<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998 Commission file number 0-27878
FIRST FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
RHODE ISLAND 05-0391383
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
180 WASHINGTON STREET, PROVIDENCE, RHODE ISLAND 02903
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (401) 421-3600
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. X Yes No
--- ---
At July 31, 1998, there were 1,328,041 shares of the Company's $1.00 par value
stock issued, with 1,261,241 shares outstanding.
<PAGE>
FIRST FINANCIAL CORP.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements............................................ 1
Consolidated Balance Sheets - June 30, 1998 and
December 31, 1997................................................. 1
Consolidated Statements of Income - Three months and
six months ended June 30, 1998 and 1997........................... 2
Consolidated Statements of Stockholders' Equity -
Six months ended June 30, 1998 and year ended
December 31, 1997................................................. 3
Consolidated Statements of Cash Flows - Six months
ended June 30, 1998 and 1997...................................... 4
Notes to Consolidated Financial Statements - June 30, 1998.......... 5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 6
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................... 12
Item 2 - Changes in Securities........................................... 12
Item 3 - Defaults Upon Senior Securities................................. 12
Item 4 - Submission of Matters to a Vote of Security Holders............. 13
Item 5 - Other Information............................................... 13
Item 6 - Exhibits and Reports on Form 8-K................................ 13
SIGNATURES............................................................... 14
EXHIBITS
Computation of Per Share Earnings - Exhibit 11........................... 15
Financial Data Schedule - Exhibit 27..................................... 16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C>
CASH AND DUE FROM BANKS...................................................... $ 2,148,272 $ 2,837,014
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL. 992,123 3,878,000
LOANS HELD FOR SALE.......................................................... 160,000 380,000
INVESTMENT SECURITIES:
Held-to-maturity (market value: $12,497,242 and $12,462,016)............... 12,518,639 12,467,740
Available-for-sale (amortized cost: $36,137,562 and $26,403,000)........... 36,340,938 26,598,634
------------ ------------
Total investment securities............................................ 48,859,577 39,066,374
------------ ------------
FEDERAL HOME LOAN BANK STOCK................................................. 447,700 447,700
LOANS:
Commercial................................................................. 9,663,876 6,418,373
Commercial real estate..................................................... 46,807,575 45,976,986
Residential real estate.................................................... 19,160,635 21,464,343
Home equity lines of credit................................................ 3,488,681 2,838,377
Consumer................................................................... 1,263,801 1,056,791
------------ ------------
80,384,568 77,754,870
Less - Unearned discount................................................... 112,677 75,107
Allowance for possible loan losses......................................... 1,400,995 1,596,613
------------ ------------
Net loans.............................................................. 78,870,896 76,083,150
------------ ------------
OTHER REAL ESTATE OWNED...................................................... 529,021 782,190
PREMISES AND EQUIPMENT, net.................................................. 2,393,901 2,458,550
OTHER ASSETS................................................................. 1,498,670 1,376,889
------------ ------------
TOTAL ASSETS................................................................. $135,900,160 $127,309,867
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand...................................................................... $ 12,947,045 $ 13,198,956
Savings and money market accounts........................................... 21,317,622 23,371,357
Time deposits............................................................... 65,793,445 62,719,558
------------ ------------
Total deposits.......................................................... 100,058,112 99,289,871
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE............................... 15,088,691 10,105,000
FEDERAL HOME LOAN BANK ADVANCES.............................................. 2,335,933 --
ACCRUED EXPENSES AND OTHER LIABILITIES....................................... 1,187,112 1,255,823
SENIOR DEBENTURE....................................................... 2,973,686 2,946,540
------------ ------------
TOTAL LIABILITIES......................................................... 121,643,534 113,597,234
------------ ------------
STOCKHOLDERS' EQUITY:
Common Stock, $1 par value
Authorized - 5,000,000 shares
Issued - 1,328,041 shares................................................ 1,328,041 1,328,041
Surplus..................................................................... 4,431,380 4,431,380
Retained earnings........................................................... 8,522,139 7,982,792
Unrealized gain on securities available-for-sale, net of taxes.............. 122,026 117,380
------------ ------------
14,403,586 13,859,593
Less - Treasury stock, at cost, 66,800 shares............................... 146,960 146,960
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................................................... 14,256,626 13,712,633
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $135,900,160 $127,309,867
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ----------------------
1998 1997 1998 1997
----------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................................ $3,811,188 $3,612,979 $1,923,015 $1,843,020
Interest on investment securities-
U.S. Government and agency obligations........................ 909,114 779,315 508,931 382,426
Collateralized mortgage obligations........................... 15,676 57,372 7,949 26,328
Mortgage backed securities.................................... 273,423 397,199 137,703 194,645
Marketable equity securities and other........................ 37,283 16,129 15,290 9,984
Interest on cash equivalents...................................... 132,478 69,618 72,316 38,810
---------- ---------- ---------- ----------
Total interest income......................................... 5,179,162 4,932,612 2,665,204 2,495,213
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits.............................................. 2,070,580 1,887,693 1,049,446 949,143
Interest on repurchase agreements................................. 353,348 325,262 196,496 165,500
Interest on advances.............................................. 39,267 -- 32,380 --
Interest on debenture............................................. 129,147 131,789 64,466 66,743
---------- ---------- ---------- ----------
Total interest expense......................................... 2,592,342 2,344,744 1,342,788 1,181,386
Net interest income............................................ ---------- ---------- ---------- ----------
2,586,820 2,587,868 1,322,416 1,313,827
PROVISION FOR POSSIBLE LOAN LOSSES................................. 125,000 150,000 75,000 75,000
---------- ---------- ---------- ----------
Net interest income after provision for possible
loan losses................................................. 2,461,820 2,437,868 1,247,416 1,238,827
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposits....................................... 138,954 160,384 72,846 77,329
Gain on sale of securities........................................ -- -- -- --
Gain on loan sales................................................ 71,837 15,823 36,132 15,823
Other............................................................. 97,218 60,671 45,148 20,328
---------- ---------- ---------- ----------
Total noninterest income....................................... 308,009 236,878 154,126 113,480
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits................................... 893,652 878,362 445,350 450,242
Occupancy expense................................................ 198,785 185,107 98,860 96,633
Equipment expense................................................ 132,148 99,419 68,074 49,226
Other real estate owned net losses and expenses.................. 34,613 24,044 32,005 6,924
Computer services................................................ 101,928 84,170 48,690 42,956
Deposit insurance assessments.................................... 6,000 4,870 3,004 2,435
Other operating expenses......................................... 337,455 354,208 168,311 177,138
---------- ---------- ---------- ----------
Total noninterest expense...................................... 1,704,581 1,630,180 864,294 825,554
---------- ---------- ---------- ----------
Income before provision for income taxes....................... 1,065,248 1,044,566 537,248 526,753
PROVISION FOR INCOME TAXES......................................... 374,553 377,903 183,371 190,457
---------- ---------- ---------- ----------
NET INCOME......................................................... $ 690,695 $ 666,663 $ 353,877 $ 336,296
========== ========== ========== ==========
Earnings per share:
Basic.......................................................... $ 0.55 $ 0.53 $ 0.28 $ 0.27
========== ========== ========== ==========
Diluted........................................................ $ 0.55 $ 0.53 $ 0.28 $ 0.27
========== ========== ========== ==========
Weighted average shares outstanding-
Basic and Diluted.............................................. 1,261,241 1,261,241 1,261,241 1,261,241
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
SECURITIES
AVAILABLE
FOR SALE,
COMMON RETAINED NET OF
STOCK SURPLUS EARNINGS TAXES
------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996.............. $1,328,041 $4,431,380 $6,923,308 $ 34,132
Net income.............................. -- -- 1,311,733 --
Change in net unrealized gain...........
on securities available-for-sale..... -- -- -- 83,248
Comprehensive income.................... -- -- -- --
Dividends declared ($.20 per share)..... -- -- (252,249) --
---------- ---------- ---------- --------
Balance, December 31, 1997.............. 1,328,041 4,431,380 7,982,792 117,380
Net income.............................. -- -- 690,695 --
Change in net unrealized gain
on securities available-for-sale..... -- -- -- 4,646
Comprehensive income.................... -- -- -- --
Dividends declared ($.12 per share...... -- -- (151,348) --
Balance, June 30, 1998.................. $1,328,041 $4,431,380 $8,522,139 $122,026
========== ========== ========== ========
<CAPTION>
TOTAL
TREASURY STOCKHOLDERS' COMPREHENSIVE
STOCK EQUITY INCOME
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1996.............. $ (146,960) $12,569,901
Net income.............................. -- 1,311,733 $ 1,311,733
Change in net unrealized gain
on securities available-for-sale..... -- 83,248 83,248
-----------
Comprehensive income.................... -- -- $ 1,394,981
===========
Dividends declared ($.20 per share)..... -- (252,249)
---------- -----------
Balance, December 31, 1997.............. (146,960) 13,712,633
Net income.............................. -- 690,695 $ 690,695
Change in net unrealized gain
on securities available-for-sale..... -- 4,646 4,646
-----------
Comprehensive income.................... -- -- $ 695,341
===========
Dividends declared ($.12 per share...... -- (151,348)
---------- -----------
Balance, June 30, 1998.................. $ (146,960) $14,256,626
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. $ 690,695 $ 666,663
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses.................................................... 125,000 150,000
Depreciation and amortization......................................................... 141,739 106,594
Amortization of discount on debenture................................................. 102,674 100,736
Net accretion on investment securities held-to-maturity............................... (3,500) (6,265)
Net accretion on investment securities available-for-sale............................. (100,317) (42,559)
Losses (gains) on sale of OREO........................................................ 18,952 (2,017)
Gains on sales of loans............................................................... (71,837) (15,823)
Proceeds from sales of loans.......................................................... 1,020,210 399,908
Loans originated for sale............................................................. (728,373) (224,085)
Net increase (decrease) in unearned discount.......................................... 37,570 (2,589)
Net (increase) in other assets........................................................ (121,781) (262,699)
Net (decrease) increase in deferred loan fees......................................... (3,529) 31,199
Net (decrease) in accrued expenses and other liabilities.............................. (159,947) (256,120)
------------ ------------
Net cash provided by operating activities............................................ 947,556 642,943
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Federal Home Loan Bank stock................................................ -- (99,600)
Proceeds from maturities of investment securities
held-to-maturity...................................................................... 8,895,095 4,121,845
Proceeds from maturities of investment securities
available-for-sale.................................................................... 43,539,739 14,931,609
Purchase of investment securities held-to-maturity...................................... (8,942,494) (2,000,000)
Purchase of investment securities available-for-sale.................................... (53,173,983) (12,382,247)
Net increase in loans................................................................... (3,056,787) (3,660,971)
Purchase of premises and equipment...................................................... (77,090) (652,424)
Sales of OREO........................................................................... 344,217 301,434
------------ ------------
Net cash (used in) provided by investing activities................................... (12,471,303) 559,646
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand accounts............................................. (251,911) 101,114
Net (decrease) increase in savings and money market accounts............................ (2,053,735) 302,026
Net increase (decrease) in time deposits................................................ 3,073,887 (815,846)
Net increase in reverse repurchase agreements........................................... 4,983,691 --
Net increase in Federal Home Loan Bank advances......................................... 2,335,933 --
Dividends paid.......................................................................... (138,737) (100,899)
------------ ------------
Net cash provided by (used in) financing activities................................... 7,949,128 (513,605)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................................................................. (3,574,619) 688,984
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................................................................. 6,715,014 4,364,713
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 3,140,395 $ 5,053,697
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid........................................................................... $ 2,592,349 $ 2,286,495
============ ============
Income taxes paid....................................................................... $ 599,500 $ 515,687
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfer of loans to OREO............................................................... $ 110,000 $ 161,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 1998
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation of
the financial statements, primarily consisting of normal recurring
adjustments, have been included. Operating results for the three months
and six months ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998, or any
other interim period.
For further information refer to the consolidated financial statements,
notes and other information included in the Company's annual report and
Form 10-K for the period ended December 31, 1997, filed with the Securities
and Exchange Commission.
(2) DIVIDEND DECLARATION
On May 18, 1998 the Company declared dividends of $75,675 or $.06 per share
to all common stockholders of record on June 15, 1998, payable on July 1,
1998.
(3) RECENT DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS No. 130 established standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements displayed with the same prominence as other financial
statements. SFAS No. 130 became effective for both interim and annual
periods beginning after December 15, 1997, with retroactive application to
prior periods presented. The Company has chosen to disclose comprehensive
income, which consists of net income and changes in unrealized gains and
losses on securities available-for-sale net of income taxes in the
Consolidated Statements of Stockholders' Equity.
The following table presents comprehensive income for the three months and
six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income $690,695 $666,663 $353,877 $336,296
Change in net unrealized gain (loss) on
securities available-for-sale 4,646 21,592 (21,304) 94,992
-------- -------- -------- --------
Comprehensive income $695,341 $688,255 $332,573 $431,288
======== ======== ======== ========
</TABLE>
5
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 FDIC up to applicable limits.
The Bank offers a variety of consumer financial products and services
designed to satisfy the deposit and loan needs of its retail customers.
The Bank's retail products include interest-bearing and noninterest-bearing
checking accounts, money market accounts, passbook and statement savings
accounts, club accounts, and short-term and long-term certificates of
deposit. The Bank also offers customary check collection services, wire
transfers, safe deposit box rentals, and automated teller machine (ATM)
cards and services. Loan products include commercial, commercial mortgage,
residential mortgage, construction, home equity and a variety of consumer
loans.
The Bank's products and services are delivered through its four branch
network system. The Bank's main office and branch are located in
Providence, Rhode Island with branches in Cranston, Richmond and its newest
branch in North Kingstown, Rhode Island.
The Company's results of operations 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 possible loan
losses, occupancy costs and, when necessary, expenses related to OREO and
to the administration of non-performing and other classified assets.
SUMMARY
- -------
For the three months ended June 30, 1998, the Company reported net income
of $353,877 compared to net income of $336,296 for the three months ended
June 30, 1997, or an increase of 5.2%. Basic and diluted net income per
share were $.28 for the quarter ended June 30, 1998, compared to $.27 per
share for the same three month period of the prior year. Net income for the
six months ended June 30, 1998, amounted to $690,695 compared to net income
of $666,663 for the six months ended June 30, 1997. Basic and diluted net
income per share for the six months ended June 30, 1998, were $.55 compared
to $.53 per share for the six months ended June 30, 1997.
The Company's improved earnings performance resulted from, (i) an increase
in earning assets, offset by a reduction in net interest spreads and net
interest margins; (ii) continued improvement in asset quality reflected by
decreases in nonperforming loans and nonperforming assets; (iii) an
increase in noninterest income primarily due to an increase in gain on loan
sales; and (iv) only a modest increase in noninterest expense. The Company
was able to absorb the start-up costs of its newest branch located as an
in-store branch in the North Kingstown Wal-Mart Super Store which opened in
June 1997. The Company also absorbed the fixed charges associated with the
technology-related capital expenditures incurred in the second half of
1997.
Total assets increased $8,590,293 or 6.7% to $135,900,160 at June 30, 1998
from $127,309,867 at December 31, 1997. The loan portfolio, net of unearned
discount, increased $2,592,128 or 3.3% to $80,271,891 at June 30, 1998 from
6
<PAGE>
$77,679,763 at December 31, 1997. Investment securities increased
$9,793,203 to $48,859,577 at June 30, 1998 from $39,066,374 at December 31,
1997, while cash and cash equivalents decreased $3,574,619 to $3,140,395 at
June 30, 1998 from $6,715,014 at December 31, 1997. The increase in the
Company's total assets was funded primarily from, (i) a $4,983,691 increase
in securities sold under agreements to repurchase to $15,088,691 at June
30, 1998 from $10,105,000 at December 31, 1997; (ii) a $2,335,933 increase
in Federal Home Loan Bank advances and; (iii) an increase in deposits of
$768,241 to $100,058,112 at June 30, 1998 from $99,289,871 at December 31,
1997.
FINANCIAL CONDITION
ASSET QUALITY
- -------------
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 acquired loans and acquired allowance for possible
loan losses associated with the 1992 acquisition of certain assets and the
assumption of certain liabilities of the former Chariho-Exeter Credit
Union:
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ -------------
1998 1997 1997
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonperforming loans................................... $ 248 $ 339 $ 17
Other real estate owned............................... $ 529 $ 537 $ 782
Total nonperforming assets............................ $ 777 $ 876 $ 799
Loans 30-89 days delinquent........................... $ 603 $ 405 $ 490
Nonperforming assets to total assets.................. 0.57% 0.75% 0.65%
Nonperforming loans to total loans.................... 0.32% 0.48% 0.02%
Net loan charge-offs to average loans................. 0.06% 0.01% 0.34%
Allowance for possible loan losses to total loans..... 1.67% 1.89% 1.64%
Allowance for possible loan losses to nonperforming
loans (multiple).................................... 5.20X 3.97X 73.33X
</TABLE>
The following represents the activity in the allowance for possible loan
losses for the three months and six months ended June 30, 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Bank Reserve:
Balance at beginning of period........................ $1,208,322 $1,199,617 $1,259,180 $1,267,506
Provision............................................ 125,000 150,000 75,000 75,000
Loan charge-offs..................................... (51,223) (26,829) (49,934) (9,699)
Recoveries........................................... 8,998 22,689 6,851 12,670
---------- ---------- ---------- ----------
Balance at end of period.............................. 1,291,097 1,345,477 1,291,097 1,345,477
---------- ---------- ---------- ----------
Acquired Reserve:
Balance at beginning of period........................ 388,291 742,840 168,966 712,202
Loan charge-offs..................................... (272,188) (169,695) (55,688) (141,041)
Recoveries (Administrative Costs).................... (6,205) (4,603) (3,380) (2,619)
---------- ---------- ----------
Balance at end of period.............................. 109,898 568,542 109,898 568,542
---------- ---------- ---------- ----------
Total Reserve......................................... $1,400,995 $1,914,019 $1,400,995 $1,914,019
========== ========== ========== ==========
</TABLE>
The Company continually reviews its delinquency position, underwriting and
appraisal procedures, charge-off experience and current real estate market
conditions with respect to its entire loan portfolio. While management believes
it uses the best information available in establishing the allowance for
possible loan losses, future adjustments may be necessary if economic conditions
differ substantially from the assumptions used in making the evaluation.
7
<PAGE>
As set forth in the Chariho Acquisition Agreement, the remaining balance, if
any, in the acquired reserve at May 1, 1999, less an amount equal to 1% of the
remaining acquired loans, must be refunded to the State of Rhode Island
Depositors Economic Protection Corporation ("DEPCO"). Conversely, in the event
the reserve is inadequate, additional loan charge-offs will reduce the amount
owed on the debenture issued to DEPCO in connection with the acquisition. At
June 30, 1998, the remaining balance of acquired loans was $3,083,886.
DEPOSITS AND OTHER BORROWINGS
- -----------------------------
Total deposits increased $768,241 during the six months ended June 30, 1998,
from $99,289,871 at December 31, 1997, to $100,058,112 at June 30, 1998. During
the six months ended June 30, 1998, demand, savings and money market deposits
decreased $2,305,646 while time deposits increased $3,073,887. The shift in
deposits from passbook and statement savings accounts to short term (one year or
less) time deposits is consistent with the Company's experience over the past
several years and is reflective of depositors' financial astuteness in the
marketplace.
Securities sold under agreements to repurchase increased $4,983,691 during the
six months ended June 30, 1998 to $15,088,691 from $10,105,000 at December 31,
1997. This increase is attributable to a single municipal customer and is
considered volatile.
During the six months ended June 30, 1998, the Company took down advances for
the first time from the Federal Home Loan Bank of Boston. The purpose of these
borrowings was to match the funding for selected loans. At June 30, 1998,
outstanding advances were $2,335,933.
8
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
- -------------------
Net interest income (the difference between interest earned on loans and
investments and interest paid on deposits and other borrowings) was $2,586,820
for the six months ended June 30, 1998, compared to $2,587,868 for the six
months ended June 30, 1997. The virtually flat reporting of net interest income
was the result of an increase in interest earning assets offset by a decrease in
net interest spreads.
The table below shows the average balance sheet, the interest earned and paid on
interest-earning assets and interest-bearing liabilities, and the resulting net
interest spread and margin for the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------
1998 1997
------------------------------ ---------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- -------- --------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST - EARNING ASSETS:
Loans............................................. $ 78,945 $ 3,811 9.64% $ 74,249 $3,613 9.73%
Investment securities taxable - AFS............... 30,849 886 5.74 26,810 865 6.45
Investment securities taxable - HTM............... 11,300 331 5.86 12,597 371 5.89
Securities purchased under agreements to
resell......................................... 5,364 132 4.92 2,828 70 4.95
Federal Home Loan Bank Stock and other............ 716 19 5.31 540 14 5.19
-------- -------- -------- -------- ------ ----
TOTAL INTEREST-EARNING ASSETS........................ 127,174 5,179 8.14 117,024 4,933 8.43
-------- -------- ------ ----
NONINTEREST-EARNING ASSETS:
Cash and due from banks.......................... 2,224 2,047
Premises and equipment........................... 2,446 1,868
Other real estate owned.......................... 677 731
Allowance for possible loan losses............... (1,497) (1,982)
Other assets..................................... 1,402 1,038
-------- --------
TOTAL NONINTEREST-EARNING ASSETS..................... 5, 252 3,702
-------- --------
TOTAL ASSETS......................................... $132,426 $120,726
======== ========
INTEREST - BEARING LIABILITIES:
Deposits:
Interest bearing demand and NOW
deposits.............................. $ 3,742 36 1.92% $ 3,144 30 1.91%
Savings deposits........................ 16,780 219 2.61 18,093 237 2.62
Money market deposits................... 1,224 15 2.45 1,447 17 2.35
Time deposits........................... 65,243 1,801 5.52 58,905 1,604 5.45
Securities sold under agreements to
repurchase............................... 12,773 353 5.53 10,778 325 6.03
Federal Home Loan Bank Advances................. 1,250 39 6.24 -- -- --
Senior debenture................................ 2,983 129 8.65 2,932 132 9.00
-------- -------- -------- -------- ------ ----
TOTAL INTEREST-BEARING LIABILITIES................... 103,995 2,592 4.98 95,299 2,345 4.92
-------- -------- ------ ----
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits..................... 13,178 11,807
Other liabilities................................ 1,309 825
-------- --------
TOTAL NONINTEREST-BEARING LIABILITIES................ 14,487 12,632
STOCKHOLDERS' EQUITY................................. 13,944 12,795
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $132,426 $120,726
======== ========
NET INTEREST INCOME.................................. $ 2,587 $2,588
======== ======
NET INTEREST SPREAD.................................. 3.16% 3.51%
======== ====
NET INTEREST MARGIN.................................. 4.07% 4.42%
======== ====
</TABLE>
9
<PAGE>
Total interest income for the three months ended June 30, 1998 was $2,665,204,
compared to $2,495,213 for the same three month period of the prior year. This
increase of $169,991 was primarily the result of a $15 million increase in
quarterly average interest-earning assets, offset by a 46 basis point reduction
in yield to 8.07% from 8.53%. The increase in earning assets was
disproportionate in that quarterly average loans as a percentage of quarterly
average earning assets decreased to 60.6% for the three months ended June 30,
1998, compared to 64.0% for the three months ended June 30, 1997.
Consequently, the majority of earning asset growth occurred within the lower
yielding investment portfolio. This growth, coupled with a lower interest rate
environment, accounted for the overall decline in earning asset yield. Total
interest income for the six months ended June 30, 1998, was $5,179,162, compared
to $4,932,612 for the six months ended June 30, 1997. Despite a $10 million
increase in average earning assets, the interest-earning asset yield declined 29
basis points to 8.14% from 8.43%. The decline in yield was a reflection of a
somewhat lower interest rate environment as well as a shift in earning asset mix
from the loan portfolio to the investment portfolio. During the three months
and six months ended June 30, 1998, the Company sought wholesale funding sources
for short-term investing or match funding loan production. Although this
strategy compressed spreads and margins; net income, earnings per share, and
return on equity showed improvement.
Total interest expense for the three months ended June 30, 1998 was $1,342,788,
compared to $1,181,386 for the same period of the prior year. This increase of
$161,402 or 13.7% was primarily the result of a $13.7 million increase in
quarterly average interest-bearing liabilities. Of this growth, approximately
$7 million came from wholesale funding sources. The other funding source
occurred within certificates of deposit which grew an average of $6.7 million.
Despite this growth, the Company's cost of funds remained flat at 4.97% during
the second quarter of 1998 and 1997. For the six months ended June 30, 1998,
total interest expense was $2,592,342 as compared to $2,344,744 for the same six
month period of 1997. This increase was the result of an $8.7 million increase
in interest-bearing liabilities along with a 6 basis point increase in cost of
funds to 4.98% from 4.92%. Despite a lower interest rate environment, growth in
higher cost time deposits, and utilization of wholesale funding sources for
arbitrage purposes and match funding of loans drove up the Company's cost of
funds.
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The provision for possible loan losses totaled $75,000 for the three months
ended June 30, 1998 and 1997. For the six months ended June 30, 1998 and 1997,
the provision for possible loan losses amounted to $125,000 and $150,000,
respectively. The decrease in the provision for the six months ended June 30,
1998, as compared to the same period of the prior year is the result of
improvement in asset quality reflected by decreases in nonperforming loans and
nonperforming assets.
NONINTEREST INCOME
- ------------------
Total noninterest income increased $40,646 to $154,126 for the three months
ended June 30, 1998, from $113,480 for the three months ended June 30, 1997.
For the six months ended June 30, 1998 and 1997, noninterest income increased
$71,131 to $308,009 from $236,878. For both the three month and six month
reporting period, the increases were attributable to an increase in gains on the
sale of the guaranteed portion of Small Business Administration ("SBA") loans
and the imposition of ATM surcharge fees for non-customer ATM usage.
NONINTEREST EXPENSE
- ---------------------
Total noninterest expense amounted to $864,294 and $825,554 for the three months
ended June 30, 1998 and 1997, respectively. The increase of $38,740 or 4.7% was
primarily the result of occupancy costs associated with the North Kingstown
branch which opened in June 1997, depreciation charges for the technology-
related capital expenditures which occurred in the second half of 1997, and
increases in computer servicing costs. Total noninterest expense increased
$74,401 or 4.6% to $1,704,581 for the six months ended June 30, 1998, from
$1,630,180 for the six months ended June 30, 1997. This increase was largely
due to operating the North Kingstown branch of approximately $89,000;
technology-related costs and charges of nearly $51,000; less savings of $70,000
associated with the repeal of the state tax on deposits and a reduction of
pension costs.
10
<PAGE>
INCOME TAXES
- ------------
Income taxes for the three months ended June 30, 1998, were $183,371 or 34.1%
of pretax income, compared to $190,457 or 36.2% of pretax income for the three
months ended June 30, 1997. For the six months ended June 30, 1998 and 1997,
income taxes were $374,453 and $377,903, respectively, or 35.2% and 36.2% of
pretax income, respectively. The lower effective tax rates in 1998 are primarily
due to proportionately more Bank income favorably taxed for state income taxes.
CAPITAL ADEQUACY
- ----------------
The FDIC and the Federal Reserve Board have established guidelines with respect
to the maintenance of appropriate levels of capital by both the Bank and the
Company.
Set forth below is a summary of FDIC and Federal Reserve Board capital
requirements, and the Company's and the Bank's capital ratios as of June 30,
1998:
<TABLE>
<CAPTION>
REGULATORY
MINIMUM (2) ACTUAL
----------- -------
<S> <C> <C>
The Company (1)
Risk-based:
Tier 1........................ 4.00% 18.47%
Totals........................ 8.00 19.74
Leverage........................ 3.00 10.30
The Bank
Risk-based:
Tier 1......................... 4.00% 17.60%
Totals....................... 8.00 18.86
Leverage......................... 3.00 10.02
</TABLE>
(1) The regulatory capital guidelines with respect to bank holding companies
are not applicable unless the bank holding company has either consolidated
assets in excess of $150 million or either: (i) engages in any bank
activity involving significant leverage; or (ii) has a significant amount
of outstanding debt that is held by the general public. Otherwise, the
Federal Reserve Board applies its capital adequacy requirements on a "bank
only" basis.
(2) The 3% regulatory minimum leverage ratio applies only to certain
highly-rated banks. Other institutions are subject to higher
requirements.
ASSET/LIABILITY MANAGEMENT
- --------------------------
The Company's objective with respect to asset/liability management is to
position the Company so that sudden changes in interest rates do not have a
material impact on net interest income and stockholders' equity. The primary
objective is to manage the assets and liabilities to provide for profitability
and capital at prudent levels of liquidity and interest rate, credit, and market
risk.
The Company uses a static gap measurement as well as a modeling approach to
review its level of interest rate risk. The internal targets established by the
Company are to maintain: (i) a static gap of no more than a positive 10% or
negative 15% of total assets at the one year time frame; (ii) a change in
economic market value from base present value of no more than positive or
negative 30%; and (iii) a change in net interest income from base of no more
than positive or negative 17%.
At March 31, 1998, the most recent date for which this information is available,
the Company's one year static gap position was a negative $13,029,000 or 9.7% of
total assets.
11
<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 March 31, 1998, the Company's
earnings-at-risk under a (plus or minus)200 basis point interest rate shock
test measured a negative 3.5% in a worst case scenario. Under a similar test,
the Company's equity-at-risk measured a negative 14.37% of market value of
equity at March 31, 1998. At March 31, 1998, the Company's earnings-at-risk and
equity-at-risk fell well within tolerance levels established by internal policy.
LIQUIDITY
- ---------
Deposits and borrowings are the principal sources of funds for use in investing,
lending and for general business purposes. Loan and investment amortization and
prepayments provide additional significant cash flows. At June 30, 1998, the
Company had $39,481,333 or 29.1% of assets in cash and cash equivalents and
investments classified as available-for-sale. The Bank is a member of the
Federal Home Loan Bank of Boston, and as such has access to an unused borrowing
capacity of $6,618,067 at June 30, 1998, of which $2,352,000 was in the form of
an overnight Line of Credit.
YEAR 2000 COMPLIANCE
- --------------------
The efficient operation of the Company's business is highly dependent on its
computer software programs and operating systems. Virtually all of these
programs and systems are furnished, supported and maintained by correspondent
institutions, computer service and system providers, and software vendors. As
the year 2000 approaches, a critical business issue has emerged regarding how
existing application software programs and operating systems can accommodate
this date value. As a result, the year 1999 could be the maximum date value
these systems will be able to accurately process. The Company has adopted a
Year 2000 Plan which calls for completion of a risk assessment, identification,
reprogramming and testing of all programs and systems no later than March 31,
1999. The Company has completed the risk assessment and identification phase of
the Year 2000 Plan and is now in the reprogramming and testing phase. The Plan
also requires all programs and systems to be fully tested and Year 2000
compliant by June 30, 1999.
The Company is in constant communication with its outside vendors, with whom it
is reliant, to ensure that their timetable and progress is consistent with that
of the Company. The Company has also communicated with significant borrowers
and mission critical vendors to determine the status of their Year 2000
compliance efforts. The Company has also kept the Bank's depositors informed of
its efforts. The Company has incorporated a contingency plan into the Year 2000
Plan should there be a major system failure. However, the Company believes that
such a major system failure is highly unlikely. The Company does not anticipate
that the remedial or systems' failure costs incurred in connection with Year
2000 compliance will be material to its financial condition or results of
operations.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company and the Bank are involved in routine legal proceedings occurring in
the ordinary course of business. In the opinion of management, final
disposition of these lawsuits will not have a material adverse effect on the
financial condition or results of operations of the Company or the Bank in the
aggregate.
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
12
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting of Stockholders on May 13, 1998. The
meeting was held for the purpose of: (I) electing Patrick J. Shanahan, Jr.,
Gary R. Alger and Joseph V. Mega, Directors of the Company for a three year term
expiring at the Annual Meeting in the year 2001 and (ii) ratifying the selection
of Arthur Andersen LLP as the independent public accountants for the Company
for the fiscal year ending December 31, 1998.
At the time of the 1998 Annual Meeting there were 1,261,241 shares entitled to
vote. Shares voted either in person or by proxy totaled 1,120,812 shares. The
results of the votes cast were as follows:
For Against Abstention
----- ------- ----------
(i) To elect Directors of the
Company for three years:
Patrick J. Shanahan, Jr. 1,120,087 725
Gary R. Alger 1,119,087 1,725
Joseph V. Mega 1,118,887 1,925
(ii) To select Arthur Andersen LLP
as independent public accountants
for the Company for the fiscal
year ending December 31,1998 1,119,212 600 1,000
In addition, upon completion of the Annual Meeting the Director's terms continue
as follows:
Name Term to Expire in:
---- ------------------
Raymond F. Bernardo 1999
Joseph A. Keough 1999
Peter L. Mathieu, Jr., M.D. 1999
Artin Coloian, Esq. 2000
John Nazarian, Ph.D. 2000
William P. Shields 2000
ITEM 5 - OTHER INFORMATION
Not Applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
11 Computation of Per Share Earnings
27 Financial Data Schedule
(B) Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
First Financial Corp.
July 31, 1998 \s\ Patrick J. Shanahan, Jr.
- ------------------------- -------------------------------
Date Patrick J. Shanahan, Jr.
Chairman, President and Chief
Executive Officer
July 31, 1998 \s\ John A. Macomber
- ------------------------- ------------------------------
Date John A. Macomber
Vice President, Treasurer
and Chief Financial Officer
14
<PAGE>
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 1,261,241 1,261,241 1,261,241 1,261,241
Weighted average equivalent shares -- -- -- --
---------- ---------- ---------- ----------
Weighted average common and common stock
equivalent shares outstanding 1,261,241 1,261,241 1,261,241 1,261,241
========== ========== ========== ==========
Net income $ 690,695 $ 666,663 $ 353,877 $ 336,296
========== ========== ========== ==========
Earnings per share:
Basic $ 0.55 $ 0.53 $ 0.28 $ 0.27
========== ========== ========== ==========
Diluted $ 0.55 $ 0.53 $ 0.28 $ 0.27
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,148,272
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 992,123
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,340,938
<INVESTMENTS-CARRYING> 12,518,639
<INVESTMENTS-MARKET> 12,497,242
<LOANS> 80,271,891
<ALLOWANCE> 1,400,995
<TOTAL-ASSETS> 135,900,160
<DEPOSITS> 100,058,112
<SHORT-TERM> 15,088,691
<LIABILITIES-OTHER> 1,187,112
<LONG-TERM> 5,309,619
0
0
<COMMON> 1,328,041
<OTHER-SE> 12,928,585
<TOTAL-LIABILITIES-AND-EQUITY> 135,900,160
<INTEREST-LOAN> 1,923,015
<INTEREST-INVEST> 742,189
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,665,204
<INTEREST-DEPOSIT> 1,049,446
<INTEREST-EXPENSE> 1,342,788
<INTEREST-INCOME-NET> 1,322,416
<LOAN-LOSSES> 75,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 864,294
<INCOME-PRETAX> 537,248
<INCOME-PRE-EXTRAORDINARY> 537,248
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 353,877
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 4.00
<LOANS-NON> 357
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,392,263
<ALLOWANCE-OPEN> 1,428,146
<CHARGE-OFFS> 105,622
<RECOVERIES> 3,471
<ALLOWANCE-CLOSE> 1,400,995
<ALLOWANCE-DOMESTIC> 1,400,995
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
