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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 0-027878
First Financial Corp.
(Exact name of registrant as specified in its charter)
----------------
<TABLE>
<S> <C>
Rhode Island 05-0391383
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
180 Washington Street, Providence, Rhode Island 02903
(Address of principal executive offices) (Zip Code)
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(401) 421-3600
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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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 4, 1999 was $15,852,228 based on the closing sale price
of Common Stock as reported on the Nasdaq National Market on such date. At
March 4, 1999, there were 1,328,041 shares of the Company's $1.00 par value
Common Stock issued, with 1,231,241 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 12, 1999 are incorporated herein by reference into
Part III hereof.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Reference
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PART I
<C> <S> <C>
Item 1. Business................................................ 3
Item 2. Properties.............................................. 14
Item 3. Legal Proceedings....................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 16
Item 6. Selected Consolidated Financial Data.................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 18
Item 7A. Quantitative and Qualitative Disclosure About Market
Risk................................................... 35
Item 8. Financial Statements and Supplementary Data............. 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 61
PART III
Item 10. Directors and Executive Officers of the Registrant...... 61
Item 11. Executive Compensation.................................. 61
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................. 61
Item 13. Certain Relationships and Related Transactions.......... 61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................... 61
Signatures ........................................................ 63
</TABLE>
2
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PART I
ITEM 1. BUSINESS
General
First Financial Corp. (Company) is a bank holding company that was organized
under Rhode Island law in 1980 for the purposes of owning all of the
outstanding capital stock of First Bank and Trust Company (Bank) and providing
greater flexibility in helping the Bank achieve its business objectives. The
Bank is a Rhode Island chartered commercial bank that was originally chartered
and opened for business on February 14, 1972. The Bank provides a broad range
of lending and deposit products primarily to individuals and small businesses
($10 million or less in total revenues). Although the Bank has full commercial
banking and trust powers, it has not exercised its trust powers and does not,
at the current time, provide asset management or trust administration
services. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) up to applicable limits.
The Bank offers a variety of 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 and
opened the facility as its Richmond branch. In June 1997, the Bank opened its
fourth retail facility with an in-store branch in the Wal-Mart super store
located at Wickford Junction in North Kingstown, Rhode Island. The North
Kingstown facility is a full service branch offering the same retail products
as the Bank's other branch offices.
The core of the Bank's business remains its ability to meet the lending and
deposit needs of customers in its market area. Most recently, the Bank has
experienced growth in business loans to borrowers with favorable cash flow
attributes seeking working capital financing. The Bank is designated a
"preferred lender" by the Small Business Administration (SBA). As a
participant in the SBA's preferred lenders program, the Bank has the sole
authority to approve certain SBA guaranteed loans. The preferred lenders
program also authorizes the Bank to act as an SBAExpress lender. This program
allows the Bank to underwrite lines of credit up to $150,000 with a 50% SBA
guarantee using the Bank's documentation.
The Bank's ability to attract these new lending relationships and the
related deposits is dependent on its willingness and ability to provide
service to customers with identified needs. The Company believes that the Bank
is particularly well-situated to serve the banking needs of the metropolitan
Providence area. The Company believes that the local character of the business
environment coupled with the Company's knowledge of its customers and their
needs, together with its comprehensive retail and small business products
create opportunities that will enable the Bank to effectively compete.
Further, the Company believes that the accessibility and responsiveness of the
Bank's personnel allow the Bank to compete effectively for certain segments
within its market, in particular local professionals and businesses, who
demand and receive customized and personalized banking products and services.
3
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1992 Acquisition
On May 1, 1992, the Bank acquired certain assets and assumed certain
liabilities of Chariho-Exeter Credit Union (Acquisition). On May 4, 1992, the
Bank reopened the Chariho-Exeter facility as the third branch of the Bank
providing the same service to the local community formerly served by Chariho-
Exeter as those provided at the Bank's other two branches. Although the
Acquisition was accounted for as a purchase, no goodwill or other intangible
asset was recorded because the purchase price did not exceed the fair value of
the assets acquired.
Through the Acquisition, the Bank acquired $33.4 million in assets, which
included $19.5 million in loans and an acquired allowance for loan losses of
approximately $3.9 million. Under the Acquisition Agreement, the Bank may,
through May 1, 1999, charge-off uncollected acquired loans to this acquired
allowance for 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
loan losses, such excess may be deducted from the Company's debt obligations
under the Senior Debenture. See "Notes to Consolidated Financial Statements,"
No. (13)--Chariho-Exeter Credit Union Acquisition.
Market Area
Although its main office is located in downtown Providence, the Bank's
Cranston branch is its largest office with deposits of $53.6 million at
December 31, 1998. The Providence, Richmond and North Kingstown branches had
approximately $26.2 million, $22.0 million and $2.6 million, respectively, in
deposits at December 31, 1998. Through its branch locations, the Bank provides
for the lending and deposit needs of its commercial and consumer customers in
its market area and by targeting customers who desire the convenience and
personal service not otherwise available as a result of recent major banking
consolidations.
Lending Activities
General. The Bank lends primarily to individuals and small businesses,
including partnerships, professional corporations and associations, and
limited liability companies. Loans made by the Bank to individuals include
owner-occupied residential mortgage loans, unsecured and secured personal
lines of credit, home equity loans, mortgage loans on investment (generally
non-owner occupied 1-4 family) and vacation properties, installment loans,
student loans, and overdraft line of credit protection. Loans made by the Bank
to businesses include typical secured loans, commercial real estate loans
(loans to individuals secured by residential property of 5 units or more are
considered commercial real estate loans) and lines of credit. Within the
commercial real estate portfolio, a loan may be secured by real estate
although the purpose of the loan is not to finance the purchase or development
of real estate nor is the principal source of repayment the sale or operation
of the real estate collateral. The Bank will often secure commercial loans for
working capital or equipment financing with real estate together with
equipment and other assets. The Bank characterizes such loans as "commercial
real estate," consistent with bank regulatory requirements. Generally, the
Bank lends only to borrowers located in Rhode Island or nearby Southeastern
Massachusetts or Connecticut. Occasionally, the Bank will lend to a borrower
in its market area where collateral securing obligations is vacation property
located outside the market area.
During the past few years, the commercial and commercial real estate loan
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 of the banking
industry. The Bank has in the past, and continues today, to specifically
target such businesses through the hiring of experienced commercial loan
officers and by focusing on commercial lending to borrowers, the purpose of
which is to help finance small business plant purchases, expansion, working
4
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capital and other corporate purposes. The Bank continues to believe that
opportunities exist to satisfy the banking and borrowing needs of the small
business community.
During the past few years, and especially during 1998, the Bank was more
active than ever in working with its commercial borrowers and the SBA in
obtaining guarantees under a variety of SBA loan programs. Generally, the Bank
will sell the guaranteed portion of such loans with servicing retained.
According to the SBA, for its fiscal year ended September 30,1998, the Bank
ranked fifth (5th) in Rhode Island out of 31 lenders in volume by number of
loans approved and sixth (6th) in dollar volume of loans guaranteed by the
SBA.
The Bank's policy on real estate lending standards establishes certain
maximum loan to value ("LTV") ratios for real estate-related loans depending
on the type of collateral securing such loans. These maximum LTV ratios range
from 50% for those loans secured by undeveloped real estate up to 90% for
loans secured by residential real estate. Notwithstanding these maximum LTV
ratios, as a general practice, the Bank imposes higher collateralization
requirements than the maximum ratios established in its policy on real estate
lending standards.
Loan Underwriting, Review and Risk Assessment. When considering loan
applications, the primary factors taken into consideration by the Bank are:
(i) the cash flow and financial condition of the borrower; (ii) the value of
any underlying collateral; (iii) the long-term prospects of the borrower,
market share and depth of management; and (iv) the character and integrity of
the borrower. These factors are evaluated in a number of ways including an
analysis of financial statements, credit reviews, trade reviews, and visits to
the borrower's place of business. The total indebtedness of the borrower to
the Bank determines the maximum limit which a lending officer has the
authority to approve a particular credit. Total indebtedness means the total
of all borrowings, including the loan being requested, whether funded or
unfunded, to a particular borrower and all related loan accounts. The
authority of individual loan officers is limited to the approval of secured
loans equal to or less than either $200,000 or $50,000, 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, 1998, the Bank's statutory lending limit to any single
borrower approximated $2.1 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, 1998, the aggregate
principal amount of all loans to directors and executive officers and related
entities was $1.9 million.
5
<PAGE>
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, 1998.
Loans having no stated schedule of repayments or no stated maturity (due on
demand) are reported as due in one year.
<TABLE>
<CAPTION>
Commercial Home
and Equity
Residential Lines of
Commercial Real Estate Credit Consumer Total
---------- ----------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Fixed Rate
Amounts Due:
One year or Less......... $ 1,190 $11,617 $ 44 $ 90 $12,941
After one year through
five years.............. 2,941 43,495 263 295 46,994
Beyond five years........ 1,190 11,063 -- 62 12,315
------- ------- ------ ---- -------
5,321 66,175 307 447 72,250
------- ------- ------ ---- -------
Variable Rate
Repricing Frequency:
Quarterly................ 8,966 560 3,182 534 13,242
Annually or less
frequently.............. 476 328 -- -- 804
------- ------- ------ ---- -------
9,442 888 3,182 534 14,046
------- ------- ------ ---- -------
Total.................. $14,763 $67,063 $3,489 $981 $86,296
======= ======= ====== ==== =======
</TABLE>
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, 1998, all loans were accruing interest.
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 primarily
secured by real estate.
At December 31, 1998, the Bank had outstanding commercial loans totalling
$14.8 million which represented 17.1% of total loans. Of the Bank's total
commercial loan portfolio, $9.4 million or 64.0% 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, 1998, the Bank's base rate was 10.25% while
the Prime Rate was 7.75%.
Commercial and Residential Real Estate Loans. At December 31, 1998, the
Bank's outstanding residential first and second mortgage loans and home equity
lines of credit of approximately $19.9 million, represented 23.0% of the
Bank's total loan portfolio. Of this amount, $17.5 million represented loans
originated directly by the Bank, while approximately $2.4 million represents
loans acquired in the Acquisition.
6
<PAGE>
Most fixed rate conforming loans originated by the Bank are referred to
correspondents. The Bank does not fund these loans. The Bank does not
originate Adjustable Rate Mortgages ("ARMS") for its own portfolio. The Bank
does, however, originate fixed rate residential first mortgage loans for its
own portfolio with a 15 to 30 year amortization period and a rate review
and/or call option at three or five year intervals. Consequently, as the Bank
attempts to satisfy the needs of its customers, it maintains an element of
interest rate sensitivity embedded in the terms of the loan.
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, 1998,
outstanding commercial real estate loans approximated $50.6 million or 58.7%
of total loans outstanding, including total construction and land development
loans of approximately $1.8 million.
Commercial real estate loans are generally priced at a fixed rate and are
generally structured with a three-year or five-year rate review and/or call
option. If a loan is priced at a floating rate, it is indexed to the Bank's
base lending rate or to the Prime Rate. At December 31, 1998, 83.5% of all
residential and commercial real estate loans are subject to repricing within
five years.
Consumer Loans. At December 31, 1998, the Bank's consumer loan portfolio
approximated $1.0 million or 1.2% of total loans outstanding. The Bank offers
a full range of consumer lending products including new and used automobile
loans, passbook and certificate of deposit loans, and other personal secured
and unsecured loans. Although the Bank makes an effort to price these loans
competitively, it faces substantial competition including, most significantly,
from consumer finance companies and, therefore, the Bank does not view this
market as possessing significant growth potential.
Allowance for Loan Losses
The following table, exclusive of the acquired allowance for loan losses,
represents the allocation of the Bank's allowance for loan losses for the
periods ending as indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan Category:
Commercial....................... $ 160 12.4% $ 75 6.2% $ 90 7.5%
Commercial Real Estate........... 840 65.3 848 70.2 718 59.8
Residential Real Estate.......... 219 17.0 266 22.0 317 26.4
Home Equity Lines of Credit...... 54 4.2 7 0.6 55 4.6
Consumer......................... 14 1.1 12 1.0 20 1.7
------ ----- ------ ----- ------ -----
Total.......................... $1,287 100.0% $1,208 100.0% $1,200 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
This allocation of the allowance for loan losses reflects management's
judgment of the relative risks of the various categories of the Bank's loan
portfolio. This allocation should not be considered as an indication of the
future amounts or types of loan charge-offs. At December 31, 1998, the Bank
classified $1.6 million of loans as substandard based on the rating system
adopted by the Bank. Of these amounts, a majority of which are included in the
commercial real estate loan portfolio, the Bank estimates a potential loss
exposure of $235,000.
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 of investments permissable for banks, which will provide
the liquidity necessary to facilitate funding of loans and to cover deposit
fluctuations while at the same time achieving a satisfactory return on the
funds invested. The Bank intends to maximize earnings from its investment
portfolio consistent with the safety and liquidity of those investment assets.
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The following table sets forth the amortized cost and fair value of the
Bank's investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------- --------- ------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Government and
agency obligations.... $10,999 $10,947 $11,750 $11,745 $11,400 $11,370
Collateralized mortgage
obligations........... 2,734 2,727 718 717 2,381 2,378
------- ------- ------- ------- ------- -------
$13,733 $13,674 $12,468 $12,462 $13,781 $13,748
======= ======= ======= ======= ======= =======
Available-for-Sale:
U.S. Government and
agency obligations.... $24,402 $24,475 $17,528 $17,559 $17,669 $17,696
Mortgage-backed
securities............ 7,546 7,662 8,580 8,727 10,684 10,712
Marketable equity
securities and other.. 1,022 950 295 313 1 3
------- ------- ------- ------- ------- -------
$32,970 $33,087 $26,403 $26,599 $28,354 $28,411
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding maturity
distribution and weighted average yields of the Bank's investment portfolio at
December 31, 1998:
<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 Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Government and
agency obligations..... $ -- --% $10,999 5.38% $ -- -- % $10,999 5.38%
Collateralized mortgage
obligations(1)......... 1,640 5.60 1,094 5.55 -- -- 2,734 5.58
------- ---- ------- ---- ------ ---- ------- ----
1,640 5.60 12,093 5.40 -- -- 13,733 5.42
------- ---- ------- ---- ------ ---- ------- ----
Available-for-Sale:
U.S. Government and
agency obligations..... 17,944 5.34 6,531 5.36 -- -- 24,475 5.35
Mortgage-backed
securities(1).......... 1,367 7.21 3,337 7.28 2,958 7.32 7,662 7.28
Marketable equity
securities and other... 950 -- -- -- -- -- 950 --
------- ---- ------- ---- ------ ---- ------- ----
20,261 5.22 9,868 6.01 2,958 7.32 33,087 5.64
------- ---- ------- ---- ------ ---- ------- ----
Total................ $21,901 5.25% $21,961 5.67% $2,958 7.32% $46,820 5.58%
======= ==== ======= ==== ====== ==== ======= ====
</TABLE>
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(1) Fixed rate collateralized mortgage obligations are presented on a
scheduled cash flow basis. The mortgage backed securities are presented
using an assumed constant prepayment rate.
8
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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, 1998, the Bank had a total of approximately 3,120 demand deposit, NOW and
money market accounts with an average balance of approximately $6,508 each;
3,364 passbook and statement savings accounts with an average balance of
approximately $5,143 each; and 3,482 certificates of deposit with an average
balance of approximately $19,121 (including 94 certificates of deposit of
$100,000 or more totalling $11.8 million).
The Bank's office and service hours are supplemented by the Bank's ATM card
service which facilitates various deposit and/or withdrawal transactions. The
Bank's ATM card may be used in the "PLUS", "CIRRUS", and "NYCE" ATM networks,
and the "Maestro" point-of-sale ("POS") network. These networks provide the
Bank's ATM cardholders with access to ATMs and POS machines throughout Rhode
Island, New England, the United States and more than 34 foreign countries.
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,
------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits.. $ 14,067 $12,124 $10,965
Interest-bearing deposits:
NOW and savings accounts.... 20,474 2.51% 21,022 2.52% 21,845 2.58%
Money market accounts....... 1,281 2.42 1,499 2.40 1,659 2.41
Certificates of deposit
under $100,000............. 54,300 5.34 51,006 5.37 49,955 5.60
Certificates of deposit over
$100,000................... 10,909 5.94 9,145 6.38 6,700 5.50
-------- ------- -------
Total..................... $101,031 $94,796 $91,124
======== ======= =======
</TABLE>
Time certificates of deposit in denominations of $100,000 or more, at
December 31, 1998, had the following schedule of maturities:
<TABLE>
<CAPTION>
Time Remaining to Maturity Amount
-------------------------- --------------
(In Thousands)
<S> <C>
Less than 3 months............................................ $ 4,026
3 to 6 months................................................. 2,304
6 to 12 months................................................ 3,068
More than 12 months........................................... 2,371
-------
Total....................................................... $11,769
=======
</TABLE>
For the past several years the Bank has been active in the securities sold
under agreements to repurchase (reverse repo) market as a means of using
wholesale funds for capital leverage and interest arbitrage purposes. During
1998 the Bank expanded its use of wholesale funding sources and took down
advances for the first time from the Federal Home Loan Bank of Boston. The
purpose of these borrowings was to match the funding for selected loans as
well as refinance a maturing reverse repo at more favorable terms.
For information regarding these borrowing arrangements refer to "Notes to
Consolidated Financial Statements."
9
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Community Reinvestment Act
The Bank is committed to serving the banking needs of the communities in
which its branches are located and surrounding areas, including low and
moderate income areas consistent with its obligations under the federal
Community Reinvestment Act. There are several ways in which the Bank attempts
to fulfill this commitment, including working with economic development
agencies, undertaking special projects, and becoming involved with
neighborhood outreach programs. The Bank has undertaken as part of its mission
to contribute to the economic and social development of the communities in
which it operates. The Bank believes that its contribution is to deliver
competitive services that are responsive to the needs of its employees,
customers, shareholders, and local communities. At its last CRA-compliance
examination, the Bank was given a "satisfactory" ranking which is the second
highest rating of the four assigned by the FDIC.
In addition to memberships and directorships in a number of civic,
charitable and not-for-profit organizations, the Bank meets with specific
community-based groups which has provided insight into the credit and housing
needs of the local community. The Bank's community outreach efforts rely on
the calling activities of the Bank's loan officers and branch managers. These
individuals contact the area's under-served small businesses to promote the
Bank's services and to gain a better understanding of their business needs. To
a lesser extent, loan officers have contacted local realtors to ascertain
community credit needs and to inform the realtors of the Bank's residential
mortgage and referral program. Loan officers are also members of, and
routinely contact the Providence and surrounding area's respective Chambers of
Commerce.
The Bank has identified two primary needs within its communities: small
business loans with reduced documentation requirements and unconventional
mortgage products with flexible underwriting guidelines. To address the small
business lending demand, the Bank participates, as a "preferred lender", in
the SBA loan programs; specifically, the 7A and 504 programs, as well as the
SBA's Low Doc and SBAExpress programs.
Competition
In attracting deposits and making loans, the Bank encounters competition
from other institutions, including larger downtown Providence and suburban-
based commercial banking organizations, savings banks, credit unions, other
financial institutions and non-bank financial service companies serving Rhode
Island. The principal methods of competition include the level of loan
interest rates, interest rates paid on deposits, marketing, range of services
provided and the quality of these services. These competitors include several
major financial companies whose greater resources may afford them a
marketplace advantage by enabling them to maintain numerous banking locations
and mount extensive promotional and advertising campaigns. Certain of these
competitors are not subject to the same regulatory environment as the Bank.
Employees
As of December 31, 1998, the Company had 40 full-time and 9 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, a defined benefit pension plan, and a matching savings incentive
plan.
Regulation and Supervision
Banks and bank holding companies are subject to extensive government
regulation through federal and state statutes and regulations which are
subject to changes that may have significant impact on the way in which such
entities may conduct business. The likelihood and potential effects of any
such changes cannot be predicted. Legislation enacted in recent years has
substantially increased the level of competition among commercial banks,
thrift institutions and nonbanking institutions, including insurance
companies, brokerage firms, mutual funds, investment banks and major
retailers. In addition, legislation such as the Federal Deposit Insurance
Corporation Improvement Act (FDICIA) and the Interstate Banking Act have
affected the banking industry by, among other
10
<PAGE>
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.
No approval under the BHCA is required, however, for a bank holding company
already owning or controlling 50% of the voting shares of a bank to acquire
additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, including greater
convenience, increased competition or gains in efficiency, against the adverse
effects, including undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
Rhode Island Law. Rhode Island law requires the prior approval of the
Banking Division in order for a Rhode Island bank or bank holding company to
acquire 5% or more of the voting stock, or merge or consolidate with an out-
of-state bank or bank holding company. In examining the transaction, the
Banking Division must determine whether the transaction is permitted under the
law of the state of the out-of-state bank or bank holding company under
conditions not substantially more restrictive than those imposed by Rhode
Island law. In determining whether to approve the transaction, the Banking
Division must determine whether the transaction is in the public interest,
will promote the safety and soundness of the Rhode Island institution and
needs of the communities served thereby, and will serve the needs of the state
generally. In addition, a merger requires the prior approval of two- thirds of
the shareholders of the Rhode Island bank and such percentage of the
shareholders of the out-of-state bank as required by the laws of such state.
Under Rhode Island law, subject to the approval of the Banking Division, an
out-of- state bank or bank holding company may acquire direct or indirect
control of more than 5% of the voting stock or merge or consolidate with or
acquire substantially all of the assets and liabilities of a Rhode Island bank
or bank holding 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.
11
<PAGE>
Dividends. The Company is a legal entity separate and distinct from the
Bank. The revenues of the Company (on a parent company only basis) are derived
primarily from interest on investments and dividends paid to the Company by
the Bank. The right of the Company, and consequently the right of creditors
and stockholders of the Company, to participate in any distribution of the
assets or earnings of any subsidiary through the payment of such dividends or
otherwise is necessarily subject to the prior claims of creditors of the
subsidiary (including depositors, in the case of banking subsidiaries), except
to the extent that certain claims of the Company in a creditor capacity may be
recognized.
It is the policy of the FDIC and the Federal Reserve Board that banks and
bank holding companies, respectively, should pay dividends only out of current
earnings and only if after paying such dividends, the bank or bank holding
company would remain adequately capitalized. Federal banking regulators also
have authority to prohibit banks and bank holding companies from paying
dividends if they deem such payment to be an unsafe or unsound practice. In
addition, it is the position of the Federal Reserve Board that a bank holding
company is expected to act as a source of financial strength to its subsidiary
banks.
The Subsidiary Bank
General. The Bank is subject to extensive regulation and examination by the
Banking Division and by the FDIC, which insures its deposits to the maximum
extent permitted by law, and to certain requirements established by the
Federal Reserve Board. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of, and collateral
for, certain loans. The prior approval of the FDIC and the Banking Division is
required for the Bank to establish or relocate an additional branch office,
assume deposits, or engage in any merger, consolidation or purchase or sale of
all or substantially all of the assets of any bank or savings association. The
laws and regulations governing the Bank generally have been promulgated to
protect depositors and not for the purpose of protecting stockholders.
Examinations and Supervision. The FDIC and the Banking Division regularly
examine the operations of the Bank, including (but not limited to) their
capital adequacy, reserves, loans, investments, earnings, liquidity,
compliance with laws and regulations, record of performance under the
Community Reinvestment Act (see below) and management practices. In addition,
the Bank is required to furnish quarterly and annual reports of income and
condition to the FDIC and periodic reports to the Banking Division. The
enforcement authority of the FDIC includes the power to impose civil money
penalties, terminate insurance coverage, remove officers and directors and
issue cease-and-desist orders to prevent unsafe or unsound practices or
violations of law or regulations. In addition, under recent federal banking
legislation, the FDIC has authority to impose additional restrictions and
requirements with respect to banks that do not satisfy applicable regulatory
capital requirements.
Dividends and Affiliate Transactions. The Bank is subject to certain
restrictions on loans to the Company, on investments in the stock or
securities thereof, on the taking of stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit
on behalf of the Company. The Bank also is subject to certain restrictions on
most types of transactions with the Company, requiring that the terms of such
transaction be substantially equivalent to terms of similar transactions with
non-affiliates. In addition, there are various limitations on the distribution
of dividends to the Company by the Bank.
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
12
<PAGE>
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.
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 nonperforming 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 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.
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<PAGE>
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, 1998, the Bank was classified as "well capitalized" under
these provisions.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Act of 1994 ("Interstate
Banking Act"), enacted in 1995, permits adequately capitalized and managed
bank holding companies to acquire control of banks in any state. Additionally,
as of June 1, 1997, the Interstate Banking Act allows for banks to branch
across state lines, provided that individual states did not elect to "opt out"
of interstate banking entirely. In 1996, Rhode Island adopted legislation
pursuant to which Rhode Island "opted in" to interstate banking. The Rhode
Island act allows Rhode Island banks to establish and maintain branches
through a merger or consolidation with or by the purchase of the whole or any
part of the assets or stock of any out-of-state bank or through de novo branch
establishment in any state other than Rhode Island.
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
On November 16, 1998, the Company's Board of Directors authorized the
repurchase of up to 5%, or 63,062 shares, of the Company's common stock. The
Company views the repurchase program as an excellent utilization of capital,
and consistent with a solid capital management strategy. On January 13, 1999
and February 5, 1999, the Company repurchased a total of 30,000 shares under
the repurchase program at prices ranging from $12.75 to $12.875 per share.
Total capital used for these repurchases amounted to $384,375.
On January 6, 1999, the Company's Board of Directors declared a regular
quarterly dividend of $.09 per share to shareholders of record on February 2,
1999. This quarterly dividend represented a 50% increase over the $.06 per
share dividend declared in the fourth quarter of 1998.
ITEM 2. PROPERTIES
The Bank delivers its products and services through its four branch network
system. The Bank owns its main office building which is located at 180
Washington Street, Providence, Rhode Island. This location consists of a two-
story masonry and steel frame building containing (with basement storage)
approximately 6,800 square feet of space. The ground floor of this building is
used for retail banking as the Providence branch. Attached to this building is
a two lane drive-up facility, the only drive-up facility located in downtown
Providence. The building also houses a built-in ATM. The second floor of this
location is used predominately for executive, administrative, and support
staff office space. This building is located on two lots which are owned by
the Bank
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and which have a total area of approximately 10,000 square feet. This land
space is also used for customer parking and access and egress through the
drive-up facility. The Bank also owns an adjacent lot of approximately 3,300
square feet which is used solely as employee parking.
In 1981, the Bank opened a branch office building at the corner of Park and
Reservoir Avenues, Cranston, Rhode Island. This one-story masonry and steel
frame building (including the lower level) has approximately 7,400 square feet
space. The ground floor of this location contains the Cranston branch, the
Bank's largest branch as measured by deposits. The building also has a three
lane drive-up facility and a drive-up ATM. The basement of this building is
used predominately by the Operations Department along with several
administrative offices. The building is situated on approximately 21,000
square feet of leased land. The lease has an original noncancellable term of
15 years with four successive renewal options, each for an additional five
years ending in the year 2009. The Bank is presently in the 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 1992 Acquisition, the Bank purchased the former credit
union's land and building and reopened the facility as the Bank's Richmond
branch at 1168 Main Street, Richmond, Rhode Island. The facility is located in
the Wyoming section in the Town of Richmond. The two story wood frame building
has nearly 6,500 square feet space (exclusive of unfinished basement area) on
a land area of approximately 40,400 square feet. The branch location has a
built-in ATM and a two lane drive-up facility.
In June 1997, the Bank opened an in-store branch located in the Wal-Mart
super store at Wickford Junction in North Kingstown, Rhode Island. The Bank
leases nearly 1,700 square feet under an original lease term of five years
with two successive renewal options, each for an additional five years ending
in the year 2012. The branch is a full service facility, exclusive of safe
deposit boxes, with an ATM.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition
of these lawsuits, based upon the advice of legal counsel as to potential
outcome, will not have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1998, the Company did not submit any
matter to a vote of its security holders, through a solicitation of proxies or
otherwise.
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<PAGE>
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 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Quarterly Dividends
Sales Prices High Low Declared
------------ ------ ------ ---------
<S> <C> <C> <C>
1998
1st Quarter.......................................... 17 15 .06
2nd Quarter.......................................... 20 3/8 16 3/4 .06
3rd Quarter.......................................... 17 3/4 11 1/2 .06
4th Quarter.......................................... 13 7/8 12 1/2 .06
1997
1st Quarter.......................................... 13 1/4 11 .05
2nd Quarter.......................................... 12 3/4 11 3/8 .05
3rd Quarter.......................................... 16 12 5/8 .05
4th Quarter.......................................... 16 1/4 15 .05
</TABLE>
As of March 4, 1999, there were approximately 172 holders of record of the
Company's common stock and approximately 350 shareholders of beneficial
ownership who hold their stock in nominee or "street" name through various
brokerage firms.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- -------- -------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets.............. $ 141,919 $ 127,310 $ 121,413 $100,304 $92,822
Investments, securities
purchased under
agreements to resell,
federal funds sold and
interest bearing
deposits................. 49,544 42,944 44,568 30,811 30,327
Total loans............... 86,296 77,680 72,536 64,701 58,569
Allowance for loan
losses................... 1,287 1,597 1,942 1,828 2,257
Total deposits............ 104,372 99,290 93,876 89,591 83,184
Securities sold under
agreements to
repurchase............... 12,256 10,105 10,778 -- --
Federal Home Loan Bank
advances................. 6,204 -- -- -- --
Senior debenture.......... 2,971 2,947 2,894 2,845 2,736
Total stockholders'
equity................... 14,813 13,713 12,570 7,192 6,559
STATEMENT OF INCOME DATA:
Interest income........... 10,564 9,969 8,867 7,732 6,794
Interest expense.......... 5,218 4,803 4,214 3,669 2,629
--------- --------- --------- -------- -------
Net interest income....... 5,346 5,166 4,653 4,063 4,165
Provision for loan losses. 250 250 455 675 555
--------- --------- --------- -------- -------
Net interest income after
provision for loan
losses................... 5,096 4,916 4,198 3,388 3,610
Noninterest income........ 616 465 536 474 390
Noninterest expense....... 3,468 3,341 3,177 3,093 2,989
Income taxes.............. 794 728 513 251 399
--------- --------- --------- -------- -------
Net income................ $ 1,450 $ 1,312 $ 1,044 $ 518 $ 612
========= ========= ========= ======== =======
PER SHARE DATA:
Net income:
Basic................... $ 1.15 $ 1.04 $ 0.99 $ 0.76 $ 0.90
Diluted................. 1.15 1.04 0.98 0.71 0.84
Book value................ 11.75 10.87 9.89 10.35 9.60
Cash dividends declared... 0.24 0.20 0.12 0.11 0.09
Dividend payout ratio..... 20.88% 19.23% 12.83% 14.51% 10.05%
Weighted average common
shares outstanding....... 1,261,241 1,261,241 1,049,609 683,200 683,200
Weighted average common
and common stock
equivalent shares
outstanding.............. 1,261,241 1,261,241 1,059,963 728,708 727,573
OPERATING RATIO DATA:
Return on average total
assets................... 1.07% 1.07% 0.96% 0.54% 0.68%
Return on average
stockholders' equity..... 10.20 10.00 10.02 7.45 9.60
Net interest margin....... 4.12 4.38 4.46 4.43 4.82
Loans to deposits ratio... 82.68 78.24 77.27 72.22 70.41
Leverage capital ratio.... 10.56 10.77 10.32 6.87 7.01
ASSET QUALITY RATIOS:
Nonperforming assets to
total assets............. 0.36% 0.63% 0.91% 2.00% 1.58%
Nonperforming loans to
total loans.............. NM 0.02 0.58 0.83 0.89
Net loan charge-offs to
average loans(1)......... 0.22 0.34 0.19 1.01 0.97
Allowance for loan losses
to total loans(1)........ 1.53 1.64 1.78 1.47 1.50
Allowance for loan losses
to nonperforming
loans(1)................. NM 7,333.39 280.35 160.63 146.76
</TABLE>
- --------
(1) Ratios are exclusive of acquired loans, acquired allowance for loan
losses, and activity in the acquired allowance for loan losses associated
with the 1992 acquisition of certain assets and the assumption of certain
liabilities of the former Chariho-Exeter Credit Union.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The results of operations of First Financial Corp. and its wholly-owned
subsidiary, First Bank and Trust Company (collectively, "Company"), depend
primarily on its net interest income, which is the difference between interest
and dividend income on interest-earning assets and interest expense on its
interest-bearing liabilities. Its interest-earning assets consist primarily of
loans and investment securities, while its interest-bearing liabilities
consist primarily of deposits, securities sold under agreements to repurchase,
Federal Home Loan Bank advances and the Senior Debenture. The Company's net
income is also affected by its level of noninterest income, including fees and
service charges, as well as by its noninterest expenses, such as salary and
employee benefits, provisions to the allowance for loan losses, occupancy
costs and, when necessary, expenses related to other real estate owned (OREO)
and to the administration of nonperforming and other classified assets.
The Company reported net income for 1998 of $1,450,048, as compared to
$1,311,733 for 1997, or an increase of 10.5%. Diluted earnings per share
amounted to $1.15 per share for 1998, based on 1,261,241 weighted average
shares outstanding, as compared to $1.04 per share for 1997, also based on
1,261,241 weighted average shares outstanding. Also, in 1998, the Company's
return on average equity (ROE) improved to 10.20% from 10.00% in 1997. The
Company's return on average assets (ROA) was 1.07% in 1998 and 1997. The
improvement in net income is primarily the result of an increase in net
interest income and noninterest income, offset somewhat by an increase in
noninterest expense and provision for income taxes. In general, the Company's
improvement in earnings is attributable to: (i) an increase in average
interest-earning assets funded from both retail and wholesale sources; (ii) an
increase in SBA lending activities; and (iii) strong asset quality.
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 1998, net interest income rose $180,461 or 3.5%, to $5,346,267
from $5,165,806 in 1997. The primary reason for this increase was due to an
increase in average interest-earning assets of $11.9 million, or 10.1% offset
somewhat by a 26 basis point decrease in average net interest spread to 3.20%
in 1998, as compared to 3.46% in 1997. The increase in average interest-
earning assets was funded largely from deposit growth and other borrowings.
Increases in average stockholders' equity and an increase in average
noninterest-bearing deposits, accounted for a decrease in average net interest
margin of 26 basis points to 4.12% in 1998, the same as the 26 basis point
decrease in net interest spread.
In 1998 total interest income amounted to $10,564,083 compared to $9,969,127
in 1997, or an increase of $594,956, or 6.0%. This increase was attributable
to an $11.9 million increase in average interest-earning assets, offset
somewhat by a 31 basis points decline in earning asset yields. The increase in
earning assets was funded by an increase of $4.3 million in retail deposits
and a $5.2 million increase in wholesale sources. Within earning assets,
average loans increased $4.7 million or 6.3%, while average investments
increased $6.9 million. During 1998, average loans represented 62.0% of total
average interest-earning assets, compared to 64.2% during 1997. This
disproportionate growth from higher yielding loans to lower yielding
investments, along with a lower interest rate environment, accounted for the
decline in average interest-earning asset yield to 8.14% from 8.45%. In terms
of rate/volume, the decline in rates reduced interest income by approximately
$256,000; but the increase in volume contributed approximately $851,000 in
interest income.
Total interest expense amounted to $5,217,816 in 1998 compared to $4,803,321
in 1997, or an increase of $414,495, or 8.6%. Average interest-bearing
deposits grew $4.3 million, while cost of funds on interest-bearing deposits
remained flat at 4.70%. Despite a declining interest rate environment, the
Company's cost of funds on retail deposits remained flat due to the
predominent growth of retail deposits in high-costing time certificates of
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<PAGE>
deposit. The cost of funds on time deposits dropped to 5.44% from 5.52%.
Average wholesale funds (reverse repurchase agreements, FHLB advances, etc.)
increased $5.2 million while its cost decreased to 6.01% from 6.77%. The
overall cost on interest-bearing liabilities decreased 5 basis points to 4.94%
in 1998 compared to 4.99% in 1997. In terms of rate/volume, the decline in
rates helped reduce interest expense by approximately $140,000, while the
increase in total interest-bearing liabilities of $9.5 million caused an
increase of approximately $555,000 in interest expense.
Overall, as a result of changes in the mix of interest-earning assets and
interest-bearing liabilities as well as a declining interest rate environment,
net interest income decreased approximately $116,000. However, due to balance
sheet growth (volume) net interest income increased $296,000. This rate/volume
activity produced an increase of $180,000 to net interest income.
19
<PAGE>
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,
--------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
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................... $ 80,461 $ 7,797 9.69% $ 75,714 $7,401 9.77% $ 68,437 $6,739 9.85%
Investment securities
taxable--AFS........... 32,357 1,823 5.63 26,608 1,695 6.37 18,180 1,165 6.41
Investment securities
taxable--HTM........... 11,748 683 5.81 11,717 672 5.74 13,828 772 5.58
Securities purchased
under agreements to
resell................. 4,530 221 4.88 3,496 175 5.01 3,456 173 5.01
Federal Home Loan Bank
stock and other........ 719 40 5.56 423 26 6.15 348 18 5.17
-------- ------- ---- -------- ------ ---- -------- ------ ----
TOTAL INTEREST-EARNING
ASSETS................. 129,815 10,564 8.14 117,958 9,969 8.45 104,249 8,867 8.51
------- ---- ------ ---- ------ ----
NONINTEREST-EARNING
ASSETS:
Cash and due from banks. 2,379 2,238 1,886
Premises and equipment.. 2,430 2,141 1,739
Other real estate owned. 605 717 1,077
Allowance for possible
loan losses............ (1,412) (1,903) (1,847)
Other assets............ 1,396 1,450 1,101
-------- -------- --------
TOTAL NONINTEREST-
EARNING ASSETS......... 5,398 4,643 3,956
-------- -------- --------
TOTAL ASSETS............ $135,213 $122,601 $108,205
======== ======== ========
INTEREST-BEARING
LIABILITIES:
Deposits:
Interest-bearing demand
and NOW deposits...... $ 3,479 67 1.93 $ 3,282 64 1.95 $ 2,550 50 1.96
Savings deposits... ... 16,995 446 2.62 17,740 465 2.62 19,295 513 2.66
Money market deposits.. 1,281 31 2.42 1,499 36 2.40 1,659 40 2.41
Time deposits.......... 65,209 3,548 5.44 60,151 3,321 5.52 56,655 3,164 5.59
Securities sold under
agreements to
repurchase............. 13,059 712 5.45 10,590 647 6.11 3,067 185 6.03
Federal Home Loan Bank
advances............... 2,667 161 6.04 -- -- -- -- -- --
Senior debenture........ 2,998 253 8.44 2,946 270 9.16 2,894 262 9.05
-------- ------- ---- -------- ------ ---- -------- ------ ----
TOTAL INTEREST-BEARING
LIABILITIES............ 105,688 5,218 4.94 96,208 4,803 4.99 86,120 4,214 4.89
------- ---- ------ ---- ------ ----
NONINTEREST-BEARING
LIABILITIES:
Noninterest-bearing
deposits............... 14,067 12,124 10,965
Other liabilities....... 1,237 1,158 700
-------- -------- --------
TOTAL NONINTEREST-
BEARING LIABILITIES.... 15,304 13,282 11,665
STOCKHOLDERS' EQUITY.... 14,221 13,111 10,420
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... $135,213 $122,601 $108,205
======== ======== ========
NET INTEREST INCOME..... $ 5,346 $5,166 $4,653
======= ====== ======
NET INTEREST SPREAD..... 3.20% 3.46% 3.62%
==== ==== ====
NET INTEREST MARGIN..... 4.12% 4.38% 4.46%
==== ==== ====
</TABLE>
20
<PAGE>
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
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1997 December 31, 1996
Compared with Compared with Compared with
December 31, 1997 December 31, 1996 December 31, 1995
Increase (Decrease) Due To Increase (Decrease) Due To Increase (Decrease) Due To
------------------------------ ----------------------------- ------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
--------- --------- -------- --------- ------- --------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................. $ 457 $ (61) $ 396 $ 717 $ (55) $ 662 $ 727 $ 18 $ 745
Investment securities
taxable--AFS......... 325 (197) 128 537 (7) 530 294 113 407
Investment securities
taxable--HTM......... 3 8 11 (122) 22 (100) (29) (30) (59)
Securities purchased
under agreements to
resell, and other.... 66 (6) 60 6 4 10 50 (8) 42
-------- --------- -------- --------- ------- --------- --------- -------- ---------
TOTAL INTEREST-EARNING
ASSETS................. $ 851 $ (256) $ 595 $ 1,138 $ (36) $ 1,102 $ 1,042 $ 93 $ 1,135
======== ========= ======== ========= ======= ========= ========= ======== =========
INTEREST-BEARING
LIABILITIES:
Interest-bearing
demand and NOW
deposits............. $ 4 $ (1) $ 3 $ 14 $ -- $ 14 $ (2) $ (4) $ (6)
Savings deposits...... (19) -- (19) (40) (8) (48) (78) 9 (69)
Money market deposits. (5) -- (5) (4) -- (4) (12) (3) (15)
Time deposits......... 275 (48) 227 197 (40) 157 594 (166) 428
Securities sold under
agreements to
repurchase........... 135 (70) 65 459 3 462 185 -- 185
Federal Home Loan Bank
advances............. 161 -- 161 -- -- -- -- -- --
Senior debenture...... 4 (21) (17) 5 3 8 7 15 22
-------- --------- -------- --------- ------- --------- --------- -------- ---------
TOTAL INTEREST-BEARING
LIABILITIES............ $ 555 $ (140) $ 415 $ 631 $ (42) $ 589 $ 694 $ (149) $ 545
======== ========= ======== ========= ======= ========= ========= ======== =========
NET CHANGE IN NET
INTEREST INCOME........ $ 296 $ (116) $ 180 $ 507 $ 6 $ 513 $ 348 $ 242 $ 590
======== ========= ======== ========= ======= ========= ========= ======== =========
</TABLE>
Provision for Loan Losses
The provision for loan losses was $250,000 in 1998 and 1997. At December 31,
1998 and 1997, the Company's recorded investment in impaired loans was
$1,571,661 and $1,394,092, respectively, of which $853,221 and $884,121,
respectively, was determined to require a valuation allowance of $235,473 and
$237,030. The Company's ratio of net loan charge-offs to average loans
decreased to .22% from .34%. At
21
<PAGE>
December 31, 1998, there were no nonperforming loans. Loans 30-89 days
delinquent decreased to $161,456 from $490,437 at the end of 1998 and 1997,
respectively. At December 31, 1998 and 1997, the allowance for loan losses to
total loans was 1.53% and 1.64%, respectively.
Noninterest Income
The following table identifies the major sources of noninterest income.
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Service charges and fees on deposit accounts........ $ 279 $ 317 $ 307
Safe deposit box rental............................. 25 25 26
Other service fees.................................. 35 32 37
Gain on sale of securities.......................... -- -- 56
Gain on sale of loans............................... 166 46 69
Loan servicing fees................................. 41 33 21
ATM surcharge fees.................................. 50 -- --
Other............................................... 20 12 20
------- ------- -------
$ 616 $ 465 $ 536
======= ======= =======
</TABLE>
Noninterest income increased $150,608 or 32.4% to $616,005 in 1998 from
$465,397 in 1997. This increase was the result of the recognition of $165,620
in gains on SBA loan sales, an increase of nearly $120,000 over 1997. During
1998, the Company originated for sale $3,368,807 of guaranteed portion SBA
loans at a gain on sale of $261,424 ($95,803 has been deferred into the 1st
quarter of 1999). These originations compare to $1,386,340 in 1997. As a
result of this SBA activity, the Company's servicing fee income increased
$8,301 to $40,805. The other contributor was the result of the imposition of
ATM surcharge fees in 1998 which contributed $50,317 to noninterest income.
Noninterest Expense
The following table identifies the major components of noninterest expense
for the respective periods presented:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Salaries and employee benefits................... $ 1,896 $ 1,802 $ 1,654
Occupancy expense................................ 393 375 364
Equipment expense................................ 270 219 200
OREO (gains) losses, write-downs, and carrying
costs, net...................................... 42 22 68
Other operating expenses:
FDIC insurance premium......................... 12 11 2
Computer service fees.......................... 199 193 162
Regulatory examination fees.................... 5 5 5
Legal and professional fees.................... 136 158 131
Directors' fees................................ 70 60 64
Postage........................................ 47 45 48
Advertising.................................... 75 62 100
Office supplies, forms, stationery, printing,
etc........................................... 76 99 103
Miscellaneous.................................. 247 290 276
-------- -------- --------
$ 3,468 $ 3,341 $ 3,177
======== ======== ========
</TABLE>
22
<PAGE>
Total overhead spending for the Company increased 3.8% to $3,468,231 in 1998
from $3,341,269 in 1997. During 1998 the Company's efficiency ratio improved
to 58.17% from 59.33% in 1997. Essentially, it cost the Company $.5817 to
generate $1.00 of revenue.
Gross salaries and wages increased $141,597 or 8.9%. This increase was
primarily attributable to across the board pay increases and a full year of
staffing at the North Kingstown branch. Benefits decreased $13,485 with the
greatest savings coming from the fully funded pension plan of $41,160. Health
insurance expense increased $12,095 or 18%. As a result of increased loan
production, the deferral of salary cost, under SFAS No. 91, increased $34,240
to $196,035 in 1998. This increase in cost deferral helped lower the total
increase in salaries and benefits of $93,877 or 5.2% to $1,895,538.
Occupancy costs increased $17,895, or 4.8% to $393,189 in 1998. This
increase was solely the result of a full year's occupancy at the North
Kingstown branch. Specifically, depreciation of leasehold improvements and
rent increased $22,242.
Equipment expense increased $51,516, or 23.5% to $270,283 during 1998.
Equipment maintenance increased $10,661, while equipment depreciation
increased $44,767. Both of these increases were the direct result of a full
year's cost associated with the technology upgrades of 1997.
The cost to carry and dispose of OREO increased $19,465 in 1998 to $41,593.
Despite a smaller OREO portfolio, disposal costs increased the Company's loss
on OREO sales by $23,683 during the year.
Other operating expenses decreased $62,373 during 1998 or 8.7% to $656,527
from $718,900. Advertising and Directors' fees were up $13,181 and $10,241
respectively, while legal and professional, office supplies, printing and
forms and the deposit tax were down $21,259, $14,398, $12,008 and $43,497,
respectively. Spending control and the elimination of the State deposit tax
accounted for these overhead reductions.
Income Taxes
Income tax expense amounted to $793,993 in 1998, or an effective tax rate of
35.4%. The effective rate in 1997 was 35.7%. The Company's combined federal
and state (net of federal benefit) statutory income tax rate was 39.94% in
1998 and 1997. The Company's effective combined federal and state tax rate was
lower than the statutory rate primarily due to the exclusion, from state
taxable income, interest income on U.S. Treasury obligations and certain
government agency debt securities in 1998 and 1997. Deferred tax assets and
liabilities are reflected at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, assets and
liabilities are adjusted through the provision for income taxes.
Financial Condition
Total Assets
The Company's total assets increased $14.6 million, or 11.5%, from $127.3
million at December 31, 1997, to $141.9 million at December 31, 1998. The
increase in total assets primarily occurred within the Company's loan
portfolio which increased $8.6 million. The remainder of the increase took
place within investment securities which increased $7.8 million. The primary
funding sources for the rise in total assets were: (i) $5.1 million increase
in total deposits; (ii) nearly $1.1 million in net income, less dividends
paid; (iii) $2.2 million increase in securities sold under agreements to
repurchase; and (iv) $6.2 million increase in Federal Home Loan Bank advances.
Investment Securities
The Company's total investment securities portfolio increased $7.8 million
to $46.8 million at December 31, 1998, from $39.0 million at December 31,
1997.
23
<PAGE>
At December 31, 1998, securities which were classified as held-to-maturity
were carried at an amortized cost of $13,733,393, with a fair value of
$13,673,673. Securities classified as available-for-sale were carried at a
fair value of $33,087,290, with an amortized cost of $32,969,558. At December
31, 1998, government agency debt securities and collateralized mortgage
obligations were classified as held-to-maturity which is consistent with the
Company's intent and ability. The available-for-sale segment of investment
securities was comprised of U.S. Treasury securities, government agency
discount notes, mortgage-backed securities, and marketable equity securities.
The securities in which the Company may invest are subject to regulation
and, for the most part, are limited to securities which are considered
investment grade securities. In addition, the Company has an internal
investment policy which restricts investments to: (i) United States treasury
securities; (ii) obligations of United States government agencies and
corporations; (iii) collateralized mortgage obligations, including securities
issued by the Federal National Mortgage Association (FNMA), the Government
National Mortgage Association (GNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC); (iv) securities of states and political subdivisions; (v)
corporate debt, all of which must be considered investment grade by a
recognized rating service; and (vi) corporate stock. In addition to achieving
a rate of return which is consistent with the overall risk profile of the
investment portfolio, the Company views the principal purpose of its
investment securities as a ready source of liquidity and as a management tool
against interest rate risk embedded within the Company's balance sheet.
Generally, the Company invests in fixed rate government and agency obligations
with a maturity not to exceed three years. Single index floating rate or step-
up securities generally have final maturities which do not exceed five years
at time of purchase. Consequently, the Company's exposure to significant
market swings is somewhat controlled. At December 31, 1998, the Company's
investment securities had net unrealized gains of $58,012 as compared to net
unrealized gains of $189,910 at December 31, 1997.
Loans
Total loans, net of unearned discount, amounted to $86.3 million at December
31, 1998, up $8.6 million, or 11.1%, from $77.7 million at the end of 1997.
The increase in total loans was predominately in the commercial and commercial
real estate portfolio, which grew $13.0 million, while residential real
estate, home equity lines of credit and consumer loans declined $4.4 million.
At December 31, 1998, total loans represented 60.8% of total assets and 82.7%
of total deposits compared to 61.0% and 78.2%, respectively, at the end of
1997.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............. $14,763 17.1% $ 6,418 8.3% $ 5,075 7.0%
Commercial real estate.. 50,646 58.7 45,977 59.2 40,226 55.4
Residential real
estate................. 16,417 19.0 21,464 27.6 22,978 31.6
Home equity lines of
credit................. 3,489 4.0 2,839 3.7 3,088 4.3
Consumer................ 1,047 1.2 1,057 1.2 1,236 1.7
------- ----- ------- ----- ------- -----
86,362 77,755 72,603
Unearned discount....... 66 75 67
------- ------- -------
86,296 100.0% 77,680 100.0% 72,536 100.0%
===== ===== =====
Allowance for loan
losses................. 1,287 1,597 1,942
------- ------- -------
Net loans............... $85,009 $76,083 $70,594
======= ======= =======
</TABLE>
In 1998, the Company encountered solid loan demand from small businesses.
The Company believes a primary reason for this demand was the desire of small
business borrowers to seek banking relationships with banks which were
responsive to their needs, and the success of the Company in meeting those
needs. The
24
<PAGE>
increase in commercial and commercial real estate loans reflected the
Company's emphasis on: (i) small business lending; (ii) obtaining loan
guarantees from the SBA; and (iii) cash-flow analysis and an overall
assessment of the borrower's financial strength and ability to repay with a
secondary view towards collateral values.
The Bank offers a full range of consumer lending products including
residential mortgages and home equity lines of credit, new and used automobile
loans, passbook and certificate of deposit loans, and other personal secured
and unsecured loans. Although the Bank makes an effort to price these loans
competitively, it faces substantial competition from mortgage and consumer
finance companies.
Nonperforming Assets
Nonperforming assets include nonperforming loans and other real estate owned
(OREO). The nonperforming loans category includes loans on which the accrual
of interest is discontinued when the collectibility of principal or interest
is in doubt, or when payments of principal or interest have become 90 days
past due and have arrearages that have not been eliminated. In certain
instances, nonperforming loans may also include loans that have become 90 days
past due but remain on accrual status because the value of the collateral
securing the loan is sufficient to cover principal and interest and the loan
is in the process of collection. OREO consists of real estate acquired through
foreclosure proceedings. In addition to the preceding two categories, the
Company may, under appropriate circumstances, restructure loans as a
concession to a borrower. At December 31, 1998, 1997 and 1996, no troubled
debt restructurings were included in the Company's loan portfolio.
The following table sets forth information regarding nonperforming assets
and delinquent loans 30-89 days past due as to interest or principal, and held
by the Company at the dates indicated. The amounts and ratios shown are
exclusive of the loans and allowance for loan losses acquired in the Chariho-
Exeter Credit Union acquisition.
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997 1996
------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans past due 90 days or more but not included
in nonaccrual loans............................. $ -- $ -- $ --
Nonaccrual loans................................. -- 17 428
------ ------ --------
Total nonperforming loans........................ -- 17 428
Other real estate owned.......................... 513 782 676
------ ------ --------
Total nonperforming assets....................... $ 513 $ 799 $ 1,104
====== ====== ========
Delinquent loans 30-89 days past due............. $ 161 $ 490 $ 196
====== ====== ========
Nonperforming loans as a percent of gross loans.. NM 0.02% 0.64%
Nonperforming assets as a percent of total
assets.......................................... 0.36% 0.65% 0.95%
Delinquent loans 30-89 days past due as a percent
of gross loans.................................. 0.19% 0.67% 0.29%
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is established through provisions charged
against income. Assessing the adequacy of the allowance for loan losses
involves substantial uncertainties and is based upon management's evaluation
of the amounts required to meet estimated charge-offs in the loan portfolio
after weighing various factors. Among the factors are: (i) the risk
characteristics of the loan portfolio generally; (ii) the quality of specific
loans; (iii) the level of non-accruing loans; (iv) current economic
conditions; (v) trends in delinquencies and prior charge-offs; and (vi) the
value of the underlying collateral. Ultimate loan losses may vary
significantly from current estimates. The Company reviews nonperforming and
performing loans to ascertain whether any impairment exists within the loan
portfolio. The Company evaluates these problem loans and estimates the
potential loss exposure when assessing the adequacy of the allowance for loan
losses. Because the allowance for loan losses is based on various estimates
and includes a high degree of judgment, subsequent changes in general economic
conditions and the economic prospects of the borrowers may require changes in
those estimates.
25
<PAGE>
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 $250,000 or more or a total relationship of $500,000
or more is scheduled to be reviewed annually by the loan peer review
committee. All loans that undergo loan peer review receive a numerical grade
ranging from 1 to 6 based on a number of criteria, including the financial
strength of the borrower as determined, in part, by such borrower's liquidity,
debt service coverage and historical performance. Any loan rated 4 or worse
will automatically be placed on a "watchlist." Certain 3 rated loans for which
the committee has identified potential problems may also be placed on the
watchlist. The loans on the watchlist are reviewed monthly by the Bank's
Credit Committee in order to determine what actions should be taken with
respect to such loans, whether any loans should be added or deleted from the
watchlist, and to make estimates regarding loan loss exposure to the loan loss
review committee. The loan loss review committee, comprised of the Bank's
chief executive officer, chief financial officer and all other loan officers,
reviews loans on the watchlist on a quarterly basis in order to establish
specific loan loss reserve levels.
In addition to assessing loss exposure for all loans included on the
watchlist, the loan loss review committee also applies a three year moving
weighted average, by category, of net charge-offs to each loan type (exclusive
of watchlist loans which are specifically reviewed). Finally, the loan loss
review committee will take into consideration the above mentioned conditions,
the effects of which are not directly measured in determining the historical
charge-off and specific allowances. The evaluation of the inherent loss
regarding these conditions involves a higher degree of uncertainty because
they are not identified with specific problem loans or loan portfolio types.
26
<PAGE>
The following table is an analysis of the Allowance for Loan Losses over the
last three years. This table excludes the acquired loans and related allowance.
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
AVERAGE LOANS OUTSTANDING........................... $77,302 $70,854 $62,846
======= ======= =======
ALLOWANCE FOR LOAN LOSSES AT BEGINNING OF YEAR...... $ 1,208 $ 1,200 $ 862
CHARGED-OFF LOANS:
Commercial........................................ 12 -- 8
Commercial Real Estate:
Non-owner occupied 1-4 family................... -- -- 18
Non-owner occupied multi-family................. 128 -- 30
Commercial...................................... 27 25 --
Residential Real Estate:
Owner occupied 1-4 family....................... -- 46 22
Non-owner occupied 1-4 family................... 7 111 36
Home Equity Lines of Credit....................... -- 74 --
Consumer.......................................... 10 11 23
------- ------- -------
Total charged-off loans......................... 184 267 137
------- ------- -------
RECOVERIES ON LOANS PREVIOUSLY CHARGED-OFF:
Commercial........................................ 1 -- 5
Commercial Real Estate:
Non-owner occupied 1-4 family................... -- -- --
Non-owner occupied multi-family................. -- -- --
Commercial...................................... -- -- 3
Residential Real Estate:
Owner occupied 1-4 family....................... -- 8 --
Non-owner occupied 1-4 family................... -- -- --
Home Equity Lines of Credit....................... -- -- --
Consumer.......................................... 12 17 12
------- ------- -------
Total recoveries................................ 13 25 20
------- ------- -------
NET LOANS CHARGED-OFF............................... 171 242 117
PROVISION FOR LOAN LOSSES........................... 250 250 455
------- ------- -------
ALLOWANCE FOR LOAN LOSSES AT END OF YEAR............ $ 1,287 $ 1,208 $ 1,200
======= ======= =======
Net loans charged-off to average loans.............. 0.22% 0.34% 0.19%
Allowance for loan losses to gross loans at end of
year............................................... 1.53 1.64 1.78
Allowance for loan losses to nonperforming loans.... NM 7332.94 280.35
Net loans charged-off to allowance for loan losses
at beginning of year............................... 14.16 20.17 13.57
Recoveries to charge-offs........................... 7.07 9.36 14.60
</TABLE>
27
<PAGE>
The following table summarizes the gross activity in OREO during the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1998 1997 1996
-------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year................... $ 782 $ 676 $ 1,470
Property acquired.............................. 245 461 183
Sales and other adjustments.................... (514) (355) (927)
Write-downs (charged to operations)............ -- -- (50)
------- ------- ---------
Balance at end of year......................... $ 513 $ 782 $ 676
======= ======= =========
The balance of OREO at December 31, 1998
consisted of:
Land development............................. $ 219
1-4 Family residential real estate........... 100
Multi-Family (5 or more) residential
properties.................................. --
Commercial real estate....................... 194
-------
$ 513
=======
</TABLE>
Deposits and Borrowings
The Company devotes considerable time and resources to gathering deposits
through its retail branch network system. Total deposits increased $5.1
million, or 5.1%, to $104.4 million at December 31, 1998, from $99.3 million
at the end of 1997. Total demand deposits increased $2.5 million, while
savings and money market accounts decreased $1.4 million. The preponderance of
deposit growth occurred within time deposits which increased $4.0 million. Of
this increase, one month to twenty-four month time deposits grew $5.7 million
while the Company's eighteen and thirty-six month variable rate certificates
of deposit decreased $2.4 million. The Company's depositors, concerned that
interest rates would decline in the near-term, shifted their deposits from the
longer term variable deposit product to the shorter term fixed rate deposit
product.
Along with its deposit gathering efforts, the Company relied on borrowing
from securities sold under agreements to repurchase (reverse repo) to leverage
its capital. At December 31, 1998, securities sold under agreements to
repurchase amounted to $12.3 million, compared to $10.1 million at December
31, 1997.
During 1998, the Bank expanded its use of wholesale funding sources and took
down advances for the first time from the Federal Home Loan Bank of Boston
(FHLB). The purpose of these borrowings was to match the funding for selected
loans as well as refinance a maturing reverse repo at more favorable terms. At
December 31, 1998, advances from the FHLB amounted to $6.2 million.
Asset/Liability Management
The principal objective of the Company's asset and liability management is
to minimize interest rate risk on net interest income and stockholders'
equity. This objective is accomplished by managing the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Company's actions in this regard are taken
under the guidance of the Asset/Liability Management Committee which includes
members of the Company's senior management and two members of the Company's
Board of Directors. The Asset/Liability Management Committee is actively
involved in formulating the economic assumptions that the Company uses in its
financial planning and budgeting process and establishes policies which
control and monitor the Company's sources, uses and pricing of funds.
The effect of interest rate changes on assets and liabilities is analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring the interest rate sensitivity "gap." An
28
<PAGE>
asset or liability is interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity "gap" is defined as the difference between interest-earning assets
and interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of falling
interest rates, a positive gap would tend to adversely affect net interest
income, while a negative gap would tend to result in an increase in net
interest income. During a period of rising interest rates, a positive gap
would tend to result in an increase in net interest income while a negative
gap would tend to affect net interest income adversely.
The Company has historically sought to maintain a relatively narrow gap
position and has, in some instances, foregone investment in higher yielding
assets where such investment, in management's opinion, exposed the Company to
undue interest rate risk. However, the Company does not attempt to perfectly
match interest rate sensitive assets and liabilities and will selectively
mismatch its assets and liabilities to a controlled degree where it considers
it both appropriate and prudent to do so. In managing its interest rate risk
exposure, the Company does not engage in derivative financial instruments for
hedging or speculative purposes. Other than fixed rate loan commitments, the
Company is prohibited, by internal policy, from engaging in the use of off-
balance sheet financial instruments.
There are a number of relevant time periods in which to measure the
Company's gap position, such as at the three, six, and twelve month points and
beyond in the maturity schedule. Management tends to focus most closely on the
gap up to the one year point in making its principal funding and investing
decisions.
29
<PAGE>
The following table presents the repricing schedule for the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1998:
<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. 11,492 6,942 20,020 8,366 -- 46,820
Loans................. 26,442 11,696 38,989 9,526 -- 86,653
------- -------- ------- ------- ------- --------
Total interest-earning
assets................. 40,658 18,638 59,009 17,892 136,197
INTEREST-BEARING
LIABILITIES:
Money Market accounts. 249 724 472 -- -- 1,445
Savings deposits and
NOW accounts......... 1,687 5,214 13,594 -- -- 20,495
Time deposits......... 27,728 28,785 10,175 -- -- 66,688
Securities sold under
agreements to
repurchase........... 4,600 2,500 5,156 -- -- 12,256
Federal Home Loan Bank
advances............. 100 300 4,102 1,702 -- 6,204
Senior debenture...... -- 2,971 -- -- -- 2,971
------- -------- ------- ------- ------- --------
Total interest-bearing
liabilities............ 34,364 40,494 33,499 1,702 -- 110,059
------- -------- ------- ------- ------- --------
NET INTEREST SENSITIVITY
GAP.................... $ 6,294 $(21,856) $25,510 $16,190 -- $ 26,138
======= ======== ======= ======= ======= ========
CUMULATIVE GAP.......... $ 6,294 $(15,562) $ 9,948 $26,138 $26,138 $ 26,138
======= ======== ======= ======= ======= ========
NET INTEREST SENSITIVITY
GAP AS A PERCENT OF
TOTAL ASSETS........... 4.4% (15.4)% 18.0% 11.4% -- 18.4%
======= ======== ======= ======= ======= ========
CUMULATIVE GAP AS A
PERCENT OF TOTAL
ASSETS................. 4.4% (11.0)% 7.0% 18.4% 18.4% 18.4%
======= ======== ======= ======= ======= ========
</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 could deviate
significantly from those assumed in calculating the table.
By using simulation modeling techniques, the Company is able to measure its
interest rate risk exposure as determined by the impact of sudden movements in
interest rates on net interest income and equity. This exposure is termed
"earnings-at-risk" and "equity-at-risk". At December 31, 1998, the Company's
earnings-at-risk under a ^200 basis point interest rate shock test measured a
negative 4.3% in a worst case scenario. Under a similar test, the Company's
equity-at-risk measured a negative 10.1% of market value of equity at December
31, 1998. At December 31, 1998, the Company's earnings-at-risk and equity-at-
risk fell well within tolerance levels established by internal policy.
Liquidity
Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. The Company further defines liquidity as
the ability to respond to the needs of depositors and borrowers and to
30
<PAGE>
earning enhancement opportunities in a changing marketplace. Primary sources
of liquidity consist of deposit inflows, loan repayments, securities sold
under agreement to repurchase, FHLB advances, maturity of investment
securities and sales of securities from the available-for-sale portfolio.
These sources fund the Bank's lending and investment activities.
At December 31, 1998, cash and due from banks, securities purchased under
agreements to resell, and short-term investments (unpledged and maturing
within one year) amounted to $19.5 million, or 13.8% 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 $40.0 million, which could assist the
Company in meeting its liquidity needs and funding its asset mix. At December
31, 1998, the Company held state and municipal demand deposits of $1.1 million
which it considered highly volatile. Nonetheless, the Company believes that
there are no adverse trends in the Company's liquidity or capital reserves,
and the Company believes that it maintains adequate liquidity to meet its
commitments.
The Company is cognizant of the special liquidity demands posed by the Year
2000 issue. Liquidity plans are being developed to ensure adequate liquidity
on hand and available should abnormal demands result from the Year 2000 issue.
Refer to the discussion below regarding Year 2000 compliance.
Capital Resources
Total stockholders' equity of the Company at December 31, 1998 was $14.8
million, as compared to $13.7 million at December 31, 1997. The increase of
$1.1 million primarily resulted from $1.4 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, 1998, the Bank's Leverage Capital Ratio was 10.31%, as compared
to 10.43% at December 31, 1997. The FDIC's minimum Leverage Capital Ratio for
"adequately capitalized" financial institutions is 3%, although this minimum
leverage ratio applies only to certain of the most highly-rated banks. Other
institutions are subject to higher requirements.
The risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and off-
balance sheet items to broad risk categories. According to these standards,
the Bank had a Tier I Risk-Based Capital Ratio of 16.61% and a Total Risk-
Based Capital Ratio of 17.87% at December 31, 1998, as compared to a Tier I
Risk-Based Capital Ratio of 16.52% and a Total Risk-Based Capital Ratio of
17.78% at December 31, 1997. 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, 1998, the Company's Leverage Capital Ratio was 10.56%, as
compared to 10.77% at December 31, 1997. The Company's Tier I Risk-Based
Capital Ratio was 17.24% and its Total Risk-Based Capital Ratio was 18.49% at
December 31, 1998, and 17.50% and 18.76%, respectively, at December 31, 1997.
Year 2000 Compliance
The efficient operation of the Company's business is highly dependent on its
computer software programs and operating systems. Virtually all of these
programs and systems are furnished, supported and maintained by correspondent
institutions, computer service and system providers, and software vendors. As
the year 2000 approaches, a critical business issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. As a result, the year 1999 could be the maximum date value
31
<PAGE>
these systems will be able to accurately process. The Company has adopted a
Year 2000 Plan which calls for completion of a risk assessment,
identification, reprogramming and testing of all programs and systems no later
than March 31, 1999. The Company has completed the risk assessment and
identification phase of the Year 2000 Plan and is now in the reprogramming and
testing phase. The Plan also requires all programs and systems to be fully
tested and Year 2000 compliant by June 30, 1999.
The Company's Board of Directors plays a very active role in the Year 2000
compliance effort. The Board has approved the Year 2000 Plan and receives
monthly status reports from members of the project team. The FDIC has also
played a very active role and has visited the Company on two occasions to
examine the Company's progress.
In confronting the Year 2000 problem, the Company faces potential risks to
its and the Bank's operations. As stated above, the Company purchases
substantially all of its software from third parties who face the same Year
2000 challenge as the Company. In addition, the Company relies almost
exclusively on other companies for the functioning of its automated system.
Thus, the Company's operations could be adversely affected if the operations
of these third parties are adversely affected by the Year 2000 problem. Most
importantly, the Company faces risks that all banking institutions, whether
large or small, also face. Included among these risks is the risk that the
Year 2000 date change may result in the inability to process and underwrite
loan applications, to credit deposits and withdrawals from customer accounts,
to credit loan payments or track delinquencies, to properly reconcile and
record daily activity or to engage in similar normal banking activities.
Additionally, if those commercial loan customers of the Bank whose operations
depend heavily on computers and computer software experience Year 2000
compliance problems and suffer adverse effects with respect to their own
operations, their ability to meet their obligations to the Bank could be
adversely affected. This could force the Bank to increase its provision for
loan losses or take more aggressive collection actions, potentially impacting
the Company's earnings. Furthermore, the Bank faces the risk that in light of
potential uncertainty as to the availability of their funds after the date
change and a decrease in interest rates, the Bank's deposit customers could
withdraw their funds, causing the Bank to experience deposit run-off prior to
the Year 2000 date change. This potential deposit contraction could make it
necessary for the Company to change its sources of funding which could
materially affect the Company's earnings. Moreover, to the extent that the
risks posed by the Year 2000 problem are pervasive in data processing and
transmission and communications services worldwide, the Company cannot predict
with any certainty that its operations will remain materially unaffected after
January 1, 2000, or on dates preceding this date at which time post-January 1,
2000 dates become significant within the Bank's systems. Finally, to the
extent that certain utility and communication services utilized by the Company
face Year 2000 problems, the Company's operations could be disrupted.
The Company is in constant communication with its outside vendors, with whom
it is reliant, to ensure that their timetable and progress is consistent with
that of the Company. The Company has also communicated with significant
borrowers and mission critical vendors to determine the status of their Year
2000 compliance efforts. The Company has also kept the Bank's depositors
informed of its efforts. The Company has incorporated a contingency plan into
the Year 2000 Plan. The contingency plan calls for a conversion to another
core system provider in the event of a system failure during the remediation
effort. If the failure occurs on or after January 1, 2000, the Company will
convert to a manual system until the computerized system is remedied. The
Company believes that a major system failure is highly unlikely, but limited
exceptions across its core applications may occur. The Company does not
anticipate that the remedial or systems' failure costs incurred in connection
with Year 2000 compliance will be material to its financial condition or
results of operations.
The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion, the date which the Company has set to complete
its Year 2000 project and statements about anticipated compliance are based on
the Company's current estimates and are subject to various uncertainties that
could cause actual results to differ materially from the Company's
expectations. Such uncertainties include, among others, the success of the
Company in identifying systems that are not Year 2000 compliant, the nature
and
32
<PAGE>
amount of programming required to upgrade or replace each of the affected
systems, the availability of qualified personnel, consultants and other
resources, and the success of the Year 2000 compliance efforts of others.
Readers are cautioned not to place undue reliance on these forward looking
statements.
Comparison of 1997 with 1996
The Company reported net income for 1997 of $1,311,733, as compared to
$1,043,677 for 1996, or an increase of 25.7%. Diluted earnings per share
amounted to $1.04 per share for 1997, based on 1,261,241 weighted average
shares outstanding, as compared to $.98 per share for 1996, based on 1,059,963
weighted average shares outstanding. The improvement in net income is
primarily the result of an increase in net interest income and a reduction in
the provision for possible loan losses, which were offset somewhat by a
decrease in noninterest income, and 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 average interest-earning
assets funded from the net proceeds of the 1996 public offering, along with
deposits and other borrowings; (ii) increase loan originations; and (iii)
improved asset quality.
Net Interest Income
In 1997, net interest income rose $512,548, or 11.0% to $5,165,806 from
$4,653,258 in 1996. The primary reason for this increase was due to an
increase in average interest-earning assets of $13.7 million, or 13.2%, offset
somewhat by a 16 basis point decrease in average net interest spread to 3.46%
in 1997, as compared to 3.62% in 1996. The increase in average interest-
earning assets was funded largely from the net proceeds of the public
offering, deposit growth and other borrowings. Increases in average
stockholders' equity and an increase in average noninterest-bearing deposits,
accounted for a decrease in average net interest margin of only 8 basis points
to 4.38% in 1997 as compared to the 16 basis point decrease in net interest
spread.
Interest income totaled $9,969,127 in 1997, an increase of $1,101,644, or
12.4% over the prior year. The $13.7 million increase in average interest-
earning assets was primarily responsible for the improvement in interest
income. During 1997, loan demand was solid. Nonetheless, the composition of
loans to average interest-earning assets decreased to 64.2% during 1997, from
65.6% during 1996. This decrease was primarily the result of the purchase of
nearly $10.5 million in mortgage-backed securities in the latter part of 1996.
These securities which were placed in the Company's available-for-sale
investment portfolio, produced yields which were lower than the blended yield
on average interest-earning assets. Consequently, despite a relatively stable
interest rate environment, the slight change in the mix of average interest-
earning assets accounted for a 6 basis point reduction in average earning
asset yield to 8.45% in 1997 from 8.51% in 1996.
Interest expense amounted to $4,803,321 in 1997, an increase of $589,096, or
14.0% over the $4,214,225 reported in 1996. This increase was largely
attributable to a $10.1 million increase in average interest-bearing
liabilities and a 10 basis point increase in cost of funds to 4.99% during
1997, from 4.89% during 1996. Of the increase in average interest-bearing
liabilities, average time deposits increased $3.5 million and average
securities sold under agreements to repurchase increased $7.5 million. Lower
cost NOW, savings and money market deposits decreased $1.0 million. The
increase in securities sold under agreements to repurchase was used to fund
the purchase of the mortgage-backed securities. Despite the gathering of new
deposits and the shifting of existing deposits into higher cost time deposits,
the Company's cost of funds would have remained flat at 4.85% in both 1997 and
1996 were it not for the increase in volume and rate of the securities sold
under agreements to repurchase.
Provision for Loan Losses
The provision for loan losses was $250,000 in 1997, compared to $455,000 in
1996. The $205,000 reduction in the provision for loan losses was strictly a
function of asset quality. As compared to year-end 1996, the Company's watch
list loans decreased to $2.5 million from $3.2 million; impaired loans
decreased to $1.4 million
33
<PAGE>
from $1.7 million; and impaired loans requiring a specific reserve decreased
to $.9 million from $1.4 million with a decrease in the specific reserve for
impaired loans to $237,000 from $376,000. The aggressive approach to loan
charge-offs during the year drove up the ratio of net loan charge-offs to
average loans to .34% from .19%, but also assisted in reducing nonaccrual
loans at year end to just $16,477 or 0.02% to total loans. The increase in 30-
89 days delinquent loans to $490,437, from $195,841 at the end of 1996 was
more a reflection of an abnormally low level of delinquencies at the end of
1996 than a deterioration of asset quality in 1997.
Noninterest Income
Noninterest income decreased $70,886 in 1997, to $465,397 from $536,283 in
1996. This decrease was primarily due to a $56,105 gain on sale of securities
in 1996 without a similar transaction in 1997. 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 $10,000, or 3.4%, to
$317,000 primarily as a result of more stringent imposition of fees and growth
in the Company's total deposits. The gain on sale of the guaranteed portion of
SBA loans decreased $23,000 in 1997 largely due to the increased competition
in this business market. Loan servicing fees increased $12,119 or 59.5%, to
$32,504 primarily due to growth in the Company's loan servicing portfolio.
Noninterest Expense
Total noninterest expense in 1997 was $3,341,269 as compared to $3,177,282
in 1996, an increase of $163,987 or 5.2%. The largest expense items accounting
for this increase were the $148,000 increase in salaries and employee
benefits; the $30,000 increase in occupancy and equipment expense; the $31,000
increase in computer service fees and; the $27,000 increase in legal and
professional fees. These increases were offset by a $46,000 decrease in OREO
carrying and disposition costs and a $38,000 decrease in advertising.
Salaries and benefits increased $148,000, or 8.9% in 1997. This increase
reflected an increase in staffing levels associated with the June 1997 opening
of the in-store branch in Wal-Mart in North Kingstown, Rhode Island. During
1997, the number of full time equivalent employees reached a high of 46 from
40 at the beginning of the year. Also, effective January 1, 1997, the Company
adopted a matching savings incentive plan, also known as a 401(k) plan, which
increased benefit costs by $32,000. During 1997, the Company undertook two
major projects, namely, the opening of the North Kingstown branch, and an
upgrade of its voice and data communications systems. These projects account
for the $11,000 increase in occupancy expense through the incurrence of rental
expense and the amortization of leasehold improvements. The upgrade in
communication systems involved the purchase of state-of-the-art computer
hardware and licensing of software applications. Depreciation charges
associated with these capital expenditures accounted for the increase of
$19,000 in equipment expense. The state-of-the-art processing capabilities and
overall enhancement of information systems was primarily responsible for the
$31,000 increase in computer service fees. 1997 represented the first full
year in which the Company operated in a publicly-held and publicly-traded
environment. In connection therewith, the Company incurred typical legal and
professional fees related to this public environment. These fees included
costs associated with preparation and production of public filings and
shareholder reports; listing fees; annual meeting costs; transfer agent costs;
and other similar costs. For this reason, legal and professional fees
increased $27,000 in 1997. OREO carrying and disposition costs decreased
$46,000 primarily due to the elimination of the need to write-down the
property's carrying value in 1997, compared to a $50,000 write-down in 1996,
along with a decrease in the foreclosed property portfolio from an average of
$1,077,000 during 1996 to an average of $717,000 during 1997. 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.
34
<PAGE>
Income Taxes
Income tax expense amounted to $728,201 in 1997, or an effective tax rate of
35.7%. The effective rate in 1996 was 33.0%. The Company's combined federal
and state (net of federal benefit) statutory income tax rate was 39.94% in
1997 and 1996. The Company's effective combined federal and state tax rate was
lower than the statutory rate primarily due to the exclusion from state
taxable income interest income on U.S. Treasury obligations and certain
government agency debt securities in 1997 and 1996 and, the utilization of a
capital loss carryforward in 1996.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to "Asset/Liability Management" within Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
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,
1998 and 1997, and the related consolidated statements of income,
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three year period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 12, 1999
35
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS.............................. $ 2,342,782 $ 2,837,014
------------ ------------
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL...... 2,723,488 3,878,000
------------ ------------
LOANS HELD FOR SALE.................................. 357,493 380,000
------------ ------------
INVESTMENT SECURITIES (Notes 1 and 3):
Held-to-maturity (fair value: $13,673,673 in 1998
and $12,462,016 in 1997).......................... 13,733,393 12,467,740
Available-for-sale (amortized cost: $32,969,558 in
1998 and $26,403,000 in 1997)..................... 33,087,290 26,598,634
------------ ------------
Total investment securities........................ 46,820,683 39,066,374
------------ ------------
FEDERAL HOME LOAN BANK STOCK......................... 447,700 447,700
------------ ------------
LOANS (Notes 1, 8 and 10):
Commercial......................................... 14,762,537 6,418,373
Commercial real estate............................. 50,646,390 45,976,986
Residential real estate............................ 16,417,012 21,464,343
Home equity lines of credit........................ 3,489,029 2,838,377
Consumer........................................... 1,047,141 1,056,791
------------ ------------
86,362,109 77,754,870
Less--Unearned discount............................ 66,264 75,107
Allowance for loan losses (Notes 4 and 13)......... 1,287,058 1,596,613
------------ ------------
Net loans.......................................... 85,008,787 76,083,150
------------ ------------
OTHER REAL ESTATE OWNED (Note 1)..................... 513,127 782,190
------------ ------------
PREMISES AND EQUIPMENT, net (Notes 5 and 8).......... 2,416,790 2,458,550
------------ ------------
OTHER ASSETS......................................... 1,288,080 1,376,889
------------ ------------
TOTAL ASSETS......................................... $141,918,930 $127,309,867
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand............................................. $ 15,743,185 $ 13,198,956
Savings and money market accounts.................. 21,940,330 23,371,357
Time deposits (Note 6)............................. 66,688,413 62,719,558
------------ ------------
Total deposits..................................... 104,371,928 99,289,871
------------ ------------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note
7).................................................. 12,255,880 10,105,000
------------ ------------
FEDERAL HOME LOAN BANK ADVANCES (Note 7)............. 6,204,077 --
------------ ------------
ACCRUED EXPENSES AND OTHER LIABILITIES............... 1,302,316 1,255,823
------------ ------------
SENIOR DEBENTURE, net of unamortized discount of
$2,134 in 1998 and $53,460 in 1997 (Note 13)........ 2,971,487 2,946,540
------------ ------------
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.................. 1,328,041 1,328,041
Surplus............................................ 4,431,380 4,431,380
Retained earnings.................................. 9,130,143 7,982,792
Accumulated other comprehensive income............. 70,638 117,380
------------ ------------
14,960,202 13,859,593
Less--Treasury stock, at cost, 66,800 shares....... 146,960 146,960
------------ ------------
Total stockholders' equity......................... 14,813,242 13,712,633
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $141,918,930 $127,309,867
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (Note 1)........ $ 7,796,758 $7,400,873 $6,738,492
Interest and dividends on investment
securities--
U.S. Government and agency obligations... 1,882,529 1,532,872 1,558,517
Collateralized mortgage obligations...... 52,398 91,684 134,144
Mortgage-backed securities............... 537,544 727,637 243,994
Marketable equity securities and other... 74,360 40,838 19,503
Interest on cash equivalents (Note 1)...... 220,494 175,223 172,833
----------- ---------- ----------
Total interest income.................... 10,564,083 9,969,127 8,867,483
INTEREST EXPENSE:
Interest on deposits....................... 4,091,958 3,886,454 3,766,620
Interest on reverse repurchase agreements.. 712,217 646,622 185,291
Interest on advances....................... 160,865 -- --
Interest on debenture (Note 13)............ 252,776 270,245 262,314
----------- ---------- ----------
Total interest expense................... 5,217,816 4,803,321 4,214,225
----------- ---------- ----------
Net interest income...................... 5,346,267 5,165,806 4,653,258
PROVISION FOR LOAN LOSSES (Note 1)........... 250,000 250,000 455,000
----------- ---------- ----------
Net interest income after provision for
loan losses............................. 5,096,267 4,915,806 4,198,258
----------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposits................ 279,185 317,176 307,060
Gain on sale of securities................. -- -- 56,105
Gain on loan sales......................... 165,620 46,410 69,402
Other...................................... 171,200 101,811 103,716
----------- ---------- ----------
Total noninterest income................. 616,005 465,397 536,283
----------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits (Note 11)... 1,895,538 1,801,661 1,653,929
Occupancy expense.......................... 393,189 375,294 364,414
Equipment expense.......................... 270,283 218,767 200,498
Other real estate owned net losses and
expenses.................................. 41,593 22,128 67,658
Computer services.......................... 199,306 193,392 162,470
Deposit insurance assessments.............. 11,795 11,127 1,500
Other operating expenses................... 656,527 718,900 726,813
----------- ---------- ----------
Total noninterest expense................ 3,468,231 3,341,269 3,177,282
----------- ---------- ----------
Income before provision for income
taxes.................................. 2,244,041 2,039,934 1,557,259
PROVISION FOR INCOME TAXES (Note 9).......... 793,993 728,201 513,582
----------- ---------- ----------
NET INCOME................................... $ 1,450,048 $1,311,733 $1,043,677
=========== ========== ==========
Earnings per share:
Basic.................................... $ 1.15 $ 1.04 $ 0.99
=========== ========== ==========
Diluted.................................. $ 1.15 $ 1.04 $ 0.98
=========== ========== ==========
Weighted average common shares outstanding... 1,261,241 1,261,241 1,049,609
Dilutive effect of common stock equivalents.. -- -- 10,354
----------- ---------- ----------
Weighted average common and common stock
equivalent shares outstanding............... 1,261,241 1,261,241 1,059,963
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Surplus Earnings Income Stock Equity Income
---------- ---------- ---------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 $1,043,677
Other comprehensive
income,net of tax:
Unrealized holding
gains................. -- -- -- -- -- -- 15,326
Less: Reclassification
adjustment for gains
included in net
income................ -- -- -- -- -- -- (56,105)
----------
Other comprehensive
income................ -- -- -- (40,779) -- (40,779) (40,779)
----------
Comprehensive income.... $1,002,898
==========
Dividends declared ($.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
(Note 2) .............. 550,000 3,973,124 -- -- -- 4,523,124
---------- ---------- ---------- ------- --------- -----------
Balance, December 31,
1996................... 1,328,041 4,431,380 6,923,308 34,132 (146,960) 12,569,901
Net income.............. -- -- 1,311,733 -- -- 1,311,733 $1,311,733
Other comprehensive
income, net of tax:
Unrealized holding
gains................. -- -- -- 83,248 -- 83,248 83,248
Comprehensive income.... $1,394,981
==========
Dividends declared ($.20
per share) ............ -- -- (252,249) -- -- (252,249)
---------- ---------- ---------- ------- --------- -----------
Balance, December 31,
1997................... 1,328,041 4,431,380 7,982,792 117,380 (146,960) 13,712,633
Net income.............. -- -- 1,450,048 -- -- 1,450,048 $1,450,048
Other comprehensive
income, net of tax:
Unrealized holding
losses....... ........ -- -- -- (46,742) -- (46,742) (46,742)
----------
Comprehensive income.... $1,403,306
==========
Dividends declared ($.24
per share). ........... -- -- (302,697) -- -- (302,697)
---------- ---------- ---------- ------- --------- -----------
Balance, December 31,
1998................... $1,328,041 $4,431,380 $9,130,143 $70,638 $(146,960) $14,813,242
========== ========== ========== ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996
------------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 1,450,048 $ 1,311,733 $ 1,043,677
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses........ 250,000 250,000 455,000
Depreciation and amortization.... 285,721 231,723 185,076
Losses (gains) on other real
estate owned.................... 14,162 (9,522) (6,681)
Gain on sale of securities....... -- -- (56,105)
Gain on sales of loans........... (165,620) (46,410) (69,402)
Proceeds from sales of loans..... 3,630,231 1,209,421 890,652
Loans originated for sale........ (3,346,300) (1,386,340) (981,250)
Net increase in deferred loan
fees............................ 6,226 46,816 30,330
Net accretion on investment
securities held-to- maturity.... (5,203) (10,730) (40,619)
Net accretion on investment
securities available-for-sale... (290,619) (66,649) (103,136)
Net (decrease) increase in
unearned discount............... (8,843) 8,391 (21,425)
Net decrease (increase) in other
assets.......................... 88,809 56,596 (314,535)
Accretion of discount on
debenture....................... 205,983 202,566 199,064
Net (decrease) increase in
accrued expenses and other
liabilities..................... (136,118) (266,589) 457,584
------------- ----------- ------------
Net cash provided by operating
activities...................... 1,978,477 1,531,006 1,668,230
------------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of
investment securities held-to-
maturity.......................... 20,472,802 13,573,509 22,766,655
Proceeds from sales and maturities
of investment securities
available-for-sale................ 150,311,185 30,233,468 21,914,591
Purchase of investment securities
held-to-maturity.................. (21,733,252) (12,250,000) (18,865,456)
Purchase of investment securities
available-for-sale................ (156,587,124) (28,215,380) (38,099,980)
Purchase of Federal Home Loan Bank
stock............................. -- (99,600) --
Net increase in loans.............. (9,418,020) (6,258,403) (8,368,347)
Purchase of premises and
equipment......................... (243,961) (1,044,993) (13,463)
Sales of other real estate owned... 499,901 366,955 984,416
------------- ----------- ------------
Net cash used in investing
activities........................ (16,698,469) (3,694,444) (19,681,584)
------------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
accounts.......................... 2,544,229 1,928,910 (1,213,387)
Net (decrease) increase in savings
and money market accounts......... (1,431,027) 621,657 (1,442,281)
Net increase in time deposits...... 3,968,855 2,863,195 6,941,235
Net increase (decrease) in reverse
repurchase agreements............. 2,150,880 (673,000) 10,778,000
Net increase in Federal Home Loan
Bank advances..................... 6,204,077 -- --
Net proceeds on issuance of common
stock............................. -- -- 4,523,124
Exercise of stock options, net of
tax effect........................ -- -- (13,703)
Dividends paid..................... (365,762) (227,023) (96,170)
------------- ----------- ------------
Net cash provided by financing
activities........................ 13,071,252 4,513,739 19,476,818
------------- ----------- ------------
</TABLE>
39
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS................................ $(1,648,744) $2,350,301 $1,463,464
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 6,715,014 4,364,713 2,901,249
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 5,066,270 $6,715,014 $4,364,713
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................. $ 5,211,783 $4,755,368 $3,834,580
=========== ========== ==========
Income taxes paid......................... $ 1,083,250 $ 787,242 $ 327,250
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfer of loans to OREO................... $ 245,000 $ 461,002 $ 183,032
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
First Financial Corp. and its wholly-owned subsidiary First Bank and Trust
Company (collectively, "Company"), after elimination of all intercompany
transactions and balances. Certain reclassifications have been made to prior
year balances to conform with the current year presentation.
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and securities purchased under agreements
to resell, which represent short-term investments in government treasury and
agency securities purchased from another institution.
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
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.
Loans held for sale are carried at the lower of cost or fair value.
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the face value of the collateral if the loan is
collateral-dependent. Currently, all impaired loans have been measured through
the latter method. All loans on nonaccrual status are considered to be
impaired. All adversely classified loans at December 31, 1998 and 1997 are
also considered to be impaired. When the measure of the impaired loan is less
than the recorded investment in the loan, the impairment is recorded through a
valuation allowance. Loans are evaluated for impairment according to the
Company's normal loan review process, including overall credit evaluation and
rating, nonaccrual status and payment experience. Loans identified as impaired
are further evaluated to determine the estimated extent of impairment. For
collateral-based loans, the extent of impairment is the shortfall, if any,
between the collateral value less costs to dispose of such collateral and the
carrying value of the loan.
41
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Provision and Allowance for Loan Losses
The balance of the allowance and the amount of the annual provision charged
to expense are estimated amounts based on past loan loss experience, changes
in the character and size of the loan portfolio, current and expected 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 in relation to the estimate of loss exposure in
the loan portfolio. Losses are charged against the allowance for loan losses
when management believes that the collectibility of principal is unlikely.
Investment Securities
Investments in equity securities that have readily determinable fair values
and all investments in debt securities are classified as either 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 fair values which are
bought and held principally for the purpose of selling them in the near term
are classified as trading securities and are carried at fair value, with
unrealized gains and losses included in current earnings. At December 31, 1998
and 1997, 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
The Company accounts for income taxes using the asset and liability method
of accounting under which deferred taxes are recognized for the future tax
consequences of the temporary differences between the financial statement and
tax basis of assets and liabilities, using the enacted tax rates expected to
be in effect when the amounts related to such temporary differences are
realized or settled. As changes in tax laws or rates are enacted, deferred
assets and liabilities will be adjusted accordingly through the provision for
income taxes.
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 and amortization:
<TABLE>
<S> <C>
Buildings and Improvements....................................... 10-40 years
Leasehold Improvements........................................... 10 years
Furniture and Fixtures........................................... 10-20 years
Equipment........................................................ 5-10 years
</TABLE>
When property is retired or otherwise disposed of, the asset and accumulated
depreciation and amortization 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.
42
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
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.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If an asset being tested
for recoverability was acquired in a business combination, the related
goodwill is included as part of the asset grouping in determining
recoverability. In instances where goodwill is identified with assets that are
subject to an impairment loss, the carrying amount of the identified goodwill
is eliminated before making any reduction of the carrying amounts of impaired
long-lived assets and identifiable intangibles.
The Company evaluates the recoverability of its carrying amounts of long-
lived assets based on estimated cash flows to be generated by each of such
assets as compared to the original estimates used in measuring such assets. To
the extent impairment is identified, the Company would reduce the carrying
value of such assets. To date the Company has not had any such impairments.
Earnings Per Share
The Company has implemented Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share," which is effective for fiscal periods
ending after December 15, 1997. This standard requires presentation of both
basic and diluted earnings per share on the face of the consolidated
statements of income. Basic earnings per share is determined by dividing net
income by the weighted average number of common shares outstanding. Diluted
earnings per share is determined by dividing net income by the weighted
average number of common shares and common stock equivalent shares
outstanding. Common stock equivalent shares represent the assumed exercise of
outstanding stock options during 1996, net of shares assumed to be repurchased
using the treasury stock method, if dilutive. Prior period amounts have been
restated to conform to current year presentation.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income" which established standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements displayed with the same prominence as
other financial statements. SFAS No. 130 became effective for both interim and
annual periods beginning after December 15, 1997, with retroactive application
to prior periods presented. Comprehensive income, which consists of net income
and changes in unrealized gains and losses on securities available-for-sale
net of income taxes is disclosed in the consolidated statements of
stockholders' equity and comprehensive income.
Employee Benefit Plans
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosure about
Pensions and Other Postretirement Benefits"--an amendment to FASB Statements
Nos. 87, 88 and 106. This statement revises
43
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
employer's disclosures about pension and other postretirement benefit plans.
It does not change the measurement or recognition of those plans but
standardizes the disclosure requirement. This statement suggests combined
formats for presentation of pension and other postretirement benefit
disclosure and requires restatement of disclosures for earlier periods. The
adoption of SFAS No. 132 did not have a material effect on the Company's
financial statements, but did affect the disclosure of employee benefits
contained elsewhere herein (Note 11).
Recent Pronouncements
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires
computer software costs associated with internal-use software to be expensed
as incurred until certain capitalization criteria are met. The Company will
adopt SOP 98-1 on January 1, 1999 and does not believe that the adoption will
have a material impact on its financial statements.
In April 1998, AICPA issued SOP 98-5, "Reporting on the Cost of Start-up
Activities." SOP 98-5 requires all costs associated with pre-opening and
organization activities to be expensed as incurred. The Company will adopt SOP
98-5 beginning January 1, 1999. The Company believes that the adoption of SOP
98-5 will have no material impact on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in income unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the statement of income and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999. A company may also
implement the statement as of the beginning of any fiscal quarter after
issuance (that is, financial quarters beginning June 16, 1998 and thereafter).
SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to
(a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS No. 133 on its
consolidated financial statements and has not determined the timing or method
of its adoption of the statement. However, the Company does not expect that
the adoption of this statement will have a material impact on its financial
position or results of operations.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained After the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise." This statement requires that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This statement shall be effective for the first fiscal quarter
beginning after December 15, 1998, and has no applicability to the Company's
financial position or results of operations at this time.
(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
44
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
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 fair value and amortized cost at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity--
U.S. Government & agency
obligations................... $10,999,326 $ 831 $53,573 $10,946,584
Collateralized mortgage
obligations................... 2,734,067 1,194 8,172 2,727,089
----------- -------- ------- -----------
$13,733,393 $ 2,025 $61,745 $13,673,673
=========== ======== ======= ===========
Available-for-sale--
U.S. Government & agency
obligations................... $24,402,016 $ 78,580 $ 5,361 $24,475,235
Mortgage-backed securities..... 7,545,496 123,203 6,890 7,661,809
Marketable equity securities
and other..................... 1,022,046 4,016 75,816 950,246
----------- -------- ------- -----------
$32,969,558 $205,799 $88,067 $33,087,290
=========== ======== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity--
U.S. Government & agency
obligations................... $11,750,000 $ 5,411 $10,311 $11,745,100
Collateralized mortgage
obligations................... 717,740 1,012 1,836 716,916
----------- -------- ------- -----------
$12,467,740 $ 6,423 $12,147 $12,462,016
=========== ======== ======= ===========
Available-for-sale--
U.S. Government & agency
obligations................... $17,527,771 $ 36,039 $ 4,478 $17,559,332
Mortgage-backed securities..... 8,580,132 146,750 221 8,726,661
Marketable equity security and
other......................... 295,097 17,544 -- 312,641
----------- -------- ------- -----------
$26,403,000 $200,333 $ 4,699 $26,598,634
=========== ======== ======= ===========
</TABLE>
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,
1998 and 1997.
45
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
A schedule of the maturity distribution of U.S. Government and agency
obligations is as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------
Held-to-Maturity Available-for-Sale
----------------------- -----------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within one year................. $ -- $ -- $17,905,038 $17,944,010
Over one year to five years..... 10,999,326 10,946,584 6,496,978 6,531,225
----------- ----------- ----------- -----------
$10,999,326 $10,946,584 $24,402,016 $24,475,235
=========== =========== =========== ===========
</TABLE>
At December 31, 1998, $10,000,000 of debt securities maturing in the one-to-
five-year period are subject to call provisions within one year.
At December 31, 1998, the collateralized mortgage obligations have principal
payment windows which extend through February 2001.
Investment securities with a carrying value of $14,848,939 and $11,985,298,
at December 31, 1998 and 1997, respectively, were pledged as collateral for
repurchase agreements, public deposits and other purposes, as required by law.
(4) Allowance for Loan Losses
In 1992, the Company acquired certain assets and assumed certain deposit
liabilities of the former Chariho-Exeter Credit Union ("Chariho"). The Company
and the State of Rhode Island Depositors Economic Protection Corporation
("DEPCO") established an allowance for loan losses of $3,850,000 for loans
acquired. This allowance is available only for loans of Chariho existing as of
the acquisition date. The following analysis summarizes activity for both the
acquired allowance and the Company's allowance for loan losses.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Company Allowance:
Balance at beginning of year............. $1,208,322 $1,199,617 $ 861,693
Provision.............................. 250,000 250,000 455,000
Loan charge-offs....................... (184,278) (267,012) (136,899)
Recoveries............................. 13,014 25,717 19,823
---------- ---------- ----------
Balance at end of year................... 1,287,058 1,208,322 1,199,617
---------- ---------- ----------
Acquired Allowance:
Balance at beginning of year............. 388,291 742,840 966,347
Loan charge-offs....................... (402,404) (341,118) (230,016)
Recoveries (costs)..................... (12,266) (13,431) 6,509
Reclassification to senior debenture
(Note 13)............................. 26,379 -- --
---------- ---------- ----------
Balance at end of year................... -- 388,291 742,840
---------- ---------- ----------
Total Allowance............................ $1,287,058 $1,596,613 $1,942,457
========== ========== ==========
</TABLE>
As set forth in the Chariho Acquisition Agreement, the remaining balance, if
any, in the acquired allowance at May 1, 1999, less an amount equal to 1% of
the remaining acquired loans, must be refunded to DEPCO.
46
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Conversely, in the event the allowance is inadequate, additional loan charge-
offs will reduce the amount owed on the debenture (Note 13) issued to DEPCO in
connection with the acquisition. At December 31, 1998, the remaining balance
of acquired loans was $2,387,021.
At December 31, 1998 and 1997, the Company's recorded investment in impaired
loans was $1,571,661 and $1,394,092, respectively, of which $853,221 and
$884,121, respectively, was determined to require a valuation allowance of
$235,473 and $237,030. The average recorded investment in impaired loans
during 1998 and 1997 was $1,454,652 and $1,760,040, respectively. For the
years ended December 31, 1998 and 1997, interest income on impaired loans
totaled $225,730 and $167,818, respectively.
At December 31, 1998 and 1997, nonaccrual loans totaled $0 and $16,477,
respectively. Had nonaccrual loans been accruing, interest income would have
increased by $248 and $10,195 for the years ended December 31, 1997 and 1996,
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.
(5) Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Land and improvements................................. $ 676,294 $ 676,294
Buildings and improvements............................ 1,240,851 1,263,718
Leasehold improvements................................ 407,186 413,096
Furniture, fixtures and equipment..................... 1,558,622 1,430,662
---------- ----------
3,882,953 3,783,770
Less--Accumulated depreciation........................ 1,466,163 1,325,220
---------- ----------
$2,416,790 $2,458,550
========== ==========
</TABLE>
(6) Time Deposits
At December 31, 1998, scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
$100,000
Maturity Or More Other Total
-------- -------- ------- -------
(In Thousands)
<S> <C> <C> <C>
1999............................................... $ 9,398 $36,951 $46,349
2000............................................... 1,344 12,684 14,028
2001............................................... 410 2,605 3,015
2002............................................... 300 856 1,156
2003 and thereafter................................ 317 1,823 2,140
------- ------- -------
$11,769 $54,919 $66,688
======= ======= =======
</TABLE>
Included in total time deposits are $13,029,000 of certificates of deposit
subject to repricing on a quarterly basis (indexed to the three month yield on
U.S. Treasury bills). Of these time deposits, $3,024,000 have remaining
maturities of one year or less.
47
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(7) Federal Home Loan Bank Advances and Other Borrowings
At December 31, 1998, advances from the Federal Home Loan Bank of Boston
("FHLB") have scheduled repayments as follows:
<TABLE>
<S> <C>
1999.............................................................. $ 104,121
2000.............................................................. 112,008
2001.............................................................. 118,564
2002.............................................................. 127,817
2003 and thereafter............................................... 5,741,567
----------
$6,204,077
==========
</TABLE>
Of the total FHLB advances, $3,704,077 represents amortizing notes with
final maturities of 10-15 years and amortization periods of 15-20 years. The
remaining $2,500,000 matures at September 17, 2003 with a one time put option
exercisable by the FHLB on September 17, 2001. Information relative to the
Company's advances from the FHLB during 1998 is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1998....................................... $6,204,077
Average amount outstanding during the year....................... $2,667,000
Maximum amount outstanding at any month end...................... $6,204,077
Weighted average interest rate at December 31, 1998.............. 5.61%
Weighted average interest rate during the year................... 6.04%
</TABLE>
All borrowings from the FHLB are secured by the Company's stock in the FHLB
and a blanket lien on "qualified collateral" defined principally as 90% of the
market value of unpledged U.S. Government and federal agency obligations and
75% of the carrying value of certain unpledged residential mortgage loans. At
December 31, 1997, the Company had no outstanding FHLB advances. At December
31, 1998 and 1997, the Company had an unused borrowing capacity of $2,750,000
and $8,954,000, respectively, which includes an unused overnight line of
credit of $2,599,000 and $2,352,000 respectively.
The Company also had $12,255,880 and $10,105,000 of other borrowings at
December 31, 1998 and 1997, respectively. These borrowings consist of reverse
repurchase agreements with customers and securities dealers and are
collateralized by mortgage-backed securities and obligations of the U.S.
Government and agency obligations. The following table represents scheduled
maturities and interest rates of these agreements at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Maturity Average Rate Amount
-------- ------------ -----------
<S> <C> <C>
January 1999........................................ 3.50% $ 4,655,880
September 1999...................................... 6.47 2,500,000
February 2001....................................... 5.67 5,100,000
---- -----------
5.29% $12,255,880
==== ===========
</TABLE>
At December 31, 1998, the Company's risk with counterparties to securities
sold under repurchase agreements was approximately $371,000. The amount at
risk with counterparties represents the excess of the greater of the carrying
value or fair value of underlying collateral plus related accrued interest
receivable over the total repurchase borrowing and related accrued interest
payable.
48
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Securities sold under repurchase agreements averaged $13,059,000 and
$10,590,000 during 1998 and 1997, respectively. The maximum amounts
outstanding at any month end were $15,108,000 during 1998 and $10,778,000
during 1997. The weighted average interest rate was 5.45% during 1998 and
6.11% during 1997.
(8) Commitments and Contingencies
Leases
The Company leases the land on which its Cranston branch office is located
and building space in which its North Kingstown in-store branch is located.
The remaining annual rental expense under these leases is as follows:
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
1999................................................................. $32,708
2000................................................................. 25,000
2001................................................................. 25,000
2002................................................................. 10,416
2003 and thereafter.................................................. --
</TABLE>
The leases contain renewal options commencing in May 1999 and extending to
May 2012. Under the terms of the renewal options, the annual rental expense
for both leases will not exceed $63,563.
Litigation
As of December 31, 1998, the Company was involved in certain lawsuits that
arose in the ordinary course of business. Management has reviewed these
actions with legal counsel and has taken into consideration the views of legal
counsel as to the outcome of the litigation. In management's opinion, final
disposition of such lawsuits will not have a materially adverse effect on the
Company's financial position or results of operations.
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 $363,000 and $342,000 as of December 31,
1998 and 1997, respectively.
Financial Instruments With Off-balance-sheet Risk and Concentration of Credit
Risk
In the normal course of business, the Company enters into various
commitments, such as commitments to extend credit and guarantees (including
standby letters of credit), which are not reflected in the accompanying
consolidated financial statements. These instruments involve, to varying
degrees, elements of credit and interest
49
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
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,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Unused portion of existing lines of credit............ $9,939,000 $7,837,000
Unadvanced construction loans......................... 604,000 856,000
Firm commitments to extend credit..................... 8,572,000 2,277,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained
upon extension of the credit is based on management's credit evaluation of the
customer. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial real
estate.
The Company originates primarily residential and commercial real estate
loans and, to a lesser extent, commercial and installment loans to customers
primarily located in the State of Rhode Island and, to a lesser extent,
southeastern Massachusetts. The Company operates two branches in the
metropolitan Providence area, and two branches in Washington County, Rhode
Island. Its primary source of revenue is providing loans to customers who are
predominantly small and middle-market businesses and middle-income
individuals.
(9) Income Taxes
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Federal--
Current.................................... $ 832,993 $665,201 $ 677,832
Prepaid.................................... (114,000) (3,250) (185,050)
State........................................ 75,000 66,250 20,800
--------- -------- ---------
$ 793,993 $728,201 $ 513,582
========= ======== =========
</TABLE>
50
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34%, as summarized below:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Provision for income
taxes at statutory
rate................... $762,974 $693,578 $529,468
State taxes, net of
federal benefit........ 49,500 43,725 13,728
Utilization of capital
loss carryforward...... -- -- (19,075)
Other................... (18,481) (9,102) (10,539)
-------- -------- --------
$793,993 $728,201 $513,582
======== ======== ========
</TABLE>
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Gross deferred tax assets:
Allowance for loan losses.................................. $329,005 $256,612
Deferred loan origination fees............................. 58,998 56,508
OREO writedown............................................. 5,200 5,200
Supplemental executive pension plan........................ 110,840 78,661
Accrued expenses........................................... 73,316 55,987
-------- --------
Gross deferred tax assets.................................... 577,359 452,968
-------- --------
Gross deferred tax liabilities:
Depreciation............................................... 180,269 161,200
Installment sales.......................................... 19,090 27,768
-------- --------
Gross deferred tax liabilities............................... 199,359 188,968
-------- --------
Net deferred tax asset....................................... $378,000 $264,000
======== ========
</TABLE>
A valuation reserve is provided when it is more likely than not that some
portion of the gross deferred tax asset will not be realized. No valuation
reserve was required as of December 31, 1998 or 1997.
(10) Related Party Transactions
Certain directors and executive officers of the Company, their immediate
families, companies in which they are principal owners, and trusts in which
they are involved are borrowers of the Company. These related party loans are
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons, and do not involve more than normal risk of collectibility.
Related party loan activity was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance at beginning of year......................... $ 905,052 $1,384,981
Originations....................................... 238,363 97,278
Payments........................................... (237,707) (74,705)
Other.............................................. 1,000,571 (502,502)
---------- ----------
Balance at end of year............................... $1,906,279 $ 905,052
========== ==========
</TABLE>
51
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(11) Employee Benefit Plans
The Company is a member of the Financial Institutions Retirement Fund
(FIRF), a multiple employer pension plan. As a participant in FIRF, the
Company expenses its contributions to this plan, which is accounted for as a
defined contribution plan. For the year ended December 31, 1998, the plan
reached a fully funded status and the Company was not required to make a
contribution. Consequently, no pension expense was recorded during 1998. The
Company's pension expense was $55,413 and $78,671 for the years ended December
31, 1997 and 1996, respectively.
Effective January 1, 1995, the Company established a nonqualified retirement
plan (Plan) to provide supplemental retirement benefits to designated
employees whose pension benefits are otherwise limited by the Internal Revenue
Code regulations. A liability and transition asset of $121,707 were recorded,
as of the effective date, in accordance with SFAS No. 87, "Employer's
Accounting for Pensions."
The following table sets forth a reconciliation of the plan's projected
benefit obligation, a reconciliation of fair value of plan assets, the funded
status of the plan, and the components of net periodic benefit cost for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year....... $365,941 $329,525 $ 322,747
Service cost.................................. 19,177 14,650 14,163
Interest cost................................. 32,715 23,948 22,002
Actuarial loss (gain)......................... 70,260 (2,182) (29,387)
-------- -------- ---------
Benefit obligation at end of year............. 488,093 365,941 329,525
-------- -------- ---------
Change in plan assets:
Fair value of plan assets at beginning of
year......................................... 310,091 -- --
Actual return on plan assets.................. 21,779 22,115 --
Employer contributions........................ 80,448 287,976 --
-------- -------- ---------
Fair value of plan assets at end of year...... 412,318 310,091 --
-------- -------- ---------
Funded status................................. (75,775) (55,850) (329,525)
Unrecognized net actuarial loss (gain)........ 39,657 (30,603) (29,380)
Unrecognized prior service cost............... 171,335 199,891 228,447
Unrecognized net asset being recognized over
10 years..................................... (31,638) (66,580) (91,323)
-------- -------- ---------
Prepaid (accrued) benefit cost................ $103,579 $ 46,858 $(221,781)
======== ======== =========
Components of net period benefit cost
Service cost.................................. $ 19,177 $ 14,650 $ 14,163
Interest cost.......... ...................... 32,715 23,948 22,002
Amortization of prior service cost............ 28,556 28,556 28,556
Amortization of unrecognized net gain......... -- (959) (7)
-------- -------- ---------
Net periodic benefit cost..................... $ 80,448 $ 66,195 $ 64,714
======== ======== =========
</TABLE>
52
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
For calculating 1998, 1997 and 1996 pension costs for this nonqualified plan
the following assumptions were used:
<TABLE>
<S> <C>
Assumed discount rate.............................................. 7.5%
Rate of increase in compensation level............................. 5.0%
Amortization period for unrecognized prior service cost............ 10 years
</TABLE>
During 1996, the Company adopted the Financial Institutions Thrift Plan for
the benefit of its employees. The Plan, which was effective January 1, 1997,
is a qualified savings incentive plan under Internal Revenue Code section
401(k). Under the terms of the Plan, the Company matches 50% of the first 6%
of each eligible employee's contribution. The Company's expense under this
plan amounted to $32,848 and $32,009 for the years ended December 31, 1998 and
1997.
(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 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 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.
(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 amortized over the initial term of the
Senior Debenture on the level yield method. The discount amortization for the
years ended December 31, 1998, 1997 and 1996 amounted to $205,983, $202,566
and $199,064, 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
53
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
$3,000,000. At December 31, 1998, the Company had charged-off $26,379 of
acquired loans against the outstanding Senior Debenture.
(14) Fair Value Of Financial Instruments
The Company is required to disclose fair values for certain of its financial
instruments. Financial instruments include such items as loans, securities,
deposits, swaps and other instruments, as defined.
Quoted market prices are used to estimate fair values where available. Many
of the Company's financial instruments, however, lack an available trading
market as characterized by a willing buyer and willing seller engaging in an
exchange transaction. It is the Company's general practice and intent to hold
the majority of its financial instruments, such as loans and deposits, to
maturity and not engage in trading or sales activities. Therefore, permitted
valuation techniques such as present value calculations, were used for the
purposes of this disclosure.
Management notes that reasonable comparability between financial
institutions may not necessarily be made due to the wide range of permitted
valuation techniques and numerous estimates which must be made given the
absence of active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a greater degree
of subjectivity to these estimated fair values.
The methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
Cash and Due from Banks, and Securities Purchased Under Agreements to
Resell. These items are generally short-term in nature and, accordingly, the
carrying amounts reported in the consolidated balance sheet are reasonable
approximations of their fair values.
Investment Securities Held-to-Maturity and Available-for-Sale. Fair values
are based principally on quoted market prices.
Loans. The fair value of accruing loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities
or for classified loans using a discount rate that reflects the risk inherent
in the loan.
The fair value of nonaccrual loans is based on the estimated market value of
the underlying collateral held.
Deposits. The fair value of demand, NOW, savings and money market deposits
is the amount payable on demand at the reporting date. The fair value of time
deposits is estimated using discounted value of contractual cash flows. The
discount rates are the rates currently offered for deposits of similar
remaining maturities.
Securities sold under agreements to repurchase. The face value is considered
to approximate its fair value.
Senior Debenture. The face value of the senior debenture is considered to
approximate its fair value.
FHLB Advances. The fair value of Federal Home Loan Bank advances are
estimated using a discounted cash flow technique that applies interest rates
currently being offered on advances to a schedule of aggregated expected
monthly maturities on FHLB advances.
54
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Commitments to Extend Credit and Standby Letters of Credit. The fair value
of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value amounts are not
material.
At December 31, 1998 and 1997, the fair value of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1998 1997
------------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
------
Cash and due from banks and
securities purchased under
agreement to resell......... $ 5,066,270 $ 5,066,270 $ 6,715,014 $ 6,715,014
Loans held for sale.......... 357,493 392,141 380,000 416,298
Investment securities:
Held-to-maturity........... 13,733,393 13,673,673 12,467,740 12,462,016
Available-for-sale......... 33,087,290 33,087,290 26,598,634 26,598,634
Federal Home Loan Bank
stock...................... 447,700 447,700 447,700 447,700
Loans--net................... 85,008,787 89,227,000 76,083,150 77,583,000
LIABILITIES
Deposits..................... $104,371,928 $105,090,000 $99,289,871 $99,412,000
Securities sold under
agreements to repurchase.... 12,255,880 12,377,000 10,105,000 10,105,000
Federal Home Loan Bank
advances.................... 6,204,077 6,415,000 -- --
Senior debenture............. 2,971,487 2,973,621 2,946,540 3,000,000
</TABLE>
55
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(15) The Company (Parent Company Only)
The condensed separate financial statements of the Parent Company are
presented below.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks................................ $ 102,773 $ 97,957
Investment securities:
Available-for-sale (amortized cost: $3,545,200 in
1998 and $3,578,030 in 1997)........................ 3,469,998 3,577,365
Investment in subsidiary bank.......................... 14,128,694 12,884,343
Other assets........................................... 114,715 102,256
----------- -----------
Total assets....................................... $17,816,180 $16,661,921
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior debenture, net of unamortized discount.......... $ 2,971,487 $ 2,946,540
Other liabilities...................................... 31,451 2,748
----------- -----------
3,002,938 2,949,288
----------- -----------
Stockholders' Equity:
Common stock......................................... 1,328,041 1,328,041
Surplus.............................................. 4,431,380 4,431,380
Retained earnings.................................... 9,130,143 7,982,792
Accumulated other comprehensive income............... 70,638 117,380
----------- -----------
14,960,202 13,859,593
Less--Treasury stock................................. 146,960 146,960
----------- -----------
Total stockholders' equity......................... 14,813,242 13,712,633
----------- -----------
Total liabilities and stockholders' equity......... $17,816,180 $16,661,921
=========== ===========
</TABLE>
56
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income............... $ 491,446 $ 461,850 $ 252,993
Interest and other expense................. 338,776 380,180 287,348
---------- ---------- ----------
Income (loss) before income taxes and
equity in undistributed earnings of
subsidiary................................ 152,670 81,670 (34,355)
Applicable income tax benefit.............. (51,007) (58,799) (56,418)
---------- ---------- ----------
Income before equity in undistributed
earnings of subsidiary.................... 203,677 140,469 22,063
Equity in undistributed earnings of
subsidiary................................ 1,246,371 1,171,264 1,021,614
---------- ---------- ----------
Net income................................. $1,450,048 $1,311,733 $1,043,677
========== ========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $1,450,048 $1,311,733 $1,043,677
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Equity in undistributed earnings of
subsidiary............................. (1,246,371) (1,171,264) (1,021,614)
Accretion of discount on debenture...... 205,983 202,566 199,064
Net accretion on investment securities.. (44,134) (98,254) (59,483)
Net decrease in accrued expenses and
other liabilities...................... (59,453) (210,471) (761,675)
Net (increase) decrease in other
assets................................. (12,459) 39,164 (141,420)
---------- ---------- ----------
Net cash provided by (used in)
operating activities................. 293,614 73,474 (741,451)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment
securities available-for-sale............ 3,600,000 7,700,000 2,700,000
Purchase of investment securities
available-for-sale....................... (3,523,036) (7,503,613) (6,316,681)
---------- ---------- ----------
Net cash provided by (used in)
investing activities................. 76,964 196,387 (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............................ (365,762) (227,023) (96,170)
---------- ---------- ----------
Net cash (used in) provided by
financing activities................. (365,762) (227,023) 4,413,251
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS... 4,816 42,838 55,119
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 97,957 55,119 --
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 102,773 $ 97,957 $ 55,119
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................. $ 201,450 $ 218,100 $ 212,550
========== ========== ==========
</TABLE>
57
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
(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 corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to quantitative
judgements by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts of ratios (set
forth in the table below) of total Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). As of December 31, 1998, 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, 1997 Federal Deposit Insurance Corporation examination
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events that management
believes have changed the Bank's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
----------------- ----------------------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ------------------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
The Company:
Total capital (to
risk weighted
assets)............ $15,814,000 18.49% $ 6,842,320 8.00% -- --
Tier I capital (to
risk weighted
assets)............ 14,742,000 17.24 3,421,160 4.00 -- --
Tier I capital (to
average assets).... 14,742,000 10.56 4,189,170 3.00 -- --
The Bank:
Total capital (to
risk weighted
assets)............ $15,070,000 17.87% $ 6,748,240 8.00% $ 8,435,300 10.00%
Tier I capital (to
risk weighted
assets)............ 14,013,000 16.61 3,374,120 4.00 5,061,180 6.00
Tier I capital (to
average assets).... 14,013,000 10.31 4,078,020 3.00 6,796,700 5.00
As of December 31, 1997:
The Company:
Total capital (to
risk weighted
assets)............ $14,574,000 18.76% $ 6,214,240 8.00% -- --
Tier I capital (to
risk weighted
assets)............ 13,595,000 17.50 3,107,120 4.00 -- --
Tier I capital (to
average assets).... 13,595,000 10.77 3,788,520 3.00 -- --
The Bank:
Total capital (to
risk weighted
assets)............ $13,741,000 17.78% $ 6,185,200 8.00% $ 7,731,500 10.00%
Tier I capital (to
risk weighted
assets)............ 12,767,000 16.52 3,092,000 4.00 4,638,900 6.00
Tier I capital (to
average assets).... 12,767,000 10.43 3,674,700 3.00 6,124,500 5.00
</TABLE>
(17) Business Segments
On January 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes
standards for reporting operating segments of a business enterprise. The new
rules establish revised standards for public companies relating to the
reporting of financial and descriptive information about their operating
segments in financial statements. Operating segments are components of an
enterprise which
58
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
are evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. The Company's chief
operating decision maker is the Chairman, President and Chief Executive
Officer of the Company. The adoption of SFAS No. 131 did not have a material
effect on the Company's primary financial statements, but did result in the
disclosure of segment information contained herein. The Company has identified
its reportable operating business segment as Community Banking based on how
the business is strategically managed.
The Company's community banking business segment consists of commercial and
retail banking. The community banking business segment is managed as a single
strategic unit which derives its revenues from a wide range of banking
services, including investing and lending activities and acceptance of demand,
savings and time deposits. There is no major customer and the Company operates
within a single geographic area (southeastern New England).
Non reportable operating segments of the Company's operations which do not
have similar characteristics to the community banking operations and do not
meet the quantitative thresholds requiring disclosure, are included in the
Other category in the disclosure of business segments below. These non
reportable segments include the Parent Company (Note 15).
The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant account policies. The
consolidation adjustments reflect certain eliminations of intersegment
revenue, cash and the Parent Company investments in subsidiary.
Reportable segment specific information and reconciliation to consolidated
financial information is as follows:
<TABLE>
<CAPTION>
Community Other Adjustments
Banking Other and Eliminations Consolidated
------------ ----------- ----------------- ------------
<S> <C> <C> <C> <C>
December 31, 1998
Investment
Securities........... $ 43,350,685 $17,598,692 $(14,128,694) $ 46,820,683
Net Loans............. 85,008,787 -- -- 85,008,787
Total Assets.......... 138,314,148 17,816,180 (14,211,398) 141,918,930
Total Deposits........ 104,454,631 -- (82,703) 104,371,928
Total Liabilities..... 124,185,453 3,002,938 (82,703) 127,105,688
Net Interest Income... 5,410,294 238,670 (302,697) 5,346,267
Provision for Loan
Losses............... 250,000 -- -- 250,000
Total Noninterest
Income............... 616,005 1,246,371 (1,246,371) 616,005
Total Noninterest
Expense.............. 3,382,231 86,000 -- 3,468,231
Net Income............ 1,549,068 1,450,048 (1,549,068) 1,450,048
December 31, 1997
Investment
Securities........... $ 35,489,009 $16,461,708 $(12,884,343) $ 39,066,374
Net Loans............. 76,083,150 -- -- 76,083,150
Total Assets.......... 123,658,196 16,661,921 (13,010,250) 127,309,867
Total Deposits........ 99,352,715 -- (62,844) 99,289,871
Total Liabilities..... 110,773,853 2,949,288 (125,907) 113,597,234
Net Interest Income... 5,226,449 191,606 (252,249) 5,165,806
Provision for Loan
Losses............... 250,000 -- -- 250,000
Total Noninterest
Income............... 465,397 1,171,264 (1,171,264) 465,397
Total Noninterest
Expense.............. 3,231,333 109,936 -- 3,341,269
Net Income............ 1,423,513 1,311,733 (1,423,513) 1,311,733
</TABLE>
59
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Community Other Adjustments
Banking Other and Eliminations Consolidated
------------ ----------- ----------------- ------------
<S> <C> <C> <C> <C>
December 31, 1996
Investment
Securities........... $ 38,515,147 $15,305,809 $(11,629,111) $ 42,191,845
Net Loans............. 70,593,970 -- -- 70,593,970
Total Assets.......... 117,632,933 15,502,348 (11,722,281) 121,413,000
Total Deposits........ 93,931,228 -- (55,119) 93,876,109
Total Liabilities..... 106,003,822 2,932,447 (93,170) 108,843,099
Net Interest Income
(Loss)............... 4,796,586 (9,321) (134,007) 4,653,258
Provision for Loan
Losses............... 455,000 -- -- 455,000
Total Noninterest
Income............... 536,283 1,021,614 (1,021,614) 536,283
Total Noninterest
Expense.............. 3,152,248 25,034 -- 3,177,282
Net Income............ 1,155,621 1,043,677 (1,155,621) 1,043,677
</TABLE>
60
<PAGE>
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, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
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,
1998.
61
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Reference Number Description
--------- ------- -----------
<C> <C> <S>
3.1 --Amended and Restated Articles of Incorporation of the
(1) Registrant.
(1) 3.2 --By-Laws of Registrant.
4.1 --Specimen Certificate for Shares of the Registrant's Common
(1) Stock, $1.00 par value.
(1) 10.1 --Lease Agreement between the Bank and Angelo Archetto
regarding Cranston, Rhode Island property dated as of May
14, 1974.
(1) 10.2 --Acquisition Agreement between the Registrant, Maurice C.
Paradis, receiver for Chariho-Exeter Credit Union, and
the Rhode Island Depositors Economic Protection
Corporation (DEPCO) dated as of May 1, 1992.
(1) 10.3 --Senior Debenture issued by Registrant to DEPCO dated as of
May 1, 1992.
(4) 10.4 --Second Amended and Restated Employment Agreement between
Registrant and Patrick J. Shanahan, Jr. dated as of
February 8, 1999.
(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.
(2) 10.9 --Financial Institutions Thrift Plan--Summary Plan
Description.
(2) 10.10 --Lease Agreement(s) between Bank and Wal-Mart Stores, Inc.,
dated as of January 27, 1997.
(3) 10.11 --Service Agreement dated as of April 1, 1997 by and between
First Bank and Trust Company and BISYS, Inc.
(Confidential treatment granted for certain portions of
the Exhibit).
(1) 21.1 --Subsidiaries of Registrant.
(4) 27.1 --Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to the Registrant's Registration Statement of
Form S-1 (Registration No. 333-1654), as amended, which was initially
filed with the Securities and Exchange Commission on February 26, 1996.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-
Q for the quarter ended March 31, 1997.
(3) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
(4) Filed herewith.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report
to be signed on its behalf by the Undersigned, thereunto duly authorized.
FIRST FINANCIAL CORP.
/s/ Patrick J. Shanahan, Jr.
By: _________________________________
Patrick J. Shanahan, Jr
Chairman, President and Chief
Executive Officer
Date: March 8, 1999
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. Chairman, President and March 8, 1999
______________________________________ Chief Executive Officer;
Patrick J. Shanahan, Jr. Director
/s/ Gary R. Alger Director March 8, 1999
______________________________________
Gary R. Alger
Director
______________________________________
Raymond F. Bernardo
/s/ Artin H. Coloian Director March 8, 1999
______________________________________
Artin H. Coloian
/s/ Joseph A. Keough Director March 8, 1999
______________________________________
Joseph A. Keough
/s/ Peter L. Mathieu, Jr., M.D. Director March 8, 1999
______________________________________
Peter L. Mathieu, Jr., M.D.
/s/ Joseph V. Mega Director March 8, 1999
______________________________________
Joseph V. Mega
/s/ John Nazarian Director March 8, 1999
______________________________________
John Nazarian
/s/ William P. Shields Director March 8, 1999
______________________________________
William P. Shields
/s/ Fred J. Simon Director March 8, 1999
______________________________________
Fred J. Simon
/s/ John A. Macomber Vice President, Treasurer March 8, 1999
*By: _________________________________ and Chief Financial
John A. Macomber Officer
</TABLE>
63
<PAGE>
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
------------------------------------------------
THIS SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT, is made and
entered into on the 8th day of February, 1999, by and among:
FIRST FINANCIAL CORP., a Rhode Island bank holding company, and FIRST
BANK AND TRUST COMPANY, a Rhode Island bank, each with its principal place of
business at 180 Washington Street, Providence, Rhode Island (together the
"Employer"); and
--------
PATRICK J. SHANAHAN, JR., of 10 Celestia Court, North Kingstown, Rhode
Island ("Employee").
--------
WHEREAS, the Employer and the Employee entered into an Amended and
Restated Employment Agreement dated as of February 6, 1996 (the "Original
--------
Employment Agreement"), pursuant to which the Employee agreed to perform
- ---------- ---------
services to the Employer upon the terms set forth therein;
WHEREAS, the Employer and Employee desire to amend and restate the
Original Employment Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties agree to amend and restate the Original Employment
Agreement as follows:
1. Employment. Employer hereby employs Employee as Chairman, President
----------
and Chief Executive Officer and Employee accepts such employment on the terms
and conditions herein set forth.
2. Term. The term of employment pursuant to this Agreement shall
----
commence on the date hereof and end on the election of either party with ninety
(90) days notification of such termination. In the event Employer shall exercise
the right of termination pursuant to this Agreement, Employer shall pay Employee
his usual and customary compensation for twenty-four (24) months commencing upon
said termination and said salary shall consist of his wages prevailing at the
time of termination, together with all existing benefits and accruements that
Employee is entitled to at the time of termination for said twenty-four (24)
month period, except in the event that Employee is terminated for Cause in which
case Employee may be terminated without further compensation. "Cause" for
purposes of this Agreement shall mean Employee's criminal conduct attributable
to his employment.
<PAGE>
-2-
3. Duties. Employee shall perform the duties of Chairman, President and
------
Chief Executive Officer pursuant to the direction and under the general
supervision of the Board of Directors of Employer, and also shall be a member of
the Board of Directors of Employer. Employee shall devote his full time and
attention to his employment aforesaid, shall use his best efforts, skills and
abilities in the performance of his duties and shall at all times promote the
best interests and success of Employer's business. It is further understood that
Employee as a member of the Board of Directors shall be compensated by a monthly
fee for attendance at such monthly meetings by receipt of the same fees for such
attendance as all other members of the Board of Directors. Any annual retainer
fee paid to the members of the Board of Directors or other compensation paid to
the Board of Directors not considered monthly attendance fees, will also be paid
to Employee.
4. Base Salary. Employee shall receive an annual base salary of
-----------
Two-Hundred and Sixty-Five Thousand ($265,000) Dollars payable in equal
consecutive weekly installments, less the standard payroll deductions for
federal and state tax withholdings ("Base Salary"), effective as of the date
---- ------
hereof. The salary shall be reviewed on December 1st of each year and the annual
increase shall not be less than five (5%) percent per year.
5. Benefits. In addition to the Base Salary, Employer shall continue to
--------
provide Employee with the benefits presently in place (i.e., company automobile,
Defined Pension Plan, life insurance, disability insurance, health insurance and
major medical family coverage, annual dues and related business expenses at
Quidnessett Country Club and Squantum Association), along with any other present
and future employee benefit programs that may be generally available to senior
management of Employer, including without limitation benefits under the
Employer's Supplemental Executive Retirement Plan.
6. Death During Employment. If Employee dies during the existence of
-----------------------
this Agreement, Employer shall continue to pay to the estate of Employee
seventy-five (75%) percent of his Base Salary. Payments are to be payable to
Employee's estate for a period of six (6) months.
7. Vacations. Employee shall be entitled to an aggregate of thirty (30)
---------
days of paid vacation during each year at such times and for such periods as
shall reasonably be determined by Employer and Employee; provided that such
aggregate number of days shall be adjusted from time to time to equal the
aggregate weeks paid vacation offered by Employer to its senior management.
8. Termination. Pursuant to paragraph 2 of this Agreement, Employer,
-----------
may at any time, upon giving said ninety (90) day notice, at its sole option,
terminate this Agreement. If Employer so terminates the Agreement, other than
for Cause, Employer shall continue to pay Employee his annual base
<PAGE>
-3-
salary plus existing benefits at the time of termination for a period of twenty-
four (24) months following such termination. If Employee voluntarily terminates
this Agreement other than pursuant to paragraph 9(a) of this Agreement, and
gives ninety (90) days notice of termination, he shall receive the salary and
benefits set forth in paragraph 2 of this Agreement for a period of one (1)
month following the expiration of the required ninety (90) day notice period.
9. Change of Control. In the event that, during the term of this
-----------------
Agreement, there shall have occurred a "Change of Control" (as defined in
Section 9(d) of this Agreement) in the ownership of Employer, the person(s),
corporation(s) or other entity or entities so acquiring control of Employer
shall assume Employer's obligations under this Agreement.
(a) Elective Termination:
--------------------
In addition, upon such a Change of Control, the Employee shall be
entitled to terminate the Agreement by a written notice to Employer or its
successor, and in such event (in addition to whatever other entitlements the
Employee shall then have under this Agreement for any benefit that would
continue upon the termination of the Employee other than for Cause pursuant to
paragraph 2 hereof and which would not be deemed a "parachute payment" under
Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "IRC"),
---
excluding the annual base salary), the Employee shall be entitled to receive a
cash severance payment equal to 2.99 times the sum of (i) the average Base
Salary (which shall include W-2 earnings resulting from the exercise of stock
options) of the Employee for the immediately preceding five (5) years prior to
the Change of Control, plus, (ii) the amount of the bonus paid to the Employee
----
by the Employer, if any, during the immediately preceding year prior to the
Change of Control, payable in one lump sum on the date of termination, provided,
--------
however, that if Employee elects to terminate the Agreement pursuant to this
- -------
paragraph 9(a), the Employee may elect to receive either the severance payment
and benefits provided under this paragraph 9(a), or such termination benefits
that would continue upon the Termination of the Employee other than for Cause
pursuant to paragraph 2 hereof, but may not elect to receive both.
(b) Involuntary Termination:
-----------------------
In addition, in the event that, subsequent to such a Change of Control,
Employer or its successor (i) terminates the Employee's employment other than
for Cause, (ii) Employer or its successor otherwise breaches this Agreement, or
(iii) the successor to Employer does not expressly assume Employer's obligations
under this Agreement, then this Agreement may, at the Employee's option, be
deemed to be involuntarily terminated by Employer and, if so, the Employee shall
be entitled to receive a severance payment as set forth in paragraph 9(a) above
(in addition to whatever other entitlements the Employee shall then have
<PAGE>
-4-
under this Agreement for any benefit that would continue upon the termination of
the Employee other than for Cause pursuant to paragraph 2 hereof and which would
not be deemed a "parachute payment" under Section 280G(b)(2) of the IRC,
excluding the annual base salary), provided, however, that if this Agreement is
-------- -------
deemed terminated pursuant to this paragraph 9(b), the Employee may elect to
receive either the severance payment and benefits provided under this paragraph
9(b), or such termination benefits that would continue upon the Termination of
the Employee other than for Cause pursuant to paragraph 2 hereof, but may not
elect to receive both. For these purposes, any diminution in the rights,
benefits or entitlements of the Employee or positions or authorities occupied by
the Employee prior to the Change of Control shall be conclusively deemed to be a
breach of this Agreement.
(c) Reductions:
----------
Notwithstanding anything to the contrary contained in this Agreement,
the payments and benefits to which the Employee would be entitled pursuant to
this Section 9 or otherwise as a result of a Change of Control shall be reduced
(i) by any severance pay or comparable payments to which the Employee is
entitled under applicable law as a result of the termination of his employment
and (ii) to the maximum amount for which the Employer will not be limited in its
deduction pursuant to Section 280G of the Internal Revenue Code of 1986, as
amended, or any successor provision or pursuant to any other provision of
applicable law. Any such reduction shall be applied to the amounts due to the
Employee in such manner as the Employee may reasonably specify within thirty
(30) days following notice from Employer of the need for such reduction or, if
the Employee fails to so specify timely, as determined by Employer.
(d) Change of Control:
-----------------
For purposes of this Section 9, a "Change of Control" shall be deemed
to have occurred in either of the following events:
(i) when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "1934
Act")) becomes a "beneficial owner" (as such term is defined in Rule
13d-3 promulgated under the 1934 Act), directly or indirectly, of
securities of the Employer representing twenty-five percent (25%) or
more of the total number of votes that may be cast for the election of
directors of Employer; or (ii) if, as a result of, or in connection
with, any tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any combination
of the foregoing transactions, the persons who were directors of
Employer immediately before such transaction shall cease to constitute
a majority of the Board of Directors of Employer or of any successor
institution.
<PAGE>
-5-
(e) Dispute Under Section 9:
-----------------------
If any dispute between the Employer and the Employee as to any of the
amounts to be determined under this Section 9, or the method of calculating such
amounts, cannot be resolved by the Employer and the Employee, either party after
giving three (3) days written notice to the other, may refer the dispute to a
partner in the Boston office of a firm of independent certified public
accountants ("Partner") selected jointly by the Employer and the Employee. The
-------
determination of such Partner as to the amount to be determined under this
Section 9 and the method of calculating such amounts shall be final and binding
on both the Employer and the Employee. The Employer shall bear the costs of any
such determination.
10. Disclosure of Information. It is understood that the
-------------------------
business of Employer is of a confidential nature. During the existence of this
Agreement, Employer may reveal to Employee confidential information concerning
Employer (the term "Employer" shall be deemed to include all affiliates,
subsidiaries, customers and participants of Employer), which, if known to
competitors thereof, would damage Employer. Employee agrees that during and
after the existence of this Agreement, he will not divulge or appropriate to his
own use, or to the use of any third party, any secret or confidential
information or knowledge obtained by him during the term concerning Employer. At
the expiration of this Agreement, Employee shall promptly deliver to Employer
all materials of a secret or confidential nature relating to the business of
Employer together with any other property of Employer which may have been
delivered to Employee or which Employee may have procured during the existence
of this Agreement.
11. Adequacy of Remedy. Employee acknowledges that the remedy at law for
------------------
breach by him of any of the provisions of paragraph 9 hereof will be inadequate
and that Employer shall be entitled to injunctive relief, in addition to any
other remedies that it may have.
12. Waiver. Failure of either party hereto to insist upon strict
------
compliance with any of the terms, covenants and conditions hereof shall not be
deemed a waiver or relinquishment of any similar right or power hereunder at any
subsequent time. This Agreement shall be binding upon and inure to the benefit
of the parties hereto, the successors and assigns of Employer and to the heirs,
executors, administrators and assigns of Employee. This Agreement may not be
assigned by Employee without the prior written consent of Employer.
13. Notice. All notices hereunder shall be in writing and shall be made
------
by Certified Mail, Return Receipt Requested, to the party to whom notice is to
be given at the address set forth below or to such other address as either party
shall designate by notice:
<PAGE>
-6-
If to Employer:
First Financial Corp.
Attn: Joseph V. Mega, Chairman/Compensation Committee
180 Washington Street
Providence, Rhode Island 02903
If to Employee:
Patrick J. Shanahan, Jr.
10 Celestia Court
North Kingstown, Rhode Island 02852
14. Governing Law. This Agreement shall be deemed to be a contract made
-------------
in and shall be governed by the laws (including the conflicts of law provisions)
and decisions of the State of Rhode Island.
15. Successors In Interest. This Agreement shall be binding on the
----------------------
parties to this Agreement as successors, assigns, heirs at law and in any change
in position of the Employee directed by the Employer. Such change in position
shall be deemed a termination of this Agreement by the Employer pursuant to
paragraph 8 herein.
16. Entire Agreement. This Agreement contains all the terms agreed upon
----------------
between the parties with respect to the subject matter hereof and supersedes all
previous written or oral negotiations, commitments and writings, including those
set forth in the Original Employment Agreement.
<PAGE>
-7-
IN WITNESS WHEREOF, this Agreement has been executed in duplicate the
day and year first above written.
FIRST FINANCIAL CORP.
By: /s/Joseph V. Mega
----------------------------------------
Chairman, Compensation Committee
FIRST BANK AND TRUST COMPANY
By: /s/Joseph V. Mega
----------------------------------------
Chairman, Compensation Committee
/s/Patrick J. Shanahan
-------------------------------------------
PATRICK J. SHANAHAN, JR.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<INT-BEARING-DEPOSITS> 0
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0
0
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<INCOME-PRETAX> 2,244,041
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</TABLE>
