** UNITED STATESSECURITIES 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 June 30, 2006

__        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**(Exact name of small business issuer as specified in its charter)

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

Issuer's telephone number       (254) 757-2424                    

Check whether the issuer (1) filed all reports requiredto be filed by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.   Yes  X     No  __

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the ExchangeAct).   Yes __     No  X

Number of shares of theIssuer's Common Stock outstanding on July 31, 2006 was 173,528.

Transitional Small Business Disclosure Format (check one)    Yes __     No  X    

 

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FORM 10-QSB

FIRST FINANCIALCORPORATIONJune 30, 2006

INDEX

| Part I Financial Information | Page No.                                     |
|------------------------------|----------------------------------------------|
|                         |                                         |
|                         | Item 1. Financial Statements                 |   |
|                         |                                         |   |
|                         |                                         | Consolidated Balance Sheet as of | 1 |
|                         |                                         | June 30, 2006 |   |
|                         |                                         |   |   |
|                         |                                         | Consolidated Statements of Income | 2 |
|                         |                                         | forthe Six-Months ended |   |
|                         |                                         | June30, 2006 and 2005 |   |
|                         |                                         |   |   |
|                         |                                         | ConsolidatedStatements of Cash |   |
|                         |                                         | Flowfor the Six-Months |   |
|                         |                                         | ended June 30, 2006 and 2005 | 3 |
|                         |                                         |   |   |
|                         |                                         | Notesto Consolidated Financial |   |
|                         |                                         | Statements | 4 |
|                         |                                         |   |   |
|                         | Item 2. Management's Discussion and Analysis |   |
|                         |                                         | Or Plan of Operation | 7 |
|                         |                                         |   |   |
|                         | Item 3. Controls and Procedures              | 12 |
|                         |                                         |   |   |
|                         |                                         |   |   |
| Part II Other Information    |                                         |
|                         |                                         |
|                         | Item 1. Legal Proceedings                    | 12 |
|                         |                                         |   |
|                         | Item 6. Exhibits and Reports on Form 8-K     | 13 |

                                    

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|  First			Financial Corporation
Consolidated Balance Sheet
 June			30, 2006
 (Unaudited)
Assets
------
Cash and cash equivalents
 $
			248,780  
Restricted cash
			-    
Accounts receivable, net of allowance for			doubtful
  accounts of $148,848
			19,985  
Marketable investment securities
			385,564  
Restricted marketable investment securities
			-    
Real estate held for investment,at cost
			-    
Mortgage loans 
			108,004  
Property and equipment
			138,714  
Other assets
			205,914  
    Total Assets
 $
			1,106,961  
   Liabilities and Stockholders'			Deficit
  --------------------------------------
Notes on line of credit
 $
			0  
Note payable
			3,426,931  
Accounts payable
			349,982  
Estimated reserve for indemnifications and			early payment default losses
			2,595,377  
Estimated reserve for losses under servicing			agreements
			-    
Estimated reserve for losses under insurance			policies
			-    
Other liabilities
			215,462  
    Total Liabilities
			6,587,752  
Stockholders' deficit:
 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
			(6,162,732)
  Accumulated other comprehensive income:
    Unrealized gain (loss) on			marketable securities, net of tax
			197,548  
			(5,445,482)
  Less:Treasury stock - at cost
(35,309)
    Total Stockholders' Deficit
			(5,480,791)
    Total Liabilities and			Stockholders' Deficit
 $
			1,106,961  
See accompanying notes to consolidated			financial statements.
    

1

      First Financial			Corporation
   Consolidated Statements of Income			
                  			Three months and Six months ended June 30, 2006 and 2005
(Unaudited)  
Three			Months Ended
Six			Months Ended
June			30,
June			30, 
2006 
2005
2006
 
2005 
Revenues: 			 Loan administration
 $326,087   
 $1,228,980  			$1,101,461  			$2,313,504   			
  Interest income
			1,115   
			304,079  
			5,764   
			651,037  
 Other income
			1,061,931   
			216,866   
			1,316,332   
			548,604  
     Total Revenues
			1,389,133   
			1,749,925   
			2,423,557   
			3,513,145     
Expenses:   
  Salaries and related expenses
			354,151   
			1,190,021   
			1,329,218   
			2,329,344  
  Interest expense
			38,577   
			276,689   
			114,328   
			592,167  
  Provision for Loan Losses
			1,704,067   
			639,432   
			1,712,845   
			655,008  
  Impairment of Assets
			807,237   
			-     
			807,237   
			-    
 Other operating expenses
			1,074,983   
			858,015   
			1,803,543   
			1,646,280  
     Total Expenses
			3,979,015   
			2,964,157   
			5,767,171   
			5,222,799     
     Income (loss) before			income taxes,
			(2,589,882) 
			(1,214,232) 
			(3,343,614) 
			(1,709,654)   
Federal income taxes
			64   
			-     
			64   
			-    
     Net income (loss)
			(2,589,946) 
			(1,214,232)
			(3,343,678) 
			(1,709,654)  
Other comprehensive income:  
  Unrealized holding gains (losses)
			183,301   
(6,068) 
			196,169   
(20,395)
     Comprehensive income			(loss) 
 $(2,406,645) 
 $(1,220,300)
 $(3,147,509) 
 $(1,730,049)  
Income Per Common Share
($13.87) 
($7.05)
($18.14) 
($9.97)    
See accompanying notes to consolidated			financial statements.
   

   2

 

 

First			Financial Corporation
  			Consolidated Statement of Cash Flows
			(Unaudited)
Six			Months Ended
2006
 
2005
Cash flows from operating activities:
   Net income (loss)
			($3,343,678)
			($1,709,654)
   Adjustments to reconcile net			income(loss) to
    net cash used by operating			activities:
   Depreciation
			1,285,455  
			195,431  
   Provision for loan losses 
			1,340,045  
			655,008  
   Loan and insurance losses paid
			(1,188,551)
			(360,479)
   Realized (gains) losses on			marketable investment securities
(11,669)
(7,272)
   Gain on sale of real estate held			for investment
			(696,164)
			-    
   Net (increase) decrease in			accounts receivable
			152,011  
(9,636)
   Net (increase) decrease in other			assets
			317,318  
			42,700  
   Net increase (decrease) in			accounts payable
(47,547)
			21,600  
   Net increase (decrease) in reserve			for losses under
     insurance policies
			-    
			(308,696)
   Net increase (decrease) in other			liabilities
			(278,789)
			(191,310)
   (Increase) decrease in restricted			cash used 
     in operating			activities - net
			-    
			479,495  
   Mortgage loans funded
			(70,392,273)
			(164,464,166)
   Mortgage loans sold
			86,221,199  
			173,217,243  
   Increase (decrease) in mortgage			loans participations sold
			(15,670,637)
			(1,850,227)
   Other
			6,073  
			3,822  
        Net			cash provided (used) for operating activities
			(2,307,206)
			5,713,859  
Cash flows from investing activities:
   Proceeds from sale of marketable			investment securities
			61,669  
			1,943,694  
   Purchases of marketable investment			securities
			(136,669)
			(904,648)
   Unrealized holding (gain) loss
			(102,435)
(20,395)
   Proceeds from sale of real estate			held for investment
			1,250,000  
			-    
   Purchase of property and equipment
(78,258)
			(108,245)
   Principal collections on mortgage			loans
			14,727  
			7,253  
   (Increase) decrease in deferred			gain on sale of property & equipment
			-    
			87,559  
        Net			cash provided (used) for investing activities
			1,009,034  
			1,005,218  
Cash flows from financing activities:
   Net change in short term			borrowings
			(6,712,993)
   Proceeds from notes payable
			1,138,343  
			-    
   Payments on notes payable
			(1,145,878)
			-    
        Net			cash used for financing activities
(7,535)
			(6,712,993)
Net increase (decrease) in cash and cash			equivalents
			(1,305,707)
			6,084  
Cash and cash equivalents at beginning of year
			1,554,487  
			1,675,465        			Cash and cash equivalents at end of period
 $248,780   
 $1,681,549      			Supplemental Disclosure of Cash Flow Information   
   Interest Paid
 $193,749  
 $583,025  
See accompanying notes to consolidated			financial statements.
3
	 
 

 

**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 financial statements,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities as of the date of the balance sheetand revenue and expense for the period. Actual results could differsignificantly from those estimates. 

The results of operationsand changes in cash flow for the six-month period ended June 30, 2006 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 preparedassuming the Company will continue as a going concern.  At June 30, 2006, theCompany has unrestricted cash and cash equivalents of $.24 million and anaccumulated deficit of $5.5 million.  At December 31, 2005, the Company hadcash and cash equivalents of $1.6 million and an accumulated deficit of $2.3million.  The Company incurred a net loss before income taxes of $3.344 millionduring the six months ended June 30, 2006 and a net loss before income taxes of$5.477 million during the year ended December 31, 2005.  

First Preference Mortgage Corporation ("FPMC"), a wholly owned subsidiaryof the Company, had incurred net losses of $4.9 million and $2.46 million forthe years ended December 31, 2005 and 2004, respectively.

In prior years, FPMC's primary funding source was a mortgage warehouseline of credit from Colonial Bank. During 2005, the Company was unable tomaintain certain borrowing covenants (i.e. minimum adjustable tangible networth) resulting in the Company being unable to borrow money under the line ofcredit to fund mortgage loan originations.  Subsequent to year-end, FMPCreceived a declination letter from Colonial Bank indicating that the line ofcredit would not be extended beyond March 31, 2006.  

4

 

In September 2005, FPMC entered into a Loan Participation Agreement withCitizens State Bank of Woodville, Texas ("CSB").  David W. Mann, the Company'schief executive officer and controlling beneficial owner, is also chiefexecutive officer and controlling beneficial owner of CSB. The sale ofparticipations to CSB has been the Company's only source of funding sinceOctober 2005.  Because CSB is related through common ownership, CSB is limitedin the amount of money it is permitted to fund as a percentage of the Company'stotal funding sources over a 12-month period.  Therefore, CSB issued adeclination letter indicating that it would cease purchasing participations fromFPMC on April 30, 2006, or sooner if required by law.

In order to participate in the FHA mortgage insurance program, FPMC isrequired to maintain a minimum net worth requirement.  As of December 31, 2005,FPMC was below the minimum net worth requirement of the Department of Housingand Urban Development ("HUD").

The significant losses for the six months ended June 30, 2006, the yearsended December 31, 2005 and 2004, the inability to fund new loan originationsthrough a mortgage warehouse line or participation agreement, and the violationof the minimum net worth requirement of HUD, create an uncertainty about FPMC'sability to continue as a going concern.  Management has discontinued themortgage operation, the Company's only significant source of revenue, with nonew mortgage loans being funded after April 28, 2006.  The financial statementsdo not include any adjustments that might be necessary if FPMC is unable tocontinue as a going concern.

The revenue from FPMC represents over 90% of the Company's total revenue. Therefore, the financial condition of FPMC creates an uncertainty about theCompany's ability to continue as a going concern.  

3 - Notes Payable

During the month of June2006, and subsequently, FPMC did not make payment to  CitiMortgage, Inc. ("CMI"),Washington Mutual Bank, FA ("Washington Mutual") orHUD as required by the agreements described above.  The last payments due inMay 2006 under each of these three agreements were remitted in May 2006.  Thenotes payable to CMI and Washington Mutual are zero interest loans.  UponFPMC's default of these two notes, FPMC raised the note payable balance toreflect the total of the future scheduled payments.  Previously, the Companyreflected these notes on a net present value basis.  This resulted in a totalincrease to notes payable in the amount of $223,822.

4 - Earnings Per Share

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

5

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.  The Company has approximately $8 million in availablenet operating loss carryforward benefits for financial statement purposes tooffset future income, if any. A valuation allowance has been provided for alltax benefits.

6 - Subsequent Event

As reported in the Company's Form 8-K filed August 11, 2006, on August8, 2006 FPMC received a letter from legal counsel to CMI dated August 7, 2006,declaring FPMC to be in default under its agreements with CMI by failing tomake payments due in June, July and August 2006 under the Workout andForbearance Agreement in the aggregate amount of $132,500.  CMI asserted thatall amounts payable by FPMC under the Workout and Forbearance Agreement and theunderlying loan agreements have been accelerated and demanded that amountscurrently totaling $3,570,088 be paid by FPMC, or that acceptable arrangementsbe made for those amounts to be paid.  CMI also asserted related claims againstcertain affiliates of FPMC, including David W. Mann, the Company's chiefexecutive officer and the beneficial owner of a majority of the Company'soutstanding common stock.  FPMC is reviewing with legal counsel its response toCMI's demands.

7 - Contingencies

In the ordinary course of business, the Company sells loans toinstitutional investors without recourse that may have to be subsequentlyrepurchased due to defects that occurred during the origination of the loan. In addition, mortgage loans sold to investors are subject to repurchase orindemnification if the loans become a specified number of months delinquentwithin a specified period of time after the loans are sold (i.e., early paymentdefault).  When a loan sold to an investor without recourse fails to perform,the investor will typically review the loan file to determine whether defectsin the origination process occurred.  If a defect is identified, the Companymay be required to either repurchase the loan or indemnify the investor for lossessustained.  If there are no defects, the Company has no commitment torepurchase the loan.  The Company has accrued for this potential loss exposureas further discussed in Item 2.  At June 30, 2006, the estimated reserve forindemnifications and early payment default losses was $2,595,377.  

6

 

**Item 2. Management'sDiscussion and Analysis or Plan of Operation**

Results of Operations

The Company had a net lossof $(3,343,678) for the six months ended June 30, 2006 compared to net loss of$(1,709,654) for the same period in 2005.  The Company had a net loss of$(2,589,946) for the three months ended June 30, 2006 compared to a net loss of$(1,214,232) for the same period in 2005.  Loan administration revenues were$1,101,461 for the first six months of 2006 compared to $2,313,504 for the sameperiod of 2005.  Loan administration revenues were $326,087 for the quarterended June 30, 2006 compared to $1,228,980 for the same period of 2005.  The decreasein loan administration revenues is the result of decreased loan originationfees from the Company's residential mortgage loan operations. During the sixmonths ended June 30, 2006, FPMC funded approximately $70 million in mortgageloans compared to approximately $164.5 million during the same period in 2005. In the quarter ended June 30, 2006, FPMC funded $16.6 million in mortgage loanscompared to $80 million during the same period in 2005. Revenues from the saleof the mortgage loans to governmental and private investors decreased byapproximately $(586,804) for the six months, and by $(402,347) for the threemonths ended June 30, 2006 compared to the same periods in 2005. This decreaseis due to the reduction in mortgage loans sold during the six months and threemonths ended June 30, 2006 compared with the same period in 2005. The decreasein loans sold is primarily due to the discontinuation of mortgage fundingoperations after April 28, 2006 described under "Liquidity and CapitalResources." 

Through September 30,2005, the loans held for sale were being reported as an asset and the amountowed on those loans to Colonial Bank, FPMC's warehouse line of credit lender,were reported as a liability.  Starting October 1, 2005, the Company sold participationsin the loans up to 99% of the face value of the loan to CSB.  Thus the loansheld for sale were reported net of the participations sold. The interest earnedand the interest owed on the loans by the Company was based on the remaining 1%interest held by the Company.  

Interest income for thesix months ended June 30, 2006 amounted to $5,764 compared to $651,037 for thesame period in 2005.  Interest income for the quarter ended June 30, 2006 was$1,115 compared to $304,079 for the same period in 2005.  This decrease ininterest income is primarily due to the reduction in the volume of residentialmortgage loans funded and the interest earned being reported on the loans netof the participation sold versus the interest earned being reported on the facevalue of the loan, as discussed above. FPMC earns interest from the date themortgage loan is closed until the date the mortgage loan is sold to investors. 

Other income for the sixmonths ended June 30, 2006 amounted to $1,316,332 compared to $548,604 for thesame period in 2005.  For the quarter ended June 30, 2006, other income was$1,061,931 compared to $216,866 for the same period in 2005.  This increase isprimarily due to the gain realized on the transfer of the Company's investmentin real estate in payment of secured debt of the Company and FPMC as furtherdiscussed in the Company's Form 8-K dated May 22, 2006.

7

Other comprehensive incomeconsists of unrealized holding gains (losses) on marketable investmentsecurities net of income taxes. For the six months ended June 30, 2006,unrealized holding gains amounted to $196,169 compared to unrealized holdinglosses of $(20,395) for the same period in 2005.  For the quarter ended June30, 2006, unrealized holding gains amounted to $183,301 as compared to lossesof $(6,068) for the same period in 2005.

Another factor affectingthe decrease in the Company's revenue and net income for the six months endedJune 30, 2006 as compared to June 30, 2005 was the Company's sale of ApexLloyds Insurance Company ("Apex Lloyds") on March 31, 2005. The Companyrealized a gain on the sale of $73,234. The Company's consolidated statementsof income include the revenue and expense of Apex for the period January 1,2005 to March 31, 2005. During the three months ended March 31, 2005, Apex hadtotal insurance revenues of approximately $71,417.

Salaries and relatedexpenses decreased to $1,329,218 for the six months ended June 30, 2006,compared to $2,329,344 for the six months ended June 30, 2005. FPMC incurred$354,151 in salaries and related expenses for the quarter ended June 30, 2006compared to $1,190,021 dollars for the same period in 2005.  This decrease isprimarily due to the reduction in staff and closing of operations during thisquarter.  It is also due to reduced commission and bonuses earned on thereduced volume of residential mortgage loans originated during the six-monthand three-month periods ended June 30, 2006 compared to the same periods in2005 as previously discussed.

For the six months endedJune 30, 2006, interest expense amounted to $114,328 compared to $592,167 forthe same period in 2005.  Interest expense for the quarter ended June 30, 2006amounted to $38,577 compared to $276,689 for the same time period in 2005.  Thereduction of interest expense is primarily due to the reduction in theborrowings used to fund a reduced volume of residential mortgage loans and theinterest owed being reported on the loan net of the participation sold versusthe interest owed being reported on the face value of the loan, as discussedabove. 

Due to the discontinuance of FPMC's mortgage operationsduring the quarter ended June 30, 2006, the use by FPMC of certain technologybased assets used in the mortgage business significantly changed before the endof its previously estimated useful life.  The impairment of value for thesetechnology based assets resulted in an expense in the amount of $807,237 forthe quarter ended June 30, 2006.

Other operating expensesfor the six months ended June 30, 2006 were $1,803,543 compared to $1,646,280for the same period in 2005. For the quarter ended June 30, 2006, otheroperating expenses amounted to $1,074,983 compared to $858,015 for the sameperiod in 2005.  The Company recorded a provision for bad debts in the amount of$128,932 including $126,865 for the 6 months ending June 30, 2006 and the 3months ending June 30, 2006, respectively based on the Company's analysis ofits accounts receivable.

8

The Company is at risk under certain of its agreementswith private investors and with the Department of Housing and Urban Development("HUD") for credit losses and cost of foreclosure on default of the borrower.

FPMC entered into a Workout and Forebearance Agreementwith CMI, effective July 20, 2005 related to indemnity obligations under loanpurchase agreements under which FPMC is obligated to repurchase certain loansfrom CMI.  As of June 30, 2006, the total of amounts payable to CMI, which hasbeen included as a component of the note payable on the accompanyingconsolidated balance sheet, was $2,084,032. The amount added to the notepayable during the six months ended June 30, 2006 was $664,608 including$487,590 for the quarter ended June 30, 2006. 

FPMC entered into a Stipulation of Settlement Agreementwith Washington Mutual effective February 21, 2006, related to indemnityobligations under a Loan Purchase Agreement in which FPMC is obligated torepurchase certain loans from Washington Mutual.  The total of amounts payableto Washington Mutual is $685,000 as of June 30, 2006.

FPMC has agreements withthe Department of Housing and Urban Development ("HUD") under which FPMC is atrisk for credit losses and cost of foreclosure on default of the borrower.  InJanuary 2005, FPMC entered into a repayment plan with HUD in the amount of$194,014 for the settlement of various claims.  FPMC booked a note payable toHUD for the amount of the obligation and reduced the amount of the loan lossreserve.  In March 2005 and February 2006, the amount payable under this planand the note payable amount were increased by $45,793 and $239,419,respectively, so that as of June 30, 2006 the total amount owed under this planwas $307,899, payable in installments of $15,012 per month, includinginterest.  As a result of this plan, the Company has booked charges against itsloan loss reserve in the aggregate amount of $479,406.  

The total amount of thesettlements with CMI, Washington Mutual and HUD aggregating $3,426,931 havebeen charged against the Company's loan loss reserve, the amount of which, atJune 30, 2006, was $2,595,377, as compared to $2,410,356 at June 30, 2005. During the six months ended June 30, 2006, the Company increased its provisionfor loan losses, indemnifications and early default losses by $647,060,resulting in a charge against income in that amount, as compared to a charge of$655,008 for the same period in 2005.  For the quarter ended June 30, 2006,FPMC increased its provision for loan losses, indemnifications and earlydefault losses by $1,827,119.  The Company calculates the loan loss reservebased on historical loan losses, recoverability of losses under the Company'sErrors and Omissions ("E&O") insurance policy as well as other factors. For additional information about the Company's claims under its E&O insurancepolicy see Liquidity and Capital Resources.

FPMC established a general reserve account on or aboutApril 27, 2006 with Countrywide Home Loans, Inc. ("Countrywide") in the amountof $143,241 to make provision for certain obligations of FPMC that may ariseunder its loan purchase agreement with Countrywide under which FPMC isobligated to repurchase loans sold to Countrywide.  The general reserve accountwas established with payment from FPMC to Countrywide in the amount of$143,241.  Countrywide and FPMC are in negotiations regarding a Loss ReserveAgreement, which would govern the general reserve account, among other things.The amount in the general reserve account at Countrywide on June 30, 2006 was$111,277.

9

During the month of June2006, and subsequently, FPMC did not make payment to CMI, Washington Mutual orHUD as required by the agreements described above.  The last payments due inMay 2006 under each of these three agreements were remitted in May 2006.  Thenotes payable to CMI and Washington Mutual are zero interest loans.  UponFPMC's default of these two notes, FPMC raised the note payable balance toreflect the total of the future scheduled payments.  Previously, the Companyreflected these notes on a net present value basis.  This resulted in an increaseto the note payable due CMI in the amount of $131,583 and an increase to thenote payable due Washington Mutual in the amount of $92,239.

As reported in the Company's Form 8-K filed August 11, 2006, on August8, 2006 FPMC received a letter from legal counsel to CMI dated August 7, 2006,declaring FPMC to be in default under its agreements with CMI by failing tomake payments due in June, July and August 2006 under the Workout andForbearance Agreement in the aggregate amount of $132,500.  CMI asserted thatall amounts payable by FPMC under the Workout and Forbearance Agreement and theunderlying loan agreements have been accelerated and demanded that amountscurrently totaling $3,570,088 be paid by FPMC, or that acceptable arrangementsbe made for those amounts to be paid.  CMI also asserted related claims againstcertain affiliates of FPMC, including David W. Mann, the Company's chiefexecutive officer and the beneficial owner of a majority of the Company'soutstanding common stock.  FPMC is reviewing with legal counsel its response toCMI's demands.

Financial Condition

At June 30, 2006, the Company's total assets were$1,106,961 compared to $22,140,404 at June 30, 2005.  As discussed underResults of Operations, above, for the six months ended June 30, 2006, totalassets includes only the net amount of the loans originated less the loanparticipations sold.  For the six months ended June 30, 2005, included inassets were the loans held for sale and the amount borrowed for these loans wasshown as a liability of the Company.  The reduction in total assets is alsoreflected in cash decreasing by approximately $1.4 million from June 30, 2005to June 30, 2006, accounts receivables decreasing by approximately $.71 millionfrom June 30, 2005 to June 30, 2006, and marketable investment securitiesincreasing by approximately $.1 million from June 30, 2005 to June 30, 2006. Stockholders' deficit of the Company was $(5,480,791) at June 30, 2006 and thestockholders' equity was $1,413,392 at June 30, 2005.

Liquidity and Capital Resources

On April 30, 2006, FPMCsold its 100% ownership interest in Tri-Triangle Agency, Inc ("TIA"), toSecurity Insurance Services, Inc. ("SISI") a subsidiary of CSB that is relatedto the Company by common ownership.  The cash price paid of $59,158 was basedon the net asset value of TIA as of March 31, 2006.  The net asset valueincludes the shareholders equity of TIA as of March 31, 2006, the net bookvalue of all fixed assets plus $1,000 and the appraised value of the insurance bookof business as determined by an appraisal prepared by an independent appraiser,dated March 1, 2006.

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Until April 28, 2006, theCompany's primary sources of liquidity were proceeds from the sale of mortgageloans, net interest income, fees earned from originating mortgage loans andborrowings under the Company's warehouse credit facilities. The Company's useof cash included the funding of mortgage loans prior to their sale, payment ofinterest, repayment of amounts borrowed pursuant to warehouse lines of credit,loan repurchase and indemnity obligations, operating and general andadministrative expenses and capital expenditures. On a consolidated basis, cashand cash equivalents were $248,780 at June 30, 2006.  The Company has assertedclaims against its errors and omissions insurer with respect to errorsoccurring in the origination of loans, particularly the failure of FPMC'semployees to obtain FHA insurance for the loans.  The Company expects torecover up to $300,000 with respect to these claims.  In addition, the Companysubmitted a Proof of Loss for a Mortgage Bankers Blanket Bond with respect toloans which had been procured by fraud and/or forgery.  The Company expects torecover at least $168,000 with respect to these claims.  

FPMC had a mortgagewarehouse line of credit with Colonial totaling $5,000,000 which expired onMarch 31, 2006. By letter received March 29, 2006, FPMC was notified byColonial that Colonial would neither renew nor extend the Colonial Agreementbeyond its March 31, 2006 maturity date.  

Effective September 26,2005, FPMC established a temporary loan participation agreement with CSB. AtMarch 31, 2006, approximately $9.9 million participations were outstandingunder this agreement. Also, effective September 26, 2005, FPMC entered into anAmended and Restated Tri-Party Agreement with CSB and Colonial Bank in whichColonial will act as administrator for loan fundings in which CSB has purchaseda participation interest from FPMC.   By letter received March 29, 2006, FPMCwas notified by CSB that CSB would discontinue purchasing participations in theloans originated by FPMC, as a result of which no such loans have beenoriginated by the Company since April 28, 2006.  On June 20, 2006, there wereno participations outstanding under these agreements.

FPMC has been unsuccessfulin obtaining any new source of funding for its mortgage activities.  Managementdoes not expect those activities to resume.  FPMC had two employees as of June30, 2006.

Management's Plan

FPMC is seeking to enterinto an agreement with Citizens Mortgage Corporation ("CMC"), a subsidiary ofCSB, under which CMC would acquire certain of FPMC's mortgage operations andrelated assets.  The terms of the sale are being discussed and final terms ofthe transaction have not been agreed upon.  If this agreement is consummated,the purchase price for FPMC's assets would consist of cash and/or stock beingissued by Security Bancshares, Inc. ("SBI"), the parent of CSB.

FPMC is evaluating planswith legal counsel regarding a possible approach to negotiations anddiscussions concerning settling the claims of creditors against FPMC.

At this time, managementdoes not intend to cause the Company or FPMC to seek protection under thebankruptcy laws. If the process of selling assets is successful and creditorscan be satisfied, the Company may retain some residual value that will bepreserved for shareholders. It is entirely possible, however, that this processwill be unsuccessful, in which case the Company or FPMC may have to seekprotection under the bankruptcy laws. If that occurs, the Company's commonstock would be likely to have no value.  

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Forward-lookingInformation

Certainstatements made above and elsewhere in this Form 10-QSB 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.

Item 3. Controls and Procedures

The Company evaluated the effectiveness of the design andoperation of its disclosure controls and procedures as of June 30, 2006. Theevaluation was carried out under the supervision and with the participation ofthe Company's management, including the Company's Chief Executive Officer andChief Financial Officer. Based on the evaluation, Mr. Mann, the Chief ExecutiveOfficer and the Chief Financial Officer, concluded that the Company'sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company, including its consolidatedsubsidiaries, required to be included in reports the Company files with orsubmits to the Securities and Exchange Commission under the Securities ExchangeAct of 1934. There have been no changes during the fiscal quarter ended June30, 2006 in the Company's internal controls over financial reporting that havematerially affected, or are reasonably likely to materially affect theCompany's internal control over financial reporting

**PART II -OTHER INFORMATION**

Item 1. Legal Proceedings

The Company is involved in routine litigation incidentalto its business, both as a plaintiff and a defendant. Management of theCompany, after consulting with legal counsel, feels that liability resultingfrom the litigation, if any, will no have a material effect on the financialposition of the Company.

 

 

 

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Item 6. Exhibits

Exhibit 10.1  Secured DebtSettlement Agreement dated as of May 16, 2006, by and among the Company, FirstPreference Mortgage Corp., JRPM Investments, Ltd. and Bluebonnet Investments,Ltd.

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

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

 

 

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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 Financial Corporation____________________________________________________________________________

  

  

  
Date                August18, 2006        
   /s/  David W.Mann                                             DavidW. Mann
 
President
 DulyAuthorized Officer and   
PrincipalFinancial Officer

 

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