10-Q 1 d10q.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 Commission file number 0-27878 First Financial Corp. (Exact name of registrant as specified in its charter) Rhode Island 05-0391383 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 180 Washington Street, Providence, Rhode Island 02903 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (401) 421-3600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- ___ At November 13, 2001, there were 1,328,041 shares of the Company's $1.00 par value stock issued, with 1,213,741 shares outstanding. FIRST FINANCIAL CORP. INDEX
PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements....................................................................... 1 Consolidated Balance Sheets - September 30, 2001 and December 31, 2000......................... 1 Consolidated Statements of Income - Nine months and three months ended September 30, 2001 and 2000................................................................................ 2 Consolidated Statements of Stockholders' Equity and Comprehensive Income - Nine months ended September 30,2001...................................................................... Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and 2000.......... 4 Notes to Consolidated Financial Statements - September 30, 2001................................ 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 8 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
PART I - FINANCIAL INFORMATION Item 1 - Financial Statements FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 2001 2000 ------------ ------------ ASSETS (Note 1) CASH AND DUE FROM BANKS...................................................... $ 3,924,719 $ 3,055,863 SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL............................. 153,668 1,748,068 LOANS HELD FOR SALE.......................................................... 2,046,859 505,000 INVESTMENT SECURITIES: Held-to-maturity (market value: $13,962,455 and $22,451,901).............. 13,778,553 22,488,801 Available-for sale........................................................ 38,608,106 31,923,655 ------------ ------------ Total investment securities........................................... 52,386,659 54,412,456 ------------ ------------ FEDERAL HOME LOAN BANK STOCK................................................. 1,091,500 716,000 LOANS: Commercial................................................................ 13,633,802 13,099,260 Commercial real estate.................................................... 81,038,847 73,522,872 Residential real estate................................................... 12,356,484 13,377,532 Home equity lines of credit............................................... 3,343,774 2,948,764 Consumer.................................................................. 995,633 939,063 ------------ ------------ 111,368,540 103,887,491 Less - Unearned discount.................................................. 2,602 7,674 Allowance for loan losses................................................. 1,813,781 1,751,621 ------------ ------------ Net loans............................................................. 109,552,157 102,128,196 ------------ ------------ PREMISES AND EQUIPMENT, net.................................................. 1,856,901 2,003,583 OTHER ASSETS................................................................. 3,135,498 3,802,341 ------------ ------------ TOTAL ASSETS................................................................. $174,147,961 $168,371,507 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: Demand..................................................................... $ 19,677,541 $ 19,187,122 Savings and money market accounts.......................................... 24,148,589 25,084,287 Time deposits.............................................................. 80,751,145 84,774,840 ------------ ------------ Total deposits......................................................... 124,577,275 129,046,249 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE............................... 6,831,755 9,574,571 FEDERAL HOME LOAN BANK ADVANCES.............................................. 21,681,548 10,869,241 ACCRUED EXPENSES AND OTHER LIABILITIES....................................... 2,581,872 2,390,731 ------------ ------------ TOTAL LIABILITIES......................................................... 155,672,450 151,880,792 ------------ ------------ 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.......................................................... 12,959,619 11,892,318 Accumulated other comprehensive income (loss).............................. 511,556 (405,939) ------------ ------------ 19,230,596 17,245,800 Less - Treasury stock, at cost, 114,300 shares............................... 755,085 755,085 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY................................................... 18,475,511 16,490,715 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $174,147,961 $168,371,507 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 1 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine Months Ended Three Months Ended September 30, September 30, -------------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- INTEREST INCOME: Interest and fees on loans.......................................... $ 7,469,805 $7,213,639 $2,535,107 $2,479,866 Interest and dividends on investment securities- U.S. Government and agency obligations..................... 1,365,361 1,618,847 411,514 588,441 Collateralized mortgage obligations........................ 22,337 53,582 5,002 14,279 Mortgage-backed securities................................. 182,353 234,386 58,303 74,566 Preferred stock............................................ 784,220 501,806 266,485 207,016 Marketable equity securities and other..................... 106,748 72,212 29,063 23,123 Interest on cash equivalents........................................ 265,607 230,962 54,770 72,523 ----------- ---------- ---------- ---------- Total interest income...................................... 10,196,431 9,925,434 3,360,244 3,459,814 ----------- ---------- ---------- ---------- INTEREST EXPENSE: Interest on deposits................................................ 3,777,862 3,921,748 1,156,764 1,395,927 Interest on repurchase agreements................................... 278,194 345,040 86,010 113,391 Interest on advances................................................ 825,779 597,058 289,161 195,710 ----------- ---------- ---------- ---------- Total interest expense...................................... 4,881,835 4,863,846 1,531,935 1,705,028 ----------- ---------- ---------- ---------- Net interest income......................................... 5,314,596 5,061,588 1,828,309 1,754,786 PROVISION FOR LOAN LOSSES............................................... 75,000 175,000 25,000 50,000 ----------- ---------- ---------- ---------- Net interest income after provision for loan losses................................................ 5,239,596 4,886,588 1,803,309 1,704,786 ----------- ---------- ---------- ---------- NONINTEREST INCOME: Service charges on deposits......................................... 230,814 207,255 70,382 70,375 Gain on loan sales.................................................. 80,351 253,748 63,349 101,487 Other............................................................... 285,242 244,023 70,535 103,183 ----------- ---------- ---------- ---------- Total noninterest income.......................................... 596,407 705,026 204,266 275,045 ----------- ---------- ---------- ---------- NONINTEREST EXPENSE: Salaries and employee benefits..................................... 1,859,377 1,853,968 606,431 650,505 Occupancy expense.................................................. 368,941 345,140 131,728 116,228 Equipment expense....................................................... 213,741 196,350 73,779 65,494 Other real estate owned net losses (gains) and expenses................. 3,604 (1,073) 1,204 3,188 Computer services....................................................... 200,088 188,092 67,294 64,534 Deposit insurance assessments...................................... 23,450 17,296 5,602 6,453 Other operating expenses........................................... 650,723 729,544 211,337 248,778 ----------- ---------- ---------- ---------- Total noninterest expense................................... 3,319,924 3,329,317 1,097,375 1,155,180 ----------- ---------- ---------- ---------- Income before provision for income taxes.................... 2,516,079 2,262,297 910,200 824,651 PROVISION FOR INCOME TAXES.............................................. 902,595 801,971 340,388 291,919 ----------- ---------- ---------- ---------- NET INCOME.............................................................. $ 1,613,484 $1,460,326 $ 569,812 $ 532,732 =========== ========== ========== ========== Earnings per share: Basic....................................................... $ 1.33 $ 1.20 $ 0.47 $ 0.44 =========== ========== ========== ========== Diluted..................................................... $ 1.33 $ 1.20 $ 0.47 $ 0.44 =========== ========== ========== ========== Weighted average common shares outstanding.............................. 1,213,741 1,214,254 1,213,741 1,213,741 Weighted average equivalent shares...................................... ---------- --------- --------- --------- ----------- ---------- ---------- ---------- Weighted average common and common stock equivalent shares outstanding................................................. 1,213,741 1,214,254 1,213,741 1,213,741 =========== ========== ========== ==========
2 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited)
Accumulated Other Total Common Retained Comprehensive Treasury Stockholders' Comprehensive Stock Surplus Earnings Income (Loss) Stock Equity Income ---------- ----------- ------------ ------------- ---------- ------------ ---------- Balance, December 31, 2000.......... $1,328,041 $4,431,380 $11,892,318 $(405,939) $ (755,085) $16,490,715 Net income.......................... --------- --------- 1,613,484 --------- ---------- 1,613,484 $1,613,484 Other comprehensive income, net of tax: Unrealized holding losses, net of reclassification adjustment... --------- --------- ---------- 917,495 ---------- 917,495 917,495 ---------- Comprehensive income................ $2,530,979 ========== Dividends declared ($.45 per share)........................... ---------- ---------- (546,183) ----------- ----------- (546,183) Balance, June 30, 2001 ............. $1,328,041 $4,431,380 $12,959,619 $ 511,556 $ (755,085) $18,475,511 ========== =========== ============= ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements 3 FIRST FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, -------------------------------------- 2001 2000 ----------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................................. $ 1,613,484 $ 1,460,326 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses............................................................. 75,000 175,000 Depreciation and amortization......................................................... 218,374 208,034 Net accretion on investment securities held-to-maturity............................... (15,102) (8,524) Net accretion on investment securities available-for-sale............................. (222,322) (249,256) Gains on sale of OREO................................................................. --------- (6,430) Gains on sales of loans............................................................... (80,351) (253,748) Net (originations) proceeds on loans held for sale.................................... (1,461,508) 801,286 Net decrease in unearned discount..................................................... (5,072) (12,919) Net decrease (increase) in other assets............................................... 55,180 (1,142,488) Net increase (decrease) in deferred loan fees......................................... 49,292 (27,734) Net increase in accrued expenses and other liabilities................................ 191,141 222,367 ------------- ------------- Net cash provided by operating activities............................................. 418,116 1,165,914 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Federal Home Loan Bank stock................................................ (375,500) (34,500) Proceeds from maturities of investment securities held-to-maturity...................................................................... 24,725,350 2,392,828 Proceeds from maturities of investment securities available-for-sale.................................................................... 211,893,743 197,788,918 Purchase of investment securities held-to-maturity...................................... (16,000,000) (8,332,609) Purchase of investment securities available-for-sale.................................... (216,826,714) (208,855,650) Net increase in loans................................................................... (7,543,181) (4,503,559) Purchase of premises and equipment...................................................... (71,692) (41,898) Sales of OREO........................................................................... ---------- 366,511 ------------- ------------- Net cash used in investing activities................................................. (4,197,994) (21,219,959) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand accounts......................................................... 490,419 1,744,895 Net (decrease) increase in savings and money market accounts............................ (935,698) 454,336 Net (decrease) increase in time deposits................................................ (4,023,695) 21,019,193 Net (decrease) increase in repurchase agreements........................................ (2,742,816) 124,063 Net increase (decrease) in Federal Home Loan Bank advances.............................. 10,812,307 (2,678,685) Purchase of common stock for treasury................................................... -------- (159,375) Dividends paid.......................................................................... (546,183) (436,947) ------------- ------------- Net cash provided by financing activities............................................. 3,054,334 20,067,480 ------------- ------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................................................................. (725,544) 13,435 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................................................................. 4,803,931 9,244,055 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 4,078,387 $ 9,257,490 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid........................................................................... $ 4,959,480 $ 4,786,480 ============= ============= Income taxes paid....................................................................... $ 1,115,456 $ 1,125,000 ============= ============= SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Transfer of loans to OREO............................................................... $ --------- $ 430,081 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 2001 (1) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Operating results for the three months and nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001, 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, 2000, filed with the Securities and Exchange Commission. (2) DIVIDEND DECLARATION On October 15, 2001 the Company declared dividends of $182,061 or $.15 per share to all common stockholders of record on November 1, 2001, payable on November 14, 2001. (3) NEW PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was issued in September 2000. SFAS No. 140 is a replacement of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Most of the provisions of SFAS No. 125 were carried forward to SFAS No. 140 without reconsideration by the Financial Accounting Standards Board (FASB), and some were changed only in minor ways. In issuing SFAS No. 140, the FASB included issues and decisions that had been addressed and determined since the original publication of SFAS No. 125. SFAS No. 140 is effective for transfers after March 31, 2001. Management does not expect the adoption of SFAS No. 140 to have a significant impact on the financial position or results of operations of the Company. In July 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 eliminates the pooling of interests method of accounting for business combinations and requires that the purchase method of accounting be used for all business combinations. This statement is effective for business combinations initiated after July 1, 2001. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this statement. The Company is required to implement SFAS No. 142 on January 1, 2002 and management has concluded that this statement will have no impact on its consolidated financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long- lived assets, and the associated asset retirement costs. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not believe that the adoption of this statement will have a material effect on the Company's financial condition. 5 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121 and portions of APB Opinion No. 30. This statement addresses the recognition of an impairment loss for long-lived assets to be held and used, or disposed of by sale or otherwise. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Management does not believe that the adoption of this statement will have a material effect on the Company's financial condition. (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 nonreportable 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, 2000 Annual Report and Form 10-K. The consolidation adjustments reflect certain eliminations of intersegment revenue. 6 Reportable segment specific information and reconciliation to consolidated financial information is as follows:
Community Other Adjustments Banking Other and Eliminations Consolidated ------- ----- ---------------- ------------ Three Months Ended September 30, 2001 Net Interest Income $1,822,430 $ 621,526 $ (615,647) $1,828,309 Provision for Loan Losses 25,000 --------- ---------- 25,000 Total Noninterest Income 204,266 --------- ---------- 204,266 Total Noninterest Expense 1,022,049 75,326 ---------- 1,097,375 Net Income 615,647 569,812 (615,647) 569,812 Three Months Ended September 30, 2000 Net Interest Income $1,748,675 $ 547,791 $ (541,680) $1,754,786 Provision for Loan Losses 50,000 --------- ---------- 50,000 Total Noninterest Income 275,045 --------- ---------- 275,045 Total Noninterest Expense 1,131,180 24,000 ---------- 1,155,180 Net Income 541,680 532,732 (541,680) 532,732 Nine Months Ended September 30, 2001 Net Interest Income $5,296,682 $1,714,341 $(1,696,427) $5,314,596 Provision for Loan Losses 75,000 --------- ---------- 75,000 Total Noninterest Income 596,407 --------- ---------- 596,407 Total Noninterest Expense 3,174,662 145,262 ---------- 3,319,924 Net Income 1,696,427 1,613,484 (1,696,427) 1,613,484 Nine Months Ended September 30, 2000 Net Interest Income $5,043,356 $1,512,437 $(1,494,205) $5,061,588 Provision for Loan Losses 175,000 --------- --------- 175,000 Total Noninterest Income 705,026 --------- --------- 705,026 Total Noninterest Expense 3,257,317 72,000 --------- 3,329,317 Net Income 1,494,205 1,460,326 (1,494,205) 1,460,326
7 Item 2 - Management's Discussion and Analysis of Financial Condition an Results of Operations General ------- First Financial Corp. ("Company") is a financial 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, automated teller machine (ATM) cards and debit 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. Recent Developments ------------------- On November 12, 2001, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Washington Trust Bancorp, Inc. ("Washington Trust"), pursuant to which the Company will merge with and into Washington Trust (the "Merger"). Pursuant to the terms of the Merger Agreement, the issued and outstanding shares of the Company will be converted into the right to $16.00 in cash and that number of shares of Washington Trust common stock, par value $0.625 per share determined based on an exchange ratio set forth in the Merger Agreement.. As of the date of this Quarterly Report on Form 10-Q, the Company estimates that the exchange ratio would be approximately 0.889 shares of Washington Trust common stock for each share of the Company's common stock. Consummation of the Merger is subject to a number of conditions, including, but not limited to, the approval of the Merger Agreement and the Merger by the shareholders of the Company and the receipt of requisite regulatory approvals. In connection with the Agreement, The Washington Trust Company of Westerly, a subsidiary of Washington Trust (the "Bank") entered into an Agreement and Plan of Merger (the "Subsidiary Agreement") with First Bank and Trust Company, a subsidiary of the Company ("First Bank"), pursuant to which First Bank will merge with and into the Bank (the "Bank Merger"). Pursuant to the Subsidiary Agreement, the issued and outstanding shares of First Bank will be cancelled immediately prior to the Bank Merger. The terms of the Merger and the Merger Agreement will be described in further detail in a registration statement, a definitive proxy statement/prospectus and other relevant documents concerning the proposed transaction to be filed by the Company and the Washington Trust with the SEC shortly This Quarterly Report on Form 10-Q contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The following factors, among others, could cause the actual results of the Merger to differ materially from the expectations of the Company and Washington Trust: changes in general national or regional economic conditions, the risk that the businesses of Washington Trust and the Company will not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected, the ability to fully realize the expected cost savings and revenues on a timely basis, the ability of the companies to obtain the required shareholder or regulatory approvals of the Merger, a materially adverse change in the financial condition of either company, and changes in the assumptions used in making such forward-looking statements. Summary ------- For the three months ended September 30, 2001, the Company reported net income of $569,812 compared to net income of $532,732 for the three months ended September 30, 2000, or an increase of 7.0%. Net income for the third quarter of 2001 represented record earnings for the Company. Basic and diluted net income per share were $0.47 for the quarter ended September 30, 2001, compared to $0.44 per share for the same three month period of the prior year. Net income for the nine months ended September 30, 2001 amounted to $1,613,484 or $1.33 per diluted share, compared to $1,460,326 or $1.20 per diluted share for the same nine month period of 2000. The Company's record operating performance for the third quarter ended September 30, 2001 was primarily the result of (i) earning asset growth, particularly within the higher yielding loan portfolio, (ii) ability to maintain net interest spread and margin in a declining interest rate environment, (iii) superior asset quality resulting in a reduced provision for loan losses, and (iv) control of overhead spending. Total assets increased $5.7 million or 3.4% to $174.1 million at September 30, 2001 from $168.4 million at December 31, 2000. The loan portfolio, net of unearned discount, increased $7.5 million or 7.2% to $111.4 million at September 30, 2001 from $103.9 million at December 31, 2000. Investment securities decreased $2.0 million to $52.4 million at September 30, 2001 from $54.4 million at December 31, 2000. Funding for the increase in total assets was provided from wholesale sources, primarily advances from the Federal Home Loan Bank of Boston. Although retail deposits 8 declined $4.4 million to $124.6 million at September 30, 2001 from $129.0 million at December 31, 2000, wholesale borrowings increased $8.1 million to $28.5 million at September 30, 2001 from $20.4 million at December 31, 2000. Stockholders' equity increased $2.0 million to $18.5 million at September 30, 2001 from $16.5 million at December 31, 2000. Essentially, the increase in total assets and the reduction in total retail deposits was funded through the use of wholesale funding sources and the increase in stockholders' equity. 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.
As of and for the As of and for the nine months ended year ended September 30, December 31, ----------------- ------------------ 2000 2000 2001 ----- ----- ---- (Dollars in Thousands) Nonperforming loans................................. $ -0- $ 158 $ -0- Other real estate owned............................. $ -0- $ 70 $ -0- Total nonperforming assets.......................... $ -0- $ 228 $ -0- Loans 30-89 days delinquent......................... $ 898 $ 186 $ 460 Nonperforming assets to total assets................ NM 0.14% NM Nonperforming loans to total loans.................. NM 0.16% NM Net loan charge-offs (recoveries) to average loans.. 0.01% (0.07)% (0.02)% Allowance for loan losses to total loans............ 1.63% 1.81% 1.69% Allowance for loan losses to nonperforming loans (multiple).................. NM 11.38X NM
NM-Not Meaningful The following represents the activity in the allowance for loan losses for the three and nine months ended September 30, 2001 and 2000:
Nine Months Ended Three Months Ended September 30, September 30, ----------------------- ------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ------------ Balance at beginning of period..................... $1,751,621 $1,556,405 $1,782,456 $1,697,072 Provision..................................... 75,000 175,000 25,000 50,000 Loan charge-offs.............................. (22,711) (44,678) (497) (2,758) Recoveries.................................... 9,871 109,506 6,822 51,919 ------------ ---------- ---------- ---------- Balance at end of period........................... $1,813,781 $1,796,233 $1,813,781 $1,796,233 ============ ========== ========== ==========
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. 9 Deposits and Other Borrowings ----------------------------- Total deposits decreased $4.4 million to $124.6 million at September 30, 2001 from $129.0 million at December 31, 2000. Demand deposits increased $.5 million to $19.7 million at September 30, 2001, while savings and money market accounts decreased $1.0 million to $24.1 million during the nine months ended September 30, 2001. Time deposits, when accounted for the largest decline in total deposits, decreased $4.0 million to $80.8 million at September 30, 2001 from $84.8 million at December 31, 2000. During the second quarter of 2001 nearly $38.5 million in retail time deposits were scheduled to mature. Of this amount, nearly $4.6 million was withdrawn. However, during the third quarter of 2001, time deposits increased $.6 million. Securities sold under agreements to repurchase decreased $2.8 million to $6.8 million at September 30, 2001 from $9.6 million at December 31, 2000. Of this decrease, $1.8 million occurred during the third quarter and related to a single municipal customer's maturity. Federal Home Loan Bank advances increased $10.8 million to $21.7 million at September 30, 2001 from $10.9 million at December 31, 2000. During the third quarter of 2001, advances remained virtually flat. 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 $5,314,596 for the nine months ended September 30, 2001, compared to $5,061,588 for the nine months ended September 30, 2000. This increase was the result of an increase in interest-earning assets, offset somewhat by a 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. 10
Nine Months Ended September 30, ----------------------------------------------------------------------------- 2001 2000 ------------------------------------ ------------------------------------ Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- Interest - earning assets: Loans......................................... $106,012,792 $ 7,469,805 9.39% $ 99,406,207 $ 7,213,639 9.68% Investment securities - AFS................... 36,069,229 1,695,331 6.27% 30,078,017 1,497,657 6.64% Investment securities - HTM.................. 16,479,150 713,025 5.77% 21,091,095 944,088 5.97% Securities purchased under agreements to resell..................................... 10,275,556 265,606 3.45% 6,161,779 230,962 5.00% Federal Home Loan Bank Stock and other........ 1,217,370 52,664 5.77% 810,155 39,088 6.43% ------------ ----------- ---------- ------------ ------------ ---- Total interest-earning assets.................. 170,054,097 10,196,431 7.99% 157,547,253 9,925,434 8.40% ----------- ---------- ------------ ---- Noninterest-earning assets: Cash and due from banks...................... 2,531,856 2,884,584 Premises and equipment....................... 1,948,293 2,093,572 Other real estate owned...................... 0 122,845 Allowance for loan losses.................... (1,779,542) (1,663,524) Other assets................................. 3,089,596 2,163,231 ------------ ------------ Total noninterest-earning assets............... 5,790,203 5,600,708 ------------ ------------ Total assets................................... $175,844,300 $163,147,961 ============ ============ Interest - bearing liabilities: Deposits: Interest bearing demand and NOW deposits................................ $ 3,001,556 $ 32,261 1.43% $ 3,138,119 $ 34,508 1.47% Savings deposits........................... 18,515,594 319,834 2.30% 17,469,233 282,390 2.16% Money market deposits...................... 3,828,894 56,168 1.96% 1,390,736 21,625 2.07% Time deposits.............................. 82,135,817 3,369,599 5.47% 82,584,747 3,583,225 5.79% Securities sold under agreements to repurchase................................ 8,610,602 278,194 4.31% 9,087,355 345,040 5.06% Federal Home Loan Bank advances............. 20,661,998 825,779 5.33% 13,427,761 597,058 5.93% ------------ ----------- ---------- ------------ ------------ ---- Total interest-bearing liabilities............. 136,754,461 4,881,835 4.76% 127,097,951 4,863,846 5.10% ----------- ---------- ------------ ---- Noninterest-bearing liabilities: Noninterest-bearing deposits................. 19,336,120 19,204,794 Other liabilities............................ 2,328,508 1,315,190 ------------ ------------ Total noninterest-bearing liabilities.......... 21,664,628 20,519,984 Stockholders' equity........................... 17,425,211 15,530,026 ------------ ---------- Total liabilities and stockholders' equity. $175,844,300 $163,147,961 ============ =========== Net interest income............................ $ 5,314,596 $ 5,061,588 =========== ============ Net interest spread............................ 3.23% 3.30% ==== ==== Net interest margin............................ 4.17% 4.28% ==== ====
11 Total interest income for the three months ended September 30, 2001 was $3,360,244 compared to $3,459,814 for the same three month period of the prior year. This decrease of $99,570 or 2.9% was primarily the result of a decline in interest rates which drove down the quarterly earning asset yield to 7.79% from last year's third quarter yield of 8.61%. Despite the decline in rates, the reduction in total interest income was offset by an $11.0 million increase in quarterly average interest-earning assets to $171.7 million. Of this increase, nearly $8.2 million occurred within the Company's loan portfolio whose yield declined 54 BP to 9.23% from 9.77%. The greatest influence which the declining rate environment had, however, was on the Company's interest expense. Despite an $8.4 million increase in quarterly average interest-bearing liabilities, total interest expense declined $173,093 to $1,531,935 for the three months ended September 30, 2001, compared to $1,705,028 for the same three months of the prior years. Correspondingly, the Company's cost of funds declined 83 BP to 4.48% from 5.31%. Consequently, net interest income increased $73,523 or 4.2% to $1,828,309 for the third quarter of 2001 versus $1,745,786 for the third quarter of 2000. The Company's net interest spread remained virtually flat at 3.31% compared to 3.30%, while its net interest margin declined 9 BP to 4.27% from 4.36%. For the nine months ended September 30, 2001, total interest income increased $271,997 to $10,196,431 from $9,925,434. Total average interest-earning assets increased $12.6 million and contributed nearly $672,000 to the increase in interest income. The declining interest rate environment resulted in the repricing of Wall Street Prime rate indexed loans as well as the call of a number of investment securities. This resulted in a decrease of nearly $400,000 to total interest income. The earning asset yield declined to 7.99% from 8.40% in this interest rate environment. Total interest expense increased a mere $17,989 to $4,881,835 from $4,863,846. Despite a $9.7 million increase in average interest-bearing liabilities, which increased interest expense by nearly $308,000, the decline in rates reduced the Company's cost of funds to 4.76% from 5.10% and reduced interest expense by approximately $290,000. Overall, net interest income increased $253,008 with almost $364,000 related to balance sheet growth or volume, and a negative $111,000 attributable to a decline in interest rates. For the nine months ended September 30, 2001, the Company's net interest spread and margin were 3.23% and 4.17%, respectively, compared to 3.30% and 4.28% for the same nine month period of the prior year. Provision for Loan Losses ------------------------- The provision for loan losses totaled $25,000 for the three months ended September 30, 2001 and $50,000 for the three months ended September 30, 2000. For the nine months ended September 30, 2001 and 2000, the provision for loan losses amounted to $75,000 and $175,000, respectively. During the quarter, the Company recorded net recoveries of $6,325 which included one charge-off of $497. At September 30, 2001, the Company had no nonperforming loans and no nonperforming assets. Also, the reserve requirement for impaired loans declined nearly $88,000 from September 30, 2000. At September 30, 2001, the allowance for loan losses to total loans measured 1.63%, compared to 1.81% at September 30, 2000 and 1.69% at December 31, 2000. Noninterest Income ------------------ Total noninterest income declined $70,779 to $204,266 during the third quarter of 2001 from $275,045 during last year's third quarter. In accounting for a servicing rights asset, servicing fee income is negated by a yield adjustment on the unsold portion of SBA loans. In this year's third quarter the Company amortized the servicing rights asset against participation fee income by $39,591 compared to $3,293 during the third quarter of 2000. Without this adjustment, participation fee income would have been $36,046 for the third quarter of 2001 compared to $32,949 during last year's third quarter. The other item which accounted for the decline in noninterest income during the third quarter of 2001 was a $39,138 decline in SBA loan sale gains to $63,349 from $101,486. Total noninterest income decreased $108,618 or 15.4% to $596,407 for the nine months ended September 30, 2001 from $705,025 for the same nine month period of the prior year. The single largest contributor to this decline was the $173,397 decrease in SBA loan sale gains. Deposit service charges, ATM surcharges and the residential mortgage program fees all had increases which helped mitigate the negative impact of the SBA gains shortfall. 12 Noninterest Expense ------------------- Total noninterest expense or overhead spending declined during the third quarter of 2001 by $57,805 or 5.0% to $1,097,375 from last year's third quarter spending of $1,155,180. Salaries and benefits decreased $44,073 to $606,431 from $650,504. This decrease resulted primarily from a shrink in workforce as well as lower discretionary bonus accruals in 2001 compared to 2000. The only other area of significant spending reduction was advertising which decreased $37,225 from last year's third quarter level of spending. Operating at an efficiency ratio of 56.17% in 2001 versus 57.73% in 2000, the Company recorded a slight decrease of $9,393 in total overhead spending to $3,319,923 for the nine months ended September 30, 2001 from $3,329,317 for the nine months ended September 30, 2000. Total salaries were down nearly $89,000 which reflected the delay in filling certain staff positions along with lower yearend bonus accrual. Pension cost increased $100,500 to $288,000 from $187,500. This increase reflected the 2000 SERP amendment which was recorded in the fourth quarter of 2000. The only other significant contributor to the lower spending level was a $67,525 decrease in advertising. Income Taxes ------------ Income taxes for the three months ended September 30, 2001, were $340,388 or 37.4% of pretax income, compared to $291,919 or 35.4% of pretax income for the three months ended September 30, 2000. For the nine months ended September 30, 2001 and 2000, income taxes were $902,595 and $801,971, respectively, or 35.9% and 35.4% 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 higher effective tax rates in 2001 were primarily due to proportionately less 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 September 30, 2001: Regulatory Minimum (1) Actual ----------- ------ The Company Risk-based: Tier 1........................ 4.00% 14.21% Totals........................ 8.00 15.46 Leverage.......................... 3.00 10.15 The Bank Risk-based: Tier 1......................... 4.00% 13.73% Totals......................... 8.00 14.99 Leverage.......................... 3.00 9.79 (1) The 3% regulatory minimum leverage ratio applies only to certain highly- rated banks. Other institutions are subject to higher requirements. 13 Asset/ Liability Management --------------------------- The Company's objective with respect to asset/liability management is to position the Company so that sudden changes in interest rates do not have a material impact on net interest income and stockholders' equity. The primary objective is to manage the assets and liabilities to provide for profitability and capital at prudent levels of liquidity and interest rate, credit, and market risk. The Company uses a static gap measurement as well as a modeling approach to review its level of interest rate risk. The internal targets established by the Company are to maintain: (i) a static gap of no more than a positive 10% or negative 15% of total assets at the one year time frame; (ii) a change in economic market value from base present value of no more than positive or negative 30%; and (iii) a change in net interest income from base of no more than positive or negative 17%. At September 30, 2001, the Company's one year static gap position was a negative $19.9 million or 11.4% 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 September 30, 2001, the Company's earnings-at-risk under a +200 basis point - interest rate shock test measured a negative 1.7% in a worst case scenario. Under a similar test, the Company's equity-at-risk measured a negative 14.3% of market value of equity at September 30, 2001. At September 30, 2001, 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 September 30, 2001, cash and due from banks, securities purchased under agreements to resell, and short-term investments (unpledged and maturing within one year) amounted to $18.7 million, or 10.7% 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 $19.6 million, which could assist the Company in meeting its liquidity needs and funding its asset mix. 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. Item 3 - Quantitative and Qualitative Disclosures about Market Risk Refer to "Asset/Liability Management" within Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations. 14 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 (B) Reports on Form 8-K None 15 SIGNATURES Under the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. First Financial Corp. November 13, 2001 /s/ Patrick J. Shanahan, Jr. ----------------- ---------------------------- Date Patrick J. Shanahan, Jr. Chairman, President and Chief Executive Officer November 13, 2001 /s/ John A. Macomber ----------------- ----------------------------- Date John A. Macomber Vice President, Treasurer and Chief Financial Officer 16