**UNITED STATES SECURITIES AND EXCHANGECOMMISSIONWashington, D.C.  20549**

** FORM 10-QSB**

**     ** X        QUARTERLY REPORTUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Forthe quarterly period ended September 30, 2004

       __        TRANSITION REPORTUNDER SECTION 13 OR 15(D) ON THE EXCHANGE ACT

For the transition period from_______________ to _______________          

**Commission file number      0-5559     **

**FIRST FINANCIAL CORPORATION**(Exactname of small business issuer as specified in its charter)             

|               Texas                    |            74-1502313                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         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|  (State or other jurisdiction of                                                                                                                                                                  | (I.R.S. Employer Identification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|  incorporation or organization)                                                                                                                                                                   |       No.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     800 Washington Avenue, Waco,Texas                                                                                                                |              76701              
(Address of principal executive offices)

(Zip Code)
Issuer's telephone number       (254) 757-2424                    

 

 

Number of shares of theIssuer's Common stock outstanding on October 31, 2004 was 173,528.

Transitional SmallBusiness Disclosure Format (check one)                    Yes ____         No_X__

            

FORM 10-QSB

FIRST FINANCIALCORPORATIONSEPTEMBER 30, 2004

INDEX

Part I Financial Information                                                       
Page No.  
           Item 1. Financial Statements     
 
                                   Consolidated Balance Sheet as of                     
1
                                   September 30, 2004     
   
                                   Consolidated Statements ofIncome                  
2
                                   for the Nine-Months ended
 
                                   September 30, 2004 and 2003
   
                                   Consolidated Statements of Cash
 
                                   Flow for the Six-Months 
 
                                   ended September 30, 2004 and 2003               
3  
                                   Notes to ConsolidatedFinancial 
 
                                   Statements                                                        
4-5  
           Item 2.Management's Discussion and Analysis
 
                                   of Results of Operations and Financial  Condition   
5-8
                                                                                          
   
           Item 3. Controls and Procedures                                              
8
                        
 
Part II Other Information
   
           Item 1. Legal Proceedings                                                        
8  
           Item 5. Other Information                                                         
8  
           Item 6. Exhibits and Reportson Form
 
                           8-K
8
                                                                                                    

 

 First Financial Corporation

Consolidated Balance Sheet

 September 30, 2004

(Unaudited)

Assets

------

Cash and cash equivalents

 $

1,586,847 

Restricted cash

922,738 

Accounts receivable, net  of allowance for doubtful

 accounts of $80,259

990,239 

Marketable investment  securities

833,761 

Restricted marketable  investment securities

586,470 

Real estate held for  investment,at cost

553,836 

Mortgage loans 

21,290,613 

Property and equipment

1,491,748 

Other assets

1,242,111 

	-------------------- 

    Total Assets

 $

29,498,363 

    ============

   Liabilities and  Stockholders' Equity

 --------------------------------------

Notes on line of credit

 $

20,868,541 

Notes payable

856,024 

Accounts payable

741,227 

Estimated reserve for  indemnifications and early payment default losses

55,485 

Estimated reserve for losses  under servicing agreements

234,595 

Estimated reserve for losses  under insurance policies

541,551 

Other liabilities

780,535 

-------------------- 

    Total Liabilities

24,077,958 

-------------------- 

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

4,888,605 

 Accumulated other  comprehensive income:

    Unrealized gain (loss)  on marketable securities, net of tax

47,407 

-------------------- 

5,455,714 

 Less:Treasury stock - at  cost

(35,309)

-------------------- 

    Total Stockholders'  Equity

5,420,405 

-------------------- 

    Total Liabilities and  Stockholders' Equity

 $
29,498,363 
    ============

See accompanying notes to  consolidated financial statements.

-1-

 

 

 
     First Financial  Corporation   Consolidated Statements  of Income                   Three  months and Nine months ended September 30, 2004 and 2003     (Unaudited)      Three months ended         Nine months ended            September 30,            September 30,    --------------------------------    --------------------------------
2004

2003

2004

2003
   ----------   ----------   ----------   ----------Revenues: Loan administration $
1,314,995 
 $
3,172,964 
 $
4,036,046 
 $
10,104,240 
 Interest income
281,030 

610,856 

910,516 

2,059,353 
 Other income
366,241 

477,455 

1,046,287 

1,154,134 
     Total Revenues
1,962,266 

4,261,275 

5,992,849 

13,317,727 
Expenses: Salaries and related  expenses
1,150,872 

1,723,279 

3,648,767 

5,406,924 
 Interest expense
219,384 

563,459 

702,726 

1,752,387 
 Other operating expenses
759,505 

1,963,694 

2,413,971 

5,027,200 
     Total Expenses
2,129,761 

4,250,432 

6,765,464 

12,186,511 
     Income (loss) before  income taxes,
(167,495)

10,843 

(772,615)

1,131,216 
Federal income taxes
23,886 

- 

23,886 

- 
     Net income (loss)
(191,381)

10,843 

(796,501)

1,131,216 
Other comprehensive  income: Unrealized holding gains  (losses)
10,989 

(14,601)

(650)

(264)
    Comprehensive income  (loss)  $
(180,392)
 $
(3,758)
 $
(797,151)
 $
1,130,952 
 ===========  ===========  ===========  =========== Income Per Common Share
($1.04)

($0.02)

($4.59)
 $
6.52 
 ===========  ===========  ===========  =========== See accompanying notes to  consolidated financial statements.
   -2-

 

 

 

First Financial Corporation

  	Consolidated Statement of Cash Flows

(Unaudited)

Nine Months Ended  September 30,
     ----------------------------
2004

2003
    -----------    -----------Cash flows from operating  activities:   Net income (loss)
($796,501)
 $
1,131,215 
   Adjustments to  reconcile net income(loss) to    net cash used by  operating activities:   Depreciation
79,900 

236,769 
   Provision for loan  losses 
98,774 

1,062,354 
  Loan and insurance  losses paid
(1,537,208)

(440,223)
   Realized (gains) losses  on marketable investment securities
4,225 

(12,318)
   Net (increase) decrease  in accounts receivable
1,758,156 

241,316 
   Net (increase) decrease  in other assets
(78,407)

785,449 
   Net increase (decrease)  in accounts payable
166,502 

(289,362)
   Net increase (decrease)  in other liabilities
(50,960)

(199,756)
   (Increase) decrease in  restricted cash used      in operating  activities - net
(154,759)

26,237 
   Mortgage loans funded
(261,575,469)

(606,676,176)
   Mortgage loans sold
264,162,344 

638,385,932 
   Increase in mortgage  loans participations sold
- 

849,923 
   Other
(22,271)

(51,494)

----------------

----------------
        Net cash provided (used)  for operating activities
2,054,326 

35,049,866 

----------------

----------------
Cash flows from investing  activities:   Proceeds from sale of marketable  investment securities
83,457 

41,332 
   Purchases of marketable  investment securities
(725,407)

(81,581)
  Unrealized holding  (gain) loss
- 

(264)
   Purchase of property  and equipment
(649,443)

(208,435)
   Principal collections  on mortgage loans
18,284 

32,064 
   (Increase) decrease in  deferred gain on sale of property & equipment
131,337 

131,339 

----------------

----------------
        Net cash provided (used)  for investing activities
(1,141,772)

(85,545)

----------------

----------------
Cash flows from financing  activities:   Net change in short  term borrowings
(2,520,470)

(32,872,767)
   Proceeds from notes  payable
825,000 

- 
   Payments on notes  payable
(18,976)

- 

----------------

----------------
        Net cash used for  financing activities
(1,714,446)

(32,872,767)

----------------

----------------
Net increase (decrease) in  cash and cash equivalents
(801,892)

2,091,554 
Cash and cash equivalents  at beginning of year
2,388,739 

1,386,523 

----------------

----------------
Cash and cash equivalents  at end of period $
1,586,847 
 $
3,478,077 
    ========    ========Supplemental Disclosure of  Cash Flow Information   Interest Paid $
711,622 
 $
1,201,867 
    ========    ========See accompanying notes to  consolidated financial statements.
-3-

 

 

FIRST FINANCIAL CORPORATIONAND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(Unaudited)

PART I - FINANCIAL INFORMATION

1 - Basis of Presentation

The financial informationincluded herein for First Financial Corporation, and all of its wholly ownedsubsidiaries (the "Company") is unaudited; however, such unauditedinformation reflects all adjustments which are, in management's opinion,necessary for a fair presentation of the financial position, results ofoperations and statement of cash flows for the interim periods. In preparingthese financial statements, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the balance sheet and revenue and expense for the period. Actualresults could differ significantly from those estimates. 

The results of operationsand changes in cash flow for the nine-month period ended September 30, 2004 arenot necessarily indicative of the results to be expected for the full year orany future period.

Certain reclassificationswere made to prior periods to ensure comparability with the current period.

2 - Earnings Per Share

Earnings per common sharewere computed by dividing net income by the weighted average number of sharesoutstanding during the period. 

3 - Income Taxes

Income taxes are providedfor the tax effects of transactions reported in the financial statements andconsist of taxes currently due plus deferred taxes related primarily todifferences between the basis of the loan loss reserve for financial and incometax reporting.  The deferred tax assets and liabilities represent the futuretax return consequences of those differences, which will either be taxable ordeductible when the assets and liabilities are recovered or settled.  Deferredtaxes also are recognized for operating losses that are available to offsetfuture taxable income and tax credits that are available to offset futurefederal income taxes.  The Company has approximately $6,400,000 in availablenet operating loss carryforward benefits for financial statement purposes tooffset future income, if any. A valuation allowance has been provided for alltax benefits.

 

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4 - Contingencies

Substantially all of theconventional pools of manufactured home loans serviced by the Company,approximately $284,898 at September 30, 2004, were sold to investors withrecourse.  The recourse provisions typically require the Company to repurchasedelinquent loans at the unpaid balances plus accrued interest, or replacedelinquent loans with another loan which is current.  Further, several of theagreements require the Company to establish and maintain cash reserveaccounts.  Deposits are periodically made to the accounts equal to a specifiedpercent of the outstanding loans. The accounts may be used to coverdeficiencies from foreclosure and liquidation of delinquent pooled mortgageloans.  Such cash reserve accounts totaled $4,495 and are included inrestricted cash at September 30, 2004.

Item 2. Management'sDiscussion and Analysis of Results of Operations and Financial Condition

Results of Operations

The Company had a net lossof $(796,501) for the nine months ended September 30, 2004 compared to netincome of $1,131,216 for the same period in 2003.  Loan administration revenueswere $4,036,046 for the first nine months of 2004 compared to $10,104,240 forthe same period of  2003.  The decrease in loan administration revenues is theresult of decreased loan origination fees from the Company's residentialmortgage loan operations. During the nine months ended September 30, 2004, FPMCfunded approximately $261.6 million in new residential mortgage loans comparedto approximately $606.0 million during the same period in 2003. This decreasein new residential mortgage loans is primarily due to the higher mortgage loaninterest rates that existed during the first nine months of 2004 compared tothe same period in of 2003. In addition, the revenues from the sale of themortgage loans to governmental and private investors decreased by approximately$3.9 million for the nine months ended September 30, 2004 compared to the sameperiod in 2003. This decrease is due to an approximately 35% reduction in thenet margins realized on the sale of these mortgage loans during the nine monthsended September 30, 2004 compared with the same period in 2003. In addition,the amount on loans sold during the period decreased by $376.1 million from thesame period in 2003. 

Interest income for thenine months ended September 30, 2004 amounted to $910,516 compared to $2,059,353for the same period in 2003.  This decrease is primarily due to theapproximately $344.4 million decrease in loan originations from 2004 to 2003 asdiscussed above. FPMC earns interest from the date the mortgage loan is closeduntil the date the mortgage loan is sold to investors.

Other income for the ninemonths ended September 30, 2004 amounted to $1,046,287 compared to $1,154,134for the same period in 2003. Other income consists primarily of consulting feesand fees earned under fronting and reinsurance agreements

Salaries and relatedexpenses decreased to $3,648,767 for the nine months ended September 30, 2004,compared to $5,406,924 for the same period in 2003. This decrease is primarilydue to the overall decrease in the volume of new residential mortgage loansoriginated during the nine months ended September 30, 2004 compared to the sameperiod in 2003 as previously discussed.

5

 

For the nine months endedSeptember 30, 2004, interest expense amounted to $702,726 compared to$1,752,387 for the same period in 2003.  The significant decrease in interestexpense for the nine months ended September 30, 2004 is primarily the result ofdecreased utilization of the warehouse line of credit and loan participationagreements due to the previously discussed decrease in loan origination volume.During this period, the weighted average interest rate on the Company'sfinancing of its mortgage lending activities decreased to approximately 4.36%compared to approximately 4.61% for the same period in 2003.

Operating expenses for thenine months ended September 30, 2004 were $2,413,971 compared to $5,027,200 forthe same period in 2003. This decrease is primarily due to the overall decreasein the volume of new residential mortgage loans originated during the ninemonths ended September 30, 2004 compared to the same period in 2003 aspreviously discussed.

During the nine monthsended September 30, 2004, the Company recorded a provision for loan losses of$98,774 compared to $1,062,354 for the same period in 2003. At September 30,2004, the reserve for loan losses amounted to $55,485 compared to $724,320 atSeptember 30, 2003. The Company is at risk under certain of its agreements withprivate investors for credit losses and cost of foreclosure on default of the borrower.The Company has analyzed certain attributes of the mortgage loans that it hassold to investors, including delinquencies, credit quality, credit insurance,loss experience and insurance coverage. Based on this review, the Companybelieves that its reserve for loan losses is adequate for potential loanlosses.

The Company made noprovision for losses under servicing agreements in either the nine months endedSeptember 30, 2004 or 2003. The reserve for losses under servicing agreementsamounted to $234,595 at September 30, 2004 and 2003. Under the terms of certainof its servicing agreements, the Company is at risk for any credit losses andcosts of foreclosure, net of credit insurance proceeds, if any, sustained ondefault of the borrower. The Company has analyzed its servicing portfoliocharacteristics, including 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 reserve for lossesunder servicing agreements is adequate for potential losses attributable to theservicing agreements.

The reserve for lossesunder insurance policies is based on estimates for reported claims and onestimates, based on experience, for unreported claims and potential lossexposure as calculated by an independent actuary. The reserve for losses underinsurance policies has been established to cover the estimated net cost ofinsured losses. It is the Company's belief that its reserve in the amount of$541,551 is adequate to absorb potential losses associated with reinsurance.

Other comprehensive incomeconsists of unrealized holding gains (losses) on marketable investmentsecurities net of income taxes. For the nine months ended September 30, 2004,unrealized holding losses amounted to ($650) compared to unrealized holdinglosses of ($264) for the same period in 2003.

6

 

Financial Condition

At September 30, 2004, theCompany's total assets were $29,498,363 compared to $17,821,079 at September 30,2003.  At September 30, 2003, the Company had $10,064,351 in mortgages held forsale, net of $14,364,611 in mortgage loan participations sold. At September 30,2004, mortgages held for sale amounted to $21,230,698 and no participationssold were outstanding. As reflected in the financial statements, thestockholders' equity of the Company was $5,420,405 at September 30, 2004 andthe stockholders' equity was $5,982,576 at September 30, 2003.

Liquidity and Capital Resources

The Company's primarysources of liquidity are proceeds from the sale of mortgage loans, net interestincome, fees earned from originating mortgage loans, premiums written frominsurance operations and borrowings under the Company's warehouse creditfacilities. The Company's use of cash include the funding of mortgage loansprior to their sale, payment of interest, repayment of amounts borrowedpursuant to warehouse lines of credit, operating and general and administrativeexpenses and capital expenditures.

On a consolidated basis,cash and cash equivalents (including restricted cash) were $2,509,585 atSeptember 30, 2004.  Included therein was cash and cash equivalents of ApexLloyds Insurance Company of $1,262,383 and First Apex Re of $487,239.  The cashflow of Apex Lloyds Insurance Company and First Apex Re are only available tothe Company as allowed by state insurance regulations.

As more fully discussed inthe Annual Report Form 10-KSB for the year ended December 31, 2003, FPMC had amortgage warehouse line of credit with a financial institution totaling$35,000,000 which expired on June 30, 2004. The maturity date of this agreementwas extended to August 31, 2004. On August 24, 2004, the maturity date wasextended to September 30, 2004 and it was subsequently extended to October 31,2004. On October 18, 2004, the line of credit was amended to a maximumprincipal amount of $25,000,000 with a scheduled maturity date of November 30,2004. This agreement includes certain financial covenants includingrequirements to maintain adjusted-tangible-net worth above $3,500,000. Also,FPMC's total liabilities to adjusted tangible net worth may never exceed 15 to1. The obligations under this agreement are guaranteed under an UnlimitedContinuing Guaranty Agreement executed by David W. Mann. Management expects torenew this agreement or possibly seek an alternate funding source for itsfinancing of operations, and therefore, management does not believe that thismatter will have a material adverse effect on the financial position of FPMC,however, the ability to provide adequate funding sources for its financing ofoperations has a direct impact on maintaining the level of operations.

FPMC has a loanparticipation agreement in the amount of $10,000,000 with its line of creditlender. Under this agreement, the financial institution has the option topurchase an undivided interest in the residential mortgage loans originated byFPMC. When a subject mortgage loan is sold in the secondary market, thefinancial institution recoups its investment plus a specified yield on itsinvestment. At September 30, 2004, no participations were outstanding underthis agreement.

 

7

 

In addition, FPMC has aloan participation agreement with another financial institution, which is arelated party by common ownership, amounting to $22,500,000. Under thisagreement, the financial institution has the option to purchase an undividedinterest in the residential mortgage loans originated by FPMC. When the subjectmortgage loan is sold in the secondary market, the financial institutionrecoups its investment plus a specified yield on its investment. At September30, 2004, no participations were outstanding under this agreement.

Item 3. Controls and Procedures

As of September 30, 2004, the Company evaluated theeffectiveness of the design and operation of its disclosure controls andprocedures. The evaluation was carried out under the supervision and with theparticipation of the Company's management, including the Company's ChiefExecutive Officer and Chief Financial Officer. Based on and as of the date ofthe evaluation, the Chief Executive Officer and the Chief Financial Officerconcluded that the Company's disclosure controls and procedures are effectivein timely alerting them to material information relating to the Company, includingit consolidated subsidiaries, required to be included in reports the Companyfiles with or submits to the Securities and Exchange Commission under theSecurities Exchange Act of 1934. There have been no significant changes in theCompany's internal controls or in other factors that could significantly affectthe Company's internal controls subsequent to the date of the evaluation.

                                    PART II -OTHER INFORMATION

Item 1. Legal Proceedings

The Company is involved inroutine litigation incidental to its business, both as a plaintiff and adefendant. Management of the Company, after consulting with legal counsel,feels that liability resulting from the litigation, if any, will no have amaterial effect on this financial position of the Company.

Item 5. Other Information

This report on Form 10-Q is accompanied by a statement ofthe Chief Executive Officer and the Chief Financial Officer of the registrantmaking certain certifications as to the contents hereof, as required by Section906 of the Sarbanes-Oxley Act of 2002.

Item 6. Exhibits andReports on Form 8-K

No Form 8-K was filedduring the quarter ended September 30, 2004.

8

SIGNATURES

Pursuant to therequirements of the Securities and Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

First FinancialCorporation____________________________________________________________________________

 
Date         November12, 2004        
  /s/  David W. Mann                                               DavidW. MannPresidentDuly Authorized Officer andPrincipal Financial Officer
 
                                                                        
                                                                          			 
                                                                        
Date         November12, 2004       
  /s/ Robert L.Harris                                                RobertL. HarrisVice President andPrincipal Accounting Officer
 
                                                                        
 
                                                                        

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