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

**FORM 10-QSB**

** **

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

                                    Forthe quarterly period ended March 31, 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**(Exactname of small business issuer as specified in its charter)

|                  Texas                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   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|  (State or other jurisdiction of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | (I.R.S. EmployerIdentification                                                                                                           |
|  incorporation or organization)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                     |
|     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 March 31, 2006 was 173,528.

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

 

 

 

FORM 10-QSB

FIRST FINANCIALCORPORATIONMarch 31, 2006

INDEX
Part I Financial Information  
Page No.
    Item 1. Financial Statements
 
     Consolidated Balance Sheet as of 
1
  March 31, 2006
 
     Consolidated Statements of Income
2
  for the Three-Months ended
 
  March 31, 2006 and 2005
 
     Consolidated Statements of Cash 
 
  Flow for the Three-Months 
 
  ended March 31, 2006 and 2005
3
     Notes to Consolidated Financial
 
  Statements
4-6
    Item 2. Management's Discussion and Analysis
 
 Or Plan of Operation
6-11
    Item 3. Controls and Procedures
11
   Part II Other Information 
 
    Item 1. Legal Proceedings
11
    Item 6. Exhibits 
11

 

                                    

 

 First Financial Corporation

Consolidated Balance Sheet

 March 31, 2006

 (Unaudited)

Assets

------
Cash and  cash equivalents                     
$
607,287 
Restricted  cash

-    

Accounts  receivable, net of allowance for doubtful

   accounts of $94,225

176,758 

Marketable  investment securities

107,835 

Restricted  marketable investment securities

-    

Real  estate held for investment,at cost

553,836 

Mortgage  loans 

212,457 

Property  and equipment

1,268,771 

Other  assets

390,441 

    Total  Assets

 $

3,317,385 

    Liabilities and Stockholders' Deficit

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

Notes on  line of credit

 $ 

0 

Note  payable

4,385,057 

Accounts  payable

401,551 

Estimated  reserve for indemnifications and early payment default losses

1,263,824 

Estimated  reserve for losses under servicing agreements

-    

Estimated  reserve for losses under insurance policies

-    

Other  liabilities

341,099 

    Total  Liabilities

6,391,531 

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

(3,572,786)

   Accumulated other comprehensive income:

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

14,247 

(3,038,837)

   Less:Treasury stock - at cost

(35,309)

    Total  Stockholders' Deficit

(3,074,146)

    Total  Liabilities and Stockholders' Deficit

 $

3,317,385 

See  accompanying notes to consolidated financial statements.
1
       First Financial Corporation

    Consolidated Statements of Income 

                    Three months ended March 31, 2006

      (Unaudited)

Three Months Ended

March 31,

2006

2005

Revenues:
Loan administration            
$
775,374 
$
1,084,524 
   Interest income

4,649  

346,958  

 Other  income

254,401  

331,738  

      Total Revenues

1,034,424  

1,763,220  

Expenses:

   Salaries and related expenses

975,067  

1,139,323  

   Interest expense

75,751  

312,478  

   Provision for Loan Losses

8,778  

15,576  

 Other  operating expenses

728,560  

788,262  

      Total Expenses

1,788,156  

2,255,639  

      Income (loss) before income taxes,

(753,732)

(492,419)

Federal  income taxes

-    

-    

     Net  income (loss)

(753,732)

(492,419)

Other  comprehensive income:

   Unrealized holding gains (losses)

12,868  

(14,327)

      Comprehensive income (loss) 

 $

(740,864)

 $

(506,746)

Income  Per Common Share

($4.27)

($2.92)

See  accompanying notes to consolidated financial statements.
2
First Financial Corporation

   Consolidated Statement of Cash  Flows

(Unaudited)

Three Months Ended

2006
   
2005
   
Cash  flows from operating activities:

   Net  income (loss)

($753,732)

($492,419)

    Adjustments to reconcile net income(loss) to

    net  cash used by operating activities:

    Depreciation

345,027  

105,443  

    Provision for loan losses 

8,778  

15,576  

   Loan  and insurance losses paid

(1,188,837)

(353,879)

    Realized (gains) losses on marketable investment securities

(11,669)

(153)

   Net  (increase) decrease in accounts receivable

(4,762)

(21,728)

   Net  (increase) decrease in other assets

132,791  

(176,391)

   Net  increase (decrease) in accounts payable

4,022  

121,707  

   Net  increase (decrease) in reserve for losses under

      insurance policies

-    

(309,696)

   Net  increase (decrease) in other liabilities

(153,151)

(34,500)

    (Increase) decrease in restricted cash used 

     in  operating activities - net

-    

479,495  

    Mortgage loans funded

(51,979,957)

(84,427,291)

    Mortgage loans sold

57,811,287  

79,381,883  

    Increase (decrease) in mortgage loans participations sold

(5,773,017)

4,334,666  

   Other

(16,298)

(12,357)

         Net cash provided (used) for operating activities

(1,579,517)

(1,389,644)

Cash  flows from investing activities:

    Proceeds from sale of marketable investment securities

61,669  

1,724,520  

    Purchases of marketable investment securities

(136,669)

(904,648)

    Unrealized holding (gain) loss

12,868  

(14,327)

    Purchase of property and equipment

(267,887)

(94,238)

    Principal collections on mortgage loans

11,745  

4,674  

    (Increase) decrease in deferred gain on sale of property & equipment

-    

43,780  

         Net cash provided (used) for investing activities

(318,274)

759,761  

Cash  flows from financing activities:

   Net  change in short term borrowings

947,374  

    Proceeds from notes payable

1,138,343  

-    

    Payments on notes payable

(187,752)

-    

         Net cash used for financing activities

950,591  

947,374  

Net  increase (decrease) in cash and cash equivalents

(947,200)

317,491  

Cash and  cash equivalents at beginning of year

1,554,487  

1,675,465  
Cash and  cash equivalents at end of period                        $607,287   $1,992,956
Supplemental  Disclosure of Cash Flow Information

    Interest Paid

 $

68,736  

 $

271,002  

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, necessaryfor a fair presentation of the financial position, results of operations andstatement of cash flows for the interim periods, assuming that the Company willcontinue 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 three-month period ended March 31, 2006 arenot necessarily indicative of the results to be expected for the full year orany future period.

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

2 - Going Concern

The accompanying financial statements have been preparedassuming the Company will continue as a going concern.  At March 31, 2006, theCompany has unrestricted cash and cash equivalents of $.6 million and anaccumulated deficit of $3.1 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 $.74 millionduring the three months ended March 31, 2006 and a net loss before income taxesof $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 has been 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"), related through commonownership.  The sale of participations to CSB has been the Company's onlysource of funding since October 2005.  Because CSB is related through commonownership, CSB is limited in the amount of money it is permitted to fund as apercentage of the Company's total funding sources over a 12-month period.  Therefore,CSB issued a declination letter indicating that it will cease purchasingparticipations from FPMC 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 current quarter ended March 31, 2006, theyears ended December 31, 2005 and 2004, the inability to fund new loanoriginations through a mortgage warehouse line or participation agreement, andthe violation of the minimum net worth requirement of HUD, create anuncertainty about FPMC's ability to continue as a going concern.  Managementhas discontinued the mortgage operation, the Company's only significant sourceof revenue, with no new mortgage loans being funded after April 28, 2006.  Thefinancial statements do not include any adjustments that might be necessary ifFPMC is unable to continue 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 - Earnings Per Share

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

4 - 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 future taxreturn consequences of those differences, which will either be taxable ordeductible when the assets and liabilities are recovered or settled.  Deferredtaxes also are recognized for operating losses that are available to offsetfuture taxable income and tax credits that are available to offset futurefederal income taxes.  The Company has approximately $6.8 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.

5

5 - Subsequent Event

Subsequent to March 31,2006, FPMC sold its 100% ownership interest in Tri-Triangle Agency, Inc("TIA"), to Security Insurance Services, Inc. ("SISI") a subsidiary of CSB thatis related to the Company by common ownership.  The cash price paid of $59,158was based on the net asset value of TIA as of March 31, 2006.  The net assetvalue includes the Shareholders Equity of TIA as of March 31, 2006, the netbook value of all fixed assets plus $1,000 and the appraised value of theinsurance book of business as determined by an appraisal prepared by anindependent appraiser, dated March 1, 2006.

6 - 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 forlosses sustained.  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 March 31, 2006, the estimated reserve forindemnifications and early payment default losses was $1,263,824.  

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

Results of Operations

The Company had a net lossof $(753,732) for the three months ended March 31, 2006 compared to net loss of$(492,419) for the same period in 2005.  Loan administration revenues were$775,374 for the first three months of 2006 compared to $1,084,524 for the sameperiod of  2005.  The decrease in loan administration revenues is the result ofdecreased loan origination fees from the Company's residential mortgage loanoperations. During the three months ended March 31, 2006, FPMC fundedapproximately $52 million in mortgage loans compared to approximately $84million, respectively during the same period in 2005. In addition, the revenuesfrom the sale of the mortgage loans to governmental and private investors decreasedby approximately $(184,457) for the three months ended March 31, 2006 comparedto the same period in 2005. This decrease is due to the reduction in mortgageloans sold during the three months ended March 31, 2006 compared with the sameperiod in 2005. The amount of loans sold during the period decreased byapproximately $(20 million) from the same period in 2005. 

6

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 soldparticipations in the loans up to 99% of the face value of the loan to CSB. Thus the loans held for sale were reported net of the participations sold. Theinterest earned and the interest owed on the loans by the Company was based onthe remaining 1% interest held by the Company.  

Interest income for thethree months ended March 31, 2006 amounted to $4,649 compared to $346,958 forthe same period in 2005. During this period, the interest income earned onmortgages held-for-sale decreased by approximately $327,569 from the sameperiod in 2005 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 threemonths ended March 31, 2006 amounted to $254,401 compared to $331,738 for thesame period in 2005.  The decrease is primarily due to the reduction in thevolume of residential mortgage loans funded.

Another factor affectingthe decrease in the Company's revenue and net income for the quarter endedMarch 31, 2006 as compared to March 31, 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 $975,067 for the three month ended March 31, 2006,compared to $1,139,323 for the three month ended March 31, 2005. This decreaseis primarily due to the reduction in commission and bonuses earned on the reducedvolume of new retail residential mortgage loans originated during the threemonths ended March 31, 2006 compared to the same period in 2005 as previouslydiscussed.  The decrease is also due to the reduction in staff and other costreductions such as employee wage concessions, the closing of the operationscenters in Houston and Hurst, Texas, and selling the Arlington, Texas retailbranch.

For the three months endedMarch 31, 2006, interest expense amounted to $75,751 compared to $312,478 forthe same period in 2005.  The reduction of interest expense is primarily due tothe reduction in the borrowings used to fund a reduced volume of residentialmortgage loans and the interest owed being reported on the loan net of theparticipation sold versus the interest owed being reported on the face value ofthe loan, as discussed above. 

7

Other operating expensesfor the three months ended March 31, 2006 were $728,560 compared to $788,262for the same period in 2005. This decrease isprimarily due to the reduction in loan production expenses, secondary marketingexpenses and loan servicing expenses on a reduced volume of loans funded forthe three months ended March 31, 2006 compared to the same period in2005.

The Company is at riskunder certain of its agreements with private investors and with the Departmentof Housing and Urban Development ("HUD") for credit losses and cost offoreclosure on default of the borrower.

FPMC entered into a Workout and Forebearance Agreementwith CitiMortgage, Inc. ("CMI"), effective July 20, 2005 related to indemnityobligations under a Loan Purchase Agreement in which FPMC is obligated torepurchase certain loans from CMI.  Prior to the execution of the Workout andForebearance Agreement, the loss exposure was included in the reserve forindemnifications and early payment default losses.  As of March 31, 2006, thenet present value of amounts payable to CMI, which has been included as acomponent of the note payable on the accompanying consolidated balance sheet,were $1,596,442. The amount added to the note payable during the three monthsended March 31, 2006 was $224,182.

FPMC entered into a Stipulation of Settlement Agreementwith Washington Mutual Bank, FA ("Washington Mutual") effective February 21,2006, related to indemnity obligations under a Loan Purchase Agreement in whichFPMC is obligated to repurchase certain loans from Washington Mutual.  Prior tothe execution of the Stipulation of Settlement Agreement on February 21, 2006,the loss exposure was included in the reserve for indemnifications and earlypayment default losses.  After execution of the agreement the net present valueof amounts payable to Washington Mutual of $595,307 has been included as acomponent of note payable on the accompanying consolidated balance sheet.  

In addition to itsagreement with CMI and Washington Mutual, FPMC has agreements with theDepartment of Housing and Urban Development ("HUD") under which FPMC is at riskfor 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 March 31, 2006 the total amount owed under thisplan was $337,245, 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 net present valueof the settlements with CMI, Washington Mutual and HUD aggregating $3,095,973 havebeen charged against the Company's loan loss reserve, the amount of which, atMarch 31, 2006, was $1,263,824, as compared to $1,777,523 at March 31, 2005. During the quarter ended March 31, 2006, the Company increased its provisionfor loan losses, indemnifications and early default losses by $8,778, resultingin a charge against income in that amount, as compared to a charge of $15,576for the same period in 2005.  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&Oinsurance policy see Liquidity and Capital Resources.

8

Other comprehensive incomeconsists of unrealized holding gains (losses) on marketable investmentsecurities net of income taxes. For the three months ended March 31, 2006,unrealized holding gains amounted to $12,868 compared to unrealized holdinglosses of $(14,327) for the same period in 2005.

Financial Condition

At March 31, 2006, theCompany's total assets were $3,317,385 compared to $30,604,379 at March 31,2005.  As discussed under Results of Operations, above, for the three monthsended March 31, 2006, total assets includes only the net amount of the loansoriginated less the loan participations sold.  For the three months ended March31, 2005, included in assets were the loans held for sale and the amountborrowed for these loans was shown as a liability of the Company.  Thereduction in total assets is also reflected in cash decreasing by approximately$1.3 million from March 31, 2005 to March 31, 2006, accounts receivablesdecreasing by approximately $.57 million from March 31, 2005 to March 31, 2006,and marketable investment securities decreasing by approximately $.40 millionfrom March 31, 2005 to March 31, 2006.  Stockholders' deficit of the Companywas $(3,074,146) at March 31, 2006 and the stockholders' equity was $2,636,695at March 31, 2005.

Liquidity and Capital Resources

Up until April 28, 2006,the Company's primary sources of liquidity were proceeds from the sale ofmortgage loans, net interest income, fees earned from originating mortgageloans and borrowings under the Company's warehouse credit facilities. TheCompany's use of cash included the funding of mortgage loans prior to theirsale, payment of interest, repayment of amounts borrowed pursuant to warehouselines of credit, loan repurchase and indemnity obligations, operating andgeneral and administrative expenses and capital expenditures. On a consolidatedbasis, cash and cash equivalents were $607,287 at March 31, 2006.  In addition,the Company has asserted claims against its errors and omissions insurer withrespect to errors occurring in the origination of loans, particularly thefailure of FPMC's employees to obtain FHA insurance for the loans.  The Companyexpects to recover at least $300,000, with respect to these claims.  

FPMC had a mortgagewarehouse line of credit with Colonial totaling $5,000,000 which expired onMarch 31, 2006. This agreement contained certain financial covenants includingrequirements that FPMC maintain adjusted tangible net worth above $833,000 andtotal liabilities to adjusted tangible net worth not exceeding 12 to 1. Theobligations under this agreement are guaranteed under an Unlimited ContinuingGuaranty Agreement executed by David W. Mann.  By letter received March 29,2006, FPMC was notified by Colonial that Colonial would neither renew norextend the Colonial Agreement beyond its March 31, 2006 maturity date.  

9

Effective September 26,2005, FPMC established a temporary loan participation agreement with CitizensState Bank ("CSB"), which is related to the Company by common ownership. Underthis agreement, CSB had the option to purchase an undivided interest inresidential mortgage loans originated by FPMC and that meet the underwritingcriteria of the financial institution, at its sole discretion.  When thesubject mortgage loan was sold in the secondary market, the financialinstitution recoups its investment plus a specified yield on its investment. 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.  

Management's Plan

On April 28, 2006, theCompany discontinued its mortgage loan operations, its only significantcontinuing sources of revenue.  FPMC will continue to sell all theparticipation loans owned by CSB that FPMC originated, in which FPMC retained a1% interest.  The face amount of these loans as of March 31, 2006 was$9,997,596 and the value as of April 28, 2006 was $12,818,448.  FPMC will beentitled to retain the excess of the sales price of these loans over the amountof CSB's participation in the loans plus interest.  FPMC will be required topay to CSB any shortfall between the sales proceeds and CSB's participationamount plus interest.  

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 at a price to be determined by appraisal as of March 31, 2006. If this agreement is consummated, the purchase price for FPMC's assets would bein the form of cash for the appraised value of the fixed assets and in the formof stock being issued by Security Bancshares, Inc. ("SBI"), the parent of CSB,for the goodwill and other remaining assets of FPMC, if any.  Also, CMC hasalready hired 39 of FPMC's former employees.  

The Company (includingFPMC) is also seeking to enter into an agreement with its secured creditors,Bluebonnet Investments, Ltd., a Texas limited partnership ("BIL"), and JRPMInvestments, Ltd., a Texas limited partnership ("JRPM"), for the release andsatisfaction of its obligations to those entities, aggregating $1,854,209,including interest, as of April 30, 2006.  David W. Mann, the president, chiefexecutive officer and chief financial officer of the Company, is a general andlimited partner of JRPM, and RAM Investors, Inc., a corporation of which Mr.Mann is the sole owner, is the other general partner of JRPM.  BluebonnetEnterprises, Inc., a corporation which is owned by a trust established for thebenefit of Mr. Mann and of which Mr. Mann is the president, is the sole generalpartner of BIL.  Further information as to the Company's obligations to BIL andJRPM may be found under the heading "Liquidity and Capital Resources" in Item 6(Management's Discussion and Analysis or Plan of Operation) of the Company'sForm 10-KSB for the year ended December 31, 2005.

10

 

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.

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 participation loansand Company assets and the terms on which creditors will agree to berepaid.

Item 3. Controls and Procedures

The Company evaluated the effectiveness of the design andoperation of its disclosure controls and procedures as of March 31, 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 March31, 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 inroutine litigation incidental to its business, both as a plaintiff and adefendant. Management of the Company, after consulting with legal counsel,feels that liability resulting from the litigation, if any, will no have amaterial effect on the financial position of the Company.

11

Item 6. Exhibits 

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.

 

 

 

 

 

 

 

12

                                                                                                                                    

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                May15, 2006       
/s/  David W. Mann            
 David W. Mann 
President
 DulyAuthorized Officer and   
PrincipalFinancial Officer

 

 

 

 

 

 

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