performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to Bancorp arises from its obligation to make payment in the event of the customers’ contractual default. As of March 31,June 30, 2004, Bancorp had issued standby letters of credit aggregating $41,716$41,540 compared to $42,229 issued as of December 31, 2003. Management conducts regular reviews of these instruments on an individual customer basis, and the results are considered in assessing the adequacy of Bancorp’s allowance for loan 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. Bancorp evaluates each customer’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by Bancorp 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. Bancorp had commitments outstanding to extend credit totaling $475,744$495,474 at March 31,June 30, 2004 and $480,632 at December 31, 2003. Management does not anticipate any material losses as a result of these commitments.

NOTE 3: COMPREHENSIVE INCOME

Bancorp discloses comprehensive income in the “Consolidated Statements of Changes in Shareholders’ Equity”.Equity.” Disclosure of the reclassification adjustments for the six and three months ended March 31,June 30, 2004 and 2003 are shown in the table below.

hedged asset. At March 31,June 30, 2004 and 2003, Bancorp had interest rate swaps with a notional value of $12,122$12,046 and $7,845,$11,840, respectively. The fair value of the swaps was an unrealized gain of $201 at June 30, 2004 and an unrealized loss of $415 and $295$631 at March 31, 2004 and 2003, respectively. This amount isJune 30, 2003. These amounts are included with other assets on the balance sheet. A corresponding fair value adjustment was also included on the balance sheet as a hedged item.

Bancorp is exposed to losses if a counterparty fails to make its payment under a contract in which Bancorp is in the receiving position. Although collateral or other security may not be obtained, Bancorp 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 5: CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF SUBSIDIARY TRUST

The corporation-obligated mandatorily redeemable capital securities (the “capital securities”)capital securities) of subsidiary trust, which appears on the balance sheet, are commonly known as Trust Preferred Securities. The subsidiary trust holds solely the junior subordinated debt securities of Bancorp (the “debentures”)debentures). Capital securities were issued in 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. Bancorp 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 the 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 Bancorp. The interest rate is variable and is subject to change every three months. The base index is three month LIBOR (London Inter-Bank Offered Rate). On March 31,June 30, 2004, the rates on Trust I and Trust II were 4.51%4.99% and 4.21%, respectively. Bancorp 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. Bancorp has entered into agreements which, taken collectively, fully or unconditionally guarantee the capital securities subject to the terms of the guarantees. The debentures issued in 2003 are first redeemable, in whole or in part, by Bancorp on September 30, 2008 and mature on September 30, 2033. The amount outstanding, net of offering costs, as of March 31,June 30, 2004 was $20,000. The debentures issued in 2002 are first redeemable, in whole or in part, by Bancorp on September 25, 2007 and mature on September 25, 2032. The amount outstanding, net of offering costs, as of March 31,June 30, 2004 was $10,000.

During the first quarter of 2004, Bancorp deconsolidated the accounts of these trust preferred entities in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities”. The deconsolidation of the net assets increased Bancorp’s consolidated debt obligation by $930, the difference representing Bancorp’s common ownership in the trusts. The deconsolidation has no impact on Bancorp’s liquidity position because it continues to be obligated to repay the debentures held by the trust preferred entities and guarantees repayment of the capital securities issued by the trusts.

The debentures currently qualify as Tier I capital under Federal Reserve Board guidelines. The

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would be minimal to Bancorp’s regulatory capital ratios. Therefore, Bancorp would continue to have capital ratios that are well above the minimum regulatory requirements.

NOTE 6: STOCK OPTIONS

As of March 31,June 30, 2004, Bancorp had two stock-based compensation plans. Bancorp accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No stock-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 Bancorp had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

The increase in volume on earning assets affected interest income more than the increase in volume on interest-bearing liabilities affected interest expense. While the effect of the change in volume was to increase net interest income, the change in the rates was greater causing overall net interest income to decrease for both the quarter and the year of 2004 from 2003. 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.

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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, decreased $2,404 or 6.54%$12,659 to $34,374$28,595 at the end of the firstsecond quarter 2004 from $36,778$41,254 at the end of the firstsecond quarter 2003. On a linked quarter basis, (first quarter 2004 compared to fourth quarter 2003), total underperforming assets decreased $506.$5,779. Nonaccrual loans are composed primarily of commercial, multi-family, and 1-4 family residential properties. Nonaccrual loans increased $2,310decreased $5,487 from the firstsecond quarter of 2003, while increasing $606and $3,863 from the linked quarter. Restructured loans decreased to $3,373significantly from $6,291$7,188 a year ago.ago to $2,936 at June 30, 2004. Other real estate owned increased $434decreased $151 from the firstsecond quarter of 2003 while decreasing slightlyand $855 from the linked quarter. Bancorp’s level of

The nonperforming assets over the last several quarters has been reflectiveto ending loans ratio decreased to 0.96% as of June 30, 2004, from 1.33% as of the uncertain economy inend of the corporation’s primary markets in Ohio and Indiana. In the firstsecond quarter of 2004, credit quality indicators stabilized and, in some cases, improved. The stabilization and2003. This is also a significant improvement in regard to credit quality has been positively influenced by signsfrom the linked-quarter percentage of economic improvement, strategies such as the fourth quarter 2003 distressed loan sale, and improved credit risk disciplines. Given the current economic environment, Bancorp expects continued stable to improving credit quality trends through 2004 although moderate fluctuations could occur as Bancorp continues to work through credit issues.1.16%.

Accruing loans past due 90 days or more fordecreased 79.34% to $721 at the firstend of the second quarter of 2004 compared tofrom $3,490 at the firstend of the second quarter of 2003 decreased $2,230 and compared to the linked quarter decreased $527.2003. This represents theBancorp’s lowest level of 90 days past due90-days-past-due loans in over five years.

Accruing loans, including loans impaired under FASB Statement No. 114, which are past due 90 days or more, where 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. Bancorp does not have a concentration of credit in any particular industry.

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