ALLOWANCE FOR LOAN AND LEASE LOSSES

Loans and leases. Management maintains the ALLL at a level that it considers sufficient to absorb probable incurred loan and lease losses inherent in the portfolio. Management determines the adequacy of the ALLL 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.

The ALLL is increased by provision expense and decreased by 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 second quarter of 2016.

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



	Three months ended						Six months ended
	June 30,						June 30,
(Dollars in thousands)	2016			2015			2016			2015
Changes in the allowance for loan and lease losses on loans, excluding covered/formerly covered loans
Balance at beginning of period	$	44,375		$	42,785		$	43,149		$	42,820
Provision for loan and lease losses	3,760			2,389			5,495			4,732
Loans charged-off	(2,049		)	(3,687		)	(3,416		)	(6,815		)
Recoveries	845			641			1,703			1,391
Balance at end of period	$	46,931		$	42,128		$	46,931		$	42,128

Changes in the allowance for loan and lease losses on covered/formerly covered loans
Balance at beginning of period	$	9,357		$	10,291		$	10,249		$	10,038
Provision for loan and lease losses	277			681			197			398
Loans charged-off	(653		)	(1,585		)	(1,728		)	(3,501		)
Recoveries	796			1,361			1,059			3,813
Balance at end of period	$	9,777		$	10,748		$	9,777		$	10,748

Changes in the allowance for loan and lease losses on total loans
Balance at beginning of period	$	53,732		$	53,076		$	53,398		$	52,858
Provision for loan and lease losses	4,037			3,070			5,692			5,130
Loans charged-off	(2,702		)	(5,272		)	(5,144		)	(10,316		)
Recoveries	1,641			2,002			2,762			5,204
Balance at end of period	$	56,708		$	52,876		$	56,708		$	52,876

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



	Three months ended June 30, 2016
				Real Estate
(Dollars in thousands)	Commercial and industrial			Construction			Commercial			Residential			Home Equity			Installment			Other			Total
Allowance for loan and lease losses:
Balance at beginning of period	$	18,170		$	2,272		$	22,416		$	4,040		$	3,976		$	354		$	2,504		$	53,732
Provision for loan and lease losses	2,572			447			1,283			(801		)	(707		)	(3		)	1,246			4,037
Gross charge-offs	(265		)	(28		)	(1,596		)	(28		)	(398		)	(30		)	(357		)	(2,702		)
Recoveries	420			202			681			81			131			62			64			1,641
Total net charge-offs	155			174			(915		)	53			(267		)	32			(293		)	(1,061		)
Ending allowance for loan and lease losses	$	20,897		$	2,893		$	22,784		$	3,292		$	3,002		$	383		$	3,457		$	56,708



	Three months ended June 30, 2015
				Real Estate
(Dollars in thousands)	Commercial and industrial			Construction		Commercial			Residential			Home Equity			Installment			Other			Total
Allowance for loan and lease losses:
Balance at beginning of period	$	15,544		$	1,237	$	25,819		$	3,483		$	4,279		$	387		$	2,327		$	53,076
Provision for loan and lease losses	2,160			131		149			445			(17		)	(9		)	211			3,070
Loans charged off	(1,255		)	0		(2,716		)	(756		)	(249		)	(59		)	(237		)	(5,272		)
Recoveries	326			17		1,105			42			373			68			71			2,002
Total net charge-offs	(929		)	17		(1,611		)	(714		)	124			9			(166		)	(3,270		)
Ending allowance for loan and lease losses	$	16,775		$	1,385	$	24,357		$	3,214		$	4,386		$	387		$	2,372		$	52,876



	Six months ended June 30, 2016
				Real Estate
(Dollars in thousands)	Commercial and industrial			Construction			Commercial			Residential			Home Equity			Installment			Other			Total
Allowance for loan and lease losses:
Balance at beginning of period	$	16,995		$	1,810		$	23,656		$	4,014		$	3,943		$	386		$	2,594		$	53,398
Provision for loan and lease losses	4,004			886			863			(793		)	(522		)	(61		)	1,315			5,692
Loans charged off	(744		)	(31		)	(2,858		)	(73		)	(738		)	(103		)	(597		)	(5,144		)
Recoveries	642			228			1,123			144			319			161			145			2,762
Total net charge-offs	(102		)	197			(1,735		)	71			(419		)	58			(452		)	(2,382		)
Ending allowance for loan and lease losses	$	20,897		$	2,893		$	22,784		$	3,292		$	3,002		$	383		$	3,457		$	56,708


	June 30, 2016
				Real Estate
	Commercial and industrial			Construction			Commercial			Residential			Home Equity			Installment			Other			Total
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	529		$	0		$	251		$	200		$	2		$	0		$	692		$	1,674
Collectively evaluated for impairment	20,368			2,893			22,533			3,092			3,000			383			2,765			55,034
Ending allowance for loan and lease losses	$	20,897		$	2,893		$	22,784		$	3,292		$	3,002		$	383		$	3,457		$	56,708

Loans
Loans individually evaluated for impairment	$	13,687		$	0		$	20,938		$	9,087		$	4,884		$	536		$	1,167		$	50,299
Loans collectively evaluated for impairment	1,780,846			374,949			2,342,518			503,713			462,665			46,381			139,842			5,650,914
Total loans	$	1,794,533		$	374,949		$	2,363,456		$	512,800		$	467,549		$	46,917		$	141,009		$	5,701,213



	Six months ended June 30, 2015
				Real Estate
(Dollars in thousands)	Commercial and industrial			Construction		Commercial			Residential			Home Equity			Installment			Other			Total
Allowance for loan and lease losses:
Balance at beginning of period	$	13,870		$	1,045	$	27,086		$	3,753		$	4,260		$	407		$	2,437		$	52,858
Provision for loan and lease losses	3,219			278		261			515			455			52			350			5,130
Loans charged off	(2,823		)	0		(4,586		)	(1,161		)	(990		)	(225		)	(531		)	(10,316		)
Recoveries	2,509			62		1,596			107			661			153			116			5,204
Total net charge-offs	(314		)	62		(2,990		)	(1,054		)	(329		)	(72		)	(415		)	(5,112		)
Ending allowance for loan and lease losses	$	16,775		$	1,385	$	24,357		$	3,214		$	4,386		$	387		$	2,372		$	52,876

	December 31, 2015
				Real Estate
(Dollars in thousands)	Commercial and industrial			Construction		Commercial			Residential			Home Equity			Installment			Other			Total
Ending allowance balance attributable to loans
Individually evaluated for impairment	$	357		$	0	$	979		$	235		$	2		$	0		$	0		$	1,573
Collectively evaluated for impairment	16,638			1,810		22,677			3,779			3,941			386			2,594			51,825
Ending allowance for loan and lease losses	$	16,995		$	1,810	$	23,656		$	4,014		$	3,943		$	386		$	2,594		$	53,398

Loans
Loans individually evaluated for impairment	$	17,411		$	0	$	24,652		$	8,994		$	5,441		$	253		$	122		$	56,873
Loans collectively evaluated for impairment	1,645,691			311,712		2,233,645			503,317			461,188			41,253			135,081			5,331,887
Total loans	$	1,663,102		$	311,712	$	2,258,297		$	512,311		$	466,629		$	41,506		$	135,203		$	5,388,760