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 March 31, 1999 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 April 30, 1999)
<PAGE>
FORM 10-QSB
FIRST FINANCIAL CORPORATION
MARCH 31, 1999
INDEX
Part I Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheet as of 1
March 31, 1999
Consolidated Statements of Income 2
for the Three-Months ended
March 31, 1999 and 1998
Consolidated Statements of Cash
Flow for the Three-Months
ended March 31, 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
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<TABLE>
First Financial Corporation
Consolidated Balance Sheet
March 31, 1999
(Unaudited)
<CAPTION>
Assets
------
<S> <C>
Cash and cash equivalents $ 1,231,159
Restricted cash 599,410
Accounts receivable 1,047,972
Marketable investment securities 483,990
Real estate held for investment,at cost 444,000
Mortgage loans 1,076,103
Investment in and advances to
affiliated companies 405,341
Property and equipment 1,007,184
Other assets 1,155,909
-------------
Total Assets $ 7,451,068
=============
Liabilities and Stockholders' Equity
--------------------------------------
Notes payable $ 0
Estimated reserve for losses under servicing
agreements 412,761
Other liabilities 1,163,380
-------------
Total Liabilities 1,576,141
-------------
Minority interest 1,911,083
-------------
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 3,479,451
-------------
3,999,153
Less:Treasury stock - at cost (35,309)
Net unrealized loss on marketable
investment securities -
-------------
Total Stockholders' Equity 3,963,844
-------------
Total Liabilities and Stockholders' Equity $ 7,451,068
=============
See accompanying notes to consolidated financial statements.
1
</TABLE>
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<TABLE>
First Financial Corporation
Consolidated Statements of Income
Three months ended March 31,1999 and 1998
(Unaudited)
<CAPTION>
1999 1998
----------------------------
<S>
Revenues: <C> <C>
Loan administration $ 1,313,111 $ 1,593,595
Interest income 351,301 394,694
Other income 177,587 105,175
------------- ------------
Total revenues 1,841,999 2,093,464
Expenses:
Salaries and related expenses 1,036,810 1,088,133
Interest expense 254,085 312,203
Provision for losses under servicing
agreements (95,000) (108,000)
Other operating expenses 670,974 695,732
------------- ------------
Total expenses 1,866,869 1,988,068
------------- ------------
Income before income taxes,
minority interest, and equity in
earnings (loss) of affiliates (24,870) 105,396
Federal income taxes - -
Income before minority interest (24,870) 105,396
Minority interest in net loss (income) 34,599 (8,025)
------------- ------------
Income before equity in earnings
(loss) of affiliates 9,729 97,371
Equity in earnings (loss) of affiliates (2,048) (3,426)
Net income 7,681 93,945
Other comprehensive income:
Unrealized holding gains (losses) 52,393 -
------------- ------------
Comprehensive income $ 60,074 $ 93,945
============= ============
Income per common share $ 0.35 $ 0.54
============= ============
See accompanying notes to consolidated financial statements.
2
</TABLE>
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<TABLE>
First Financial Corporation
Consolidated Statement of Cash Flows
<CAPTION>
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
-------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 60,072 $ 93,944
Adjustments to reconcile net income(loss) to
net cash used by operating activities:
Depreciation 65,309 39,722
Provision for losses under servicing agreements (95,000) (84,897)
Equity in (income) loss of affiliates 2,048 3,426
Realized losses on marketable investment securities (11,018) -
Net (increase) decrease in accounts receivable 165,429 (634,162)
Net (increase) decrease in other assets 89,487 (111,732)
Net increase (decrease) in other liabilities (325,862) 362,050
Increase in minority interest (34,599) 7,079
(Increase) decrease in restricted cash used
in operating activities - net (38,886) (177,069)
Increase in mortgage loans - net -
Mortgage loans funded (82,744,426) (92,580,474)
Mortgage loans sold 95,953,167 84,308,620
Increase in mortgage loans participations sold (13,008,099) 8,336,664
Other (47,428) 22,028
--------------- ---------------
Net cash provided (used) for operating activities 30,193 (414,801)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sale of marketable investment securities 47,128 -
Purchases of marketable investment securities (129,439) -
Unrealized holding (gain) loss (52,393) -
Purchase of property and equipment (136,025) (53,696)
Principal collections on mortgage loans 114,511 251,187
Amortization of discount on mortgage loans purchased (5,272) (7,960)
(Advances to) repayments from affiliates - -
--------------- ---------------
Net cash provided (used) for investing activities (161,490) 189,531
--------------- ---------------
Cash flows from financing activities:
Payment on notes payable - -
Net cash used for financing activities - -
Net increase (decrease) in cash and cash equivalents (131,297) (225,270)
Cash and cash equivalents at beginning of year 1,362,456 1,167,270
--------------- ---------------
Cash and cash equivalents at end of period $ 1,231,159 $ 942,000
=============== ===============
Supplemental Disclosure of Cash Flow Information
Interest Paid $ 333,359 $ 241,860
=============== ===============
See accompanying notes to consolidated financial statements.
3
</TABLE>
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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. 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 three-month
period ended March 31, 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 $1,500,000 at March 31, 1999,
4
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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. 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 $10,533 and
are included in restricted cash at March 31, 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 $7,681 for the quarter ended March 31,
1999 compared to net income of $93,945 for the same period in 1998.
Loan administration revenues were $1,313,111 for the first quarter for
1999 compared to $1,593,595 for the first quarter of 1998. The
decrease in loan administration revenues is primarily due to decreased
loan origination fees from the Company's residential mortgage loan
operations. During the quarter ended March 31, 1999, First Preference
Mortgage Corp., a third tier subsidiary of Key Group, funded
approximately $82.7 million in new residential mortgage loans compared
to approximately $92.6 million during the same period in 1998.
Interest income for the quarter ended March 31, 1999 amounted to
$351,301 compared to $394,694 for the same period in 1998. This
decline is primarily due to the decline in new residential mortgage
loans originated during the first quarter 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.
Salaries and related expenses decreased to $1,036,810 for the three
months ended March 31, 1999, compared to $1,088,133 for the three
months ended March 31, 1998. This decrease is primarily due to a
reduction in the amount of commission expense as a result of decreased
loan origination volumes during the first quarter of 1999 compared to
the first quarter of 1998.
For the quarter ended March 31, 1999, interest expense amounted to
$254,085 compared to $312,203 for the same period in 1998. The
significant decrease in interest expense for the quarter ended March
31, 1999 is primarily due to decreased utilization of the Company's
loan participation agreement. As previously discussed, the volume of
new residential loan originations for the quarter ended March 31, 1999
decreased by approximately 11% over the comparable period in 1998.
During the quarter ended March 31, 1999, the provision for losses
under servicing agreements was ($95,000) resulting in a balance in the
reserve for losses under servicing agreements of $412,761 at March 31,
1999. For the quarter ended March 31, 1998, the Company had a
negative provision for losses under servicing agreements of ($108,000)
which resulted in a balance in the reserve for losses under servicing
agreements of $823,639 at March 31, 1998. As previously discussed,
5
<PAGE>
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 $34,599
for the quarter ended March 31, 1999. For the quarter ended March 31,
1998, the minority interest in the net income of Key Group amounted to
($8,025). 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 ($38,915) and $9,026 for the
quarter ended March 31, 1999 and 1998, respectively.
The consolidated statements of income for the three months ended March
31, 1999 reflect equity in net loss of affiliates of ($2,048) compared
to a net loss of ($3,426) for the three months ended March 31, 1998.
Other comprehensive income consists of unrealized holding gains
(losses) on marketable investment securities net of income taxes. For
the quarter ended March 31, 1999, unrealized holding gains amount to
$52,393.
Financial Condition
At March 31, 1999, the Company's total assets were $7,451,068.
Included in the Company's total assets are the assets of Key Group,
LTD. which amounted to $4,761,647 at March 31, 1999. The Key Group
assets at March 31, 1999 consisted primarily of cash and cash
equivalents of $1,304,100, mortgage loans of $944,733, property and
equipment of $1,118,749 and accounts receivable, prepaid expenses and
other assets of $1,394,065. The minority interest in the net assets
of Key Group at March 31, 1999 amounted to $1,911,083.
On consolidated basis, cash and cash equivalents (including restricted
cash) were $1,830,569 at March 31, 1999. Included therein was cash
and cash equivalents for Key Group of $1,304,100 and Apex Lloyds
Insurance Company of $470,593. 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 31, 1999.
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
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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 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.
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.
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%
7
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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 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
8
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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 March 31, 1999.
Exhibit 27 - Financial Data Schedule
9
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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 May 14, 1999 /s/ David W. Mann
David W. Mann
President
Duly Authorized Officer and
Principal Financial Officer
Date May 14, 1999 /s/ Annie Laurie Miller
Annie Laurie Miller
Executive Vice President and
Principal Accounting Officer
10
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