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 June 30, 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
incorporation or organization) No.)
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 August 15, 1999)
<PAGE>
FORM 10-QSB
FIRST FINANCIAL CORPORATION
JUNE 30, 1999
INDEX
Part I Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheet as of 1
June 30, 1999
Consolidated Statements of Income 2
for the Three-Months and Six-Months
ended June 30, 1999 and 1998
Consolidated Statements of Cash
Flow for the Six-Months
ended June 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 4. Submission of Matters to a Vote
Of Security Holders 9 - 10
Item 6. Exhibits and Reports on Form
8-K 10
<PAGE>
First Financial Corporation
Consolidated Balance Sheet
June 30, 1999
(Unaudited)
Assets
------
Cash and cash equivalents $ 1,178,723
Restricted cash 627,266
Accounts receivable 1,667,149
Marketable investment securities 326,054
Real estate held for investment,at cost 444,000
Mortgage loans 1,094,893
Investment in and advances to
affiliated companies 405,332
Property and equipment 1,075,225
Other assets 1,140,985
-------------
Total Assets $ 7,959,627
=============
Liabilities and Stockholders' Equity
--------------------------------------
Notes payable -
Estimated reserve for losses under servicing
agreements 391,262
Other liabilities 1,607,890
-------------
Total Liabilities 1,999,152
-------------
Minority interest 1,932,187
-------------
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 3,543,895
-------------
4,063,597
Less:Treasury stock - at cost (35,309)
Net unrealized loss on marketable
investment securities -
-------------
Total Stockholders' Equity 4,028,288
-------------
Total Liabilities and Stockholders' Equity $ 7,959,627
=============
See accompanying notes to consolidated financial statements.
1
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<TABLE>
First Financial Corporation
Consolidated Statements of Income
Three months and Six months ended June 30,1999 and 1998
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Loan administration $ 1,578,055 $ 1,745,213 $ 2,891,166 $ 3,338,808
Interest income 286,908 381,937 638,209 776,631
Other income 359,648 170,734 537,235 275,909
-------------- -------------- -------------- --------------
Total Revenues 2,224,611 2,297,884 4,066,610 4,391,348
-------------- -------------- -------------- --------------
Expenses:
Salaries and related expenses 1,144,753 1,157,038 2,181,563 2,245,171
Interest expense 203,113 304,455 457,198 616,658
Provision for losses under servicing
agreements (44,000) (57,000) (139,000) (165,000)
Other operating expenses 789,896 697,560 1,460,870 1,393,292
-------------- -------------- -------------- --------------
Total Expenses 2,093,762 2,102,053 3,960,631 4,090,121
-------------- -------------- -------------- --------------
Income before income taxes,
minority interest, equity in earnings
(loss) of affiliates 130,849 195,831 105,979 301,227
Federal income taxes - - - -
-------------- -------------- -------------- --------------
Income before minority interest 130,849 195,831 105,979 301,227
Minority interest in net loss (income) (21,104) (59,682) 13,495 (67,707)
-------------- -------------- -------------- --------------
Income before equity in earnings (loss) of
affiliates 109,745 136,149 119,474 233,520
Equity in earnings (loss) of affiliates 135 28,998 (1,913) 25,572
-------------- -------------- -------------- --------------
Net income 109,880 165,147 117,561 259,092
Other comprehensive income:
Unrealized holding gains (losses) (45,437) - 6,956 -
-------------- -------------- -------------- --------------
Net income $ 64,443 $ 165,147 $ 124,517 $ 259,092
============== ============== ============== ==============
Income Per Common Share $0.37 $0.95 $0.72 $1.49
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
2
</TABLE>
<PAGE>
<TABLE>
First Financial Corporation
Consolidated Statidated Statement of Cash Flows
<CAPTION>
(Unaudited)
Six Months Ended June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 124,516 $ 259,092
Adjustments to reconcile net income(loss) to
net cash used by operating activities:
Depreciation 138,673 92,789
Provision for losses under servicing agreements (139,000) (165,000)
Equity in (income) loss of affiliates 1,913 (25,572)
Realized (gains) losses on marketable investment securities (211,625) -
Net (increase) decrease in accounts receivable (453,748) (277,281)
Net (increase) decrease in other assets 104,411 (141,983)
Net increase (decrease) in other liabilities 118,648 399,835
Increase in minority interest (13,495) 67,706
(Increase) decrease in restricted cash used
in operating activities - net (66,742) (253,115)
Mortgage loans funded (182,999,820) (193,084,348)
Mortgage loans sold 192,976,226 183,931,192
Increase in mortgage loans participations sold (9,889,855) 9,080,997
Other 6,349 40,474
-------------- --------------
Net cash provided (used) for operating activities (303,549) (75,214)
-------------- --------------
Cash flows from investing activities:
Proceeds from sale of marketable investment securities 387,168 -
Purchases of marketable investment securities (186,489) -
Unrealized holding (gains) losses (10,540) -
Purchase of property and equipment (274,866) (297,172)
Principal collections on mortgage loans 210,746 503,730
Amortization of discount on mortgage loans purchased (6,203) (17,081)
(Advances to) repayments from affiliates - -
-------------- --------------
Net cash provided (used) for investing activities 119,816 189,477
-------------- --------------
Cash flows from financing activities:
Payment on notes payable - -
-------------- --------------
Net cash used for financing activities - -
-------------- --------------
Net increase (decrease) in cash and cash equivalents (183,733) 114,263
Cash and cash equivalents at beginning of year 1,362,456 1,167,270
-------------- --------------
Cash and cash equivalents at end of period $ 1,178,723 $ 1,281,533
============= =============
Supplemental Disclosure of Cash Flow Information
Interest Paid $ 309,331 $ 585,393
============= =============
See accompanying notes to consolidated financial statements.
3
</TABLE>
<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 six-month
period ended June 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 $1,350,000 at June 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. Further, several of the
4
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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 June 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 $117,561 for the six months ended June
30, 1999 compared to net income of $259,092 for the same period in
1998. Loan administration revenues were $2,891,166 for the first six
months of 1999 compared to $3,338,808 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 six months
ended June 30, 1999, First Preference Mortgage Corp., a third tier
subsidiary of Key Group, funded approximately $183.0 million in new
residential mortgage loans compared to approximately $193.1 million
during the same period in 1998.
Interest income for the six months ended June 30, 1999 amounted to
$638,209 compared to $776,631 for the same period in 1998. This
decline is primarily due to the decline in new residential mortgage
loans originated during the first six 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 six months ended June 30, 1999 amounted to
$537,235 compared to $275,909 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.
Salaries and related expenses decreased to $2,181,563 for the six
months ended June 30, 1999, compared to $2,245,171 for the six months
ended June 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 six months ended June 30, 1999 as
compared to the same period in 1998.
For the six months ended June 30, 1999, interest expense amounted to
$457,198 compared to $616,658 for the same period in 1998. The
significant decrease in interest expense for the six months ended June
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 six months ended June 30,
1999 decreased by approximately 5% over the comparable period in 1998.
During the six months ended June 30, 1999, the provision for losses
under servicing agreements was ($139,000) resulting in a balance in
the reserve for losses under servicing agreements of $391,262 at June
30, 1999. For the six months ended June 30, 1998, the Company had a
5
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negative provision for losses under servicing agreements of ($165,000)
which resulted in a balance in the reserve for losses under servicing
agreements of $767,186 at June 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 $13,495
for the six months ended June 30, 1999. For the six months ended June
30, 1998, the minority interest in the net income of Key Group
amounted to ($67,707). 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 ($15,170)
and $76,154 for the six months ended June 30, 1999 and 1998,
respectively.
The consolidated statements of income for the six months ended June
30, 1999 reflect equity in net loss of affiliates of ($1,913) compared
equity in net income of $25,572 for the six months ended June 30,
1998.
Other comprehensive income consists of unrealized holding gains
(losses) on marketable investment securities net of income taxes. For
the six ended June 30, 1999, unrealized holding gains amounted to
$6,956.
Financial Condition
At June 30, 1999, the Company's total assets were $7,959,627.
Included in the Company's total assets are the assets of Key Group,
LTD. which amounted to $5,015,807 at June 30, 1999. The Key Group
assets at March 31, 1999 consisted primarily of cash and cash
equivalents of $1,000,519, mortgage loans of $973,246, property and
equipment of $1,190,351 and accounts receivable, prepaid expenses and
other assets of $1,851,691. The minority interest in the net assets
of Key Group at March 31, 1999 amounted to $1,932,187.
On consolidated basis, cash and cash equivalents (including restricted
cash) were $1,805,989 at June 30, 1999. Included therein was cash and
cash equivalents for Key Group of $1,000,519 and Apex Lloyds Insurance
Company of $712,218. 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.
6
<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.
7
<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 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.
8
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on May 18, 1999, pursuant
to an information statement dated April 16, 1999, furnished by the
Board of Directors to the Shareholders of Record.
At the meeting, the following were elected to the Board of Directors:
John Carl Hauser, David W. Mann, Robert A. Mann, Walter J. Rusek, Mary
Hyden Mann Hunter, Allen B. Mann and Barrett Smith.
9
<PAGE>
In other matters, the shareholders approved the selection of Pattillo,
Brown & Hill, Certified Public Accountants, as auditors for the fiscal
year ended December 31, 1999 and ratified and approved all actions
taken by the Company's directors and management during the preceding
year. No other matters were voted upon.
Item 6. Exhibits and Reports on Form 8-K
No Form 8-K was filed during the quarter ended June 30, 1999.
10
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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 August 13, 1999 /s/ David W. Mann
David W. Mann
President
Duly Authorized Officer and
Principal Financial Officer
Date August 13, 1999 /s/ Annie Laurie Miller
Annie Laurie Miller
Executive Vice President and
Principal Accounting Officer
(Remainder of page purposely left blank.)
11
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