<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the Transition Period From _______________ to _______________
Commission File Number 33-42622
--------
FIRST FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer As Specified in its Charter)
Tennessee 62-1474162
--------- ----------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
1691 N. Mt. Juliet Road, Mount Juliet, TN 37122
-----------------------------------------------
(Address of Principal Executive Offices)
(615) 754-2265
--------------
(Issuer's Telephone Number)
Not Applicable
--------------
Former Name, Former Address and Former Fiscal Years,
If Changed Since Last Report
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: 940,038 .
Transitional Small Business Disclosure Format (check one).
YES NO X
--- ---
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited consolidated financial statements of the small business issuer and
its wholly-owned subsidiary are as follows:
Consolidated Balance Sheets - September 30, 1997 and December 31, 1996.
Consolidated Statements of Earnings - For the three months and nine months
ended September 30, 1997 and 1996.
Consolidated Statements of Cash Flows - For the nine months ended
September 30, 1997 and 1996.
2
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FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- --------
(In Thousands)
<S> <C> <C>
Assets
Loans $ 145,046 124,312
Less: Allowance for loan losses (1,700) (1,541)
--------- --------
Net loans 143,346 122,771
Securities available-for-sale, at market (amortized cost
$38,134,000 and $42,427,000, respectively) 38,379 42,473
Loans held for sale 2,208 1,723
Federal funds sold 6,200 3,725
--------- --------
Total earning assets 190,133 170,692
Cash and due from banks 5,486 5,412
Bank premises and equipment, net of accumulated depreciation 6,277 5,457
Accrued interest receivable 1,800 1,638
Other real estate 2 2
Other assets 847 772
--------- --------
$ 204,545 183,973
========= ========
Liabilities and Stockholders' Equity
Deposits $ 186,026 167,445
Advances from Federal Home Loan Bank 955 993
Short-term borrowings 600 800
Accrued interest payable 1,072 882
Other liabilities 347 289
Long-term debt 387 391
--------- --------
Total liabilities 189,387 170,800
--------- --------
Stockholders' equity:
Preferred stock, no par value, authorized 5,000,000 shares,
no shares issued --
Common stock, $2.50 par value; authorized 5,000,000 shares,
issued 1,077,964 and 1,068,914 shares, respectively 2,695 2,672
Additional paid-in capital 4,005 3,850
Retained earnings 9,563 7,879
Unrealized gains on available-for-sale, net of applicable
income taxes 152 29
Less cost of 137,926 shares of treasury stock (1,257) (1,257)
--------- --------
Total stockholders' equity 15,158 13,173
--------- --------
$ 204,545 183,973
========= ========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
-------- ------- -------- -------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,570 3,068 $ 10,087 8,756
Interest and dividends on securities:
Taxable securities 441 504 1,424 1,536
Exempt from Federal income taxes 137 109 405 318
Interest on loans held for sale 32 22 98 82
Interest on federal funds sold 90 29 209 73
Interest on interest-bearing deposits in other banks
and other interest -- 2 -- 7
-------- ------- -------- -------
Total interest income 4,270 3,734 12,223 10,772
-------- ------- -------- -------
Interest expense:
Interest on deposits 1,953 1,646 5,558 4,726
Interest on short term borrowings 13 16 44 53
Interest on advances from Federal Home Loan Bank 17 22 53 68
Interest on Federal funds purchased -- 2 -- 7
Interest on long-term debt 6 7 20 21
-------- ------- -------- -------
Total interest expense 1,989 1,693 5,675 4,875
-------- ------- -------- -------
Net interest income 2,281 2,041 6,548 5,897
Provision for loan losses 120 90 260 250
-------- ------- -------- -------
Net interest income after provision for
loan losses 2,161 1,951 6,288 5,647
-------- ------- -------- -------
Non-interest income:
Service charges on deposit accounts 253 218 747 615
Other fees and commissions 71 57 194 157
Other income 225 179 612 519
Gain on sale of securities 1 -- -- 7
-------- ------- -------- -------
550 454 1,553 1,298
-------- ------- -------- -------
Non-interest expenses:
Salaries and employee benefits 962 849 2,793 2,459
Occupancy expenses, net 86 77 246 220
Furniture and equipment expense 129 114 385 347
Other operating expenses 484 470 1,467 1,350
Loss on sale of securities -- 2 47 2
-------- ------- -------- -------
1,661 1,512 4,938 4,378
-------- ------- -------- -------
Earnings before income taxes 1,050 893 2,903 2,567
Income taxes 358 308 986 883
-------- ------- -------- -------
Net earnings $ 692 585 $ 1,917 1,684
======== ======= ======== =======
Weighted average number of shares and common
equivalents outstanding 958,683 945,551 953,163 941,500
======== ======= ======== =======
Net earnings per common and common equivalent share .72 .62 2.01 1.79
======== ======= ======== =======
Dividends per share $ .25 .20 .25 .20
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- -------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 11,990 10,635
Fees and commissions received 941 831
Interest paid (5,485) (4,765)
Originations of loans held for sale (28,039) (23,923)
Proceeds from loan sales 28,166 24,665
Cash paid to suppliers and employees (4,606) (4,174)
Income taxes paid (1,077) (943)
-------- -------
Net cash provided by operating activities 1,890 2,326
-------- -------
Cash flows from investing activities:
Loans made to customers, net of repayments (20,835) (20,048)
Proceeds from sales of available-for-sale securities 7,236 8,713
Proceeds from maturities of available-for-sale securities 2,810 3,685
Purchase of available-for-sale securities (5,695) (10,026)
Decrease (increase) in interest-bearing deposits in
financial institutions -- 96
Purchase of premise and equipment (1,141) (774)
Proceeds from sale of other real estate -- 239
Increase in other real estate -- (5)
-------- -------
Net cash used in investing activities (17,625) (18,120)
-------- -------
Cash flows from financing activities:
Net increase in time deposits 8,919 12,711
Net increase in non-interest bearing, savings and NOW
deposit accounts 9,662 7,486
Payment of dividend (233) (186)
Issuance of common stock 178 130
Repayment of note payable - line of credit (200) (196)
Repayment of long-term debt (4) (3)
Repayment from advances from Federal Home Loan Bank (38) (246)
-------- -------
Net cash provided by financing activities 18,284 19,696
-------- -------
Net increase in cash and cash equivalents 2,549 3,902
Cash and cash equivalents at beginning of period 9,137 5,633
-------- -------
Cash and cash equivalents at end of period $ 11,686 9,535
======== =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------- ------
(In Thousands)
<S> <C> <C>
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings $ 1,917 1,684
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 250 254
Provision for loan losses 260 250
Gain on sale of investment securities - available-for-sale -- (7)
Loss on sale of investment securities - available-for-sale 47 2
Decrease (increase) in loans held for sale (485) 282
Increase in interest receivable (162) (148)
Increase in other assets, net (184) (155)
Increase in other liabilities 57 54
Increase in interest payable 190 110
------- ------
Total adjustments (27) 642
------- ------
Net cash provided by operating activities $ 1,890 2,326
======= ======
Supplemental Schedule of Noncash Activities:
Change in unrealized gain (loss) in value of securities
available-for-sale, net of income taxes of $72,000
and income tax benefits of $307,000, respectively $ 123 (501)
======= ======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
6
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FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of First
Financial Corporation and its wholly-owned subsidiary, First Bank and Trust
(First Bank).
The accompanying consolidated financial statements have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Certain reclassifications have been made to the 1996 figures to
conform to the presentation for 1997.
In the opinion of management, the statements contain all adjustments and
disclosures necessary to summarize fairly the financial position of the Company
as of September 30, 1997 and December 31, 1996, and the results of operations
for the three months and nine months ended September 30, 1997 and 1996 and
changes in cash flows for the nine months ended September 30, 1997 and 1996. All
significant intercompany transactions have been eliminated. The interim
consolidated financial statements should be read in conjunction with the notes
to the consolidated financial statements presented in the Company's 1996 Annual
Report to stockholders. The results for interim periods are not necessarily
indicative of results to be expected for the complete year.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1997 1996
------- ------
(In Thousands)
<S> <C> <C>
Balance, January 1, 1997 and 1996, respectively $ 1,541 1,246
Add (deduct):
Losses charged to allowance (120) (64)
Recoveries credited to allowance 19 75
Provision for loan losses 260 250
------- ------
Balance, September 30, 1996 and 1995, respectively $ 1,700 1,507
======= ======
</TABLE>
EARNINGS PER SHARE
The computation of earnings per common share and common equivalent share is
based upon the weighted average number of common shares outstanding during the
period plus the effect of common shares contingently issuable from stock
options. On April 18, 1996, the stockholders approved a two-for-one stock split
effective for shareholders of record on May 1, 1996. The weighted average number
of shares outstanding used in the computation of earnings per share and
dividends per share has been retroactively adjusted to reflect the stock split.
7
<PAGE> 8
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The purpose of this discussion is to provide insight into the
financial condition and results of operations of the Registrant and its
subsidiary. This discussion should be read in conjunction with the consolidated
financial statements. Reference should also be made to the Company's 1996 Annual
Report to stockholders for a complete discussion of factors that impact
liquidity, capital and the results of operations.
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The concept of liquidity involves the ability of the Company and
its subsidiary to meet future cash flow requirements, particularly those of
customers who are either withdrawing funds from their accounts or borrowing to
meet their credit needs.
Proper asset/liability management is necessary to maintain
stability in the balance of interest-sensitive assets to interest-sensitive
liabilities in order to provide a stable growth in net interest margins.
Earnings on interest-sensitive assets such as loans tied to the prime rate of
interest and federal funds sold, may vary considerably from fixed rate assets
such as long-term investment securities and fixed rate loans. Interest-sensitive
liabilities such as large certificates of deposit and money market certificates,
generally require higher costs than fixed rate instruments such as passbook
savings.
Banks, in general, must maintain large cash balances to meet
day-to-day cash flow requirements as well as maintaining required reserves for
regulatory agencies. The cash balances maintained are the primary source of
liquidity. Federal funds sold, which are basically overnight or short-term loans
to other banks that increase the other bank's required reserves, are also a
major source of liquidity.
The Company's investment portfolio consists of earning assets that
provide interest income. For those securities classified as held-to-maturity,
the Company has the ability and intent to hold these securities to maturity or
on a long-term basis. Securities classified as available-for-sale include
securities intended to be used as a part of the Company's asset/liability
strategy and/or securities that may be sold in response to changes in interest
rate, prepayment risk, the need or desire to increase capital and similar
economic factors. The Company has approximately $7.2 million of securities
scheduled to mature or reprice in the next twelve months.
8
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FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,
CONTINUED
A secondary source of liquidity is the Bank's loan portfolio. At
September 30, 1997 first mortgage loans of approximately $20 million and other
loans of approximately $54 million either will become due or will be subject to
rate adjustments within twelve months from the respective date. Continued
emphasis will be placed on structuring adjustable rate loans.
As for liabilities, certificates of deposit of $100,000 or greater
of approximately $27 million will become due or subject to repricing during the
next twelve months. The Bank's deposit base increased approximately $18.6
million during the nine months ended September 30, 1997.
The Company also has the ability to meet its liquidity needs
through advances from the Federal Home Loan Bank. At September 30, 1997 the
Company had $955,000 of these advances and has a total line of credit with the
FHLB of $9,000,000. In addition, the subsidiary has a line of credit with other
banks totaling $14,000,000 which can be used to purchase Federal funds. The
Company also has a $5,000,000 line of credit which currently has an outstanding
balance of $600,000.
As of September 30, 1997, the Bank's asset sensitivity was 5% (the
excess of earning assets over interest sensitive liabilities divided by total
assets at the one year threshold). Management estimates an increase or decrease
in interest rates of 1% would have an immaterial impact on earnings.
Management works diligently to maintain proper liquidity. It is
anticipated that with present maturities, the projected growth in deposit base,
and the efforts of management in its asset/liability management program,
liquidity will not pose a problem in the foreseeable future. At the present
time, there are no known trends or any known commitments, demands, events or
uncertainties that will result in or that are reasonably likely to result in the
Company's liquidity changing in any material way. Liquidity was 17.4% at
September 30, 1997 and 22.9% at December 31, 1996.
CAPITAL RESOURCES
A primary source of capital is internal growth through retained
earnings. The ratio of stockholders' equity to total assets was 7.4% at
September 30, 1997 and 7.2% at December 31, 1996. Total assets increased 11.2%
during the nine months ended September 30, 1997. Cash dividends of $.25 per
outstanding share were declared July 1, 1997. Cash dividends paid during 1996
were $.20 per share. Cash dividends will be paid or increased in the remainder
of 1997 over 1996 only in the discretion of the Board of Directors to the extent
profits increase.
Effective June 6, 1996, the Company established a Dividend
Reinvestment Plan. The Plan offers eligible shareholders the opportunity to
purchase additional shares of common stock, upon the Company's declaration of
dividends. There were 7,224 shares issued under the Plan during 1996. On July 1,
1997 an additional 7,850 shares were issued under the Plan. No material changes
in the mix or cost of capital is anticipated in the foreseeable future.
At the present time there are no material commitments for capital
expenditures other than the planned branch described below.
9
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FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,
CONTINUED
CAPITAL RESOURCES, CONTINUED
The FDIC, which is the subsidiary's primary Federal regulator, has
specified guidelines for purposes of evaluating a bank's capital adequacy. Under
these guidelines, a credit risk is assigned to various categories of assets and
commitments ranging from 0% to 100% based on the risk associated with the asset
or commitment.
The following schedule details the Company's risk-based capital at
September 30, 1997 (excluding the effect of the adoption of SFAS No. 115):
<TABLE>
<CAPTION>
In Thousands
------------
(except percentages)
<S> <C>
Tier I capital:
Stockholders' equity $ 15,006
Tier II capital:
Allowable allowance for loan losses 1,700
Total capital $ 16,706
========
Risk-weighted assets $148,973
========
Risk-based capital ratios:
Tier I capital ratio 10.07%
========
Tier II capital ratio 11.21%
========
</TABLE>
The Company is required to maintain a Tier II capital to risk
weighted asset ratio of 8% and a Tier I capital to risk weighted asset ratio of
4%. At September 30, 1997, the Company and its subsidiary bank were in
compliance with these requirements.
In addition, the Company and its subsidiary are required to
maintain a leverage ratio (defined as equity divided by the most recent quarter
average total assets) of a minimum of 4%. The leverage ratio at September 30,
1997 was 7.32%.
Management continues to implement its plan to maximize the
leverage position of the Company consistent with safe and sound business
practices and the current regulatory environment. Past decisions by management
have committed the Company to a path of growth to achieve the strategic goals of
maximum leverage. Management is cognizant of the pressures of this philosophy
but believe various combinations of retained earnings, additional capital stock
issues, preferred stock offerings, and other avenues will enable the Company to
maintain a capital position consistent with sound banking principles and at the
same time reward stockholders with significant earnings per share.
10
<PAGE> 11
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,
CONTINUED
CAPITAL RESOURCES, CONTINUED
Effective January 1, 1992, the Company acquired 100% of the common
stock of First Bank; and accordingly, became a one bank holding company. The
Board of Directors and management recommended the holding company structure with
a view to providing flexibility in the expansion of First Bank's present
business and to assist the Bank in being more responsive to its customers'
broadening and changing financial needs. In particular, the holding company
structure is believed to provide greater flexibility in raising additional
capital for First Bank. Greater flexibility in raising capital is necessary in
order to insure that the growth of the Bank's capital will keep pace with its
asset growth.
There is no established trading market for the Company's stock.
From time to time the Company may acquire shares of its stock to provide
liquidity in the shares. All shares of common stock have been retroactively
adjusted for the two-for-one stock split approved on April 18, 1996. During the
nine months ending September 30, 1997 the Company issued 1,200 shares of its
voting common stock in connection with the exercise of stock options and no
shares were redeemed. No shares of the Company's voting common stock were
redeemed for the year ending December 31, 1996. These trades may involve the
Company, its directors and officers and, accordingly, may not be reliable
indicators of value.
In April, 1993, the stockholders approved a stock option plan
whereby 159,000 shares of the Company's stock is available for issuance to
directors, officers and employees of the Company. At September 30, 1997, 79,400
shares had been granted at $10 per share (2,120 shares have been exercised at
September 30, 1997); 2,000 shares had been granted at $12 per share (600 shares
have been exercised at September 30, 1997), 4,000 shares were granted at $13 per
share (no shares have been exercised as of September 30, 1997), 29,792 shares
were granted at $15 per share (170 shares have been exercised at September 30,
1997) and 528 shares were granted at $19 per share (no shares have been
exercised as of September 30, 1997). The options are granted at the estimated
market price of the stock at the date the option was granted. At September 30,
1997 there were 112,830 shares granted but not exercised. The options are
generally exercisable ratably over a ten year period from the date granted. At
September 30, 1997 options to purchase 43,280 common shares were available for
grant in future years. The Company has adopted the provisions of "Accounting for
Stock-Based Compensation" (SFAS 123). The impact of the adoption of SFAS No. 123
will be reflected as a proforma disclosure in the notes to the annual
consolidated financial statements and will be immaterial to the financial
statements taken as a whole.
At present, the net book value of premises and equipment is 41.4%
of the Company's capital. The subsidiary bank now has a significant presence in
the Wilson County market with offices in Mt. Juliet, Tennessee, Hermitage,
Tennessee and Lebanon, Tennessee. The bank also has a branch bank facility in
Smyrna, Rutherford County, Tennessee which opened in the fourth quarter of 1996.
The Company is also in the process of constructing a new branch bank facility in
Donelson, Davidson County, Tennessee. Management believes that expansion into
these different markets diversifies its risk and provides increased opportunity
for generating growth and profits. At present the ratio of fixed assets to
capital at the subsidiary bank level is 40.0%. Investment in fixed assets can
have a detrimental impact on profits, particularly in the short term.
11
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FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,
CONTINUED
RESULTS OF OPERATIONS
Net earnings were $1,917,000 for the nine months ended September
30, 1997 as compared to $1,684,000 for the same period in 1996. Earnings per
share increased from $1.79 in 1996 to $2.01 for the same period in 1997.
As in most financial institutions, a major element in analyzing
the statement of earnings is net interest income, which is the excess of
interest earned over interest paid. This is particularly true with the potential
volatility of interest rates that exists in any economy.
The Company's interest income, excluding tax equivalent
adjustments, increased by $1,451,000 or 13.5% during the nine months ended
September 30, 1997 and $1,826,000 or 20.4% for the same period in 1996. Interest
income for the quarter ended September 30, 1997 increased $536,000 or 14.4% over
the quarter ended September 30, 1996 and $182,000 or 4.5% over the second
quarter of 1997. The increases were primarily attributable to higher volumes of
earning assets. The ratio of average earning assets to total average assets was
95.0% for the nine months ended September 30, 1997 and 93.2% for the year ended
December 31, 1996.
Interest expense increased by $800,000 for the nine months ended
September 30, 1997 or 16.4% compared to an increase of $659,000 or 15.6% for the
same period in 1996. Interest expense for the quarter ended September 30, 1997
increased $296,000 or 17.5% as compared to the quarter ended September 30, 1996
and increased $101,000 or 5.3% over the second quarter of 1997. The increases in
1997 and 1996 can be attributable largely to an increase in volume.
The foregoing contributed to an increase in net interest income of
$651,000 or 11.0% during the first nine months of 1997 and $1,167,000 or 24.7%
in the comparable period of 1996. Net interest income for the quarter ended
September 30, 1997 increased $240,000 or 11.8% as compared to $317,000 or 18.4%
for the comparable period of 1996.
Since assets are more sensitive to movements in rates this should
favor the income statement. Should loan demand not increase, the competition,
intent on increasing market share, could drive interest expenses up and the
Company's net interest margin would then be expected to decline.
Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures". These pronouncements apply to
impaired loans except for large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment including credit card, residential
mortgage, and consumer installment loans. The adoption of the pronouncements had
no material impact on the Company's consolidated financial statements.
12
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FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,
CONTINUED
RESULTS OF OPERATIONS, CONTINUED
A loan is impaired when it is probable that the Company will be
unable to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, the Company shall
recognize an impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or credit to the
provision for loan losses.
The Company's single family residential mortgage, consumer and
credit card loans which total approximately $47,741,000 $25,619,000 and
$824,000, respectively at September 30, 1997, are divided into various groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
and thus are not subject to the provisions of SFAS Nos. 114 and 118.
Substantially all other loans of the Company are evaluated for impairment under
the provisions of SFAS Nos. 114 and 118.
The Company considers all loans on nonaccrual status to be
impaired. Loans are placed on nonaccrual status when doubt as to timely
collection of principal or interest exists, or when principal or interest is
past due 90 days or more unless such loans are well-secured and in the process
of collection. Delays or shortfalls in loan payments are evaluated with various
other factors to determine if a loan is impaired. Generally, delinquencies under
90 days are considered insignificant unless certain other factors are present
which indicate impairment is probable. The decision to place a loan on
nonaccrual status is also based on an evaluation of the borrower's financial
condition, collateral, liquidation value, and other factors that affect the
borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all
interest accrued on the loan in the current fiscal year is reversed from income,
and all interest accrued and uncollected from the prior year is charged off
against the allowance for loan losses. Thereafter, interest on nonaccrual loans
is recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt. At
September 30, 1997, the Company had $329,000 of loans on nonaccrual status with
an average outstanding balance of $180,000 for the nine months ended September
30, 1997. The Company had no loans on nonaccrual at December 31, 1996 and no
accrual loans outstanding at any time during the year ended December 31, 1996.
The Company recognized $41,000 in interest income for the nine months ended
September 30, 1997 related to nonaccrual loans and no interest related to
nonaccrual loans for the nine months ended September 30, 1996.
Loans not on nonaccrual status are classified as impaired in
certain cases where there is inadequate protection by the current net worth and
financial capacity of the borrower or of the collateral pledged, if any. In
those cases, such loans have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Company will sustain some loss. In
such cases, interest income continues to accrue as long as the loan does not
meet the Company's criteria for nonaccrual status.
13
<PAGE> 14
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,
CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Generally the Company also classifies as impaired any loans the
terms of which have been modified in a troubled debt restructuring after January
1, 1995. Interest is accrued on such loans that continue to meet the modified
terms of their loan agreements. At September 30, 1997, the Company had $65,000
of loans that have had the terms modified in a troubled debt restructuring.
The Company's charge-off policy for impaired loans is similar to
its charge-off policy for all loans in that loans are charged-off in the month
when they are considered uncollectible.
Impaired loans and related allowance for loan loss amounts at
September 30, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
Allowance Allowance
Recorded for Recorded for
(In Thousands) Investment Loan Loss Investment Loan Loss
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Impaired loans with allowance for
loan loss $ 699,052 139,810 585,831 117,166
Impaired loans with no allowance for
loan loss -- -- -- --
---------- --------- ---------- -------
$ 699,052 139,810 585,831 117,166
========== ========= ========== =======
</TABLE>
The allowances for loan loss related to impaired loans were measured based upon
the estimated fair value of related collateral.
The average recorded investment in impaired loans for the nine
months ended September 30, 1997 and 1996 was $642,441 and $505,927,
respectively. The related amount of interest income recognized on the accrual
method for the period that such loans were impaired was $73,186 and $43,902 for
the nine months ended September 30, 1997 and 1996, respectively. There was no
interest income recognized on the cash method for the period that such loans
were impaired.
The following schedule details selected information as to
non-performing loans of the Company at September 30, 1997:
<TABLE>
<CAPTION>
Past Due
90 Days Non-Accrual
------- -----------
(In Thousands)
<S> <C> <C>
Real estate loans $219 327
Installment loans 71 3
Commercial 116 193
---- ---
$406 523
==== ===
Renegotiated loans $ 65 --
==== ===
</TABLE>
14
<PAGE> 15
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,
CONTINUED
RESULTS OF OPERATIONS, CONTINUED
At September 30, 1997, loans which include the above, totaling
$2,426,120 were included in the Company's internal classified loan list. Of
these loans $924,164 are consumer and $1,501,956 are commercial loans. The
collateral values securing these loans total approximately $4,535,670,
($1,814,170 related to consumer loans and $2,721,500 related to commercial
loans). Such loans are listed as classified when information obtained about
possible credit problems of the borrower has prompted management to question the
ability of the borrower to comply with the repayment terms of the loan
agreement. The loan classifications do not represent or result from trends or
uncertainties which management expects will materially and adversely affect
future operating results, liquidity or capital resources.
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at September
30, 1997 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
Non-interest income, excluding securities transactions, increased
$262,000 or 20.3% during the nine months ended September 30, 1997 and increased
$180,000 or 16.2% for the same period in 1996. The increase for the quarter
ended September 30, 1997 was $95,000 or 20.9% as compared to the comparable
quarter in 1996 and an increase of $4,000 or .7% as compared to the quarter
ended June 30, 1997. The primary increase in non-interest income consists of an
increase in income generated from sales of mortgage loans. Mortgage loan income
(included in other income) for the nine month period ended September 30, 1997,
was $612,000 as compared to $461,000 for the period ending September 30, 1996.
The increase of $151,000 or 32.8% has been caused by the increase in the
refinancing of mortgage loans as compared to the same period in last year and
the increase in housing development in the subsidiary bank's service area. Other
increases in 1997 and 1996 resulted from increased service charges on deposits,
primarily for demand deposit and NOW accounts. These increases in service
charges were the result of additional volume combined with modest price
increases to offset a portion of the interest costs of NOW accounts and the
increased costs of processing the demand deposit accounts. Commissions and
service charges are monitored continually to insure maximum return based on
costs and competition.
Non-interest expense, excluding securities transactions, increased
$515,000 or 11.8% during the first nine months of 1997 and $609,000 or 16.2%
during the same period in 1996. The increase for the quarter ended September 30,
1997 was $151,000 or 10.0% as compared to the comparable quarter in 1996 and an
increase of $26,000 or 1.6% as compared to the quarter ended June 30, 1997. The
increases in 1997 and 1996 were primarily attributable to increases in salaries
and employee benefits which is due to increased number of employees and
increases in annual compensation and an increase in occupancy and furniture and
fixture expenses associated with the opening of a new branch late in 1996.
15
<PAGE> 16
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION,
CONTINUED
RESULTS OF OPERATIONS, CONTINUED
There was a $47,000 security loss in the available-for-sale
category for the nine months ended September 30, 1997. There were securities
losses for the nine months ended September 30, 1996 totaling $2,000.
Management is not aware of any known trends, events or
uncertainties that will, or is reasonably likely to, have a material effect on
the Company's liquidity, capital resources or operations of the Company. The
Company is not aware of any current recommendations which, if they were to be
implemented, would have a material effect on liquidity, capital resources or
operations other than as discussed in the capital resources section of this
plan.
The Company will implement SFAS No. 128 - "Earnings Per Share" as
of December 31, 1997. Implementation of the pronouncement is not expected to
have a significant impact on reported earnings per share.
SFAS 130 - "Reporting Comprehensive Income" is effective for
fiscal years beginning after December 15, 1997. The Company has not determined
the effect of the adoption of SFAS 130.
IMPACT OF INFLATION
The primary impact which inflation has on the results of the
Company's operations is evidenced by its effects on interest rates. Interest
rates tend to reflect, in part, the financial market's expectations of the level
of inflation and, therefore, will generally rise or fall as the level of
expected inflation fluctuates. To the extent interest rates paid on deposits and
other sources of funds rise or fall at a faster rate than the interest income
earned on Federal funds sold, loans or investment, net interest income will
vary. Inflation also impacts on non-interest expenses as goods and services are
purchased, although this has not had a significant effect on net earnings. If
the inflation rate stays flat or increases slightly, management believes that
the effect on profits will not be significant.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
(a) None
(b) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) None
(b) None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) None
(b) None
(c) None
(d) None
ITEM 5. OTHER INFORMATION
(a) None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only) - This
schedule contains summary financial information extracted from the
financial statements of the Company at September 30, 1997
(unaudited) and as is qualified in its entirety by reference to
such financial statements as set forth in the Company's quarterly
report on Form 10-QSB for the period ending September 30, 1996.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Securities Exchange
Act, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
FIRST FINANCIAL CORPORATION
(Registrant)
DATE: November 14, 1997 /s/ David Major
------------------------------------ -----------------------------
David Major
Chairman, President and
Chief Executive Officer
DATE: November 14, 1997 /s/ Sally Kimble
------------------------------------ -----------------------------
Sally Kimble
Treasurer, Chief Financial
Officer, and Chief Accounting
Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,486
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,379
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 145,046
<ALLOWANCE> 1,700
<TOTAL-ASSETS> 204,545
<DEPOSITS> 186,026
<SHORT-TERM> 600
<LIABILITIES-OTHER> 1,419
<LONG-TERM> 1,342
0
0
<COMMON> 2,695
<OTHER-SE> 12,463
<TOTAL-LIABILITIES-AND-EQUITY> 204,545
<INTEREST-LOAN> 10,087
<INTEREST-INVEST> 1,829
<INTEREST-OTHER> 307
<INTEREST-TOTAL> 12,223
<INTEREST-DEPOSIT> 5,558
<INTEREST-EXPENSE> 5,675
<INTEREST-INCOME-NET> 6,548
<LOAN-LOSSES> 260
<SECURITIES-GAINS> (47)
<EXPENSE-OTHER> 4,891
<INCOME-PRETAX> 2,903
<INCOME-PRE-EXTRAORDINARY> 2,903
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,917
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 2.01
<YIELD-ACTUAL> 0
<LOANS-NON> 523
<LOANS-PAST> 406
<LOANS-TROUBLED> 65
<LOANS-PROBLEM> 2,426
<ALLOWANCE-OPEN> 1,541
<CHARGE-OFFS> 120
<RECOVERIES> 19
<ALLOWANCE-CLOSE> 1,700
<ALLOWANCE-DOMESTIC> 1,700
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
