ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans, excluding covered loans. For each reporting period, management maintains the allowance for loan and lease losses at a level that it considers sufficient to absorb probable loan and lease losses inherent in the portfolio. There were no material changes to First Financial's accounting policies or methodology related to the allowance for loan and lease losses during the first nine months of 2014.

The allowance is increased by provision expense and decreased by actual charge-offs, net of recoveries of amounts previously charged-off. First Financial's policy is to charge-off all or a portion of a loan when, in management's opinion, it is unlikely to collect the principal amount owed in full either through payments from the borrower or from the liquidation of collateral.



	Three months ended						Nine months ended
	September 30,						September 30,
(Dollars in thousands)	2014			2013			2014			2013
Balance at beginning of period	$	42,027		$	47,047		$	43,829		$	47,777
Provision for loan and lease losses	1,093			1,413			2,281			6,863
Loans charged off	(1,816		)	(5,111		)	(6,427		)	(12,515		)
Recoveries	1,150			2,165			2,771			3,389
Balance at end of period	$	42,454		$	45,514		$	42,454		$	45,514
Total loans	$	4,449,972		$	3,430,916		$	4,449,972		$	3,430,916
Allowance for loan and lease losses to total ending loans	0.95		%	1.33		%	0.95		%	1.33		%

Year-to-date changes in the allowance for loan and lease losses by loan category were as follows:



	Nine months ended September 30, 2014
			Real Estate
(Dollars in thousands)	Commercial		Construction		Commercial		Residential		Installment			Home Equity		Other		Total
Allowance for loan and lease losses:
Balance at beginning of period	$	10,568	$	824	$	20,478	$	3,379	$	365		$	5,209	$	3,006	$	43,829
Provision for loan and lease losses	517		274		855		61		(153		)	721		6		2,281
Gross charge-offs	1,310		0		1,944		701		205			1,396		871		6,427
Recoveries	1,185		0		771		161		173			186		295		2,771
Total net charge-offs	125		0		1,173		540		32			1,210		576		3,656
Ending allowance for loan and lease losses	$	10,960	$	1,098	$	20,160	$	2,900	$	180		$	4,720	$	2,436	$	42,454
Ending allowance on loans individually evaluated for impairment	$	802	$	0	$	3,338	$	368	$	0		$	2	$	0	$	4,510
Ending allowance on loans collectively evaluated for impairment	10,158		1,098		16,822		2,532		180			4,718		2,436		37,944
Ending allowance for loan and lease losses	$	10,960	$	1,098	$	20,160	$	2,900	$	180		$	4,720	$	2,436	$	42,454
Loans
Ending balance of loans individually evaluated for impairment	$	7,913	$	0	$	20,763	$	3,215	$	104		$	614	$	0	$	32,609
Ending balance of loans collectively evaluated for impairment	1,296,869		193,776		1,931,292		423,343		47,457			415,485		109,141		4,417,363
Total loans	$	1,304,782	$	193,776	$	1,952,055	$	426,558	$	47,561		$	416,099	$	109,141	$	4,449,972



	Twelve months ended December 31, 2013
			Real Estate
(Dollars in thousands)	Commercial		Construction			Commercial		Residential		Installment			Home Equity		Other		Total
Allowance for loan and lease losses:
Balance at beginning of period	$	7,926	$	3,268		$	24,151	$	3,599	$	522		$	5,173	$	3,138	$	47,777
Provision for loan and lease losses	5,385		(3,115		)	2,659		593		(132		)	1,937		1,387		8,714
Gross charge-offs	3,415		1			8,326		1,016		335			2,409		1,781		17,283
Recoveries	672		672			1,994		203		310			508		262		4,621
Total net charge-offs	2,743		(671		)	6,332		813		25			1,901		1,519		12,662
Ending allowance for loan and lease losses	$	10,568	$	824		$	20,478	$	3,379	$	365		$	5,209	$	3,006	$	43,829
Ending allowance on loans individually evaluated for impairment	$	2,080	$	0		$	2,872	$	348	$	0		$	2	$	0	$	5,302
Ending allowance on loans collectively evaluated for impairment	8,488		824			17,606		3,031		365			5,207		3,006		38,527
Ending allowance for loan and lease losses	$	10,568	$	824		$	20,478	$	3,379	$	365		$	5,209	$	3,006	$	43,829
Loans - excluding covered loans
Ending balance of loans individually evaluated for impairment	$	10,391	$	0		$	18,023	$	3,493	$	122		$	648	$	0	$	32,677
Ending balance of loans collectively evaluated for impairment	1,025,277		80,741			1,478,964		349,438		47,011			375,806		115,727		3,472,964
Total loans - excluding covered loans	$	1,035,668	$	80,741		$	1,496,987	$	352,931	$	47,133		$	376,454	$	115,727	$	3,505,641

Covered Loans. The majority of covered loans are accounted for under FASB ASC Topic 310-30, whereby First Financial is required to periodically re-estimate the expected cash flows on the loans. First Financial updated the valuations related to covered loans during the third quarter 2014 and realized net recoveries of $0.7 million during the quarter. As a result of improved cash flow expectations from the updated valuations as well as net charge-off activity during the period, First Financial recognized negative provision expense, or impairment recapture, of $0.2 million during the third quarter, resulting in an allowance for covered loan losses of $11.5 million as of September 30, 2014. First Financial recognized negative provision expense on covered loans of $2.8 million and realized net charge-offs of $4.6 million for the first nine months of 2014. For the third quarter of 2013, First Financial recognized provision expense on covered loans of $5.3 million related to net charge-offs of $15.0 million during the period. For the first nine months of 2013, the Company recognized provision expense on covered loans of $6.1 million and net charge-offs of $28.0 million.

First Financial recognized loss sharing expenses of $1.0 million and $1.7 million for the third quarters of 2014 and 2013, respectively, primarily related to attorney fees, appraisal costs and delinquent taxes. The Company also recognized gains on covered OREO of $1.4 million for the third quarter of 2014 and losses on covered OREO of $0.2 million for the third quarter of 2013. The net payable due to the FDIC under loss sharing agreements related to covered loan provision expense, gains/losses on covered OREO and loss sharing expenses of $0.2 million was recognized as negative FDIC loss sharing income and a corresponding decrease to the FDIC indemnification asset during the third quarter of 2014. The net receivable due from the FDIC under loss sharing agreements of $5.6 million for the third quarter of 2013, was recognized as negative FDIC loss sharing income and a corresponding decrease to the FDIC indemnification asset.

On a year-to-date basis, First Financial recognized loss sharing expenses of $4.0 million and $5.6 million for 2014 and 2013 respectively. Similarly, on a year-to-date basis, First Financial recognized gains on covered OREO of $1.0 million for 2014 and $2.2 million for 2013. The receivable due from the FDIC under loss sharing agreements related to covered loan provision expense, gains/losses on covered OREO and loss sharing expenses of $0.4 million for the first nine months of 2014 and $7.1 million for the comparable period in 2013, was recognized as FDIC loss sharing income and a corresponding increase to the FDIC indemnification asset.

The allowance for loan and lease losses on covered loans is presented in the table below:



(Dollars in thousands)	September 30, 2014		December 31, 2013
Commercial	$	5,468	$	9,400
Real estate - commercial	5,186		8,515
Real estate - residential	750		761
Installment	131		225
Total	$	11,535	$	18,901

Changes in the allowance for loan and lease losses on covered loans were as follows:



	Three months ended						Nine months ended
	September 30,						September 30,
(Dollars in thousands)	2014			2013			2014			2013
Balance at beginning of period	$	12,425		$	32,961		$	18,901		$	45,190
Provision for loan and lease losses	(200		)	5,293			(2,805		)	6,052
Loans charged-off	(3,053		)	(21,009		)	(13,778		)	(35,374		)
Recoveries	2,363			6,014			9,217			7,391
Balance at end of period	$	11,535		$	23,259		$	11,535		$	23,259
Total loans	$	332,265		$	518,524		$	332,265		$	518,524
Allowance for loan and lease losses to total ending loans	3.47		%	4.49		%	3.47		%	4.49		%