<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 SEPTEMBER 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 November 10, 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 - September 30, 1998 and
December 31, 1997..................................................... 1
Consolidated Statements of Income - Three months and nine months
ended September 30, 1998 and 1997..................................... 2
Consolidated Statements of Stockholders' Equity - Nine months ended
September 30, 1998 and year ended December 31, 1997................... 3
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1998 and 1997........................................... 4
Notes to Consolidated Financial Statements - September 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................................................. 13
Item 2 - Changes in Securities............................................. 13
Item 3 - Defaults Upon Senior Securities................................... 13
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.................................. 14
SIGNATURES................................................................. 15
EXHIBITS
Computation of Per Share Earnings - Exhibit 11............................. 16
Financial Data Schedule - Exhibit 27....................................... 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CASH AND DUE FROM BANKS...................................................... $ 3,148,558 $ 2,837,014
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL.............................. 6,499,038 3,878,000
LOANS HELD FOR SALE.......................................................... 120,000 380,000
INVESTMENT SECURITIES:
Held-to-maturity (fair value: $10,536,440 and $12,462,016)................. 10,529,740 12,467,740
Available-for-sale (amortized cost: $33,019,614 and $26,403,000)........... 33,055,014 26,598,634
------------ ------------
Total investment securities............................................ 43,584,754 39,066,374
------------ ------------
FEDERAL HOME LOAN BANK STOCK................................................. 447,700 447,700
LOANS:
Commercial................................................................. 11,903,732 6,418,373
Commercial real estate..................................................... 46,293,420 45,976,986
Residential real estate.................................................... 17,857,855 21,464,343
Home equity lines of credit................................................ 3,394,418 2,838,377
Consumer................................................................... 1,222,095 1,056,791
------------ ------------
80,671,520 77,754,870
Less - Unearned discount................................................... 100,364 75,107
Allowance for possible loan losses......................................... 1,322,938 1,596,613
------------ ------------
Net loans.............................................................. 79,248,218 76,083,150
------------ ------------
OTHER REAL ESTATE OWNED...................................................... 564,021 782,190
PREMISES AND EQUIPMENT, net.................................................. 2,350,824 2,458,550
OTHER ASSETS................................................................. 1,442,593 1,376,889
------------ ------------
TOTAL ASSETS................................................................. $137,405,706 $127,309,867
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand...................................................................... $ 15,627,422 $ 13,198,956
Savings and money market accounts........................................... 22,078,958 23,371,357
Time deposits............................................................... 63,786,111 62,719,558
------------ ------------
Total deposits.......................................................... 101,492,491 99,289,871
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE............................... 12,201,610 10,105,000
FEDERAL HOME LOAN BANK ADVANCES.............................................. 5,121,336 --
ACCRUED EXPENSES AND OTHER LIABILITIES....................................... 1,189,656 1,255,823
SENIOR DEBENTURE............................................................. 2,953,850 2,946,540
------------ ------------
TOTAL LIABILITIES............................................................ 122,958,943 113,597,234
------------ ------------
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........................................................... 8,813,062 7,982,792
Unrealized gain on securities available-for-sale, net of taxes.............. 21,240 117,380
------------ ------------
14,593,723 13,859,593
Less - Treasury stock, at cost, 66,800 shares............................... 146,960 146,960
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................................................... 14,446,763 13,712,633
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $137,405,706 $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>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................................ $5,790,886 $5,468,231 $1,979,698 $1,855,252
Interest on investment securities-
U.S. Government and agency obligations........................ 1,404,151 1,154,391 495,037 375,076
Collateralized mortgage obligations........................... 30,396 77,953 14,720 20,581
Mortgage backed securities.................................... 417,021 578,640 143,598 181,441
Marketable equity securities and other........................ 53,155 25,989 15,872 9,860
Interest on cash equivalents...................................... 172,366 107,889 39,888 38,271
---------- ---------- ---------- ----------
Total interest income......................................... 7,867,975 7,413,093 2,688,813 2,480,481
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits.............................................. 3,089,046 2,861,917 1,018,466 974,224
Interest on repurchase agreements................................. 551,110 488,416 197,762 163,154
Interest on advances.............................................. 82,484 -- 43,217 --
Interest on debenture............................................. 193,184 201,926 64,037 70,137
---------- ---------- ---------- ----------
Total interest expense......................................... 3,915,824 3,552,259 1,323,482 1,207,515
Net interest income............................................ ---------- ---------- ---------- ----------
3,952,151 3,860,834 1,365,331 1,272,966
PROVISION FOR POSSIBLE LOAN LOSSES................................. 200,000 200,000 75,000 50,000
---------- ---------- ---------- ----------
Net interest income after provision for possible
loan losses................................................... 3,752,151 3,660,834 1,290,331 1,222,966
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposits....................................... 211,206 236,719 72,252 76,335
Gain on sale of securities........................................ -- -- -- --
Gain on loan sales................................................ 115,572 15,823 43,735 --
Other............................................................. 134,265 83,626 37,047 22,955
---------- ---------- ---------- ----------
Total noninterest income....................................... 461,043 336,168 153,034 99,290
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits................................... 1,337,968 1,350,268 444,316 471,906
Occupancy expense................................................ 299,978 280,439 101,193 95,332
Equipment expense................................................ 200,468 156,485 68,320 57,066
Other real estate owned net losses and expenses.................. 45,285 28,873 10,672 4,829
Computer services................................................ 158,191 124,796 56,263 40,626
Deposit insurance assessments.................................... 8,962 8,250 2,962 3,380
Other operating expenses......................................... 525,803 527,370 188,348 173,162
---------- ---------- ---------- ----------
Total noninterest expense...................................... 2,576,655 2,476,481 872,074 846,301
---------- ---------- ---------- ----------
Income before provision for income taxes....................... 1,636,539 1,520,521 571,291 475,955
PROVISION FOR INCOME TAXES......................................... 579,246 550,645 204,693 172,742
---------- ---------- ---------- ----------
NET INCOME......................................................... $1,057,293 $ 969,876 $ 366,598 $ 303,213
========== ========== ========== ==========
Earnings per share:
Basic.......................................................... $0.84 $0.77 $0.29 $0.24
========== ========== ========== ==========
Diluted........................................................ $0.84 $0.77 $0.29 $0.24
========== ========== ========== ==========
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
COMMON RETAINED FOR SALE,
STOCK SURPLUS EARNINGS NET OF
---------- --------- ---------- ----------
<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 ($.20 per
share)............................... -- -- (252,249) --
---------- ---------- ---------- ----------
Balance, December 31, 1997.............. 1,328,041 4,431,380 7,982,792 117,380
Net income.............................. -- -- 1,057,293 --
Change in net unrealized gain
on securities available-for-sale..... -- -- -- (96,140)
Comprehensive income.................... -- -- -- --
Dividends declared ($.18 per
share................................ -- -- (227,023) --
---------- ---------- ---------- ----------
Balance, September 30, 1998............. $1,328,041 $4,431,380 $8,813,062 $ 21,240
========== ========== ========== ==========
</TABLE>
<TABLE>
<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.............................. -- 1,057,293 $ 1,057,293
Change in net unrealized gain
on securities available-for-sale..... -- (96,140) (96,140)
-----------
Comprehensive income.................... -- -- $ 961,153
===========
Dividends declared ($.18 per
share............................... -- (227,023)
----------- -----------
Balance, September 30, 1998............. $ (146,960) $14,446,763
=========== ===========
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
--------------- --------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................................. $ 1,057,293 $ 969,876
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for possible loan losses.................................................... 200,000 200,000
Depreciation and amortization......................................................... 213,827 168,275
Amortization of discount on debenture................................................. 154,487 151,598
Net accretion on investment securities held-to-maturity............................... (4,285) (8,750)
Net accretion on investment securities available-for-sale............................. (183,404) (60,194)
Losses (gains) on sale of OREO........................................................ 18,952 (2,017)
Gains on sales of loans............................................................... (115,572) (15,823)
Proceeds from sales of loans.......................................................... 2,261,042 557,480
Loans originated for sale............................................................. (1,835,421) (368,695)
Net increase in unearned discount..................................................... 25,257 3,853
Net (increase) in other assets........................................................ (65,704) (13,370)
Net (decrease) increase in deferred loan fees......................................... (21,366) 38,291
Net (decrease) in accrued expenses and other liabilities.............................. (211,910) (244,959)
------------ ------------
Net cash provided by operating activities.......................................... 1,493,196 1,375,565
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Federal Home Loan Bank stock................................................ -- (99,600)
Proceeds from maturities of investment securities held-to-maturity...................... 12,602,696 7,885,101
Proceeds from maturities of investment securities available-for-sale.................... 88,517,783 (18,130,071)
Purchase of investment securities held-to-maturity...................................... (10,660,411) (3,500,000)
Purchase of investment securities available-for-sale.................................... (94,950,993) 17,671,170
Net increase in loans................................................................... (3,513,959) (5,612,579)
Purchase of premises and equipment...................................................... (106,101) (959,569)
Sales of OREO........................................................................... 344,217 304,448
------------ ------------
Net cash used in investing activities............................................... (7,766,768) (2,441,100)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand accounts........................................................ 2,428,466 1,504,916
Net (decrease) in savings and money market accounts..................................... (1,292,399) (740,292)
Net increase in time deposits........................................................... 1,066,553 3,409,218
Net increase (decrease) in reverse repurchase agreements................................ 2,096,610 (223,000)
Net increase in Federal Home Loan Bank advances......................................... 5,121,336 --
Dividends paid.......................................................................... (214,412) (163,961)
------------ ------------
Net cash provided by financing activities........................................... 9,206,154 3,786,881
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................................ 2,932,582 2,721,346
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................... 6,715,014 4,364,713
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 9,647,596 $ 7,086,059
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................................................... $ 3,922,304 $ 3,474,859
============ ============
Income taxes paid....................................................................... $ 872,000 $ 652,242
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Transfer of loans to OREO............................................................... $ 145,000 $ 326,002
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED SEPTEMBER 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 nine months ended September 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 August 17, 1998 the Company declared dividends of $75,675 or $.06 per
share to all common stockholders of record on September 15, 1998, payable
on October 1, 1998.
(3) RECENT DEVELOPMENTS
On October 13, 1998, First Financial Corp. ("Company") issued to the Board
of Directors of Mayflower Co-operative Bank ("Mayflower"), Middleboro,
Massachusetts, an expression of interest to acquire Mayflower. The
proposed acquisition would require the exchange of each share of Mayflower
common stock outstanding for nearly 1.7 shares of the Company's common
stock. On October 29, 1998, the Company received a written rejection of its
proposal from the Mayflower Board of Directors.
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
nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $1,057,293 $ 969,876 $ 366,598 $303,213
Change in net unrealized gain (loss) on
securities available-for-sale (96,140) 76,444 (100,786) 54,852
---------- ---------- --------- --------
Comprehensive income $ 961,153 $1,046,320 $ 265,812 $358,065
========== ========== ========= ========
</TABLE>
5
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
- --------
First Financial Corp. is a bank holding company that was organized under
Rhode Island law in 1980 for the purposes of owning all of the outstanding
capital stock of First Bank and Trust Company ("Bank") and providing
greater flexibility in helping the Bank achieve its business objectives.
The Bank is a Rhode Island chartered commercial bank that was originally
chartered and opened for business on February 14, 1972. The Bank provides
a broad range of lending and deposit products primarily to individuals and
small businesses ($10 million or less in total revenues). Although the
Bank has full commercial banking and trust powers, it has not exercised its
trust powers and does not, at the current time, provide asset management or
trust administration services. The Bank's deposits are insured by the FDIC
up to applicable limits.
The Bank offers a variety of consumer financial products and services
designed to satisfy the deposit and loan needs of its retail customers.
The Bank's retail products include interest-bearing and noninterest-bearing
checking accounts, money market accounts, passbook and statement savings
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 September 30, 1998, the Company reported net
income of $366,598 compared to net income of $303,213 for the three months
ended September 30, 1997, or an increase of 20.9%. Basic and diluted net
income per share were $.29 for the quarter ended September 30, 1998,
compared to $.24 per share for the same three month period of the prior
year. Net income for the nine months ended September 30, 1998, amounted to
$1,057,293 compared to net income of $969,876 for the nine months ended
September 30, 1997. Basic and diluted net income per share for the nine
months ended September 30, 1998, were $.84 compared to $.77 per share for
the nine months ended September 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 $10,095,839 or 7.9% to $137,405,706 at September 30,
1998 from $127,309,867 at December 31, 1997. The loan portfolio, net of
unearned discount, increased $2,891,393 or 3.7% to $80,571,156 at
September 30, 1998
6
<PAGE>
from $77,679,763 at December 31, 1997. Investment securities increased
$4,518,380 to $43,584,754 at September 30, 1998 from $39,066,374 at December 31,
1997, and cash and cash equivalents also increased $2,932,582 to $9,647,596 at
September 30, 1998 from $6,715,014 at December 31, 1997. The increase in the
Company's total assets was funded primarily from, (i) a $2,096,610 increase in
securities sold under agreements to repurchase to $12,201,610 at September 30,
1998 from $10,105,000 at December 31, 1997; (ii) a $5,121,336 increase in
Federal Home Loan Bank advances and; (iii) an increase in deposits of $2,202,620
to $101,492,491 at September 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
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- -----------------
1998 1997 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonperforming loans................................... $ 102 $ 162 $ 17
Other real estate owned............................... $ 564 $ 702 $ 782
Total nonperforming assets............................ $ 666 $ 864 $ 799
Loans 30-89 days delinquent........................... $ 269 $ 794 $ 490
Nonperforming assets to total assets.................. 0.48% 0.71% 0.65%
Nonperforming loans to total loans.................... 0.13% 0.22% 0.02%
Net loan charge-offs to average loans................. 0.11% 0.21% 0.34%
Allowance for possible loan losses to total loans..... 1.70% 1.72% 1.64%
Allowance for possible loan losses
to nonperforming loans (multiple)................... 13.03X 7.77X 73.33X
</TABLE>
The following represents the activity in the allowance for possible loan
losses for the three months and nine months ended September 30, 1998 and
1997:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ----------------------------
1998 1997 1998 1997
----------- ------------------ ----------- ---------------
<S> <C> <C> <C> <C>
Bank Reserve:
Balance at beginning of period............................ $1,208,322 $1,199,617 $1,291,097 $1,345,477
Provision................................................ 200,000 200,000 75,000 50,000
Loan charge-offs......................................... (96,214) (168,770) (44,991) (141,941)
Recoveries............................................... 10,830 23,681 1,832 992
---------- ---------- ---------- ----------
Balance at end of period.................................. 1,322,938 1,254,528 1,322,938 1,254,528
---------- ---------- ---------- ----------
Acquired Reserve:
Balance at beginning of period............................ 388,291 742,840 109,898 568,542
Loan charge-offs......................................... (460,093) (169,695) (187,905) --
Recoveries (Administrative Costs)........................ (12,072) (10,978) (5,867) (6,375)
Reclassification to Senior Debenture..................... 83,874 -- 83,874 --
---------- ---------- ---------- ----------
Balance at end of period.................................. -0- 562,167 -0- 562,167
---------- ---------- ---------- ----------
Total Reserve............................................. $1,322,938 $1,816,695 $1,322,938 $1,816,695
========== ========== ========== ==========
</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, as was the case during the third quarter of 1998,
additional loan charge-offs reduce the amount owed on the debenture issued to
DEPCO in connection with the acquisition. At September 30, 1998, the remaining
balance of acquired loans was $2,703,236.
DEPOSITS AND OTHER BORROWINGS
- -----------------------------
Total deposits increased $2,202,620 during the nine months ended September 30,
1998, from $99,289,871 at December 31, 1997, to $101,492,491 at September 30,
1998. During the nine months ended September 30, 1998, savings and money market
deposits decreased $1,292,399 while demand and time deposits increased
$3,495,019. 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 $2,096,610 during the
nine months ended September 30, 1998 to $12,201,610 from $10,105,000 at December
31, 1997. This increase is attributable to a single municipal customer and is
considered volatile.
During the nine months ended September 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 as well as
refinance a maturing reverse repurchase agreement at more favorable terms. At
September 30, 1998, outstanding advances were $5,121,336.
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 $3,952,151
for the nine months ended September 30, 1998, compared to $3,860,834 for the
nine months ended September 30, 1997. The increase in 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>
NINE MONTHS ENDED SEPTEMBER 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............................................. $ 79,698 $ 5,791 9.69% $ 74,969 $5,468 9.72%
Investment securities taxable - AFS............... 31,598 1,356 5.72 26,544 1,284 6.45
Investment securities taxable - HTM............... 11,790 519 5.87 12,136 531 5.83
Securities purchased under agreements to
resell......................................... 4,674 172 4.91 2,896 108 4.97
Federal Home Loan Bank Stock and other
673 30 5.94 540 22 5.43
TOTAL INTEREST-EARNING ASSETS........................ -------- -------- -------- -------- ------ ----
128,433 7,868 8.17 117,085 7,413 8.44
-------- -------- ------ ----
NONINTEREST-EARNING ASSETS:
Cash and due from banks.......................... 2,244 2,164
Premises and equipment........................... 2,425 2,040
Other real estate owned.......................... 628 698
Allowance for possible loan losses............... (1,449) (1,954)
Other assets..................................... 1,407 1,326
-------- --------
TOTAL NONINTEREST-EARNING ASSETS..................... 5, 255 4,274
-------- --------
TOTAL ASSETS......................................... $133,688 $121,359
======== ========
INTEREST - BEARING LIABILITIES:
Deposits:
Interest bearing demand and NOW
deposits................................ $ 3,631 53 1.95% $ 3,196 47 1.96%
Savings deposits........................ 16,855 332 2.63 17,924 352 2.62
Money market deposits................... 1,236 22 2.37 1,427 26 2.43
Time deposits........................... 64,955 2,682 5.51 59,132 2,437 5.50
Securities sold under agreements to
repurchase............................... 13,338 551 5.51 10,714 488 6.07
Federal Home Loan Bank Advances................. 1,771 83 6.25 -- -- --
Senior debenture................................ 2,988 193 8.61 2,936 202 9.17
-------- -------- -------- -------- ------ ----
TOTAL INTEREST-BEARING LIABILITIES................... 104,774 3,916 4.98 95,329 3,552 4.97
-------- -------- ------ ----
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits..................... 13,571 11,924
Other liabilities................................ 1,266 1,148
-------- --------
TOTAL NONINTEREST-BEARING LIABILITIES................ 14,837 13,072
STOCKHOLDERS' EQUITY................................. 14,077 12,958
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $133,688 $121,359
======== ========
NET INTEREST INCOME.................................. $ 3,952 $3,861
======== ======
NET INTEREST SPREAD.................................. 3.19% 3.47%
======== ======
NET INTEREST MARGIN.................................. 4.10% 4.40%
======== ======
</TABLE>
9
<PAGE>
Total interest income for the three months ended September 30, 1998 was
$2,688,813, compared to $2,480,481 for the same three month period of the prior
year. This increase of $208,332 was primarily the result of a $13.6 million
increase in quarterly average interest-earning assets, offset by a 24 basis
point reduction in yield to 8.22% from 8.46%. The increase in earning assets
was disproportionate in that quarterly average loans as a percentage of
quarterly average earning assets decreased to 62.0% for the three months ended
September 30, 1998, compared to 65.1% for the three months ended September 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 nine months ended September 30, 1998, was
$7,867,975, compared to $7,413,093 for the nine months ended September 30, 1997.
Despite a $11.3 million increase in average earning assets, the interest-earning
asset yield declined 27 basis points to 8.17% from 8.44%. 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 nine months ended September 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 September 30, 1998 was
$1,323,482, compared to $1,207,515 for the same period of the prior year. This
increase of $115,967 or 9.6% was primarily the result of a $10.9 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 $4.8
million. For the nine months ended September 30, 1998, total interest expense
was $3,915,824 as compared to $3,552,259 for the same nine month period of 1997.
This increase was the result of an $9.4 million increase in interest-bearing
liabilities along with a basis point increase in cost of funds to 4.98% from
4.97%. 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
- ----------------------------------
During the third quarter of 1998, the Company provided $75,000 for possible loan
losses compared to $50,000 during the third quarter of 1997. This increased
provision was not an indication of a deterioration of asset quality, but rather
an accommodation to loan portfolio growth. At September 30, 1998, nonperforming
loans were down $60,000 to $102,000 and delinquencies were down $525,000 to
$269,000, compared to September 30, 1997. The allowance for possible loan
losses as a percent of total loans was 1.70% and 1.72% at September 30, 1998 and
1997, respectively. The provision for possible loan losses amounted to $200,000
for the nine months ended September 30, 1998 and 1997.
NONINTEREST INCOME
- ------------------
Total noninterest income increased $53,744 to $153,034 for the three months
ended September 30, 1998, from $99,290 for the three months ended September 30,
1997. For the nine months ended September 30, 1998, noninterest income
increased $124,875 to $461,043 from $336,168 for the nine months ended Setpember
30, 1997. For both the three month and nine 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 $872,074 and $846,301 for the three months
ended September 30, 1998 and 1997, respectively. The increase of $25,773 or
3.0% was primarily the result of 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 $100,174 or 4.0%
to $2,576,655 for the nine months ended September 30, 1998, from $2,476,481 for
the nine months ended September 30, 1997. This increase was largely due to
operating the North Kingstown branch which opened in June 1997; technology-
related costs and charges; offset by savings 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 September 30, 1998, were $204,693 or
35.8% of pretax income, compared to $172,742 or 36.3% of pretax income for the
three months ended September 30, 1997. For the nine months ended September 30,
1998 and 1997, income taxes were $579,246 and $550,645, respectively, or 35.4%
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 September
30, 1998:
<TABLE>
<CAPTION>
REGULATORY
MINIMUM (2) ACTUAL
----------- -------
<S> <C> <C>
The Company (1)
Risk-based:
Tier 1........................ 4.00% 18.44%
Totals........................ 8.00 19.69
Leverage........................ 3.00 10.60
The Bank
Risk-based:
Tier 1......................... 4.00% 17.71%
Totals....................... 8.00 18.97
Leverage......................... 3.00 10.33
</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 September 30, 1998, the Company's one year static gap position was a negative
$13,250,000 or 9.6% 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 September 30, 1998, the Company's
earnings-at-risk under a (plus or minus)200 basis point interest rate shock
test measured a negative 2.3% in a worst case scenario. Under a similar test,
the Company's equity-at-risk measured a negative 10.26% of market value of
equity at September 30, 1998. At September 30, 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 September 30, 1998,
the Company had $42,702,610 or 31.8% 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 $3,832,664 at September 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.
In confronting the Year 2000 problem, the Company faces potential risks to its
and the Bank's operations. As stated above, the Company purchases substantially
all of its software from third parties who face the same Year 2000 challenge as
the Company. In addition, the Company relies almost exclusively on other
companies for the functioning of its automated system. Thus, the Company's
operations could be adversely affected if the operations of these third parties
are adversely affected by the Year 2000 problem. Most importantly, the Company
faces risks that all banking institutions, whether large or small, also face.
Included among these risks is the risk that the Year 2000 date change may result
in the inability to process and underwrite loan applications, to credit deposits
and withdrawals from customer accounts, to credit loan payments or track
delinquencies, to properly reconcile and record daily activity or to engage in
similar normal banking activities. Additionally, if those commercial loan
customers of the Bank whose operations depend heavily on computers and computer
software experience Year 2000 compliance problems and suffer adverse effects
with respect to their own operations, their ability to meet their obligations to
the Bank could be adversely affected. This could force the Bank to increase its
provision for loan losses or take more aggressive collection actions,
potentially impacting the Company's earnings. Furthermore, the Bank faces the
risk that in light of potential uncertainty as to the availability of their
funds after the date change and a decrease in interest rates, the Bank's deposit
customers could withdraw their funds, causing the Bank to experience deposit
run-off prior to the Year 2000 date change. This potential deposit contraction
could make it necessary for the Company to change its sources of funding which
could materially affect the Company's earnings. Moreover, to the extent that
the risks posed by the Year 2000 problem are pervasive in data processing and
transmission and communications services worldwide, the Company cannot predict
with any certainty that its operations will remain materially unaffected after
January 1, 2000 or on dates preceding this date at which time post-January 1,
2000 dates become significant within the Bank's systems. Finally, to the extent
that certain utility and communication services utilized by the Company face
Year 2000 problems, the Company's operations could be disrupted.
12
<PAGE>
The Company is in constant communication with its outside vendors, with whom it
is reliant, to ensure that their timetable and progress is consistent with that
of the Company. The Company has also communicated with significant borrowers
and mission critical vendors to determine the status of their Year 2000
compliance efforts. The Company has also kept the Bank's depositors informed of
its efforts. The Company has incorporated a contingency plan into the Year 2000
Plan. The contingency plan calls for a conversion to another core system
provider in the event of a system failure during the remediation effort. If the
failure occurs on or after January 1, 2000, the Company will convert to a manual
system until the computerized system is remedied. The Company believes that a
major system failure is highly unlikely, but limited exceptions across its core
applications may occur. The Company does not anticipate that the remedial or
systems' failure costs incurred in connection with Year 2000 compliance will be
material to its financial condition or results of operations.
The discussion above contains certain forward-looking statements. The costs of
the Year 2000 conversion, the date which the Company has set to complete its
Year 2000 project and statements about anticipated compliance are based on the
Company's current estimates and are subject to various uncertainties that could
cause actual results to differ materially from the Company's expectations. Such
uncertainties include, among others, the success of the Company in identifying
systems that are not Year 2000 compliant, the nature and amount of programming
required to upgrade or replace each of the affected systems, the availability of
qualified personnel, consultants and other resources, and the success of the
year 2000 compliance efforts of others. Readers are cautioned not to place
undue reliance on these forward looking statements.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5 - OTHER INFORMATION
Not Applicable
13
<PAGE>
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
14
<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.
November 10, 1998 /s/ Patrick J. Shanahan, Jr.
- ----------------- --------------------------------
Date Patrick J. Shanahan, Jr.
Chairman, President and
Chief Executive Officer
November 10, 1998 /s/ John A. Macomber
- ----------------- --------------------------------------
Date John A. Macomber
Vice President, Treasurer
and Chief Financial Officer
15
<PAGE>
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 $1,057,293 $ 969,876 $ 366,598 $ 303,213
========== ========== ========== ==========
Earnings per share:
Basic $ 0.84 $ 0.77 $ 0.29 $ 0.24
========== ========== ========== ==========
Diluted $ 0.84 $ 0.77 $ 0.29 $ 0.24
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,148,558
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,499,038
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,055,014
<INVESTMENTS-CARRYING> 10,529,740
<INVESTMENTS-MARKET> 10,536,440
<LOANS> 80,571,156
<ALLOWANCE> 1,322,938
<TOTAL-ASSETS> 137,405,706
<DEPOSITS> 101,492,491
<SHORT-TERM> 12,201,610
<LIABILITIES-OTHER> 1,189,656
<LONG-TERM> 8,075,186
0
0
<COMMON> 1,328,041
<OTHER-SE> 13,118,722
<TOTAL-LIABILITIES-AND-EQUITY> 137,405,706
<INTEREST-LOAN> 1,979,698
<INTEREST-INVEST> 709,115
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,688,813
<INTEREST-DEPOSIT> 1,018,466
<INTEREST-EXPENSE> 1,323,482
<INTEREST-INCOME-NET> 1,365,331
<LOAN-LOSSES> 75,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 872,074
<INCOME-PRETAX> 571,291
<INCOME-PRE-EXTRAORDINARY> 571,291
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 366,598
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
<YIELD-ACTUAL> 4.17
<LOANS-NON> 101,493
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,483,894
<ALLOWANCE-OPEN> 1,400,995
<CHARGE-OFFS> 149,022
<RECOVERIES> (4,032)
<ALLOWANCE-CLOSE> 1,322,938
<ALLOWANCE-DOMESTIC> 1,322,938
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
