@W MISSION
The mission of First Financial Corporation is
3 be the FIRST choice
for all your financial needs.
VISION
First Financial Corporation will strive to be the premier financial
services organization providing the highest quality customer service in
our market area. We will work consistently to provide an exceptional
customer experience and to make customer satisfaction our number
one priority.
To that end, we will employ and retain a well-trained, highly motivated
work force whose focus is superior customer service. We will seek to
understand customers as individuals, know them by name and develop
long-term relationships with each one of them.
As an independent, locally managed organization, we will provide
financial products, services, technologies and delivery channels that
revolve around the needs of customers in the communities we serve.
We will reinvest our customers’ assets first and foremost within our
market area.
We will maintain our long tradition of being an involved community
partner, supporting programs and projects that contribute to the
growth, vitality and qualiry of life in the communities we serve. We
will encourage all of our employees to give their time, talents and
leadership to local civic and charitable efforts and activities.
We will continue to earn the trust and respect of our customers,
employees and shareholders by operating in a safe and sound manner
that promotes long-term profitability, prudent growth and equitable
return on investment.
02007 First Financial Corporation
lo our SbmhLdm mid Friends:
2006 WAS A YMK ~ I L L ~ L I wsn I SIGNIFICANT ACCOMPLISHMENTS and the
promise of iiiore to corne. Highlights include exp:itision into new markets
through the construction and opening of new banking centers i n Vincenncs
and Greencastle, Indiana. In J d y we were recognized by U.S. Banker maga-
zine for our outstattding Community Reinvestment Act rating and through-
out the year we enjoyed a significant increase in the price of our stock.
Dcspite a flattening a n d sometimes inverted yield curvc, net income
increased 2.1 Yo in 2006 to $23.5 million. Income pcr share of $1.77 was a
2 . W o incrcase over 2005. Retui-n on assets rose to 1.10% from 1.07%. At
year end, the Corporation's total assers were $2.2 billion, a $37 million
increase largely funded by a $37.8 tnillion growth in deposits.
O u r dedication to cost control and operating efficiency continued in 2006.
Overall, the Corporition experienced a rnodest $1 .1 million or 1.76%
increase in non-interest expense. Emphasis on managing expenses allowed us
to open two new full-servicc banking centers m d at the same time, reduce by
10 the number of fdl-time equivalent employees.
During the year, we continued our focus on credit quality. That effort result-
ed in an $8.7 million decrease in net charge-ofk, down 56% from 2005,
allowing us to reduce the provision for loan losses by $4.7 million or 40%.
Overall the Corporation's loan portfolio decreased slightly to $1.39 billion as
demand for constirncr loans arid residential mortgages dirninished due to
higher interest rates. An increase in conimcrcial and real estate construction
loans mitigated this shorthall.
A flat yield curve was a matter of industry concern in 2006. Despite compres-
sion of interest rate spreads nationwide, the net interest margin at First
Financial Bank increased for the third consecutive year. Discipline and adher-
cnce to sound pricing strategies allowed LIS to increase our margin to 3.93%.
By comparison, according to the Federal Deposit Insurance Corporation, the
average net interest margin for all FDIC-insured banks fcll to 3.31% in 2006.
Strong performance allows us to continue to return capital to our shareholders.
2006 marked the 18th consecutive year our Board of Directors has declared
higher dividends. T h e cash dividend increased to 85 cents per share, com-
pared to 82 cents per share in 2005, an increase of 3.66%).
A bottom-line indicator of our performance is our stock price. Several factors
werc at work in 2006 which irnpactcd stock prices of financial institutions
nationwide. An uncertain economy, the war in Iraq and the impact of the
yield curve are the most prominent. Despite these factors, the market price of
our stock climbed 31.396, from $27.00 per share on Decernbcr 31, 2005, to
$35.45 per share on December 31, 2006. Coupled with a dividend yield of
3.15% our shareholders received a total return of 34.4%.
F I R S T F I N A N C I A L C O R P O R A T I O N
We are committed to attracting, retaining and dcepening the personal rela-
tionships we enjoy with our customers. We bclicvc this approach is valued by
our custoniers and provides our company with a competitive advantage.
Long-term relationships with our customers, whosc personal and financial
needs change over time, are the basis of our consistent results. These multi-
product relationships, coupled with convenience, unparallclcd service and
focus on the customer produce loyalty arid satisfaction, which are essential for
the growth of our company.
We arc coininitted to expansion of our core businesses, organically and
through acquisition. As a company, we have the vision, skills and financial
ability to pursuc growth opportunities that make sense and create value. We
believe strategic branch expansion is an acceptable avenue for growth where
and when attractive acquisition opportunities are not present. In February
and December 2006, we pursued this strategy, opening new banking centers
in Vincennes and Greencastle, Indiana. In both communities, we were fortu-
nate to hire strong bankers whose standing, knowledge and experience have
placed us well ahead of projections, leading us to expect an expcdited break-
even time frame.
We take our individual and corporate responsibilities seriously. O u r cmploy-
ees are encouraged to take an active role in community dcvclopment and
philanthropy. Irivesttnent comes in two forms: money and time. In 2006
First faniily menibers spent thousands of hours strciigthening and growing
corntnunities, civic and charitable organizations. Chrporately, we con-
tributed thousands of dollars to support their work, In J d y 2006 we were
pleased to learn U.S. Hanker magazine recognized First Financial Bank as one
of four banks in thc United States which received an outstanding
Community licinvcstinent Act rating frorn the Ofice of the Comptroller of
the Currency+ This recognition is an indication of the commitment of our
eiiiployees and company to the betterment and success of the communities
and customers we serve.
In 2006 we were saddened by the loss of Dr. George Mitchell, who joined the
Board of Directors of First National Bank of Marshall on March 25, 1943.
When the Bank becamc a part of the First family, Dr. Mitchell rcniained on
the Cornrnunity Hoard continuing his dedicued service, not only to our
bank, but also to his hometown of Marshall, Illinois. Perhaps no one better
demonstrated “the spirit of communiry” than Dr. Mitchell, who guidcd the
bank and served as a community leader for over 57 years.
In closing, we would like to thank our customers for their business, our
investors for their trust and all of our employees and directors for what they
do to ensure our success. We sincerely value and appreciate your support.
DONALD E. SMITH
Presidcnt and Chairman
CEO and Vice Chairman
2 0 0 6 ANNUAL R E P O R T
(above) Destroyed by arson in
2005, the historic Bridgeton
covered bridge was rebuilt in
2006 through the efforts of the
Parke County community. First
Financial Bank Parke Region
was proud to be a partner in the
process by serving as a collec-
tion point for donations, provid-
ing public relations support and
raising funds through auctions
and other community events.
(rigbt) For the second year in a
row, First Financial Bank was a
proud sponsor of the Fairbanks
Park Arts and Music Festival in
Terre Haute. A sell-out crowd
gathered in the park’s outdoor
amphitheater to see America in
a concert that was underwritten
in part by the bank.
SPIRIT IS THE LSLNCC OF WIG) WF. ARE. T h e spirit of community has always
guided First Financial Corporation in achieving our goals, whether it’s
building stronger relationships with the custoiners we serve today or building
stronger communities for the future. By putting local families, businesses,
neigh borhoods, towns and cities first, we create opportunities that have a
positive impact o n our growth.
Ow community spirit was demonstrated in March with the grand opening
of the 47th First Financial banking center in Vilicclines, Ind. As corririiuriity
leaders, ernployees and guests gathered to parricipate in the ribbon cutting i ti
Vincennes, p e p r a t i o n s were already underway for our 48 th banking center
to be built in Grccncastle, Tnd. Ground was broken for the ncw bank iri July
and it oneried in December, with its grand opening celebration scheduled for
spring 2007.
1
When the Bridgeton
Covered I in thou=iands)
Unreal izcd holding gains and (losses) on securities availablc-for-sale
Reclassification adjustments for (gains) arid losses later
recognized in income
Net unrealized gains and losse
Tax cffect
Otlicr comprehensive income loss)
16. REGULATORY MATTERS:
December 31,
2006
200s
2004
$ 1,938
$(10,186) $(5,347)
(6 1
1,932
(771 \
li161’
!b
57 1
165
(10,757) (5,182)
4.303
2.076
$ (6[454) $(3,106)
The Corporation and its bank affiliates are subject to various regulatory capital requirements admiriistcrcd by the
fedcral banking agcncies. Failure to meet minimum capital requiretncnts can iriitiatc certain mandatory-and
possi-
bly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the
Corporation’s financial statements.
i:urrher, the Corporation’s primary source of funds to pay dividends to sharcholders is dividends from its subsidiary
banks and compliance with these capital requirements can affect the abiliry of the Corporation and its banking affili-
ates to pay dividends. At December 31, 2006, approxiniatcly $21.5 million of undisrributed earnings of the sub-
sidiary banks, included in consolidated retained carnings, were available for distribution to the Corporation without
regulatory approval.
Under capital adequacy guidelines and the rcgulatory frarnework for prompt corrective action, the Corporation and
Banks must meet specific capital guidelines that irivolvc quantitative measures of the Corporation’s assets, liabilities,
and certain off-balance-sheet itenis as calculated iiridcr regulatory accounting practices. The Corporation’s and
Ranks‘ capital amounts and classification are also subject to qualitative judgnicnts by the regulators about compo-
nents, risk weightings and other factors.
Quantitative measures establishcd by regulation to ctisure capital adequacy require the Corporation and Banks to main-
tain minimum amounts arid ratios of‘lhtal and Tier I Capital to risk-wcighted assets, and of’l’ier I Capital to average
assets. Management believes, as of December 31, 2006 and 2005, tllat the Corporation meets all capital adequacy
rcquirements to which it is subject.
As of December 31, 2006, the most recent notification from the rcspcctive regulatory agencies categorizcd the sub-
sidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as
wcll capitalized, the banks must maintain minimum total risk-based, Tier I risk-bascd and Tier I leveragc ratios as set
forth in the table. Therc are nn conditions or cvents since that notification that managcment believes havc changed
the banks‘ category.
NOTES 'ro CONSOLIDATED
FINANCIAL STATEMENTS
F I R S T F I N A N C I A L CORPORATION
'The following table presents thc actual arid required capital anwunts and related ratios for thc Corporation attd First
lhancial Hank, N.A., at year cnd 2006 and 2005.
(i)ollar ariiouiiis i n thous;inds)
Total risk-based capital
Corporation - 2006
Corporation - 2005
First Financial Rank - 2006
First Financial Bank - 2005
Tier T risk-based capital
Corporation - 2006
Corporation - 2005
First Finaiicial Bank - 2006
First Financial Rank - 2005
, ,. Iier 1 levcrage capital
Corporation - 2006
Corporation - 2005
First Financial Bank - 2006
First Financial Bank - 2005
Actual
For Capital
Adequacy Purposes
To Be Well Capitalized
Under Prompt Corrective
Actlon Provlslons
Amount
Ratio
Amount
Ratio
Amount
Ratio
$283,226 17.78%
273,207 16.99%
272,455 17.74%
262,282 17.09%
$127,423 8.00%)
128,637 8.00%
122,834 8.00'%)
122,804
8.00(Yo
NIA
NIA
153,542
153,506
NIA
NIA
10.00%
10.00%
$267,057 16.77?44
257,165 15.33%
259,43 1
I 6.90'%)
16.20%
248,727
$63,71 1
4.00%
64,319 4.00%
61,417 4.00%
61,402 4.00%)
NIA
NIA
92,125
92, 103
$267,057 12.43%
257,165 11.89%)
25O,43 1
12.48%
248,727 11.94%
$85,319 4.00(%
86,532 4.00%
83,146 4.00%
83,355 4.00'%)
NIA
NIA
103,932
1 04,194
NIA
NIA
6.00%
6.00%
NIA
N I A
5.00%
5.00%
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:
The parcnt company's condensed balance sheers AS of December 3 1 , 2006 arid 2005, and thr related condcnsed state-
tnents of inconie and cash flows for each ofthe three ycm in the period ended Deceiiihcr 3 I , 2006, are AS follows:
CONDENSED BALANCE SHEETS
( n O l h ~ I l l O l l I l ~ S
ASSETS
I11 dKJLlSat1dS)
Cash deposits in afiliated baiiks
Investments in subsidiaries
T ~ n d arid headquarters huildjng, net
Other
TO'IAL ASSETS
LIABILITIES AND SHAREHOLDERS' EQUITY
Liahilities
Borrowings (including $4.0 rnillion from subsidiary)
Dividends payahlc
Other liabilitics
TO'IAL. LIARICITIES
Shareholders' equity
'TOTAL LIAI~II.I'I~~F~S
AND SIIAKEHC)I.I)F.RS' EQUITY
December 31,
2006
2005
$ 7,730
270,693
6,043
9,120
$293,586
$ 1.0,636
5,708
5,982
22,326
27 1,260
$293,586
$ 8,364
267,335
6,244
8,613
$290,556
$ 10,636
5,603
4,994
2 1,233
269,323
$290,556
NOTES TO CONSOL1 DATED FINANCIAL STATEMENTS
2 0 0 6 A N N U A L R E P O R T
CONDENSED STATEMENTS OF INCOME
(uollal , I f l l O l l l l t \ I f 1 t h O l l \ d t l d S )
Dividend s from subsid i aries
Other income
Interest on borrowings
Other operating expenses
Income before income taxes and equity
in undistrihuted earnings of subsidiaries
Income tax benefit
Income bcfore equity in undistrihuted
earnings of subsidiaries
Equity in undistributed (dividends in excess of) earnings ofsiiLlsidiaries
Net income
CONDENSED STATEMENTS OF CASH FLOWS
(Dollar artioiiiits iri thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization
Equity in unciisrrihuted earnings
(dividends in exccss of) of subsidiaries
Contribution of shares to ES01'
Increase (decrease) in other liabilities
(Increase) decrease in other Lissct5
NET CASH FROM OPERA'IING AC'I'IVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchasc of furniture and fixtures
N u CASH PROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
l'rincipal payments on long-term borrowings
Purchase of treasury stock
Dividends paid
NET CAS11 PROM FINANCING AcTlvl'l'les
NET (DECREASE)
CASH, BEGINNING OF YEAR
CASH, END OF YkAR
INC:KLASE IN CASH
Supplemenral disclosures of' cash flow information:
Cash j x d during the year for:
I nteres t
Income taxcs
Years Ended December 31,
200s
$33,828
1,013
(343)
(3,017)
2006
$14,192
984
(615)
(3,074 1
2004
$13,670
967
(703)
(2,931)
I I ,4X7
1121
3 0 3 8 1
1,177
1 1,003
309
L
12,608
32,058
11,912
1 0,93 1
$23,539
(9,004)
$23,054
16,037
$28,009
Years Ended December 31.
PO06
2005
2004
$23,539
$23,054
$28,009
260
258
206
(1 0,931)
1,164
872
(227)
14,677
9,004
1,144
479
(392)
33,547
(16,097)
1,163
416
869
14,566
(43 1
(43 1
(325 )
(325 )
-
(4,087)
( 1 1,181)
(1 5,268)
(634)
8,364
$ 7,730
( 1 8,000 )
(5,783 )
(10,779)
(34,568)
( 1,346 )
9,7 10
$ 8,364
-
-
-
(2,330)
(1 0,155 )
(12,485)
2,08 1
7,629
$ 9,710
$
943
$11,202
$
938
$ 678
$ 5,413
$ 6,501
NOTES TO C0NSOLII)ATED FINANCIAL STATEMENTS
F I R S T F I N A N C I A L C O R P O R A T I O N
18. SELECTED QUARTERLY DATA (UNAUDITED)
(1 >oll:t r ;i niou n ts in thousands)
March 31
June 30
September 30
December 3 1
(nollai- amounts in thousands)
March3 1
June 30
Scpterriber 30
Deceinher 3 1
interest
Income
$31,423
$32,777
$33,012
$33,620
Interest
Expense
$13,027
$14,266
$14,768
$15,068
Interest
Income
$29,365
$23,776
$30,893
$31,613
Interest
Expense
$1 1,022
$11,498
$12,208
$12,741
2006
Net
Interest
Income
$18,396
$18,511
$18,244
$18,552
Provision
for Loan
Losses
$2,203
$ 645
$2,495
$1,640
2005
Net
Interest
Income
$18,343
$ 8,278
!$ 8,685
$ 8,872
Provision
for Loan
Losses
$2,223
$3,783
$2,608
$3,084
Net
Income
$5,503
$6,425
$5,455
$6,150
Net Income
Per Share
$ .41
$ .48
$ .41
.47
!$
Net
Net Income
Income Per Share
$6,311
$4,992
$6,323
$5,428
$ .48
$ 3 7
$ .46
$ -41
REPORT OF INDEPENDENT REGISTEKED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENTS
To the Sharcholders and Board of Ilircctors of First Financial Corporation:
We have audited thc accorripanying consolidared balance sheets of First Financial Corporation as of Decerriber 31,
2006 and 2005, and the related consolidated srarenients of income, changes in shareholders‘ equity, and cash flows for
each of the three ycars in die period ended Dccettiber 31, 2006. These financial statements are the rcsporisibility of the
Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
Wc conducred our audits i n accorclance with the standards of the Public Company Accounting (hcrsighr Board
(United States). ‘I’hose standards require that we plan and perform the audit to obtain reasonable assuratice about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence support-
ing the amounts arid disclosures i t i the finaricial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating thc overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
I n our opinion, the consolidated financial statements referred to above prcscnt f-airly, in all matcrial respects, the
financial position o f I . h t Financial Corporation as of Deccrnber 31, 2006 and 2005, and tlie results of its opcrarions and
its cash flows for each of the three years in the period ended December 3 1, 2006, in conformity with U.S. generally
accepted accounting principles.
We have also audi red, in accordance with tlie standards of thc Public Company Accoun ring Oversight Board (United
States), the effectiveness of First Financial Corporation’s internal control over financial reporting as of Decerriber 31,
2006, based on criteria csrablished in lnternal Control-Integrated Framework issued by thc Corrirriittee of Sponsoring
Organizations of the Treadway Commission, arid our report, dated February 23, 2007, expressed an unqualjfied opinion
thereon.
Indianapolis, Indiana
February 23,2007
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOLJNIING FIKM
ON IN’I’ERNAL C O N T R O L O V E R FINANCIAL REPORTING
2 0 0 6 A N N U A L R E P O R T
To thc Sharcholders and Board of Directors of First Financial Corporation:
We have audited management’s assessnient, includcd in the accompanying “Keport on Internal Control Over Financial
Keporting,” that First Financial Corporation (Chporation) maintained effective internal control ovcr financial reporting as
of Lkcember 3 1, 2006, hascd on criteria established in “Internal Control-Integrated Framcwork issucd by the Cornmittee
of Sponsoring Organizations of the Treadway Coinniissioii (COSO). Firs1 1:inancial Corporation’s management is responsi-
ble for rriairitairiing effective internal control over f;nancial reporting and for its assesslnent of the cffcctivcncss of internal
coritrol over financial reporting. Our rcsponsibility is to express an opinion on nianagcnicnt’s asscssnicnt and an opinion on
the effectiveness of thc Corporation’s internal control over financial rcporting bascd on our audit.
We c o n h c t c d our audit i n accordatice with the standards of thc Public Company Accounting Oversight Board
(United Statcs). Tliosc standards require that we plan and perform thc audit to obiain rewmahle assurance about whcthcr
effective intcrnal control over financial reporting was niaintaincd in all rriaterial respects. O u r audit includcd obtaining an
understanding of intcrnal conirol over financial reporting, cvaluating managernetit’s assessment, testing and evaluating thc
design and operating cffcctiveness of internal control, and pcrforrning such other p-ocedures as we considcrcd ncccssary in
the circumstances. Wc bclicvc that our audit provides a reasonahlc hasis for our opinion.
A company’s intcrnal control over financial reporting is a proccss designed to provide reasonable assiiraiicc rcgarding
the reliability of finaiicial reporting and the preparation of financial statements for external purposcs in accordatice with
U.S. gcncrally accepted accounting principles. A company’s internal control over financial rcporting includes those policies
and procedures that (1) pertain to thc iiiai ntenance of records that, in rcasonablc dctail, accurately and fairly reflect thc
transactions and dispositions of the assets o f the company; (2) providc reasonalde assurance that transactions arc rccorded as
necessary to pcrnmit preparation of financial statcnicnts in accordatice with U. S. generally acccptcd accounting principles,
a n d that receipts and cxpcndiiures of the coinpany arc bcing made only in accordance with authorizations or rnariagement
and directors of thc company; and (3) provide reasonablc assurance regarding prevention or timely dctection of’ unautho-
rized acquisition, use, or disposition of the company’s assets that could have a rnaterial effect on the f h n c i a l staternents.
Bccause o f its inherent limitations, intcrnal control over financial rcporting rnay not prevent or detect niisstatcnictiis.
Also, projections of any evaluation of cffcctivetiess to future periods arc subject to the risk that controls may hccorne inade-
quate because of cliangcs in conditions, or that the dcgrcc of cornpliance with the policies or proccdurcs may deteriorate.
In our opinion, managenicnt’s assessrnent that First Financial Corporation maintained effectivc internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respccts, hascd on criteria establislicd in
“Internal Control-l ntegrated F r a m e w o r k issued b y the Comniittee of Sponsoring Organizations of thc Trcadway
Commission (COSO). Also in o u r opinion, First t:inaticial Corporation maintained, in all material respects, cffcctivc inter-
nal control ovcr financial r e p r t i n g as of Dcccrnber 3 1 , 2006, based on critcria cstahlished i n “ Internal Control-Intcgrated
Framework“ issucd hy the Committee of Sponsoring Organizations of the Trcadway Cornrnission (COSO).
We have also audited, in accordatice with the standards of the Public Conipany Accounting Oversight Board (Unitcd
States), the coiisolidatcd balance sheets as of Deccnibcr 31, 2006 a n d 2005, and thc rclated consoliclated statenicnts of
income, changcs in shareholders’ equity, and cash flows for each of the thrcc ycars in the period ended Dcccmher 31, 2006
of First Financial Corporation a n d our rcport dated Ikbruai-y 23, 2007 cxprcssed an urirlu:iJified opinion.
Indianapolis, L ridiana
February 23,2007
F I R S T F I N A N C I A L C O R P O R A T I O N
MANAGEMENT’S REPORT O N INTERNAL CONTROL
OVER FINANCIAL REPORTING
The nianagernent of First Financial Corporation (die “Corporation”) has prepared and is rcsptisible for the preparation
and accuracy (:if the consolidated financial stateinciits and relatcd linancial information includcd i n the Annual Keport.
T h e tnanagcmcni of the Corporation is rcspotisible for cslablishing and rriaintaining adequate internal control ovcr (;tian-
cid reporting as clefincd in Kulrs 13a-l5(f) and 15d-1 5(f) undcr the Securitics Exchange Act of 1334. T h c Corporation’s
internal control ovcr financial reporci rig is designed to providc reasonablc assurance regarding the rrliability of financial
reporting and the prepintion of f;nancial statements for cxtertial purposes in accordance with gencrally accepted accoutit-
ing principles. The Corporation’s interrial control ovcr firiancial rcpori ing includcs diose policies and procedures that: (i)
pertain to the tnaintcnance of records ihat, in reasonable detail, accurately and Iiirly reflect the iransactions and dispositions
of the assets of the Corporation; (ii) providr reasotiable assurance that transactions arc recorded as iiccessary to pcrrnii
preparation of financial statements in accordancc with gencrally accepted accounting principles, and that 1-eceipts and
expenditures of the Corporation arc hcing made only in accordance with authorizations of rnariagement and directors of‘ the
Corporation; and (iii) provide reasonablc assitrancc regarding prcverition or tirnely detrction of unauthorized acquisition,
use or disposition of thc Corporation’s assets that could havc a inaterial effcct on the financial statemcnts.
Bccause of its inherent limitations, internal control ovcr financial reporting niay not prevent or detect misstaterrients. Also,
projections of any evaluation of effrctivciiess to h t u r e periods arc subject to the risk that controls may bccome jnadcquate
because of changes in conditions, or that the dcgrce of conipliatice with thc policies or procedures may deterioratc.
Managemcni assessed the Corporation’s system of i titernal control over f;nancial reporting as of Decetnber 3 1, 2006, in
relation to criteria for effective iniernal control over financial reporting as described in “Internal Control-Integrated
Framework,” issued by the Conmiittee of Sponsoring Organiutions of the Trradway Commission. Hased on this assess-
ment, niariagement coiicluded that, as of December 3 1, 2006, its system o f internal control over financial reporting is e f k -
tive and meets the criteria oK the “Intcrnal Control-Integrated Frarnework.”
Crowc Chizek and C::ornpany LLC, indcpcndent registcred public accounting firm, has issucd an attestation report dated
Fchruaty 23, 2007 on managernent’s assessment of the Corporation’s internal control over financial rcportirig.
MANAGEMENT’S D J S ~ U S S ~ ~ N
AN 11 ANALYSIS
Management’s discussion and analysis reviews the financial condition of First Fiilaiicial Corporation at Deccmber 3 I , 2006
and 2005, and the results of its operations for the three years ended Ueceinbcr 31, 2006. Where appropriate, factors that may
affcct future financial performance arc also discussed. The discussion should be read in conjunction with the accorripanying
consolidated financial statements, relatcd f‘ootnotes and selected t;nancial data.
A cautionary note a b o ~ t t forward-looking statcrnents: In its oral aiid written coniniunication, First Financial Corporation froni
time to time includes forward-lookjng staternents, within the mcanirig of the Private Securities Litigation Keforni Act of 1395.
Such forward-looking statcrnents can include statements about estimated cost savings, plans and objectives for future opera-
tions and cxpectations abotit perfortnance, as well as econorriic and market conditions and trcnds. They often can bc identified
hy the usc of words such as “expcct,” “niay,” “could,” “intend,” “project,” “estiriiate,” “believe” or “anticipate.” First I h n c i a l
C:orporation may include forward-looking statements in filings with the Securitics and Exchange Commission, in other written
materials such as this Annual Keport arid in oral statements rnade by senior niailagerrient to analysts, invcstnrs, reprcseritatives
of the media and others. It is iritendcd ihat thesc forward-looking stateiiiciits speak only as of thc date thcy are made, and First
Financial Corporation undertakes no obligation to upciatc any forward-looking staretilent to reflect events or circutnstances
aftcr die date on whjcli the forward-looking statement is made or to reflect the occwretice of unanticipatcd events.
By their nature, forward-looking statenicnts are bascd on assumptions and are subject to rislrs, uncertainties and other factors.
Actual results rnay diffcr rnaterially from those contained in thc forward-looking statement. The discussion in this
“Managerncnt‘s Discussion and Analysis of Results of Operations a t i d Financial Conditiotl” lists so~rie of the factors which
could c ~ u s e actual results to vary materially from those in m y forward-looking statciiietits. Other uncertainties which cotild
affect First Financial Chporation’s fiitiire perhmiancc include the effects of‘competition, technological changes and regulatory
developmcnts; changes in fiscal, monetary and tax policies; market, economic, operational, liquidity, credit and inwrest rate
risks associated with First Financial Corporation’s business; inflation; compciition in the financial services industry; changes in
gcneral econortiic conditions, either natioiially or regionally, rcsulting in, among other things, credit quality deterioration; aiid
changes in sccurities markets. Invcstors should consider these risks, uncertainties and other factors in addition to those incti-
tioned by First Ikancial Corporation in its other filings from time to time when corisiilering any fonvard-looking st-atemcnt.
MANAGEMENT’S DISCUSSION AND ANALYSTS
2 0 0 6 ANNUAL R E P O R T
First 1:inancial Corporation (the (::orporatiori) is a financial serviccs cotripany. ‘I’he Corporation, which is hcadquarccrcd in
Terre Haute, Ind., offers a wide variety of financial services including commercial, mortgage and consiimer lcnding, lease
firiancing, trust account services and depositor services thrwgh its three subsidiaries. At the close of business in 2006 the
Corporation and its suhsidiaries had 798 full-time equivalent erriployees.
First Jyiriancial Hank is the largest bank in Vigo County, Itid. It operates 12 full-service hanking branches within the coutity;
five in Clay Count.y, Ind.; one in Greenc County, I d . ; ttirec in Knox County, Itid.; five in Parke Cyounty, lnd.; one in
I’utnani County, Incl., five in Sullivan County, I d . ; four in Vermillion County, I d . ; one in Clark County, Ill.; one in Coles
County, 111.; three in Crawf‘ord County, Ill.; one in Jasper County, I l l . ; two in Lawrence County, TI].: two i n Richland
County, Ill.; one in Vermilion County, Ill.; and one in Wayne County, Ill. In addition to its brandies, it has a main crfficc in
downtown ‘Ycrre Haute and a 50,000-square-foot comrriercial building on South Third Street in ’Jtrrc Haute, which serves as
the Corporation’s operations cetiicr and provides additic-)tial office space. Morris Plan has oiic ofice and is located in Vigo
C h i n ty.
First Financial Bank and Morris Plan face cornpctition from other fitiaticial institutions. These competitors consist ofcom-
rncrcial batiks, a niuttral savings bank a d other financial institutions, incluciing consuiiie1- finance cornpanics, insurance
companies, brokerage f i r m and credit unions.
The Corporation’s business activi tics are cerilercd in west-central Indiana and east-central Illinois. The Corporation has no for-
eign activities other than periodically investing available funds in time deposits held in foreign brandies of doniestic banlci.
Forrest Sherer Inc. is a prcniier regional supplier of insurance, surety and other financial products. The Forrest Shcrer brand is
well recognized in the Midwest, wiih more than 6 2 professionals and over 85 years of succcssfill service to both businesses arid
households in their market area. The agcncy has represcntation agrccments with tiiort than 40 regional and national insurers to
market their products of property arid casualty insurance, surety lmnds, ernploycc benefit platis, life irisurancc and arinuitics.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Management’s Discussion and Analysis of t;inancial Condition and Kesults of Operations, as well ;1s disclosures found else-
where in this report arc based upon First Financial Corporation’s consolidated financial st;iiefiicnts, which have been prepared in
accordance with accounting principles generally acccptcd in the United States of America. ‘I’hc preparat.ion of these financial
statements requires the Corporation to make estimates and judgments that affect the reported amounts of
enues, and expenses. Material estirnatcs that are particularly susceptible to significant change i t i the near term relate to thc dcter-
mination of the allowance for loan losscs and goodwill. Actual results could differ from those estimates.
Allowance for loan losses. The allowance for loan losscs represents management’s estimate of losscs inherent in the existing
loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced hy
loans charged off, net of recoveries. ‘I’he allowa~ice for loan losses is determined bascd on managcment’s assessmait of several
factors: reviews and evaluations of specific loans, changes in the nature and voluiiic of the loan portfolic), current econorriic
condiiions and the related impact on scgiiients of the loan portfolio, historical loan loss experience and the level of classified
and nonpcrformirig loans.
I m i i s are considered impaired if, based 011 current information and events, it is probable that the Corporation will be
unable 10 collect the schcduled payments of principal or interest according to the contractual t e r m of the loan agreement.
When a loan is deeinetl irnpaircd, impairment is meastired hy using the fair value o f underlying collateral, the presetit value
of the future cash flcrws discounted at the cffcctive interest rate stipulated in the loan agreement, or ihc estimated rnarkct
value of the loan. In rrieasuring the fair valiic of the collatcral, man;ige:emcnt uses assumptions (e.g., discount rate) and
rriethodologies (e.g., comparison to the recent selling price of similar assets) consistent with rhose that would be utilized by
unrelatcd third parties.
Changes i n the financial condition of iridividual borrowers, ccononiic conditions, historical loss experience, or the condition
of the various markets i n which collateral may bc sold may affect the required level o f the allowance for loan losses and the
associated provision for loan losscs. Should cash flow assurnpiions or market conditions change, a different amount may be
recorded for the allowance for loan losscs and the associated provision for loan losses.
Goodwill. ‘I’he carrying value of goodwill requires management to use estimates and assumptions ahout the fair value of the
reporting unit compared to its book value. A n irripairment analysis is prepared ~n an annual basis. Fair values of the report-
ing units are detcrmined by an analysis which considers cash flows strcams, profitahility and estimated niarkct values of‘ the
repctrting m i t . The majority of the C o r p o r a h i ’ s goodwill is recorded at Forest Slicrcr, Inc.
Management bclicves the accoun tirig estimates related to the allowance for loan losses arid the valuation of goodwill are “critical
accounting estimates“ because: (1 ) the estimates are highly susceptible to change from period to period because they require
management lo riiakc assuiiiptioris conccrning, among oiher factors, the changes in the types atirl volumes of the portlnlios, val-
uation assumptions, arid economic conditions, and (2) the impact of recognizing an irnpairmcnt or loan loss could have a mate-
rial effect on the Corporation’s assets reported on the balancc sheet as well as net income.
RESULTS OF OPERATIONS - SUMMARY FOR 2006
F I R S T F I N A N C I A L C O R P O R A T I O N
Nct incornc for 2006 was $23.5 million, or $1.77 per share. ‘l’his represents a 2.1%) incrcasc i n tier income and a
2.9% increase in earnings per share, cornpared to 2005. Keturn on asscts a t Decernber 31, 2006 increased 2.8%) to
1.109’0 cornpared to 1.07% at Dcccmber 31, 2005.
NET INTEREST INCOME
‘I‘he primipal sourcc of the Corporation’s earnings is net in terest income, which represents thc difference benveen
interest earned oti loans and investments and thc interest cost associated with deposits and other soiirces of funding.
Net interest income declined slightly in 2006 a t $73.7 million coniparcd to $74.2 rriilliori in 2005. Total avcragc
intcrest-earning ‘issets remained at $2.01 billion in 2006, which was unchanged from 2005. ‘I’he tax equivalent yield
oti these ‘issets increased to 6.770/0 in 2006 from 6.28%) in 2005. Total civerage interest-bearing liahilities of $1.71 bil-
lion in 2005 deueased to $1.64 billiori in 2006. The avcragc cost of these interest-bearing liabilities increased to
3.48% in 2006 from 2.77% in 2005.
The net interest rriargin increased slightly from 3.92% in 2005 to 3.93% in 2006. This increase was primarily the
rcsult of increased funding provided by non-interest bearing liabilities. Exning asset yield\ incrcascd 49 basis points
while the rate on i n tcrcst-bearing liabilities increascd by 71 basis points.
The following t h l e sets forth the comporierirs of net interest income due to changes in volurnc and rate. The table
information compares 2006 to 2005 and 2005 to 2004.
(Dollar minuiirs i n rhousands~
lritcrcst earned o n
inierest-earning assets:
Loans (1)
(2)
Taxahle investment
securities
‘l’ax-cxcrnpt investment
securities ( 2 )
Federal funds sold
Total interest income
Interest paid on
interest-bcaring liabilities:
’ I’ransaction accounts
Time deposits
Short-term borrowings
Other borrowings
Total interest expense
Nct iritcrcst income
2006 Compared to 2005
Increase (Decrease) Due to
2005 Compared to 2004
Increase (Decrease) Due to
Volume
Rate
Volume/
Rate
Total
Volume
Rate
Volume/
Rate
Total
$(3,842) $ 7,662
$ (304) $ 3,516
$ (726) $ 4,502
$
( 3 7 ) $ 3,829
1,875
2,878
321
5,074
(564)
2,129
( 7 8 )
1,487
(835)
302
~ - - -
88
21 2
~~-~
(1,577)
(1,913)
(1,726)
446
4,036
238
175
10,053
(‘147)
45
5,819
546
234
9,430
56
189
130
6
31
54
(765)
80 1
(304)
(750)
(1,018)
$ (553)
~
5,138
5,276
437
360
11,211
$ (258) $ 587
(559)
210
(170)
( 1 4 )
(533)
3,814
6,287
(37)
(404)
9,660
206
16
( 6 5 3 )
(1,054)
( 1 , 4 8 5 )
$ (230) $ (428) $
2,804
314
1,169
614
4,901
918
I49
-
(750)
( 3 2 )
(633)
$ 763
3 , I59
330
(234)
(472)
2,783
$ 1,253
~
~
~
~
-
~
-
( I ) For purposes of these comput<\tions, nonaccluing loans are included in thc daily average loan ainourits out3tanding.
(2) Interest incorne includes the effect of tax equivalent adjustrnents using a federal cax rate of 35%.
RESULTS OF OPERA’TIONS - SUMMARY FOR 2006
2 0 0 6 A N N U A L R E P O R T
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to expense is based upon credit loss experience and the results of a detailed
analysis estimating an appropriate and adequate allowmce for Joan losscs. The analysis includes the cvalucuion of
impaired loans a 5 prescribed under Statement of Financial Accounting Standards (SFAS) Nos. 1 I4 and I 18, pooled
l o ~ n s as prescribed under SFAS No. 5, and econornic and other risk factors as outlined in various Joint Interagency
Staterncnts issued by the bank regulatory agencies. For the year ended December 3 1 , 2006, the provision for loan
losses waq $7.0 million, a n de~reasc of $4.7 million, or 40.3%, umqured to 2005. The decrcw WAS the result of
severdl component\ related to the analysis of the Corporation’s Allowmce for Loan and Tmse Losces.
Net charge-off\ for 2006 were $6.8 million as compared to $15.6 tnillion for 2005. Credit quality concerns were
addressed in 2005 and reduced charge-off5 and lower proviion for loan losse5 were experienced in 2006. At
December 31, 2006, the resulting allowilahle at
these locations
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FRST FINANCIAL CORPORATION
ONE FIRST FINANCIAL PLAZA
TERRE HAUTE, INDLANA 47807
812-238-6000 800-5 11-0045
www. firs t-online. corn
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