UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

                                                                                                                                                               

Washington, D.C. 20549

 

FORM 10-Q

 

 

[X]          Quarterly Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30,2008

 

or

 

[  ]           Transition Report Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 1-7784

 

 

**First Financial Corporation**

(Exact name of registrant as specified inits charter)

 

   

| Texas                                  | 74-1502313                |
|----------------------------------------|---------------------------|
|  (State		or other jurisdiction of |  (I.R.S.Employer     |
|  incorporation		or organization)  |  Identification No.) |

 

800 Washington Avenue, Waco, Texas  76701

(Address of principal executiveoffices)   (Zip Code)

 

 

Registrant's telephone number, includingarea code: (254) 757-2424

 

            Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes [X]        No [  ]

 

            Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company.  See definition of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. (Check one):

 

    Large accelerated filer[  ]        Accelerated filer [  ]       Non-accelerated filer [  ]          Smallerreporting company [X]    

 

            Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes [  ]  No [X]

 

            As of July31, 2008, there were 402,058 shares of common stock outstanding.

 

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FORM 10-Q

 

FIRST FINANCIALCORPORATION

June 30, 2008

 

 

 

INDEX

 

 

Part I FinancialInformation

 

|                                                                                                                                                                                                                                                    | Page No. |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|             Item 1. FinancialStatements                                                                                                                                                          |     |
|                                                                                                                                                                                                                                                    |     |
|                                    		Consolidated Balance Sheet as of    | 1        |
|                                     June 30, 2008		and December 31, 2007 |     |
|                                                                                                                                                                                                                                                    |     |
|                                    		Consolidated Statements		of Income  | 2        |
|                                     forthe Three-Months ended            |     |
|                                     June30, 2008 and 2007                |     |
|                                                                                                                                                                                                                                                    |     |
|                                    ConsolidatedStatements of Cash        |     |
|                                     Flowfor the Three-Months             |     |
|                                    		ended June 30, 2008 and 2007        | 3        |
|                                                                                                                                                                                                                                                    |     |
|                                    		Notesto Consolidated Financial      |     |
|                                    		Statements                          |  4  |
|                                                                                                                                                                                                                                                    |     |
|            		Item 2. Management'sDiscussion and Analysis                                                                                                                                         |     |
|                                    		of Financial Condition              | 8        |
|                                   		and Results of Operations                 |     |
|                                                                |     |
|            		Item 4. Controls and		Procedures                                                                                                                                                    | 10       |
|                                                                                                                            |     |
|                                                                |     |
| Part II Other Information                                                                                                                                                                                                                               |     |
|                                                                                                                                                                                                                                                    |     |
|            		Item 1. Legal Proceedings                                                                                                                                                           | 11       |
|                                                                                                                                                                                                                                                    |     |
|           		Item 3. 		Default Upon Senior Securities                                                                                                                                                  | 11       |
|                                                                                                                                                                                                                                                    |     |
|            		Item 6. Exhibits                                                                                                                                                                    | 12       |

 

 

 

 

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Item 1. Financial Statements

 

| First Financial Corporation                                                     |
|---------------------------------------------------------------------------------|
| Consolidated Balance Sheet                                                      |
|   As of June 30, 2008 and December  31, 2007                               |
|  (Unaudited)                                                               |
|                                                                            |   |   |   | ** ** |
|                                                                            |   | 6/30/2008 |   | 12/31/2007 |
|                                                                            | Assets |   |   | ** ** |
|                                                                            | ------ |   |   |   |
| Cash and  cash equivalents                                                      | $40,600   |   | $82,769   |
| Accounts  receivable                                                            |              88,448   |   |                88,449   |
| Notes  receivable from related party                                            |                    -     |   |                      -     |
| Marketable  investment securities                                               |            680,105   |   |          1,371,507    |
| Mortgage  loans                                                                 |               2,908   |   |                 5,080   |
| Property  and equipment                                                         |                    -     |   |                 2,160   |
| Prepaid  expense and other assets                                               |              72,435   |   |              114,876   |
|                                                                            |   |   |   |   |
|                                                                            |     Total  Assets | $884,496   |   | $1,664,841   |
|                                                                            |   |   |   |   |
|     Liabilities and Stockholders' Deficit                             |   |   |   |
|    --------------------------------------                                  |   |   |   |
| Notes on  line of credit                                                        | $0   |   | $0   |
| Notes  payable                                                                  |         2,882,517   |   |           2,464,970   |
| Accounts  payable                                                               |            217,996   |   |                51,438   |
| Estimated  reserve for indemnifications and early payment default losses        |         3,916,875   |   |           4,332,843   |
| Accrued  expenses and other liabilities                                         |            132,176   |   |             124,721    |
|                                                                            |   |   |   |   |
|                                                                            |     Total  Liabilities |         7,149,563   |   |           6,973,972   |
|                                                                            |   |   |   |   |
|                                                                            |   |   |   |   |
| Stockholders'  deficit:                                                         |   |   |   |
|   Common  stock - no par value; authorized                                 |   |   |   |
|      500,000 shares; issued 402,058 shares                       |               1,000   |   |                 1,000   |
|    Additional paid-in capital                                              |         1,454,594   |   |           1,454,594   |
|    Retained earnings                                                       |        (8,038,622) |   |          (7,767,269) |
|    Accumulated other comprehensive income:                                 |   |   |   |
|      Unrealized gain (loss) on marketable securities, net of tax |            317,960   |   |           1,002,544   |
|                                                                            |   |   |   |   |
|                                                                            |   |        (6,265,068) |   |          (5,309,131) |
|    Less:Treasury stock - at cost                                           |                    -     |   |                      -     |
|                                                                            |   |   |   |   |
|                                                                            |     Total  Stockholders' Deficit |        (6,265,068) |   |          (5,309,131) |
|                                                                            |   |   |   |   |
|                                                                            |     Total  Liabilities and Stockholders' Deficit |  $        884,496   |   |  $       1,664,841   |
|                                                                            |   |   |   |   |
|                                                                            |   |   |   |   |
| See  accompanying notes to consolidated financial statements.                   |
|                                                                            |   |   |   |   |
|                                                                            |   |   |   |   |

 

1

 

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| First Financial Corporation                                             |
|-------------------------------------------------------------------------|
| Consolidated Statements of Income                                       |
| Three months and six months ended  June 30, 2008 and 2007               |
| (Unaudited)                                                             |
|                                                                    |   |   |   |   |   |   |   |
|                                                                    |   |   |   |   |   |   |   |
|                                                                    | Three Months Ended |   | Six Months Ended |
|                                                                    | June 30, |   | June 30, |
|                                                                    |   |   |   |   |   |   |   |
|                                                                    | 2008 |   | 2007 |   | 2008 |   | 2007 |
|                                                                    |   |   |   |   |   |   |   |
| Revenues:                                                               |   |   |   |   |   |   |   |
|   Loan  administration                                             |  $              230   |   |  $            7,799   |   |  $              490   |   |  $              7,985   |
|    Interest income                                                 |                  100   |   |               9,126   |   |                  227   |   |                 9,702   |
|   Oil and  gas royalties                                           |              10,021   |   |               5,263   |   |              78,117   |   |                14,530   |
|   Net  gain from sale of securities                                |              30,103   |   |              45,231   |   |              30,103   |   |                49,183   |
|   Other  income                                                    |                  545   |   |               4,625   |   |                  545   |   |                 9,226   |
|       Total Revenues                                |              40,999   |   |              72,044   |   |            109,482   |   |                90,626   |
|                                                                    |   |   |   |   |   |   |   |
| Expenses:                                                               |   |   |   |   |   |   |   |
|    Salaries and related expenses                                   |              27,603   |   |              37,423   |   |              55,075   |   |                75,515   |
|    Interest expense                                                |              60,913   |   |               3,474   |   |              63,262   |   |                4,245    |
|    Provision for loan losses                                       |                    -     |   |            643,519   |   |                    -     |   |              745,181   |
|    Professional fees and other administrative expenses             |            108,205   |   |            236,592   |   |            262,495   |   |             284,750    |
|       Total Expenses                                |            196,721   |   |            921,009   |   |            380,832   |   |           1,109,692   |
|                                                                    |   |   |   |   |   |   |   |
|       Income (loss) before income other income,     |           (155,722) |   |           (848,964) |   |           (271,350) |   |          (1,019,065) |
|       and  provision for income tax expense    |   |   |   |   |   |   |   |
|                                                                    |   |   |   |   |   |   |   |
| Other  non-operating income                                             |   |   |   |   |   |   |   |
|   Net  gain from settlement of note payable                        |                    -     |   |                    -     |   |                    -     |   |                      -     |
|      Total  Other Income                            |                    -     |   |                    -     |   |                    -     |   |                      -     |
|                                                                    |   |   |   |   |   |   |   |
|       Income (loss) before provision for income tax |           (155,722) |   |           (848,964) |   |           (271,350) |   |          (1,019,065) |
|                                                                    |   |   |   |   |   |   |   |
| Federal  income taxes                                                   |                    -     |   |                    -     |   |                    -     |   |                      -     |
|      Net  income (loss)                             |           (155,722) |   |           (848,964) |   |           (271,350) |   |          (1,019,065) |
|                                                                    |   |   |   |   |   |   |   |
| Other  comprehensive income:                                            |   |   |   |   |   |   |   |
|    Unrealized holding gains (losses)                               |           (274,427) |   |         1,039,703   |   |           (684,584) |   |           1,508,901   |
|       Comprehensive income (loss)                   |  $       (430,149) |   |  $        190,738   |   |  $       (955,934) |   |  $          489,835   |
|                                                                    |   |   |   |   |   |   |   |
| Income  Per Common Share                                                | ($1.07) |   | $0.47   |   | ($2.38) |   | $1.22   |
|                                                                    |   |   |   |   |   |   |   |
|                                                                    |   |   |   |   |   |   |   |
|                                                                    |   |   |   |   |   |   |   |
|                                                                    |   |   |   |   |   |   |   |
| See  accompanying notes to consolidated financial statements.           |
|                                                                    |   |   |   |   |   |   |   |
|                                                                    |   |   |   |   |   |   |   |

 

 

2

 

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| First Financial Corporation                                                                   |
|-----------------------------------------------------------------------------------------------|
|    Consolidated Statement of Cash  Flows                                            |
| Six months ended June 30, 2008 and  2007                                                      |
| (Unaudited)                                                                                   |
|                                                                                          |   |   |   |
|                                                                                          | Six Months Ended |
|                                                                                          |   |   |   |
|                                                                                          | 2008 |   | 2007 |
|                                                                                          |   |   |   |
| Cash  flows from operating activities:                                                        |   |   |   |
|    Net  income (loss)                                                               | ($271,350) |   | ($1,019,065) |
|     Adjustments to reconcile net income(loss) to                                    |   |   |   |
|     net  cash used by operating activities:                                    |   |   |   |
|     Depreciation                                                                    |               2,160 |   |                 9,963 |
|     Provision for loan losses                                                       |           (415,968) |   |              745,181 |
|    Loan  and insurance losses paid                                                  |                    -   |   |              170,022 |
|     Realized (gains) losses on marketable investment securities                     |             (30,103) |   |                 9,987 |
|    Gain  on sale of real estate held for investment                                 |                    -   |   |                      -   |
|    Net  (increase) decrease in accounts receivable                                  |                      1 |   |                   (155) |
|    Net  (increase) decrease in other assets                                         |              42,439 |   |                20,912 |
|    Net  increase (decrease) in accounts payable                                     |            166,558 |   |               (75,751) |
|    Net  increase (decrease) in other liabilities                                    |               7,455 |   |               (23,871) |
|     Mortgage loans sold                                                             |              2,172 |   |                      -   |
|    Other                                                                            |   |   |                 2,050 |
|                                                                                          |   |   |   |
|          Net cash provided (used) for operating activities |           (496,636) |   |             (160,727) |
|                                                                                          |   |   |   |
| Cash  flows from investing activities:                                                        |   |   |   |
|    Net  (increase) decrease in notes receivable                                     |                    -   |   |                55,000 |
|     Proceeds from sale of marketable investment securities                          |              36,920 |   |                      -   |
|     Purchases of marketable investment securities                                   |   |   |               (97,678) |
|     Proceeds from sale of real estate held for investment                           |                    -   |   |                      -   |
|     Purchase of property and equipment                                              |                    -   |   |                      -   |
|     Principal collections on mortgage loans                                         |                    -   |   |                16,395 |
|     (Increase) decrease in deferred gain on sale of property & equipment        |                    -   |   |                      -   |
|                                                                                          |   |   |   |
|          Net cash provided (used) for investing activities |              36,920 |   |               (26,284) |
|                                                                                          |   |   |   |
| Cash  flows from financing activities:                                                        |   |   |   |
|    Net  change in short term borrowings                                             |                    -   |   |                      -   |
|     Proceeds from notes payable                                                     |           417,547 |   |                      -   |
|     Payments on notes payable                                                       |                    -   |   |              111,554 |
| Proceeds from additional paid-in capital                                                      |                    -   |   |                      -   |
| Proceeds from sale of treasury stock                                                          |                    -   |   |                      -   |
|                                                                                          |   |   |   |
|          Net cash used for financing activities            |            417,547 |   |              111,554 |
|                                                                                          |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                                         |             (42,169) |   |              (75,456) |
| Cash and  cash equivalents at beginning of year                                               |              82,769 |   |              463,031 |
|                                                                                          |   |   |   |
| Cash and  cash equivalents at end of period                                                   | $40,600 |   | $387,575 |
|                                                                                          |   |   |   |
| Supplemental  Disclosure of Cash Flow Information                                             |   |   |   |
|     Interest Paid                                                                   | $63,262 |   | $6,936 |
|                                                                                          |   |   |   |
|                                                                                          |   |   |   |
| See  accompanying notes to consolidated financial statements.                                 |
|                                                                                          |   |   |   |

 

3

 

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FIRST FINANCIALCORPORATION AND 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, assuming thatthe Company will continue as a going concern. In preparing these financialstatements, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of thebalance sheet and revenue and expense for the period. Actual results coulddiffer significantly from those estimates. 

The results of operationsand changes in cash flow for the six-month period ended June 30, 2008 are notnecessarily indicative of the results to be expected for the full year or anyfuture period.

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

2 – Going Concern

The accompanying financial statements have been prepared assumingthe Company will continue as a going concern.  At June 30, 2008, theCompany has unrestricted cash and cash equivalents of $40,600 and an accumulateddeficit of $6.2 million.  At December 31, 2007, the Company had cash andcash equivalents of $82,769 and an accumulated deficit of $5.3 million. The Company recorded a loss before provision for income tax of $271,350during the six months ended June 30, 2008 and a net loss before income taxes of$1.670 million during the year ended December 31, 2007.  

First Preference Mortgage Corporation (“FPMC”), a wholly owned subsidiaryof the Company that historically contributed over 90% to the Company’s totalrevenue, had incurred net losses of $1.65 million, $4.4 million, and $4.9million for the years ended December 31, 2007, 2006, and 2005 respectively.

In 2005 and 2006, FPMC lost its sources of funding for its mortgageorigination activities upon the termination of its mortgage warehouse line ofcredit and loan participation agreement with commercial banks and itsineligibility to participate in mortgage insurance programs sponsored by theDepartment of Housing and Urban Development (“HUD”).

 

 

4

 

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Significant losses for the years ended December 31, 2007, 2006, 2005, and2004, the inability of FPMC to fund new loan originations through a mortgagewarehouse line or participation agreement, and FPMC’s ineligibility toparticipate in HUD programs, create significant doubt about FPMC’s and possiblythe Company’s ability to continue as a going concern.  Management hasdiscontinued the mortgage operation, the Company’s and FPMC’s only significantsource of revenue, with no new mortgage loans being funded after April 28,2006.  The financial statements do not include any adjustments that might benecessary if FPMC or the Company is unable to continue as a going concern.

 

On December 1, 2006, FPMCand Citizens Mortgage Corporation (“CMC”) executed an agreement entitledMemorandum of Asset Purchase (the “Agreement”) under which FPMC sold to CMCsubstantially all of its furniture, fixtures and equipment and its retail andwholesale loan production operations and going concern value for a purchaseprice of $333,873, of which $78,873 was paid in cash on the date of executionand the $255,000 balance was paid in the form of CMC’s promissory note.  Thepromissory note was unsecured, earned interest at 0.75% below the prime ratepublished in the Wall Street Journal (initially, 7.50%), and was repayable in12 quarterly installments of principal and accrued interest starting March 15,2007.  The effective date provided in the Agreement was May 1, 2006.  Paymentson CMC’s promissory note were made periodically in 2007, with the balance paidin full on December 27, 2007.  Under the Agreement CMC assumed no liabilities,obligations or commitments of FPMC, other than certain equipment leaseagreements.  In connection with the discontinuance by FPMC of its loanproduction operations, CMC employed certain of FPMC’s former employees and tookover the processing of loan applications that had been received by FPMC.  CMCis a wholly owned subsidiary of Citizens State Bank of Woodville, Texas (“CSB”)of which David W. Mann, the company’s chief executive officer and controllingbeneficial owner, is also chief executive officer and controlling beneficialowner.

 

The purchase price andterms provided in the Agreement were negotiated on behalf of FPMC by theindependent directors of the Company and by legal counsel selected by them. The purchase price was based on an evaluation provided by an independentexpert.

 

 

3– Notes Payable

 

Duringand  prior to 2006, FPMC had agreements with CitiMortgage, Inc.(“CitiMortgage”), Washington Mutual Bank, F.A. (“Washington Mutual”) or theDepartment of Housing and Urban Development (“HUD”), under which mortgagesoriginated by FPMC were sold to those parties.  Amounts payable to CitiMortgage and Washington Mutual underthese agreements have been reflected as notes payable on the Company’s balancesheets and, because they were zero interestobligations the amounts were determined on a net present value basis. Duringthe month of June 2006, and subsequently, FPMC did not make payment toCitiMortgage, Washington Mutual or HUD as required by FPMC’s agreements withthose parties.  The last payments made by FPMC under each of these agreementswere remitted in May 2006.  Upon FPMC’s non-payment of the payments due afterMay 2006, FPMC raised the note payable balance to reflect the total of thefuture scheduled payments to CitiMortgage and Washington Mutual.  This resultedin a total increase to notes payable in the amount of $223,822. This increasewas reflected in the previously reported amounts for June 2006.  OnSeptember 15, 2006, FPMC entered into a Release and Settlement Agreement withWashington Mutual.  For consideration of $65,000 paid by FPMC, WashingtonMutual released FPMC of any claims, complaints, liabilities, obligations,promises, agreements, contracts and causes of action, against FPMC.  Notespayable was decreased by $685,000.

 

5

 

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On August 28, 2006, CitiMortgage initiated an action in theUnited States District Court for the Eastern District of Missouri naming FPMC,CMC, and David W. Mann as defendants and alleging breach of contract claims anda fraudulent transfer claim (the “CitiMortgage Litigation”). On March 25, 2008,FPMC, David W. Mann, the President, Chief Executive Officer and beneficialowner of approximately 82.4% of the Company’s outstanding shares, andCitiMortgage entered into a settlement agreement to resolve the litigationinitiated by CitiMortgage.  The settlement agreement provides for the entry ofa consent judgment in favor of CitiMortgage against FPMC in the amount of$2,500,000 and a stay of the action against the defendants.  The consentjudgment was entered by the court on March 27, 2008 and thereafter bearsinterest at a rate of 9% per year.  The consent judgment is included in notes payableon the Company’s June 30, 2008 balance sheet. The stay remained in effect untilCitiMortgage received $600,000 in two payments of $300,000 each on March 31,2008 and July 31, 2008, respectively, at which time the releases describedbelow became effective.

 

The two $300,000 payments were made by Mr. Mann and otherentities of which he is a principal owner (other than the Company and itssubsidiaries).  Upon CitiMortgage’s receipt of the second payment on July 31,2008, CitiMortgage assigned the $2,500,000 judgment against FPMC to Mr. Mann.

 

If, within 91 days after the July 31, 2008 payment, nopetition in bankruptcy has been filed with respect to FPMC or any party makinga payment in the settlement and no finding has been made by a court or arbitratorthat Mr. Mann, FPMC or its officers, directors or shareholders engaged in anyfraudulent or other transfer of assets in defraud of CitiMortgage or othercreditors, the litigation will be permanently dismissed and Mr. Mann, FPMC, theCompany, and all related parties will be released from all claims thatCitiMortgage made, or could have made, in the litigation.  The $2,500,000consent judgment against FPMC, which will not be released in the releases givenby CitiMortgage, will bear interest at the rate of 9% per annum from date ofentry and, upon its assignment to Mr. Mann, will be enforceable by him againstFPMC.

 

Pursuant to the judgment described above, the note payable toCitiMortgage recorded on FPMC’s books was increased by $415,968 to $2,500,000during the quarter ended March 31, 2008.  The offset to this entry was a$415,968 reduction of the estimated reserve for indemnifications and earlypayment default losses.

 

On March 28, 2007 JRPMloaned the Company $110,000 in order to fund the Company’s exercise of awarrant held by the Company to purchase 246,429 shares of Inspiration MiningCorporation (“IMC”) at a price of $0.450 CAD per share, or $.0389 USD pershare. At the time of the loan the closing price of the IMC shares on theToronto Stock Exchange was $3.12 CAD per share, or $2.69 USD per share. The$110,000 loan is represented by a promissory note that bears interest at 9.5%per year, was originally payable in full as to principal and interest on July25, 2007, and is secured by a pledge of 82,143 of the IMC shares.  As of July31, 2007, the Company made a payment of $8,578.75, including $3,578.75 ininterest, to JRPM and renewed the note to be payable in full on October 31,2007.  On October 31, 2007, the Company made a payment of $42,526 including $2,526in interest, to JRPM, reducing the principal amount of the note to $65,000, andrenewed the note to be payable in full on April 22, 2008.  JRPM extended thenote payable by 90 days past April 22, 2008.  On July 18, 2008, the Companymade a payment of $40,000 to JRPM, reducing the principal amount of the note to$25,000, and renewed the note to be payable in full October 21, 2008.  Intereston the note continues to accrue at 9.5% per year.

 

6

 

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4 - Earnings Per Share

 

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

 

5 - 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.  As of December 31, 2007, the Company had approximately$18.2 million in available net operating loss carryforward benefits forfinancial statement purposes to offset future income, if any.  A valuationallowance has been provided for all tax benefits; therefore, no asset isreflected on the Company’s balance sheet for the net operating losscarryforward benefits.

 

6 - Contingencies

 

In the ordinary course of FPMC’s mortgage business, prior to itsdiscontinuance in April, 2006, FPMC sold loans to institutional investorswithout recourse that may have to be subsequently repurchased due to defectsthat occurred during the origination of the loan.  In addition, mortgage loanssold to investors were subject to repurchase or indemnification if the loansbecame a specified number of months delinquent within a specified period oftime after the loans were sold (i.e., early payment default).  When a loan soldto an investor without recourse failed to perform, the investor would typicallyreview the loan file to determine whether defects in the origination processoccurred.  If a defect was identified, FPMC would be required to eitherrepurchase the loan or indemnify the investor for losses sustained.  If therewere no defects, FPMC had no commitment to repurchase the loan.  FPMC hasaccrued for this potential loss exposure.  At June 30, 2008, the estimatedreserve for indemnifications and early payment default losses of the Companywas $3,916,875.  The CitiMortgage litigation is expected to be dismissed in itsentirety 91 days after July 31, 2008.  The settlement is described further inNote 3.

 

7

 

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In addition to the foregoing, the Company isinvolved in routine litigation incidental to its business, both as a plaintiffand a defendant.  Management of the Company, after consulting with legalcounsel, believes that liability resulting from such litigation, if any, willnot have a material effect on the financial position of the Company.

 

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

 

Results of Operations

 

The Company had a net loss of $271,350 for the six months endedJune 30, 2008 compared to a net loss of $1,019,065 for the same period in 2007. The Company had a net loss of $155,722 for the three months ended June 30, 2008compared to a net loss of $848,964 for the same period in 2007.  The totalexpenses during the six months ended June 30, 2008 were $380,832 as compared to$1,109,692 for the same period last year.  The total expenses during thequarter ended June 30, 2008 were $196,721 as comparedto $921,009 for the same period last year.  

 

Loan administration revenues were $490 for the first sixmonths of 2008 compared to $7,985 for the same period of 2007.  For the quarterended June 30, 2008, loan administration revenues were $230 compared to $7,799for the same period of 2007.  Interest income for the six months ended June 30,2008 amounted to $227 compared to $9,702 for the same period in 2007.  Interestincome for the three months ended June 30, 2008 amounted to $100 compared to $9,126for the same period in 2007. Because of the discontinuance of FPMC’s mortgageoperations, the Company’s loan administration revenues and interest income willcontinue to be insignificant.

 

Oil and gas royalties forthe six months ended June 30, 2008 amounted to $78,117 compared to $14,530 forthe same period in 2007.  Oil and gas royalties for the quarter ended June 30,2008 amounted to $10,021 compared to $5,263 for the same period in 2007.  TheCompany received a $60,020 oil and gas lease bonus in the first quarter of2008.

 

Net gain from sale ofsecurities for the six months ended June 30, 2008 was $30,103 compared to$49,183 for the same period in 2007.  For the quarter ended June 30, 2008, netgain from sale of securities was $30,103 compared to $45, 231 for the sameperiod in 2007.

 

Other income for the six months ended June 30, 2008 was $545compared to $9,226 for the same period in 2007.  For the quarter ended June 30,2008, other income was $545 compared to $4,625 for the same period in 2007.

 

Other comprehensive incomeconsists of unrealized holding gains (losses) on marketable investmentsecurities.  Unrealized holding losses for the six months ended June 30, 2008amounted to $684,584 compared to gains of $1,508,901 for the same period in2007.  For the three months ended June 30, 2008, unrealized holding lossesamounted to $274,427 compared to gains of $1,039,703 for the same period in2007.  Most of the volatility is attributable to the change in the market valueof shares of stock of a Canadian mining company, Inspiration Mining Corporation(“ISM”), which is traded on the Toronto Stock Exchange.

 

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Salaries and relatedexpenses decreased to $55,075 for the six months ended June 30, 2008 comparedto $75,515 for the same period in 2007.  Salaries and related expenses were $27,603for the quarter ended June 30, 2008 compared to $37,423 for the same period in2007. 

 

Interest expense for the sixmonths ended June 30, 2008 was $63,262 compared to $4,245 for the same timeperiod in 2007.  Interest expense for the quarter ended June 30, 2008 was $60,913compared to $3,474 for the same time period in 2007. The increase in interestexpense is due to the $2,500,000 consent judgment entered into in connectionwith the settlement of the CitiMortgage Litigation described in Note 3 to thefinancial statements filed with this report.  The judgment bears interest at arate of 9% per year.

 

Professional fees andother administrative expenses for the six months ended June 30, 2008 amountedto $262,495 compared to $284,750 for the same period in 2007.  Professionalfees and other administrative expenses for the three months ended June 30, 2008amounted to $108,205 compared to $236,592 for the same period in 2007.

 

During the six months ended June30, 2008, FPMC did not record a provision for loan losses, indemnifications andearly default losses.   During the six months ended June 30, 2007, FPMCincreased its provision for loan losses, indemnifications and early defaultlosses by $915,204, resulting in a charge against income in that amount.  At June30, 2008, the reserve for loan losses amounted to $3,916,875 compared to $4,035,484at June 30, 2007.  During the quarter ended March 31, 2008, the note payable toCitiMortgage recorded on FPMC’s books was increased by $415,968 and the offsetwas recorded to the reserve for loan losses causing the reserve to decreasefrom June 30, 2007 to June 30, 2008.  FPMC is at risk under certain of itsagreements with private investors and HUD for credit losses and cost offoreclosure on default of the borrower.  FPMC calculates the loan loss reservebased on historical loan losses, current claims against FPMC, andrecoverability of losses under FPMC’s Errors and Omissions insurance policy aswell as other factors.

 

Financial Condition

 

At June 30, 2008, the Company's total assets were $884,496compared to $1,664,841 at December 31, 2007 and $3,320,770 at June 30, 2007. The decrease in total assets is primarily due to the decreased value ofmarketable investment securities of $691,402 and $1,783,448 compared toDecember 31, 2007 and June 30, 2007, respectively.  The decrease in cash andcash equivalents of $42,169 and $346,975 compared to December 31, 2007 and June30, 2007, respectively also contributed to the decrease in total assets.   Therewas also a decrease in the note receivable balance of $200,000 since June 30,2007 due to the payoff of the note receivable from CMC described under Note 2. The Company’s primary source of potential value is its net operating losscarryforward in the amount of approximately $18.2 million which, incircumstances permitted by United States federal income tax laws andregulations, could be available to shelter taxable income produced by theoperations of certain entities if those operations and the Company's operationswere combined.  Under those laws and regulations, entities that could makemaximum use of the Company's net operating loss carry forwards would be thosecontrolled by David W. Mann.  As reflected in the financial statements, thestockholders' deficit of the Company was $6,265,068 at June 30, 2008, $5,309,131at December 31, 2007,  and $3,377,640 at June 30, 2007.

 

 

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# Liquidity and Capital Resources

 

As of April 28, 2006, FPMC’smortgage operations, its primary source of revenue ceased.  Further discussioncan be found under “Liquidity and Capital Resources” in the 10-KSB filed by theCompany on April 16, 2007 for the year ended December 31, 2006.

 

On a consolidated basis,cash and cash equivalents were $40,600 at June 30, 2008. On that date theCompany had an accumulated deficit (that is, total liabilities in excess oftotal assets) of approximately $6.2 million.  

 

At this time, management doesnot intend to cause the Company or FPMC to seek protection under the bankruptcylaws, but intends to seek settlements with creditors, to the extent that suchsettlements are in the best interest of the Company, as part of the orderlywinding down of FPMC’s business.  FPMC has reached settlements with WashingtonMutual and has settled the litigation with CitiMortgage, as reported in Note 3to the financial statements filed with this report.  If its other creditors canbe satisfied, FPMC may retain some residual value that will be preserved forshareholders.  It is entirely possible, however, that this process will beunsuccessful, in which case FPMC, the Company or both may have to seekprotection under the bankruptcy laws or may be forced into involuntarybankruptcy by creditors.  If that occurs, the Company’s common stock would belikely to have no value. 

 

Forward-lookingInformation

Certainstatements made above and elsewhere in this Form 10-Q constitute“forward-looking statements,” including but not limited to those identified bythe words “expect,” “believe,” “seek to,” “intend,” “will,” “possible,” “may”and similar expressions that are attributed to the Company or its management.No forward-looking statements of the Company or its management are guaranteesof future outcomes. These statements involve risks and uncertainties, andactual results may differ materially from those in the forward-lookingstatements as a result of various factors, including but not limited to thevalue that can be obtained from the sale of the Company’s mortgageoperations and Company assets and the terms on which creditors will agreeto be repaid.

 

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# Item 3. Controls and Procedures

 

The Company evaluated the effectiveness of the design andoperation of its disclosure controls and procedures (as defined in Rule 13a-15(e)under the Securities Exchange Act of 1934) as of June 30, 2008. The evaluationwas carried out under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer. Based on the evaluation, Mr. Mann, the Chief ExecutiveOfficer and the Chief Financial Officer, concluded that the design andoperation of the Company’s disclosure controls and procedures are effective inproviding assurance that information required to be disclosed by the Company inthe reports that it files or submits to the Securities and Exchange Commissionunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission, and that such information is accumulatedand communicated to management as appropriate to allow timely decisionsregarding disclosure. There have been no changes during the fiscal quarterended June 30, 2008 in the Company’s internal controls over financial reportingthat have materially affected, or are reasonably likely to materially affectthe Company’s internal control over financial reporting.

 

                                   PART II -OTHER INFORMATION

 

# Item 1. Legal Proceedings

 

FPMC’s litigation andrecent settlement with CitiMortgage is reported in Note 3 to the financial statementsfiled with this report. In addition, the Company is also involved in routinelitigation incidental to its business, both as a plaintiff and adefendant.  Management of the Company, after consulting with legalcounsel, believes that liability resulting from such litigation, if any, willnot have a material effect on the financial position of the Company.

 

Item 3.  Defaults UponSenior Securities

 

Information is contained in Note 3 to the financial statements filed with thisreport as to the default by FPMC upon its obligations to CitiMortgage, thesettlements of the CitiMortgage litigation and the consent judgment in theamount of $2,500,000 entered in that litigation in favor of CitiMortgage andassigned to Mr. David Mann.

 

 

 

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Item 6. Exhibits

 

Exhibit 3.1  Restated Articles of Incorporation of FirstFinancial Corporation (incorporated by reference to the Company’s Annual Reporton Form 10-KSB for the fiscal year ended December 31, 2002).

 

Exhibit 3.2  Amended and Restated Bylaws of FirstFinancial Corporation (incorporated by reference to the Company’s Annual Reporton Form 10-KSB for the fiscal year ended December 31, 2002).

 

Exhibit 10.2  Memorandum of Asset Purchase betweenFirst Preference Mortgage Corp. and Citizens Mortgage Corp. dated December 1,2006 (incorporated by reference to the Company's Annual Report on form 10-KSB/Afor fiscal year ended December 31, 2006.)

 

Exhibit 10.3  Settlement Agreement and Mutual Releaseentered into March 28, 2008, by and among CitiMortgage, Inc., First PreferenceMortgage Corporation and David W. Mann (incorporated by reference to theCompany's Annual Report on form 10-KSB for fiscal year ended December 31, 2007).

 

Exhibit 31.1   Certification of the Chief ExecutiveOfficer and Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002 filed herewith.

 

Exhibit 32.1  Certification of the Chief Executive Officer and Chief Financial Officerpursuant to 18 U.S.C. Section 1350 filed herewith.

 

 

 

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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     August 14, 2008                  |                		   /s/ David W. Mann                        		                 DavidW. Mann |
|----------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                               |                 President                                                                                                                                                                                                                                                                                                |
|                                                                                                                                               |                 DulyAuthorized Officer and                                                                                                                                                                                                                                                                          |
|                                                                                                                                               |                 PrincipalFinancial Officer                                                                                                                                                                                                                                                                               |

 

 

 

 

 

 

 

 

 

 

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