<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
Commission File Number 33-426222
---------
FIRST FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer As Specified in its Charter)
Tennessee 62-1474162
- ------------------------------- ----------------------------
(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
1691 N. Mt. Juliet Road, Mount Juliet, TN 37122
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(615) 754-2265
- --------------------------------------------------------------------------------
(Issuer's Telephone Number)
Not Applicable
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Common stock outstanding: 992,139 shares at May 12, 1999
-------
Transitional Small Business Disclosure Format (check one)
YES NO X
---- ----
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited consolidated financial statements of the small business issuer and
its wholly-owned subsidiary are as follows:
Consolidated Balance Sheets - March 31, 1999 and December 31, 1998.
Consolidated Statements of Earnings - For the three months ended March 31,
1999 and 1998.
Consolidated Statements of Comprehensive Earnings - For the three months
ended March 31, 1999 and 1998.
Consolidated Statements of Cash Flows - For the three months ended March
31, 1999 and 1998.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
2
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FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- --------
(In Thousands)
Assets
<S> <C> <C>
Loans $ 188,091 174,371
Less: Allowance for loan losses 1,959 1,821
--------- --------
Net loans 186,132 172,550
Securities available-for-sale, at market (amortized cost
$53,433,000 and $55,790,000, respectively) 53,758 56,347
Loans held for sale 968 5,438
Federal funds sold 1,925 12,485
--------- --------
Total earning assets 242,783 246,820
Cash and due from banks 7,078 11,284
Bank premises and equipment, net of accumulated depreciation 7,969 8,068
Accrued interest receivable 2,121 2,024
Deferred income taxes 321 233
Other assets 693 805
--------- --------
$ 260,965 269,234
========= ========
Liabilities and Stockholders' Equity
Deposits $ 238,927 247,711
Accrued interest payable 1,207 1,119
Other liabilities 412 455
Advances from Federal Home Loan Bank 552 683
Long-term debt 380 381
--------- --------
Total liabilities 241,478 250,349
--------- --------
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 1,091,254 and 1,090,486 shares at March 31, 1999
and December 31, 1998 2,728 2,726
Additional paid-in capital 4,215 4,208
Retained earnings 13,599 12,862
Net unrealized gains on available-for-sale securities, net of
applicable income taxes of $123,000 and $211,000, respectively 202 346
Less cost of 137,926 shares of treasury stock (1,257) (1,257)
--------- --------
Total stockholders' equity 19,487 18,885
--------- --------
$ 260,965 269,234
========= ========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
------ -----
(Dollars In Thousands
Except Per Share Amount)
<S> <C> <C>
Interest income:
Interest and fees on loans $4,151 3,663
Interest and dividends on securities:
Taxable securities 564 439
Exempt from Federal income taxes 180 161
Interest on loans held for sale 53 47
Interest on federal funds sold 62 111
------ -----
Total interest income 5,010 4,421
------ -----
Interest expense:
Interest on deposits 2,245 2,058
Interest on short term borrowings -- 8
Interest on advances from Federal Home Loan Bank 12 17
Interest on long-term debt 7 7
------ -----
Total interest expense 2,264 2,090
------ -----
Net interest income 2,746 2,331
Provision for loan losses 160 120
------ -----
Net interest income after provision for loan losses 2,586 2,211
------ -----
Non-interest income:
Service charges on deposit accounts 279 257
Other fees and commissions 112 67
Other income 262 231
Securities gains 1 --
------ -----
654 555
------ -----
Non-interest expense:
Salaries and employee benefits 1,197 1,126
Occupancy expenses, net 130 104
Furniture and equipment expense 197 151
Other operating expenses 536 482
Data processing fees 74 59
------ -----
2,134 1,922
------ -----
Earnings before income taxes 1,106 844
Income taxes 369 274
------ -----
Net earnings $ 737 570
====== =====
Basic earnings per common share $ .77 .60
====== =====
Diluted earnings per common share $ .75 .59
====== =====
Dividends per share $ -- --
====== =====
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----- ----
(In Thousands)
<S> <C> <C>
Net earnings $ 737 570
----- ---
Other comprehensive earnings, net of tax:
Unrealized gains (losses) on available-for-sale securities
arising during period, net of tax benefit of $87,000 and income tax
expense of $9,000, respectively (143) 15
Reclassification adjustment for gains included in net
earnings, net of taxes (1) --
----- ---
Other comprehensive earnings (loss) (144) 15
----- ---
Comprehensive earnings $ 593 585
===== ===
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------- -------
(In Thousands)
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 4,956 4,433
Fees and commissions received 391 324
Interest paid (2,176) (2,023)
Originations of loans held for sale (12,339) (17,005)
Proceeds from loan sales 17,071 15,528
Cash paid to suppliers and employees (2,213) (1,987)
Income taxes paid (63) (274)
-------- -------
Net cash provided by (used in) operating activities 5,627 (1,004)
-------- -------
Cash flows from investing activities:
Loans made to customers, net of repayments (13,742) (3,908)
Proceeds from sales of available-for-sale securities 1,001 --
Proceeds from maturities of available-for-sale securities 1,175 340
Proceeds from calls of available-for-sale securities 5,392 2,309
Purchase of available-for-sale securities (5,253) (2,880)
Purchase of premise and equipment, net (59) (179)
Increase in other real estate -- (57)
-------- -------
Net cash used in investing activities (11,486) (4,375)
-------- -------
Cash flows from financing activities:
Net increase in time deposits 4,133 7,380
Net (decrease) increase in non-interest bearing, savings,
and NOW deposit accounts (12,917) 3,936
Repayment of short-term borrowings -- (600)
Repayment of long-term debt (1) (1)
Repayment of Federal Home Loan Bank advances (131) (13)
Issuance of common stock 9 9
-------- -------
Net cash provided by (used in) financing activities (8,907) 10,711
-------- -------
Net increase (decrease) in cash and cash equivalents (14,766) 5,332
Cash and cash equivalents at beginning of period 23,769 15,400
-------- -------
Cash and cash equivalents at end of period $ 9,003 20,732
======== =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
6
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------- -------
(In Thousands)
<S> <C> <C>
Reconciliation of net earnings to net cash provided by (used in) operating
activities:
Net earnings $ 737 570
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 201 127
Provision for loan losses 160 120
Gain on sale of available-for-sale securities (1) --
Decrease (increase) in loans held for sale 4,470 (1,708)
Decrease (increase) in other assets, net 112 (355)
Decrease (increase) in interest receivable (97) 16
Increase in interest payable 88 67
Increase (decrease) in other liabilities (43) 159
-------- -------
Total adjustments 4,890 (1,574)
-------- -------
Net cash provided by (used in) operating activities $ 5,627 (1,004)
======== =======
Supplemental Schedule of Noncash Activities:
Unrealized gain (loss) in values of securities available-for-sale, net of
income tax benefit of $87,000 and expense of $9,000, respectively for the
quarters ended March 31, 1999 and 1998, respectively $ (144) 15
======== =======
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
7
<PAGE> 8
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of First
Financial Corporation (Company) and its wholly-owned subsidiary, First Bank and
Trust (First Bank) and First Bank's wholly owned title insurance agency,
American Title and Escrow Company, and First Bank's inactive finance company
subsidiary, First Southern Finance, Inc.
The accompanying consolidated financial statements have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, the statements contain all adjustments and
disclosures necessary to summarize fairly the financial position of the Company
as of March 31, 1999 and December 31, 1998, and the results of operations for
the three months ended March 31, 1999 and 1998, comprehensive earnings for the
three months ended March 31, 1999 and 1998 and cash flows for the three months
ended March 31, 1999 and 1998. All significant intercompany transactions have
been eliminated. The interim consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements presented in
the Company's 1998 Annual Report to stockholders. The results for interim
periods are not necessarily indicative of results to be expected for the
complete fiscal year.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 1998
------- ------
(In Thousands)
<S> <C> <C>
Balance, January 1, 1999 and 1998, respectively $ 1,821 1,704
Add (deduct):
Losses charged to allowance (27) (68)
Recoveries credited to allowance 5 16
Provision for loan losses 160 120
------- ------
Balance, March 31, 1999 and 1998, respectively $ 1,959 1,772
======= ======
</TABLE>
PROPOSED MERGER
On May 1, 1999, the Company entered into an Agreement and Plan of Merger (the
Plan) whereby all of the Company's common stock will be acquired by National
Commerce Bancorporation (NCBC) for stock of NCBC. Pursuant to the terms of the
Plan, NCBC will be the surviving company. The Plan is subject to Shareholder
and regulatory approval, as well as to various specified conditions. In
connection with the proposed merger, the Company has granted an option to NCBC
to purchase 19.5% of the Company's outstanding common voting shares under
specified circumstances, such percentage to be measured at the conclusion of
the exercise. The Company expects to file a Current Report on Form 8-K in
respect of the Plan and the option. Shareholders will be provided proxy
materials in connection with any meeting of Shareholders to be held to consider
and to vote on the proposed merger. In this regard, it is expected that NCBC
will file a registration statement under the Securities Act of 1933, on an
appropriate form, to register its shares for issuance to Shareholders of the
Company in the event that the merger is approved by the Shareholders.
8
<PAGE> 9
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
EARNINGS PER SHARE
Statement of Financial Accounting Standards ("SFAS") 128 "Earnings Per Share"
established uniform standards for computing and presenting earnings per share.
The computation of basic earnings per share is based on the weighted average
number of common shares outstanding during the period. The computation of
diluted earnings per share for the Company begins with the basic earnings per
share plus the effect of common shares contingently issuable from stock options.
The following is a summary of components comprising basic and diluted earnings
per share (EPS) for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
(In Thousands, except share amounts) 1999 1998
-------- -------
<S> <C> <C>
Basic EPS Computation:
Numerator - earnings available to common
shareholders $ 737 570
-------- -------
Denominator - weighted average number of
common shares outstanding 952,693 942,187
-------- -------
Basic earnings per common share $ .77 .60
======== =======
Diluted EPS Computation:
Numerator $ 737 570
-------- -------
Denominator:
Weighted average number of common shares
outstanding 952,693 942,187
Dilutive effect of stock options 35,673 21,856
-------- -------
988,366 964,043
-------- -------
Diluted earnings per common share $ .75 .59
======== =======
</TABLE>
Management is not aware of any current recommendations by the regulatory
authorities which, if implemented, would have a material effect on the Company's
liquidity, capital resources or operations.
9
<PAGE> 10
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company and its subsidiaries. This
discussion should be read in conjunction with the consolidated financial
statements. Reference should also be made to the Company's 1998 Annual Report to
stockholders for a more complete discussion of factors that impact liquidity,
capital and the results of operations.
As discussed in Item 1, on May 1, 1999, the Company signed an Agreement
and Plan of Merger (the "Agreement") with National Commerce Bancorporation
("NCBC") under which NCBC will acquire 100% of the outstanding stock of First
Financial Corporation for stock of NCBC. Any outstanding options will be
converted to options to acquire stock of NCBC. Pursuant to the terms of the
Agreement, each share of First Financial Corporation common stock will receive
2.8502 shares of NCBC shares and each holder of an option to purchase a share of
the Company will receive an option to purchase 2.8502 shares of NCBC at the
option price divided by 2.8502. The exchange ratio is based on a closing market
price per share of $24.25 of NCBC shares at April 12, 1999. The Merger is
contingent on stockholder approval, regulatory approval and various other
conditions.
FORWARD-LOOKING STATEMENTS
Management's discussion of the Company, and management's analysis of the
Company's operations and prospects, and other matters, may include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and other provisions of federal and state
securities laws. Although the Company believes that the assumptions underlying
such forward-looking statements contained in this Report are reasonable, any of
the assumptions could be inaccurate and, accordingly, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
The use of such words as expect, anticipate, forecast, and comparable terms
should be understood by the reader to indicate that the statement is "forward
looking" and thus subject to change in a manner that can be unpredictable.
Factors that could cause actual results to differ from the results anticipated,
but not guaranteed, in this Report, include (without limitation) economic and
social conditions, competition for loans, mortgages, and other financial
services and products, changes in interest rates, unforeseen changes in
liquidity, results of operations, and financial conditions affecting the
Company's customers, material unforeseen complications related to addressing
Year 2000 issues (both as to the Company and as to its customers, vendors,
consultants and governmental agencies), as well as other risks that cannot be
accurately quantified or completely identified. Many factors affecting the
Company's financial condition and profitability, including changes in economic
conditions, the volatility of interest rates, political events and competition
from other providers of financial services simply cannot be predicted. Because
these factors are unpredictable and beyond the Company's control, earnings may
fluctuate from period to period. The purpose of this type of information (such
as in Item 2, as well as other portions of this Report) is to provide Form
10-QSB readers with information relevant to understanding and assessing the
financial condition and results of operations of the Company not to predict the
future or to guarantee results. The Company is unable to predict the types of
circumstances, conditions, and factors that can cause anticipated results to
change. The Company undertakes no obligation to publish revised forward-looking
statements to reflect the occurrence of changes or of unanticipated events,
circumstances, or results.
10
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FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
The concept of liquidity involves the ability of the Company and its
subsidiaries to meet future cash flow requirements, particularly those of
customers who are either withdrawing funds from their accounts or borrowing to
meet their credit needs.
Proper asset/liability management is necessary to maintain stability in
the balance of interest-sensitive assets to interest-sensitive liabilities in
order to provide a stable growth in net interest margins. Earnings on
interest-sensitive assets such as loans tied to the prime rate of interest and
federal funds sold, may vary considerably from fixed rate assets such as
long-term investment securities and fixed rate loans. Interest-sensitive
liabilities such as large certificates of deposit and money market certificates,
generally require higher costs than fixed rate instruments such as passbook
savings.
Banks, in general, must maintain large cash balances to meet day-to-day
cash flow requirements as well as maintaining required reserves for regulatory
agencies. The cash balances maintained are the primary source of liquidity.
Federal funds sold, which are basically overnight or short-term loans to other
banks that increase the other bank's required reserves, are also a major source
of liquidity.
The Company's investment portfolio consists of earning assets that
provide interest income. Securities classified as available-for-sale include
securities intended to be used as a part of the Company's asset/liability
strategy and/or securities that may be sold in response to changes in interest
rate, prepayment risk, the need or desire to increase capital and similar
economic factors. The Company has approximately $13.6 million of securities
scheduled to mature or reprice in the next twelve months.
A secondary source of liquidity is the Bank's loan portfolio. At March
31, 1999 first mortgage loans of approximately $18.1 million and other loans of
approximately $91.1 million either will become due or will be subject to rate
adjustments within twelve months from the respective date. Continued emphasis is
placed on structuring adjustable rate loans.
As for liabilities, certificates of deposit of $100,000 or greater of
approximately $31.1 million will become due during the next twelve months. The
Bank's deposit base decreased approximately $8.8 million during the quarter
ended March 31, 1999. The decrease resulted from a few very large governmental
and corporate year end related deposits which significantly increased the
deposit base. However, these deposits were temporary in nature and were
withdrawn shortly after year end.
The Company also has the ability to meet its liquidity needs through
advances from the Federal Home Loan Bank ("FHLB"). At March 31, 1999, the Bank
had $552,000 of these advances and has a total line of credit with FHLB of
$9,000,000. In addition, the subsidiary bank has a line of credit with other
banks totaling $14,000,000 which can be used to purchase Federal funds. The
Company also has a $5,000,000 line of credit which currently has no outstanding
balance. The line of credit is secured by a pledge of all the shares of First
Bank and Trust. Pursuant to the proposed merger with NCBC, this pledge must be
terminated.
11
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FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
As of March 31, 1999, the Bank's asset sensitivity was 26.1% (the excess
of earning assets over interest sensitive liabilities divided by total assets at
March 31, 1999). Management estimates an increase or decrease in interest rates
of 1% would have an immaterial impact on earnings.
It is anticipated that with present maturities, the anticipated growth
in deposit base, and the efforts of management in its asset/liability management
program, liquidity will not pose a problem in the foreseeable future. At the
present time, there are no known trends or any known commitments, demands,
events or uncertainties that will result in or that are reasonably likely to
result in the Company's liquidity changing in any material way. Liquidity was
19.2% at March 31, 1999 and 23.3% at December 31, 1998.
CAPITAL RESOURCES
A primary source of capital is internal growth through retained
earnings. The ratio of stockholders' equity to total assets was 7.5% at March
31, 1999 and 7.0% at December 31, 1998. Total assets decreased 3.1% during the
three months ended March 31, 1999. Cash dividends of $.25 per share were
declared during the year ended December 31, 1998 and none have been declared in
1999. Cash dividends will be declared in 1999 only in the discretion of the
Board of Directors to the extent of available profits.
Effective June 6, 1996, the Company established a Dividend Reinvestment
Plan (DRIP). The Plan offers eligible shareholders the opportunity to purchase
additional shares of common stock, upon the Company's declaration of dividends.
There were 6,395 original issue shares sold to participants under the Plan
during 1998. Due to the proposed merger with NCBC, the Company plans to suspend
or discontinue the DRIP for at least calendar year 1999. 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 regulator, has
specific 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.
12
<PAGE> 13
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following schedule details the Company's risk-based capital at March
31, 1999 (excluding the effect of SFAS No. 115):
<TABLE>
<CAPTION>
In Thousands
------------
(except percentages)
<S> <C>
Tier I capital:
Stockholders' equity $ 19,285
Tier II capital:
Allowable allowance for loan losses limited to 1.25%
of risk-weighted assets 1,959
--------
Total risk-based capital $ 21,244
========
Risk-weighted assets $200,009
========
Risk-based capital ratios:
Tier I capital ratio 9.64%
========
Total risk-based capital ratio 10.62%
========
</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 March 31, 1999 and 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 average
total assets) of 4%. The leverage ratio at March 31, 1999 was 7.4%.
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, possible additional capital stock issues, possible
preferred stock offerings, and other avenues will maintain a capital position
consistent with sound banking principles and at the same time reward
stockholders with significant earnings per share.
13
<PAGE> 14
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. 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 some
liquidity in the shares. All shares of common stock have been retroactively
adjusted for a two-for-one stock split approved on April 18, 1996. During the
quarter ended March 31, 1999, the Company issued 768 shares of its voting common
stock in connection with the exercise of options and no shares were redeemed. No
shares of the Company's common voting stock were redeemed for the year ending
December 31, 1998. Privately negotiated trades may involve the Company, its
directors and officers and, accordingly, may not be reliable indicators of
value.
In April, 1993, the stockholders approved a stock option plan whereby
159,000 shares of the Company's stock is available for issuance to directors,
officers and employees of the Company. At December 31, 1998, 79,400 shares of
the options had been granted at $10 per share (7,039 shares have been exercised
at March 31, 1999); 2,000 shares of the options had been granted at $12 per
share (1,000 shares have been exercised at March 31, 1999), 4,000 shares of the
options had been granted at $13 per share (800 shares have been exercised as of
March 31, 1999), 29,792 shares of the options were granted at $15 per share (846
shares have been exercised as of March 31, 1999), 528 shares of the options were
granted at $19 per share (no shares have been exercised as of March 31, 1999),
13,000 shares of the options were granted at $22.50 per share (100 shares have
been exercised as of March 31, 1999) and 2,000 shares of the options were
granted at $33 per share (no shares have been exercised as of March 31, 1999).
The options are granted at the estimated market price of the stock at the date
the option was granted. At March 31, 1999 there were 120,935 shares granted but
not exercised. The options are generally exercisable ratably over a ten year
period from the date granted. At March 31, 1999 options to purchase 28,280
common shares were available for grant in future years. However, the Company
does not expect to grant any additional options pending the proposed merger with
NCBC.
At present, the net book value of premises and equipment is 40.9% of the
Company's capital. The subsidiary bank now has a significant presence in the
Wilson County market with offices in Mt. Juliet, Tennessee, Hermitage, Tennessee
and Lebanon, Tennessee. The bank also has a new branch bank facility in Smyrna,
Rutherford County, Tennessee which opened in the fourth quarter of 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 March 31, 1999, the
ratio of fixed assets to capital of the subsidiary bank is 41.1%. 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 Company. American Title and Escrow
Company provides full service mortgage loan closing services and began full
operations in January, 1999. First Bank and Trust also owns 100% interest in an
inactive finance company, First Southern Finance, Inc.
14
<PAGE> 15
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
YEAR 2000 ISSUES
The term "Year 2000 issue" refers to the necessity of converting
computer information systems so that such systems recognize more than two digits
to identify a year in any given date field, and are thereby able to
differentiate between years in the twentieth and twenty-first centuries ending
with the same two digits (e.g., 1900 and 2000). To address the Year 2000 issue,
the Company has adopted a broad-based approach designed to encompass the
Company's total environment.
The Board of Directors of First Bank has taken a proactive approach. A
Y2K Coordinator was appointed and the EDP Committee was asked to serve as the
Y2K Steering Committee. The Y2K Action Team was formed consisting of key people
from all areas of the bank. The Action team is following a comprehensive seven
phase Y2K Action Plan with a detailed Work Plan. Senior management and the Board
of Directors approved a timeline and budget of $213,435. Actual expenditures to
date and currently anticipated future expenditures are within this estimate. The
Board of Directors reviews the status of the plan on a monthly basis. Areas
being addressed by the Y2K Action Team are:
- The mission critical hardware and software within the bank. This
includes FiServ, Inc., the bank's data processor. Twelve additional
pieces of software are included on this list.
- Software interfaces.
- Hardware. The bank's Wide Area Network and each workstation or stand
alone PC.
- Communications - Includes the phone systems.
- Customer Awareness. Brochures have been developed, seminars conducted
with employees and customers, information added to the bank's web site
www.1firstbank.com.
- 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 continuing the process
of testing and validating the renovation of all systems and hardware and have
substantially met all goals as of March 31, 1999.
15
<PAGE> 16
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 $737,000 for the three months ended March 31, 1999 as
compared to $570,000 for the same period in 1998. Basic earnings per share
increased from $.60 in 1998 to $.77 for the same period in 1999. Diluted
earnings per share increased from $.59 in 1998 to $.75 for the same period in
1999.
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. This is particularly true with the volatility in
interest rates encountered in recent years.
The Company's interest income, excluding tax equivalent adjustments,
increased by $589,000 or 13.3% during the three months ended March 31, 1999 and
increased $556,000 or 14.4% for the same period in 1998. The increases were
primarily attributable to higher volumes of earning assets. The ratio of average
earning assets to total average assets was 93.1% for the quarter ended March 31,
1999 and 93.1% for the year ended December 31, 1998.
Interest expense increased by $174,000 for the three months ended March
31, 1999 or 8.3% compared to $292,000 or 16.2% for the same period in 1998. The
increases in 1999 and 1998 can be attributable largely to an increase in volume.
The increases in 1999 were partially offset by lower interest rates.
The foregoing increases in interest income and interest expenses
resulted in an increase in net interest income of $415,000 or 17.8% during the
first three months of 1999 and $264,000 or 12.8% in the comparable period of
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 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 credit card, residential
mortgage, and consumer installment loans.
16
<PAGE> 17
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
A loan is impaired when it is probable that the Company will be
unable to collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, the Company shall
recognize an impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or credit to the
provision for loan losses.
The Company's first mortgage single family residential, consumer
and credit card loans which total approximately $43,412,000, $26,332,000 and
$105,000, respectively at March 31, 1999, are divided into various groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment
and thus are not subject to the provisions of SFAS Nos. 114 and 118.
Substantially all other loans of the Company are evaluated for impairment under
the provisions of SFAS Nos. 114 and 118.
The Company considers all loans on nonaccrual status to be
impaired. Loans are placed on nonaccrual status when doubt as to timely
collection of principal or interest exists, or when principal or interest is
past due 90 days or more unless such loans are well-secured and in the process
of collection. Delays or shortfalls in loan payments are evaluated with various
other factors to determine if a loan is impaired. Generally, delinquencies under
90 days are considered insignificant unless certain other factors are present
which indicate impairment is probable. The decision to place a loan on
nonaccrual status is also based on an evaluation of the borrower's financial
condition, collateral, liquidation value, and other factors that affect the
borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all
interest accrued on the loan in the current fiscal year is reversed from income,
and all interest accrued and uncollected from the prior year is charged off
against the allowance for loan losses. Thereafter, interest on nonaccrual loans
is recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt. At March
31, 1999 and 1998 impaired loans which had been placed on non-accrual status
totaled $53,000 and $171,000, respectively. Had interest been accrued on these
loans, net earnings would have increased by approximately $1,500 and $6,000 for
the three months ended March 31, 1999 and 1998, respectively.
Loans not on nonaccrual status are classified as impaired in
certain cases where there is inadequate protection by the current net worth and
financial capacity of the borrower or of the collateral pledged, if any. In
those cases, such loans have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt, and if such deficiencies are not
corrected, there is a probability that the Company will sustain some loss. In
such cases, interest income continues to accrue as long as the loan does not
meet the Company's criteria for nonaccrual status.
17
<PAGE> 18
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company's charge-off policy for impaired loans is similar to
its charge-off policy for all loans in that loans are charged-off in the month
when they are considered uncollectible.
Impaired loans and related allowance for loan loss amounts at March 31,
1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------- ---------------------
Allowance Allowance
Recorded for Recorded for
Investment Loan Loss Investment Loan Loss
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Impaired loans with allowance for
loan loss $876 175 1,540 308
Impaired loans with no allowance
for loan loss -- -- -- --
---- ----- ----- ---
$876 175 1,540 308
==== ===== ===== ===
</TABLE>
The allowance for loan loss related to impaired loans were
measured based upon the estimated fair value of related collateral.
The average recorded investment in impaired loans for the three
months ended March 31, 1999 and 1998 was approximately $1,028,000 and
$1,115,000, respectively. The related amount of interest income recognized on
the accrual method for the period that such loans were impaired was $30,000 and
$33,000 for the three months ended March 31, 1999 and 1998, respectively. There
was no interest income recognized on the cash method for the period that such
loans were impaired.
The following schedule details selected information as to
non-performing loans of the Company at March 31, 1999:
<TABLE>
<CAPTION>
Past Due
90 Days Non-Accrual
------- -----------
(In Thousands)
<S> <C> <C>
Real estate loans $ -- 46
Installment loans 57 --
Commercial 136 7
---- --
$193 53
==== ==
Renegotiated loans $ -- --
==== ==
</TABLE>
18
<PAGE> 19
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
At March 31, 1999, loans, which include the above, totaling $2,041,000
were included in the Company's internal classified loan list. Of these loans
$1,130,000 are consumer and $911,000 are commercial loans. The collateral values
securing these loans based on estimates received by management, total
approximately $3,604,000 ($1,995,000 related to consumer loans and $1,609,000
related to commercial loans). Such loans are listed as classified when
information obtained about possible credit problems of the borrower has prompted
management to question the ability of the borrower to comply with the repayment
terms of the loan agreement. The loan classifications do not represent or result
from trends or uncertainties which management expects will materially impact
future operating results, liquidity or capital resources.
There were no material amounts of other interest-bearing assets
(interest-bearing deposits with other banks, municipal bonds, etc.) at March 31,
1999 which would be required to be disclosed as past due, non-accrual,
restructured or potential problem loans, if such interest-bearing assets were
loans.
Non-interest income increased $98,000 or 17.7% exclusive of any
securities gains during the three months ended March 31, 1999 and increased
$96,000 or 20.9% for the same period in 1998. There were no security gains for
the three months ended March 31, 1998 and a security gain of $1,000 for the
three months ended March 31, 1999. The primary increase in non-interest income
resulted from increased service charges on deposit accounts, increased fees and
commissions and an increase in income generated from sales of mortgage loans.
Mortgage loan income (included in other income) for the three month period ended
March 31, 1999 was $262,000 as compared to $231,000 for the period ending March
31, 1998. The increase of $31,000 or 13.4% resulted from the increase in the
refinancing of mortgage loans as compared to the same period in last year and
the increase in housing development in the subsidiary bank's service area.
Additionally, other fees and commissions increased $45,000 or 67.2% resulting
from the opening of American Title and Escrow in the beginning of 1999.
Non-interest expense excluding securities transactions increased
$212,000 or 11.0% during the first three months of 1999 and $322,000 or 20.1%
during the same period in 1998. The increases in 1999 and 1998 were attributable
to increases in salaries and employee benefits which is due to increased number
of employees and increases in annual compensation, an increase in the number of
locations, the opening of American Title and Escrow and computer hardware and
software upgrades.
There were no security losses during the three months ended March 31,
1999 and 1998.
Management is not aware of any known trends, events or uncertainties
that will have or are reasonably likely to have a material effect on the
Company's liquidity, capital resources or operations of the Company. The Company
is not aware of any current recommendations, which, if they were to be
implemented, would have a material effect on liquidity, capital resources or
operations other than as discussed in the capital resources section of this
plan.
19
<PAGE> 20
FIRST FINANCIAL CORPORATION
FORM 10-QSB, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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, the impact on profits is not expected to be significant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary component of market risk is interest rate
volatility. Fluctuations in interest rates will ultimately impact both the level
of income and expense recorded on a large portion of the Company's assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity. Based upon the nature of the Company's operations, the Company is not
subject to foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the Company
meets monthly to analyze the rate sensitivity position. These meetings focus the
spread between the cost of funds and interest yields generated primarily through
loans and investments.
There have been no material changes in reported market risks during the
three months ended March 31, 1999. Please refer to Item 2 of Part I of this
report for additional information related to market and other risks.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
(a) On May 1, 1999, the Company's Board of Directors approved a
Agreement and Plan of Merger ("Plan") pursuant to which the
Company would merge with and into National Commerce
Bancorporation ("NCBC"), with NCBC as the surviving
corporation. This Plan is subject to Shareholder and
regulatory approval. In connection with the proposed merger,
the Company has granted an option to NCBC to purchase 19.5%
of the Company's outstanding common voting shares under
specified circumstances, such percentage to be measured at
the conclusion of the exercise. The Company expects to file a
Current Report on Form 8-K in respect of the Plan and the
option.
(b) Please refer to Item 2(a).
(c) The Registrant issued 768 shares of its $2.50 par value common
stock pursuant to exercised options and no shares of such
common stock pursuant to its Dividend Reinvestment Plan.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) None.
(b) None.
Item 4. (a) - (d) No meeting of or action by security holders occurred
during the period covered by this report.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only; omitted
in paper copy) - This schedule contains summary financial
information extracted from the financial statements of the
Company at March 31, 1999 (unaudited) and is qualified in its
entirety by reference to such financial statements as set
forth in the Company's quarterly report on Form 10-QSB for the
period ending March 31, 1999.
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements 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)
DATE: May 12, 1999 /s/ David Major
--------------------- -------------------------------------------
David Major
Chairman, President and Chief Executive
Officer
DATE: May 12, 1999 /s/ Sally P. Kimble
--------------------- -------------------------------------------
Sally P. Kimble
Treasurer, Chief Financial Officer and
Chief Accounting Officer
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,078
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,925
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,758
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 188,091
<ALLOWANCE> 1,959
<TOTAL-ASSETS> 260,965
<DEPOSITS> 238,927
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,619
<LONG-TERM> 932
0
0
<COMMON> 2,728
<OTHER-SE> 16,759
<TOTAL-LIABILITIES-AND-EQUITY> 260,965
<INTEREST-LOAN> 4,204
<INTEREST-INVEST> 744
<INTEREST-OTHER> 62
<INTEREST-TOTAL> 5,010
<INTEREST-DEPOSIT> 2,245
<INTEREST-EXPENSE> 2,264
<INTEREST-INCOME-NET> 2,746
<LOAN-LOSSES> 160
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 2,134
<INCOME-PRETAX> 1,106
<INCOME-PRE-EXTRAORDINARY> 1,106
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 737
<EPS-PRIMARY> .77
<EPS-DILUTED> .75
<YIELD-ACTUAL> 4.78
<LOANS-NON> 53
<LOANS-PAST> 192
<LOANS-TROUBLED> 101
<LOANS-PROBLEM> 2,041
<ALLOWANCE-OPEN> 1,821
<CHARGE-OFFS> 27
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 1,959
<ALLOWANCE-DOMESTIC> 1,959
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
