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, 1998
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
Incorporation or Organization) Identification Number)
800 Washington Avenue, Waco, Texas 76701
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (254) 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. $9,089,952.
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, 1999.
Documents Incorporated by Reference: See Page 2.
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DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-KSB Incorporated Document
Part III, Directors, The Information required by
Item 9 Executive Officers, this Item 9, is hereby
Promoters and incorporated by reference to
Control Persons; the definitive information
Compliance with statement to be filed within
Section 16(a) of 120 days after the end of the
the Exchange Act last fiscal year.
Part III, Executive The information required by
Item 10 compensation 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, Security ownership The information required by
Item 11 of certain this Item 11, is hereby
beneficial owners incorporated by reference to
and management the definitive information
statement to be filed within
120 days after the end of the
last fiscal year.
Part III, Certain The information required by
Item 12 relationships and this Item 12, is hereby
related incorporated by reference to
transactions 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 - 43
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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, 1999, the Company services a portfolio of
manufactured home loans aggregating approximately $1.8 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 January 7, 1998, First Apex Re, Inc. ("FAR") was incorporated for
the purpose of providing reinsurance coverage for mortgage guaranty
insurance placed on loans originated by related and/or affiliated
entities. The Company directly owns 52% of the outstanding stock of
FAR. The remaining 48% is owned by Apex Lloyds Insurance Company, a
wholly-owned subsidiary of the Company.
(continued)
3
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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 Robert A. Mann is the trustee and David
W. Mann 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/or
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: Security Washington Avenue Corp.,
First Preference Financial Corp. and First Financial Information
Services, Inc. First Preference Mortgage Corp. ("FPMC"), a wholly-
owned subsidiary of Security Washington Avenue Corp., 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, Austin, Dallas, Houston, Athens, 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. During 1996, 1997, and 1998, FPMC originated
approximately $201 million, $261 million and $397 million in new
residential mortgage loans. 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 is 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, 1998, and February
28, 1999, FPMC was servicing a portfolio of conventional residential
mortgage loans aggregating approximately $15.6 million and $15.2
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 are similar to loan products offered by its competitors.
Effective on January 1, 1998, home equity lending was authorized in
Texas. FPMC has not yet entered the market of home equity lending,
but is continuing to evaluate the possibility of competing in this
market. As a small company, FPMC attempts to provide superior service
to attract customers. FPMC has a trademark registered with the State
of Texas covering its name and Company logo. A similar trademark
application is pending with the Federal Patent and Trademark Office.
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.
(continued)
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Item 1. Description of Business (Continued)
The Company and its consolidated subsidiaries employed 106 employees
as of December 31, 1998, of which 97 are full-time employees. Seventy-
eight (78) of these employees work for First Preference Mortgage
Corp., of which 74 are full-time employees.
The Company does not spend any significant amounts on research and
development or compliance with environmental laws.
Item 2. Description of Properties
First Preference Mortgage Corp. ("FPMC"), a third tier subsidiary of
Key Group, Ltd., in which the Company is a limited partner, 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. The
building is in good condition with no known or anticipated material
repairs being required. The building was purchased by FPMC subject to
a lien held by the Company. FPMC paid off the loan secured by the
building in December 1998 and the lien was released. (See Certain
Relationships and Related Transactions")
FPMC currently leases approximately 1,750 square feet of office space
located at 919 N. Valley Mills Drive, Waco, Texas. The lease term
expires in July 2000.
FPMC leased space for an office in the Woodlands, Texas from January
31, 1994 through November 1997. The Woodlands office was closed in
January 1996, and the office space was sub-leased for part of the time
until the lease expired in November 1997.
FPMC has operated an Austin, Texas office since March 1994 (except for
a five month period from February 1996 through June 1996). Until
March 1999, this office was in leased space at 4807 Spicewood Springs
Road, Austin, Texas. In March 1999, FPMC moved its Austin office to
3301 Northland Drive, Austin, Texas, in approximately 1,618 square
feet of leased space for a term of 3 years.
FPMC leases approximately 2,111 square feet of office space located at
6409 Colleyville Blvd., Colleyville, Texas for a lease term of 13
months, which began in March 1994 and expires in April 2000.
In October 1995, FPMC leased approximately 982 square feet of office
space located at 1800 Shiloh Road, Suite 101, Tyler, Texas, for a
lease term of 36 months commencing November 1, 1995. Prior to the
expiration of this lease, FPMC moved this office to approximately
1,154 square feet of office space located at 3620 Old Bullard Road,
Tyler, Texas, for a lease term of 36 months commencing November 1,
1998.
On June 12, 1996, FPMC sub-leased approximately 1,899 square feet of
office space located at 1221 Abrams Road, Richardson, Texas, for a
lease term of 12 months commencing July 1, 1996. This was closed in
April 1997.
(continued)
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Item 2. Description of Properties (Continued)
In August 1996, FPMC leased approximately 500 square feet of office
space located at 1053 North Pacific, Mineola, Texas, for a lease term
of 12 months commencing September 1, 1996. This lease continued in
effect on a month-to-month basis until February 1998, when the office
was closed.
In November 1997, FPMC leased approximately 991 square feet of office
space located at 11550 Fuqua, Suite 410, Houston, Texas, for a lease
term of 24 months.
In April 1998, FPMC leased a two office suite located at 203 North
Praireville Street, Athens, Texas, for a lease term of six months.
This lease continues in effect on a month-to-month basis.
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 approximately eighty acres of undeveloped
land 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.
The Company does not currently invest in real estate mortgages but
does invest in manufactured home loans as mentioned previously in Item
1. FPMC, 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 FPMC.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries is currently involved
in any legal proceeding where the amount involved exceeds 10% of the
current assets 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.
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PART II
Item 5. Market for the Registrants' Common Equity and
Related Security Holder Matters
There is no established market for the Company's no par value common
stock. On March 31, 1999, the Company had approximately 474 holders
of record of its common stock.
The Company did not pay any cash dividends during the last two fiscal
years. Other than restrictions applicable to Texas corporations in
general, there are no restrictions that limit the ability to pay
dividends on common equity or that are likely to do so in the future.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company had net income of $400,158 for 1998, compared to net
income of $329,979 for 1997. In general, the Company's net income is
due to the negative provision for losses under manufactured home
servicing agreements and the Company's share of the net income of Key
Group.
For the year ended December 31, 1998, the Company had a negative
provision for losses under servicing agreements of $227,000 resulting
in a balance in the reserve for losses under servicing agreements at
December 31, 1998, of $442,555. In 1997, the negative provision for
losses under servicing agreements was $324,900, resulting in a balance
in the reserve account at year-end of $908,245. As previously
discussed, under the terms of certain of its servicing agreements, the
Company is at risk for any credit losses and costs of foreclosure, net
of credit insurance proceeds, if any, sustained on default of the
borrower. The Company has analyzed its servicing portfolio
characteristics, including the servicing portfolio balance, loss
experience, maturity and aging of the loans and the credit insurance
coverage on the loans. Based on this analysis, it is the Company's
belief that its exposure to losses attributable to the servicing
agreements continues to decline.
For the year ended December 31, 1998, Key Group had net income of
$248,306 compared to net income of $218,757 in 1997. The minority
interest in the net income of Key Group amounted to $116,863 in 1998,
compared to $102,956 in 1997. The minority interest represents the
ownership of other entities in the Key Group net income or loss. The
Company's share of the net income of Key Group was $131,443 and
$115,801 in 1998 and 1997, respectively.
The Company's manufactured home servicing portfolio at the end of 1998
was approximately $1.8 million, consisting of $1.1 million for
institutional investors and $.7 million held by a third tier
subsidiary of Key Group, Ltd., in which the Company is a limited
partner, compared to a total manufactured home servicing portfolio of
$3.4 million at the end of 1997. This reduction of approximately $1.6
million is attributable to loan foreclosures, loan payoffs and normal
loan run off. In addition, at the end of 1998, FPMC serviced
approximately $15.6 million in residential mortgage loans for
governmental and private investors compared to approximately $19.1
million at the end of 1997.
(continued)
7
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Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
Loan administration and production revenue for 1998 were $4,550,876
compared to $3,345,016 in 1997. The increase in loan administration
and production revenue during 1998, as compared to 1997, is primarily
due to increased loan originations from FPMC's residential mortgage
loan operations. During 1998 FPMC originated approximately $397.2
million in new residential mortgage loans compared to approximately
$261 million in 1997.
Interest income for 1998 amounted to $1,606,448 compared to $1,248,424
in 1997. During 1998, the interest income earned by the Company and
its subsidiaries on investments decreased by approximately $73,000 or
23%. This decrease is primarily due to the decline in the Company's
mortgages held for investment which decreased by approximately
$921,000 from December 31, 1997, to December 31, 1998. During the year
ended December 31, 1998, the interest income earned on mortgages held-
for-sale increased by approximately $435,000 compared to 1997,
primarily due to the increase in volume of the number of loans
originated in 1998. FPMC earns interest from the date the mortgage
loan is closed until the date the mortgage loan is sold to investors.
Interest expense for the year ended December 31, 1998, amounted to
$1,253,047 compared to $779,975 for the same period in 1997. The
increase in interest expense for the year is due to the increased
utilization of the FPMC's loan participation agreement as a result of
the increased origination of new residential mortgage loans as
discussed above. The difference between interest income and interest
expense in 1998 was approximately $353,000 compared to approximately
$468,000 in 1997. This decline in the spread between interest income
and interest expense was primarily due to residential mortgage interest
rates declining in 1998 at a faster pace then the interest rate paid on
borrowed funds. (See Liquidity and Capital Resources.)
During the years ended December 31, 1998 and 1997, the Company did not
originate any manufactured home loans. The Company only originates
new manufactured home loans to finance the resale of its inventory of
repossessed mobile homes that were originally financed through the
Company.
For the year ended December 31, 1998, the Company (and its
subsidiaries) realized gain on sales of assets of $2,416,971 compared
to $1,863,832 in 1997. This increase is attributable to the volume of
new residential mortgage loans sold by FPMC to governmental and
private investors which increased to approximately $380.2 million in
1998, compared to $259.6 million in 1997, and an increase in the net
margin realized on the sale of these mortgage loans.
Salaries and related expenses for 1998 were $4,679,492 compared to
$3,687,301 in 1997. This significant increase is the result of the
continued expansion of the residential mortgage loan origination and
servicing operations of FPMC, as discussed above.
Operating expenses for 1998 were $2,854,538 compared to $2,278,202 in
1997. The primary reason for this increase is the increase in new
residential mortgage loan originations by FPMC, as discussed above.
(continued)
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Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company'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 2 to 3 years.
This decline in the manufactured home loans will adversely affect the
Company's loan administration revenue, interest income and insurance
premiums and commissions.
At December 31, 1998, the Company's total assets were $7,781,250.
Included in the Company's total assets are the assets of Key Group
which amounted to $4,937,441 at December 31, 1998. The Key Group
assets at December 31, 1998, consisted primarily of cash and cash
equivalents of $1,160,181, accounts receivable of $635,096, mortgage
loans of $1,183,400, property and equipment of $1,046,214, and prepaid
expenses and other assets of $912,550. The minority interest in the
net assets of Key Group at December 31, 1998, amounted to $1,945,682.
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, FPMC
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 $1,922,980 at December 31, 1998. Included
therein were cash and cash equivalents for Key Group of $1,160,181 and
Apex Lloyds of $522,452. 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 the sale or liquidation of existing assets, collection of
claims on credit insurance and servicing fees.
The subsidiaries of the Company that are engaged in an active business
generate cash from their own operations.
In addition, FPMC has a master loan participation agreement with a
financial institution in the amount of $30,000,000 which expires on
August 31, 1999. Under this agreement, the financial institution has
the option to purchase an undivided interest in the residential
mortgage loans originated by FPMC. 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,
1998, approximately $28,086,000 in participations were outstanding
under this agreement.
(continued)
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Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company had no material commitments for capital expenditures at
December 31, 1998. During 1998 and the first quarter of 1999, First
Financial Information Services, a second tier subsidiary of Key Group
has committed to spend approximately $240,000 to upgrade the
technology utilized by FPMC in its residential mortgage lending
operations. The source of funds will be available cash from FPMC. As
reflected in the attached financial statements, the stockholders'
equity of the Company was $3,903,771 at December 31, 1998, and the
stockholders' equity was $3,492,834 at December 31, 1997.
YEAR 2000
Like many companies today, the Company, its subsidiaries, and entities
in which the Company has a significant investment rely on technology
to support the day-to-day operations of the Company. Due to the
Company's dependence on computer technology, the nature and impact of
year 2000 processing failures on the Company's business could be
material. The "Year 2000 Problem" is centered around the programming
of a two-digit year, not a four-digit year. Some systems may
interpret 00 as 1900 and not 2000. Year 2000 poses many potential
problems, from the obvious of system failure to the obscure of data
integrity. The Company has defined two levels of year 2000
Compliance. First is System Compliance. The Company considers a
system to be year 2000 compliant if the system will operate correctly
into and beyond year 2000. This includes non-ambiguous displays of
dates. The second definition is Company Compliance. Company
compliance is defined as being able to provide the products, services,
and support in the same or similar manner as today into and beyond
year 2000. The Company does not have control over all systems that
could be affected by year 2000. The Company is addressing potential
problems posed by failure or interruption of internal computer or
environment systems, failure or interruption of services from third
party relationships, and failure or interruption of customer
relationships. The Company is evaluating the year 2000 preparedness
of critical third party relationships through questionnaires, phone
calls, and information posted on the Internet.
The Company is utilizing the guidelines established by the FFIEC,
Federal Financial Institutions Examination Council, for developing the
year 2000 Compliance plan. The Year 2000 Compliance plan requires
Year 2000 Compliance efforts from the Company's subsidiaries and
partnerships. The Company is utilizing the assistance of legal
counsel and year 2000 consultants to supplement its Year 2000
Compliance Program. The activities of the Company and its related
entities can be grouped into five categories: 1) Loan Servicing, 2)
Insurance, 3) Data Processing Services, 4) Investments, and 5)
Mortgage. For more detail on the specific entities and relationships,
refer to the Company Description. The Company is requiring all
entities that have a potential year 2000 material impact to
aggressively address them.
(continued)
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YEAR 2000 (Continued)
The Company and its subsidiaries and partnerships have extensive Year
2000 Compliance plans and have substantially completed the year 2000
assessment, including PCs, applications, and environmental systems.
The plan calls for the completion of the testing phase by May 31,
1999, and the contingency planning phase by July 1999. All new
contracts are being reviewed for Year 2000 Issues. Vendors, business
relationships, and some customers have been sent year 2000
questionnaires to help the Company better assess and minimize the
potential risks posed by these relationships. The Company is also
reviewing the financial soundness and year 2000 efforts of the Company's
investments.
The total impact of year 2000 is unknown. The Company will have
completed testing of internal systems and interfaces with key third
party relationships by May 31, 1999. To help validate the Company's
efforts, the Mortgage and Loan servicing group is participating in
the Mortgage Bankers Association of America Year 2000 Readiness
Testing.
The budgeted cost of the year 2000 efforts for the Company is $85,000.
This includes $15,000 specifically for the insurance group, $70,000
for the mortgage and data processing group which also covers the loan
servicing and data processing entities. Approximately $30,000 has
been spent to date. The breakdown of the percentage of cost is:
Consulting Fees 27%
Literature and Promotional 6%
Legal Counsel 18%
Testing 18%
Miscellaneous 31%
In addition to the above costs, the Company has upgraded systems for
performance reasons and not for year 2000. These upgrades were not
accelerated due to Year 2000 Issues. These system upgrades are year
2000 compliant.
The Company believes that its greatest year 2000 risks are those posed
by external sources, including utilities companies, service providers
and customers. Certain service providers are part of the financial
industry and are under some form of regulatory guidelines which should
help to minimize their potential failure. The failure of the
investors to meet their obligation to the mortgage group or the
failure of the insurance outsourcing entities to properly handle
insurance operations would have a significant material affect on the
Company. Through questionnaires and other forms of communication, the
Company is assessing and monitoring third party relationships,
including service providers, outsource insurance entities, investors,
brokers and customers, for Year 2000 Compliance to minimize potential
year 2000 problems.
The risks posed by utility failure can also be significant, but little
can be done for extended failure, more than a few days. The Company
is evaluating the implementation of a backup power generator for the
corporate office that could sustain the Company for a short power
outage, not to exceed three days.
(continued)
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YEAR 2000 (Continued)
No guarantee can be made with respect to Year 2000 Compliance because
too many interdependencies exist between systems, companies, and
entities to be able to assure that all possible things have been
tested. Many services, such as long distance phone and utilities are
out of the direct control of the Company. The Company considers
contingency planning as one of the most critical phases of Year 2000
Compliance plans.
The Company and its related companies will focus the second quarter of
1999 on developing and testing contingency plans, including what hard
copy reports could be used to sustain manual operations for a short
period of time. These contingency plans will be tested and the staff
will be trained on proper execution of these contingency plans.
Additional backups and hard copy reports will be run prior to January
1, 2000, and prior to other potential problem dates. The Company is
currently performing a feasibility study for a backup power generator
for the corporate office. To assure that the Company has adequate
support to handle potential problems and issues, the Company is
requesting that no vacation time will be taken from December 1, 1999
through January 31, 2000. The Company is working with key staff to
minimize turnover.
The real effect of year 2000 has so many variables that the Company
can not realistically make any valid predictions as to the total
impact financially or otherwise. The Company is making every effort
it can to minimize the potential risks that are within the Company's
control, such as validating internal systems and developing
contingency plans. If the U. S. experiences total power outages or
all outsourcing or third party relationships encounter failure, then
the Company will be significantly impacted, as will all other
companies. More realistically, the Company may expect delays in
services while things are being corrected. The Company is working on
developing realistic contingency plans for those things that have
valid contingency options, such as courier services.
The Company has not received assurance that the year 2000 problem has
been solved by all of its business partners and suppliers, nor can the
Company assure everyone that it will not have interruptions due to the
failure of electric and telephone service as a result of this problem.
While no one can say that there will not be any problems nor is it
possible to simultaneously guarantee each other that no problems will
appear, the Company will do its best to minimize and quickly correct
any errors that do occur.
Certain information contained in this year 2000 discussion constitutes
forward-looking statement within the meaning of the Private Securities
Litigation Reform Act of 1995. Although the Company believes its
expectations are based on reasonable assumptions and because Year 2000
Issues present many unknowns, the Company's actual results could
differ materially from its expectations.
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PATTILLO, BROWN & HILL, L.L.P.
Certified Public Accountants - Business Consultants
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, 1998,
and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the two years in the period ended
December 31, 1998. 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, 1998,
and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Pattillo, Brown & Hill, L.L.P.
April 7, 1999
American Plaza - 200 West Hwy. 6 - Suite 300 - P.O. Box 20725 -
Waco, Tx 76702-0725 - (254) 772-4901 - Fax: (254) 772-4920 -
Affiliate Offices: Brownsville, TX (956) 544-7778 - Hillsboro, TX
(254) 582-2583 - Albuquerque, NM (505) 266-5904
13
<PAGE>
<TABLE>
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<CAPTION>
ASSETS
<S> <C>
Cash and cash equivalents $ 1,362,456
Restricted cash 560,524
Accounts receivable 1,082,843
Receivables from related parties 130,558
Marketable investment securities 301,715
Real estate held-for-investment, at cost 444,000
Mortgage loans held-for-investment 799,289
Mortgage loans held-for-sale 522,281
Investments in and advances to affiliated companies 405,944
Property and equipment 931,705
Deferred tax benefit 293,244
Cash surrender value of officers' life insurance 338,508
Other assets 608,183
-------------
Total Assets $ 7,781,250
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes payable to related parties $ -
Estimated reserve for losses under servicing agreements 442,555
Estimated reserve for losses under insurance policies 154,934
Accounts payable 496,736
Accrued expenses and other liabilities 666,067
Payables to related parties 40,286
Interest payable 131,219
-------------
Total Liabilities 1,931,797
-------------
Minority interest 1,945,682
-------------
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 3,008,441
Comprehensive income 410,937
-------------
3,939,080
Less: Treasury stock - at cost 35,309
-------------
Total Stockholders' Equity 3,903,771
-------------
Total Liabilities and Stockholders' Equity $ 7,781,250
=============
See accompanying notes to consolidated financial statements.
</TABLE>
14
<PAGE>
<TABLE>
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31
1998 1997
------------- --------------
<S> <C> <C>
REVENUE
Loan administration and production $ 4,550,876 $ 3,345,016
Interest income 1,606,448 1,248,424
Insurance premiums and commissions 207,368 63,879
Consulting fees 298,631 246,675
Realized gain (losses) on sale of assets 2,416,971 1,863,832
Other 9,658 6,098
------------- --------------
Total Revenue 9,089,952 6,773,924
------------- --------------
COST AND EXPENSES
Salaries and related expenses 4,679,492 3,687,301
Interest expense 1,253,047 779,975
Provision for losses under servicing agreements and other (227,000) (324,900)
Operating expenses:
Insurance claim losses and loss expenses - 61,940
Professional fees 120,609 153,331
Depreciation and amortization 222,140 144,205
General and administrative expense 2,511,789 1,918,726
------------- --------------
Total Cost and Expenses 8,560,077 6,420,578
------------- --------------
INCOME BEFORE INCOME TAXES, EQUITY IN EARNINGS
OF AFFILIATES, AND EXTRAORDINARY ITEMS 529,875 353,346
------------- --------------
INCOME TAXES
Current 5,715 -
Deferred - -
------------- --------------
Total Income Taxes 5,715 -
------------- --------------
INCOME BEFORE MINORITY INTEREST 524,160 353,346
MINORITY INTEREST (EARNINGS) LOSS (116,863) (102,956)
------------- --------------
INCOME BEFORE EQUITY IN EARNINGS OF
AFFILIATES AND EXTRAORDINARY ITEMS 407,297 250,390
EQUITY IN EARNINGS (LOSS) OF AFFILIATES (7,139) 79,589
------------- --------------
NET INCOME 400,158 329,979
OTHER COMPREHENSIVE INCOME
Unrealized holding gains (losses) 10,779 (11,259)
------------- --------------
COMPREHENSIVE INCOME $ 410,937 $ 318,720
============= ==============
INCOME PER COMMON SHARE $ 2.31 $ 1.89
============= ==============
See accompanying notes to consolidated financial statements.
</TABLE>
15
<PAGE>
<TABLE>
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 1,000 $ 518,702 $ 2,689,721 $(35,309) $ 3,174,114
Comprehensive income - - 318,720 - 318,720
--------- ----------- ------------- --------- -------------
Balance, December 31, 1997 1,000 518,702 3,008,441 (35,309) 3,492,834
Comprehensive income - - 410,937 - 410,937
--------- ----------- ------------- --------- -------------
Balance, December 31, 1998 $ 1,000 $ 518,702 $ 3,419,378 $(35,309) $ 3,903,771
========= =========== ============= ========== =============
The accompanying notes to consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<CAPTION>
Years Ended December 31
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Comprehensive income (loss) $ 410,937 $ 318,720
Adjustments to reconcile comprehensive income (loss) to
net cash provided for operating activities:
Realized (gain) losses on sale of assets (6,910) (92,638)
Depreciation and amortization 178,036 96,593
Realized (gain) loss on sale of mortgage loans (2,416,971) -
Equity in net (earnings) loss of affiliates 8,273 (29,588)
Provision for losses under servicing agreements and other (436,380) (551,417)
Increase in restricted cash used in operating activities - net (250,000) -
(Increase) decrease in accounts receivable 118,377 (376,981)
Increase (decrease) in accounts payable (316,539) (21,061)
Increase (decrease) in minority interest 116,863 102,956
Mortgage loans funded (397,239,243) (261,088,529)
Mortgage loans sold 384,855,579 259,591,829
Change in mortgage loan participation sold 14,504,564 1,251,034
Other 70,737 139,164
-------------- --------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (402,677) (659,918)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Gain) loss on sale of marketable investment securities (787) (6,098)
Proceeds from sale of marketable investment securities 51,000 6,847
Purchases of marketable investment securities (31,542) -
Unrealized holding (gain) loss (10,779) 11,259
Principal received on mortgage loans 964,899 943,426
Purchases of property and equipment (397,038) (801,675)
Proceeds from sales of property and equipment 6,910 816,150
Disposition of equipment 15,200 -
-------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 597,863 969,909
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - -
Payments on notes payable - -
-------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES - -
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 195,186 309,991
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,167,270 857,279
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,362,456 $ 1,167,270
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,160,036 $ 779,975
============== ==============
Federal income taxes paid $ 5,715 $ -
============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
17
<PAGE>
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 originating and
servicing a portfolio of residential mortgage and 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.
Insurance Related Activities
The Company owns 100% of a property and casualty
insurance company and 52% of a mortgage guarantee insurance
company which are included in the consolidated financial
statements. The policies below relate specifically to the
insurance activities of the companies.
Premium Revenues - Premiums on property and casualty
contracts are recognized as earned primarily on a prorata
basis over the contract period.
Unpaid Losses and Loss Expenses - Unpaid losses and loss
expenses are based on cash-basis estimates for reported
claims, and on estimates, based on experience, for unreported
claims and loss expenses. The provisions for unpaid losses
and loss expenses at December 31, 1998 and 1997, have been
established to cover the estimated net cost of insured losses.
The amounts are necessarily based on estimates and,
accordingly, there can be no assurance that the ultimate
liability will not exceed such estimates.
Acquisition Cost - Acquisition cost includes such things
as commissions, premium taxes and other items, which are
charged to current operations as incurred. Amounts are
deferred based upon the capitalization and unearned premium
rates. Deferred costs are amortized over the contract period
on a prorata basis.
(continued)
18
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Insurance Related Activities (Continued)
Reinsurance - The Company cedes 100% of the insurance
written on residential homes to a reinsurer under a fronting
and reinsurance agreement. This reinsurance arrangement
provided greater diversification of business and minimized the
Company's losses arising from large risks or from hazards of
an unusual nature. Although the ceding of insurance does not
discharge the original insurer from its primary liability to
its policyholder, the insurance company that assumes the
coverage assumes the related liability, and it is the practice
of insurers for accounting purposes to treat insured risks, to
the extent of the reinsurance ceded, as though they were risks
for which the original insurer is not liable. During 1998,
substantially all of the Company's insurance was written under
this fronting and reinsurance agreement.
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 11).
All significant intercompany transactions and balances have
been eliminated in the consolidation.
Cash Equivalents
For the purposes of the 1998 and 1997 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 year-end. The
unrealized gain is recorded net of income taxes as a component
of comprehensive income. Realized gains or losses on sale of
securities are calculated based on the specific identification
method.
Investment in Affiliated Companies
Investment in a limited partnership, limited-liability
company, and unincorporated joint ventures at December 31,
1998, 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.
(continued)
19
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Real Estate Held For Investment
Real estate held for investment is carried at the lower
of cost or market in accordance with FASB 121. As of year-
end, no permanent impairments to this property had occurred.
Mortgage Loans Held For Sale
Mortgage loans held for sale 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.
Mortgage Loans Held For Investment
Mortgage loans held for investment are carried at
historical cost unless otherwise permanently impaired.
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.
(continued)
20
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Loan Servicing Rights
For mortgage loans sold, the Company retains the right to
service certain loans. Those rights are capitalized and
amortized over the life of the loan on a straight-line basis.
Reclassifications
Certain reclassifications have been made to prior
periods' financial statements to conform to current year
classifications. Such reclassifications had no effect on
previously reported net income.
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.
(continued)
21
<PAGE>
2. CONTINGENCIES AND THE CURRENT OPERATING ENVIRONMENT (Continued)
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.
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 $1,060,000 at December 31, 1998. The
Company was also servicing loans owned by the Company's majority
owned subsidiary, Key Group, Ltd., aggregating approximately
$747,000 at December 31, 1998. Related trust funds of
approximately $3,800 at December 31, 1998, 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 $15,601,000 at
December 31, 1998. Related trust funds of approximately $289,000
at December 31, 1998, on deposit in special bank accounts are not
included in the financial statements.
4. MARKETABLE INVESTMENT SECURITIES
Marketable investment securities at December 31, 1998, consist of:
<TABLE>
<CAPTION>
Unrealized Unrealized Market
December 31, 1998 Cost Gain Loss Value
<S> <C> <C> <C> <C>
Marketable equity securities - available-for-sale $ 154,654 $ 27,585 $ 4,498 $ 177,741
Corporate bonds - held-to-maturity 123,974 - - 123,974
---------- ----------- --------- -----------
$ 278,628 $ 27,585 $ 4,498 $ 301,715
========== =========== ========= ===========
</TABLE>
The net unrealized gain for 1998 relating to securities available-
for-sale is $10,779.
(continued)
22
<PAGE>
4. MARKETABLE INVESTMENT SECURITIES (Continued)
The corporate bonds mature as follows:
1999 $ -
2000 -
2001 125,000
2002 -
2003
2004 and thereafter -
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, 1998 and 1997. Summary financial
information of Vidor, Ltd. and Whispering Pines, L.L.C. for the
year ended December 31, 1998 and 1997, is as follows:
1998 1997
-------------- -------------
Vidor, Ltd.
Assets $ 1,833,289 $ 1,868,862
Liabilities 74,601 74,596
-------------- -------------
Equity $ 1,758,688 $ 1,794,266
============== =============
Revenue $ 86,817 $ 424,172
Expenses 120,698 111,432
-------------- -------------
Net Income $ ( 33,881) $ 312,740
============== =============
1998 1997
-------------- -------------
Whispering Pines
Assets $ 191,470 $ 190,777
Liabilities - -
-------------- -------------
Equity $ 191,470 $ 190,777
============== =============
Revenue $ 3,166 $ 6,853
Expenses 2,473 3,006
-------------- -------------
Net Income $ 693 $ 3,847
============== =============
23
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1998:
Estimated
Useful Lives
Land $ 181,500
Buildings and improvements 395,243 10 to 40 years
Equipment, furniture and fixtures 1,320,669 3 to 10 years
-------------
1,897,412
Less accumulated depreciation ( 965,707)
-------------
$ 931,705
=============
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 1988 and 1987, 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
1998 1997
-------------- --------------
Balance, beginning $ 908,245 $ 1,371,067
Current provisions ( 227,000) ( 324,900)
Losses - net ( 238,690) ( 137,922)
-------------- --------------
Balance, ending $ 442,555 $ 908,245
============== ==============
The losses incurred above are shown net of credit insurance
proceeds and other payments received as further discussed in Note 2.
8. LEASES
The Company maintains various equipment under long-term operating
leases. Future minimum rental payments required under these
leases are approximately:
1999 $ 32,879
2000 23,054
2001 4,900
(continued)
24
<PAGE>
8. LEASES (Continued)
The rental expense for equipment leases was $86,933 and $71,576
for December 31, 1998 and 1997, respectively.
The Company also leases office space for its locations under
various operating leases. The future minimum rental payments
required are approximately:
1999 $ 81,408
2000 33,247
2001 11,540
2002 -
The rental expense for office space was $143,727 and $217,441 for
1998 and 1997, respectively.
9. RELATED PARTY TRANSACTIONS
As described below, the Company is involved in a number of other
transactions with companies owned or managed by related parties.
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.
Bluebonnet, a Texas limited partnership in which Robert A. Mann
and/or 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 Robert A. Mann is trustee and David W. Mann is 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
<PAGE>
9. 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 Financial Corp., First Financial Information
Services, Inc., and Security Washington Avenue Corp. 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"). During 1997,
First Preference Holdings, Inc. transferred 100% of First
Preference Mortgage Corp's stock to Security Washington Avenue
Corp. in exchange for 100% of the outstanding stock of Security
Washington Avenue Corp.
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 by members of
the Mann family. Robert A. Mann is a general and limited partner
of Bluebonnet in his individual capacity. He is also the
Chairman of the Board and a director of Bluebonnet Enterprises,
Inc., the corporate general partner of Bluebonnet. Robert A. Mann
and Robert A. Mann's other two children (David W. Mann's
siblings) have direct or indirect interests in limited
partnerships which are the limited partners of Bluebonnet.
Robert A. Mann is trustee and David W. Mann is a beneficiary of
the trust which owns the outstanding stock of the corporate
general partner of Bluebonnet and the corporate general partners
of the limited partnerships which are limited partners of
Bluebonnet.
During 1997, the Company sold real estate to a related party in
exchange for a note receivable in the amount of $32,500. The
note is still outstanding at year-end.
10. INCOME TAXES
The provision for income taxes consists of the following components
at December 31, 1998 and 1997:
1998 1997
------------- ------------
Income tax computed at corporate
Federal rate $ 137,997 $ 112,193
Earnings (loss) of affiliates ( 12,673) 7,945
Nondeductible reduction in reserve
for losses ( 71,465) ( 110,466)
Nondeductible income and expenses ( 4,847) ( 2,310)
Change in deferred tax asset ( 43,297) ( 7,362)
------------- ------------
$ 5,715 $ -
============= ============
(continued)
26
<PAGE>
10. INCOME TAXES (Continued)
The deferred tax benefit in the accompanying balance sheet at
December 31, 1998, includes the following components:
Deferred tax benefit attributable to net
operating loss carryforwards $ 2,092,438
Deferred tax benefit attributable to reserve
for losses under servicing agreements 150,469
Deferred tax benefit applicable to unrealized
(gain) loss on marketable equity securities ( 10,779)
Deferred tax asset valuation allowance (1,938,884)
--------------
Net deferred tax asset $ 293,244
==============
The valuation allowance increased by approximately $54,000 due
primarily to change in the amount deferred relating to reserve
for losses under servicing, and difference between net operating
loss carryforward recorded on the books and actual benefit from
the tax return for 1997.
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, 1998, for federal income tax purposes, the
Company has consolidated unused net operating loss carryforwards
of approximately $5,200,000 substantially all of which expire in
2002, 2003 and 2006, and consolidated unused contribution
carryforwards of approximately $22,000 expiring from 1998-2003.
11. COMMITMENTS AND CONTINGENCIES
Substantially all of the conventional pools of manufactured home
loans serviced by the Company, approximating $1,900,000 and
$3,600,000 at December 31, 1998 and 1997, 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 $10,524 and are included in restricted
cash at December 31, 1998.
(continued)
27
<PAGE>
11. 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.
12. SEGMENT REPORTING
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:
<TABLE>
<CAPTION>
Corporate
Mortgage Insurance and
Banking Sales Other Consolidated
----------- -------------- ------------- --------------
For the Year Ended December 31, 1998
<S> <C> <C> <C> <C>
Revenue $ 8,532,483 $ 258,733 $ 298,736 $ 9,089,952
Operating profit 651,416 126,368 ( 24,926) 752,858
Identifiable assets 6,198,647 1,449,353 142,025 7,790,025
Depreciation 193,069 24,487 4,584 222,140
Capital expenditures 312,207 66,230 18,601 397,038
For the Year Ended December 31, 1997
Revenue $ 6,364,286 $ 96,891 $ 246,888 $ 6,708,065
Operating profit 548,736 ( 7,846) ( 73,275) 467,615
Identifiable assets 6,565,868 1,160,045 111,744 7,837,657
Depreciation 131,882 11,263 1,060 144,205
Capital expenditures 797,115 4,560 - 801,675
</TABLE>
13. 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.
(continued)
28
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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.
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 Market
Market Value
------------ ------------
Mortgage Loans Held-for-Sale $ 522,281 $ 529,985
============ ============
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 Market
Market Value
------------ ------------
Mortgage Loans Held-for-Investment $ 799,289 $ 844,162
============ ============
Mortgage Servicing Rights
Mortgage Servicing Rights is net of any amortization taken.
The fair value of the balance is based upon the market rate of
servicing rights of similar loans. The value of these loans are:
Carrying Market
Market Value
------------ ------------
Mortgage Servicing Rights $ 75,117 $ 146,843
============ ============
(continued)
29
<PAGE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Concentrations of Credit
The Company maintains cash balances at several
depository institutions. Cash accounts at these institutions
are insured by FDIC for up to $100,000 for each account.
Amounts in excess of insured limits were approximately
$4,250,736 at December 31, 1998. Of that balance,
approximately $3,625,000 relates to funds on deposit in the
settlement account with a depository institution. The
primary function of this account is to receive payment on
loans sold which were financed by the depository institution.
When payments are received, the balance is distributed to the
depository institution and the Company, based upon the
financing agreement.
Retirement Plans
The Company maintains a 401(k) profit sharing plan for
the benefit of all employees who have attained the age of
twenty-one and have completed one year of service. The
calendar year plan provides for voluntary employee
contributions as a deduction from wages with a required
matching contribution by the employer. The Company has a
matching contribution equal to 50% of the amount of the
salary reduction up to 2% plus 25% for reductions in excess
of 2% to a maximum of 4%. For the year ended December 31,
1998, the Company incurred a total contribution expense of
$3,094.
30
<PAGE>
PART II
(Continued)
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosures
Not Applicable
31
<PAGE>
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.
32
<PAGE>
PART III
(Continued)
Item 13. Exhibits and Reports on Form 8-K. Page
Number
(a) Exhibits included herein:
10 - Seventh Amendment to Master Whole-Loan
Purchase Agreement dated May 31, 1998,
between First Preference Mortgage Corp.
and Bank One, Texas, N.A. 35 - 37
10 - Eighth Amendment to Master Whole-Loan
Purchase Agreement dated August 31, 1998,
between First Preference Mortgage Corp.
and Bank One, Texas, N.A. 38 - 41
21 - Subsidiaries of the Registrant 42
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 - Master Whole-Loan Purchase Agreement dated
March 27, 1996, between First Preference
Mortgage Corp. and Bank One Texas, N.A.
10 - First Amendment to Master Whole-Loan
Purchase Agreement dated March 18, 1997,
between First Preference Mortgage Corp.
and Bank One, Texas, N.A.
10 - Second Amendment to Master Whole-Loan
Purchase Agreement dated June 24, 1997,
Between First Preference Mortgage Corp.
And Bank One, Texas, N.A.
(continued)
33
<PAGE>
Item 13. Exhibits and Reports on Form 8-K. Page
Number
10 - Third Amendment to Master Whole-Loan
Purchase Agreement dated July 24, 1997,
Between First Preference Mortgage Corp.
And Bank One, Texas, N.A.
10 - Fourth Amendment to Master Whole-Loan
Purchase Agreement dated August 24, 1997,
Between First Preference Mortgage Corp.
And Bank One, Texas, N.A.
10 - Fifth Amendment to Master Whole-Loan
Purchase Agreement dated September 29, 1997,
Between First Preference Mortgage Corp.
And Bank One, Texas, N.A.
10 - Sixth Amendment to Master Whole-Loan
Purchase Agreement dated February 27, 1998,
between First Preference Mortgage Corp.
and Bank One, Texas, N.A.
(b) Report on Form 8-K
No form 8-K was filed during the quarter ended December 31, 1998.
34
<PAGE>
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/ Annie Laurie Miller
By: David W. Mann By: Annie Laurie Miller
President and Principal Executive Vice President and
Financial Officer Principal Accounting Officer
Date: April 14, 1999 Date: April 14, 1999
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 14, 1999
Robert A. Mann, Director and
Chairman of the Board
/s/ David W. Mann Date: April 14, 1999
David W. Mann, Director and President
/s/ Walter J. Rusek Date: April 14, 1999
Walter J. Rusek, Director
/s/ Barrett Smith Date: April 14, 1999
Barrett Smith, Director
/s/ Jack Hauser Date: April 14, 1999
Jack Hauser, Director
Date: April 14, 1999
Allen B. Mann, Director
/s/ Mary Hyden Mann Hunter Date: April 14, 1999
Mary Hyden Mann Hunter, Director
SEVENTH AMENDMENT TO MASTER WHOLE-LOAN PURCHASE AGREEMENT
This DOCUMENT is entered into as of May 31, 1998, between FIRST
PREFERENCE MORTGAGE CORP., a Texas Corporation ("Seller"), and BANK ONE,
TEXAS, N.A., a national banking association ("Buyer").
Seller and Buyer are party to the Master Whole-Loan Purchase Agreement
(as it may have been renewed, extended, and amended through the date of
this document, the ("Purchase Agreement") dated as of March 27, 1996.
Seller and Buyer have agreed, upon the following terms an conditions, to
permanently increase the Purchase Commitment to $30,000,000. Accordingly,
for adequate and sufficient consideration, Seller and Buyer agree as
follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this document
(a) terms defined in the Purchase Agreement have the same meanings
when used in this document and (b) references to "Sections,"
"Schedules," and "Exhibits" are to the Purchase Agreement's sections,
schedules, and exhibits.
2. AMENDMENT. The following definition in Section 1.1 of the
Purchase Agreement is entirely amended as follows:
Purchase Commitment means $30,000,000
3. CONDITIONS PRECEDENT. Notwithstanding any contrary provision,
the foregoing paragraphs in this document are not effective unless and
until (a) the representations and warranties in this document are true
and correct and (b) Buyer receives counterparts of this document
executed by each party named on the signature page or pages of this
document.
4. RATIFICATIONS. To induce Buyer to enter into this document,
Seller (a) ratifies and confirms all provisions of the Purchase
Documents as amended by this document, (b) ratifies and confirms that
all guaranties, assurances, and Liens granted, conveyed, or assigned
to Buyer under the Purchase Documents (as they have been renewed,
extended, and amended) are not released, reduced, or otherwise
adversely affected by this document and continue to guarantee, assure,
and secure full payment and performance of the present and future
Obligation, and (c) agrees to perform those acts and duly authorize,
execute, acknowledge, deliver, file, and record those additional
documents, and certificates as Buyer may request in order to create,
perfect, preserve, and protect those guaranties, assurances, and
Liens.
5. REPRESENTATIONS. To induce Buyer to enter into this document,
Seller represents and warrants to Buyer that as of the date of this
document (a) Seller has all requisite authority and power to execute,
deliver, perform its obligations under this document, which execution,
delivery, and performance have been duly authorized by all necessary
corporate action, require no action by or filing with any Tribunal, do
not violate any of its articles of incorporation, certificate of
<PAGE>
incorporation, or bylaws or (except where not a Material-Adverse
Event) violate any Law applicable to it or any material agreement to
which it of its assets are bound, (b) upon execution and delivery by
all parties to it, this document will constitute Seller's legal and
binding obligation, enforceable against it in accordance with this
document's terms except as that enforceability may be limited by
Debtor Laws and general principles of equity, (c) all other
representations and warranties in the Purchase Documents are true and
correct in all material respects except to the extent that (i) any of
them speak to a different specific date or (ii) the facts on which any
of them were based have been changed by transactions contemplated or
permitted by the Purchase Agreement, and (d) no Material-Adverse
Event, Default or Potential Default exists.
6. EXPENSES. Seller shall pay all costs, fees, and expenses paid or
incurred by Buyer incident to this document, including, without
limitation, the reasonable fees and expenses of Buyer's counsel in
connection with the negotiation, preparation, delivery, and execution
of this document and any related documents.
7. MISCELLANEOUS. All references in the Purchase Documents to the
"Master Whole-Loan Purchase Agreement" refer to the Purchase Agreement
as amended by this document. This document is a "Purchase Document"
referred to in the Purchase Agreement; therefore, the provisions
relating to Purchase Documents in Sections 1 and 11 are incorporated
in this document by reference. Except as specifically amended and
modified in this document, the Purchase Agreement is unchanged and
continues in full force and effect. This document may be executed in
any number of counterparts with the same effect as if all signatories
had signed the same document. All counterparts must be construed
together to constitute one and the same instrument. This document
binds and inures to each of the undersigned and their respective
successors and permitted assigns, subject to Section 11.12. THIS
DOCUMENT AND THE OTHER PURCHASE DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE
PARTIES, THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[ REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.]
<PAGE>
EXECUTED as of the date first stated above.
FIRST PREFERENCE MORTGAGE CORP., BANK ONE, TEXAS, N.A.,
As Seller As Buyer
By _____________________________ By ___________________________
Name _____________________________ Name _________________________
Title ____________________________ Title_________________________
EIGHTH AMENDMENT TO MASTER WHOLE-LOAN PURCHASE AGREEMENT
This DOCUMENT is entered into as of August 31, 1998, between FIRST
PREFERENCE MORTGAGE CORP., a Texas Corporation ("Seller"), and BANK ONE,
TEXAS, N.A., a national banking association ("Buyer").
Seller and Buyer are party to the Master Whole-Loan Purchase Agreement
(as it may have been renewed, extended, and amended through the date of
this document, the ("Purchase Agreement") dated as of March 27, 1996.
Seller and Buyer have agreed, upon the following terms an conditions, to
reduce the Yield applicable to the Total-Purchase Price repayable to Buyer,
and to increase the commitment fee payable to Buyer on the unused portion
of the Purchase Commitment. Accordingly, for adequate and sufficient
consideration, Seller and Buyer agree as follows:
1. TERMS AND REFERENCES. Unless otherwise stated in this document
(a) terms defined in the Purchase Agreement have the same meanings
when used in this document and (b) references to "Sections,"
"Schedules," and "Exhibits" are to the Purchase Agreement's sections,
schedules, and exhibits.
2. AMENDMENT. The following definition in Section 1.1 of the
Purchase Agreement is entirely amended as follows:
(A) Section 1.1 is amended by entirely amending the following
definitions in that section:
Adjusted-Fed-Funds-Rate means, at any time, an annual
interest rate equal to the sum of the Fed-Funds Rate plus (a)
1.25% for Purchases of Gestation Loans, and (b) 2.00% for other
Purchases.
Covered Rate means an annual interest rate that is (a) 1.25%
for Purchases of Gestation Loans and (b) 2.00% for other
Purchases.
Gestation Sublimit means, at any time, 25% of the Purchase
Commitment.
Jumbo Sublimit, at any time and except as otherwise approved
by Buyer in writing, means (a) for all Jumbo Loans, 20% of the
Purchase Commitment, and (b) for any Jumbo Loan in excess of
$500,000, only the first $500,000.
Stated-Termination Date means August 30, 1999.
Wet Sublimit means (a) at any time during the first three
and last five Business Days of a Calendar Month, 35% of the
Purchase Commitment, and (b) at any other time, 30% of the
Purchase Commitment.
<PAGE>
(B) The second bullet point in Section 3.7(b) is entirely amended
as follows:
0.15% of the amount during the fee-calculation period
that the daily-average Total-Purchase Price is less
than 50% of the daily-average Purchase Commitment.
3. CONDITIONS PRECEDENT. Notwithstanding any contrary provision,
the foregoing paragraphs in this document are not effective unless and
until (a) the representations and warranties in this document are true
and correct and (b) Buyer receives counterparts of this document
executed by each party named on the signature page or pages of this
document.
4. RATIFICATIONS. To induce Buyer to enter into this document,
Seller (a) ratifies and confirms all provisions of the Purchase
Documents as amended by this document, (b) ratifies and confirms that
all guaranties, assurances, and Liens granted, conveyed, or assigned
to Buyer under the Purchase Documents (as they have been renewed,
extended, and amended) are not released, reduced, or otherwise
adversely affected by this document and continue to guarantee, assure,
and secure full payment and performance of the present and future
Obligation, and (c) agrees to perform those acts and duly authorize,
execute, acknowledge, deliver, file, and record those additional
documents, and certificates as Buyer may request in order to create,
perfect, preserve, and protect those guaranties, assurances, and
Liens, including, without limitation, filing a UCC-3 termination
statement with the Secretary of State of the State of Texas on or
before September 20, 1998, terminating Financing Statement No. 95-
0089157 filed on May 5, 1995, by Pacific Southwest Bank, as secured
party, and Seller, as debtor.
5. REPRESENTATIONS. To induce Buyer to enter into this document,
Seller represents and warrants to Buyer that as of the date of this
document (a) Seller has all requisite authority and power to execute,
deliver, perform its obligations under this document, which execution,
delivery, and performance have been duly authorized by all necessary
corporate action, require no action by or filing with any Tribunal, do
not violate any of its articles of incorporation, certificate of
incorporation, or bylaws or (except where not a Material-Adverse
Event) violate any Law applicable to it or any material agreement to
which it of its assets are bound, (b) upon execution and delivery by
all parties to it, this document will constitute Seller's legal and
binding obligation, enforceable against it in accordance with this
document's terms except as that enforceability may be limited by
Debtor Laws and general principles of equity, (c) all other
representations and warranties in the Purchase Documents are true and
correct in all material respects except to the extent that (i) any of
them speak to a different specific date or (ii) the facts on which any
of them were based have been changed by transactions contemplated or
permitted by the Purchase Agreement, and (d) no Material-Adverse
Event, Default or Potential Default exists.
6. EXPENSES. Seller shall pay all costs, fees, and expenses paid or
incurred by Buyer incident to this document, including, without
<PAGE>
limitation, the reasonable fees and expenses of Buyer's counsel in
connection with the negotiation, preparation, delivery, and execution
of this document and any related documents.
7. MISCELLANEOUS. All references in the Purchase Documents to the
"Master Whole-Loan Purchase Agreement" refer to the Purchase Agreement
as amended by this document. This document is a "Purchase Document"
referred to in the Purchase Agreement; therefore, the provisions
relating to Purchase Documents in Sections 1 and 11 are incorporated
in this document by reference. Except as specifically amended and
modified in this document, the Purchase Agreement is unchanged and
continues in full force and effect. This document may be executed in
any number of counterparts with the same effect as if all signatories
had signed the same document. All counterparts must be construed
together to constitute one and the same instrument. This document
binds and inures to each of the undersigned and their respective
successors and permitted assigns, subject to Section 11.12. THIS
DOCUMENT AND THE OTHER PURCHASE DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE
PARTIES, THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[ REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.]
<PAGE>
EXECUTED as of the date first stated above.
FIRST PREFERENCE MORTGAGE CORP., BANK ONE, TEXAS, N.A.,
As Seller As Buyer
By ___________________________ By ___________________________
Name ______________________ Name ______________________
Title______________________ Title ______________________
Exhibit 21
FIRST FINANCIAL CORPORATION AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Name Under Which Subsidiary State of Incorporation Percentage
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%
First Apex, Re Vermont 52.0%
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
Security Washington Avenue Corp. Delaware
The following is a 48% owned Subsidiary of Apex Lloyds Insurance Company:
First Apex, Re Vermont
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,922,980
<SECURITIES> 301,715
<RECEIVABLES> 1,213,401
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,897,412
<DEPRECIATION> 965,707
<TOTAL-ASSETS> 7,781,250
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 3,902,771
<TOTAL-LIABILITY-AND-EQUITY> 7,781,250
<SALES> 0
<TOTAL-REVENUES> 9,089,952
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,560,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 529,875
<INCOME-TAX> 5,715
<INCOME-CONTINUING> 524,160
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 410,937
<EPS-PRIMARY> 2.31
<EPS-DILUTED> 2.31
</TABLE>
