U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission file number 0-5559
FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Texas 74-1502313
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
800 Washington Avenue, Waco, Texas 76701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (254) 757-2424
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 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.
Yes ___X___ No _______ .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, No Par Value 173,528
(Class) (Outstanding at November 15, 1998)
<PAGE>
FORM 10-QSB
FIRST FINANCIAL CORPORATION
SEPTEMBER 30, 1998
INDEX
Part I Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheet as of 1
September 30, 1998
Consolidated Statements of Income 2
for the Three-Months and Nine-Months
ended September 30, 1998 and 1997
Consolidated Statements of Cash
Flow for the Nine-Months
ended September 30, 1998 and 1997 3
Notes to Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial 5-7
Condition
Part II Other Information
Item 1. Legal Proceedings 7
Item 6. Exhibits and Reports on Form
8-K 7
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<TABLE>
First Financial Corporation
Consolidated Balance Sheet
September 30, 1998
(Unaudited)
<CAPTION>
<S> <C>
Assets
------
Cash and cash equivalents $ 1,197,539
Restricted cash 563,481
Accounts receivable 1,591,541
Marketable investment securities 313,442
Real estate held for investment,at cost 444,000
Mortgage loans 1,339,321
Investment in and advances to
affiliated companies 429,648
Property and equipment 973,120
Other assets 1,152,830
------------
Total Assets $ 8,004,922
============
Liabilities and Stockholders' Equity
--------------------------------------
Notes payable 0
Estimated reserve for losses under servicing
agreements 634,894
Other liabilities 1,550,629
------------
Total Liabilities 2,185,523
------------
Minority interest 1,925,946
------------
Stockholders' equity:
Common stock - no par value; authorized
500,000 shares;issued 183,750 shares,
of which 10,222 shares are held in
treasury shares 1,000
Additonal paid-in capital 518,702
Retained earnings 3,411,412
------------
3,931,114
Less:Treasury stock - at cost (35,309)
Net unrealized loss on marketable
investment securities (2,352)
------------
Total Stockholders' Equity 3,893,453
------------
Total Liabilities and Stockholders' Equity $ 8,004,922
===========
See accompanying notes to consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
First Financial Corporation
Consolidated Statements of Income
Three months and Nine months ended September 30,1998 and 1997
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Loan administration $1,767,727 $1,500,553 $5,106,535 $3,711,623
Interest income 381,332 358,219 1,157,963 924,842
Other income 207,099 135,002 483,008 348,888
----------- ----------- ----------- -----------
Total Revenues 2,356,158 1,993,774 6,747,506 4,985,353
----------- ----------- ----------- -----------
Expenses:
Salaries and related expenses 1,199,413 1,002,594 3,444,584 2,696,310
Interest expense 272,602 250,348 889,260 557,177
Provision for losses under servicing
agreements (11,630) (59,214) (128,156) (246,500)
Other operating expenses 720,111 663,838 2,064,929 1,700,935
----------- ----------- ----------- -----------
Total Expenses 2,180,496 1,857,566 6,270,617 4,707,922
----------- ----------- ----------- -----------
Income before income taxes,
minority interest, equity in earnings
(loss) of affiliates and extraordinary items 175,662 136,208 476,889 277,431
Federal income taxes 0 0 0 0
----------- ----------- ----------- -----------
Income before minority interest 175,662 136,208 476,889 277,431
Minority interest in net loss (income) (29,420) (59,293) (97,127) (61,773)
----------- ----------- ----------- -----------
Income before equity in earnings (loss) of
affiliates and extraordinary item 146,242 76,915 379,762 215,658
Equity in earnings (loss) of affiliates 2,098 15,741 27,670 44,548
----------- ----------- ----------- -----------
Net income $ 148,340 $ 92,656 $ 407,432 $ 260,206
=========== =========== =========== ===========
Income Per Common Share $ 0.74 $ 0.46 $ 2.03 $ 1.30
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
First Financial Corporation
Consoidated Statement of Cash Flows
<CAPTION>
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 407,432 $ 260,206
Adjustments to reconcile net income(loss) to
net cash used by operating activities:
Depreciation 134,142 108,503
Provision for losses under servicing agreements (128,156) (246,500)
Equity in (income) loss of affiliates (27,670) (42,817)
Realized losses on marketable investment securities (787) (6,098)
Net (increase) decrease in accounts receivable (259,763) (344,028)
Net (increase) decrease in other assets (74,556) (23,666)
Net increase (decrease) in other liabilities (52,402) 145,677
Increase in minority interest 97,127 61,773
(Increase) decrease in restricted cash used
in operating activities - net (252,957) 100,000
Increase in mortgage loans - net 0 0
Mortgage loans funded (284,645,578) (190,620,772)
Mortgage loans sold 280,661,413 186,947,405
Increase in mortgage loans participations sold 3,920,694 3,377,896
Other (130,411) (114,962)
--------------- --------------
Net cash provided (used) for operating activities (351,472) (397,383)
--------------- --------------
Cash flows from investing activities:
Proceeds from sale of marketable investment securities 1,000 6,847
Purchases of marketable investment securities (18,777) 0
Purchase of property and equipment (335,754) (51,742)
Principal collections on mortgage loans 772,872 716,086
Amortization of discount on mortgage loans purchased (37,600) (37,996)
(Advances to) repayments from affiliates 0 50,000
--------------- --------------
Net cash provided (used) for investing activities 381,741 683,195
--------------- --------------
Cash flows from financing activities:
Payment on notes payable 0 0
--------------- --------------
Net cash used for financing activities 0 0
--------------- --------------
Net increase (decrease) in cash and cash equivalents 30,269 285,812
Cash and cash equivalents at beginning of year 1,167,270 757,279
--------------- --------------
Cash and cash equivalents at end of period $ 1,197,539 $ 1,043,091
=============== ==============
Supplemental Disclosure of Cash Flow Information
Interest Paid $ 894,607 $ 541,810
=============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
3
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FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 - Basis of Presentation
The financial information included herein for First Financial
Corporation, and all of its wholly owned and majority owned
subsidiaries (the "Company") is unaudited; however, such unaudited
information reflects all adjustments which are, in management's
opinion, necessary for a fair presentation of the financial
position, results of operations and statement of cash flows for the
interim periods. Minority interest represents ownership of other
entities in the net assets and net earnings of Key Group, Ltd. ("Key
Group").
The results of operations and changes in cash flow for the nine-
month period ended September 30, 1998 are not necessarily indicative
of the results to be expected for the full year.
Certain reclassifications were made to prior periods to ensure
comparability with the current period.
2 - Earnings Per Share
Earnings per common share were computed by dividing net income by
the weighted average number of shares outstanding.
3 - Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between the
basis of the loan loss reserve for financial and income tax
reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for
operating losses that are available to offset future taxable income
and tax credits that are available to offset future federal income
taxes. The Company has approximately $5,300,000 in available net
operating loss carryforward benefits for financial statement
purposes to offset future income, if any.
4 - Contingencies
Substantially all of the conventional pools of manufactured home
loans serviced by the Company, approximately $2,300,000 at September
30, 1998, were sold to investors with recourse. The recourse
provisions typically require the Company to repurchase delinquent
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loans at the unpaid balances plus accrued interest, or replace
delinquent loans with another loan which is current. Further,
several of the agreements require the Company to establish and
maintain cash reserve accounts. Deposits are periodically made to
the accounts equal to a specified percent of the outstanding loans.
The accounts may be used to cover deficiencies from foreclosure and
liquidation of delinquent pooled mortgage loans. Such cash reserve
accounts totaled $10,524 and are included in restricted cash at
September 30, 1998.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
The Company had a net income of $407,432 for the nine months ended
September 30, 1998 compared to net income of $260,206 for the same
period in 1997. Loan administration revenues were $5,106,535 for
the first nine months of 1998 compared to $3,711,623 for the same
period of 1997. The increase in loan administration revenues is
primarily due to increased loan origination and service fees from
the Company's residential mortgage loan operations. During the nine
months ended September 30, 1998, originations of new residential
mortgage loans amounted to approximately $284.6 million compared to
approximately $190.6 during the same period in 1997.
Interest income for the nine months ended September 30, 1998
amounted to $1,157,963 compared to $924,842 for the same period in
1997. During the nine months ended September 30, 1998, the interest
income earned by the Company on investments declined by
approximately $49,000 or 19%. This decline is primarily due to the
decline in the Company's mortgages held for investment which
decreased by approximately $953,000 from September 30, 1997 to
September 30, 1998. During the first nine months of 1998, the
interest income earned on mortgages held for sale increased by
approximately $282,000 primarily due to the increased volume of new
residential mortgage loans originated during this time period as
discussed above. First Preference Mortgage Corp., a third tier
subsidiary of Key Group, earns interest from the date the mortgage
loan is closed until the date the mortgage loan is sold to
investors.
Other income for the nine months ended September 30, 1998 amounted
to $483,008 as compared to $348,888 for the same period in 1997.
This increase is primarily due to increases in the amount of
insurance premiums earned and an increase in the insurance
commissions earned under a fronting and reinsurance agreement.
Salaries and related expenses increased to $3,444,584 for the nine
months ended September 30, 1998, compared to $2,696,310 for the nine
months ended September 30, 1997. This increase is due to the
5
<PAGE>
continued expansion of the residential mortgage origination and
servicing activities of First Preference Mortgage Corp., as
discussed above.
For the nine months ended September 30, 1998, interest expense
amounted to $889,260 compared to $557,177 for the same period in
1997. The significant increase in interest expense for the nine
months ended September 30, 1998 is primarily due to the increased
utilization of the Company's loan participation agreement. As
previously discussed, the volume of new residential loan
originations for the nine months ended September 30, 1998 increased
by approximately 49% over the comparable period in 1997.
During the nine months ended September 30, 1998, the provision for
losses under servicing agreements was ($128,156) resulting in a
balance in the reserve for losses under servicing agreements of
$634,894 at September 30, 1998. For the nine months ended September
30, 1997, the Company had a negative provision for losses under
servicing agreements of ($246,500) which resulted in a balance in
the reserve for losses under servicing agreements of $1,002,816 at
September 30, 1997. As previously discussed, under the terms of
certain of its servicing agreements, the Company is at risk for any
credit losses and costs of foreclosure, net of credit insurance
proceeds, if any, sustained on default of the borrower. Based on an
analysis of the Company's servicing portfolio, it is the Company's
belief that its exposure to losses attributable to the servicing
agreements continues to decline.
The minority interest in the net income of Key Group amounted to
($97,127) for the nine months ended September 30, 1998. For the
nine months ended September 30, 1997, the minority interest in the
net income of Key Group amounted to ($61,733). The minority
interest represents the ownership of other entities in the Key Group
net income or net loss.
The consolidated statements of income for the nine months ended
September 30, 1998 reflect equity in net income of affiliates of
$27,670 compared to net income of $44,548 for the nine months ended
September 30, 1997.
Financial Condition
At September 30, 1998, the Company's total assets were $8,004,922.
Included in the Company's total assets are the assets of Key Group,
LTD. which amounted to $5,296,680 at September 30, 1998. The Key
Group assets at September 30, 1998 consisted primarily of cash and
cash equivalents of $1,131,743, mortgage loans of $1,194,985,
property and equipment of $1,078,764 and accounts receivable,
prepaid expenses and other assets of $1,891,188. The minority
interest in the net assets of Key Group at September 30, 1998
amounted to $1,925,946.
On consolidated basis, cash and cash equivalents (including
restricted cash) were $1,761,020 at September 30, 1998. Included
therein was cash and cash equivalents for Key Group of $1,131,743
6
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and Apex Lloyds Insurance Company of $529,642. The cash flow of Key
Group is only available to the Company to the extent that cash is
received in the form of partnership distributions. Key Group has
paid no distributions and has no plans to pay distributions in the
foreseeable future. The cash flow of Apex Lloyds Insurance Company
is only available to the Company as allowed by state insurance
regulations.
As more fully discussed in the Annual Report Form 10-KSB for the
year ended December 31, 1997, First Preference Mortgage Corp. has a
master loan participation with a financial institution totaling
$30,000,000 which expires August 31, 1999.
7
<PAGE>
FFC
Year 2000 Disclosure
10-Q update
Overview
Like many companies today, the Company, its subsidiaries, and entities
in which the Company has a significant investment rely on technology
to support the day to day operations of the Company. Due to the
Company's dependence on computer technology, the nature and impact of
Year 2000 processing failures on the Company's business could be
material. The "Year 2000 Problem" is centered around the programming
of a two-digit year, not a four-digit year. Some systems may
interpret 00 as 1900 and not 2000. Year 2000 poses many potential
problems, from the obvious of system failure to the obscure of data
integrity. The Company has defined two levels of Year 2000
Compliance. First is System Compliance. The Company considers a
system to be Year 2000 compliant if the system will operate correctly
into and beyond Year 2000. This includes non-ambiguous displays of
dates. The second definition is Company Compliance. Company
compliance is defined as being able to provide the products, services,
and support in the same or similar manner as today into and beyond
Year 2000. The Company does not have control over all systems that
could be affected by Year 2000. The Company is addressing potential
problems posed by failure or interruption of internal computer or
environment systems, failure or interruption of services from third
party relationships, and failure or interruption of customer
relationships. The Company is evaluating the Year 2000 preparedness
of critical third party relationships through questionnaires, phone
calls, and information posted on the Internet.
The Company is utilizing the guidelines established by the FFIEC,
Federal Financial Institutions Examination Council, for developing the
Year 2000 Compliance plan. The Year 2000 Compliance plan requires
Year 2000 Compliance efforts from the Company's subsidiaries and
partnerships. The Company is utilizing the assistance of legal
counsel and Year 2000 consultants to supplement its the Year 2000
Compliance Program. The activities of the Company and its related
entities can be grouped into five categories: 1) Loan Servicing, 2)
Insurance, 3) Data Processing Services, 4) Investments, and 5)
Mortgage. For more detail on the specific entities and relationships,
refer to the Company Description. The Company is requiring all
entities that have a potential Year 2000 material impact to
aggressively address them.
Readiness
The Company and its subsidiaries and partnerships have extensive Year
2000 Compliance plans and have substantially completed the Year 2000
assessment, including PCs, applications, and environmental systems.
The plan calls for the completion of the testing phase by May 31,
1999, and the contingency planning phase by July 1999. All new
contracts are being reviewed for Year 2000 issues. Vendors, business
relationships, and some customers have been sent Year 2000
questionnaires to help the Company better assess and minimize the
potential risks posed by these relationships. The Company is also
reviewing the financial soundness and Year 2000 efforts of Company's
investments.
8
<PAGE>
The total impact of Year 2000 is unknown. The Company will have
completed testing of internal systems and interfaces with key third
party relationships by May 31, 1999. To help validate the Company's
efforts, the Mortgage and Loan servicing group are participating in
the Mortgage Bankers Association of America Year 2000 Readiness
Testing.
Costs
The budgeted cost of the Year 2000 efforts for the Company is $85,000.
This includes $15,000 specifically for the insurance group, $70,000
for the mortgage and data processing group which also covers the loan
servicing and data processing entities. Approximately $30,000 has
been spent to date. The breakdown of the percentage of cost is:
Consulting Fees 27%
Literature and Promotional 6%
Legal Counsel 18%
Testing 18%
Miscellaneous 31%
In addition to the above costs, the Company has upgraded systems for
performance reasons and not for Year 2000. These upgrades were not
accelerated due to Year 2000 issues. These system upgrades are Year
2000 compliant.
Risks
The Company believes that its greatest Year 2000 risks are those posed
by external sources, including utilities companies, service providers
and customers. Certain services providers are part of the Financial
Industry and are under some form of regulatory guidelines which should
help to minimize their potential failure. The failure of the investors
to meet their obligation to the Mortgage group or the failure of the
insurance outsourcing entities to properly handle insurance operations
would have a significant material affect on the Company. Through
questionnaires and other forms of communication, the Company is
assessing and monitoring third party relationships, including service
providers, outsource insurance entities, investors, brokers and
customers, for Year 2000 Compliance to minimize potential Year 2000
problems.
The risks posed by utility failure can also be significant, but little
can be down for extended failure, more than a few days. The Company
is evaluating the implementation of a backup power generator for the
corporate office that could sustain the Company for a short power
outage, not to exceed three days.
Contingency Plans
No guarantee can be made with respect to Year 2000 Compliance because
too many interdependencies exist between systems, companies, and
entities to be able to assure that all possible things have been
tested. Many services, such as long distance phone and utilities are
out of the direct control of the Company. The Company considers
contingency planning as one of the most critical phases of Year 2000
Compliance plans.
9
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The Company and its related companies will focus the second quarter of
1999 on developing and testing contingency plans, including what hard
copy reports could be used to sustain manual operations for a short
period of time. These contingency plans will be tested and the staff
will be trained on proper execution of these contingency plans.
Additional backups and hard copy reports will be run prior to January
1, 2000 and prior to other potential problem dates. The Company is
currently performing a feasibility study for a backup power generator
for the corporate office. To assure that the Company has adequate
support to handle potential problems and issues, the Company is
requesting that no vacation time will be taken from December 1, 1999
through January 31, 2000. The Company is working with key staff to
minimize turn over.
Summary
The real effect of Year 2000 has so many variables that the Company
can not realistically make any valid predictions as to the total
impact financially or otherwise. The Company is making every effort
it can to minimize the potential risks that are within the Company's
control, such as validating internal systems and developing
contingency plans. If the US experiences total power outages or all
outsourcing or third party relationships encounter failure, then the
Company will be significantly impacted, as will all other companies.
More realistically, the Company may expect delays in services while
things are being corrected. The Company is working on developing
realistic contingency plans for those things that have valid
contingency options, such as courier services.
The Company has not received assurance that the Year 2000 problem has
been solved by all of its business partners and suppliers. Nor can
the Company assure everyone that it will not have interruptions due to
the failure of electric and telephone service as a result of this
problem. While no one can say that there will not be any problems nor
is it possible to simultaneously guarantee each other that no problems
will appear, the Company will do its best to minimize and quickly
correct any errors that do occur.
Important Factors Regarding Forward-Looking Statements
Certain information contained in this Year 2000 discussion constitutes
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes its
expectations are based on reasonable assumptions and because Year 2000
issues present many unknowns, the Company's actual results could
differ materially from its expectations.
10
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine litigation incidental to its
business, both as a plaintiff and a defendant. Management of the
Company, after consulting with legal counsel, feels that liability
resulting from the litigation, if any, will not have a material
effect on this financial position of the Company.
Item 6. Exhibits and Reports on Form 8-K
No Form 8-K was filed during the quarter ended September 30, 1998.
Exhibit 27 - Financial Data Schedule
11
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SIGNATURES
Pursuant to the requirements of the Securities and 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 Corporation
________________________________________________________________
Date Novermber 11, 1998 /s/ David W. Mann
David W. Mann
President
Duly Authorized Officer and
Principal Financial Officer
Date November 11, 1998 /s/ Annie Laurie Miller
Annie Laurie Miller
Executive Vice President and
Principal Accounting Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,761,020
<SECURITIES> 313,442
<RECEIVABLES> 1,591,541
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,868,209
<DEPRECIATION> 895,089
<TOTAL-ASSETS> 8,004,922
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 3,892,453
<TOTAL-LIABILITY-AND-EQUITY> 8,004,922
<SALES> 0
<TOTAL-REVENUES> 6,747,506
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,270,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 476,889
<INCOME-TAX> 0
<INCOME-CONTINUING> 476,889
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 407,432
<EPS-PRIMARY> 2.03
<EPS-DILUTED> 2.03
</TABLE>
