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 March 31, 2006

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.

(Exact name of registrant as specified in its charter)

Ohio		31-1042001
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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.

Yes þ No o

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

Large accelerated filer þ     Accelerated filer o      Non-accelerated filer o

     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 May 2, 2006
Common stock, No par value		39,607,945

 

 

FIRST FINANCIAL BANCORP.

INDEX

		Page No.
Part I-FINANCIAL INFORMATION
Item 1-Financial Statements
Consolidated Balance Sheets — March 31, 2006 and December 31, 2005			1
Consolidated Statements of Earnings — Three Months Ended March 31, 2006 and 2005			2
Consolidated Statements of Cash Flows — Three Months Ended March 31, 2006 and 2005			4
Consolidated Statements of Changes in Shareholders’ Equity — Three Months Ended March 31, 2006 and 2005			6
Notes to Consolidated Financial Statements			7
Item 2-Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3-Quantitative and Qualitative Disclosures about Market Risk			28
Item 4-Controls and Procedures			29
Part II-OTHER INFORMATION
Item 2-Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 6-Exhibits			32
Signatures			35
EX-10.11
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I – FINANCIAL INFORMATION

		March 31,				December 31,
		2006				2005
		(Unaudited)
ASSETS
Cash and due from banks		$	160,915			$	163,281
Federal funds sold and securities purchased under agreements to resell			132,500				98,000
Investment securities held-to-maturity (market value $10,403 at March 31, 2006 and $12,768 at December 31, 2005)			10,232				12,555
Investment securities available-for-sale, at market value (cost $346,424 at March 31, 2006 and $555,157 at December 31, 2005)			344,136				554,673
Other investments			34,398				40,755
Loans:
Commercial			596,936				582,594
Real estate — construction			84,958				86,022
Real estate — commercial			651,698				646,079
Real estate — retail			761,891				772,334
Installment, net of unearned			493,526				515,200
Credit card			21,648				22,936
Lease financing			1,838				2,258
Total loans			2,612,495				2,627,423
Less:
Allowance for loan losses			40,656				42,485
Net loans			2,571,839				2,584,938
Premises and equipment			73,963				73,025
Goodwill			28,261				28,116
Other intangibles			7,408				7,920
Accrued interest and other assets			125,901				127,545
TOTAL ASSETS		$	3,489,553			$	3,690,808
LIABILITIES
Deposits:
Noninterest-bearing		$	451,176			$	440,988
Interest-bearing			2,499,228				2,484,451
Total deposits			2,950,404				2,925,439
Short-term borrowings:
Federal funds purchased and securities sold under agreements to repurchase			46,004				66,634
Other			47,000				45,000
Total short-term borrowings			93,004				111,634
Federal Home Loan Bank long-term debt			83,482				286,655
Other long-term debt			30,930				30,930
Accrued interest and other liabilities			35,119				36,269
TOTAL LIABILITIES			3,192,939				3,390,927
SHAREHOLDERS’ EQUITY
Common stock — no par value Authorized — 160,000,000 shares Issued — 48,558,614 shares in 2006 and 2005			392,838				392,607
Retained earnings			72,986				75,357
Accumulated comprehensive income			(9,010	)			(7,876	)
Treasury Stock, at cost, 8,966,264 shares in 2006 and 8,995,134 shares in 2005			(160,200	)			(160,207	)
TOTAL SHAREHOLDERS’ EQUITY			296,614				299,881
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	3,489,553			$	3,690,808

See notes to consolidated financial statements.

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

		Three months ended
		March 31,
		2006				2005
Interest income
Loans, including fees		$	42,857			$	42,378
Investment securities
Taxable			5,141				5,408
Tax-exempt			1,104				1,230
Total investment securities interest			6,245				6,638
Interest-bearing deposits with other banks			0				1
Federal funds sold and securities purchased under agreements to resell			1,582				104
Total interest income			50,684				49,121
Interest expense
Deposits			14,933				10,426
Short-term borrowings			896				461
Long-term borrowings			2,058				3,808
Subordinated debentures and capital securities			598				446
Total interest expense			18,485				15,141
Net interest income			32,199				33,980
Provision for loan losses			752				455
Net interest income after provision for loan losses			31,447				33,525
Noninterest income
Service charges on deposit accounts			5,089				4,166
Trust revenues			4,053				4,094
Bankcard interchange income			1,648				1,420
Investment advisory fees			846				840
Gains from sales of loans			245				464
Losses on sales of investment securities			(476	)			(6	)
Other			3,349				4,058
Total noninterest income			14,754				15,036
Noninterest expenses
Salaries and employee benefits			20,217				18,910
Net occupancy			2,839				2,349
Furniture and equipment			1,480				1,621
Data processing			1,807				1,589
Marketing			683				511
Communication			667				781
Professional services			1,307				1,386
Debt extinguishment			4,295				0
Amortization of intangibles			217				220
Other			7,148				5,793
Total noninterest expenses			40,660				33,160

		Three months ended
		March 31,
		2006				2005
Earnings from continuing operations before income taxes			5,541				15,401
Income tax expense			1,574				4,869
Earnings from continuing operations			3,967				10,532
Discontinued operations
Earnings from discontinued operations before income taxes			0				307
Income tax expense			0				113
Earnings from discontinued operations			0				194
Net Earnings		$	3,967			$	10,726
Earnings per share from continuing operations:
Basic		$	0.10			$	0.25
Diluted		$	0.10			$	0.25
Earnings per share from discontinued operations:
Basic		$	0.00			$	0.00
Diluted		$	0.00			$	0.00
Earnings per share:
Basic		$	0.10			$	0.25
Diluted		$	0.10			$	0.25
Cash dividends declared per share		$	0.16			$	0.16
Average basic shares outstanding			39,560,109				43,601,128
Average diluted shares outstanding			39,612,496				43,673,090

See notes to consolidated financial statements.

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

		Three months ended
		March 31,
		2006				2005
Operating activities
Earnings from continuing operations		$	3,967			$	10,726
Adjustments to reconcile net cash provided by operating activities
Provision for loan losses			752				455
Provision for depreciation and amortization			1,975				1,890
Stock-based compensation expense			319				426
Net amortization of premiums and accretion of discounts on investment securities			(272	)			421
Losses on sales of investment securities			476				6
Originations of loans held for sale			(18,559	)			(21,286	)
Gains from sales of loans held for sale			(245	)			(464	)
Proceeds from sale of loans held for sale			18,622				21,552
Deferred income taxes			(175	)			(24	)
Decrease in interest receivable			1,418				369
Increase in cash surrender value of life insurance			(852	)			(2,037	)
Increase in prepaid expenses			(1,040	)			(574	)
(Decrease) increase in accrued expenses			(708	)			500
(Decrease) increase in interest payable			(60	)			493
Other			1,864				3,989
Net decrease from discontinued operations			0				153
Net cash provided by operating activities			7,482				16,595
Investing activities
Proceeds from sales of securities available-for-sale			184,902				680
Proceeds from calls, paydowns and maturities of securities available-for-sale			32,331				29,002
Purchases of securities available-for-sale			(2,348	)			(9,720	)
Proceeds from calls, paydowns and maturities of securities held-to-maturity			2,323				1,429
Purchases of securities held-to-maturity			0				(2,050	)
Net decrease in interest-bearing deposits with other banks			0				495
Net increase in federal funds sold and securities purchased under agreements to resell			(34,500	)			(14,401	)
Net decrease in loans and leases			11,347				18,864
Recoveries from loans and leases previously charged off			684				1,313
Proceeds from disposal of other real estate owned			804				853
Purchases of premises and equipment			(2,500	)			(2,956	)
Net decrease from discontinued operations			0				195
Net cash provided by investing activities			193,043				23,704
Financing activities
Net increase in total deposits			24,965				52,110
Net decrease in short-term borrowings			(18,630	)			(68,760	)
Repayments of long-term borrowings			(203,173	)			(2,139	)
Cash dividends			(6,338	)			(6,972	)
Purchase of common stock			0				(1,906	)
Proceeds from exercise of stock options,			236				19
Excess tax benefit on share-based compensation			49				0
Net decrease from discontinued operations			0				(1,251	)
Net cash used in financing activities			(202,891	)			(28,899	)
Cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents			(2,366	)			11,400
Cash and cash equivalents at beginning of period			163,281				155,353
Cash and cash equivalents at end of period		$	160,915			$	166,753
Cash and cash equivalents consist of the following:
Cash and cash equivalents from continuing operations			160,915				163,806
Cash and cash equivalents from discontinued operations			0				2,947
Cash and cash equivalents at end of period		$	160,915			$	166,753

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

		Three months ended
		March 31,
		2006				2005
Supplemental disclosures
Interest paid		$	18,545			$	15,141
Income taxes paid		$	0			$	0
Recognition of deferred tax assets attributable to SFAS No. 115		$	670			$	2,890
Acquisition of other real estate owned through foreclosure		$	316			$	2,078
Issuance of restricted stock awards		$	35			$	0

See notes to consolidated financial statements.

FIRST FINANCIAL BANCORP. AND SUBSIDIARIES

		Three months ended
		March 31,
		2006				2005
Balances at January 1		$	299,881			$	371,455
Net earnings			3,967				10,726
Other comprehensive income, net of taxes:
Changes in unrealized losses on securities, available for sale			(1,134	)			(4,961	)
Comprehensive income			2,833				5,765
Cash dividends declared			(6,338	)			(6,972	)
Purchase of common stock			0				(1,906	)
Excess tax benefit on share-based compensation			49				0
Exercise of stock options, net of shares purchased			221				19
Restricted stock awards			(351	)			(640	)
Share-based compensation expense			319				426
Balances at March 31		$	296,614			$	368,147

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, 2005, 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, 2005.

First Financial adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” effective January 1, 2006, using the modified-prospective transition method which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation expense over the service period for awards expected to vest. This Statement applies to all awards granted after January 1, 2006 and to awards modified, repurchased, or cancelled after that date. Prior to January 1, 2006, First Financial accounted for its stock options under the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued To Employees” and related Interpretations, and applied the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” First Financial’s employee stock options have fixed terms and the exercise price of the stock options equals the market price on the date of grant. Therefore, no compensation cost was recognized for stock options prior to January 1, 2006.

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 completed 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 prior 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 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 three months ended March 31, 2005 is as follows:

		Three months ended
		March 31,
		2005
Interest income
Loans, including fees		$	1,441
Investment securities			130
Interest-bearing deposits with other banks			22
Federal funds sold and securities purchased under agreements to resell			29
Total interest income			1,622
Interest expense
Deposits			390
Long-term borrowings			301
Total interest expense			691
Net interest income			931
Provision for loan losses			50
Net interest income after provision for loan losses			881
Noninterest income
Service charges on deposit accounts			51
Other			37
Total noninterest income			88
Noninterest expenses
Salaries and employee benefits			314
Net occupancy			24
Furniture and equipment			17
Data processing			136
Other			171
Total noninterest expenses			662
Income before taxes			307
Income tax expense			113
Net earnings		$	194

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 March 31, 2006, First Financial had issued standby letters of credit aggregating $31,913 compared to $38,296 issued as of December 31, 2005. 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 $550,895 at March 31, 2006, and $523,276 at December 31, 2005. 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 three months ended March 31, 2006, and 2005 are shown in the table below.

		Three months ended
		March 31,
		2006				2005
Net Income		$	3,967			$	10,726
Other comprehensive income, net of tax:
Unrealized holding (losses) gains arising during period			(1,435	)			(4,965	)
Less: reclassification adjustment for (losses) gains included in net income			(301	)			(4	)
Other comprehensive income			(1,134	)			(4,961	)
Comprehensive income		$	2,833			$	5,765

At March 31, 2006, the unfunded pension losses, net of taxes, recorded as accumulated comprehensive income are $7,562.

NOTE 5: DERIVATIVES

The use of derivative instruments allows a bank to meet the needs of its customers while reducing the interest-rate risk associated with certain transactions. In 2001, First Financial’s board of directors approved a policy authorizing the use of certain derivative products. The approved derivative instruments included interest rate caps, floors, and swaps. Currently, First Financial utilizes interest rate swaps as a means to offer long-term fixed-rate loans to commercial borrowers while maintaining the variable-rate income that better suits First Financial’s funding position. In this way, First Financial is able to effectively modify its exposure to interest-rate risk by converting certain fixed-rate assets to floating rate.

First Financial’s portfolio consists of interest-rate swaps that are accounted for as fair-value hedges. These swap agreements are designated as hedges of specific assets and are accounted for under the short-cut method. First Financial’s 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.

First Financial had interest rate swaps with a notional value of $25,725 at March 31, 2006, $23,909 at December 31, 2005, and $13,750 at March 31, 2005. The fair value of the swaps was an unrealized gain of $809 at March 31, 2006, $243 at December 31, 2005, and $195 at March 31, 2005. These amounts are included with other assets on the balance sheet. The corresponding fair-value adjustment is also included on the balance sheet with the hedged item.

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 March 31, 2006, the rates on Trust I and Trust II were 8.36% and 8.06%, 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 March 31, 2006, 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 March 31, 2006, was $10,000.

NOTE 7: STOCK OPTIONS

First Financial adopted the provisions of SFAS No. 123(R) effective January 1, 2006, using the modified-prospective transition method, which requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. Share-based compensation expense for stock options and restricted stock awards included in salaries and employee benefits expense was $319 at March 31, 2006. Total unrecognized compensation cost related to nonvested share-based compensation was $2,991 at March 31, 2006 and is expected to be recognized over a weighted average period of 2.6 years.

Under the intrinsic method of accounting, compensation expense had not been recognized in the prior year statements of earnings for stock-based compensation plans, other than for restricted stock awards. The following table illustrates the effect on net earnings and earnings per share if First Financial had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation in the first quarter 2005:

		Three Months Ended
		March 31,
		2005
Net earnings, as reported		$	10,726
Add: restricted stock expense, net of taxes, included in net income			277
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			321
Pro forma net earnings		$	10,682
Earnings per share
Basic–as reported		$	0.25
Basic–pro forma		$	0.25
Diluted–as reported		$	0.25
Diluted–pro forma		$	0.24

As of March 31, 2006, First Financial had two stock-based compensation plans. The 1991 Stock Incentive Plan provides incentive stock options and stock awards to certain key employees and non-qualified stock options to directors of First Financial who are not employees for up to 1,691,036 common shares of First Financial. The options are not exercisable for at least one year from the date of grant and are thereafter exercisable for such periods (which may not exceed 10 years) as the board of directors, or a committee thereof, specifies, provided that the optionee has remained in the employment of First Financial and its subsidiaries. All options expire at the end of the exercise period, and forfeited or expired options become available for re-issuance. On April 27, 1999, the shareholders approved the 1999 Stock Incentive Plan which provides for 7,507,500 shares for similar awards and options.

The fair value of stock options is determined using the Black-Scholes valuation model. The expected dividend yield is based on historical dividend payouts; the expected volatility is based on historical volatilities of company stock for a period approximating the expected life; the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option; and the expected life represents the period of time the options are expected to be outstanding and is based on historical trends. The weighted average assumptions used in the computations are as follows (no stock options were granted during the first quarter 2005):

		Three Months Ended
		March 31,
						2005 Pro
		2006				Forma
Fair value of options granted		$	3.35				N/A
Expected dividend yield			3.58	%			N/A
Expected volatility			0.218				N/A
Risk-free interest rate			4.31	%			N/A
Expected life			6.88				N/A

Activity in the above plan for the first quarter 2006 is summarized as follows:

						Three Months Ended
		March 31, 2006
										Weighted
										Average
		Number				Weighted Average				Remaining				Aggregate
		of shares				Exercise Price				Contractual Life				Intrinsic Value
Outstanding at beginning of quarter			1,609,945			$	17.43
Granted			9,800				17.90
Exercised			(57,370	)			14.75
Forfeited or expired			(40,580	)			17.25
Outstanding at end of quarter			1,521,795			$	17.54				5.92			$	236,226
Exercisable at end of quarter			1,083,243			$	17.50				4.63			$	236,226

Intrinsic value for stock options is defined as the difference between the current market value and the grant price. The total intrinsic value of options exercised during the first quarter 2006 was $180. The weighted average grant date fair value of options granted during the first quarter 2006 was $3.35. Cash received from stock options exercised during the quarter was $236, and the related tax benefit for tax deductions from stock options exercised totaled $101. First Financial uses treasury shares purchased under the company’s share repurchase program to satisfy share-based exercises.

Restricted stock awards have historically been recorded as deferred compensation, a component of shareholders’ equity at the fair value of these awards at the grant date and amortized on a straight-line basis to salaries and benefits expense over the specified vesting periods, which is currently four years. For awards granted prior to 2005, the vesting of the awards only required a service period to be met. Therefore, 25% of each grant would vest each of the four years. For the 2005 and 2006 restricted stock awards to vest, the company must meet a performance goal of 12.00% return on equity. Since the return on equity goal was not met in 2005 and the first quarter of 2006, 25% of the awards granted in 2005 and the first quarter of 2006 will not vest. However, if average return on equity for 2005 and 2006 is 12.00% or higher, the first year’s awards, as well as the second year’s awards, will vest in 2006.

The following is a summary of activity in restricted stock for the first quarter 2006:

		Three Months Ended
		March 31, 2006
						Weighted
						Average
		Number				Grant Date
		of shares				Fair Value
Nonvested at beginning of quarter			218,054			$	17.22
Granted			2,000				17.91
Vested			(64,145	)			16.97
Forfeited			(5,998	)			17.03
Nonvested at end of quarter			149,911			$	17.33

The fair value of restricted stock is determined based on the number of shares granted and the quoted price of First Financial’s common stock. The total fair value of restricted stock vested during the first quarter 2006 was $1,089.

NOTE 8: EMPLOYEE BENEFIT PLANS

First Financial sponsors a non-contributory defined benefit pension plan covering substantially all employees. First Financial expects to contribute $7,578 to its pension plan in 2006. The following table sets forth information concerning amounts recognized in First Financial’s Consolidated Balance Sheets and Consolidated Statements of Earnings.

		Three months ended
		March 31,
		2006				2005
Service cost		$	1,098			$	955
Interest cost			744				748
Expected return on plan assets			(687	)			(678	)
Amortization of transition asset			(14	)			(16	)
Amortization of unrecognized prior service cost			14				15
Amortization of actuarial loss			342				248
Net periodic benefit cost		$	1,497			$	1,272

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.

		Three months ended
		March 31,
		2006				2005
Service cost		$	21			$	20
Amortization of unrecognized prior service cost			(1	)			(1	)
Amortization of actuarial loss			(1	)			(9	)
Net periodic postretirement benefit cost		$	19			$	10

NOTE 9: OTHER MATTERS

Core deposit intangibles are amortized on a straight-line basis over their useful lives. Core deposit balances are being amortized over varying periods, none of which exceeds 10 years.

NOTE 10: SUBSEQUENT EVENT

On April 25, 2006, First Financial’s subsidiary, First Financial Bank, N.A, signed a definitive agreement to sell its Southeastern Indiana banking offices to MainSource Bank, a subsidiary of MainSource Financial Group, Inc. of Greensburg, Indiana.

First Financial Bank signed a purchase and assumption agreement with MainSource Bank for the sale of approximately $30,000 in loans and property of the banking offices, and the assumption of approximately $56,000 in deposit accounts. The resulting financial impact for First Financial is an estimated pre-tax gain of approximately $4,500. Subject to regulatory approval, the sale is expected to be completed on or before September 30, 2006.

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

		2006				2005
		Mar. 31				Dec. 31				Sep. 30				June 30				Mar. 31
Average Consolidated Balance Sheet Items:
Loans less unearned income		$	2,596,755			$	2,657,156			$	2,783,315			$	2,795,754			$	2,788,075
Investment securities			497,528				620,868				625,418				635,982				655,114
Other earning assets			141,513				127,701				20,938				17,188				18,141
Total Earning Assets			3,235,796				3,405,725				3,429,671				3,448,924				3,461,330
Total assets			3,545,412				3,719,197				3,827,395				3,846,259				3,853,336
Noninterest-bearing deposits			417,061				433,228				428,881				433,379				425,365
Interest-bearing deposits			2,486,336				2,488,062				2,473,697				2,476,112				2,468,148
Total deposits			2,903,397				2,921,290				2,902,578				2,909,491				2,893,513
Borrowings			313,743				418,388				446,939				445,141				464,300
Shareholders’ equity			298,578				350,934				367,472				369,477				370,829
Key Ratios:
Average equity to average total assets			8.42	%			9.44	%			9.60	%			9.61	%			9.62	%
Return on average total assets			0.45	%			0.30	%			1.50	%			1.03	%			1.13	%
Return on average equity			5.39	%			3.20	%			15.64	%			10.74	%			11.73	%
Return on average tangible equity			6.12	%			3.57	%			17.32	%			11.90	%			13.00	%
Net interest margin			4.04	%			3.72	%			3.83	%			3.94	%			3.98	%
Net interest margin (fully tax equivalent)			4.12	%			3.80	%			3.92	%			4.03	%			4.07	%

These ratios include earnings from continuing and discontinued operations.

SUMMARY

STRATEGIC PLAN UPDATE

On March 14, 2005, First Financial announced its new strategic plan for the organization. First Financial has made steady progress toward completing key elements of the plan in 2006. The areas of focus are the organizational restructure which was completed in 2005, the balance sheet restructure discussed in the net interest income section, the growth plan, and the Performance Improvement Plan.

The growth plan is moving forward. First Financial continues to work with a branding firm to evaluate its market position and brand identity in all markets and business lines and to define a brand strategy for the future. This process should be completed in the first half of 2006. The headquarters for the Cincinnati and Dayton markets have been selected. First Financial will continue to recruit sales staff, evaluate metropolitan markets for expansion, and consider strategic acquisitions to extend and expand the franchise.

The objective of the Performance Improvement Plan is to maximize revenue and develop the proper cost structure for the consolidated organization to achieve a peer-level efficiency ratio. First Financial has established a long-term target efficiency ratio of between 55% and 60%. Management remains confident that it can achieve this target. The largest component of the improvement is a $7,500 to $8,000 planned reduction in salary and benefits through eliminating approximately 200 staff positions. Over half of the staff changes will occur in the second quarter of 2006 and the remainder will occur before the end of the fourth quarter of 2006. These staff reductions are in addition to the estimated $5,000 in consolidation-related staff reductions announced and achieved as part of the strategic plan in March of 2005. Estimated severance charges associated with this staff reduction are $1,300 and will be recognized when incurred.

To date, approximately $1,500 to $2,000 in revenue enhancements have been identified. Enhancements are associated with better management of internal processes such as cash balances in branches and a planned redeployment in low and nonearning assets. These improvements will occur in the second and third quarters of 2006.

BRANCH PLAN

First Financial has completed its branch evaluation. The evaluation was conducted using a balanced approach that considered both geography and financial performance.

The remaining offices are expected to meet or exceed financial performance goals and are aligned with the strategic intentions of the company. First Financial will continue to concentrate future growth plans and capital investments in larger metropolitan markets, and continuing to operate in smaller markets. Smaller markets have historically provided stable, low-cost funding sources to First Financial and are an important part of the funding plan for the expansion in the commercial lending market. Furthermore, First Financial’s historical strength in a number of these markets should enable it to hold market share.

First Financial’s branch strategy is to serve a combination of metropolitan and non-metropolitan markets in Indiana, Ohio, and Kentucky. In addition to geographic fit, each market must have growth potential and the ability to meet profit targets.

Seven offices have been offered for sale in two distinct market areas: Michigan and Southern Indiana. Total deposits and loans for the offered offices are approximately $101,116 and $101,928, respectively. The Michigan market area includes 2 offices, Hastings and Gun Lake; and the Southern Indiana market includes 5 offices, Vevay, Vevay Drive-up, East Enterprise, Liberty, and Madison. Subject to regulatory approval, the sale of the Southern Indiana market is expected to be completed on or before September 30, 2006.

First Financial will close an additional 12 offices: in Ohio: Willshire, Mariemont, and Montgomery; in Indiana: West College Corner, Carthage, Montpelier, Winchester, Wabash, Warsaw, Ft. Wayne, and Burlington; in Kentucky: Petersburg. These closures are expected to have a minimal effect on the $72,000 in deposits and $84,000 in loans that will be serviced by other offices. The timing of the closures is expected to be in the third quarter of 2006 and the closures are subject to regulatory approval.

After the branch plan is executed, First Financial will have 87 offices serving 9 distinct markets with an average branch size of approximately $33 million. The operating model for growth includes market presidents managing distinct markets with the authority to make decisions at the point of client contact. The net financial impact of the branch sales is immaterial.

INFORMATION TECHNOLOGY UPDATE

First Financial has entered into an agreement with Jack Henry & Associates Inc. to license their software applications, which will be used to provide primary core data processing. This in-house solution provides First Financial with a more cost-effective model. It is expected that the conversion to the Jack Henry system will occur in October of 2006, and should enhance First Financial’s capability to deliver client services in a better, faster, and more efficient manner.

This decision is consistent with its strategic plan and is an integral component of our comprehensive review of the use of technology. This review includes analysis of First Financial’s data and voice telecommunication usage, on-line and ATM services, and other ancillary services. Expected savings as a result of this comprehensive review are estimated to be between $3,000 and $4,000 per year and should be fully recognized in 2007. Costs associated with this conversion will include the early termination of some existing contracts. To-date, between $500 and $1,000 in likely early-termination penalties have been identified and will be recognized when incurred.

OPERATING RESULTS

Net earnings for the first three months of 2006 were $3,967 or $0.10 in diluted earnings per share versus $10,726 or $0.25 for the first three months of 2005. Income from continuing operations for the three months ended March 31, 2006, was $3,967 or $0.10 in diluted earnings per share versus $10,532 or $0.25 in diluted earnings per share for the same period in 2005. The $6,565 decrease in income from continuing operations was due to several material items. The effects of the balance sheet restructure of $4,295 in prepayment penalties and the $476 in additional losses on investment securities had a combined effect of $0.08 per share in the quarter. Additionally, other items including losses on property sales, professional services related to the balance-sheet restructure, severance charges, and other expenses amounted to approximately $1,300 or $0.02 per share. In addition to the items above, First Financial has had increased recurring expenses related to the execution of its strategic plan of roughly $600 or $0.01 per share in reduced net interest income due to parent company borrowings used in the repurchase of shares in the fourth quarter of 2005. Additionally, the effects of mortgage loan runoff as part of the intended loan mix shift discussed in the strategic plan totaled approximately $400 or $0.01 per share in reduced net interest income. Other recurring items include increased pension expense and the effects of FAS 123R and state franchise taxes of approximately $600 or $0.01 cent per share.

Return on average assets of 0.45% for the first three months of 2006 compared to 1.13% for the same period in 2005. Return on average shareholders’ equity was 5.39% for the first three months of 2006 versus 11.73% for the comparable period in 2005.

First-quarter 2006 noninterest income was $14,754, a decrease of $282 or 1.88% from the first quarter of 2005, due primarily to the loss on investment securities of $476. Excluding the effects of the loss on sales of investment securities, noninterest income increased $194 or 1.29% over the same period. First Financial had quarterly increases in service charges on deposit accounts income of $923 which included the positive effects of its new overdraft program. Bankcard interchange income increased $228 due to both increased debit card issuance and usage, while life insurance income decreased $613 due to lower investment performance on a portion of the portfolio and gains on mortgage loan sales decreased $219 due to operating in an increasing rate environment.

On a linked-quarter basis, total noninterest income was up $5,375 or 57.31%. This increase was primarily due to the $6,519 impairment on investment securities recorded in the fourth quarter of 2005. This increase was somewhat offset by a decrease of $787 from a gain on mortgage loans sold in the fourth quarter. Excluding the effects of the loan sales and the impairment on investment securities, noninterest income increased $141 or 0.93% which was primarily due to an increase in recurring executive life insurance income of $229.

Trust revenues were relatively unchanged on both a linked-quarter and year-over-year basis due to the stability in market values of trust assets under management over the periods. First Financial has hired several new Wealth Resources Group personnel to facilitate its growth plans in this business.

Total noninterest expense increased $7,500 or 22.62% for the first quarter of 2006 from the first quarter of 2005. This increase was primarily due to $4,295 in debt extinguishment expense associated with the payoff of Federal Home Loan Bank borrowings of approximately $185,000 in the first quarter of 2006. Excluding the effect of the debt extinguishment, noninterest expense would have increased $3,205. Salaries and employee benefits increased $1,307 or 6.91% over the same period in 2005 due to $345 in increased salaries as additional sales and support staff was added. Also included in the quarter were $155 in severance charges and $537 in increased pension expense due to the use of updated mortality tables and adjustments made to reflect actual plan experience. Occupancy expense increased $490 due primarily to increased maintenance costs, utilities, and new building rent consistent with First Financial’s growth plans. Other noninterest expenses increased $1,355 or 23.39% due primarily to increases in credit and collection expense of $216 and loss on the sale of real estate owned and other property owned of $354.

On a linked-quarter basis (first quarter 2006 compared to fourth quarter 2005), noninterest expense was relatively flat excluding the effects of the prepayment penalty and an increase in data processing expenses more than offset by a reduction in professional services associated with restructuring. First Financial anticipates additional restructuring related expenses primarily in the data processing, professional services,

and severance charges. These amounts will be disclosed when quantified and recognized in the period in which they are incurred.

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.

		2006				2005
		Mar. 31				Dec. 31				Sep. 30				June 30				Mar. 31
Interest income		$	50,684			$	50,717			$	50,740			$	50,119			$	49,121
Interest expense			18,485				18,778				17,597				16,214				15,141
Net interest income			32,199				31,939				33,143				33,905				33,980
Tax equivalent adjustment to interest income			661				723				746				756				758
Net interest income (fully tax equivalent)		$	32,860			$	32,662			$	33,889			$	34,661			$	34,738
Average earning assets			3,235,796				3,405,725				3,429,671				3,448,924				3,461,330
Net interest margin *			4.04	%			3.72	%			3.83	%			3.94	%			3.98	%
Net interest margin (tax equivalent)			4.12	%			3.80	%			3.92	%			4.03	%			4.07	%

Net interest income for the first quarter of 2006 was $32,199, compared to $33,980 in the first quarter of 2005, a decline of 5.24% or $1,781. This decrease is due primarily to a managed decline in asset levels and borrowings at the parent company with a quarterly cost of $643. The borrowings at the parent company will be paid down over the next several quarters as dividends are paid from the subsidiary bank to the parent company. Net interest income on a linked-quarter basis increased $260 or 0.81%. This increase is due primarily to the mid-quarter impact of the balance-sheet restructure. First Financial’s net interest margin increased to 4.04% in the first quarter of 2006 from 3.98% in the first quarter of 2005. Linked-quarter net interest margin increased 32 basis points from 3.72% to 4.04% due to the combined effects of: the balance sheet restructure, 31 basis points; the asset sensitivity of the balance sheet, 7 basis points; and the negative effect of mortgage and indirect loan runoff, 6 basis points. Earning asset rates increased on approximately 30% of the loan portfolio with the Prime rate adjustments during the quarter. Approximately 90% of this $766 million Prime and Fed Funds-based portfolio repriced during the first quarter of 2006.

The Statistical Information that follows is presented on a GAAP basis.

STATISTICAL INFORMATION

		March 31, 2006												December 31, 2005												March 31, 2005
Three months ended		Average								Average				Average								Average				Average								Average
(in thousands)		Balance				Interest				Rate				Balance				Interest				Rate				Balance				Interest				Rate
Earning Assets
Investments:
Interest-bearing deposits with other banks		$	—			$	—				0.00	%		$	—			$	—				0.00	%		$	149			$	1				2.72	%
Federal funds sold			141,513				1,582				4.53	%			127,701				1,297				4.03	%			17,992				104				2.34	%
Investment securities			497,528				6,245				5.09	%			620,868				6,654				4.25	%			655,114				6,638				4.11	%
Loans (1):
Commercial loans			580,681				10,964				7.66	%			575,075				10,461				7.22	%			618,700				9,649				6.32	%
Real estate — construction			85,672				1,537				7.28	%			96,529				1,539				6.33	%			84,022				1,192				5.75	%
Real estate — mortgage			1,404,739				20,554				5.93	%			1,436,013				20,911				5.78	%			1,483,108				21,086				5.77	%
Installment			501,857				8,237				6.66	%			525,350				8,343				6.30	%			576,969				8,598				6.04	%
Credit card			21,748				599				11.17	%			21,517				571				10.53	%			20,549				528				10.42	%
Lease financing			2,058				30				5.91	%			2,672				38				5.64	%			4,727				75				6.46	%
Loan fees			—				936								—				903								—				1,250
Total loans			2,596,755				42,857				6.69	%			2,657,156				42,766				6.39	%			2,788,075				42,378				6.16	%
Total earning assets			3,235,796				50,684				6.35	%			3,405,725				50,717				5.91	%			3,461,330				49,121				5.76	%
Nonearning Assets
Cash and due from banks			123,129												129,663												119,590
Allowance for loan losses			(42,402	)											(41,741	)											(44,823	)
Premises and equipment			73,556												72,351												67,098
Other assets			155,333												153,199												144,971
Assets related to discontinued operations			—												—												105,170
Total assets		$	3,545,412											$	3,719,197											$	3,853,336
Interest-bearing liabilities
Deposits:
Interest-bearing demand			203,363				1,332				2.66	%			180,999				954				2.09	%			159,949				487				1.23	%
Savings deposits			1,040,940				2,987				1.16	%			1,018,271				2,362				0.92	%			1,048,855				1,301				0.50	%
Time deposits			1,242,033				10,614				3.47	%			1,288,792				10,699				3.29	%			1,259,344				8,638				2.78	%
Short-term borrowings			97,414				896				3.73	%			72,132				473				2.60	%			104,477				461				1.79	%
Long-term borrowings			216,329				2,656				4.98	%			346,256				4,290				4.92	%			359,823				4,254				4.79	%
Total interest-bearing liabilities			2,800,079				18,485				2.68	%			2,906,450				18,778				2.56	%			2,932,448				15,141				2.09	%
Noninterest-bearing liabilities and shareholders’ equity
Noninterest-bearing demand			417,061												433,228												425,365
Other liabilities			29,694												28,585												27,517
Liabilities related to discontinued operations			—												—												97,177
Shareholders’ equity			298,578												350,934												370,829
Total liabilities and shareholders’ equity		$	3,545,412											$	3,719,197											$	3,853,336
Net interest income						$	32,199											$	31,939											$	33,980
Net interest spread											3.68	%											3.34	%											3.66	%
Contribution of noninterest-bearing sources of funds											0.36	%											0.38	%											0.32	%
Net interest margin (2)											4.04	%											3.72	%											3.98	%

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 the three months ended March 31, 2006, in comparison to 2005. 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 to net interest income.

		Three Months
		Ended
		Mar. 31, 2006				Change Due To:
		Over 2005				Rate				Volume
Interest income		$	1,563			$	5,096				($3,533	)
Interest expense			3,344				4,218				(874	)
Net interest income		($	1,781	)		$	878				($2,659	)