<PAGE>
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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, 1999
Commission File No. 0-027878
First Financial Corp.
(Exact name of registrant as specified in its charter)
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Rhode Island 05-0391383
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
180 Washington Street, Providence, Rhode Island 02903
(Address of principal executive offices) (Zip Code)
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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>
<CAPTION>
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
<S> <C>
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 6, 2000, was $12,592,563 based on the closing sale
price of Common Stock as reported on the Nasdaq National Market on such date.
At March 6, 2000, there were 1,328,041 shares of the Company's $1.00 par value
Common Stock issued, with 1,213,741 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 10, 2000, are incorporated herein by reference
into Part III hereof.
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<PAGE>
FORM 10-K
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
Market for Registrant's Common Equity and Related
Item 5. Stockholder Matters....................................... 16
Item 6. Selected Consolidated Financial Data...................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk. 34
Item 8. Financial Statements and Supplementary Data............... 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 59
PART III
Item 10. Directors and Executive Officers of the Registrant........ 59
Item 11. Executive Compensation.................................... 59
Security Ownership of Certain Beneficial Owners and
Item 12. Management................................................ 59
Item 13. Certain Relationships and Related Transactions............ 59
PART IV
Exhibits, Financial Statement Schedules, and Reports on
Item 14. Form 8-K.................................................. 59
Signatures.......................................................... 61
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
General
First Financial Corp. (Company) is a bank holding company that was organized
under Rhode Island law in 1980 for the purposes of owning all of the
outstanding capital stock of First Bank and Trust Company (Bank) and providing
greater flexibility in helping the Bank achieve its business objectives. The
Bank is a Rhode Island chartered commercial bank that was originally chartered
and opened for business on February 14, 1972. The Bank provides a broad range
of lending and deposit products primarily to individuals and small businesses
($10 million or less in total revenues). Although the Bank has full commercial
banking and trust powers, it has not exercised its trust powers and does not,
at the current time, provide asset management or trust administration
services. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation (FDIC) up to applicable limits.
The Bank offers a variety of commercial and consumer financial products and
services designed to satisfy the deposit and loan needs of its customers. The
Bank's deposit products include interest-bearing and noninterest-bearing
checking accounts, money market accounts, passbook and statement savings
accounts, club accounts, and short-term and long-term certificates of deposit.
The Bank also offers customary check collection services, wire transfers, safe
deposit box rentals, and automated teller machine (ATM) cards and services.
Loan products include commercial, commercial mortgage, residential mortgage,
construction, home equity and a variety of consumer loans.
The Bank's strategy of managed growth through varied and often challenging
economic cycles has been strategically supplemented by both de novo branch
expansion and acquisition. The Bank's first expansion beyond its main office
occurred in 1981 with the opening of its Cranston, Rhode Island branch. The
Bank was presented with a further growth opportunity in 1991 as a result of
the Rhode Island "credit union crisis," when 45 privately-insured banks and
credit unions were closed by the Rhode Island Governor. In 1992, the Bank
acquired certain assets and assumed certain liabilities of the Chariho-Exeter
Credit Union located in the Wyoming section of Richmond, Rhode Island and
opened the facility as its Richmond branch. In June 1997, the Bank opened its
fourth retail facility with an in-store branch in the Wal-Mart super store
located at Wickford Junction in North Kingstown, Rhode Island. The North
Kingstown facility is a full service branch offering the same retail products
as the Bank's other branch offices.
The core of the Bank's business remains its ability to meet the lending and
deposit needs of customers in its market area. Most recently, the Bank has
experienced growth in business loans to borrowers with favorable cash flow
attributes seeking working capital financing. The Bank is designated a
"preferred lender" by the Small Business Administration (SBA). As a
participant in the SBA's preferred lenders program, the Bank has the sole
authority to approve certain SBA guaranteed loans. The preferred lenders
program also authorizes the Bank to act as an SBAExpress lender. This program
allows the Bank to underwrite lines of credit up to $150,000 with a 50% SBA
guarantee using the Bank's documentation.
The Bank's ability to attract these new lending relationships and the
related deposits is dependent on its willingness and ability to provide
service to customers with identified needs. The Company believes that the Bank
is particularly well-situated to serve the banking needs of the metropolitan
Providence area. The Company believes that the local character of the business
environment coupled with the Company's knowledge of its customers and their
needs, together with its comprehensive retail and small business products
create opportunities that will enable the Bank to effectively compete.
Further, the Company believes that the accessibility and responsiveness of the
Bank's personnel allow the Bank to compete effectively for certain segments
within its market, in particular local professionals and businesses, who
demand and receive customized and personalized banking products and services.
3
<PAGE>
1992 Acquisition
On May 1, 1992, the Bank acquired certain assets and assumed certain
liabilities of Chariho-Exeter Credit Union (Acquisition). On May 4, 1992, the
Bank reopened the Chariho-Exeter facility as the third branch of the Bank
providing the same service to the local community formerly served by Chariho-
Exeter as those provided at the Bank's other two branches. Although the
Acquisition was accounted for as a purchase, no goodwill or other intangible
asset was recorded because the purchase price did not exceed the fair value of
the assets acquired.
Through the Acquisition, the Bank acquired $33.4 million in assets, which
included $19.5 million in loans and an acquired allowance for loan losses of
approximately $3.9 million. Under the Acquisition Agreement, the Bank was
allowed, through May 1, 1999, to charge-off uncollected acquired loans to this
acquired allowance for loan losses. See "Notes to Consolidated Financial
Statements", No. (3)--Allowance for Loan Losses.
In connection with the Acquisition, the Company issued the Senior Debenture
to assist in financing the Acquisition. The proceeds of the Senior Debenture
were invested as a contribution of capital to the Bank. See "Notes to
Consolidated Financial Statements", No. (12)--Chariho-Exeter Credit Union
Acquisition.
Market Area
Although its main office is located in downtown Providence, the Bank's
Cranston branch is its largest office with deposits of $52.8 million at
December 31, 1999. The Providence, Richmond and North Kingstown branches had
approximately $26.7 million, $22.1 million and $3.0 million, respectively, in
deposits at December 31, 1999. Through its branch locations, the Bank provides
for the lending and deposit needs of its commercial and consumer customers in
its market area and by targeting customers who desire the convenience and
personal service not otherwise available as a result of recent major banking
consolidations.
Lending Activities
General. The Bank lends primarily to individuals and small businesses,
including partnerships, professional corporations and associations, and
limited liability companies. Loans made by the Bank to individuals include
owner-occupied residential mortgage loans, unsecured and secured personal
lines of credit, home equity loans, mortgage loans on investment (generally
non-owner occupied 1-4 family) and vacation properties, installment loans,
student loans, and overdraft line of credit protection. Loans made by the Bank
to businesses include typical secured loans, commercial real estate loans
(loans to individuals secured by residential property of 5 units or more are
considered commercial real estate loans) and lines of credit. Within the
commercial real estate portfolio, a loan may be secured by real estate
although the purpose of the loan is not to finance the purchase or development
of real estate nor is the principal source of repayment the sale or operation
of the real estate collateral. The Bank will often secure commercial loans for
working capital or equipment financing with real estate together with
equipment and other assets. The Bank characterizes such loans as "commercial
real estate," consistent with bank regulatory requirements. Generally, the
Bank lends only to borrowers located in Rhode Island or nearby Southeastern
Massachusetts or Connecticut. Occasionally, the Bank will lend to a borrower
in its market area where collateral securing obligations is vacation property
located outside the market area.
During the past few years, the commercial and commercial real estate loan
portfolios have increased and remain the largest components of the Bank's loan
portfolio. This increase is partially attributable to the Bank's positive
response to an increase in those businesses seeking working capital and
expansion funds who are frustrated by the consolidation of the banking
industry. The Bank has in the past, and continues today, to specifically
target such businesses through the hiring of experienced commercial loan
officers and by focusing on commercial lending to borrowers, the purpose of
which is to help finance small business plant purchases, expansion, working
capital and other corporate purposes. The Bank continues to believe that
opportunities exist to satisfy the banking and borrowing needs of the small
business community.
4
<PAGE>
During the past few years, and especially during 1999, the Bank was more
active than ever in working with its commercial borrowers and the SBA in
obtaining guarantees under a variety of SBA loan programs. Generally, the Bank
will sell the guaranteed portion of such loans with servicing retained.
According to the SBA, for its fiscal year ended September 30,1999, the Bank
ranked third (3rd) in Rhode Island out of 31 lenders in volume by number of
loans approved and fifth (5th) in dollar volume of loans guaranteed by the
SBA. Overall, the Bank was ranked first (1st) among community banks and was
selected as the recipient of the New Markets Lender of the Year Silver Award
for lending to women and minorities.
The Bank's policy on real estate lending standards establishes certain
maximum loan to value ("LTV") ratios for real estate-related loans depending
on the type of collateral securing such loans. These maximum LTV ratios range
from 50% for those loans secured by undeveloped real estate up to 90% for
loans secured by residential real estate. Notwithstanding these maximum LTV
ratios, as a general practice, the Bank imposes higher collateralization
requirements than the maximum ratios established in its policy on real estate
lending standards.
Loan Underwriting, Review and Risk Assessment. When considering loan
applications, the primary factors taken into consideration by the Bank are:
(i) the cash flow and financial condition of the borrower; (ii) the value of
any underlying collateral; (iii) the long-term prospects of the borrower,
market share and depth of management; and (iv) the character and integrity of
the borrower. These factors are evaluated in a number of ways including an
analysis of financial statements, credit reviews, trade reviews, and visits to
the borrower's place of business. The total indebtedness of the borrower to
the Bank determines the maximum limit which a lending officer has the
authority to approve a particular credit. Total indebtedness means the total
of all borrowings, including the loan being requested, whether funded or
unfunded, to a particular borrower and all related loan accounts. The
authority of individual loan officers is limited to the approval of secured
loans equal to or less than either $200,000 or $25,000, depending on the
individual loan officer, and unsecured loans equal to or less than either
$25,000 or $5,000, depending on the individual loan officer. The authority of
the chief executive officer is limited to the approval of secured loans equal
to or less than $400,000 and unsecured loans equal to or less than $300,000.
All loan requests in excess of an individual loan officer's limit must be
approved by the Bank's Credit Committee for secured loans equal to or less
than $800,000 and for unsecured loans equal to or less than $300,000. Loan
requests in excess of the Credit Committee's limit must be presented to the
Bank's Board of Directors. Generally, the Bank requires personal guarantees
and supporting financial statements from one or more of the principals of any
entity borrowing money from the Bank.
Loan business is generated primarily through referrals and direct-calling
efforts. Referrals of loan business come from the Bank's directors,
stockholders of the Company, existing customers of the Bank and professionals
such as lawyers, accountants, financial intermediaries and brokers.
At December 31, 1999, the Bank's statutory lending limit to any single
borrower approximated $2.2 million, subject to certain exceptions provided
under applicable law. The Bank also has a policy of extending loans, under the
same terms and conditions applicable to any other borrower, to directors and
executive officers of the Company and the Bank limiting the aggregate
principal amount of such loans to 100% of capital and otherwise complying with
applicable regulatory requirements. At December 31, 1999, the aggregate
principal amount of all loans to directors and executive officers and related
entities was $1.6 million.
5
<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, 1999.
Loans having no stated schedule of repayments or no stated maturity (due on
demand) are reported as due in one year.
<TABLE>
<CAPTION>
Commercial
and Home
Commercial Equity
Residential Real Lines of
Real Estate Estate Credit Consumer Total
----------- ---------- -------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Fixed Rate
Amounts Due:
One year or Less......... $ 1,550 $ 5,785 $ 59 $255 $ 7,649
After one year through
five years.............. 8,217 43,967 -- 389 52,573
Beyond five years........ 3,317 13,962 -- 23 17,302
------- ------- ------ ---- -------
13,084 63,714 59 667 77,524
------- ------- ------ ---- -------
Variable Rate
Repricing Frequency:
Quarterly................ -- 14,310 2,992 76 17,378
Annually or less
frequently.............. -- 37 -- -- 37
------- ------- ------ ---- -------
-- 14,347 2,992 76 17,415
------- ------- ------ ---- -------
Total.................. $13,084 $78,061 $3,051 $743 $94,939
======= ======= ====== ==== =======
</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, 1999, approximately $181,000 of loans scheduled to
mature within one year or less, were non-accruing.
Residential Real Estate Loans. At December 31, 1999, the Bank's outstanding
residential first and second mortgage loans and home equity lines of credit of
approximately $16.1 million, represented 17.0% of the Bank's total loan
portfolio.
Most fixed rate conforming loans originated by the Bank are referred to
correspondents. The Bank does not fund these loans. The Bank does not
originate Adjustable Rate Mortgages ("ARMS") for its own portfolio. The Bank
does, however, originate fixed rate residential first mortgage loans for its
own portfolio with a 15 to 30 year amortization period and a rate review
and/or call option at three or five year intervals. Consequently, as the Bank
attempts to satisfy the needs of its customers, it maintains an element of
interest rate sensitivity embedded in the terms of the loan.
Commercial Loans and Commerical Real Estate Loans. Subject to federal and
state restrictions, the Bank is authorized to make secured or unsecured
commercial business loans for general corporate purposes. Commercial loans
include working capital loans, equipment financing, standby letters of credit,
and secured and unsecured demand, term and time loans.
6
<PAGE>
The Bank has committed, and plans to continue to commit, substantial
resources to the promotion and development of commercial lending (i.e. small
business plant purchases, expansion and working capital) secured by real
estate, which loans are characterized as "commercial real estate loans." At
December 31, 1999, outstanding commercial and commercial real estate loans
approximated $78.1 million or 82.3% of total loans outstanding, including
total construction and land development loans of approximately $1.5 million.
Commercial and commercial real estate loans are generally priced at a fixed
rate and are generally structured with a three-year or five-year rate review
and/or call option. If a loan is priced at a floating rate, it is indexed to
the Bank's base lending rate or to the Wall Street Prime Rate.
At December 31, 1999, 81.8% of all residential, commercial and commercial
real estate loans are subject to repricing within five years. At December 31,
1999, the Bank's base rate was 10.25% while the Prime Rate was 8.50%.
Consumer Loans. At December 31, 1999, the Bank's consumer loan portfolio
approximated $.7 million or .8% of total loans outstanding. The Bank offers a
full range of consumer lending products including new and used automobile
loans, passbook and certificate of deposit loans, and other personal secured
and unsecured loans. Although the Bank makes an effort to price these loans
competitively, it faces substantial competition including, most significantly,
from consumer finance companies and, therefore, the Bank does not view this
market as possessing significant growth potential.
Investment Activities
The investment policy of the Bank is an integral part of the overall
asset/liability management of the Bank. The Bank's investment policy is to
establish a portfolio of investments permissable for banks, which will provide
the liquidity necessary to facilitate funding of loans and to cover deposit
fluctuations while at the same time achieving a satisfactory return on the
funds invested. The Bank intends to maximize earnings from its investment
portfolio consistent with the safety and liquidity of those investment assets.
The following table sets forth the amortized cost and fair value of the
Bank's investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
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........... $14,000 $13,769 $10,999 $10,947 $11,750 $11,745
Collateralized mortgage
obligations........... 1,691 1,681 2,734 2,727 718 717
------- ------- ------- ------- ------- -------
$15,691 $15,450 $13,733 $13,674 $12,468 $12,462
======= ======= ======= ======= ======= =======
Available-for-Sale:
U.S. Government and
agency
obligations........... $14,801 $14,722 $24,402 $24,475 $17,528 $17,559
Mortgage-backed
securities ........... 5,198 5,054 7,546 7,662 8,580 8,727
Marketable equity
securities and other.. 1,169 1,081 1,022 950 295 313
------- ------- ------- ------- ------- -------
$21,168 $20,857 $32,970 $33,087 $26,403 $26,599
======= ======= ======= ======= ======= =======
</TABLE>
7
<PAGE>
The following table sets forth certain information regarding maturity
distribution and weighted average yields of the Bank's investment portfolio at
December 31, 1999:
<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... $ -- -- % $14,000 5.53% $ -- -- % $14,000 5.53%
Collateralized
mortgage
obligations(1)....... 1,124 5.48 567 6.30 -- -- 1,691 5.75
------- ---- ------- ---- ------ ---- ------- ----
1,124 5.48 14,567 5.56 -- -- 15,691 5.55
------- ---- ------- ---- ------ ---- ------- ----
Available-for-Sale:
U.S. Government and
agency obligations... 10,261 5.30 4,461 5.47 -- -- 14,722 5.35
Mortgage-backed
securities(1)........ 1,453 7.54 2,478 7.27 1,123 6.52 5,054 7.18
Marketable equity
securities and
other................ 1,081 -- -- -- -- -- 1,081 --
------- ---- ------- ---- ------ ---- ------- ----
12,795 5.10 6,939 6.11 1,123 6.52 20,857 5.51
------- ---- ------- ---- ------ ---- ------- ----
Total............... $13,919 5.13% $21,506 5.74% $1,123 6.52% $36,548 5.53%
======= ==== ======= ==== ====== ==== ======= ====
</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.
Sources of Funds
Deposits obtained through the Bank's offices and automated teller machines
("ATM") have traditionally been the principal source of the Bank's funds for
use in lending, investing and for other general business purposes. At December
31, 1999, the Bank had a total of approximately 3,192 demand deposit, NOW and
money market accounts with an average balance of approximately $7,186 each;
3,397 passbook and statement savings accounts with an average balance of
approximately $5,382 each; and 3,158 certificates of deposit with an average
balance of approximately $19,989 (including 110 certificates of deposit of
$100,000 or more totalling $12.8 million).
The Bank's office and service hours are supplemented by the Bank's ATM card
service which facilitates various deposit and/or withdrawal transactions. The
Bank's ATM card may be used in the "PLUS", "CIRRUS", and "NYCE" ATM networks,
and the "Maestro" point-of-sale ("POS") network. These networks provide the
Bank's ATM cardholders with access to ATMs and POS machines throughout Rhode
Island, New England, the United States and more than 34 foreign countries.
8
<PAGE>
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,
-------------------------------------------------
1999 1998 1997
---------------- ---------------- ---------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ------- -------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
deposits.................... $ 17,209 $ 14,067 $12,124
Interest bearing deposits:
NOW and savings accounts... 21,616 2.04% 20,474 2.51% 21,022 2.52%
Money market accounts...... 1,835 2.07 1,281 2.42 1,499 2.40
Certificates of deposit
under $100,000............ 53,039 4.92 54,300 5.34 51,006 5.37
Certificates of deposit
over $100,000............. 12,079 5.34 10,909 5.94 9,145 6.38
-------- -------- -------
Total.................... $105,778 $101,031 $94,796
======== ======== =======
</TABLE>
Time certificates of deposit in denominations of $100,000 or more, at
December 31, 1999, had the following schedule of maturities:
<TABLE>
<CAPTION>
Time Remaining to Maturity Amount
-------------------------- --------------
(In Thousands)
<S> <C>
Less than 3 months............................................ $ 4,425
3 to 6 months................................................. 2,844
6 to 12 months................................................ 3,479
More than 12 months........................................... 2,068
-------
Total....................................................... $12,816
=======
</TABLE>
For the past several years the Bank has been active in the Securities Sold
Under Agreements to Repurchase (repo) market as a means of using wholesale
funds for capital leverage and interest arbitrage purposes. During 1999 the
Bank also increased its use of advances from the Federal Home Loan Bank of
Boston. The purpose of these advances (borrowings) was to match the funding
for selected loans as well as refinance maturing repo's at more favorable
terms.
For information regarding these borrowing arrangements refer to "Notes to
Consolidated Financial Statements."
Community Reinvestment Act
The Bank is committed to serving the banking needs of the communities in
which its branches are located and surrounding areas, including low and
moderate income areas consistent with its obligations under the federal
Community Reinvestment Act. There are several ways in which the Bank attempts
to fulfill this commitment, including working with economic development
agencies, undertaking special projects, and becoming involved with
neighborhood outreach programs. The Bank has undertaken as part of its mission
to contribute to the economic and social development of the communities in
which it operates. The Bank believes that its contribution is to deliver
competitive services that are responsive to the needs of its employees,
customers, shareholders, and local communities. At its last CRA-compliance
examination, the Bank was given a "satisfactory" ranking which is the second
highest rating of the four assigned by the FDIC.
In addition to memberships and directorships in a number of civic,
charitable and not-for-profit organizations, the Bank meets with specific
community-based groups which has provided insight into the credit and housing
needs of the local community. The Bank's community outreach efforts rely on
the calling activities of the Bank's loan officers and branch managers. These
individuals contact the area's under-served small businesses to promote the
Bank's services and to gain a better understanding of their business needs. To
a lesser
9
<PAGE>
extent, loan officers have contacted local realtors to ascertain community
credit needs and to inform the realtors of the Bank's residential mortgage and
referral program. Loan officers are also members of, and routinely contact the
Providence and surrounding area's respective Chambers of Commerce.
The Bank has identified two primary needs within its communities: small
business loans with reduced documentation requirements and unconventional
mortgage products with flexible underwriting guidelines. To address the small
business lending demand, the Bank participates, as a "preferred lender", in
the SBA loan programs; specifically, the 7A and 504 programs, as well as the
SBA's Low Doc and SBAExpress programs. As previously mentioned, the Bank was
selected as the SBA's 1999 recipient of the New Markets Lender of the Year
Silver Award for lending to women and minorities.
Competition
In attracting deposits and making loans, the Bank encounters competition
from other institutions, including larger downtown Providence and suburban-
based commercial banking organizations, savings banks, credit unions, other
financial institutions and non-bank financial service companies serving Rhode
Island. The principal methods of competition include the level of loan
interest rates, interest rates paid on deposits, marketing, range of services
provided and the quality of these services. These competitors include several
major financial companies whose greater resources may afford them a
marketplace advantage by enabling them to maintain numerous banking locations
and mount extensive promotional and advertising campaigns. Certain of these
competitors are not subject to the same regulatory environment as the Bank.
Employees
As of December 31, 1999, the Company had 44 full-time and 4 part-time
employees. The Company's employees are not represented by any collective
bargaining unit. The Company maintains a benefit program which includes health
insurance, life insurance, a defined benefit pension plan and a matching
savings incentive plan.
Regulation and Supervision
Banks and bank holding companies are subject to extensive government
regulation through federal and state statutes and regulations which are
subject to changes that may have significant impact on the way in which such
entities may conduct business. The likelihood and potential effects of any
such changes cannot be predicted. Legislation enacted in recent years has
substantially increased the level of competition among commercial banks,
thrift institutions and nonbanking institutions, including insurance
companies, brokerage firms, mutual funds, investment banks and major
retailers. The following summary is qualified in its entirety by the text of
the relevant statutes and regulations.
The Company
General. The Company, as a bank holding company, is subject to regulation
and supervision by the Board of Governors of the Federal Reserve System
("Federal Reserve Board") and by the Rhode Island Department of Business
Regulation, Division of Banking (the "Banking Division"). The Company is
required to file semiannually and annually a report of its operations with,
and is subject to examination by, the Federal Reserve Board.
Financial Services Modernization. On November 12, 1999, President Clinton
signed into law The Gramm-Leach-Bliley Act ("Gramm-Leach") which significantly
altered banking laws in the United States. Gramm-Leach enables combinations
among banks, securities firms and insurance companies beginning March 11,
2000. As a result of Gramm-Leach, many of the depression-era laws which may be
engaged in by banks and bank holding companies, were repealed. Under Gramm-
Leach, bank holding companies are permitted to offer their customers virtually
any type of financial service that is financial in nature or incidental
thereto, including banking, securities underwriting, insurance (both
underwriting and agency) and merchant banking.
10
<PAGE>
In order to engage in these new financial activities, a bank holding company
must qualify and register with the Federal Reserve Board as a "financial
holding company" by demonstrating that each of its bank subsidiaries is "well
capitalized," "well managed," and has at least a "satisfactory" rating under
the Community Reinvestment Act of 1977 ("CRA").
These new financial activities authorized by Gramm-Leach may also be engaged
in by a "financial subsidiary" of a national or state bank, except for
insurance or annuity underwriting, insurance company portfolio investments,
real estate investment and development and merchant banking, which must be
conducted in a financial holding company. In order for the new financial
activities to be engaged in by a financial subsidiary of a national or state
bank, Gramm-Leach requires each of the parent bank (and its sister-bank
affiliates) to be well capitalized and well managed; the aggregate
consolidated assets of all of that bank's financial subsidiaries may not
exceed the lesser of 45% of its consolidated total assets or $50 billion; the
bank must have at least a satisfactory CRA rating; and, if that bank is one of
the 100 largest national banks, it must meet certain financial rating or other
comparable requirements.
Gramm-Leach establishes a system of functional regulation, under which the
federal banking agencies will regulate the banking activities of financial
holding companies and banks' financial subsidiaries, the U.S. Securities and
Exchange Commission will regulate their securities activities and state
insurance regulators will regulate their insurance activities. Gramm-Leach
also provides new protections against the transfer and use by financial
institutions of consumers' nonpublic, personal information.
BHCA--Activities and Other Limitations. Although the Company may meet the
qualifications for electing to become a financial holding company under Gramm-
Leach, the Company has elected to retain its pre-Gramm-Leach status for the
present time under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). The BHCA prohibits a bank holding company from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
bank, or, except where a majority of shares are already owned, increasing such
ownership or control of any bank, without prior approval of the Federal
Reserve Board. No approval under the BHCA is required, however, for a bank
holding company already owning or controlling 50% of the voting shares of a
bank to acquire additional shares of such bank.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, including greater
convenience, increased competition or gains in efficiency, against the adverse
effects, including undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
Rhode Island Law. Rhode Island law requires the prior approval of the
Banking Division in order for a Rhode Island bank or bank holding company to
acquire 5% or more of the voting stock, or merge or consolidate with an out-
of-state bank or bank holding company. In examining the transaction, the
Banking Division must determine whether the transaction is permitted under the
law of the state of the out-of-state bank or bank holding company under
conditions not substantially more restrictive than those imposed by Rhode
Island law. In determining whether to approve the transaction, the Banking
Division must determine whether the transaction is in the public interest,
will promote the safety and soundness of the Rhode Island institution and
needs of the communities served thereby, and will serve the needs of the state
generally. In addition, a merger requires the prior approval of two-thirds of
the shareholders of the Rhode Island bank and such percentage of the
shareholders of the out-of-state bank as required by the laws of such state.
Under Rhode Island law, subject to the approval of the Banking Division, an
out-of-state bank or bank holding company may acquire direct or indirect
control of more than 5% of the voting stock or merge or consolidate with or
acquire substantially all of the assets and liabilities of a Rhode Island bank
or bank holding
11
<PAGE>
company provided that the laws of the state in which the out-of-state bank is
located, or in which operations of the bank subsidiaries of an out-of-state
bank holding company are principally conducted, expressly authorize, as
determined by the Banking Division, under conditions no more restrictive than
those imposed by the laws of Rhode Island, the acquisition by a Rhode Island
bank or bank holding company of 5% of the voting stock or the merger or
consolidation with or acquisition of all of the assets of banks or bank
holding companies located in that state. Additionally, under Rhode Island law,
no "person" may acquire 25% of the voting stock, or such lesser number of
shares as constitutes control, of a Rhode Island depository institution
without the prior approval of the Banking Division.
Dividends. The Company is a legal entity separate and distinct from the
Bank. The revenues of the Company (on a parent company only basis) are derived
primarily from interest on investments and dividends paid to the Company by
the Bank. The right of the Company, and consequently the right of creditors
and stockholders of the Company, to participate in any distribution of the
assets or earnings of any subsidiary through the payment of such dividends or
otherwise is necessarily subject to the prior claims of creditors of the
subsidiary (including depositors, in the case of banking subsidiaries), except
to the extent that certain claims of the Company in a creditor capacity may be
recognized.
It is the policy of the FDIC and the Federal Reserve Board that banks and
bank holding companies, respectively, should pay dividends only out of current
earnings and only if after paying such dividends, the bank or bank holding
company would remain adequately capitalized. Federal banking regulators also
have authority to prohibit banks and bank holding companies from paying
dividends if they deem such payment to be an unsafe or unsound practice. In
addition, it is the position of the Federal Reserve Board that a bank holding
company is expected to act as a source of financial strength to its subsidiary
banks.
The Subsidiary Bank
General. The Bank is subject to extensive regulation and examination by the
Banking Division and by the FDIC, which insures its deposits to the maximum
extent permitted by law, and to certain requirements established by the
Federal Reserve Board. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of, and collateral
for, certain loans. The prior approval of the FDIC and the Banking Division is
required for the Bank to establish or relocate an additional branch office,
assume deposits, or engage in any merger, consolidation or purchase or sale of
all or substantially all of the assets of any bank or savings association. The
laws and regulations governing the Bank generally have been promulgated to
protect depositors and not for the purpose of protecting stockholders.
Examinations and Supervision. The FDIC and the Banking Division regularly
examine the operations of the Bank, including (but not limited to) their
capital adequacy, reserves, loans, investments, earnings, liquidity,
compliance with laws and regulations, record of performance under the
Community Reinvestment Act (see below) and management practices. In addition,
the Bank is required to furnish quarterly and annual reports of income and
condition to the FDIC and periodic reports to the Banking Division. The
enforcement authority of the FDIC includes the power to impose civil money
penalties, terminate insurance coverage, remove officers and directors and
issue cease-and-desist orders to prevent unsafe or unsound practices or
violations of law or regulations. In addition, under recent federal banking
legislation, the FDIC has authority to impose additional restrictions and
requirements with respect to banks that do not satisfy applicable regulatory
capital requirements.
Dividends and Affiliate Transactions. The Bank is subject to certain
restrictions on loans to the Company, on investments in the stock or
securities thereof, on the taking of stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit
on behalf of the Company. The Bank also is subject to certain restrictions on
most types of transactions with the Company, requiring that the terms of such
transaction be substantially equivalent to terms of similar transactions with
non-affiliates. In addition, there are various limitations on the distribution
of dividends to the Company by the Bank.
12
<PAGE>
Capital Requirements
The FDIC has established guidelines with respect to the maintenance of
appropriate levels of capital by FDIC-insured banks. At such time, if ever,
that the Company exceeds $150 million in consolidated assets or either: (i)
engages in any non-bank activity involving significant leverage; or (ii) has a
significant amount of outstanding debt that is held by the general public, it
will become subject to various capital adequacy requirements of the Federal
Reserve Board applicable to all such bank holding companies. Until such time,
the Federal Reserve Board applies the following guidelines on a bank only
basis. The Federal Reserve Board has adopted substantially identical capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. If a banking organization's capital levels fall below
the minimum requirements established by such guidelines, a bank or bank
holding company will be expected to develop and implement a plan acceptable to
the FDIC or the Federal Reserve Board, respectively, to achieve adequate
levels of capital within a reasonable period, and may be denied approval to
acquire or establish additional banks or non-bank businesses, merge with other
institutions or open branch facilities until such capital levels are achieved.
The guidelines generally require banks and bank holding companies to
maintain at least half of its total capital comprised of common equity,
retained earnings and a limited amount of perpetual preferred stock, less
goodwill ("Tier I Capital"). Additionally, these guidelines require banks and
bank holding companies to maintain a ratio of Tier I Capital to risk-weighted
assets of at least four (4%) percent and a ratio of total capital to risk-
weighted assets of at least eight (8%) percent ("Total Risk-Based Capital
Ratio"). Hybrid capital instruments, perpetual preferred stock which is not
eligible to be included as Tier I Capital, term subordinated debt and
intermediate-term preferred stock and, subject to limitations, general
allowances for loan losses, is known as "Tier 2 Capital." The sum of Tier 1
and Tier 2 Capital is "Total Risk-Based Capital." Assets are adjusted under
the risk-based guidelines to take into account different risk characteristics.
Prompt Corrective Action. Under Section 38 of the FDIA, as added by the
FDICIA, each federal banking agency has implemented a system of prompt
corrective action for institutions which it regulates. Under the regulations,
a bank shall be deemed to be (i) "well capitalized" if it has Total Risk-Based
Capital Ratio of 10.0% or more, has a Tier Risk-Based Capital Ratio of 6.0% or
more, has a Tier I Leverage Capital Ratio of 5.0% or more and is not subject
to any written capital order or directive; (ii) "adequately capitalized" if it
has a Total Risk-Based Capital Ratio of 8.0% or more, a Tier I Risk-Based
Capital Ratio of 4.0% or more and a Tier I Leverage Capital Ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a Total Risk-Based
Capital Ratio that is less than 8.0%, a Tier I Risk-Based Capital Ratio that
is less than 4.0% or a Tier I Leverage Capital Ratio that is less than 4.0%
(3.0% under certain circumstances), (iv) "significantly undercapitalized" if
it has a Total Risk-Based Capital Ratio that is less than 6.0%, a Tier I Risk-
Based Capital Ratio that is less than 3.0% or a Tier I Leverage Capital Ratio
that is less than 3.0%, and (v) "critically undercapitalized" if it has a
ratio of tangible equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the regulations also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution
as adequately capitalized and may require an adequately capitalized
institution or an undercapitalized institution to comply with supervisory
actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
As of December 31, 1999, the Bank was classified as "well capitalized" under
these provisions.
Interstate Banking Legislation
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as
amended (the "Interstate Banking Act" generally permits bank holding companies
to acquire banks in any state, and preempts all state laws restricting the
ownership by a bank holding company of banks in more than one state. The
Interstate Banking Act also permits a bank to merge with an out-of-state bank
and convert any offices into branches of the resulting bank if both states
have not opted out of interstate branching; permits a bank to acquire branches
from
13
<PAGE>
an out-of-state bank if the law of the state where the branches are located
permits the interstate branch acquisition; and permits banks to establish and
operate de novo interstate branches whenever the host state opts-in to de novo
branching. Bank holding companies and banks seeking to engage in transactions
authorized by the Interstate Banking Act must be adequately capitalized and
managed. In 1996, Rhode Island adopted legislation pursuant to which Rhode
Island "opted in" to interstate banking. The Rhode Island act allows Rhode
Island banks to establish and maintain branches through a merger or
consolidation with or by the purchase of the whole or any part of the assets
or stock of any out-of-state bank or through de novo branch establishment in
any state other than Rhode Island.
Recent Developments
On November 16, 1998, the Company's Board of Directors authorized the
repurchase of up to 5%, or 63,062 shares, of the Company's common stock. The
Company views the repurchase program as an excellent utilization of capital,
and consistent with a solid capital management strategy. During 1999, the
Company repurchased a total of 35,000 shares under the repurchase program. On
January 11, 2000 and January 13, 2000, the Company repurchased an additional
12,500 shares under the repurchase program at prices ranging from $12.625 to
$12.9375 per share.
On January 10, 2000, the Company's Board of Directors declared a regular
quarterly dividend of $.12 per share to shareholders of record on February 2,
2000. This quarterly dividend represented a 33% increase over the $.09 per
share dividend declared in the fourth quarter of 1999.
ITEM 2. PROPERTIES
The Bank delivers its products and services through its four branch network
system. The Bank owns its main office building which is located at 180
Washington Street, Providence, Rhode Island. This location consists of a two-
story masonry and steel frame building containing (with basement storage)
approximately 6,800 square feet of space. The ground floor of this building is
used for retail banking as the Providence branch. Attached to this building is
a two lane drive-up facility, the only drive-up facility located in downtown
Providence. The building also houses a built-in ATM. The second floor of this
location is used predominately for executive, administrative, and support
staff office space. This building is located on two lots which are owned by
the Bank and which have a total area of approximately 10,000 square feet. This
land space is also used for customer parking and access and egress through the
drive-up facility. The Bank also owns an adjacent lot of approximately 3,300
square feet which is used solely as employee parking.
In 1981, the Bank opened a branch office building at the corner of Park and
Reservoir Avenues, Cranston, Rhode Island. This one-story masonry and steel
frame building (including the lower level) has approximately 7,400 square feet
space. The ground floor of this location contains the Cranston branch, the
Bank's largest branch as measured by deposits. The building also has a three
lane drive-up facility and a drive-up ATM. The basement of this building is
used predominately by the Operations Department along with several
administrative offices. The building is situated on approximately 21,000
square feet of leased land. The lease has an original noncancellable term of
15 years with four successive renewal options, each for an additional five
years ending in the year 2009. The Bank is presently in the third of the four
renewal options which expires in the year 2004. Upon the expiration of the
lease in the year 2009, the Bank will have the right to renew the lease upon
the same terms and conditions, except for the term and annual rent to be paid
thereunder which are to be determined by mutual agreement or, if not so
determined, by arbitration. In late 1994 the Bank acquired an adjacent parcel
of land, which approximates 4,700 square feet, for use as expanded customer
parking and access to the facility from Reservoir Avenue. The Bank also owns
land across the street from this building. This land, with total area of
approximately 3,300 square feet, is used solely for employee parking.
As part of the 1992 Acquisition, the Bank purchased the former credit
union's land and building and reopened the facility as the Bank's Richmond
branch at 1168 Main Street, Richmond, Rhode Island. The facility is located in
the Wyoming section in the Town of Richmond. The two story wood frame building
has nearly
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<PAGE>
6,500 square feet space (exclusive of unfinished basement area) on a land area
of approximately 40,400 square feet. The branch location has a built-in ATM
and a two lane drive-up facility.
In June 1997, the Bank opened an in-store branch located in the Wal-Mart
super store at Wickford Junction in North Kingstown, Rhode Island. The Bank
leases nearly 1,700 square feet under an original lease term of five years
with two successive renewal options, each for an additional five years ending
in the year 2012. The branch is a full service facility, exclusive of safe
deposit boxes, with an ATM.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the
ordinary course of business. In the opinion of management, final disposition
of these lawsuits, based upon the advice of legal counsel as to potential
outcome, will not have a material adverse effect on the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1999, the Company did not submit any
matter to a vote of its security holders, through a solicitation of proxies or
otherwise.
15
<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 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Quarterly Dividends
Sales Prices High Low Declared
------------ ------ ------ ---------
<S> <C> <C> <C>
1999
1st Quarter.......................................... 13 5/8 12 1/4 .09
2nd Quarter.......................................... 12 7/8 11 1/2 .09
3rd Quarter.......................................... 14 1/2 12 1/4 .09
4th Quarter.......................................... 13 1/2 12 3/8 .09
1998
1st Quarter.......................................... 17 15 .06
2nd Quarter.......................................... 20 3/8 16 3/4 .06
3rd Quarter.......................................... 17 3/4 11 1/2 .06
4th Quarter.......................................... 13 7/8 12 1/2 .06
</TABLE>
As of March 6, 2000, there were approximately 165 holders of record of the
Company's common stock and approximately 340 shareholders of beneficial
ownership who hold their stock in nominee or "street" name through various
brokerage firms.
16
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION
DATA:
Total assets............ $ 144,782 $ 141,919 $ 127,310 $ 121,413 $100,304
Investments, securities
purchased under
agreements to resell,
federal funds sold and
interest bearing
deposits............... 40,351 49,544 42,944 44,568 30,811
Total loans, net of
unearned discount...... 94,939 86,296 77,680 72,536 64,701
Allowance for loan
losses................. 1,556 1,287 1,597 1,942 1,828
Total deposits.......... 104,589 104,372 99,290 93,876 89,591
Securities sold under
agreements to
repurchase............. 9,411 12,256 10,105 10,778 --
Federal Home Loan Bank
advances............... 13,610 6,204 -- -- --
Senior debenture........ -- 2,971 2,947 2,894 2,845
Total stockholders'
equity................. 15,482 14,813 13,713 12,570 7,192
STATEMENT OF INCOME
DATA:
Interest income......... 11,180 10,564 9,969 8,867 7,732
Interest expense........ 4,934 5,218 4,803 4,214 3,669
---------- ---------- ---------- ---------- --------
Net interest income..... 6,246 5,346 5,166 4,653 4,063
Provision for loan
losses................. 275 250 250 455 675
---------- ---------- ---------- ---------- --------
Net interest income
after provision for
loan losses............ 5,971 5,096 4,916 4,198 3,388
Noninterest income...... 826 616 465 536 474
Noninterest expense..... 3,917 3,468 3,341 3,177 3,093
Income taxes............ 1,061 794 728 513 251
---------- ---------- ---------- ---------- --------
Net income.............. $ 1,819 $ 1,450 $ 1,312 $ 1,044 $ 518
========== ========== ========== ========== ========
PER SHARE DATA:
Net income:
Basic................... $ 1.47 $ 1.15 $ 1.04 $ 0.99 $ 0.76
Diluted................. 1.47 1.15 1.04 0.98 0.71
Book value.............. 12.63 11.75 10.87 9.89 10.35
Cash dividends declared. 0.36 0.24 0.20 0.12 0.11
Dividend payout ratio... 24.45% 20.88% 19.23% 12.83% 14.51%
Weighted average common
shares outstanding..... 1,233,104 1,261,241 1,261,241 1,049,609 683,200
Weighted average common
and common stock
equivalent shares
outstanding............ 1,233,104 1,261,241 1,261,241 1,059,963 728,708
OPERATING RATIO DATA:
Return on average total
assets................. 1.26% 1.07% 1.07% 0.96% 0.54%
Return on average
stockholders' equity... 12.04 10.20 10.00 10.02 7.45
Net interest margin..... 4.49 4.12 4.38 4.46 4.43
Loans to deposits ratio. 90.77 82.68 78.24 77.27 72.22
Leverage capital ratio.. 10.71 10.56 10.77 10.32 6.87
ASSET QUALITY RATIOS:
Nonperforming assets to
total assets........... 0.12% 0.36% 0.63% 0.91% 2.00%
Nonperforming loans to
total loans............ 0.19 NM 0.02 0.58 0.83
Net loan charge-offs to
average loans(1)....... 0.01 0.22 0.34 0.19 1.01
Allowance for loan
losses to total
loans(1)............... 1.64 1.53 1.64 1.78 1.47
Allowance for loan
losses to nonperforming
loans(1)............... 861.94 NM 7,333.39 280.35 160.63
</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, the "Company"), depend
primarily on its net interest income, which is the difference between interest
and dividend income on interest-earning assets and interest expense on its
interest-bearing liabilities. Its interest-earning assets consist primarily of
loans and investment securities, while its interest-bearing liabilities
consist primarily of deposits, securities sold under agreements to repurchase,
Federal Home Loan Bank advances and the Senior Debenture. The Company's net
income is also affected by its level of noninterest income, including fees and
service charges, as well as by its noninterest expenses, such as salary and
employee benefits, provisions to the allowance for loan losses, occupancy
costs and, when necessary, expenses related to other real estate owned (OREO)
and to the administration of nonperforming and other classified assets.
The Company reported net income for 1999 of $1,818,648, as compared to
$1,450,048 for 1998, or an increase of 25.4%. Diluted earnings per share
amounted to $1.47 per share for 1999, based on 1,233,104 weighted average
shares outstanding, as compared to $1.15 per share for 1998, based on
1,261,241 weighted average shares outstanding. During 1999, the Company
recorded two one-time transactions. The first nonrecurring transaction was the
sale of OREO at a gain of $222,452. The second nonrecurring transaction was a
$129,362 write-off of a long-lived asset in recognition of its impaired value.
The after-tax impact of these two transactions was to increase net income by
$61,439, or $.05 per diluted share. In 1999, the Company's return on average
equity (ROE) improved to 12.04% from 10.20% in 1998. The Company's return on
average assets (ROA) was 1.26% in 1999 and 1.07% in 1998. The improvement in
net income is primarily the result of an increase in net interest income and
noninterest income, offset somewhat by an increase in noninterest expense and
provision for income taxes. In general, the Company's record performance in
1999 is attributable to (i) an increase in net interest spreads and margins,
(ii) balance sheet growth, predominately within the loan portfolio, (iii) an
increase in the recognition of gains on SBA loan sales, and (iv) continued
strength in asset quality.
Results of Operations
Net Interest Income
Net interest income, the difference between interest income and interest
expense, is the single largest contributor to the Company's results of
operations. In 1999, net interest income rose $899,235 or 16.8%, to $6,245,502
from $5,356,267 in 1998. The primary reason for this increase was due to an
increase in average interest-earning assets of $9.2 million, or 7.1% along
with a 38 basis point increase in average net interest spread to 3.58% in
1999, as compared to 3.20% in 1998. The increase in average interest-earning
assets was funded largely from deposit growth and other borrowings. Increases
in average stockholders' equity and an increase in average noninterest-bearing
deposits, accounted for an increase in average net interest margin of 37 basis
points to 4.49% in 1999.
In 1999, total interest income amounted to $11,179,570 compared to
$10,564,083 in 1998, or an increase of $615,487 or 5.8%. This increase was
attributable to a $9.2 million, or 7.1% increase in average interest-earning
assets, offset somewhat by a 10 basis point reduction in earning asset yield.
The increase in average interest-earning assets occurred solely within the
higher yielding average loan portfolio which increased $11.5 million to $92.0
million. During 1999, average loans represented 66.1% of total average
interest-earning assets compared to 62.0% during 1998. This shifting in
earning asset mix and the overall growth of earning assets accounted for the
increase in interest income and resulted in only a slight decline in earning
asset yield to 8.04% from 8.14%. In terms of rate/volume, earning asset growth
and the shifting of earning asset mix (volume) increased interest income by
nearly $967,000 while the declining rate environment reduced interest income
by approximately $351,000.
18
<PAGE>
The funding for the increase in average earning assets came from a $1.6
million increase in interest-bearing deposits; a $3.4 million increase in
wholesale sources; a $3.1 million increase in noninterest-bearing deposits
and; a $.9 million increase in average stockholders' equity. In early 1999,
the Company reduced the interest rate paid on transactional deposits by
upwards of 50 basis points and implemented a marginal pricing strategy for
term deposits. This aggressive approach to pricing deposits helped reduce cost
of funds by 48 basis points to 4.46% from 4.94%. This activity resulted in a
decrease in interest expense of $283,748 or 5.4% to $4,934,068 in 1999 from
$5,217,816 in 1998. In terms of rate/volume, interest expense increased
approximately $222,000 due to increases in interest-bearing liabilities, while
interest expense decreased nearly $506,000 due to lowering of interest rates.
Overall, as a result of aggressive retail deposit pricing and a declining
rate environment, net interest income increased approximately $155,000. Also,
due to balance sheet growth (volume) predominately within the loan portfolio,
net interest income increased approximately $745,000. This rate/volume
activity produced an increase of nearly $900,000 to net interest income.
19
<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,
--------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................... $ 91,965 $ 8,688 9.45% $ 80,461 $ 7,797 9.69% $ 75,714 $7,401 9.77%
Investment securities
taxable--AFS........... 28,000 1,509 5.39 32,357 1,823 5.63 26,608 1,695 6.37
Investment securities
taxable--HTM........... 14,462 789 5.46 11,748 683 5.81 11,717 672 5.74
Securities purchased
under agreements to
resell................. 4,048 162 4.00 4,530 221 4.88 3,496 175 5.01
Federal Home Loan Bank
stock and other........ 556 32 5.76 719 40 5.56 423 26 6.15
-------- ------- ---- -------- -------- ---- -------- ------ ----
TOTAL INTEREST-EARNING
ASSETS................. 139,031 11,180 8.04 129,815 10,564 8.14 117,958 9,969 8.45
------- ---- -------- ---- ------ ----
NONINTEREST-EARNING
ASSETS:
Cash and due from banks. 2,702 2,379 2,238
Premises and equipment.. 2,276 2,430 2,141
Other real estate owned. 231 605 717
Allowance for loan
losses................. (1,367) (1,412) (1,903)
Other assets............ 1,390 1,396 1,450
-------- -------- --------
TOTAL NONINTEREST-
EARNING
ASSETS................. 5,232 5,398 4,643
-------- -------- --------
TOTAL ASSETS............ $144,263 $135,213 $122,601
======== ======== ========
INTEREST-BEARING
LIABILITIES:
Deposits:
Interest-bearing demand
and NOW
deposits.............. $ 3,347 49 1.46 $ 3,479 67 1.93 $ 3,282 64 1.95
Savings deposits....... 18,269 392 2.15 16,995 446 2.62 17,740 465 2.62
Money market deposits.. 1,835 38 2.07 1,281 31 2.42 1,499 36 2.40
Time deposits.......... 65,118 3,253 5.00 65,209 3,548 5.44 60,151 3,321 5.52
Securities sold under
agreements to
repurchase............. 11,311 553 4.89 13,059 712 5.45 10,590 647 6.11
Federal Home Loan Bank
advances............... 9,605 564 5.87 2,667 161 6.04
Senior debenture 1,204 85 7.06 2,998 253 8.44 2,946 270 9.16
-------- ------- ---- -------- -------- ---- -------- ------ ----
TOTAL INTEREST-BEARING
LIABILITIES............ 110,689 4,934 4.46 105,688 5,218 4.94 96,208 4,803 4.99
------- ---- -------- ---- ------ ----
NONINTEREST-BEARING
LIABILITIES:
Noninterest-bearing
deposits............... 17,209 14,067 12,124
Other liabilities....... 1,262 1,237 1,158
-------- -------- --------
TOTAL NONINTEREST-
BEARING
LIABILITIES............ 18,471 15,304 13,282
STOCKHOLDERS' EQUITY.... 15,103 14,221 13,111
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... $144,263 $135,213 $122,601
======== ======== ========
NET INTEREST INCOME .... $ 6,246 $ 5,346 $5,166
======= ======== ======
NET INTEREST SPREAD .... 3.58% 3.20% 3.46%
==== ==== ====
NET INTEREST MARGIN .... 4.49% 4.12% 4.38%
==== ==== ====
</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
December 31, 1999 Year Ended December 31, 1997
Compared with December 31, 1998 Compared Compared with
December 31, 1998 with December 31, 1996
Increase December 31, 1997 Increase Increase
(Decrease) Due To (Decrease) Due To (Decrease) Due To
-------------------- ------------------------------ --------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ----- ----- --------- --------- -------- ------ ---- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................. $1,084 $(193) $ 891 $ 457 $ (61) $ 396 $ 717 $(55) $ 662
Investment securities
taxable--AFS......... (236) (78) (314) 325 (197) 128 537 (7) 530
Investment securities
taxable--HTM......... 147 (41) 106 3 8 11 (122) 22 (100)
Securities purchased
under agreements to
resell, and other.... ( 28) (39) (67) 66 (6) 60 6 4 10
------ ----- ----- -------- --------- -------- ------ ---- ------
TOTAL INTEREST-EARNING
ASSETS................. $ 967 $(351) $ 616 $ 851 $ (256) $ 595 $1,138 $(36) $1,102
====== ===== ===== ======== ========= ======== ====== ==== ======
INTEREST-BEARING
LIABILITIES:
Interest-bearing
demand and NOW
deposits............. $ (2) $ (16) $ (18) $ 4 $ (1) $ 3 $ 14 $-- $ 14
Savings deposits...... 26 ( 80) (54) (19) -- (19) (40) (8) (48)
Money market deposits. 11 (4) 7 (5) -- (5) (4) -- (4)
Time deposits......... (8) (287) (295) 275 (48) 227 197 (40) 157
Securities sold under
agreements to
repurchase........... (86) (73) (159) 135 (70) 65 459 3 462
Federal Home Loan Bank
advances............. 408 (5) 403 161 -- 161 -- -- --
Senior debenture...... (127) (41) (168) 4 (21) (17) 5 3 8
------ ----- ----- -------- --------- -------- ------ ---- ------
TOTAL INTEREST-BEARING
LIABILITIES............ $ 222 $(506) $(284) $ 555 $ (140) $ 415 $ 631 $(42) $ 589
====== ===== ===== ======== ========= ======== ====== ==== ======
NET CHANGE IN NET
INTEREST INCOME........ $ 745 $ 155 $ 900 $ 296 $ (116) $ 180 $ 507 $ 6 $ 513
====== ===== ===== ======== ========= ======== ====== ==== ======
</TABLE>
21
<PAGE>
Provision for Loan Losses
The provision for loan losses was $275,000 in 1999 and $250,000 in 1998. At
December 31, 1999 and 1998, the Company's recorded investment in impaired
loans was $1,630,204 and $1,571,661, respectively, of which $613,074 and
$853,221, respectively, was determined to require a valuation allowance of
$147,586 and $235,473. The Company's ratio of net loan charge-offs to average
loans decreased to .01% from .22%. At December 31, 1999, nonperforming loans
were $180,571. At December 31, 1998, there were no nonperforming loans. Loans
30-89 days delinquent decreased to $153,714 from $161,456 at the end of 1999
and 1998, respectively. At December 31, 1999 and 1998, the allowance for loan
losses to total loans was 1.64% and 1.53%, respectively.
Noninterest Income
The following table identifies the major sources of noninterest income.
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------
1999 1998 1997
---- ---- ----
(Dollars in
Thousands)
<S> <C> <C> <C>
Service charges and fees on deposit accounts................. $268 $279 $317
Safe deposit box rental...................................... 25 25 25
Other service fees........................................... 26 35 32
Gain on sale of loans ....................................... 340 166 46
Loan servicing fees.......................................... 73 41 33
ATM surcharge fees........................................... 55 50 --
Other........................................................ 39 20 12
---- ---- ----
$826 $616 $465
==== ==== ====
</TABLE>
Noninterest income increased $210,070 or 34.1% to $826,075 in 1999 from
$616,005 in 1998. This increase was the result of the recognition of $340,061
in gains on SBA loan sales, an increase of nearly $174,000 over 1998. During
1999, the Company originated for sale nearly $5.8 million of guaranteed
portion SBA loans. These originations compare to $3.3 million in 1998. As a
result of this SBA activity, the Company's servicing fee income increased
$32,613 to $73,418.
22
<PAGE>
Noninterest Expense
The following table identifies the major components of noninterest expense
for the respective periods presented:
<TABLE>
<CAPTION>
Years Ended December
31,
---------------------
1999 1998 1997
------ ------ ------
(Dollars in
Thousands)
<S> <C> <C> <C>
Salaries and employee benefits....................... $2,133 $1,896 $1,802
Occupancy expense.................................... 551 393 375
Equipment expense.................................... 290 270 219
OREO (gains) losses, write-downs, and carrying costs,
net................................................. (209) 42 22
Other operating expenses:
FDIC insurance premium............................. 12 12 11
Computer service fees.............................. 252 199 193
Legal and professional fees........................ 214 136 158
Directors' fees.................................... 116 70 60
Postage............................................ 47 47 45
Advertising........................................ 146 75 62
Office supplies, forms, stationery, printing, etc.. 87 76 99
Miscellaneous...................................... 278 252 295
------ ------ ------
$3,917 $3,468 $3,341
====== ====== ======
</TABLE>
Total overhead spending for the Company increased 12.9% to $3,916,893 in
1999 from $3,468,231 in 1998. During 1999 the Company's efficiency ratio
improved to 55.39% from 58.17% in 1998. Essentially, it cost the Company
$.5539 to generate $1.00 of revenue.
Salaries and wages increased $157,530, to 9.1% to $1,883,572 during 1999.
The primary reason for the increase was due to salary increases, additional
staff and a larger bonus pool.
During 1999 employee benefits increased $84,712 or 22% to $450,235 from
$365,523. The increase was primarily related to a $49,547 increase in the
Supplemental Executive Retirement Plan contribution; an $18,732, or 23.6%
increase in health insurance costs; a $14,147 increase in 401(k) costs and; a
$9,475 increase in payroll taxes. Overall, the increase in benefit costs was a
combination of both increased unit cost along with a greater number of
employees availing themselves to such benefits.
Occupancy expense increased $158,245 during 1999. However, this increase
includes the $129,362 write-off of a long-lived asset in recognition of its
impaired value. Exclusive of this write-off, occupancy expense increased
$28,883, or 7.3%. The majority of the increase was related to higher tangible
personal property taxes and depreciation charges associated with branch
building improvements.
Equipment expenses increased $19,805, or 7.3% to $290,088 from $270,282 in
1998. The single largest item contributing to this increase was a $9,353
increase in equipment maintenance costs, much of which was Y2K upgrade
related.
OREO costs showed the most dramatic swing in performance in 1999 compared to
1998. During 1999, OREO costs showed a net gain of $208,977 as compared to a
net loss of $41,593 during 1998. With a smaller OREO portfolio during 1999,
the carrying costs of foreclosed property dropped to $6,032 from $27,431.
Further, disposition gains, net of writedowns, were $215,008 in 1999, compared
to disposition losses of $14,161 during 1998. The single largest contributor
to 1999's net gains was the sale of vacant lots at a gain of $222,452. During
1999, the OREO portfolio averaged $231,000 versus $604,786 in 1998. At
December 31, 1999 there was no foreclosed property on the Company's books.
23
<PAGE>
Computer services increased $52,658, or 26.4% to $251,964 in 1999 compared
to $199,306 in 1998. There were two primary reasons for this increase. First,
the Company availed itself of more technological services. Second, as the
Company went through the Y2K preparation process, costs incurred in connection
with the project were captured in the computer services category.
Other operating expenses increased $230,652, or 35% to $887,179 from
$656,527. However, most of the overall increase was confined to three expense
categories. First, legal and professional fees increased $77,134 to $213,620.
Of this increase, $59,000 represented uninsured costs of an ongoing legal
matter. Second, Directors' fees increased $46,333 to $116,133 in 1999 versus
$69,800 in 1998. This increase reflects the increase in the annual Director
retainer to $5,000 from $3,000, and meeting fees to $500 from $300 per
meeting. Finally, advertising increased $70,559 to $145,787 from $75,228. This
increase was discretionary, and demonstrated the Company's focus on
advertising and marketing during 1999.
Income Taxes
Income tax expense amounted to $1,061,036 in 1999, or an effective tax rate
of 36.8%. The effective rate in 1998 was 35.4%. The Company's combined federal
and state (net of federal benefit) statutory income tax rate was 39.94% in
1999 and 1998. The Company's effective combined federal and state tax rate was
lower than the statutory rate primarily due to the exclusion, from state
taxable income, interest income on U.S. Treasury obligations and certain
government agency debt securities in 1999 and 1998. Deferred tax assets and
liabilities are reflected at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, assets and
liabilities are adjusted through the provision for income taxes.
Financial Condition
Total Assets
The Company's total assets increased $2.9 million, or 2%, from $141.9
million at December 31, 1998, to $144.8 million at December 31, 1999. The
increase in total assets primarily occurred within the Company's loan
portfolio which increased $8.6 million and a $4.2 million increase in cash and
cash equivalents. These increases were offset somewhat by a $10.3 million
decrease in investment securities. The primary funding source for the increase
in total assets was the wholesale funding market. While retail deposits
remained virtually flat at $104.6 million at December 31, 1999, compared to
$104.4 million at December 31, 1998, repurchase agreements and Federal Home
Loan Bank advances increased $4.6 million. The $3.0 million senior debenture
was repaid during 1999 and shareholders' equity increased nearly $.7 million.
Investment Securities
The Company's total investment securities portfolio decreased $10.3 million
to $36.5 million at December 31, 1999, from $46.8 million at December 31,
1998.
At December 31, 1999, securities which were classified as held-to-maturity
were carried at an amortized cost of $15,691,004, with a fair value of
$15,450,453. Securities classified as available-for-sale were carried at a
fair value of $20,857,124, with an amortized cost of $21,167,567. At December
31, 1999, government agency debt securities and collateralized mortgage
obligations were classified as held-to-maturity which is consistent with the
Company's intent and ability. The available-for-sale segment of investment
securities was comprised of U.S. Treasury securities, government agency debt
securities, mortgage-backed securities, and marketable equity securities.
The securities in which the Company may invest are subject to regulation
and, for the most part, are limited to securities which are considered
investment grade securities. In addition, the Company has an internal
investment policy which restricts investments to: (i) United States treasury
securities; (ii) obligations of United States government agencies and
corporations; (iii) collateralized mortgage obligations, including securities
issued
24
<PAGE>
by the Federal National Mortgage Association (FNMA), the Government National
Mortgage Association (GNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC); (iv) securities of states and political subdivisions; (v) corporate
debt, all of which must be considered investment grade by a recognized rating
service; and (vi) corporate stock. In addition to achieving a rate of return
which is consistent with the overall risk profile of the investment portfolio,
the Company views the principal purpose of its investment securities as a
ready source of liquidity and as a management tool against interest rate risk
embedded within the Company's balance sheet. Generally, the Company invests in
fixed rate government and agency obligations with a maturity not to exceed
three years. Single index floating rate or step-up securities generally have
final maturities which do not exceed five years at time of purchase.
Consequently, the Company's exposure to significant market swings is somewhat
controlled. At December 31, 1999, the Company's investment securities had net
unrealized losses of $550,994 as compared to net unrealized gains of $58,012
at December 31, 1998.
Loans
Total loans, net of unearned discount, amounted to $94.9 million at December
31, 1999, up $8.6 million, or 10.0%, from $86.3 million at the end of 1998.
The increase in total loans was predominately in the commercial real estate
portfolio, which grew $15.2 million, while commercial, residential real
estate, home equity lines of credit and consumer loans declined $6.6 million.
At December 31, 1999, total loans represented 65.6% of total assets and 90.8%
of total deposits compared to 60.8% and 82.7%, respectively, at the end of
1998.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial.............. $12,249 12.9% $14,763 17.1% $ 6,418 8.3%
Commercial real estate.. 65,812 69.3 50,646 58.7 45,977 59.2
Residential real estate. 13,084 13.8 16,417 19.0 21,464 27.6
Home equity lines of
credit................. 3,051 3.2 3,489 4.0 2,839 3.7
Consumer................ 766 0.8 1,047 1.2 1,057 1.2
------- ----- ------- ----- ------- -----
94,962 86,362 77,755
Unearned discount....... 23 66 75
------- ------- -------
94,939 100.0% 86,296 100.0% 77,680 100.0%
===== ===== =====
Allowance for loan
losses................. 1,556 1,287 1,597
------- ------- -------
Net loans............... $93,383 $85,009 $76,083
======= ======= =======
</TABLE>
In 1999, the Company encountered solid loan demand from small businesses.
The Company believes a primary reason for this demand was the desire of small
business borrowers to obtain banking relationships with banks which are
responsive to their needs, and the success of the Company in meeting those
needs. The increase in commercial and commercial real estate loans reflected
the Company's emphasis on: (i) small business lending; (ii) obtaining loan
guarantees from the SBA; and (iii) cash-flow analysis and an overall
assessment of the borrower's financial strength and ability to repay with a
secondary view towards collateral values.
The Bank offers a full range of consumer lending products including
residential mortgages and home equity lines of credit, new and used automobile
loans, passbook and certificate of deposit loans, and other personal secured
and unsecured loans. Although the Bank makes an effort to price these loans
competitively, it faces substantial competition from mortgage and consumer
finance companies.
Nonperforming Assets
Nonperforming assets include nonperforming loans and other real estate owned
(OREO). The nonperforming loans category includes loans on which the accrual
of interest is discontinued when the collectibility of principal or interest
is in doubt, or when payments of principal or interest have become 90 days
25
<PAGE>
past due and have arrearages that have not been eliminated. In certain
instances, nonperforming loans may also include loans that have become 90 days
past due but remain on accrual status because the value of the collateral
securing the loan is sufficient to cover principal and interest and the loan
is in the process of collection. OREO consists of real estate acquired through
foreclosure proceedings. In addition to the preceding two categories, the
Company may, under appropriate circumstances, restructure loans as a
concession to a borrower. At December 31, 1999, 1998 and 1997, no troubled
debt restructurings were included in the Company's loan portfolio.
The following table sets forth information regarding nonperforming assets
and delinquent loans 30-89 days past due as to interest or principal, and held
by the Company at the dates indicated. The amounts and ratios shown are
exclusive of the loans and allowance for loan losses acquired in the Chariho-
Exeter Credit Union acquisition.
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998 1997
----- ----- -----
(Dollars in
Thousands)
<S> <C> <C> <C>
Loans past due 90 days or more but not included in
nonaccrual loans $ -- $ -- $ --
Nonaccrual loans..................................... 181 -- 17
----- ----- -----
Total nonperforming loans............................ 181 -- 17
Other real estate owned.............................. -- 513 782
----- ----- -----
Total nonperforming assets........................... $ 181 $ 513 $ 799
===== ===== =====
Delinquent loans 30-89 days past due................. $ 154 $ 161 $ 490
===== ===== =====
Nonperforming loans as a percent of gross loans...... 0.19% NM 0.02%
Nonperforming assets as a percent of total assets.... 0.12% 0.36% 0.65%
Delinquent loans 30-89 days past due as a percent of
gross loans......................................... 0.16% 0.19% 0.67%
</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.
The Bank has an informal loan peer review function and a loan loss review
committee. The loan peer review committee, which meets monthly, is an informal
committee comprised of the Bank's chief executive officer and all loan
officers. Every loan of $250,000 or more or a total relationship of $500,000
or more is scheduled to be reviewed not less than once every two years by the
loan peer review committee. All loans that undergo loan peer review receive a
numerical grade ranging from 1 to 6 based on a number of criteria, including
the financial strength of the borrower as determined, in part, by such
borrower's liquidity, debt service coverage and historical performance. Any
loan rated 4 or worse will automatically be placed on a "watchlist." Certain 3
rated loans for which the committee has identified potential problems may also
be placed on the watchlist. The loans on the watchlist are reviewed monthly by
the Bank's Credit Committee in order to determine what actions should be taken
with respect to such loans, whether any loans should be added or deleted from
the watchlist, and to make estimates regarding loan loss exposure to the loan
loss review committee. The loan loss review committee, comprised of the Bank's
chief executive officer, chief financial officer and all other loan officers,
reviews loans on the watchlist on a quarterly basis in order to establish
specific loan loss reserve levels.
26
<PAGE>
In addition to assessing loss exposure for all loans included on the
watchlist (specific allowance), the loan loss review committee also applies a
three year moving weighted average, by category, of net charge-offs to each
loan type (general allowance) (exclusive of watchlist loans which are
specifically reviewed). Finally, the loan loss review committee will take into
consideration the above mentioned conditions, the effects of which are not
directly measured in determining the general and specific allowances. The
evaluation of the inherent loss regarding these conditions involves a higher
degree of uncertainty because they are not identified with specific problem
loans or loan portfolio types. Thus, an unallocated allowance for loan losses
is used to recognize the estimated risk associated with the general and
specific allowance calculations and to reflect management's evaluation of
various conditions, the effect of which are not directly measurable in
determining the general and specific allowance.
The following table, exclusive of the acquired allowance for loan losses,
represents the allocation of the Bank's allowance for loan losses for the
periods ending as indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loan Category:
Commercial....................... $ 192 12.3% $ 160 12.4% $ 75 6.2%
Commercial Real Estate........... 1,044 67.1 840 65.3 848 70.2
Residential Real Estate.......... 248 15.9 219 17.0 266 22.0
Home Equity Lines of Credit...... 60 3.9 54 4.2 7 0.6
Consumer......................... 12 0.8 14 1.1 12 1.0
------ ----- ------ ----- ------ -----
Total.......................... $1,556 100.0% $1,287 100.0% $1,208 100.0%
====== ===== ====== ===== ====== =====
</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, 1999, the Bank
classified $1.6 million of loans as substandard based on the rating system
adopted by the Bank. Of these amounts, a majority of which are included in the
commercial real estate loan portfolio, the Bank estimates a potential loss
exposure of $148,000.
27
<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,
--------------------------
1999 1998 1997
------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
AVERAGE LOANS OUTSTANDING.......................... $91,888 $77,302 $ 70,854
======= ======= ========
ALLOWANCE FOR LOAN LOSSES AT BEGINNING OF YEAR..... $ 1,287 $ 1,208 $ 1,200
CHARGED-OFF LOANS:
Commercial....................................... 52 12 --
Commercial Real Estate:
Non-owner occupied 1-4 family.................. -- -- --
Non-owner occupied multi-family................ -- 128 --
Commercial..................................... -- 27 25
Residential Real Estate:
Owner occupied 1-4 family...................... -- -- 46
Non-owner occupied 1-4 family.................. -- 7 111
Home Equity Lines of Credit...................... -- -- 74
Consumer......................................... 2 10 11
------- ------- --------
Total charged-off loans........................ 54 184 267
------- ------- --------
RECOVERIES ON LOANS PREVIOUSLY CHARGED-OFF:
Commercial....................................... 3 1 --
Commercial Real Estate:
Non-owner occupied 1-4 family.................. -- -- --
Non-owner occupied multi-family................ 19 -- --
Commercial..................................... 23 -- --
Residential Real Estate:
Owner occupied 1-4 family...................... 3 -- 8
Non-owner occupied 1-4 family.................. -- -- --
Home Equity Lines of Credit...................... -- -- --
Consumer......................................... -- 12 17
------- ------- --------
Total recoveries............................... 48 13 25
------- ------- --------
NET LOANS CHARGED-OFF.............................. 6 171 242
PROVISION FOR LOAN LOSSES.......................... 275 250 250
------- ------- --------
ALLOWANCE FOR LOAN LOSSES AT END OF YEAR........... $ 1,556 $ 1,287 $ 1,208
======= ======= ========
Net loans charged-off to average loans............. 0.01% 0.22% 0.34%
Allowance for loan losses to gross loans at end of
year.............................................. 1.64 1.53 1.64
Allowance for loan losses to nonperforming loans... 861.94 NM 7332.94
Net loans charged-off to allowance for loan losses
at beginning of year.............................. 0.47 14.16 20.17
Recoveries to charge-offs.......................... 88.89 7.07 9.36
</TABLE>
28
<PAGE>
The following table summarizes the gross activity in OREO during the periods
indicated:
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1999 1998 1997
----- ----- -----
(Dollars in
Thousands)
<S> <C> <C> <C>
Balance at beginning of year............................ $ 513 $ 782 $ 676
Property acquired....................................... -- 245 461
Sales and other adjustments............................. (493) (514) (355)
Write-downs (charged to operations)..................... (20) -- --
----- ----- -----
Balance at end of year.................................. $ -- $ 513 $ 782
===== ===== =====
</TABLE>
Deposits and Borrowings
The Company devotes considerable time and resources to gathering deposits
through its retail branch network system. Total deposits increased $.2
million, to $104.6 million at December 31, 1999, from $104.4 million at the
end of 1998. During 1999, the Company reported increases in its core
transactional type deposit products. Total demand deposits increased $1.8
million, and savings and money market accounts increased $1.9 million.
However, time deposits, which are more interest rate sensitive, decreased $3.5
million. The Company adopted a marginal pricing strategy during 1998 and
carried the strategy forward into 1999. The strategy, which was for the
purpose of reducing the Company's overall funding costs set time deposit rates
at the low end of competitive market rates with replacement funds provided, if
necessary, from wholesale funding sources. During 1999, the Company's overall
cost of funds declined 48 basis points to 4.46%, and its cost of funds for
time deposits declined 44 basis points to 5.00%.
Along with its deposit gathering efforts, the Company relied on borrowing
from securities sold under agreements to repurchase (repo) to leverage its
capital. At December 31, 1999, securities sold under agreements to repurchase
amounted to $9.4 million, compared to $12.3 million at December 31, 1998.
During 1999, the Company increased its use of wholesale funding sources from
the Federal Home Loan Bank of Boston (FHLB). The purpose of these borrowings
was to match the funding for selected loans as well as refinance maturing
repo's at more favorable terms. At December 31, 1999, advances from the FHLB
amounted to $13.6 million, compared to $6.2 million at December 31, 1998.
Asset/Liability Management
The principal objective of the Company's asset and liability management is
to minimize interest rate risk on net interest income and stockholders'
equity. This objective is accomplished by managing the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing dates. The Company's actions in this regard are taken
under the guidance of the Asset/ Liability Management Committee which includes
members of the Company's senior management and two members of the Company's
Board of Directors. The Asset/Liability Management Committee is actively
involved in formulating the economic assumptions that the Company uses in its
financial planning and budgeting process and establishes policies which
control and monitor the Company's sources, uses and pricing of funds.
The effect of interest rate changes on assets and liabilities is analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring the interest rate sensitivity "gap." An asset or
liability is interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity "gap"
is defined as the difference between interest-earning assets and interest-
bearing liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds
interest rate sensitive assets. During a period of falling interest rates, a
positive gap would tend to adversely affect net interest income, while
29
<PAGE>
a negative gap would tend to result in an increase in net interest income.
During a period of rising interest rates, a positive gap would tend to result
in an increase in net interest income while a negative gap would tend to
affect net interest income adversely.
The Company has historically sought to maintain a relatively narrow gap
position and has, in some instances, foregone investment in higher yielding
assets where such investment, in management's opinion, exposed the Company to
undue interest rate risk. However, the Company does not attempt to perfectly
match interest rate sensitive assets and liabilities and will selectively
mismatch its assets and liabilities to a controlled degree where it considers
it both appropriate and prudent to do so. In managing its interest rate risk
exposure, the Company does not engage in derivative financial instruments for
hedging or speculative purposes. Other than fixed rate loan commitments, the
Company is prohibited, by internal policy, from engaging in the use of off-
balance sheet financial instruments.
There are a number of relevant time periods in which to measure the
Company's gap position, such as at the three, six, and twelve month points and
beyond in the maturity schedule. Management tends to focus most closely on the
gap up to the one year point in making its principal funding and investing
decisions.
The following table presents the repricing schedule for the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1999:
<TABLE>
<CAPTION>
Over
Over Over Five
Three One Years
Within to Year to to Over
Three Twelve Five Ten Ten
Months Months Years Years Years Total
------- -------- ------- ------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities purchased
under agreements to
resell, and other..... $ 3,803 $ -- $ -- $ -- $ -- $ 3,803
Investment securities.. 6,720 6,266 19,846 3,716 -- 36,548
Loans.................. 22,993 10,184 50,492 12,212 -- 95,881
------- -------- ------- ------- ------- --------
Total interest-earning
assets................. 33,516 16,450 70,338 15,928 -- 136,232
INTEREST-BEARING
LIABILITIES:
Money Market accounts.. 342 996 649 -- -- 1,987
Savings deposits and
NOW accounts.......... 1,799 5,559 14,494 -- -- 21,852
Time deposits.......... 25,349 28,753 9,125 -- -- 63,227
Securities sold under
agreements to
repurchase............ 4,311 -- 5,100 -- -- 9,411
Federal Home Loan Bank
advances.............. 261 3,283 6,674 3,392 -- 13,610
Senior debenture....... -- -- -- -- -- --
------- -------- ------- ------- ------- --------
Total interest-bearing
liabilities............ 32,062 38,591 36,042 3,392 -- 110,087
------- -------- ------- ------- ------- --------
NET INTEREST SENSITIVITY
GAP.................... $ 1,454 $(22,141) $34,296 $12,536 $ -- $ 26,145
======= ======== ======= ======= ======= ========
CUMULATIVE GAP.......... $ 1,454 $(20,687) $13,609 $26,145 $26,145 $ 26,145
======= ======== ======= ======= ======= ========
NET INTEREST SENSITIVITY
GAP AS A PERCENT OF
TOTAL ASSETS........... 1.0% (15.3)% 23.7% 8.7% -- % 18.1%
======= ======== ======= ======= ======= ========
CUMULATIVE GAP AS A
PERCENT OF TOTAL
ASSETS................. 1.0% (14.3)% 9.4% 18.1% 18.1% 18.1%
======= ======== ======= ======= ======= ========
</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.
30
<PAGE>
By using simulation modeling techniques, the Company is able to measure its
interest rate risk exposure as determined by the impact of sudden movements in
interest rates on net interest income and equity. This exposure is termed
"earnings-at-risk" and "equity-at-risk". At December 31, 1999, the Company's
earnings-at-risk under a 200 basis point interest rate shock test measured a
negative 0.9% in a worst case scenario. Under a similar test, the Company's
equity-at-risk measured a negative 13.2% of market value of equity at December
31, 1999. At December 31, 1999, the Company's earnings-at-risk and equity-at-
risk fell well within tolerance levels established by internal policy.
Liquidity
Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. The Company further defines liquidity as
the ability to respond to the needs of depositors and borrowers and to earning
enhancement opportunities in a changing marketplace. Primary sources of
liquidity consist of deposit inflows, loan repayments, securities sold under
agreement to repurchase, FHLB advances, maturity of investment securities and
sales of securities from the available-for-sale portfolio. These sources fund
the Bank's lending and investment activities.
At December 31, 1999, cash and due from banks, securities purchased under
agreements to resell, and short-term investments (unpledged and maturing
within one year) amounted to $15.2 million, or 10.5% of total assets.
Management is responsible for establishing and monitoring liquidity targets as
well as strategies and tactics to meet these targets. Through membership in
the Federal Home Loan Bank of Boston (FHLB), the Company has access to both
short and long-term unused borrowings of nearly $28.6 million, which could
assist the Company in meeting its liquidity needs and funding its asset mix.
At December 31, 1999, the Company held state and municipal demand deposits of
$.8 million which it considered highly volatile. Nonetheless, the Company
believes that there are no adverse trends in the Company's liquidity or
capital reserves, and the Company believes that it maintains adequate
liquidity to meet its commitments. The Company encountered no unusual
liquidity demands as a result of the Year 2000 issue.
Capital Resources
Total stockholders' equity of the Company at December 31, 1999, was $15.5
million, as compared to $14.8 million at December 31, 1998. The increase of
$.7 million primarily resulted from $1.8 million in net income; less dividends
declared of $.4 million, repurchase of common stock of $.4 million, and
unrealized losses on investment securities of $.3 million.
The Bank is subject to the leverage and risk-based capital ratio
requirements of the FDIC. The Bank is deemed to be "well capitalized" by the
FDIC and is classified as such for FDIC insurance- assessment purposes. At
December 31, 1999, the Bank's Leverage Capital Ratio was 10.26%, as compared
to 10.31% at December 31, 1998. The FDIC's minimum Leverage Capital Ratio for
"adequately capitalized" financial institutions is 3%, although this minimum
leverage ratio applies only to certain of the most highly-rated banks. Other
institutions are subject to higher requirements.
The risk-based capital guidelines include both a definition of capital and a
framework for calculating risk-weighted assets by assigning assets and off-
balance sheet items to broad risk categories. According to these standards,
the Bank had a Tier I Risk-Based Capital Ratio of 16.05% and a Total Risk-
Based Capital Ratio of 17.30% at December 31, 1999, as compared to a Tier I
Risk-Based Capital Ratio of 16.61% and a Total Risk-Based Capital Ratio of
17.87% at December 31, 1998. The minimum risk-based Tier I and Total Capital
Ratios at each of these dates were 4.0% and 8.0%, respectively.
The capital structure of the Company is subject to the capital ratio
requirements of the Federal Reserve Bank, which happens to be the same
requirements which FDIC imposes on the Bank.
At December 31, 1999, the Company's Leverage Capital Ratio was 10.71%, as
compared to 10.56% at December 31, 1998. The Company's Tier I Risk-Based
Capital Ratio was 16.72% and its Total Risk-Based Capital Ratio was 17.97% at
December 31, 1999, and 17.24% and 18.49%, respectively, at December 31, 1998.
31
<PAGE>
Year 2000 Compliance
The efficient operation of the Company's business is highly dependent on its
computer software programs and operating systems. Virtually all of these
programs and systems are furnished, supported and maintained by correspondent
institutions, computer service and system providers, and software vendors.
In confronting the Year 2000 problem, the Company's Board of Directors
played a very active role in the Year 2000 compliance effort. The Board
approved the Year 2000 Plan and received monthly status reports from members
of the project team. The FDIC has also played a very active role and visited
the Company on several occasions to examine the Company's progress.
The Company faced potential risks to its and the Bank's operations. As
stated above, the Company purchases substantially all of its software from
third parties who faced the same Year 2000 challenge as the Company. In
addition, the Company relies almost exclusively on other companies for the
functioning of its automated system. Thus, the Company's operations could be
adversely affected if the operations of these third parties were adversely
affected by the Year 2000 problem. Most importantly, the Company faced risks
that all banking institutions, whether large or small, also faced. Included
among these risks is the risk that the Year 2000 date change would result in
the inability to process and underwrite loan applications, to credit deposits
and withdrawals from customer accounts, to credit loan payments or track
delinquencies, to properly reconcile and record daily activity or to engage in
similar normal banking activities. Additionally, if those commercial loan
customers of the Bank whose operations depend heavily on computers and
computer software experience Year 2000 compliance problems and suffer adverse
effects with respect to their own operations, their ability to meet their
obligations to the Bank could be adversely affected. This could force the Bank
to increase its provision for loan losses or take more aggressive collection
actions, potentially impacting the Company's earnings.
At January 1, 2000, the Company did not encounter any Year 2000 date change
difficulties. All systems and operations continued to function without
interruption. The Company is not aware of any Year 2000 difficulties
encountered by any of its borrowers. Nonetheless, the Company continues to
closely monitor the Year 2000 issue as critical dates emerge throughout the
year.
Comparison of 1998 with 1997
The Company reported net income for 1998 of $1,450,048, as compared to
$1,311,733 for 1997, or an increase of 10.5%. Diluted earnings per share
amounted to $1.15 per share for 1998, based on 1,261,241 weighted average
shares outstanding, as compared to $1.04 per share for 1997, also based on
1,261,241 weighted average shares outstanding. Also, in 1998, the Company's
return on average equity (ROE) improved to 10.20% from 10.00% in 1997. The
Company's return on average assets (ROA) was 1.07% in 1998 and 1997. The
improvement in net income is primarily the result of an increase in net
interest income and noninterest income, offset somewhat by an increase in
noninterest expense and provision for income taxes. In general, the Company's
improvement in earnings is attributable to: (i) an increase in average
interest-earning assets funded from both retail and wholesale sources; (ii) an
increase in SBA lending activities; and (iii) strong asset quality.
Net Interest Income
Net interest income, the difference between interest income and interest
expense, rose $180,461 or 3.5%, to $5,346,267 in 1998 from $5,165,806 in 1997.
The primary reason for this increase was due to an increase in average
interest-earning assets of $11.9 million, or 10.1% offset somewhat by a 26
basis point decrease in average net spread to 3.20% in 1998, as compared to
3.46% in 1997. The increase in average interest-earning assets was funded
largely from deposit growth and other borrowings. Increases in average
stockholders' equity and an increase in average noninterest-bearing deposits,
accounted for a decrease in average net interest margin of 26 basis points to
4.12% in 1998, the same as the 26 basis point decrease in net interest spread.
In 1998, total interest income amounted to $10,564,083 compared to
$9,969,127 in 1997, or an increase of $594,956, or 6.0%. This increase was
attributable to an $11.9 million increase in average interest-earning assets,
32
<PAGE>
offset somewhat by a 31 basis points decline in earning asset yields. The
increase in earning assets was funded by an increase of $4.3 million in retail
deposits and a $5.2 million increase in wholesale sources. Within earning
assets, average loans increased $4.7 million or 6.3%, while average
investments increased $6.9 million. During 1998, average loans represented
62.0% of total average interest-earning assets, compared to 64.2% during 1997.
This disproportionate growth from higher yielding loans to lower yielding
investments, along with a lower interest rate environment, accounted for the
decline in average interest-earning asset yield to 8.14% from 8.45%. In terms
of rate/volume, the decline in rates reduced interest income by approximately
$256,000; but the increase in volume contributed approximately $851,000 in
interest income.
Total interest expense amounted to $5,217,816 in 1998 compared to $4,803,321
in 1997, or an increase of $414,495, or 8.6%. Average interest-bearing
deposits grew $4.3 million, while cost of funds on interest-bearing deposits
remained flat at 4.70%. Despite a declining interest rate environment, the
Company's cost of funds on retail deposits remained flat due to the
predominant growth of retail deposits in high-costing time certificates of
deposit. The cost of funds on time deposits dropped to 5.44% from 5.52%.
Average wholesale funds (repurchase agreements, FHLB advances, etc.) increased
$5.2 million while its cost decreased to 6.01% from 6.77%. The overall cost on
interest-bearing liabilities decreased 5 basis points to 4.94% in 1998
compared to 4.99% in 1997. In terms of rate/volume, the decline in rates
helped reduce interest expense by approximately $140,000, while the increase
in total interest-bearing liabilities of $9.5 million caused an increase of
approximately $555,000 in interest expense.
Overall, as a result of changes in the mix of interest-earning assets and
interest-bearing liabilities as well as a declining interest rate environment,
net interest income decreased approximately $116,000. However, due to balance
sheet growth (volume) net interest income increased $296,000. This rate/volume
activity produced an increase of $180,000 to net interest income.
Provision for Loan Losses
The provision for loan losses was $250,000 in 1998 and 1997. At December 31,
1998 and 1997, the Company's recorded investment in impaired loans was
$1,571,661 and $1,394,092, respectively, of which $853,221 and $884,121,
respectively, was determined to require a valuation allowance of $235,473 and
$237,030. The Company's ratio of net loan charge-offs to average loans
decreased to .22% from .34%. At December 31, 1998, there were no nonperforming
loans. Loans 30-89 days delinquent decreased to $161,456 from $490,437 at the
end of 1998 and 1997, respectively. At December 31, 1998 and 1997, the
allowance for loan losses to total loans was 1.53% and 1.64%, respectively.
Noninterest Income
Noninterest income increased $150,608 or 32.4% to $616,005 in 1998 from
$465,397 in 1997. This increase was the result of the recognition of $165,620
in gains on SBA loan sales, an increase of nearly $120,000 over 1997. During
1998, the Company originated for sale $3,368,807 of guaranteed portion SBA
loans at a gain on sale of $261,424 ($95,803 has been deferred into the 1st
quarter of 1999). These originations compare to $1,386,340 in1997. As a result
of this SBA activity, the Company's servicing fee income increased $8,301 to
$40,805. The other contributor was the result of the imposition of ATM
surcharge fees in 1998 which contributed $50,317 to noninterest income.
Noninterest Expense
Total overhead spending for the Company increased 3.8% to $3,468,231 in 1998
from $3,341,269 in 1997. During 1998, the Company's efficiency ratio improved
to 58.17% from 59.33% in 1997.
Gross salaries and wages increased $141,597 or 8.9%. This increase was
primarily attributable to across the board pay increases and a full year of
staffing at the North Kingstown branch. Benefits decreased $13,485 with the
greatest savings coming from the fully funded pension plan of $41,160. Health
insurance expense increased
33
<PAGE>
$12,095 or 18%. As a result of increased loan production, the deferral of
salary cost, under SFAS No. 91, increased $34,240 to $196,035 in 1998. This
increase in cost deferral helped lower the total increase in salaries and
benefits of $93,877 or 5.2% to $1,895,538.
Occupancy costs increased $17,895, or 4.8% to $393,189 in 1998. This
increase was solely the result of a full year's occupancy at the North
Kingstown branch. Specifically, depreciation of leasehold improvements and
rent increased $22,242.
Equipment expense increased $51,516, or 23.5% to $270,283 during 1998.
Equipment maintenance increased $10,661, while equipment depreciation
increased $44,767. Both of these increases were the direct result of a full
year's cost associated with the technology upgrades of 1997.
The cost to carry and dispose of OREO increased $19,465 in 1998 to $41,593.
Despite a smaller OREO portfolio, disposal costs increased the Company's loss
on OREO sales by $23,683 during the year.
Other operating expenses decreased $62,373 during 1998 or 8.7% to $656,527
from $718,900. Advertising and Directors' fees were up $13,181 and $10,241
respectively, while legal and professional, office supplies, printing and
forms and the deposit tax were down $21,259, $14,398, $12,008 and $43,497,
respectively. Spending control and the elimination of the State deposit tax
accounted for these overhead reductions.
Income Taxes
Income tax expense amounted to $793,993 in 1998, or an effective tax rate of
35.4%. The effective rate in 1997 was 35.7%. The Company's combined federal
and state (net of federal benefit) statutory income tax rate was 39.94% in
1998 and 1997. The Company's effective combined federal and state tax rate was
lower than the statutory rate primarily due to the exclusion from state
taxable income interest income on U.S. Treasury obligations and certain
government agency debt securities in 1998 and 1997.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to "Asset/Liability Management" within Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of First Financial Corp.:
We have audited the accompanying consolidated balance sheets of First
Financial Corp. (a Rhode Island corporation) and subsidiary as of December 31,
1999 and 1998, and the related consolidated statements of income, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Financial Corp. and subsidiary as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
January 12, 2000
35
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS............................. $ 5,441,190 $ 2,342,782
------------ ------------
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL..... 3,802,865 2,723,488
------------ ------------
LOANS HELD FOR SALE (Note 1)........................ 942,338 357,493
------------ ------------
INVESTMENT SECURITIES (Notes 1 and 2):
Held-to-maturity (fair value: $15,450,453 in 1999
and $13,673,673 in 1998).......................... 15,691,004 13,733,393
Available-for-sale (amortized cost: $21,167,567 in
1999 and $32,969,558 in 1998)..................... 20,857,124 33,087,290
------------ ------------
Total investment securities........................ 36,548,128 46,820,683
------------ ------------
FEDERAL HOME LOAN BANK STOCK........................ 681,500 447,700
------------ ------------
LOANS (Notes 1, 7 and 9):
Commercial......................................... 12,248,552 14,762,537
Commercial real estate............................. 65,812,129 50,646,390
Residential real estate............................ 13,084,006 16,417,012
Home equity lines of credit........................ 3,051,265 3,489,029
Consumer........................................... 766,383 1,047,141
------------ ------------
94,962,335 86,362,109
Less--Unearned Discount............................ 23,221 66,264
Allowance for loan losses (Notes 3 and 12)......... 1,556,405 1,287,058
------------ ------------
Net loans.......................................... 93,382,709 85,008,787
------------ ------------
OTHER REAL ESTATE OWNED (Note 1).................... -- 513,127
------------ ------------
PREMISES AND EQUIPMENT, net (Notes 4 and 7)......... 2,167,103 2,416,790
------------ ------------
OTHER ASSETS........................................ 1,815,822 1,288,080
------------ ------------
TOTAL ASSETS........................................ $144,781,655 $141,918,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand............................................. $ 17,522,309 $ 15,743,185
Savings and money market accounts.................. 23,838,702 21,940,330
Time deposits (Note 5)............................. 63,227,494 66,688,413
------------ ------------
Total deposits..................................... 104,588,505 104,371,928
------------ ------------
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Note
6)................................................. 9,411,111 12,255,880
------------ ------------
FEDERAL HOME LOAN BANK ADVANCES (Note 6) ........... 13,610,400 6,204,077
------------ ------------
ACCRUED EXPENSES AND OTHER LIABILITIES.............. 1,689,999 1,302,316
------------ ------------
SENIOR DEBENTURE, net of unamortized discount of
$2,134 in 1998 (Note 12)........................... -- 2,971,487
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Notes 2, 11 and 15):
Common Stock, $1 par value; Authorized--5,000,000
shares; Issued--1,328,041 shares.................. 1,328,041 1,328,041
Surplus............................................ 4,431,380 4,431,380
Retained earnings.................................. 10,504,194 9,130,143
Accumulated other comprehensive (loss) income...... (186,265) 70,638
------------ ------------
16,077,350 14,960,202
Less--Treasury stock, at cost, 101,800 shares in
1999 and 66,800 shares in 1998 ................... 595,710 146,960
------------ ------------
Total stockholders' equity......................... 15,481,640 14,813,242
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $144,781,655 $141,918,930
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (Note 1)..... $ 8,687,625 $ 7,796,758 $7,400,873
Interest on investment securities--
U.S. Government and agency obligations. 1,735,195 1,882,529 1,532,872
Collateralized mortgage obligations.... 129,786 52,398 91,684
Mortgage-backed securities............. 393,975 537,544 727,637
Marketable equity securities and other. 71,483 74,360 40,838
Interest on cash equivalents (Note 1).. 161,506 220,494 175,223
----------- ----------- ----------
Total interest income.................. 11,179,570 10,564,083 9,969,127
INTEREST EXPENSE:
Interest on deposits.................... 3,732,477 4,091,958 3,886,454
Interest on repurchase agreements....... 553,342 712,217 646,622
Interest on advances ................... 563,746 160,865 --
Interest on debenture (Note 12)......... 84,503 252,776 270,245
----------- ----------- ----------
Total interest expense................. 4,934,068 5,217,816 4,803,321
----------- ----------- ----------
Net interest income.................... 6,245,502 5,346,267 5,165,806
PROVISION FOR LOAN LOSSES (Note 1)........ 275,000 250,000 250,000
----------- ----------- ----------
Net interest income after provision for
loan losses........................... 5,970,502 5,096,267 4,915,806
----------- ----------- ----------
NONINTEREST INCOME:
Service charges on deposits............ 267,626 279,185 317,176
Gain on loan sales..................... 340,061 165,620 46,410
Other.................................. 218,388 171,200 101,811
----------- ----------- ----------
Total noninterest income............... 826,075 616,005 465,397
----------- ----------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits (Note
10)................................... 2,133,193 1,895,538 1,801,661
Occupancy expense (Note 4)............. 551,434 393,189 375,294
Equipment expense...................... 290,088 270,283 218,767
Other real estate owned net (gains)
losses, and expenses.................. (208,977) 41,593 22,128
Computer services...................... 251,964 199,306 193,392
Deposit insurance assessments.......... 12,012 11,795 11,127
Other operating expenses............... 887,179 656,527 718,900
----------- ----------- ----------
Total noninterest expense.............. 3,916,893 3,468,231 3,341,269
----------- ----------- ----------
Income before provision for income
taxes................................. 2,879,684 2,244,041 2,039,934
PROVISION FOR INCOME TAXES (Note 8)....... 1,061,036 793,993 728,201
----------- ----------- ----------
NET INCOME................................ $ 1,818,648 $ 1,450,048 $1,311,733
=========== =========== ==========
Earnings per share:
Basic.................................. $ 1.47 $ 1.15 $ 1.04
=========== =========== ==========
Diluted................................ $ 1.47 $ 1.15 $ 1.04
=========== =========== ==========
Weighted average common shares
outstanding.............................. 1,233,104 1,261,241 1,261,241
Weighted average equivalent shares........ -- -- --
----------- ----------- ----------
Weighted average common and common stock
equivalent shares outstanding............ 1,233,104 1,261,241 1,261,241
=========== =========== ==========
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Surplus Earnings (Loss) Income Stock Equity Income
---------- ---------- ----------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... $1,328,041 $4,431,380 $ 6,923,308 $ 34,132 $(146,960) $12,569,901
Net income.............. -- -- 1,311,733 -- -- 1,311,733 $1,311,733
Other comprehensive
income, net of tax:
Unrealized holding
gains, net of
reclassification
adjustment............ -- -- -- 83,248 -- 83,248 83,248
----------
Comprehensive income.... $1,394,981
==========
Dividends declared ($.20
per share)............. -- -- (252,249) -- -- (252,249)
---------- ---------- ----------- --------- --------- -----------
Balance, December 31,
1997................... 1,328,041 4,431,380 7,982,792 117,380 (146,960) 13,712,633
Net income.............. -- -- 1,450,048 -- -- 1,450,048 $1,450,048
Other comprehensive
income, net of tax:
Unrealized holding
losses, net of
reclassification
adjustment............ -- -- -- (46,742) -- (46,742) (46,742)
----------
Comprehensive income:... $1,403,306
==========
Dividends declared ($.24
per share)............. -- -- (302,697) -- -- (302,697)
---------- ---------- ----------- --------- --------- -----------
Balance, December 31,
1998................... 1,328,041 4,431,380 9,130,143 70,638 (146,960) 14,813,242
Net Income.............. -- -- 1,818,648 -- -- 1,818,648 $1,818,648
Other comprehensive
income, net of tax:
Unrealized holding
losses, net of
reclassification
adjustment............ -- -- -- (256,903) -- (256,903) (256,903)
----------
Comprehensive income.... $1,561,745
==========
Dividends declared ($.36
per share)............. -- -- (444,597) -- -- (444,597)
Repurchase of 35,000
shares of common stock. -- -- -- -- (448,750) (448,750)
---------- ---------- ----------- --------- --------- -----------
Balance, December 31,
1999................... $1,328,041 $4,431,380 $10,504,194 $(186,265) $(595,710) $15,481,640
========== ========== =========== ========= ========= ===========
</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
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income....................... $ 1,818,648 $ 1,450,048 $ 1,311,733
Adjustments to reconcile net
income to net cash provided by
operating activities:
Provision for loan losses...... 275,000 250,000 250,000
Depreciation and amortization.. 305,694 285,721 231,723
Write-off of impaired long-
lived asset................... 129,362 -- --
(Gains) losses on sale of other
real estate owned............. (215,008) 14,162 (9,522)
Gain on sales of loans......... (340,061) (165,620) (46,410)
Proceeds from sales of loans... 5,547,975 3,630,231 1,209,421
Loans originated for sale...... (5,792,759) (3,346,300) (1,386,340)
Net increase in deferred loan
fees.......................... 4,535 6,226 46,816
Net accretion on investment
securities held-to- maturity.. (6,916) (5,203) (10,730)
Net accretion on investment
securities available-for-sale. (370,177) (290,619) (66,649)
Net (decrease) increase in
unearned discount............. (43,043) (8,843) 8,391
Net (increase) decrease in
other assets.................. (290,742) 202,809 59,846
Deferred income taxes
(benefit)..................... (237,000) (114,000) (3,250)
Amortization of discount on
debenture..................... 15,860 205,983 202,566
Net increase (decrease) in
accrued expenses
and other liabilities......... 280,385 (136,118) (266,589)
------------- ------------- ------------
Net cash provided by operating
activities.................... 1,081,753 1,978,477 1,531,006
------------- ------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from maturities of
investment securities held-to-
maturity........................ 3,532,387 20,472,802 13,573,509
Proceeds from maturities of
investment securities available-
for-sale........................ 310,600,674 150,311,185 30,233,468
Purchase of investment securities
held-to-maturity................ (5,483,082) (21,733,252) (12,250,000)
Purchase of investment securities
available-for-sale.............. (298,428,506) (156,587,124) (28,215,380)
Purchase of Federal Home Loan
Bank stock...................... (233,800) -- (99,600)
Net increase in loans............ (8,610,414) (9,418,020) (6,258,403)
Purchase of premises and
equipment....................... (185,369) (243,961) (1,044,993)
Sales of other real estate owned. 728,135 499,901 366,955
------------- ------------- ------------
Net cash provided by (used in)
investing activities............ 1,920,025 (16,698,469) (3,694,444)
------------- ------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase in demand accounts.. 1,779,124 2,544,229 1,928,910
Net increase (decrease) in
savings and money market
accounts........................ 1,898,372 (1,431,027) 621,657
Net (decrease) increase in time
deposits........................ (3,460,919) 3,968,855 2,863,195
Net (decrease) increase in
repurchase agreements........... (2,844,769) 2,150,880 (673,000)
Net increase in Federal Home Loan
Bank advances................... 7,406,323 6,204,077 --
Repayment of Senior Debenture.... (2,708,777) -- --
Purchase of common stock for
treasury........................ (448,750) -- --
Dividends paid................... (444,597) (365,762) (227,023)
------------- ------------- ------------
Net cash provided by financing
activities...................... 1,176,007 13,071,252 4,513,739
------------- ------------- ------------
</TABLE>
39
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ $4,177,785 $(1,648,744) $2,350,301
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR....................................... 5,066,270 6,715,014 4,364,713
---------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $9,244,055 $ 5,066,270 $6,715,014
========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid............................. $4,907,286 $ 5,211,783 $4,755,368
========== =========== ==========
Income taxes paid......................... $1,236,000 $ 1,083,250 $ 787,242
========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfer of loans to OREO................. $ -- $ 245,000 $ 461,002
========== =========== ==========
</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, 1999, 1998 and 1997
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
First Financial Corp. and its wholly-owned subsidiary First Bank and Trust
Company (collectively, "Company"), after elimination of all intercompany
transactions and balances. Certain reclassifications have been made to prior
year balances to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant changes in the near
term relate to the determination of the allowance for loan losses, deferred
tax assets and the valuation of foreclosed real estate.
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and securities purchased under agreements
to resell, which represent short-term investments in government treasury and
agency securities purchased from another institution.
Investment Securities
Debt securities that management has the positive intent and ability to hold
to maturity are classified as held-to-maturity and are carried at cost,
adjusted for the amortization of premium or the accretion of discount. Debt
and equity securities with readily determinable fair values which are bought
and held principally for the purpose of selling them in the near term are
classified as trading securities and are carried at fair value, with
unrealized gains and losses included in current earnings. At December 31, 1999
and 1998, the Company had no securities classified as trading. Debt and equity
securities not classified as either held-to-maturity or trading are classified
as available-for-sale and are carried at fair value, with unrealized after-tax
gains and losses reported as a separate component of stockholders' equity.
Loans
Loans are stated at the principal amount outstanding, net of unamortized
deferred loan origination fees and costs. Deferred loan origination fees and
costs are amortized as an adjustment to yield over the life of the related
loans. Interest on commercial, real estate and consumer loans is accrued based
on the principal amounts outstanding. The Company's policy is to discontinue
the accrual of interest on loans when scheduled payments become past due in
excess of 90 days, and when, in the judgement of management, the ultimate
collectibility of principal or interest becomes doubtful. When a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is generally reversed against interest income in the current period. Interest
income is recognized on an accrual basis for impaired loans, until such loans
are placed on nonaccrual status. The Company recognizes interest income on
these nonaccrual loans on a cash basis when the ultimate collectibility of
principal is no longer considered doubtful. Otherwise, cash payments on
nonaccrual loans are applied to principal.
41
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
Loans held for sale are carried at the lower of cost or fair value.
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the face value of the collateral if the loan is
collateral-dependent. Currently, all impaired loans have been measured through
the latter method. All loans on nonaccrual status are considered to be
impaired. All adversely classified loans at December 31, 1999 and 1998 are
also considered to be impaired. When the measure of the impaired loan is less
than the recorded investment in the loan, the impairment is recorded through a
valuation allowance. Loans are evaluated for impairment according to the
Company's normal loan review process, including overall credit evaluation and
rating, nonaccrual status and payment experience. Loans identified as impaired
are further evaluated to determine the estimated extent of impairment. For
collateral-based loans, the extent of impairment is the shortfall, if any,
between the collateral value less costs to dispose of such collateral and the
carrying value of the loan.
Rights to service loans for others are recognized as an asset. The total
cost of originated loans that are sold with servicing rights retained is
allocated between the servicing rights and the loans without the servicing
rights based on their relative fair values. Capitalized servicing rights are
included in other assets and are amortized as an offset to other income over
the period of estimated net servicing income. They are periodically evaluated
for impairment based on their fair value. Impairment is measured on an
aggregated basis according to interest rate band and period of origination.
The fair value is estimated based on the present value of expected cash flows,
incorporating assumptions for discount rate, prepayment speed and servicing
cost. Any impairment is recognized as a charge to earnings through a valuation
allowance.
Provision and Allowance for Loan Losses
The balance of the allowance and the amount of the annual provision charged
to expense are estimated amounts based on management's systematic review of
past loan loss experience, changes in the character and size of the loan
portfolio, current economic conditions, adverse situations that may affect the
borrowers ability to repay, and other pertinent factors. Ultimate losses may
vary from the current estimates. These estimates are reviewed periodically,
and as adjustments become necessary, they are reported as an expense in the
periods in which they become known. The allowance is maintained at a level
considered by management to be adequate to cover reasonably foreseeable loan
losses. Losses are charged against the allowance for loan losses when
management believes that the collectibility of principal is unlikely. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
carrying amount or fair value less cost to sell. Expenses from operations and
changes in valuations are included in other real estate owned (gains) losses
and expenses.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives of the assets.
42
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
The following is a summary of the lives over which the Company computes
depreciation:
<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 are removed from the accounts, and any resulting gain or loss is
reflected in the consolidated statements of income. Costs of major additions
and improvements are capitalized, and expenditures for maintenance and repairs
are charged to operations as incurred.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If an asset being tested
for recoverability was acquired in a business combination, the related
goodwill is included as part of the asset grouping in determining
recoverability. In instances where goodwill is identified with assets that are
subject to an impairment loss, the carrying amount of the identified goodwill
is eliminated before making any reduction of the carrying amounts of impaired
long-lived assets and identifiable intangibles.
The Company evaluates the recoverability of its carrying amounts of long-
lived assets based on estimated cash flows to be generated by each of such
assets as compared to the original estimates used in measuring such assets. To
the extent impairment is identified, this Company would reduce the carrying
value of such assets.
Income Taxes
The Company accounts for income taxes using the asset and liability method
of accounting under which deferred taxes are recognized for the future tax
consequences of the temporary differences between the financial statement and
tax basis of assets and liabilities, using the enacted tax rates expected to
be in effect when the amounts related to such temporary differences are
realized or settled. As changes in tax laws or rates are enacted, deferred
assets and liabilities will be adjusted accordingly through the provision for
income taxes.
Earnings Per Share
Basic earnings per share is determined by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per
share is determined by dividing net income by the weighted average number of
common shares and common stock equivalent shares outstanding. There were no
dilutive shares outstanding during 1999, 1998 and 1997.
Comprehensive Income
Comprehensive income, which consists of net income and changes in unrealized
gains and losses on securities available-for-sale net of income taxes is
disclosed in the consolidated statements of stockholders' equity and
comprehensive income.
43
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
Recent Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in income unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the statement of income and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. SFAS No. 133, as
amended by SFAS No. 137, "Deferral of the Effective Date of FASB Statement No.
133", is effective for fiscal years beginning after June 15, 2000. A company
may also implement the statement as of the beginning of any fiscal quarter
after issuance (that is, financial quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must
be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1997 (and, at the Company's
election, before January 1, 1998). The Company has not yet quantified the
impact of adopting SFAS No. 133 on its consolidated financial statements and
has not determined the timing or method of its adoption of the statement.
However, the Company does not expect that the adoption of this statement will
have a material impact on its financial position or results of operations.
(2) Investment Securities
The estimated fair value and amortized cost of investment securities at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity--
U.S. Government & agency
obligations.................... $14,000,000 $ -- $230,568 $13,769,432
Collateralized mortgage
obligations.................... 1,691,004 -- 9,983 1,681,021
----------- -------- -------- -----------
$15,691,004 $ -- $240,551 $15,450,453
=========== ======== ======== ===========
Available-for-sale--
U.S. Government & agency
obligations.................... $14,801,041 $ 251 $ 79,350 $14,721,942
Mortgage backed securities...... 5,197,769 4,600 148,047 5,054,322
Marketable equity security and
other.......................... 1,168,757 41,627 129,524 1,080,860
----------- -------- -------- -----------
$21,167,567 $ 46,478 $356,921 $20,857,124
=========== ======== ======== ===========
<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 security...... 1,022,046 4,016 75,816 950,246
----------- -------- -------- -----------
$32,969,558 $205,799 $ 88,067 $33,087,290
=========== ======== ======== ===========
</TABLE>
44
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
A schedule of the maturity distribution of U.S. Government and agency
obligations is as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
Held-to-Maturity Available-for-Sale
----------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Within one year................. $ -- $ -- $10,292,154 $10,260,964
Over one year to five years..... 14,000,000 13,769,432 4,508,887 4,460,978
----------- ----------- ----------- -----------
$14,000,000 $13,769,432 $14,801,041 $14,721,942
=========== =========== =========== ===========
</TABLE>
At December 31, 1999, approximately $13,000,000 of debt securities maturing
in the one-to-five-year period are subject to call provisions within one year.
There were no sales of investment securities in 1999, 1998 and 1997.
At December 31, 1999, the collateralized mortgage obligations have principal
payment windows which extend through March 2002.
Investment securities with a carrying value of $10,995,483 and $14,848,939,
at December 31, 1999 and 1998, respectively, were pledged as collateral for
repurchase agreements, public deposits and other purposes, as required by law.
(3) Allowance for Loan Losses
In 1992, the Company acquired certain assets and assumed certain deposit
liabilities of the former Chariho-Exeter Credit Union ("Chariho"). The Company
and the State of Rhode Island Depositors Economic Protection Corporation
("DEPCO") established an allowance for loan losses of $3,850,000 for loans
acquired. This allowance was available only for loans of Chariho existing as
of the acquisition date. The following analysis summarizes activity for both
the acquired allowance and the Company's allowance for loan losses.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Company Allowance:
Balance at beginning of year.............. $1,287,058 $1,208,322 $1,199,617
Provision............................... 275,000 250,000 250,000
Loan charge-offs........................ (53,634) (184,278) (267,012)
Recoveries.............................. 47,981 13,014 25,717
---------- ---------- ----------
Balance at end of year.................... 1,556,405 1,287,058 1,208,322
---------- ---------- ----------
Acquired Allowance:
Balance at beginning of year.............. -- 388,291 742,840
Loan charge-offs........................ (266,482) (402,404) (341,118)
Recoveries (costs)...................... 1,638 (12,266) (13,431)
Reclassification to senior
debenture (Note 12).................... 264,844 26,379 --
---------- ---------- ----------
Balance at end of year.................... -- -- 388,291
---------- ---------- ----------
Total Allowance......................... $1,556,405 $1,287,058 $1,596,613
========== ========== ==========
</TABLE>
45
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
As set forth in the Chariho Acquisition Agreement, the remaining balance, if
any, in the acquired allowance at May 1, 1999, less an amount equal to 1% of
the remaining acquired loans, must be refunded to DEPCO. Conversely, in the
event the allowance is inadequate, additional loan charge-offs were to reduce
the amount owed on the debenture (Note 12) issued to DEPCO in connection with
the acquisition. On May 31, 1999, the Company repaid the Senior Debenture in
the amount of $2,708,777, which represented the original face value of
$3,000,000, less $291,223 in net acquired loan losses in excess of the
acquired loan loss allowance.
At December 31, 1999 and 1998, the Company's recorded investment in impaired
loans was $1,630,204 and $1,571,661, respectively, of which $613,074 and
$853,221, respectively, was determined to require a valuation allowance of
$147,586 and $235,473. The average recorded investment in impaired loans
during 1999 and 1998 was $1,473,906 and $1,454,652, respectively. For the
years ended December 31, 1999 and 1998, interest income on impaired loans
totaled $186,264 and $225,730, respectively.
At December 31, 1999 and 1998, nonaccrual loans totaled $180,571 and $0,
respectively. Had nonaccrual loans been accruing, interest income would have
increased by $14,742, $0 and $248 for the years ended December 31, 1999, 1998
and 1997, respectively.
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balances of mortgage and other loans
serviced for others were $10,931,194 and $6,816,252 at December 31, 1999 and
1998, respectively. The balance of capitalized servicing rights, net of
valuation allowances (fair value), included in other assets at December 31,
1999 and 1998, was $174,453 and $0, respectively. The fair value of servicing
rights was determined using a riskless discount rate and a normal prepayment
speed factor.
(4) Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Land and improvements................................. $ 676,294 $ 676,294
Buildings and improvements............................ 1,431,565 1,240,851
Leasehold improvements................................ 277,824 407,186
Furniture, fixtures and equipment..................... 1,466,506 1,558,622
---------- ----------
3,852,189 3,882,953
Less--Accumulated depreciation........................ 1,685,086 1,466,163
---------- ----------
$2,167,103 $2,416,790
========== ==========
</TABLE>
In June 1999, the Company recognized impairment in value of one of its long-
lived assets and recorded a write-off in value of $129,362. Depreciation and
amortization expense related to bank premises and equipment was $305,694,
$285,721 and $231,723 in 1999, 1998 and 1997, respectively.
46
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
(5) Time Deposits
At December 31, 1999, scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
$100,000
Maturity Or More Other Total
-------- -------- ------- -------
(In Thousands)
<S> <C> <C> <C>
2000................................................ $10,748 $40,349 $51,097
2001................................................ 1,333 6,557 7,890
2002................................................ 299 1,273 1,572
2003................................................ 336 1,820 2,156
2004................................................ 100 412 512
------- ------- -------
$12,816 $50,411 $63,227
======= ======= =======
</TABLE>
Included in total time deposits are $12,129,000 of certificates of deposit
subject to repricing on a quarterly basis (indexed to the three month yield on
U.S. Treasury bills). Of these time deposits, $9,202,000 have remaining
maturities of one year or less.
(6) Federal Home Loan Bank Advances and Other Borrowings
At December 31, 1999, advances from the Federal Home Loan Bank of Boston
("FHLB") have scheduled repayments as follows:
<TABLE>
<S> <C>
2000............................................................. $ 241,246
2001............................................................. 255,600
2002............................................................. 1,665,928
2003............................................................. 2,768,961
2004............................................................. 279,608
2005 and thereafter.............................................. 8,399,057
-----------
$13,610,400
===========
</TABLE>
Of the total FHLB advances, $8,610,400 represents amortizing notes with
final maturities of 3-15 years and amortization periods of 15-25 years. Of the
remaining $5,000,000, $2,500,000 matures at September 17, 2003, with a one
time call option exercisable by the FHLB on September 17, 2001. The remaining
$2,500,000 matures at September 21, 2009, with a one time call option
exercisable by the FHLB on September 21, 2000. Information relative to the
Company's advances from the FHLB during 1999 is as follows:
<TABLE>
<S> <C>
Balance, December 31, 1999...................................... $13,610,400
Average amount outstanding during the year...................... 9,605,428
Maximum amount outstanding at any month end..................... 13,628,537
Weighted average interest rate at December 31, 1999............. 5.85%
Weighted average interest rate during the year.................. 5.87%
</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, 1999 and 1998, the Company had an unused borrowing capacity of
$26,290,000 and $32,607,000 respectively, which excludes an unused overnight
line of credit of $2,352,000.
47
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
The Company also had $9,411,111 and $12,255,880 of other borrowings at
December 31, 1999 and 1998, respectively. These borrowings consist of
repurchase agreements with customers and securities dealers and are
collateralized by mortgage-backed securities and obligations of the U.S.
Government and agency obligations. The following table represents scheduled
maturities and interest rates of these agreements at December 31, 1999.
<TABLE>
<CAPTION>
Weighted
Maturity Average Rate Amount
-------- ------------ ----------
<S> <C> <C>
January 2000......................................... 3.50% $4,311,111
February 2001........................................ 5.67 5,100,000
---- ----------
4.68% $9,411,111
==== ==========
</TABLE>
At December 31, 1999, the Company's risk with counterparties to securities
sold under repurchase agreements was approximately $389,000. The amount at
risk with counterparties represents the excess of the greater of the carrying
value or estimated market value of underlying collateral plus related accrued
interest receivable over the total repurchase borrowing and related accrued
interest payable.
Securities sold under repurchase agreements averaged $11,311,027 and
$13,059,000 during 1999 and 1998, respectively. The maximum amounts
outstanding at any month end were $12,055,000 during 1999 and $15,108,000
during 1998. The weighted average interest rate was 4.89% during 1999 and
5.45% during 1998.
(7) Commitments and Contingencies
Leases
The Company leases the land on which its Cranston branch office is located,
and building space in which its North Kingstown in-store branch is located.
The annual rental expense under these leases is as follows:
<TABLE>
<S> <C>
2000................................................................. $46,500
2001................................................................. 46,500
2002................................................................. 31,916
2003................................................................. 21,500
2004................................................................. 8,958
2005 and thereafter.................................................. --
</TABLE>
The leases contain renewal options commencing in May 2002 and extending to
May 2012. Under the terms of the rental options, the annual rental expense for
both leases will not exceed $63,563.
Litigation
As of December 31, 1999, the Company was involved in certain lawsuits that
arose in the ordinary course of business. Management has reviewed these
actions with legal counsel and has taken into consideration the views of legal
counsel as to the outcome of the litigation. In management's opinion, final
disposition of such lawsuits will not have a materially adverse effect on the
Company's financial position or results of operations.
48
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
Reserve Requirement
The Company is required to maintain reserve balances with the Federal
Reserve Bank under the Federal Reserve Act and Regulation D. Required
balances, including vault cash, were $469,000 and $363,000 as of December 31,
1999 and 1998, respectively.
Financial Instruments With Off-balance-sheet Risk and Concentration of Credit
Risk
In the normal course of business, the Company enters into various
commitments, such as commitments to extend credit and guarantees (including
standby letters of credit), which are not reflected in the accompanying
consolidated financial statements. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the accompanying consolidated balance sheets. The contract
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Off-balance sheet instruments, whose contract amounts present credit risk,
include the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Unused portion of existing lines of credit............ $7,864,000 $9,939,000
Unadvanced construction loans......................... 2,149,000 604,000
Firm commitments to extend credit..................... 1,679,000 8,572,000
</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.
49
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
(8) Income Taxes
The provision for income taxes consists of the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Federal--
Current................................... $1,140,786 $ 832,993 $665,201
Prepaid................................... (237,000) (114,000) (3,250)
State....................................... 157,250 75,000 66,250
---------- --------- --------
$1,061,036 $ 793,993 $728,201
========== ========= ========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory rate of 34%, as summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Provision for income taxes at statutory
rate...................................... $ 979,093 $762,974 $693,578
State taxes, net of federal benefit........ 103,785 49,500 43,725
Other...................................... (21,842) (18,481) (9,102)
---------- -------- --------
$1,061,036 $793,993 $728,201
========== ======== ========
</TABLE>
The approximate tax effects of temporary differences that give rise to gross
deferred tax assets and gross deferred tax liabilities at December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Gross deferred tax assets:
Allowance for loan losses............................... $484,241 $329,005
Deferred loan origination fees.......................... 60,812 58,998
OREO writedown.......................................... -- 5,200
Supplemental executive pension plan..................... 162,838 110,840
Accrued expenses........................................ 95,106 73,316
-------- --------
Gross deferred tax assets................................. 802,997 577,359
-------- --------
Gross deferred tax liabilities:
Depreciation............................................ 174,728 180,269
Installment sales....................................... 13,269 19,090
-------- --------
Gross deferred tax liabilities............................ 187,997 199,359
-------- --------
Net deferred tax asset.................................... $615,000 $378,000
======== ========
</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, 1999 or 1998.
(9) Related Party Transactions
Certain directors and executive officers of the Company, their immediate
families, companies in which they are principal owners, and trusts in which
they are involved are borrowers of the Company. These related party
50
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons, and do not involve more than normal risk of collectibility.
Related party loan activity was as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance at beginning of year.......................... $1,906,279 $ 905,052
Originations........................................ -- 238,363
Payments............................................ 301,828 (237,707)
Other............................................... -- 1,000,571
---------- ----------
Balance at end of year................................ $1,604,451 $1,906,279
========== ==========
</TABLE>
(10) Employee Benefit Plan
The Company is a member of the Financial Institutions Retirement Fund
(FIRF), a multiple employer pension plan. As a participant in FIRF, the
Company expenses its contributions to this plan, which is accounted for as a
defined contribution plan. For the years ended December 31, 1999 and 1998, the
plan reached a fully funded status and the Company was not required to make a
contribution. Consequently, no pension expense was recorded during 1999 and
1998. The Company's pension expense was $55,413 for the year ended December
31, 1997.
Effective January 1, 1995, the Company established a nonqualified retirement
plan (Plan) to provide supplemental retirement benefits to designated
employees whose pension benefits are otherwise limited by the Internal Revenue
Code regulations. A liability and transition asset of $121,707 were recorded,
as of the effective date, in accordance with SFAS No. 87, "Employer's
Accounting for Pensions".
51
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
The following table sets forth a reconciliation of the Plan's projected
benefit obligation, a reconciliation of fair value of plan assets, the funded
status of the plan, and the components of net periodic benefit cost for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year....... $ 488,093 $365,941 $329,525
Service cost.................................. 28,316 19,177 14,650
Interest cost................................. 50,542 32,715 23,948
Actuarial loss (gain)......................... 185,803 70,260 (2,182)
--------- -------- --------
Benefit obligation at end of year............. 752,754 488,093 365,941
--------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning of
year......................................... 412,318 310,091 --
Actual return on plan assets.................. 32,298 21,779 22,115
Employer contributions........................ 129,995 80,448 287,976
--------- -------- --------
Fair value of plan assets at end of year...... 574,611 412,318 310,091
--------- -------- --------
Funded status................................. (178,143) (75,775) (55,850)
Unrecognized net actuarial loss (gain)........ 202,879 39,657 (30,603)
Unrecognized prior service cost............... 142,779 171,335 199,891
Unrecognized net asset being recognized over
10 years..................................... (90,696) (31,638) (66,580)
--------- -------- --------
Prepaid (accrued) benefit cost................ $ 76,819 $103,579 $ 46,858
========= ======== ========
Components of net period benefit cost
Service cost.................................. $ 28,316 $ 19,177 $ 14,650
Interest cost................................. 50,542 32,715 23,948
Amortization of prior service cost............ 28,556 28,556 28,556
Amortization of unrecognized loss (gain)...... 22,581 -- (959)
--------- -------- --------
Net periodic benefit cost..................... $ 129,995 $ 80,448 $ 66,195
========= ======== ========
</TABLE>
For calculating 1999, 1998 and 1997 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 $46,995, $32,848, and $32,009 for the years ended December
31, 1999, 1998 and 1997.
(11) Stockholders' Equity
On November 16, 1998, the Company's Board of Directors authorized the
repurchase of up to 5%, or 63,062 shares, of the Company's common stock.
During 1999 the Company repurchased a total of 35,000 shares under the
repurchase program at prices ranging from $12.75 to $12.875 per share. Total
capital used for these repurchases amounted to $448,750.
52
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
(12) Chariho-Exeter Credit Union Acquisition
In May 1992, the Company entered into the Acquisition Agreement with the
receiver for Chariho and DEPCO. In connection with the Acquisition Agreement,
the Company entered into a Securities Purchase Agreement with DEPCO. Under
this agreement, the Company issued the Senior Debenture, a $3 million variable
rate debenture to DEPCO. The Company invested the proceeds on the issuance of
the debenture as a contribution of capital to the Bank. Under the terms of the
debenture, interest began to accrue on the third anniversary of the Senior
Debenture and was payable semiannually thereafter. The Senior Debenture bore
interest at the average five-year Treasury rate (indexed rate) plus 1% until
maturity and at the indexed rate plus 4% during the extension period.
A discount of $717,005 was recorded to reduce the carrying value of the
Senior Debenture at the date of issuance in recognition of its favorable
interest terms. This discount was amortized over the initial term of the
Senior Debenture on the level yield method. The discount amortization for the
years ended December 31, 1999, 1998 and 1997 amounted to $15,860, $205,983 and
$202,566, respectively, and is classified as interest expense in the
accompanying consolidated statements of income.
As discussed in (Note 3), the Senior Debenture matured on May 1, 1999 and
the Company repaid the obligation.
(13) Fair Value Of Financial Instruments
The Company is required to disclose fair values for certain of its financial
instruments. Financial instruments include such items as loans, securities,
deposits, swaps and other instruments, as defined.
Quoted market prices are used to estimate fair values where available. Many
of the Company's financial instruments, however, lack an available trading
market as characterized by a willing buyer and willing seller engaging in an
exchange transaction. It is the Company's general practice and intent to hold
the majority of its financial instruments, such as loans and deposits, to
maturity and not engage in trading or sales activities. Therefore, permitted
valuation techniques such as present value calculations, were used for the
purposes of this disclosure.
Management notes that reasonable comparability between financial
institutions may not necessarily be made due to the wide range of permitted
valuation techniques and numerous estimates which must be made given the
absence of active secondary markets for many of the financial instruments.
This lack of uniform valuation methodologies also introduces a greater degree
of subjectivity to these estimated fair values.
The methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
Cash and Due from Banks, and Securities Purchased Under Agreements to
Resell. These items are generally short-term in nature and, accordingly, the
carrying amounts reported in the consolidated balance sheet are reasonable
approximations of their fair values.
Investment Securities Held-to-Maturity and Available-for-Sale. Fair values
are based principally on quoted market prices.
Loans. The fair value of accruing loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities
or for classified loans using a discount rate that reflects the risk inherent
in the loan.
53
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
The fair value of nonaccrual loans is based on the estimated market value of
the underlying collateral held.
Deposits. The fair value of demand, NOW, savings and money market deposits
is the amount payable on demand at the reporting date. The fair value of time
deposits is estimated using discounted value of contractual cash flows. The
discount rates are the rates currently offered for deposits of similar
remaining maturities.
Securities sold under agreements to repurchase. The face value is considered
to approximate its fair value.
Senior Debenture. The face value of the senior debenture is considered to
approximate its fair value.
FHLB Advances. The fair value of Federal Home Loan Bank advances are
estimated using a discounted cash flow technique that applies interest rates
currently being offered on advances to a schedule of aggregated expected
monthly maturities on FHLB advances.
Commitments to Extend Credit and Standby Letters of Credit. The fair value
of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The fair value amounts are not
material.
At December 31, 1999 and 1998, the estimated fair value of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1999 1998
------------------------- -------------------------
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....... $ 9,244,055 $ 9,244,055 $ 5,066,270 $ 5,066,270
Loans held for sale........ 942,338 1,008,571 357,493 392,141
Investment securities:
Held-to-maturity......... 15,691,004 15,450,453 13,733,393 13,673,673
Available-for-sale....... 20,857,124 20,857,124 33,087,290 33,087,290
Federal Home Loan Bank
stock..................... 681,500 681,500 447,700 447,700
Loans--net................. 93,382,709 94,033,000 85,008,787 89,227,000
Loan servicing asset....... 174,453 174,453 -- --
LIABILITIES
-----------
Deposits................... $104,588,505 104,430,000 $104,371,928 $105,090,000
Securities sold under
agreements to repurchase.. 9,411,111 9,282,000 12,255,880 12,377,000
Federal Home Loan Bank
advances.................. 13,610,400 13,479,000 6,204,077 6,415,000
Senior debenture........... -- -- 2,971,487 2,973,621
</TABLE>
54
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
(14) The Company (Parent Company Only)
The condensed separate financial statements of the Company are presented
below.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
------
Cash and due from banks............................... $ 79,227 $ 102,773
Investment securities:
Available-for-sale (amortized cost: $631,779 in 1999
and $3,545,200 in
1998).............................................. 502,255 3,469,998
Investment in subsidiary bank......................... 14,827,906 14,128,694
Other assets.......................................... 82,023 114,715
----------- -----------
Total assets...................................... $15,491,411 $17,816,180
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Senior debenture, net of unamortized discount......... $ -- $ 2,971,487
Other liabilities..................................... 9,771 31,451
----------- -----------
9,771 3,002,938
----------- -----------
Stockholders' Equity:
Common stock........................................ 1,328,041 1,328,041
Surplus............................................. 4,431,380 4,431,380
Retained earnings................................... 10,504,194 9,130,143
Accumulated other comprehensive income.............. (186,265) 70,638
----------- -----------
16,077,350 14,960,202
Less--Treasury stock.................................. 595,710 146,960
----------- -----------
Total stockholders' equity........................ 15,481,640 14,813,242
----------- -----------
Total liabilities and stockholders' equity........ $15,491,411 $17,816,180
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income............... $1,028,666 $ 491,446 $ 461,850
Interest and other expense................. 162,503 338,776 380,180
---------- ---------- ----------
Income before income taxes and equity in
undistributed earnings
of subsidiary............................. 866,163 152,670 81,670
Applicable income tax benefit.............. (28,963) (51,007) (58,799)
---------- ---------- ----------
Income before equity in undistributed
earnings of subsidiary.................... 895,126 203,677 140,469
Equity in undistributed earnings of
subsidiary................................ 923,522 1,246,371 1,171,264
---------- ---------- ----------
Net income................................. $1,818,648 $1,450,048 $1,311,733
========== ========== ==========
</TABLE>
55
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 1,818,648 $ 1,450,048 $ 1,311,733
Adjustments to reconcile net income to
net cash provided by
(used in) operating activities--
Equity in undistributed earnings of
subsidiary......................... (923,522) (1,246,371) (1,171,264)
Amortization of discount on
debenture.......................... 15,860 205,983 202,566
Net accretion on investment
securities......................... (34,904) (44,134) (98,254)
Net increase (decrease) in accrued
expenses and other liabilities..... 12,702 (59,453) (210,471)
Net decrease (increase) in other
assets............................. 32,692 (12,459) 39,164
----------- ----------- -----------
Net cash provided by operating
activities....................... 921,476 293,614 73,474
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment
securities available-for-sale ....... 8,825,000 3,600,000 7,700,000
Purchase of investment securities
available-for-sale................... (5,876,675) (3,523,036) (7,503,613)
----------- ----------- -----------
Net cash provided by investing
activities....................... 2,948,325 76,964 196,387
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Senior Debenture......... (3,000,000) -- --
Purchase of common stock for treasury. (448,750) -- --
Dividends paid ....................... (444,597) (365,762) (227,023)
----------- ----------- -----------
Net cash used in financing
activities....................... (3,893,347) (365,762) (227,023)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................ (23,546) 4,816 42,838
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR................................... 102,773 97,957 55,119
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR.. $ 79,227 $ 102,773 $ 97,957
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid......................... $ 82,369 $ 201,450 $ 218,100
=========== =========== ===========
</TABLE>
(15) Regulatory Capital
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to quantitative
judgements by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts of ratios (set
forth in the table below) of total Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). As of December 31, 1999, the Company
and the Bank met all capital adequacy requirements to which
56
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
they are subject and are considered "well capitalized" by the federal banking
agencies. The March 31, 1999 Federal Deposit Insurance Corporation examination
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. There are no conditions or events that management
believes have changed the Bank's category.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
----------------- ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
The Company:
Total capital (to
risk weighted
assets)............. $16,843,000 17.97% $7,497,920 8.00% -- --
Tier I capital (to
risk weighted
assets)............. 15,667,000 16.72 3,748,960 4.00 -- --
Tier I capital (to
average assets)..... 15,667,000 10.71 4,386,930 3.00 -- --
The Bank:
Total capital (to
risk weighted
assets)............. $16,105,000 17.30% $7,446,720 8.00% $9,308,400 10.00%
Tier I capital (to
risk weighted
assets)............. 14,937,000 16.05 3,723,360 4.00 5,585,040 6.00
Tier I capital (to
average assets)..... 14,937,000 10.26 4,367,130 3.00 7,278,550 5.00
As of December 31,
1998
The Company:
Total capital (to
risk weighted
assets)............. $15,814,000 18.49% $6,842,320 8.00% -- --
Tier I capital (to
risk weighted
assets)............. 14,742,000 17.24 3,421,160 4.00 -- --
Tier I capital (to
average assets)..... 14,742,000 10.56 4,189,170 3.00 -- --
The Bank:
Total capital (to
risk weighted
assets)............. $15,070,000 17.87% $6,748,240 8.00% $8,435,300 10.00%
Tier I capital (to
risk weighted
assets)............. 14,013,000 16.61 3,374,120 4.00 5,061,180 6.00
Tier I capital (to
average assets)..... 14,013,000 10.31 4,078,020 3.00 6,796,700 5.00
</TABLE>
(16) Business Segments
The Company's chief operating decision maker is the Chairman, President and
Chief Executive Officer of the Company. The Company has identified its
reportable operating business segment as Community Banking based on how the
business is strategically managed.
The Company's community banking business segment consists of commercial and
retail banking. The community banking business segment is managed as a single
strategic unit which derives its revenues from a wide range of banking
services, including investing and lending activities and acceptance of demand,
savings and time deposits. There is no major customer and the Company operates
within a single geographic area (southeastern New England).
57
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1999, 1998 and 1997
Non reportable operating segments of the Company's operations which do not
have similar characteristics to the community banking operations and do not
meet the quantitative thresholds requiring disclosure, are included in the
Other category in the disclosure of business segments below. These non
reportable segments include the Parent Company (Note 14).
The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant account policies. The
consolidation adjustments reflect certain eliminations of intersegment
revenue, cash and the Parent Company investments in subsidiary.
Reportable segment specific information and reconciliation to consolidated
financial information is as follows:
<TABLE>
<CAPTION>
Community Other Adjustments
Banking Other and Eliminations Consolidated
------------ ----------- ----------------- ------------
<S> <C> <C> <C> <C>
December 31, 1999
Investment Securities. $ 36,045,873 $15,330,161 $(14,827,906) $ 36,548,128
Net Loans............. 93,382,709 -- -- 93,382,709
Total Assets.......... 144,163,948 15,491,411 (14,873,704) 144,781,655
Total Deposits........ 104,634,303 -- (45,798) 104,588,505
Total Liabilities..... 129,336,042 9,771 (45,798) 129,300,015
Net Interest Income... 6,255,500 944,163 (954,161) 6,245,502
Provision for Loan
Losses............... 275,000 -- -- 275,000
Total Noninterest
Income............... 826,075 923,522 (923,522) 826,075
Total Noninterest
Expense.............. 3,838,893 78,000 -- 3,916,893
Net Income............ 1,877,683 1,818,648 (1,877,683) 1,818,648
December 31, 1998
Investment Securities. $ 43,350,685 $17,598,692 $(14,128,694) $ 46,820,683
Net Loans............. 85,008,787 -- -- 85,008,787
Total Assets.......... 138,314,148 17,816,180 (14,211,398) 141,918,930
Total Deposits........ 104,454,631 -- (82,703) 104,371,928
Total Liabilities..... 124,185,453 3,002,938 (82,703) 127,105,688
Net Interest Income... 5,410,294 238,670 (302,697) 5,346,267
Provision for Loan
Losses............... 250,000 -- -- 250,000
Total Noninterest
Income............... 616,005 1,246,371 (1,246,371) 616,005
Total Noninterest
Expense.............. 3,382,231 86,000 -- 3,468,231
Net Income............ 1,549,068 1,450,048 (1,549,068) 1,450,048
December 31, 1997
Investment Securities. $ 35,489,009 $16,461,708 $(12,884,343) $ 39,066,374
Net Loans............. 76,083,150 -- -- 76,083,150
Total Assets.......... 123,658,196 16,661,921 (13,010,250) 127,309,867
Total Deposits........ 99,352,715 -- (62,844) 99,289,871
Total Liabilities..... 110,773,853 2,949,288 (125,907) 113,597,234
Net Interest Income... 5,266,449 191,606 (252,249) 5,165,806
Provision for Loan
Losses............... 250,000 -- -- 250,000
Total Noninterest
Income............... 465,397 1,171,264 (1,171,264) 465,397
Total Noninterest
Expense.............. 3,231,333 109,936 -- 3,341,269
Net Income............ 1,423,513 1,311,733 (1,423,513) 1,311,733
</TABLE>
58
<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, 1999 and 1998
Consolidated Statements of Income for the years ended December 31, 1999,
1998, and 1997
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(3) Financial Statement Schedules
The Financial Data Schedule is included as Exhibit 27.1 to this Form 10-K
and certain other schedules are omitted because they are not applicable or
because the information is provided in Part II, Item 8, "Financial Statements
and Supplementary Data".
(4) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
59
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Reference Number Description
--------- ------- -----------
<C> <C> <S>
--Amended and Restated Articles of Incorporation of the
(1) 3.1 Registrant.
(1) 3.2 --By-Laws of Registrant.
--Specimen Certificate for Shares of the Registrant's
(1) 4.1 Common Stock, $ 1.00 par value.
(1) 10.1 --Lease Agreement between the Bank and Angelo Archetto
regarding Cranston, Rhode Island property dated as of
May 14, 1974.
(1) 10.2 --Acquisition Agreement between the Registrant, Maurice C.
Paradis, receiver for Chariho-Exeter Credit Union, and
the Rhode Island Depositors Economic Protection
Corporation (DEPCO)
dated as of May 1, 1992.
--Senior Debenture issued by Registrant to DEPCO dated as
(1) 10.3 of May 1, 1992.
(4) 10.4 --Second amended and Restated Employment Agreement between
Registrant and Patrick J. Shanahan, Jr. dated as of
February 8, 1999.
(1) 10.6 --Supplemental Executive Retirement Plan.
(1) 10.7 --Financial Institutions Retirement Fund Defined Pension
Plan--Summary Plan Description.
--Form of Deferred Compensation Agreement regarding
(1) 10.8 Directors' Fees.
--Financial Institutions Thrift Plan--Summary Plan
(2) 10.9 Description.
(2) 10.10 --Lease Agreement(s) between Bank and Wal-Mart Stores,
Inc., dated as of January 27, 1997.
(3) 10.11 --Service Agreement dated as of April 1, 1997 by and
between First Bank and Trust Company and BISYS, Inc.
(Confidential treatment granted for certain portions of
the Exhibit).
(1) 21.1 --Subsidiaries of Registrant.
(5) 27.1 --Financial Data Schedule
</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) Incorporated by reference to the Registrant's Annual report on Form 10-K
for the year ended December 31, 1998.
(5) Filed herewith.
60
<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 13, 2000
Pursuant to the requirements of the Securities Act of 1934, as amended,
this Report has been signed below by the following persons in the capacities
and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Patrick J. Shanahan, Jr. Chairman, President and March 13, 2000
______________________________________ Chief Executive Officer;
Patrick J. Shanahan, Jr. Director
/s/ Gary R. Alger Director March 13, 2000
______________________________________
Gary R. Alger
Director March 13, 2000
______________________________________
Raymond F. Bernardo
/s/ Artin H. Coloian Director March 13, 2000
______________________________________
Artin H. Coloian
/s/ Joseph A. Keough Director March 13, 2000
______________________________________
Joseph A. Keough
/s/ Dr. Peter L. Mathieu, Jr. Director March 13, 2000
______________________________________
Dr. Peter L. Mathieu, Jr.
/s/ Joseph V. Mega Director March 13, 2000
______________________________________
Joseph V. Mega
/s/ John Nazarian, Ph.D. Director March 13, 2000
______________________________________
John Nazarian, Ph.D.
/s/ Fred J. Simon Director March 13, 2000
______________________________________
Fred J. Simon
Director March 13, 2000
______________________________________
William P. Shields
/s/ John A. Macomber Vice President, Treasurer March 13, 2000
______________________________________ and
John A. Macomber Chief Financial Officer
</TABLE>
61
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,441,190
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,802,865
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,857,124
<INVESTMENTS-CARRYING> 15,691,004
<INVESTMENTS-MARKET> 15,450,453
<LOANS> 94,939,114
<ALLOWANCE> 1,556,405
<TOTAL-ASSETS> 144,781,655
<DEPOSITS> 104,588,505
<SHORT-TERM> 9,411,111
<LIABILITIES-OTHER> 1,689,999
<LONG-TERM> 13,610,400
0
0
<COMMON> 1,328,041
<OTHER-SE> 14,153,599
<TOTAL-LIABILITIES-AND-EQUITY> 144,781,655
<INTEREST-LOAN> 8,687,625
<INTEREST-INVEST> 2,491,945
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,179,570
<INTEREST-DEPOSIT> 3,732,477
<INTEREST-EXPENSE> 4,934,068
<INTEREST-INCOME-NET> 6,245,502
<LOAN-LOSSES> 275,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,916,893
<INCOME-PRETAX> 2,879,684
<INCOME-PRE-EXTRAORDINARY> 2,879,684
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,818,648
<EPS-BASIC> 1.47
<EPS-DILUTED> 1.47
<YIELD-ACTUAL> 4.49
<LOANS-NON> 180,571
<LOANS-PAST> 583,479
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,630,204
<ALLOWANCE-OPEN> 1,287,058
<CHARGE-OFFS> 53,634
<RECOVERIES> 47,981
<ALLOWANCE-CLOSE> 1,556,405
<ALLOWANCE-DOMESTIC> 1,556,405
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
