<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 JUNE 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the Transition Period From _______________ to _______________
Commission File Number 33-426222
---------
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: 949,041 shares at August 5, 1998.
------------
Transitional Small Business Disclosure Format (check one).
YES NO X
---- -----
<PAGE> 2
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 - June 30, 1998 and December 31, 1997.
Consolidated Statements of Earnings - For the three months and six months
ended June 30, 1998 and 1997.
Consolidated Statements of Comprehensive Earnings - For the three and six
months ended June 30, 1998 and 1997.
Consolidated Statements of Cash Flows - For the six months ended June 30,
1998 and 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
2
<PAGE> 3
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- --------
(In Thousands)
Assets
<S> <C> <C>
Loans $ 152,038 146,769
Less: Allowance for loan losses 1,645 1,704
--------- --------
Net loans 150,393 145,065
Securities available-for-sale, at market (amortized cost
$49,974,000 and $39,613,000, respectively) 50,386 40,015
Loans held for sale 4,700 2,606
Federal funds sold 10,475 9,300
--------- --------
Total earning assets 215,954 196,986
Cash and due from banks 8,480 6,100
Bank premises and equipment, net of accumulated depreciation 7,093 6,752
Accrued interest receivable 2,013 1,873
Other real estate 59 2
Deferred income taxes 254 258
Other assets 668 521
--------- --------
$ 234,521 212,492
========= ========
Liabilities and Stockholders' Equity
Deposits $ 214,731 193,260
Advances from Federal Home Loan Bank 704 942
Short-term borrowings -- 600
Accrued interest payable 1,190 1,096
Other liabilities 285 246
Long-term debt 384 386
--------- --------
Total liabilities 217,294 196,530
--------- --------
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 1,080,572 and 1,079,572 shares, respectively 2,701 2,699
Additional paid-in capital 4,028 4,021
Retained earnings 11,499 10,250
Net unrealized gains on available-for-sale securities, net of
applicable income taxes of $156,000 and $152,000, respectively 256 249
Less cost of 137,926 shares of treasury stock (1,257) (1,257)
--------- --------
Total stockholders' equity 17,227 15,962
--------- --------
$ 234,521 212,492
========= ========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
------ ------ ------ -----
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $3,744 3,390 $7,407 6,517
Interest and dividends on securities:
Taxable securities 469 478 908 983
Exempt from Federal income taxes 161 136 322 268
Interest on loans held for sale 65 34 112 66
Interest on federal funds sold 218 50 329 119
------ ------ ------ -----
Total interest income 4,657 4,088 9,078 7,953
------ ------ ------ -----
Interest expense:
Interest on deposits 2,188 1,847 4,246 3,605
Interest on short term borrowings -- 16 8 31
Interest on advances from Federal Home Loan Bank 17 18 34 36
Interest on long-term debt 6 7 13 14
------ ------ ------ -----
Total interest expense 2,211 1,888 4,301 3,686
------ ------ ------ -----
Net interest income 2,446 2,200 4,777 4,267
Provision for loan losses 120 80 240 140
------ ------ ------ -----
Net interest income after provision for
loan losses 2,326 2,120 4,537 4,127
------ ------ ------ -----
Non-interest income:
Service charges on deposit accounts 247 265 504 494
Other fees and commissions 57 63 124 123
Other income 330 217 561 387
------ ------ ------ -----
634 545 1,189 1,004
------ ------ ------ -----
Non-interest expenses:
Salaries and employee benefits 1,108 926 2,234 1,831
Occupancy expenses, net 108 83 212 160
Furniture and equipment expense 161 130 312 256
Other operating expenses 510 440 992 875
Loss on sale of securities -- 43 -- 48
Data processing fees 59 56 118 108
------ ------ ------ -----
1,946 1,678 3,868 3,278
------ ------ ------ -----
Earnings before income taxes 1,014 987 1,858 1,853
Income taxes 335 337 609 628
------ ------ ------ -----
Net earnings $ 679 650 $1,249 1,225
====== ====== ====== =====
Basic earnings per common share $ .73 .70 $ 1.33 1.32
====== ====== ====== =====
Diluted earnings per common share $ .71 .69 $ 1.30 1.29
====== ====== ====== =====
Dividends per share $ -- -- $ -- --
====== ====== ====== =====
</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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ---------------------
1998 1997 1998 1997
----- ---- ------ ------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Net earnings $ 679 650 $1,249 1,225
----- --- ------ ------
Other comprehensive earnings (losses) net of tax:
Unrealized gains (losses) on available-for-sale
securities arising during period, net of tax
benefits of $5,000, income taxes of $89,000 and
$4,000, and tax benefits of 11,000, respectively (8) 146 7 (19)
Reclassification adjustment for losses included in
net earnings, net of tax benefits of $16,000 and
$18,000, respectively -- 27 -- 30
----- --- ------ ------
Other comprehensive earnings (loss) (8) 173 7 11
----- --- ------ ------
Comprehensive earnings $ 671 823 $1,256 1,236
===== === ====== ======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE> 6
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 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 $ 8,894 7,709
Fees and commissions received 628 617
Interest paid (4,207) (3,562)
Originations of loans held for sale (32,754) (18,118)
Proceeds from loan sales 31,221 18,639
Cash paid to suppliers and employees (3,691) (3,051)
Income taxes paid (623) (675)
-------- -------
Net cash provided by (used in) operating activities (532) 1,559
-------- -------
Cash flows from investing activities:
Loans made to customers, net of repayments (5,568) (15,084)
Proceeds from sales of available-for-sale securities -- 4,402
Proceeds from maturities of available-for-sale securities 4,902 2,144
Purchase of available-for-sale securities (15,218) (3,547)
Decrease in interest bearing deposits in other banks -- --
Purchase of premise and equipment (612) (828)
Proceeds from sale of other real estate (57) --
Increase in other real estate -- --
-------- -------
Net cash used in investing activities (16,553) (12,913)
-------- -------
Cash flows from financing activities:
Net increase in time deposits 10,584 4,743
Net increase in non-interest bearing, savings and NOW
deposit accounts 10,887 10,251
Repayment of short-term borrowings (600) --
Repayment of advances from Federal Home Loan Bank (238) (25)
Repayment of long-term debt (2) (2)
Issuance of common stock 9 5
-------- -------
Net cash provided by financing activities 20,640 14,972
-------- -------
Net increase in cash and cash equivalents 3,555 3,618
Cash and cash equivalents at beginning of period 15,400 9,137
-------- -------
Cash and cash equivalents at end of period $ 18,955 12,755
======== =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
6
<PAGE> 7
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SIX MONTHS ENDED JUNE 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 $ 1,249 1,225
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 227 146
Provision for loan losses 240 140
Loss (gain) on sale of available-for-sale securities -- 48
(Increase) decrease in loans held for sale (2,094) 134
Increase in interest receivable (140) (179)
Increase in other assets, net (147) (167)
Increase in other liabilities 39 88
Increase in interest payable 94 124
-------- -------
Total adjustments (1,781) 334
-------- -------
Net cash provided by (used in) operating activities $ (532) 1,559
======== =======
Supplemental schedule of non-cash activities:
Unrealized gain in value of securities available-for
sale, net of tax expense of $4,000 in 1998 and
$8,000 in 1997 $ 7 11
======== =======
</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 ("Company" or "Registrant") and its
wholly-owned subsidiary, First Bank and Trust ("Bank" or "Subsidiary").
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.
In the opinion of management, the statements contain all
adjustments and disclosures necessary to summarize fairly the financial position
of the Company as of June 30, 1998 and December 31, 1997, and the results of
operations for the three months and six months ended June 30, 1998 and 1997, and
comprehensive earnings for the three and six months ended June 30, 1998 and 1997
and changes in cash flows for the six months ended June 30, 1998 and 1997,
respectively. 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 fiscal year.
Certain reclassifications have been made to 1997 information to
conform to the presentation of 1998 information.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 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 (320) (49)
Recoveries credited to allowance 21 14
Provision for loan losses 240 140
------- ------
Balance, June 30, 1998 and 1997, respectively $ 1,645 1,646
======= ======
</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 six months ended June
30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 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 $ 679 650 $ 1,249 1,225
-------- ------- -------- -------
Denominator - weighted average number of
common shares outstanding 942,646 931,239 942,419 931,114
-------- ------- -------- -------
Basic earnings per common share $ .73 .70 $ 1.33 1.32
======== ======= ======== =======
Diluted EPS Computation:
Numerator $ 679 650 $ 1,249 1,225
-------- ------- -------- -------
Denominator:
Weighted average number of common
shares outstanding 942,646 931,239 942,419 931,114
Dilutive effect of stock options 21,625 20,924 21,625 20,924
-------- ------- -------- -------
964,271 952,163 964,044 952,038
-------- ------- -------- -------
Diluted earnings per common share $ .71 .69 $ 1.30 1.29
======== ======= ======== =======
</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 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.
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 $16.9 million of securities
scheduled to mature or reprice in the next twelve months.
10
<PAGE> 11
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
June 30, 1998 first mortgage loans of approximately $24.3 million and other
loans of approximately $68.8 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 $28.7 million will become due or subject to repricing during
the next twelve months. The Bank's deposit base increased approximately $21.5
million during the six months ended June 30, 1998.
The Company also has the ability to meet its liquidity needs
through advances from the Federal Home Loan Bank. At June 30, 1998 the Bank had
$704,000 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 June 30, 1998, the Bank's asset sensitivity was 12.6%, (the
excess of interest sensitive assets over earning liabilities divided by total
assets at the one year threshold). Management estimates an increase or decrease
in interest rates would have an immaterial impact on earnings.
It is anticipated that with present maturities, the anticipated
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 23.1% at June 30, 1998 and 19.5% at December 31, 1997.
CAPITAL RESOURCES
A primary source of capital is internal growth through retained
earnings. The ratio of stockholders' equity to total assets was 7.3% at June 30,
1998 and 7.5% at December 31, 1997. Total assets increased 10.4% during the six
months ended June 30, 1998. Cash dividends of $.25 per share were paid during
the year ended December 31, 1997. No cash dividends were paid during the first
six months of 1998 or 1997. 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 of available profits.
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 new 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.
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, CONTINUED
The following schedule details the Company's risk-based capital at
June 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 $ 16,971
Tier II capital:
Allowable allowance for loan losses 1,645
Total capital $ 18,616
========
Risk-weighted assets $164,390
========
Risk-based capital ratios:
Tier I capital ratio 10.32%
======
Tier II capital ratio 11.32%
======
</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 June 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 4%. The leverage ratio at June 30, 1998 was 7.4%.
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 believes 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 profits.
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 believe that the holding company structure
will permit greater flexibility in the expansion of the Bank's present business
and will assist the Bank in being more responsive to its customers' broadening
and changing financial needs. In particular, the holding company structure was
adopted to provide greater flexibility in raising additional capital for the
Bank. Greater flexibility in raising capital is an important component in
seeking to assure that the growth of the Bank's capital will keep pace with its
asset growth.
12
<PAGE> 13
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION, CONTINUED
CAPITAL RESOURCES, CONTINUED
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
six months ended June 30, 1998, the Company issued 1,000 shares of its common
voting 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, 1997. Privately negotiated trades may involved 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 June 30, 1998, 79,400
shares had been granted at $10 per share (4,176 shares have been exercised at
June 30, 1998), 2,000 shares had been granted at $12 per share (600 shares have
been exercised at June 30, 1998), 4,000 shares were granted at $13 per share,
(no shares have been exercised as of June 30, 1998), 29,792 shares were granted
at $15 per share (622 shares have been exercised at June 30, 1998), 528 shares
were granted at $19 per share (no shares have been exercised at June 30, 1998)
and 13,000 shares were granted at $22.50 per share (100 shares have been
exercised as of June 30, 1998). The options are granted at the estimated market
price of the stock at the date the option was granted. At June 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 June 30,
1998 options to purchase 30,280 common shares were available for grant in future
years.
At present, the net book value of premises and equipment is 41.2%
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 new 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.
RESULTS OF OPERATIONS
Net earnings were $1,249,000 for the six months ended June 30,
1998 as compared to $1,225,000 for the same period in 1997. Basic earnings per
share increased from $1.32 for the six months ended June 30, 1997 to $1.33 for
the same period in 1998. Diluted earnings per share increased from $1.29 for the
six months ended June 30, 1997 to $1.30 for the same period in 1998.
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
volatility in interest rates encountered in recent years.
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
The Company's interest income, excluding tax equivalent
adjustments, increased by $1,125,000 or 14.1% during the six months ended June
30, 1998 and $915,000 or 13% for the same period in 1997. Interest income for
the quarter ended June 30, 1998 increased $569,000 or 13.9% over the quarter
ended June 30, 1997 and $236,000 or 5.3% over the first 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 91.8% for the six
months ended June 30, 1998 and 93.1% for the year ended December 31, 1997.
Interest expense increased by $615,000 the six months ended June
30, 1998 or 16.7% compared to an increase of $504,000 or 15.8% for the same
period in 1997. Interest expense for the quarter ended June 30, 1998 increased
$323,000 or 17.1% as compared to the quarter ended June 30, 1997 and increased
$121,000 or 5.8% over the first quarter of 1998. The increases in 1998 and 1997
can be attributable largely to an increase in volume.
The foregoing resulted in an increase in net interest income of
$510,000 or 12.0% during the first six months of 1998 and $411,000 or 10.7% in
the comparable period of 1997. Net interest income for the quarter ended June
30, 1998 increased $246,000 or 11.2% as compared to $229,000 or 11.6% 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 will decline.
Effective January 1, 1995, the Company adopted on a prospective
basis 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.
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.
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
The Company's first mortgage single family residential, consumer,
other loans secured by real estate and credit card loans which total
approximately $41,223,000, $24,044,000, $12,631,000 and $1,017,000, respectively
at June 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.
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 June
30, 1998 and 1997 impaired loans which had been placed on non-accrual status
totaled $23,000 and $211,000, 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.
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
Impaired loans and related allowance for loan loss amounts at June 30,
1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ -----------------------------
Allowance Allowance
Recorded for Recorded for
Investment Loan Loss Investment Loan Loss
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Impaired loans with allowance for
loan loss $1,234,370 246,874 715,000 143,000
Impaired loans with no allowance
for loan loss
-- -- -- --
---------- ------- ------- -------
$1,234,370 246,874 715,000 143,000
========== ======= ======= =======
</TABLE>
The provision for loan losses was $240,000 for the first six
months of 1998 compared to $140,000 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 allowance 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 six
months ended June 30, 1998 and 1997 was approximately $975,000 and $596,000,
respectively. The related amount of interest income recognized on the accrual
method for the period that such loans were impaired was $70,000 and $20,000 for
the six months ended June 30, 1998 and 1997, respectively. There was no interest
income recognized on the cash method for the period that such loans were
impaired.
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 following schedule details selected information as to
non-performing loans of the Company at June 30, 1998:
<TABLE>
<CAPTION>
Past Due
90 Days Non-Accrual
------- -----------
(In Thousands)
<S> <C> <C>
Real estate loans $ 50 43
Installment loans 62 1
Commercial 151 22
---- ---
$263 66
==== ===
Renegotiated loans $ -- --
==== ===
</TABLE>
At June 30, 1998, loans which include the above, totaling
$2,578,000 were included in the Company's internal classified loan list. Of
these loans $500,000 are consumer and $2,078,000 are commercial loans. The
collateral values securing these loans are estimated at approximately
$4,703,000, ($1,193,000 related to consumer loans and $3,510,000 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 agreed repayment terms
of the loan agreement. The loan classifications do not represent or result from
trends or uncertainties which management expects will materially impact 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 June 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.
Non-interest income, excluding securities transactions, increased
$185,000 or 18.4% during the six months ended June 30, 1998 and increased
$167,000 or 20% for the same period in 1997. The increase for the quarter ended
June 30, 1998 was $89,000 or 16.3% as compared to the comparable quarter in 1997
and an increase of $79,000 or 14.2% as compared to the three months ended March
31, 1998. 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 six month period ended June 30, 1998, was $561,000 as
compared to $387,000 for the period ending June 30, 1997. The increase of
$174,000 or 45% 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 1998 and
1997 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.
There were no security losses or gains in the available-for-sale
category for the six months ended June 30, 1998 as compared to a $48,000
security loss in 1997.
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
Non-interest expense, excluding securities transactions, increased
$638,000 or 19.8% during the first six months of 1998 and $364,000 or 12.7%
during the same period in 1997. The increase for the quarter ended June 30, 1998
was $311,000 or 19% as compared to the quarter ended June 30, 1997 and $24,000
or 1.2% as compared to the three months ended March 31, 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 and increases in annual
compensation, and increased occupancy expense resulting from the opening of a
new branch and the expansion and improvement of existing branches.
Management is not aware of any known trends, events or
uncertainties that will have or 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.
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 funds, loans or investments, net interest income will vary. Inflation
also affects non-interest expenses as goods and services are purchased, although
this has not appeared to have a significant effect on net earnings. If the
inflation rate stays flat or increases slightly, the effect on profits will not
likely 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 six months ended June 30, 1998. Please refer to Item 2 of this
report for additional information related to market and other risks.
18
<PAGE> 19
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 SECURITY HOLDERS
(a) The Corporation's Annual Meeting of Shareholders was held on April 16,
1998. Matters submitted to, and approved by shareholders are listed
below.
(b) The following persons nominated as Directors were elected:
<TABLE>
<CAPTION>
Broker
Name For Against Abstain Non-Votes
---- --- ------- ------- ---------
<S> <C> <C> <C> <C>
Harold G. Bone 659,329 0 0 0
Robert L. Callis 659,329 0 0 0
Morris D. Ferguson 659,329 0 0 0
Arthur P. Gardner 659,329 0 0 0
David Major 659,329 0 0 0
M. Dale McCulloch 659,329 0 0 0
Dan E. Midgett 659,329 0 0 0
Monty Mires 659,329 0 0 0
James S. Short 659,329 0 0 0
Harold W. Sutton 659,329 0 0 0
</TABLE>
(c) The election by the Board of Directors of Maggart and Associates, P.C.,
as the Corporation's independent accountants and auditors for the year
ending December 31, 1998 was ratified by the following vote:
<TABLE>
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
659,329 0 0 0
</TABLE>
(d) None
19
<PAGE> 20
PART II. OTHER INFORMATION, CONTINUED
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 June 30, 1998 (unaudited) and 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
June 30, 1997.
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
20
<PAGE> 21
SIGNATURES
In accordance with the requirements of the 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: 8/10/98 /s/ David Major
---------------------- -----------------------------------------------
David Major
Chairman, President and Chief Executive Officer
DATE: 8/10/98 /s/ Sally Kimble
---------------------- -----------------------------------------------
Sally Kimble
Treasurer, Chief Financial Officer, and
Chief Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF FIRST FINANCIAL CORPORATION FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,480
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,475
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,386
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 152,038
<ALLOWANCE> 1,645
<TOTAL-ASSETS> 234,521
<DEPOSITS> 214,731
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,475
<LONG-TERM> 1,088
0
0
<COMMON> 2,701
<OTHER-SE> 14,526
<TOTAL-LIABILITIES-AND-EQUITY> 234,521
<INTEREST-LOAN> 7,519
<INTEREST-INVEST> 1,230
<INTEREST-OTHER> 329
<INTEREST-TOTAL> 9,078
<INTEREST-DEPOSIT> 4,246
<INTEREST-EXPENSE> 4,301
<INTEREST-INCOME-NET> 4,777
<LOAN-LOSSES> 240
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,868
<INCOME-PRETAX> 1,858
<INCOME-PRE-EXTRAORDINARY> 1,858
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,249
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 0
<LOANS-NON> 66
<LOANS-PAST> 263
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,578
<ALLOWANCE-OPEN> 1,704
<CHARGE-OFFS> 320
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 1,645
<ALLOWANCE-DOMESTIC> 1,645
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
