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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _______________ to _______________
Commission File Number: 33-42622
FIRST FINANCIAL CORPORATION
(Name of Small Business Issuer in its charter)
Tennessee 62-1474162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1691 North Mt. Juliet Road
Mt. Juliet, Tennessee 37122
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (615) 754-2265
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
registered:
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Voting Stock, Par Value $2.50
(Title of Class)
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
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
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The issuer's revenues for the year ended December 31, 1998 were $21,438,000.
The aggregate market value based upon the estimated market price of $35.00 per
share based on the last known privately negotiated transaction in the shares (in
that there exists no established trading market for registrant's shares and no
bid or asked prices of such stock are available) of the issuer's common voting
stock (its only outstanding class of securities) that are held by nonaffiliates
as of March 16, 1999 is approximately $24,097,886. The market value calculation
assumes that all shares beneficially owned by members of the Board of Directors
and the executive officers of the Registrant are owned by "affiliates," a status
that each of these persons individually disclaims. This is based on an estimated
688,511 shares held by non-affiliates at December 31, 1998 (outstanding shares
of 952,560 less 264,049 shares attributed to the Directors and executive
officers, not including shares subject to options exercisable within 60 days).
The number of shares outstanding for each of the Registrant's classes of common
stock, as of March 16, 1999: 953,328.
DOCUMENTS INCORPORATED BY REFERENCE: As set forth in the Exhibit Index, the
issuer is incorporating by reference certain portions of its Annual Report to
security holders for the fiscal year ended December 31, 1998, into Part I, Item
1, Part II, Items 6 and 7, of this Report.
Transitional Small Business Disclosure Format (check one). Yes No X
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FIRST FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I........................................................................... 1
ITEM 1. DESCRIPTION OF BUSINESS................................ 1
ITEM 2. DESCRIPTION OF PROPERTY................................ 36
ITEM 3. LEGAL PROCEEDINGS...................................... 36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS....................................... 36
PART II.......................................................................... 36
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS............................ 36
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION................................... 40
ITEM 7. FINANCIAL STATEMENTS................................... 40
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................... 40
PART III......................................................................... 41
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT. ............................ 41
ITEM 10. EXECUTIVE COMPENSATION................................. 43
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................................. 46
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........ 48
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................... 48
Signatures........................................................... 50
Exhibit Index.........................................................51
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
(A) BUSINESS DEVELOPMENT.
First Financial Corporation (the "Company" or "Registrant") is a
financial services corporation incorporated under the laws of the State of
Tennessee in 1991 for the purpose of becoming a bank holding company by
acquiring all issued and outstanding common stock of First Bank & Trust ("First
Bank" or the "Bank"). The Company is a bank holding company within the meaning
of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company
Act").
The Company's principal business is the ownership of First Bank. The
Company and First Bank have focused on developing the financial services of the
Bank in Wilson, Rutherford and Davidson Counties in Tennessee and in other areas
(generally, in those counties reasonably close to Wilson County). Expansion
continues in Wilson, Rutherford, and Davidson Counties, Tennessee. At December
31, 1998, the Company had total assets of $269,234,000 and First Bank had total
deposits of $247,711,000. The Company reported net earnings of $2,848,000 in
1998. Additional information concerning the general development of the Company's
business during the past three years is set forth in Item 6, "Management's
Discussion and Analysis or Plan of Operation," and in Item 7, "Financial
Statements," in this Annual Report on Form 10-KSB ("Report").
The principal executive offices of the Company and First Bank are
located at 1691 North Mt. Juliet Road, Box 355, Mt. Juliet, Wilson County,
Tennessee 37122, telephone (615) 754-2265.
Please refer to "Business of the Company" below and to the consolidated
financial statements for the year ended December 31, 1998 (the "Consolidated
Financial Statements"). CERTAIN OF THE STATEMENTS IN THIS REPORT AND IN THE
CONSOLIDATED FINANCIAL STATEMENTS ARE "FORWARD LOOKING," AND THE COMPANY'S
ACTUAL COSTS, EXPERIENCE, AND RESULTS MAY DIFFER DUE TO, AMONG OTHER THINGS,
ACTUAL EXPERIENCE, GOVERNMENTAL REGULATIONS, OVERALL ECONOMIC CONDITIONS, AND
OTHER FACTORS THAT, AS TO OCCURRENCE OR IMPACT, CANNOT BE RELIABLY PREDICTED.
(B) BUSINESS OF THE COMPANY.
The Company's principal business is the ownership of First Bank and all
material operations of the Company are currently conducted through First Bank,
its wholly owned subsidiary. The Company and the Bank concentrate on developing
the financial service business of the Bank in Wilson, Davidson and Rutherford
Counties in Tennessee and in other trade areas (generally, in those counties
reasonably close to Wilson County). First Bank is a Tennessee banking
corporation originally established in 1989. The Bank conducts a full-service
commercial banking business centered principally in Wilson County, Tennessee,
with full-service banking offices located also in Rutherford and Davidson
Counties in Tennessee.
The Company's principal source of income in 1998 was the earnings of
First Bank. First Bank's earnings are primarily derived from interest income
from loans and returns from its investment portfolio. The Company may in the
future engage in various business activities permitted of bank holding
companies, either directly, through newly formed subsidiaries, or through
acquisitions. The Company intends to provide banking and financial services in
Middle Tennessee, with a principal focus in the Wilson, Rutherford, and Davidson
County trade areas, through the operations of First Bank.
First Bank has its principal office in Mt. Juliet, Tennessee and
additional banking offices in Hermitage, Donelson, Lebanon, Old Hickory, and
Smyrna, Tennessee. The Bank operates one loan production office in
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Murfreesboro, Tennessee. The Bank provides banking and financial services
throughout the Middle Tennessee markets of Wilson, Davidson, Rutherford and
other contiguous counties. For retail customers, the Bank offers a full range of
depository products including regular and money market checking accounts;
regular, special, and money market savings accounts; various types of
certificates of deposit and Individual Retirement Accounts, as well as safe
deposit facilities. First Bank also offers its retail customers consumer and
other installment loans and credit services. The Bank makes available to local
businesses and institutions traditional lending services, such as lines of
credit, accounts receivable and floor plan loans, and real estate and real
estate construction loans, as well as standard depository services. The Bank's
principal source of income is from interest earned on personal, commercial,
agricultural, and real estate loans of various types; and from fees earned on
the origination and sale of mortgage loans. First Bank has correspondent banking
relationships with a variety of banks, including certain regional banks. First
Bank has no active trust department. The Company and First Bank intend for the
foreseeable future to concentrate their efforts in Middle Tennessee.
The Company had at December 31, 1998 an annually renewable line of
credit in an amount not to exceed five million dollars with an unaffiliated
commercial bank. This line is secured by all of the stock of First Bank. This
line is available for use to repurchase shares of the Company's Common Stock
(with a view to fostering some liquidity in the shares where appropriate in the
judgment of management) and for other cash needs of the Company. The line has
been extended for one year periods from time to time and is currently scheduled
to mature on or before June 30, 1999. At maturity, the line may be converted to
a term note for a period not to exceed ten (10) years. Beginning July 1, 1999,
the Company has the option, prior to the beginning of the following month, to
select either the prime rate of the lender or a fixed three month rate of 2.25%
over the London Interbank Offered Rate. Under the loan terms, the Company must
assure that First Bank maintains a ration of total capital to total tangible
assets greater than or equal to those of a "well capitalized" bank as defined by
the regulatory authorities. The outstanding balances of this line was zero at
year end 1998 and $600,000 at year end 1997.
In addition, the Company has certain long-term debt. The Company
originally executed a 7.0% promissory note in the amount of $400,000 on October
26, 1994. At December 31, 1998, the outstanding principal balance of this debt
was approximately $381,000. The promissory note is payable in monthly principal
and interest installments of $2,661, with the remaining balance due October 26,
2004. This note is secured by a first mortgage deed of trust lien on land
originally purchased for a future branch site. Construction of this branch was
completed in 1996 and this branch is now open for business. Principal maturities
for the years 1999 through 2003 are $5,000, $6,000, $6,000, $7,000 and $7,000,
respectively, with the remaining balance of $350,000 due in later years.
The Company also has available to it the ability to obtain certain
advances from the Federal Home Loan Bank. At December 31, 1998, the Company had
outstanding advances from that bank of approximately $683,000 as compared to
$942,000 at December 31, 1997. The advances bear different interest rates,
varying from 7.05% to 7.65%. These advances were collateralized at December 31,
1998, by first mortgage loans from First Bank's mortgage loan portfolio
aggregating an estimated $1,025,000.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Potential software failures
due to processing errors arising from calculations using the Year 2000 date are
a known risk. Further discussion of this issue is presented below in this Item
under "Computers and the Year 2000" and in "Item 7. Management's Discussion and
Analysis" appearing later in this Report.
The Company and the Bank are subject to extensive supervision and
regulation by federal banking agencies. Their respective operations are subject
to a wide array of federal and state laws applicable to banking and to bank
holding companies. Certain of the laws and regulations that affect these
operations are outlined briefly below in this Item and in other portions of this
Report.
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Please refer also to the Consolidated Financial Statements for
additional, important information concerning the Company and First Bank.
FINANCIAL SUMMARY OF THE COMPANY
A financial summary of the Company and its consolidated subsidiary,
First Bank, is detailed below (amounts are rounded):
DECEMBER 31
(Dollars in Thousands except Per Share)
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1998 1997 1996 1995 1994
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Total Assets $269,234 $212,492 $183,973 $157,755 $125,589
Total Earning Assets $246,820 $196,986 $170,692 $146,779 $115,871
Total Deposits $247,711 $193,260 $167,445 $142,922 $113,030
Stockholders' Equity $ 18,885 $ 15,962 $ 13,173 $ 11,047 $ 8,885
Gross Revenues $ 21,438 $ 18,742 $ 16,368 $ 13,919 $ 10,735
Net Earnings $ 2,848 $ 2,604 $ 2,350 $ 1,741 $ 1,330
Basic Earnings per Common Share $ 3.01 $ 2.78 $ 2.53 $ 1.89 $ 1.43
Diluted Earnings per Common Share $ 2.91 $ 2.71 $ 2.50 $ 1.88 $ 1.43
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SUBSIDIARY
First Bank is the Company's sole direct subsidiary. An organizational
chart of the Company and its subsidiary, and First Bank and its subsidiaries,
appears as part of Exhibit 21.
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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.
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 6 and Item 7, as well as other portions of this Report) is to provide
Form 10-KSB 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 undertakes no obligation to publish
revised forward-looking statements to reflect the occurrence of changes or of
unanticipated events, circumstances, or results.
SERVICES AND TRANSACTIONS WITH FIRST BANK
Intercompany transactions between the Company and First Bank, its
wholly-owned subsidiary, are subject to restrictions of existing banking laws
(such as Sections 23A and 23B of the Federal Reserve Act) and accepted
principles of fair dealing. The Company can provide the Bank with advice and
specialized services in the areas of accounting and taxation, budgeting and
strategic planning, employee benefits and human resources, auditing, trust, and
banking and corporate law. The Company may elect to charge a fee for these
services from time to time. The responsibility for the management of the Bank,
however, remains with its Board of Directors and with the officers elected by
the Bank's Board.
SUPERVISION AND REGULATION
The commercial banking business is highly regulated. Both the Company
and First Bank are subject to the supervision, examination, and regulation of
various federal and state agencies, including the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), the Tennessee Department
of Financial Institutions, and the Federal Deposit Insurance Corporation
("FDIC"). The requirements and restrictions imposed by the laws of the United
States and the State of Tennessee on the Bank and/or on the Company include
requirements to maintain reserves against deposits, limitations on the interest
rates that may be charged on various types of loans, and restrictions on the
nature and amount of loans that may be granted and on the types of investments
which may be made. The operations of bank holding companies and banks are also
affected by various consumer laws and regulations, including those relating to
equal credit opportunity, truth in savings disclosures, debt collection laws,
and regulation of consumer lending practices.
Congress and state legislatures periodically propose new legislation
affecting the operations of bank holding companies and banks, so no assurance
can be given that the statutes and regulations described below will remain in
effect or that the Company and its subsidiary, First Bank, will remain at all
times in complete compliance with all applicable laws and regulations. The
discussion in this section, which briefly summarizes certain of such statutes,
does not purport to be complete, and it is qualified in its entirety by
reference to such statutes and regulations.
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Bank Holding Company Act
As a registered bank holding company, the financial condition and
operations of the Company as well as those of its subsidiary, First Bank, are
subject to examination and supervision by the Federal Reserve Board. The Bank
Holding Company Act requires prior Federal Reserve Board approval for bank
acquisitions and prohibits a bank holding company from engaging in any business
other than banking or bank-related activities. Specifically, the Bank Holding
Company Act requires that a bank holding company obtain prior approval of the
Federal Reserve Board before (1) acquiring, directly or indirectly (except in
certain limited circumstances), ownership or control of more than 5% of the
voting stock of a bank, (2) acquiring all or substantially all of the assets of
a bank, or (3) merging or consolidating with another bank holding company. The
Bank Holding Company Act also generally limits the business in which a bank
holding company may engage to banking, managing or controlling banks, and
furnishing or performing services for the banks that it controls.
In addition, pursuant to the Bank Holding Company Act, a bank holding
company may engage in nonbanking activities, or may acquire shares in a company
engaged in nonbanking activities provided that the Federal Reserve Board has
determined by regulation or order that the activity is so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Except in certain circumstances, the Bank Holding Company Act has
historically prohibited a bank holding company from acquiring a bank outside the
state where the bank holding company's banking business is principally
conducted, unless the laws of the state where the bank is located specifically
authorize such acquisitions by out-of-state bank holding companies. Effective
September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 ("Riegle-Neal"), which is discussed below, removed most restrictions
to the expansion of interstate banking. Riegle-Neal is likely to have
far-reaching effects on the historical rules applicable to interstate banking
and interstate branching.
Federal Reserve Act
The Federal Reserve Act imposes strict limitations on investments by
subsidiary banks in the stock or other securities of their parent bank holding
company or any of its other subsidiaries and on the taking of such stock or
securities as collateral for loans to any borrowers. In addition, the Federal
Reserve Act imposes strict limitations on extensions of credit and other
transactions by and between subsidiary banks and their parent bank holding
company or any of its other subsidiaries or corporate affiliates. As a
subsidiary of the Company, First Bank is subject to limitations under Sections
23A and 23B of the Federal Reserve Act with respect to extensions of credit to,
investments in, and certain other transactions with the Company. Further, any
loans and extensions of credit from First Bank to the Company also would be
subject to various loan-to-value collateral requirements. The Bank Holding
Company Act and regulations of the Federal Reserve Board prohibit a bank holding
company and its subsidiaries from engaging in certain (but not all) tie-in
arrangements in connection with any extension of credit, lease, or sale of
property or the furnishing of services.
Capital Adequacy. The Federal Reserve Board has issued standards for
measuring capital adequacy for bank holding companies. These standards are
designed to provide risk-responsive capital guidelines and to incorporate a
consistent framework for use by financial institutions operating in major
international financial markets. The banking regulators have issued standards
for banks that are similar to, but not identical with, the standards for bank
holding companies. In general, the risk-related standards require financial
institutions and financial institution holding companies to maintain certain
capital levels based on "risk-adjusted" assets, so that categories of assets
with potentially higher credit risk will require more capital backing than
categories with lower credit risk. In addition, banks and bank holding
companies are required to maintain capital to support off-balance-sheet
activities such as loan commitments. The Company and its subsidiary financial
institution, First Bank, exceed all applicable capital adequacy minimums. Please
refer to the Consolidated Financial Statements (Item 7 of this Report) and to
the Section entitled "Management's
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Discussion and Analysis or Plan of Operation," which appears as Item 6 of this
Report, and to "Capital Adequacy" herein, for additional information.
Support of Subsidiary Banks. Under Federal Reserve Board policy, the
Company is expected to act as a source of financial strength to its subsidiary
(the Bank) and to commit resources to support First Bank in circumstances where
it might not choose to do so absent such a policy. This support may be required
at times when the Company may not find itself able to provide it. In addition,
any capital loans by the Company to First Bank would also be subordinate in
right of payment to depositors and certain other indebtedness of such subsidiary
Bank. Consistent with this policy regarding bank holding companies serving as a
source of financial strength for their subsidiary banks, the Federal Reserve
Board has stated that, as a matter of prudent banking, a bank holding company
generally should not maintain a rate of cash dividends unless its net income
available to common shareholders has been sufficient to fully fund the
dividends, and the prospective rate of earnings retention appears consistent
with the bank holding company's capital needs, asset quality and over all
financial condition.
THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the depository institution regulatory and
funding provisions of the Federal Deposit Insurance Act as well as several other
federal banking statutes. Among other things, FDICIA requires the federal
banking regulators to take prompt corrective action in respect of depository
institutions that do not meet minimum capital requirements. FDICIA establishes
five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." A depository institution is well capitalized if it
significantly exceeds the minimum level required by regulation for each relevant
capital measure, adequately capitalized if it meets each such measure,
undercapitalized if it fails to meet any such measure and significantly
undercapitalized if it is significantly below such measure. The critically
undercapitalized level occurs where tangible equity is less than 2% of total
tangible assets or less than 65% of the minimum leverage ratio to be prescribed
by regulation (except to the extent that 2% would be higher than such 65%
level). A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are also subject to
restrictions on borrowing from the Federal Reserve System. In addition,
undercapitalized depository institutions are subject to growth limitations and
are required to submit capital restoration plans. A depository institution's
holding company must guarantee the capital plan, up to an amount equal to the
lesser of 5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator.
The five FDICIA capital categories described above will be used by the
banking regulators to determine the severity of corrective action the
appropriate regulator may take in the event an institution reaches a given level
of undercapitalization. For example, an institution which becomes
"undercapitalized" must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, any entity
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controlling a bank (i.e., bank holding companies) must guarantee compliance with
the plan until the institution has been adequately capitalized for four
consecutive calendar quarters. The liability of the holding company is limited
to the lesser of 5% of the institution's total assets or the amount which is
necessary to bring the institution into compliance with all capital standards.
In addition, "undercapitalized" institutions will be restricted from paying
management fees, dividends and other capital distributions. Further, these
institutions will be subject to certain asset growth restrictions and will be
required to obtain prior approval from the appropriate regulator to open new
branches or expand into new lines of business. As an institution drops to lower
capital levels, the extent of action to be taken by the appropriate regulator
increases, restricting the types of transactions in which the institution may
engage and ultimately providing for the appointment of a receiver for certain
institutions deemed to be critically undercapitalized.
In order to comply with the FDICIA, the Federal Reserve Board and the
FDIC have adopted regulations defining operational and managerial standards
relating to internal controls, loan documentation, credit underwriting criteria,
interest rate exposure, asset growth, and compensation, fees and benefits.
CAPITAL ADEQUACY
Under the Federal Reserve Board's risk-based capital guidelines
applicable to the Company, the minimum ratio of capital to risk-weighted assets
(including certain off-balance sheet items, such as standby letters of credit)
is 8%. To be considered a "well capitalized" bank under the guidelines, a bank
must have a total risk-based capital ratio in excess of 10%. Under these
guidelines, at least half of the total capital is to be comprised of common
equity, retained earnings and a limited amount of perpetual preferred stock,
after subtracting certain intangibles, and certain other adjustments ("Tier 1
capital"). The remainder may consist of perpetual debt, mandatory convertible
debt securities, a limited amount of subordinated debt, other preferred stock
not qualifying for Tier 1 capital and a limited amount of loan loss reserves
("Tier 2 capital"). Bank is subject to similar capital requirements adopted by
the FDIC. In addition, the Federal Reserve Board, the FDIC and the Office of the
Comptroller of the Currency have adopted a minimum leverage ratio (Tier 1
capital to adjusted quarter average assets) of 4%. Generally, banking
organizations are expected to operate well above the minimum required capital
level of 4% unless they meet certain specified criteria, including that they
have the highest regulatory ratings. Most banking organizations are required to
maintain a leverage ratio of 4% plus an additional cushion of at least 1% to 2%.
The guidelines also provide that banking organizations experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance upon intangible assets. Failure to meet capital guidelines could
subject a banking institution to a variety of enforcement remedies available to
federal regulatory authorities, including the termination of deposit insurance
by the FDIC, issuance of a capital directive, a prohibition on the taking of
brokered deposits and certain other restrictions.
On December 31, 1998 the Company's subsidiary bank exceeded the "well
capitalized" threshold per the guidelines, with a Tier 1 capital ratio of 9.7%,
a total risk-based capital ratio of 10.6%, and a leverage ratio of 7.4%.
THE RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT
In September 1994, the Interstate Banking Act became law. The
Interstate Banking Act provides that as of September 29, 1995, adequately
capitalized and managed bank holding companies are permitted to acquire banks in
any state. State laws prohibiting interstate banking or discriminating against
out-of-state banks were preempted as of the effective date, although states were
permitted to require that target banks located within the state be in existence
for a period of up to five years before such banks may be subject to the
Interstate Banking Act. The Interstate Banking Act establishes deposit caps
which prohibit acquisitions that would result in the acquirer controlling 30% or
more of the deposits of insured banks and thrifts held in the state in which the
acquisition or merger is occurring or in any state in which the target maintains
a branch or 10% or more of the deposits nationwide. State-level deposit caps are
not preempted as long as they do not discriminate against out-of-state
acquirers, and the federal deposit caps apply only to initial entry
acquisitions.
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In addition, the Interstate Banking Act provides that as of June 1,
1997, adequately capitalized and managed banks may engage in interstate
branching by merging banks in different states and allowing banks to maintain
branches in states other than the states where they maintain their principal
place of business. Various proposed new laws have been (and will likely be)
introduced in the Tennessee General Assembly in response to the Interstate
Banking Act, as well as in response to other legal, regulatory, interest group,
and economic developments, the form or impact of which cannot be reliably
predicted.
CHANGES IN LAWS AND REGULATIONS
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of any
such changes and the impact such changes might have on the Company and its
subsidiaries, however, cannot be determined at this time.
RESTRICTIONS ON DIVIDENDS PAID BY THE BANK AS A COMPANY SUBSIDIARY
The Company has derived and expects to continue to derive most of its
funds for operations and substantially all funds available for the payment of
dividends from First Bank. Both federal and state laws impose restrictions on
the ability of banks to pay dividends. State law restricts the ability of
corporations to pay dividends, as is more fully discussed in Item 5 of this
Report. The Company and First Bank, its wholly-owned bank subsidiary, are
subject to regulatory capital requirements administered by the FDIC, the Federal
Reserve Board and the TDFI.
Failure to meet capital requirements can initiate certain mandatory -
and possibly additional discretionary actions by regulators that could, in that
event, have a direct material effect on the institution's financial statements.
The relevant regulations require First Bank to meet specific capital adequacy
guidelines that involve quantitative measures of the Bank's assets and
liabilities as calculated under regulatory accounting principles. The
regulations also require the regulators to make qualitative judgments about the
Company and First Bank. Those qualitative judgments could also affect the
Company's and First Bank's capital status and the amounts of dividends the
subsidiary bank may distribute. At December 31, 1998, management believes that
the Company and the Bank meet all such capital requirements to which they are,
respectively, subject.
The Company and the Bank are subject to various legal restrictions on
the extent to which a bank holding company (such as the Company) and any nonbank
subsidiary that it might own or form in the future can borrow or otherwise
obtain credit from any bank subsidiary such as the Bank. For example, First Bank
is subject to limitations imposed by Section 23A of the Federal Reserve Act with
respect to extensions of credit to, investments in, and certain other
transactions with, the Company. In general, these restrictions require that any
such extensions of credit must be on non-preferential terms and secured by
designated amounts of specified collateral and be limited, as to the holding
company or any one of such nonbank subsidiaries, to 10% of the lending
institution's capital stock and surplus, and as to the holding company and all
such nonbank subsidiaries in the aggregate, to 20% of such capital stock and
surplus. Further, Section 23B of the Federal Reserve Act imposes restrictions on
"non-credit" transactions between the Bank and the Company (and nonbank Company
affiliates).
TENNESSEE BANK AND BANK HOLDING COMPANY REGULATION; RESTRICTIONS ON DIVIDENDS
Subject to certain exceptions and the ultimate impact of the Interstate
Banking Act, a Tennessee bank holding company is prohibited under Tennessee law
from acquiring a bank outside the four major metropolitan areas (Shelby,
Davidson, Knox, and Hamilton Counties in which Memphis, Nashville, Knoxville,
and Chattanooga are located, respectively), unless the bank has been in
operation for at least five (5) years. A bank or bank holding company is
prohibited from acquiring any bank in Tennessee if the bank or bank holding
company (including all insured depository institutions which are affiliates of
the bank or bank holding company), upon consummation of the acquisition, would
-8-
<PAGE> 11
control thirty percent (30%) or more of the total amount of the deposits of the
insured depository institutions in Tennessee. Under Tennessee law, any Tennessee
bank that has been in operation for at least five years may be acquired, under
certain circumstances, by banks and bank holding companies from outside
Tennessee. Acquisitions are subject to the approval of the Commissioner of the
Tennessee Department of Financial Institutions (the "TDFI"), the FDIC, and the
Federal Reserve Board based upon a variety of statutory and regulatory criteria.
Branching is regulated generally by the TDFI and the FDIC pursuant to certain
state and federal law requirements.
A bank chartered under the laws of the State of Tennessee, such as
First Bank, is subject to the applicable provisions of the Tennessee Banking Act
and to other matters of Tennessee law (such as, solely by way of example and not
limitation, in respect of usury and branching). All national banks, all
subsidiary banks of a bank holding company, and (as a practical matter) all
banks chartered under Tennessee law must become and remain insured banks under
the Federal Deposit Insurance Act ("FDIA"). As a state chartered bank, First
Bank is not required to be a member of the Federal Reserve System and it is not
a member. First Bank is subject to the provisions of FDIA and to supervision and
regular examination by the FDIC. Such examinations, however, are for the
protection of the bank insurance fund and, indirectly depositors, and are not
for the protection of investors and shareholders. Certain provisions of
Tennessee law may be preempted by Riegle-Neal and no prediction can be made as
to its impact on Tennessee law or the Company's regulation thereunder.
First Bank is limited in the amount of dividends that it may declare
under federal and state law. Prior regulatory approval must be obtained before
declaring any dividends if the amount of capital, and surplus is below certain
statutory limits. Please refer to the Consolidated Financial Statements and to
Item 5 of this Report, "Market for Registrant's Common Equity and Related
Stockholder Matters," for additional information on dividends.
From time to time the Federal Reserve Board asserts or seeks to assert
its supervisory and regulatory control over banks (and their subsidiaries) where
the banks are neither national banks nor members of the Federal Reserve System.
An important result of this apparent extension of the Federal Reserve Board's
authority could be that these subsidiary banks would be unable to take advantage
of the powers granted to state banks and their subsidiaries under state law. The
Bank, as a Tennessee state-chartered bank that is not a member of the Federal
Reserve System, could be affected by such limitations and regulatory control.
DEPOSIT INSURANCE
First Bank is subject to charges for deposit insurance coverage by the
FDIC. The Bank's deposits are insured under the Bank Insurance Fund, which is
administered by the FDIC. The rates charged to the Bank for deposit insurance
vary from year to year and are expected to increase for the year 1999.
BANK AND BANK HOLDING COMPANY REGULATION; RESTRICTIONS ON DIVIDENDS
Subject to certain exceptions and the ultimate impact of the Interstate
Banking Act, both a Tennessee bank holding company and an out-of-state bank are
prohibited under Tennessee law from acquiring control of, merging, or
consolidating with a Tennessee bank, unless the Tennessee bank has been in
operation for at least five (5) years. Notwithstanding the above-described
prohibition(s), a bank which does not have its home state in Tennessee may
establish or acquire a branch in Tennessee through the acquisition of all or
substantially all of the assets and the assumption of all or substantially all
of the liabilities of or related to a branch located in Tennessee which has been
in operation for at least five (5) years, provided that the laws of the home
state of the out-of-state bank permit Tennessee banks to establish and maintain
branches in that state through the acquisition of a branch under substantially
the same terms and conditions. A bank or bank holding company is prohibited from
acquiring any bank in Tennessee if the bank or bank holding company (including
all insured depository institutions which are affiliates of the bank or bank
holding company), upon consummation of the acquisition, would control thirty
percent (30%) or more of the total amount of
-9-
<PAGE> 12
the deposits of the insured depository institutions in Tennessee. Under
Tennessee law, any Tennessee bank that has been in operation for at least five
years may be acquired, under certain circumstances, by banks and bank holding
companies from outside Tennessee. Acquisitions are subject to the approval of
the Commissioner of the Tennessee Department of Financial Institutions (the
"TDFI"), the FDIC, and the Federal Reserve Board based upon a variety of
statutory and regulatory criteria. Branching is regulated generally by the TDFI
and the FDIC pursuant to certain state and federal law requirements and the
Interstate Banking Act.
A bank chartered under the laws of the State of Tennessee, such as
First Bank, is subject to the applicable provisions of the Tennessee Banking Act
and to other matters of that Act (such as, solely by way of example and not
limitation, in respect of usury and branching). All national banks, all
subsidiary banks of a bank holding company, and (as a practical matter) all
banks chartered under Tennessee law must become and remain insured banks under
the Federal Deposit Insurance Act ("FDIA"). As a state chartered bank, First
Bank is not required to be a member of the Federal Reserve System and it is not
a member. First Bank is subject to the provisions of FDIA and to supervision and
regular examination by the FDIC. Such examinations, however, are for the
protection of the bank insurance fund and, indirectly, for depositors, and are
not for the protection of investors and shareholders. Certain provisions of
Tennessee law may be preempted by the Interstate Banking Act and no prediction
can be made as to its impact on Tennessee law or the Company's regulation
thereunder.
The Company is a legal entity separate and distinct from the Bank, its
sole financial institution subsidiary. The Company has derived and expects to
continue to derive most of its funds for operations and substantially all funds
available for the payment of dividends from First Bank. Both federal and state
laws impose restrictions on the ability of banks and bank holding companies to
pay dividends. State law restricts the ability of corporations (such as the
Company) to pay dividends, and both state and federal laws limit dividends by
the Bank. For example, prior regulatory approval must be obtained before
declaring any dividends if the amount of capital, and surplus is below certain
statutory limits. Please refer to the Consolidated Financial Statements and to
Item 5 of this Report, "Market for Registrant's Common Equity and Related
Stockholder Matters," for additional information on dividends. See also the
section of this Report entitled "Capital Adequacy." From time to time the
Federal Reserve Board asserts or seeks to assert its supervisory and regulatory
control over banks (and their subsidiaries) where the banks are neither national
banks nor members of the Federal Reserve System. An important result of this
apparent extension of the Federal Reserve Board's authority could be that these
subsidiary banks would be unable to take advantage of the powers granted to
state banks and their subsidiaries under state law. The Bank, as a Tennessee
state-chartered bank that is not a member of the Federal Reserve System, could
be affected by such limitations and regulatory control.
BUSINESS COMBINATION ACT
The Tennessee Business Combination Act (the "Business Combination Act")
limits the ability of Tennessee corporations to engage in business combinations
with "interested shareholders". The Business Combination Act may significantly
impede, delay or prevent a purchaser's ability to acquire a significant equity
interest in the Company. In general, the Business Combination Act prevents an
"interested shareholder" (generally, a shareholder beneficially owning 10% or
more of a corporation's outstanding voting stock) or an affiliate or associate
thereof from engaging in a "business combination" (defined as a variety of
transactions including a merger as described generally below) with a Tennessee
corporation for a period of five years following the date on which the
shareholder became an interested shareholder. The Company has recently filed a
registration statement in respect of its Common Stock with the Securities and
Exchange Commission (the "Commission") pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Hence, in the
future, the Company may become subject to the provisions of the Business
Combination Act. Constitutional questions may serve to limit the effect of the
Business Combinations Act and, accordingly, the effect of the Business
Combination Act on the Company and the Company's Common Stock (if any) is
uncertain.
-10-
<PAGE> 13
RESTRICTIONS ON DIVIDENDS PAID BY THE BANK AS A COMPANY SUBSIDIARY
The Company has derived and expects to continue to derive most of its
funds for operations and substantially all funds available for the payment of
dividends from First Bank. Both federal and state laws impose restrictions on
the ability of banks to pay dividends. State law restricts the ability of
corporations to pay dividends, as is more fully discussed in Item 5 of this
Report. The Company and First Bank, its wholly-owned bank subsidiary, are
subject to regulatory capital requirements administered by the FDIC, the Federal
Reserve Board and the TDFI. Failure to meet capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions by
regulators that could, in that event, have a direct material effect on the
institution's financial statements. The relevant regulations require First Bank
to meet specific capital adequacy guidelines that involve quantitative measures
of the Bank's assets and liabilities as calculated under regulatory accounting
principles. The regulations also require the regulators to make qualitative
judgments about the Company and First Bank. Those qualitative judgments could
also affect the Company's and First Bank's capital status and the amounts of
dividends the subsidiary bank may distribute. At December 31, 1998, management
believes that the Company and the Bank meet all such capital requirements to
which they are, respectively, subject. Please refer to the Consolidated
Financial Statements for additional information.
USURY PROVISIONS
The Constitution of the State of Tennessee requires the state
legislature to fix interest rates in the state, and the legislature has adopted
statutes to accomplish this purpose. The general interest rate statutes
currently in effect establish a maximum "formula rate" of interest at 4% above
the average prime loan rate (or the average short-term business average rate,
however denominated) for the most recent week for which such average rate has
been published by the Federal Reserve Board, or 24% per annum, whichever is
lower. In the event that the Federal Reserve Board fails to publish the average
rate for four consecutive weeks or the maximum effective rate should be
adjudicated or become inapplicable for any reason whatsoever, the maximum
effective rate is deemed to be 24% per annum until the Tennessee General
Assembly otherwise provides. As of March 9, 1999, the maximum "formula rate" of
interest was 11.5%. Specific usury laws may apply also to particular classes of
lenders (e.g., credit unions and savings and loan associations) and transactions
(e.g., bank installment loans and home mortgages). The maximum possible nominal
rate of interest under these laws generally cannot exceed (and may be less than)
24% per annum.
The relative importance of the usury laws to the financial operations
of the Company and First Bank varies from time to time, depending on a number of
factors, including conditions in the money markets, the cost and the
availability of funds, and prevailing interest rates. The management of the
Company is unable to state whether existing usury laws have had or will have a
material adverse effect on its businesses or earnings.
COMPETITION
The banking business in the areas served by the Company and First Bank
is highly competitive. Many of the Company's competitors are more established
and have greater financial and other resources than the Company. Competition
exists with other area state and national banks for deposits, loans, and, with
larger banks located in some of the principal cities within Tennessee, for
commercial loans. First Bank also competes for funds with savings and loan
associations, credit unions, certain government agencies and in the open money
market. Competition also exists for loans from other financial institutions,
such as savings and loan associations, insurance companies, small loan
companies, credit unions, and certain governmental agencies. The deregulation of
depository institutions, as well as the increased ability of nonbanking
financial institutions to provide services previously reserved for commercial
banks, has intensified competition. Because nonbanking financial institutions
are not subject to the same regulatory restrictions as banks and bank holding
companies, in many instances they may operate with greater flexibility because
they may not be subject to the same types of regulatory applications and
processes as are the Company and First Bank.
-11-
<PAGE> 14
The principal geographic area of the Company and First Bank's
operations encompasses Mt. Juliet, Hermitage, Lebanon, Old Hickory, Donelson,
Smyrna and surrounding areas of Tennessee, principally in Wilson, Davidson, and
Rutherford Counties and in other counties contiguous to Wilson County. In this
area, various commercial banks and two credit unions have more than thirty
separate offices as of February 1, 1998. The Company competes with some of the
largest bank holding companies in Tennessee, which have or control banks or
branches in the area, including First American National Bank, NationsBank,
SunTrust Bank, N.A., First Tennessee Bank, N.A., and Union Planters National
Bank, as well as with other highly competitive national, regional, and local
financial institutions and "nonbank" competitors.
To compete with major financial institutions in its service area, the
Company and First Bank rely, in part, on specialized services, local promotional
activity, and personal contacts with customers by its officers, directors, and
employees. For customers whose loan demands exceed First Bank's lending limit,
First Bank seeks to arrange for loans on a participation basis with
correspondent banks. First Bank also assists customers requiring services not
offered by First Bank in obtaining those services from its correspondent banks.
RECENT DEVELOPMENTS
As noted previously, new laws and regulations are commonly prescribed
by governmental agencies that affect the Company and the Bank. For example, a
recent change in Tennessee law removed the prohibition against the acquisition
of certain branches that have been in existence for at least five years by
out-of-state banks and bank holding companies. It is now possible to have "S
corporation" tax status as a bank under federal income tax laws, with the effect
that the tax attributes of S corporations are available, under federal law, to
financial institutions.
Other developments include certain new accounting proposals. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which standardizes the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. This Statement is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of this
Statement to have a material impact on financial condition or results of
operation. At the initial application of this Statement, the Company may elect
to transfer any security classified by the Company as held-to-maturity to the
available-for-sale or trading classification. In addition, the Company may elect
to transfer any security classified as available-for-sale to the trading
classification. Presently, management does not expect to elect these options.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which revises employers'
disclosures about pension and other post-retirement benefit plans. The statement
does not change the measurement or recognition of those plans, but requires
additional information on changes in benefits obligations and fair values of
plan assets, and eliminates certain disclosures previously required by SFAS Nos.
87, 88 and 106. This statement is effective for fiscal years beginning after
December 15, 1997. The Company does not expect the adoption of this Statement to
have a material effect on the Company's financial reporting.
EMPLOYEES
The Company and First Bank have 102 full-time employees and 23
part-time employees at December 31, 1998. None of these employees is covered by
a collective-bargaining agreement. Group life, health, and disability insurance
are maintained for or made available to employees by First Bank, as is a 401(k)
profit-sharing plan adopted by First Bank. The Company believes its relations
with its employees are satisfactory.
-12-
<PAGE> 15
ECONOMIC CONDITIONS AND GOVERNMENTAL POLICY
The Company's earnings are affected not only by the extensive
regulation described above, but also by general economic conditions. These
economic conditions influence, and are themselves influenced, by the monetary
and fiscal policies of the United States government and its various agencies,
particularly the FRB. The Registrant cannot predict changes in monetary policies
or their impact on its operations and earnings.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local statutes and
ordinances regulating the discharge of materials into the environment. The
Company does not believe that it will be required to expend any material amounts
in order to comply with these laws and regulations by virtue of its and First
Bank's activities. However, such laws may from time to time affect the Company
and First Bank in the context of lending activities to borrowers who may
themselves engage in activities or encounter circumstances in which the
environmental laws, rules, and regulations are implicated.
RESEARCH
The Company makes no material expenditures for research and
development. However, the reader is referred to the following section on
"Computers and the Year 2000."
COMPUTERS AND THE YEAR 2000 - THE "Y2K" ISSUE
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 time line 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.
- 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.
-13-
<PAGE> 16
- Environment. The physical building and 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 digits 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 March 31, 1999. It is anticipated that this phase will be
substantially completed at that time.
The Company is actively working with its software and hardware
suppliers, as well as with those who supply data-processing services to the
Company, in connection with Year 2000 issues. Management believes, based on its
inquiries to them, that those software and hardware vendors which are material
to the Company are generally on schedule to meet their and the Company's Year
2000 goals. The Company assumes, but cannot be assured, that all applicable
federal and state governmental agencies, especially those which are important to
the banking and payment systems, will achieve Year 2000 compliance on time.
The Company's credit customers are also subject to potential losses as
a result of Year 2000 issues relating to their own businesses, computers,
customers, and vendors. The Company is studying this issue and expects to work
with its customers in addressing Year 2000 issues that could reasonably be
expected adversely to affect the Company. Any exposure that, in the opinion of
management of the Company, is not adequately addressed to management's
satisfaction, will be taken into consideration in assessing the risk and/or loss
potential, if any, associated with that credit relationship.
The Company does not anticipate that its expenditures in connection
with the remediation of Year 2000 issues will be material to its results of
operations, liquidity, and capital resources taken as a whole. The preceding
statements in this paragraph are forward looking, and the Company's actual
costs, experience, and results may differ due to, among other things, the
conversion of various data-processing systems, additional system testing, vendor
contract negotiations, and technological developments.
Effective for periods ending after December 15, 1998, the Accounting
Standards Executive Committee issued Statement of Position No. 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." The
Company plans to adopt the provisions of this statement and it has determined
that the adoption of this statement is not expected to have a material adverse
impact on the Company.
In summary, the Position Statement states that the following costs
incurred in developing internal-use software should be capitalized: direct costs
for materials and services paid to external parties for developing or obtaining
the software; payroll and payroll-related costs for employees' time spent
directly on the project; and interest costs incurred in developing the software.
Currently, banks must expense such costs, which can be material to the
results of operation, in accordance with the guidance provided by banking
regulators such as the Office of the Comptroller of the Currency. The impact of
this Position Statement to the Company's results is currently being evaluated
and cannot currently be estimated.
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<PAGE> 17
DEPENDENCE UPON A SINGLE CUSTOMER
The Bank's principal customers are generally located in the Middle
Tennessee area with a concentration in Wilson County, Tennessee. Neither the
Company nor First Bank is dependent upon a single customer or a very few
customers.
LINE OF BUSINESS
The Company operates under the Bank Holding Company Act of 1956 in the
area of finance. The Company derived 100% of its consolidated total operating
income from the commercial banking business in 1998.
STATISTICAL INFORMATION AND SELECTED FINANCIAL DATA
Certain selected financial data required by this part of this Annual
Report on Form 10-KSB are expressly incorporated herein by reference to the
portion of the Company's 1998 Annual Report to security holders set forth under
the caption "Selected Financial Data (Unaudited)." No portion of the 1998 Annual
Report to security holders should be deemed to be incorporated by reference,
however, except (as here) by express incorporation. Certain statistical
information concerning the Company (which should be read in conjunction with
Item 6, "Management's Discussion and Analysis or Plan of Operation" that is set
forth as a part of Item 6 and which is also reflected in certain of the Notes to
the Consolidated Financial Statements included in Item 7 of this Report), is set
forth below:
[Remainder of page intentionally left blank.]
-15-
<PAGE> 18
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rate and Interest Differential
The Schedule which follows indicates the average balances for each major
balance sheet item, an analysis of net interest income and the change in
interest income and interest expense attributable to changes in volume and
changes in rates.
The difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities is net interest income,
which is the Company's gross margin. Analysis of net interest income is
more meaningful when income from tax-exempt earning assets is adjusted to a
tax equivalent basis. Accordingly, the following schedule includes a
tax-equivalent adjustment of tax-exempt earning assets, assuming a weighted
average Federal income tax rate of 34%.
In this Schedule "change due to volume" is the change in volume multiplied
by the interest rate for the prior year. "Change due to rate" is the change
in interest rate multiplied by the volume for the current year. Changes in
interest income and expense not due solely to volume or rate changes are
included in the "change due to rate" category.
Non-accrual loans have been included in the loan category. Loan fees of
$629,000, $549,000 and $520,000 for 1998, 1997 and 1996, respectively, are
included in loan income and represent an adjustment of the yield on these
loans.
-16-
<PAGE> 19
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
---------------------------------------------------------------------------------------------------
1998 1997 1998/1997 CHANGE
--------------------------------- --------------------------------- -----------------------------
Average Interest Income/ Average Interest Income/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate Total
------------ -------- --------- ----------- -------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable loans $157,349 9.79% 15,407 136,918 10.01% 13,707 2,045 (345) 1,700
------------ -------- --------- ----------- -------- ---------- ----------
Tax exempt loans 321 6.85 22 418 5.98 25 (6) 3 (3)
Taxable equivalent adjustment - - 11 - - 13 (3) 1 (2)
------------ -------- --------- ----------- -------- ---------- ----------
Total tax-exempt loans 321 10.28 33 418 9.09 38 (9) 4 (5)
------------ -------- --------- ----------- -------- ---------- ----------
Total loans 157,670 9.79 15,440 137,336 10.01 13,745 2,036 (341) 1,695
Less allowance for possible
loan losses (1,728) - - (1,646) - - -
------------ -------- --------- ----------- -------- ---------- ----------
Net loans 155,942 9.90 15,440 135,690 10.13 13,745 2,051 (356) 1,695
------------ -------- --------- ----------- -------- ---------- ----------
Investment securities-taxable 33,739 6.15 2,074 28,184 6.56 1,848 365 (139) 226
Investment securities-tax
exempt 13,326 4.97 662 11,249 4.89 550 102 10 112
Taxable equivalent adjustment - - 341 - - 283 52 6 58
------------ -------- --------- ----------- -------- ---------- ----------
Total tax-exempt
investment securities 13,326 7.53 1,003 11,249 7.41 833 154 16 170
------------ -------- --------- ----------- -------- ---------- ----------
Total investment securities 47,065 6.54 3,077 39,433 6.80 2,681 519 (123) 396
------------ -------- --------- ----------- -------- ---------- ----------
Loans held for sale 3,538 5.88 208 2,125 6.68 142 94 (28) 66
Federal funds sold 10,867 4.98 541 7,485 5.08 380 172 (11) 161
Interest-bearing deposits in
financial institutions - - - - - - - - -
------------ -------- --------- ----------- -------- ---------- ----------
Total earning assets, net
of allowance for possible
loan losses 217,412 8.86 19,266 184,733 9.17 16,948 2,997 (679) 2,318
------------ -------- --------- ----------- -------- ---------- ----------
Cash and due from banks 5,968 4,922
Other assets 10,270 8,704
------------ -----------
Total assets $233,650 198,359
============ ===========
</TABLE>
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<PAGE> 20
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
-----------------------------------------------------------------------------------------------
1998 1997 1998/1997 CHANGE
---------------------------------- -------------------------------- -------------------------
Average Interest Income/ Average Interest Income/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate Total
------------ -------- ---------- --------- -------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deposits:
Negotiable order of withdrawal
accounts $ 25,628 2.53% 648 20,310 2.64% 536 140 (28) 112
Money market demand accounts 28,079 3.91 1,098 22,115 3.99 883 238 (23) 215
Savings accounts 9,802 2.69 264 8,479 2.69 228 36 - 36
Individual retirement savings
accounts 1,653 4.60 76 1,724 4.58 79 (3) - (3)
Certificates of deposit,
$100,000 and over 34,611 5.93 2,054 31,190 5.86 1,829 200 25 225
Certificates of deposit
under $100,000 84,642 5.48 4,641 73,268 5.50 4,028 626 (13) 613
Other borrowings 1,258 7.47 94 2,058 7.48 154 (60) - (60)
--------- -------- ---------- ---------- -------- ---------- -------
Total interest-bearing
liabilities 185,673 4.78 8,875 159,144 4.86 7,737 1,289 (151) 1,138
Demand 29,103 - - 23,459 - - -
--------- -------- ---------- ---------- -------- ---------- -------
Total liabilities 214,776 4.13 8,875 182,603 4.24 7,737 1,364 (226) 1,138
--------- -------- ---------- ---------- -------- ---------- -------
Other liabilities 2,479 2,388
Stockholders' equity 16,395 13,368
--------- ----------
Total liabilities and
stockholders' equity $233,650 198,359
========= ==========
Net interest income 10,391 9,211 1,180
========== ========== =======
Net yield on earning assets 4.78% 4.99%
======== ========
Net interest spread 4.73% 4.93%
======== ========
</TABLE>
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<PAGE> 21
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
-----------------------------------------------------------------------------------------------
1997 1996 1997/1996 CHANGE
---------------------------------- -------------------------------- -------------------------
Average Interest Income/ Average Interest Income/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate Total
------------ -------- ---------- --------- -------- --------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable loans $136,918 10.01% 13,707 114,519 10.35% 11,858 2,318 (469) 1,849
---------- -------- ---------- ---------- -------- ---------- -------
Tax exempt loans 418 5.98 25 571 6.13 35 (9) (1) (10)
Taxable equivalent adjustment - - 13 - - 19 (5) (1) (6)
---------- -------- ---------- ---------- -------- ---------- -------
Total tax-exempt loans 418 9.09 38 571 9.46 54 (14) (2) (16)
---------- -------- ---------- ---------- -------- ---------- -------
Total loans 137,336 10.01 13,745 115,090 10.35 11,912 2,302 (469) 1,833
Less allowance for possible loan
losses (1,646) - - (1,409) - - -
---------- -------- ---------- ---------- -------- ---------- -------
Net loans 135,690 10.13 13,745 113,681 10.48 11,912 2,306 (473) 1,833
---------- -------- ---------- ---------- -------- ---------- -------
Investment securities-taxable 28,184 6.56 1,848 31,791 6.40 2,036 (231) 43 (188)
Investment securities-tax exempt 11,249 4.89 550 8,920 4.89 436 114 - 114
Taxable equivalent adjustment - - 283 - - 225 58 - 58
---------- -------- ---------- ---------- -------- ---------- -------
Total tax-exempt
investment securities 11,249 7.41 833 8,920 7.41 661 172 - 172
---------- -------- ---------- ---------- -------- ---------- -------
Total investment securities 39,433 6.80 2,681 40,711 6.62 2,697 (85) 69 (16)
---------- -------- ---------- ---------- -------- ---------- -------
Loans held for sale 2,125 6.68 142 1,733 6.87 119 27 (4) 23
Federal funds sold 7,485 5.08 380 3,119 4.39 137 192 51 243
Interest-bearing deposits in
financial institutions - - - 95 8.42 8 (8) - (8)
---------- -------- ---------- ---------- -------- ---------- -------
Total earning assets, net
of allowance for possible
loan losses 184,733 9.17 16,948 159,339 9.33 14,873 2,369 (294) 2,075
---------- -------- ---------- ---------- -------- ---------- -------
Cash and due from banks 4,922 4,369
Other assets 8,704 7,186
---------- ----------
Total assets $198,359 170,894
========== ==========
</TABLE>
-19-
<PAGE> 22
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT INTEREST RATES
-----------------------------------------------------------------------------------------------
1997 1996 1997/1996 CHANGE
---------------------------------- -------------------------------- -------------------------
Average Interest Income/ Average Interest Income/ Due to Due to
Balance Rate Expense Balance Rate Expense Volume Rate Total
------------ -------- --------- --------- -------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Deposits:
Negotiable order of withdrawal
accounts $ 20,310 2.64% 536 16,046 2.50% 401 107 28 135
Money market demand accounts 22,115 3.99 883 19,680 4.04 795 98 (10) 88
Savings accounts 8,479 2.69 228 8,121 2.76 224 10 (6) 4
Individual retirement savings
accounts 1,724 4.58 79 1,737 4.61 80 (1) - (1)
Certificates of deposit,
$100,000 and over 31,190 5.86 1,829 24,766 5.70 1,412 366 51 417
Certificates of deposit
under $100,000 73,268 5.50 4,028 64,109 5.54 3,553 507 (32) 475
Other borrowings 2,058 7.48 154 2,580 7.40 191 (39) 2 (37)
---------- -------- ---------- ---------- -------- ---------- --------
Total interest-bearing
liabilities 159,144 4.86 7,737 137,039 4.86 6,656 1,074 7 1,081
Demand
23,459 - - 20,861 - - -
---------- -------- ---------- ---------- -------- ---------- --------
Total liabilities 182,603 4.24 7,737 157,900 4.22 6,656 1,042 39 1,081
---------- -------- ---------- ---------- -------- ---------- --------
Other liabilities 2,388 1,260
Stockholders' equity 13,368 11,734
---------- ----------
Total liabilities and
stockholders' equity $198,359 170,894
========== ==========
Net interest income 9,211 8,217 994
========== ========== ========
Net yield on earning assets 4.99% 5.16%
======== ========
Net interest spread 4.93% 5.11%
======== ========
</TABLE>
-20-
<PAGE> 23
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
II. Investment Portfolio
A. Securities at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
-------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Government
obligations $ 3,002 14 -- 3,016
Securities of U.S.
government agencies
and corporations 7,327 44 33 7,338
Obligations of state and
political subdivisions 15,064 503 1 15,566
Mortgage-backed
securities 27,177 134 112 27,199
Collateralized mortgage
obligations 2,548 14 6 2,556
Federal Home Loan
Bank Stock 672 -- -- 672
------- --- --- ------
$55,790 709 152 56,347
======= === === ======
</TABLE>
Securities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
-------------------------------------------------
(In Thousands)
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government
obligations $ 6,748 23 3 6,768
Securities of U.S.
government agencies
and corporations 7,540 64 16 7,588
Obligations of
state and political
subdivisions 12,874 263 20 13,117
Collateralized mortgage
obligations 10,258 149 36 10,371
Federal Home Loan
Bank Stock 1,611 -- 22 1,589
Mortgage-backed
securities 582 -- -- 582
------- --- -- ------
$39,613 499 97 40,015
======= === == ======
</TABLE>
-21-
<PAGE> 24
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
II. Investment Portfolio, Continued
B. The following schedule details the estimated maturities and
weighted average yields of investment securities of the Company
at December 31, 1998.
<TABLE>
<CAPTION>
Estimated Weighted
Amortized Market Average
Available-For-Sale Securities Cost Value Yields
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Securities of U.S. Government
obligations:
Less than one year $ 3,002 3,016 6.0%
One to five years -- -- --
Five to ten years -- -- --
More than ten years -- -- --
------- ------ -----
Total securities of
U.S. Government obligations 3,002 3,016 6.0
------- ------ -----
Securities of U.S. Government
agencies and corporations:
Less than one year -- -- --
One to five years 2,388 2,405 6.0
Five to ten years 3,231 3,222 6.4
More than ten years 1,708 1,711 5.9
------- ------ -----
Total securities of U.S.
Government agencies
and corporations 7,327 7,338 6.2
------- ------ -----
Obligations of states and
political subdivisions*:
Less than one year 1,125 1,132 4.3
One to five years 5,039 5,131 4.5
Five to ten years 3,748 3,856 4.7
More than ten years 5,152 5,447 5.2
------- ------ -----
Total obligations of states
and political subdivisions 15,064 15,566 4.8
------- ------ -----
Corporate and other:
Deposit notes and corporate bonds 672 672 7.2
------- ------ -----
Mortgage-backed securities 27,177 27,199 6.0
------- ------ -----
Collateralized mortgage obligations 2,548 2,556 5.7
------- ------ -----
Total available-for-sale
securities $55,790 56,347 5.6
======= ====== =====
</TABLE>
* Weighted average yield is stated on a tax-equivalent basis,
assuming a weighted average Federal income tax rate of 34%.
-22-
<PAGE> 25
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
III. Loan Portfolio:
A. Loan Types
The following schedule details the loans of the Company at
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
In Thousands
--------------------------
1998 1997
--------- --------
<S> <C> <C>
Commercial, financial and
agricultural $ 61,737 46,024
Real estate - construction 14,271 12,656
Real estate - mortgage 82,936 74,032
Consumer 16,443 15,158
--------- --------
Gross loans 175,387 147,870
Less unearned interest (1,016) (1,101)
--------- --------
Total loans, net of unearned interest 174,371 146,769
Less allowance for possible loan losses (1,821) (1,704)
--------- --------
Net loans $ 172,550 145,065
========= ========
</TABLE>
-23-
<PAGE> 26
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
III. Loan Portfolio, Continued:
B. Maturities and Sensitivities of Loans to Changes in Interest
Rates
The following schedule details maturities and sensitivity to
interest rates changes for commercial loans of the Company at
December 31, 1998.
<TABLE>
<CAPTION>
1 Year to
Less Than Less Than After 5
1 Year* 5 Years Years Total
--------- --------- ------- -----
<S> <C> <C> <C> <C>
Maturity Distribution:
Commercial, financial
and agricultural $40,697 20,279 761 61,737
Real estate -
construction 14,155 116 -- 14,271
------- ------ ------ ------
$54,852 20,395 761 76,008
======= ====== ====== ======
Interest-Rate Sensitivity:
Fixed interest rates $40,129 20,395 761 61,285
Floating or adjustable
interest rates 14,723 -- -- 14,723
------- ------ ------ ------
Total commercial,
financial and
agricultural
loans plus
real estate -
construction
loans $54,852 20,395 761 76,008
======= ====== ====== ======
</TABLE>
* Includes demand loans, bankers acceptances, commercial paper and
deposit notes.
-24-
<PAGE> 27
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
III. Loan Portfolio, Continued
C. Risk Elements
The following schedule details selected information as to
non-performing loans of the Company at December 31, 1998 and
1997.
<TABLE>
<CAPTION>
In Thousands
-----------------------
1998 1997
-------- -------
<S> <C> <C>
Non-accrual loans:
Commercial, financial and agricultural $ 7 389
Real estate - construction -- --
Real estate - mortgage 20 89
Consumer -- 3
Lease financing receivable -- --
-------- -------
Total non-accrual $ 27 481
======== =======
Loans 90 days past due:
Commercial, financial and agricultural $ 78 139
Real estate - construction -- --
Real estate - mortgage 180 109
Consumer 60 67
Lease financing receivable -- --
-------- -------
Total loans 90 days past due $ 318 315
======== =======
Renegotiated loans:
Commercial, financial and agricultural $ -- 49
Real estate - construction -- --
Real estate - mortgage 101 108
Consumer -- --
Lease financing receivable -- --
-------- -------
Total renegotiated loans past due $ 101 157
======== =======
Loans current - considered uncollectible $ -- --
======== =======
Total non-performing loans $ 446 953
======== =======
Total loans, net of unearned interest $174,371 146,769
======== =======
Percent of total loans outstanding,
net of unearned interest 0.26% 0.65%
======== =======
Other real estate -- 2
======== =======
</TABLE>
-25-
<PAGE> 28
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
III. Loan Portfolio, Continued:
C. Risk Elements, Continued:
The accrual of interest income is discontinued, and previously accrued
interest is reversed, when it is determined that collection of
interest is less than probable or the collection of any amount of
principal is doubtful. The decision to place a loan on a non-accrual
status is based on an evaluation of the borrower's financial
condition, collateral liquidation value, economic and business
conditions and other factors that affect the borrower's ability to
pay. At the time a loan is placed on a non-accrual status, the accrued
but unpaid interest is also evaluated as to collectibility. If
collectibility is doubtful, the unpaid interest is charged off.
Thereafter, interest on non-accrual loans is recognized only as
received. Non-accrual loans were $27,000 at December 31, 1998 and
$481,000 at December 31, 1997. Had interest been accrued on these
loans, net earnings would have been increased by approximately $3,000
in 1998 and $35,000 in 1997. Total interest income would have
increased from $18,914,000 to $18,928,000 in 1998 as compared to
$16,652,000 to $16,687,000 in 1997. There were no non-accrual loans
outstanding in 1996.
Nonperforming loans have decreased by $507,000 from December 31, 1997
to December 31, 1998. The decrease resulted from a decrease in
non-accrual loans of $454,000, an increase in loans ninety-days or
more past due of $3,000, and a decrease in renegotiated loans of
$56,000. The decrease in renegotiated loans from 1997 to 1998 resulted
primarily from the pay down of loans between years. The one loan
comprising this balance is included within real estate-mortgage.
At December 31, 1998, loans totaling $2,729,000 were included in the
Company's internal classified loan list. Of these loans $1,067,000 are
consumer, $1,617,000 are commercial and $45,000 are real estate loans.
The collateral values securing these loans total approximately
$4,763,000 based on management estimates, ($1,625,000 related to
consumer loans, $3,088,000 related to commercial loans and $50,000
related to real estate loans). Such loans are listed as classified
when information obtained about possible credit problems of the
borrower has prompted management to question the ability of the
borrower to comply with the repayment terms of the loan.
At December 31, 1998, there were no loan concentrations within a
single industry segment that exceeded ten percent of total loans other
than as included in the preceding table of types of loans. Loan
concentrations are amounts loaned to a multiple number of borrowers
engaged in similar activities which would cause them to be similarly
impacted by economic or other conditions.
-26-
<PAGE> 29
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
III. Loan Portfolio, Continued:
C. Risk Elements, Continued:
At December 31, 1998 there was no other real estate. Other real estate
totaled $2,000 and consisted of one property in 1997. During the year
one property was added to other real estate with an assigned value of
approximately $59,000. The property was subsequently sold for
approximately $57,000. Another property with an assigned value of
approximately $2,000 was charged off during the year. There was no
other activity in the other real estate account during 1998.
D. Other Interest-Bearing Assets
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at
December 31, 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.
-27-
<PAGE> 30
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
IV. Summary of Loan Loss Experience
The following schedule details selected information related to the
allowance for possible loan losses account of the Company at December 31,
1998 and 1997 and the years then ended.
<TABLE>
<CAPTION>
In Thousands Except Percentages
-------------------------------
1998 1997
--------- --------
<S> <C> <C>
Allowance for loan losses at beginning of period $ 1,704 1,541
--------- --------
Less: net loan charge-offs:
Charge-offs:
Commercial, financial and agricultural (297) (73)
Real estate construction -- --
Real estate - mortgage -- (35)
Consumer (91) (101)
Lease financing -- --
--------- --------
(388) (209)
--------- --------
Recoveries:
Commercial, financial and agricultural 12 5
Real estate construction -- --
Real estate - mortgage -- --
Consumer 13 17
Lease financing -- --
--------- --------
25 22
--------- --------
Net loan charge-offs (363) (187)
--------- --------
Provision for loan losses charged to expense 480 350
--------- --------
Allowance for loan losses at end of period $ 1,821 1,704
========= ========
Total loans, net of unearned interest, at end of year $ 174,371 146,769
========= ========
Average total loans outstanding,
net of unearned interest, during year $ 156,505 137,336
========= ========
Net charge-offs as a percentage of average
total loans outstanding, net of unearned
interest, during year 0.23% 0.14%
========= ========
Ending allowance for loan losses as a
percentage of total loans outstanding
net of unearned interest, at end of year 1.04% 1.16%
========= ========
</TABLE>
-28-
<PAGE> 31
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
IV. Summary of Loan Loss Experience, Continued
The following detail provides a breakdown of the allocation of the
allowance for possible loan losses:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------- -----------------------
Percent Percent
of Loans of Loans
In Each In Each
Category Category
In To Total In To Total
Thousands Loans Thousands Loans
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 771 35% 316 31%
Real estate construction -- 8 -- 9
Real estate mortgage 69 48 148 50
Consumer 981 9 1,240 10
------ ---- ----- ---
$1,821 100% 1,704 100%
====== ==== ===== ===
</TABLE>
The allowance for possible loan losses is an amount that management
believes will be adequate to absorb possible losses on existing loans that
may become uncollectible. The provision for possible loan losses charged to
operating expense is based on past loan loss experience and other factors
which, in management's judgment, deserve current recognition in estimating
possible loan losses. Other such factors considered by management include
growth and composition of the loan portfolio, review of specific loan
problems, the relationship of the allowance for possible 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 pay.
Management conducts a continuous review of all loans that are delinquent,
previously charged down loans and loans determined to potentially be
uncollectible. Loan classifications are reviewed periodically by a person
independent of the lending function. The Board of Directors reviews the
adequacy of the allowance for possible loan losses on a quarterly basis.
The breakdown of the allowance by loan category is based in part on
evaluations of specific loans, past history and economic conditions within
specific industries or geographic areas. Accordingly, since all of these
conditions are subject to change, the allocation is not necessarily
indicative of the breakdown of the future losses.
-29-
<PAGE> 32
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
V. Deposits
The average amounts and average interest rates for deposits for 1998 and
1997 are detailed in the following schedule:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Average Average
Balance Balance
------------ Average ------------ Average
In Thousands Rate In Thousands Rate
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Non-interest bearing deposits $ 29,103 0.00% 23,459 0.00%
Negotiable order of withdrawal
accounts 25,628 2.53% 20,310 2.64%
Money market demand accounts 28,079 3.91% 22,115 3.99%
Savings accounts 9,802 2.69% 8,479 2.69%
Individual retirement savings
accounts 1,653 4.60% 1,724 4.58%
Certificates of deposit $100,000
and over 34,611 5.93% 31,190 5.86%
Certificates of deposit under
$100,000 84,642 5.48% 73,268 5.50%
-------- -------
$213,518 4.11% 180,545 4.20%
======== ==== ======= ====
</TABLE>
The following schedule details the maturities of certificates of deposit
and individual retirement accounts of $100,000 and over at December 31,
1998.
<TABLE>
<CAPTION>
In Thousands
------------
<S> <C>
Less than three months $ 15,466
Three to six months 4,554
Six to twelve months 8,264
More than twelve months 8,016
--------
$ 36,300
========
</TABLE>
-30-
<PAGE> 33
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
VI. Return on Equity and Assets
The following schedule details selected key ratios of the Company at
December 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ -----
<S> <C> <C> <C>
Return on assets 1.22% 1.31% 1.38%
(Net income divided by average total assets)
Return on equity 17.37% 19.48% 20.02%
(Net income divided by average equity)
Dividend payout ratio 8.31% 8.99% 8.03%
(Dividends declared per share divided
by net earnings per share)
Equity to assets ratio 7.02% 6.74% 6.87%
(Average equity divided by average
total assets)
Leverage capital ratio 7.37% 7.45% 7.14%
(Equity divided by fourth quarter
average total assets, excluding the
effect of the adoption of SFAS No. 115)
</TABLE>
The minimum leverage capital ratio required by the regulatory agencies is
4%.
Beginning January 1, 1991, new risk-based capital guidelines were adopted
by regulatory agencies. 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.
-31-
<PAGE> 34
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
VI. Return on Equity and Assets, Continued
The following schedule details the Company's risk-based capital at December
31, 1998 and 1997 (excluding the effect of the adoption of SFAS No. 115):
<TABLE>
<CAPTION>
In Thousands
------------------------
1998 1997
-------- ------
<S> <C> <C>
Tier I capital:
Stockholders' equity, excluding the net
unrealized gain on available-for-sale
securities $ 18,539 15,713
Tier II capital:
Allowable allowance for loan losses
(limited to 1.25% of risk-weighted
assets) 1,821 1,704
-------- -------
Total risk-baed capital $ 20,360 17,417
======== =======
Risk-weighted assets $192,172 155,645
======== =======
Risk-based capital ratios:
Tier I capital ratio 9.65% 10.10%
======== =======
Total Risk-Based capital ratio 10.59% 11.19%
======== =======
</TABLE>
The Company is required to maintain a total risk-based capital to risk
weighted asset ratio of 8% and a Tier I capital to risk weighted asset
ratio of 4%. At December 31, 1998, the Company and its subsidiary bank were
in compliance with these requirements.
-32-
<PAGE> 35
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
VI. Return on Equity and Assets, Continued
The following schedule details the Company's interest rate sensitivity at
December 31, 1998:
<TABLE>
<CAPTION>
(In Thousands) Repricing Within
-----------------------------------------------------------
Total 0-90 Days 91-365 Days Over 1 Year
-------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Earning assets:
Loans $174,371 55,598 45,852 72,921
Loans held for sale 5,438 5,438 -- --
Securities 56,347 4,743 14,875 36,729
Federal funds sold 12,485 12,485 -- --
-------- ------- ------- --------
Total earning assets 248,641 78,264 60,727 109,650
-------- ------- ------- --------
Interest-bearing liabilities:
Negotiable order of withdrawal accounts 28,677 -- -- 28,677
Money market demand accounts 33,241 -- -- 33,241
Savings accounts 14,241 -- -- 14,241
Individual retirement savings accounts 1,718 1,718 -- --
Certificates of deposit, $100,000 and over 36,300 15,466 12,818 8,016
Certificates of deposit, under $100,000 91,046 16,801 48,810 25,435
Other borrowings 1,064 -- -- 1,064
-------- ------- ------- --------
Total interest bearing liabilities 206,287 33,985 61,628 110,674
-------- ------- ------- --------
Interest-sensitivity gap $ 42,354 44,279 (901) (1,024)
======== ======= ======= ========
Cumulative gap 44,279 43,378 42,354
======= ======= ========
Interest-sensitivity gap as % of total assets 16.4% (0.3)% (0.4)%
======= ======= ========
Cumulative gap as % of total assets 16.4% 16.1% 15.7%
======= ======= ========
</TABLE>
Negotiable order of withdrawal accounts, money market demand accounts and
savings accounts have no contractual maturities. Management believes these
accounts are not necessarily interest rate sensitive and has included them
in the interest rate sensitivity table above in the period over one year.
-33-
<PAGE> 36
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
VI. Return on Equity and Assets, Continued
If all negotiable order of withdrawal accounts, money market demand
accounts and savings accounts had been included in the 0-90 days category
above, the cumulative gap as a percentage of total assets would have been
negative (11.8%) and (12.2%), respectively for the 0-90 days and 91-365
days at December 31, 1998.
VII. Other Borrowings
The Company has entered into a loan agreement with a commercial bank. The
agreement extends a line of credit to the Company in an amount not to
exceed $5,000,000. The line is available to purchase and retire stock of
the Company as it becomes available and to meet other cash needs of the
Company. The line matures on or before June 30, 1999 and at the maturity
may be converted to a term note for a period not to exceed ten (10) years.
The stock of the subsidiary company collateralizes the line. The Company
has the option, prior to the beginning of the following month, to select
either the prime rate of the lender or a fixed three month rate of 2.25%
over the London Interbank Offered Rate ("Libor"). The subsidiary bank must
maintain a total capital to total tangible asset ratio equal to or greater
than those of a "well capitalized" bank as defined by the regulatory
authorities. There was no outstanding balance at December 31, 1998 and the
outstanding balance at December 31, 1997 was $600,000.
The advances from the Federal Home Loan Bank at December 31, 1998 consist
of the following:
<TABLE>
<CAPTION>
Interest Rate In Thousands
------------- ------------
<S> <C>
7.05% $ 450
7.65% 233
-------
$ 683
=======
</TABLE>
-34-
<PAGE> 37
FIRST FINANCIAL CORPORATION
Form 10-KSB
December 31, 1998
VII Other Borrowings, Continued
Advances from the Federal Home Loan Bank are to mature as follows as of
December 31, 1998:
<TABLE>
<CAPTION>
Amount
---------
In
Year Ending December, 31 Thousands
------------------------ ---------
<S> <C>
1999 $ 464
2000 15
2001 17
2002 18
2003 20
Later years 149
-----
$ 683
=====
</TABLE>
These advances are collateralized by approximately $1,025,000 of the
Subsidiary Bank's mortgage loan portfolio.
On October 26, 1994, the Company executed a 7.0% promissory note in the
amount of $400,000. The promissory note is payable in monthly principal and
interest installments of $2,661, with the remaining balance due October 26,
2004. This note is secured by a first mortgage Deed of Trust on land
purchased for a branch site which was opened during 1996.
The balance of the note at December 31, 1998 and 1997 was $381,000 and
$386,000, respectively.
Maturities for the years ending 1999 through 2003 are $5,000, $6,000,
$6,000, $7,000 and $7,000, respectively, with the remaining balance of
$350,000 due in later years.
-35-
<PAGE> 38
ITEM 2. PROPERTIES.
The Main Office of the Company and First Bank is a two-story bank
building in Mt. Juliet, Tennessee. In addition, First Bank has seven Branches
located in Lebanon, Hermitage, Donelson, Old Hickory, and Smyrna, Tennessee, all
of which are located in Wilson, Davidson and Rutherford Counties in Tennessee.
First Bank owns all of its offices with the exception of two offices. (The Bank
leases the land and building in one location and it leases only the land in
another location.) The Bank operates seven automated teller machines and one
loan production office.
In the judgment of management, the facilities of the Company and First
Bank are generally suitable and adequate for the current and reasonably
foreseeable needs of the Company and First Bank. However, new office sites, and
further geographic expansion, have been and likely will be considered from time
to time, and the Bank has recently began using a building located on a lot
contiguous to the Main Office.
ITEM 3. LEGAL PROCEEDINGS.
Various actions and proceedings are expected to be pending or
threatened against or involve the Company and First Bank from time to time. In
the opinion of management, the ultimate resolution of any foreseeable or known
proceedings will not have a material effect on the Company's or First Bank's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders in the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION
There is no established public trading market for the Company's Common
Stock. Management, however, believes that Middle Tennessee is the principal
market area for the Common Stock. The following table sets forth the high and
low sales prices per share of the Common Stock for each quarter of fiscal year
1998. (Unless otherwise expressly stated, all per share data have been adjusted
to give effect, to the two-for-one stock split that was approved by the
Company's Shareholders on April 18, 1996.) The Company did not redeem any shares
of its Common Stock in 1998, 1997 or 1996. The Company may repurchase its own
shares from time to time, however, on an ad hoc basis with a view towards
providing some liquidity in its common stock. The other information included
below has been reported to the Company by certain selling or purchasing
shareholders in privately negotiated transactions during the periods indicated.
Although management believes that the information supplied by purchasers and
sellers concerning their respective transactions is generally reliable, it has
not been verified. Such information may not include all transactions in the
Company's Common Stock for the respective periods shown, and it is possible that
transactions occurred during the periods reflected or discussed at prices higher
or lower than the prices set forth below. Some of the transactions may have
involved the Company or its principals.
-36-
<PAGE> 39
COMMON STOCK PRICE
(As Reported to the Company)
<TABLE>
<CAPTION>
YEAR/CALENDAR QUARTER HIGH LOW
------ ------
<S> <C> <C>
1998
Fourth Quarter $33.00 $33.00
Third Quarter $32.00 $32.00
Second Quarter $26.00 $26.00
First Quarter $26.00 $26.00
1997
Fourth Quarter $25.00 $25.00
Third Quarter $22.50 $22.50
Second Quarter * *
First Quarter $21.00 $20.00
</TABLE>
*No reported trades.
The last trade known to management involved 100 shares at $35.00 per
share on March 9, 1999 . Because there is no established public trading market
for the Company's Common Stock, and because the Company and its directors,
officers, and/or employees may be involved, the prices shown above may not
necessarily be indicative of the fair market value of the Common Stock or of the
prices at which the Company's Common Stock would trade if there were an
established public trading market. Accordingly, there can be no assurance that
the Common Stock will subsequently be purchased or sold at prices comparable to
the prices set forth above.
THE COMPANY'S COMMON STOCK
The Company is authorized by its Charter to issue 5,000,000 shares of
Common Stock, par value of $2.50 per share. In connection with the acquisition
of First Bank, effective January 1, 1992, the Company issued (adjusted to
reflect the two-for-one stock split that occurred in 1996) 1,060,000 shares of
the Common Stock. At March 16, 1999, the Company had 953,328 shares outstanding
(not including the shares reserved for options which have been or may be granted
under existing plans).
Holders of the Company's Common Stock are entitled to cast one vote for
each share held of record on all matters submitted to a vote of shareholders and
are not entitled to cumulate votes for the election of directors. Holders of the
Common Stock have no preemptive rights to subscribe for or to purchase any
additional shares of the Company's Common Stock. In the event of liquidation,
holders of the Company's Common Stock are entitled to share in the distribution
of assets remaining after payment of debts and expenses. Holders of the Common
Stock are entitled to receive dividends when declared by the Company's Board of
Directors out of funds legally available therefor. Under its Charter, the
Company is required to indemnify its directors and officers for acts on behalf
of the Company to the fullest extent permitted under applicable law.
-37-
<PAGE> 40
The Company is a legal entity separate and distinct from First Bank.
There are various legal and regulatory limitations under federal and state law
on the extent to which a bank holding company subsidiary such as First Bank can
finance or otherwise supply funds to the Company. First Bank is also subject to
limitations under Section 23A of the Federal Reserve Act with respect to
extensions of credit to, investments in, and certain other transactions with,
the Company. Furthermore, loans and extensions of credit are also subject to
various collateral requirements.
FFC PREFERRED STOCK
The Company's Charter authorizes the issuance by the company of up to
5,000,000 shares of its preferred stock (the "FFC Preferred Stock"), none of
which have been issued or authorized (or committed) for issuance. The FFC
Preferred Stock may be issued by vote of the Board of Directors without
shareholder approval. The FFC Preferred Stock may be issued in one or more
classes and series, with such designations, full or limited voting rights (or
without voting rights), redemption, conversion, or sinking fund provisions,
dividend liquidation rights, and other preferences and limitations as the Board
of Directors may determine in the exercise of its business judgment. The FFC
Preferred Stock may be issued by the Board of Directors for a variety of
reasons.
The FFC Preferred Stock could be issued in public or private
transactions in one or more (isolated or series of) issues. The shares of any
series of FFC Preferred Stock could be issued with rights, including voting,
dividend, and liquidation features, superior to those of any issue or class of
the Company's Common Stock. The issuance of shares of the FFC Preferred Stock
could serve to dilute the voting rights or ownership percentage of holders of
shares of the Company's Common Stock. The issuance of shares of the FFC
Preferred Stock might also serve to deter or block any attempt to obtain control
of the company, or to facilitate any such attempt. The Company has no present
plans or commitments to issue any FFC Preferred Stock.
(B) HOLDERS
The approximate number of record holders, including those shares held
in "nominee" or "street name," of the Company's Common Stock at February 1, 1999
was approximately 531.
(C) DIVIDENDS
The Company commenced business for all practical purposes on January 1,
1992. The Company declared and paid cash dividends on its Common Stock of $0.25
per share in 1998, $0.25 per share in 1997, and $0.20 per share in 1996. Future
dividends may be paid as determined by the Company's Board of Directors from
time to time in accordance with federal and state law. The Company presently
intends to pay dividends in accordance with past practices; however, any
dividends that may be declared and paid by the Company in the future will be
subject to Board discretion and will depend upon earnings, financial condition,
regulatory and prudential considerations, and or other factors affecting the
Company that cannot be reliably predicted, including Board discretion. Please
refer to the section of this Annual Report entitled "Supervision and Regulation"
in Part I, as well as to the discussion in this section.
The Company, as a corporation governed in part by the Tennessee
Business Corporation Act ("TBCA"), as amended, is subject to the limitations on
dividends and other distributions set forth in the TBCA. The TBCA contains
certain statutory restrictions on the ability to make distributions, including
the payment of dividends. Tennessee law allows a for-profit corporation to pay
dividends under certain circumstances that might preclude payments of dividends
by a state bank. Under state law, a bank holding company may declare and pay
dividends provided that (1) the payment of dividends would not render the
corporation unable to pay its debts as they become due in the usual course of
business; (2) the corporation's total assets would not be less than the sum of
its total liabilities plus (unless the charter permits otherwise) the amount
that would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy upon dissolution the preferential rights of
shareholders whose preferential rights are superior to
those receiving
-38-
<PAGE> 41
the distribution; or (3) the payment of dividends would not be contrary to any
restriction contained in the corporation's charter. At present, the Company's
charter does not expressly permit distributions described in (2) above, nor does
the Company have any shareholders with rights preferential to holders of the
Company's common equity. The Company has no restriction in its charter
concerning the payment of dividends.
The Company expects that funds for the payment of dividends and
expenses (including organizational expenses) of the Company initially will come
from dividends paid to the Company by First Bank. If the Company requires
additional funds for acquisitions or investments, it may be able to obtain those
funds from additional dividends paid by First Bank or from external financing.
Tennessee banking statutes provide that the directors of a state bank,
after making proper deduction for all expenditures, expenses, taxes, losses, bad
debts, and any write-offs or other deductions required by the TDFI, may credit
net profits to the bank's undivided profits account. Directors of a state bank
may quarterly, semiannually, or annually declare a dividend from the undivided
profits account in an amount as they shall judge expedient, provided that prior
to determining that undivided profits are available for the declaration of
dividends, the following transfers shall be made: (1) net losses shall be
deducted from the undivided profits account; and (2) there shall be transferred
from the undivided profits account to the surplus account (a) the amount
required to raise the surplus to fifty percent (50%) of the capital stock; and,
(b) an amount, not less than ten percent (10%) of net profits, until the surplus
equals the capital stock, and provided that the bank has adequately reserved
against deposits and such reserve will not be impaired by the declaration of the
dividend. A state bank, with the approval of the TDFI, may transfer funds from
its capital surplus account to its undivided profits account or any part of its
capital stock account.
The payment of dividends by any bank is, of course, dependent upon its
earnings and financial condition and, in addition to the limitations discussed
above, is subject to the statutory power of certain federal and state regulatory
agencies to act to prevent unsafe or unsound banking practices. Please refer
also to the discussion of "Restrictions on Dividends Paid by Subsidiary Bank"
set forth in Item 1 of this Report, to"Management's Discussion and Analysis or
Plan of Operation", in this Report, and to the Consolidated Financial
Statements.
(D) FFC DIVIDEND REINVESTMENT PLAN
In 1996 the Company established a dividend reinvestment plan (the
"Dividend Reinvestment Plan") for those Shareholders who desire to reinvest
their cash dividends in Company Common Stock. Pursuant to the Dividend
Reinvestment Plan, the Company can purchase shares of the Common Stock in the
open market or issue authorized but previously unissued shares to meet the
requirements of this plan. During 1998, the Company issued 6,395 original shares
(at a price per share of $26.00) to participants in the Dividend Reinvestment
Plan, as compared to 7,850 in 1997 (at a price per share of $21.00).
(E) SALES OF UNREGISTERED SECURITIES
The Company has not sold any unregistered securities that were not
previously reported in a quarterly report on its quarterly Report on Form 10-QSB
except as set forth in this paragraph. In 1998, the Company issued 4,519 shares
to certain of the participants in the 1993 First Financial Corporation Stock
Option Plan (the "Stock Option Plan") at an average weighted price per share of
$10.68. Please refer to Note 16 of the Consolidated Financial Statements for
additional information on the dividend reinvestment plan and to Note 18 of the
Consolidated Financial Statements for additional information on the Stock Option
Plan.
-39-
<PAGE> 42
(F) REGISTRATION UNDER THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's Directors and
certain officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the Commission initial
reports of ownership and reports of changes in ownership of the Company's Common
Stock and other equity securities of the Company that might be issued in the
future. These officers, directors and greater than ten-percent shareholders are
required by a Commission regulation to furnish the Company with copies of these
reports.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The Management's Discussion and Analysis or Plan of Operation called
for by this part is expressly incorporated by reference to the section of the
Company's 1998 Annual Report to security holders entitled "Management's
Discussion and Analysis or Plan of Operation". However, no portion of the 1998
Annual Report to security holders should be deemed to be incorporated by
reference, except (as here) by express reference.
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company and the Bank, its subsidiary.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements.
ITEM 7. FINANCIAL STATEMENTS.
The following consolidated financial statements of the Company and
subsidiary set forth in the Company's 1998 Annual Report to security holders are
included in this Report:
- Independent Auditors' Report;
- Consolidated Balance Sheets - December 31, 1998 and 1997;
- Consolidated Statements of Earnings - Three years ended December
31, 1998;
- Consolidated Statements of Comprehensive Earnings - Three years
ended December 31, 1998;
- Consolidated Statements of Changes in Stockholders' Equity -
Three years ended December 31, 1998;
- Consolidated Statements of Cash Flows - Three years ended
December 31, 1998; and all
- Notes to Consolidated Financial Statements.
The Consolidated Financial Statements called for by this Item are
expressly incorporated by reference to the Consolidated Financial Statements
section of the Company's 1998 Annual Report to security holders. No portion of
the 1998 Annual Report to security holders should be deemed to be incorporated
by reference, however, except (as here) by express reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 43
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(A) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
IDENTIFICATION OF DIRECTORS.
The following tables identify the directors and executive officers of
the Company, the year first elected to the Board of the Bank, and their business
experience during the past five years. (All of the Directors serve also on the
Board of First Bank.) Directors are elected to serve one year terms and until
their successors have been elected and duly qualified. Certain of the named
Directors are also executive officers of First Bank.
DIRECTORS OF THE REGISTRANT
<TABLE>
<CAPTION>
PREVIOUS FIVE YEARS BUSINESS DIRECTOR
NAME (AGE) EXPERIENCE SINCE
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Harold Gordon Bone (57) President, Horizon Concrete; Partner/Co-Manager, BnB 1992
Enterprises (Building and rental property).
Robert L. Callis (53) Attorney at Law; Secretary to the Board of Directors. 1992
Morris D. Ferguson, M.D. (66) Retired Physician. 1992
Arthur P. Gardner (62) Retired senior vice president, S & S Industries, Inc. 1992
(Manufacturing).
M. Dale McCulloch (48) President, Jones Bros., Inc. (Construction). 1992
David Major (50) Chairman, President, and Chief Executive First Financial 1992
Corporation and First Bank & Trust; Director, Plateau
Insurance Company, 1991 - present.
Dan E. Midgett (55) President, Dan E. Midgett & Co., Inc. 1992
Monty Mires (53) Real estate investor. 1992
James S. Short (48) Executive Vice President and Senior Loan Officer First 1992
Financial Corporation and First Bank & Trust.
Harold W. Sutton (67) Owner, Harold Sutton Realty, Inc. 1992
</TABLE>
-41-
<PAGE> 44
IDENTIFICATION OF EXECUTIVE OFFICERS.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company and/or First
Bank. Unless otherwise indicated, these officers have served in the indicated
capacities during the last five years.
<TABLE>
<CAPTION>
Name Age Office and Business Experience
- ----------- --- -----------------------------------------
<S> <C> <C>
David Major 50 Chairman, Director, President and Chief Executive Officer,
First Financial Corporation, and First Bank.
James S. Short 48 Director, Executive Vice President and Senior Loan Officer,
First Financial Corporation, and First Bank.
Sally P. Kimble 45 Treasurer, Chief Financial and Accounting Officer, First
Financial Corporation; Senior Vice President of Operations,
Cashier, Chief Financial and Accounting Officer, First Bank.
Allen M. Henson 57 Senior Vice President, First Bank.
David B. Penuel 59 Senior Vice President, First Bank.
D. Edwin Davenport 48 Senior Vice President, First Bank.
</TABLE>
Officers are elected annually and serve at the pleasure of the Board of
Directors.
(B) IDENTIFICATION OF SIGNIFICANT EMPLOYEES
Significant employees are identified in the preceding section under the
caption "Identification of Executive Officers."
(C) FAMILY RELATIONSHIPS. Director Midgett is a first cousin of David
Grandstaff, who is a Vice President of First Bank. Director-Executive
Vice President Short is a first cousin of Joy Leonard, an Assistant
Vice President of First Bank.
(D) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
None.
(E) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's
directors, executive officers, and any persons holding more than ten percent of
the Shares are required to report their ownership of the shares and any changes
in that ownership to the Securities and Exchange Commission (the "SEC"). These
persons also are required by SEC regulations to furnish the Company with copies
of these reports. Specific due dates for these reports have been established and
the Company is required to report any failure to file by these dates during the
Company's 1998 fiscal year. Based solely on a review of the reports furnished to
the Company or written representations from the Company's directors and
executive officers, the Company believes that all of these filing requirements
were satisfied by the
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<PAGE> 45
Company's directors and executive officers during the 1998 fiscal year. The
Company is not aware of any person who or which owns beneficially ten percent or
more of its shares, which category of person would also be subject to Section
16(a).
ITEM 10. EXECUTIVE COMPENSATION
REMUNERATION OF DIRECTORS AND OFFICERS
There were no changes in the Company's chief executive during the last
fiscal year. The following table sets forth the compensation of the Company's
Chief Executive Officer for 1998 and the other four most highly compensated
executive officers as of December 31, 1998 (if their total annual salary and
bonus equaled or exceeded $100,000). The figures below include all compensation
paid for all services to the Company for that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------------------------- -------------------------------------------------------------
Awards Payouts
---------------------------- ------------------------------
Securities
Other Restricted Underlying
Name and Principal Annual Stock Award(s) Options/SARs LTIP All Other
Position Year Salary($) Bonus($) Compensation($)(1) ($) (#)2 Payouts($) Compensation($)(3)
- ------------------ ---- --------- -------- ------------------ -------------- ------------ ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Major, 1998 $148,974 $ -0- $19,491 N/A -0- $ -0- $11,822
President/CEO 1997 141,880 -0- 18,941 N/A 1,300 -0- 7,042
1996 126,880 3,952 18,512 N/A -0- -0- 6,589
James S. Short, 1998 $102,641 $ -0- $19,559 N/A -0- $ -0- $ 9,137
Exec. Vice President 1997 95,300 -0- 23,794 N/A 1,300 -0- 9,897
1996 85,300 2,657 13,291 N/A -0- -0- 10,170
</TABLE>
NOTES TO SUMMARY COMPENSATION TABLE
(1) This amount includes Director's fees, sales pay, and club dues.
(2) The amounts in this column reflect the number of unexercised options
granted to the named person(s) in the year(s) indicated.
(3) This amount includes the Company's contribution to the Company's
401(k) plan on behalf of the named executive(s), as well as the value of the
named executive officer(s)'s automobile usage and insurance premiums paid by the
company.
* * *
STOCK OPTION GRANTS
The Company granted no stock options to any of the executive officer(s)
named in the Summary Compensation Table. The Company does not grant stock
appreciation rights.
1998 STOCK EXERCISES
The table below provides information as to exercises of options under
the Company's Stock Option Plan by the named executive officer(s) reflected in
the Summary Compensation Table and the year-end value of unexercised options
held by such officer(s). (The Company grants no stock appreciation rights.)
-43-
<PAGE> 46
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Securities
Underlying Value of
Unexercised Unexercised in-the-
Options/SARs Money
At Fiscal Year End Options/SARs At
(#) Fiscal Year End ($)
------------------ ----------------------
Shares Acquired Value Realized on Exercisable/ Exercisable/
Name and Title on Exercise (#) Exercise ($)(2) Nonexerciseable(2) Nonexerciseable(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David Major 435 $10,005 14,681/11,688 $321,753/$244,164
President/CEO
James S. Short, EVP 500 $11,500 11,720/9,592 $256,130/$198,436
</TABLE>
NOTES TO PRECEDING TABLE
(1) Unless otherwise expressly stated, all per share data in this
Report on Form 10-KSB have been adjusted to reflect the two-for-one stock split
approved by the Shareholders on April 18, 1996.
(2) This amount represents the difference between the estimated market
price on December 31, 1998 of $33.00 per share and the respective exercise
price(s) of the options at the date(s) of grant. Such amounts may not
necessarily be realized. Actual values that may be realized, if any, upon the
exercise of such options will be based on the market price of the Common Stock
at the time of any such exercise(s) and thus are dependent upon future
performance of the Common Stock.
----------
BENEFITS
The stockholders of the Company approved the Stock Option Plan in 1993.
The Stock Option Plan provides for the granting of stock options, and authorizes
the issuance of common stock upon the exercise of such options, for up to
106,000 shares of common stock, to employees, nonemployee directors and advisors
of the Company and up to 53,000 shares of common stock to the Directors of the
Company.
Under the Stock Option Plan, stock option awards may be granted in the
form of incentive stock options or nonstatutory stock options, and are generally
exercisable for up to ten years following the date such option awards are
granted. Exercise prices of incentive stock options must be equal to or greater
than 100% of the fair market value of common stock on the grant date.
The Stock Option Committee designated by the Board administers the
Stock Option Plan. The Stock Option Plan may be terminated at any time by the
Board of Directors. Options granted under the Stock Option Plan are exercisable
as determined by the Board of Directors and generally are expected to vest
approximately 10% per year over a ten year period and expire after ten years,
although this period may be shortened by the Board of Directors. (Most of the
options granted in 1995 vest in equal increments over 8 years; the remainder
vest in equal increments over 10 years. Other options have been granted based on
shorter vesting schedules.) The Stock Option Plan provides that options must be
exercised no later than ten years after being granted (five years in the case of
incentive Stock Options granted to an employee who owns more than 10% of the
voting power of all stock).
-44-
<PAGE> 47
The Stock Option Plan provides that the Board of Directors shall
approve the exercise price of options on the date of grant, which for incentive
stock options cannot be less than the fair market value of the Common Stock on
that date (110% of the fair market value for Incentive Stock Options granted to
any employee who owns more than 10% of the voting stock). The number of shares
which may be issued under the Stock Option Plan and the exercise prices for
outstanding options are subject to adjustment in the event that the number of
outstanding shares of Common Stock are changed by reason of stock splits, stock
dividends, reclassifications or recapitalizations. In addition, upon a merger or
consolidation involving the Company, participants may be entitled to shares in
the surviving corporation upon the terms set forth in the Stock Option Plan.
Options granted under the Stock Option Plan are nontransferable, other
than by will, the laws of descent and distribution or, for nonstatutory stock
options, pursuant to certain domestic relations orders. Payment for shares of
Common Stock to be issued upon exercise of an Option may, if permitted in the
option agreement, be made in cash, by delivery of Common Stock valued at its
fair market value on the date of exercise or delivery of a promissory note as
specified in the option agreement. At the end of 1998, 59,583 shares were
exercisable under the Stock Option Plan.
Beginning January 1, 1993, the Company put into effect a 401(K)
profit-sharing plan for the benefit of its employees. Employees eligible to
participate in the plan are those at least 21 years old, who have worked one
year, and who have completed 1,000 hours of service. The provisions of the plan
provide for both employee and employer contributions. For the year ended
December 31, 1998, the employer matched fifty cents ($.50) per dollar of
employee contributions up to a maximum of 6% of the employee's compensation. The
Company's contribution for the year, including administrative fees, totaled
$77,000, as compared with $68,000 for 1997 and $ 55,000 for 1996.
All Shareholders, including Officers and Directors, are eligible to
participate in the 1996 First Financial Corporation Dividend Reinvestment Plan
in accordance with its terms.
Please refer to the Consolidated Financial Statements for additional
information concerning all of the various benefit plans of the Company and First
Bank.
DIRECTOR COMPENSATION
Each Director receives $1,000 for each regularly scheduled meeting of
the Board of Directors ($500 for specially called meetings). Each non-employee
Director receives $100 for each specially called Committee Meeting that the
Director attends. Directors were paid in 1998 a retainer of $5,000 each for the
year 1999. Directors participate also in the Stock Option Plan. See "Benefits"
elsewhere in this Report.
Beginning in 1993, the Company provided its directors with the
opportunity to participate in an unfunded, deferred compensation program (the
"Deferred Compensation Program"). The Deferred Compensation Program provides
also for death benefits. There were four participants in the Deferred
Compensation Program at year end 1998 and 1997. (Directors Morris D. Ferguson
and Harold W. Sutton reached retirement age under the Program in fiscal 1997
and, accordingly, ceased to participate in the Program.) Under the Deferred
Compensation Program, participants may defer up to 100% of their yearly total
cash compensation. The amounts deferred remain the sole property of the Company,
which uses them together with additional corporate funds, to purchase either
insurance policies on the lives of the participants or other investments. The
insurance policies, which remain the sole property of the Company, are payable
to the Company upon the death of the participant. The Company separately
contracts with the participants to pay benefits based upon the deferred amount
compounded at a floating interest rate of prime as reported in the Wall Street
Journal plus two percent. The total received will vary for each individual due
to age, amount of deferral, retirement, and whether or not the director has
chosen to receive monthly benefits or a lump sum payment. At December 31, 1998,
the deferred compensation liability totaled $142,000 (compared to $110,000 at
December 31, 1997). The cash surrender value of life insurance was $261,000 at
December 31, 1998 (compared to $211,000 at December 31, 1997).
-45-
<PAGE> 48
The face amount of the insurance policies in force at December 31, 1998
approximated $1,108,000. The Deferred Compensation Program is not qualified
under Section 401 of the Internal Revenue Code.
EMPLOYMENT AGREEMENTS
Neither the Company nor First Bank has any employment agreements at
December 31, 1998. The Company enters into simple agreements with the Directors
in connection with their service for the upcoming year and their agreement to
stand for election at the next Annual Meeting of the Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company is authorized to issue 5,000,000 shares of its Common Stock
and 5,000,000 shares of FFC Preferred Stock. (Please refer to Item 5 of this
Report for additional discussion of the Company's authorized classes of
securities.) As of March 16, 1998 there were 953,328 shares of the Company's
Common Stock issued and outstanding exclusive of shares reserved for options. No
shares of the FFC Preferred Stock were issued and outstanding or committed for
issuance at said date.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock by (A) persons owning five percent or
more of the Company's Common Stock, (B) directors of the Company, and (C) the
directors and executive officers of the Company as a group. No person known to
the Company is the beneficial owner of more than 5% of the issued and
outstanding shares of the Company's Common Stock. This information is based on
information filed with or provided to the Company as of approximately February
15, 1999 and provided by the Company as of March 16, 1999. This table includes,
in the ownership and percentage calculations, shares subject to options which
may be exercised within the next sixty days by all directors and executive
officers who are option holders in accordance with Rule 13d-3(d)(1) under the
Exchange Act. However, each director's percentage of ownership is based on such
director's pro forma ownership (including shares subject to being obtained by
the exercise of options within the next 60 days) and the actual number of shares
outstanding (953,328) at said date, plus that number of shares obtainable by the
named person on the exercise of such options.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF BENEFICIAL PERCENT OF CLASS (1)
OWNER OWNERSHIP(1)
<S> <C> <C>
(A) M. Dale McCulloch 54,725(2) 5.38
818 Moreland Hills Drive
Mt. Juliet, TN 37122
(B) Harold G. Bone 34,250(3) 3.37
Robert L. Callis, Esq. 31,796(4) 3.13
Morris D. Ferguson, M.D. 14,998 1.48
Arthur P. Gardner 7,305(5) *
M. Dale McCulloch 54,725(2) 5.38
David Major 34,034 3.35
</TABLE>
-46-
<PAGE> 49
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF BENEFICIAL PERCENT OF CLASS (1)
OWNER OWNERSHIP(1)
<S> <C> <C>
Dan E. Midgett 21,398(6) 2.10
Monty Mires 20,751 2.04
James S. Short 32,448(7) 3.19
Harold W. Sutton 12,790(8) 1.26
(C) Directors and Officers As a
Group (14 Persons) 327,420(9) 32.2
</TABLE>
- ---------------------------
* Less than 1%.
Notes to Preceding Table
(1) The percentages shown are based on 953,328 total shares outstanding
as of March 16, 1999. The shares shown in each Director's column, and in the
group total, include shares beneficially owned at March 16, 1999 by the named
individual and those obtainable by the exercise of shares by such person within
the next 60 days. The percentages include, as to each individual and group
listed, the number of shares of Common Stock deemed to be owned by such holder
pursuant to Rule 13d-3(d)(1) of the Exchange Act. Under that Rule, a beneficial
owner of a security includes any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or shares
voting power or investment power with respect to the security. Voting power
includes the power to vote or to direct the voting of the power with respect to
the security. Investment power includes the power to dispose or to direct the
disposition of the security. Unless otherwise indicated, a shareholder possesses
sole voting and investment power with respect to all of the shares shown
opposite her or his name, including shares held in her or his individual
retirement account. The following Directors and Executive Officers hold the
specified number of options exercisable within 60 days: Mr. Bone (1,502), Mr.
Callis (2,470), Dr. Ferguson (2,998), Mr. Gardner (2,734), Mr. Major (17,353),
Mr. McCulloch (2,036), Mr. Midgett (2,734), Mr. Mires (2,998), Mr. Short
(13,868), Mr. Sutton (2,998), Mr. Davenport (1,760), Mr. Henson (2,360), Mrs.
Kimble (4,200), and Mr. Penuel (3,360). Shares held in self-directed Individual
Retirement Accounts have been shown in each Director's total, which shares are
shown as the individual possessing sole voting and dispositive authority.
(2) This Director disclaims voting and investment authority as to 25,148
shares controlled by his spouse. Included in this Director's total are 1,848
shares which belong to such Director's minor children.
(3) This Director has voting and investment authority with respect to
15,742 of the shares indicated as custodian for his children.
(4) This Director disclaims voting and investment authority as to 4,971
shares controlled by his spouse. This Director also shares voting and
dispositive authority as to 400 of the shares reflected in the total that are
part of a trust.
(5) This Director shares voting and investment authority as to 1,653
shares held jointly with his spouse and disclaims voting and investment
authority as to 713 shares controlled by his spouse.
-47-
<PAGE> 50
(6) A plan of this Director's company (within the meaning of the Employee
Retirement Income Security Act of 1974), owns 4,800 of the shares indicated.
This Director disclaims voting and investment authority as to 1,400 shares
controlled by his spouse. Included in this Director's total are 1,000 shares
which belong to such Director's minor child.
(7) Included in this Director's total are 201 shares which belong to such
Director's minor step-children.
(8) This Director shares voting and investment authority as to 8,519
shares held jointly with his spouse and disclaims voting and investment
authority as to 302 shares controlled by his spouse.
(9) This total includes all options attributable to such Executive
Officers and Directors as well as shares as to which such persons might disclaim
voting or investment authority.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's and First Bank's directors and principal officers, as well
as business organizations and individuals associated with them, are customers of
the Bank and had normal banking transactions with the Bank during 1998. All loan
transactions were made in the ordinary course of business and on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated borrowers and did not
involve more than the normal risk of collectibility or present other unfavorable
features. The Company relies upon its directors and executive officers for
identification of their respective associates and affiliates (as those terms are
defined in the Exchange Act), and transacts business with certain directors and
their interests from time to time in the ordinary course of its business on
terms believed by the Company to be competitive.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
(1) The following statements and the Report of Maggart & Associates,
P.C., Independent Certified Public Accountants, which are
contained in the 1998 Annual Report to security holders, are
expressly incorporated herein by reference:
(a) Consolidated Balance Sheets as of December 31, 1998 and 1997;
(b) Consolidated Statements of Earnings for the three years ended
December 31, 1998;
(c) Consolidated Statements of Comprehensive Earnings for the
three years ended December 31, 1998;
(d) Consolidated Statements of Changes in Stockholders' Equity
for the three years ended December 31, 1998;
(e) Consolidated Statements of Cash Flows for the three years
ended December 31, 1998; and
(f) All Notes to the foregoing Consolidated Financial Statements.
-48-
<PAGE> 51
(2) Listing of Exhibits:
<TABLE>
<S> <C>
3(i) Charter, as amended.*
3(ii) Bylaws.**
10.1 First Financial Corporation 1993 Stock Option Plan.***
10.2 First Financial Corporation 1996 Dividend Reinvestment Plan.*
10.3 First American National Bank Loan Documents.**
10.4 Director Agreement (Generic Form).**
11 Statement re: computation re per share earnings (Incorporated by reference
to Note 17 of the Consolidated Financial Statements).
13.1 Portions of the Annual Report to Security Holders, as set forth in the
Exhibit Index. Omitted in paper copies.
21 Subsidiary of the Registrant for the year ended December 31, 1998.
27 Financial Data Schedule.****
</TABLE>
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1998.
(c) Exhibits - The exhibits required to be filed with this Annual Report are
attached hereto as a separate section of this report.
(d) Financial Statements Schedules - All schedules have been omitted since
the required information is either not applicable, is disclosed in Item 1
or Item 7 of this Report, or is disclosed in the Consolidated Financial
Statements or related Notes.
* Incorporated herein by reference to exhibits filed with Annual
Report on Form 10-KSB under the Securities Exchange Act of 1934
for the fiscal year ended December 31, 1996.
** Incorporated herein by reference to Exhibit 10 filed with the
Annual Report on Form 10-KSB under the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1997.
*** Incorporated herein by reference to Exhibit 10 filed with the
Annual Report on Form 10-K under the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1993.
**** This Exhibit is solely for the use of the United States
Securities and Exchange Commission. No paper copy is being filed.
This Schedule, filed only in electronic format, contains summary
financial information extracted from the financial statements of
the Company at December 31, 1998 and is qualified in its entirety
by reference to such financial statements as set forth in the
Company's Annual Report on Form 10-KSB for the period ending on
December 31, 1998.
-49-
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL CORPORATION
(REGISTRANT)
By: /s/ David Major
-----------------------
David Major
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David Major Chairman, President, Chief Executive March 18, 1999
- -------------------------- Officer and Director
David Major
/s/ Robert L. Callis Secretary and Director March 18, 1999
- --------------------------
Robert L. Callis
/s/ Sally P. Kimble Chief Financial Officer, Chief March 18, 1999
- -------------------------- Accounting Officer, and Treasurer
Sally P. Kimble
/s/ Harold Gordon Bone Director March 18, 1999
- --------------------------
Harold Gordon Bone
/s/ Morris D. Ferguson Director March 18, 1999
- --------------------------
Morris D. Ferguson
/s/ Arthur P. Gardner Director March 18, 1999
- --------------------------
Arthur P. Gardner
/s/ M. Dale McCulloch Director March 18, 1999
- --------------------------
M. Dale McCulloch
/s/ Dan E. Midgett Director March 18, 1999
- --------------------------
Dan E. Midgett
/s/ Monty Mires Director March 18, 1999
- --------------------------
Monty Mires
/s/ James S. Short Director, Executive Vice March 18, 1999
- -------------------------- President, and Senior Loan Officer
James S. Short
/s/ Harold W. Sutton Director March 18, 1999
- --------------------------
Harold W. Sutton
</TABLE>
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT LOCATION
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3(i) Charter, as amended. (1)
3(ii) Bylaws. (2)
10.1 First Financial Corporation 1993 Stock Option Plan. (3)
10.2 First Financial Corporation 1996 Dividend Reinvestment Plan. (1)
10.3 First American National Bank Loan Documents. (2)
10.4 Director Agreement (Generic Form) (2)
11 Statement re: computation of per share earnings. (4)
13.1 Annual Report to Security Holders (Only those portions incorporated (5)
by reference) into the Report on Form 10-KSB. [Omitted in Paper
Copies]
21 Subsidiaries of the Registrant for the year ended December 31, 1998.
27 Financial Statement Schedule. (6)
[Omitted in Paper
Copies]
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Incorporated herein by reference to exhibits filed with Annual
Report on Form 10-KSB under the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1996.
(2) Incorporated herein by reference to exhibits filed with the
Company's Annual Report on Form 10-KSB under the Exchange Act
for the fiscal year ended December 31, 1997.
(3) Incorporated herein by reference to Exhibit 10 filed with the
Annual Report on Form 10-K under the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1993.
(4) Incorporated by reference to Note 17 of the Consolidated
Financial Statements.
(5) Portions of the Annual Report to Security Holders are
incorporated by reference into the Form 10-K. These portions
are "Selected Financial Data," the Managements Discussion and
Analysis or Plan of Operations," and the Company's
Consolidated Financial Statements for the year ended December
31, 1998. This Exhibit is omitted in the paper copy pursuant
to Instruction G(2) of the Instructions to Form 10-KSB.
(6) This Exhibit is solely for the use of the United States
Securities and Exchange Commission. No paper copy is being
filed. This Schedule, filed only in electronic format,
contains summary financial information extracted from the
financial statements of the Company at December 31, 1998 and
is qualified in its entirety by reference to such financial
statements as set forth in the Company's Annual Report on Form
10-KSB for the period ending on December 31, 1998.
<PAGE> 54
FIRST FINANCIAL
CORPORATION
Selected Financial Data
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Information)
Year Ended December 31, 1998 1997 1996 1995 1994
- --------------------------------------------- ----------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Interest income............................. $ 18,914 16,652 14,629 12,381 8,846
Interest expense............................ 8,875 7,737 6,656 5,793 3,790
- --------------------------------------------- ----------- ------ ------ ------ -----
Net interest income................ 10,039 8,915 7,973 6,588 5,056
Provision for possible loan losses.......... (480) (350) (310) (356) (325)
- --------------------------------------------- ----------- ------ ------ ------ -----
Net interest income after provision
for possible loan losses................. 9,559 8,565 7,663 6,232 4,731
Non-interest income......................... 2,524 2,090 1,739 1,538 1,889
Non-interest expense........................ (7,794) (6,690) (5,855) (5,149) (4,588)
- --------------------------------------------- ----------- ------ ------ ------ -----
Earnings before income taxes 4,289 3,965 3,547 2,621 2,032
Income taxes................................ 1,441 1,361 1,197 880 702*
- --------------------------------------------- ----------- ------ ------ ------ -----
Net earning........................ $ 2,848 2,604 2,350 1,741 1,330
============================================= =========== ====== ====== ====== =====
Comprehensive earnings $ 2,945 2,824 2,182 2,326 949
============================================= =========== ====== ====== ====== =====
Cash dividends declared..................... $ 236 233 186 161 159
============================================= =========== ====== ====== ====== =====
Total assets end of year.................... $ 269,234 212,492 183,973 157,755 125,589
============================================= =========== ====== ====== ====== =====
Stockholders' equity end of year............ $ 18,885 15,962 13,173 11,047 8,885
============================================= =========== ====== ====== ====== =====
Per share information:
Basic earnings per common share*......... $ 3.01 2.78 2.53 1.89 1.43
============================================= =========== ====== ====== ====== =====
Diluted earnings per common share*....... $ 2.91 2.71 2.50 1.88 1.43
============================================= =========== ====== ====== ====== =====
Dividends per share*..................... $ .25 .25 0.20 0.175 0.175
============================================= =========== ====== ====== ====== =====
Book value per share end of year*........ $ 19.83 16.95 14.15 11.97 9.63
============================================= =========== ====== ====== ====== =====
</TABLE>
* On April 18, 1996, the stockholders approved a two-for-one stock split. All
data with respect to earnings per share has been adjusted to reflect this
transaction. In addition, the earnings per share calculations have been
retroactively adjusted to present basic and diluted earnings per share in
accordance with Statement of Financial Accounting Standards 128, "Earnings
Per Share", which became effective in 1997.
<PAGE> 55
FIRST FINANCIAL
CORPORATION
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 Company and its subsidiary. This
discussion should be read in conjunction with the consolidated financial
statements.
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, believe, 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 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 debt and equity 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. 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, or the need or desire to increase capital and similar economic factors.
The Company has $19,618,000 of securities scheduled to mature or reprice in the
next twelve months.
<PAGE> 56
FIRST FINANCIAL
CORPORATION
Management's Discussion and Analysis or
Plan of Operation
- --------------------------------------------------------------------------------
A secondary source of liquidity is the Company's loan portfolio. At
December 31, 1998 the Company has commercial loans of approximately $41 million
and other loans (real estate construction, real estate mortgage and consumer) of
approximately $66 million which either will become due or will be subject to
rate adjustments within the next twelve months. Continued emphasis will be
placed on structuring adjustable rate loans.
As for liabilities, certificates of deposit of $100,000 or greater of
approximately $28 million will become due during the next twelve months. The
Company's deposit base has shown continued growth, increasing by approximately
$54 million or 28.2% in 1998. During 1997 deposits increased by approximately
$26 million or 15.4%.
The Company also has the ability to meet its liquidity needs through
advances from the Federal Home Loan Bank. At December 31, 1998 and 1997, the
Company had $683,000 and $942,000, respectively, of these advances.
As of December 31, 1998 the Company's asset sensitivity was 16.1% (the
excess of earnings assets over interest sensitive liabilities divided by total
assets at the one year threshold). Negotiable order of withdrawal accounts,
money market demand accounts and savings accounts have no contractual
maturities. Management's calculation of asset sensitivity has included them in
the over one year repricing category. 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. Given present
maturities, the anticipated growth in deposit base, and the efforts of
management in its asset/liability management program, it is anticipated that
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 are anticipated to result in or that are reasonably likely to
result in the Company's liquidity changing in any material way. Liquidity was
23.3% at December 31, 1998 and 19.5% at December 31, 1997. Liquidity is defined
as net cash, short-term investments and marketable securities divided by
deposits and short-term liability.
The Company presently maintains an asset sensitive position over the 1999
year or a positive gap assuming negotiable order of withdrawal, money market
demand and savings accounts are not rate sensitive. Asset sensitivity means that
more of the Company's assets are capable of repricing over certain time frames
than liabilities. The interest rates associated with these liabilities may not
actually change over this period but are capable of changing. For example, the
90 day gap is a picture of the possible repricing over a 90 day period.
The following table shows the rate sensitivity gaps for different time
periods as of December 31, 1998:
<TABLE>
<CAPTION>
-----------------------------------------------------------
Interest rate sensitivity gaps: 1-90 91-365 One Year
December 31, 1998 Days Days and Longer Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest-earning assets................... $ 78,264 $ 60,727 $ 109,650 $ 248,641
Interest-bearing liabilities.............. 33,985 61,628 110,674 206,287
------------------------------------------ ------------ ------------ ----------- ------------
Interest-rate sensitivity gap............. $ 44,279 $ (901) $ (1,024) $ 42,354
========================================== ============ ============ =========== ============
Cumulative gap............................ $ 44,279 $ 43,378 $ 42,354
Interest-rate sensitivity gap
as a % of total assets................. 16.4% (.3%) (.4%)
========================================== ============ ============ ===========
Cumulative gap as a % of
total assets........................... 16.4% 16.1% 15.7%
========================================== ============ ============ ===========
</TABLE>
For purposes of presentation management considers negotiable order of
withdrawal accounts, money market demand accounts and savings accounts totaling
$76,159,000 at December 31, 1998 as being not necessarily interest rate
sensitive and has included them in the above table in the over one year period.
The cumulative gap would be decreased by $76,159,000 for all periods through 365
days if the accounts with no contractual maturities had been included in the
1-90 days maturity category.
<PAGE> 57
FIRST FINANCIAL
CORPORATION
Management's Discussion and Analysis or
Plan of Operation
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
A primary source of capital is internal growth through retained earnings.
The ratio of stockholders' equity to total assets was 7.0% at December 31, 1998,
7.5% at December 31, 1997 and 7.2% at December 31, 1996. Total assets increased
26.7% from $212,492,000 to $269,234,000 during the year ended December 31, 1998.
During 1997 total assets increased from $183,973,000 to $212,492,000 or 15.5%.
Management has anticipated an annual growth rate of 15% to 20% for 1999 compared
to the annual growth rates of 26.7% for 1998 and 15.5% for 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.
The FDIC, which is the subsidiary's primary Federal regulatory agency, 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 December
31, 1998 (excluding the effect of the adoption of SFAS No. 115):
<TABLE>
<CAPTION>
(In Thousands)
- ------------------------------------------------------------------------------------------- ------------
<S> <C>
Tier I capital: Stockholders' equity...................................................... $ 18,539
Tier II capital:
Allowable allowance for loan losses (limited to 1.25% of risk-weighted assets)......... 1,821
- ------------------------------------------------------------------------------------------- -------------
Total risk-based capital.......................................................... $ 20,360
=========================================================================================== =============
Risk-weighted assets....................................................................... $ 192,172
=========================================================================================== =============
Risk-based capital ratios: Tier I capital ratio........................................... 9.65%
=========================================================================================== =============
Total risk-based capital ratio............................................................. 10.59%
=========================================================================================== =============
</TABLE>
The Company is required to maintain a total risk-based capital to risk
weighted asset ratio of 8% and a Tier I capital to risk weighted asset ratio of
4%. At December 31, 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's average
total assets - excluding the effect of the adoption of SFAS No. 115) of 4%. The
Company's leverage ratio at December 31, 1998 was 7.37% as compared to 7.45% at
December 31, 1997 and 7.14% at December 31, 1996.
Management intends 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 be or become available 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 Trust ("the Bank") and, accordingly, became a one bank holding
company. The Board of Directors and management believe that the holding company
structure permits greater flexibility in the expansion of the Bank's present
business and allows the Bank to be more responsive to its customers' broadening
and changing financial needs. In particular, the holding company structure will
provide greater flexibility in raising additional capital for the 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.
<PAGE> 58
FIRST FINANCIAL
CORPORATION
Management's Discussion and Analysis or
Plan of Operation
- --------------------------------------------------------------------------------
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 three years ended December 31, 1998 the Company did not
redeem any of its common voting stock. All shares of common stock have been
retroactively adjusted for a two-for-one stock split approved on April 18, 1996.
The Company will continue to be a source of liquidity for its stock, however, at
least in the near term, it will not be an aggressive purchaser.
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 December 31, 1998, 79,400 shares of
the options had been granted at $10 per share, 2,000 shares were granted at $12
per share, 4,000 shares were granted at $13 per share, 29,792 shares were
granted at $15 per share, 528 shares were granted at $19 per share, 13,000
shares were granted at $22.50 per share and 2,000 shares were granted in 1998 at
$33 per share. The options are granted at the estimated market price of the
stock at the date the option was granted. At December 31, 1998 there were
121,703 options granted but not exercised. The options are generally exercisable
ratably over a ten year period from the date granted. At December 31, 1998
options to purchase 28,280 common shares were available for grant in future
years.
At present, the net book value of premises and equipment is 42.7% 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 and
Donelson, Davidson County, Tennessee which opened in the fourth quarter of 1998.
In addition, the Company opened 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 43.0%. Investment in
fixed assets can have a detrimental impact on profits, particularly in the short
term.
The Company's subsidiary, First Bank and Trust, formed a 100% owned
subsidiary in 1998, American Title and Escrow. American Title and Escrow will
provide full service mortgage loan closing services. Although formed in the
current year, American Title and Escrow did not begin full operations until
subsequent to year end.
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.
<PAGE> 59
FIRST FINANCIAL
CORPORATION
Management's Discussion and Analysis or
Plan of Operation
- --------------------------------------------------------------------------------
- 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.
- 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 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
digits 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 March 31, 1999. 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 $2,848,000 in 1998 as compared to $2,604,000 in 1997 and
$2,350,000 in 1996. Basic earnings per common share increased from $2.53 in 1996
to $2.78 in 1997 to $3.01 in 1998. Diluted earnings per common share increased
from $2.50 in 1996 to $2.71 in 1997 to $2.91 in 1998.
As in most financial institutions, a major element in analyzing the
statement of earnings is net interest income, i.e., the excess of interest
earned over interest paid.
The Company's total interest income, excluding tax equivalent adjustments,
increased by $2,262,000 or 13.6% in 1998, $2,023,000 or 13.8% in 1997, and
$2,248,000 or 18.2% in 1996. The gains resulting from volume in 1998 are offset
by a decrease in interest rates. The increases were primarily attributable to
higher volumes of earning assets in 1998, 1997, and 1996. The gains resulting
from volume in 1997 were offset by a decrease in interest rates. The ratio of
average earning assets to total average assets was 93.1% for the year ended
December 31, 1998, 93.1% for 1997 and 93.2% for 1996.
Interest expense increased by $1,138,000 in 1998 or 14.7%, increased
$1,081,000 or 16.2% in 1997, and increased $863,000 or 14.9% in 1996. The
increase in 1998 can be attributable largely to an increase in volume with a
minor rate impact. The increase in 1997 can be attributable largely to an
increase in volume. The increase in 1996 can be attributed generally to an
increase in volume which was partially offset by a decrease in weighted average
interest rates and a decrease in overall borrowings.
The foregoing resulted in an increase in net interest income of $1,124,000
or 12.6% during 1998, $942,000 or 11.8% in 1997, and $1,385,000 or 21.0% in
1996.
<PAGE> 60
FIRST FINANCIAL
CORPORATION
Management's Discussion and Analysis or
Plan of Operation
- --------------------------------------------------------------------------------
For the year ended December 31, 1998, the Company had interest income, on a
tax-equivalent adjusted basis, as a percent of average earning assets, of 8.9%,
compared with 9.2% for the year ended December 31, 1997 and 9.3% for 1996.
Interest expense as a percentage of interest bearing liabilities declined from
4.86% to 4.78% from 1997 to 1998. Interest expense as a percentage of average
interest bearing liabilities remained level at 4.9% in 1996 and 1997. Net
interest spread, which is defined as the excess of the percentage of tax
equivalent interest income to average earning assets over the percentage of
interest expense to average interest bearing liabilities, decreased from 5.1% in
1996 to 4.9% in 1997 and decreased to 4.7% in 1998.
Since assets are more sensitive to movements in rates this should favor the
income statement. Should loan demand not increase, and competition, intent on
increasing market share, drive interest expenses up, the net interest margin can
be expected to decline.
The provision for loan losses was $480,000 in 1998 as compared to $350,000
in 1997 and $310,000 in 1996. The provision for possible 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 possible
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 following schedule details selected information as to nonperforming
loans of the Company's subsidiary at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------ ---- ----
<S> <C> <C>
Loans past due 90 days or more and still accruing:
Commercial, financial and agricultural loans ............ $ 78 $139
Real estate - construction .............................. -- --
Real estate - mortgage loans ............................ 180 109
Consumer loans .......................................... 60 67
- ------------------------------------------------------------ ---- ----
318 315
============================================================ ==== ====
Non-accrual loans:
Commercial, financial and agricultural loans ............ 7 389
Real estate - construction loans ........................ -- --
Real estate - mortgage loans ............................ 20 89
Consumer loans .......................................... -- 3
- ------------------------------------------------------------ ---- ----
27 481
============================================================ ==== ====
Renegotiated loans:
Commercial, financial and agricultural loans ............ -- 49
Real estate - construction loans ........................ -- --
Real estate - mortgage loans ............................ 101 108
Consumer loans .......................................... -- --
- ------------------------------------------------------------ ---- ----
101 157
============================================================ ==== ====
Total nonperforming loans ......................... $446 $953
============================================================ ==== ====
</TABLE>
Nonperforming loans have decreased by $507,000 from December 31, 1997 to
December 31, 1998 and represent .65% and .25% of total loans, respectively. The
decrease resulted from a decrease in non-accrual loans of $454,000, an increase
in loans ninety-days or more past due of $3,000, and a decrease in renegotiated
loans of $56,000. The decrease in renegotiated loans from 1997 to 1998 resulted
primarily from the paydown of loans between years. The one loan comprising this
balance is included within real estate - mortgage.
<PAGE> 61
FIRST FINANCIAL
CORPORATION
Management's Discussion and Analysis or
Plan of Operation
- --------------------------------------------------------------------------------
At December 31, 1998 loans totaling $2,729,000 were included in the
Company's internal classified loan list. Of these loans $1,067,000 are consumer,
$1,617,000 are commercial loans and $45,000 are real estate loans. The
collateral values securing these loans total approximately $4,763,000 based on
management estimates ($1,625,000 related to consumer loans, $3,088,000 related
to commercial loans and $50,000 related to real estate loans). The determination
of these collateral values involves subjective judgment and are not guaranteed.
At December 31, 1997, the Company's internally classified loans totaled
$2,018,000 as compared to $1,634,000 at December 31, 1996. 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.
Non-interest income increased $434,000 or 20.8% in 1998, and increased
$351,000 or 20.2% in 1997, and increased $201,000 or 13.1% in 1996. Included in
the year ended December 31, 1998 and 1996 are net security gains of $27,000 and
$11,000, respectively. Exclusive of these transactions, non-interest income
increased $407,000 or 19.5% in 1998 and increased $362,000 or 20.9% in 1997. The
overall increase in non-interest income in 1998 includes a $30,000 increase in
service charges on deposits, a $398,000 increase in gains on sales of loans, and
a $21,000 decrease in other fees. The increases in 1997 and 1996 resulted from
increases in service charges, and gains on sales of loans. Gain on sale of loans
increased from $600,000 in 1996 to $812,000 in 1997 and increased to $1,210,000
in 1998. Commissions and service charges are monitored continually to insure
maximum return based on costs and competition.
Non-interest expense increased $1,104,000 or 16.5% in 1998, $835,000 or
14.3% in 1997, and $706,000 or 13.7% in 1996. Included in the year ended
December 31, 1997 are net security losses of $47,000 related to sales of
available-for-sale securities. Exclusive of these transactions, non-interest
expense increased $1,151,000 or 17.3% and $788,000 or 13.5% in 1998 and 1997,
respectively. The increases in 1998, 1997, and 1996 were primarily attributable
to increases in salaries and employee benefits which is due to an increased
number of employees, locations, and increases in annual compensation; increases
in occupancy expenses and additions to furniture and equipment in 1996 and the
opening of new locations in 1997 and 1998. Employee salaries and benefits
increased $656,000 or 17.2% in 1998, $526,000 or 16.0% in 1997 and $509,000 or
18.3% in 1996. The FDIC insurance premiums and state banking fees increased from
$34,000 in 1996 to $59,000 in 1997 and increased to $62,000 in 1998. The
decrease in 1996 FDIC premiums resulted from a reduction in the assessment rate
from .23% to .04% of eligible deposits (the lowest rate under the newly enacted
risk based assessment regulations) effective June 1, 1995 and effective January
1, 1996, the FDIC premiums were reduced to the annual minimum of $2,000.
Premiums for 1998 increased to $24,000 as compared to $21,000 in 1997.
The Company accounts for its securities under the provisions of Statement
of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for
Certain Investments in Debt and Equity Securities". Under the provisions of the
Statement, securities are to be classified in three categories and accounted for
as follows:
- Debt securities that the enterprise has the positive intent and
ability to hold to maturity are classified as held-to-maturity
securities and reported at amortized cost.
- Debt and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and
losses included in earnings.
- Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and
losses excluded from earnings and reported in a separate component of
shareholders' equity.
The classification of the entire securities portfolio at December 31, 1998
and 1997 as available-for-sale was made to provide for more flexibility in
asset/liability management and capital management.
<PAGE> 62
FIRST FINANCIAL
CORPORATION
Management's Discussion and Analysis or
Plan of Operation
- --------------------------------------------------------------------------------
The net increase in capital at December 31, 1996 resulting from applying
these accounting provisions totaled $29,000 which represents the unrealized
appreciation in securities available-for-sale of $47,000 less applicable tax
deductions of $18,000. At December 31, 1997, the net increase in capital totaled
$249,000 which represents the unrealized appreciation in securities
available-for-sale of $401,000 less applicable taxes of $152,000. The net
increase in capital at December 31, 1998 totaled $346,000 which represents the
unrealized appreciation in securities available-for-sale of $556,000 less
applicable taxes of $211,000.
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.
Branch operations contributed 66.6% of the Bank's total deposits by year
end as compared to 67.9% in 1997, as well as 49.1% of the loans as compared to
45.3% in 1997. The origination and sale of loans net of direct expenses
contributed $439,000 in pretax income in 1998 and $177,000 in 1997. Management
will continue to investigate potential opportunities to offer new products as
well as opportunities to increase market share through geographical expansion.
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 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.
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 on
the spread between the cost of funds and interest yields generated primarily
through loans and investments.
<PAGE> 63
MAGGART & ASSOCIATES, P.C.
Certified Public Accountants
FIRST UNION TOWER
SUITE 2150
150 FOURTH AVENUE, NORTH
NASHVILLE, TENNESSEE 37219-2417
Telephone (615) 252-6100
Facsimile (615) 252-6105
- --------------------------------------------------------------------------------
Independent Auditor's Report
THE BOARD OF DIRECTORS
FIRST FINANCIAL CORPORATION:
We have audited the accompanying consolidated balance sheets of First
Financial Corporation and Subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, comprehensive earnings, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
First Financial Corporation and Subsidiary as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Maggart & Associates, P.C.
Nashville, Tennessee
January 11, 1999
<PAGE> 64
FIRST FINANCIAL
CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997
- ----------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
ASSETS
Loans, net of allowance for possible loan losses of $1,821,000 and $1,704,000,
respectively ......................................................................... $ 172,550 $ 145,065
Securities available-for-sale, at market (amortized cost of $55,790,000 and
$39,613,000, respectively) ........................................................... 56,347 40,015
Loans held for sale ..................................................................... 5,438 2,606
Federal funds sold ...................................................................... 12,485 9,300
- ----------------------------------------------------------------------------------------- --------- ---------
Total earning assets .................................................. 246,820 196,986
- ----------------------------------------------------------------------------------------- --------- ---------
Cash and due from banks ................................................................. 11,284 6,100
Premises and equipment, net ............................................................. 8,068 6,752
Other real estate ....................................................................... -- 2
Accrued interest receivable ............................................................. 2,024 1,873
Deferred income taxes ................................................................... 233 258
Other assets ............................................................................ 805 521
--------- ---------
Total assets .......................................................... $ 269,234 $ 212,492
- ----------------------------------------------------------------------------------------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits ...................................................................... $ 42,488 $ 25,550
Negotiable order of withdrawal accounts .............................................. 28,677 23,954
Money market account deposits ........................................................ 33,241 23,118
Savings accounts ..................................................................... 15,959 9,833
Certificates of deposit .............................................................. 127,346 110,805
- ----------------------------------------------------------------------------------------- --------- ---------
Total deposits ........................................................ 247,711 193,260
- ----------------------------------------------------------------------------------------- --------- ---------
Accrued interest payable ................................................................ 1,119 1,096
Other liabilities ....................................................................... 455 246
Short-term borrowings ................................................................... -- 600
Advances from Federal Home Loan Bank .................................................... 683 942
Long-term debt .......................................................................... 381 386
- ----------------------------------------------------------------------------------------- --------- ---------
Total liabilities ..................................................... 250,349 196,530
- ----------------------------------------------------------------------------------------- --------- ---------
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 1,090,486 and 1,079,572 shares, respectively ................................ 2,726 2,699
Additional paid-in capital ........................................................... 4,208 4,021
Retained earnings .................................................................... 12,862 10,250
Net unrealized gains on available-for-sale securities, net of applicable
income taxes of $211,000 and $152,000, respectively ................................ 346 249
Less cost of 137,926 shares of treasury stock ........................................ (1,257) (1,257)
- ----------------------------------------------------------------------------------------- --------- ---------
Total stockholders' equity ............................................ 18,885 15,962
- ----------------------------------------------------------------------------------------- --------- ---------
COMMITMENTS AND CONTINGENCIES
- -----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ............................ $ 269,234 $ 212,492
- ----------------------------------------------------------------------------------------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 65
FIRST FINANCIAL
CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Amounts) 1998 1997 1996
- ----------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans .................................... $ 15,429 $ 13,732 $ 11,893
Interest and dividends on securities:
Taxable securities ......................................... 2,074 1,848 2,036
Exempt from Federal income taxes ........................... 662 550 436
Interest on loans held for sale ............................... 208 142 119
Interest on Federal funds sold ................................ 541 380 137
Interest on interest-bearing deposits in financial institutions -- -- 8
- ----------------------------------------------------------------- -------- -------- --------
Total interest income .................................. 18,914 16,652 14,629
- ----------------------------------------------------------------- -------- -------- --------
Interest expense:
Interest on negotiable order of withdrawal accounts ........... 648 536 401
Interest on money market demand accounts ...................... 1,098 883 795
Interest on savings deposits .................................. 264 228 224
Interest on individual retirement savings accounts ............ 76 79 80
Interest on certificates of deposit ........................... 6,695 5,857 4,965
Interest on short-term borrowings ............................. 8 57 76
Interest on advances from Federal Home Loan Bank .............. 59 70 88
Interest on long-term debt .................................... 27 27 27
- ----------------------------------------------------------------- -------- -------- --------
Total interest expense ................................ 8,875 7,737 6,656
- ----------------------------------------------------------------- -------- -------- --------
Net interest income before provision for loan losses ............ 10,039 8,915 7,973
Provision for possible loan losses .............................. (480) (350) (310)
- ----------------------------------------------------------------- -------- -------- --------
Net interest income after provision for possible loan losses ... 9,559 8,565 7,663
Non-interest income ............................................. 2,524 2,090 1,739
Non-interest expense ............................................ (7,794) (6,690) (5,855)
- ----------------------------------------------------------------- -------- -------- --------
Earnings before income taxes ........................... 4,289 3,965 3,547
Income taxes .................................................... 1,441 1,361 1,197
- ----------------------------------------------------------------- -------- -------- --------
Net earnings ........................................... $ 2,848 $ 2,604 $ 2,350
- ----------------------------------------------------------------- -------- -------- --------
Basic earnings per common share ................................. $ 3.01 $ 2.78 $ 2.53
- ----------------------------------------------------------------- -------- -------- --------
Diluted earnings per common share ............................... $ 2.91 $ 2.71 $ 2.50
- ----------------------------------------------------------------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 66
FIRST FINANCIAL
CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- ---------------------------------------------------------------------- ------- ------ -------
<S> <C> <C> <C>
Net earnings: $ 2,848 $2,604 $ 2,350
------- ------ -------
Other comprehensive earnings (losses) net of tax:
Unrealized gains on available-for-sale securities arising during
period, net of income tax expense of $70,000, $117,000 and
benefit of $99,000, respectively 114 191 (161)
Reclassification adjustment for losses (gains) included in net
earnings, net of income tax expense of $10,000, benefit of $18,000
and expense of $4,000, respectively (17) 29 (7)
------- ------ -------
Other comprehensive earnings (loss) 97 220 (168)
- ----------------------------------------------------------------------- ------- ------ -------
Comprehensive earnings $ 2,945 $2,824 $ 2,182
======================================================================= ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 67
FIRST FINANCIAL
CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Net
Unrealized
Gains
(Losses)
On
Additional Available-
Common Paid-In Retained For-Sale Treasury
(In Thousands, Except Shares) Stock Capital Earnings Securities Stock Total
- ----------------------------------------- ------ ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 ............... $2,651 $3,741 $ 5,715 $ 197 $(1,257) $ 11,047
Net earnings for year ................... -- -- 2,350 -- -- 2,350
Cash dividends declared ($.20 per share) -- -- (186) -- -- (186)
Issuance of 962 shares of common stock .. 3 8 -- -- -- 11
Issuance of 7,224 shares of common stock
pursuant to dividend reinvestment plan 18 101 -- -- -- 119
Net change in unrealized appreciation
during the year, net of tax benefit of
$103,000 -- -- -- (168) -- (168)
- ----------------------------------------- ------ ------ -------- ----- ------- --------
Balance December 31, 1996 ............... 2,672 3,850 7,879 29 (1,257) 13,173
Net earnings for year ................... -- -- 2,604 -- -- 2,604
Cash dividends declared ($.25 per share) -- -- (233) -- -- (233)
Issuance of 2,808 shares of common stock 7 26 -- -- -- 33
Issuance of 7,850 shares of common stock
pursuant to dividend reinvestment plan 20 145 -- -- -- 165
Net change in unrealized appreciation
during the year, net of taxes of
$134,000.............................. -- -- -- 220 -- 220
- ----------------------------------------- ------ ------ -------- ----- ------- --------
Balance December 31, 1997 ............... 2,699 4,021 10,250 249 (1,257) 15,962
Net earnings for year ................... -- -- 2,848 -- -- 2,848
Cash dividends declared ($.25 per share) -- -- (236) -- -- (236)
Issuance of 4,519 shares of common stock 11 37 -- -- -- 48
Issuance of 6,395 shares of common stock
pursuant to dividend reinvestment plan 16 150 -- -- -- 166
Net change in unrealized appreciation
during the year, net of taxes of
$59,000 .............................. -- -- -- 97 -- 97
- ----------------------------------------- ------ ------ -------- ----- ------- --------
BALANCE DECEMBER 31, 1998 $2,726 $4,208 $ 12,862 $ 346 $(1,257) $ 18,885
========================================= ====== ====== ======== ===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 68
FIRST FINANCIAL
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- ---------------------------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received .................................................. $ 18,792 $ 16,336 $ 14,463
Fees received ...................................................... 1,287 1,278 1,128
Interest paid ...................................................... (8,852) (7,523) (6,578)
Cash paid to suppliers and employees ............................... (7,204) (6,302) (5,544)
Proceeds from loan sales ........................................... 60,962 38,614 34,603
Originations of loans held for sale ................................ (62,584) (38,685) (33,914)
Income taxes paid .................................................. (1,564) (1,483) (1,330)
- ---------------------------------------------------------------------- -------- -------- --------
Net cash provided by operating activities ................... 837 2,235 2,828
- ---------------------------------------------------------------------- -------- -------- --------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities ............... 1,519 7,236 10,711
Proceeds from maturities of available-for-sale securities .......... 15,360 4,276 4,321
Purchase of available-for-sale securities .......................... (33,057) (8,666) (14,112)
Loans made to customers, net of repayments ......................... (27,965) (22,644) (23,276)
Purchase of premise and equipment .................................. (1,890) (1,698) (1,300)
Proceeds from maturities of interest-bearing deposits in
financial institutions .......................................... -- -- 203
Proceeds from sale of other real estate ............................ 59 -- 239
Increase in other real estate ...................................... (59) -- (5)
Purchase of other assets ........................................... -- -- (34)
- ---------------------------------------------------------------------- -------- -------- --------
Net cash used in investing activities ....................... (46,033) (21,496) (23,253)
- ---------------------------------------------------------------------- -------- -------- --------
Cash flows from financing activities:
Net increase in non-interest-bearing demand,
savings and NOW deposit accounts ................................ 16,541 14,194 6,414
Net increase in time deposits ...................................... 37,910 11,621 18,109
Repayments of short-term borrowings, net ........................... (600) (200) (196)
Repayment of advances from Federal Home Loan Bank .................. (259) (51) (338)
Repayment of long-term debt ........................................ (5) (5) (4)
Issuance of common stock ........................................... 214 198 130
Dividends paid ..................................................... (236) (233) (186)
- ---------------------------------------------------------------------- -------- -------- --------
Net cash provided by financing activities ................... 53,565 25,524 23,929
- ---------------------------------------------------------------------- -------- -------- --------
Net increase in cash and cash equivalents ............................ 8,369 6,263 3,504
Cash and cash equivalents at beginning of year ....................... 15,400 9,137 5,633
- ---------------------------------------------------------------------- -------- -------- --------
Cash and cash equivalents at end of year ............................. $ 23,769 $ 15,400 $ 9,137
====================================================================== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 69
FIRST FINANCIAL
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE YEARS ENDED DECEMBER 31, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1996
- ---------------------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings ................................................... $ 2,848 $ 2,604 $ 2,350
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization .............................. 603 324 324
Amortization of organization expense ....................... -- -- 9
Loss (gain) on securities .................................. (27) 47 (11)
Provision for possible loan losses ......................... 480 350 310
Provision for losses on other real estate .................. 2 -- --
Provision for deferred taxes ............................... (34) 18 (123)
Decrease (increase) in loans held for sale ................. (2,832) (883) 89
Increase in accrued interest receivable .................... (151) (237) (175)
Increase in other assets ................................... (284) (159) (52)
Decrease in taxes payable .................................. -- (90) (11)
Increase in interest payable ............................... 23 214 78
Increase in accrued expenses ............................... 209 47 40
- --------------------------------------------------------------------- ------- ------- -------
Total adjustments ...................................... (2,011) (369) 478
- --------------------------------------------------------------------- ------- ------- -------
Net cash provided by operating activities .............. $ 837 $ 2,235 $ 2,828
===================================================================== ======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Change in realized gain (loss) in value of securities
available-for-sale, net of taxes of $59,000 in 1998 and
$134,000 in 1997 and tax benefit of $103,000 in 1996 ........... $ 97 $ 220 $ (168)
===================================================================== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 70
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Financial Corporation
and Subsidiary are in accordance with generally accepted accounting
principles and conform to general practices within the banking
industry. The following is a brief summary of the significant policies.
- --------------------------------------------------------------------------------
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, First Bank &
Trust ("the Bank"). First Bank and Trust's consolidated
financial statements include the activity of its wholly-owned
subsidiary, American Title and Escrow which was formed during
1998. All significant intercompany accounts and transactions
have been eliminated in consolidation.
- --------------------------------------------------------------------------------
(B) NATURE OF OPERATIONS
First Bank & Trust operates under state bank charter and
provides full banking services. As a state bank, the
subsidiary bank is subject to regulation of the Tennessee
Department of Financial Institutions and the Federal Deposit
Insurance Corporation. The area served by First Bank & Trust
is Wilson County, Tennessee and surrounding counties in Middle
Tennessee. Services are provided at the main office and six
branch offices plus a loan production office.
- --------------------------------------------------------------------------------
(C) ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
- --------------------------------------------------------------------------------
(D) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are stated at the principal amount outstanding. Unearned
discounts, deferred loan fees net of loan acquisition costs,
and the allowance for possible loan losses are shown as
reductions of loans. Loan origination and commitment fees and
certain loan-related costs are being deferred and the net
amount amortized as an adjustment of the related loan's yield
over the contractual life of the loan. Unearned discount
represents the unamortized amount of finance charges,
principally related to certain installment loans. Interest
income on most loans is accrued based on the principal amount
outstanding.
The Company follows the provisions of 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
residential mortgage, consumer and credit card loans.
8
<PAGE> 71
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
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 recognizes an
impairment by creating a valuation allowance with a
corresponding charge to the provision for possible loan losses
or by adjusting an existing valuation allowance for the
impaired loan with a corresponding charge or credit to the
provision for possible loan losses.
The Company's consumer loans 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 along 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 and uncollected 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 possible 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 cash received is
applied as a reduction of principal. A nonaccrual loan may be
restored to an 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.
Loans not on nonaccrual status are classified as impaired in
certain cases when 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.
Generally, the Company also classifies as impaired any loans
the terms of which have been modified in a troubled debt
restructuring. Interest is generally accrued on such loans
that continue to meet the modified terms of their loan
agreements.
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.
- --------------------------------------------------------------------------------
(E) ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses represents a charge to
earnings necessary, after loan charge-offs and recoveries, to
maintain the allowance for possible loan losses at an
appropriate level which is adequate to absorb estimated losses
inherent in the loan portfolio. Such estimated losses arise
primarily from the loan portfolio but may also be derived from
other sources, including commitments to extend credit and
standby letters of credit. The level of the allowance is
determined on a quarterly basis using procedures which
include: (1) categorizing commercial and commercial real
estate loans into risk categories to estimate loss
probabilities based primarily on the historical loss
experience of those risk categories and current economic
conditions; (2) analyzing significant commercial and
commercial real estate credits and calculating specific
reserves as necessary; (3) assessing various homogeneous
consumer loan categories to estimate loss probabilities based
primarily on historical loss experience; (4) reviewing
unfunded commitments; and (5) considering various other
factors, such as changes in credit concentrations, loan mix,
and economic conditions which may not be specifically
quantified in the loan analysis process.
9
<PAGE> 72
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The allowance for possible loan losses consists of an
allocated portion and an unallocated, or general portion. The
allocated portion is maintained to cover estimated losses
applicable to specific segments of the loan portfolio. The
unallocated portion is maintained to absorb losses which
probably exist as of the evaluation date but are not
identified by the more objective processes used for the
allocated portion of the allowance due to risk of errors or
imprecision. While the total allowance consists of an
allocated portion and an unallocated portion, these terms are
primarily used to describe a process. Both portions of the
allowance are available to provide for inherent loss in the
entire portfolio.
The allowance for possible loan losses is increased by
provisions for possible loan losses charged to expense and is
reduced by loans charged off net of recoveries on loans
previously charged off. The provision is based on management's
determination of the amount of the allowance necessary to
provide for estimated loan losses based on its evaluation of
the loan portfolio. Determining the appropriate level of the
allowance and the amount of the provision involves
uncertainties and matters of judgment and therefore cannot be
determined with precision.
- --------------------------------------------------------------------------------
(F) DEBT AND EQUITY SECURITIES
The Company accounts for its debt and equity securities
under the provisions of Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), "Accounting for Certain
Investments in Debt and Equity Securities". Under the
provisions of the Statement, securities are classified in
three categories and accounted for as follows:
- SECURITIES HELD-TO-MATURITY
Debt securities that the enterprise has the positive
intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized
cost. Amortization of premiums and accretion of
discounts are recognized by the interest method.
- TRADING SECURITIES
Debt and equity securities that are bought and held
principally for the purpose of selling them in the near
term are classified as trading securities and reported
at fair value, with unrealized gains and losses included
in earnings.
- SECURITIES AVAILABLE-FOR-SALE
Debt and equity securities not classified as either
held-to-maturity securities or trading securities are
classified as available-for-sale securities and reported
at estimated fair value, with unrealized gains and
losses excluded from earnings and reported in a separate
component of stockholders' equity. Amortization of
premiums and discounts are recognized by the interest
method.
No securities have been classified as trading securities or
securities held-to-maturity.
Realized gains or losses from the sale of securities are
recognized based upon the specific identification method.
- --------------------------------------------------------------------------------
(G) LOANS HELD FOR SALE
Mortgage loans held for sale are reported at the lower of cost
or market value, determined by outstanding commitments from
investors at the balance sheet date. These loans are valued on
an aggregate basis.
10
<PAGE> 73
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(H) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost. Depreciation is
computed primarily by the straight-line method over the
estimated useful lives of the related assets. Gain or loss on
items retired and otherwise disposed of is credited or charged
to operations and cost and related accumulated depreciation
are removed from the asset and accumulated depreciation
accounts.
Expenditures for major renewals and improvements of premises
and equipment are capitalized and those for maintenance and
repairs are charged to earnings as incurred.
- --------------------------------------------------------------------------------
(I) LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" requires that long-lived
assets and certain identifiable intangibles to be held and
used or disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Management
has determined that no impairment loss need be recognized for
its long-lived assets.
- --------------------------------------------------------------------------------
(J) OTHER REAL ESTATE
Real estate acquired in settlement of loans is initially
recorded at the lower of cost (loan value of real estate
acquired in settlement of loans plus incidental expense) or
estimated fair value, less estimated cost to sell. Based on
periodic evaluations by management, the carrying values are
reduced by a direct charge to earnings when they exceed net
realizable value. Costs relating to the development and
improvement of the property are capitalized, while holding
costs of the property are charged to expense in the period
incurred.
- --------------------------------------------------------------------------------
(K) CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
Federal funds sold. Generally, Federal funds sold are
purchased and sold for one-day periods. The subsidiary bank
maintains deposits with other financial institutions in excess
of the Federal insurance amounts. Management makes deposits
only with financial institutions it considers to be
financially sound.
- --------------------------------------------------------------------------------
(L) INCOME TAXES
Provisions for income taxes are based on taxes payable or
refundable for the current year (after exclusion of
non-taxable income such as interest on state and municipal
securities) and deferred taxes on temporary differences
between the amount of taxable and pretax financial income and
between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax
assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to
the period in which the deferred tax asset and liabilities are
expected to be realized or settled as prescribed in SFAS No.
109, "Accounting for Income Taxes." As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
The Company and its subsidiary file a consolidated Federal
income tax return. Each member of the consolidated group
provides for income taxes on a separate-return basis.
- --------------------------------------------------------------------------------
11
<PAGE> 74
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(M) ADVERTISING COSTS
Advertising costs are expensed when incurred.
- --------------------------------------------------------------------------------
(N) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996
figures to conform to the presentation for 1998.
- --------------------------------------------------------------------------------
(O) OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the subsidiary bank has
entered into off-balance-sheet financial instruments
consisting of commitments to extend credit, commitments under
credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or
related fees are incurred or received.
- --------------------------------------------------------------------------------
(2) LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans and allowance for possible loan losses at December 31, 1998 and
1997 are summarized as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
------------------------------------------------------------ --------- ---------
<S> <C> <C>
Commercial, financial and agricultural ..................... $ 61,737 $ 46,024
Real estate - construction ................................. 14,271 12,656
Real estate - mortgage ..................................... 82,936 74,032
Consumer ................................................... 16,443 15,158
------------------------------------------------------------ --------- ---------
175,387 147,870
Less unearned interest ..................................... (1,016) (1,101)
Less allowance for possible loan losses .................... (1,821) (1,704)
------------------------------------------------------------ --------- ---------
$ 172,550 $ 145,065
============================================================ ========= =========
</TABLE>
The principal maturities on loans at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------------------------------
Commercial
Financial
and Real Estate Real Estate -
Maturity Agricultural Construction Mortgage Consumer Total
---------------------------- ------------ ------------ ------------- -------- --------
<S> <C> <C> <C> <C> <C>
3 months or less ........... $19,166 $ 9,731 $19,188 $ 7,661 $ 55,746
3 to 12 months ............. 21,531 4,424 19,050 749 45,754
1 to 5 years ............... 20,279 116 37,382 7,643 65,420
Over 5 Years ............... 761 -- 7,316 390 8,467
---------------------------- ------- ------- ------- -------- --------
$61,737 $14,271 $82,936 $ 16,443 $175,387
============================ ======= ======= ======= ======== ========
</TABLE>
At December 31, 1998, variable rate and fixed rate loans total
$44,174,000 and $131,213,000, respectively. Variable and fixed rate
loans at December 31, 1997 were $32,490,000 and $115,380,000,
respectively.
12
<PAGE> 75
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
In the normal course of business, the Company's subsidiary has made
loans at prevailing interest rates and terms to directors and executive
officers of the Company and to their affiliates. At December 31, 1998
and 1997, the aggregate amount of these loans was $1,547,000 and
$1,897,000, respectively. As of December 31, 1998, none of these loans
were restructured, nor were any related party loans charged-off during
the most recent three years.
An analysis of the activity with respect to such loans to related
parties is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
--------------------------------------------------- ------- -------
<S> <C> <C>
Balance, January 1 ................................ $ 1,897 $ 2,753
New Loans during the year ......................... 2,552 1,451
Repayments during the year ........................ (2,902) (2,307)
--------------------------------------------------- ------- -------
Balance, December 31 .............................. $ 1,547 $ 1,897
=================================================== ======= =======
</TABLE>
At December 31, 1998 and 1997, loans which had been placed on
non-accrual status totaled $27,000 and $481,000, respectively. Had
interest been accrued on these loans, net earnings would have been
increased by approximately $3,000 in 1998 and $35,000 in 1997. No loans
were on non-accrual status during 1996.
Transactions in the allowance for possible loan losses for the years
ended December 31, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year ........... $ 1,704 $ 1,541 $ 1,246
Provision charged to operating expense 480 350 310
Loans charged off .................... (388) (209) (98)
Recoveries on losses ................. 25 22 83
-------------------------------------- ------- ------- -------
Balance, end of year ................. $ 1,821 $ 1,704 $ 1,541
====================================== ======= ======= =======
</TABLE>
The Company's principal customers are basically in the Middle Tennessee
area with a concentration in Wilson County, Tennessee. Credit is
extended to businesses and individuals and is evidenced by promissory
notes. The terms and conditions of the loans including collateral
varies depending upon the purpose of the credit and the borrower's
financial condition.
Impaired loans and related loan loss reserve amounts at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
----------------------------------------------- --------- --------
<S> <C> <C>
Recorded investment............................ $ 1,540 $ 715
Loan loss reserve.............................. 308 143
========= ========
</TABLE>
The average recorded investment in impaired loans for the years ended
December 31, 1998 and 1997 was $1,128,000 and $650,000, respectively.
The related total amount of interest income recognized on the accrual
basis for the period that such loans were impaired was $163,000,
$60,000 and $31,000 for 1998, 1997 and 1996, respectively. The amount
of interest income recognized on the cash basis for the period such
loans were impaired was none for 1998 and 1996 and $8,000 in 1997.
13
<PAGE> 76
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
In 1998, 1997 and 1996, the Company originated for sale in the
secondary market loans of $62,584,000, $38,685,000, and $33,914,000,
respectively. Under normal terms, the Company may be required, in the
event of default, to repurchase loans sold for a period of ninety days.
At December 31, 1998, the subsidiary Bank had repurchased no loans
which had been originated by the subsidiary Bank and sold in the
secondary market. The subsidiary Bank's allowance for loan losses is
available to absorb losses related to the loan portfolio, including
off-balance sheet credit exposures. Management expects no significant
loss of income to result from these recourse provisions. The gain on
sale of these loans totaled $1,210,000 in 1998, $812,000 in 1997, and
$600,000 in 1996.
- --------------------------------------------------------------------------------
(3) DEBT AND EQUITY SECURITIES
Debt and equity securities have been classified in the balance sheet
according to management's intent. The amortized cost and the estimated
market values of securities at December 31 were as follows:
<TABLE>
<CAPTION>
Securities Available-For-Sale
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
----------------------------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government obligations ............. $ 3,002 $ 14 $ -- $ 3,016
Securities of U.S. government
agencies and corporations ............. 7,327 44 33 7,338
Obligations of state and political
subdivisions .......................... 15,064 503 1 15,566
Mortgage-backed securities .............. 27,177 134 112 27,199
Collateralized mortgage obligations ..... 2,548 14 6 2,556
Federal Home Loan Bank stock ............ 672 -- -- 672
----------------------------------------- ------- ---- ------- -------
$55,790 $709 $ 152 $56,347
========================================= ======= ==== ======= =======
</TABLE>
The effective yield at December 31, 1998 on the collateralized mortgage
obligations was 5.7%.
<TABLE>
<CAPTION>
Securities Available-For-Sale
1997
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
----------------------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government obligations ....... $ 6,748 $ 23 $ 3 $ 6,768
Securities of U.S. government
agencies and corporations ....... 7,540 64 16 7,588
Obligations of state and political
subdivisions .................... 12,874 263 20 13,117
Mortgage-backed securities ........ 10,258 149 36 10,371
Collateralized mortgage obligations 1,611 -- 22 1,589
Federal Home Loan Bank stock ...... 582 -- -- 582
----------------------------------- ------- ---- ------- -------
$39,613 $499 $ 97 $40,015
=================================== ======= ==== ======= =======
</TABLE>
The effective yield at December 31, 1997 on the collateralized mortgage
obligations was 5.5%.
14
<PAGE> 77
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The Company periodically applies the stress test to its securities
portfolio. To satisfy the stress test a security's estimated market
value should not decline more than certain percentages given certain
assumed interest rate increases. The Company had no securities that
failed to meet the stress test as of December 31, 1998.
Included in the securities are $13,699,000 (amortized cost of
$13,313,000) and $11,381,000 (amortized cost of $10,861,000) at
December 31, 1998 and 1997, respectively, in obligations of political
subdivisions located within the State of Tennessee. Management
purchases only obligations of such political subdivisions it considers
to be financially sound.
The amortized cost and estimated market value of debt and equity
securities at December 31, 1998, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
(In Thousands)
------------------------
Estimated
Amortized Market
Securities Available-for-Sale Cost Value
---------------------------------------------------------------- --------- ---------
<S> <C> <C>
Due in one year or less ........................................ $ 4,155 $ 4,176
Due after one year through five years .......................... 7,896 8,001
Due after five years through ten years ......................... 8,087 8,184
Due after ten years ............................................ 7,803 8,115
------- -------
27,941 28,476
Mortgage-backed securities ..................................... 27,177 27,199
Federal Home Loan Bank stock ................................... 672 672
---------------------------------------------------------------- ------- -------
$55,790 $56,347
================================================================ ======= =======
</TABLE>
Included within the securities portfolio is stock of the Federal Home
Loan Bank amounting to $672,000 and $582,000 at December 31, 1998 and
1997, respectively. The stock can be sold back only at par and only to
the Federal Home Loan Bank or to another member institution.
Proceeds and realized gains and losses on sales of debt and equity
securities for the year ended December 31 are summarized as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31 (In Thousands) 1998 1997 1996
------------------------------------------------------ ------ ------- --------
<S> <C> <C> <C>
Gross proceeds from sales ............................ $1,519 $ 7,236 $ 10,711
====================================================== ====== ======= ========
Gross realized gains ................................. $ 27 $ 17 $ 57
Gross realized losses ................................ -- (64) (46)
------------------------------------------------------ ------ ------- --------
Net realized gains (losses)........................... $ 27 $ (47) $ 11
====================================================== ====== ======= ========
</TABLE>
Investment securities carried in the balance sheet at $17,294,000
(amortized cost of $16,969,000) as of December 31, 1998 were pledged to
secure public and trust deposits and for other purposes as required or
permitted by law. At December 31, 1997, the carrying value of pledged
securities was $19,376,000 with an amortized cost of $19,199,000.
- --------------------------------------------------------------------------------
15
<PAGE> 78
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(4) PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
---------------------------------- -------- -------
<S> <C> <C>
Land ............................. $ 1,472 $ 1,472
Land improvements ................ 142 120
Buildings ........................ 5,236 4,171
Leasehold improvements ........... 396 73
Construction in progress ......... 28 111
Furniture and equipment .......... 3,384 2,864
Autos ............................ 38 38
-------- -------
10,696 8,849
Less accumulated depreciation (2,628) (2,097)
---------------------------------- -------- -------
$ 8,068 $ 6,752
================================== ======== =======
</TABLE>
- --------------------------------------------------------------------------------
(5) CERTIFICATES OF DEPOSIT
Principal maturities of certificates of deposit and individual
retirement accounts at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------
Single Deposits Single Deposits
Maturity Under $100,000 Over $100,000 Total
--------------------------------------------- --------------- --------------- --------
<S> <C> <C> <C>
3 months or less ............................ $16,904 $ 15,466 $ 32,370
3 to 6 months ............................... 18,141 4,554 22,695
6 to 12 months .............................. 30,586 8,264 38,850
1 to 5 years ................................ 25,415 8,016 33,431
--------------------------------------------- ------- -------- --------
$91,046 $ 36,300 $127,346
============================================= ======= ======== ========
</TABLE>
The subsidiary bank is required to maintain cash balances or balances
with the Federal Reserve Bank or other correspondent banks based on
certain percentages of deposit types. The average required amounts for
the years ended December 31, 1998 and 1997 were approximately
$2,333,000 and $1,015,000, respectively.
At December 31, 1998 certificates of deposit and other deposits in
denominations of $100,000 or more amounted to $75,300,000 as compared
to $49,600,000 at December 31, 1997.
- --------------------------------------------------------------------------------
(6) SHORT-TERM BORROWINGS
The Company has entered into a loan agreement with a commercial bank.
The agreement extends a line of credit to the Company in an amount not
to exceed $5,000,000. The line is available to purchase and retire
stock of the Company as it becomes available or to meet other cash
needs of the Company. The line matures on or before June 30, 1999, and
at the maturity may be converted to a term note for a period not to
exceed ten (10) years. The stock of the subsidiary Bank collateralizes
the line. The Company has the option, prior to the beginning of the
following month, to select either the prime rate of the lender or a
fixed three month rate of 2.25% over the London Interbank Offered Rate
("Libor"). The subsidiary bank must maintain a total capital to total
tangible asset ratio equal to or greater than those of a "well
capitalized" bank as defined by the regulatory authorities. There was
no outstanding balance at December 31, 1998, and the outstanding
balance at December 31, 1997 was $600,000.
- --------------------------------------------------------------------------------
16
<PAGE> 79
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(7) ADVANCES FROM FEDERAL HOME LOAN BANK
The advances from the Federal Home Loan Bank at December 31, 1998 and
1997 consist of the following:
<TABLE>
<CAPTION>
(In Thousands)
---------------------
Interest Rate 1998 1997
------- --------
<S> <C> <C>
7.05%........................................ $ 450 $ 616
7.65%........................................ 233 326
--------------------------------------------- ------- --------
$ 683 $ 942
============================================= ======= ========
</TABLE>
Advances from the Federal Home Loan Bank at December 31, 1998 are to
mature as follows:
<TABLE>
<CAPTION>
(In Thousands)
Year Ending December 31, Amount
-----------------
<S> <C>
1999........................................ $ 464
2000........................................ 15
2001........................................ 17
2002........................................ 18
2003........................................ 20
Later years................................. 149
------------------------------------------------------- ----------
$ 683
======================================================= ==========
</TABLE>
These advances are collateralized by approximately $1,025,000 of the
subsidiary bank's mortgage loan portfolio.
- --------------------------------------------------------------------------------
(8) LONG-TERM DEBT
On October 26, 1994, the Company executed a 7.0% promissory note in the
amount of $400,000. The promissory note is payable in monthly principal
and interest installments of $2,661, with the remaining balance due
October 26, 2004. This note is secured by a first mortgage Deed of
Trust on land purchased for a branch site. The balance of the note at
December 31, 1998, and 1997 was $381,000 and $386,000, respectively.
Principal maturities at December 31, 1998, for the years 1999 through
2003 are $5,000, $6,000, $6,000, $7,000 and $7,000, respectively, with
the remaining balance of $350,000 due in later years.
- --------------------------------------------------------------------------------
17
<PAGE> 80
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(9) NON-INTEREST INCOME AND NON-INTEREST EXPENSE
The significant components of non-interest income and non-interest
expense for the years ended December 31 are presented below:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
----------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Non-interest income:
Service charges on deposits .......... $1,031 $1,001 $ 836
Other fees ........................... 256 277 292
Gains on sales of loans .............. 1,210 812 600
Security gains ....................... 27 -- 11
----------------------------------------- ------ ------ ------
$2,524 $2,090 $1,739
========================================= ====== ====== ======
Non-interest expense:
Employee salaries and benefits ....... $4,468 $3,812 $3,286
Occupancy expenses ................... 535 376 384
Furniture and equipment expenses ..... 619 523 409
FDIC insurance and State banking fees 62 59 34
Cost of operation of other real estate 3 1 3
Data processing fees ................. 246 223 202
Security losses ...................... -- 47 --
Other operating expenses ............. 1,861 1,649 1,537
----------------------------------------- ------ ------ ------
$7,794 $6,690 $5,855
========================================= ====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
(10) INCOME TAXES
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31 (In Thousands) 1998 1997
-------------------------------------- ----- -----
<S> <C> <C>
Deferred tax asset:
Federal ........................... $ 596 $ 491
State ............................. 112 92
-------------------------------------- ----- -----
708 583
-------------------------------------- ----- -----
Deferred tax liability:
Federal ........................... (400) (274)
State ............................. (75) (51)
-------------------------------------- ----- -----
(475) (325)
-------------------------------------- ----- -----
Net deferred tax asset.. $ 233 $ 258
====================================== ===== =====
</TABLE>
18
<PAGE> 81
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The tax effects of each type of significant item that gave rise to deferred
taxes at December 31 are:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
------------------------------------------------------------------------ ----- -----
<S> <C> <C>
Financial statement allowance for loan losses in excess of tax allowance $ 581 $ 541
Financial statement deduction for deferred compensation
in excess of deduction for tax purposes .............................. 127 42
Dividend income not recognized for tax purposes ........................ (55) (38)
Excess of depreciation deducted for tax purposes
over amounts deducted in the financial statements .................... (209) (135)
Excess of market value over estimated book value
related to securities available-for-sale ............................. (211) (152)
------------------------------------------------------------------------ ----- -----
$ 233 $ 258
======================================================================== ===== =====
</TABLE>
The components of income tax expense (benefit) are summarized as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
---------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Current:
Federal .................................... $ 1,211 $ 1,119 $ 1,102
State ...................................... 264 224 218
---------------------------------------------- ------- ------- -------
1,475 1,343 1,320
---------------------------------------------- ------- ------- -------
Deferred:
Federal .................................... (29) 15 (104)
State ...................................... (5) 3 (19)
---------------------------------------------- ------- ------- -------
(34) 18 (123)
---------------------------------------------- ------- ------- -------
$ 1,441 $ 1,361 $ 1,197
============================================== ======= ======= =======
</TABLE>
A reconciliation of actual income taxes in the consolidated statements
of earnings with the "expected" tax expense (computed by applying the
statutory Federal income tax of 34% to earnings before income taxes) is
as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
------------------------------------ ------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense .... $ 1,458 $ 1,348 $ 1,206
State income taxes, net of Federal
income tax benefit .............. 172 161 127
Tax exempt interest, net of interest
expense exclusion ............... (203) (169) (140)
Other .............................. 14 21 4
------------------------------------ ------- ------- -------
$ 1,441 $ 1,361 $ 1,197
==================================== ======= ======= =======
</TABLE>
Total income tax expense includes a tax expense of $10,000 in 1998,
a tax benefit of $18,000 in 1997 and tax expense of $4,000 in 1996
related to security transactions.
- --------------------------------------------------------------------------------
19
<PAGE> 82
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(11) COMMITMENTS AND CONTINGENT LIABILITIES
The Company is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel,
believes that the liabilities, if any, arising from such litigation and
claims will not be material to the consolidated financial position.
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 appointed a Year 2000
Committee to coordinate the identification, evaluation and
implementation of changes to computer systems and applications
necessary to achieve Year 2000 compliance.
Areas being addressed by the Committee include:
- The Bank's primary data processing system. This includes
assessing FiServ, Inc., the Bank's data processor. This is
of the highest priority for day to day operations,
accounting and success of the Bank.
- Government systems, such as the Federal Reserve Bank for
check clearing, wire transfers, and the free flow and
exchange of funds between institutions are absolutely
critical.
- The internal PC hardware and software systems within the
Bank, along with telecommunications systems.
- The primary securities portfolio accounting and safekeeping
system for the Bank.
- Credit administration - the committee is reviewing the risk
associated with Year 2000 status of the Bank's loan
customers and depositors.
- Status of the Bank's primary vendors' Year 2000 compliance.
Management does not currently believe that the costs of assessment,
remediation, or replacement of the Bank's systems, or the potential
failure of third parties' systems will have a material adverse effect
on the Bank's business, financial condition, results of operations, or
liquidity.
The Company's subsidiary leases property for two of its branch
locations, a loan production office, and mortgage origination and
service operations. The first branch lease is adjusted annually based
on the consumer price index. The lease expires December 31, 1999;
however, it contains an option to renew the lease for four five-year
consecutive increments. The second branch lease is renewed on a monthly
basis. The lease payments are adjusted annually. Based upon the rates
in effect at December 31, 1998, future minimum lease commitments are as
follows:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------------------------------------- ---------
<S> <C>
1999................................................ $ 91
2000................................................ 46
2001................................................ 37
2002................................................ 36
----------------------------------------------------------- ---------
$ 210
=========================================================== =========
</TABLE>
Rentals which are included in occupancy expense amount to $112,000,
$55,000, and $68,000 in 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
20
<PAGE> 83
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(12) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist primarily of
commitments to extend credit. These instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in
the consolidated balance sheets. The contract or notional amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
<TABLE>
<CAPTION>
Contract or
Notional Amount
(In Thousands) 1998 1997
-------------------------------------------------- ------- -------
<S> <C> <C>
Financial instruments whose contract
amount represent credit risk:
Commercial loan commitments ................. $21,189 $13,552
Unfunded lines-of-credit .................... 15,891 13,547
Letters of credit ........................... 4,942 4,562
-------------------------------------------------- ------- -------
Total ....................................... $42,022 $31,661
================================================== ======= =======
</TABLE>
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to be drawn upon, the total commitment amounts
generally represent future cash requirements. The Company evaluates
each customer's credit-worthiness on a case-by-case basis. The amount
of collateral, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral normally consists of real property.
- --------------------------------------------------------------------------------
(13) CONCENTRATION OF CREDIT RISK
Practically all of the Company's loans, commitments, and commercial and
standby letters of credit have been granted to customers in the
Company's market area. Practically all such customers are depositors of
the subsidiary bank. Investment in state and municipal securities also
include governmental entities within the Company's market area. The
concentrations of credit by type of loan are set forth in note 2 to the
consolidated financial statements.
In addition, Federal funds sold were deposited with three banks.
- --------------------------------------------------------------------------------
(14) PROFIT-SHARING PLAN
The Company has in effect a 401(K) profit sharing plan for the benefit
of its employees. Employees eligible to participate in the plan are
those at least 21 years old and who have completed 1,000 hours of
service. The provisions of the plan provide for both employee and
employer contributions. For the years ended December 31, 1998, 1997,
and 1996 the employer matched $.50 cents per dollar of employee
contributions up to a maximum of 6% of the employee compensation. The
Company's contribution for the year, including administrative fees,
totaled $77,000 for 1998, $68,000 for 1997, and $55,000 for 1996.
- --------------------------------------------------------------------------------
21
<PAGE> 84
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(15) REGULATORY MATTERS AND RESTRICTIONS ON DIVIDENDS
The Company and its wholly-owned bank subsidiary are subject to
regulatory capital requirements administered by the Federal Deposit
Insurance Corporation, the Federal Reserve and the Tennessee Department
of Financial Institutions. Failure to meet minimum capital requirements
can initiate certain mandatory -- and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Company's financial statements. The Company's capital
classification is also subject to qualitative judgments about
components, risk weightings and other factors. Those qualitative
judgments could also affect the Bank's capital status and the amount of
dividends the subsidiary may distribute. At December 31, 1998,
management believes that the Company and its subsidiary meet all such
capital requirements to which they are subject.
The Company and its subsidiary bank are required to maintain minimum
amounts of capital to total "risk weighted" assets, as defined by the
banking regulators. At December 31, 1998, the Company and its bank
subsidiaries are required to have minimum Tier I and total risk-based
capital (total capital) ratios of 4% and 8%, respectively. The
Company's actual ratios at that date were 9.7% and 10.6%, respectively.
The subsidiary bank's Tier I ratio was 9.58% and the total capital
ratio was 10.53% at December 31, 1998. The leverage ratios at December
31, 1998 were 7.4% for the Company and 7.3% for the subsidiary bank and
the minimum requirements were 4%.
- --------------------------------------------------------------------------------
(16) DIVIDEND REINVESTMENT PLAN
Under the terms of the Company's dividend reinvestment plan holders of
common stock may elect to automatically reinvest cash dividends in
additional shares of common stock. The Company may elect to sell
original issue shares or to purchase shares in the open market for the
account of participants. Original issue shares of 6,395 in 1998, 7,850
in 1997 and 7,224 in 1996 were sold to participants under the terms of
the plan.
- --------------------------------------------------------------------------------
(17) EARNINGS PER SHARE (EPS)
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 begins with the basic earnings per share plus the effect of
common shares contingently issuable from stock options. In addition, on
April 18, 1996, the stockholders approved a two-for-one stock split
effective for stockholders of record on May 1, 1996. The weighted
average number of shares used in the computation of earnings per share
have been retroactively adjusted to reflect the provisions of SFAS 128
and the stock split. Dividends per share have also been retroactively
adjusted to reflect the stock split.
22
<PAGE> 85
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
The following is a summary of the components comprising basic and
diluted earnings per share (EPS):
<TABLE>
<CAPTION>
(In Thousands, except share amounts) 1998 1997 1996
------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Basic EPS Computation:
Numerator - Income available to common stockholders $ 2,848 $ 2,604 $ 2,350
Denominator - Weighted average number of common
shares outstanding .............................. 945,801 935,904 927,064
-------- -------- --------
Basic earnings per common share ................... $ 3.01 $ 2.78 $ 2.53
======== ======== ========
Diluted EPS Computation:
Numerator ......................................... $ 2,848 $ 2,604 $ 2,350
-------- -------- --------
Denominator:
Weighted average number of common shares
outstanding ................................... 945,801 935,904 927,064
Dilutive effect of stock options ................ 34,234 23,539 13,844
-------- -------- --------
980,035 959,443 940,908
-------- -------- --------
Diluted net earnings per common shares ............ $ 2.91 $ 2.71 $ 2.50
======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(18) STOCK OPTION PLAN
In April, 1993, the stockholders of the Company approved the 1993 Stock
Option Plan (the "Stock Option Plan"). The Stock Option Plan provides
for the granting of stock options, and authorizes the issuance of
common stock upon the exercise of such options, for up to 106,000
shares of common stock, to employees, nonemployee directors and
advisors of the Company and up to 53,000 shares of common stock to the
directors of the Company.
Under the Stock Option Plan, stock option awards may be granted in the
form of incentive stock options or nonstatutory stock options, and are
generally exercisable for up to ten years following the date such
option awards are granted. Exercise prices of incentive stock options
must be equal to or greater than 100% of the fair market value of the
common stock on the grant date.
SFAS 123, "Accounting for Stock Based Compensation" (SFAS 123) sets
forth the methods for recognition of cost of plans similar to those of
the Company. As is permitted, management has elected to continue
accounting for the plan under APB Opinion 25 and related
Interpretations in accounting for its plan. Accordingly, no
compensation cost has been recognized for the stock option plan.
However, under SFAS 123, the Company is required to make proforma
disclosures as if cost had been recognized in accordance with the
pronouncement. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of SFAS No. 123, the
Company's net earnings and basic earnings per common share and diluted
earnings per common share would have been reduced to the proforma
amounts indicated below:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
---------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net earnings
As Reported................................. $ 2,848 $ 2,604 $ 2,350
Proforma.................................... $ 2,826 $ 2,582 $ 2,337
Basic earnings per common share
As Reported................................. $ 3.01 $ 2.78 $ 2.53
Proforma.................................... $ 2.99 $ 2.76 $ 2.52
Diluted earnings per common shares
As Reported................................. $ 2.91 $ 2.71 $ 2.50
Proforma.................................... $ 2.88 $ 2.69 $ 2.48
-------- -------- --------
</TABLE>
23
<PAGE> 86
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Accordingly, due to the initial phase-in period, the effects of
applying this statement for proforma disclosures are not likely to be
representative of the effects on reported net income for future years.
A summary of the stock option activity for 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 124,222 $ 12.63 114,030 $ 11.48 114,464 $ 11.44
Granted......................... 2,000 33.00 13,000 22.50 528 19.00
Exercised....................... (4,519) 10.68 (2,808) 11.53 (962) 10.88
Forfeited....................... - - - - - -
------- --------- ------- --------- ------- ----------
Outstanding at end of year...... 121,703 $ 13.04 124,222 $ 12.63 114,030 $ 11.48
================================ ======= ========= ======= ========= ======= ==========
Options exercisable at year end. 59,583 49,524 38,993
================================ ======= ======= =======
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- -----------------------------------
Weighted
Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Outstanding Exercise Contractual Exercisable Exercise
Prices at 12/31/98 Price Life at 12/31/98 Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10 to $13 77,161 $ 10.16 4.1 years 42,001 $ 10.07
$15 to $22.50 42,542 $ 17.32 4.3 years 17,382 $ 16.31
$33 2,000 $ 33.00 9 years 200 $ 33.00
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(19) DEFERRED COMPENSATION PLAN
The Company provides its directors with the opportunity to participate
in an unfunded, deferred compensation program, which also provides for
death and retirement benefits. There were four participants in the
program at December 31, 1998 and 1997. Under the program, participants
may defer up to 100% of their yearly total cash compensation. The
amounts deferred remain the sole property of the Company, which uses
them together with additional corporate funds, to purchase either
insurance policies on the lives of the participants or other
investments. The insurance policies, which remain the sole property of
the Company, are payable to the Company upon the death of the
participant. The Company separately contracts with the participants to
pay benefits based upon the deferred amount compounded at a floating
interest rate of prime as reported in the Wall Street plus two percent.
At December 31, 1998, the deferred compensation liability totaled
$142,000 as compared to $110,000 at December 31, 1997. The Cash
surrender value of life insurance was $261,000 and $211,000 at December
31, 1998 and 1997, respectively. The face amount of the insurance
policies in force at December 31, 1998 approximated $1,108,000. The
program is not qualified under Section 401 of the Internal Revenue
Service.
- --------------------------------------------------------------------------------
24
<PAGE> 87
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(20) FIRST FINANCIAL CORPORATION - PARENT COMPANY FINANCIAL INFORMATION
FIRST FINANCIAL CORPORATION (Parent Company Only)
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
-------------------------------------------------------------------------- -------- --------
<S> <C> <C>
ASSETS
Cash ..................................................................... $ 87* $ 44*
Investment in commercial bank subsidiary ................................. 18,760* 16,482*
Due from commercial bank subsidiary ...................................... 4* 6*
Other assets ............................................................. 34 34
-------------------------------------------------------------------------- -------- --------
Total assets ........................................................ $ 18,885 $ 16,566
========================================================================== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings .................................................... $ -- $ 600
Accrued interest payable ................................................. -- 4
-------------------------------------------------------------------------- -------- --------
-- 604
-------------------------------------------------------------------------- -------- --------
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 1,090,486 and 1,079,572 shares, respectively ................. 2,726 2,699
Additional paid-in capital ............................................. 4,208 4,021
Retained earnings ...................................................... 12,862 10,250
Net unrealized gain on available-for-sale securities,
net of applicable income taxes of $211,000 and $152,000, respectively 346 249
Less cost of 137,926 shares of treasury stock .......................... (1,257) (1,257)
-------------------------------------------------------------------------- -------- --------
Total stockholders' equity ........................................ 18,885 15,962
-------------------------------------------------------------------------- -------- --------
Total liabilities and stockholders' equity ........................ $ 18,885 $ 16,566
========================================================================== ======== ========
</TABLE>
25
<PAGE> 88
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(20) FIRST FINANCIAL CORPORATION - PARENT COMPANY FINANCIAL INFORMATION
FIRST FINANCIAL CORPORATION (Parent Company Only)
STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
------------------------------------------------------------ ------- ------ -------
<S> <C> <C> <C>
Income:
Dividends from commercial bank subsidiary ................ $ 725* $ 300* $ 285*
------------------------------------------------------------ ------- ------ -------
Expenses:
Interest expense ......................................... 8 57 69
Amortization of organizational costs ..................... -- -- 9
Other expenses ........................................... 85 49 39
------------------------------------------------------------ ------- ------ -------
93 106 117
------------------------------------------------------------ ------- ------ -------
Earnings before Federal income tax benefits and equity
in undistributed earnings of commercial bank
subsidiary .......................................... 632 194 168
Federal income tax benefits ................................ 35 40 44
Equity in undistributed earnings of commercial bank
subsidiary................................................ 2,181* 2,370* 2,138*
------------------------------------------------------------ ------- ------ -------
Net earnings .......................................... 2,848 2,604 2,350
Other comprehensive earnings (losses) net of tax:
Unrealized gains on available-for-sale securities arising
during period, net of income tax expense of $70,000,
$117,000 and benefit of $99,000, respectively ......... 114 191 (161)
Reclassification adjustment for losses (gains) included
in net earnings, net of income tax expense of $10,000,
benefit of $18,000 and expense of $4,000, respectively (17) 29 (7)
------- ------ -------
Other comprehensive earnings (loss) ............... 97 220 (168)
------- ------ -------
Comprehensive earnings ............................ $ 2,945 $2,824 $ 2,182
============================================================ ======= ====== =======
</TABLE>
*Eliminated in consolidation.
---------------------------------------------------------------------
26
<PAGE> 89
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(20) FIRST FINANCIAL CORPORATION - PARENT COMPANY FINANCIAL INFORMATION
FIRST FINANCIAL CORPORATION (Parent Company Only)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Net
Unrealized
Gains (Losses)
Additional On Available-
Common Paid-In Retained For-Sale Treasury
(In Thousands, Except Shares) Stock Capital Earnings Securities Stock Total
- -------------------------------------------- ------ ---------- -------- -------------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 .................. 2,651 3,741 5,715 197 (1,257) 11,047
Net earnings for year ...................... -- -- 2,350 -- -- 2,350
Cash dividends declared
($.20 per share) ........................ -- -- (186) -- -- (186)
Issuance of 962 shares of common stock ..... 3 8 -- -- -- 11
Issuance of 7,224 shares of common stock
pursuant to dividend reinvestment
plan .................................... 18 101 -- -- -- 119
Net change in unrealized appreciation
during the year, net of tax benefit of
$103,000 ................................ -- -- -- (168) -- (168)
- -------------------------------------------- ------ ------ -------- ----- ------- --------
Balance December 31, 1996 .................. 2,672 3,850 7,879 29 (1,257) 13,173
Net earnings for year ...................... -- -- 2,604 -- -- 2,604
Cash dividends declared
($.25 per share) ........................ -- -- (233) -- -- (233)
Issuance of 2,808 shares of common stock ... 7 26 -- -- -- 33
Issuance of 7,850 shares of common
stock pursuant to dividend reinvestment
plan..................................... 20 145 -- -- -- 165
Net change in unrealized appreciation
during the year, net of taxes of
$134,000 ................................ -- -- -- 220 -- 220
- -------------------------------------------- ------ ------ -------- ----- ------- --------
Balance December 31, 1997 .................. 2,699 4,021 10,250 249 (1,257) 15,962
Net earnings for year ...................... -- -- 2,848 -- -- 2,848
Cash dividends declared
($.25 per share) ........................ -- -- (236) -- -- (236)
Issuance of 4,519 shares of common
stock ................................... 11 37 -- -- -- 48
Issuance of 6,395 shares of common
stock pursuant to dividend reinvestment
plan .................................... 16 150 -- -- -- 166
Net change in unrealized appreciation during
the year, net of taxes of $59,000 ....... -- -- -- 97 -- 97
- -------------------------------------------- ------ ------ -------- ----- ------- --------
BALANCE DECEMBER 31, 1998 .................. $2,726 $4,208 $ 12,862 $ 346 $(1,257) $ 18,885
============================================ ====== ====== ======== ===== ======= ========
</TABLE>
27
<PAGE> 90
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(20) FIRST FINANCIAL CORPORATION - PARENT COMPANY FINANCIAL INFORMATION
FIRST FINANCIAL CORPORATION (Parent Company Only)
STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 1998
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
----------------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash paid to suppliers .................................. $ (85) $ (49) $ (39)
Interest paid ........................................... (12) (57) (72)
Income taxes received ................................... 37 43 71
----------------------------------------------------------- ------- ------- -------
Net cash used in operating activities .......... (60) (63) (40)
----------------------------------------------------------- ------- ------- -------
Cash flows from investing activities:
Dividend received from commercial bank subsidiary ....... 725 300 285
Purchase of other assets ................................ -- -- (34)
----------------------------------------------------------- ------- ------- -------
Net cash provided by investing activities ...... 725 300 251
----------------------------------------------------------- ------- ------- -------
Cash flows from financing activities:
Repayments of short-term borrowings ..................... (600) (200) (196)
Dividends paid .......................................... (236) (233) (186)
Issuance of common stock ................................ 214 198 130
----------------------------------------------------------- ------- ------- -------
Net cash used in financing activities .......... (622) (235) (252)
----------------------------------------------------------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents ...... 43 2 (41)
Cash and cash equivalents at beginning of year ............ 44 42 83
----------------------------------------------------------- ------- ------- -------
Cash and cash equivalents at end of year .................. $ 87 $ 44 $ 42
=========================================================== ======= ======= =======
Reconciliation of net earnings to net cash used in
operating activities:
Net earnings ......................................... $ 2,848 $ 2,604 $ 2,350
Adjustments to reconcile net earnings to net cash
used in operating activities:
Equity in earnings of commercial bank subsidiary . (2,906) (2,670) (2,423)
Amortization of organization costs ............... -- -- 9
Decrease in due from bank subsidiary ............. 2 4 27
Decrease in accrued interest payable ............. (4) (1) (3)
----------------------------------------------------------- ------- ------- -------
Total adjustments .............................. (2,908) (2,667) (2,390)
----------------------------------------------------------- ------- ------- -------
Net cash used in operating activities .......... $ (60) $ (63) $ (40)
=========================================================== ======= ======= =======
</TABLE>
28
<PAGE> 91
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
(21) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" (SFAS No. 107), requires
that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set
forth below for the Company's financial instruments.
CASH AND SHORT-TERM INVESTMENTS
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
SECURITIES
The carrying amounts for short-term securities approximate
fair value because they mature in 90 days or less and do not
present unanticipated credit concerns. The fair value of
longer-term securities and mortgage-backed securities,
except certain state and municipal securities, is estimated
based on bid prices published in financial newspapers or bid
quotations received from securities dealers. The fair value
of certain state and municipal securities is not readily
available through market sources other than dealer
quotations, so fair value estimates are based on quoted
market prices of similar instruments, adjusted for
differences between the quoted instruments and the
instruments being valued.
SFAS No. 107 specifies that fair values should be calculated
based on the value of one unit without regard to any premium
or discount that may result from concentrations of ownership
of a financial instrument, possible tax ramifications, or
estimated transaction costs. Accordingly, these
considerations have not been incorporated into the fair
value estimates.
LOANS
Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by
type such as commercial, mortgage, credit card and other
consumer. Each loan category is further segmented into fixed
and adjustable rate interest terms.
The fair value of the various categories of loans is
estimated by discounting the future cash flows using the
current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining average estimated maturities.
The estimated maturity for mortgages is modified from the
contractual terms to give consideration to management's
experience with prepayments. Management has made estimates
of fair value discount rates that it believes to be
reasonable. However, because there is no market for many of
these financial instruments, management has no basis to
determine whether the fair value presented below would be
indicative of the value negotiated in an actual sale.
The value of the loan portfolio is also discounted in
consideration of the credit quality of the loan portfolio as
would be the case between willing buyers and sellers.
Particular emphasis has been given to loans on the
subsidiary bank's internal watch list. Valuation of these
loans is based upon borrower performance, collateral values
(including external appraisals), etc.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and
certain money market deposits is the amount payable on
demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using
the rates currently offered for deposits of similar
remaining maturities. Under the provision of SFAS No. 107
the fair value estimates for deposits do not include the
benefit that results from the low cost funding provided by
the deposit liabilities compared to the cost of borrowing
funds in the market.
29
<PAGE> 92
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
For these short-term instruments, the carrying amount is a
reasonable estimate of fair value.
ADVANCES FROM FEDERAL HOME LOAN BANK
The fair value of these advances is estimated by discounting
the future payments using the current rates at which similar
advances could be obtained for the same remaining average
maturities.
LONG-TERM DEBT
The fair value of this instrument is estimated by
discounting future payments using the Company's current
incremental borrowing rate for a similar instrument.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND
FINANCIAL GUARANTEES WRITTEN
Loan commitments are made to customers generally for a
period not to exceed one year and at the prevailing interest
rates in effect at the time the loan is closed. Commitments
to extend credit related to construction loans are made for
a period not to exceed six months with interest rates at the
current market rate at the date of closing. In addition,
standby letters of credit are issued for periods up to three
years with rates to be determined at the date the letter of
credit is funded. Fees are only charged for the construction
loans and the standby letters of credit and the amounts
unearned at December 31, 1998, are insignificant.
Accordingly, these commitments have no carrying value and
management estimates the commitments to have no significant
fair value.
The carrying value and estimated fair values of the
Company's financial instruments at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
------------------------- ----------------------
1998 1997
------------------------- ----------------------
CARRYING FAIR Carrying Fair
(In Thousands) AMOUNT VALUE Amount Value
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $ 23,769 $ 23,769 $ 15,400 $ 15,400
Securities 56,347 56,347 40,015 40,015
Loans 174,371 146,769
Less: allowance for loan losses (1,821) (1,704)
-------- --------
Loans, net of allowance 172,550 172,279 145,065 144,520
-------- --------
Loans held for sale 5,438 5,438 2,606 2,606
Financial liabilities:
Deposits 247,711 248,809 193,260 194,282
Short-term borrowings -- -- 600 600
Advances from Federal Home Loan Bank 683 707 942 997
Long-term debt 381 368 386 364
Unrecognized financial instruments:
Commitments to extend credit -- -- -- --
Standby letters of credit -- -- -- --
</TABLE>
30
<PAGE> 93
FIRST FINANCIAL
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
LIMITATIONS
Fair value estimates are made at a specific point in time,
based on relevant market information and information about
the financial instruments. These estimates do not reflect
any premium or discount that could result from offering for
sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists
for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial
instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters
of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on estimating
on-and-off-balance sheet financial instruments without
attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are
not considered financial instruments. For example, a
subsidiary Bank has a mortgage department that contributes
net fee income annually. The mortgage department is not
considered a financial instrument, and its value has not
been incorporated into the fair value estimates. Other
significant assets and liabilities that are not considered
financial assets or liabilities include deferred tax assets
and liabilities and property, plant and equipment. In
addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered
in the estimates.
31
<PAGE> 1
EXHIBIT 13.1
PORTIONS OF
ANNUAL REPORT TO SECURITY HOLDERS
INCORPORATED INTO THE
1998 ANNUAL REPORT ON FORM 10-KSB
(OMITTED IN PAPER COPIES)
<PAGE> 2
EXHIBIT 13.1
ANNUAL REPORT TO SECURITY HOLDERS
Portions of the Annual Report to security holders for the fiscal year
ended December 31, 1998, are incorporated herein by reference as set forth in
this Annual Report on Form 10-KSB. These portions are "Selected Financial Data,"
"Management's Discussion and Analysis or Plan of Operation," and the Company's
Consolidated Financial Statements for the year ended December 31, 1998. This
Exhibit is omitted in the paper copy.
<PAGE> 1
EXHIBIT 21
SUBSIDIARY OF THE REGISTRANT
The following table sets forth the subsidiary of First Financial
Corporation at December 31, 1998. Such subsidiary is wholly owned by the Company
and it is included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
Jurisdiction Percentage of
of Voting Securities
Subsidiary Incorporation Owned
- ---------- ------------- -----------------
<S> <C> <C>
First Bank & Trust Tennessee 100%
First Southern Finance* Tennessee 100%
American Title & Escrow Tennessee 100%
Company*
</TABLE>
*Wholly owned by First Bank & Trust.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,284
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,485
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 56,347
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 174,371
<ALLOWANCE> 1,821
<TOTAL-ASSETS> 269,234
<DEPOSITS> 247,711
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,574
<LONG-TERM> 1,064
0
0
<COMMON> 2,726
<OTHER-SE> 16,159
<TOTAL-LIABILITIES-AND-EQUITY> 269,234
<INTEREST-LOAN> 15,637
<INTEREST-INVEST> 2,736
<INTEREST-OTHER> 541
<INTEREST-TOTAL> 18,914
<INTEREST-DEPOSIT> 8,781
<INTEREST-EXPENSE> 8,875
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.78
<LOANS-NON> 27
<LOANS-PAST> 318
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,729
<ALLOWANCE-OPEN> 1,704
<CHARGE-OFFS> 388
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 1,821
<ALLOWANCE-DOMESTIC> 1,821
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
