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 30,1999 Commission file number 0-5559
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FIRST FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Texas 74-1502313
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
800 Washington Avenue, Waco, Texas 76701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (254) 757-2424
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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
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(Class) (Outstanding at November 15, 1999)
<PAGE>
FORM 10-QSB
FIRST FINANCIAL CORPORATION
SEPTEMBER 30, 1999
INDEX
Part I Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheet as of 1
September 30, 1999
Consolidated Statements of Income 2
for the Three-Months and Nine-Months
ended September 30, 1999 and 1998
Consolidated Statements of Cash
Flow for the Nine-Months
ended September 30, 1999 and 1998 3
Notes to Consolidated Financial
Statements 4-5
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial 5-9
Condition
Part II Other Information
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form
8-K 9
<PAGE>
First Financial Corporation
Consolidated Balance Sheet
September 30, 1999
(Unaudited)
Assets
------
Cash and cash equivalents $ 1,208,280
Restricted cash 654,026
Accounts receivable 1,313,494
Marketable investment securities 330,422
Real estate held for investment,at cost 444,000
Mortgage loans 798,236
Investment in and advances to
affiliated companies 412,502
Property and equipment 1,018,394
Other assets 972,012
--------
Total Assets $ 7,151,366
===========
Liabilities and Stockholders' Equity
--------------------------------------
Notes payable -
Estimated reserve for losses under servicing
agreements 391,782
Other liabilities 904,225
-------
Total Liabilities 1,296,007
---------
Minority interest 1,862,042
----------
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 3,508,924
---------
4,028,626
Less:Treasury stock - at cost (35,309)
-------
Total Stockholders' Equity 3,993,317
---------
Total Liabilities and Stockholders' Equity $ 7,151,366
=========
===========
See accompanying notes to consolidated financial statements.
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<TABLE>
First Financial Corporation
Consolidated Statements of Income
Three months and Nine months ended September 30, 1999 and 1998
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Loan administration $ 1,060,810 $ 1,767,727 $ 3,951,976 $ 5,106,535
Interest income 231,805 381,332 870,014 1,157,963
Other income 355,774 207,099 893,009 483,008
---------- ----------- ----------- -----------
Total Revenues 1,648,389 2,356,158 5,714,999 6,747,506
---------- ----------- ----------- -----------
Expenses:
Salaries and related expenses 1,051,348 1,199,413 3,232,911 3,444,584
Interest expense 150,445 272,602 607,643 889,260
Provision for losses under servicing
agreements (42,000) (28,000) (181,000) (193,000)
Other operating expenses 602,206 736,481 2,063,076 2,129,773
---------- ----------- ----------- -----------
Total Expenses 1,761,999 2,180,496 5,722,630 6,270,617
---------- ----------- ----------- -----------
Income before income taxes,
minority interest, equity in earnings
(loss) of affiliates (113,610) 175,662 (7,631) 476,889
Federal income taxes 790 - 790 -
---------- ----------- ----------- -----------
Income before minority interest (114,400) 175,662 (8,421) 476,889
Minority interest in net loss (income) 70,145 (29,420) 83,640 (97,127)
---------- ----------- ----------- -----------
Income before equity in earnings (loss) of
affiliates (44,255) 146,242 75,219 379,762
Equity in earnings (loss) of affiliates 12,392 2,098 10,479 27,670
---------- ----------- ----------- -----------
Net income (31,863) 148,340 85,698 407,432
Other comprehensive income:
Unrealized holding gains (losses) (3,110) - 3,846 -
---------- ----------- ----------- -----------
Net income $ (34,973) $ 148,340 $ 89,544 $ 407,432
=========== =========== =========== ===========
Income Per Common Share ($0.20) $0.74 $0.52 $2.03
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
First Financial Corporation
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30,
----------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 89,544 $ 407,432
Adjustments to reconcile net income(loss) to
net cash used by operating activities:
Depreciation 214,213 134,142
Provision for losses under servicing agreements (181,000) (128,156)
Equity in (income) loss of affiliates (10,479) (27,670)
Realized (gains) losses on marketable investment securities (211,625) (787)
Net (increase) decrease in accounts receivable (100,093) (259,763)
Net (increase) decrease in other assets 273,384 (74,556)
Net increase (decrease) in other liabilities (585,017) (52,402)
Increase in minority interest (83,640) 97,127
(Increase) decrease in restricted cash used
in operating activities - net (93,502) (252,957)
Mortgage loans funded (260,047,382) (284,645,578)
Mortgage loans sold 277,861,369 280,661,413
Increase in mortgage loans participations sold (17,517,807) 3,920,694
Other 57,891 (130,411)
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Net cash provided (used) for operating activities (334,144) (351,472)
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Cash flows from investing activities:
Proceeds from sale of marketable investment securities 387,168 1,000
Purchases of marketable investment securities (195,503) (18,777)
Unrealized holding (gains) losses (8,549) -
Purchase of property and equipment (294,718) (335,754)
Principal collections on mortgage loans 299,251 772,872
Amortization of discount on mortgage loans purchased (7,681) (37,600)
(Advances to) repayments from affiliates - -
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Net cash provided (used) for investing activities 179,968 381,741
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Cash flows from financing activities:
Payment on notes payable - -
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Net cash used for financing activities - -
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Net increase (decrease) in cash and cash equivalents (154,176) 30,269
Cash and cash equivalents at beginning of year 1,362,456 1,167,270
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Cash and cash equivalents at end of period $ 1,208,280 $ 1,197,539
=========== ===========
Supplemental Disclosure of Cash Flow Information
Interest Paid $ 694,543 $ 894,607
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
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. In preparing these financial
statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenue and
expense for the period. Actual results could differ significantly
from those estimates. 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, 1999 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 $5,200,000 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 $1,200,000 at
September 30, 1999, were sold to investors with recourse. The
recourse provisions typically require the Company to repurchase
delinquent loans at the unpaid balances plus accrued interest, or
replace delinquent loans with another loan which is current.
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<PAGE>
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,
1999.
Item 2. Management's Discussion and Analysis of Results of
- -----------------------------------------------------------------
Operations and Financial Condition
- ------------------------------------
Results of Operations
- -----------------------
The Company had a net income of $89,544 for the nine months ended
September 30, 1999 compared to net income of $407,432 for the
same period in 1998. Loan administration revenues were
$3,951,976 for the first nine months of 1999 compared to
$5,106,535 for the same period of 1998. The decrease in loan
administration revenues is primarily due to decreased loan
origination fees and loan servicing fees from the Company's
residential mortgage loan operations. During the nine months
ended September 30, 1999, First Preference Mortgage Corp., a
third tier subsidiary of Key Group, funded approximately $260.0
million in new residential mortgage loans compared to
approximately $284.6 million during the same period in 1998.
Interest income for the nine months ended September 30, 1999
amounted to $870,014 compared to $1,157,963 for the same period
in 1998. This decline is primarily due to the decline in new
residential mortgage loans originated during the first nine
months of 1999 as compared to 1998 as discussed above. First
Preference Mortgage Corp. 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, 1999
amounted to $893,009 compared to $483,008 for the same period in
1998. This increase is primarily due to realized gains on the
sale of certain of the Company's marketable investment securities
and the sale of the residential mortgage loan portfolio serviced
by First Preference Mortgage Corp.
Salaries and related expenses decreased to $3,232,911 for the
nine months ended September 30, 1999, compared to $3,444,584 for
the nine months ended September 30, 1998. This decrease is
primarily due to a reduction in the amount of commission expense
as a result of the decreased loan origination volumes during the
nine months ended September 30, 1999 as compared to the same
period in 1998.
For the nine months ended September 30, 1999, interest expense
amounted to $607,643 compared to $889,260 for the same period in
1998. The significant decrease in interest expense for the nine
months ended September 30, 1999 is primarily due to decreased
utilization of the Company's loan participation agreement and a
reduction in interest rate charged by the financial institution.
As previously discussed, the volume of new residential loan
originations for the nine months ended September 30, 1999
decreased by approximately 9% over the comparable period in 1998.
-5-
<PAGE>
During the nine months ended September 30, 1999, the provision
for losses under servicing agreements was ($181,000) resulting in
a balance in the reserve for losses under servicing agreements of
$391,782 at September 30, 1999. For the nine months ended
September 30, 1998, the Company had a negative provision for
losses under servicing agreements of ($193,000) which resulted in
a balance in the reserve for losses under servicing agreements of
$634,894 at September 30, 1998. 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 loss of Key Group amounted to
$83,640 for the nine months ended September 30, 1999. For the
nine months ended September 30, 1998, the minority interest in
the net income of Key Group amounted to ($97,127). The minority
interest represents the ownership of other entities in the Key
Group net income or net loss. The Company's share of the net
income (loss) of Key Group was ($94,075) and $109,246 for the
nine months ended September 30, 1999 and 1998, respectively.
The consolidated statements of income for the nine months ended
September 30, 1999 reflect equity in net income of affiliates of
$10,479 compared to $27,670 for the same period in 1998.
Other comprehensive income consists of unrealized holding gains
(losses) on marketable investment securities net of income taxes.
For the nine ended September 30, 1999, unrealized holding gains
amounted to $3,846.
Financial Condition
- --------------------
At September 30, 1999, the Company's total assets were
$7,151,366. Included in the Company's total assets are the
assets of Key Group, LTD. which amounted to $4,509,024 at
September 30, 1999. The Key Group assets at September 30, 1999
consisted primarily of cash and cash equivalents of $1,153,910,
mortgage loans of $686,599, property and equipment of $1,154,399
and accounts receivable, prepaid expenses and other assets of
$1,514,116. The minority interest in the net assets of Key Group
at September 30, 1999 amounted to $1,862,042.
On consolidated basis, cash and cash equivalents (including
restricted cash) were $1,862,306 at September 30, 1999. Included
therein was cash and cash equivalents for Key Group of $1,153,910
and Apex Lloyds Insurance Company of $668,141. 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. 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, 1998, First Preference Mortgage Corp. has
a master loan participation with a financial institution totaling
$30,000,000 which expires August 28, 2000.
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<PAGE>
Year 2000
- -----------
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.
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 August 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.
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.
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<PAGE>
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.
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.
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.
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
-8-
<PAGE>
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.
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.
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.
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 no 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,
1999.
-9-
<PAGE>
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 November 11, 1999 /s/ David W. Mann
------------------ --------------------
David W. Mann
President
Duly Authorized Officer and
Principal Financial Officer
Date November 11, 1999 /s/ Annie Laurie Miller
------------------ ------------------------
Annie Laurie Miller
Executive Vice President and
Principal Accounting Officer
(Remainder of page purposely left blank.)
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<S> <C>
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<PERIOD-END> SEP-30-1999
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0
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