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. For further discussion of First Financial's allowance methodology, see Note 1 – Summary of Significant Accounting Policies.

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.

During 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.

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. For further detail regarding accounting for purchased impaired loans and the related allowance, see Note 1 – Summary of Significant Accounting Policies.

Changes in the ALLL for the three years ended December 31 were as follows:



(Dollars in thousands)	2017			2016			2015
Changes in the ALLL, excluding covered/formerly covered loans
Balance at beginning of year	$	49,422		$	43,149		$	42,820
Provision for loan and lease losses	8,038			9,322			7,926
Loans charged-off	(12,712		)	(6,652		)	(11,660		)
Recoveries	4,124			3,603			4,063
Balance at end of year	$	48,872		$	49,422		$	43,149

Changes in the ALLL for covered/formerly covered loans
Balance at beginning of year	$	8,539		$	10,249		$	10,038
Provision for loan and lease losses	(4,456		)	818			1,715
Loans charged-off	(951		)	(4,462		)	(8,896		)
Recoveries	2,017			1,934			7,392
Balance at end of year	$	5,149		$	8,539		$	10,249

Total changes in the ALLL
Balance at beginning of year	$	57,961		$	53,398		$	52,858
Provision for loan and lease losses	3,582			10,140			9,641
Loans charged-off	(13,663		)	(11,114		)	(20,556		)
Recoveries	6,141			5,537			11,455
Balance at end of year	$	54,021		$	57,961		$	53,398

Changes in the ALLL by loan category as of December 31 were as follows:



	2017
							Real Estate
(Dollars in thousands)	Commercial and industrial			Lease financing			Construction			Commercial			Residential			Home Equity			Installment			Credit card			Total
Allowance for loan and lease losses
Balance at beginning of year	$	19,225		$	716		$	3,282		$	26,540		$	3,208		$	3,043		$	388		$	1,559		$	57,961
Provision for loan and lease losses	6,917			(42		)	207			(7,291		)	1,695			1,778			(90		)	408			3,582
Gross charge-offs	(10,194		)	0			(1		)	(1,038		)	(435		)	(913		)	(225		)	(857		)	(13,663		)
Recoveries	1,650			1			89			2,719			215			1,027			234			206			6,141
Total net charge-offs	(8,544		)	1			88			1,681			(220		)	114			9			(651		)	(7,522		)
Ending allowance for loan and lease losses	$	17,598		$	675		$	3,577		$	20,930		$	4,683		$	4,935		$	307		$	1,316		$	54,021



	2016
							Real Estate
(Dollars in thousands)	Commercial and industrial			Lease financing			Construction			Commercial			Residential			Home Equity			Installment			Credit card			Total
Allowance for loan and lease losses
Balance at beginning of year	$	16,995		$	821		$	1,810		$	23,656		$	4,014		$	3,943		$	386		$	1,773		$	53,398
Provision for loan and lease losses	3,705			(106		)	1,280			5,365			(655		)	(175		)	53			673			10,140
Gross charge-offs	(2,630		)	0			(93		)	(4,983		)	(387		)	(1,445		)	(386		)	(1,190		)	(11,114		)
Recoveries	1,155			1			285			2,502			236			720			335			303			5,537
Total net charge-offs	(1,475		)	1			192			(2,481		)	(151		)	(725		)	(51		)	(887		)	(5,577		)
Ending allowance for loan and lease losses	$	19,225		$	716		$	3,282		$	26,540		$	3,208		$	3,043		$	388		$	1,559		$	57,961



	2015
						Real Estate
(Dollars in thousands)	Commercial and industrial			Lease financing		Construction			Commercial			Residential			Home Equity			Installment			Credit card			Total
Allowance for loan and lease losses
Balance at beginning of year	$	13,870		$	435	$	1,045		$	27,086		$	3,753		$	4,260		$	407		$	2,002		$	52,858
Provision for loan and lease losses	4,809			384		597			1,439			1,234			573			25			580			9,641
Gross charge-offs	(5,408		)	0		(85		)	(10,083		)	(1,531		)	(1,891		)	(509		)	(1,049		)	(20,556		)
Recoveries	3,724			2		253			5,214			558			1,001			463			240			11,455
Total net charge-offs	(1,684		)	2		168			(4,869		)	(973		)	(890		)	(46		)	(809		)	(9,101		)
Ending allowance for loan and lease losses	$	16,995		$	821	$	1,810		$	23,656		$	4,014		$	3,943		$	386		$	1,773		$	53,398

The ALLL balance and the recorded investment in loans by portfolio segment and based on impairment method as of December 31 were as follows:



	December 31, 2017
					Real Estate
(Dollars in thousands)	Commercial and industrial		Lease financing		Construction		Commercial		Residential		Home Equity		Installment		Credit card		Total
Ending allowance on loans individually evaluated for impairment	$	169	$	0	$	0	$	448	$	160	$	2	$	0	$	0	$	779
Ending allowance on loans collectively evaluated for impairment	17,429		675		3,577		20,482		4,523		4,933		307		1,316		53,242
Ending allowance for loan and lease losses	$	17,598	$	675	$	3,577	$	20,930	$	4,683	$	4,935	$	307	$	1,316	$	54,021

Loans and Leases
Ending balance of loans individually evaluated for impairment	$	7,331	$	82	$	29	$	21,542	$	7,932	$	4,456	$	255	$	0	$	41,627
Ending balance of loans collectively evaluated for impairment	1,905,412		89,265		467,701		2,468,549		463,459		489,148		41,331		46,691		5,971,556
Total loans	$	1,912,743	$	89,347	$	467,730	$	2,490,091	$	471,391	$	493,604	$	41,586	$	46,691	$	6,013,183



	December 31, 2016
					Real Estate
(Dollars in thousands)	Commercial and industrial		Lease financing		Construction		Commercial		Residential		Home equity		Installment		Credit card		Total
Ending allowance on loans individually evaluated for impairment	$	550	$	0	$	0	$	593	$	179	$	2	$	0	$	0	$	1,324
Ending allowance on loans collectively evaluated for impairment	18,675		716		3,282		25,947		3,029		3,041		388		1,559		56,637
Ending allowance for loan and lease losses	$	19,225	$	716	$	3,282	$	26,540	$	3,208	$	3,043	$	388	$	1,559	$	57,961

Loans and Leases
Ending balance of loans individually evaluated for impairment	$	13,203	$	195	$	0	$	20,460	$	9,601	$	4,074	$	437	$	0	$	47,970
Ending balance of loans collectively evaluated for impairment	1,768,745		92,913		399,434		2,407,117		491,379		456,314		50,202		43,408		5,709,512
Total loans	$	1,781,948	$	93,108	$	399,434	$	2,427,577	$	500,980	$	460,388	$	50,639	$	43,408	$	5,757,482