First Financial Bancorp Reports Third Quarter 2012 Financial Results

CINCINNATI, Oct. 25, 2012 /PRNewswire/ -- First Financial Bancorp (Nasdaq: FFBC) ("First Financial" or the "Company") announced today financial and operational results for the third quarter 2012.

Third quarter 2012 net income was $16.2 million and earnings per diluted common share were $0.28.  This compares with second quarter 2012 net income of $17.8 million and earnings per diluted common share of $0.30 and third quarter 2011 net income of $15.6 million and earnings per diluted common share of $0.27.

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 January 2, 2013 to shareholders of record as of November 30, 2012.  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.

The board of directors also approved a share repurchase plan under which the Company has the ability to repurchase up to 5,000,000 shares.  Under the plan, the Company expects to repurchase approximately 1,000,000 shares annually beginning in the fourth quarter 2012.  This annual target will be subject to market conditions and quarterly evaluation by the board as well as balance sheet composition and growth.  The Company expects to disclose a summary of total shares repurchased on a quarterly basis in future periods.  The share repurchase plan is not expected to impact the variable dividend and as a result the return of capital to shareholders is expected to exceed 100% of earnings through 2013.  Subsequent to the expiration of the variable dividend, the Company expects to return to shareholders a target range of 60% - 80% of earnings through a combination of its regular dividend and share repurchases while still maintaining capital ratios that exceed internal target thresholds, current regulatory capital requirements and proposed capital requirements under Basel III.

• 88th consecutive quarter of profitability
• Continued solid quarterly performance
  • Return on average assets of 1.05%
  • Return on average risk-weighted assets of 1.72%
  • Return on average shareholders' equity of 9.01%
• Capital ratios remain strong
  • Tangible common equity to tangible assets of 9.99%
  • Tier 1 capital ratio of 16.93%
  • Total risk-based capital ratio of 18.21%
• Quarterly net interest margin declined to 4.21% from 4.49% for the linked quarter
  • Yield earned on covered loans declined 59 bps
  • Decline in investment portfolio yield due to elevated prepayment and redemption activity
  • Cost of interest-bearing deposits declined 4 bps during the quarter to 0.57%
• Total uncovered loan portfolio growth of 7.1% on an annualized basis
  • Solid growth in C&I and commercial real estate loan balances
  • Specialty finance product lines continue to grow
• Provision for loan and lease losses related to the uncovered loan portfolio totaled $3.6 million for the third quarter 2012, declining $4.8 million, or 56.8%, compared to the linked quarter
• Significant improvement in nonperforming assets and continued downward trend in classified assets
  • Total nonperforming assets declined $10.9 million, or 11.1%, compared to the linked quarter
  • Nonperforming assets to total assets declined to 1.41% from 1.57% as of June 30, 2012
  • Total classified assets declined $12.2 million, or 8.4%, compared to the linked quarter and $39.2 million, or 22.7%, compared to September 30, 2011

During the third quarter 2012, the Company completed a comprehensive efficiency study across all business lines and support functions.  As a result, it identified approximately $17.1 million of annualized cost savings impacting several expense categories, inclusive of the estimated $3.0 million of net operating expenses associated with 2012 banking center consolidations previously announced in the second quarter.  Realization of the identified cost savings is anticipated to begin during the fourth quarter 2012, however the Company does not expect to recognize net savings during 2012 as one-time costs associated with implementing the efficiency plan are expected to offset estimated savings.  Related to such costs, the Company incurred $0.4 million of pre-tax employee benefit expenses associated with the efficiency plan during the third quarter.  Furthermore, the Company continues to review its operational structure as part of an on-going process, similar to its branch franchise and market evaluations, and will provide detail in future periods as additional cost savings opportunities are identified.

Claude Davis, President and Chief Executive Officer, commented, "Our operating results for the quarter were impacted by declines in both net interest income and net interest margin which were affected by the convergence of several events.  The combination of a decline in the yield earned on our covered loan portfolio and elevated prepayments and redemptions related to our investment portfolio contributed to the $5.0 million decrease in net interest income and 28 bp decline in net interest margin compared to the linked quarter.

"On the positive side, our credit results related to the uncovered portfolio for the quarter were solid as we showed meaningful improvement in almost all performance ratios.  The level of classified assets continued to decline and nonperforming assets dropped to its lowest level since the fourth quarter 2009.  While net charge-offs still remain somewhat elevated at 71 bps of average loans, the 21.6% decline in net charge-offs compared to the prior quarter was encouraging.

"Additionally, our uncovered loan portfolio continued to grow, increasing 7.1% on an annualized basis during the quarter as a result of solid performance in our commercial, commercial real estate, specialty finance and residential mortgage portfolios.  Third quarter originations and renewals were solid and consistent with the prior quarter and our pipeline of new business opportunities remains strong.

"We completed an in-depth analysis of our cost structure during the quarter and specifically identified approximately $17.1 million of cost reductions across all business lines and support areas.  In addition to the previously announced banking center consolidations, we began implementing certain other initiatives as early as the second quarter and continued to do so in the third quarter parallel with completion of the study.  Our expectation is that all initiatives will be in place by the end of the second quarter 2013 with actual savings realization following closely behind.  Executing an efficient operating model is a strategic priority for First Financial and many of the processes we employed during the quarter to identify efficiencies will be performed on a continual basis to ensure long term positive operating leverage.

"We are pleased to announce that the board of directors has approved a share buyback plan under which we expect to repurchase approximately 1,000,000 shares annually over a five year period.  We will implement the plan during the fourth quarter 2012 and are also pleased to report that share repurchases are not anticipated to impact the variable dividend, which we expect to continue through 2013 unless the Company's capital position changes materially or capital deployment opportunities arise that move us towards our capital thresholds sooner than expected.  Despite returning greater than 100% of our earnings to shareholders through 2013 and targeting a long term return of 60% - 80% of the capital we generate through dividends and share repurchases, we expect to maintain a sufficient level of capital to support growth initiatives."

NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income for the third quarter 2012 was $59.8 million as compared to $64.8 million for the second quarter 2012 and $65.2 million as compared to the year-over-year period.  Compared to the linked quarter, total interest income decreased $5.6 million, or 7.8%, and total interest expense declined $0.6 million, or 8.9%.  Net interest margin was 4.21% for the third quarter 2012 as compared to 4.49% for the second quarter 2012 and 4.55% for the third quarter 2011.  The declines in net interest income and net interest margin were significantly impacted by activity in the Company's covered loan and investment securities portfolios.

Contributing to the lower interest income earned on loans and decline in net interest margin was an 8.8% decline in the average balance of covered loans outstanding as well as a 59 bp decrease in the yield earned on the portfolio compared to the linked quarter.  The decline in the yield earned on covered loans was partially driven by the full amortization of discounts associated with certain loans accounted for under ASC Topic 310-20 late in the second quarter 2012.  Additionally, a large credit in the same portfolio that had previously been classified as nonaccrual paid off in full during the second quarter 2012 with all accrued interest recognized, positively impacting the yield in that quarter as well.

Interest income earned on investment securities declined as a result of a $107.2 million decrease, or 6.3%, in average balances as well as a 37 bp decrease in the yield earned on the portfolio compared to the linked quarter.  Elevated prepayment activity related to higher yielding mortgage-backed securities impacted both the average balances and portfolio yield during the quarter.  The prepayment activity also resulted in accelerated premium amortization, negatively affecting interest income and contributing to 5 bps of the decline in net interest margin.  Additionally, a significant portion of the Company's higher-yielding investment grade single-issuer trust preferred securities were redeemed by the issuers' early in the quarter, also impacting interest income and net interest margin.

While average uncovered loan balances increased 4.8% during the quarter on an annualized basis, and new loan origination activity was strong, payoff activity was also elevated.  As a result of the low interest rate environment and heightened competition, loan originations during the quarter were recorded at yields approximately 94 bps lower than loans that paid off during the quarter, muting the impact of increased balances on interest income earned and net interest margin.

Interest income and net interest margin were also negatively impacted, to a lesser extent, by a decline in loan fees.

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 4.7% and the cost of funds related to these deposits decreased 4 bps to 57 bps compared to 61 bps for the linked quarter.  Additionally, net interest margin benefitted from the impact of a lower earning asset base, which declined 2.7% compared to the second quarter 2012.

NET INTEREST MARGIN OUTLOOK
The Company's expectation for net interest margin in future periods is that the quarterly declines will be less severe than the third quarter's results as compared to the linked quarter.  In the third quarter, there were linked quarter changes in the yield earned on the investment portfolio due to prepayments and on the covered loan portfolio.  Similar changes are not expected to have the same magnitude in future periods.  Expected margin headwinds should impact fourth quarter 2012 net interest margin by approximately 8 to 15 bps.  Prepayment activity, if experienced as expected, should have a negligible linked quarter impact on net interest margin; but could have as much as a 5 bp impact in some accelerated scenarios.

NONINTEREST INCOME
The following table presents noninterest income for the three months ended September 30, 2012, June 30, 2012 and September 30, 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 third quarter 2012 was $16.0 million compared to $16.4 million in the second quarter 2012 and $14.1 million in the third quarter 2011.  The decline compared to the linked quarter was driven by a decrease in client derivative fees and bankcard income, partially offset by an increase in service charges on deposits and gain on sale of loans from mortgage originations.  Other items not expected to recur consist of $2.6 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 September 30, 2012, June 30, 2012 and September 30, 2011 including the estimated effect of covered asset activity, acquired-non-strategic operations, acquisition-related costs and other transition items.

Excluding the items highlighted in Table II, noninterest expense in the third quarter 2012 was $50.7 million as compared to $49.2 million in the second quarter 2012 and $44.8 million in the third quarter 2011.  The increase of $1.1 million compared to the linked quarter was due to higher uncovered OREO expenses, marketing expenses and data processing costs, partially offset by lower salaries and employee benefits and professional services expenses.  Loss share and covered asset expense includes $3.6 million of credit-related expenses, offset by a small amount of net recoveries on covered OREO.  Other items not expected to recur consist primarily of $0.4 million of employee benefit costs associated with execution of the efficiency plan.

INCOME TAXES
For the third quarter 2012, income tax expense was $8.9 million, resulting in an effective tax rate of 35.4%, compared with income tax expense of $8.7 million and an effective tax rate of 32.8% during the second quarter 2012 and $9.7 million and an effective tax rate of 38.2% during the comparable year-over-year period.  The increase in the effective tax rate during the third quarter 2012 compared to the second quarter 2012 resulted from the lower rate recognized during the prior quarter driven by a one-time adjustment related to state income taxes at the subsidiary level.

CREDIT QUALITY – EXCLUDING COVERED ASSETS
The following table presents certain credit quality metrics related to the Company's uncovered loan portfolio as of September 30, 2012 and for the trailing four quarters.

Net Charge-offs
For the third quarter 2012, net charge-offs declined $1.5 million, or 21.6%, compared to the linked quarter.  Significant items driving net charge-offs for the quarter included $0.8 million related to the disposition of a commercial loan and $2.3 million related to valuation adjustments of three commercial real estate credits.

Nonperforming Assets
Nonaccrual loans, including nonaccrual troubled debt restructurings, decreased $10.9 million, or 14.8%, to $62.4 million as of September 30, 2012 from $73.3 million as of June 30, 2012 driven primarily by the finalization of resolution strategies related to credits in the commercial and construction and land development portfolios, including transfers to OREO, dispositions and net charge-offs, as well as $3.4 million of paydowns on a commercial line of credit during the quarter.

OREO decreased $1.8 million to $13.9 million during the third quarter as resolutions and valuation adjustments of $2.7 million exceeded $0.9 million of additions during the quarter.  There were no individually significant items included in either the additions or resolutions for the quarter.

Classified assets as of September 30, 2012 totaled $133.4 million as compared to $145.6 million for the linked quarter and $172.6 million as of September 30, 2011, representing declines of 8.4% and 22.7%, respectively.  Classified assets, which have declined for eight consecutive quarters, are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse.

Delinquent Loans
As of September 30, 2012, loans 30-to-89 days past due decreased to $17.0 million, or 0.55% of period-end loans, as compared to $26.0 million, or 0.86%, as of June 30, 2012 and $19.5 million, or 0.66%, as of September 30, 2011.  The decrease compared to the linked quarter was driven primarily by lower delinquencies in the commercial real estate portfolio.

Provision for Loan & Lease Losses
Third quarter 2012 provision expense related to uncovered loans and leases was $3.6 million as compared to $8.4 million during the linked quarter and $7.6 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.  The decrease relative to the linked and comparable quarters was driven primarily by the continued positive migration trends in classified assets as well as the finalization of resolution strategies on certain loans during the quarter.  As a percentage of net charge-offs, third quarter 2012 provision expense equaled 67.2%.

LOANS (EXCLUDING COVERED LOANS)
The following table presents the loan portfolio, not including covered loans, as of September 30, 2012, June 30, 2012 and September 30, 2011.

Loans, excluding covered loans, totaled $3.1 billion as of September 30, 2012, increasing $53.4 million, or 7.1% on an annualized basis, compared to the linked quarter and $128.4 million, or 4.4%, compared to the third quarter 2011.

INVESTMENTS
The following table presents a summary of the total investment portfolio at September 30, 2012.

The investment portfolio decreased $86.1 million, or 5.2%, during the third quarter 2012 as $133.8 million of purchases late in the quarter were offset by sales, amortizations and paydowns, including elevated prepayment activity related to fixed rate MBS.  The Company sold $84.3 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 $2.6 million.  As of September 30, 2012, the overall duration of the investment portfolio was 1.8 years, consistent with June 30, 2012.  The yield earned on the portfolio during the quarter declined to 2.09% from 2.46% for the linked quarter.  As of September 30, 2012, the market value of the portfolio classified as available-for-sale resulted in a net unrealized gain of $16.9 million which is included in other comprehensive income.

The investment purchases mentioned above were made late in the quarter and had little impact on net interest income and net interest margin for the quarter.  Additionally, the Company has purchased $256.9 million of securities during the fourth quarter 2012.  Collectively, these purchases consist primarily of fixed rate agency CMOs and tax-exempt pass-through securities and, to a lesser extent, variable rate agency CMOs.  To mitigate prepayment and premium risk, the majority of these purchases consisted of securities with lower premiums.  Additionally, a large percentage of these purchases were collateralized by higher LTV loans originated under the HARP program as well as lower balance mortgages which together should exhibit more favorable prepayment protection in a low interest rate environment.

The Company's current investment strategy consists of a "barbelled" approach under which both short and long duration securities are targeted to provide a weighted average duration and yield profile approximating an intermediate duration security.  This strategy will provide current income from the longer duration securities which benefit from the steepness of the yield curve while also mitigating interest rate risk with shorter duration variable rate securities which will reset when interest rates begin to rise.

DEPOSITS
Non-time deposit balances totaled $3.7 billion as of September 30, 2012, representing a decrease of $24.7 million, or 0.7%, compared to June 30, 2012.  The decline was driven primarily by a $37.7 million decrease in public fund balances.  Offsetting this activity was an increase of $29.2 million in core business and commercial account balances.

Total time deposit balances decreased $132.5 million, or 9.9%, 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 45 bps for the quarter, a decrease of 8.2% compared to the prior quarter and 40.8% compared to the third quarter 2011.  The composition of the Company's deposit base has also improved as non-time deposits comprised 75.7% of total deposits as of September 30, 2012 compared to 68.7% as of September 30, 2011.

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

The Company's leverage and tangible common equity ratios increased during the quarter as total tangible assets declined and tangible common equity remained essentially unchanged compared to June 30, 2012.  As of September 30, 2012, tangible book value per common share was $10.47, consistent with June 30, 2012 and compared to $11.15 as of September 30, 2011.  Regulatory capital ratios as of September 30, 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 Friday, October 26, 2012 at 9:00 a.m. Eastern Time.  Members of the public who would like to listen to the conference call should dial (877) 317-6789 (U.S. toll free), (866) 605-3852 (Canada toll free) or +1 (412) 317-6789 (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 November 12, 2012 at (877) 344-7529 (U.S. toll free) and +1 (412) 317-0088 (International); conference number 10019897.  The webcast will be archived on the Investor Relations section of the Company's website through October 26, 2013.

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 news 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 September 30, 2012, the Company had $6.2 billion in assets, $3.9 billion in loans, $4.9 billion in deposits and $716 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 $2.4 billion in assets under management as of September 30, 2012.  The Company's strategic operating markets are located in Ohio, Indiana and Kentucky where it operates 122 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 September 30, 2012, June 30, 2012 and September 30, 2011.

ACCELERATED DISCOUNT ON LOAN PREPAYMENTS AND DISPOSITIONS
During the third quarter 2012, First Financial recognized approximately $3.8 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, acquisition-related costs and transition-related items 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 September 30, 2012.

LOSS SHARE AGREEMENTS
As of September 30, 2012, 21.2% 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 September 30, 2012, June 30, 2012 and September 30, 2011.

During the third quarter 2012, the total balance of covered loans decreased $78.3 million, or 8.7%, 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 on-going 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 September 30, 2012, June 30, 2012, March 31, 2012 and December 31, 2011.

The Company has established an allowance for loan losses associated with covered loans based on estimated valuation procedures performed each quarter.  The allowance for covered loan losses increased $0.6 million, or 1.2%, during the third quarter.  As a percentage of total covered loans, the allowance for loan losses totaled 5.92% as of September 30, 2012 compared to 5.35% as of June 30, 2012.

Net charge-offs on covered loans during the third quarter 2012 were $6.1 million compared to $3.9 million for the second quarter 2012, an increase of $2.2 million, or 56.2%.  During the third quarter 2012, the Company recognized provision expense of $6.6 million, representing an increase of $0.6 million, or 9.5%, 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.  The Company continues to refine its expectations with respect to both factors as the covered portfolio ages.

In addition to the provision expense, the Company incurred loss share and covered asset expenses of $3.6 million, consisting primarily of credit expenses related to covered assets offset by a small amount of gains related to covered OREO.  The receivable due from the FDIC under loss share agreements of $8.5 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