million at December 31, 1998. During 1999, the Company increased its use of 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, 1999, advances from the FHLB amounted to $13.6 million, compared to $6.2 million at December 31, 1998. 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. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while 29 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, 1999:
Over Over Over Five Three One Years Within to Year to to Over Three Twelve Five Ten Ten Months Months Years Years Years Total ------- -------- ------- ------- ------- -------- (Dollars in Thousands) INTEREST-EARNING ASSETS: Securities purchased under agreements to resell, and other..... $ 3,803 $ -- $ -- $ -- $ -- $ 3,803 Investment securities.. 6,720 6,266 19,846 3,716 -- 36,548 Loans.................. 22,993 10,184 50,492 12,212 -- 95,881 ------- -------- ------- ------- ------- -------- Total interest-earning assets................. 33,516 16,450 70,338 15,928 -- 136,232 INTEREST-BEARING LIABILITIES: Money Market accounts.. 342 996 649 -- -- 1,987 Savings deposits and NOW accounts.......... 1,799 5,559 14,494 -- -- 21,852 Time deposits.......... 25,349 28,753 9,125 -- -- 63,227 Securities sold under agreements to repurchase............ 4,311 -- 5,100 -- -- 9,411 Federal Home Loan Bank advances.............. 261 3,283 6,674 3,392 -- 13,610 Senior debenture....... -- -- -- -- -- -- ------- -------- ------- ------- ------- -------- Total interest-bearing liabilities............ 32,062 38,591 36,042 3,392 -- 110,087 ------- -------- ------- ------- ------- -------- NET INTEREST SENSITIVITY GAP.................... $ 1,454 $(22,141) $34,296 $12,536 $ -- $ 26,145 ======= ======== ======= ======= ======= ======== CUMULATIVE GAP.......... $ 1,454 $(20,687) $13,609 $26,145 $26,145 $ 26,145 ======= ======== ======= ======= ======= ======== NET INTEREST SENSITIVITY GAP AS A PERCENT OF TOTAL ASSETS........... 1.0% (15.3)% 23.7% 8.7% -- % 18.1% ======= ======== ======= ======= ======= ======== CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS................. 1.0% (14.3)% 9.4% 18.1% 18.1% 18.1% ======= ======== ======= ======= ======= ========
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. 30 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, 1999, the Company's earnings-at-risk under a 200 basis point interest rate shock test measured a negative 0.9% in a worst case scenario. Under a similar test, the Company's equity-at-risk measured a negative 13.2% of market value of equity at December 31, 1999. At December 31, 1999, 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, 1999, cash and due from banks, securities purchased under agreements to resell, and short-term investments (unpledged and maturing within one year) amounted to $15.2 million, or 10.5% 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 $28.6 million, which could assist the Company in meeting its liquidity needs and funding its asset mix. At December 31, 1999, the Company held state and municipal demand deposits of $.8 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. The Company encountered no unusual liquidity demands as a result of the Year 2000 issue. Capital Resources Total stockholders' equity of the Company at December 31, 1999, was $15.5 million, as compared to $14.8 million at December 31, 1998. The increase of $.7 million primarily resulted from $1.8 million in net income; less dividends declared of $.4 million, repurchase of common stock of $.4 million, and unrealized losses on investment securities of $.3 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, 1999, the Bank's Leverage Capital Ratio was 10.26%, as compared to 10.31% at December 31, 1998. 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 16.05% and a Total Risk- Based Capital Ratio of 17.30% at December 31, 1999, as compared to a Tier I Risk-Based Capital Ratio of 16.61% and a Total Risk-Based Capital Ratio of 17.87% at December 31, 1998. 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 Bank, which happens to be the same requirements which FDIC imposes on the Bank. At December 31, 1999, the Company's Leverage Capital Ratio was 10.71%, as compared to 10.56% at December 31, 1998. The Company's Tier I Risk-Based Capital Ratio was 16.72% and its Total Risk-Based Capital Ratio was 17.97% at December 31, 1999, and 17.24% and 18.49%, respectively, at December 31, 1998. 31 Year 2000 Compliance The efficient operation of the Company's business is highly dependent on its computer software programs and operating systems. Virtually all of these programs and systems are furnished, supported and maintained by correspondent institutions, computer service and system providers, and software vendors. In confronting the Year 2000 problem, the Company's Board of Directors played a very active role in the Year 2000 compliance effort. The Board approved the Year 2000 Plan and received monthly status reports from members of the project team. The FDIC has also played a very active role and visited the Company on several occasions to examine the Company's progress. The Company faced potential risks to its and the Bank's operations. As stated above, the Company purchases substantially all of its software from third parties who faced the same Year 2000 challenge as the Company. In addition, the Company relies almost exclusively on other companies for the functioning of its automated system. Thus, the Company's operations could be adversely affected if the operations of these third parties were adversely affected by the Year 2000 problem. Most importantly, the Company faced risks that all banking institutions, whether large or small, also faced. Included among these risks is the risk that the Year 2000 date change would result in the inability to process and underwrite loan applications, to credit deposits and withdrawals from customer accounts, to credit loan payments or track delinquencies, to properly reconcile and record daily activity or to engage in similar normal banking activities. Additionally, if those commercial loan customers of the Bank whose operations depend heavily on computers and computer software experience Year 2000 compliance problems and suffer adverse effects with respect to their own operations, their ability to meet their obligations to the Bank could be adversely affected. This could force the Bank to increase its provision for loan losses or take more aggressive collection actions, potentially impacting the Company's earnings. At January 1, 2000, the Company did not encounter any Year 2000 date change difficulties. All systems and operations continued to function without interruption. The Company is not aware of any Year 2000 difficulties encountered by any of its borrowers. Nonetheless, the Company continues to closely monitor the Year 2000 issue as critical dates emerge throughout the year. Comparison of 1998 with 1997 The Company reported net income for 1998 of $1,450,048, as compared to $1,311,733 for 1997, or an increase of 10.5%. Diluted earnings per share amounted to $1.15 per share for 1998, based on 1,261,241 weighted average shares outstanding, as compared to $1.04 per share for 1997, also based on 1,261,241 weighted average shares outstanding. Also, in 1998, the Company's return on average equity (ROE) improved to 10.20% from 10.00% in 1997. The Company's return on average assets (ROA) was 1.07% in 1998 and 1997. The improvement in net income is 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 improvement in earnings is attributable to: (i) an increase in average interest-earning assets funded from both retail and wholesale sources; (ii) an increase in SBA lending activities; and (iii) strong asset quality. Net Interest Income Net interest income, the difference between interest income and interest expense, rose $180,461 or 3.5%, to $5,346,267 in 1998 from $5,165,806 in 1997. The primary reason for this increase was due to an increase in average interest-earning assets of $11.9 million, or 10.1% offset somewhat by a 26 basis point decrease in average net spread to 3.20% in 1998, as compared to 3.46% in 1997. 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 a decrease in average net interest margin of 26 basis points to 4.12% in 1998, the same as the 26 basis point decrease in net interest spread. In 1998, total interest income amounted to $10,564,083 compared to $9,969,127 in 1997, or an increase of $594,956, or 6.0%. This increase was attributable to an $11.9 million increase in average interest-earning assets, 32 offset somewhat by a 31 basis points decline in earning asset yields. The increase in earning assets was funded by an increase of $4.3 million in retail deposits and a $5.2 million increase in wholesale sources. Within earning assets, average loans increased $4.7 million or 6.3%, while average investments increased $6.9 million. During 1998, average loans represented 62.0% of total average interest-earning assets, compared to 64.2% during 1997. This disproportionate growth from higher yielding loans to lower yielding investments, along with a lower interest rate environment, accounted for the decline in average interest-earning asset yield to 8.14% from 8.45%. In terms of rate/volume, the decline in rates reduced interest income by approximately $256,000; but the increase in volume contributed approximately $851,000 in interest income. Total interest expense amounted to $5,217,816 in 1998 compared to $4,803,321 in 1997, or an increase of $414,495, or 8.6%. Average interest-bearing deposits grew $4.3 million, while cost of funds on interest-bearing deposits remained flat at 4.70%. Despite a declining interest rate environment, the Company's cost of funds on retail deposits remained flat due to the predominant growth of retail deposits in high-costing time certificates of deposit. The cost of funds on time deposits dropped to 5.44% from 5.52%. Average wholesale funds (repurchase agreements, FHLB advances, etc.) increased $5.2 million while its cost decreased to 6.01% from 6.77%. The overall cost on interest-bearing liabilities decreased 5 basis points to 4.94% in 1998 compared to 4.99% in 1997. In terms of rate/volume, the decline in rates helped reduce interest expense by approximately $140,000, while the increase in total interest-bearing liabilities of $9.5 million caused an increase of approximately $555,000 in interest expense. Overall, as a result of changes in the mix of interest-earning assets and interest-bearing liabilities as well as a declining interest rate environment, net interest income decreased approximately $116,000. However, due to balance sheet growth (volume) net interest income increased $296,000. This rate/volume activity produced an increase of $180,000 to net interest income. Provision for Loan Losses The provision for loan losses was $250,000 in 1998 and 1997. At December 31, 1998 and 1997, the Company's recorded investment in impaired loans was $1,571,661 and $1,394,092, respectively, of which $853,221 and $884,121, respectively, was determined to require a valuation allowance of $235,473 and $237,030. The Company's ratio of net loan charge-offs to average loans decreased to .22% from .34%. At December 31, 1998, there were no nonperforming loans. Loans 30-89 days delinquent decreased to $161,456 from $490,437 at the end of 1998 and 1997, respectively. At December 31, 1998 and 1997, the allowance for loan losses to total loans was 1.53% and 1.64%, respectively. Noninterest Income Noninterest income increased $150,608 or 32.4% to $616,005 in 1998 from $465,397 in 1997. This increase was the result of the recognition of $165,620 in gains on SBA loan sales, an increase of nearly $120,000 over 1997. During 1998, the Company originated for sale $3,368,807 of guaranteed portion SBA loans at a gain on sale of $261,424 ($95,803 has been deferred into the 1st quarter of 1999). These originations compare to $1,386,340 in1997. As a result of this SBA activity, the Company's servicing fee income increased $8,301 to $40,805. The other contributor was the result of the imposition of ATM surcharge fees in 1998 which contributed $50,317 to noninterest income. Noninterest Expense Total overhead spending for the Company increased 3.8% to $3,468,231 in 1998 from $3,341,269 in 1997. During 1998, the Company's efficiency ratio improved to 58.17% from 59.33% in 1997. Gross salaries and wages increased $141,597 or 8.9%. This increase was primarily attributable to across the board pay increases and a full year of staffing at the North Kingstown branch. Benefits decreased $13,485 with the greatest savings coming from the fully funded pension plan of $41,160. Health insurance expense increased 33 $12,095 or 18%. As a result of increased loan production, the deferral of salary cost, under SFAS No. 91, increased $34,240 to $196,035 in 1998. This increase in cost deferral helped lower the total increase in salaries and benefits of $93,877 or 5.2% to $1,895,538. Occupancy costs increased $17,895, or 4.8% to $393,189 in 1998. This increase was solely the result of a full year's occupancy at the North Kingstown branch. Specifically, depreciation of leasehold improvements and rent increased $22,242. Equipment expense increased $51,516, or 23.5% to $270,283 during 1998. Equipment maintenance increased $10,661, while equipment depreciation increased $44,767. Both of these increases were the direct result of a full year's cost associated with the technology upgrades of 1997. The cost to carry and dispose of OREO increased $19,465 in 1998 to $41,593. Despite a smaller OREO portfolio, disposal costs increased the Company's loss on OREO sales by $23,683 during the year. Other operating expenses decreased $62,373 during 1998 or 8.7% to $656,527 from $718,900. Advertising and Directors' fees were up $13,181 and $10,241 respectively, while legal and professional, office supplies, printing and forms and the deposit tax were down $21,259, $14,398, $12,008 and $43,497, respectively. Spending control and the elimination of the State deposit tax accounted for these overhead reductions. Income Taxes Income tax expense amounted to $793,993 in 1998, or an effective tax rate of 35.4%. The effective rate in 1997 was 35.7%. The Company's combined federal and state (net of federal benefit) statutory income tax rate was 39.94% in 1998 and 1997. 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 1998 and 1997. 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". 34 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts January 12, 2000 35 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, -------------------------- 1999 1998 ------------ ------------ ASSETS CASH AND DUE FROM BANKS............................. $ 5,441,190 $ 2,342,782 ------------ ------------ SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL..... 3,802,865 2,723,488 ------------ ------------ LOANS HELD FOR SALE (Note 1)........................ 942,338 357,493 ------------ ------------ INVESTMENT SECURITIES (Notes 1 and 2): Held-to-maturity (fair value: $15,450,453 in 1999 and $13,673,673 in 1998).......................... 15,691,004 13,733,393 Available-for-sale (amortized cost: $21,167,567 in 1999 and $32,969,558 in 1998)..................... 20,857,124 33,087,290 ------------ ------------ Total investment securities........................ 36,548,128 46,820,683 ------------ ------------ FEDERAL HOME LOAN BANK STOCK........................ 681,500 447,700 ------------ ------------ LOANS (Notes 1, 7 and 9): Commercial......................................... 12,248,552 14,762,537 Commercial real estate............................. 65,812,129 50,646,390 Residential real estate............................ 13,084,006 16,417,012 Home equity lines of credit........................ 3,051,265 3,489,029 Consumer........................................... 766,383 1,047,141 ------------ ------------ 94,962,335 86,362,109 Less--Unearned Discount............................ 23,221 66,264 Allowance for loan losses (Notes 3 and 12)......... 1,556,405 1,287,058 ------------ ------------ Net loans.......................................... 93,382,709 85,008,787 ------------ ------------ OTHER REAL ESTATE OWNED (Note 1).................... -- 513,127 ------------ ------------ PREMISES AND EQUIPMENT, net (Notes 4 and 7)......... 2,167,103 2,416,790 ------------ ------------ OTHER ASSETS........................................ 1,815,822 1,288,080 ------------ ------------ TOTAL ASSETS........................................ $144,781,655 $141,918,930 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: Demand............................................. $ 17,522,309 $ 15,743,185 Savings and money market accounts.................. 23,838,702 21,940,330 Time deposits (Note 5)............................. 63,227,494 66,688,413 ------------ ------------ Total deposits..................................... 104,588,505 104,371,928 ------------ ------------ SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note 6)................................................. 9,411,111 12,255,880 ------------ ------------ FEDERAL HOME LOAN BANK ADVANCES (Note 6) ........... 13,610,400 6,204,077 ------------ ------------ ACCRUED EXPENSES AND OTHER LIABILITIES.............. 1,689,999 1,302,316 ------------ ------------ SENIOR DEBENTURE, net of unamortized discount of $2,134 in 1998 (Note 12)........................... -- 2,971,487 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY (Notes 2, 11 and 15): 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.................................. 10,504,194 9,130,143 Accumulated other comprehensive (loss) income...... (186,265) 70,638 ------------ ------------ 16,077,350 14,960,202 Less--Treasury stock, at cost, 101,800 shares in 1999 and 66,800 shares in 1998 ................... 595,710 146,960 ------------ ------------ Total stockholders' equity......................... 15,481,640 14,813,242 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $144,781,655 $141,918,930 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 36 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ----------------------------------- 1999 1998 1997 ----------- ----------- ---------- INTEREST INCOME: Interest and fees on loans (Note 1)..... $ 8,687,625 $ 7,796,758 $7,400,873 Interest on investment securities-- U.S. Government and agency obligations. 1,735,195 1,882,529 1,532,872 Collateralized mortgage obligations.... 129,786 52,398 91,684 Mortgage-backed securities............. 393,975 537,544 727,637 Marketable equity securities and other. 71,483 74,360 40,838 Interest on cash equivalents (Note 1).. 161,506 220,494 175,223 ----------- ----------- ---------- Total interest income.................. 11,179,570 10,564,083 9,969,127 INTEREST EXPENSE: Interest on deposits.................... 3,732,477 4,091,958 3,886,454 Interest on repurchase agreements....... 553,342 712,217 646,622 Interest on advances ................... 563,746 160,865 -- Interest on debenture (Note 12)......... 84,503 252,776 270,245 ----------- ----------- ---------- Total interest expense................. 4,934,068 5,217,816 4,803,321 ----------- ----------- ---------- Net interest income.................... 6,245,502 5,346,267 5,165,806 PROVISION FOR LOAN LOSSES (Note 1)........ 275,000 250,000 250,000 ----------- ----------- ---------- Net interest income after provision for loan losses........................... 5,970,502 5,096,267 4,915,806 ----------- ----------- ---------- NONINTEREST INCOME: Service charges on deposits............ 267,626 279,185 317,176 Gain on loan sales..................... 340,061 165,620 46,410 Other.................................. 218,388 171,200 101,811 ----------- ----------- ---------- Total noninterest income............... 826,075 616,005 465,397 ----------- ----------- ---------- NONINTEREST EXPENSE: Salaries and employee benefits (Note 10)................................... 2,133,193 1,895,538 1,801,661 Occupancy expense (Note 4)............. 551,434 393,189 375,294 Equipment expense...................... 290,088 270,283 218,767 Other real estate owned net (gains) losses, and expenses.................. (208,977) 41,593 22,128 Computer services...................... 251,964 199,306 193,392 Deposit insurance assessments.......... 12,012 11,795 11,127 Other operating expenses............... 887,179 656,527 718,900 ----------- ----------- ---------- Total noninterest expense.............. 3,916,893 3,468,231 3,341,269 ----------- ----------- ---------- Income before provision for income taxes................................. 2,879,684 2,244,041 2,039,934 PROVISION FOR INCOME TAXES (Note 8)....... 1,061,036 793,993 728,201 ----------- ----------- ---------- NET INCOME................................ $ 1,818,648 $ 1,450,048 $1,311,733 =========== =========== ========== Earnings per share: Basic.................................. $ 1.47 $ 1.15 $ 1.04 =========== =========== ========== Diluted................................ $ 1.47 $ 1.15 $ 1.04 =========== =========== ========== Weighted average common shares outstanding.............................. 1,233,104 1,261,241 1,261,241 Weighted average equivalent shares........ -- -- -- ----------- ----------- ---------- Weighted average common and common stock equivalent shares outstanding............ 1,233,104 1,261,241 1,261,241 =========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 37 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the Years Ended December 31, 1999, 1998 and 1997
Accumulated Other Total Common Retained Comprehensive Treasury Stockholders' Comprehensive Stock Surplus Earnings (Loss) Income Stock Equity Income ---------- ---------- ----------- ------------- --------- ------------- ------------- Balance, December 31, 1996................... $1,328,041 $4,431,380 $ 6,923,308 $ 34,132 $(146,960) $12,569,901 Net income.............. -- -- 1,311,733 -- -- 1,311,733 $1,311,733 Other comprehensive income, net of tax: Unrealized holding gains, net of reclassification adjustment............ -- -- -- 83,248 -- 83,248 83,248 ---------- Comprehensive income.... $1,394,981 ========== Dividends declared ($.20 per share)............. -- -- (252,249) -- -- (252,249) ---------- ---------- ----------- --------- --------- ----------- 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 ========== ========== =========== ========= ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. 38 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------ 1999 1998 1997 ------------- ------------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................... $ 1,818,648 $ 1,450,048 $ 1,311,733 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses...... 275,000 250,000 250,000 Depreciation and amortization.. 305,694 285,721 231,723 Write-off of impaired long- lived asset................... 129,362 -- -- (Gains) losses on sale of other real estate owned............. (215,008) 14,162 (9,522) Gain on sales of loans......... (340,061) (165,620) (46,410) Proceeds from sales of loans... 5,547,975 3,630,231 1,209,421 Loans originated for sale...... (5,792,759) (3,346,300) (1,386,340) Net increase in deferred loan fees.......................... 4,535 6,226 46,816 Net accretion on investment securities held-to- maturity.. (6,916) (5,203) (10,730) Net accretion on investment securities available-for-sale. (370,177) (290,619) (66,649) Net (decrease) increase in unearned discount............. (43,043) (8,843) 8,391 Net (increase) decrease in other assets.................. (290,742) 202,809 59,846 Deferred income taxes (benefit)..................... (237,000) (114,000) (3,250) Amortization of discount on debenture..................... 15,860 205,983 202,566 Net increase (decrease) in accrued expenses and other liabilities......... 280,385 (136,118) (266,589) ------------- ------------- ------------ Net cash provided by operating activities.................... 1,081,753 1,978,477 1,531,006 ------------- ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities held-to- maturity........................ 3,532,387 20,472,802 13,573,509 Proceeds from maturities of investment securities available- for-sale........................ 310,600,674 150,311,185 30,233,468 Purchase of investment securities held-to-maturity................ (5,483,082) (21,733,252) (12,250,000) Purchase of investment securities available-for-sale.............. (298,428,506) (156,587,124) (28,215,380) Purchase of Federal Home Loan Bank stock...................... (233,800) -- (99,600) Net increase in loans............ (8,610,414) (9,418,020) (6,258,403) Purchase of premises and equipment....................... (185,369) (243,961) (1,044,993) Sales of other real estate owned. 728,135 499,901 366,955 ------------- ------------- ------------ Net cash provided by (used in) investing activities............ 1,920,025 (16,698,469) (3,694,444) ------------- ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand accounts.. 1,779,124 2,544,229 1,928,910 Net increase (decrease) in savings and money market accounts........................ 1,898,372 (1,431,027) 621,657 Net (decrease) increase in time deposits........................ (3,460,919) 3,968,855 2,863,195 Net (decrease) increase in repurchase agreements........... (2,844,769) 2,150,880 (673,000) Net increase in Federal Home Loan Bank advances................... 7,406,323 6,204,077 -- Repayment of Senior Debenture.... (2,708,777) -- -- Purchase of common stock for treasury........................ (448,750) -- -- Dividends paid................... (444,597) (365,762) (227,023) ------------- ------------- ------------ Net cash provided by financing activities...................... 1,176,007 13,071,252 4,513,739 ------------- ------------- ------------
39 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years Ended December 31, ---------------------------------- 1999 1998 1997 ---------- ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ $4,177,785 $(1,648,744) $2,350,301 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................... 5,066,270 6,715,014 4,364,713 ---------- ----------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR...... $9,244,055 $ 5,066,270 $6,715,014 ========== =========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................. $4,907,286 $ 5,211,783 $4,755,368 ========== =========== ========== Income taxes paid......................... $1,236,000 $ 1,083,250 $ 787,242 ========== =========== ========== SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Transfer of loans to OREO................. $ -- $ 245,000 $ 461,002 ========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 40 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1999, 1998 and 1997 (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 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 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, 1999 and 1998, 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. 41 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 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, 1999 and 1998 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. Rights to service loans for others are recognized as an asset. 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. 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 reasonably foreseeable loan losses. Losses are charged against the allowance for loan losses when management believes that the collectibility of principal is unlikely. This evaluation is inherently 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. 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. 42 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 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 1999, 1998 and 1997. 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. 43 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 Recent Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in income 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 statement of income and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133", is effective for fiscal years beginning after June 15, 2000. A company may also implement the statement as of the beginning of any fiscal quarter after issuance (that is, financial quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the impact of adopting SFAS No. 133 on its consolidated financial statements and has not determined the timing or method of its adoption of the statement. However, the Company does not expect that the adoption of this statement will have a material impact on its financial position or results of operations. (2) Investment Securities The estimated fair value and amortized cost of investment securities at December 31, 1999 and 1998 are as follows:
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 security and other.......................... 1,168,757 41,627 129,524 1,080,860 ----------- -------- -------- ----------- $21,167,567 $ 46,478 $356,921 $20,857,124 =========== ======== ======== =========== December 31, 1998 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- Held-to-maturity-- U.S. Government & agency obligations.................... $10,999,326 $ 831 $ 53,573 $10,946,584 Collateralized mortgage obligations.................... 2,734,067 1,194 8,172 2,727,089 ----------- -------- -------- ----------- $13,733,393 $ 2,025 $ 61,745 $13,673,673 =========== ======== ======== =========== Available-for-sale-- U.S. Government & agency obligations.................... $24,402,016 $ 78,580 $ 5,361 $24,475,235 Mortgage backed securities...... 7,545,496 123,203 6,890 7,661,809 Marketable equity security...... 1,022,046 4,016 75,816 950,246 ----------- -------- -------- ----------- $32,969,558 $205,799 $ 88,067 $33,087,290 =========== ======== ======== ===========
44 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 A schedule of the maturity distribution of U.S. Government and agency obligations is as follows:
December 31, 1999 ----------------------------------------------- Held-to-Maturity Available-for-Sale ----------------------- ----------------------- Amortized Fair Amortized Fair Cost Value Cost Value ----------- ----------- ----------- ----------- Within one year................. $ -- $ -- $10,292,154 $10,260,964 Over one year to five years..... 14,000,000 13,769,432 4,508,887 4,460,978 ----------- ----------- ----------- ----------- $14,000,000 $13,769,432 $14,801,041 $14,721,942 =========== =========== =========== ===========
At December 31, 1999, approximately $13,000,000 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 1999, 1998 and 1997. At December 31, 1999, the collateralized mortgage obligations have principal payment windows which extend through March 2002. Investment securities with a carrying value of $10,995,483 and $14,848,939, at December 31, 1999 and 1998, respectively, were pledged as collateral for repurchase agreements, public deposits and other purposes, as required by law. (3) 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.
December 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Company Allowance: Balance at beginning of year.............. $1,287,058 $1,208,322 $1,199,617 Provision............................... 275,000 250,000 250,000 Loan charge-offs........................ (53,634) (184,278) (267,012) Recoveries.............................. 47,981 13,014 25,717 ---------- ---------- ---------- Balance at end of year.................... 1,556,405 1,287,058 1,208,322 ---------- ---------- ---------- Acquired Allowance: Balance at beginning of year.............. -- 388,291 742,840 Loan charge-offs........................ (266,482) (402,404) (341,118) Recoveries (costs)...................... 1,638 (12,266) (13,431) Reclassification to senior debenture (Note 12).................... 264,844 26,379 -- ---------- ---------- ---------- Balance at end of year.................... -- -- 388,291 ---------- ---------- ---------- Total Allowance......................... $1,556,405 $1,287,058 $1,596,613 ========== ========== ==========
45 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 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. 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 average recorded investment in impaired loans during 1999 and 1998 was $1,473,906 and $1,454,652, respectively. For the years ended December 31, 1999 and 1998, interest income on impaired loans totaled $186,264 and $225,730, respectively. At December 31, 1999 and 1998, nonaccrual loans totaled $180,571 and $0, respectively. Had nonaccrual loans been accruing, interest income would have increased by $14,742, $0 and $248 for the years ended December 31, 1999, 1998 and 1997, respectively. 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 $10,931,194 and $6,816,252 at December 31, 1999 and 1998, respectively. The balance of capitalized servicing rights, net of valuation allowances (fair value), included in other assets at December 31, 1999 and 1998, was $174,453 and $0, respectively. The fair value of servicing rights was determined using a riskless discount rate and a normal prepayment speed factor. (4) Premises and Equipment Premises and equipment are summarized as follows:
December 31, --------------------- 1999 1998 ---------- ---------- Land and improvements................................. $ 676,294 $ 676,294 Buildings and improvements............................ 1,431,565 1,240,851 Leasehold improvements................................ 277,824 407,186 Furniture, fixtures and equipment..................... 1,466,506 1,558,622 ---------- ---------- 3,852,189 3,882,953 Less--Accumulated depreciation........................ 1,685,086 1,466,163 ---------- ---------- $2,167,103 $2,416,790 ========== ==========
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 $305,694, $285,721 and $231,723 in 1999, 1998 and 1997, respectively. 46 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 (5) Time Deposits At December 31, 1999, scheduled maturities of time deposits are as follows:
$100,000 Maturity Or More Other Total -------- -------- ------- ------- (In Thousands) 2000................................................ $10,748 $40,349 $51,097 2001................................................ 1,333 6,557 7,890 2002................................................ 299 1,273 1,572 2003................................................ 336 1,820 2,156 2004................................................ 100 412 512 ------- ------- ------- $12,816 $50,411 $63,227 ======= ======= =======
Included in total time deposits are $12,129,000 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, $9,202,000 have remaining maturities of one year or less. (6) Federal Home Loan Bank Advances and Other Borrowings At December 31, 1999, advances from the Federal Home Loan Bank of Boston ("FHLB") have scheduled repayments as follows: 2000............................................................. $ 241,246 2001............................................................. 255,600 2002............................................................. 1,665,928 2003............................................................. 2,768,961 2004............................................................. 279,608 2005 and thereafter.............................................. 8,399,057 ----------- $13,610,400 ===========
Of the total FHLB advances, $8,610,400 represents amortizing notes with final maturities of 3-15 years and amortization periods of 15-25 years. Of the remaining $5,000,000, $2,500,000 matures at September 17, 2003, with a one time call option exercisable by the FHLB on September 17, 2001. The remaining $2,500,000 matures at September 21, 2009, with a one time call option exercisable by the FHLB on September 21, 2000. Information relative to the Company's advances from the FHLB during 1999 is as follows: Balance, December 31, 1999...................................... $13,610,400 Average amount outstanding during the year...................... 9,605,428 Maximum amount outstanding at any month end..................... 13,628,537 Weighted average interest rate at December 31, 1999............. 5.85% Weighted average interest rate during the year.................. 5.87%
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, 1999 and 1998, the Company had an unused borrowing capacity of $26,290,000 and $32,607,000 respectively, which excludes an unused overnight line of credit of $2,352,000. 47 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 The Company also had $9,411,111 and $12,255,880 of other borrowings at December 31, 1999 and 1998, 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, 1999.
Weighted Maturity Average Rate Amount -------- ------------ ---------- January 2000......................................... 3.50% $4,311,111 February 2001........................................ 5.67 5,100,000 ---- ---------- 4.68% $9,411,111 ==== ==========
At December 31, 1999, the Company's risk with counterparties to securities sold under repurchase agreements was approximately $389,000. 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 $11,311,027 and $13,059,000 during 1999 and 1998, respectively. The maximum amounts outstanding at any month end were $12,055,000 during 1999 and $15,108,000 during 1998. The weighted average interest rate was 4.89% during 1999 and 5.45% during 1998. (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: 2000................................................................. $46,500 2001................................................................. 46,500 2002................................................................. 31,916 2003................................................................. 21,500 2004................................................................. 8,958 2005 and thereafter.................................................. --
The leases contain renewal options commencing in May 2002 and extending to May 2012. Under the terms of the rental options, the annual rental expense for both leases will not exceed $63,563. Litigation As of December 31, 1999, 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. 48 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 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 $469,000 and $363,000 as of December 31, 1999 and 1998, 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, --------------------- 1999 1998 ---------- ---------- Unused portion of existing lines of credit............ $7,864,000 $9,939,000 Unadvanced construction loans......................... 2,149,000 604,000 Firm commitments to extend credit..................... 1,679,000 8,572,000
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. 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. 49 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 (8) Income Taxes The provision for income taxes consists of the following components:
Years Ended December 31, ------------------------------- 1999 1998 1997 ---------- --------- -------- Federal-- Current................................... $1,140,786 $ 832,993 $665,201 Prepaid................................... (237,000) (114,000) (3,250) State....................................... 157,250 75,000 66,250 ---------- --------- -------- $1,061,036 $ 793,993 $728,201 ========== ========= ========
The provision for income taxes differs from the amount computed by applying the statutory rate of 34%, as summarized below:
Years Ended December 31, ------------------------------ 1999 1998 1997 ---------- -------- -------- Provision for income taxes at statutory rate...................................... $ 979,093 $762,974 $693,578 State taxes, net of federal benefit........ 103,785 49,500 43,725 Other...................................... (21,842) (18,481) (9,102) ---------- -------- -------- $1,061,036 $793,993 $728,201 ========== ======== ========
The approximate tax effects of temporary differences that give rise to gross deferred tax assets and gross deferred tax liabilities at December 31, 1999 and 1998 are as follows:
December 31, ----------------- 1999 1998 -------- -------- Gross deferred tax assets: Allowance for loan losses............................... $484,241 $329,005 Deferred loan origination fees.......................... 60,812 58,998 OREO writedown.......................................... -- 5,200 Supplemental executive pension plan..................... 162,838 110,840 Accrued expenses........................................ 95,106 73,316 -------- -------- Gross deferred tax assets................................. 802,997 577,359 -------- -------- Gross deferred tax liabilities: Depreciation............................................ 174,728 180,269 Installment sales....................................... 13,269 19,090 -------- -------- Gross deferred tax liabilities............................ 187,997 199,359 -------- -------- Net deferred tax asset.................................... $615,000 $378,000 ======== ========
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, 1999 or 1998. (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 50 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 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:
1999 1998 ---------- ---------- Balance at beginning of year.......................... $1,906,279 $ 905,052 Originations........................................ -- 238,363 Payments............................................ 301,828 (237,707) Other............................................... -- 1,000,571 ---------- ---------- Balance at end of year................................ $1,604,451 $1,906,279 ========== ==========
(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. 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. The Company's pension expense was $55,413 for the year ended December 31, 1997. 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. A liability and transition asset of $121,707 were recorded, as of the effective date, in accordance with SFAS No. 87, "Employer's Accounting for Pensions". 51 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 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, 1999, 1998 and 1997:
1999 1998 1997 --------- -------- -------- Change in benefit obligations: Benefit obligation at beginning of year....... $ 488,093 $365,941 $329,525 Service cost.................................. 28,316 19,177 14,650 Interest cost................................. 50,542 32,715 23,948 Actuarial loss (gain)......................... 185,803 70,260 (2,182) --------- -------- -------- Benefit obligation at end of year............. 752,754 488,093 365,941 --------- -------- -------- Change in plan assets: Fair value of plan assets at beginning of year......................................... 412,318 310,091 -- Actual return on plan assets.................. 32,298 21,779 22,115 Employer contributions........................ 129,995 80,448 287,976 --------- -------- -------- Fair value of plan assets at end of year...... 574,611 412,318 310,091 --------- -------- -------- Funded status................................. (178,143) (75,775) (55,850) Unrecognized net actuarial loss (gain)........ 202,879 39,657 (30,603) Unrecognized prior service cost............... 142,779 171,335 199,891 Unrecognized net asset being recognized over 10 years..................................... (90,696) (31,638) (66,580) --------- -------- -------- Prepaid (accrued) benefit cost................ $ 76,819 $103,579 $ 46,858 ========= ======== ======== Components of net period benefit cost Service cost.................................. $ 28,316 $ 19,177 $ 14,650 Interest cost................................. 50,542 32,715 23,948 Amortization of prior service cost............ 28,556 28,556 28,556 Amortization of unrecognized loss (gain)...... 22,581 -- (959) --------- -------- -------- Net periodic benefit cost..................... $ 129,995 $ 80,448 $ 66,195 ========= ======== ========
For calculating 1999, 1998 and 1997 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
During 1996, the Company adopted the Financial Institutions Thrift Plan for the benefit of its employees. The 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 $46,995, $32,848, and $32,009 for the years ended December 31, 1999, 1998 and 1997. (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 1999 the Company repurchased a total of 35,000 shares under the repurchase program at prices ranging from $12.75 to $12.875 per share. Total capital used for these repurchases amounted to $448,750. 52 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 (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, 1999, 1998 and 1997 amounted to $15,860, $205,983 and $202,566, 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. 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. 53 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 The fair value of nonaccrual loans is based on the estimated market value of the underlying collateral held. 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. Senior Debenture. The face value of the senior debenture 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, 1999 and 1998, the estimated fair value of the Company's financial instruments are as follows:
December 31, --------------------------------------------------- 1999 1998 ------------------------- ------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------------ ------------ ------------ ------------ ASSETS ------ Cash and due from banks and securities purchased under agreement to resell....... $ 9,244,055 $ 9,244,055 $ 5,066,270 $ 5,066,270 Loans held for sale........ 942,338 1,008,571 357,493 392,141 Investment securities: Held-to-maturity......... 15,691,004 15,450,453 13,733,393 13,673,673 Available-for-sale....... 20,857,124 20,857,124 33,087,290 33,087,290 Federal Home Loan Bank stock..................... 681,500 681,500 447,700 447,700 Loans--net................. 93,382,709 94,033,000 85,008,787 89,227,000 Loan servicing asset....... 174,453 174,453 -- -- LIABILITIES ----------- Deposits................... $104,588,505 104,430,000 $104,371,928 $105,090,000 Securities sold under agreements to repurchase.. 9,411,111 9,282,000 12,255,880 12,377,000 Federal Home Loan Bank advances.................. 13,610,400 13,479,000 6,204,077 6,415,000 Senior debenture........... -- -- 2,971,487 2,973,621
54 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 (14) The Company (Parent Company Only) The condensed separate financial statements of the Company are presented below. CONDENSED BALANCE SHEETS
December 31, ------------------------ 1999 1998 ----------- ----------- ASSETS ------ Cash and due from banks............................... $ 79,227 $ 102,773 Investment securities: Available-for-sale (amortized cost: $631,779 in 1999 and $3,545,200 in 1998).............................................. 502,255 3,469,998 Investment in subsidiary bank......................... 14,827,906 14,128,694 Other assets.......................................... 82,023 114,715 ----------- ----------- Total assets...................................... $15,491,411 $17,816,180 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Senior debenture, net of unamortized discount......... $ -- $ 2,971,487 Other liabilities..................................... 9,771 31,451 ----------- ----------- 9,771 3,002,938 ----------- ----------- Stockholders' Equity: Common stock........................................ 1,328,041 1,328,041 Surplus............................................. 4,431,380 4,431,380 Retained earnings................................... 10,504,194 9,130,143 Accumulated other comprehensive income.............. (186,265) 70,638 ----------- ----------- 16,077,350 14,960,202 Less--Treasury stock.................................. 595,710 146,960 ----------- ----------- Total stockholders' equity........................ 15,481,640 14,813,242 ----------- ----------- Total liabilities and stockholders' equity........ $15,491,411 $17,816,180 =========== ===========
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, ---------------------------------- 1999 1998 1997 ---------- ---------- ---------- Interest and dividend income............... $1,028,666 $ 491,446 $ 461,850 Interest and other expense................. 162,503 338,776 380,180 ---------- ---------- ---------- Income before income taxes and equity in undistributed earnings of subsidiary............................. 866,163 152,670 81,670 Applicable income tax benefit.............. (28,963) (51,007) (58,799) ---------- ---------- ---------- Income before equity in undistributed earnings of subsidiary.................... 895,126 203,677 140,469 Equity in undistributed earnings of subsidiary................................ 923,522 1,246,371 1,171,264 ---------- ---------- ---------- Net income................................. $1,818,648 $1,450,048 $1,311,733 ========== ========== ==========
55 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................ $ 1,818,648 $ 1,450,048 $ 1,311,733 Adjustments to reconcile net income to net cash provided by (used in) operating activities-- Equity in undistributed earnings of subsidiary......................... (923,522) (1,246,371) (1,171,264) Amortization of discount on debenture.......................... 15,860 205,983 202,566 Net accretion on investment securities......................... (34,904) (44,134) (98,254) Net increase (decrease) in accrued expenses and other liabilities..... 12,702 (59,453) (210,471) Net decrease (increase) in other assets............................. 32,692 (12,459) 39,164 ----------- ----------- ----------- Net cash provided by operating activities....................... 921,476 293,614 73,474 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investment securities available-for-sale ....... 8,825,000 3,600,000 7,700,000 Purchase of investment securities available-for-sale................... (5,876,675) (3,523,036) (7,503,613) ----------- ----------- ----------- Net cash provided by investing activities....................... 2,948,325 76,964 196,387 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of Senior Debenture......... (3,000,000) -- -- Purchase of common stock for treasury. (448,750) -- -- Dividends paid ....................... (444,597) (365,762) (227,023) ----------- ----------- ----------- Net cash used in financing activities....................... (3,893,347) (365,762) (227,023) ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................ (23,546) 4,816 42,838 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................... 102,773 97,957 55,119 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR.. $ 79,227 $ 102,773 $ 97,957 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid......................... $ 82,369 $ 201,450 $ 218,100 =========== =========== ===========
(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 the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 1999, the Company and the Bank met all capital adequacy requirements to which 56 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 they are subject and are considered "well capitalized" by the federal banking agencies. The March 31, 1999 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 Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions ----------------- ---------------- ---------------- Amount Ratio Amount Ratio Amount Ratio ----------- ----- ---------- ----- ---------- ----- 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 As of December 31, 1998 The Company: Total capital (to risk weighted assets)............. $15,814,000 18.49% $6,842,320 8.00% -- -- Tier I capital (to risk weighted assets)............. 14,742,000 17.24 3,421,160 4.00 -- -- Tier I capital (to average assets)..... 14,742,000 10.56 4,189,170 3.00 -- -- The Bank: Total capital (to risk weighted assets)............. $15,070,000 17.87% $6,748,240 8.00% $8,435,300 10.00% Tier I capital (to risk weighted assets)............. 14,013,000 16.61 3,374,120 4.00 5,061,180 6.00 Tier I capital (to average assets)..... 14,013,000 10.31 4,078,020 3.00 6,796,700 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). 57 FIRST FINANCIAL CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Years Ended December 31, 1999, 1998 and 1997 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 account 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, 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 December 31, 1997 Investment Securities. $ 35,489,009 $16,461,708 $(12,884,343) $ 39,066,374 Net Loans............. 76,083,150 -- -- 76,083,150 Total Assets.......... 123,658,196 16,661,921 (13,010,250) 127,309,867 Total Deposits........ 99,352,715 -- (62,844) 99,289,871 Total Liabilities..... 110,773,853 2,949,288 (125,907) 113,597,234 Net Interest Income... 5,266,449 191,606 (252,249) 5,165,806 Provision for Loan Losses............... 250,000 -- -- 250,000 Total Noninterest Income............... 465,397 1,171,264 (1,171,264) 465,397 Total Noninterest Expense.............. 3,231,333 109,936 -- 3,341,269 Net Income............ 1,423,513 1,311,733 (1,423,513) 1,311,733
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. 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, 1999 and 1998 Consolidated Statements of Income for the years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements (3) Financial Statement Schedules The Financial Data Schedule is included as Exhibit 27.1 to this Form 10-K and certain other 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, 1999. 59 EXHIBIT INDEX
Exhibit Reference Number Description --------- ------- ----------- --Amended and Restated Articles of Incorporation of the (1) 3.1 Registrant. (1) 3.2 --By-Laws of Registrant. --Specimen Certificate for Shares of the Registrant's (1) 4.1 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. --Senior Debenture issued by Registrant to DEPCO dated as (1) 10.3 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. (1) 10.6 --Supplemental Executive Retirement Plan. (1) 10.7 --Financial Institutions Retirement Fund Defined Pension Plan--Summary Plan Description. --Form of Deferred Compensation Agreement regarding (1) 10.8 Directors' Fees. --Financial Institutions Thrift Plan--Summary Plan (2) 10.9 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. (5) 27.1 --Financial Data Schedule
- -------- (1) Incorporated by reference to the Registrant's Registration Statement of 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 13, 2000 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 13, 2000 ______________________________________ Chief Executive Officer; Patrick J. Shanahan, Jr. Director /s/ Gary R. Alger Director March 13, 2000 ______________________________________ Gary R. Alger Director March 13, 2000 ______________________________________ Raymond F. Bernardo /s/ Artin H. Coloian Director March 13, 2000 ______________________________________ Artin H. Coloian /s/ Joseph A. Keough Director March 13, 2000 ______________________________________ Joseph A. Keough /s/ Dr. Peter L. Mathieu, Jr. Director March 13, 2000 ______________________________________ Dr. Peter L. Mathieu, Jr. /s/ Joseph V. Mega Director March 13, 2000 ______________________________________ Joseph V. Mega /s/ John Nazarian, Ph.D. Director March 13, 2000 ______________________________________ John Nazarian, Ph.D. /s/ Fred J. Simon Director March 13, 2000 ______________________________________ Fred J. Simon Director March 13, 2000 ______________________________________ William P. Shields /s/ John A. Macomber Vice President, Treasurer March 13, 2000 ______________________________________ and John A. Macomber Chief Financial Officer
61 EX-27 2 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 5,441,190 0 3,802,865 0 20,857,124 15,691,004 15,450,453 94,939,114 1,556,405 144,781,655 104,588,505 9,411,111 1,689,999 13,610,400 0 0 1,328,041 14,153,599 144,781,655 8,687,625 2,491,945 0 11,179,570 3,732,477 4,934,068 6,245,502 275,000 0 3,916,893 2,879,684 2,879,684 0 0 1,818,648 1.47 1.47 4.49 180,571 583,479 0 1,630,204 1,287,058 53,634 47,981 1,556,405 1,556,405 0 0
-----END PRIVACY-ENHANCED MESSAGE-----