<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000 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 August 4, 2000, there were 1,328,041 shares of the Company's $1.00 par value
stock issued, with 1,213,741 shares outstanding.
<PAGE>
FIRST FINANCIAL CORP.
INDEX
<TABLE>
<CAPTION>
PAGE
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1 - Financial Statements........................................................................ 1
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999............................... 1
Consolidated Statements of Income - Three months and six months ended June 30, 2000
and 1999..................................................................................... 2
Consolidated Statements of Stockholders' Equity and Comprehensive Income - Six months
ended June 30, 2000 and year ended December 31, 1999......................................... 3
Consolidated Statements of Cash Flows - Six months ended June 30, 2000 and 1999................. 4
Notes to Consolidated Financial Statements - June 30, 2000...................................... 5
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................... 7
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings........................................................................... 14
Item 2 - Changes in Securities....................................................................... 14
Item 3 - Defaults Upon Senior Securities............................................................. 14
Item 4 - Submission of Matters to a Vote of Security Holders......................................... 14
Item 5 - Other Information........................................................................... 14
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>
June 30, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CASH AND DUE FROM BANKS........................................................ $ 2,613,735 $ 5,441,190
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL................................ 5,320,932 3,802,865
LOANS HELD FOR SALE............................................................ 836,501 942,338
INVESTMENT SECURITIES:
Held-to-maturity (market value: $22,464,164 and $15,450,453)................. 22,738,391 15,691,004
Available-for sale (amortized cost: $31,417,624 and $21,167,567)............. 30,305,517 20,857,124
------------ ------------
Total investment securities............................................ 53,043,908 36,548,128
------------ ------------
FEDERAL HOME LOAN BANK STOCK................................................... 716,000 681,500
LOANS:
Commercial................................................................... 12,850,215 12,248,552
Commercial real estate....................................................... 68,691,037 65,812,129
Residential real estate...................................................... 14,368,931 13,084,006
Home equity lines of credit.................................................. 2,735,660 3,051,265
Consumer..................................................................... 750,774 766,383
------------ ------------
99,396,617 94,962,335
Less - Unearned discount..................................................... 14,024 23,221
Allowance for loan losses.................................................... 1,697,072 1,556,405
------------ ------------
Net loans.............................................................. 97,685,521 93,382,709
------------ ------------
OTHER REAL ESTATE OWNED........................................................ 268,000 ---
PREMISES AND EQUIPMENT, net.................................................... 2,055,826 2,167,103
OTHER ASSETS................................................................... 3,136,283 1,815,822
------------ ------------
TOTAL ASSETS................................................................... $165,676,706 $144,781,655
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS:
DEPOSITS
Demand....................................................................... $ 19,380,911 $ 17,522,309
Savings and money market accounts............................................ 21,062,473 23,838,702
Time deposits................................................................ 85,064,920 63,227,494
------------ ------------
Total deposits.......................................................... 125,508,304 104,588,505
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE................................. 9,496,125 9,411,111
FEDERAL HOME LOAN BANK ADVANCES................................................ 13,491,764 13,610,400
ACCRUED EXPENSES AND OTHER LIABILITIES......................................... 1,702,951 1,689,999
SENIOR DEBENTURE............................................................... --- ---
------------ ------------
TOTAL LIABILITIES.............................................................. 150,199,144 129,300,015
------------ ------------
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............................................................ 11,140,490 10,504,194
Accumulated other comprehensive (loss) income................................ (667,264) (186,265)
------------ ------------
16,232,647 16,077,350
Less - Treasury stock, at cost, 114,300 shares in 2000; 101,800 shares
in 1999................................................................... 755,085 595,710
------------ ------------
TOTAL STOCKHOLDERS' EQUITY..................................................... 15,477,562 15,481,640
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................... $165,676,706 $144,781,655
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans......................................... $4,733,773 $4,201,084 $2,408,563 $2,122,507
Interest and dividends on investment securities-
U.S. Government and agency obligations.................... 1,030,406 852,965 575,382 434,950
Collateralized mortgage obligations....................... 39,303 74,070 17,447 35,032
Mortgage-backed securities................................ 159,820 207,773 77,230 96,598
Other debt securities..................................... 294,790 --- 204,372 ---
Marketable equity securities and other.................... 49,089 31,698 23,321 12,111
Interest on cash equivalents....................................... 158,439 74,509 50,923 37,920
---------- ---------- ---------- ----------
Total interest income..................................... 6,465,620 5,442,099 3,357,238 2,739,118
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits............................................... 2,525,821 1,857,640 1,355,670 925,849
Interest on repurchase agreements.................................. 231,649 300,511 111,821 149,703
Interest on advances............................................... 401,347 215,465 199,880 115,799
Interest on debenture.............................................. --- 84,503 --- 33,803
---------- ---------- ---------- ----------
Total interest expense..................................... 3,158,817 2,458,119 1,667,371 1,225,154
---------- ---------- ---------- ----------
Net interest income........................................ 3,306,803 2,983,980 1,689,867 1,513,964
PROVISION FOR LOAN LOSSES.............................................. 125,000 125,000 75,000 50,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses............................................... 3,181,803 2,858,980 1,614,867 1,463,964
---------- ---------- ---------- ----------
NONINTEREST INCOME:
Service charges on deposits........................................ 136,880 132,094 69,451 65,023
Gain on loan sales................................................. 152,261 154,154 95,955 53,952
Other.............................................................. 140,839 99,420 65,294 48,856
Total noninterest income................................... ---------- ---------- ---------- ----------
429,980 385,668 230,700 167,831
---------- ---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits.................................... 1,203,463 1,022,075 616,098 515,732
Occupancy expense................................................. 228,912 336,947 109,513 231,257
Equipment expense................................................. 130,856 147,257 64,686 74,875
Other real estate owned net (gains) losses and expenses........... (4,261) (212,110) (4,427) (226,681)
Computer services................................................. 123,558 124,636 60,175 65,428
Deposit insurance assessments..................................... 10,843 5,977 5,259 2,977
Other operating expenses.......................................... 480,766 406,755 251,506 205,095
---------- ---------- ---------- ----------
Total noninterest expense.................................. 2,174,137 1,831,537 1,102,810 868,683
---------- ---------- ---------- ----------
Income before provision for income taxes................... 1,437,646 1,413,111 742,757 763,112
PROVISION FOR INCOME TAXES............................................. 510,052 517,039 263,903 274,499
---------- ---------- ---------- ----------
NET INCOME............................................................. $ 927,594 $ 896,072 $ 478,854 $ 488,613
========== ========== ========== ==========
Earnings per share:
Basic...................................................... $ 0.76 $ 0.73 $ 0.39 $ 0.40
========== ========== ========== ==========
Diluted.................................................... $ 0.76 $ 0.73 $ 0.39 $ 0.40
========== ========== ========== ==========
Weighted average common shares outstanding............................. 1,214,514 1,235,136 1,213,741 1,231,241
Diluted effect of common stock equivalents............................. --- --- --- ---
---------- ---------- ---------- ----------
Weighted average common and common stock equivalent
shares outstanding................................................ 1,214,514 1,235,136 1,213,741 1,231,741
========== ========== ========== ==========
</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 Treasury Stockholders' Comprehensive
Stock Surplus Earnings (Loss) Income Stock Equity Income
----------- ---------- ------------ ------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998........... $ 1,328,041 $4,431,380 $ 9,130,143 $ 70,638 $(146,960) $ 14,813,242
Net income........................... --- --- 1,818,648 --- --- 1,818,648 $ 1,818,648
Other comprehensive income, net
of tax:
Unrealized holding losses, net.... --- --- --- (256,903) --- (256,903) (256,903)
------------
of reclassification adjustment
Comprehensive income................. $ 1,561,745
============
Dividends declared ($.36 per
share)............................ (444,597) (444,597)
Repurchase of 35,000 shares of
common stock...................... (448,750) (448,750)
---------- ---------- ----------- --------- --------- ------------
Balance, December 31, 1999........... 1,328,041 4,431,380 10,504,194 (186,265) (595,710) 15,481,640
Net income........................... --- --- 927,594 --- --- 927,594 $ 927,594
Other comprehensive income, net
of tax:
Unrealized holding losses, net.... --- --- --- (480,999) --- (480,999) (480,999)
------------
of reclassification adjustment
Comprehensive income................. $ 446,595
============
Dividends declared ($.24 per
share)............................ --- --- (291,298) --- --- (291,298)
Repurchase of 12,500 shares of
common stock...................... (159,375) (159,375)
----------- ---------- ----------- --------- --------- ------------
Balance, June 30, 2000............... $ 1,328,041 $4,431,380 $11,140,490 $(667,264) $(755,085) $ 15,477,562
=========== ========== =========== ========= ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
FIRST FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 927,594 $ 896,072
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses.................................................... 125,000 125,000
Depreciation and amortization................................................ 138,550 153,792
Writeoff of impaired long-lived asset........................................ --- 129,362
Amortization of discount on debenture........................................ --- 15,860
Net accretion on investment securities held-to-maturity............ (4,897) (3,155)
Net accretion on investment securities available-for-sale.................... (169,823) (186,185)
Gains on sale of OREO........................................................ (5,014) (219,118)
Gains on sales of loans...................................................... (152,261) (154,154)
Proceeds from sales of loans................................................. 3,427,708 2,268,857
Loans originated for sale.................................................... (3,169,610) (3,958,631)
Net decrease in unearned discount............................................ (9,197) (24,379)
Net increase in other assets................................................. (999,795) (140,710)
Net (decrease) increase in deferred loan fees (20,588) 12,315
Net increase in accrued expenses and other liabilities 12,952 289,730
------------- -----------
Net cash provided by (used in) operating activities...................... 100,619 (795,344)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Federal Home Loan Bank stock..................................... (34,500) (39,800)
Proceeds from maturities of investment securities
held-to-maturity........................................................... 707,276 2,425,992
Proceeds from maturities of investment securities
available-for-sale........................................................... 131,856,949 167,546,146
Purchase of investment securities held-to-maturity........................... (7,749,766) (2,488,394)
Purchase of investment securities available-for-sale......................... (141,937,184) (165,662,016)
Net increase in loans....................................................... (4,828,108) (4,476,327)
Purchase of premises and equipment........................................... (27,273) (80,057)
Sales of OREO................................................................ 167,095 684,955
------------- -----------
Net cash used in investing activities.................................. (21,845,511) (2,089,501)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand accounts.............................................. 1,858,602 4,888,281
Net (decrease) increase in savings and money market accounts...... (2,776,229) 1,370,394
Net increase (decrease) in time deposits..................................... 21,837,426 (1,080,634)
Net increase (decrease) in repurchase agreements............................ 85,014 (397,990)
Net (decrease) increase in Federal Home Loan Bank advances........ (118,636) 3,544,349
Repayment of senior debenture................................................ --- (2,708,777)
Purchase of common stock for treasury........................................ (159,375) (384,375)
Dividends paid............................................................... (291,298) (222,974)
Net cash provided by financing activities......................... 20,435,504 5,008,274
------------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS........................................................... (1,309,388) 2,123,429
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD....................................................................... 9,244,055 5,066,270
------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 7,934,667 $ 7,189,699
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................................. $ 3,074,250 $ 2,462,048
============= ===========
Income taxes paid................................................... $ 805,000 $ 843,000
============= ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfer of loans to OREO.................................................... $ 430,081 $ ---
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED JUNE 30, 2000
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation of the
financial statements, primarily consisting of normal recurring adjustments,
have been included. Operating results for the three months and six months
ended June 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000, 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, 1999, filed with the Securities
and Exchange Commission.
(2) DIVIDEND DECLARATION
On July 10, 2000 the Company declared dividends of $145,649 or $.12 per
share to all common stockholders of record on August 1, 2000, payable on
August 14, 2000.
(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, as amended by SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on 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, 2000. A company may also implement
the statement as of the beginning of any fiscal quarter after issuance
(that is, financial quarters beginning June 16, 1998 and thereafter). SFAS
No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to
(a) derivative instruments and (b) certain derivative instruments embedded
in hybrid contracts that were issued, acquired or substantively modified
after December 31, 1997 (and, at the Company's election, before January 1,
1998). The Company has not yet quantified the impact of adopting SFAS No.
133 on its consolidated financial statements and has not determined the
timing or method of its adoption of the statement. However, the Company
does not expect that the adoption of this statement will have a material
impact on its financial position or results of operations.
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 revenue from a wide range of
banking services, including investing and lending activities and acceptance
of demand, savings and time deposits. There is no major customer and the
Company operates within a single geographic area (southeastern New
England).
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.
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, 1999 Annual Report and 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>
Three Months Ended June 30, 2000
Net Interest Income $ 1,683,804 $ 499,617 $(493,554) $ 1,689,867
Provision for Loan Losses 75,000 --- --- 75,000
Total Noninterest Income 230,700 --- --- 230,700
Total Noninterest Expense 1,078,810 24,000 --- 1,102,810
Net Income 493,554 478,854 (493,554) 478,854
Three Months Ended June 30, 1999
Net Interest Income 1,529,169 498,113 (513,318) 1,513,964
Provision for Loan Losses 50,000 --- --- 50,000
Total Noninterest Income 167,831 --- --- 167,831
Total Noninterest Expense 846,683 22,000 --- 868,683
Net Income 513,318 488,613 (513,318) 488,613
Six Months Ended June 30, 2000
Net Interest Income 3,294,682 964,646 (952,525) 3,306,803
Provision for Loan Losses 125,000 --- --- 125,000
Total Noninterest Income 429,980 --- --- 429,980
Total Noninterest Expense 2,126,137 48,000 --- 2,174,137
Net Income 952,525 927,594 (952,525) 927,594
Six Months Ended June 30, 1999
Net Interest Income 3,011,320 918,112 (945,452) 2,983,980
Provision for Loan Losses 125,000 --- --- 125,000
Total Noninterest Income 385,668 --- --- 385,668
Total Noninterest Expense 1,785,537 46,000 --- 1,831,537
Net Income 945,452 896,072 (945,452) 896,072
</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 and Federal Home Loan Bank advances. 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 (OREO) and to the administration of non-performing
and other classified assets.
Summary
-------
For the three months ended June 30, 2000, the Company reported net income of
$478,854, compared to net income of $488,613 for the three months ended June 30,
1999, or a decrease of 2.0%. Basic and diluted net income per share were $.39
for the quarter ended June 30, 2000, compared to $.40 per share for the same
three month period of the prior year. Net income for the six months ended June
30, 2000 amounted to $927,594, compared to net income of $896,072 for the six
months ended June 30, 1999. Basic and diluted net income per share for the six
months ended June 30, 2000 and June 30, 1999 were $.76 and $.73, respectively.
During the three months ended June 30, 1999, the Company recorded two one-time
transactions. The first nonrecurring transaction was the sale of OREO at a gain
of $222,452. The second nonrecurring transaction was a $129,362 write-off of a
long-lived asset in recognition of its impaired value. The after-tax impact of
these two transactions was to increase net income by $61,439, or $.05 per share.
Exclusive of last year's nonrecurring transactions, net income increased 12.1%
for the three months ended June 30, 2000 over the core earnings for the three
months ended June 30, 1999. For the six months ended June 30, 2000, net income
increased 11.1% over the core earnings for the same six month period of the
prior year.
Exclusive of last year's nonrecurring transactions, the second quarter ended
June 30, 2000 was the second strongest in
7
<PAGE>
the Company's history. Overall, this achievement was accomplished as a result
of (i) balance sheet growth, which more than offset a slight decline in net
interest margin, and (ii) continued strength in asset quality.
Total assets increased $20.9 million or 14.4% to $165.7 million at June 30,
2000, from $144.8 million at December 31, 1999. The loan portfolio, net of
unearned discount, increased $4.5 million or 4.7% to $99.4 million at June 30,
2000, from $94.9 million at December 31, 1999. Investment securities increased
$16.5 million to $53.0 million at June 30, 2000, from $36.5 million at December
31, 1999. The increase in the Company's total assets was funded from retail
deposits and, in particular, time deposits. Total deposits increased $20.9
million to $125.5 million at June 30, 2000, from $104.6 million at December 31,
1999, while time deposits increased $21.8 million to $85.0 million at June 30,
2000, from $63.2 million at December 31, 1999. During February 2000, the
Company successfully marketed a 14 month certificate of deposit promotion
through its branch network at a slightly above market rate of 6.77% (7.00%
annual percentage yield). This promotion raised over $23 million in new
deposits and opened over 1,000 new deposit accounts, all of which were from the
local community. The purpose of this retail deposit growth activity was to
increase the Company's customer base; strengthen the Company's presence in the
community; leverage the Company's strong capital position and; solidify the
Company's ability to fund future loan portfolio growth. The Company invested
the proceeds in government agency and corporate debt obligations.
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 as of and for
the six months and twelve months ended June 30, 1999 and December 31, 1999,
respectively, 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
six months ended year ended
June 30, December 31,
----------------- -----------------
2000 1999 1999
------ ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Nonperforming loans................................. $ 120 $ 126 $ 181
Other real estate owned............................. $ 268 $ 47 $ -0-
Total nonperforming assets.......................... $ 388 $ 173 $ 181
Loans 30-89 days delinquent......................... $ 347 $ 583 $ 154
Nonperforming assets to total assets................ 0.23% 0.12% 0.12%
Nonperforming loans to total loans.................. 0.12% 0.14% 0.19%
Net loan (recoveries) charge-offs to average loans.. (0.02)% 0.02% 0.01%
Allowance for loan losses to total loans............ 1.71% 1.53% 1.64%
Allowance for loan losses
to nonperforming loans (multiple).................. 14.10X 11.10X 8.62X
</TABLE>
In May 1992, the Company issued a $3 million Senior Debenture to the Depositors
Economic Protection Corporation (DEPCO) in connection with its acquisition of
certain assets and the assumption of certain liabilities of Chariho-Exeter
Credit Union. Under the terms of the Senior Debenture, the Company was allowed
to charge net acquired loan losses in excess of the acquired loan loss reserve
against the outstanding Senior Debenture. On May 31, 1999, the Senior Debenture
matured. The Company repaid the Debenture in the amount of $2,708,777, which
represented the original face value of $3,000,000, less $291,223 in net acquired
loan losses in excess of the acquired loan loss reserve.
8
<PAGE>
The following represents the activity in the allowance for loan losses for the
three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Bank Reserve
Balance at beginning of period......................... $ 1,556,405 $ 1,287,058 $ 1,615,727 $ 1,318,374
Provision............................................ 125,000 125,000 75,000 50,000
Loan charge-offs..................................... (41,920) (46,852) (40,480) ---
Recoveries........................................... 57,587 28,446 46,825 25,278
----------- ----------- ----------- ------------
Balance at end of period.............................. 1,697,072 1,393,652 1,697,072 1,393,652
----------- ----------- ----------- ------------
Acquired Reserve:
Balance at beginning of period.................... --- --- --- ---
Loan charge-offs.................................... --- (266,482) --- (266,482)
Recoveries (Administrative Costs).................. --- 1,638 --- 155
Reclassification to senior debenture............... --- 264,844 --- 266,327
Balance at end of period............................ --- --- --- ---
----------- ----------- ----------- ------------
Total Reserve.......................................... $ 1,697,072 $ 1,393,652 $ 1,697,072 $ 1,393,652
=========== =========== =========== ============
</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.
Deposits and Other Borrowings
-----------------------------
Total deposits increased $20.9 million or 20.0% to $125.5 million at June 30,
2000 from $104.6 million at December 31, 1999. During the six months ended June
30, 2000, demand deposits increased $1.9 million, savings and money market
accounts decreased $2.8 million, and time deposits increased $21.8 million. The
previously mentioned promotional activity and market acceptance of new deposit
product offerings accounted for the positive deposit growth. Also contributing
to the deposit activity were customers seeking banking relationships as an
alternative to the merger and acquisition activity of area financial
institutions.
Securities sold under agreements to repurchase and Federal Home Loan Bank
advances remained virtually flat at $23.0 million at June 30, 2000 and December
31, 1999.
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 $3,306,803
for the six months ended June 30, 2000, compared to $2,983,980 for the six
months ended June 30, 1999. This increase was the result of an increase in
interest-earning assets, offset somewhat by a slight decline in net interest
margins.
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.
9
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------------------------
2000 1999
------------------------------------------ --------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------- ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest - earning assets:
Loans......................................... $ 98,713,438 $ 4,733,773 9.59% $ 89,835,475 $ 4,201,084 9.35%
Investment securities - AFS................... 29,675,090 957,232 6.45% 30,037,301 786,661 5.24%
Investment securities - HTM.................. 20,146,672 590,993 5.87% 13,269,027 363,998 5.49%
Securities purchased under agreements to
resell.................................... 6,594,388 158,438 4.81% 3,790,269 74,509 3.93%
Federal Home Loan Bank Stock and other 786,875 25,184 6.40% 472,255 15,847 6.71%
------------ ----------- ------- ------------ ------------ -------
Total interest-earning assets.................. 155,916,463 6,465,620 8.29% 137,404,327 5,442,099 7.92%
----------- ------- ------------ -------
Noninterest-earning assets:
Cash and due from banks...................... 3,073,862 2,401,343
Premises and equipment....................... 2,123,663 2,386,403
Other real estate owned...................... 129,975 421,736
Allowance for loan losses.................... (1,625,582) (1,259,705)
Other assets................................. 2,040,338 1,322,010
------------ ------------
Total noninterest-earning assets............... 5,742,256 5,271,787
------------ ------------
Total assets................................... $161,658,719 $142,676,114
============ ============
Interest - bearing liabilities:
Deposits:
Interest bearing demand and NOW
deposits............................... $ 3,240,912 $ 23,643 1.46% $ 3,457,562 $ 25,204 1.46%
Savings deposits........................ 17,441,758 185,057 2.12% 17,843,570 188,545 2.11%
Money market deposits................... 1,315,497 13,648 2.08% 1,510,307 15,173 2.01%
Time deposits........................... 81,382,491 2,303,473 5.66% 65,537,310 1,628,718 4.97%
Securities sold under agreements to
repurchase............................... 9,453,410 231,649 4.90% 12,043,802 300,511 4.99%
Federal Home Loan Bank Advances...... 13,552,230 401,347 5.92% 7,639,702 215,465 5.64%
Senior debenture............................ 0.00 0.00 0.00% 2,428,590 84,503 6.96%
------------ ---------- --------- ------------ ------------ ------
Total interest-bearing liabilities............. 126,386,298 3,158,817 5.00% 110,460,843 2,458,119 4.45%
---------- --------- ------------ ------
Noninterest-bearing liabilities:
Noninterest-bearing deposits................. 18,460,724 16,275,856
Other liabilities............................ 1,396,903 1,278,526
------------ ------------
Total noninterest-bearing liabilities.......... 19,857,627 17,554,382
Stockholders' equity........................... 15,414,794 14,660,889
------------ ------------
Total liabilities and stockholders' equity. $161,658,719 $142,676,114
============ ============
Net interest income............................ $3,306,803 $ 2,983,980
========== ============
Net interest spread............................ 3.30% 3.47%
========== ======
Net interest margin............................ 4.24% 4.34%
========== ======
</TABLE>
10
<PAGE>
Total interest income for the three months ended June 30, 2000 was $3,357,238,
compared to $2,739,118 for the same three month period of the prior year. This
increase of $618,120 or 22.6% was primarily the result of a $22.1 million
increase in quarterly average interest-earning assets to $160.0 million for the
second quarter of 2000 from $137.9 million for the second quarter of 1999.
Quarterly average loans increased $9.7 million from a year ago, while the
remainder of the growth went into the lower yielding investment portfolio. The
yield on quarterly average interest-earning assets increased to 8.39% for the
three months ended June 30, 2000, compared to 7.95% for the three months ended
June 30, 1999. The increase in quarterly interest-earning asset yield was
primarily attributed to a rising interest rate environment. Total interest
expense increased $442,217 to $1,667,371 for the three months ended June 30,
2000 compared to $1,225,154 for the same three month period of 1999. This
increase reflected the growth of quarterly average interest-bearing liabilities
of $19.7 million to $130.0 million in the second quarter of 2000 from $110.3
million in the second quarter of 1999. All of this growth took place within the
higher cost time deposits which, coupled with a rising rate environment, drove
up the Company's cost of funds to 5.13% in the second quarter of 2000 from 4.44%
in last year's second quarter. Overall, the Company's net interest spread
decreased to 3.26% from 3.51% and its margin also declined to 4.22% from 4.39%.
However, this spread and margin compression was anticipated when the Company ran
a certificate of deposit promotion to partially leverage the Company's capital
position and presumably increase market share. Effectively, net interest income
increased $175,903 or 11.6% during the second quarter of 2000 compared to the
second quarter of 1999.
Total interest income for the six months ended June 30, 2000 was $6,465,620,
compared to $5,442,099 for the six months ended June 30, 1999. This increase of
$1,023,521 or 18.8% was largely the result of an $18.5 million increase in
average interest-earning assets, of which $8.9 million took place in the loan
portfolio and the remaining $9.6 million of growth occurred within the
investment portfolio. Of the increase in total interest income, approximately
$693,000 was related to balance sheet growth (volume). A rising rate environment
boosted the yield on interest-earning assets to 8.29% for the first six months
of 2000, compared to 7.92% for the first six months of 1999. This yield
improvement added nearly $331,000 to the increase in interest income. The total
interest expense increased $700,698 or 28.5% to $3,158,817 for the six months
ended June 30, 2000 from $2,458,119 for the six months ended June 30, 1999.
Total average interest-bearing liabilities increased $15.9 million to $126.4
million from $110.5 million. All of this increase took place within higher cost
time deposits which funded interest-earning asset growth. This volume related
increase accounted for nearly $468,000 of the increase in interest expense. The
Company's cost of funds increased to 5.00% for the six months ended June 30,
2000 from 4.45% for the same six month period of 1999. This increase in cost of
funds was due in part to a rising interest rate environment, along with a change
in the composition mix of interest-bearing liabilities. This increase in funding
costs added approximately $233,000 to the increase in interest expense. Overall,
net interest income increased $322,823 to $3,306,803 from $2,983,980. Changes in
volume (balance sheet growth) contributed nearly $225,000 to this increase,
while changes in rates added approximately $98,000. Net interest spread declined
17 basis points to 3.30% from 3.47%, while net interest margin decreased 10
basis points to 4.24% for the first six months of 2000 from 4.34% for last
year's first six months.
Provision for Loan Losses
-------------------------
The provision for loan losses totaled $75,000 for the three months ended June
30, 2000 and $50,000 for the three months ended June 30, 1999. For the six
months ended June 30, 2000 and 1999, the provision for loan losses amounted to
$125,000.
Noninterest Income
------------------
Total noninterest income increased $62,869 to $230,700 for the three months
ended June 30, 2000, from $167,831 for the three months ended June 30, 1999. For
the six months ended June 30, 2000 and 1999, noninterest income increased
$44,312 to $429,980 from $385,668. For both the three month and six month
reporting period, the increases were attributable to an increase in gains on the
sale of the guaranteed portion of Small Business Administration ("SBA") loans
plus SBA loan servicing fees.
11
<PAGE>
Noninterest Expense
-------------------
Total noninterest expense amounted to $1,102,810 and $868,683 for the three
months ended June 30, 2000 and 1999, respectively. Excluding the nonrecurring
transactions relating to the gain on OREO sale and the write-off of a long-lived
asset, noninterest expense would have amounted to $961,773 for the three months
ended June 30, 1999, or an increase of $141,037, or 14.7% for the three months
ended June 30, 2000 compared to the three months ended June 30, 1999. For the
six months ended June 30, 2000 and 1999, noninterest expense was $2,174,137 and
$1,831,537, respectively. Excluding the nonrecurring transactions, noninterest
expense would have totaled $1,924,627 for the six months ended June 30, 1999, or
an increase of $249,510, or 13.0%. For both the three month and six month
periods ended June 30, 2000, the increases in overhead costs are primarily the
result of (i) higher salaries and wages associated with filling additional staff
positions, and across-the-board pay increases, (ii) higher benefit costs, (iii)
increases in legal and professional fees, and (iv) higher marketing, advertising
and business development costs.
Income Taxes
------------
Income taxes for the three months ended June 30, 2000, were $263,903 or 35.5% of
pretax income, compared to $274,499 or 36.0% of pretax income for the three
months ended June 30, 1999. For the six months ended June 30, 2000 and 1999,
income taxes were $510,052 and $517,039, respectively, or 35.5% and 36.6% of
pretax income, respectively. 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.
The lower effective tax rates in 2000 were primarily due to proportionately more
income excluded for state income tax purposes.
Capital Adequacy
----------------
The FDIC and the Federal Reserve Board have established guidelines with respect
to the maintenance of appropriate levels of capital by both the Bank and the
Company.
Set forth below is a summary of FDIC and Federal Reserve Board capital
requirements, and the Company's and the Bank's capital ratios as of June 30,
2000:
<TABLE>
<CAPTION>
Regulatory
Minimum (1) Actual
----------- --------
<S> <C> <C>
The Company
Risk-based:
Tier 1........................ 4.00% 14.57%
Totals........................ 8.00 15.83
Leverage........................ 3.00 9.71
The Bank
Risk-based:
Tier 1......................... 4.00% 14.03%
Totals....................... 8.00 15.29
Leverage......................... 3.00 9.37
</TABLE>
(1) The 3% regulatory minimum leverage ratio applies only to certain highly-
rated banks. Other institutions are subject to higher requirements.
12
<PAGE>
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 June 30, 2000, the Company's one year static gap position was a negative
$41.9 million or 25.3% 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 June
30, 2000, the Company's earnings-at-risk under a +200 basis point interest rate
shock test measured a negative 6.25% in a worst case scenario. Under a similar
test, the Company's equity-at-risk measured a negative 18.86% of market value of
equity at June 30, 2000. At June 30, 2000, the Company's earnings-at-risk and
equity-at-risk fell well within tolerance levels established by internal policy.
Liquidity
---------
Liquidity is defined as the ability to meet current and future financial
obligations of a short-term nature. The Company further defines liquidity as the
ability to respond to the needs of depositors and borrowers and to earning
enhancement opportunities in a changing marketplace. Primary sources of
liquidity consist of deposit inflows, loan repayments, securities sold under
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 June 30, 2000, cash and due from banks, securities purchased under agreements
to resell, and short-term investments (unpledged and maturing within one year)
amounted to $16.6 million, or 10.0% 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 an unused borrowing capacity of nearly $29.0
million, which could assist the Company in meeting its liquidity needs and
funding its asset mix. At June 30, 2000, the Company held state and municipal
demand deposits of $.8 million which it considered highly volatile. Nonetheless,
the Company believes that there are no adverse trends in the Company's liquidity
or capital reserves, and the Company believes that it maintains adequate
liquidity to meet its commitments.
Year 2000 Compliance
--------------------
At January 1, 2000, the Company did not encounter any Year 2000 date change
difficulties. All systems and operations continued to function without
interruption. The Company is not aware of any Year 2000 difficulties encountered
by any of its borrowers. Nonetheless, the Company continues to closely monitor
the Year 2000 issue as critical dates emerge throughout the year.
13
<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
The Company held its 2000 Annual Meeting of Stockholders on May 10, 2000. The
meeting was held for the purpose of: (i) electing Artin H. Coloian, Esq., John
Nazarian, Ph.D. and William P. Shields, Directors of the Company for a three
year term expiring at the Annual Meeting in the year 2003 and (ii) ratifying the
selection of Arthur Andersen LLP as the independent public accountants for the
Company for the fiscal year ending December 31, 2000.
At the time of the 2000 Annual Meeting there were 1,213,741 shares entitled to
vote. Shares voted either in person or by proxy totaled 1,076,063 shares. The
results of the votes cast were as follows:
<TABLE>
<CAPTION>
For Against Abstention
---------- ----------- ------------
<S> <C> <C> <C>
(i) To elect Directors of the Company for three years:
Artin H. Coloian, Esq. 1,057,701 18,362
John Nazarian, Ph.D. 1,057,801 18,262
William P. Shields 1,057,801 18,262
(ii) To select Arthur Andersen LLP as independent
public accountants for the Company for the 1,069,411 6,050 602
fiscal year ending December 31, 2000
</TABLE>
In addition, upon completion of the Annual Meeting the Director's Terms continue
as follows:
<TABLE>
<CAPTION>
Name Term to Expire in:
---- --------------------
<S> <C>
Patrick J. Shanahan, Jr. 2001
Gary R. Alger 2001
Joseph V. Mega 2001
Raymond F. Bernardo 2002
Joseph A. Keough, Esq. 2002
Peter L. Mathieu, Jr., M.D. 2002
Fred J. Simon, Jr. 2002
</TABLE>
Item 5 - Other Information
Not Applicable
14
<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
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.
August 4, 2000 /s/ Patrick J. Shanahan, Jr.
---------------------- --------------------------------
Date Patrick J. Shanahan, Jr.
Chairman, President and Chief Executive Officer
August 4, 2000 /s/ John A. Macomber
---------------------- --------------------------------
Date John A. Macomber
Vice President, Treasurer
and Chief Financial Officer
16
