<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, 1998
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:
Common stock outstanding: 949,097 shares at November 4, 1998
-------------
Transitional Small Business Disclosure Format (check one).
YES NO X
---- -----
1
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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, 1998 and December 31, 1997.
Consolidated Statements of Earnings - For the three months and nine months
ended September 30, 1998 and 1997.
Consolidated Statements of Comprehensive Earnings - For the three months
and nine months ended September 30, 1998 and 1997.
Consolidated Statements of Cash Flows - For the nine months ended
September 30, 1998 and 1997.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
2
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FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- ---------------
(In Thousands)
Assets
<S> <C> <C>
Loans $ 166,306 146,769
Less: Allowance for loan losses 1,731 1,704
--------------- ---------------
Net loans 164,575 145,065
Securities available-for-sale, at market (amortized cost
$53,387,000 and $39,613,000, respectively) 54,109 40,015
Loans held for sale 2,435 2,606
Federal funds sold 3,650 9,300
--------------- ---------------
Total earning assets 224,769 196,986
Cash and due from banks 7,633 6,100
Bank premises and equipment, net of accumulated depreciation 7,375 6,752
Accrued interest receivable 2,033 1,873
Other real estate - 2
Deferred income taxes 136 258
Other assets 670 521
--------------- ---------------
$ 242,616 212,492
=============== ===============
Liabilities and Stockholders' Equity
Deposits $ 221,880 193,260
Advances from Federal Home Loan Bank 694 942
Short-term borrowings - 600
Accrued interest payable 1,151 1,096
Other liabilities 398 246
Long-term debt 382 386
--------------- ---------------
Total liabilities 224,505 196,530
--------------- ---------------
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 1,086,967 and 1,079,572 shares, respectively 2,717 2,699
Additional paid-in capital 4,178 4,021
Retained earnings 12,025 10,250
Unrealized gains on available-for-sale, net of applicable
income taxes 448 249
Less cost of 137,926 shares of treasury stock (1,257) (1,257)
--------------- ---------------
Total stockholders' equity 18,111 15,962
--------------- ---------------
$ 242,616 212,492
=============== ===============
</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, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 3,926 3,570 $ 11,333 10,087
Interest and dividends on securities:
Taxable securities 571 441 1,479 1,424
Exempt from Federal income taxes 167 137 489 405
Interest on loans held for sale 46 32 158 98
Interest on federal funds sold 146 90 475 209
------------ ------------ ------------ ------------
Total interest income 4,856 4,270 13,934 12,223
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits 2,250 1,953 6,496 5,558
Interest on short term borrowings - 13 8 44
Interest on advances from Federal Home Loan Bank 11 17 45 53
Interest on long-term debt 7 6 20 20
------------ ------------ ------------ ------------
Total interest expense 2,268 1,989 6,569 5,675
------------ ------------ ------------ ------------
Net interest income 2,588 2,281 7,365 6,548
Provision for loan losses 120 120 360 260
------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 2,468 2,161 7,005 6,288
------------ ------------ ------------ ------------
Non-interest income:
Service charges on deposit accounts 259 253 763 747
Other fees and commissions 65 71 189 194
Other income 280 225 841 612
Gain on sale of securities 24 1 24 -
------------ ------------ ------------ ------------
628 550 1,817 1,553
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries and employee benefits 1,091 962 3,325 2,793
Occupancy expenses, net 119 86 331 246
Furniture and equipment expense 176 129 488 385
Other operating expenses 559 484 1,669 1,467
Loss on sale of securities - - - 47
------------ ------------ ------------ ------------
1,945 1,661 5,813 4,938
------------ ------------ ------------ ------------
Earnings before income taxes 1,151 1,050 3,009 2,903
Income taxes 389 358 998 986
------------ ------------ ------------ ------------
Net earnings $ 762 692 $ 2,011 1,917
============ ============ ============ ============
Basic earnings per common share $ .81 .74 $ 2.13 2.05
============ ============ ============ ============
Diluted earnings per common share $ .79 .72 $ 2.09 2.01
============ ============ ============ ============
Dividends per share $ .25 .25 $ .25 .25
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
1998 1997 1998 1997
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Net earnings $ 762 692 $ 2,011 1,917
------------ ------------- ------------ ------------
Other comprehensive earnings (losses) net of tax:
Unrealized gains on available-for-sale securities
arising during period, net of income taxes of
$127,000, $69,000, $131,000 and $58,000
respectively 207 112 214 94
Reclassification adjustment for losses (gains) included
in net earnings, net of income tax expense of
$9,000, $9,000 and tax benefit of $18,000,
respectively (15) - (15) 29
------------ -------------- ------------ ------------
Other comprehensive earnings (loss) 192 112 199 123
------------ ------------- ------------ ------------
Comprehensive earnings $ 954 804 $ 2,210 2,040
============ ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 13,747 11,990
Fees and commissions received 952 941
Interest paid (6,514) (5,485)
Originations of loans held for sale (42,233) (28,039)
Proceeds from loan sales 43,245 28,166
Cash paid to suppliers and employees (5,444) (4,606)
Income taxes paid (949) (1,077)
--------------- ---------------
Net cash provided by operating activities 2,804 1,890
--------------- ---------------
Cash flows from investing activities:
Loans made to customers, net of repayments (19,869) (20,835)
Proceeds from sales of available-for-sale securities 1,519 7,236
Proceeds from maturities and calls of available-for-sale
securities 8,868 2,810
Purchase of available-for-sale securities (24,109) (5,695)
Purchase of premise and equipment (1,039) (1,141)
Proceeds from sale of other real estate 2 -
--------------- ----------------
Net cash used In investing activities (34,628) (17,625)
--------------- ---------------
Cash flows from financing activities:
Net increase in time deposits 11,168 8,919
Net increase in non-interest bearing, savings and NOW
deposit accounts 17,452 9,662
Payment of dividend (236) (233)
Issuance of common stock 175 178
Repayment of note payable - line of credit (600) (200)
Repayment of long-term debt (4) (4)
Repayment from advances from Federal Home Loan Bank (248) (38)
--------------- ---------------
Net cash provided by financing activities 27,707 18,284
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (4,117) 2,549
Cash and cash equivalents at beginning of period 15,400 9,137
--------------- ---------------
Cash and cash equivalents at end of period $ 11,283 11,686
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
6
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 2,011 1,917
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 389 250
Provision for loan losses 360 260
Gain on sale of investment securities - available-for-sale (24) -
Loss on sale of investment securities - available-for-sale - 47
Decrease (increase) in loans held for sale 171 (485)
Increase in interest receivable (160) (162)
Increase in other assets, net (150) (184)
Increase in other liabilities 152 57
Increase in interest payable 55 190
--------------- ---------------
Total adjustments 793 (27)
--------------- ---------------
Net cash provided by operating activities $ 2,804 1,890
=============== ===============
Supplemental Schedule of Noncash Activities:
Change in unrealized gain (loss) in value of securities
available-for-sale, net of income taxes of $122
and income taxes of $72,000, respectively $ 199 123
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
7
<PAGE> 8
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). In July, 1998, First Bank formed a wholly-owned subsidiary,
American Title and Escrow (ATE). ATE had no activity during the quarter and has
been consolidated with First Bank and Trust.
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 1997 figures to
conform to the presentation for 1998.
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, 1998 and December 31, 1997, and the results of operations
for the three months and nine months ended September 30, 1998 and 1997,
comprehensive earnings for the nine months and three months ended September 30,
1998 and 1997 and changes in cash flows for the nine months ended September 30,
1998 and 1997. 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
1997 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,
----------------------------------
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Balance, January 1, 1998 and 1997, respectively $ 1,704 1,541
Add (deduct):
Losses charged to allowance (356) (120)
Recoveries credited to allowance 23 19
Provision for loan losses 360 260
--------------- ---------------
Balance, September 30, 1998 and 1997, respectively $ 1,731 1,700
=============== ===============
</TABLE>
8
<PAGE> 9
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
EARNINGS PER SHARE
In 1997, Statement of Financial Accounting Standards ("SFAS") 128 "Earnings Per
Share" established uniform standards for computing and presenting earnings per
share. SFAS 128 replaces the presentation of primary earnings per share with the
presentation of basic earnings per share and diluted earnings per share. The
computation of basic earnings per share is based on the weighted average number
of common shares outstanding during the period. The computation of diluted
earnings per share for the Company begins with the basic earnings per share plus
the effect of common shares contingently issuable from stock options.
The following is a summary of components comprising basic and diluted earnings
per share (EPS) for the three months and nine months ended September 30, 1998
and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
(In Thousands, except share amounts) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS Computation:
Numerator - net earnings available to
common shareholders $ 762 692 $ 2,011 1,917
----------- ---------- ---------- ----------
Denominator - weighted average number of
common shares outstanding 942,646 939,440 942,495 933,920
----------- ---------- ---------- ----------
Basic earnings per common share $ .81 .74 $ 2.13 2.05
=========== ========== ========== ==========
Diluted EPS Computation:
Numerator $ 762 692 $ 2,011 1,917
----------- ---------- ---------- ----------
Denominator:
Weighted average number of common
shares outstanding 942,646 939,440 942,495 933,920
Dilutive effect of stock options 20,551 20,000 20,551 20,000
----------- ---------- ---------- ----------
963,197 959,440 963,046 953,920
----------- ---------- ---------- ----------
Diluted earnings per common share $ .79 .72 $ 2.09 2.01
=========== ========== ========== ==========
</TABLE>
Management is not aware of any current recommendations by the
regulatory authorities which, if implemented, would have a material effect on
the Company's liquidity, capital resources or operations.
9
<PAGE> 10
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 1997 Annual
Report to stockholders for a complete discussion of factors that impact
liquidity, capital and the results of operations.
FORWARD-LOOKING STATEMENTS
Management's discussion of the Company, and management's analysis
of the Company's operations and prospects, and other matters, may include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and other provisions of federal and state
securities laws. Although the Company believes that the assumptions underlying
such forward-looking statements contained in this Report are reasonable, any of
the assumptions could be inaccurate and, accordingly, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
The use of such words as expect, anticipate, forecast, and comparable terms
should be understood by the reader to indicate that the statement is "forward
looking" and thus subject to change in a manner that can be unpredictable.
Factors that could cause actual results to differ from the results anticipated,
but not guaranteed, in this Report, include (without limitation) economic and
social conditions, competition for loans, mortgages, and other financial
services and products, changes in interest rates, unforeseen changes in
liquidity, results of operations, and financial conditions affecting the
Company's customers, material unforeseen complications related to addressing
Year 2000 issues (both as to the Company and as to its customers, vendors,
consultants and governmental agencies), as well as other risks that cannot be
accurately quantified or completely identified. Many factors affecting the
Company's financial condition and profitability, including changes in economic
conditions, the volatility of interest rates, political events and competition
from other providers of financial services simply cannot be predicted. Because
these factors are unpredictable and beyond the Company's control, earnings may
fluctuate from period to period. The purpose of this type of information (such
as in Item 2, as well as other portions of this Report) is to provide Form
10-QSB readers with information relevant to understanding and assessing the
financial condition and results of operations of the Company, and not to predict
the future or to guarantee results. The Company is unable to predict the types
of circumstances, conditions, and factors that can cause anticipated results to
change. The Company undertakes no obligation to publish revised forward-looking
statements to reflect the occurrence of changes or of unanticipated events,
circumstances, or results.
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.
10
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FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, CONTINUED
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT, CONTINUED
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 $18.8 million of securities
scheduled to mature or reprice in the next twelve months.
A secondary source of liquidity is the Bank's loan portfolio. At
September 30, 1998 first mortgage loans of approximately $21.5 million and other
loans of approximately $75.4 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 $26.6 million will become due or subject to repricing during
the next twelve months. The Bank's deposit base increased approximately $28.6
million during the nine months ended September 30, 1998.
The Company also has the ability to meet its liquidity needs
through advances from the Federal Home Loan Bank. At September 30, 1998 the
Company had $694,000 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 no outstanding
balance.
As of September 30, 1998, the Bank's asset sensitivity was 14.2%
(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 21.7% at
September 30, 1998 and 19.5% at December 31, 1997.
11
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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
A primary source of capital is internal growth through retained
earnings. The ratio of stockholders' equity to total assets was 7.5% at
September 30, 1998 and December 31, 1997. Total assets increased 14.2% during
the nine months ended September 30, 1998. Cash dividends paid during 1997 were
$.25 per share. Cash dividends of $.25 per share were paid during the first nine
months of 1998. Cash dividends will be paid or increased in the remainder of
1998 over 1997 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 7,850 shares issued under the Plan during 1997. 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.
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, 1998 (excluding the effect of the adoption of SFAS No. 115):
<TABLE>
<CAPTION>
In Thousands
------------
(except percentages)
<S> <C>
Tier I capital:
Stockholders' equity $ 17,663
Tier II capital:
Allowable allowance for loan losses 1,731
Total risk-based capital $ 19,394
==============
Risk-weighted assets $ 176,693
==============
Risk-based capital ratios:
Tier I capital ratio 10.00%
==============
Total capital ratio 10.98%
==============
</TABLE>
12
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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 Company is required to maintain a risk-based capital to risk
weighted asset ratio of 8% and a Tier I capital to risk weighted asset ratio of
4%. At September 30, 1998, 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,
1998 was 7.48%.
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.
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. During the nine months ending September 30, 1998 the
Company issued 1,000 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 during the year ending December 31,
1997. 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, 1998, 79,400
shares had been granted at $10 per share (4,176 shares have been exercised at
September 30, 1998); 2,000 shares had been granted at $12 per share (600 shares
have been exercised at September 30, 1998), 4,000 shares were granted at $13 per
share (no shares have been exercised as of September 30, 1998), 29,792 shares
were granted at $15 per share (622 shares have been exercised at September 30,
1998), 528 shares were granted at $19 per share (no shares have been exercised
as of September 30, 1998) and 13,000 shares were granted at $22.50 per share
(100 shares have been exercised as of September 30, 1998). The options are
granted at the estimated market price of the stock at the date the option was
granted. At September 30, 1998 there were 123,222 shares granted but not
exercised. The options are generally exercisable ratably over a ten year period
from the date granted. At September 30, 1998 options to purchase 30,280 common
shares were available for grant in future years.
13
<PAGE> 14
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, CONTINUED
CAPITAL RESOURCES, CONTINUED
At present, the net book value of premises and equipment is 40.7%
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 1997.
The Company is also in the process of constructing a new branch bank facility in
Donelson, Davidson County, Tennessee. The Company will open a loan production
office in Murfreesboro, Rutherford County, Tennessee in November, 1998.
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
40.9%. Investment in fixed assets can have a detrimental impact on profits,
particularly in the short term.
YEAR 2000 ISSUES
The term "Year 2000 issue" refers to the necessity of converting
computer information systems so that such systems recognize more than two digits
to identify a year in any given date field, and are thereby able to
differentiate between years in the twentieth and twenty-first centuries ending
with the same two digits (e.g., 1900 and 2000). To address the Year 2000 issue,
the Company has adopted a broad-based approach designed to encompass the
Company's total environment.
The Board of Directors of First Bank has taken a proactive
approach. A Y2K Coordinator was appointed and the EDP Committee was asked to
serve as the Y2K Steering Committee. The Y2K Action Team was formed consisting
of key people from all areas of the bank. The Action team is following a
comprehensive seven phase Y2K Action Plan with a detailed Work Plan. Senior
management and the Board of Directors approved a timeline and budget of
$213,435. Actual expenditures to date and currently anticipated future
expenditures are within this estimate. The Board of Directors reviews the status
of the plan on a monthly basis. Areas being addressed by the Y2K Action Team
are:
- The mission critical hardware and software within the bank. This
includes FiServ, Inc., the bank's data processor. Twelve
additional pieces of software are included on this list.
- Software interfaces.
- Hardware. The bank's Wide Area Network and each workstation or
stand alone PC.
- Communications. Includes the phone systems.
- Customer Awareness. Brochures have been developed, seminars
conducted with employees and customers, information added to the
bank's web site www.1firstbank.com.
14
<PAGE> 15
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, CONTINUED
YEAR 2000 ISSUES, CONTINUED
- Customer Evaluations. The loan and deposit bases have been
evaluated for possible risk. This evaluation will be on going
through January 1, 2000. Evaluation rating will be adjusted as
necessary.
- Environment. The physical building and the systems utilized to
keep it operating smoothly and comfortably for the bank's
employees.
- Vendors.
- Printed Paper Forms. All forms have been evaluated for
combination two digit date fields. Those beginning with 19 will
be replaced.
First Bank's Y2K Action Team has contacted each vendor or supplier
to determine their Year 2000 readiness. The Action Team is in the process of
testing and validating the renovation of all systems and hardware. The target
date for completion is December 31, 1998. It is anticipated that this phase will
be substantially completed at that time.
First Bank does not expect the Year 2000 issue to have a material
impact to operations, liquidity or financial condition due to the comprehensive
plan carried out by the Y2K Action Team. However, there are no guarantees with
the Year 2000 and the team will continuously evaluate the Company's position
until January 31, 2000. Management also believes that First Bank's (and the
Company's) ultimate ability to successfully address the Year 2000 issue will be
significantly affected by external factors such as the success of governmental
agencies, suppliers and customers to address their own Year 2000 issues.
Although management is actively addressing and establishing contingency plans to
deal with these external factors, they ultimately are beyond management's
control.
RESULTS OF OPERATIONS
Net earnings were $2,011,000 for the nine months ended September
30, 1998 as compared to $1,917,000 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 $1,711,000 or 14.0% during the nine months ended
September 30, 1998 and $1,451,000 or 13.5% for the same period in 1997. Interest
income for the quarter ended September 30, 1998 increased $586,000 or 13.7% over
the quarter ended September 30, 1997 and $199,000 or 4.3% over the second
quarter of 1998. The increases were primarily attributable to higher volumes of
earning assets. The ratio of average earning assets to total average assets was
91.5% for the nine months ended September 30, 1998 and 93.1% for the year ended
December 31, 1997.
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
Interest expense increased by $894,000 for the nine months ended
September 30, 1998 or 15.8% compared to an increase of $800,000 or 16.4% for the
same period in 1997. Interest expense for the quarter ended September 30, 1998
increased $279,000 or 14.0% as compared to the quarter ended September 30, 1997
and increased $57,000 or 2.6% over the second quarter of 1998. The increases in
1998 and 1997 can be attributable largely to an increase in volume.
The foregoing contributed to an increase in net interest income of
$817,000 or 12.5% during the first nine months of 1998 and $651,000 or 11.0% in
the comparable period of 1997. Net interest income for the quarter ended
September 30, 1998 increased $307,000 or 13.5% as compared to $240,000 or 11.8%
for the comparable period of 1997.
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.
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 first mortgage single family residential mortgage,
consumer, other loans secured by real estate and credit card loans which total
approximately $40,544,000, $26,274,000, $14,806,000 and $1,013,000, respectively
at September 30, 1998, 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.
16
<PAGE> 17
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
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, 1998 and 1997 impaired loans which had been placed on non-accrual
status totaled $20,000 and $329,000, respectively.
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.
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, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- -------------------------
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 $ 1,385,259 277,052 715,000 143,000
Impaired loans with no allowance for
loan loss - - - -
-------------- ------------ -------------------------
$ 1,385,259 277,052 715,000 143,000
============= =========== ========== ===========
</TABLE>
17
<PAGE> 18
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
The provision for loan losses was $360,000 for the first nine
months of 1998 compared to $260,000 for the same period in 1997. The provision
for loan losses is based on past loan experience and other factors which, in
management's judgment, deserve current recognition in estimating possible loan
losses. Such other factors considered by management include growth and
composition of the loan portfolio, review of specific loan problems, the
relationship of the allowance for loan losses to outstanding loans, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral and current economic conditions that may affect the
borrower's ability to repay. Management has in place a system designed to
identify and monitor problem loans on a timely basis.
The average recorded investment in impaired loans for the nine
months ended September 30, 1998 and 1997 was $1,050,129 and $642,441,
respectively. The related amount of interest income recognized on the accrual
method for the period that such loans were impaired was $118,832 and $73,186 for
the nine months ended September 30, 1998 and 1997, 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, 1998:
<TABLE>
<CAPTION>
Past Due
90 Days Non-Accrual
-------- -----------
(In Thousands)
<S> <C> <C>
Real estate loans $ 181 33
Installment loans 104 -
Commercial 188 20
--------------- ----------------
$ 473 53
=============== ================
Renegotiated loans $ - -
=============== ================
</TABLE>
At September 30, 1998, loans which include the above, totaling
$2,587,000 were included in the Company's internal classified loan list. Of
these loans $711,000 are consumer and $1,876,000 are commercial loans. The
collateral values securing these loans total approximately $4,556,000,
($1,595,000 related to consumer loans and $2,961,000 related to commercial
loans). The determination of these collateral values involves subjective
judgment which are not guaranteed. 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, 1998 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
18
<PAGE> 19
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Non-interest income, excluding securities transactions, increased
$240,000 or 15.5% during the nine months ended September 30, 1998 and increased
$262,000 or 20.3% for the same period in 1997. The increase for the quarter
ended September 30, 1998 was $55,000 or 10% as compared to the comparable
quarter in 1997 and a decrease of $30,000 or 4.7% as compared to the quarter
ended June 30, 1998. The primary increases in non-interest income consists of an
increase in income generated from sales of mortgage loans. The decrease from the
quarter ended September 30, 1998 as compared to the quarter ended June 30, 1998
is due to a decline in the rate of increase in income from the sale of mortgage
loans. Mortgage loan income (included in other income) for the nine month period
ended September 30, 1998, was $841,000 as compared to $612,000 for the period
ending September 30, 1997. The increase of $229,000 or 37.4% has been caused in
large measure 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 1998 and 1997 resulted from
increased service charges on deposits, primarily for demand deposit and NOW
accounts. These increases in service charges were generally 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
$922,000 or 18.9% during the first nine months of 1998 and $515,000 or 11.8%
during the same period in 1997. The increase for the quarter ended September 30,
1998 was $284,000 or 17.1% as compared to the comparable quarter in 1997 and a
decrease of $1,000 or .05% as compared to the quarter ended June 30, 1998. The
increases in 1998 and 1997 were primarily attributable to increases in salaries
and employee benefits which is due to increased number of employees, increases
in annual compensation and an increase in occupancy and furniture and fixture
expenses associated with the opening of a new branch late in 1997.
There was a $24,000 security gain in the available-for-sale
category for the nine months ended September 30, 1998. There were securities
losses for the nine months ended September 30, 1997 totaling $47,000.
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.
19
<PAGE> 20
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, CONTINUED
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both the level
of income and expense recorded on a large portion of the Company's assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity. Based upon the nature of the Company's operations, the Company is not
subject to foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the
earnings risk associated with changing interest rates. Management seeks to
maintain profitability in both immediate and long term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the Company
meets monthly to analyze the rate sensitivity position. These meetings focus the
spread between the cost of funds and interest yields generated primarily through
loans and investments.
There have been no material changes in reported market risks
during the nine months ended September 30, 1998. Please refer to Item 2 of
Part I of this report for additional information related to market and other
risks.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
(a) Not Applicable
(b) Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) Not Applicable
(b) Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) None
(b) Not Applicable
(c) Not Applicable
(d) Not Applicable
ITEM 5. OTHER INFORMATION
(a) Not Applicable
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, 1998
(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, 1998.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
21
<PAGE> 22
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 10, 1998 /s/ David Major
----------------- ---------------------------------------
David Major
Chairman, President and Chief Executive
Officer
DATE: November 10, 1998 /s/ Sally Kimble
----------------- ---------------------------------------
Sally Kimble
Treasurer, Chief Financial Officer, and
Chief Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST FINANCIAL CORPORATION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,633
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,650
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54,109
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 166,306
<ALLOWANCE> 1,731
<TOTAL-ASSETS> 242,616
<DEPOSITS> 221,880
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,549
<LONG-TERM> 1,076
0
0
<COMMON> 2,717
<OTHER-SE> 15,394
<TOTAL-LIABILITIES-AND-EQUITY> 242,616
<INTEREST-LOAN> 11,491
<INTEREST-INVEST> 1,968
<INTEREST-OTHER> 475
<INTEREST-TOTAL> 13,934
<INTEREST-DEPOSIT> 6,496
<INTEREST-EXPENSE> 6,569
<INTEREST-INCOME-NET> 7,365
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 7,005
<EXPENSE-OTHER> 5,813
<INCOME-PRETAX> 3,009
<INCOME-PRE-EXTRAORDINARY> 3,009
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,011
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.09
<YIELD-ACTUAL> 0
<LOANS-NON> 53
<LOANS-PAST> 473
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,587
<ALLOWANCE-OPEN> 1,704
<CHARGE-OFFS> 356
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 1,731
<ALLOWANCE-DOMESTIC> 1,731
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
