U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1995
Commission file number 0-5559
FIRST FINANCIAL CORPORATION
(Exact Name of Small Business Issuer in Its Charter)
Texas 74-1502313
(State or Other Jurisdiction of (I.R.S. Employer
Incorporationo r Organization) Identification Number)
800 Washington Avenue, Waco, Texas 76701
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code
(817) 757-2424
Securities registered pursuant to Section 12(b) of the
Exchange Act:
Name of Each Exchange on
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the
Exchange Act:
Common Stock, No Par Value
(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
Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K is not contained in
this form, and no disclosure will be contained, to the best
of 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.
[ x ]
State issuer's revenue for its most recent fiscal year.
$5,149,139
There is no established trading market for the registrant's
class of voting stock and, therefore, registrant cannot
determine the aggregate value of voting stock held by
nonaffiliates.
The number of shares outstanding of the issuer's no par
value common stock was 173,528 at March 31, 1996.
Documents Incorporated by Reference: See Page 2.
-1-
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-KSB Incorporated Document
Part III, Item 9 -
Directors, Execu- tive
Officers,
Promoters and
Control Persons;
Compliance with
Section 16(a) of
the Exchange Act
The Information required by
this Item 9, is hereby
incorporated by reference
to the definitive
information statement to be
filed within 120 days after
the end of the last fiscal
year.
Part III, Item 10 -
Executive
compensation
The information required by
this Item 10, is hereby
incorporated by reference
to the definitive
information statement to be
filed within 120 days after
the end of the last fiscal
year.
Part III, Item 11 -
Security ownership
of certain
beneficial owners
and management
The information required by
this Item 11, is hereby
incorporated by reference
to the definitive
information statement to be
filed within 120 days after
the end of the last fiscal
year.
Part III, Item 12 - Certain
relationships
and related
transactions
The information required by
this Item 12, is hereby
incorporated by reference
to the definitive
information statement to be
filed within 120 days after
the end of the last fiscal
year.
Transitional Small Business Disclosure Format (check one)
Yes No X
Total number of pages, including cover pages - 42
-2-
PART I
Item 1. Description of Business
First Financial Corporation ("the Company") was incorporated
in the State of Texas in 1964. During the last three years,
the primary business of the Company, either directly or
through its subsidiaries, has been servicing a portfolio of
manufactured home loans, engaging in a limited amount of
insurance activities, and providing consulting and data
processing services to related companies. The Company also
has a significant investment as a limited partner in another
financial services business. (See discussion below of Key
Group, Ltd.)
As of February 28, 1996, the Company services a portfolio of
manufactured home loans aggregating approximately $6.4
million sold to conventional investors or held for
investment by the Company. This activity generates service
fee and loan administration income, as well as interest
income. A majority of these manufactured home loans carry
some type of insurance against all or a portion of the
credit risk. The Company's servicing activities include
collecting payments from borrowers and remitting such funds
to investors, accounting for loan principal and interest,
investor reporting, holding escrow funds for payment of
mortgage-related expenses such as taxes and insurance,
making advances to cover delinquent payments, making
inspections as required of the mortgage premises, contacting
delinquent borrowers, supervising foreclosures and property
disposition in the event of unremedied defaults and
administrative duties.
In 1987 and 1988, the Company lost its authority to be
involved in loan programs guaranteed by the Government
National Mortgage Association ("GNMA"), the Veterans
Administration ("VA") and the Federal Housing Administration
("FHA") due to its failure to make required pass through
payments. As a result, the Company is no longer in a
position to actively seek to originate new manufactured home
loans, other than loans for the purchase of repossessed
manufactured homes previously financed by the Company.
A wholly-owned subsidiary of the Company, First Financial
Insurance Agency, Inc., sells hazard insurance policies
relating to manufactured home loans serviced by the Company.
This activity generates commission income. Substantially
all of the income relates to insurance written on
manufactured homes financed by the Company.
Apex Lloyds Insurance Company ("Apex Lloyds"), a wholly-
owned subsidiary of the Company, is involved in underwriting
hazard and credit risks relating to manufactured home loans
serviced by the Company. Also, hazard insurance on
residential homes not financed by the Company or any related
company is written by Apex Lloyds through a fronting and
reinsurance agreement with an unrelated third party. The
insurance business is a highly regulated business.
On October 17, 1994, the Company sold 100% of the stock of
First Financial General Agency, Inc. ("FFGA"), a wholly-
owned subsidiary for $195,000, to an unrelated third party.
The Company realized a gain of approximately $158,000 on
the sale. Prior to the sale of its stock all of the assets
and liabilities of FFGA were transferred to the Company,
except that in-force insurance business was assigned to Tri-
Triangle Agency, Inc., a company in which Robert A. Mann has
a significant interest. Earnings for this entity that were
included in the financial statements were less than $1,000
for 1994.
(continued)
-3-
Item 1. Description of Business (Continued)
Subsidiaries of the Company compete with other insurance
agencies and companies for the sale of manufactured and
residential home owners hazard insurance policies. Primary
competitive factors in the insurance industry include rates,
quality of service and marketing efforts. There are a large
number of competitors in the geographic area in which the
Company operates.
The Company owns, as a limited partner, 52.94% of Key
Group, LTD., a Texas limited partnership ("Key Group"). The
general partners of Key Group are Robert A. Mann, who is
Chairman of the Board of the Company, and First Key
Holdings, Inc., a Texas corporation owned by the David W.
Mann 1990 Trust, of which David W. Mann is the trustee and a
beneficiary. David W. Mann, who is the son of Robert A.
Mann, is President of the Company. Bluebonnet Investments,
Ltd., is the other limited partner of Key Group, and owns
47.05% of the partnership. Robert A. Mann and David W. Mann
have direct and indirect interests in Bluebonnet
Investments, Ltd.
Key Group conducts business through its wholly-owned
subsidiary, First Preference Holdings, Inc. ("First
Preference Holdings"), which has three wholly-owned
subsidiaries: First Preference Mortgage Corp., First
Preference Financial Corp. and First Financial Information
Services, Inc. First Preference Mortgage Corp. ("FPMC")
originates and services residential mortgage loans and is an
approved seller/servicer for Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation,
Veterans Administration and Federal Housing Administration.
FPMC currently operates at locations in Waco, Colleyville,
and Tyler, Texas. Each branch office is staffed with loan
originators who actively solicit residential mortgage loans
in their respective market. Substantially all of the loans
originated by FPMC are sold to governmental or private
investors. FPMC retains the right to service certain loans
it sells to investors for which FPMC is paid a service fee.
FPMC funds the loans it originates prior to the sale of such
loans to investors. The source of money to fund these loans
are arrangements with financial institutions pursuant to
which such financial institutions purchase a participation
in the loan. The loan participation is repurchased from the
financial institutions when the loan is sold to the
investor. As of December 31, 1995 and February 28, 1996,
FPMC was servicing a portfolio of conventional residential
mortgage loans aggregating approximately $20.7 million and
$21.4 million, respectively for institutional investors.
There are a large number of competitors in the origination
and servicing of residential mortgage loans, including other
mortgage companies, banks and financial institutions.
Compared to its competitors, FPMC is a small company. The
loan products offered by FPMC is similar to loan products
offered by its competitors. As a small company, FPMC
attempts to provide superior service to attract customers.
First Preference Financial Corp. ("FPFC") was formed to be
an originator and servicer of consumer loans, primarily in
the manufactured home market. FPFC has not sought or
obtained the necessary governmental licenses to originate
and service such consumer loans. At the present time, FPFC
has no active business.
First Financial Information Services, Inc. ("FFIS") provides
data processing services for FPMC, the Company and its
subsidiaries. On June 1, 1992, the Company sold 100% of the
issued and outstanding common stock of FFIS to First
Preference Holdings for a purchase price equal to $6,145,
which represented the Company's investment in FFIS.
(continued)
-4-
Item 1. Description of Business (Continued)
In September 1993, the Company repurchased a group of loans
that it was servicing from the Resolution Trust Corporation
in its capacity as receiver of a failed savings and loan
association. This purchase involved contracts with an
unpaid balance of approximately $1,175,014, and was
purchased for a purchase price of approximately $998,762.
The Company immediately sold the purchased contracts to FPMC
at the same price paid by the Company for such contracts,
with the Company continuing to service the contracts for a
servicing fee. In connection with this transaction, a
related entity made a loan to FPMC to acquire these
contracts. (See "Certain Relationships and Related
Transactions")
During 1994, FPMC repaid $868,000 of debt to related parties
by selling participations in manufactured home contracts at
face value to the related parties. FPMC realized a gain on
these sales equal to the unamortized discount on these
contracts of approximately $119,500. (See "Certain
Relationships and Related Transactions")
During 1994, FPMC sold a participation in a pool of
manufactured housing installment sales contracts and
installment loan agreements in the amount of $388,000 to
First Preference Holdings, Inc., its parent, at face value
in exchange for a note from First Preference Holdings, Inc.
for $388,000. The company realized a gain related to the
unamortized discount on these loans of approximately
$50,000. The participation interest was immediately
transferred back to FPMC as a contribution to capital.
During 1995, First Preference Holdings, Inc. paid off the
$318,000 remaining balance on the note it owed FPMC. (See
Certain Relationships and Related Transactions")
During 1995, FPMC repurchased the participation interest
held by a related party in certain manufactured home loans
owned by FPMC for approximately $231,000, the unpaid balance
of the participations. (See Certain Relationships and
Related Transactions")
The Company and its consolidated subsidiaries employed 74
employees as of December 31, 1995, of which all are full-
time employees. Fifty of these employees work for First
Preference Mortgage Corp.
The Company does not spend any significant amounts on
research and development or compliance with environmental
laws.
Item 2. Properties
The Company owns an office building containing approximately
13,500 square feet of office space at 800 Washington Avenue,
Waco, Texas. This office building has served as the
Company's principal office since August 1991 and
approximately 8,500 square feet of this office building is
leased to related companies. The building is in good
condition with no known or anticipated material repairs
being required.
First Preference Mortgage Corp., a second tier subsidiary of
Key Group, LTD., in which the Company is a limited partner,
leases approximately 1676 square feet of office space
located at 914 Lake Air Drive, Suite G, Waco, Texas for a
lease term of 36 months. This lease expires August 1997.
(continued)
-5-
Item 2. Properties (Continued)
On March 4, 1993 First Preference Mortgage Corp. leased
approximately 987 square feet of office space located at
2040 Loop 336 West, Conroe, Texas for a lease term of 10
months. On September 27, 1993, a new lease agreement was
executed for approximately 1,248 square feet of office space
at the same location for a lease term of 24 months. In
March 1995, this office was closed and its operations were
consolidated at The Woodlands location described below.
On January 31, 1994, First Preference Mortgage Corp.
subleased approximately 87 square feet of office space
located at 25232 Grogans Park Drive, The Woodlands, Texas
for a lease term of 12 months. On October 31, 1994, First
Preference Mortgage Corp. leased approximately 2834 square
feet of office space located at 14000 Woodloch Forest Drive,
The Woodlands, Texas for a lease term of 38 months. In
November, 1994, all operations in The Woodlands were moved
to this new location, and the Grogans Park Drive office in
The Woodlands was closed. This office was closed January
31, 1996.
On March 1, 1994, First Preference Mortgage Corp. leased
approximately 1801 square feet of office space located at
4807 Spicewood Springs Road, Austin, Texas for a lease term
of 60 months. On January 31, 1996, this office was closed.
On March 30, 1994, First Preference Mortgage Corp. leased
approximately 1649 square feet of office space located at
6409 Colleyville Blvd., Colleyville, Texas for a lease term
of 60 months.
On May 16, 1994, First Preference Mortgage Corp. leased
approximately 800 square feet of office space located at 102
Old Bowman Road, Round Rock, Texas for a lease term of 12
months. As of October 15, 1995, this office was closed.
In October 1995, First Preference Mortgage Corp. leased
approximately 982 square feet of office space located at
1800 Shiloh Road, Suite 101, Tyler, Texas 75703 for a lease
term of 36 months commencing November 1, 1995.
On April 30, 1993, Apex Lloyds Insurance Company, a
subsidiary of the Company, purchased an office building
containing approximately 14,475 square feet of office space
at 825 Washington Avenue, Waco, Texas. The building is
presently being used to store records and was purchased with
the intent that it will be used as the home office of Apex
in the future.
The Company does not invest in real estate in the normal
course of business and, therefore, no formal real estate
investment policies exist. The Company does, however, own a
limited amount of real estate and, from time to time, may
purchase such either for possible capital gain or for income
purposes.
The Company currently owns an office building mentioned
above, approximately eighty acres of undeveloped land and a
residential lot in McLennan County, Texas, and an interest
in a lodge located in Tyler County, Texas. In addition, the
Company has invested in a limited partnership whose primary
assets are undeveloped real estate holdings in Orange
County, Texas.
(continued)
-6-
Item 2. Properties (Continued)
The Company does not currently invest in real estate
mortgages but does invest in manufactured home loans as
mentioned previously in Item 1. First Preference Mortgage
Corp., however, originates, services and warehouses first
lien single family residential mortgages which are then sold
to investors. Therefore, these residential mortgages are
not considered to be investments of First Preference
Mortgage Corp.
Item 3. Legal Proceedings
The Company is involved in other routine litigation
incidental to its business, both as plaintiff and defendant.
Management of the Company, after consulting with legal
counsel, feels that liability resulting from this
litigation, if any, will not have a material effect on the
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this
report.
-7-
PART II
Item 5. Market for the Registrants' Common Equity and
Related Security Holder Matters
There is no established public trading market for the
Company's no par value common stock. On March 31, 1996, the
Company had approximately 472 holders of record of its
common stock.
The Company did not pay any cash dividends during the last
two fiscal year. Other than restrictions applicable to
Texas corporations in general, there are no restrictions
that limit the ability to pay dividends on common equity.
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Company had net income of $234,449 for 1995, compared to
net income of $102,968 for 1994. In general, the Company's
net income is due to the negative provision for losses under
manufactured home servicing agreements. The increase in net
income in 1995 is primarily due to the Company's share of
the net loss of Key Group, decreasing from $190,373 in 1994
to $61,124 in 1995, as discussed below.
The Company's manufactured home servicing portfolio at the
end of 1995 was approximately $6.4 million, consisting of
$2.9 million for institutional investors and $3.5 million
held by second tier subsidiaries of Key Group, LTD. in which
the Company is a limited partner, compared to a total
manufactured home servicing portfolio of $7.9 million at the
end of 1994. The reduction of approximately $1.5 million is
attributable to loan foreclosures, loan payoffs and normal
loan run off. In addition, at the end of 1995, First
Preference Mortgage Corp. services approximately $20.7
million in residential mortgage loans for governmental and
private investors compared to $14.6 million at the end of
1994.
Loan administration and production revenue for 1995 were
$2,565,437 compared to $1,330,735 in 1994. The increase in
loan administration and production revenue during 1995, as
compared to 1994, is primarily due to loan origination and
service fees from the Company's residential mortgage loan
operations. During 1995, First Preference Mortgage Corp.
originated approximately $174 million in new residential
mortgage loans compared to approximately $57 million during
1994.
Interest income for 1995 amounted to $1,364,400 compared to
$884,430 in 1994. The increase in interest income is
primarily due to the increased volume of new residential
mortgage loans originated during 1995 as compared to 1994 as
discussed above. First Preference Mortgage Corp. earns
interest from the date the mortgage loan is closed until the
date the mortgage loan is sold to investors.
Manufactured home loan originations during 1995 amounted to
$95,185 as compared to $118,710 in 1994. The Company only
originates new manufactured home loans to finance the resale
of its inventory on repossessed mobile homes that were
originally financed through the Company.
(continued)
-8-
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
For the year ended December 31, 1995, the Company realized
gain on sales of assets of $785,266, compared to realized
gains of $563,982 in 1994. The increase is the result of
new residential mortgage loans sold by First Preference
Mortgage Corp. to governmental or private investors which
increased to approximately $165.5 million in 1995 compared
to $54.3 million in 1994. On October 14, 1994, the Company
sold First Financial General Agency, Inc., a wholly-owned
subsidiary for $195,000, realizing a gain of approximately
$158,000. Also, First Preference Mortgage Corp. repaid
$868,000 of debt to related parties by selling
participations in manufactured home loans at face value to
the related parties. First Preference Mortgage realized a
gain on these sales equal to the unamortized discount on
these loans of approximately $119,000. During 1994, First
Preference Mortgage Corp. sold $388,000 of manufactured home
loans to First Preference Holdings, Inc., its parent at face
value in exchange for a note receivable in the principal
amount of $388,000. First Preference Mortgage Corp.
realized a gain related to the unamortized discount on these
loans of approximately $50,000.
Salaries and related expenses for 1995 were $2,873,413
compared to $2,048,350 in 1994. The significant increase in
1995 as compared to 1994 is due to the addition of personnel
in connection with operations of the residential mortgage
origination and servicing operations of First Preference
Mortgage Corp.
Interest expense for the year ended December 31, 1995
amounted to $1,030,130 compared to $255,543 in 1994. This
significant increase is due to increased utilization of the
Company's warehouse credit lines in connection with the
origination of residential mortgage loans which increased by
approximately 309% during 1995 as compared to 1994.
During 1995, the negative provision for losses under
servicing agreements was $701,000 resulting in a balance in
the reserve for losses under servicing agreements at the end
of the year of $1,886,283. In 1994 the negative provision
for losses under servicing agreements was $682,000,
resulting in a balance in the reserve account at year end in
1994 of $2,673,445. The negative provisions are due to the
Company's belief that its exposure to losses attributable to
the servicing agreements continues to decline.
Operating expenses for 1995 were $1,821,494 compared to
$1,463,023 in 1994. This increase is primarily due to the
significant increase in new residential mortgage loan
originations by First Preference Mortgage Corp. which
increased by approximately 309% in 1995 over 1994.
The consolidated statements of income for the year ended
December 31, 1995, reflect equity in net income of
affiliates of $55,002 compared to equity in net income of
$750 in 1994.
For the year ended December 31, 1995, Key Group had net loss
of $115,469 compared to a net loss of $359,627 in 1994. The
minority interest in the net income (loss) of Key Group
amounted to $(54,345) in 1995 compared to $(169,254) in
1994. The minority interest represents the ownership of
other entities in the Key Group net income or net loss.
(continued)
-9-
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
First Financial Corporation's portfolio of manufactured home
loans held for investment and serviced for investors is a
declining asset due to loan payoffs and normal loan run off.
It is estimated that a majority of these manufactured home
loans will be liquidated over the next 3 to 4 years. This
decline in the manufactured home loans will adversely affect
the Company's loan administration revenues, interest income
and insurance premiums and commissions.
At December 31, 1995, the Company's total assets were
$9,026,817. Included in the Company's total assets are the
assets of Key Group which amounted to $5,359,196 at December
31, 1995. The Key Group assets at December 31, 1995
consisted primarily of cash and cash equivalents of
$351,699, mortgage loans of $3,269,577, property and
equipment of $351,952 and prepaid expenses and other assets
of $1,385,892. The minority interest in the net assets of
Key Group at December 31, 1995 amounted to $1,806,229.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of cash are to meet operational
expenses, meet debt service obligations to its lenders, and
make payments due the holders of loans serviced by the
Company. In addition, First Preference Mortgage Corp.
provides interim funding for originated residential mortgage
loans. The Company, under the terms of most of the
Company's manufactured home loan servicing agreements, is
required to make payments to the holders of the serviced
loans even if the borrower does not make the payments due.
On a consolidated basis, cash and cash equivalents
(including restricted cash) were $1,082,821 at December 31,
1995. Included therein was cash and cash equivalents for
Key Group of $351,699 and Apex Lloyds of $678,817. The cash
flow of Key Group is only available to the Company to the
extent that cash is received in the form of partnership
distributions. Key Group has paid no distributions and has
no plans to pay distributions in the foreseeable future.
The cash flow of Apex Lloyds is only available to the
Company as allowed by state insurance regulations.
The Company's primary sources of cash to meet its
operational expenses, meet debt service obligations to its
lenders and advance deficiencies in scheduled payments due
the holders of manufactured home loans serviced by the
Company will be cash on hand, cash generated by liquidation
of existing assets, collection of claims on credit insurance
and servicing fees.
First Preference Mortgage Corp. has a master loan
participation agreement with two financial institutions
totaling $25,000,000 of which $10,000,000 expires on April
1996 and $15,000,000 expired in December 1995; however, FPMC
has continued to utilize this agreement since December 1995.
FPMC is in the process of negotiating a formal renewal of
this agreement. Under these agreements, the financial
institutions have the option to purchase an undivided
interest in the residential mortgage loans originated by
First Preference Mortgage Corp. When the subject mortgage
loan is sold in the secondary market, the financial
institution recoups its investment plus a specified yield on
its investment. At December 31, 1995, approximately
$12,533,000 in participations were outstanding under these
agreements.
(continued)
-10-
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The Company has no material commitments for capital
expenditures at December 31, 1995. As reflected in the
attached financial statements, the stockholders' equity of
the Company was $2,928,353 at December 31, 1995 and the
stockholders' equity was $2,691,563 at December 31, 1994.
-11-
Item 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
Number
Independent Auditors' Report
....................................... 13
Financial Statements
Consolidated Balance
Sheet.................................... 14
Consolidated Statements of
Income............................. 15
Consolidated Statements of Stockholders' Equity
(Deficit) .... 16
Consolidated Statements of Cash
Flow.......................... 17
Notes to Consolidated Financial Statements
................... 18 - 31
-12-
PATTILLO, BROWN & HILL, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
Providing Services Since 1923
RONNIE W. CRAWFORD, CPA, CFP AMERICAN PLAZA
FRANK L. WILCOX, CPA (DEC'D)
VINCE PALASOTA, CPA 200 WEST HIGHWAY 6, SUITE 300
R.D. PATTILLO, CPA (RET.)
B. STEVEN BOSTICK, CPA P.O. BOX 20725
RODNEY L. BROWN, CPA (RET.)
HAL M. WHITAKER, CPA WACO, TEXAS 76702-0725
WALTER H. HILL, JR., CPA (RET.)
NANCY HENRY POTTS, CPA (817) 772-4901
JAMES C. CURRY, CPA, CGFM FAX (817) 772-4920
AFFILIATE OFFICES:
JAMES E. KOCH, CPA
BROWNSVILLE OFFICE (210) 544-7778
DALLAS OFFICE (214) 777-6440
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
First Financial Corporation
We have audited the accompanying consolidated balance
sheet of First Financial Corporation and Subsidiaries as of
December 31, 1995, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of
the two years on the period ended December 31, 1995. These
consolidated 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 audit in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit 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 audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of First Financial Corporation and
Subsidiaries as of December 31, 1995, and the results of its
operations and its cash flows for each of the two years in
the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
April 3, 1996
-13-
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
ASSETS
Cash and cash equivalents $ 755,691
Restricted cash 327,130
Accounts receivable 684,252
Receivables from related parties 429,453
Marketable investment securities 306,762
Real estate held for investment, at cost 474,074
Mortgage loans held for investment 3,256,810
Mortgage loans held for sale 351,818
Investments in and advances to affiliated companies 391,380
Property and equipment 934,729
Deferred tax benefit 302,752
Cash surrender value of officers' life insurance 297,909
Other assets 514,057
$ 9,026,817
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable $ -
Notes payable to related parties 371,000
Estimated reserve for losses under
servicing agreements 1,886,283
Estimated reserve for losses under
insurance policies 271,582
Accounts payable 1,173,759
Accrued expenses and other liabilities 438,572
Payables to related parties 62,084
Interest payable 88,955 4,292,235
Minority interest 1,806,229
Stockholders' equity
Common stock - no par value; authorized 500,000
shares; issued 183,750 shares, of which 10,222
shares are held in treasury shares 1,000
Additional paid-in capital 518,702
Retained earnings 2,447,180
Unrealized gain (loss) on securities
net of applicable taxes ( 3,220)
2,963,662
Less: Treasury stock - at cost ( 35,309)
2,928,353
$ 9,026,817
==========
See accompanying notes to consolidated financial statements.
-14-
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
1995 1994
REVENUE
Loan administration and production $ 2,565,437 $ 1,330,735
Interest income 1,364,400 844,430
Insurance premiums and commissions 78,879 38,834
Consulting fees 331,675 212,320
Realized gain (losses) on sale of assets 785,266 563,982
Other 23,482 27,579
5,149,139 3,017,880
COST AND EXPENSES
Salaries and related expenses 2,873,413 2,048,350
Interest expense 1,030,130 255,543
Provision for losses under servicing agreements and other (701,000) (682,000)
Operating expenses
Insurance claim losses and loss expenses 83,100 88,648
Professional fees 136,853 131,262
Depreciation and amortization 200,289 183,945
Other operating expenses 1,401,252 1,059,168
5,024,037 3,084,916
INCOME BEFORE INCOME TAXES, EQUITY IN EARNINGS
OF AFFILIATES, AND EXTRAORDINARY ITEMS 125,102 ( 67,036)
INCOME TAXES
Current - -
Deferred - -
- -
INCOME BEFORE MINORITY INTEREST 125,102 ( 67,036)
MINORITY INTEREST (EARNINGS) LOSS 54,345 169,254
INCOME BEFORE EQUITY IN EARNINGS OF
AFFILIATES AND EXTRAORDINARY ITEMS 179,447 102,218
EQUITY IN EARNINGS OF AFFILIATES 55,002 750
NET INCOME $ 234,449 $ 102,968
========== ==========
INCOME PER COMMON SHARE $ 1.28 $ .57
========== ==========
See accompanying notes to consolidated financial statements.
-15-
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
Net
Unrealized
Loss on
Additional Marketable
Common
Paid-in Retained Treasury Investment
Stock
Capital Earnings Stock Securities Total
Balance, December 31, 1993 $ 1,000 $ 518,702 $ 2,109,763 $( 35,309)
$ - $2,594,156
Unrealized loss on marketable
investment securities - - - - ( 5,561) ( 5,561)
Net income - - 102,968 -
- 102,968
Balance, December 31, 1994 $ 1,000 $ 518,702 $ 2,212,731 $( 35,309)
$( 5,561) $2,691,563
Net income - - 234,449 -
- 234,449
Unrealized loss on marketable
investment securities - - - -
2,341 2,341
Balance, December 31, 1995 $ 1,000 $ 518,702 $2,447,180 $( 35,309)
$( 3,220) $2,928,353
========== ========== ==========
========== ========== =========
See accompanying notes to consolidated financial statements.
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Years Ended December 31
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 234,449 $ 102,968
Adjustments to reconcile net income (loss) to
net cash provided for operating activities
Realized (gain) losses on sale of assets ( 785,266) ( 394,516)
Depreciation and amortization 200,080 184,318
Equity in net (earnings) loss of affiliates (
55,002) ( 750)
Provision for losses under servicing agreements and
other ( 701,000) ( 682,000)
Increase in restricted cash used in operating
activities - net ( 711) ( 650)
Sale of stock interest in subsidiary - 158,455
(Increase) decrease in accounts receivable (
378,690) ( 97,245)
Increase in accounts payable 1,021,948 181,962
Increase (decrease) in minority interest ( 54,344) ( 169,255)
Mortgage loans funded (174,133,861) (56,280,635)
Mortgage loans sold 166,021,115 54,146,283
Mortgage loan participation sold 8,345,385 2,123,077
Other ( 108,994) ( 43,743)
NET CASH USED BY OPERATING ACTIVITIES ( 394,891) ( 771,731)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable investment securities 2,996 638,466
Purchases of marketable investment securities (
48,000) -
Amortization of discount on mortgage loans purchased (
68,932) ( 140,994)
Principal received on mortgage loans 858,787 1,272,596
Purchases of property and equipment ( 116,036) ( 357,226)
Proceeds from sales of property and equipment - 17,176
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 628,815 1,430,018
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 35,000 425,000
Payments on notes payable ( 236,634) ( 921,007)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (
201,634) ( 496,007)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32,290 162,280
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 723,401 561,121
CASH AND CASH EQUIVALENTS, END OF YEAR $ 755,691 $ 723,401
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 964,878 $ 1,140
============ ===========
Federal income taxes paid $ - $ -
============ ===========
See accompanying notes to consolidated financial statements.
-17-
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
First Financial Corporation ("the Company") was
incorporated in the State of Texas in 1964. During
the last three years, the primary business of the
Company, either directly or through its
subsidiaries, has been servicing a portfolio of
manufactured home loans, engaging in a limited
amount of insurance activities, and providing
consulting and data processing services to related
companies.
Basis for Financial Presentation
The Company's financial statements have been
prepared in conformity with generally accepted
accounting principles. In preparing those
financial statements, management is required to
make estimates and assumptions that affect the
reported amounts of assets and liabilities as of
the date of the balance sheet and revenue and
expenses for the period. Actual results could
differ significantly from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements
include the financial statements of First Financial
Corporation, and all of its wholly owned and
majority owned subsidiaries. Minority interest
represents ownership of other entities in the net
assets of Key Group, Ltd. (See Note 10). All
significant intercompany transactions and balances
have been eliminated in the consolidation.
Cash Equivalents
For the purposes of the 1995 and 1994 consolidated
statements of cash flows, the Company considers all
highly liquid instruments with original maturities
of three months or less to be cash equivalents.
Marketable Investment Securities
Marketable investment securities classified as
available for sale are adjusted to market value at
the year-end. The unrealized gain is recorded net
of income taxes to stockholder's equity. Realized
gains or losses on sale of securities are
calculated based on the specific identification
method.
(continued)
-18-
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Affiliated Companies
Investment in a limited partnership, limited-
liability company, and unincorporated joint
ventures at December 31, 1995 are accounted for by
the equity method.
Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed using accelerated and
straight-line methods over the estimated useful
lives of the assets.
Mortgage Loans
Mortgage loans are carried at the lower of
aggregate cost or market as determined by
outstanding commitments from investors or current
investment yield requirements calculated on the
aggregate loan basis.
Income Taxes
Income taxes are provided for the tax effects of
transactions reported in the financial statements
and consist of taxes currently due plus deferred
taxes related primarily to differences between the
basis of the loan loss reserve for financial and
income tax reporting. The deferred tax assets and
liabilities represent the future tax return
consequences of those differences, which will
either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred
taxes also are recognized for operating losses that
are available to offset future taxable income and
tax credits that are available to offset future
federal income taxes.
Foreclosed Manufactured Homes and Claims Receivable
Foreclosed manufactured homes and claims
receivable, which consists of manufactured homes
acquired by foreclosures, is valued at the lower of
cost or net realizable value.
Loan Administration Revenue
Loan administration revenue represents net fees
earned for servicing manufactured home loans owned
by institutional investors. The fees are generally
calculated on the outstanding principal balances of
the loans serviced and are recorded as income when
earned. Loan production revenue, representing fees
earned for originating residential mortgage loans,
is also included in loan administration revenue.
Earnings Per Common Share
Earnings per common share were computed by dividing
net income by the weighted average number of shares
outstanding plus stock options for 26,925 shares
granted under the Company's 1986 and 1984 stock
option plans.
-19-
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain reclassifications have been made to prior
periods' financial statements in order for them to
be better compared to the December 31, 1995
financial statements.
2. CONTINGENCIES AND THE CURRENT OPERATING ENVIRONMENT
First Financial Corporation (FFC) participated in the
Government National Mortgage Association (GNMA)
Mortgage-Backed Securities (GNMA-MBS) program for
manufactured homes through 1987. Under the GNMA-MBS
program, the Company collected monthly principal and
interest payments from the mortgagor and remitted the
payment to the security holder, after deducting a
service fee. The security holder of a GNMA-MBS was
guaranteed monthly payment of principal and interest
regardless of whether the Company collected the
necessary amount from the mortgagor. Therefore, First
Financial Corporation made advances to security holders
using its own funds for scheduled principal and
interest payments due that were delinquent or in the
process of repossession. Substantially all loans were
originated with some credit risk protection; however, a
portion of the loss remained uninsured and had to be
sustained by the Company.
The declining economies and increased unemployment
rates of the Southwest in 1986 and 1987 caused
delinquent loans and loans in repossession status to
increase significantly. These high levels of
delinquent loans and loans in repossession status
placed a serious strain on the Company's liquidity.
Beginning in 1986 and on numerous occasions throughout
1987, management met and discussed with and made
various proposals to representatives of GNMA in an
effort to reduce the losses being sustained by the
Company on the loans serviced under the GNMA-MBS
Program.
None of the proposals were accepted by GNMA. In
September 1987, the Company advised GNMA that it would
not be able to meet the scheduled payments to security
holders on September 15, 1987 and made application
requesting funds to meet the payments. The advance of
funds by GNMA constitutes default under the guaranty
agreements between the Company and GNMA. As a result of
the default, the Company's rights, title and interests
in mortgages pooled under its GNMA-MBS Program were
extinguished.
Subsequent to its extinguishment, the Company entered
into an Interim Servicing Agreement with GNMA with
respect to the mortgages pooled under the GNMA-MBS
Program. Under the agreement, the Company continued to
service the mortgages on behalf of GNMA through March
1, 1988.
Between September 15, 1987 and March 1, 1988, GNMA made
advances of approximately $15,100,000 to the Company in
order to meet scheduled payments to security holders.
On September 12, 1988, GNMA made demand on the Company
for approximately $21,129,000 in losses incurred by
GNMA as a result of the default and GNMA assuming the
issuer obligations of the Company. Further, GNMA
anticipated that it would incur additional losses in
connection with assuming the Company's issuer
responsibilities. There has been no reassertion of
these claims since that time.
(continued)
-20-
2. CONTINGENCIES AND THE CURRENT OPERATING ENVIRONMENT
(Continued)
FFC's management and legal counsel are not aware of any
facts which would lead them to believe that it is
probable GNMA will or intends to assert or reassert any
claims against FFC. The Company's position is it has
no liability to GNMA. Legal counsel has advised FFC
that if GNMA does assert or reassert any claims, FFC
should in addition to its defense it has no liability,
raise other defenses such as the expiration of the
statute of limitations and laches. It is not possible
to determine, at this time, the ultimate outcome of
these matters and the effects, if any, on the
accompanying consolidated financial statements since
the final resolution depends on circumstances which
cannot currently be evaluated with certainty.
3. LOAN ADMINISTRATION
The Company was servicing loans owned by institutional
investors aggregating approximately $2,900,000 at
December 31, 1995. The Company was also servicing
loans owned by the Company's majority owned subsidiary,
Key Group, Ltd., aggregating approximately $3,500,000
at December 31, 1995. Related trust funds of
approximately $110,000 at December 31, 1995 on deposit
in special bank accounts are not included in the
consolidated financial statements.
The Company's majority owned subsidiary, Key Group,
Ltd., was servicing residential loans held for sale or
owned by institutional investors aggregating
approximately $20,755,000 at December 31, 1995.
Related trust funds of approximately $208,800 at
December 31, 1995 on deposit in special bank accounts
are not included in the financial statements.
4. MARKETABLE INVESTMENT SECURITIES
Marketable investment securities at December 31, 1995
consists of:
Market
December 31, 1995 Cost Value
Marketable equity securities
- - available-for-sale $ 138,521 $ 133,642
Corporate bonds - held-to-maturity 173,120 174,922
$ 311,641 $ 325,661
========= =========
A realized loss of $4,127 was recognized in current
year due to sale of marketable equity securities. The
unrealized loss relating to securities available-for-
sale is $4,879.
The corporate bonds mature as follows:
1996 $ -
1997 -
1998 50,000
1999 -
2000 -
2001 and thereafter 125,000
-21-
5. INVESTMENT IN AND ADVANCES TO AFFILIATED COMPANIES
Investment in and advances to affiliated companies
consists of a 24.99% interest in Vidor, Ltd. (a limited
partnership) and a 25% interest in Whispering Pines,
L.L.C. (a limited liability company) at December 31,
1995. Summary financial information of Vidor, Ltd. and
Whispering Pines, L.L.C. for the year ended December
31, 1995 is as follows:
1995
Vidor, Ltd.
Assets $ 1,590,002
Liabilities 105,031
Equity $ 1,484,971
==========
Revenue $ 384,691
Expenses 266,106
Net Income $ 118,585
==========
Whispering Pines
Assets $ 426,922
Liabilities 4,920
Equity $ 422,002
==========
Revenue $ 89,243
Expenses 28,738
Net Income $ 60,505
==========
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at
December 31, 1995:
Estimated
Useful Lives
Land $ 25,524
Buildings and improvements 1,039,575 10 to
40 years
Equipment, furniture and fixtures 824,007 3 to
10 years
1,889,106
Less accumulated depreciation ( 954,377)
$ 934,729
=========
-22-
7. ESTIMATED RESERVE FOR LOSSES UNDER SERVICING AGREEMENTS
Under the terms of certain of its existing servicing
agreements, the Company is at risk for any credit
losses and costs of foreclosure, net of credit
insurance proceeds, sustained on default of the
borrower. During 1987 and 1986, as a result of the
declining economies and other matters discussed in Note
2, the Company made substantial loss provisions to
raise the estimated reserve for losses under servicing
agreements to levels that adequately reflect
management's estimate of future losses that may be
incurred under the Company's current and prior
servicing agreements. Beginning in 1990, the Company
changed its reserve estimate for losses under servicing
agreements as a result of decreases in the amount of
serviced loans outstanding. An analysis of the reserve
follows:
December 31,
1995 1994
Balance, beginning $ 2,673,445 $ 3,463,161
Current provisions ( 701,000) ( 682,000)
Losses - net ( 86,162) ( 107,716)
Balance, ending $ 1,886,283 $ 2,673,445
========== ==========
The losses incurred above are shown net of credit
insurance proceeds and other payments received as
further discussed in Note 2.
8. ACCOUNTS PAYABLE
Included in accounts payable at December 31, 1995 is
$645,360 due to Fleet Mortgage Company. In March 1996,
the Company paid $245,360 to Fleet. The remaining
$400,000 was set up as a note payable due in four
monthly installments of $100,000 plus 5.17% interest
beginning April 20, 1996.
9. NOTES PAYABLE
Notes payable at December 31, 1995 and 1994 consists of
the following:
1995 1994
Note payable to a bank, 0 22,634
which bears interest at
the bank's base rate (9%
at December 31, 1994), secured
by mortgage loans, maturing
September 3, 1996, interest
and principal payable monthly.
(continued)
-23-
9. NOTES PAYABLE (Continued)
Notes payable to related parties at December 31, 1995
and 1994 consist of the following:
1995 1994
Note payable to a company - 22,634
owned by related parties, which
bears interest at prime plus 1.5%
(10% at December 31, 1994), secured
by mortgage loans, maturing November
15, 1996, interest payable monthly.
Note payable to a company owned by a 125,000 125,000
related party, which bears interest at
prime plus .75% (9.25% at December 31, 1994),
secured by mortgage loans, maturing
November 15, 1996, interest payable monthly.
Note payable to a company owned by a 36,000 175,000
related party, which bears interest at
prime plus 1% (9.5% at December 31, 1994),
secured by mortgage loans, maturing
November 15, 1996, interest payable monthly.
$ 371,000 550,000
========= =========
Notes payable mature in each of the next five years as
follows:
1996 $ 371,000
1997 -
1998 -
1999 -
2000 -
2001 and thereafter -
$ 371,000
=========
10. LEASES
The Company leases certain property and equipment under
operating leases consisting principally of office
equipment and office space. Total rental expense was
$202,953 and $118,192 in 1995 and 1994 respectively.
The future minimum lease payments for the next five
years are as follows:
1996 $ 160,930
1997 132,142
1998 62,566
1999 31,525
2000 9,499
2001 and thereafter -
-24-
11. RELATED PARTY TRANSACTIONS
As described below, the Company is involved in a number
of other transactions with companies owned or managed
by related parties.
The Company was indebted to certain related entities
for $371,000 at December 31, 1995, and recorded
interest expense of $53,591 for the year then ended.
On September 30, 1991, the Company executed a Limited
Partnership Agreement (the "Agreement") to form a
limited partnership with the name "Key Group, Ltd." A
certificate of Limited Partnership for Key Group, Ltd.
("Key Group") was filed with and approved by the
Secretary of State of Texas on October 2, 1991. The
limited partners in Key Group are the Company and
Bluebonnet Investments, Ltd. ("Bluebonnet"). The
general partners are Robert A. Mann and First Key
Holdings, Inc.
Pursuant to the Agreement, on September 30, 1991, the
Company, as a limited partner in Key Group, contributed
to Key Group certain mobile home notes payable to and
held by the Company having an aggregate unpaid balance
of approximately $1,750,000, plus an amount of cash on
hand equal to the difference between $2,249,780 and the
unpaid balance of such notes as of the date transferred
to Key Group. In exchange for its contribution, the
Company received 52,936 partnership units ("Units") out
of a total of 100,000 Units representing approximately
52.94% of Key Group.
During 1992, First Preference Financial Corp. sold a
26.63848% undivided interest in its mortgage loans held
for investment for a total purchase price of $425,000
to a limited partnership owned by related parties. The
purchase price represents the principal portion of the
loans sold. The company continues to receive the
payments from the servicer on the mortgage loans and
remits the principal and interest at prime plus 1% to
the limited partnership on a monthly basis.
No gain or loss was realized on the sale. To the
extent interest collected differs from the guaranteed
rate of prime plus 1%, the Company realizes a gain or
loss in the period of collection.
Bluebonnet, a Texas limited partnership in which Robert
A. Mann and David W. Mann have direct and indirect
interest (as described below), contributed cash or cash
equivalents equal to $1,999,795 in exchange for 47,054
Units representing approximately 47.05% of Key Group.
Robert A. Mann, individually, and First Key Holdings,
Inc., a Texas corporation which is owned by the David
W. Mann 1990 Trust, of which David W. Mann is the
trustee and a beneficiary, each contributed $212.50 for
5 Units each in Key Group.
Key Group executed a Servicing Agreement with the
Company pursuant to which the Company will continue to
service the notes the Company contributed to Key Group.
(continued)
-25-
11. RELATED PARTY TRANSACTIONS (Continued)
Key Group conducts business through its wholly-owned
subsidiary, First Preference Holdings, Inc. ("First
Preference Holdings"). First Preference Holdings owns
three wholly-owned subsidiaries: First Preference
Mortgage Corp., First Preference Financial Corp. and
First Financial Information Services, Inc. First
Preference Mortgage Corp. originates and services
residential mortgage loans and is an approved
Seller/Servicer for Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("Freddie Mac"), Veterans Administration
("VA") and Federal Housing Administration ("FHA").
First Preference Financial Corp. was formed to be an
originator and servicer of consumer loans, primarily in
the manufactured home market. At the present time,
First Preference Financial Corp. has not obtained any
government licenses to originate and service consumer
loans. First Financial Information Services, Inc.
provides data processing services for the Company and
its subsidiaries. On June 1, 1992, the Company sold
100% of the issued and outstanding common stock of
First Financial Information Services to First
Preference Holdings for a purchase price equal to its
investment in First Financial Information Services,
Inc.
Bluebonnet is directly and indirectly controlled and
owned by members of the Mann family. Robert A. Mann is
a general and limited partner of Bluebonnet in his
individual capacity. Robert A. Mann, David W. Mann and
Robert A. Mann's other two children (David W. Mann's
siblings) have direct or indirect interests in limited
partnerships which are limited partners of Bluebonnet.
David W. Mann is trustee and beneficiary of the trust
which owns the outstanding stock of the corporate
general partner of Bluebonnet and is president and sole
director of such corporate general partner.
The Company also borrowed an additional $35,000 and
$425,000 from related parties for working capital
purposes during 1995 and 1994, respectively.
During 1995, the Company purchased manufactured home loans
from a related party for approximately $231,000, the
face value of those notes.
12. INCOME TAXES
The provision for income taxes consists of the
following components at December 31, 1995 and 1994:
1995 1994
Income tax computed at corporate
Federal rate $ 79,713 $( 22,792)
Earnings (loss) of affiliates ( 27,138) 57,801
Nondeductible reduction in reserve
for losses ( 238,340) ( 231,880)
Nondeductible expenses 3,337 ( 1,940)
Change in deferred tax asset 182,428 198,811
$ - $ -
========= =========
(continued)
-26-
12. INCOME TAXES (Continued)
The deferred tax benefit in the accompanying balance
sheet at December 31, 1995 includes the following
components:
Deferred tax benefit attributable to net
operating loss carryforwards $ 2,018,700
Deferred tax benefit attributable to
reserve for losses under servicing
agreements 641,336
Deferred tax benefit applicable to unrealized
loss on marketable equity securities 1,659
Deferred tax asset valuation allowance
(2,358,943)
Net deferred tax asset $
302,752
=========
The valuation allowance decreased by approximately
$84,000 due primarily to change in the amount deferred
relating to reserve for losses under servicing.
A valuation allowance has been provided for
substantially all future benefits available for tax
purposes due to the trend of historical losses of the
Company and the unlikely possibility of future
realization. The net deferred tax asset is
substantially unchanged from prior years and relates
to benefits available at a subsidiary level where an
unconsolidated return is filed.
At December 31, 1995, for Federal income tax purposes,
the Company has consolidated unused net operating loss
carryforwards of approximately $5,900,000
substantially all of which expire in 2002, 2003 and
2006, consolidated unused contribution carryforwards
of approximately $27,485 expiring from 1995 - 1998.
13. COMMITMENTS AND CONTINGENCIES
Substantially all of the conventional pools of
manufactured home loans serviced by the Company,
approximating $6,400,000 and $7,900,000 at December
31, 1995 and 1994, respectively, were sold to
investors with recourse. The recourse provisions
typically require the Company to repurchase delinquent
loans at the unpaid principal balances plus accrued
interest, or replace delinquent loans with another
loan which is current. Further, several of the
agreements require the Company to establish and
maintain cash reserve accounts. Deposits are
periodically made to the accounts equal to a specified
percent of the outstanding loans. The accounts may be
used to cover deficiencies from foreclosure and
liquidation of delinquent pooled mortgage loans. Such
cash reserve accounts totaled $27,130 and are included
in restricted cash at December 31, 1995.
(continued)
-27-
13. COMMITMENTS AND CONTINGENCIES (Continued)
The Company is involved in various other claims and
legal actions arising in the ordinary course of
business. Historically, the ultimate disposition of
these matters has not had a material adverse effect on
the company's financial condition. It is not possible
to determine, at this time, the ultimate outcome of
these matters and the effects, if any, on the
accompanying consolidated financial statements since
the final resolution depends on circumstances which
cannot currently be evaluated with certainty. Certain
accruals for loss contingencies have been recorded in
the financial statements of the Company.
14. STOCK OPTION PLANS
Under the Company's 1986 and 1984 stock option plans,
100,000 shares of common stock were reserved for
issuance upon exercise of options granted to officers
and key employees. As of December 31, 1994, 26,925
options had been granted; however, none had been
exercised. These plans expired during 1994.
15. SALE OF STOCK INTEREST IN SUBSIDIARY
On October 17, 1994, the Company sold 100% of the stock
of First Financial General Agency, Inc. ("FFGA"), a
wholly-owned subsidiary for $195,000. The Company
realized a gain of approximately $158,000 on the sale.
Prior to the sale of its stock all of the assets and
liabilities of FFGA were transferred to the Company,
except that in-force insurance business was assigned to
Tri-Triangle Agency, Inc., a company in which Robert A.
Mann has a significant interest. Earnings for this
entity that were included in the financial statements
were less than $1,000 for 1994.
16. SEGMENT REPORTING (UNAUDITED)
The Company operates principally in two segments,
mortgage banking and commission sales and underwriting
of hazard insurance for manufactured housing primarily
in the Central and Southeast region of Texas. Other
segments include underwriting credit insurance, and
land development through the Company's affiliated
company.
Information concerning the Company's operations in
different segments follows:
Corporate
Mortgage Insurance and
Banking Sales Other Consolidated
For the Year Ended
December 31, 1995
Revenue $4,701,068 $ 115,976 $ 332,095 $5,149,139
Operating profit 166,823 96,351 ( 144,867) 118,307
Identifiable assets 7,487,710 1,338,237 199,211 9,025,158
Depreciation 177,235 16,562 6,492 200,289
Capital expenditures 3,067 6,217 - 9,284
(continued)
-28-
16. SEGMENT REPORTING (UNAUDITED) (Continued)
For the Year Ended
December 31, 1994
Revenue $2,756,808 $ 73,174 $ 187,898 $3,017,880
Operating profit ( 47,202) 34,066 ( 53,900) ( 67,036)
Identifiable assets 7,281,832 1,352,683 68,708 8,703,223
Depreciation 163,360 15,192 5,393 183,945
Capital expenditures 340,313 16,913 - 357,226
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The fair value of cash and cash equivalents
approximates the carrying value because of the
short time until realization of these amounts.
Accounts Receivable and Payable
The fair value of accounts receivable and accounts
payable approximates the carrying value because of
the short time until realization of those
balances.
Long-term Debt
Because all notes payable have a maturity of one
year or less, the fair value of these instruments
does not significantly differ from the carrying
value.
Mortgage Loans Held for Sale
Mortgage loans held for sale are net of any
participations sold to investors. The fair value
of mortgage loans held for sale is based upon the
estimated price the investor is willing to pay.
The value of these loans are:
Carrying Value Market Value
Mortgage Loans Held for Sale $351,818 $357,012
Mortgage Loans Held for Investment
Mortgage loans held for investment are net of any
participations sold and any discounts. The fair
value of the balance is based upon discounted cash
flows at the market rate of interest for similar
loans. The value of these loans are:
Carrying Value Market Value
Mortgage Loans Held for Investment $3,256,810 $3,386,841
-29-
PART II
(Continued)
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures
Not Applicable
-30-
PART III
Item 9. Directors and Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the
Exchange Act
The information required by this Item 9, is hereby
incorporated by reference to the definitive information
statement to be filed within 120 days after the end of the
last fiscal year.
Item 10. Executive Compensation
The information required by this Item 10, is hereby
incorporated by reference to the definitive information
statement to be filed within 120 days after the end of the
last fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners
and Management
The information required by this Item 11, is hereby
incorporated by reference to the definitive information
statement to be filed within 120 days after the end of the
last fiscal year.
Item 12. Certain Relationships and Related Transactions
The information required by this Item 12, is hereby
incorporated by reference to the definitive information
statement to be filed within 120 days after the end of the
last fiscal year.
-31-
PART III
(Continued)
Item 13. Exhibits and Reports on Form 8-K. Page
Number
(a) Exhibits included herein:
10 - Fifth Renewal, Extension and Modification 34
- - 37
agreement dated May 25, 1995, between First
Preference Mortgage Corp. and Pacific
Southwest Bank, F.S.B.
10 - Sixth Modification Agreement dated January 1, 38 - 40
1996, between First Preference Mortgage Corp.
and Pacific Southwest Bank, F.S.B.
21 - Subsidiaries of the Registrant
Exhibits hereby incorporated by reference:
3 - Articles of Incorporation filed with Form 10-
K
year ended December 31, 1987, on page 35.
3 - Bylaws of Registrant filed with Form 10-K
year
ended December 31, 1991, and pages 38 to 64.
10 - Limited Partnership Agreement with Key Group,
Ltd. dated September 30, 1991, filed with
Form
8-K dated September 30, 1991, on pages 5 -
29.
10 - Servicing Agreement dated September 30, 1991,
with Key Group, Ltd. filed with Form 8-K
dated September 30, 1991, on pages 30 - 49.
10 - Loan Sale Agreement dated September 3, 1993,
with
the Resolution Trust Corporation filed with
Form 10-KSB year ended December 31, 1993, on
pages 34 - 59.
10 - Second Renewal, Extension and Modification
Agreement dated May 31, 1994, between
First Preference Mortgage Corp. and Pacific
Southwest Bank, F.S.B. filed with Form 10-KSB
for year ended December 31, 1994, on pages
38 - 41.
(continued)
-32-
Item 13. Exhibits and Reports on Form 8-K. (Continued)
Page
Number
10 - Third Renewal, Extension and Modification
Agreement dated September 30, 1994, between
First Preference Mortgage Corp. and Pacific
Southwest Bank, F.S.B. filed with Form 10-KSB
for year ended December 31, 1994, on pages
42 - 44.
10 - Fourth Renewal, Extension and Modification
Agreement dated November 17, 1994, between
First Preference Mortgage Corp. and Pacific
Southwest Bank, F.S.B. filed with Form 10-KSB
for year ended December 31, 1994, on pages
45 - 47.
10 - Loan Purchase Agreement dated September 30,
1994,
between First Preference Mortgage Corp. and
Bank Texas, N.A. Filed with Form 10-KSB for
the year ended December 31, 1994, on pages
48 - 63.
10 - Mortgage Loan Master Repurchase Agreement
dated
October 17, 1994 between First Preference
Mortgage Corp. and Lomas Mortgage USA, Inc.
filed with Form 10-KSB for the year ended
December 31, 1994, on pages 64 - 93.
10 - Agreement dated December 12, 1994 between
First
Preference Mortgage Corp. and Provident Bank
filed with Form 10-KSB for the year ended
December 31, 1994, on pages 94 - 115.
(b) Report on Form 8-K
No reports on Form 8-K have been filed by the
Registrant during the last quarter of the period
covered by this report.
-33-
FIFTH RENEWAL, EXTENSION AND MODIFICATION AGREEMENT
This Fifth Renewal, Extension and Modification
Agreement (the "Agreement") is made and entered into as of
the 25th day of May, 1995, by and between FIRST PREFERENCE
MORTGAGE CORPORATION ("Seller") and PACIFIC SOUTHWEST BANK,
("Buyer" and "Custodian") for mutual consideration herein
evidenced.
INTRODUCTORY PROVISIONS
The following form the basis of and are part of this
Agreement:
A. On or about April 19, 1993, Seller, Buyer and
Custodian entered into that certain Master Loan
Participation and Custodian Agreement (the "Participation
Agreement").
B. On or about November 1, 1993, Seller, Buyer and
Custodian entered into that certain Renewal, Extension and
Modification Agreement (the "First Modification").
C. On or about May 31, 1994, Seller, Buyer and
Custodian entered into that certain Second Renewal,
Extension and Modification Agreement (the "Second
Modification").
D. On or about September 30, 1994, Seller, Buyer and
Custodian entered into that certain Third Renewal, Extension
and Modification Agreement (the "Third Modification").
E. On or about November 17, 1994, Seller, Buyer and
Custodian entered into that certain Fourth Renewal,
Extension and Modification Agreement (the "Fourth
Modification") to modify the Master Loan Participation and
Custodian Agreement. (The Master Loan Participation and
Custodian Agreement as modified by the First Modification,
Second Modification and Third Modification, and any other
modifications, shall be hereinafter collectively referred to
as the "Participation Agreement".)
F. The Participation Agreement terminates by its
terms on April 30, 1995.
G. Seller, Buyer and Custodian desire to renew,
extend and modify the Participation Agreement on the terms
and conditions herein set forth.
H. All capitalized terms used in this Agreement and
not otherwise defined herein shall have the meanings
ascribed to them in the Participation Agreement.
NOW, THEREFORE, for and in consideration of TEN AND
NO/100 DOLLARS ($10.00), the mutual covenants herein
contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged,
Seller, Buyer and Custodian hereby covenant and agree as
follows:
1. Termination Date. The Termination Date of the
Participation Agreement is hereby modified from April 30,
1995, as modified in the first paragraph of the Third
Modification and as modified in the first paragraph of the
Fourth Modification, as stated therein, to April 30, 1996.
All references to the Termination Date in the Participation
Agreement, in any Participation Certificate or in any other
document relating thereto shall hereafter be deemed to mean
the Termination Date as hereby modified.
2. Purchase Price. The first two sentences of
Section 1.03. of the Participation Agreement, as modified in
the second paragraph of the Second Modification dated May
31, 1994 and as modified in the second paragraph of the
Third Modification dated September 30, 1994 are deleted in
their entirety and the following is substituted therefor:
The Purchase Price for each Interest with respect
to any Loan the security for which is a
condominium or townhouse shall be equal to the
lesser of (i) ninety-nine percent (99%) of the
principal balance of the Loan, or (ii) the
Commitment Amount. The Purchase Price for each
Interest with respect to any other Loans shall be
equal to the lesser of: (i) ninety-nine percent
(99%) of the principal balance of the Loan, or
(ii) the Commitment Amount.
3. Maximum Total Purchase Price. The maximum amount
of total Purchase Price from time to time outstanding, as
described in Section 1.05. of the Participation Agreement,
and as modified in the third paragraph of the First
Modification dated November 1, 1993 is hereby increased from
$6,000,000.00 to $10,000,000.00. The maximum amount of
total Purchase Price from time to time outstanding with
respect to Loans the security for which is a condominium or
townhouse, as described in Section 1.05 of the Participation
Agreement and as modified in the fourth paragraph of the
Second Modification dated May 31, 1994, is hereby increased
from $600,000.00 to $1,000,000.00.
4. No Other Changes. Except as expressly renewed,
extended and modified hereby, all terms and provisions of
the Participation Agreement shall be and shall remain
unchanged and the Participation Agreement is hereby ratified
and confirmed and shall be and shall remain in full force
and effect, enforceable in accordance with its terms, as
hereby modified.
5. No Defaults. Seller covenants and warrants that
there is no default under the Participation Agreement, nor
does any exist under the Participation Agreement, as herein
modified, which, with the passage of time, the giving of
notice, or both, would constitute a default thereunder and
that there are no defenses, counterclaims or offsets with
respect to the Participation Agreement, as herein amended.
6. Confirmation of Representations and Warranties.
Seller hereby reaffirms all of the representations and
warranties made to Buyer at the time the Participation
Agreement was entered into and declare the same to be true
as of such date and as of the date hereof.
7. Payment of Costs. Seller hereby agrees to pay to
Buyer, in accordance with the terms of the Participation
Agreement, all expenses incurred by Buyer in connection with
this Agreement, including, without limitation, Buyer's
reasonable attorneys' fees incurred in connection with the
preparation of this Agreement.
8. Binding Effect. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties'
respective representatives, successors and assigns.
9. Applicable Law. Buyer's, Seller's and Custodian's
obligations hereunder are performable in Dallas County,
Texas, and the laws of the State of Texas and of the United
States of America shall govern the rights and duties of the
parties hereto and the validity, construction, enforcement
and interpretation hereof.
10. Counterparts. This Agreement may be executed
concurrently in one or more counterparts by the parties,
which counterparts together when executed by all the parties
shall for all purposes be the original, but all of which
together shall constitute one and the same agreement.
SELLER:
First Preference Mortgage Corporation,
a Texas corporation
By: David W. Mann 6-20-95
Name: David W. Mann,
Title: President
BUYER:
PACIFIC SOUTHWEST BANK,
a federal savings association
By: Fred H. Stephens
Name: Fred H. Stephens
Title: Vice President
CUSTODIAN:
PACIFIC SOUTHWEST BANK,
a federal savings association
By: Fred H. Stephens
Name: Fred H. Stephens
Title: Vice President
h:\users\rmach\ffc\psw5part.doc
SIXTH MODIFICATION AGREEMENT
This Sixth Modification Agreement (the "Agreement") is
made and entered into as of the 1st day of January, 1996, by
and between FIRST PREFERENCE MORTGAGE CORPORATION ("Seller")
and PACIFIC SOUTHWEST BANK, ("Buyer" and "Custodian") for
mutual consideration herein evidenced.
INTRODUCTORY PROVISIONS
The following form the basis of and are part of this
Agreement:
A. On or about April 19, 1993, Seller, Buyer and
Custodian entered into that certain Master Loan
Participation and Custodian Agreement (the "Participation
Agreement").
B. On or about November 1, 1993, Seller, Buyer and
Custodian entered into that certain Renewal, Extension and
Modification Agreement (the "First Modification").
C. On or about May 31, 1994, Seller, Buyer and
Custodian entered into that certain Second Renewal,
Extension and Modification Agreement (the "Second
Modification").
D. On or about September 30, 1994, Seller, Buyer and
Custodian entered into that certain Third Renewal, Extension
and Modification Agreement (the "Third Modification").
E. On or about November 17, 1994, Seller, Buyer and
Custodian entered into that certain Fourth Renewal,
Extension and Modification Agreement (the "Fourth
Modification")
F. On or about May 25, 1995, Seller, Buyer and
Custodian entered into that certain Fifth Renewal, Extension
and Modification Agreement (the "Fifth Modification") to
further modify the Master Loan Participation and Custodian
Agreement. (The Master Loan Participation and Custodian
Agreement as modified by the First Modification, Second
Modification, Third Modification, Fourth Modification and
the Fifth Modification and any other modifications, shall be
hereinafter collectively referred to as the "Participation
Agreement".)
G. The Participation Agreement terminates by its
terms on April 30, 1996.
H. Seller, Buyer and Custodian desire to modify the
Participation Agreement on the terms and conditions herein
set forth.
I. All capitalized terms used in this Agreement and
not otherwise defined herein shall have the meanings
ascribed to them in the Participation Agreement.
NOW, THEREFORE, for and in consideration of TEN AND
NO/100 DOLLARS ($10.00), the mutual covenants herein
contained and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged,
Seller, Buyer and Custodian hereby covenant and agree as
follows:
1. Payment Terms. The first sentence of Section
1.04(a) of the Participation Agreement (as modified in
Paragraph 3 of the Second Modification dated May 31, 1994,
and as modified in Paragraph 3 of the Third Modification
dated September 30, 1994) are hereby deleted in their
entirety and the following is substituted therefor:
Beginning January 1, 1996, the Yield shall accrue
to Buyer on the Purchase Price at a varying rate of
interest per annum based on a 360-day year equal to the
lesser of (i) one- quarter of one percent (.25%) above the
Prime Rate, and (ii) the Highest Lawful Rate.
2. No Other Changes. Except as expressly renewed,
extended and modified hereby, all terms and provisions of
the Participation Agreement shall be and shall remain
unchanged and the Participation Agreement is hereby ratified
and confirmed and shall be and shall remain in full force
and effect, enforceable in accordance with its terms, as
hereby modified.
3. No Defaults. Seller covenants and warrants that
there is no default under the Participation Agreement, nor
does any exist under the Participation Agreement, as herein
modified, which, with the passage of time, the giving of
notice, or both, would constitute a default thereunder and
that there are no defenses, counterclaims or offsets with
respect to the Participation Agreement, as herein amended.
4. Confirmation of Representations and Warranties.
Seller hereby reaffirms all of the representations and
warranties made to Buyer at the time the Participation
Agreement was entered into and declare the same to be true
as of such date and as of the date hereof.
5. Payment of Costs. Seller hereby agrees to pay to
Buyer, in accordance with the terms of the Participation
Agreement, all expenses incurred by Buyer in connection with
this Agreement, including, without limitation, Buyer's
reasonable attorneys' fees incurred in connection with the
preparation of this Agreement.
6. Binding Effect. This Agreement shall be binding
upon, and shall inure to the benefit of, the parties'
respective representatives, successors and assigns.
7. Applicable Law. Buyer's, Seller's and Custodian's
obligations hereunder are performable in Dallas County,
Texas, and the laws of the State of Texas and of the United
States of America shall govern the rights and duties of the
parties hereto and the validity, construction, enforcement
and interpretation hereof.
8. Counterparts. This Agreement may be executed
concurrently in one or more counterparts by the parties,
which counterparts together when executed by all the parties
shall for all purposes be the original, but all of which
together shall constitute one and the same agreement.
SELLER:
First Preference Mortgage
Corporation,
a Texas corporation
By: David W. Mann
Name:David W. Mann,
Title:President
BUYER:
PACIFIC SOUTHWEST BANK,
a federal savings association
By: Fred H. Stephens
Name: Fred H. Stephens
Title: Senior Vice President
CUSTODIAN:
PACIFIC SOUTHWEST BANK,
a federal savings association
By: Fred H. Stephens
Name: Fred H. Stephens
Title: Senior Vice President
h:\users\rmach\ffc\psw6part.doc
EXHIBIT 22 - SUBSIDIARIES OF THE REGISTRANT
Exhibit 22
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Name Under Which Subsidiar State of Incorporation %
Does Business or Organization of Ownership
First Financial Insurance Agency, Inc. Arkansas 100.0%
First Financial Credit Corporation Delaware 100.0%
PreOwned Homes, Inc. Delaware 100.0%
Mobile Home Conveyors and Liquidators, Inc. Delaware 100.0%
First Advisory Services, Inc. Delaware 100.0%
Shelter Resources, Inc. Delaware 100.0%
Apex Lloyds Insurance Company Texas 100.0%
Texas Apex, Inc. Texas 100.0%
Key Group, Ltd. Texas 52.9%
The following are 100% owned Subsidiaries of Key Group,
Ltd.:
First Preference Holdings, Inc. Texas
First Preference Mortgage Corp. Texas
First Preference Financial Corp. Texas
First Financial Information Services, Inc. Delaware
-41-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, First Financial
Corporation has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
FIRST FINANCIAL CORPORATION
/s/ David W. Mann /s/ Robert
L. Harris
By: David W. Mann By: Robert L.
Harris
President and Principal Vice President
and Principal
Financial Officer Accounting
Officer
Date: April 12, 1996 Date: April
12, 1996
Pursuant to the requirements of the Securities Exchange
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:
/s/ Robert A. Mann Date: April
12, 1996
Robert A. Mann, Director and
Chairman of the Board
/s/ David W. Mann Date: April
12, 1996
David W. Mann, Director and
President
/s/ Henry Dietz Date: April
12, 1996
Henry Dietz, Director
/s/ Walter J. Rusek Date: April
12, 1996
Walter J. Rusek, Director
/s/ Jackson K. Walker, M.D. Date: April
12, 1996
Jackson K. Walker, M.D., Director
/s/ Barrett Smith Date: April
12, 1996
Barrett Smith, Director
/s/ Jack Hauser Date: April
12, 1996
Jack Hauser, Director
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1995
[PERIOD-END] DEC-31-1995
[CASH] 1,079,821
[SECURITIES] 306,762
[RECEIVABLES] 1,113,705
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 1,889,106
[DEPRECIATION] 954,377
[TOTAL-ASSETS] 9,026,817
[CURRENT-LIABILITIES] 0
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1,000
[OTHER-SE] 2,927,353
[TOTAL-LIABILITY-AND-EQUITY] 9,026,817
[SALES] 0
[TOTAL-REVENUES] 5,149,139
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 5,024,037
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] 125,102
[INCOME-TAX] 0
[INCOME-CONTINUING] 125,102
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 234,449
[EPS-PRIMARY] 1.28
[EPS-DILUTED] 1.28
</TABLE>
