ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans and leases. For each reporting period, management maintains the ALLL at a level that it considers sufficient to absorb probable loan and lease losses inherent in the portfolio. Management determines the adequacy of the allowance based on historical loss experience as well as other significant factors such as composition of the portfolio, economic conditions, geographic footprint, the results of periodic internal and external evaluations of delinquent, nonaccrual and classified loans and any other adverse situations that may affect a specific borrower's ability to repay, including the timing of future payments. This evaluation is inherently subjective as it requires utilizing material estimates that may be susceptible to significant change. 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 2015.

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.

In the third quarter of 2015, First Financial closed its merger with Oak Street. Loans acquired in this transaction were recorded at estimated fair value at the acquisition date with no carryover of the related ALLL. See Note 15 - Business Combinations for further detail.

Covered/formerly covered loans. The majority of covered/formerly covered loans are purchased impaired loans, whereby First Financial is required to periodically re-estimate the expected cash flows on the loans. First Financial updated the valuations related to covered/formerly covered loans during the third quarter of 2015. First Financial recognized provision expense of $1.3 million and net charge-offs of $1.0 million during the third quarter of 2015, resulting in an ending allowance of $11.0 million as of September 30, 2015. First Financial recognized provision expense of $1.7 million and realized net charge-offs of $0.7 million for the first nine months of 2015. For the third quarter of 2014, First Financial recognized negative provision expense, or impairment recapture, on covered loans of $0.2 million and net charge-offs of $0.7 million, resulting in an ending allowance of $11.5 million. For the first nine months of 2014, the Company recognized negative provision expense on covered loans of $2.8 million and net charge-offs of $4.6 million.

First Financial recognized loss sharing expenses of $0.6 million and $1.0 million for the third quarters of 2015 and 2014, respectively. The Company also recognized losses on covered/formerly covered OREO of $0.1 million for the third quarter of 2015 and gains on covered OREO of $1.4 million for the third quarter of 2014. The net payable due to the FDIC under loss sharing agreements related to covered loan recoveries, gains/losses on covered OREO and loss sharing expenses of $1.0 million was recognized as negative FDIC loss sharing income during the third quarter of 2015. The net payable due to the FDIC under loss sharing agreements of $0.2 million for the third quarter of 2014, was recognized as negative FDIC loss sharing income and a corresponding decrease to the FDIC indemnification asset.

First Financial recognized loss sharing expenses of $1.5 million and $4.0 million for the nine months ended September 30, 2015 and 2014, respectively. First Financial also recognized losses on covered/formerly covered OREO of $0.5 million for the nine months ended September 30, 2015 and gains on covered/formerly covered OREO of $1.0 million for the nine months ended September 30, 2014. The net payable due to the FDIC under loss sharing agreements of $2.3 million for the first nine months of 2015 was recognized as negative loss sharing income. The receivable due from the FDIC under loss sharing agreements of $0.4 million for the first nine months of 2014, was recognized as loss sharing income and a corresponding increase to the FDIC indemnification asset.

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



	Three months ended						Nine months ended
	September 30,						September 30,
(Dollars in thousands)	2015			2014			2015			2014
Changes in the allowance for loan and lease losses on loans, excluding covered/formerly covered loans
Balance at beginning of period	$	42,128		$	42,027		$	42,820		$	43,829
Provision for loan and lease losses	1,382			1,093			6,114			2,281
Loans charged-off	(2,385		)	(1,816		)	(9,200		)	(6,427		)
Recoveries	1,194			1,150			2,585			2,771
Balance at end of period	$	42,319		$	42,454		$	42,319		$	42,454

Changes in the allowance for loan and lease losses on covered/formerly covered loans
Balance at beginning of period	$	10,748		$	12,425		$	10,038		$	18,901
Provision for loan and lease losses	1,265			(200		)	1,663			(2,805		)
Loans charged-off	(1,577		)	(3,053		)	(5,078		)	(13,778		)
Recoveries	577			2,363			4,390			9,217
Balance at end of period	$	11,013		$	11,535		$	11,013		$	11,535

Changes in the allowance for loan and lease losses on total loans
Balance at beginning of period	$	52,876		$	54,452		$	52,858		$	62,730
Provision for loan and lease losses	2,647			893			7,777			(524		)
Loans charged-off	(3,962		)	(4,869		)	(14,278		)	(20,205		)
Recoveries	1,771			3,513			6,975			11,988
Balance at end of period	$	53,332		$	53,989		$	53,332		$	53,989

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



	Nine months ended September 30, 2015
			Real Estate
(Dollars in thousands)	Comm		Constr		Comm			Resid		Install		Home Equity		Other		Total		Covered/formerly covered		Grand Total
Allowance for loan and lease losses:
Balance at beginning of period	$	11,259	$	1,045	$	20,668		$	2,828	$	323	$	4,260	$	2,437	$	42,820	$	10,038	$	52,858
Provision for loan and lease losses	5,034		540		(2,282		)	1,324		77		905		516		6,114		1,663		7,777
Gross charge-offs	2,528		84		3,664			665		267		1,185		807		9,200		5,078		14,278
Recoveries	586		39		977			174		163		478		168		2,585		4,390		6,975
Total net charge-offs	1,942		45		2,687			491		104		707		639		6,615		688		7,303
Ending allowance for loan and lease losses	$	14,351	$	1,540	$	15,699		$	3,661	$	296	$	4,458	$	2,314	$	42,319	$	11,013	$	53,332
Ending allowance on loans individually evaluated for impairment	$	478	$	0	$	938		$	235	$	0	$	2	$	0	$	1,653	$	0	$	1,653
Ending allowance on loans collectively evaluated for impairment	13,873		1,540		14,761			3,426		296		4,456		2,314		40,666		11,013		51,679
Ending allowance for loan and lease losses	$	14,351	$	1,540	$	15,699		$	3,661	$	296	$	4,458	$	2,314	$	42,319	$	11,013	$	53,332
Loans
Ending balance of loans individually evaluated for impairment	$	7,651	$	0	$	22,287		$	2,742	$	0	$	362	$	0	$	33,042	$	0	$	33,042
Ending balance of loans collectively evaluated for impairment	1,620,696		275,430		2,019,783			444,132		37,609		427,038		120,508		4,945,196		237,825		5,183,021
Total loans	$	1,628,347	$	275,430	$	2,042,070		$	446,874	$	37,609	$	427,400	$	120,508	$	4,978,238	$	237,825	$	5,216,063



	Twelve months ended December 31, 2014
			Real Estate
(Dollars in thousands)	Comm		Constr		Comm		Resid		Install		Home Equity		Other		Total		Covered/formerly covered			Grand 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	$	18,901		$	62,730
Provision for loan and lease losses	871		221		1,325		181		23		565		183		3,369		(1,841		)	1,528
Gross charge-offs	1,440		0		2,329		922		283		1,745		1,158		7,877		18,096			25,973
Recoveries	1,260		0		1,194		190		218		231		406		3,499		11,074			14,573
Total net charge-offs	180		0		1,135		732		65		1,514		752		4,378		7,022			11,400
Ending allowance for loan and lease losses	$	11,259	$	1,045	$	20,668	$	2,828	$	323	$	4,260	$	2,437	$	42,820	$	10,038		$	52,858
Ending allowance on loans individually evaluated for impairment	$	739	$	0	$	4,002	$	310	$	0	$	2	$	0	$	5,053	$	0		$	5,053
Ending allowance on loans collectively evaluated for impairment	10,520		1,045		16,666		2,518		323		4,258		2,437		37,767		10,038			47,805
Ending allowance for loan and lease losses	$	11,259	$	1,045	$	20,668	$	2,828	$	323	$	4,260	$	2,437	$	42,820	$	10,038		$	52,858
Loans - excluding covered loans
Ending balance of loans individually evaluated for impairment	$	6,122	$	0	$	25,938	$	2,963	$	0	$	609	$	0	$	35,632	$	0		$	35,632
Ending balance of loans collectively evaluated for impairment	1,291,190		196,272		1,948,757		429,712		44,269		415,420		113,969		4,439,589		302,014			4,741,603
Total loans - excluding covered loans	$	1,297,312	$	196,272	$	1,974,695	$	432,675	$	44,269	$	416,029	$	113,969	$	4,475,221	$	302,014		$	4,777,235