First Financial Bancorp Reports Fourth Quarter and Full Year 2012 Financial Results

CINCINNATI, Jan. 29, 2013 /PRNewswire/ -- First Financial Bancorp (Nasdaq: FFBC) ("First Financial" or the "Company") announced today financial and operational results for the fourth quarter 2012 and for the twelve month period ended December 31, 2012.

Fourth quarter 2012 net income was $16.3 million and earnings per diluted common share were $0.28.  This compares with third quarter 2012 net income of $16.2 million and earnings per diluted common share of $0.28 and fourth quarter 2011 net income of $17.9 million and earnings per diluted common share of $0.31.

For the twelve month period ended December 31, 2012, net income was $67.3 million and earnings per diluted common share were $1.14 as compared to net income of $66.7 million and earnings per diluted common share of $1.14 for the twelve month period ended December 31, 2011.

The board of directors has authorized a regular dividend of $0.15 per common share and a variable dividend of $0.13 per common share for the next regularly scheduled dividend, payable on April 1, 2013 to shareholders of record as of March 1, 2013.  This is a continuation of the 100% dividend payout ratio first announced in the second quarter 2011 and is expected to continue through 2013 unless the Company's capital position materially changes or capital deployment opportunities arise.

Under the announced share repurchase plan, the Company repurchased 460,500 shares during the fourth quarter at an average price of $14.78 per share.  When combined with the regular and variable dividends paid to shareholders, First Financial returned 110.8% of 2012 full year net income to shareholders during the year.  Additionally, the Company has repurchased 84,000 shares during the first quarter 2013 at an average price of $14.83 per share.

• 89^th consecutive quarter of profitability 
• Quarterly adjusted pre-tax, pre-provision income of $28.6 million, an increase of $4.2 million, or 17.1%, compared to the linked quarter
• Continued solid performance
  • Quarterly return on average assets of 1.03%; full year return on average assets of 1.07%
  • Quarterly return on average risk-weighted assets of 1.68%; full year return on average risk-weighted assets of 1.78%
  • Quarterly return on average shareholders' equity of 9.06%; full year return on average shareholders' equity of 9.43%
• Capital ratios remain strong
  • Tangible common equity to tangible assets of 9.50%
  • Tier 1 capital ratio of 16.32%
  • Total risk-based capital ratio of 17.60%
• Quarterly net interest margin increased to 4.27% from 4.21% for the linked quarter
  • Results included a $2.2 million prepayment fee; excluding this item net interest margin was 4.11% for the quarter
  • Adjusted yield on the uncovered portfolio increased 3 bps during the quarter to 4.73%
  • Cost of interest-bearing deposits declined 8 bps during the quarter to 0.49%
• Total uncovered loan portfolio growth of 14.7% on an annualized basis
  • Strong growth in C&I, commercial real estate, specialty finance and residential mortgage balances
  • Uncovered loan growth exceeded covered loan decline by $35.6 million
• Significant core deposit growth during the fourth quarter
  • Non-time deposits increased 15.1% on an annualized basis
  • Growth driven by the commercial and retail lines of business
• Total classified assets declined $4.3 million, or 3.3%, compared to the linked quarter and $33.3 million, or 20.5%, compared to December 31, 2011

Implementation of the efficiency plan announced in the third quarter continues as previously disclosed with regard to estimated annualized cost savings and timing.  During the fourth quarter, the Company announced that it will be consolidating 10 banking centers located in Ohio and Indiana effective February 15, 2013.  The estimated annual pre-tax operating costs associated with these locations are included in the identified $17.1 million of annualized cost savings.  Also during the quarter, the Company incurred certain pre-tax expenses not expected to recur of $1.0 million, or $0.01 per diluted share after taxes.  Approximately $0.6 million was related to employee benefit expenses associated with the efficiency plan and $0.3 million was related to real estate expenses associated with previously announced banking center consolidation and closure plans.  Additionally, the Company recognized pre-tax gains of $1.0 million resulting from the sales of investment securities, or $0.01 per diluted share after taxes.

Claude Davis, President and Chief Executive Officer, commented, "While 2012 presented a variety of challenges, we ended the year on a strong note as we experienced solid growth in both our uncovered loan portfolio and core deposit base.  We were especially pleased that for the first time since the Irwin transaction in 2009, uncovered loan growth exceeded the decline in covered loans as total loan balances increased $35.6 million during the fourth quarter.

"During the fourth quarter, total uncovered loans increased $113.0 million, or 14.7% on an annualized basis, and increased $210.6 million, or 7.1%, compared to the prior year.  As in recent quarters, the level of early payoffs remained elevated; however, our strong pipeline at the end of the third quarter translated into fourth quarter originations and renewals resulting in one of our best quarters in recent years.  We had a particularly strong December driven by new business in our traditional commercial and franchise lending businesses.  We are optimistic that this momentum will carry over into 2013 as the pipeline continued to look solid at the end of the year, with specialty finance expected to contribute meaningfully to first quarter originations.

"Over the last several years, we have made significant investments intended to create long-term franchise value for all stakeholders in the Company, including the branch acquisitions we made during 2011 and the build-outs of our specialty finance and mortgage origination platforms.  We recognize that we face a revenue headwind as the current interest rate and economic environments combined with our declining covered loan portfolio creates challenges for achieving earnings growth and positive operating leverage over the next several quarters. The strategic initiatives we have implemented, as well as the efficiency plan we are executing on, are evidence of our commitment to build the premier community banking franchise serving our markets.

"During 2012, these investments in the franchise began to payoff.  Almost 45% of our year-over-year growth in uncovered loans came from the Indianapolis and Dayton markets as we achieved significant growth in both our commercial and retail lines of business.  While the earnings impact of this growth was muted due to the interest rate environment, our sales efforts in these markets have laid the groundwork for continued success as we aggressively pursue new client relationships.  Additionally, the deposit relationships we added as part of the branch acquisitions contributed to the growth in core noninterest income as fee revenue from deposit products increased 9.6% during the year.

"Our business credit and equipment finance products also enjoyed tremendous growth as outstanding balances increased over 80% during the year, demonstrating our ability to adapt to the ever-changing needs of our client base.  Furthermore, mortgage originations, both those we sell in the secondary market as well as those retained on our balance sheet, increased over 67% during 2012.  Fee revenue from our mortgage business, which is still early in its full development, increased 51% year-over-year." 

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income for the fourth quarter 2012 was $62.0 million as compared to $59.8 million for the third quarter 2012 and $65.5 million as compared to the year-over-year period.  Compared to the linked quarter, total interest income increased $1.3 million, or 2.0%, and total interest expense declined $0.8 million, or 12.9%.  Net interest margin was 4.27% for the fourth quarter 2012 as compared to 4.21% for the third quarter 2012 and 4.32% for the fourth quarter 2011.

Interest income earned on loans increased $0.9 million, or 1.4%, compared to the prior quarter.  Included in the quarterly increase was a prepayment fee of $2.2 million related to the early payoff of one relationship.  Excluding this prepayment fee, net interest margin was 4.11%, a decline of 10 bps compared to the linked quarter.  Net of the prepayment fee, the lower interest income earned on loans and decline in net interest margin was driven primarily by an 8.3% decrease in the average balance of covered loans outstanding and, to a lesser extent, a decline in the yield earned on the portfolio.

The covered loan activity was partially offset by growth in average uncovered loan balances of $78.0 million, or 2.6% on a linked quarter basis.  Excluding the impact of the prepayment fee, the yield earned on the uncovered portfolio during the quarter was approximately 4.73%, a 3 bp increase compared to the linked quarter.

Interest income earned from investment securities increased as a result of a $140.6 million, or 8.8%, increase in average balances compared to the linked quarter.  However, the impact on net interest margin was muted as the portfolio yield declined 10 bps to 1.99% as investment rates remain low in the current environment.

Interest expense and net interest margin continued to benefit from the impact of deposit pricing and rationalization strategies as the average balance of interest-bearing deposits declined 2.5% compared to the prior quarter, driven by a $133.7 million, or 10.6%, decrease in average time deposit balances during the quarter.  The cost of funds related to interest-bearing deposits decreased 8 bps to 49 bps compared to 57 bps for the linked quarter. 

NONINTEREST INCOME

The following table presents noninterest income for the three months ended December 31, 2012, September 30, 2012 and December 31, 2011 highlighting the estimated impact of covered loan activity and other transition items on the Company's reported balance.

Excluding the items highlighted in Table I, noninterest income earned in the fourth quarter 2012 was $16.7 million compared to $16.0 million in the third quarter 2012 and $15.1 million in the fourth quarter 2011.  There were no individually significant items driving the increase compared to the linked quarter.  Other items not expected to recur consist of $1.0 million of gains on sales of investment securities which are discussed in more detail in Investments.

NONINTEREST EXPENSE

The following table presents noninterest expense for the three months ended December 31, 2012, September 30, 2012 and December 31, 2011, including the estimated effect of covered asset activity, acquired-non-strategic operations and acquisition-related costs.

Excluding the items highlighted in Table II, noninterest expense in the fourth quarter 2012 was $49.4 million as compared to $50.3 million in the third quarter 2012 and $47.2 million in the fourth quarter 2011.  The decrease of $0.9 million compared to the linked quarter was due to lower uncovered OREO and collection expenses, partially offset by higher data processing and professional services expenses.  Loss share and covered asset expense includes $2.3 million of credit-related expenses, offset by a small amount of net recoveries on covered OREO.  Other items not expected to recur include $0.6 million of employee benefit expenses associated with the efficiency plan and $0.3 million of real estate expenses associated with previously announced banking center consolidation and closure plans.

INCOME TAXES

For the fourth quarter 2012, income tax expense was $9.2 million, resulting in an effective tax rate of 36.1%, compared with income tax expense of $8.9 million and an effective tax rate of 35.4% during the third quarter 2012 and $10.4 million and an effective tax rate of 36.8% during the comparable year-over-year period.

CREDIT QUALITY – EXCLUDING COVERED ASSETS

The following table presents certain credit quality metrics related to the Company's uncovered loan portfolio as of December 31, 2012 and the trailing four quarters.

Net Charge-offs

For the fourth quarter 2012, net charge-offs declined slightly to $5.3 million, or 1.4%, compared to the linked quarter.  Net charge-offs for the fourth quarter included approximately $1.1 million of consumer loan charge-offs, primarily home equity loans, resulting from recent guidance by the Office of the Comptroller of the Currency ("OCC") clarifying that loans to consumer borrowers that have been discharged in bankruptcy where the borrower has not reaffirmed the debt are considered troubled debt restructurings and should be reported as nonaccrual loans and recorded at the lesser of the remaining loan balance or the fair value of the collateral securing the loan.  There were no other individually significant items included in net charge-offs during the fourth quarter and the total amount was driven primarily by activity in the commercial real estate portfolio.

Nonperforming Assets

Nonaccrual loans, including nonaccrual troubled debt restructurings, increased $2.6 million, or 4.2%, to $65.0 million as of December 31, 2012 from $62.4 million as of September 30, 2012 driven primarily by $2.3 million of additions resulting from the previously mentioned OCC guidance on troubled debt restructurings as well as a $7.0 million addition related to a single commercial relationship where the Company believes the total exposure is collateralized substantially in excess of the outstanding balance.  These additions were offset by resolution strategies related to credits in the commercial real estate and home equity portfolios, including collections, writedowns, transfers to OREO, dispositions and net charge-offs.

OREO decreased $1.4 million, or 10.0%, to $12.5 million during the fourth quarter as resolutions and valuation adjustments of $2.5 million exceeded $1.1 million of additions during the quarter.  There were no individually material items included in either the additions or resolutions for the quarter.

Classified assets as of December 31, 2012 totaled $129.0 million as compared to $133.4 million for the linked quarter and $162.4 million as of December 31, 2011, representing declines of 3.3% and 20.5%, respectively.  Classified assets, which have declined for nine consecutive quarters, are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse.

Delinquent Loans

As of December 31, 2012, loans 30-to-89 days past due decreased to $16.3 million, or 0.51% of period-end loans, as compared to $17.0 million, or 0.55%, as of September 30, 2012 and $20.4 million, or 0.69%, as of December 31, 2011.

Provision Expense and Allowance for Loan & Lease Losses

Fourth quarter 2012 provision expense related to uncovered loans and leases was $3.9 million as compared to $3.6 million during the linked quarter and $5.2 million during the comparable year-over-year quarter.  Provision expense is a result of the Company's modeling efforts to estimate the period-end allowance for loan and lease losses.  As a percentage of net charge-offs, fourth quarter 2012 provision expense equaled 73.3%. Excluding the $1.1 million of charge-offs related to consumer loans resulting from the OCC guidance, fourth quarter provision equaled 91.6% of net charge-offs.

The allowance for loan and lease losses declined $1.4 million, or 2.9%, compared to the prior quarter as a result of a decline in reserves related to resolved nonaccrual loans.  Furthermore, the additions to nonaccrual loans discussed above required no reserves at December 31, 2012 as those resulting from the OCC guidance were recorded at the lesser of the remaining loan balance or the fair value of the underlying collateral and the Company believes the single commercial relationship is collateralized substantially in excess of the outstanding balance.  

LOANS (EXCLUDING COVERED LOANS)

The following table presents the loan portfolio, not including covered loans, as of December 31, 2012, September 30, 2012 and December 31, 2011.  

Loans, excluding covered loans, totaled $3.2 billion as of December 31, 2012, increasing $113.0 million, or 14.7% on an annualized basis, compared to the linked quarter and $210.6 million, or 7.1%, compared to December 31, 2011.  The increase relative to both the linked and comparable quarters was driven by growth in commercial lending, including the C&I, commercial real estate and specialty finance portfolios, as well as growth in residential mortgage lending.

INVESTMENTS

The following table presents a summary of the total investment portfolio at December 31, 2012.

The investment portfolio increased $290.9 million, or 18.4%, during the fourth quarter 2012 as $564.5 million of purchases were offset by sales, amortizations and paydowns, including continued elevated prepayment activity related to fixed rate MBS.  The Company sold $152.4 million of lower-yielding agency MBS during the quarter in order to reduce liquidity, interest rate cap and prepayment risks, recognizing a pre-tax gain of $1.0 million.  As of December 31, 2012, the overall duration of the investment portfolio increased to 2.8 years compared to 1.8 years as of September 30, 2012.  The yield earned on the portfolio during the quarter declined to 1.99% from 2.09% for the linked quarter.  As of December 31, 2012, the market value of the portfolio classified as available-for-sale resulted in a net unrealized gain of $15.0 million which is included in other comprehensive income.

A portion of the purchases made during the quarter were funded by wholesale borrowings under a strategy to pre-fund the investment portfolio based on the portfolio's expected cash flows over the next twelve months.  The increase in total short-term borrowings of $253.4 million during the fourth quarter approximates the borrowings under this strategy and had a weighted average cost of funds of 0.17%.

DEPOSITS

Non-time deposit balances totaled $3.9 billion as of December 31, 2012, representing an increase of $141.9 million, or 15.1% on an annualized basis, compared to September 30, 2012.  The increase was driven primarily by a $100.6 million increase in commercial balances and a $69.6 million increase in retail balances, offset by a decline of $35.2 million in public fund balances.

Total time deposit balances decreased $130.7 million, or 10.9%, compared to the linked quarter as the Company continued to focus on reducing non-core relationship deposits in connection with its deposit rationalization strategies.

The Company's rationalization strategies related to deposit pricing continued to have a positive impact as the total cost of deposit funding declined to 38 bps for the quarter, a decrease of 15.6% compared to the prior quarter and 40.6% compared to the fourth quarter 2011.  The composition of the Company's deposit base continues to improve as non-time deposits comprised 78.4% of total deposits as of December 31, 2012 compared to 70.7% as of December 31, 2011.

CAPITAL MANAGEMENT

The following table presents First Financial's regulatory and other capital ratios as of December 31, 2012, September 30, 2012 and December 31, 2011.  

The Company's tangible common equity and regulatory capital ratios decreased during the quarter primarily due to the increases in tangible assets and risk-weighted assets resulting from the higher balances of investment securities and uncovered loans and, to a lesser extent, the decrease in shareholders' equity resulting from share repurchases.  As of December 31, 2012, tangible book value per common share was $10.47, consistent with September 30, 2012 and compared to $10.41 as of December 31, 2011.  Regulatory capital ratios as of December 31, 2012 are considered preliminary pending the filing of the Company's regulatory reports.

Teleconference / Webcast Information

First Financial's senior management will host a conference call to discuss the Company's financial and operating results on Wednesday, January 30, 2013 at 9:00 a.m. Eastern Time.  Members of the public who would like to listen to the conference call should dial (888) 317-6016 (U.S. toll free), (855) 669-9657 (Canada toll free) or +1 (412) 317-6016 (International) (no passcode required).  The number should be dialed five to ten minutes prior to the start of the conference call.  The conference call will also be accessible as an audio webcast via the Investor Relations section of the Company's website at www.bankatfirst.com.  A replay of the conference call will be available beginning one hour after the completion of the live call through February 14, 2013 at (877) 344-7529 (U.S. toll free) and +1 (412) 317-0088 (International); conference number 10023463.  The webcast will be archived on the Investor Relations section of the Company's website through January 30, 2014.

Press Release and Additional Information on Website

This press release as well as supplemental information and any non-GAAP reconciliations related to this release is available to the public through the Investor Relations section of First Financial's website at www.bankatfirst.com/investor.

Forward-Looking Statement

Certain statements contained in this release which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act (the ''Act'').  In addition, certain statements in future filings by First Financial with the SEC, in press releases, and in oral and written statements made by or with the approval of First Financial which are not statements of historical fact constitute forward-looking statements within the meaning of the Act.  Examples of forward-looking statements include, but are not limited to, projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items, statements of plans and objectives of First Financial or its management or board of directors and statements of future economic performances and statements of assumptions underlying such statements.  Words such as ''believes,'' ''anticipates,'' "likely," "expected," ''intends,'' and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Management's analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance.  However, such performance involves risks and uncertainties that may cause actual results to differ materially.  Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

• management's ability to effectively execute its business plan;
• the risk that the strength of the United States economy in general and the strength of the local economies in which we conduct operations may continue to deteriorate resulting in, among other things, a further deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio, allowance for loan and lease losses and overall financial performance;
• U.S. fiscal debt and budget matters;
• the ability of financial institutions to access sources of liquidity at a reasonable cost;
• the impact of recent upheaval in the financial markets and the effectiveness of domestic and international governmental actions taken in response, and the effect of such governmental actions on us, our competitors and counterparties, financial markets generally and availability of credit specifically, and the U.S. and international economies, including potentially higher FDIC premiums arising from increased payments from FDIC insurance funds as a result of depository institution failures;
• the effect of and changes in policies and laws or regulatory agencies (notably the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act);
• the effect of the current low interest rate environment or changes in interest rates on our net interest margin and our loan originations and securities holdings;
• our ability to keep up with technological changes;
• failure or breach of our operational or security systems or infrastructure, or those of our third party vendors or other service providers;
• our ability to comply with the terms of loss sharing agreements with the FDIC;
• mergers and acquisitions, including costs or difficulties related to the integration of acquired companies and the wind-down of non-strategic operations that may be greater than expected, such as the risks and uncertainties associated with the Irwin Mortgage Corporation bankruptcy proceedings and other acquired subsidiaries;
• the risk that exploring merger and acquisition opportunities may detract from management's time and ability to successfully manage our Company;
• expected cost savings in connection with the consolidation of recent acquisitions may not be fully realized or realized within the expected time frames, and deposit attrition, customer loss and revenue loss following completed acquisitions may be greater than expected;
• our ability to increase market share and control expenses;
• the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board and the SEC;
• adverse changes in the securities, debt and/or derivatives markets;
• our success in recruiting and retaining the necessary personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;
• monetary and fiscal policies of the Board of Governors of the Federal Reserve System (Federal Reserve) and the U.S. government and other governmental initiatives affecting the financial services industry;
• our ability to manage loan delinquency and charge-off rates and changes in estimation of the adequacy of the allowance for loan and lease losses; and
• the costs and effects of litigation and of unexpected or adverse outcomes in such litigation.

In addition, please refer to our Annual Report on Form 10-K for the year ended December 31, 2011, as well as our other filings with the SEC, for a more detailed discussion of these risks and uncertainties and other factors. Such forward-looking statements are meaningful only on the date when such statements are made, and First Financial undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such a statement is made to reflect the occurrence of unanticipated events.

About First Financial Bancorp

First Financial Bancorp is a Cincinnati, Ohio based bank holding company.  As of December 31, 2012, the Company had $6.5 billion in assets, $3.9 billion in loans, $5.0 billion in deposits and $710 million in shareholders' equity. The Company's subsidiary, First Financial Bank, N.A., founded in 1863, provides banking and financial services products through its three lines of business: commercial, retail and wealth management.  The commercial and retail units provide traditional banking services to business and consumer clients.  First Financial Wealth Management provides wealth planning, portfolio management, trust and estate, brokerage and retirement plan services and had approximately $2.3 billion in assets under management as of December 31, 2012.  The Company's strategic operating markets are located in Ohio, Indiana and Kentucky where it operates 124 banking centers.  Additional information about the Company, including its products, services and banking locations is available at www.bankatfirst.com.

SUPPLEMENTAL INFORMATION ON COVERED ASSETS AND ACQUISITION-RELATED ITEMS

To assist in analyzing the effect of the Company's 2009 FDIC assisted transactions and 2011 branch transactions on its financial results, supplemental information that segregates the estimated impact on pre-tax earnings of certain acquisition-related items and provides additional detail on the covered loan portfolio follows.

SUMMARY OF SIGNIFICANT ACQUISITION-RELATED ITEMS

The following table illustrates the estimated income and expense effects of certain direct acquisition-related items for the three months ended December 31, 2012, September 30, 2012 and December 31, 2011.

ACCELERATED DISCOUNT ON LOAN PREPAYMENTS AND DISPOSITIONS

During the fourth quarter 2012, First Financial recognized approximately $2.5 million in accelerated discount from acquired loans, net of the corresponding adjustment on the FDIC indemnification asset.  Accelerated discount is recognized when acquired loans, which are recorded on the Company's balance sheet at an amount less than the unpaid principal balance, prepay at an amount greater than their recorded book value.  Prepayments can occur through either customer driven payments before the maturity date or loan sales.  The amount of discount attributable to the credit loss component of each loan varies and the recognized amount is offset by a related reduction in the FDIC indemnification asset.  Accelerated discount recognized during the quarter resulted primarily from loan prepayments.

OPERATING EXPENSES AND OTHER ACQUISITION-RELATED COSTS

Acquired-non-strategic operating expenses and acquisition-related costs have declined significantly as costs associated with acquisitions, including market exit costs and professional services and other resolution expenses related to non-strategic acquired subsidiaries, have continued to wind down over the past several quarters.

NET INTEREST MARGIN IMPACT

Net interest margin is affected by certain activity related to the acquired loan portfolio.  The majority of these loans are accounted for under ASC Topic 310-30 and, as such, the Company is required to periodically update its forecast of expected cash flows from these loans.  Impairment, as a result of a decrease in expected cash flows, is recognized as provision expense in the period it is measured and has no impact on net interest margin.  Improvements in expected cash flows, in excess of any prior impairment, are recognized on a prospective basis through an upward adjustment to the yield earned on the portfolio.  Impairment and improvement are both partially offset by the impact of changes in the value of the FDIC indemnification asset.  Impairment is partially offset by an increase to the FDIC indemnification asset as a result of FDIC loss sharing income.  Improvement, which is reflected as a higher yield, is partially offset by a lower yield earned on the FDIC indemnification asset until the next periodic valuation of the loans and the indemnification asset.  The weighted average yield of the acquired loan portfolio may also be subject to change as loans with higher yields pay down more quickly or slowly than loans with lower yields.

The following table shows the estimated yield earned by the Company on its covered and uncovered loan portfolios and the FDIC indemnification asset for the three months ended December 31, 2012.

The yield related to uncovered loans was impacted by the $2.2 million prepayment fee discussed above in Net Interest Income and Net Interest Margin.  Excluding this item, the yield earned on the uncovered loan portfolio during the fourth quarter was 4.73%.

LOSS SHARE AGREEMENTS

As of December 31, 2012, 19.0% of the Company's total loans were covered loans.  As required under the loss-share agreements, First Financial must file monthly certifications with the FDIC on single-family residential loans and quarterly certifications on all other loans.  To date, all certifications have been filed in a timely manner and without significant issues.

COVERED LOAN PORTFOLIO

The following table presents the covered loan portfolio as of December 31, 2012, September 30, 2012 and December 31, 2011.

During the fourth quarter 2012, the total balance of covered loans decreased $77.4 million, or 9.4%, as compared to the previous quarter.

ALLOWANCE FOR LOAN AND LEASE LOSSES - COVERED

Under the applicable accounting guidance, the allowance for loan losses related to covered loans is a result of impairment identified in ongoing valuation procedures and is generally recognized in the current period as provision expense.  However, if improvement is noted in a loan pool that had previously experienced impairment, the amount of improvement is recognized as a reduction to the applicable period's provision expense.  Additional improvement beyond previously recorded impairment is reflected as a yield adjustment on a prospective basis.  The timing inherent in this accounting treatment may result in earnings volatility in future periods.

The following table presents activity in the allowance for loan losses related to covered loans for the three months ended December 31, 2012, September 30, 2012, June 30, 2012 and March 31, 2012.

The Company has established an allowance for loan losses associated with covered loans based on estimated valuation procedures performed each quarter.  As a percentage of total covered loans, the allowance for loan losses totaled 6.04% as of December 31, 2012 compared to 5.92% as of September 30, 2012.

Net charge-offs on covered loans during the fourth quarter 2012 were $9.0 million compared to $6.1 million for the third quarter 2012, an increase of $2.9 million, or 48.5%.  During the fourth quarter 2012, the Company recognized provision expense of $5.3 million, representing a decrease of $1.3 million, or 20.2%, compared to the linked quarter.  The difference between provision expense and net charge-offs primarily relates to the quarterly re-estimation of cash flow expectations required under ASC Topic 310-30.  The net present value of expected cash flows is influenced by both the amount and timing of such cash flows.

In addition to the provision expense, the Company incurred loss share and covered asset expenses of $2.3 million, consisting primarily of credit expenses offset by a small amount of gains related to covered OREO.  The receivable due from the FDIC under loss share agreements of $5.8 million related to total credit costs incurred was recognized as FDIC loss share income and a corresponding increase to the FDIC indemnification asset.  

SOURCE First Financial Bancorp