##### 



Five Year Comparison Of Selected Financial Data
 (Dollar amounts in thousands,except per share amounts)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002BALANCE SHEET DATA:Total assets
    
    $
    2,175,998
    
    
    $
    2,136,918
    
    
    $
    2,183,992
    
    
    $
    2,223,057
    
    
    $
    2,169,748Securities
    
    
    559,053
    
    
    
    536,291
    
    
    
    507,990
    
    
    
    576,950
    
    
    
    520,166Loans, net of unearned fees
    
    
    1,392,755
    
    
    
    1,395,741
    
    
    
    1,463,871
    
    
    
    1,429,525
    
    
    
    1,432,564Deposits
    
    
    1,502,682
    
    
    
    1,464,918
    
    
    
    1,443,121
    
    
    
    1,479,347
    
    
    
    1,434,654Borrowings
    
    
    358,008
    
    
    
    370,090
    
    
    
    438,013
    
    
    
    451,862
    
    
    
    457,645Shareholders equity
    
    
    271,260
    
    
    
    269,323
    
    
    
    268,335
    
    
    
    255,279
    
    
    
    241,971INCOME STATEMENT DATA:Interest income
    
    
    130,832
    
    
    
    121,647
    
    
    
    116,888
    
    
    
    122,661
    
    
    
    136,262Interest expense
    
    
    57,129
    
    
    
    47,469
    
    
    
    44,686
    
    
    
    48,225
    
    
    
    58,086Net interest income
    
    
    73,703
    
    
    
    74,178
    
    
    
    72,202
    
    
    
    74,436
    
    
    
    78,176Provision for loan losses
    
    
    6,983
    
    
    
    11,698
    
    
    
    8,292
    
    
    
    7,455
    
    
    
    9,478Other income
    
    
    28,826
    
    
    
    32,025
    
    
    
    35,754
    
    
    
    30,819
    
    
    
    30,468Other expenses
    
    
    64,656
    
    
    
    63,538
    
    
    
    63,656
    
    
    
    62,461
    
    
    
    63,317Net income
    
    
    23,539
    
    
    
    23,054
    
    
    
    28,009
    
    
    
    26,493
    
    
    
    28,640PER SHARE DATA:Net income
    
    
    1.77
    
    
    
    1.72
    
    
    
    2.07
    
    
    
    1.95
    
    
    
    2.10Cash dividends
    
    
    0.85
    
    
    
    .82
    
    
    
    .79
    
    
    
    .70
    
    
    
    .62PERFORMANCE RATIOS:Net income to average assets
    
    
    1.10
    %
    
    
    1.07
    %
    
    
    1.28
    %
    
    
    1.21
    %
    
    
    1.30
    %Net income to average
shareholders equity
    
    
    8.57
    
    
    
    8.52
    
    
    
    10.45
    
    
    
    10.57
    
    
    
    12.01Average total capital
to average assets
    
    
    13.56
    
    
    
    13.35
    
    
    
    13.24
    
    
    
    12.45
    
    
    
    11.73Average shareholders equity
to average assets
    
    
    12.79
    
    
    
    12.51
    
    
    
    12.23
    
    
    
    11.43
    
    
    
    10.80Dividend payout
    
    
    44.18
    
    
    
    47.57
    
    
    
    38.13
    
    
    
    35.88
    
    
    
    29.57
  9




---



##### 



Consolidated Balance Sheets
 December 31,(Dollar amounts in thousands, except per share data)
    
    2006
    
    
    2005ASSETSCash and due from banks
    
    $
    77,682
    
    
    $
    78,201Federal funds sold
    
    
    21,437
    
    
    
    2,982Securities available-for-sale
    
    
    559,053
    
    
    
    536,291Loans, net of allowance of $16,169 in 2006 and $16,042 in 2005
    
    
    1,376,586
    
    
    
    1,379,699Accrued interest receivable
    
    
    13,972
    
    
    
    12,537Premises and equipment, net
    
    
    33,267
    
    
    
    31,270Bank-owned life insurance
    
    
    57,905
    
    
    
    55,832Goodwill
    
    
    7,102
    
    
    
    7,102Other intangible assets
    
    
    2,363
    
    
    
    2,860Other real estate owned
    
    
    3,194
    
    
    
    4,115Other assets
    
    
    23,437
    
    
    
    26,029Total Assets
    
    $
    2,175,998
    
    
    $
    2,136,918LIABILITIES AND SHAREHOLDERS EQUITYDeposits:Non-interest-bearing
    
    $
    227,808
    
    
    $
    182,416Interest-bearing:Certificates of deposit of $100 or more
    
    
    189,323
    
    
    
    189,493Other interest-bearing deposits
    
    
    1,085,551
    
    
    
    1,093,0091,502,682
    
    
    
    1,464,918Short-term borrowings
    
    
    16,203
    
    
    
    26,224Other borrowings
    
    
    341,805
    
    
    
    343,866Other liabilities
    
    
    44,048
    
    
    
    32,587Total Liabilities
    
    
    1,904,738
    
    
    
    1,867,595Shareholders equityCommon stock, $.125 stated value per share,Authorized shares  40,000,000Issued shares  14,450,966Outstanding shares  13,270,321 in 2006 and 13,373,570 in 2005
    
    
    1,806
    
    
    
    1,806Additional paid-in capital
    
    
    68,003
    
    
    
    67,670Retained earnings
    
    
    235,967
    
    
    
    223,710Accumulated other comprehensive income (loss)
    
    
    (5,494
    )
    
    
    1,903Less: Treasury shares at cost  1,180,645 in 2006 and 1,077,396 in 2005
    
    
    (29,022
    )
    
    
    (25,766
    )Total Shareholders Equity
    
    
    271,260
    
    
    
    269,323Total Liabilities and Shareholders Equity
    
    $
    2,175,998
    
    
    $
    2,136,918
   10




---



##### 



Consolidated Statements of Income
 Years Ended December 31,(Dollar amounts in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2004INTEREST AND DIVIDEND INCOME:Loans, including related fees
    
    $
    99,850
    
    
    $
    96,388
    
    
    $
    92,440Securities:Taxable
    
    
    21,877
    
    
    
    16,802
    
    
    
    15,315Tax-exempt
    
    
    6,243
    
    
    
    6,306
    
    
    
    7,055Other
    
    
    2,862
    
    
    
    2,151
    
    
    
    2,078Total Interest and Dividend Income
    
    
    130,832
    
    
    
    121,647
    
    
    
    116,888INTEREST EXPENSE:Deposits
    
    
    37,285
    
    
    
    27,184
    
    
    
    23,695Short-term borrowings
    
    
    746
    
    
    
    783
    
    
    
    1,017Other borrowings
    
    
    19,098
    
    
    
    19,502
    
    
    
    19,974Total Interest Expense
    
    
    57,129
    
    
    
    47,469
    
    
    
    44,686Net Interest Income
    
    
    73,703
    
    
    
    74,178
    
    
    
    72,202Provision for loan losses
    
    
    6,983
    
    
    
    11,698
    
    
    
    8,292Net Interest Income After
Provision For Loan Losses
    
    
    66,720
    
    
    
    62,480
    
    
    
    63,910NON-INTEREST INCOME:Trust and financial services
    
    
    3,766
    
    
    
    3,626
    
    
    
    3,918Service charges and fees on deposit accounts
    
    
    11,639
    
    
    
    11,732
    
    
    
    11,499Other service charges and fees
    
    
    5,279
    
    
    
    6,440
    
    
    
    6,794Securities gains (losses)
    
    
    6
    
    
    
    571
    
    
    
    (165
    )Insurance commissions
    
    
    6,323
    
    
    
    5,995
    
    
    
    6,142Gain on sale of mortgage loans
    
    
    191
    
    
    
    1,289
    
    
    
    806Gain on life insurance benefit
    
    
    
    
    
    
    
    
    
    
    4,113Other
    
    
    1,622
    
    
    
    2,372
    
    
    
    2,647Total Non-Interest Income
    
    
    28,826
    
    
    
    32,025
    
    
    
    35,754NON-INTEREST EXPENSES:Salaries and employee benefits
    
    
    39,739
    
    
    
    38,617
    
    
    
    37,876Occupancy expense
    
    
    3,994
    
    
    
    3,796
    
    
    
    3,904Equipment expense
    
    
    4,305
    
    
    
    3,861
    
    
    
    3,585Other
    
    
    16,618
    
    
    
    17,264
    
    
    
    18,291Total Non-Interest Expense
    
    
    64,656
    
    
    
    63,538
    
    
    
    63,656Income Before Income Taxes
    
    
    30,890
    
    
    
    30,967
    
    
    
    36,008Provision for income taxes
    
    
    7,351
    
    
    
    7,913
    
    
    
    7,999Net Income
    
    $
    23,539
    
    
    $
    23,054
    
    
    $
    28,009EARNINGS PER SHARE:Basic and Diluted
    
    $
    1.77
    
    
    $
    1.72
    
    
    $
    2.07Weighted average number of shares outstanding (in thousands)
    
    
    13,295
    
    
    
    13,433
    
    
    
    13,525
   11




---



##### 



Consolidated Statements of Changes in Shareholders Equity
 AccumulatedOtherCommon
    
    
    Additional
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury(Dollar amounts in thousands, except per share data)
    
    Stock
    
    
    Paid-In Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance, January 1, 2004
    
    $
    1,806
    
    
    $
    67,181
    
    
    $
    194,294
    
    
    $
    11,463
    
    
    $
    (19,465
    )
    
    $
    255,279Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    28,009
    
    
    
    
    
    
    
    
    
    
    
    28,009Other comprehensive income, net of tax:Change in net unrealized gains/losses
on securities available-for-sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,106
    )
    
    
    
    
    
    
    (3,106
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,903Two-for-one stock split (6,782,885 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Contribution of 40,000 shares to ESOP
    
    
    
    
    
    
    338
    
    
    
    
    
    
    
    
    
    
    
    825
    
    
    
    1,163Treasury stock purchase (80,120 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,330
    )
    
    
    (2,330
    )Cash dividends, $.70 per share
    
    
    
    
    
    
    
    
    
    
    (10,680
    )
    
    
    
    
    
    
    
    
    
    
    (10,680
    )Balance, December 31, 2004
    
    
    1,806
    
    
    
    67,519
    
    
    
    211,623
    
    
    
    8,357
    
    
    
    (20,970
    )
    
    
    268,335Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    23,054
    
    
    
    
    
    
    
    
    
    
    
    23,054Other comprehensive loss, net of tax:Change in net unrealized gains/losses
on securities available-for-sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,454
    )
    
    
    
    
    
    
    (6,454
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,600Contribution of 36,000 shares to ESOP
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    993
    
    
    
    1,144Treasury stock purchase (79,000 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,789
    )
    
    
    (5,789
    )Cash dividends, $.79 per share
    
    
    
    
    
    
    
    
    
    
    (10,967
    )
    
    
    
    
    
    
    
    
    
    
    (10,967
    )Balance, December 31, 2005
    
    
    1,806
    
    
    
    67,670
    
    
    
    223,710
    
    
    
    1,903
    
    
    
    (25,766
    )
    
    
    269,323Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    23,539
    
    
    
    
    
    
    
    
    
    
    
    23,539Other comprehensive loss, net of tax:Change in net unrealized gains/losses
on securities available-for-sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,161
    
    
    
    
    
    
    
    1,161Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,700Adjustment to initially apply
SFAS No. 158, net of tax (Note 1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,558
    )
    
    
    
    
    
    
    (8,558
    )Contribution of 34,000 shares to ESOP
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    831
    
    
    
    1,164Treasury stock purchase (137,249 shares)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,087
    )
    
    
    (4,087
    )Cash dividends, $.85 per share
    
    
    
    
    
    
    
    
    
    
    (11,282
    )
    
    
    
    
    
    
    
    
    
    
    (11,282
    )Balance, December 31, 2006
    
    $
    1,806
    
    
    $
    68,003
    
    
    $
    235,967
    
    
    $
    (5,494
    )
    
    $
    (29,022
    )
    
    $
    271,260
   12




---



##### 



Consolidated Statements of Cash Flows
 Years Ended December 31,(Dollar amounts in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    23,539
    
    
    $
    23,054
    
    
    $
    28,009Adjustments to reconcile net income to net cash
provided by operating activities:Net (accretion) amortization on securities
    
    
    2,540
    
    
    
    (1,462
    )
    
    
    2,092Provision for loan losses
    
    
    6,983
    
    
    
    11,698
    
    
    
    8,292Securities (gains) losses
    
    
    (6
    )
    
    
    (571
    )
    
    
    165Depreciation and amortization
    
    
    3,515
    
    
    
    3,363
    
    
    
    3,184Provision for deferred income taxes
    
    
    (3,579
    )
    
    
    1,716
    
    
    
    1,648Net change in accrued interest receivable
    
    
    (1,435
    )
    
    
    (521
    )
    
    
    1,057Contribution of shares to ESOP
    
    
    1,164
    
    
    
    1,144
    
    
    
    1,163Gains on life insurance benefit
    
    
    
    
    
    
    
    
    
    
    (4,113
    )Other, net
    
    
    9,688
    
    
    
    592
    
    
    
    1,842Net Cash from Operating Activities
    
    
    42,409
    
    
    
    39,013
    
    
    
    43,339CASH FLOWS FROM INVESTING ACTIVITIES:Sales of securities available-for-sale
    
    
    
    
    
    
    11,376
    
    
    
    11,466Calls, maturities and principal reductions on securities available-for-sale
    
    
    157,031
    
    
    
    373,741
    
    
    
    105,945Purchases of securities available-for-sale
    
    
    (180,393
    )
    
    
    (422,141
    )
    
    
    (55,885
    )Loans made to customers, net of repayments
    
    
    (6,510
    )
    
    
    49,806
    
    
    
    (44,834
    )Net change in federal funds sold
    
    
    (18,455
    )
    
    
    2,418
    
    
    
    450Purchase of bank-owned life insurance
    
    
    
    
    
    
    (5,000
    )
    
    
    Purchase of customer list
    
    
    
    
    
    
    (338
    )
    
    
    Proceeds from life insurance benefit
    
    
    
    
    
    
    
    
    
    
    7,267Additions to premises and equipment
    
    
    (5,015
    )
    
    
    (2,908
    )
    
    
    (4,458
    )Net Cash from Investing Activities
    
    
    (53,342
    )
    
    
    6,954
    
    
    
    19,951CASH FLOWS FROM FINANCING ACTIVITIES:Net change in deposits
    
    
    37,764
    
    
    
    21,797
    
    
    
    (36,226
    )Net change in other short-term borrowings
    
    
    (10,021
    )
    
    
    (49,303
    )
    
    
    6,898Dividends paid
    
    
    (11,181
    )
    
    
    (10,779
    )
    
    
    (10,155
    )Purchases of treasury stock
    
    
    (4,087
    )
    
    
    (5,789
    )
    
    
    (2,330
    )Proceeds from other borrowings
    
    
    
    
    
    
    
    
    
    
    85,006Repayments on other borrowings
    
    
    (2,061
    )
    
    
    (18,620
    )
    
    
    (105,753
    )Net Cash from Financing Activities
    
    
    10,414
    
    
    
    (62,694
    )
    
    
    (62,560
    )Net Change in Cash and Cash Equivalents
    
    
    (519
    )
    
    
    (16,727
    )
    
    
    730Cash and Cash Equivalents, Beginning of Year
    
    
    78,201
    
    
    
    94,928
    
    
    
    94,198Cash and Cash Equivalents, End of Year
    
    $
    77,682
    
    
    $
    78,201
    
    
    $
    94,928SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the year for:Interest
    
    $
    56,150
    
    
    $
    46,919
    
    
    $
    44,979Income taxes
    
    $
    11,202
    
    
    $
    5,413
    
    
    $
    6,501
   13




---



##### 



Notes to Consolidated Financial Statements
 1.
    
    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:BusinessOrganization:The consolidated financial statements of First Financial Corporation and its
subsidiaries (the Corporation) include the parent company and its wholly-owned subsidiaries, First
Financial Bank, N.A. of Vigo County, Indiana, The Morris Plan Company of Terre Haute (Morris Plan),
First Financial Reinsurance Company, a corporation incorporated in the country of Turks and Caicos
Islands (FFRC) and Forrest Sherer Inc., a full-line insurance agency headquartered in Terre Haute,
Indiana. Inter-company transactions and balances have been eliminated.First Financial Bank also has two investment subsidiaries, Portfolio Management Specialists A
(Specialists A) and Portfolio Management Specialists B (Specialists B), which were established to
hold and manage certain assets as part of a strategy to better manage various income streams and
provide opportunities for capital creation as needed. Specialists A and Specialists B subsequently
entered into a limited partnership agreement, Global Portfolio Limited Partners. Portfolio
Management Specialists B also owns First Financial Real Estate, LLC. At December 31, 2006, $461.4
million of securities and loans were owned by these subsidiaries. Specialists A, Specialists B,
Global Portfolio Limited Partners and First Financial Real Estate LLC are included in the
consolidated financial statements.The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety of financial
services including commercial, mortgage and consumer lending, lease financing, trust account
services and depositor services through its four subsidiaries. The Corporations primary source of
revenue is derived from loans to customers, primarily middle-income individuals, and investment
activities.The Corporation operates 48 branches in west-central Indiana and east-central Illinois. First
Financial Bank is the largest bank in Vigo County. It operates 12 full-service banking branches
within the county; five in Clay County, Indiana; one in Greene County, Indiana; three in Knox
County, Indiana; five in Parke County, Indiana; one in Putnam County, Indiana; five in Sullivan
County, Indiana; four in Vermillion County, Indiana; one in Clark County, Illinois; one in Coles
County, Illinois; three in Crawford County, Illinois; one in Jasper County, Illinois; two in
Lawrence County, Illinois; two in Richland County, Illinois; one in Vermilion County, Illinois; and
one in Wayne County, Illinois. It also has a main office in downtown Terre Haute and an operations
center/office building in southern Terre Haute.Regulatory Agencies:First Financial Corporation is a multi-bank holding company and as such is
regulated by various banking agencies. The holding company is regulated by the Seventh District of
the Federal Reserve System. The national bank subsidiary is regulated by the Office of the
Comptroller of the Currency. The state bank subsidiary is jointly regulated by the state banking
organization and the Federal Deposit Insurance Corporation.Significant Accounting PoliciesUse of Estimates:To prepare financial statements in conformity with U.S. generally accepted
accounting principles, management makes estimates and assumptions based on available information.
These estimates and assumptions affect the amounts reported in the financial statements and
disclosures provided, and actual results could differ. The allowance for loan losses, carrying
value of intangible assets, loan servicing rights and the fair values of financial instruments are
particularly subject to change.Cash Flows:Cash and cash equivalents include cash and demand
deposits with other financial institutions. Net cash flows are reported for customer loan and
deposit transactions and short-term borrowings.Securities:The Corporation classifies all securities as available for sale. Securities are
classified as available for sale when they might be sold before maturity. Securities available for
sale are carried at fair value with unrealized holdings gains and losses, net of taxes, reported in
other comprehensive income within shareholders equity.Interest income includes amortization of purchase premium or discount. Premiums and discounts are
amortized on the level yield method without anticipating prepayments. Mortgage-backed securities
are amortized over the expected life. Realized gains and losses on sales are based on the amortized
cost of the security sold. Declines in the fair value of securities below their cost that are other
than temporary are reflected as realized losses. In estimating other-than-temporary losses,
management considers: 1) the length of time and extent that fair value has been less than cost; 2)
the financial condition and near term prospects of the issuer; and 3) the Corporations ability and
intent to hold the security for a period sufficient to allow for any anticipated recovery in fair
value.Loans:Loans that management has the intent and ability to hold for the foreseeable future until
maturity or pay-off are reported at the principal balance outstanding, net of unearned interest,
deferred loan fees and costs, and allowance for loan losses. Loans held for sale are reported at
the lower of cost or market, on an aggregate basis.Interest income is accrued on the unpaid principal balance and includes amortization of net
deferred loan fees and costs over the loan term without anticipating prepayments. Interest income
is not reported when full loan repayment is in doubt, typically when the loan is impaired or
payments are significantly past due.All interest accrued but not received for loans placed on nonaccrual is reversed against
interest income. Interest received on such loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status
when all the principal and interest amounts contractually due are brought current and future
payments are reasonably assured. In all cases, loans are placed on non-accrual or charged-off if
collection of principal or interest is considered doubtful.Allowance for Loan Losses:The
allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses
are charged against the allowance when management believes the uncollectibility of a loan balance
is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates
the allowance balance required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral values,
  14




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##### 



Notes to Consolidated Financial Statements
 economic conditions and other factors. Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in managements judgment, should be
charged off. The allowance consists of specific and general components. The specific component
relates to loans that are individually classified as impaired or loans otherwise classified as
substandard or doubtful. The general component covers non-classified loans and is based on
historical loss experience adjusted for current factors.A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated
in total for smaller-balance loans of similar nature such as residential mortgages, consumer and
credit card loans, and on an individual basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the present value of estimated
future cash flows, using the loans existing rate, or at the fair value of collateral if repayment
is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as
consumer and residential real estate loans, are collectively evaluated for impairment and,
accordingly, they are not separately identified for impairment disclosures.Foreclosed Assets:Assets acquired through or instead of loan foreclosures are initially recorded
at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation
allowance is recorded through expense. Costs after acquisition are expensed.Premises and Equipment:Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the useful lives of the assets, which range
from 3 to 33 years for furniture and equipment and 5 to 39 years for buildings and leasehold
improvements.Federal Home Loan Bank (FHLB) Stock:The Corporation is a member of the FHLB system. Members are
required to own a certain amount of stock based on the level of borrowings and other factors, and
may invest in additional amounts. FHLB stock is carried at cost and periodically evaluated for
impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate
recovery of par value. Both cash and stock dividends are reported as income. FHLB stock is included
with securities.Servicing Rights:Servicing rights are recognized as assets for the allocated
value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to loan type and interest rate, and
then secondarily as to loan type and investor. Any impairment of a grouping is reported as a
valuation allowance.Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a
contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as
income when earned. The amortization of mortgage servicing rights is netted against loan servicing
fee income.Bank-Owned Life Insurance:The Corporation has purchased life insurance policies on certain key
executives. Bank-owned life insurance is recorded at its cash surrender value, or the amount that
can be realized. Income on the investments in life insurance is included in other interest income.Goodwill and Other Intangible Assets:Goodwill results from business acquisitions and represents
the excess of the purchase price over the fair value of acquired tangible assets and liabilities
and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any
such impairment will be recognized in the period identified.Other intangible assets consist of core deposit and acquired customer relationship intangible
assets arising from the whole bank, insurance agency and branch acquisitions. They are initially
measured at fair value and then are amortized over their estimated useful lives, which are 12 and
10 years, respectively.Long-Term Assets:Premises and equipment and other long-term assets are reviewed for impairment
when events indicate their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at fair value.Benefit Plans:Pension expense is the
net of service and interest cost, return on plan assets and amortization of gains and losses not
immediately recognized. The amount contributed is determined by a formula as decided by the Board
of Directors. Deferred compensation and supplemental retirement plan expense allocates the benefits
over years of service.Employee Stock Ownership Plan:Shares of treasury stock are issued to the ESOP and compensation
expense is recognized based upon the total market price of shares when contributed.Deferred Compensation Plan:A deferred compensation plan covers all directors. Under the plan, the
Corporation pays each director, or their beneficiary, the amount of fees deferred plus interest
over 10 years, beginning when the director achieves age 65. A liability is accrued for the
obligation under these plans. The expense incurred for the deferred compensation for each of the
last three years was $201 thousand, $164 thousand and $160 thousand, resulting in a deferred
compensation liability of $2.2 million and $2.2 million as of year-end 2006 and 2005.Long-Term Incentive Plan:A long-term incentive plan provides for the payment of incentive
rewards as a 15-year annuity to all directors and certain key officers. The plan expires December
31, 2009, and compensation expense is recognized over the service period. Payments under the plan
generally do not begin until the earlier of January 1, 2015, or the January 1 immediately following
the year in which the participant reaches age 65. Compensation expense for each of the last three
years was $1.7 million, $1.6 million and $1.5 million, resulting in a liability of $9.4 million and
$7.8 million as of year-end 2006 and 2005.Income Taxes:Income tax expense is the total of the current year income tax due or refundable and
the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
  15




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##### 



Notes to Consolidated Financial Statements
 Loan Commitments and Related Financial Instruments:Financial instruments include credit
instruments, such as commitments to make loans and standby letters of credit, issued to meet
customer financing needs. The face amount for these items represents the exposure to loss, before
considering customer collateral or ability to repay. Such financial instruments are recorded when
they are funded.Earnings Per Share:Earnings per common share is net income divided by the weighted average number
of common shares outstanding during the period. The Corporation does not have any potentially
dilutive securities. Earnings and dividends per share are restated for stock splits and dividends
through the date of issue of the financial statements.Comprehensive Income:Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities available for sale,
which are also recognized as separate components of equity.Loss Contingencies:Loss contingencies, including claims and legal actions arising in the ordinary
course of business, are recorded as liabilities when the likelihood of loss is probable and an
amount of range of loss can be reasonably estimated. Management does not believe there are
currently such matters that will have a material effect on the financial statements.Dividend Restriction:Banking regulations require maintaining certain capital levels and may limit
the dividends paid by the bank to the holding company or by the holding company to shareholders.Fair Value of Financial Instruments:Fair values of financial instruments are estimated using
relevant market information and other assumptions, as more fully disclosed in a separate note. Fair
value estimates involve uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or market conditions could significantly affect the
estimates.Operating Segment:While the Corporations chief decision-makers monitor the revenue streams of the
various products and services, the operating results of significant segments are similar and
operations are managed and financial performance is evaluated on a corporate-wide basis.
Accordingly, all of the Corporations financial service operations are considered by management to
be aggregated in one reportable operating segment, which is banking.Adoption of New Accounting Standards: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. The Corporation has
determined that the adoption of FIN 48 will not have a material effect on the financial statements.SFAS No. 157 In September 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. This Statement
establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies
assumptions about risk and the effect of a restriction on the sale or use of an asset. The new
standard is effective for fiscal years beginning after November 15, 2007. The Corporation does not
believe that the adoption of SFAS No. 157 will have a material impact on the financial statements.SFAS No. 158 In September 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 158, Employers Accounting for Defined Benefit Pension and Other Post-retirement Plans  an
amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires an employer to
recognize the overfunded or underfunded status of a defined benefit post-retirement plan (other
than a multi-employer plan) as an asset or liability in its statement of financial position and to
recognize changes in the funded status in the year in which the changes occur through comprehensive
income. Defined benefit plan assets and obligations are to be measured as of the date of the
employers fiscal year-end. The employer must disclose in the notes to the financial statements
additional information about certain effects on net periodic benefit cost for the next fiscal year
that arise from delayed recognition of gains and losses, prior service costs or credits, and
transition asset or obligation. The new standard is effective for employers with publicly traded
equity securities as of the end of the fiscal year ending after December 15, 2006. The adoption of
this standard had no impact on our consolidated statement of income or cash flows. The adoption of
this standard had the following impact on individual line items of our December 31, 2006 balance
sheet:
 Before
    
    
    
    
    
    
    AfterApplication of
    
    
    
    
    
    
    Application ofSFAS No. 158
    
    
    Adjustments
    
    
    SFAS No. 158Deferred tax assets
    
    $
    8,699
    
    
    $
    5,706
    
    
    $
    14,404Total assets
    
    $
    2,170,292
    
    
    $
    5,706
    
    
    $
    2,175,998Liability for post-retirement benefits
    
    $
    (2,666
    )
    
    $
    14,264
    
    
    $
    11,598Total liabilities
    
    $
    1,890,474
    
    
    $
    14,264
    
    
    $
    1,904,738Accumulated other comprehensive
income (loss)
    
    $
    (3,064
    )
    
    $
    (8,558
    )
    
    $
    (5,494
    )Total shareholders equity
    
    $
    279,818
    
    
    $
    (8,558
    )
    
    $
    271,260
  16




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 SAB 108 In September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (SAB 108). SAB 108 provides interpretive guidance on how the effects
of the carryover or reversal of prior year misstatements should be considered in quantifying a
potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality
of financial statement misstatements using either the income statement or balance sheet approach,
with the income statement approach focusing on new misstatements added in the current year, and
the balance sheet approach focusing on the cumulative amount of misstatement present in a
companys balance sheet. Misstatements that would be material under one approach can be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires that companies view
financial statement misstatements as material if they are material according to either the income
statement or balance sheet approach. This statement is effective as of the end of the fiscal year
ending after December 15, 2006. The adoption of SAB 108 had no effect on the Corporations
financial statements for the year ending December 31, 2006.Effect of Newly Issued But Not Yet Effective Accounting Standards Other new accounting
standards have been issued that the Corporation does not expect will have a material effect on
the financial statements when adopted in future years or for which the Corporation has not yet
completed its evaluation of the potential effect upon adoption. In general, these standards
revise the accounting for derivatives embedded in other financial instruments for 2007, revise
the recognition and accounting for servicing of financial assets for 2007, revise the accrual of
post-retirement benefits associated with providing life insurance for 2008, and revise the
accounting for cash surrender value for 2007.Reclassifications:Some items in prior year financial statements were reclassified to conform to
the current presentation.2.
    
    FAIR VALUES OF FINANCIAL INSTRUMENTS:Carrying amount is the estimated fair value for cash and due from banks, federal funds sold,
short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable,
demand deposits, short-term debt and variable-rate loans or deposits that reprice frequently and
fully. Security fair values are based on market prices or dealer quotes, and if no such
information is available, on the rate and term of the security and information about the issuer.
For fixed-rate loans or deposits, variable rate loans or deposits with infrequent repricing or
repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying collateral values.
Fair value of debt is based on current rates for similar financing. The fair value of off-balance
sheet items is not considered material.The carrying amount and estimated fair value of financial instruments are presented in the table
below and were determined based on the above assumptions:
 December 31,2006
    
    
    2005Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(Dollar amounts in thousands)
    
    Value
    
    
    Value
    
    
    Value
    
    
    ValueCash and due from banks
    
    $
    77,682
    
    
    $
    77,682
    
    
    $
    78,201
    
    
    $
    78,201Federal funds sold
    
    
    21,437
    
    
    
    21,437
    
    
    
    2,982
    
    
    
    2,982Securities available-for-sale
    
    
    559,053
    
    
    
    559,053
    
    
    
    536,291
    
    
    
    536,291Loans, net
    
    
    1,376,586
    
    
    
    1,366,848
    
    
    
    1,379,699
    
    
    
    1,371,835Accrued interest receivable
    
    
    13,972
    
    
    
    13,972
    
    
    
    12,537
    
    
    
    12,537Deposits
    
    
    (1,502,682
    )
    
    
    (1,506,761
    )
    
    
    (1,464,918
    )
    
    
    (1,469,670
    )Short-term borrowings
    
    
    (16,203
    )
    
    
    (16,203
    )
    
    
    (26,224
    )
    
    
    (26,224
    )Federal Home Loan Bank advances
    
    
    (335,205
    )
    
    
    (336,231
    )
    
    
    (337,266
    )
    
    
    (338,849
    )Other borrowings
    
    
    (6,600
    )
    
    
    (6,600
    )
    
    
    (6,600
    )
    
    
    (6,600
    )Accrued interest payable
    
    
    (4,668
    )
    
    
    (4,668
    )
    
    
    (3,692
    )
    
    
    (3,692
    )
  17




---



##### 



Notes to Consolidated Financial Statements
 3.
    
    RESTRICTIONS ON CASH AND DUE FROM BANKS:Certain affiliate banks are required to maintain average reserve balances with the Federal Reserve
Bank that do not earn interest. The amount of those reserve balances was approximately $7.4 million
and $4.1 million at December 31, 2006 and 2005, respectively.4.
    
    SECURITIES:The fair value of securities available-for-sale and related gross unrealized gains and losses
recognized in accumulated other comprehensive income were as follows:
 December 31, 2006Amortized
    
    
    Unrealized
    
    
    Fair(Dollar amounts in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government sponsored entity
mortgage-backed securities and agencies
    
    $
    334,383
    
    
    $
    1,025
    
    
    $
    (4,562
    )
    
    $
    330,846Collateralized mortgage obligations
    
    
    9,935
    
    
    
    37
    
    
    
    (2
    )
    
    
    9,970State and municipal
    
    
    136,124
    
    
    
    4,163
    
    
    
    (217
    )
    
    
    140,070Corporate obligations
    
    
    68,952
    
    
    
    520
    
    
    
    
    
    
    
    69,472Equities
    
    
    4,556
    
    
    
    4,139
    
    
    
    
    
    
    
    8,695Total
    
    $
    553,950
    
    
    $
    9,884
    
    
    $
    (4,781
    )
    
    $
    559,053
 December 31, 2005Amortized
    
    
    Unrealized
    
    
    Fair(Dollar amounts in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government sponsored entity
mortgage-backed securities and agencies
    
    $
    306,697
    
    
    $
    787
    
    
    $
    (6,081
    )
    
    $
    301,403Collateralized mortgage obligations
    
    
    2,357
    
    
    
    7
    
    
    
    (4
    )
    
    
    2,360State and municipal
    
    
    129,916
    
    
    
    4,543
    
    
    
    (414
    )
    
    
    134,045Corporate obligations
    
    
    89,740
    
    
    
    534
    
    
    
    (50
    )
    
    
    90,224Equities
    
    
    4,410
    
    
    
    3,849
    
    
    
    
    
    
    
    8,259Total
    
    $
    533,120
    
    
    $
    9,720
    
    
    $
    (6,549
    )
    
    $
    536,291
 As of December 31, 2006, the Corporation does not have any securities from any issuer, other than
the U.S. Government, with an aggregate book or fair value that exceeds ten percent of shareholders
equity.Securities with a carrying value of approximately $51.4 million and $54.7 million at December 31,
2006 and 2005, respectively, were pledged as collateral for short-term borrowings and for other
purposes.Below is a summary of the gross gains and losses realized by the Corporation on investment sales
during the years ended December 31, 2006, 2005 and 2004, respectively.
 (Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Proceeds
    
    
    
    
    
    $
    11,376
    
    
    $
    11,466Gross gains
    
    
    
    
    
    
    537
    
    
    
    409Gross losses
    
    
    
    
    
    
    
    
    
    
    
 Additional gains of $6 thousand in 2006 and $34 thousand in 2005 resulted from redemption premiums
on called securities.The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis.
Factors considered include length of time impaired, reason for impairment, outlook and the
Corporations ability to hold the investment to allow for recovery of fair value. There were no
securities considered to be other-than-temporarily impaired at December 31, 2006 or December 31,
2005. At December 31, 2004, the Corporation had one security that it considered to be
other-than-temporarily impaired, and the Corporation wrote down the value of the investment by $621
thousand to its fair value and subsequently sold the security.
  18




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##### 



Notes to Consolidated Financial Statements
 Contractual maturities of debt securities at year-end 2006 were as follows. Securities not due at a
single maturity or with no maturity date, primarily mortgage-backed and equity securities, are
shown separately.
 Available-for-SaleAmortized
    
    
    Fair(Dollar amounts in thousands)
    
    Cost
    
    
    ValueDue in one year or less
    
    $
    38,542
    
    
    $
    38,899Due after one but within five years
    
    
    83,667
    
    
    
    85,683Due after five but within ten years
    
    
    56,049
    
    
    
    58,182Due after ten years
    
    
    39,129
    
    
    
    39,200217,387
    
    
    
    221,964Mortgage-backed securities and equities
    
    
    336,563
    
    
    
    337,089Total
    
    $
    553,950
    
    
    $
    559,053
 The following tables show the securities gross unrealized losses and fair value, aggregated by
investment category and length of time that individual securities have been in continuous
unrealized loss position, at December 31, 2006 and 2005.
 December 31, 2006Less Than 12 Months
    
    
    More Than 12 Months
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(Dollar amounts in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Government sponsored entity
mortgage-backed securities and agencies
    
    $
    56,368
    
    
    $
    (196
    )
    
    $
    192,410
    
    
    $
    (4,366
    )
    
    $
    248,778
    
    
    $
    (4,562
    )Collateralized mortgage obligations
    
    
    4,771
    
    
    
    
    
    
    
    14
    
    
    
    (2
    )
    
    
    4,785
    
    
    
    (2
    )State and municipal obligations
    
    
    5,950
    
    
    
    (62
    )
    
    
    13,422
    
    
    
    (155
    )
    
    
    19,372
    
    
    
    (217
    )Corporate obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    $
    67,089
    
    
    $
    (258
    )
    
    $
    205,846
    
    
    $
    (4,523
    )
    
    $
    272,935
    
    
    $
    (4,781
    )
 December 31, 2005Less Than 12 Months
    
    
    More Than 12 Months
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(Dollar amounts in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Government sponsored entity
mortgage-backed securities and agencies
    
    $
    206,666
    
    
    $
    (4,250
    )
    
    $
    57,222
    
    
    $
    (1,831
    )
    
    $
    263,888
    
    
    $
    (6,081
    )Collateralized mortgage obligations
    
    
    904
    
    
    
    (2
    )
    
    
    1,334
    
    
    
    (2
    )
    
    
    2,238
    
    
    
    (4
    )State and municipal obligations
    
    
    14,509
    
    
    
    (240
    )
    
    
    8,994
    
    
    
    (174
    )
    
    
    23,503
    
    
    
    (414
    )Corporate obligations
    
    
    698
    
    
    
    (2
    )
    
    
    950
    
    
    
    (48
    )
    
    
    1,648
    
    
    
    (50
    )Total temporarily impaired securities
    
    $
    222,777
    
    
    $
    (4,494
    )
    
    $
    68,500
    
    
    $
    (2,055
    )
    
    $
    291,277
    
    
    $
    (6,549
    )
 These losses represent negative adjustments to market value relative to the rate of interest paid
on the securities and not losses related to the creditworthiness of the issuer. Management has the
intent and ability to hold for the foreseeable future and believes the value will recover as the
securities approach maturity or market rates change.
  19




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##### 



Notes to Consolidated Financial Statements
 5.
    
    LOANS:
Loans are summarized as follows:
 December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005Commercial, financial and agricultural
    
    $
    407,995
    
    
    $
    382,214Real estate  construction
    
    
    33,336
    
    
    
    31,918Real estate  residential
    
    
    447,865
    
    
    
    429,064Real estate  commercial
    
    
    244,124
    
    
    
    277,944Installment
    
    
    257,065
    
    
    
    272,062Lease financing
    
    
    2,064
    
    
    
    2,845Total gross loans
    
    
    1,392,989
    
    
    
    1,396,047Less: unearned income
    
    
    (234
    )
    
    
    (306
    )Allowance for loan losses
    
    
    (16,169
    )
    
    
    (16,042
    )Total
    
    $
    1,376,586
    
    
    $
    1,379,699
 In the normal course of business, the Corporations subsidiary banks make loans to directors and
executive officers and to their associates. In 2006 the aggregate dollar amount of these loans to
directors and executive officers who held office at the end of the year amounted to $22.0 million
at the beginning of the year. During 2006, advances of $24.2 million and repayments of $21.9
million were made with respect to related party loans for an aggregate dollar amount outstanding of
$24.3 million at December 31, 2006.Loans serviced for others, which are not reported as assets, total $382.2 million and $416.6
million at year-end 2006 and 2005.Activity for capitalized mortgage servicing rights (included in other assets) and the related
valuation allowance was as follows:
 December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Servicing rights:Beginning of year
    
    $
    2,931
    
    
    $
    2,960
    
    
    $
    3,114Additions
    
    
    114
    
    
    
    735
    
    
    
    631Amortized to expense
    
    
    (726
    )
    
    
    (764
    )
    
    
    (785
    )End of year
    
    $
    2,319
    
    
    $
    2,931
    
    
    $
    2,960Valuation allowance:Beginning of year
    
    
    
    
    
    
    
    
    
    $
    200Reductions credited to expense
    
    
    
    
    
    
    
    
    
    
    (200
    )End of year
    
    
    
    
    
    
    
    
    
    $
    0
 Third party valuations are conducted periodically for mortgage servicing rights. Based on these
valuations, fair values approximate carrying values.6.
    
    ALLOWANCE FOR LOAN LOSSES:Changes in the allowance for loan losses are summarized as follows:
 December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Balance at beginning of year
    
    $
    16,042
    
    
    $
    19,918
    
    
    $
    21,239Provision for loan losses
    
    
    6,983
    
    
    
    11,698
    
    
    
    8,292Recoveries of loans previously charged off
    
    
    3,653
    
    
    
    1,918
    
    
    
    1,771Loans charged off
    
    
    (10,509
    )
    
    
    (17,492
    )
    
    
    (11,384
    )Balance at End of Year
    
    $
    16,169
    
    
    $
    16,042
    
    
    $
    19,918
  20




---



##### 



Notes to Consolidated Financial Statements
 Impaired loans were as follows:
 December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005Year-end loans with no allocated allowance for loan losses
    
    $
    503
    
    
    $
    500Year-end loans with allocated allowance for loan losses
    
    
    4,865
    
    
    
    3,622Total
    
    $
    5,368
    
    
    $
    4,122Amount of the allowance for loan losses allocated
    
    $
    2,480
    
    
    $
    1,657Nonperforming loans:Loans past due over 90 days still on accrual
    
    
    4,691
    
    
    
    6,354Non-accrual loans
    
    
    9,893
    
    
    
    8,464
 Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated
for impairment and individually classified impaired loans.
 (Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Average of impaired loans during the year
    
    $
    3,336
    
    
    $
    11,992
    
    
    $
    14,794Interest income recognized during impairment
    
    
    13
    
    
    
    126
    
    
    
    436Cash-basis interest income recognized
    
    
    0
    
    
    
    11
    
    
    
    315
 7.
    
    PREMISES AND EQUIPMENT:Premises and equipment are summarized as follows:
 December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005Land
    
    $
    5,653
    
    
    $
    5,617Building and leasehold improvements
    
    
    38,047
    
    
    
    35,290Furniture and equipment
    
    
    31,717
    
    
    
    29,88775,417
    
    
    
    70,794Less accumulated depreciation
    
    
    (42,150
    )
    
    
    (39,524
    )Total
    
    $
    33,267
    
    
    $
    31,270
 Aggregate depreciation expense was $3.02 million, $2.79 million and $2.62 million for 2006, 2005 and 2004,
respectively.8.
    
    GOODWILL AND INTANGIBLE ASSETS:The Corporation completed its annual impairment testing of goodwill during the second quarter of 2006 and
2005. Management does not believe any amount of the goodwill is impaired.Intangible assets subject to amortization at December 31, 2006 and 2005 are as follows:
 2006
    
    
    2005Gross
    
    
    Accumulated
    
    
    Gross
    
    
    Accumulated(Dollar amounts in thousands)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationCustomer list intangible
    
    $
    3,446
    
    
    $
    1,997
    
    
    $
    3,446
    
    
    $
    1,692Core deposit intangible
    
    
    2,193
    
    
    
    1,279
    
    
    
    2,193
    
    
    
    1,117Non-compete agreements
    
    
    500
    
    
    
    500
    
    
    
    500
    
    
    
    470$
    6,139
    
    
    $
    3,776
    
    
    $
    6,139
    
    
    $
    3,279
 Aggregate amortization expense was $497 thousand, $571 thousand and $558 thousand for 2006, 2005 and
2004, respectively.Estimated amortization expense for the next five years is as follows:
 In thousands2007
    
    $
    4252008
    
    
    4252009
    
    
    4252010
    
    
    4252011
    
    
    245
  21




---



##### 



Notes to Consolidated Financial Statements
 9.
    
    DEPOSITSScheduled maturities of time deposits for the next five years are as follows:
 2007
    
    $
    504,6842008
    
    
    78,2062009
    
    
    39,0322010
    
    
    14,9362011
    
    
    9,414
 10.
    
    SHORT-TERM BORROWINGSA summary of the carrying value of the Corporations short-term borrowings at December 31, 2006
and 2005 is presented below:
 (Dollar amounts in thousands)
    
    2006
    
    
    2005Federal funds purchased
    
    $
    10,179
    
    
    $
    19,032Repurchase agreements
    
    
    5,407
    
    
    
    5,579Other short-term borrowings
    
    
    617
    
    
    
    1,613$
    16,203
    
    
    $
    26,224
 (Dollar amounts in thousands)
    
    2006
    
    
    2005Average amount outstanding
    
    $
    15,691
    
    
    $
    25,927Maximum amount outstanding at a month end
    
    
    38,940
    
    
    
    54,808Average interest rate during year
    
    
    4.77
    %
    
    
    3.16
    %Interest rate at year-end
    
    
    4.74
    %
    
    
    3.77
    %
 Federal funds purchased are generally due in one day and bear interest at market rates. Other
borrowings, primarily note payableU.S. government, are due on demand, secured by a pledge of
securities and bear interest at market rates.Substantially all repurchase agreement liabilities represent amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not covered by federal deposit
insurance. The Corporation maintains possession of and control over these securities.11.
    
    OTHER BORROWINGS:Other borrowings at December 31, 2006 and 2005 are summarized as follows:
 (Dollar amounts in thousands)
    
    2006
    
    
    2005FHLB advances
    
    $
    335,205
    
    
    $
    337,266City of Terre Haute, Indiana economic development revenue bonds
    
    
    6,600
    
    
    
    6,600Total
    
    $
    341,805
    
    
    $
    343,866
 The aggregate minimum annual retirements of other borrowings are as follows:
 2007
    
    $
    6,9572008
    
    
    52,7792009
    
    
    22,9402010
    
    
    257,5002011
    
    
    611Thereafter
    
    
    1,018$
    341,805
  22




---



##### 



Notes to Consolidated Financial Statements
 The Corporations subsidiary banks are members of the Federal Home Loan Bank (FHLB) and accordingly
are permitted to obtain advances. The advances from the FHLB, aggregating $335.2 million at
December 31, 2006, and $337.3 million at December 31, 2005, accrue interest, payable monthly, at
annual rates, primarily fixed, varying from 4.9% to 6.6% in 2006 and 3.3% to 6.6% in 2005. The
advances are due at various dates through August 2017. FHLB advances are, generally, due in full at
maturity. They are secured by eligible securities totaling $197.5 million and $129.9 million at
December 31, 2006 and 2005 and a blanket pledge on real estate loan collateral. Based on this
collateral and the Corporations holdings of FHLB stock, the Corporation is eligible to borrow up
to $437.5 million at year end 2006. Certain advances may be prepaid, without penalty, prior to
maturity. The FHLB can adjust the interest rate from fixed to variable on certain advances, but
those advances may then be prepaid, without penalty.The economic development revenue bonds (bonds) require periodic interest payments each year until
maturity or redemption. The interest rate, which was 3.97% at December 31, 2006, and 3.58% at
December 31, 2005, is determined by a formula which considers rates for comparable bonds and is
adjusted periodically. The bonds are collateralized by a first mortgage on the Corporations
headquarters building. The bonds mature December 1, 2015, but bondholders may periodically require
earlier redemption.The debt agreement for the bonds requires the Corporation to meet certain financial covenants.
These covenants require the Corporation to maintain a Tier I capital ratio of at least 6.2% and net
income to average assets of 0.6%. At December 31, 2006 and 2005, the Corporation was in compliance
with all of its debt covenants.The Corporation maintains a letter of credit with another financial institution, which could be
used to repay the bonds, should they be called. The letter of credit expired November 1, 2006, and
was automatically extended for one year. Assuming redemption will be funded by the letter of
credit, or by other similar borrowings, there are no anticipated principal maturities of the bonds
within the next five years.12.
    
    INCOME TAXES:Income tax expense is summarized as follows:
 (Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Federal:Currently payable
    
    $
    10,409
    
    
    $
    6,202
    
    
    $
    5,884Deferred
    
    
    (3,335
    )
    
    
    1,334
    
    
    
    1,2827,074
    
    
    
    7,536
    
    
    
    7,166State:Currently payable
    
    
    521
    
    
    
    (5
    )
    
    
    467Deferred
    
    
    (244
    )
    
    
    382
    
    
    
    366277
    
    
    
    377
    
    
    
    833Total
    
    $
    7,351
    
    
    $
    7,913
    
    
    $
    7,999
 The reconciliation of income tax expense with the amount computed by applying the statutory federal
income tax rate of 35% to income before income taxes is summarized as follows:
 (Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Federal income taxes computed at the statutory rate
    
    $
    10,812
    
    
    $
    10,839
    
    
    $
    12,603Add (deduct) tax effect of:Tax exempt income
    
    
    (3,056
    )
    
    
    (2,902
    )
    
    
    (4,889
    )State tax, net of federal benefit
    
    
    180
    
    
    
    245
    
    
    
    541Affordable housing credits
    
    
    (329
    )
    
    
    (327
    )
    
    
    (327
    )Other, net
    
    
    (256
    )
    
    
    58
    
    
    
    71Total
    
    $
    7,351
    
    
    $
    7,913
    
    
    $
    7,999
  23




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and liabilities at December 31, 2006 and 2005, are as follows:
 (Dollar amounts in thousands)
    
    2006
    
    
    2005Deferred tax assets:Net unrealized losses on pension
    
    $
    5,705
    
    
    $
    Loan losses provision
    
    
    6,448
    
    
    
    6,454Deferred compensation
    
    
    4,675
    
    
    
    4,012Compensated absences
    
    
    513
    
    
    
    494Post-retirement benefits
    
    
    1,068
    
    
    
    920State net operating loss carry forward
    
    
    
    
    
    
    78Other
    
    
    1,025
    
    
    
    981Gross Deferred Assets
    
    
    19,434
    
    
    
    12,939Deferred tax liabilities:Net unrealized gains on securities available-for-sale
    
    
    (2,042
    )
    
    
    (1,268
    )Depreciation
    
    
    (1,435
    )
    
    
    (1,440
    )Federal Home Loan Bank stock dividends
    
    
    (751
    )
    
    
    (1,519
    )Mortgage servicing rights
    
    
    (924
    )
    
    
    (1,176
    )Pensions
    
    
    (2,361
    )
    
    
    (2,394
    )Other
    
    
    (1,281
    )
    
    
    (3,012
    )Gross Deferred Liabilities
    
    
    (8,794
    )
    
    
    (10,809
    )Net Deferred Tax Assets (liabilities)
    
    $
    10,640
    
    
    $
    2,130
 13.
    
    FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:The Corporation is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include conditional commitments and commercial letters of credit. The financial instruments involve
to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in
the financial statements. The Corporations maximum exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to make loans is
limited generally by the contractual amount of those instruments. The Corporation follows the same
credit policy to make such commitments as is followed for those loans recorded in the consolidated
financial statements.Commitment and contingent liabilities are summarized as follows at December 31:
 (Dollar amounts in thousands)
    
    2006
    
    
    2005Home equity
    
    $
    38,205
    
    
    $
    32,338Credit card lines
    
    
    46,238
    
    
    
    46,276Commercial operating lines
    
    
    159,630
    
    
    
    150,462Other commitments
    
    
    51,018
    
    
    
    43,034$
    295,091
    
    
    $
    272,110Commercial letters of credit
    
    
    17,289
    
    
    
    6,933
 The majority of commercial operating lines and home equity lines are variable rate, while the
majority of other commitments to fund loans are fixed rate. Since many commitments to make loans
expire without being used, these amounts do not necessarily represent future cash commitments.
Collateral obtained upon exercise of the commitment is determined using managements credit
evaluation of the borrower, and may include accounts receivable, inventory, property, land and
other items. The approximate duration of these commitments is generally one year or less.
  24




---



##### 



Notes to Consolidated Financial Statements
 14.
    
    RETIREMENT PLANS:Substantially all employees of the Corporation are covered by a retirement program that consists of
a defined benefit plan and an employee stock ownership plan (ESOP). Plan assets consist primarily
of the Corporations stock and obligations of U.S. Government agencies. Benefits under the defined
benefit plan are actuarially determined based on an employees service and compensation, as
defined, and funded as necessary.Assets in the ESOP are considered in calculating the funding to the defined benefit plan required
to provide such benefits. Any shortfall of benefits under the ESOP are to be provided by the
defined benefit plan. The ESOP may provide benefits beyond those determined under the defined
benefit plan. Contributions to the ESOP are determined by the Corporations Board of Directors. The
Corporation made contributions to the defined benefit plan of $1.96 million, $1.41 million and
$1.42 million in 2006, 2005 and 2004. The Corporation contributed $1.16 million, $1.14 million and
$1.16 million to the ESOP in 2006, 2005 and 2004.The Corporation uses a measurement date of December 31, 2006.Net periodic benefit cost and other amounts recognized in other comprehensive income included the
following components:
 (Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Service cost  benefits earned
    
    $
    2,919
    
    
    $
    2,725
    
    
    $
    2,508Interest cost on projected benefit obligation
    
    
    2,328
    
    
    
    2,451
    
    
    
    2,168Expected return on plan assets
    
    
    (2,793
    )
    
    
    (3,285
    )
    
    
    (2,799
    )Net amortization and deferral
    
    
    744
    
    
    
    229
    
    
    
    227Total pension expense
    
    $
    3,198
    
    
    $
    2,120
    
    
    $
    2,104
 The estimated net loss and prior service costs for the defined benefit pension plan that will be
amortized from accumulated other comprehensive income into net periodic benefit cost over the next
fiscal year are $468 thousand and $(18) thousand.The following information sets forth the change in projected benefit obligation, reconciliation of
plan assets, and the funded status of the Corporations retirement program. Actuarial present value
of benefits is based on service to date and present pay levels.
 (Dollar amounts in thousands)
    
    2006
    
    
    2005Change in benefit obligation:Benefit obligation at January 1
    
    $
    42,541
    
    
    $
    42,820Service cost
    
    
    2,919
    
    
    
    2,725Interest cost
    
    
    2,328
    
    
    
    2,451Actuarial (gain) loss
    
    
    3,602
    
    
    
    (1,831
    )Benefits paid
    
    
    (1,470
    )
    
    
    (3,624
    )Benefit obligation at December 31
    
    
    49,920
    
    
    
    42,541Reconciliation of fair value of plan assets:Fair value of plan assets at January 1
    
    
    34,488
    
    
    
    41,007Actual return on plan assets
    
    
    (8,911
    )
    
    
    (5,445
    )Employer contributions
    
    
    3,127
    
    
    
    2,550Benefits paid
    
    
    (1,470
    )
    
    
    (3,624
    )Fair value of plan assets at December 31
    
    
    45,056
    
    
    
    34,488Funded status:Funded status at December 31
    
    
    (4,864
    )
    
    
    (8,053
    )Unrecognized prior service cost
    
    
    
    
    
    
    (158
    )Unrecognized net actuarial cost
    
    
    
    
    
    
    14,214Net amount recognized in the consolidated balance sheets
    
    $
    (4,864
    )
    
    $
    6,003
  25




---



##### 



Notes to Consolidated Financial Statements
 Prior to the adoption of FAS Statement No. 158, amounts recognized in the balance sheet at December
31, 2005 consist of:
 Prepaid benefit cost
    
    $
    6,003
 Amounts recognized in accumulated other comprehensive income at December 31, 2006 consist of:
 Net loss (gain)
    
    $
    10,935Prior service cost (credit)
    
    
    (140
    )$
    10,795
 The accumulated benefit obligation for the defined benefit pension plan was $42,152 and $34,206 at
year-end 2006 and 2005.Principal assumptions used:
 Discount rate
    
    
    5.50
    %
    
    
    5.75
    %Rate of increase in compensation levels
    
    
    3.75
    
    
    
    3.75Expected long-term rate of return on plan assets
    
    
    8.00
    
    
    
    8.00
 The expected long-term rate of return was estimated using market benchmarks for equities and bonds
applied to the plans target asset allocation. Management estimated the rate by which plan assets
would perform based on historical experience as adjusted for changes in asset allocations and
expectations for future return on equities as compared to past periods.Plan Assets The Corporations pension plan weighted-average asset allocation for the years 2006
and 2005 by asset category are as follows:
 Pension Plan
    
    
    ESOPPension Plan
    
    
    ESOP
    
    
    Percentage of Plan
    
    
    Percentage of PlanTarget Allocation
    
    
    Target Allocation
    
    
    Assets at December 31,
    
    
    Assets at December 31,Asset Category
    
    2007
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Equity securities
    
    
    40-70
    %
    
    
    100-100
    %
    
    
    64
    %
    
    
    64
    %
    
    
    94
    %
    
    
    99
    %Debt securities
    
    
    60-30
    
    
    
    0-0
    
    
    
    35
    
    
    
    35
    
    
    
    0
    
    
    
    0Other
    
    
    0-0
    
    
    
    0-0
    
    
    
    1
    
    
    
    1
    
    
    
    6
    
    
    
    1Total
    
    
    
    
    
    
    
    
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 The investment objective for the retirement program is to maximize total return without exposure to
undue risk. Asset allocation favors equities, with a target allocation of approximately 88%. This
target includes the Corporations ESOP, which is 94% invested in corporate stock. Other investment
allocations include fixed income securities and cash.Equity securities include First Financial Corporation common stock in the amount of $17.0 million
(57 percent of total plan assets) and $22.1 million (64 percent of total plan assets) at December
31, 2006 and 2005, respectively.
  26




---



##### 



Notes to Consolidated Financial Statements
 Contributions The Corporation expects to contribute $1.8 million to its pension plan and $1.2
million to its ESOP in 2007.Estimated Future Payments The following benefit payments, which reflect expected future service,
are expected:
 Pension Benefits(Dollar amounts in thousands)2007
    
    $
    5132008
    
    
    5642009
    
    
    6292010
    
    
    7562011
    
    
    84620122016
    
    
    7,027
 Supplemental Executive Retirement Plan The Corporation has established a Supplemental Executive
Retirement Plan (SERP) for certain executive officers. The provisions of the SERP allow the Plans
participants who are also participants in the Corporations defined benefit pension plan to receive
supplemental retirement benefits to help recompense for benefits lost due to imposition of IRS
limitations on benefits under the Corporations tax qualified defined benefit pension plan.
Expenses related to the plan were $199 thousand in 2006 and $193 thousand in 2005. The SERP has
expected benefit payments of $619 thousand after five years, which reflects expected future
service. The plan is unfunded and has a measurement date of December 31.The Corporation has $1.0 million and $674 thousand recognized in the balance sheet as a liability
at December 31, 2006 and 2005. Amounts recognized in accumulated other comprehensive income at
December 31, 2006 consist of $165 thousand net gain and $370 thousand in prior service cost. The
estimated loss and prior service costs for the SERP that will be amortized from accumulated other
comprehensive income into net periodic benefit cost over the next fiscal year are $(17) thousand
and $74 thousand.The Corporation also provides medical benefits to its employees subsequent to their retirement. The
Corporation uses a measurement date of December 31, 2006. Accrued post-retirement benefits as of
December 31, 2006 and 2005 are as follows:
 December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005Change in benefit obligation:Benefit obligation at January 1
    
    $
    5,500
    
    
    $
    6,021Service cost
    
    
    116
    
    
    
    141Interest cost
    
    
    302
    
    
    
    319Plan participants contributions
    
    
    144
    
    
    
    143Actuarial (gain) loss
    
    
    5
    
    
    
    (736
    )Benefits paid
    
    
    (475
    )
    
    
    (388
    )Benefit obligation at December 31
    
    $
    5,592
    
    
    $
    5,500Reconciliation of funded status:Funded status
    
    $
    5,592
    
    
    $
    5,500Unrecognized transition obligation
    
    
    
    
    
    
    (482
    )Unrecognized net gain (loss)
    
    
    
    
    
    
    (2,726
    )Net amount recognized
    
    $
    5,592
    
    
    $
    2,292
  27




---



##### 



Notes to Consolidated Financial Statements
 Prior to adoption of FAS Statement No. 158, amounts recognized in the balance sheet at December 31,
2005 consisted of an accrued benefit cost of $2.3 million. Amounts recognized in accumulated other
comprehensive income at December 31, 2006 consist of a net loss of $2.5 million and $422 thousand
in transition obligation. The post-retirement benefits paid in 2006 and 2005 of $475 thousand and
$388 thousand, respectively, were fully funded by company and participant contributions. There were
no other changes to plan assets in 2006 and 2005.The estimated net loss and transition obligation for the post-retirement benefit plan that will be
amortized from accumulated other comprehensive income into net periodic benefit cost over the next
fiscal year is $172 thousand and $60 thousand.Weighted-average assumptions as of December 31:
 December 31,2006
    
    
    2005Discount rate
    
    
    5.75
    %
    
    
    5.50
    %Initial weighted health care cost trend rate
    
    
    9.50
    
    
    
    7.50Ultimate health care cost trend rate
    
    
    5.00
    
    
    
    5.00Year in which the rate is assumed to stabilize and remain unchanged
    
    
    2016
    
    
    
    2007
 Post-retirement health benefit expense included the following components:
 Years Ended December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Service cost
    
    $
    116
    
    
    $
    141
    
    
    $
    83Interest cost
    
    
    302
    
    
    
    319
    
    
    
    243Amortization of transition obligation
    
    
    60
    
    
    
    60
    
    
    
    60Recognized actuarial loss
    
    
    240
    
    
    
    250
    
    
    
    137Net periodic benefit cost
    
    $
    718
    
    
    $
    770
    
    
    $
    523
 Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in the assumed health care cost trend rates would
have the following effects:
 1% Point
    
    
    1% Point(Dollar amounts in thousands)
    
    Increase
    
    
    DecreaseEffect on total of service and interest cost components
    
    $
    9
    
    
    $
    (7
    )Effect on post-retirement benefit obligation
    
    
    159
    
    
    
    (135
    )
 Contributions The Corporation expects to contribute $319 thousand to its other post-retirement
benefit plan in 2007.Estimated Future Payments The following benefit payments, which reflect expected future service,
are expected:
 Post-Retirement Medical Benefits(Dollar amounts in thousands)2007
    
    $
    3192008
    
    
    3292009
    
    
    3412010
    
    
    3542011
    
    
    36020122016
    
    
    2,124
 Amounts recognized in the balance sheet at December 31, 2005 consist of an accrued benefit cost of
$2.8 million. Amounts recognized in accumulated other comprehensive income at December 31, 2006
consist of a net loss of $8.4 million.
  28




---



##### 



Notes to Consolidated Financial Statements
 15.
    
    OTHER COMPREHENSIVE INCOME (LOSS):Other comprehensive income (loss) components and related taxes were as follows:
 December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Unrealized holding gains and (losses) on securities available-for-sale
    
    $
    1,938
    
    
    $
    (10,186
    )
    
    $
    (5,347
    )Reclassification adjustments for (gains) and losses later
recognized in income
    
    
    (6
    )
    
    
    571
    
    
    
    165Net unrealized gains and losses
    
    
    1,932
    
    
    
    (10,757
    )
    
    
    (5,182
    )Tax effect
    
    
    (771
    )
    
    
    4,303
    
    
    
    2,076Other comprehensive income (loss)
    
    $
    1,161
    
    
    $
    (6,454
    )
    
    $
    (3,106
    )
 16.
    
    REGULATORY MATTERS:The Corporation and its bank affiliates are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatoryand possibly additional discretionaryactions by regulators that, if
undertaken, could have a direct material effect on the Corporations financial statements.Further, the Corporations primary source of funds to pay dividends to shareholders is dividends
from its subsidiary banks and compliance with these capital requirements can affect the ability of
the Corporation and its banking affiliates to pay dividends. At December 31, 2006, approximately
$21.5 million of undistributed earnings of the subsidiary banks, included in consolidated retained
earnings, were available for distribution to the Corporation without regulatory approval.Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Corporation and Banks must meet specific capital guidelines that involve quantitative measures of
the Corporations assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporations and Banks capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings and
other factors.Quantitative measures established by regulation to ensure capital adequacy require the Corporation
and Banks to maintain minimum amounts and ratios of Total and Tier I Capital to risk-weighted
assets, and of Tier I Capital to average assets. Management believes, as of December 31, 2006 and
2005, that the Corporation meets all capital adequacy requirements to which it is subject.As of December 31, 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. 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 banks
category.
  29




---



##### 



Notes to Consolidated Financial Statements
 The following table presents the actual and required capital amounts and related ratios for the
Corporation and First Financial Bank, N.A., at year end 2006 and 2005.
 To Be Well CapitalizedFor Capital
    
    
    Under Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action Provisions(Dollar amounts in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioTotal risk-based capitalCorporation  2006
    
    $
    283,226
    
    
    
    17.78
    %
    
    $
    127,423
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/ACorporation  2005
    
    
    273,207
    
    
    
    16.99
    %
    
    
    128,637
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AFirst Financial Bank  2006
    
    
    272,455
    
    
    
    17.74
    %
    
    
    122,834
    
    
    
    8.00
    %
    
    
    153,542
    
    
    
    10.00
    %First Financial Bank  2005
    
    
    262,282
    
    
    
    17.09
    %
    
    
    122,804
    
    
    
    8.00
    %
    
    
    153,506
    
    
    
    10.00
    %Tier I risk-based capitalCorporation  2006
    
    $
    267,057
    
    
    
    16.77
    %
    
    $
    63,711
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ACorporation  2005
    
    
    257,165
    
    
    
    15.99
    %
    
    
    64,319
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Financial Bank  2006
    
    
    259,431
    
    
    
    16.90
    %
    
    
    61,417
    
    
    
    4.00
    %
    
    
    92,125
    
    
    
    6.00
    %First Financial Bank  2005
    
    
    248,727
    
    
    
    16.20
    %
    
    
    61,402
    
    
    
    4.00
    %
    
    
    92,103
    
    
    
    6.00
    %Tier I leverage capitalCorporation  2006
    
    $
    267,057
    
    
    
    12.43
    %
    
    $
    85,919
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/ACorporation  2005
    
    
    257,165
    
    
    
    11.89
    %
    
    
    86,532
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AFirst Financial Bank  2006
    
    
    259,431
    
    
    
    12.48
    %
    
    
    83,146
    
    
    
    4.00
    %
    
    
    103,932
    
    
    
    5.00
    %First Financial Bank  2005
    
    
    248,727
    
    
    
    11.94
    %
    
    
    83,355
    
    
    
    4.00
    %
    
    
    104,194
    
    
    
    5.00
    %
 17.
    
    PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:The parent companys condensed balance sheets as of December 31, 2006 and 2005, and the related
condensed statements of income and cash flows for each of the three years in the period ended
December 31, 2006, are as follows:CONDENSED BALANCE SHEETS
 December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005ASSETSCash deposits in affiliated banks
    
    $
    7,730
    
    
    $
    8,364Investments in subsidiaries
    
    
    270,693
    
    
    
    267,335Land and headquarters building, net
    
    
    6,043
    
    
    
    6,244Other
    
    
    9,120
    
    
    
    8,613Total Assets
    
    $
    293,586
    
    
    $
    290,556LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesBorrowings (including $4.0 million from subsidiary)
    
    $
    10,636
    
    
    $
    10,636Dividends payable
    
    
    5,708
    
    
    
    5,603Other liabilities
    
    
    5,982
    
    
    
    4,994Total Liabilities
    
    
    22,326
    
    
    
    21,233Shareholders equity
    
    
    271,260
    
    
    
    269,323Total Liabilities and
Shareholders Equity
    
    $
    293,586
    
    
    $
    290,556
  30




---



##### 



Notes to Consolidated Financial Statements
 CONDENSED STATEMENTS OF INCOME
 Years Ended December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004Dividends from subsidiaries
    
    $
    14,192
    
    
    $
    33,828
    
    
    $
    13,670Other income
    
    
    984
    
    
    
    1,013
    
    
    
    967Interest on borrowings
    
    
    (615
    )
    
    
    (943
    )
    
    
    (703
    )Other operating expenses
    
    
    (3,074
    )
    
    
    (3,017
    )
    
    
    (2,931
    )Income before income taxes and equity
in undistributed earnings of subsidiaries
    
    
    11,487
    
    
    
    30,881
    
    
    
    11,003Income tax benefit
    
    
    1,121
    
    
    
    1,177
    
    
    
    909Income before equity in undistributed
earnings of subsidiaries
    
    
    12,608
    
    
    
    32,058
    
    
    
    11,912Equity in undistributed (dividends in excess of) earnings of subsidiaries
    
    
    10,931
    
    
    
    (9,004
    )
    
    
    16,097Net income
    
    $
    23,539
    
    
    $
    23,054
    
    
    $
    28,009
 CONDENSED STATEMENTS OF CASH FLOWS
 Years Ended December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    23,539
    
    
    $
    23,054
    
    
    $
    28,009Adjustments to reconcile net income to net cash
provided by operating activities:Provision for depreciation and amortization
    
    
    260
    
    
    
    258
    
    
    
    206Equity in undistributed earnings
(dividends in excess of) of subsidiaries
    
    
    (10,931
    )
    
    
    9,004
    
    
    
    (16,097
    )Contribution of shares to ESOP
    
    
    1,164
    
    
    
    1,144
    
    
    
    1,163Increase (decrease) in other liabilities
    
    
    872
    
    
    
    479
    
    
    
    416(Increase) decrease in other assets
    
    
    (227
    )
    
    
    (392
    )
    
    
    869Net Cash from Operating Activities
    
    
    14,677
    
    
    
    33,547
    
    
    
    14,566CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of furniture and fixtures
    
    
    (43
    )
    
    
    (325
    )
    
    
    Net Cash from Investing Activities
    
    
    (43
    )
    
    
    (325
    )
    
    
    CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on long-term borrowings
    
    
    
    
    
    
    (18,000
    )
    
    
    Purchase of treasury stock
    
    
    (4,087
    )
    
    
    (5,789
    )
    
    
    (2,330
    )Dividends paid
    
    
    (11,181
    )
    
    
    (10,779
    )
    
    
    (10,155
    )Net Cash from Financing Activities
    
    
    (15,268
    )
    
    
    (34,568
    )
    
    
    (12,485
    )Net (Decrease) Increase in Cash
    
    
    (634
    )
    
    
    (1,346
    )
    
    
    2,081Cash, Beginning of Year
    
    
    8,364
    
    
    
    9,710
    
    
    
    7,629Cash, End of Year
    
    $
    7,730
    
    
    $
    8,364
    
    
    $
    9,710Supplemental disclosures of cash flow information:Cash paid during the year for:Interest
    
    $
    943
    
    
    $
    938
    
    
    $
    678Income taxes
    
    $
    11,202
    
    
    $
    5,413
    
    
    $
    6,501
  31




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 18.
    
    SELECTED QUARTERLY DATA
(UNAUDITED)
 2006Net
    
    
    ProvisionInterest
    
    
    Interest
    
    
    Interest
    
    
    for Loan
    
    
    Net
    
    
    Net Income(Dollar amounts in thousands)
    
    Income
    
    
    Expense
    
    
    Income
    
    
    Losses
    
    
    Income
    
    
    Per ShareMarch 31
    
    $
    31,423
    
    
    $
    13,027
    
    
    $
    18,396
    
    
    $
    2,203
    
    
    $
    5,509
    
    
    $
    .41June 30
    
    $
    32,777
    
    
    $
    14,266
    
    
    $
    18,511
    
    
    $
    645
    
    
    $
    6,425
    
    
    $
    .48September 30
    
    $
    33,012
    
    
    $
    14,768
    
    
    $
    18,244
    
    
    $
    2,495
    
    
    $
    5,455
    
    
    $
    .41December 31
    
    $
    33,620
    
    
    $
    15,068
    
    
    $
    18,552
    
    
    $
    1,640
    
    
    $
    6,150
    
    
    $
    .47
 2005Net
    
    
    ProvisionInterest
    
    
    Interest
    
    
    Interest
    
    
    for Loan
    
    
    Net
    
    
    Net Income(Dollar amounts in thousands)
    
    Income
    
    
    Expense
    
    
    Income
    
    
    Losses
    
    
    Income
    
    
    Per ShareMarch 31
    
    $
    29,365
    
    
    $
    11,022
    
    
    $
    18,343
    
    
    $
    2,223
    
    
    $
    6,311
    
    
    $
    .48June 30
    
    $
    29,776
    
    
    $
    11,498
    
    
    $
    18,278
    
    
    $
    3,783
    
    
    $
    4,992
    
    
    $
    .37September 30
    
    $
    30,893
    
    
    $
    12,208
    
    
    $
    18,685
    
    
    $
    2,608
    
    
    $
    6,323
    
    
    $
    .46December 31
    
    $
    31,613
    
    
    $
    12,741
    
    
    $
    18,872
    
    
    $
    3,084
    
    
    $
    5,428
    
    
    $
    .41
 
 Report of Independent Registered Public Accounting Firm on Financial Statements
      
  32




---



##### 



Report of Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting
        
  33




---



##### 



Managements Report on Internal Control Over Financial Reporting
      Managements Discussion and Analysis
     34




---



##### 



Managements Discussion and Analysis
      CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Allowance for loan losses.
   Goodwill.
   35




---



##### 



Results of Operations  Summary for 2006
  NET INTEREST INCOME
    2006 Compared to 2005
    
    
    2005 Compared to 2004Increase (Decrease) Due to
    
    
    Increase (Decrease) Due toVolume/
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Volume/(Dollar amounts in thousands)
    
    Volume
    
    
    Rate
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Rate
    
    
    TotalInterest earned on
interest-earning assets:Loans (1) (2)
    
    $
    (3,842
    )
    
    $
    7,662
    
    
    $
    (304
    )
    
    $
    3,516
    
    
    $
    (726
    )
    
    $
    4,592
    
    
    $
    (37
    )
    
    $
    3,829Taxable investment
securities
    
    
    1,875
    
    
    
    2,878
    
    
    
    321
    
    
    
    5,074
    
    
    
    (564
    )
    
    
    2,129
    
    
    
    (78
    )
    
    
    1,487Tax-exempt investment
securities (2)
    
    
    302
    
    
    
    238
    
    
    
    6
    
    
    
    546
    
    
    
    (835
    )
    
    
    (947
    )
    
    
    56
    
    
    
    (1,726
    )Federal funds sold
    
    
    88
    
    
    
    175
    
    
    
    31
    
    
    
    294
    
    
    
    212
    
    
    
    45
    
    
    
    189
    
    
    
    446Total interest income
    
    
    (1,577
    )
    
    
    10,953
    
    
    
    54
    
    
    
    9,430
    
    
    
    (1,913
    )
    
    
    5,819
    
    
    
    130
    
    
    
    4,036Interest paid on
interest-bearing liabilities:Transaction accounts
    
    
    (765
    )
    
    
    5,138
    
    
    
    (559
    )
    
    
    3,814
    
    
    
    206
    
    
    
    2,804
    
    
    
    149
    
    
    
    3,159Time deposits
    
    
    801
    
    
    
    5,276
    
    
    
    210
    
    
    
    6,287
    
    
    
    16
    
    
    
    314
    
    
    
    
    
    
    
    330Short-term borrowings
    
    
    (304
    )
    
    
    437
    
    
    
    (170
    )
    
    
    (37
    )
    
    
    (653
    )
    
    
    1,169
    
    
    
    (750
    )
    
    
    (234
    )Other borrowings
    
    
    (750
    )
    
    
    360
    
    
    
    (14
    )
    
    
    (404
    )
    
    
    (1,054
    )
    
    
    614
    
    
    
    (32
    )
    
    
    (472
    )Total interest expense
    
    
    (1,018
    )
    
    
    11,211
    
    
    
    (533
    )
    
    
    9,660
    
    
    
    (1,485
    )
    
    
    4,901
    
    
    
    (633
    )
    
    
    2,783Net interest income
    
    $
    (559
    )
    
    $
    (258
    )
    
    $
    587
    
    
    $
    (230
    )
    
    $
    (428
    )
    
    $
    918
    
    
    $
    763
    
    
    $
    1,253
 1
 2
  36




---



##### 



Results of Operations  Summary for 2006
 PROVISION FOR LOAN LOSSES
   NON-INTEREST INCOME
  NON-INTEREST EXPENSES
  INCOME TAXES
  COMPARISON OF 2005 TO 2004
      37




---



##### 



Financial Condition  Summary
    SECURITIES
   1 Year and Less
    
    
    1 to 5 Years
    
    
    5 to 10 Years
    
    
    Over 10 Years
    
    
    2006(Dollar amounts in thousands)
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    TotalU.S. government sponsored
entity mortgage-backed
securities and agencies
    
    $
    12,769
    
    
    
    3.67
    %
    
    $
    252,344
    
    
    
    4.71
    %
    
    $
    61,296
    
    
    
    5.21
    %
    
    $
    4,437
    
    
    
    5.00
    %
    
    $
    330,846Collateralized mortgage
obligations(1)
    
    
    10
    
    
    
    11.50
    
    
    
    98
    
    
    
    9.42
    
    
    
    4,932
    
    
    
    5.00
    
    
    
    4,930
    
    
    
    5.05
    
    
    
    9,970States and political subdivisions
    
    
    27,137
    
    
    
    4.23
    
    
    
    54,066
    
    
    
    2.70
    
    
    
    53,250
    
    
    
    2.55
    
    
    
    5,617
    
    
    
    4.69
    
    
    
    140,070Corporate obligations
    
    
    11,586
    
    
    
    7.17
    
    
    
    29,233
    
    
    
    6.66
    
    
    
    0
    
    
    
    
    
    
    
    28,653
    
    
    
    4.68
    
    
    
    69,472Total
    
    
    51,502
    
    
    
    4.76
    
    
    
    335,741
    
    
    
    4.55
    
    
    
    119,478
    
    
    
    4.02
    
    
    
    43,637
    
    
    
    4.76
    
    
    
    550,358Equities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,695
    
    
    
    
    
    
    
    8,695TOTAL
    
    $
    51,502
    
    
    
    
    
    
    $
    335,741
    
    
    
    
    
    
    $
    119,478
    
    
    
    
    
    
    $
    52,332
    
    
    
    
    
    
    $
    559,053
 1
  38




---



##### 



Financial Condition  Summary
 LOAN PORTFOLIO
  (Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Loan CategoryCommercial, financial and agricultural
    
    $
    407,995
    
    
    $
    382,214
    
    
    $
    401,724
    
    
    $
    374,638
    
    
    $
    331,316Real estate  construction
    
    
    33,336
    
    
    
    31,918
    
    
    
    32,810
    
    
    
    35,361
    
    
    
    42,930Real estate  mortgage
    
    
    691,989
    
    
    
    707,008
    
    
    
    753,826
    
    
    
    766,911
    
    
    
    789,618Installment
    
    
    257,065
    
    
    
    272,062
    
    
    
    272,261
    
    
    
    248,290
    
    
    
    268,067Lease financing
    
    
    2,604
    
    
    
    2,845
    
    
    
    3,658
    
    
    
    4,884
    
    
    
    1,281Total
    
    $
    1,392,989
    
    
    $
    1,396,047
    
    
    $
    1,464,279
    
    
    $
    1,430,084
    
    
    $
    1,433,212
 After OneWithin
    
    
    But Within
    
    
    After Five(Dollar amounts in thousands)
    
    One Year
    
    
    Five Years
    
    
    Years
    
    
    TotalMaturity DistributionCommercial, financial and agricultural
    
    $
    206,097
    
    
    $
    163,430
    
    
    $
    38,468
    
    
    $
    407,995Real estate  construction
    
    
    15,021
    
    
    
    10,723
    
    
    
    7,592
    
    
    
    33,336Total
    
    $
    221,118
    
    
    $
    174,153
    
    
    $
    46,060
    
    
    
    441,331Real estate  mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    691,989Installment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257,065Lease financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,604Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,392,989Loans maturing after one year with:Fixed interest rates
    
    
    
    
    
    $
    64,764
    
    
    $
    38,910Variable interest rates
    
    
    
    
    
    
    109,389
    
    
    
    7,150Total
    
    
    
    
    
    $
    174,153
    
    
    $
    46,060
  39




---



##### 



Financial Condition  Summary
 ALLOWANCE FOR LOAN LOSSES
  (Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Amount of loans outstanding
at December 31,
    
    $
    1,392,989
    
    
    $
    1,396,047
    
    
    $
    1,464,279
    
    
    $
    1,430,084
    
    
    $
    1,433,212Average amount of loans by year
    
    $
    1,384,138
    
    
    $
    1,441,247
    
    
    $
    1,452,572
    
    
    $
    1,417,026
    
    
    $
    1,432,290Allowance for loan losses
at beginning of year
    
    $
    16,042
    
    
    $
    19,918
    
    
    $
    21,239
    
    
    $
    21,249
    
    
    $
    18,313Addition resulting from acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,711Loans charged off:Commercial, financial and agricultural
    
    
    2,066
    
    
    
    6,093
    
    
    
    4,080
    
    
    
    2,253
    
    
    
    4,627Real estate  mortgage
    
    
    1,617
    
    
    
    2,590
    
    
    
    623
    
    
    
    1,101
    
    
    
    892Installment
    
    
    6,826
    
    
    
    8,809
    
    
    
    6,680
    
    
    
    5,586
    
    
    
    4,619Leasing
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Total loans charged off
    
    
    10,509
    
    
    
    17,492
    
    
    
    11,384
    
    
    
    8,940
    
    
    
    10,138Recoveries of loans previously charged off:Commercial, financial and agricultural
    
    
    1,262
    
    
    
    284
    
    
    
    452
    
    
    
    432
    
    
    
    840Real estate  mortgage
    
    
    187
    
    
    
    343
    
    
    
    37
    
    
    
    166
    
    
    
    110Installment
    
    
    2,204
    
    
    
    1,291
    
    
    
    1,281
    
    
    
    877
    
    
    
    935Leasing
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Total recoveries
    
    
    3,653
    
    
    
    1,918
    
    
    
    1,771
    
    
    
    1,475
    
    
    
    1,885Net loans charged off
    
    
    6,856
    
    
    
    15,574
    
    
    
    9,613
    
    
    
    7,465
    
    
    
    8,253Provision charged to expense
    
    
    6,983
    
    
    
    11,698
    
    
    
    8,292
    
    
    
    7,455
    
    
    
    9,478Balance at end of year
    
    $
    16,169
    
    
    $
    16,042
    
    
    $
    19,918
    
    
    $
    21,239
    
    
    $
    21,249Ratio of net charge-offs during period
to average loans outstanding
    
    
    .50
    %
    
    
    1.08
    %
    
    
    .66
    %
    
    
    .53
    %
    
    
    .58
    %
    40




---



##### 



Financial Condition  Summary
 Years Ended December 31,(Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Commercial, financial and agricultural
    
    $
    9,043
    
    
    $
    8,148
    
    
    $
    11,840
    
    
    $
    13,844
    
    
    $
    12,993Real estate  mortgage
    
    
    1,843
    
    
    
    867
    
    
    
    850
    
    
    
    1,254
    
    
    
    1,471Installment
    
    
    5,283
    
    
    
    7,027
    
    
    
    7,228
    
    
    
    6,141
    
    
    
    5,856Leasing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Unallocated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    914Total Allowance for Loan
Losses
    
    $
    16,169
    
    
    $
    16,042
    
    
    $
    19,918
    
    
    $
    21,239
    
    
    $
    21,249
 NONPERFORMING LOANS
  (Dollar amounts in thousands)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Non-accrual loans
    
    $
    9,893
    
    
    $
    8,464
    
    
    $
    19,862
    
    
    $
    8,429
    
    
    $
    11,807Restructured loans
    
    
    52
    
    
    
    57
    
    
    
    430
    
    
    
    542
    
    
    
    546Accruing loans past due over 90 days
    
    
    4,691
    
    
    
    6,354
    
    
    
    7,813
    
    
    
    5,384
    
    
    
    5,899$
    14,636
    
    
    $
    14,875
    
    
    $
    28,105
    
    
    $
    14,355
    
    
    $
    18,252
  (Dollar amounts in thousands)
    
    2006
    
    
    2005Non-accrual loans:1-4 family residential
    
    $
    1,598
    
    
    
    16
    %
    
    $
    1,118
    
    
    
    13
    %Commercial loans
    
    
    6,551
    
    
    
    66
    
    
    
    5,888
    
    
    
    70Installment loans
    
    
    1,744
    
    
    
    18
    
    
    
    1,458
    
    
    
    17$
    9,893
    
    
    
    100
    %
    
    $
    8,464
    
    
    
    100
    %Past due 90 days or more:1-4 family residential
    
    $
    1,607
    
    
    
    34
    %
    
    $
    3,197
    
    
    
    51
    %Commercial loans
    
    
    2,542
    
    
    
    54
    
    
    
    1,554
    
    
    
    24Installment loans
    
    
    542
    
    
    
    12
    
    
    
    1,603
    
    
    
    25$
    4,691
    
    
    
    100
    %
    
    $
    6,354
    
    
    
    100
    %
  41




---



##### 



FINANCIAL CONDITION  SUMMARY
 DEPOSITS
  2006
    
    
    2005
    
    
    2004(Dollar amounts in thousands)
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    Rate
    
    
    Amount
    
    
    RateNon-interest-bearing
demand deposits
    
    $
    206,839
    
    
    
    
    
    
    $
    153,027
    
    
    
    
    
    
    $
    150,944Interest-bearing demand deposits
    
    
    201,928
    
    
    
    1.14
    %
    
    
    294,344
    
    
    
    0.77
    %
    
    
    259,859
    
    
    
    0.50
    %Savings deposits
    
    
    410,458
    
    
    
    1.87
    %
    
    
    392,791
    
    
    
    1.21
    %
    
    
    392,635
    
    
    
    0.65
    %Time deposits:$100,000 or more
    
    
    188,572
    
    
    
    4.27
    %
    
    
    185,436
    
    
    
    3.11
    %
    
    
    163,890
    
    
    
    2.86
    %Other time deposits
    
    
    480,116
    
    
    
    4.01
    %
    
    
    457,685
    
    
    
    3.11
    %
    
    
    478,706
    
    
    
    3.04
    %TOTAL
    
    $
    1,487,913
    
    
    
    
    
    
    $
    1,483,283
    
    
    
    
    
    
    $
    1,446,034
  3 months or less
    
    $
    8,891Over 3 through 6 months
    
    
    36,404Over 6 through 12 months
    
    
    49,276Over 12 months
    
    
    94,752Total
    
    $
    189,323
  42




---



##### 



Financial Condition  Summary
 OTHER BORROWINGS
  CAPITAL RESOURCES
   INTEREST RATE SENSITIVITY AND LIQUIDITY
  Interest Rate Risk:
     43




---



##### 



Financial Condition  Summary
 Basis Point
    
    Percentage Change in Net Interest IncomeInterest Rate Change
    
    12 months
    
    
    24 months
    
    
    36 monthsDown 200
    
    
    -0.52
    %
    
    
    -6.20
    %
    
    
    -12.09
    %Down 100
    
    
    -0.07
    
    
    
    -2.65
    
    
    
    -5.47Up 100
    
    
    -3.14
    
    
    
    -0.60
    
    
    
    2.62Up 200
    
    
    -8.40
    
    
    
    -3.62
    
    
    
    2.71
  Liquidity Risk:
 CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
  Contractual Obligations:
 Payments Due InNote
    
    
    One Year
    
    
    One to
    
    
    Three to
    
    
    Over Five(Dollar amounts in thousands)
    
    Reference
    
    
    or Less
    
    
    Three Years
    
    
    Five Years
    
    
    Years
    
    
    TotalDeposits without a stated maturity
    
    
    
    
    
    $
    856,012
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    856,012Consumer certificates of deposit
    
    
    
    
    
    
    504,684
    
    
    
    117,238
    
    
    
    24,350
    
    
    
    398
    
    
    
    646,670Short-term borrowings
    
    
    10
    
    
    
    16,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,203Other borrowings
    
    
    11
    
    
    
    6,957
    
    
    
    75,719
    
    
    
    258,111
    
    
    
    1,018
    
    
    
    341,805
 Commitments:
 Total Amount
    
    
    One Year
    
    
    Over One(Dollar amounts in thousands)
    
    Committed
    
    
    or Less
    
    
    YearCommitments to extend credit:Unused loan commitments
    
    $
    295,091
    
    
    $
    177,019
    
    
    $
    118,072Commercial letters of credit
    
    
    17,289
    
    
    
    13,642
    
    
    
    3,647
  OUTLOOK
   44




---



##### 



Consolidated Balance Sheet  Average Balances and Interest Rates
 December 31,2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/(Dollar amounts in thousands)
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateASSETSInterest-earning assets:Loans (1) (2)
    
    $
    1,384,138
    
    
    
    100,475
    
    
    
    7.26
    %
    
    $
    1,441,247
    
    
    
    96,957
    
    
    
    6.73
    %
    
    $
    1,452,572
    
    
    
    93,128
    
    
    
    6.41
    %Taxable investment securities
    
    
    430,492
    
    
    
    21,877
    
    
    
    5.08
    
    
    
    387,269
    
    
    
    16,802
    
    
    
    4.34
    
    
    
    402,063
    
    
    
    15,315
    
    
    
    3.81Tax-exempt investments
(2)
    
    
    176,044
    
    
    
    12,794
    
    
    
    7.27
    
    
    
    171,802
    
    
    
    12,248
    
    
    
    7.13
    
    
    
    182,727
    
    
    
    13,974
    
    
    
    7.65Federal funds sold
    
    
    16,203
    
    
    
    788
    
    
    
    4.87
    
    
    
    13,772
    
    
    
    496
    
    
    
    3.60
    
    
    
    2,628
    
    
    
    50
    
    
    
    1.90Total interest-earning assets
    
    
    2,006,877
    
    
    
    135,934
    
    
    
    6.77
    %
    
    
    2,014,090
    
    
    
    126,503
    
    
    
    6.28
    %
    
    
    2,039,990
    
    
    
    122,467
    
    
    
    6.00
    %Non-interest earning assets:Cash and due from banks
    
    
    66,302
    
    
    
    
    
    
    
    
    
    
    
    74,005
    
    
    
    
    
    
    
    
    
    
    
    77,443Premises and equipment, net
    
    
    31,309
    
    
    
    
    
    
    
    
    
    
    
    30,720
    
    
    
    
    
    
    
    
    
    
    
    30,610Other assets
    
    
    59,363
    
    
    
    
    
    
    
    
    
    
    
    62,779
    
    
    
    
    
    
    
    
    
    
    
    66,177Less allowance for loan losses
    
    
    (16,533
    )
    
    
    
    
    
    
    
    
    
    
    (18,298
    )
    
    
    
    
    
    
    
    
    
    
    (22,052
    )TOTALS
    
    $
    2,147,318
    
    
    
    
    
    
    
    
    
    
    $
    2,163,296
    
    
    
    
    
    
    
    
    
    
    $
    2,192,168LIABILITIES AND
SHAREHOLDERS EQUITYInterest-bearing liabilities:Transaction accounts
    
    $
    612,387
    
    
    
    10,845
    
    
    
    1.77
    %
    
    $
    687,135
    
    
    
    7,031
    
    
    
    1.02
    %
    
    $
    652,494
    
    
    
    3,872
    
    
    
    .59
    %Time deposits
    
    
    668,687
    
    
    
    26,440
    
    
    
    3.95
    
    
    
    643,121
    
    
    
    20,153
    
    
    
    3.13
    
    
    
    642,596
    
    
    
    19,823
    
    
    
    3.08Short-term borrowings
    
    
    15,759
    
    
    
    746
    
    
    
    4.73
    
    
    
    25,766
    
    
    
    783
    
    
    
    3.04
    
    
    
    71,926
    
    
    
    1,017
    
    
    
    1.41Other borrowings
    
    
    343,014
    
    
    
    19,098
    
    
    
    5.57
    
    
    
    356,728
    
    
    
    19,502
    
    
    
    5.47
    
    
    
    376,600
    
    
    
    19,974
    
    
    
    5.30Total interest-bearing
liabilities:
    
    
    1,639,847
    
    
    
    57,129
    
    
    
    3.48
    %
    
    
    1,712,750
    
    
    
    47,469
    
    
    
    2.77
    %
    
    
    1,743,616
    
    
    
    44,686
    
    
    
    2.56
    %Non interest-bearing
liabilities:Demand deposits
    
    
    206,839
    
    
    
    
    
    
    
    
    
    
    
    153,027
    
    
    
    
    
    
    
    
    
    
    
    150,944Other
    
    
    25,958
    
    
    
    
    
    
    
    
    
    
    
    26,942
    
    
    
    
    
    
    
    
    
    
    
    29,5191,872,644
    
    
    
    
    
    
    
    
    
    
    
    1,892,719
    
    
    
    
    
    
    
    
    
    
    
    1,924,079Shareholders equity
    
    
    274,674
    
    
    
    
    
    
    
    
    
    
    
    270,577
    
    
    
    
    
    
    
    
    
    
    
    268,089Totals
    
    $
    2,147,318
    
    
    
    
    
    
    
    
    
    
    $
    2,163,296
    
    
    
    
    
    
    
    
    
    
    $
    2,192,168Net interest earnings
    
    
    
    
    
    $
    78,805
    
    
    
    
    
    
    
    
    
    
    $
    79,034
    
    
    
    
    
    
    
    
    
    
    $
    77,781Net yield on interest-earning assets
    
    
    
    
    
    
    
    
    
    
    3.93
    %
    
    
    
    
    
    
    
    
    
    
    3.92
    %
    
    
    
    
    
    
    
    
    
    
    3.81
    %
 1
 2
  45




---



##### 



MARKET AND DIVIDEND INFORMATION
   2006
    
    
    2005Cash
    
    
    
    
    
    
    
    
    
    
    CashTrade Price
    
    
    Dividends
    
    
    Trade Price
    
    
    DividendsQuarter ended
    
    High
    
    
    Low
    
    
    Declared
    
    
    High
    
    
    Low
    
    
    DeclaredMarch 31
    
    $
    29.80
    
    
    $
    27.00
    
    
    
    
    
    
    $
    34.48
    
    
    $
    29.55June 30
    
    $
    31.91
    
    
    $
    27.42
    
    
    $
    .42
    
    
    $
    29.57
    
    
    $
    25.39
    
    
    $
    .40September 30
    
    $
    33.45
    
    
    $
    28.21
    
    
    
    
    
    
    $
    31.99
    
    
    $
    25.70December 31
    
    $
    35.92
    
    
    $
    31.50
    
    
    $
    .43
    
    
    $
    28.29
    
    
    $
    25.75
    
    
    $
    .42
 TOTAL RETURN PERFORMANCE
 Period EndingIndex
    
    12/31/01
    
    
    12/31/02
    
    
    12/31/03
    
    
    12/31/04
    
    
    12/31/05
    
    
    12/31/06First Financial
Corporation
    
    $
    100.00
    
    
    $
    113.87
    
    
    $
    143.96
    
    
    $
    172.20
    
    
    $
    136.70
    
    
    $
    184.38Russell 2000
    
    
    100.00
    
    
    
    79.52
    
    
    
    117.09
    
    
    
    138.55
    
    
    
    144.86
    
    
    
    171.47SNL $1B-$5B Bank
Index
    
    
    100.00
    
    
    
    115.44
    
    
    
    156.98
    
    
    
    193.74
    
    
    
    190.43
    
    
    
    220.36
  46