SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT to SECTION 13 or 15(d) of the SECURITIES
EXCHANGE ACT of 1934
For the fiscal year ended December 31, 1996
Commission File No. 0-27878
FIRST FINANCIAL CORP.
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(Exact name or registrant as specified in its charter)
Rhode Island 05-0391383
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification Number)
180 Washington Street
Providence, Rhode Island 02903
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(Address of principal executive offices) (Zip Code)
(401) 421-3600
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(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
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____ .
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.________
The aggregate market value of Common Stock held by nonaffiliates of the
Registrant as of March 12, 1997 was $15,134,892 based on the closing sale price
of Common Stock as reported on the Nasdaq National Market on such date. At March
12, 1997, there were 1,328,041 shares of the Company's $1.00 par value Common
Stock issued, with 1,261,241 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 14, 1997 are incorporated herein by reference into
Part III hereof.
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FORM 10-K
TABLE OF CONTENTS
PART I Page Reference
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<S> <C> <C> <C>
Item 1 - Business 1
Item 2 - Properties 12
Item 3 - Legal Proceedings 12
Item 4 - Submission of Matters to a 12
Vote of Security Holders
PART II
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Item 5 - Market for Registrant's Common 13
Equity and Related Stockholder
Matters
Item 6 - Selected Financial Data 13
Item 7 - Management's Discussion and Analysis 14
of Financial Condition and Results of
Operations
Item 8 - Financial Statements and Supplementary 27
Data
Item 9 - Changes in and Disagreements with Accountants 45
on Accounting and Financial Disclosure
PART III
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Item 10 - Directors and Executive Officers of the 45
Registrant
Item 11 - Executive Compensation 45
Item 12 - Security Ownership of Certain Beneficial 45
Owners and Management
Item 13 - Certain Relationships and Related 45
Transactions
PART IV
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Item 14 - Exhibits, Financial Statement 45
Schedules, and Reports on Form 8-K
Signatures 47
</TABLE>
PART I
ITEM 1. BUSINESS
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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 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 consumer financial products and services
designed to satisfy the deposit and loan needs of its retail customers. The
Bank's retail 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.
In January 1997, the Bank entered into an agreement with Wal-Mart Stores
whereby the Bank will open two branch offices in two Wal-Mart Stores (the
"Wal-Mart Branches"). Subject to the receipt of regulatory approval, these
branches will be full service branches which will offer the same retail products
as the Bank's three other branch offices. See "Recent Developments".
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 secured by real estate. Evidencing
the Bank's success in catering to this business market, the Bank in 1995 was
listed in Entrepreneur Magazine as one of the 294 banks in the country most
likely to grant a small business loan, and as the 12th largest dollar lender of
SBA funds in the Providence region for the 1996 fiscal year. The Bank recently
received the designation of "certified lender" by the SBA. As a result of this
designation, the SBA is contractually obligated to respond within three business
days to SBA loan requests submitted by the Bank.
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 the 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.
ACQUISITION
On May 1, 1992, the Bank acquired certain assets and assumed certain
liabilities of Chariho-Exeter Credit Union. 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.
1
Through the Acquisition, the Bank acquired $33.4 million in assets,
which included $19.5 million in loans and an acquired allowance for possible
loan losses of nearly $3.9 million. Under the Acquisition Agreement, the Bank
may, through May 1, 1999, charge-off uncollected acquired loans to this acquired
allowance for possible loan losses. At May 1, 1999, any remaining acquired
allowance, less an amount equal to 1% of the remaining acquired loans, must be
repaid in the form of cash.
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. If, at any
time prior to May 1, 1999, net acquired loan losses exceed the acquired
allowance for possible loan losses, such excess may be deducted from the
Company's debt obligations under the Senior Debenture.
MARKET AREA
Although its main office is located in downtown Providence, the Bank's
Cranston branch is its largest office with deposits of $48.3 million at December
31, 1996. The Providence branch and the Wyoming branch had approximately $22.2
million and $23.4 million, respectively, in deposits at December 31, 1996.
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 the recent major banking consolidations. See
"Recent Developments" for a discussion of an expansion of the Bank's market
area.
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 real estate loan portfolio has
increased and remains the largest part 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 in the banking industry. The Bank has in the
past and continues to specifically target such businesses through the hiring of
new experienced commercial loan officers and by focusing on commercial lending
secured by real estate 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.
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; and (iii) 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
2
accounts. The authority of individual loan officers is limited to the approval
of secured loans equal to or less than either $200,000 or $150,000, depending on
the individual loan officer, and unsecured loans equal to or less than either
$25,000 or $10,000, 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 $500,000
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, 1996, the Bank's statutory lending limit to any single
borrower approximated $1.9 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, 1996, the aggregate principal amount of
all loans to directors and executive officers and related entities was $1.4
million.
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 other
loan officers. Every loan of $150,000 or more is scheduled to be reviewed
annually by the loan peer review committee. All loans that undergo loan peer
review receive a grade ranging from A to F 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 D or worse will automatically be placed on a "watchlist." Certain C 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 recommendations regarding loan loss reserve levels to the
loan loss review committee. The loan loss review committee, comprised of the
Bank's executive officers and all other loan officers, reviews loans on the
watchlist on a quarterly basis in order to establish loan loss reserve levels.
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,
1996. Loans having no stated schedule of repayments or no stated maturity (due
on demand) are reported as due in three months or less.
<TABLE>
<CAPTION>
COMMERCIAL HOME
AND EQUITY
RESIDENTIAL LINES OF
COMMERCIAL REAL ESTATE CREDIT CONSUMER TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FIXED RATE
Amounts Due:
Three Months or Less.......................... $ 522 $ 3,331 $ ---- $ 109 $ 3,962
After three months through one year........... 123 7,114 ---- 180 7,417
After one year through five years............. 932 33,862 43 274 35,111
Beyond five years............................. 7 9,437 ----- 39 9,483
----- ------ -- --- ------
1,584 53,744 43 602 55,973
----- ------ -- --- ------
VARIABLE RATE
Repricing Frequency:
Quarterly..................................... 3,494 9,635 3,045 549 16,723
Annually...................................... ----- ----- ----- ----- ------
Every five years but less frequently
than annually............................... ----- ----- ----- ----- ------
Less frequently than every five years ........ ----- ----- ----- ----- ------
3,494 9,635 3,045 549 16,723
----- ----- ----- --- ------
Total ..................................... $5,078 $63,379 $3,088 $1,151 $ 72,696
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</TABLE>
3
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, 1996, $428,000 of loans scheduled
to mature within three months or less, were non-accruing.
Commercial 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. Commercial loans do not include business loans secured by real
estate.
At December 31, 1996, the Bank had outstanding commercial loans
totalling $5.1 million which represented 7.0% of total loans. Of the Bank's
total commercial loan portfolio, $3.5 million or 68.8% consisted of loans priced
on a floating rate basis at a margin over the Bank's base lending rate or Wall
Street Prime Rate. At December 31, 1996, the Bank's base rate was 10.00 % while
the Prime Rate was 8.25%.
Commercial and Residential Real Estate Loans. At December 31, 1996, the
Bank's outstanding residential first and second mortgage loans and home equity
lines of credit of approximately $26.1 million, represented 35.9% of the Bank's
total loan portfolio. Of this amount, $20.8 million represented loans originated
directly by the Bank, while approximately $5.3 million represents loans acquired
in the Acquisition.
Most fixed rate conforming loans originated by the Bank are sold to
correspondents. The Bank funds these loans at time of closing. 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.
The Bank has 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, 1996,
outstanding commercial real estate loans approximated $40.2 million or 55.4% of
total loans outstanding, including total construction and land development loans
of approximately $4.9 million.
Commercial real estate loans are generally priced at a floating rate
indexed to the Bank's base lending rate or to the Prime Rate. If a loan is
priced at a fixed rate, it is generally structured with a three-year or
five-year rate review and/or call option. At December 31, 1996, 85.1% of all
residential and commercial real estate loans are subject to repricing within
five years.
Consumer Loans. At December 31, 1996, the Bank's consumer loan portfolio
approximated $1.2 million or 1.7% 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 from consumer finance companies
and, therefore, the Bank does not view this market as possessing significant
growth potential.
4
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The following table, exclusive of acquired loans and the acquired
allowance for possible loan losses, represents the allocation of the Bank's
allowance for possible loan losses and the percentage of each loan category to
total loans, net of unearned discount, for the periods ending as indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995 1994
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(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loan Category:
Commercial.................................... $ 90 7.5% $ 35 6.1% $ 33 7.7%
Commercial Real Estate........................ 718 59.8 463 54.7 449 48.5
Residential Real Estate....................... 317 26.4 312 30.7 238 33.8
Home Equity Lines of Credit................... 55 4.6 37 6.3 35 8.1
Consumer...................................... 20 1.7 15 2.2 9 1.9
------- ----- ---- ----- ---- -----
Total....................................... $ 1,200 100.0% $862 100.0% $764 100.0%
======= ===== ==== ===== ==== =====
</TABLE>
This allocation of the allowance for possible 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 an indication of
the future amounts or types of loan charge-offs. At December 31, 1996, the Bank
classified $1.7 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 $376,000.
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 which will provide 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 estimated market
value of the Bank's investment portfolio at the dates indicated:
<TABLE>
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DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994
---------------------- -------------------- ----------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Government and agency obligations $11,400 $11,370 $ 12,596 $12,551 $ 10,752 $ 10,410
Collateralized mortgage obligations 2,381 2,378 2,048 2,016 2,395 2,276
----- ----- ----- ----- ----- -----
$13,781 $13,748 $ 14,644 $ 14,567 $ 13,147 $ 12,686
======= ======= ======== ======== ======== ========
Available-for-Sale:
U.S. Government and agency obligations. $17,669 $17,696 $ 14,995 $ 15,088 $ 15,102 $ 14,890
Mortgage backed securities 10,684 10,712 -------- ----- ------- ------
Marketable equity security 1 3 12 44 12 32
----- ----- ----- ----- ----- -----
$28,354 $28,411 $ 15,007 $ 15,132 $ 15,114 $ 14,922
======= ======= ======== ======== ======== ========
</TABLE>
Included in the Bank's held-to-maturity investment portfolio at December
31, 1996, are $6.5 million in structured notes with an estimated fair value of
$6.5 million.
5
The following table sets forth certain information regarding maturity
distribution and weighted average yields of the Bank's investment portfolio at
December 31, 1996:
<TABLE>
<CAPTION>
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 RATE VALUE RATE VALUE RATE VALUE RATE
----- ---- ----- ---- ----- ---- ----- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY:
U.S. Government and
agency obligations $ 8,400 5.73% $3,000 6.16% $ ----- -----% $ 11,400 5.84%
Collateralized mortgage
obligations(1) 1,733 5.46 648 5.92 ----- ----- 2,381 5.59
----- ---- --- ---- ------- ------- ----- ----
10,133 5.68 3,648 6.12 ----- ----- 13,781 5.80
----- ---- --- ---- ------- ------- ----- ----
AVAILABLE FOR SALE:
U.S. Government and
agency obligations(1) 11,686 5.79 6,010 5.89 ----- ----- 17,696 5.82
Mortgage backed securities. 1,133 7.93 5,174 7.93 4,405 7.93 10,712 7.93
Marketable equity security 3 ---- ----- ---- ----- ----- 3 ----
----- ---- --- ---- ------- ------- ----- ----
12,822 5.98 11,184 6.83 4,405 7.93 28,411 6.62
----- ---- --- ---- ------- ------- ----- ----
TOTAL $22,955 5.85% $14,832 6.66% $ 4,405 7.93% $ 42,192 6.35%
======= ==== ======= ==== ======= ==== ======== ====
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</TABLE>
(1) Fixed rate collateralized mortgage obligations are presented on a
scheduled cash flow basis. Variable rate U.S. Government and agency
obligations are presented on a repricing frequency 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, 1996, the Bank had a total of approximately 2,721 demand deposit
accounts with an average balance of approximately $4,145 each; 3,833 passbook,
statement savings and NOW accounts with an average balance of approximately
$5,526 each; 71 money market accounts with an average balance of approximately
$22,071 each, and 3,441 certificates of deposit with an average balance of
approximately $17,395 (including 72 certificates of deposit of $100,000 or more
totalling $9.0 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 "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.
The following table sets forth the average balances and average rates
paid on the Bank's deposits for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994
------------------- -------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing deposits: $10,965 $12,397 $12,791
Interest bearing deposits:
NOW and savings accounts 21,845 2.58% 24,858 2.56% 30,618 2.60%
Money market accounts 1,659 2.41 2,149 2.56 2,473 2.67
Certificates of deposit under $100,000 49,955 5.60 41,034 6.23 31,634 4.75
Certificates of deposit over $100,000 6,700 5.50 4,974 3.62 3,043 3.45
-------- ------- -------
Total $ 91,124 $85,412 $80,559
======== ======= =======
</TABLE>
6
Time certificates of deposit in denominations of $100,000 or more, at
December 31, 1996, had the following schedule of maturities:
TIME REMAINING TO MATURITY AMOUNT
-------------------------- ------
(IN THOUSANDS)
Less than 3 months................................... $ 3,731
3 to 6 months........................................ 2,822
6 to 12 months....................................... 1,587
More than 12 months.................................. 818
---------
Total....................................... $ 8,958
=========
For information regarding Other Borrowings refer to "Notes to Consolidated
Financial Statements" incorporated herein by reference.
COMMUNITY REINVESTMENT ACT
The Bank is committed to serving the banking needs of the entire
community, including low and moderate income areas consistent with its
obligations under the 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 seeks to meet with
specific community-based groups which may provide insight into the credit and
housing needs of the local community. The Bank has had periodic discussions with
officials from the Providence Plan Housing Corporation and the Providence
Community Action Program. These groups are primarily concerned with developing
affordable housing opportunities within the City of Providence. The Bank's
community outreach efforts rely on the calling activities of the Bank's loan
officers and branch managers. These individuals periodically contact the area's
underserved small businesses to promote the Bank's services and to gain a better
understanding of their business needs. To a lesser extent, loan officers have
contacted local realtors to ascertain community credit needs and to inform the
realtors of the Bank's residential mortgage and referral program. Loan officers
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 "certified lender", in the
SBA loan programs; specifically, the 7A and 504 programs, as well as the SBA's
Low Doc program.
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, efforts to obtain deposits,
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.
EMPLOYEES
As of December 31, 1996, the Company had 34 full-time and 12 part-time
employees. The Company's employees are not represented by any collective
bargaining unit, and the Company believes its employee relations are good. The
Company maintains a benefit program which includes health insurance, life
insurance, and a defined benefit pension plan.
7
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. In addition, the enactment
of recent banking legislation such as the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) and the Interstate Banking Act have affected the
banking industry by, among other things, broadening the regulatory powers of the
federal banking agencies in a number of areas and enabling banks and bank
holding companies to expand the geographic area in which they may provide
banking services. 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.
BHCA -- Activities and Other Limitations. The Bank Holding Company Act
("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. The
BHCA also generally prohibits a bank holding company from acquiring any bank
located outside of the state in which the existing bank subsidiaries of the bank
holding company are located unless specifically authorized by applicable state
law. However, the Interstate Banking Act provides that, among other things,
substantially all state law barriers to the acquisition of banks by out-of-state
bank holding companies will be eliminated. The law will also permit interstate
branching by banks effective as of June 1, 1997, subject to the ability of
states to opt-out completely or set an earlier effective date. See " -Interstate
Banking Legislation." 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 possible
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 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.
8
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 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 transactions be
substantially equivalent to terms of similar transactions with non-affiliates.
In addition, there are various limitations on the distribution of dividends to
the Company by the Bank.
Capital Requirements
The FDIC has established guidelines with respect to the maintenance of
appropriate levels of capital by FDIC-insured banks. At such time, if ever, that
the Company exceeds $150 million in consolidated assets or either: (i) engages
in any non-bank activity involving significant leverage; or (ii) has a
significant amount of outstanding debt that is held by the general public, it
will become subject to various capital adequacy requirements of the Federal
Reserve Board applicable to all such bank holding companies. Until such time,
the Federal Reserve Board applies the following guidelines on a bank only basis.
The Federal Reserve Board has adopted substantially identical capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the BHCA. If a banking organization's capital levels fall below the minimum
requirements established by such guidelines, a bank or bank holding company will
be expected to develop and implement a plan acceptable to the FDIC or the
Federal Reserve Board, respectively, to achieve adequate levels of capital
within a reasonable period, and may be denied approval to acquire or establish
additional banks or non-bank businesses, merge with other institutions or open
branch facilities until such capital levels are achieved. Recently enacted
federal legislation requires federal bank regulators to take "prompt corrective
action" with respect to insured depository institutions that fail to satisfy
minimum capital requirements and imposes significant restrictions on such
institutions.
9
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, with the categories ranging from 0%
(requiring no additional capital), for assets such as cash, to 100% for the bulk
of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Single-family residential first mortgage loans which
are not either 90 days or more past-due or non-performing and which have been
made in accordance with prudent underwriting standards are assigned a 50% level
in the risk-weighting system, as are certain privately issued mortgage-backed
securities representing indirect ownership of such loans. Off-balance sheet
items also are adjusted to take into account certain risk characteristics.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDICIA, each federal banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. The federal banking
agencies have promulgated substantially similar regulations to implement the
system of prompt corrective action established by Section 38 of the FDIA, which
became effective on December 19, 1992. 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 I 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).
A "critically undercapitalized institution" is to be placed in
conservatorship or receivership within 90 days unless the FDIC formally
determines that forbearance from such action would better protect the deposit
insurance fund. Unless the FDIC or other appropriate federal banking regulatory
agency makes specific further findings and certifies that the institution is
viable and is not expected to fail, an institution that remains critically
undercapitalized on average during the fourth calendar quarter after the date it
becomes critically undercapitalized must be placed in receivership.
Immediately upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA (i) restricting payment of
capital distributions and management fees, (ii) requiring that the appropriate
federal banking agency monitor the condition of the institution and its efforts
to restore its capital, (iii) requiring submission of a capital restoration
plan, (iv) restricting the growth of the institution's assets and (v) requiring
prior approval of certain expansion proposals. The appropriate federal banking
agency for an undercapitalized institution also may take any number of
discretionary supervisory actions if the agency determines that any of these
actions is necessary to resolve the problems of the institution at the least
possible long-term cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory actions include:
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on deposits;
requiring replacement of senior executive officers and directors; restricting
the activities of the institution and its affiliates; requiring divestiture of
the institution or the sale of the institution to a willing purchaser; and any
other supervisory action that the agency deems appropriate. These and additional
mandatory and permissive supervisory actions may be taken with respect to
significantly undercapitalized and critically undercapitalized institutions.
As of December 31, 1996, the Bank was classified as "well capitalized"
under these provisions.
10
Interstate Banking Legislation
On September 29, 1994 the Interstate Banking Act became law. Under the
new law, different types of interstate transactions and activities will be
permitted, each with different effective dates. Interstate transactions and
activities provided for under the new law include: (i) bank holding company
acquisitions of separately held banks in a state other than a bank holding
company's home state; (ii) mergers between insured banks with different home
states, including consolidations of affiliated insured banks; (iii)
establishment of interstate branches either de novo or by branch acquisition;
and (iv) affiliated banks acting as agents for one another for certain banking
functions without regard to state law prohibitions on interstate branching or
unauthorized banking. In general, nationwide interstate bank acquisitions will
be permissible one year after the date of enactment, irrespective of state law
limitations. Interstate mergers will be permissible on July 1, 1997, unless a
state passes legislation either to prevent or to permit the earlier occurrence
of interstate mergers. States may at any time enact legislation permitting
interstate de novo branching. Banks may act as agents for affiliated depository
institutions beginning within one year after enactment.
Once the applicable effective date has occurred (and, in the case of
interstate mergers and de novo branching, subject to applicable state law
"opt-out" or "opt-in" provisions), the appropriate federal bank regulator may
approve the respective interstate transactions only if certain criteria are met.
First, in order for a banking institution (a bank or bank holding company) to
receive approval for an interstate transaction, it must be "adequately
capitalized" and "adequately managed." The phrase "adequately capitalized" is
generally defined as meeting or exceeding all applicable federal regulatory
capital standards, while the phrase "adequately managed" is left undefined.
Second, the appropriate federal bank regulator must consider the applicant's and
its affiliated institutions' records under the CRA, as well as the applicant's
record under applicable state community reinvestment laws.
The new law applies deposit "concentration limits" to interstate
acquisition and merger transactions. Specifically, a banking institution may not
receive federal approval for interstate expansion if it and its affiliates would
control (i) more than 10% of the deposits held by all insured depository
institutions in the United States, or (ii) 30% or more of the deposits of all
insured depository institutions in any state in which the banks or branches
involved in the transactions (or any affiliated depository institution) overlap.
States may, by statute, regulation or order, raise or lower the 30% limit. In
addition, the new law preempts certain existing state law restrictions on
interstate banking (such as regional compacts and reciprocity requirements),
effective one year after enactment. However, in order to receive federal
approval for an interstate merger or de novo branching transaction, an applicant
still also must comply with any non-discriminatory host state filing and other
requirements.
The foregoing references to laws and regulations which are applicable to
the Company and the Bank are brief summaries thereof which do not purport to be
complete and which are qualified in their entirety by reference to such laws and
regulations.
RECENT DEVELOPMENTS
In January 1997, the Bank entered into a definitive agreement with
Wal-Mart Stores, Inc. of Bentonville, Arkansas, pursuant to which the Bank will
open de novo branch offices in two Wal-Mart Stores located in Rhode Island. Upon
opening of the branches, the Bank will be the first financial institution
headquartered in Rhode Island to open banking offices in Wal-Mart, the world
renowned retailer which operates more than 2,200 stores in the United States.
The Bank expects to open the branches in June 1997, subject to receipt
of required regulatory approvals. The branches will be full-service retail
branches offering all of the retail products offered at the Bank's three other
branch offices, including checking and savings accounts, consumer loans, and
mortgages. The branches will be open seven days a week and will include full
service automated teller machines (ATMs). First Bank estimates it will hire up
to 18 individuals to staff the in-store branches.
In February 1997, the Bank gave notice to NCR Corporation that the Bank
was terminating its Data Processing Contract with NCR Corporation. In connection
with the termination of the Data Processing Contract, the Bank will incur a
termination penalty of approximately $83,000, which was fully reserved for by
the Bank. The Bank currently anticipates that it will enter into a new contract
for the provision of data processing services with a third party in the second
quarter of 1997.
11
ITEM 2. PROPERTIES
The Bank delivers its products and services through its three 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 leased and 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 an 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 second of the four renewal options which
expires in the year 1999. 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 Acquisition, the Bank purchased the former credit union's
land and building and reopened the facility as the Bank's Wyoming branch at 1168
Main Street, Richmond, Rhode Island. The facility is located in the Wyoming
section in the Town of Richmond. The two story wood frame building has nearly
6,500 square feet space (exclusive of unfinished basement area) on a land area
of approximately 40,400 square feet. The branch location has a built-in ATM and
a two lane drive-up facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, based upon the advice
of legal counsel, final disposition of these lawsuits 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 1996, the Company did not submit
any matter to a vote of its security holders, through a solicitation of proxies
or otherwise.
12
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 1996 and 1995 are as
follows:
QUARTERLY SALES PRICES HIGH LOW DIVIDENDS DECLARED
1996
1st Quarter -- -- $.03
2nd Quarter 10 1/8 9 1/8 .03
3rd Quarter 10 9 .03
4th Quarter 11 1/2 9 1/4 .03
1995
1st Quarter -- -- --
2nd Quarter -- -- $.055
3rd Quarter -- -- --
4th Quarter -- -- .055
As of March 24, 1997, there were approximately 200 holders of record of
the Company's common stock and approximately 400 shareholders of beneficial
ownership who hold their stock in nominee or "street" name through various
brokerage firms.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets ............................................ $121,413 $100,304 $ 92,822 $ 87,594 $ 96,571
Investments, securities purchased under agreements to
resell, federal funds sold and interest bearing deposits 44,568 30,811 30,327 29,634 42,453
Total loans ............................................. 72,536 64,701 58,569 54,453 49,349
Allowance for possible loan losses ...................... 1,942 1,828 2,257 2,300 1,414
Total deposits .......................................... 93,876 89,591 83,184 78,535 86,695
Securities sold under agreements to repurchase .......... 10,778 -- -- -- --
Senior debenture ........................................ 2,894 2,845 2,736 2,557 2,390
Total stockholders' equity .............................. 12,560 7,192 6,559 6,124 5,621
STATEMENT OF INCOME DATA:
Interest income ......................................... 8,867 7,732 6,794 6,624 6,510
Interest expense ........................................ 4,214 3,669 2,629 2,803 2,955
------- ------- ------- ------- -------
Net interest income ..................................... 4,653 4,063 4,165 3,821 3,555
Provision for possible loan losses ...................... 455 675 555 545 630
------- ------- ------- ------- -------
Net interest income after provision for possible
loan losses ............................................ 4,198 3,388 3,610 3,276 2,925
Noninterest income ...................................... 536 474 390 409 477
Noninterest expense ..................................... 3,177 3,093 2,989 2,805 2,956
Income taxes ............................................ 513 251 399 330 177
------- ------- ------- ------- -------
Net income .............................................. $ 1,044 $ 518 $ 612 $ 550 $ 269
======= ======= ======= ======= =======
PER SHARE DATA:
Net income .............................................. $ 0.98 $ 0.71 $ 0.84 $ 0.76 $ 0.37
Book value .............................................. 9.89 10.35 9.60 8.96 8.23
Cash dividends declared ................................. 0.12 0.11 0.09 0.07 0.06
Dividend payout ratio ................................... 12.83% 14.51% 10.05% 8.69% 15.26%
Weighted average common and common stock
equivalent shares outstanding ..........................1,059,963 728,708 727,573 726,459 724,974
OPERATING RATIO DATA:
Return on average total assets .......................... 0.96% 0.54% 0.68% 0.61% 0.30%
Return on average stockholders' equity .................. 10.02 7.45 9.60 9.30 4.83
Net interest margin ..................................... 4.46 4.43 4.82 4.38 4.32
Loans to deposits ratio ................................. 77.27 72.22 70.41 69.34 56.92
Leverage capital ratio .................................. 10.32 6.87 7.01 6.81 5.74
ASSET QUALITY RATIOS:
Nonperforming assets to total assets .................... 0.91% 2.00% 1.58% 2.34% 1.13%
Nonperforming loans to total loans ...................... 0.58 0.83 0.89 0.98 1.55
Net loan charge-offs to average loans(1) ................ 0.19 1.01 0.97 1.11 1.73
Allowance for possible loan losses to total loans(1) .... 1.78 1.47 1.50 1.54 1.71
Allowance for possible loan losses to nonperforming
loans(1) ............................................... 280.35 160.63 146.76 132.46 94.12
</TABLE>
- ---------
(1) Ratios are exclusive of acquired loans, acquired reserve for loan losses,
and activity in the acquired reserve for loan losses associated with the
1992 acquisition of certain assets and the assumption of certain liabilities
of the former Chariho-Exeter Credit Union.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
First Financial Corp. 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 FDIC up to applicable limits.
The Bank offers a variety of consumer financial products and services
designed to satisfy the deposit and loan needs of its retail customers. The
Bank's retail products include interest-bearing and noninterest-bearing checking
accounts, money market accounts, passbook and statement savings, 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 results of operations of First Financial Corp. and its wholly-owned
subsidiary, First Bank and Trust Company ("Company"), depend primarily on its
net interest income, which is the difference between interest and dividend
income on interest-earning assets and interest expense on its interest-bearing
liabilities. Its interest-earning assets consist primarily of loans and
investment securities, while its interest-bearing liabilities consist primarily
of deposits, securities sold under agreements to repurchase and 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
possible loan losses, occupancy costs and, when necessary, expenses related to
other real estate owned (OREO) and to the administration of non-performing and
other classified assets.
The Company reported net income for 1996 of $1,043,677, as compared to
$517,777 for 1995, or an increase of 101.6%. Earnings per share amounted to $.98
per share for 1996, based on 1,059,963 weighted average shares outstanding, as
compared to $.71 per share for 1995, based on 728,708 weighted average shares
outstanding. Also, in 1996, the Company's return on average assets (ROA)
improved to .96% from .54% in 1995. The Company's return on average equity (ROE)
also improved to 10.02% in 1996, from 7.45% in 1995. The improvement in net
income is primarily the result of an increase in net interest income, a
reduction in the provision for possible loan losses, and an increase in
noninterest income, all of which were offset somewhat by an increase in
noninterest expense and provision for income taxes. In general, the Company's
improvement in earnings is attributable to its ability to: (i) increase
interest-earning assets funded from the net proceeds of the public offering,
along with deposits and other borrowings; (ii) increase loan originations; (iii)
improve net interest margins; and (iv) improve asset quality.
During 1996, the Company completed a public offering of its common stock and
issued 550,000 shares while increasing stockholders' equity by $4.5 million. The
increased capital allowed the Company to grow its balance sheet without
impairing its capital position. Total assets increased $21.1 million or 21.0% to
$121.4 million at the end of 1996. This growth occurred through a $4.3 million,
or 4.8% increase in deposits, to $93.9 million; a $10.8 million increase in
securities sold under agreements to repurchase; the $4.5 million in net proceeds
from the public offering; and nearly $.9 million in net income, less common
stock dividends.
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 1996, net interest income rose $589,911, or 14.5%, to $4,653,258
from $4,063,347 in 1995. The primary reason for this increase was due to an
14
increase in average interest-earning assets of $12.5 million, or 13.6% and a
slight increase in average net interest spread to 3.62% in 1996, as compared to
3.59% in 1995. The increase in average earning assets was funded largely from
the net proceeds of the public offering, deposit growth and other borrowings.
Increases in average stockholders' equity, offset somewhat by a decrease in
average noninterest-bearing deposits, coupled with a relatively flat average net
interest spread accounted for the 3 basis point increase in average net interest
margin to 4.46% in 1996.
Interest income totalled $8,867,483 in 1996, an increase of $1,135,464, or
14.7% over the prior year. The $12.5 million increase in average interest-
earning assets was primarily responsible for the improvement in interest income.
During 1996, loan demand was solid and the composition of average
interest-earning assets between loans and investments remained relatively
constant from 1995 to 1996. The interest rate environment also remained
relatively flat, resulting in an 8 basis point increase in average earning asset
yield to 8.51% in 1996 from 8.43% in 1995. During 1996, the Company realized
$47,000 in cash basis interest income from a loan which was nonaccruing at the
end of 1995. Without this transaction, the average earning asset yield and net
interest margin for 1996 would have been 5 basis points lower, or 8.46% and
4.41%, respectively.
Interest expense amounted to $4,214,225 in 1996, an increase of $545,553, or
14.9% over the $3,668,672 reported in 1995. The increase was attributable to a
$10.3 million increase in average interest-bearing liabilities and a 5 basis
point increase in average cost of funds. During 1996, average interest-bearing
demand and NOW, savings, and money market deposits decreased $3.4 million while
higher cost average time deposits increased $10.6 million. Also, higher cost
securities sold under agreements to repurchase increased on average by $3.1
million. Despite the impact of a declining short term interest rate environment,
the shifting of existing core savings deposits into higher cost time deposits
along with gathering new deposits into higher cost time deposits accounted for
the increase in average cost of funds to 4.89% in 1996 from 4.84% in 1995.
In the latter part of 1996, the Company entered into a series of contracts
to sell securities under agreements to repurchase. The proceeds from these
agreements were used to purchase $10,490,000 of mortgage backed securities with
a yield of 7.93%, at an average borrowing cost of 6.03%. The purpose of this
transaction was to leverage the Company's capital position with the intent to
ultimately increase the Company's return on stockholders' equity. Although the
transaction added nearly $60,000 to net interest income in 1996, the spreads
from this sole transaction were narrower than from the Company's other investing
and financing activities. Consequently, the net interest spread and net interest
margin would have been 3.67% and 4.53%, respectively, without this single
transaction.
15
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities.
Average balances are derived from daily balances. Loans are net of unearned
discount. Non-accrual loans are included in the average balances used in
calculating this table.
AVERAGE BALANCES AND INTEREST RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans .................................$ 68,437 $6,739 9.85% $61,043 $5,994 9.82% $56,812 $5,514 9.70%
Investment securities taxable -- AFS .. 18,180 1,165 6.41 13,575 758 5.58 14,633 621 4.24
Investment securities taxable -- HTM .. 13,828 772 5.58 14,357 831 5.79 10,672 487 4.56
Securities purchased under agreements
to resell ............................ 3,456 173 5.01 2,796 149 5.33 4,348 172 3.96
Federal Home Loan Bank stock .......... 348 18 5.17 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------
TOTAL INTEREST-EARNING ASSETS ........... 104,249 8,867 8.51 91,771 7,732 8.43 86,465 6,794 7.86
------- ------- ------- ------- ------- ------
NONINTEREST-EARNING ASSETS:
Cash and due from banks ............... 1,886 2,073 2,628
Premises and equipment ................ 1,739 1,810 1,553
Other real estate owned ............... 1,077 1,206 1,101
Allowance for possible loan losses .... (1,847) (2,086) (2,205)
Other assets .......................... 1,101 875 700
------- ------- -------
TOTAL NONINTEREST-EARNING ASSETS ........ 3,956 3,878 3,777
------- ------- -------
TOTAL ASSETS ............................$108,205 $95,649 $90,242
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Interest-bearing demand and NOW
deposits ...........................$ 2,550 50 1.96 $ 2,642 56 2.12 $ 2,877 63 2.19
Savings deposits ..................... 19,295 513 2.66 22,216 582 2.62 27,741 734 2.65
Money market deposits ................ 1,659 40 2.41 2,149 55 2.56 2,473 66 2.67
Time deposits ........................ 56,655 3,164 5.59 46,008 2,736 5.95 34,677 1,587 4.58
Securities sold under agreements to
repurchase ........................... 3,067 185 6.03 -- -- -- -- -- --
Senior debenture ...................... 2,894 262 9.05 2,818 240 8.52 2,644 179 6.77
------- ------- ------- ------- ------- ------- ------- ------- ------
TOTAL INTEREST-BEARING LIABILITIES ...... 86,120 4,214 4.89 75,833 3,669 4.84 70,412 2,629 3.73
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits .......... 10,965 12,397 12,791
Other liabilities ..................... 700 473 668
------- ------- -------
TOTAL NONINTEREST-BEARING LIABILITIES ... 11,665 12,870 13,459
STOCKHOLDERS' EQUITY .................... 10,420 6,946 6,371
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ................................$108,205 $95,649 $90,242
======= ======= =======
NET INTEREST INCOME ..................... $ 4,653 $ 4,063 $ 4,165
======= ======= =======
NET INTEREST SPREAD ..................... 3.62% 3.59% 4.13%
==== ==== ======
NET INTEREST MARGIN ..................... 4.46% 4.43% 4.82%
==== ==== ======
</TABLE>
16
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
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
COMPARED WITH COMPARED WITH COMPARED WITH
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------- -------------------------- --------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- -------------------------- --------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 727 $ 18 $ 745 $ 412 $ 68 $ 480 $ 509 $ (294) $ 215
Investment securities taxable -- AFS 294 113 407 (59) 196 137 621 (1) 620
Investment securities taxable -- HTM (29) (30) (59) 213 131 344 (649) 140 (509)
Securities purchased under agreements to
resell, and other 50 (8) 42 (82) 59 (23) (254) 98 (156)
------ ----- ------- ------ ----- ------- ------ ------ ------
TOTAL INTEREST-EARNING ASSETS $1,042 $ 93 $ 1,135 $ 484 $ 454 $ 938 $ 227 $ (57) $ 170
====== ===== ======= ====== ===== ======= ======= ====== ======
INTEREST-BEARING LIABILITIES:
Interest-bearing demand and NOW deposits $ (2) $ (4) $ (6) $ (5) $ (2) $ (7) $ 3 $ (1) $ 2
Savings deposits (78) 9 (69) (144) (8) (152) (5) (53) (58)
Money market deposits (12) (3) (15) (8) (3) (11) 3 (1) 2
Time deposits 594 (166) 428 674 475 1,149 20 (137) (117)
Securities sold under agreements to
repurchase 185 -- 185 -- -- -- (14) -- (14)
Senior debenture 7 15 22 15 46 61 12 (1) 11
------ ----- ------- ------ ----- ------- ------ ------ ------
TOTAL INTEREST-BEARING LIABILITIES $ 694 $(149) $ 545 $ 532 $ 508 $ 1,040 $ 19 $(193) $(174)
====== ===== ======= ====== ===== ======= ======= ====== ======
NET CHANGE IN NET INTEREST INCOME $ 348 $ 242 $ 590 $ (48) $ (54) $ (102) $ 208 $ 136 $ 344
====== ===== ======= ====== ===== ======= ======= ====== ======
</TABLE>
Provision for Possible Loan Losses
The provision for possible loan losses was $455,000 in 1996, compared to
$675,000 in 1995. The reduction in the provision was primarily the result of
fewer net charge-offs during 1996, thus eliminating the necessity to replenish
the reserve for net charge-offs, which was the case in 1995. Due to the overall
improvement in asset quality, net charge- offs amounted to $117,076 in 1996,
compared to $577,413 in 1995. The 1996 provision for possible loan losses was
used primarily to allow for the overall growth of the Company's loan portfolio.
Noninterest Income
The following table identifies the major sources of noninterest income.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges and fees on
deposit accounts $307 $285 $256
Safe deposit box rental 26 25 25
Other service fees 37 37 56
Gain on sale of securities 56 -- --
Gain on sale of loans 69 94 29
Loan servicing fee 20 15 --
Other 21 18 24
---- ---- ----
$536 $474 $390
==== ==== ====
</TABLE>
17
Noninterest income increased $62,425 in 1996, to $536,283 from $473,858 in
1995. This increase was primarily due to a $56,105 gain on sale of securities.
Generally, the Company's intention is not to sell securities prior to maturity.
However, in order to utilize a capital loss tax carryforward, which was
scheduled to expire at the end of 1996, a security was sold and the tax
carryforward was utilized.
Service charges and fees on deposit accounts increased $21,647, or 7.6%, to
$307,060 primarily as a result of more stringent imposition of fees, revisions
to the fee schedule of various deposit products and, growth in the Company's
total deposits. The gain on sale of the guaranteed portion of SBA loans
decreased $25,065 in 1996 largely due to the increased competition in this
business market.
Noninterest Expense
The following table identifies the major components of noninterest expense
for the respective periods presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee
benefits $1,654 $1,566 $1,554
Occupancy expense 364 337 342
Equipment expense 200 196 175
OREO (gains) losses, write-
downs, and carrying costs,
net 68 188 44
Other operating expenses:
FDIC insurance premium 2 95 177
Computer service 162 151 130
Regulatory examination
fees 5 15 11
Legal and professional fees 131 68 55
Directors' fees 64 59 54
Postage 48 44 45
Advertising 100 45 40
Office supplies, forms,
stationery, printing,
etc. 103 78 77
Miscellaneous 276 251 284
------ ------ ------
$3,177 $3,093 $2,988
====== ====== ======
</TABLE>
Total noninterest expense in 1996 was $3,177,282 as compared to $3,092,911
in 1995, an increase of $84,371, or 2.7%. The largest expense items accounting
for this increase were the $88,000 increase in salaries and employee benefits;
the $63,000 increase in legal and professional fees and; the $55,000 increase in
advertising costs. These increases were offset by a $120,000 decrease in OREO
carrying and disposition costs and a $93,000 decrease in FDIC insurance
premiums.
Salaries and employee benefits increased $88,000, or 5.6% in 1996. This
increase reflected a general pay adjustment for nearly all employees, and higher
payroll taxes, health insurance and retirement benefit costs. The increase was
offset somewhat by an increase in deferred loan origination costs and a decrease
in full time equivalent staffing from 43 at the beginning of the year to 40 at
the end of 1996. OREO carrying and disposition costs declined $120,000, or 64%
solely as a result of a decrease in the OREO portfolio which declined nearly
$795,000, or 54%. In 1996, the Company's FDIC insurance assessment decreased
$93,000. Effective January 1, 1996 the Bank's annual FDIC insurance assessment
was reduced to the minimum statutory requirement. The Bank qualified for this
rate on the basis of its strong capital position and supervisory evaluation.
Legal and professional fees rose $63,000, or 92.6% in 1996. This increase was
attributable to fees typically incurred in connection with reporting
requirements applicable to public companies, along with professional fees
associated with an assessment and evaluation of the Company's voice and data
processing and communications systems. Other increases or decreases in general
and administrative expenses, including advertising, were largely due to the
Company's increased item processing, greater efficiency and productivity, and
decisions to increase or curtail discretionary programs, projects and spending.
Income Taxes
Income tax expense amounted to $513,582 in 1996, or an effective tax rate of
32.7%. The effective rate in 1995 was 33.0%. The Company's combined federal and
state (net of federal benefit) statutory income tax rate was 39.94% in 1996 and
39.28% in 1995. The Company's effective combined federal and state tax rate was
lower than the statutory rate primarily due to the utilization of a capital loss
carryforward in 1996 and, the exclusion from state taxable income interest
income on U.S. Treasury obligations and certain government agency debt
securities in 1996 and 1995. 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.
18
FINANCIAL CONDITION
Total Assets
The Company's total assets increased $21.1 million, or 21.0%, from $100.3 at
December 31, 1995, to $121.4 million at December 31, 1996. The increase in total
assets primarily occurred within the Company's investment securities portfolio
which grew $12.4 million and its loan portfolio which increased $7.8 million.
The remainder of the increase took place within cash, cash equivalents and loans
held for sale of $1.7 million, and offset by a decline of $.8 million in the
foreclosed real estate (OREO) portfolio. The primary funding sources for the
rise in total assets were: (i) $10.8 million in securities sold under agreements
to repurchase; (ii) $4.3 million increase in total deposits; (iii) $4.5 million
in net proceeds from the public offering; (iv) nearly $.9 million in net income,
less dividends paid; and (v) $.6 million increase in accrued expenses and other
liabilities.
Investment Securities
The Company's total investment securities portfolio increased $12.4 million
to $42.2 million at December 31, 1996, from $29.8 million at December 31, 1995.
In September 1996, the Company borrowed $10.8 million through the sale of
securities under agreements to repurchase. Simultaneously, the Company purchased
$10.5 million of Government National Mortgage Association (GNMA), 30 year, 8.50%
coupon, mortgage backed securities (MBS) at a premium of nearly $300,000. This
sole transaction is the major reason for the increase in investment securities.
The purchased premium is amortized using a level yield method of 7.93%. At the
time of purchase, the MBS had an estimated average life of 8.1 years. The $10.8
million borrowing had staggered maturities extending to September 1999 at a
weighted average interest rate of 5.90%.
At December 31, 1996, securities which were classified as held-to-maturity
were carried at amortized cost of $13,780,519, with a market value of
$13,747,464. Securities classified as available-for- sale were carried at market
value of $28,411,326, with an amortized cost of $28,354,439. At December 31,
1996, government agency debt securities and collateralized mortgage obligations
were classified as held-to-maturity which is consistent with the Bank's intent
and ability. The available-for-sale segment of investment securities was
comprised of U.S. Treasury securities, government agency discount notes and
mortgage backed securities.
The securities in which the Company may invest are subject to regulation
and, for the most part, are limited to securities which are considered
investment grade securities. In addition, the Company has an internal investment
policy which restricts investments to: (i) United States treasury securities;
(ii) obligations of United States government agencies and corporations; (iii)
collateralized mortgage obligations, including securities issued by the Federal
National Mortgage Association (FNMA), the Government National Mortgage
Association (GNMA), and the Federal Home Loan Mortgage Corporation (FHLMC); (iv)
securities of states and political subdivisions; (v) corporate debt, all of
which must be considered investment grade by a recognized rating service; and
(vi) corporate stock. In addition to achieving a rate of return which is
consistent with the overall risk profile of the investment portfolio, the
Company views the immediate 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 two 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,
1996, the Company's investment securities had net unrealized gains of $23,832 as
compared to net unrealized gains of $47,188 at December 31, 1995.
During 1996, the Company sold an investment security which was classified as
available-for-sale at a gain of $56,105 in order to utilize a capital loss tax
carryforward which was scheduled to expire at the end of 1996. Nonetheless,
despite this sales transaction and the segmentation of its securities portfolio,
the Company anticipates that it will hold all securities for their intended
purpose.
Loans
The Company lends primarily to individuals and small businesses, including
partnerships, professional corporations and associations, and limited liability
companies. Loans made by the Company 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 protec-
19
tion. Loans made by the Company to businesses include typical asset-based 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 Company will often secure
commercial loans for working capital or equipment financing with real estate
together with equipment and other assets. The Company characterizes such loans
as "commercial real estate," consistent with regulatory requirements. Generally,
the Company lends only to borrowers located in Rhode Island or nearby
Southeastern Massachusetts or Connecticut. Occasionally, the Company will lend
to a borrower in its market area where collateral securing obligations is
vacation property located outside the market area.
Total loans, net of unearned discount, amounted to $72.5 million at December
31, 1996, up $7.8 million, or 12.1%, from $64.7 million at the end of 1995. The
increase in total loans was predominately in the commercial and commercial real
estate portfolio, which grew $9.3 million, while residential real estate, home
equity lines of credit and consumer loans declined $1.5 million. At December 31,
1996, total loans represented 59.7% of total assets and 77.2% of total deposits
compared to 64.5% and 72.2%, respectively, at the end of 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 5,075 7.0% $ 3,549 5.5% $ 3,935 6.7%
Commercial real estate 40,226 55.4 32,413 50.0 25,094 42.8
Residential real estate 22,978 31.6 23,658 36.5 24,284 41.4
Home equity lines of credit 3,088 4.3 3,672 5.7 4,110 7.0
Consumer 1,236 1.7 1,497 2.3 1,227 2.1
------- ----- ------- ----- ------- -----
72,603 64,789 58,650
Unearned discount 67 88 81
Allowance for possible loan losses 1,942 1,828 2,257
------- ------- -------
Net loans $70,594 100.0% $62,873 100.0% $56,312 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
In 1996, the Company encountered strong loan demand from small businesses.
The Company believes a primary reason for this increased demand was the
frustration of small business borrowers with the number and magnitude of
mergers, consolidations and down-sizing within the banking industry which in
turn led such borrowers to seek banking relationships with banks which were
responsive to their needs. The increase in commercial and commercial real estate
loans reflected the Company's renewed 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.
Non-Performing Assets
Non-performing assets include non-performing loans and other real estate
owned (OREO). The non- performing loans category includes loans on which the
accrual of interest is discontinued when the collectibility of principal or
interest is in doubt, or when payments of principal or interest have become 90
days past due and have arrearages that have not been eliminated. In certain
instances, non-performing 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, restruc-
20
ture loans as a concession to a borrower. At December 31, 1996, 1995, and 1994
no troubled debt restructurings were included in the Company's loan portfolio.
The following table sets forth information regarding non-performing 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 possible loan losses acquired in the
Chariho-Exeter Credit Union Acquisition.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans past due 90 days or more
but not included in non-
accrual loans $ -- $ 17 $ --
Non-accrual loans 428 519 521
------ ------ ------
Total non-performing loans 428 536 521
Other real estate owned 676 1,470 945
------ ------ ------
Total non-performing assets $1,104 $2,006 $1,466
------ ------ ------
Delinquent loans 30-89 days
past due $ 196 $ 266 $1,314
====== ======= ======
Non-performing loans as a
percent of gross loans 0.64% 0.91% 1.02%
Non-performing assets as a
percent of total assets 0.95% 2.11% 1.69%
Delinquent loans 30-89 days
past due as a percent of gross
loans 0.29% 0.45% 2.58%
</TABLE>
Allowance for Possible Loan Losses
The allowance for possible loan losses is established through provisions
charged against income. Assessing the adequacy of the allowance for possible
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 non-performing 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 possible loan losses. Because the allowance for
possible 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.
21
The following table is an analysis of the Allowance for Possible Loan Losses
over the last three years. This table excludes the acquired loans and related
allowance.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
AVERAGE LOANS OUTSTANDING $62,846 $57,048 $51,250
======= ======= =======
ALLOWANCE FOR POSSIBLE LOAN LOSSES AT BEGINNING OF YEAR $ 862 $ 764 $ 704
CHARGED-OFF LOANS:
Commercial 8 48 23
Commercial Real Estate:
Non-owner occupied 1-4 family 18 47 51
Non-owner occupied multi-family 30 411 525
Commercial -- 158 21
Residential Real Estate:
Owner occupied 1-4 family 22 -- --
Non-owner occupied 1-4 family 36 35 --
Home Equity Lines of Credit -- 5 --
Consumer 23 11 5
------- ------- -------
Total charged-off loans 137 715 625
------- ------- -------
RECOVERIES ON LOANS PREVIOUSLY CHARGED OFF:
Commercial 5 44 94
Commercial Real Estate:
Non-owner occupied 1-4 family -- -- --
Non-owner occupied multi-family -- 67 --
Commercial 3 19 --
Residential Real Estate:
Owner occupied 1-4 family -- -- 25
Non-owner occupied 1-4 family -- -- --
Home Equity Lines of Credit -- -- --
Consumer 12 8 11
------- ------- -------
Total recoveries 20 138 130
------- ------- -------
NET LOANS CHARGED-OFF 117 577 495
PROVISION FOR POSSIBLE LOAN LOSSES 455 675 555
------- ------- -------
ALLOWANCE FOR POSSIBLE LOAN LOSSES AT END OF YEAR $ 1,200 $ 862 $ 764
======= ======= =======
Net loans charged-off to average loans 0.19% 1.01% 0.97%
Allowance for possible loan losses to gross loans at end of year 1.78 1.47 1.50
Allowance for possible loan losses to non-performing loans 280.35 160.63 146.76
Net loans charged-off to allowance for possible loan losses at beginning of
year 13.57 75.52 70.31
Recoveries to charge-offs 14.60 19.30 20.80
</TABLE>
22
The following table summarizes the gross activity in OREO during the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of
year $1,470 $ 945 $ 1,522
Property acquired 183 1,257 501
Sales and other adjust-
ments (927) (607) (1,033)
Write-downs (charged to
operations) (50) (125) (45)
------ ------ -------
Balance at end of year $ 676 $1,470 $ 945
====== ====== =======
The balance of OREO at
December 31, 1996 consisted of:
Land development $ 216
1-4 Family residential
real estate 142
Multi-Family (5 or more)
residential properties --
Commercial real estate 318
------
$ 676
======
</TABLE>
Deposits and Borrowings
The Company devotes considerable time and resources to gathering deposits
through its retail branch network system. Total deposits increased $4.3 million,
or 4.8%, to $93.9 million at December 31, 1996, from $89.6 million at the end of
1995. The preponderance of growth of deposits consisted of six month and one
year time deposits and, to a lesser extent, within the Company's variable rate
certificate of deposit product. This deposit product, with terms of 18 or 36
months, is subject to repricing on a quarterly basis and is indexed to the three
month yield on U.S. Treasury bills. At the end of 1996, the variable rate
certificate of deposit amounted to $24.4 million, of which $19.2 million was
scheduled to mature in one year.
Along with its deposit gathering efforts, the Company relied on borrowing
from securities sold under agreements to repurchase to leverage its capital. At
December 31, 1996, securities sold under agreements to repurchase amounted to
$10.8 million. The Company did not have similar arrangements at the end of 1995.
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. 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 may be
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 said to be 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 a negative gap would tend to result in an increase in net 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 any off-balance sheet hedging or
speculative activities. Other than fixed rate loan commitments, the Company is
prohibited, by internal policy, from engaging in the use of off- balance sheet
financial instruments.
23
There are a number of relevant time periods in which to measure the
Company's gap position, such as at the 3, 6, and 12 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, 1996:
<TABLE>
<CAPTION>
WITHIN OVER THREE OVER ONE OVER FIVE
THREE TO TWELVE YEAR TO YEARS TO OVER TEN
MONTHS MONTHS FIVE YEARS TEN YEARS YEARS TOTAL
------ ------ ---------- --------- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities purchased under agreements to resell,
and other $ 2,724 $ -- $ -- $ -- $ -- $ 2,724
Investment securities 11,873 11,082 14,832 2,580 1,825 42,192
Loans 21,271 9,319 33,736 8,370 -- 72,696
------- -------- ------- ------- ------- --------
Total interest-earning assets 35,868 20,401 48,568 10,950 1,825 117,612
INTEREST-BEARING LIABILITIES:
Money Market accounts 270 785 512 -- -- 1,567
Savings deposits and NOW accounts 1,745 5,394 14,044 -- -- 21,183
Time deposits 34,905 19,622 5,329 -- -- 59,856
Securities sold under agreements to repurchase 5,778 -- 5,000 -- -- 10,778
Senior debenture -- 2,894 -- -- -- 2,894
------- -------- ------- ------- ------- --------
Total interest-bearing liabilities 42,698 28,695 24,885 -- -- 96,278
------- -------- ------- ------- ------- --------
NET INTEREST SENSITIVITY GAP $(6,830) $ (8,294) $23,683 $10,950 $ 1,825 $ 21,334
======= ======== ======= ======= ======= ========
CUMULATIVE GAP $(6,830) $(15,124) $ 8,559 $19,509 $21,334 $ 21,334
======= ======== ======= ======= ======= ========
NET INTEREST SENSITIVITY GAP AS A PERCENT OF TOTAL
ASSETS (5.63)% (6.83)% 19.51% 9.02% 1.50% 17.57%
CUMULATIVE GAP AS A PERCENT OF TOTAL ASSETS (5.63)% (12.46)% 7.05% 16.07% 17.57% 17.57%
</TABLE>
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 would likely deviate significantly from
those assumed in calculating the table.
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, 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, 1996, cash and due from banks, securities purchased under
agreements to resell, and short-term investments (maturing within one year)
amounted to $18.5 million, or 15.2% 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 borrowings
of nearly $7.0 million, which could assist the Company in meeting its liquidity
needs and funding its asset mix. At December 31, 1996, the Company held state
and municipal demand deposits of $1.1 million which it considered
24
highly volatile. Nonetheless, the Company believes that there are no adverse
trends in the Company's liquidity or capital reserves, and the Company believes
that it maintains adequate liquidity to meet its commitments.
Capital Resources
Total stockholders' equity of the Company at December 31, 1996 was $12.6
million, as compared to $7.2 million at December 31, 1995. The increase of $5.4
million primarily resulted from the $4.5 million in net proceeds of the public
offering and nearly $.9 million in net income, less dividends declared.
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, 1996, the Bank's Leverage Capital Ratio was 9.85%, as compared to
10.17% at December 31, 1995. The FDIC's minimum Leverage Capital Ratio for
"adequately capitalized" financial institutions is 3%, although this minimum
leverage ratio applies only to certain of the most highly-rated banks. Other
institutions are subject to higher requirements.
The risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and
off-balance sheet items to broad risk categories. According to these standards,
the Bank had a Tier I Risk-Based Capital Ratio of 14.71% and a Total Risk-Based
Capital Ratio of 15.96% at December 31, 1996, as compared to a Tier I Risk-Based
Capital Ratio of 15.02% and a Total Risk-Based Capital Ratio of 16.26% at
December 31, 1995. 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, 1996, the Company's Leverage Capital Ratio was 10.32%, as
compared to 6.87% at December 31, 1995. The Company's Tier I Risk-Based Capital
Ratio was 15.78% and its Total Risk-Based Capital Ratio was 17.03% at December
31, 1996, and 10.20% and 11.46%, respectively, at December 31, 1995.
COMPARISON OF 1995 WITH 1994
The Company reported net income for 1995 of $517,777, or $.71 per share, a
decrease of 15.4% from 1994 net income of $611,901, or $.84 per share. The level
of non-performing assets impacted the Company's operating results by
necessitating additional provisions to the allowance for possible loan losses,
along with carrying and disposition costs associated with OREO. The provision
for possible loan losses for 1995 totalled $675,000, as compared to $555,000 for
the prior year. Expenses associated with carrying and disposing OREO were
$188,000 in 1995 as compared to $44,000 in 1994. Although non- performing loans
remained relatively flat at December 31, 1995 and 1994, OREO properties
increased during 1995. This increase was primarily the result of the Company's
efforts to resolve impaired loans swiftly, with the goal of minimizing loss. The
difference between the carrying value of the loans and the value of the
underlying collateral was charged to the allowance for possible loan losses. The
provisions to the allowance for possible loan losses, reflected as charges
against income, were necessary to restore the allowance to a level which the
Company believed was necessary to absorb future possible loan losses, if any.
The Company's provisions to the allowance for possible loan losses and for
OREO expenses and losses were related to the economic downturn and decrease in
commercial real estate market values from the record highs of the mid-and-late-
1980's.
For the year ended December 31, 1995, the Company's net interest income was
$4.1 million, a decrease of $100,000, or 2.4% from $4.2 million for the year
ended December 31, 1994. The Company's net interest margin declined to 4.43% for
the year ended December 31, 1995, from 4.82% for the year ended December 31,
1994. In its attempt to satisfy an increased loan demand, the Company shifted
its earning assets from lower yielding investments to higher yielding loans and
increased its loan to deposit ratio from 70.41% to 72.22%. This partially offset
the impact on the Company's cost of funds during 1995 of 1994's rising interest
rate environment and the shifting of existing core savings deposits and the
gathering of new deposits into higher cost time deposits during the year.
Non Interest Income
Noninterest income increased from $390,000 for the year ended December 31,
1994 to $474,000 for the year ended December 31, 1995. This in-
25
crease was principally the result of gains on the sale of the guaranteed portion
of SBA loans. In 1995, the guaranteed portion of four SBA loans sold by the
Company amounted to approximately $1 million. From these sales, the Company
recognized a total gain of $94,000 as noninterest income. The Company retained
servicing of these loans and recorded servicing fee income of $15,000 in 1995.
In 1994, the Bank sold the guaranteed portion of two SBA loans and recognized a
gain of $29,000.
NonInterest Expense
Total noninterest expense for the year ended December 31, 1995 was
$3,093,000 as compared to $2,988,000 for the year ended December 31, 1994.
Salaries and employee benefits increased $12,000, or .7%, from $1,554,000 for
the year ended December 31, 1994 to $1,566,000 for the year ended December 31,
1995. This increase reflected the addition of a commercial loan officer during
1995 together with a general pay adjustment for nearly all employees. The
overall increase in salaries and benefits was offset somewhat by an increase in
deferred loan origination costs of $69,000 from $72,000 for the year ended
December 31, 1994 to $141,000 for the year ended December 31, 1995. This
increase in deferred costs was a direct result of an increase in loan
originations.
Equipment expense increased $21,000 from $175,000 for the year ended
December 31, 1994 to $196,000 for the year ended December 31, 1995. This
increase was attributable to depreciation charges associated with the purchase
in late 1994 of nearly $156,000 of item processing computer equipment.
OREO losses, write-downs and carrying costs increased $144,000 from $44,000
for the year ended December 31, 1994 to $188,000 for the year ended December 31,
1995. This increase was the result of higher carrying and/or disposition costs
associated with a larger OREO portfolio.
26
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,
1996 and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen
Boston, Massachusetts
January 16, 1997
27
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 1,988,713 $ 1,866,249
------------ -------------
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL 2,376,000 1,035,000
------------ -------------
LOANS HELD FOR SALE 160,000 --
------------ -------------
SECURITIES (Notes 1 and 3):
Held-to-maturity (market value: $13,747,464 in 1996 and $14,566,501 in 1995) 13,780,519 14,644,165
Available-for-sale (amortized cost: $28,354,439 in 1996 and $15,006,743 in 1995) 28,411,326 15,131,595
------------ -------------
Total investment securities 42,191,845 29,775,760
------------ -------------
FEDERAL HOME LOAN BANK STOCK 348,100 348,100
------------ -------------
LOANS (Notes 1, 8 and 10):
Commercial 5,074,679 3,549,458
Commercial real estate 40,225,717 32,412,836
Residential real estate 22,978,397 23,657,622
Home equity lines of credit 3,088,134 3,671,892
Consumer 1,236,216 1,496,933
------------ -------------
72,603,143 64,788,741
Less -- Unearned discount 66,716 88,141
Allowance for possible loan losses (Notes 4 and 13) 1,942,457 1,828,040
------------ -------------
Net loans 70,593,970 62,872,560
------------ -------------
OTHER REAL ESTATE OWNED (Note 1) 675,607 1,470,310
------------ -------------
PREMISES AND EQUIPMENT, net (Notes 5 and 8) 1,645,280 1,816,893
------------ -------------
OTHER ASSETS 1,433,485 1,118,950
------------ -------------
TOTAL ASSETS $121,413,000 $ 100,303,822
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand $ 11,270,046 $ 12,483,433
Savings and money market accounts 22,749,700 24,191,981
Time deposits (Note 6) 59,856,363 52,915,128
------------ -------------
Total deposits 93,876,109 89,590,542
------------ -------------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note 7) 10,778,000 --
------------ -------------
ACCRUED EXPENSES AND OTHER LIABILITIES 1,294,594 677,059
------------ -------------
SENIOR DEBENTURE, net of unamortized discount of $105,604 in 1996 and
$155,368 in 1995 (Note 13) 2,894,396 2,844,632
------------ -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 2, 3, 12 and 16):
Common Stock, $1 par value
Authorized -- 5,000,000 shares
Issued -- 1,328,041 shares in 1996 and 750,000 shares in 1995 1,328,041 750,000
Surplus 4,431,380 500,000
Retained earnings 6,923,308 6,013,638
Unrealized gain on securities available-for-sale, net of taxes 34,132 74,911
------------ -------------
12,716,861 7,338,549
Less -- Treasury stock, at cost, 66,800 shares 146,960 146,960
------------ -------------
Total stockholders' equity 12,569,901 7,191,589
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $121,413,000 $ 100,303,822
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
28
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (Note 1) $6,738,492 $ 5,994,034 $5,513,587
Interest on investment securities --
U.S. Government and agency obligations 1,558,517 1,432,729 1,010,386
Collateralized mortgage obligations 134,144 154,783 96,948
Mortgage backed securities 243,994 -- --
Marketable equity securities and other 19,503 1,320 1,020
Interest on cash equivalents (Note 1) 172,833 149,153 171,650
---------- ---------- ----------
Total interest income 8,867,483 7,732,019 6,793,591
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits 3,766,620 3,429,019 2,449,860
Interest on reverse repurchase agreements 185,291 -- --
Interest on debenture (Note 13) 262,314 239,653 178,976
---------- ---------- ----------
Total interest expense 4,214,225 3,668,672 2,628,836
---------- ---------- ----------
Net interest income 4,653,258 4,063,347 4,164,755
PROVISION FOR POSSIBLE LOAN LOSSES (Note 1) 455,000 675,000 555,000
---------- ---------- ----------
Net interest income after provision for possible loan losses 4,198,258 3,388,347 3,609,755
---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposits 307,060 285,413 256,102
Gain on sale of securities 56,105 -- --
Gain on loan sales 69,402 94,467 29,133
Other 103,716 93,978 104,406
---------- ---------- ----------
Total noninterest income 536,283 473,858 389,641
---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits (Note 11) 1,653,929 1,566,105 1,554,326
Occupancy expense 364,414 337,032 342,179
Equipment expense 200,498 196,172 175,420
Other real estate owned net losses, and expenses 67,658 187,776 44,033
Computer services 162,470 150,603 130,042
Deposit insurance assessments 1,500 95,483 176,972
Other operating expenses 726,813 559,740 565,375
---------- ---------- ----------
Total noninterest expense 3,177,282 3,092,911 2,988,347
---------- ---------- ----------
Income before provision for income taxes 1,557,259 769,294 1,011,049
PROVISION FOR INCOME TAXES (Note 9) 513,582 251,517 399,148
---------- ---------- ----------
Net income $1,043,677 $ 517,777 $ 611,901
========== ========== ==========
Earnings per share $ 0.98 $ 0.71 $ 0.84
========== ========== ==========
Weighted average common and common stock equivalent shares outstanding 1,059,963 728,708 727,573
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
29
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES
AVAILABLE TOTAL
COMMON RETAINED FOR SALE, NET TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS OF TAXES STOCK EQUITY
----- ------- -------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 750,000 $ 500,000 $5,020,599 $ -- $(146,960) $ 6,123,639
Net income -- -- 611,901 -- -- 611,901
Dividends ($.09 per share) -- -- (61,487) -- -- (61,487)
Change in net unrealized gain (loss)
on securities available-for-sale -- -- -- (114,893) -- (114,893)
---------- ---------- ---------- --------- --------- ------------
Balance, December 31, 1994 750,000 500,000 5,571,013 (114,893) (146,960) 6,559,160
Net income -- -- 517,777 -- -- 517,777
Dividends ($.11 per share) -- -- (75,152) -- -- (75,152)
Change in net unrealized gain (loss)
on securities available-for-sale -- -- -- 189,804 -- 189,804
---------- ---------- ---------- --------- --------- ------------
Balance, December 31, 1995 750,000 500,000 6,013,638 74,911 (146,960) 7,191,589
Net income -- -- 1,043,677 -- -- 1,043,677
Dividends declared ($.12 per share) -- -- (134,007) -- -- (134,007)
Exercise of stock options and related
tax effect 28,041 (41,744) -- -- -- (13,703)
Issuance of 550,000 shares of common
stock, net of offering costs 550,000 3,973,124 -- -- -- 4,523,124
Change in net unrealized gain (loss)
on securities available-for-sale -- -- -- (40,779) -- (40,779)
---------- ---------- ---------- --------- --------- ------------
Balance, December 31, 1996 $1,328,041 $4,431,380 $6,923,308 $ 34,132 $(146,960) $ 12,569,901
========== ========== ========== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
30
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,043,677 $ 517,777 $ 611,901
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for possible loan losses 455,000 675,000 555,000
Depreciation and amortization 185,076 171,201 147,740
Gains (losses) on OREO (6,681) 112,302 30,742
Gain on sale of securities (56,105) -- --
Gain on sales of loans (69,402) (94,467) (29,133)
Proceeds from sales of loans 890,652 1,002,982 338,078
Loans originated for sale (981,250) (908,515) (308,945)
Net (accretion) on investment securities held-to-maturity (40,619) (11,698) (82,186)
Net (accretion) amortization on investment securities
available-for-sale (103,136) (89,580) 46,187
Net (decrease) increase in unearned discount (21,425) 7,327 7,159
Net (increase) in other assets (314,535) (264,888) (271,367)
Accretion of discount on debenture 199,064 192,312 178,976
Net increase (decrease) in deferred loan fees 30,330 37,297 (3,907)
Net increase (decrease) in accrued expenses and other liabilities 457,584 124,512 (36,058)
------------ ------------ ------------
Net cash provided by operating activities 1,668,230 1,471,562 1,184,187
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities held-to-maturity 22,766,655 10,318,259 37,481,225
Proceeds from sale and maturities of investment securities
available-for-sale 21,914,591 32,380,000 5,500,000
Purchase of investment securities held-to-maturity (18,865,456) (11,804,178) (35,080,210)
Purchase of investment securities available-for-sale (38,099,980) (32,183,850) (8,590,672)
Purchase of Federal Home Loan Bank stock -- (348,100) --
Net increase in loans (8,368,347) (8,534,422) (5,115,528)
Purchase of premises and equipment (13,463) (152,944) (387,387)
Sales of OREO 984,416 616,274 1,021,778
------------ ------------ ------------
Net cash used in investing activities (19,681,584) (9,708,961) (5,170,794)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand accounts (1,213,387) 448,760 987,195
Net decrease in savings and money market accounts (1,442,281) (7,847,890) (763,206)
Net increase in time deposits 6,941,235 13,805,346 4,425,079
Net increase in reverse repurchase agreements 10,778,000 -- --
Net proceeds on issuance of common stock 4,523,124 -- --
Exercise of stock options, net of tax effect (13,703) -- --
Dividends paid (96,170) (75,152) (61,487)
------------ ------------ ------------
Net cash provided by financing activities 19,476,818 6,331,064 4,587,581
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,463,464 (1,906,335) 600,974
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,901,249 4,807,584 4,206,610
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,364,713 $ 2,901,249 $ 4,807,584
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 3,834,580 $ 3,606,104 $ 2,434,918
============ ============ ============
Income taxes paid $ 327,250 $ 331,250 $ 473,250
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Transfer of loans to OREO $ 183,032 $ 1,257,259 $ 500,570
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
31
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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 ("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.
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 securities
purchased from another institution.
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.
Loans
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118 (SFAS No. 114, as amended). A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. SFAS No. 114, as amended, requires that impaired
loans be 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 under SFAS No. 114. All adversely classified loans at December 31, 1996
and 1995 are also considered to be impaired. When the measure of the impaired
loan is less than the recorded investments in the loan, the impairment is
recorded through a valuation allowance. All loans are individually 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.
As a result of adopting SFAS No. 114, as amended, no additional allowance
for loan losses was required as of January 1, 1995.
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 judgment 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.
Provision and Allowance for
Possible Loan Losses
The balance of the allowance and the amount of the annual provision charged
to expense are estimated amounts based on past loan loss experience, changes in
the character and size of the loan portfolio, current and expected
32
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
economic conditions, 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 possible loan losses when management
believes that the collectibility of principal is unlikely.
Investment Securities
On January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which had an immaterial
impact as of that date. This statement addresses the accounting and reporting
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Under this statement, securities are
classified as held-to- maturity, available-for-sale or trading. 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 market 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, 1996 and 1995,
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.
Income Taxes
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.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets.
The following is a summary of the lives over which the Company computes
depreciation:
Buildings and Improvements ................................ 10-40 years
Furniture and Fixtures .................................... 10-20 years
Equipment ................................................. 5-10 years
When a 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.
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.
Earnings Per Share
Earnings per share is determined by dividing net income by the weighted
average number of common shares and common stock equivalent shares outstanding.
Common stock equivalent shares represent the assumed exercise of out-
33
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
standing stock options at December 31, 1995 and 1994, net of shares assumed to
be repurchased using the treasury stock method, if dilutive.
(2) PUBLIC OFFERING
On May 13, 1996, the Securities and Exchange Commission simultaneously
declared effective the Company's Registration Statement on Form S-1 filed under
the Securities Act of 1933, as amended, and its Registration Statement on Form
8-A filed under the Securities Exchange Act of 1934, as amended. The
Registration Statement related to the public offering of 550,000 shares of
common stock. On May 13, 1996 the Company entered into an agreement with an
underwriter to purchase from the Company the shares of the common stock at the
public offering price of $9.75 per share, less an underwriting discount of $.58
per share. On May 17, 1996, the Company received from the underwriter the net
proceeds of the public offering in the amount of $5,043,500 exclusive of
$520,376 in expenses incurred in connection with the offering.
(3) INVESTMENT SECURITIES
The estimated market value and amortized cost at December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held-to-maturity --
U.S. Government & agency obligations $11,399,314 $ 4,665 $34,268 $11,369,711
Collateralized mortgage obligations 2,381,205 5,311 8,763 2,377,753
----------- ------- ------- -----------
$13,780,519 $ 9,976 $43,031 $13,747,464
=========== ======= ======= ===========
Available-for-sale --
U.S. Government & agency obligations $17,669,642 $38,565 $12,321 $17,695,886
Mortgage backed securities 10,684,297 28,043 -- 10,712,340
Marketable equity security 500 2,600 -- 3,100
----------- ------- ------- -----------
$28,354,439 $69,208 $12,321 $28,411,326
=========== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Held-to-maturity --
U.S. Government & agency obligations $12,595,739 $ 16,430 $61,600 $12,550,569
Collateralized mortgage obligations 2,048,426 2,488 34,982 2,015,932
----------- ------- ------- -----------
$14,644,165 $ 18,918 $96,582 $14,566,501
=========== ======== ======= ===========
Available-for-sale --
U.S. Government & agency obligations $14,994,993 $ 97,762 $ 4,660 $15,088,095
Marketable equity security 11,750 31,750 -- 43,500
----------- ------- ------- -----------
$15,006,743 $129,512 $ 4,660 $15,131,595
=========== ======== ======= ===========
</TABLE>
34
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
During 1996, the Company sold 2,150 shares of a marketable equity security
with a cost basis of $11,250 at a gain of $56,105 in order to utilize a capital
loss tax carryforward which was scheduled to expire at the end of 1996. There
were no sales of securities during the years ended December 31, 1995 and 1994.
A schedule of the maturity distribution of U.S. Government and agency
obligations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Within one year $ 3,149,314 $ 3,144,119 $ 9,974,578 $ 9,985,277
Over one year to five years 8,250,000 8,225,592 7,695,064 7,710,609
---------- ----------- ----------- -----------
$11,399,314 $11,369,711 $17,669,642 $17,695,886
=========== =========== =========== ===========
</TABLE>
At December 31, 1996, approximately $5,250,000 of debt securities maturing
in the one-to-five-year period are subject to periodic rate adjustment within
one year.
At December 31, 1996, the collateralized mortgage obligations have principal
payment windows which extend through September 1998.
During 1996, the Company purchased $10,490,000 of Government National
Mortgage Association, 30 year, 8.50% coupon, mortgage backed securities at a
premium of $301,587, which are being amortized using the level yield method. At
the time of purchase, the securities had an estimated average life of 8.1 years.
Investment securities having a book value of $12,637,297 and $1,407,800, at
December 31, 1996 and 1995, respectively, were pledged as collateral for
repurchase agreements, public deposits and other purposes, as required by law.
(4) ALLOWANCE FOR POSSIBLE 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 a reserve for possible loan losses of $3,850,000 for loans
acquired. This reserve is available only for loans of Chariho existing as of the
acquisition date. The following analysis summarizes activity for both the
acquired reserve and the Company's reserve for possible loan losses.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Company Reserve:
Balance at beginning of year $ 861,693 $ 764,106 $ 704,102
Provision 455,000 675,000 555,000
Loan charge-offs (136,899) (715,507) (624,867)
Recoveries 19,823 138,094 129,871
---------- ---------- ----------
Balance at end of year 1,199,617 861,693 764,106
---------- ---------- ----------
Acquired Reserve:
Balance at beginning of year 966,347 1,493,201 1,595,753
Loan charge-offs (230,016) (528,210) (462,596)
Recoveries 6,509 1,356 360,044
---------- ---------- ----------
Balance at end of year 742,840 966,347 1,493,201
---------- ---------- ----------
Total Reserve $1,942,457 $1,828,040 $2,257,307
========== ========== ==========
</TABLE>
35
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
As set forth in the Chariho Acquisition Agreement, the remaining balance, if
any, in the acquired reserve 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 reserve is inadequate, additional loan charge-offs will reduce the amount
owed on the debenture issued to DEPCO in connection with the acquisition. At
December 31, 1996, the remaining balance of acquired loans was $5,290,491.
At December 31, 1996 and 1995, the Company's recorded investment in impaired
loans was $1,658,514 and $1,223,781, respectively, of which $1,359,343 and
$786,908, respectively, was determined to require a valuation allowance of
$375,674 and $273,068 as calculated under SFAS No. 114, as amended. The average
recorded investment in impaired loans during 1996 and 1995 was $1,558,661 and
$1,844,050, respectively.
At December 31, 1996 and 1995, nonaccrual loans totaled $427,893 and
$519,193, respectively. Had nonaccrual loans been accruing, interest income
would have increased by $10,195, $57,357 and $44,940 for the years ended
December 31, 1996, 1995 and 1994, respectively. During 1996, the Company
satisfactorily resolved a loan which was on nonaccrual status at December 31,
1995, and recorded approximately $47,000 in cash basis interest income. For the
years ended December 31, 1996 and 1995, interest income on impaired loans
totaled $153,972 and $75,692, respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
Land and improvements $ 673,407 $ 673,407
Buildings and improvements 1,254,336 1,254,336
Furniture, fixtures and
equipment 1,175,866 1,170,592
---------- ----------
3,103,609 3,098,335
Less -- Accumulated
depreciation 1,458,329 1,281,442
---------- ----------
$1,645,280 $1,816,893
========== ==========
</TABLE>
(6) TIME DEPOSITS
At December 31, 1996, scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
$100,000
MATURITY OR MORE OTHER TOTAL
- -------- ------- ----- -----
<S> <C> <C> <C>
1997 $8,139,581 $41,039,958 $49,179,539
1998 316,993 7,503,275 7,820,268
1999 301,341 1,104,218 1,405,559
2000 -- 556,780 556,780
2001 200,000 694,217 894,217
---------- ----------- -----------
$8,957,915 $50,898,448 $59,856,363
========== =========== ===========
</TABLE>
Included in total time deposits are $24,368,024 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, $19,199,748 have remaining
maturities of one year or less.
(7) FEDERAL HOME LOAN BANK ADVANCES
AND OTHER BORROWINGS
At December 31, 1996, the Company had no outstanding advances and had an
unused borrowing capacity of $6,962,000 with the Federal Home Loan Bank of
Boston, of which $2,022,000 was in the form of an overnight line of credit.
During 1996, the Company entered into a series of contracts to sell
securities under agreements to repurchase. The proceeds from these agreements
were used to purchase the Company's mortgage backed securities portfolio which,
along with other securities, collateralized the agreements. The following table
represents scheduled maturities and interest rates of these agreements at
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
MATURITY RATE AMOUNT
-------- ---- ------
<S> <C> <C>
January 16, 1997 5.50% $ 5,778,000
September 18, 1998 6.27 2,500,000
September 17, 1999 6.47 2,500,000
---- -----------
5.90% $10,778,000
==== ===========
</TABLE>
36
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
At December 31, 1996, the Company's risk with counterparties to securities
sold under repurchase agreements was approximately $873,397. 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 $3,067,000 during 1996,
and the maximum amounts outstanding at any month end during 1996 was
$10,778,000. The weighted average interest rate during 1996 was 6.03%.
(8) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases the land on which its Cranston branch office is located.
The annual rental expense under this lease, which contains renewal options
extending to 2009, is $18,500 through May 1999, at which time annual rental
expense increases to $21,500 through May 2004 and $24,500 through May 2009.
Litigation
As of December 31, 1996, 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 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.
Employment Contract
In February 1996, the Company amended the employment agreement with its
chief executive officer. This agreement provides for, among other things, a lump
sum severance payment equal to 2.99 times annual base salary (as defined) in the
event of a "change-in-control" (as defined) and upon either elective or
involuntary termination thereafter. This Agreement, which has an indefinite
term, provides for an annual increase in salary of not less than 5%.
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 $290,000 at December 31, 1996 and 1995.
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Unused portion of existing
lines of credit $4,814,988 $4,048,403
Unadvanced construction
loans 1,587,917 1,043,653
Firm commitments to extend
credit 903,000 2,468,000
</TABLE>
37
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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 one branch in South County, Rhode Island. Its
primary source of revenue is providing loans to customers who are predominately
small and middle-market businesses and middle-income individuals.
(9) INCOME TAXES
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal --
Current $677,832 $332,667 $365,655
Deferred
(prepaid) (185,050) (82,400) 22,700
State 20,800 1,250 10,793
-------- -------- --------
$513,582 $251,517 $399,148
======== ======== ========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the federal statutory rate of 34%, as summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Provision for income
taxes at statutory
rate $529,468 $261,560 $343,757
State taxes, net of
federal benefit 13,728 825 7,123
Utilization of
capital loss
carryforward (19,075) -- --
Other (10,539) (10,868) 48,268
-------- -------- --------
$513,582 $251,517 $399,148
======== ======== ========
</TABLE>
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Gross deferred tax assets:
Reserve for possible loan
losses $240,788 $169,680
Deferred loan origination fees 37,781 25,648
Capital losses carryforward -- 34,300
OREO writedowns 32,000 64,000
Supplemental executive pension
plan 52,183 26,298
Accrued expenses 85,709 --
-------- --------
Gross deferred tax assets 448,461 319,926
Valuation allowance -- (34,300)
-------- --------
Gross Deferred tax assets -- net
of valuation allowance 448,461 285,626
-------- --------
Gross deferred tax liabilities:
Depreciation 157,200 178,661
Installment sales 30,511 31,265
-------- --------
Gross deferred tax liabilities 187,711 209,926
-------- --------
Net deferred tax asset $260,750 $75,700
======== =======
</TABLE>
The valuation allowance relates to capital loss carryforwards of which
$24,124 was utilized during 1996 and the remainder expired on December 31, 1996.
38
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(10) RELATED PARTY TRANSACTIONS
Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons, and do not involve more than normal risk of
collectibility.
Related party loan activity was as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of
year $1,738,616 $1,783,740
Originations 318,567 1,155,782
Payments (517,847) (1,191,310)
Other (154,355) (9,596)
---------- ----------
Balance at end of year $1,384,981 $1,738,616
========== ==========
</TABLE>
(11) EMPLOYEE BENEFIT PLAN
The Company is a member of the Financial Institutions Retirement Fund
(FIRF), a multiple employer pension plan. As a participant in FIRF, the Company
expenses its contributions to this plan, which is accounted for as a defined
contribution plan. The Company's pension expense was $78,671, $66,685 and
$83,889 for the years ended December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1995, the Company established a nonqualified retirement
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".
The following table sets forth the non- qualified plan's funded status,
amounts recognized in the consolidated balance sheet as of December 31, 1996 and
1995, and related expense for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of
benefit obligation:
Vested accumulated benefit
obligation $(221,781) $(187,451)
========= =========
Projected benefit
obligation $(329,525) $(322,747)
Plan assets at fair value -- --
--------- ---------
(329,525) (322,747)
Unrecognized prior service
cost 228,447 257,003
Unrecognized net asset being
recognized over 10 years (91,323) (121,707)
Unrecognized net (gain) or
loss (29,380) --
--------- ---------
Accrued pension cost $(221,781) $(187,451)
========= =========
Net pension expense:
Service costs -- benefits
attributable to service
during the period $ 14,163 $ 15,771
Interest cost on projected
benefit obligation 21,995 21,417
Amortization of
unrecognized prior
service cost 28,556 28,556
--------- ---------
$ 64,714 $ 65,744
========= =========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
For calculating 1996 and 1995 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 year
</TABLE>
During 1996, the Company adopted the Financial Institutions Thrift Plan for
the benefit of its employees. The Plan, which is 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 will match 50% of the first 6% of each
eligible employee's contribution.
39
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(12) STOCKHOLDERS' EQUITY
In November 1986, the Company granted a non-statutory option ("Stock Option
Agreement") to purchase 60,000 shares of common stock to its Chief Executive
Officer at an exercise price of $2.50 per share, the estimated fair market value
of the Company's stock at that time. These options were exercisable for a period
of 10 years from the date of grant. In February of 1996, the Company amended the
Stock Option Agreement to allow the offset of the shares otherwise issuable
under the Stock Option Agreement by the number of shares required to exercise
the options and pay the minimum withholding tax requirement. In May 1996, the
options were exercised in connection with the public offering, under the amended
Stock Option Agreement. As a result of the exercise of the options, 28,041
shares of the Company's common stock were issued. In connection with the
cashless exercise of these options, the Company paid the minimum withholding tax
requirement of $161,603 and recognized a tax benefit of $147,900 on the deemed
compensation to the recipient.
In 1995, the Company's stockholders approved an increase in the number of
authorized shares from 1,000,000 shares to 5,000,000 shares with a par value of
$1 per share.
(13) 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 is payable semiannually thereafter. The Senior Debenture bears
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 is being accreted over the initial term of the
Senior Debenture on the level yield method. The discount accretion for the years
ended December 31, 1996, 1995 and 1994 amounted to $199,064, $192,312 and
$178,976, respectively, and is classified as interest expense in the
accompanying consolidated statements of income.
The Senior Debenture is scheduled to mature on May 31, 1999; however, the
Company may, at its option, extend the maturity date to May 1, 2002 for up to
one half of the then outstanding principal balance.
As discussed in Note 4, the Company may, through May 1, 1999, charge net
acquired loan losses in excess of the acquired loan loss reserve of $3,850,000
against the outstanding Senior Debenture to the extent of $3,000,000.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" as
amended by SFAS No. 119 "Disclosure about Derivative Financial Instruments and
Fair Value of Financial Instruments," collectively referred to as SFAS No. 107
requires that the Company disclose estimated fair values for certain of its
financial instruments. Financial instruments include such items as loans,
securities, deposits, swaps and other instruments as defined in the standard.
The statement requires that where available, quoted market prices be used to
estimate fair values. 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 instru ments, such as loans and
deposits, to maturity and not engage in trading or sales activities. Therefore,
valuation techniques permitted by the statement, such as present value
calculations, were used for the purposes of this disclosure.
40
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
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.
The fair value of nonaccrual loans is estimated based on the estimated fair
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.
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. Accordingly, the fair market value
amounts (considered to be the discounted present value of the remaining
contractual fees over the unexpired commitment period) would not be material.
41
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
At December 31, 1996 and 1995, the estimated fair value of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks and securities purchased under
agreement to resell $ 4,364,713 $ 4,364,713 $ 2,901,249 $ 2,901,249
Loans held for sale 160,000 168,000 -- --
Securities:
Held-to-maturity 13,780,519 13,747,464 14,644,165 14,566,501
Available-for-sale 28,411,326 28,411,326 15,131,595 15,131,595
Federal Home Loan Bank stock 348,100 348,100 348,100 348,100
Loans -- net 70,593,970 71,011,000 62,872,560 63,253,000
LIABILITIES
Deposits 93,876,109 94,081,000 89,590,542 89,964,000
Securities sold under agreements to repurchase 10,778,000 10,778,000 -- --
Senior debenture 2,894,396 3,000,000 2,844,632 3,000,000
</TABLE>
(15) THE COMPANY (PARENT COMPANY ONLY)
The condensed separate financial statements of the Company are presented
below.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 55,119 $ --
Securities:
Available-for-sale (amortized cost: $3,676,163) 3,676,698 --
Investment in subsidiary bank 11,629,111 10,648,596
Other assets 141,420 --
----------- -----------
Total assets $15,502,348 $10,648,596
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debenture, net of unamortized discount $ 2,894,396 $ 2,844,632
Intercompany payable -- 612,375
Other liabilities 38,051 --
----------- -----------
2,932,447 3,457,007
----------- -----------
Stockholders' Equity:
Common stock 1,328,041 750,000
Surplus 4,431,380 500,000
Retained earnings 6,923,308 6,013,638
Unrealized gain on securities available-for-sale, net of taxes 34,132 74,911
----------- -----------
12,716,861 7,338,549
Less -- Treasury stock 146,960 146,960
----------- -----------
Total stockholders' equity 12,569,901 7,191,589
----------- -----------
Total liabilities and stockholders' equity $15,502,348 $10,648,596
=========== ===========
</TABLE>
42
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income $ 252,993 $ 75,152 $ 61,488
Interest and other expense 287,348 239,653 178,976
---------- --------- ---------
Loss before income taxes and equity in undistributed earnings of
subsidiary (34,355) (164,501) (117,488)
Applicable income tax benefit (56,418) (81,483) (60,852)
---------- --------- ---------
Income (loss) before equity in undistributed earnings of subsidiary 22,063 (83,018) (56,636)
Equity in undistributed earnings of subsidiary 1,021,614 600,795 668,537
---------- --------- ---------
Net income $1,043,677 $ 517,777 $ 611,901
========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,043,677 $ 517,777 $ 611,901
Adjustments to reconcile net income to net cash provided by operating
activities --
Equity in undistributed earnings of subsidiary (1,021,614) (600,795) (668,537)
Accretion of discount on debenture 199,064 192,312 178,976
Net (accretion) on investment securities (59,483) -- --
Net decrease in accrued expenses and other liabilities (761,675) (34,142) (60,852)
Net (increase) in other assets (141,420) -- --
----------- --------- ---------
Net cash (used in) provided by operating activities (741,451) 75,152 61,488
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
available-for-sale 2,700,000 -- --
Purchase of investment securities available-for-sale (6,316,681) -- --
----------- --------- ---------
Net cash used in investing activities (3,616,681) -- --
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds on issuance of common stock 4,523,124 -- --
Exercise of stock options, net of tax effect (13,703) -- --
Dividends paid (96,170) (75,152) (61,488)
----------- --------- ---------
Net cash provided by (used in) financing activities 4,413,251 (75,152) (61,488)
----------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 55,119 -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR -- -- --
----------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 55,119 $ -- $ --
=========== ========= =========
</TABLE>
(16) 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 cor-
43
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
rective 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, 1996, the Company
and the Bank met all capital adequacy requirements to which they are subject and
are considered "well capitalized" by the federal banking agencies.
The December 31, 1995 Federal Deposit Insurance Corporation exam categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Company and Bank
must maintain minimum total risk- based, Tier I risk-based, Tier I leverage
ratios as set forth in the table. There are no conditions or events that
management believes have changed the Bank's category.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ---------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
The Company:
Total capital (to risk weighted assets) $13,430,343 17.03% $6,309,745 8.00% $7,887,180 10.00%
Tier I capital (to risk weighted assets) 12,444,446 15.78 3,154,872 4.00 4,732,308 6.00
Tier I capital (to average assets) 12,444,446 10.32 3,617,174 3.00 6,028,623 5.00
The Bank:
Total capital (to risk weighted assets) $12,481,382 15.96% $6,255,397 8.00% $7,819,247 10.00%
Tier I capital (to risk weighted assets) 11,503,977 14.71 3,127,699 4.00 4,691,548 6.00
Tier I capital (to average assets) 11,503,977 9.85 3,504,084 3.00 5,840,141 5.00
</TABLE>
44
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, 1996 and 1995
Consolidated Statements of Income for the years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
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,
1996.
45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
REFERENCE NUMBER DESCRIPTION
<S> <C> <C> <C>
(1) 3.1 ------ Amended and Restated Articles of Incorporation of the Registrant.
(1) 3.2 ------ By-Laws of Registrant.
(1) 4.1 ------ Specimen Certificate for Shares of the Registrant's Common Stock, $1.00 par value.
(1) 10.1 ------ Lease Agreement between the Bank and Angelo Archetto regarding Cranston, Rhode Island
property dated as of May 14, 1974.
(1) 10.2 ------ Acquisition Agreement between the Registrant, Maurice C. Paradis, receiver for
Chariho-Exeter Credit Union, and the Rhode Island Depositors Economic
Protection Corporation (DEPCO) dated as of May 1, 1992.
(1) 10.3 ------ Senior Debenture issued by Registrant to DEPCO dated as of May 1, 1992.
(1) 10.4 ------ Amended and Restated Employment Agreement between Registrant
and Patrick J. Shanahan, Jr. dated as of February 6, 1996.
(1) 10.5 ------ Stock Option Agreement between Registrant and Patrick J. Shanahan, Jr.
dated as of November 24, 1986, and Amendment No. 1 thereto dated as of February 22, 1996.
(1) 10.6 ------ Supplemental Executive Retirement Plan.
(1) 10.7 ------ Financial Institutions Retirement Fund Defined Pension Plan - Summary Plan Description.
(1) 10.8 ------ Form of Deferred Compensation Agreement regarding Directors' Fees.
(1) 10.9 ------ Data Processing Contract between the Bank and NCR Corporation dated as of
December 11, 1990, as amended.
(2) 10.10 ------ Financial Institutions Thrift Plan - Summary Plan Description
(2) 10.11 ------ Lease Agreement(s) between Bank and Wal-Mart Stores, Inc. dated as of January 27, 1997.
(1) 21.1 ------ Subsidiaries of Registrant.
(3) 27.1 ------ Financial Data Schedule.
- --------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 333-1654),
as amended, which was initially filed with the Securities and Exchange Commission on February 26, 1996.
(2) To be filed by amendment.
(3) Filed herewith.
</TABLE>
46
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.
Date: March 25, 1997 By: /s/ PATRICK J. SHANAHAN, JR.
----------------------------- ---------------------------------
Patrick J. Shanahan, Jr.
President and Chief Executive Officer
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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ PATRICK J. SHANAHAN, JR. President and Chief Executive
----------------------------------- Officer; Director March 25, 1997
Patrick J. Shanahan, Jr.
----------------------------------- Chairman of the Board
William A. Carroll (Deceased)
/s/ PETER L. MATHIEU, JR., M.D.
----------------------------------- Director March 25, 1997
Peter L. Mathieu, Jr., M.D.
----------------------------------- Director March ,1997
Raymond F. Bernardo
/s/ JOSEPH A. KEOUGH
---------------------------------- Director March 26, 1997
Joseph A. Keough
---------------------------------- Director March ,1997
William P. Shields
/s/ JOSEPH V. MEGA
- ------------------------------------ Director March 28, 1997
Joseph V. Mega
/s/ DR. JOHN NAZARIAN
- ------------------------------------ Director March 26, 1997
Dr. John Nazarian
/s/ ARTIN COLOIAN
- ------------------------------------ Director March 26, 1997
Artin Coloian
/s/ JOHN A. MACOMBER
- ------------------------------------ Vice President, Treasurer and Chief
John A. Macomber Financial Officer March 25, 1997
</TABLE>
47
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1988713
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2376000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28411326
<INVESTMENTS-CARRYING> 13780519
<INVESTMENTS-MARKET> 13747464
<LOANS> 72696427
<ALLOWANCE> 1942457
<TOTAL-ASSETS> 121413000
<DEPOSITS> 73876000
<SHORT-TERM> 10778000
<LIABILITIES-OTHER> 1294594
<LONG-TERM> 2894396
0
0
<COMMON> 1328041
<OTHER-SE> 11241860
<TOTAL-LIABILITIES-AND-EQUITY> 121413000
<INTEREST-LOAN> 6738492
<INTEREST-INVEST> 1928991
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8867483
<INTEREST-DEPOSIT> 3766620
<INTEREST-EXPENSE> 4214225
<INTEREST-INCOME-NET> 4653258
<LOAN-LOSSES> 455000
<SECURITIES-GAINS> 56105
<EXPENSE-OTHER> 3177282
<INCOME-PRETAX> 1557259
<INCOME-PRE-EXTRAORDINARY> 1557259
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1043677
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 4.46
<LOANS-NON> 427893
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1658514
<ALLOWANCE-OPEN> 1828040
<CHARGE-OFFS> 366915
<RECOVERIES> 26332
<ALLOWANCE-CLOSE> 1942457
<ALLOWANCE-DOMESTIC> 1942457
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
