<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 MARCH 31, 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 May 8, 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 - March 31, 1998 and December 31, 1997....................................... 1
Consolidated Statements of Income - Three months ended March 31, 1998 and 1997........................... 2
Consolidated Statements of Stockholders' Equity - Three months ended
March 31, 1998 and year ended December 31, 1997.......................................................... 3
Consolidated Statements of Cash Flows - Three months ended March 31, 1998 and 1997...................... 4
Notes to Consolidated Financial Statements - March 31, 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>
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C>
CASH AND DUE FROM BANKS...................................................... $ 2,435,474 $ 2,837,014
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL.............................. 8,399,000 3,878,000
LOANS HELD FOR SALE.......................................................... 325,000 380,000
INVESTMENT SECURITIES:
Held-to-maturity (market value: $9,336,367 and $12,462,016)................. 9,333,474 12,467,740
Available-for sale (amortized cost: $31,037,107 and $26,403,000)............ 31,275,989 26,598,634
------------ ------------
Total investment securities........................................... 40,609,463 39,066,374
------------ ------------
FEDERAL HOME LOAN BANK STOCK................................................. 447,700 447,700
LOANS:
Commercial.................................................................. 7,027,971 6,418,373
Commercial real estate...................................................... 46,975,973 45,976,986
Residential real estate..................................................... 20,613,324 21,464,343
Home equity lines of credit................................................. 2,686,531 2,838,377
Consumer.................................................................... 1,121,560 1,056,791
------------ ------------
78,425,359 77,754,870
Less - Unearned discount.................................................... 88,441 75,107
Allowance for possible loan losses.......................................... 1,428,146 1,596,613
------------ ------------
Net loans............................................................. 76,908,772 76,083,150
------------ ------------
OTHER REAL ESTATE OWNED...................................................... 672,190 782,190
PREMISES AND EQUIPMENT, net.................................................. 2,451,819 2,458,550
OTHER ASSETS................................................................. 1,528,165 1,376,889
------------ ------------
TOTAL ASSETS................................................................. $133,777,583 $127,309,867
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand.................................................................... $ 12,240,691 $ 13,198,956
Savings and money market accounts......................................... 21,116,262 23,371,357
Time deposits............................................................. 66,278,401 62,719,558
------------ ------------
Total deposits........................................................ 99,635,354 99,289,871
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE............................... 15,108,100 10,105,000
FEDERAL HOME LOAN BANK ADVANCES.............................................. 643,395 --
ACCRUED EXPENSES AND OTHER LIABILITIES....................................... 1,379,787 1,255,823
SENIOR DEBENTURE............................................................. 3,011,220 2,946,540
------------ ------------
TOTAL LIABILITIES............................................................ 119,777,856 113,597,234
------------ ------------
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......................................................... 8,243,936 7,982,792
Unrealized gain on securities available-for-sale, net of taxes............ 143,330 117,380
------------ ------------
14,146,687 13,859,593
Less - Treasury stock, at cost, 66,800 shares............................. 146,960 146,960
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................................................... 13,999,727 13,712,633
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $133,777,583 $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>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................................ $1,888,173 $1,769,959
Interest on investment securities-
U.S. Government and agency obligations........................ 400,183 396,889
Collateralized mortgage obligations........................... 7,728 31,044
Mortgage backed securities.................................... 135,720 202,554
Marketable equity securities and other........................ 21,993 6,145
Interest on cash equivalents...................................... 60,162 30,808
---------- ----------
Total interest income......................................... 2,513,959 2,437,399
---------- ----------
INTEREST EXPENSE:
Interest on deposits.............................................. 1,021,134 938,550
Interest on repurchase agreements................................. 156,852 159,762
Interest on advances.............................................. 6,888 --
Interest on debenture............................................. 64,681 65,046
---------- ----------
Total interest expense......................................... 1,249,555 1,163,358
---------- ----------
Net interest income............................................ 1,264,404 1,274,041
PROVISION FOR POSSIBLE LOAN LOSSES................................. 50,000 75,000
---------- ----------
Net interest income after provision for possible
loan losses................................................... 1,214,404 1,199,041
---------- ----------
NONINTEREST INCOME:
Service charges on deposits....................................... 66,108 83,055
Gain on sale of securities........................................ -- --
Gain on loan sales................................................ 35,705 --
Other............................................................. 52,071 40,343
---------- ----------
Total noninterest income....................................... 153,884 123,398
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits................................... 448,302 428,120
Occupancy expense................................................ 99,925 88,474
Equipment expense................................................ 64,074 50,193
Other real estate owned net losses and expenses.................. 2,608 17,120
Computer services................................................ 53,237 41,214
Deposit insurance assessments.................................... 2,996 2,435
Other operating expenses......................................... 169,145 177,070
---------- ----------
Total noninterest expense...................................... 840,287 804,626
---------- ----------
Income before provision for income taxes....................... 528,001 517,813
PROVISION FOR INCOME TAXES......................................... 191,182 187,446
---------- ----------
NET INCOME......................................................... $ 336,819 $ 330,367
========== ==========
Earnings per share:
Basic.......................................................... $0.27 $0.26
========== ==========
Diluted........................................................ $0.27 $0.26
========== ==========
Weighted average common shares outstanding......................... 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
========== ==========
</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 TOTAL
COMMON RETAINED AVAILABLE FOR SALE, TREASURY STOCKHOLDERS'
STOCK SURPLUS EARNINGS NET OF TAXES STOCK EQUITY
---------- ---------- ----------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.............. $1,328,041 $4,431,380 $6,923,308 $ 34,132 $(146,960) $12,569,901
Net income.............................. -- -- 1,311,733 -- -- 1,311,733
Change in net unrealized gain...........
on securities available-for-sale..... -- -- -- 83,248 -- 83,248
Comprehensive income.................... -- -- -- -- -- --
Dividends declared ($.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.............................. -- -- 336,819 -- -- 336,819
Change in net unrealized gain
on securities available-for-sale..... -- -- -- 25,950 -- 25,950
Comprehensive income.................... -- -- -- -- -- --
Dividends declared ($.20 per
share................................ -- -- (75,675) -- -- (75,675)
---------- ---------- ---------- ----------- ------------- -----------
Balance, March 31, 1998................. $1,328,041 $4,431,380 $8,243,936 $143,330 $(146,960) $13,999,727
========== ========== ========== =========== ============= ===========
<CAPTION>
COMPREHENSIVE
INCOME
-------------
<S> <C>
Balance, December 31, 1996..............
Net income.............................. $1,311,733
Change in net unrealized gain...........
on securities available-for-sale..... 83,248
----------
Comprehensive income.................... $1,394,981
==========
Dividends declared ($.20 per
share)...............................
Balance, December 31, 1997..............
Net income.............................. $ 336,819
Change in net unrealized gain
on securities available-for-sale..... 25,950
----------
Comprehensive income.................... $ 362,769
==========
Dividends declared ($.20 per
share................................
Balance, March 31, 1998.................
</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>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................... $ 336,819 $ 330,367
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for possible loan losses........................................... 50,000 75,000
Depreciation and amortization................................................ 69,702 46,348
(Gains) losses on sale of OREO............................................... (3,664) 982
Gain on sales of loans....................................................... (35,705) --
Proceeds from sales of loans................................................. 415,705 168,018
Loans originated for sale.................................................... (325,000) (610,170)
Net accretion on investment securities held-to-maturity...................... (2,340) (3,167)
Net accretion on investment securities available-for-sale.................... (12,631) (25,717)
Net increase (decrease) in unearned discount................................. 13,334 (7,368)
Net increase in other assets................................................. (151,276) (329,018)
Amortization of discount on debenture........................................ 50,861 50,269
Net increase in deferred loan fees........................................... 1,377 44,486
Net increase in accrued expenses and other liabilities....................... 107,870 33,963
------------ -----------
Net cash provided by (used in) operating activities....................... 515,052 (226,007)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Federal Home Loan Bank stock...................................... -- (99,600)
Proceeds from maturities of investment securities
held-to-maturity........................................................... 6,135,590 2,895,731
Proceeds from maturities of investment securities
available-for-sale......................................................... 11,689,172 9,065,310
Purchase of investment securities held-to-maturity............................ (2,998,984) (1,250,000)
Purchase of investment securities available-for-sale.......................... (16,310,646) (7,717,208)
Net increase in loans......................................................... (890,333) (1,891,765)
Purchase of premises and equipment............................................ (62,971) (288,975)
Sales of OREO................................................................. 113,664 75,449
------------ -----------
Net cash (used in) provided by investing activities....................... (2,324,508) 788,942
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand accounts.................................... (958,265) 233,770
Net (decrease) in savings and money market accounts........................... (2,255,095) (302,592)
Net increase (decrease) in time deposits...................................... 3,558,843 (1,308,094)
Net increase in reverse repurchase agreements................................. 5,003,100 --
Net increase in Federal Home Loan Bank advances............................... 643,395 --
Dividends paid................................................................ (63,062) (37,837)
------------ -----------
Net cash provided by (used in) financing activities....................... 5,928,916 (1,414,753)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................................................... 4,119,460 (851,818)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD....................................................................... 6,715,014 4,364,713
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................................... $ 10,834,474 $ 3,512,895
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid................................................................. $ 1,251,208 $ 1,141,449
============ ===========
Income taxes paid............................................................. $ 388,650 $ 234,937
============ ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfer of loans to OREO..................................................... $ -- $ 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 MARCH 31, 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
ended March 31, 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 January 12, 1998 the Company declared dividends of $75,675 or $.06 per
share to all common stockholders of record on March 16, 1998, payable on
April 2, 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 is 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 in the Consolidated Statements of
Stockholders' Equity on a net of tax basis.
The following table presents comprehensive income for the three months
ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Net income $336,819 $ 330,367
Change in net unrealized gain (loss) on
securities available-for-sale 25,950 ( 73,400)
-------- ---------
Comprehensive income $362,769 $ 256,967
======== =========
</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 it's 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.
In January 1998, the Company and Wal-Mart entered into a termination agreement
with respect to the opening of a Bank branch in the Wal-Mart store in Warwick,
Rhode Island. In January 1997, the Company had agreed to open an in-store
branch in the Wal-Mart store. As a result of the termination agreement, the
Company and Wal-Mart each agreed that the Bank would not open the in-store
branch. In entering into the termination agreement, management of the Company
decided to allocate resources elsewhere. The termination agreement does not in
any way effect the Bank's branch opened in the North Kingstown Wal-Mart store in
June 1997.
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 Lone 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 March 31, 1998, the Company reported net income of
$336,819 compared to net income of $330,367 for the three months ended March 31,
1997, or an increase of 2.0%. Basic and diluted net income per share were $.27
for the quarter ended March 31, 1998, compared to $.26 per share in the first
quarter of 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
6
<PAGE>
by decreases in nonperforming loans, nonperforming assets, and net loan charge-
offs, and (iii) only a modest increase in net 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; as well as absorb the fixed charges associated with the technology-related
capital expenditures incurred in the second half of 1997.
Total assets increased $6,467,716 or 5.1% to $133,777,583 at March 31, 1998 from
$127,309,867 at December 31, 1997. The loan portfolio, net of unearned
discount, increased $657,155 or 0.8% to $78,336,918 at March 31, 1998 from
$77,679,763 at December 31, 1997. Investment securities increased $1,543,089 to
$40,609,463 at March 31, 1998 from $39,066,374 at December 31, 1997, while cash
and cash equivalents increased $4,119,460 to $10,834,474 at March 31, 1998 from
$6,715,014 at December 31, 1997. The increase in the Company's total assets was
funded primarily from (i) a $5,003,100 increase in securities sold under
agreements to repurchase to $15,108,100 at March 31, 1998 from $10,105,000 at
December 31, 1997; (ii) a $643,395 increase in Federal Home Loan Bank advances
and; (iii) an increase in deposits of $345,483 to $99,635,354 in March 31 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
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------- ------------------
1998 1997 1997
---------- -------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
(Dollars in Thousands)
Nonperforming loans................................... $ -0- $ 289 $ 17
Other real estate owned............................... $ 672 $ 760 $ 782
Total nonperforming assets............................ $ 672 $1,049 $ 799
Loans 30-89 days delinquent........................... $1,001 $ 533 $ 490
Nonperforming assets to total assets.................. 0.50% 0.91% 0.65%
Nonperforming loans to total loans.................... -0-% 0.42% 0.02%
Net loan charge-offs to average loans................. -0-% 0.01% 0.34%
Allowance for possible loan losses to total loans..... 1.68% 1.84% 1.64%
Allowance for possible loan losses
to nonperforming loans (multiple)................... NM 4.39X 73.33X
</TABLE>
The following represents the activity in the allowance for possible loan losses
for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
BANK ACQUIRED TOTAL
---- -------- -----
<S> <C> <C> <C>
Balance at December 31, 1997......................... $1,208,322 $ 388,291 $1,596,613
Provision for possible loan losses................... 50,000 -------- 50,000
Charge-offs.......................................... (1,289) (216,500) (217,789)
Recoveries........................................... 2,147 (2,825) (678)
---------- --------- ----------
Balance at March 31, 1998............................ $1,259,180 $ 168,966 $1,428,146
========== ========= ==========
</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
March 31, 1998, the remaining balance of acquired loans was $3,501,524.
DEPOSITS AND OTHER BORROWINGS
- -----------------------------
Total deposits increased $345,483 during the three months ended March 31, 1998,
from $99,289,871 at December 31, 1997, to $99,635,354 at March 31, 1998. During
the three months ended March 31, 1998, demand, savings and money market deposits
decreased $3,213,360 while time deposits increased $3,558,843. 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 $5,003,100 during the
three months ended March 31, 1998 to $15,108,100 from $10,105,000 at December
31, 1997. This increase is attributable to a single municipal customer and is
considered volatile.
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) decreased to
$1,264,404 for the three months ended March 31, 1998, compared to $1,274,041 for
the first quarter of 1997. This decrease was the result of a decrease in net
interest spreads and margins which was partially offset by an increase in
interest-earning assets.
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>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
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............................................... $ 78,160 $ 1,888 9.66% $ 73,625 $1,770 9.62%
Investment securities taxable - AFS................. 27,326 394 5.77 27,479 445 6.48
Investment securities taxable - HTM................. 11,176 161 5.76 12,975 185 5.70
Securities purchased under agreements to
resell............................................ 4,760 60 5.13 2,629 31 4.72
Federal Home Loan Bank Stock and other 758 11 5.80 349 6 6.88
-------- ------- ------- -------- ------ ----
TOTAL NONINTEREST-EARNING ASSETS:...................... 122,180 2,514 8.23 117,057 2,437 8.33
------- ------- ------ ----
NONINTEREST-EARNING ASSETS:
Cash and due from banks............................. 2,082 1,366
Premises and equipment.............................. 2,462 1,671
Other real estate owned............................. 766 799
Allowance for possible loan losses.................. (1,548) (1,883)
Other assets........................................ 1,607 1,098
-------- --------
TOTAL NONINTEREST-EARNING ASSETS....................... 5,369 3,051
-------- --------
TOTAL ASSETS........................................... $127,549 $120,108
======== ========
INTEREST - BEARING LIABILITIES:
Deposits:
Interest bearing demand and NOW
deposits....................................... 3,652 18 1.97% $ 2,919 14 1.92%
Savings deposits.................................. 16,585 108 2.60 18,193 119 2.62
Money market deposits............................. 1,286 8 2.49 1,497 9 2.40
Time deposits..................................... 64,387 887 5.51 59,207 796 5.38
Securities sold under agreements to
repurchase........................................ 10,770 157 5.83 10,778 160 5.94
Federal Home Loan Bank Advances..................... 437 7 6.41 -- -- --
Senior debenture.................................... 2,969 65 8.76 2,927 65 8.88
-------- ------- ------- -------- ------ ----
TOTAL INTEREST-BEARING LIABILITIES..................... 100,086 1,250 5.00 95,521 1,163 4.87
------- ------- ------ ----
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits........................ 12,296 11,510
Other liabilities................................... 1,316 399
-------- -------
TOTAL NONINTEREST-BEARING LIABILITIES.................. 13,612 11,909
STOCKHOLDERS' EQUITY................................... 13,851 12,678
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 127,549 $120,108
======== ========
NET INTEREST INCOME.................................... $ 1,264 $1,274
======= ======
NET INTEREST SPREAD.................................... 3.23% 3.46%
====== ====
NET INTEREST MARGIN.................................... 4.14% 4.35%
======= ====
</TABLE>
9
<PAGE>
Total interest income for the three months ended March 31, 1998 was $2,513,959,
compared to $2,437,399 for the same three month period of the prior year. This
increase of $76,560, or 3.1%, was primarily the result of a $5.1 million
increase in quarterly average interest-earning assets. Of the increase in
average interest-earning assets, $4.5 million was placed in the loan portfolio
which grew to a quarterly average of $78.2 million, or an increase of 6.2% as
compared to the comparable period of the prior year. Despite the growth in
average interest-earning assets, the overall yield on average interest-earning
assets dropped 10 basis points to 8.23% for the first quarter of 1997. This
decline in yields was primarily the result of a flattening yield curve causing
an acceleration of prepayments in the Company's mortgage-backed security
portfolio. This acceleration forced a more rapid write-off of purchase premium
thereby reducing the Company's yield.
Total interest expense for the three months ended March 31, 1998 was $1,249,555,
compared to $1,163,358 for the same period of the prior year. This increase of
$86,197, or 7.4% was the result of a $4.6 million increase in quarterly average
interest-bearing liabilities and a 13 basis point increase in cost of funds to
5.00% from 4.87% during last year's first quarter. The increase in average
interest-bearing liabilities took place within time deposits which grew on
average $5.2 million. Since these deposits are the Company's highest cost
deposit products, the Company's overall cost of funds increased despite a lower
interest rate environment from a year ago.
PROVISION FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The provision for possible loan losses totaled $50,000 for the three months
ended March 31, 1998, compared to $75,000 during the same three month period of
the prior year. The decrease in the provision was the result of improvement in
asset quality reflected by decreases in nonperforming loans and an increase in
the percentage of the allowance for possible loan losses to total loans.
NONINTEREST INCOME
- ------------------
Total noninterest income totaled $153,884 for the three months ended March 31,
1998 as compared to $123,398 during the same period of the prior year. Gains on
the sale of the guaranteed portion of Small Business Administration ("SBA")
loans of $35,705 during the first quarter of 1998 account for the increase in
total noninterest income.
NONINTEREST EXPENSE
- ---------------------
Total noninterest expense increased approximately $35,661 or 4.4% to $840,286
for the first quarter of 1998. Within noninterest expense, the predominant
reasons for the net increase are attributable to the start-up costs associated
with the de-novo in-store branch at Wal-Mart and the fixed charges associated
with the capital expenditures in the second half of 1997. Total salaries
increased $41,182, of which approximately $30,000 was associated with the North
Kingstown Branch. Through a $24,000 reduction in pension costs, the Company was
able to reduce the overall increase in salaries and benefits to slightly more
than $20,000. Occupancy costs increased $11,451 all of which was attributable to
the North Kingstown branch. Computer services and equipment expense increased
$25,904 during the first quarter. This increase was solely related to the
capital expenditures associated with the voice and data communication systems'
conversions which occurred in the second half of 1997. A $14,512 decrease in
OREO losses and an $7,925 drop in other operating expenses helped offset the
increase in technology related expenses.
10
<PAGE>
INCOME TAXES
- ------------
Income taxes for the three months ended March 31, 1998 and 1997 were 36.2% of
pretax income. The Company's combined federal and state (net of federal benefit)
statutory income tax rate is 39.9%. The Company's effective combined federal and
state tax rate was lower that 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.
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 March 31,
1998:
<TABLE>
<CAPTION>
REGULATORY
MINIMUM (2) ACTUAL
----------- -------
<S> <C> <C>
The Company (1)
Risk-based:
Tier 1........................ 4.00% 18.40%
Totals........................ 8.00 19.66
Leverage........................ 3.00 11.20
The Bank
Risk-based:
Tier 1......................... 4.00% 17.62%
Totals......................... 8.00 18.88
Leverage......................... 3.00 10.55
</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 December 31, 1997, the most recent date for which this information is
available, the Company's one year static gap position was a negative $17,745,000
or 13.9% 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 December 31, 1997, the Company's
earnings-at-risk under a +-200 basis point interest rate shock test measured a
negative 5.1% in a worst case scenario. Under a similar test, the Company's
equity-at-risk measured a negative 15.25% of market value of equity at December
31, 1997. At December 31, 1997, 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 March 31, 1998, the
Company had $42,110,463, or 31.5% 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 $8,310,600 at March 31, 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 December 31,
1998. Further, 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 does not anticipate that the costs to be 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
Not applicable.
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.
May 8, 1998 \s\ Patrick J. Shanahan, Jr.
- ----------- -----------------------------
Date Patrick J. Shanahan, Jr.
Chairman, President and Chief Executive Officer
May 8, 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>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Weighted average common shares outstanding 1,261,241 1,261,241
Weighted average equivalent shares -- --
---------- ----------
Weighted average common and common stock 1,261,241 1,261,241
========== ==========
equivalent shares outstanding
Net income $ 336,819 $ 330,367
========== ==========
Earnings per share:
Basic $ 0.27 $ 0.26
========== ==========
Diluted $ 0.27 $ 0.26
========== ==========
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,435,474
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,399,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,275,989
<INVESTMENTS-CARRYING> 9,333,474
<INVESTMENTS-MARKET> 9,336,367
<LOANS> 78,336,918
<ALLOWANCE> 1,428,146
<TOTAL-ASSETS> 133,777,583
<DEPOSITS> 99,635,354
<SHORT-TERM> 15,751,495
<LIABILITIES-OTHER> 1,379,787
<LONG-TERM> 3,011,220
0
0
<COMMON> 1,328,041
<OTHER-SE> 12,671,686
<TOTAL-LIABILITIES-AND-EQUITY> 133,777,583
<INTEREST-LOAN> 1,888,173
<INTEREST-INVEST> 625,786
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,513,959
<INTEREST-DEPOSIT> 1,021,134
<INTEREST-EXPENSE> 1,249,555
<INTEREST-INCOME-NET> 1,264,404
<LOAN-LOSSES> 50,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 840,287
<INCOME-PRETAX> 528,001
<INCOME-PRE-EXTRAORDINARY> 528,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336,819
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<YIELD-ACTUAL> 4.14
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,431,351
<ALLOWANCE-OPEN> 1,596,613
<CHARGE-OFFS> 217,789
<RECOVERIES> (678)
<ALLOWANCE-CLOSE> 1,428,146
<ALLOWANCE-DOMESTIC> 1,428,146
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
