<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, 1999 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 5, 1999, there were 1,328,041 shares of the Company's $1.00 par value
stock issued, with 1,231,241 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, 1999 and December 31, 1998...................... 1
Consolidated Statements of Income - Three months ended March 31, 1999 and 1998.......... 2
Consolidated Statements of Stockholders' Equity and Comprehensive Income- Three
months ended March 31, 1999 and year ended December 31, 1998........................... 3
Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998...... 4
Notes to Consolidated Financial Statements - March 31, 1999............................. 5
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 7
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings................................................................ 15
Item 2 - Changes in Securities............................................................ 15
Item 3 - Defaults Upon Senior Securities.................................................. 15
Item 4 - Submission of Matters to a Vote of Security Holders.............................. 15
Item 5 - Other Information................................................................ 15
Item 6 - Exhibits and Reports on Form 8-K................................................. 15
SIGNATURES................................................................................ 16
EXHIBITS
Computation of per share earnings - Exhibit 11............................................ 17
Financial Data Schedule - Exhibit 27...................................................... 18
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CASH AND DUE FROM BANKS..................................................... $ 2,605,460 $ 2,342,782
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL............................. 2,503,472 2,723,488
LOANS HELD FOR SALE......................................................... ------- 357,493
INVESTMENT SECURITIES:
Held-to-maturity (market value: $13,313,247 and $13,673,673).............. 13,405,131 13,733,393
Available-for-sale (amortized cost: $31,265,071 and $32,969,558).......... 31,288,499 33,087,290
------------ ------------
Total investment securities.......................................... 44,693,630 46,820,683
------------ ------------
FEDERAL HOME LOAN BANK STOCK................................................ 447,700 447,700
LOANS:
Commercial................................................................ 14,848,676 14,762,537
Commercial real estate.................................................... 55,241,669 50,646,390
Residential real estate................................................... 15,488,640 16,417,012
Home equity lines of credit............................................... 2,988,277 3,489,029
Consumer.................................................................. 1,021,109 1,047,141
------------ ------------
89,588,371 86,362,109
Less - Unearned discount.................................................. 53,191 66,264
Allowance for loan losses................................................. 1,318,374 1,287,058
------------ ------------
Net loans............................................................ 88,216,806 85,008,787
------------ ------------
OTHER REAL ESTATE OWNED..................................................... 413,127 513,127
PREMISES AND EQUIPMENT, net................................................. 2,391,298 2,416,790
OTHER ASSETS................................................................ 1,447,052 1,288,080
------------ ------------
TOTAL ASSETS................................................................ $142,718,545 $141,918,930
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS:
DEPOSITS:
Demand..................................................................... $ 15,364,355 $ 15,743,185
Savings and money market accounts.......................................... 23,265,076 21,940,330
Time deposits.............................................................. 64,735,936 66,688,413
------------ ------------
Total deposits........................................................ 103,365,367 104,371,928
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE.............................. 12,039,725 12,255,880
FEDERAL HOME LOAN BANK ADVANCES............................................. 8,104,281 6,204,077
ACCRUED EXPENSES AND OTHER LIABILITIES...................................... 1,628,731 1,302,316
SENIOR DEBENTURE............................................................ 3,023,670 2,971,487
------------ ------------
TOTAL LIABILITIES........................................................... 128,161,774 127,105,688
------------ ------------
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.......................................................... 9,314,628 9,130,143
Accumulated other comprehensive income..................................... 14,057 70,638
------------ ------------
15,088,106 14,960,202
Less - Treasury stock, at cost, 96,800 shares in 1999; 66,800 shares
in 1998................................................................ 531,335 146,960
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................................................... 14,556,771 14,813,242
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $142,718,545 $141,918,930
============ ============
</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,
-----------------------
1999 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans............................................ $2,078,577 $1,888,173
Interest and dividends on investment securities-
U.S. Government and agency obligations...................... 418,015 400,183
Collateralized mortgage obligations......................... 39,038 7,728
Mortgage-backed securities.......................................... 111,175 135,720
Marketable equity securities and other...................... 19,587 21,993
Interest on cash equivalents.......................................... 36,589 60,162
---------- ----------
Total interest income........................................ 2,702,981 2,513,959
---------- ----------
INTEREST EXPENSE:
Interest on deposits.................................................. 931,791 1,021,134
Interest on reverse repurchase agreements............................. 150,808 156,852
Interest on advances.................................................. 99,666 6,888
Interest on debenture................................................. 50,700 64,681
---------- ----------
Total interest expense........................................ 1,232,965 1,249,555
---------- ----------
Net interest income........................................... 1,470,016 1,264,404
PROVISION FOR LOAN LOSSES................................................. 75,000 50,000
---------- ----------
Net interest income after provision for
loan losses................................................. 1,395,016 1,214,404
NONINTEREST INCOME:
Service charges on deposits........................................... 67,071 66,108
Gain on sale of securities............................................ --- ---
Gain on loan sales.................................................... 100,202 35,705
Other................................................................. 50,564 52,071
---------- ----------
Total noninterest income...................................... 217,837 153,884
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits....................................... 506,343 448,302
Occupancy expense.................................................... 105,690 99,925
Equipment expense.................................................... 72,382 64,074
Other real estate owned net losses and expenses...................... 14,571 2,608
Computer services.................................................... 59,208 53,237
Deposit insurance assessments........................................ 3,000 2,996
Other operating expenses............................................. 201,660 169,145
---------- ----------
Total noninterest expense..................................... 962,854 840,287
---------- ----------
Income before provision for income taxes...................... 649,999 528,001
PROVISION FOR INCOME TAXES................................................ 242,540 191,182
---------- ----------
NET INCOME................................................................ $ 407,459 $ 336,819
========== ==========
Earnings per share:
Basic......................................................... $0.33 $0.27
========== ==========
Diluted....................................................... $0.33 $0.27
========== ==========
Weighted average common shares outstanding................................ 1,239,074 1,261,241
Dilutive effect of common stock equivalents............................... --- ---
---------- ----------
Weighted average common and common stock equivalent
shares outstanding................................................... 1,239,074 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
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK SURPLUS EARNINGS INCOME STOCK EQUITY
--------- --------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997.............. $1,328,041 $4,431,380 $7,982,792 $ 117,380 $(146,960) $13,712,633
Net income.............................. --- --- 1,450,048 --- --- 1,450,048
Other comprehensive income, net of tax:
Unrealized holding losses............ --- --- --- (46,742) --- (46,742)
Comprehensive income....................
Dividends declared ($.24 per share)..... --- --- (302,697) --- --- (302,697)
---------- ---------- ---------- ---------- --------- -----------
Balance, December 31, 1998.............. 1,328,041 4,431,380 9,130,143 70,638 (146,960) 14,813,242
Net income.............................. --- --- 407,459 --- --- 407,459
Other comprehensive income, net of tax:
Unrealized holding losses............ --- --- --- (56,581) --- (56,581)
Comprehensive income....................
Dividends declared ($.18 per share)..... --- --- (222,974) --- --- (222,974)
Repurchase of 30,000 shares of
common stock........................ (384,375) (384,375)
---------- ---------- ---------- ---------- --------- -----------
Balance, March 31, 1999................. $1,328,041 $4,431,380 $9,314,628 $ 14,057 $(531,335) $14,556,771
========== ========== ========== ========== ========= ===========
<CAPTION>
INCOME
---------
<S> <C>
Balance, December 31, 1997..............
Net income.............................. $1,450,048
Other comprehensive income, net of tax:
Unrealized holding losses............ (46,742)
----------
Comprehensive income.................... $1,403,306
==========
Dividends declared ($.24 per share).....
Balance, December 31, 1998..............
Net income.............................. $ 407,459
Other comprehensive income, net of tax:
Unrealized holding losses............ (56,581)
----------
Comprehensive income.................... $ 350,878
==========
Dividends declared ($.18 per share).....
Repurchase of 30,000 shares of
common stock........................
Balance, March 31, 1999.................
</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,
------------------------------------------
1999 1998
-------------------- -------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................ $ 407,459 $ 336,819
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for loan losses....................................................... 75,000 50,000
Depreciation and amortization....................................................... 73,464 69,702
Losses (gains) on sale OREO...................................................... 3,334 (3,664)
Gains on sales of loans.......................................................... (100,202) (35,705)
Proceeds from sales of loans..................................................... 1,205,770 415,705
Loans originated for sale........................................................ (777,425) (325,000)
Net accretion on investment securities held-to-maturity.......................... (1,836) (2,340)
Net accretion on investment securities available-for-sale........................ (83,251) (12,631)
Net (decrease) increase in unearned discount..................................... (13,073) 13,334
Net increase in other assets..................................................... (158,972) (151,276)
Accretion of discount on debenture............................................... 9,517 50,861
Net increase in deferred loan fees............................................... 7,159 1,377
Net increase in accrued expenses and other liabilities........................... 325,342 107,870
------------ ------------
Net cash provided by operating activities....................................... 972,286 515,052
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investment securities
held-to-maturity................................................................. 1,818,492 6,135,590
Proceeds from maturities of investment securities
available-for-sale............................................................... 80,620,467 11,689,172
Purchase of investment securities held-to-maturity................................. (1,488,394) (2,998,984)
Purchase of investment securities available-for-sale............................... (78,832,729) (16,310,646)
Net increase in loans.............................................................. (3,277,105) (890,333)
Purchase of premises and equipment................................................. (47,972) (62,971)
Sales of OREO...................................................................... 96,666 113,664
------------ ------------
Net cash used in investing activities............................................ (1,110,575) (2,324,508)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand accounts................................................... (378,830) (958,265)
Net increase (decrease) in savings and money market accounts....................... 1,324,746 (2,255,095)
Net (decrease) increase in time deposits........................................... (1,952,477) 3,558,843
Net (decrease) increase in reverse repurchase agreements........................... (216,155) 5,003,100
Net increase in Federal Home Loan Bank advances.................................... 1,900,204 643,395
Purchase of common stock for treasury.............................................. (384,375) ------------
Dividends paid..................................................................... (112,162) (63,062)
------------ ------------
Net cash provided by financing activities........................................ 180,951 5,928,916
------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................................................................ 42,662 4,119,460
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD............................................................................ 5,066,270 6,715,014
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................... $ 5,108,932 $ 10,834,474
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest
paid.............................................................................. $ 1,224,271 $ 1,251,208
============ ============
Income taxes paid.................................................................. $ 313,000 $ 388,650
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfer of loans to OREO.......................................................... $ --- $ ---
============ ============
</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, 1999
(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,
1999, are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999, 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, 1998, filed with the Securities
and Exchange Commission.
(2) DIVIDEND DECLARATION
On March 30, 1999, the Company declared dividends of $110,811.69 or $.09
per share to all common stockholders of record on May 3, 1999, payable on
May 17, 1999.
(3) RECENT DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at
its fair value. This statement requires that changes in the derivative's
fair value be recognized currently in income unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the
hedged item in the statement of income and requires that a company must
formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. A company may also implement the statement
as of the beginning of any fiscal quarter after issuance (that is,
financial quarters beginning June 16, 1998 and thereafter). SFAS No. 133
cannot be applied retroactively. SFAS No. 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1, 1998).
The Company has not yet quantified the impact of adopting SFAS No. 133 on
its consolidated financial statements and has not determined the timing or
method of its adoption of the statement. However, the Company does not
expect that the adoption of this statement will have a material impact on
its financial position or results of operations.
On November 16, 1998, the Company's Board of Directors authorized the
repurchase of up to 5%, or 63,062 shares, of the Company's common stock.
The Company views the repurchase program as an excellent utilization of
capital, and consistent with a solid capital management strategy. On
January 13, 1999 and February 5, 1999, the Company repurchased a total of
30,000 shares under the repurchase program at prices ranging from $12.75 to
$12.875 per share. Total capital used for these repurchases amounted to
$384,375.
5
<PAGE>
(4) BUSINESS SEGMENTS
The Company's community banking business segment consists of commercial and
retail banking. The community banking business segment is managed as a
single strategic unit which derives its revenues from a wide range of
banking services, including investing and lending activities and acceptance
of demand, savings and time deposits. There is no major customer and the
Company operates withing a single geographic area (southeastern New
England).
Nonreportable operating segments of the Company's operations which do not
have similar characteristics to the community banking operations and do not
meet the quantitative thresholds requiring disclosure, are included in the
Other category in the disclosure of business segments below. These non
reportable segments include the Parent Company (Note 15).
The accounting policies used in the disclosure of business segments for
these interim financial statements are the same as those used in the
December 31, 1998 Annual Report on Form 10-K. The consolidation adjustments
reflect certain eliminations of intersegment revenue.
Reportable segment specific information and reconciliation to consolidated
financial information is as follows:
<TABLE>
<CAPTION>
COMMUNITY OTHER ADJUSTMENTS
BANKING OTHER AND ELIMINATIONS CONSOLIDATED
--------- ------- ----------------- ------------
<S> <C> <C> <C> <C>
March 31, 1999
Net Interest Income 1,482,151 210,839 (222,974) 1,470,016
Provision for Loan Losses 75,000 ------ ------- 75,000
Total Noninterest Income 217,837 209,160 (209,160) 217,837
Total Noninterest Expense 938,854 24,000 ------- 962,854
Net Income 432,134 407,459 (432,134) 407,459
March 31, 1998
Net Interest Income 1,281,170 58,909 (75,675) 1,264,404
Provision for Loan Losses 50,000 ------ ------- 50,000
Total Noninterest Income 153,884 284,091 (284,091) 153,884
Total Noninterest Expense 822,287 18,000 ------- 840,287
Net Income 359,766 336,819 (359,766) 336,819
</TABLE>
6
<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 commercial and consumer financial products and
services designed to satisfy the deposit and loan needs of its customers. The
Bank's deposit products include interest-bearing and noninterest-bearing
checking accounts, money market accounts, passbook and statement savings
accounts, club accounts, and short-term and long-term certificates of deposit.
The Bank also offers customary check collection services, wire transfers, safe
deposit box rentals, and automated teller machine (ATM) cards and services. Loan
products include commercial, commercial mortgage, residential mortgage,
construction, home equity and a variety of consumer loans.
The Bank's 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 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
loan losses, occupancy costs and, when necessary, expenses related to other real
estate owned acquired through foreclosure and to the administration of non-
performing and other classified assets.
SUMMARY
- -------
For the three months ended March 31, 1999, the Company reported net income of
$407,459 compared to net income of $336,819 for the three months ended March 31,
1998, or an increase of 21.0%. Basic and diluted net income per share were $.33
for the quarter ended March 31, 1999, based on 1,239,074 weighted average common
and common stock equivalent shares outstanding, compared to $.27 per share in
the first quarter of 1998, based on 1,261,241 weighted average common and common
stock equivalent shares outstanding.
The first quarter ended March 31, 1999 was another record quarter for the
Company--was the fourth (4) consecutive record quarter; represented the eleventh
(11th) record quarter of the past thirteen (13) quarters; and marked the first
(1st) time quarterly earnings surpassed $400,000. Overall, this achievement was
accomplished as a result of (i) an increase in net interest spreads and margins,
(ii) balance sheet growth, predominately within the loan portfolio, (iii) an
increase in the recognition of gains on SBA loans sales, and (iv) continued
strength in asset quality.
Total assets increased $799,615 or 0.6% to $142,718,545 at March 31, 1999, from
$141,918,930 at December 31, 1998. The loan portfolio, net of unearned discount,
increased $3,239,335 or 3.8% to $89,535,180 at March 31, 1999, from $86,295,845
at December 31, 1998. This increase in outstanding loans was funded primarily
from the Company's investment securities which decreased $2,127,053 to
$44,693,630 at March 31, 1999, from $46,820,683 at December 31, 1998. The
increase in the loan portfolio was also funded by a $1,900,204 increase in
Federal Home Loan Bank advances to $8,104,281 at March 31, 1999, from $6,204,077
at December 31, 1998. Total deposits decreased $1,006,561 or 1.0% to
$103,365,367 from $104,371,928.
7
<PAGE>
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 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,
-------------------------- -------------------------
1999 1998 1998
----------- ---------- -------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Nonperforming loans........................................ $ 78 $ -0- $ -0-
Other real estate owned.................................... $ 413 $ 672 $ 513
Total nonperforming assets................................. $ 491 $ 672 $ 513
Loans 30-89 days delinquent................................ $ 231 $ 1,001 $ 161
Nonperforming assets to total assets....................... 0.34% 0.36% 0.36%
Nonperforming loans to total loans......................... 0.09% -0-% -0-%
Net loan charge-offs to average loans...................... 0.05% 0.22% 0.22%
Allowance for possible loan losses to total loans.......... 1.50% 1.68% 1.53%
Allowance for possible loan losses
to nonperforming loans (multiple)......................... 16.94X NM NM
</TABLE>
The following represents the activity in the allowance for loan losses for the
three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Company Allowance:
Balance at beginning of period............................ $1,287,058 $1,208,322
Provision............................................... 75,000 50,000
Loan charge-offs........................................ (46,852) (1,289)
Recoveries.............................................. 3,168 2,147
------- ------
Balance at end of period.................................. 1,318,374 1,259,180
--------- ---------
Acquired Allowance:
Balance at beginning of period............................ -------- 388,291
Loan charge-offs.......................................... -------- (216,500)
Recoveries (Costs)............................... 1,483 (2,825)
Reclassification to senior debenture............. (1,483) ------
----------- ---------
Balance at end of period.................................. ----- 168,966
----------- ---------
Total Allowance.............................................. $1,318,374 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 loan
losses, future adjustments may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation.
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.
Through March 31, 1999, the Company has netted $24,896 in excess charge-offs
against the Senior Debenture. At March 31, 1999, the remaining balance of
acquired loans was $1,858,326.
8
<PAGE>
DEPOSITS AND OTHER BORROWINGS
- -----------------------------
Total deposits decreased $1,006,561 during the three months ended March 31,
1999, from $104,371,928 at December 31, 1998, to $103,365,367 at March 31, 1999.
During the three months ended March 31,1999, demand, savings and money market
deposits increased $945,916 while time deposits decreased $1,952,477. Included
in the decrease of time deposits was a $700,000 withdrawal by a single municipal
depositor from a short term certificate of deposit.
Securities sold under agreements to repurchase decreased $216,155 during the
three months ended March 31, 1999 to $12,039,725 from $12,255,880 at December
31, 1998. Federal Home Loan Bank advances increased $1,900,204 to $8,104,281 at
March 31, 1999, from $6,204,077 at December 31, 1998. This increase was the
result of the Company's continued strategy of match funding selected loan
originations.
9
<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) increased to
$1,470,016 for the three months ended March 31, 1999, compared to $1,264,404 for
the first quarter of 1998. This increase was the result of an increase in net
interest spreads and margins as well as an increase in interest-earning assets.
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities.
Average balances are derived from daily balances. Loans are net of unearned
discount. Non-accrual loans are included in the average balances used in
calculating this table.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------------------
1999 1998
------------------------------------- -----------------------------------
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............................................. $ 89,378,320 $2,078,577 9.30% $ 78,143,199 $ 1,888,173 9.67%
Investment securities taxable - AFS............... 30,165,980 404,434 5.36 27,573,925 394,069 5.72
Investment securities taxable - HTM............... 13,148,653 175,629 5.34 11,175,943 161,067 5.76
Securities purchased under agreements to
resell......................................... 3,749,121 36,589 3.90 4,759,633 60,162 5.06
Federal Home Loan Bank Stock and other 559,287 7,752 5.54 772,781 10,488 5.43
------------ ---------- ---- ------------ ------------ ----
TOTAL INTEREST-EARNING ASSETS........................ 137,001,361 2,702,981 7.89 122,425,481 2,513,959 8.21
NONINTEREST-EARNING ASSETS:
Cash and due from banks............................ 2,293,341 2,081,615
Premises and equipment........................... 2,407,191 2,462,381
Other real estate owned.......................... 448,682 766,301
Allowance for loan losses........................ (1,287,900) (1,547,730)
Other assets..................................... 1,297,641 1,361,160
---------- ------------
TOTAL NONINTEREST-EARNING ASSETS..................... 5,158,955 5,123,727
------------ ------------
TOTAL ASSETS......................................... $142,160,316 $127,549,208
============ ============
INTEREST - BEARING LIABILITIES:
Deposits:
Interest bearing demand and NOW
deposits................................ $ 3,411,554 $ 12,340 1.45 $ 3,652,219 $ 17,555 1.92%
Savings deposits........................ 17,481,734 91,145 2.09 16,584,880 107,522 2.59
Money market deposits................... 1,455,090 7,132 1.96 1,285,459 7,681 2.39
Time deposits........................... 65,959,543 821,174 4.98 64,387,373 888,377 5.52
Securities sold under agreements to
repurchase............................... 12,126,200 150,808 4.97 10,769,830 156,852 5.83
Federal Home Loan Bank advances....... 7,177,688 99,666 5.55 436,632 6,888 6.31
Senior debenture................................ 3,016,080 50,700 6.72 2,969,298 64,680 8.71
------------ ---------- ---- ------------ ------------ ----
TOTAL INTEREST-BEARING LIABILITIES................... 110,627,889 1,232,965 4.46 100,085,691 1,249,555 4.99
---------- ---- ------------ ----
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits..................... 15,697,353 12,296,481
Other liabilities................................ 1,248,518 1,316,480
------------ ------------
TOTAL NONINTEREST-BEARING LIABILITIES................ 16,945,871 13,612,961
STOCKHOLDERS' EQUITY................................. 14,586,556 13,850,556
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $142,160,316 $127,549,208
============ ============
NET INTEREST INCOME.................................. $1,470,016 $ 1,264,404
========== ============
INTEREST SPREAD...................................... 3.43% 3.22%
===== =====
NET INTEREST MARGIN.................................. 4.29% 4.13%
===== =====
</TABLE>
10
<PAGE>
Interest income increased $189,023 or 7.5%, to $2,702,981, from $2,513,958.
This increase was attributable to a $14.6 million increase in average interest-
earning assets, offset somewhat by a 32 basis point decline in earning asset
yields. Within earning assets, average loans increased $11.2 million, or 14.4%,
while average investments increased $3.4 million. During the first quarter of
1999, average loans represented 65.2% of total average interest-earning assets,
compared to 63.8% during the first quarter of 1998. This growth from lower
yielding investments to higher yielding loans helped slow the decline in
interest-earning asset yield in a declining interest rate environment and helped
improve the Company's net interest spread. In terms of rate/volume, the decline
in rates reduced interest income by approximately $120,000; but the increase in
volume contributed approximately $310,000 in interest income.
Total interest expense amounted to $1,232,965 in the first quarter of 1999
compared to $1,249,555 in the first quarter of 1998, or a decrease of $16,590,
or 1.3%. Average interest-bearing deposits grew $10.5 million, while cost of
funds declined 53 basis points to 4.46% from 4.99%. Deposit pricing (especially
within passbook, statement savings, NOW, money market and one-year certificates
of deposit) in a declining interest rate environment accounted for the decline
in the Company's cost of funds. In terms of rate/volume, the decline in rates
helped reduce interest expense by approximately $152,000, while the increase in
total interest bearing liabilities caused an increase of approximately $135,000
in interest expense.
Net interest income rose $205,612 or 16.3% during the first quarter of 1999
compared to the comparable quarter of the prior year, to $1,470,016 from
$1,264,404. The primary reasons for this increase were due to the $14.6 million
increase in average interest-earning assets and the 21 basis point increase in
average net interest spread to 3.43% from 3.22%. Overall, as a result of a
declining interest rate environment, net interest income increased approximately
$32,000, while the growth in interest-earning assets increased net interest
income approximately $174,000. For the first quarter of 1999, net interest
margin improved to 4.29% from 4.13% a year earlier.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses totaled $75,000 for the three months ended March
31, 1999, compared to $50,000 during the same three month period of the prior
year. The increased provision was not an indication of a deterioration of asset
quality, but rather a reflection of loan portfolio growth. At March 31, 1999,
the allowance for loan losses as a percent of total loans was 1.50% compared to
1.68% at March 31, 1998.
NONINTEREST INCOME
- ------------------
Total noninterest income equaled $217,837 for the three months ended March 31,
1999, compared to $153,884 during the same period of the prior year. Gains on
the sale of the guaranteed portion of Small Business Administration ("SBA")
loans of $100,202 during the first quarter of 1999 compared to $35,705 during
the first quarter of 1998 account for the increase in total noninterest income.
NONINTEREST EXPENSE
- -------------------
Noninterest expense increased $122,567 or 14.6% to $962,854 from $840,287.
Salaries and benefits increased $58,041 or 12.9% primarily as a result of three
additional full time equivalent (FTE) positions to 45 FTE in 1999 vs. 42 FTE in
1998 and across the board pay increases and higher benefit costs. Occupancy and
equipment expense increased $14,073 or 8.6% primarily due to depreciation
charges associated with 1998's capital expenditures. OREO expenses are up nearly
$12,000 due to the lack of income producing properties in portfolio as well as
higher costs to dispose. Other operating costs are up approximately $39,000, or
17.3% mainly due to increases in discretionary spending categories.
INCOME TAXES
- ------------
Income taxes for the three months ended March 31,1999 and 1998, were 37.3% and
36.2%, respectively, 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 than the statutory rate
primarily due to the exclusion, from state taxable income of interest income on
U.S. Treasury obligations and certain government agency debt securities.
11
<PAGE>
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,
1999:
<TABLE>
<CAPTION>
REGULATORY
MINIMUM (2) ACTUAL
----------- -------
<S> <C> <C>
The Company (1)
Risk-based:
Tier 1........................ 4.00% 16.45%
Totals........................ 8.00 17.70
Leverage........................ 3.00 10.24
The Bank
Risk-based:
Tier 1......................... 4.00% 16.28%
Totals....................... 8.00 17.53
Leverage......................... 3.00 10.25
</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, 1998, the most recent date for which this information is
available, the Company's one year static gap position was a negative $15,562,000
or 11.0% of total assets. By using simulation modeling techniques, the Company
is able to measure its interest rate risk exposure as determined by the impact
of sudden movements in interest rates on net interest income and equity. This
exposure is termed "earnings-at-risk' and 'equity-at-risk'. At December 31,
1998, the Company's earnings-at-risk under a 200 basis point interest rate
shock test measured a negative 4.3% in a worst case scenario. Under a similar
test, the Company's equity-at-risk measured a negative 10.1% of market value of
equity at December 31, 1998. At December 31, 1998, the Company's earnings-at-
risk and equity-at-risk fell well within tolerance levels established by
internal policy.
LIQUIDITY
- ---------
Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. The Company
12
<PAGE>
further defines liquidity as the ability to respond to the needs of depositors
and borrowers and to earning enhancement opportunities in a changing
marketplace. Primary sources of liquidity consist of deposit inflows, loan
repayments, securities sold under agreements to repurchase, FHLB advances,
maturity of investment securities and sales of securities from the
available-for-sale portfolio. These sources fund the Bank's lending and
investment activities.
At March 31, 1999, cash and due from banks, securities purchased under
agreements to resell, and short-term investments (unpledged and maturing within
one year) amounted to $16.1 million, or 11.3% of total assets. Management is
responsible for establishing and monitoring liquidity targets as well as
strategies and tactics to meet these targets. Through membership in the Federal
Home Loan Bank of Boston (FHLB), the Company has access to both short and long-
term borrowings of nearly $40.0 million, which could assist the Company in
meeting its liquidity needs and funding its asset mix. At March 31, 1999, the
Company held state and municipal demand deposits of $1.0 million which it
considered highly volatile. Nonetheless, the Company believes that there are no
adverse trends in the Company's liquidity or capital reserves, and the Company
believes that it maintains adequate liquidity to meet its commitments.
The Company is cognizant of the special liquidity demands posed by the Year 2000
issue. Liquidity plans are being developed to ensure adequate liquidity on hand
and available should abnormal demands result from the Year 2000 issue. Refer to
the discussion below regarding Year 2000 compliance.
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. As of March 31, 1999,
the Company completed the risk assessment and identification phase of the Year
2000 Plan and has substantially completed the reprogramming and testing phase.
The Plan requires all programs and systems to be fully tested and Year 2000
compliant by June 30, 1999, and the Company expects to complete the
reprogramming and testing phase by June 30, 1999.
The Company's Board of Directors plays a very active role in the Year 2000
compliance effort. The Board has approved the Year 2000 Plan and receives
monthly status reports from members of the project team. The FDIC has also
played a very active role and has visited the Company on two occasions to
examine the Company's progress.
In confronting the Year 2000 problem, the Company faces potential risks to its
and the Bank's operations. As stated above, the Company purchases substantially
all of its software from third parties who face the same Year 2000 challenge as
the Company. In addition, the Company relies almost exclusively on other
companies for the functioning of its automated system. Thus, the Company's
operations could be adversely affected if the operations of these third parties
are adversely affected by the Year 2000 problem. Included among these risks
faced by the Company 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
13
<PAGE>
worldwide, the Company cannot predict with any certainty that its operations
will remain materially unaffected after January 1, 2000, or on dates preceding
this date at which time post-January 1, 2000 dates become significant within the
Bank's systems. Finally, to the extent that certain utility and communication
services utilized by the Company face Year 2000 problems, the Company's
operations could be disrupted.
The Company is in constant communication with its outside vendors, with whom it
is reliant, to ensure that their timetable and progress is consistent with that
of the Company. The Company has also communicated with significant borrowers
and mission critical vendors to determine the status of their Year 2000
compliance efforts. The Company has also kept the Bank's depositors informed of
its efforts. The Company has incorporated a contingency plan into the Year 2000
Plan. The contingency plan calls for a conversion to another core system
provider in the event of a system failure during the remediation effort. If the
failure occurs on or after January 1, 2000, the Company will convert to a manual
system until the computerized system is remedied. The Company believes that a
major system failure is highly unlikely, but limited exceptions across its core
applications may occur. The Company does not anticipate that the remedial or
systems' failure costs incurred in connection with Year 2000 compliance will be
material to its financial condition or results of operations.
The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion, the date which the Company has set to complete its
Year 2000 project and statements about anticipated compliance are based on the
Company's current estimates and are subject to various uncertainties that could
cause actual results to differ materially from the Company's expectations. Such
uncertainties include, among others, the success of the Company in identifying
systems that are not Year 2000 compliant, the nature and 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.
14
<PAGE>
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
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
15
<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 5, 1999 /s/Patrick J. Shanahan,Jr
- ---------------------------- -------------------------------
Date Patrick J. Shanahan, Jr.
Chairman, President and Chief Executive
Officer
May 5, 1999 /s/ John A. Macomber
- ---------------------------- -------------------------------
Date John A. Macomber
Vice President, Treasurer
and Chief Financial Officer
16
<PAGE>
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Weighted average common shares outstanding 1,239,074 1,261,241
Dilutive effect of common stock equivalents --- ---
--------- ---------
Weighted average common and common stock
equivalent shares outstanding 1,239,074 1,261,241
========= =========
Net income $ 407,459 $ 336,819
========= =========
Earnings per share:
Basic $ 0.33 $ 0.27
========= =========
Diluted $ 0.33 $ 0.27
========= =========
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,605,460
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,503,472
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,288,499
<INVESTMENTS-CARRYING> 13,405,131
<INVESTMENTS-MARKET> 13,313,247
<LOANS> 89,535,180
<ALLOWANCE> 1,318,374
<TOTAL-ASSETS> 142,718,545
<DEPOSITS> 103,365,367
<SHORT-TERM> 12,039,725
<LIABILITIES-OTHER> 1,628,731
<LONG-TERM> 11,127,951
0
0
<COMMON> 1,328,041
<OTHER-SE> 13,228,730
<TOTAL-LIABILITIES-AND-EQUITY> 142,718,545
<INTEREST-LOAN> 2,078,577
<INTEREST-INVEST> 624,404
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,702,981
<INTEREST-DEPOSIT> 931,791
<INTEREST-EXPENSE> 1,232,965
<INTEREST-INCOME-NET> 1,470,016
<LOAN-LOSSES> 75,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 962,854
<INCOME-PRETAX> 649,999
<INCOME-PRE-EXTRAORDINARY> 407,459
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407,459
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
<YIELD-ACTUAL> 4.29
<LOANS-NON> 6,620
<LOANS-PAST> 71,190
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,545,048
<ALLOWANCE-OPEN> 1,287,058
<CHARGE-OFFS> 46,852
<RECOVERIES> 3,168
<ALLOWANCE-CLOSE> 1,318,374
<ALLOWANCE-DOMESTIC> 1,318,374
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
