FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-12379

FIRST FINANCIAL BANCORP.

Ohio		31-1042001
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
300 High Street, Hamilton, Ohio		45011
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (513) 867-5447

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act).

Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at October 28, 2005
Common stock, No par value		42,861,608

 

 

FIRST FINANCIAL BANCORP.

INDEX

		Page No.
Part I-FINANCIAL INFORMATION
Item 1-Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 2005 and December 31, 2004			1
Consolidated Statements of Earnings - Nine and Three Months Ended September 30, 2005 and 2004			2
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2005 and 2004			4
Consolidated Statements of Changes in Shareholders’ Equity – Nine Months Ended September 30, 2005 and 2004			6
Notes to Consolidated Financial Statements			7
Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3-Quantitative and Qualitative Disclosures about Market Risk			24
Item 4-Controls and Procedures			25
Part II-OTHER INFORMATION
Item 2-Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 6-Exhibits			28
Signatures			31
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

		September 30,				December 31,
		2005				2004
ASSETS
Cash and due from banks		$	156,446			$	152,437
Interest-bearing deposits with other banks			0				495
Federal funds sold and securities purchased under agreements to resell			48,000				12,049
Investment securities held-to-maturity, at cost (market value $14,512 at September 30, 2005 and $13,176 at December 31, 2004)			14,227				12,809
Investments available-for-sale, at market value (cost $607,305 at September 30, 2005 and $651,394 at December 31, 2004)			605,186				655,129
Loans:
Commercial			587,691				635,489
Real estate-construction			103,314				86,345
Real estate-commercial			622,237				618,145
Real estate-retail			857,763				860,785
Installment			536,552				580,156
Credit card			21,258				21,894
Lease financing			3,002				5,229
Total loans			2,731,817				2,808,043
Less:
Unearned income			0				6
Allowance for loan losses			42,036				45,076
Net loans			2,689,781				2,762,961
Premises and equipment			72,044				66,216
Goodwill			28,117				28,444
Other intangibles			7,490				7,838
Assets related to discontinued operations			0				108,231
Accrued interest and other assets			120,000				113,112
TOTAL ASSETS		$	3,741,291			$	3,919,721
LIABILITIES
Deposits:
Noninterest-bearing		$	431,736			$	438,367
Interest-bearing			2,498,003				2,467,498
Total deposits			2,929,739				2,905,865
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase			58,273				64,249
Federal Home Loan Bank short-term borrowings			0				78,100
Other			0				5,845
Total short-term borrowings			58,273				148,194
Federal Home Loan Bank long-term debt			317,660				330,356
Other long-term debt			30,930				30,930
Liabilities related to discontinued operations			0				100,224
Accrued interest and other liabilities			35,541				32,697
TOTAL LIABILITIES			3,372,143				3,548,266
SHAREHOLDERS’ EQUITY
Common stock — no par value
Authorized — 160,000,000 shares Issued — 48,558,614 shares in 2005 and 2004			395,039				395,521
Retained earnings			79,375				65,095
Accumulated comprehensive income			(6,695	)			(3,123	)
Restricted Stock Awards			(3,077	)			(3,073	)
Treasury Stock, at cost, 5,579,633 shares in 2005 and 4,881,378 shares in 2004			(95,494	)			(82,965	)
TOTAL SHAREHOLDERS’ EQUITY			369,148				371,455
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	3,741,291			$	3,919,721

See notes to consolidated financial statements.

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

		Nine months ended								Three months ended
		September 30,								September 30,
		2005				2004				2005				2004
Interest income
Loans, including fees		$	129,870			$	124,209			$	44,122			$	42,256
Investment securities
Taxable			16,016				18,740				5,219				5,970
Tax-exempt			3,690				4,151				1,221				1,321
Total investment interest			19,706				22,891				6,440				7,291
Interest-bearing deposits with other banks			1				43				0				11
Federal funds sold and securities purchased under agreements to resell			294				35				69				15
Total interest income			149,871				147,178				50,631				49,573
Interest expense
Deposits			34,639				27,075				12,779				9,139
Short-term borrowings			1,379				1,871				411				817
Federal Home Loan Bank long-term debt			11,358				11,503				3,769				3,885
Other long-term debt			1,467				1,058				529				379
Total interest expense			48,843				41,507				17,488				14,220
Net interest income			101,028				105,671				33,143				35,353
Provision for loan losses			2,556				6,565				1,351				1,985
Net interest income after provision for loan losses			98,472				99,106				31,792				33,368
Noninterest income
Service charges on deposit accounts			13,719				14,143				4,944				4,859
Trust income			11,947				11,696				3,974				3,774
Bankcard interchange income			4,565				3,841				1,577				1,393
Investment advisory fees			2,604				2,692				936				911
(Losses) gains from sales of loans			(336	)			1,120				(1,280	)			424
Investment securities (losses) gains			0				(11	)			6				(8	)
Other			11,384				11,590				3,852				4,564
Total noninterest income			43,883				45,071				14,009				15,917
Noninterest expenses
Salaries and employee benefits			57,420				56,112				19,353				19,175
Net occupancy			7,055				6,222				2,465				2,097
Furniture and equipment			4,979				5,339				1,694				1,766
Data processing			4,677				4,973				1,627				1,640
Marketing			1,760				2,084				535				664
Communication			2,254				2,085				758				692
Professional services			4,378				4,020				1,465				1,648
Amortization of intangibles			660				656				220				220
Other			18,294				17,567				6,615				5,891
Total noninterest expenses			101,477				99,058				34,732				33,793

		Nine months ended								Three months ended
		September 30,								September 30,
		2005				2004				2005				2004
Earnings from continuing operations before income taxes			40,878				45,119				11,069				15,492
Income tax expense			12,904				14,399				3,250				4,800
Earnings from continuing operations			27,974				30,720				7,819				10,692
Earnings from discontinued operations
Other operating income (loss)			583				585				(140	)			185
Gain on sale of discontinued operations			10,366				0				10,366				0
Income from discontinued operations before income taxes			10,949				585				10,226				185
Income tax expense			3,824				196				3,561				53
Earnings from discontinued operations			7,125				389				6,665				132
Net Earnings		$	35,099			$	31,109			$	14,484			$	10,824
Earnings per share from continuing operations:
Basic		$	0.64			$	0.70			$	0.18			$	0.24
Diluted		$	0.64			$	0.70			$	0.18			$	0.24
Earnings per share from discontinued operations:
Basic(1)		$	0.16			$	0.01			$	0.15			$	0.00
Diluted(1)		$	0.16			$	0.01			$	0.15			$	0.00
Earnings per share:
Basic(2)		$	0.81			$	0.71			$	0.34			$	0.25
Diluted(2)		$	0.81			$	0.71			$	0.33			$	0.25
Cash dividends declared per share		$	0.48			$	0.45			$	0.16			$	0.15
Average basic shares outstanding			43,422,516				43,855,706				43,166,270				43,750,598
Average diluted shares outstanding			43,503,393				43,920,027				43,262,371				43,817,398

(1)  EPS from discontinued operations for the third quarter of 2004 round to less than $0.01 per share.

(2)  EPS for net earnings for the third quarter of 2004 rounds to $0.25 per share.

See notes to consolidated financial statements.

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

		Nine months ended
		September 30,
		2005				2004
Operating activities
Earnings from continuing operations		$	27,974			$	30,720
Adjustments to reconcile net cash provided by operating activities
Provision for loan losses			2,556				6,565
Provision for depreciation and amortization			6,745				6,316
Net amortization of investment security premiums and accretion of discounts			1,196				1,924
Realized investment securities losses			0				11
Originations of loans held for sale			(112,784	)			(100,766	)
Losses (gains) from sales of loans held for sale			336				(1,120	)
Proceeds from sale of loans held for sale			111,847				100,643
Deferred income taxes			366				(73	)
(Increase) decrease in interest receivable			(484	)			649
Increase in cash surrender value of life insurance			(6,937	)			(8,800	)
(Increase) decrease in prepaid expenses			(146	)			242
Increase (decrease) in accrued expenses			807				(1,046	)
Increase (decrease) in interest payable			869				(79	)
Other			3,619				4,803
Net cash provided by operating activities from continuing operations			35,964				39,989
Investing activities
Proceeds from sales of securities available-for-sale			682				0
Proceeds from calls, paydowns and maturities of securities available-for-sale			81,274				169,789
Purchases of securities available-for-sale			(39,074	)			(72,432	)
Proceeds from calls, paydowns and maturities of securities held-to-maturity			9,158				11,790
Purchases of securities held-to-maturity			(10,565	)			(6,872	)
Net decrease in interest-bearing deposits with other banks			495				2,245
Net (increase) decrease in federal funds sold and securities purchased under agreements to resell			(35,951	)			30
Net decrease (increase) in loans and leases			65,701				(134,207	)
Recoveries from loans and leases previously charged off			2,676				3,545
Proceeds from disposal of other real estate owned			1,791				3,818
Purchases of premises and equipment			(9,928	)			(8,143	)
Net cash provided by (used in) investing activities from continuing operations			66,259				(30,437	)
Financing activities
Net increase (decrease) in total deposits			23,874				(22,514	)
Net decrease in short-term borrowings			(89,921	)			(9,821	)
Net (decrease) increase in long-term borrowings			(12,696	)			34,971
Cash dividends declared			(20,819	)			(19,787	)
Purchase of common stock			(13,978	)			(5,809	)
Proceeds from exercise of stock options, net of shares purchased			194				5
Net cash used in financing activities from continuing operations			(113,346	)			(22,955	)
Net cash provided by (used in) discontinued operations			12,216				(2,376	)
Cash and cash equivalents:
Net increase (decrease) in cash and cash equivalents			1,093				(15,779	)
Cash and cash equivalents at beginning of period			155,353				183,612
Cash and cash equivalents at end of period		$	156,446			$	167,833
Cash and cash equivalents consist of the following:
Cash and cash equivalents from continuing operations			156,446				165,549
Cash and cash equivalents from discontinued operations			0				2,284
Cash and cash equivalents at end of period		$	156,446			$	167,833

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollars in thousands)

		Nine months ended
		September 30,
		2005				2004
Supplemental disclosures
Interest paid		$	47,972			$	43,821
Income taxes paid		$	11,313			$	11,958
Recognition of deferred tax assets attributable to SFAS No. 115		$	2,215			$	1,367
Acquisition of other real estate owned through Foreclosure		$	2,247			$	3,560
Issuance of restricted stock awards		$	1,413			$	1,463

See notes to consolidated financial statements.

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

		Nine months ended
		September 30,
		2005				2004
Balances at January 1		$	371,455			$	366,483
Net earnings			35,099				31,109
Other comprehensive income, net of taxes:
Changes in unrealized losses on securities, available for sale			(3,572	)			(2,164	)
Comprehensive income			31,527				28,945
Cash dividends declared			(20,819	)			(19,787	)
Purchase of common stock			(13,978	)			(5,901	)
Exercise of stock options, net of shares purchased			194				5
Restricted stock awards			(640	)			93
Amortization of restricted stock awards			1,409				1,514
Balances at September 30		$	369,148			$	371,352

See notes to consolidated financial statements.

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

The consolidated financial statements for interim periods are unaudited; however, in the opinion of the management of First Financial Bancorp. (First Financial), all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation have been included.

NOTE 1: BASIS OF PRESENTATION
The consolidated financial statements of First Financial, a bank holding company, include the accounts of First Financial and its wholly-owned subsidiaries — First Financial Bank, N.A. and First Financial Capital Advisors LLC, a registered investment advisory company. All significant intercompany transactions and accounts have been eliminated in consolidation.

The accompanying financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary to be in conformity with U.S. generally accepted accounting principles for annual financial statements.

The consolidated balance sheet at December 31, 2004, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements for annual periods. For further information, refer to the consolidated financial statements and footnotes thereto included in the First Financial Bancorp. Annual Report on Form 10-K for the year ended December 31, 2004.

Certain reclassifications of prior year’s amounts have been made to conform to current year presentation. Such reclassifications had no effect on earnings.

NOTE 2: DISCONTINUED OPERATIONS

On September 16, 2005, First Financial closed the sale of substantially all of the assets and certain liabilities of its Fidelity Federal Savings Bank subsidiary to Mutual Federal Savings Bank, a subsidiary of MutualFirst Financial, Inc. of Muncie, Indiana. Fidelity Federal is reported as a discontinued operation for financial reporting purposes for all periods presented. The results of its operations and its cash flows have been removed from First Financial’s results of continuing operations for all periods presented.

The following table lists the assets and liabilities of Fidelity Federal included in the December 31, 2004, consolidated balance sheets as assets and liabilities related to discontinued operations that were sold on September 16, 2005:

		December 31,
		2004
Assets
Cash and due from banks		$	2,916
Investments available for sale			14,302
Other earning assets			3,475
Net loans			85,646
Bank premises and equipment			682
Interest receivable			491
Other assets			719
Total assets		$	105,231
Liabilities
Noninterest-bearing deposits		$	5,536

		December 31,
		2004
Interest-bearing deposits			73,585
Borrowings			20,500
Other liabilities			603
Total liabilities		$	100,224

The results of Fidelity Federal are presented as discontinued operations in a separate category on the income statement following the results from continuing operations. The income from discontinued operations for the nine months and three months ended September 30, 2005, and 2004, respectively, is as follows:

		Nine months ended								Three months ended
		September 30,								September 30,
		2005				2004				2005				2004
Interest income
Loans, including fees		$	4,034			$	4,461			$	1,163			$	1,431
Investment securities			354				421				101				136
Interest-bearing deposits with other banks			55				41				14				12
Federal funds sold and securities purchased under agreements to resell			109				53				35				24
Total interest income			4,552				4,976				1,313				1,603
Interest expense
Deposits			1,197				1,127				391				364
Federal Home Loan Bank long-term debt			865				1,161				260				390
Total interest expense			2,062				2,288				651				754
Net interest income			2,490				2,688				662				849
Provision for loan losses			50				375				0				113
Net interest income after provision for loan losses			2,440				2,313				662				736
Noninterest income
Service charges on deposit accounts			154				184				50				60
Gain on sale of discontinued operations			10,366				0				10,366				0
Other			(87	)			107				(164	)			39
Total noninterest income			10,433				291				10,252				99
Noninterest expenses
Salaries and employee benefits			1,032				955				437				317
Net occupancy			67				70				22				22
Furniture and equipment			45				47				14				16
Data processing			369				422				102				134
Other			411				525				113				161
Total noninterest expenses			1,924				2,019				688				650
Income before taxes			10,949				585				10,226				185
Income tax expense			3,824				196				3,561				53
Net earnings		$	7,125			$	389			$	6,665			$	132

NOTE 3: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In the normal course of business, First Financial offers a variety of financial instruments with off-balance sheet risk to its customers to aid them in meeting their requirements for liquidity and credit enhancement and to reduce its own exposure to fluctuations in interest rates. These financial instruments include standby letters of credit and commitments outstanding to extend credit. A discussion of these instruments follows.

First Financial’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for standby letters of credit and commitments outstanding to extend credit is represented by the contractual amounts of those instruments. First Financial uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Following is a discussion of these transactions.

Standby letters of credit are conditional commitments issued by First Financial to guarantee the performance of a customer to a third party. First Financial’s portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to First Financial arises from its obligation to make payment in the event of the customers’ contractual default. As of September 30, 2005, First Financial had issued standby letters of credit aggregating $40,848 compared to $43,453 issued as of December 31, 2004. Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the need to provide for losses. Management does not anticipate any material losses as a result of these letters of credit.

Loan commitments are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. First Financial evaluates each customer’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by First Financial upon extension of credit, is based on management’s credit evaluation of the counterparty. The
collateral held varies, but may include securities, real estate, inventory, plant, or equipment. First Financial had commitments outstanding to extend credit totaling $503,999 at September 30, 2005, and $500,945 at December 31, 2004. Management does not anticipate any material losses as a result of these commitments.

NOTE 4: COMPREHENSIVE INCOME

First Financial discloses comprehensive income in the “Consolidated Statements of Changes in Shareholders’ Equity.” Disclosure of the reclassification adjustments for the nine and three months ended September 30, 2005, and 2004 are shown in the table below.

		Nine months ended								Three months ended
		September 30,								September 30,
		2005				2004				2005				2004
Net Income		$	35,099			$	31,109			$	14,484			$	10,824
Other comprehensive income, net of tax:
Unrealized holding (losses) gains arising during period			(3,572	)			(2,170	)			(1,827	)			7,447
Less: reclassification adjustment for (losses) gains included in net income			0				(6	)			4				(6	)
Other comprehensive income			(3,572	)			(2,164	)			(1,831	)			7,453
Comprehensive income		$	31,527			$	28,945			$	12,653			$	18,277

The unfunded pension losses, net of taxes, recorded as accumulated comprehensive income are $5,320.

NOTE 5: ACCOUNTING FOR DERIVATIVES

First Financial follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” in accounting for its derivative activities. First Financial has interest rate swaps that are accounted for as fair value hedges under SFAS No. 133. First Financial utilizes interest rate swap agreements to effectively modify its exposure to interest rate risk by converting certain fixed rate assets to a floating rate. The use of these interest rate swaps allows First Financial’s subsidiary bank to offer a long-term fixed-rate loan to commercial borrowers. The interest rate swaps allow First Financial to convert the fixed interest rate to a variable rate that better suits its funding position. The swap agreements involve the receipt of floating rate amounts in exchange for fixed interest payments over the life of the agreements without an exchange of the underlying principal amount. The swaps are accounted for under the short-cut method. These contracts are designated as hedges of specific assets. The net interest receivable or payable on swaps is accrued and recognized as an adjustment to the interest income or expense of the hedged asset. First Financial had interest rate swaps with a notional value of $21,001 at September 30, 2005, and $11,961 at September 30, 2004. The fair value of the swaps was an unrealized gain of $105 at September 30, 2005 and an unrealized loss of $179 at September 30, 2004. These amounts are included with other assets on the balance sheet. The fair value adjustment was made to the hedged item on the balance sheet.

First Financial is exposed to losses if a counterparty fails to make its payment under a contract in which First Financial is in the receiving position. Although collateral or other security may not be obtained, First Financial minimizes its credit risk by monitoring the credit standing of each counterparty and believes that each will be able to fully satisfy its obligation under the agreement.

NOTE 6: OTHER LONG-TERM DEBT

Other long-term debt, which appears on the balance sheet, consists of junior subordinated debentures owed to two unconsolidated subsidiary trusts. Capital securities were issued in the third quarter of 2003 by a statutory business trust — First Financial (OH) Statutory Trust II and in the third quarter of 2002 by another statutory business trust — First Financial (OH) Statutory Trust I. First Financial owns 100% of the common equity of both of the trusts. The trusts were formed with the sole purpose of issuing the capital securities and investing the proceeds from the sale of such capital securities in the debentures. The debentures held by the trust are the sole assets of each trust. Distributions on the capital securities are payable quarterly at a variable rate of interest, which is equal to the interest rate being earned by the trust on the debentures and are recorded as interest expense of First Financial. The interest rate is variable and is subject to change every three months. The base index is the three-month LIBOR (London Inter-Bank Offered Rate). On September 30, 2005, the rates on Trust I and Trust II were 7.36% and 6.59%, respectively. First Financial has the option to defer interest for up to five years on the debentures. However, the covenants prevent the payment of dividends on common stock if the interest is deferred. The capital securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures. First Financial has entered into agreements which, taken collectively, fully or unconditionally guarantee the capital securities subject to the terms of the guarantees. The debentures qualify as Tier I capital under Federal Reserve Board guidelines. The debentures issued in 2003 are first redeemable, in whole or in part, by First Financial on September 30, 2008 and mature on September 30, 2033. The amount outstanding, net of offering costs, as of September 30, 2005, was $20,000. The debentures issued in 2002 are first redeemable, in whole or in part, by First Financial on September 25, 2007, and mature on September 25, 2032. The amount outstanding, net of offering costs, as of September 30, 2005, was $10,000.

NOTE 7: STOCK OPTIONS

As of September 30, 2005, First Financial had two stock-based compensation plans. First Financial accounts for those plans under the intrinsic value method. No stock option-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if First Financial had applied the fair value recognition provisions of FASB Statement No. 123 “Accounting for Stock-Based Compensation” (SFAS No. 123) to stock-based employee compensation.

		Nine Months Ended								Three Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net earnings, as reported		$	35,099			$	31,109			$	14,484			$	10,824
Add: restricted stock expense, net of taxes, included in net income			916				984				288				293
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			1,098				1,169				362				351
Pro forma net earnings		$	34,917			$	30,924			$	14,410			$	10,766
Earnings per share
Basic—as reported		$	0.81			$	0.71			$	0.34			$	0.25
Basic—pro forma		$	0.80			$	0.71			$	0.33			$	0.25
Diluted—as reported		$	0.81			$	0.71			$	0.33			$	0.25
Diluted—pro forma		$	0.80			$	0.70			$	0.33			$	0.25

SFAS No. 123 was revised in 2004 and was effective for public entities as of the first interim period that begins after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission amended the compliance date. The new rule allows companies to implement SFAS No. 123 at the beginning of their next fiscal year, which will be January 1, 2006, for First Financial. This Statement supercedes APB 25 and applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. SFAS No. 123(R) will allow for two transition alternatives for public entities: modified-prospective transition or modified-retrospective transition. Under the modified-prospective transition method, companies would be required to recognize compensation cost for share-based payments to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied. Measurement and attribution of compensation cost for awards that were granted prior to, but not vested as of the date SFAS No. 123(R) is adopted would be based on the same estimate of the grant-date fair value and the same attribution method used previously under SFAS No. 123. Prior periods would not be restated. Under the modified-retrospective transition method, companies would be allowed to restate prior periods by recognizing compensation cost in the amounts previously reported in the proforma footnote disclosures under the provisions of SFAS No. 123. See table above for proforma footnote disclosures reported for the three and nine months ended September 30, 2005, and 2004. New awards and unvested awards would be accounted for in the same manner for both the modified-prospective and modified-retrospective methods. First Financial does not plan to adopt SFAS No. 123 early. The method of adoption has not yet been determined. Therefore, the effect of SFAS 123 on First Financial’s financial statements has not yet been determined.

NOTE 8: EMPLOYEE BENEFIT PLANS

First Financial sponsors a non-contributory defined benefit pension plan covering substantially all employees. First Financial expects to contribute $5,605 to its pension plan in 2005. The following table sets forth information concerning amounts recognized in First Financial’s Consolidated Balance Sheets and Consolidated Statements of Earnings.

		Nine months ended								Three months ended
		September 30,								September 30,
		2005				2004				2005				2004
Service cost		$	2,875			$	2,573			$	964			$	852
Interest cost			2,283				2,111				788				705
Expected return on plan assets			(2,033	)			(1,834	)			(678	)			(608	)
Amortization of transition asset			(48	)			(60	)			(16	)			(20	)
Amortization of unrecognized prior service cost			44				110				15				37
Amortization of actuarial loss			780				617				284				207
Net periodic benefit cost		$	3,901			$	3,517			$	1,357			$	1,173

Some of First Financial’s subsidiaries maintain health care and, in limited instances, life insurance plans for current retired employees. The following table sets forth the components of net periodic postretirement benefit costs.

		Nine months ended								Three months ended
		September 30,								September 30,
		2005				2004				2005				2004
Service cost		$	60			$	63			$	20			$	21
Amortization of unrecognized prior service asset			(3	)			(3	)			(1	)			(1	)
Amortization of actuarial gain			(25	)			(31	)			(9	)			(10	)
Net periodic postretirement benefit cost		$	32			$	29			$	10			$	10

ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FIRST FINANCIAL BANCORP. AND SUBSIDIARIES
(Unaudited, dollars in thousands)

SELECTED QUARTERLY FINANCIAL DATA

		2005												2004
		Sep. 30				June 30				Mar. 31				Dec. 31				Sep. 30
Average Consolidated Balance Sheet Items:
Loans less unearned income			2,783,315				2,795,754				2,788,075				2,810,389				2,832,997
Investment securities			625,418				635,982				655,114				685,616				715,282
Other earning assets			6,357				17,188				18,141				2,757				6,690
Total Earning Assets			3,415,090				3,448,924				3,461,330				3,498,762				3,554,969
Total assets			3,816,894				3,852,422				3,857,854				3,885,054				3,939,541
Noninterest-bearing deposits			428,881				433,379				425,365				427,357				404,659
Interest-bearing deposits			2,473,712				2,476,112				2,468,148				2,428,999				2,443,358
Total deposits			2,902,593				2,909,491				2,893,513				2,856,356				2,848,017
Borrowings			432,342				445,141				464,300				528,829				597,258
Shareholders’ equity			367,472				369,477				370,829				370,722				364,495
Key Ratios:
Average equity to average total assets			9.63	%			9.59	%			9.61	%			9.54	%			9.25	%
Return on average total assets			1.51	%			1.03	%			1.13	%			1.02	%			1.09	%
Return on average equity			15.64	%			10.74	%			11.73	%			10.74	%			11.81	%
Return on average tangible equity			17.32	%			11.90	%			13.00	%			11.91	%			13.13	%
Net interest margin			3.85	%			3.94	%			3.98	%			3.92	%			3.96	%
Net interest margin (fully tax equivalent)			3.94	%			4.03	%			4.07	%			4.01	%			4.04	%

These ratios include earnings from continuing and discontinued operations.

SUMMARY

STRATEGIC PLAN UPDATE

Cost Reduction Initiatives

First Financial has successfully completed the final step in the consolidation of its bank and operating subsidiaries into one banking charter: First Financial Bank, National Association. Under this national bank charter, First Financial now operates in different geographic markets under the brand names First Financial Bank, Community First Bank & Trust, and Sand Ridge Bank. In addition, First Financial merged First Financial Bancorp Service Corp. with and into First Financial Bank.

The operation of the five business units described in the strategic plan are carried out under the charter of First Financial Bank, N.A. The three banking units are marketed in their local areas under the brand names Community First Bank & Trust, Sand Ridge Bank, and First Financial Bank. Throughout all of its markets, First Financial Bank, N.A. provides wealth management services through its First Financial Wealth Resources Group line of business. The bank provides insurance services through its First Financial Insurance line of business, a subsidiary of the bank.

While the charter consolidation and related data processing consolidation was completed in the third quarter, other operational centralizations and changes continue as originally scheduled. Pre-tax salary and benefit reductions attributable to operational consolidations are still expected to be within the range of $4.8 million and $5.2 million or $0.07 to $0.08 per share after tax. Approximately half of the operational staff reductions were completed by the end of the third quarter.

Other operational cost savings are expected to occur during 2006 that include a reduction in consumer check costs through a new vendor relationship effective in November of 2005. A significant noninterest expense for First Financial is the core data processing expense. First Financial is currently evaluating alternatives with the objective of identifying a cost effective data processing system. First Financial has engaged a consultant to assist in the evaluation of this operating expense as it is the belief of management that spending is higher than peers in this category. Our existing core data processing contract expires in November of 2006. Additional estimated cost savings for non-staff related operational expenses are still being reviewed.

Costs associated with the operational consolidation element of the plan were previously announced and originally estimated to be $4,500 on a pre-tax basis or $0.07 per share. Included in the original estimates were costs of $2,900 for charges associated with staff reductions, $600 in consulting and professional services, and $1,000 in conversion-related programming costs, customer notifications, and other consolidation-related costs. The $2,900 estimate associated with staff reductions has been revised to $2,200. The reduction is the result of employee transfers to revenue producing jobs, transfers to fill other vacant positions, and resignations. In the third quarter of 2005, $923 of operational consolidation costs were recognized, including $101 in charges associated with staff reductions, $350 in consulting and professional services, $169 was data processing expense, and $303 in other consolidation-related costs. The majority of the remaining costs are expected to be recognized in the fourth quarter of 2005. Total expected annualized cost savings from the operational consolidation remain estimated at $4,800 to $5,200 when fully realized.

BALANCE SHEET AND CAPITAL MANAGEMENT

First Financial has formalized a Capital Plan approved by its Board of Directors during the third quarter of 2005. The Capital Plan establishes ranges for targeted capital ratios as follows: Leverage ratio from 8.00% to 8.50%; risk based capital ratio of 12.75% to 13.25%; tangible equity to tangible assets of 6.75% to 7.25%. These capital levels were determined by management to be consistent with our assessment of the requirements to address estimated risks, to support a stable dividend to shareholders, and to support estimated organic growth of the franchise.

First Financial also completed the sale of the Fidelity Federal Savings Bank subsidiary, headquartered in Marion, Indiana, to Mutual Federal Savings Bank in Muncie, Indiana. This transaction resulted in an after-tax gain of $6,738 or $0.15 per diluted share.

First Financial has made the strategic decision to discontinue offering the dealer-originated installment loan product (indirect lending for automobiles, boats, and RVs). This decision was based primarily on the low profit margin of this highly competitive, rate driven product. First Financial will continue offering auto, boat, and RV loans to customers directly through its branch network. As of September 30, 2005, the indirect loan portfolio balance was approximately $193,000. In September, First Financial sold $42,000 of its marine and RV indirect portfolio for a loss of approximately $1,649.

OPERATING RESULTS

Net earnings for the first nine months of 2005 were $35,099 or $0.81 in diluted earnings per share versus $31,109 or $0.71 for the first nine months of 2004. Income from continuing operations for the nine months ended September 30, 2005, was $27,974 or $0.64 in diluted earnings per share versus $30,720 or $0.70 in diluted earnings per share for the same period in 2004. This 8.94% decrease in income from continuing operations was the result of a decline in net interest income of $4,643 as outlined in the “Rate/Volume Analysis” and “Net Interest Income” sections. Other factors contributing to the decline in income from continuing operations were a decrease in noninterest income of $1,188 and an increase in noninterest expenses of $2,419. These negative factors were offset by a decline in the provision for loan losses of $4,009.

Return on average assets of 1.22% for the first nine months of 2005 compared to 1.06% for the same period in 2004. Return on average shareholders’ equity was 12.71% for the first nine months of 2005 versus 11.37% for the comparable period in 2004.

Net earnings for the third quarter of 2005 were $14,484 or $0.33 in diluted earnings per share, compared to $10,824 or $0.25 in diluted earnings per share for the third quarter of 2004. Income from continuing operations for the third quarter of 2005 was $7,819 or $0.18 in diluted earnings per share compared to the third quarter of 2004 of $10,692 or $0.24 in diluted earnings per share. Return on average assets of 1.51% for the third quarter of 2005 compared to 1.09% for the same period in 2004. Return on average shareholders’ equity was 15.64% for the third quarter of 2005 versus 11.81% for the comparable period in 2004.

Third-quarter 2005 noninterest income was $14,009, a decrease of $1,908 or 11.99% from the third quarter of 2004, due primarily to the loss of $1,649 associated with the sale of approximately $42,000 in indirect loans. This loss was due to the acceleration of origination costs and the market value loss on the portfolio. The origination costs would ordinarily be recognized over time as a reduction to yield on the loans. Excluding the $1,649 loss in the third quarter of 2005 and the $757 gain from the sale of the Kewanna branch in the third quarter of 2004, noninterest income increased $498 or 3.29%. Other noninterest income declined $712 or 15.60% primarily due to a decrease of $432 in executive life insurance income. These decreases to noninterest income were offset by increases to trust income of $200 and bankcard interchange income of $184. The insurance business unit produced $626 in revenue for the third quarter of 2005 compared to $566 in the comparable period in 2004 .

On a linked-quarter basis, total noninterest income was down $829 or 5.59%. Increases of $335 in service charges on deposit accounts were offset by the loss on the sale of the indirect loans referred to previously. Excluding the loss on sale, noninterest income increased by $820 or 5.53%.

Year-to-date noninterest income decreased $1,188 or 2.64% from 2004. The loss on the sale of the indirect loans was partially offset by increased bankcard interchange income of $724. Excluding the loss on sale and branch sale, the increase was $1,218 or 2.75%.

Total noninterest expense increased $939 or 2.78% for the third quarter of 2005 from the third quarter of 2004. Salaries and employee benefits increased $178 or 0.93% due primarily to severance charges, enhancements to the executive staff at the parent company, and increased health care costs offset by staff reductions. Net occupancy expenses for the third quarter of 2005 increased $368 or 17.55% as a result of increased building rent, depreciation, and related expenses. Other noninterest expenses increased $724 or 12.29% partially due to increases in credit card expense of $184, postage expense of $121, donations and contributions of $96, and credit and collection expense of $70. Professional services expenses decreased $183 or 11.10%. However, it is anticipated that this expense will increase in the fourth quarter.

Consolidation related expenses were $923 in the third quarter of 2005, consisting of $101 in charges associated with staff reductions, $350 in consulting and professional services, $169 in data processing expense, and $303 in other consolidation-related costs. The remaining $2,308 of the total of $3,900 in estimated costs should occur throughout the balance of 2005 and possibly into 2006 depending on the timing of decisions regarding the reorganization of certain support functions.

Year-to-date noninterest expenses increased $2,419 or 2.44%. Salaries and benefits increased $1,308 or 2.33%. Net occupancy increased $833 or 13.39%. Professional services expense increased $358 or 8.91%. Data processing expenses decreased $296 or 5.95%. Other noninterest expenses increased $727, which primarily included increases in credit card expense of $488 due to increased card usage and legal expense of $187.

NET INTEREST INCOME

Net interest income, First Financial’s principal source of earnings, is the amount by which interest and fees generated by earning assets exceed the interest costs of liabilities obtained to fund them. For analytical purposes, net interest income is also presented in the table that follows, adjusted to a tax equivalent basis assuming a 35% marginal tax rate for interest earned on tax-exempt assets such as municipal loans, tax-free leases, and investments. This is to recognize the income tax savings that facilitates a comparison between taxable and tax-exempt assets. Management believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully tax equivalent basis. Therefore, management believes these measures provide useful information to investors by allowing them to make peer comparisons. Management also uses these measures to make peer comparisons.

		2005												2004
		Sep. 30				June 30				Mar. 31				Dec. 31				Sep. 30
Interest income		$	50,631			$	50,119			$	49,121			$	49,294			$	49,573
Interest expense			17,488				16,214				15,141				14,783				14,220
Net interest income			33,143				33,905				33,980				34,511				35,353
Tax equivalent adjustment to interest income			746				756				758				773				778
Net interest income (fully tax equivalent)		$	33,889			$	34,661			$	34,738			$	35,284			$	36,131
Average earning assets			3,415,090				3,448,924				3,461,330				3,498,762				3,554,969
Net interest margin *			3.85	%			3.94	%			3.98	%			3.92	%			3.96	%
Net interest margin (tax equivalent)			3.94	%			4.03	%			4.07	%			4.01	%			4.04	%

Net interest income for the third quarter of 2005 was $33,143, compared to $35,353 in the third quarter of 2004, a decline of 6.25% or $2,210. This decrease is due primarily to an increase in deposit costs and a decrease in asset balances. Net interest income on a linked-quarter basis (third quarter 2005 compared to second quarter 2005) decreased $762 or 2.25% also due to increased deposit costs and decreased asset balances. Net interest income for 2005 on a year-to-date basis decreased $4,643 or 4.39% from the comparable period in 2004. First Financial’s net interest margin decreased to 3.85% in the third quarter of 2005 from 3.96% in the third quarter of 2004. Linked-quarter net interest margin decreased nine basis points from 3.94% to 3.85%. On a year-to-date basis, net interest margin decreased from 3.99% for 2004 to 3.92% for 2005.

Net interest income decreased by $762 and net interest margin decreased 9 basis points on a linked quarter basis. The decrease in margin is due to deposit pricing accounting for approximately 15 basis points of decline, investments 2 basis points of decline offset by loan pricing of 8 basis points of increase. Competitive deposit pricing pressure in certain markets has created the need for product and pricing enhancements resulting in approximately 6 basis points of the 15 basis points noted above. Continued margin pressure is likely to occur as competitive driven pricing is expected to continue.

		2005																2004
		Qtrly. Avg. Balance				Avg. Yld/ Cost				Qtrly. Avg. Balance				Avg. Yld/ Cost				Qtrly. Avg. Balance				Avg. Yd/ Cost
		Sep. 30				Sep. 30				June 30				June 30				Sep. 30				Sep. 30
Investment securities & other earning assets		$	631,775				4.09	%		$	653,170				4.14	%		$	721,972				4.02	%
Net loans, including fees			2,783,315				6.29	%			2,795,754				6.22	%			2,832,997				5.92	%
Earning assets		$	3,415,090				5.88	%		$	3,448,924				5.83	%		$	3,554,969				5.53	%
Interest-bearing deposits		$	2,473,712				2.05	%		$	2,476,112				1.85	%		$	2,443,358				1.48	%
Short-term borrowings			82,307				1.98	%			90,653				2.24	%			241,421				1.34	%
Long-term borrowings			319,105				4.69	%			323,558				4.69	%			324,907				4.74	%
Other long-term debt			30,930				6.79	%			30,930				6.38	%			30,930				4.86	%
Interest sensitive liabilities		$	2,906,054				2.39	%		$	2,921,253				2.23	%		$	3,040,616				1.86	%

RATE/VOLUME ANALYSIS

The impact of changes in volume and interest rates on net interest income is illustrated in the following table. As shown, the increase in market interest rates had a significant effect on First Financial’s rates impacting both interest income and interest expense for both the nine months and quarter ended September 30, 2005, in comparison to 2004. First Financial’s adjustable and variable rate loans repriced upward more slowly than the increase in deposit costs. The decrease in volume on earning assets affected interest income more than the decrease in volume on interest-bearing liabilities affected interest expense, resulting in a decrease in net interest income. The change in interest due to the combined effect of both rate and volume has been allocated to the volume and rate variance on a prorated basis.

		Nine Months												Three Months
		Ended												Ended
		Sep. 30, 2005				Change Due To:								Sep. 30, 2005				Change Due To:
		Over 2004				Rate				Volume				Over 2004				Rate				Volume
Interest income		$	2,693			$	6,829				($4,136	)		$	1,058			$	3,132				($2,074	)
Interest expense			7,336				9,005				(1,669	)			3,268				4,078				(810	)
Net interest income			($4,643	)			($2,176	)			($2,467	)			($2,210	)			($946	)			($1,264	)

ASSETS

Average loans, net of unearned income, for the third quarter of 2005 decreased 1.75% and year-to-date average loan balances increased 0.36% from the comparable periods a year ago. On a linked-quarter basis, average outstanding loan balances decreased 0.44%. The decline in loan volume for all periods has been primarily in the commercial loan categories. The loan portfolio was also affected by the sale of $42,000 in indirect marine and recreational vehicle loans in the third quarter of 2005. Additionally, indirect installment originations ceased in the third quarter and approximately $25,000 in runoff of this portfolio occurred. It is the belief of management that the strategic decisions to sell a portion and no longer originate indirect installment loans will both reduce risk in the portfolio and provide greater focus to client-centered efforts when building our business.

Loan pricing dependency is distributed as follows on average balances for the quarter: prime, Fed Funds, LIBOR, and Treasury based loans represent approximately 65% of the portfolio and 35% are fixed rate.

Securities available for sale were $605,186 at September 30, 2005, compared to $655,129 at December 31, 2004, and $678,394 at September 30, 2004. The change from year-end 2004, is due to purchases of $49,639 in securities; $68,715 in mortgage-backed and collateralized mortgage obligation paydowns; $22,908 in maturities, calls, and bond premium amortization; and $5,854 in market value decrease. The company continues to maintain a shorter portfolio duration (the cash-weighted term to maturity of the portfolio) to reduce its sensitivity to the downward changes in bond pricing, to changes in interest rates, and to reduce interest rate risk. The combined investment portfolio was 16.56%, 17.04%, and 17.41% of total assets at September 30, 2005, December 31, 2004, and September 30, 2004, respectively.

DEPOSITS

Average deposit balances for the third quarter increased $54,576 or 1.92% from the comparable period a year ago primarily due to increases in average interest-bearing and noninterest-bearing checking accounts. Average deposits increased 2.07% on a year-to-date basis due to increases in noninterest-bearing deposit balances. This increase in noninterest-bearing deposit accounts marks the successful efforts of focused strategies over the past twelve months. Average deposits have decreased 0.24% on a linked-quarter basis primarily due to decreases in time deposits. Interest expense on deposits increased as a result of overall market rate increases rather than a shift in our competitive position in the markets we serve. More aggressive pricing by competitors has occurred in these markets; therefore, First Financial has kept pace to maintain its position in the market.

Deposit pricing dependency is distributed as follows on average balances for the quarter: prime, Fed Funds, indexed, and managed rate deposits represent approximately 42% of the portfolio and 58% are fixed.

INCOME TAXES

Income tax expense for the first nine months of 2005 was $16,728 versus $14,595 in 2004. Tax expense relating to income from continuing operations totaled $12,904 and $14,404 for the nine months ended September 30, 2005 and 2004, respectively, with no tax effect related to securities transactions for the nine months ended September 30, 2005 and a tax benefit related to securities transactions of $5 for the same period in 2004. Tax expense related to income from continuing operations for the first six months of 2005 was $12,904, a decrease of $1,495 when compared to $14,399 reported for the same period in 2004. Tax expense related to discontinued operations totaled $3,824 and $196 for the nine months ended September 30, 2005 and 2004, respectively. The taxes on gain from the sale of the discontinued operations were $3,628. No taxes related to securities transactions were recorded for discontinued operations.

First Financial’s overall effective tax rates for the first nine months of 2005 and 2004 were 32.28% and 31.93%, respectively. Effective tax rates for income from continuing operations was 31.57% and 31.91% for the nine months ended September 30, 2005 and 2004, respectively. Effective tax rates for income from discontinued operations were 34.93% and 33.50% for the nine months ended September 30, 2005 and 2004, respectively.

Income tax expense for the third quarter of 2005 was $6,811, an increase of $1,958 when compared to $4,853 reported for the same period in 2004. Tax expense related to income from continuing operations for the third quarter of 2005 was $3,250, a decrease of $1,550 when compared to $4,800 reported for the same period in 2004. Tax expense related to discontinued operations totaled $3,561 and $53 for the quarters ended September 30, 2005 and 2004, respectively.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable credit losses. Management’s periodic evaluation of the adequacy of the allowance is based on First Financial’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective, as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The evaluation of these factors is completed by a group of senior officers from the risk management, credit administration, financial, and lending areas.

The provision for loan losses for the third quarter of 2005 was $1,351 compared to $1,985 for the same period in 2004. Net charge-offs of $2,821 for the third quarter were $1,626 more than the $1,195 net charge-offs for the third quarter of 2004. Year-to-date net charge-offs were $5,596 in 2005, down $133 from $5,729 recorded in 2004. Increases in commercial loans charged-off caused the increase in net charge-offs for the third quarter of 2005 compared to the same period in 2004. The percentage of annualized net charge-offs to average loans for the third quarter of 2005 was 0.40% compared to 0.17% for the same period in 2004. This level of chargeoffs is still within an acceptable range. The percentage of net charge-offs to average loans was 0.27% for year-to-date 2005 compared to 0.28% for the same period in 2004. First Financial continued to maintain appropriate reserves with an allowance to ending loans ratio of 1.54% at quarter end versus 1.67% for the same quarter a year ago. It is management’s belief that the allowance for loan losses is adequate to absorb inherent credit losses.

The overall mix of the loan portfolio was affected by the sale of $42,000 in indirect installment loans and an additional $25,000 in contractual and prepayment runoff. These portfolios have historically had relatively high loss rates when compared to other portfolios.

Management will be closely evaluating the effect of the recent change in bankruptcy laws and the much publicized increase in filings prior to the adoption of the new law in the fourth quarter of 2005. It is management’s belief that there could be a short-term increase in bankruptcy filings and that there may be an adverse impact on credit quality in some future periods. Management will adjust the provision expense accordingly to maintain adequate reserves should these events occur. It is also management’s belief that while there may be a short-term increase in losses, this would be normalized over time.

IMPAIRED LOANS

At September 30, 2005, and 2004, the recorded investment in loans that are considered to be impaired under FASB Statement No. 114 was $2,957 and $3,672, respectively, all of which are on a nonaccrual basis. The related allowance for loan losses on these impaired loans was $1,330 at September 30, 2005, and $1,497 at September 30, 2004. At September 30, 2005 and 2004, there were no impaired loans that did not have an allowance for loan losses. The average recorded investment in impaired loans for the quarters ended September 30, 2005, and 2004, was approximately $3,147 and $3,833. For the nine months and quarter ended September 30, 2005, First Financial recognized interest income on those impaired loans of $64 and $29 compared to $229 and $130 for the same periods in 2004. First Financial recognizes income on impaired loans using the cash basis method. The table that follows indicates the activity in the allowance for loan losses for the quarters presented.

		Quarter Ended
		2005												2004
		Sep. 30				June 30				Mar. 31				Dec. 31				Sep. 30
Balance at beginning of period		$	43,506			$	44,172			$	45,076			$	47,272			$	46,482
Provision for loan losses			1,351				750				455				(587	)			1,985
Loans charged off			(3,333	)			(2,267	)			(2,672	)			(2,567	)			(1,975	)
Recoveries			512				851				1,313				958				780
Net charge-offs			(2,821	)			(1,416	)			(1,359	)			(1,609	)			(1,195	)
Balance at end of period		$	42,036			$	43,506			$	44,172			$	45,076			$	47,272
Ratios:
Allowance to period end loans, net of unearned income			1.54	%			1.55	%			1.59	%			1.61	%			1.67	%
Recoveries to charge-offs			18.23	%			37.54	%			49.14	%			37.32	%			39.49	%
Allowance as a multiple of net charge-offs			14.90				30.72				32.50				28.01				39.56

NONPERFORMING/UNDERPERFORMING ASSETS

Total underperforming assets, which includes nonaccrual loans, restructured loans, other real estate owned, and loans 90 days or more past due and still accruing, increased $4,759 to $29,745 at the end of the third quarter of 2005 from $24,986 at the end of the third quarter of 2004. Nonaccrual loans increased $5,186, other real estate owned increased $209, and accruing loans past due 90 days or more increased $900. However, restructured loans decreased $1,536. On a linked quarter basis, total underperforming assets increased $5,016. This increase is due primarily to a $4,155 increase in nonaccrual loans that involves a few large commercial real estate credits with an aggregate outstanding balance at September 30, 2005 of approximately $2,521. These credits have been appropriately considered in establishing the allowance for loan losses at September 30, 2005. This level of nonperforming assets remains within an acceptable range. The level of reserves to nonperforming loans is 150.31%.

The nonperforming assets to ending loans ratio increased to 1.02% as of September 30, 2005, from 0.85% as of the end of the third quarter of 2004.

Accruing loans, including loans impaired under FASB Statement No. 114, which are past due 90 days or more, for which there is not a likelihood of becoming current, are transferred to nonaccrual loans. However, those loans which management believes will become current and therefore accruing are classified as “Accruing loans 90 days or more past due” until they become current. First Financial does not have a concentration of credit in any particular industry.

The table that follows shows the categories that are included in nonperforming and underperforming assets.

		Quarter Ended
		2005												2004
		Sep. 30				June 30				Mar. 31				Dec. 31				Sep. 30
Nonaccrual loans		$	24,563			$	20,408			$	16,033			$	17,472			$	19,377
Restructured loans			808				884				885				2,110				2,344
Other real estate owned			2,595				2,673				2,705				1,481				2,386
Total nonperforming assets			27,966				23,965				19,623				21,063				24,107
Accruing loans past due 90 days or more			1,779				764				352				1,784				879
Total underperforming assets		$	29,745			$	24,729			$	19,975			$	22,847			$	24,986
Allowance for loan losses to total underperforming assets			141.32	%			175.93	%			221.14	%			197.30	%			189.19	%
Nonperforming assets as a percentage of loans, net of unearned income plus other real estate owned			1.02	%			0.85	%			0.70	%			0.75	%			0.85	%
Underperforming assets as a percent of loans, net of unearned income plus other real estate owned			1.09	%			0.88	%			0.72	%			0.81	%			0.88	%