UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 2006 Commission File Number 0-16759 FIRST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) <TABLE> <S> <C> INDIANA 35-1546989 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) </TABLE> <TABLE> <S> <C> One First Financial Plaza, Terre Haute, IN 47807 (Address of principal executive office) (Zip Code) </TABLE> (812)238-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No . ----- ----- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer x Non-accelerated filer . --- --- --- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x . ----- ----- As of August 1, 2006, the Registrant had outstanding 13,268,021 shares of common stock, without par value.
FIRST FINANCIAL CORPORATION FORM 10-Q INDEX <TABLE> <CAPTION> Page No. -------- <S> <C> PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets.............................. 3 Consolidated Statements of Income........................ 4 Consolidated Statements of Shareholders' Equity.......... 5 Consolidated Statements of Cash Flows.................... 7 Notes to Consolidated Financial Statements............... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 11 Item 4. Controls and Procedures.................................. 12 PART II. Other Information: Item 1. Legal Proceedings........................................ 13 Item 1A. Risk Factors............................................. 13 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......................................... 13 Item 3. Defaults upon Senior Securities.......................... 13 Item 4. Submission of Matters to a Vote of Security Holders...... 13 Item 5. Other Information........................................ 14 Item 6. Exhibits................................................. 14 Signatures........................................................ 15 </TABLE> 2
Part I - Financial Information Item 1. Financial Statements FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> June 30, December 31, 2006 2005 ----------- ------------ (Unaudited) <S> <C> <C> ASSETS Cash and due from banks $ 102,847 $ 78,201 Federal funds sold and short-term investments 6,690 2,982 Securities available-for-sale 562,399 536,291 Loans: Commercial, financial and agricultural 406,007 382,214 Real estate - construction 27,767 31,918 Real estate - mortgage 687,522 707,008 Installment 262,194 272,062 Lease financing 2,917 2,845 ---------- ---------- 1,386,407 1,396,047 Less: Unearned income (270) (306) Allowance for loan losses (16,145) (16,042) ---------- ---------- 1,369,992 1,379,699 ---------- ---------- Accrued interest receivable 11,927 12,537 Premises and equipment, net 31,808 31,270 Bank-owned life insurance 56,835 55,832 Goodwill 7,102 7,102 Other intangible assets 2,597 2,860 Other real estate owned 3,800 4,115 Other assets 21,766 26,029 ---------- ---------- TOTAL ASSETS $2,177,763 $2,136,918 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 253,656 $ 182,416 Interest-bearing: Certificates of deposit of $100 or more 196,939 189,493 Other interest-bearing deposits 1,048,879 1,093,009 ---------- ---------- 1,499,474 1,464,918 Short-term borrowings 38,939 26,224 Other borrowings 343,569 343,866 Other liabilities 28,705 32,587 ---------- ---------- TOTAL LIABILITIES 1,910,687 1,867,595 ---------- ---------- Shareholders' equity Common stock, $.125 stated value per share; Authorized shares--40,000,000 Issued shares-14,450,966 Outstanding shares--13,268,021 in 2006 and 13,373,570 in 2005 1,806 1,806 Additional paid-in capital 67,670 67,670 Retained earnings 230,071 223,710 Accumulated other comprehensive income (loss) (3,632) 1,903 Treasury shares at cost 1,182,945 in 2006 and 1,077,396 in 2005 (28,839) (25,766) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 267,076 269,323 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,177,763 $2,136,918 ========== ========== </TABLE> See accompanying notes. 3
FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> Three Months Six Months Ended Ended June 30, June 30, ----------------- ----------------- 2006 2005 2006 2005 ------- ------- ------- ------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> INTEREST INCOME: Loans, including related fees $24,707 $23,931 $48,813 $47,225 Securities: Taxable 5,802 3,990 10,867 7,747 Tax-exempt 1,538 1,518 3,073 3,170 Other 730 337 1,447 999 ------- ------- ------- ------- TOTAL INTEREST INCOME 32,777 29,776 64,200 59,141 ------- ------- ------- ------- INTEREST EXPENSE: Deposits 9,360 6,492 17,558 12,445 Short-term borrowings 143 93 285 291 Other borrowings 4,763 4,913 9,450 9,784 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 14,266 11,498 27,293 22,520 ------- ------- ------- ------- NET INTEREST INCOME 18,511 18,278 36,907 36,621 Provision for loan losses 645 3,783 2,848 6,006 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,866 14,495 34,059 30,615 ------- ------- ------- ------- NON-INTEREST INCOME: Trust and financial services 1,003 881 1,917 1,856 Service charges and fees on deposit accounts 3,099 2,974 5,836 5,579 Other service charges and fees 1,280 1,403 2,627 3,020 Securities gains/ (losses), net 1 19 9 25 Insurance commissions 1,479 1,538 2,853 2,877 Gain on sale of mortgage loans 23 436 154 623 Other 330 556 1,232 1,559 ------- ------- ------- ------- TOTAL NON-INTEREST INCOME 7,215 7,807 14,628 15,539 ------- ------- ------- ------- NON-INTEREST EXPENSES: Salaries and employee benefits 10,304 9,620 20,563 18,884 Occupancy expense 944 923 1,885 1,912 Equipment expense 1,125 921 2,168 1,839 Other 3,838 4,313 7,811 8,483 ------- ------- ------- ------- TOTAL NON-INTEREST EXPENSE 16,211 15,777 34,427 31,118 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 8,870 6,525 16,260 15,036 Provision for income taxes 2,445 1,533 4,326 3,733 ------- ------- ------- ------- NET INCOME $ 6,425 $ 4,992 $11,934 $11,303 ======= ======= ======= ======= EARNINGS PER SHARE: Basic and Diluted $ 0.48 $ 0.37 $ 0.90 $ 0.84 ======= ======= ======= ======= Dividends per share $ 0.42 $ 0.40 $ 0.42 $ 0.40 ======= ======= ======= ======= Weighted average number of shares outstanding (in thousands) 13,295 13,456 13,323 13,488 ======= ======= ======= ======= </TABLE> See accompanying notes 4
FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended June 30, 2006 and 2005 (Dollar amounts in thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Additional Accumulated Other ---------------- ------------------------ Common Paid-in Retained Comprehensive Treasury Stock Capital Earnings Income/(Loss) Stock Total ------ ------- -------- ------------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Balance, April 1, 2006 $1,806 $67,670 $229,219 $ 594 $(27,456) $271,833 Comprehensive income: Net income 6,425 6,425 Change in net unrealized gains/ (losses) on securities available-for-sale (4,226) (4,226) -------- Total comprehensive income 2,199 Cash dividends, $.42 per share (5,573) (5,573) Treasury stock purchase (1,383) (1,383) ------ ------- -------- ------- -------- -------- Balance, June 30, 2006 $1,806 $67,670 $230,071 $(3,632) $(28,839) $267,076 ====== ======= ======== ======= ======== ======== Balance, April 1, 2005 $1,806 $67,519 $217,934 $ 5,252 $(22,337) $270,174 Comprehensive income: Net income 4,992 4,992 Change in net unrealized gains/ (losses) on securities available-for-sale 1,161 1,161 -------- Total comprehensive income/(loss) 6,153 Cash dividends, $.40 per share (5,364) (5,364) Treasury stock purchase (2,418) (2,418) ------ ------- -------- ------- -------- -------- Balance, June 30, 2005 $1,806 $67,519 $217,562 $ 6,413 $(24,755) $268,545 ====== ======= ======== ======= ======== ======== </TABLE> See accompanying notes. 5
FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Six Months Ended June 30, 2006, and 2005 (Dollar amounts in thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Additional Accumulated Other ---------------- ------------------------ Common Paid-in Retained Comprehensive Treasury Stock Capital Earnings Income/(Loss) Stock Total ------ ------- -------- ------------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2006 $1,806 $67,670 $223,710 $ 1,903 $(25,766) $269,323 Comprehensive income: Net income 11,934 11,934 Change in net unrealized gains/ (losses) on securities available-for-sale (5,535) (5,535) -------- Total comprehensive income 6,399 Cash dividends, $.42 per share (5,573) (5,573) Treasury stock purchase (3,073) (3,073) ------ ------- -------- ------- -------- -------- Balance, June 30, 2006 $1,806 $67,670 $230,071 $(3,632) $(28,839) $267,076 ====== ======= ======== ======= ======== ======== Balance, January 1, 2005 $1,806 $67,519 $211,623 $ 8,357 $(20,970) $268,335 Comprehensive income Net income 11,303 11,303 Change in net unrealized gains/ (losses) on securities available-for-sale (1,944) (1,944) -------- Total comprehensive income 9,359 Cash dividends, $.40 per share (5,364) (5,364) Treasury stock purchase (3,785) (3,785) ------ ------- -------- ------- -------- -------- Balance, June 30, 2005 $1,806 $67,519 $217,562 $ 6,413 $(24,755) $268,545 ====== ======= ======== ======= ======== ======== </TABLE> See accompanying notes. 6
FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands, except per share data) <TABLE> <CAPTION> Six Months Ended June 30, -------------------- 2006 2005 --------- -------- (Unaudited) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 11,934 $ 11,303 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization (accretion) of premiums and discounts on investments (1,246) (362) Provision for loan losses 2,848 6,006 Securities (gains), net (9) (25) Depreciation and amortization 1,771 1,672 Other, net 5,878 (1,154) --------- -------- NET CASH FROM OPERATING ACTIVITIES 21,176 17,440 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of securities available-for-sale 737 2,234 Maturities and principal reductions on securities available-for-sale 87,485 66,756 Purchases of securities available-for-sale (122,300) (60,820) Loans made to customers, net of repayments 5,004 (6,025) Net change in federal funds sold (3,708) (902) Additions to premises and equipment (2,046) (836) --------- -------- NET CASH FROM INVESTING ACTIVITIES (34,828) 407 --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 34,556 46,487 Net change in short-term borrowings 12,715 (67,719) Dividends paid (5,603) (5,414) Purchase of treasury stock (3,073) (3,785) Repayments on other borrowings (297) (330) --------- -------- NET CASH FROM FINANCING ACTIVITIES 38,298 (30,761) --------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS 24,646 (12,914) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 78,201 94,928 --------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 102,847 $ 82,014 ========= ======== </TABLE> See accompanying notes. 7
FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying June 30, 2006 and 2005 consolidated financial statements are unaudited. The December 31, 2005 consolidated financial statements are as reported in the First Financial Corporation (the "Corporation") 2005 annual report. The information presented does not include all information and footnotes required by U.S. generally accepted accounting procedures for complete financial statements. The following notes should be read together with notes to the consolidated financial statements included in the 2005 annual report filed with the Securities and Exchange Commission as an exhibit to Form 10-K. 1. The significant accounting policies followed by the Corporation and its subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated financial statements and are of a normal recurring nature. The Corporation reports financial information for only one segment, banking. Some items in the prior year financials were reclassified to conform to the current presentation. 2. A loan is considered to be impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan. Impairment is primarily measured based on the fair value of the loan's collateral. The following table summarizes impaired loan information: <TABLE> <CAPTION> (000's) ----------------------- June 30, December 31, 2006 2005 -------- ------------ <S> <C> <C> Impaired loans with related allowance for loan losses calculated under SFAS No. 114 $1,898 $3,622 Impaired loans with no related allowance for loan losses 500 500 ------ ------ $2,398 $4,122 ====== ====== </TABLE> Interest payments on impaired loans are typically applied to principal unless collection of the principal amount is deemed to be fully assured, in which case interest is recognized on a cash basis. 3. Securities The amortized cost and fair value of the Corporation's investments are shown below. All securities are classified as available-for-sale. <TABLE> <CAPTION> (000's) (000's) June 30, 2006 December 31, 2005 --------------------------- --------------------------- Amortized Cost Fair Value Amortized Cost Fair Value -------------- ---------- -------------- ---------- <S> <C> <C> <C> <C> United States Government entity mortgage- backed securities $341,938 $329,677 $306,697 $301,403 Collateralized Mortgage Obligations 119 126 2,357 2,360 State and Municipal Obligations 132,445 134,371 129,916 134,045 Corporate Obligations 89,473 89,847 89,740 90,224 Equity Securities 4,480 8,378 4,410 8,259 -------- -------- -------- -------- $568,445 $562,399 $533,120 $536,291 ======== ======== ======== ======== </TABLE> 4. Short-Term Borrowings Period-end short-term borrowings were comprised of the following: <TABLE> <CAPTION> (000's) ----------------------- June 30, December 31, 2006 2005 -------- ------------ <S> <C> <C> Federal Funds Purchased $32,559 $19,032 Repurchase Agreements 4,949 5,579 Note Payable - U.S. Government 1,431 1,613 ------- ------- $38,939 $26,224 ======= ======= </TABLE> 8
5. Other Borrowings Other borrowings at period-end are summarized as follows: <TABLE> <CAPTION> (000's) ----------------------- June 30, December 31, 2006 2005 -------- ------------ <S> <C> <C> FHLB advances $336,969 $337,266 City of Terre Haute, Indiana economic development revenue bonds 6,600 6,600 -------- -------- $343,569 $343,866 ======== ======== </TABLE> 6. Components of Net Periodic Benefit Cost <TABLE> <CAPTION> THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30, (000's) (000's) ---------------------------------- ----------------------------------- Post-Retirement Post-Retirement Pension Benefits Health Benefits Pension Benefits Health Benefits ---------------- --------------- ----------------- --------------- 2006 2005 2006 2005 2006 2005 2006 2005 ----- ----- ---- ---- ------- ------- ---- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> Service cost $ 749 $ 701 $ 29 $ 35 $ 1,499 $ 1,403 $ 58 $ 70 Interest cost 591 622 75 80 1,182 1,245 151 160 Expected return on plan assets (698) (821) -- -- (1,397) (1,642) -- -- Amortization of transition obligation -- -- 15 15 -- -- 30 30 Amortization of prior service cost 14 14 -- -- 28 28 -- -- Amortization of net (gain) loss 191 62 60 63 381 123 120 125 ----- ----- ---- ---- ------- ------- ---- ---- Net Periodic Benefit Cost $ 847 $ 578 $179 $193 $ 1,693 $ 1,157 $359 $385 ===== ===== ==== ==== ======= ======= ==== ==== </TABLE> Employer Contributions First Financial Corporation previously disclosed in its financial statements for the year ended December 31, 2005 that it expected to contribute $1.5 and $1.2 million respectively to its Pension Plan and ESOP and $294,000 to the Post Retirement Health Benefits Plan in 2006. First Financial Corporation anticipates contributing $1.5 and $1.2 million respectively to its Pension Plan and ESOP in 2006. Contributions of $189,000 have been made through the second quarter of 2006 for the Post Retirement Health Benefits plan. First Financial Corporation anticipates contributing an additional $138,000 to the Post Retirement Health Benefits plan in 2006. 7. Recent Accounting Pronouncements FASB Interpretation No. 48 - In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are still evaluating the impact, if any, the adoption of FIN 48 will have on our financial statements. ITEMS 2. and 3. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk The purpose of this discussion is to point out key factors in the Corporation's recent performance compared with earlier periods. The discussion should be read in conjunction with the financial statements beginning on page three of this report. All figures are for the consolidated entities. It is presumed the readers of these financial statements and of the following narrative have previously read the Corporation's annual report for 2005. This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. The forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Corporation's ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in the competitive environment; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or 9
legislative requirements affecting the Corporation's business; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2005, and subsequent filings with the United States Securities and Exchange Commission (SEC). Copies of these filings are available at no cost on the SEC's Web site at www.sec.gov or on the Corporation's Web site at www.first-online.com. Management may elect to update forward-looking statements at some future point; however, it specifically disclaims any obligation to do so. Critical Accounting Policies Certain of the Corporation's accounting policies are important to the portrayal of the Corporation's financial condition and results of operations, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation of goodwill. See further discussion of these critical accounting policies in the 2005 Annual Report on Form 10-K. Summary of Operating Results Net income for the three months ended June 30, 2006 was $6.4 million compared to $5.0 million in the same period in 2005. Basic earnings per share increased to $0.48 for the second quarter of 2006 compared to $0.37 for 2005, a 29.7% increase. The primary components of income and expense affecting net income are discussed in the following analysis. Net Interest Income The Corporation's primary source of earnings is net interest income, which is the difference between the interest earned on loans and other investments and the interest paid for deposits and other sources of funds. Net interest income increased to $36.9 million in the first six months of 2006 from $36.6 million in the same period in 2005, a 0.8% increase. The net interest margin decreased to 3.92% in 2006 from 3.95% in 2005, a 0.8% decrease, driven by an increase in the proportion interest-earning assets in the investment portfolio compared to the loan portfolio. Investments provide a lower level of risk and with that a lower return. Non-Interest Income Non-interest income for the quarter was $7.2 million. The strategy of holding more mortgage loans in the portfolio has the effect of reducing non-interest income as loan fees are deferred. This was the primary difference between these results and the $7.8 million of non-interest income for the same period in 2005 when loans were being sold which requires immediate recognition of fees into income. Deposit fee income, however increased due to the higher level of deposits in 2006. Non-Interest Expenses The Corporation's non-interest expense for the quarter ended June 30, 2006 compared to the same period in 2005 increased by $434 thousand or 2.7%. Equipment expenses and personnel costs were higher during the second quarter of 2006 compared to the same period of 2005. Cost increases included merit increases in salaries and higher benefit costs, as well as the new banking center in Vincennes, Indiana opened early in 2006. The effective tax rate for 2006 has increased to 26.6% compared to 24.8% for 2005. Provision for Loan Losses The Corporation's provision for loan losses decreased $3.1 million for the second quarter of 2006 compared to the same period of 2005. Net charge-offs for the three months ended June 30, 2006 were $1.3 million compared to $6.1 million for the same period in 2005. Non-performing Loans Non-performing loans consist of (1) non-accrual loans on which the ultimate collectability of the full amount of interest is uncertain, (2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, and (3) loans past due ninety days or more as to principal or interest. A summary of non-performing loans at June 30, 2006 and December 31, 2005 follows: 10
<TABLE> <CAPTION> (000's) --------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- <S> <C> <C> Non-accrual loans $ 7,157 $ 8,464 Restructured loans 175 57 ------- ------- 7,332 8,521 Accruing loans past due over 90 days 6,298 6,354 ------- ------- $13,630 $14,875 ======= ======= Ratio of the allowance for loan losses as a percentage of non-performing loans 118% 108% </TABLE> The following loan categories comprise significant components of the nonperforming loans: <TABLE> <CAPTION> (000's) --------------------------------- June 30, 2006 December 31, 2005 ------------- ----------------- <S> <C> <C> Non-Accrual Loans: 1-4 family residential $ 997 $1,118 Commercial loans 4,436 5,888 Installment loans 1,724 1,458 ------ ------ $7,157 $8,464 ====== ====== Past due 90 days or more: 1-4 family residential $3,000 $3,197 Commercial loans 2,795 1,554 Installment loans 503 1,603 ------ ------ $6,298 $6,354 ====== ====== </TABLE> Interest Rate Sensitivity and Liquidity First Financial Corporation has established risk measures, limits and policy guidelines for managing interest rate risk and liquidity. Responsibility for management of these functions resides with the Asset Liability Committee. The primary goal of the Asset Liability Committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors. Interest Rate Risk Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation's net interest income is largely dependent on the effective management of this risk. The Asset Liability position is measured using sophisticated risk management tools, including earning simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitor both short-term and long-term exposure to interest rate risk. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve and the effects of embedded options on net interest income. This measure projects earnings in the various environments over the next three years. It is important to note that measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis of these assumptions and believes them to be valid and theoretically sound. These assumptions are continuously monitored for behavioral changes. The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Corporation's risk management strategy. The table below shows the Corporation's estimated sensitivity profile as of June 30, 2006. The change in interest rates assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point increase in rates, net interest income would decrease .79% over the next 12 months and increase ..71% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 2.17% over the next 12 months and decrease 4.18% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change. 11
<TABLE> <CAPTION> Percentage Change in Net Interest Income Basis Point --------------------------------- Interest Rate Change 12 months 24 months 36 months - -------------------- --------- --------- --------- <S> <C> <C> <C> Down 200 -4.95 -9.20 -13.81 Down 100 -2.17 -4.18 -6.55 Up 100 -.79 .71 3.45 Up 200 -2.58 -.25 4.99 </TABLE> Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effect of rate changes, and represents a worst-case scenario. Liquidity Risk Liquidity is measured by each bank's ability to raise funds to meet the obligations of its customers, including deposit withdrawals and credit needs. This is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities and core deposits. The Corporation has $12.8 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $62.3 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $12.4 million in securities to be called within the next 12 months. With these sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers. Financial Condition Comparing the first six months of 2006 to the same period of 2005, average loans are down $67.5 million. Average deposits are up $28.5 million. Average investments increased $79.8 million. Average borrowings decreased $28.6 million. The average allowance for loan and lease losses declined from 1.36% at June 30, 2005 to 1.23% at June 30, 2006. A reduction in classified assets, lower net charge-offs and improved overall credit quality allowed the Corporation to reduce its allowance percentage of loans outstanding. Capital Adequacy As of June 30, 2006, the most recent notification from the respective regulatory agencies categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action regulations. To be categorized as well capitalized the banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the bank's category. <TABLE> <CAPTION> To Be Well June 30, 2006 December 31, 2005 Capitalized ------------- ----------------- ----------- <S> <C> <C> <C> Total risk-based capital ratio Corporation 17.21% 16.99% N/A First Financial Bank 17.33% 17.09% 10.00% Tier I risk-based capital ratio Corporation 16.21% 15.99% N/A First Financial Bank 16.47% 16.20% 6.00% Tier I leverage capital ratio Corporation 12.12% 11.89% N/A First Financial Bank 11.99% 11.94% 5.00% </TABLE> ITEM 4. Controls and Procedures First Financial Corporation's management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2006, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, management including the Chief Executive Officer and Chief Financial Officer, concluded that disclosure controls and procedures as of June 30, 2006 were effective in ensuring information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis. Additionally, there was no change in the Corporation's internal control over financial reporting that occurred during the quarter ended June 30, 2006 that have materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. 12
PART II - Other Information ITEM 1. Legal Proceedings. There are no material pending legal proceedings, other than routine litigation incidental to the business of the Corporation or its subsidiaries, to which the Corporation or any of the subsidiaries is a party or of which any of their respective property is subject. Further, there is no material legal proceeding in which any director, officer, principal shareholder, or affiliate of the Corporation or any of its subsidiaries, or any associate of such director, officer, principal shareholder or affiliate is a party, or has a material interest, adverse to the Corporation or any of its subsidiaries. ITEM 1A. Risk Factors. There have been no material changes in the risk factors from those disclosed in the Corporation's 2005 Annual Report on Form 10-K. ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. (a) None. (b) Not applicable. (c) Purchases of Equity Securities The Corporation periodically acquires shares of its common stock directly from shareholders in individually negotiated transactions. The Corporation has not adopted a formal policy or adopted a formal program for repurchases of shares of its common stock. Following is certain information regarding shares of common stock purchased by the Corporation during the quarter covered by this report. <TABLE> <CAPTION> (c) (a) (b) Total Number Of (d) Total Average Shares Purchased Maximum Number Number Price As Part Of Publicly Of Shares That Of Shares Paid Per Announced Plans May Yet Be Purchased Share Or Programs * Purchased * --------- -------- ------------------- -------------- <S> <C> <C> <C> <C> April 1 - 30 2006 -- -- N/A N/A May 1 - 31, 2006 25,764 30.79 N/A N/A June 1 - 30, 2006 20,000 29.49 N/A N/A ------ ----- --- --- Total 45,764 30.22 N/A N/A ====== ===== === === </TABLE> * The Corporation has not adopted a formal policy or program regarding repurchases of its shares of stock. ITEM 3. Defaults upon Senior Securities. Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of the shareholders of the Corporation was held on April 19, 2006. (b) The following were elected Directors of the Corporation for a three year term as follows: <TABLE> <CAPTION> Votes for Votes Against ---------- ------------- <S> <C> <C> Thomas T. Dinkel 11,199,793 81,410 Norman L. Lowery 11,240,101 41,102 Patrick O'Leary 11,149,585 131,618 </TABLE> The following was elected Director of the Corporation for a one year term: <TABLE> <CAPTION> Votes for Votes Against ---------- ------------- <S> <C> <C> Ronald K. Rich. 11,239,927 41,275 </TABLE> The following individual's terms as directors continued after the meeting: W. Curtis Brighton, B. Guille Cox, Jr., Anton H. George, Gregory Gibson, Donald E. Smith and Virginia L. Smith. (c) At the annual meeting, the only item for consideration was the election of the four directors. The vote tabulation for the election of such Directors is set forth above. 13
ITEM 5. Other Information. Not applicable. ITEM 6. Exhibits. <TABLE> <CAPTION> Exhibit No: Description of Exhibit: - ----------- ----------------------- <S> <C> 3.1 Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by reference to Exhibit 3(i) of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002. 3.2 Code of By-Laws of First Financial Corporation, incorporated by reference to Exhibit 3(ii) of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002. 10.1 Employment Agreement for Norman L. Lowery, dated March 29, 2006 and effective January 1, 2006, incorporated by reference to Exhibit 10.1 to the Corporation's Form 8-K filed on March 31, 2006. 10.2 2001 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit 10.3 of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002. 10.3 2006 Schedule of Director Compensation, incorporated by reference to Exhibit 10.3 of the Corporation's Form 10-K filed for the fiscal year ended December 31, 2005. 10.4 2006 Schedule of Named Executive Officer Compensation, incorporated by reference to Exhibit 10.4 of the Corporation's Form 10-K filed for the fiscal year ended December 31, 2005. 31.1 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 by Principal Executive Officer, dated August 4, 2006 31.2 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 by Principal Financial Officer, dated August 4, 2006. 32.1 Certification, dated August 4, 2006, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2005 on Form 10-Q for the quarter ended June 30, 2006. </TABLE> 14
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST FINANCIAL CORPORATION (Registrant) Date: August 4, 2006 By /s/ Donald E. Smith ------------------------------------- Donald E. Smith, Chairman Date: August 4, 2006 By /s/ Norman L. Lowery ------------------------------------- Norman L. Lowery, Vice Chairman and CEO Date: August 4, 2006 By /s/ Michael A. Carty ------------------------------------- Michael A. Carty, Treasurer and CFO 15
Exhibit Index <TABLE> <CAPTION> Exhibit No: Description of Exhibit: - ----------- ----------------------- <S> <C> 3.1 Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by reference to Exhibit 3(i) of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002. 3.2 Code of By-Laws of First Financial Corporation, incorporated by reference to Exhibit 3(ii) of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002. 10.1 Employment Agreement for Norman L. Lowery, dated March 29, 2006 and effective January 1, 2006, incorporated by reference to Exhibit 10.1 to the Corporation's Form 8-K filed on March 31, 2006. 10.2 2001 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit 10.3 of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002. 10.3 2006 Schedule of Director Compensation, incorporated by reference to Exhibit 10.3 of the Corporation's Form 10-K filed for the fiscal year ended December 31, 2005. 10.4 2006 Schedule of Named Executive Officer Compensation, incorporated by reference to Exhibit 10.4 of the Corporation's Form 10-K filed for the fiscal year ended December 31, 2005. 31.1 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 by Principal Executive Officer, dated August 4, 2006 31.2 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 by Principal Financial Officer, dated August 4, 2006. 32.1 Certification, dated August 4, 2006, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2005 on Form 10-Q for the quarter ended June 30, 2006. </TABLE> 16