ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management's estimate of probable loan losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions charged to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off. Management evaluates the adequacy of the allowance at least quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time.

The components of the allowance for loan losses represent estimates based upon ASC Topic 450, Contingencies, and ASC Topic 310, Receivables. ASC Topic 450 applies to homogeneous loan pools such as consumer installment, residential mortgages and consumer lines of credit, as well as commercial loans that are not individually evaluated for impairment under ASC Topic 310. ASC Topic 310 is applied to commercial loans that are individually evaluated for impairment.

Under ASC Topic 310, a loan is impaired when, based upon current information and events, it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest. Management performs individual assessments of impaired loans to determine the existence of loss exposure and, where applicable, the extent of loss exposure based upon the present value of expected future cash flows available to pay the loan, or based upon the fair value of the collateral less estimated selling costs where a loan is collateral dependent.

In estimating loan loss contingencies, management considers numerous factors, including historical charge-off rates and subsequent recoveries. Management also considers, but is not limited to, qualitative factors that influence the Corporation's credit quality, such as delinquency and non-performing loan trends, changes in loan underwriting guidelines and credit policies, as well as the results of internal loan reviews. Finally, management considers the impact of changes in current local and regional economic conditions in the markets that the Corporation serves. Assessment of relevant economic factors indicates that the Corporation's primary markets historically tend to lag the national economy, with local economies in the Corporation's primary market areas also improving or weakening, as the case may be, but at a more measured rate than the national trends. Regional economic factors influencing management's estimate of reserves include uncertainty of the labor markets in the regions the Corporation serves as well as the impact of unemployment trends in these areas, which have fluctuated in response to the recent economic cycle. Homogeneous loan pools are evaluated using similar criteria that are based upon historical loss rates for various loan types. Historical loss rates are adjusted to incorporate changes in existing conditions that may impact, both positively or negatively, the degree to which these loss histories may vary. This determination inherently involves a high degree of uncertainty and considers current risk factors that may not have occurred in the Corporation's historical loan loss experience.

At June 30, 2011 and December 31, 2010, there were $17,804 and $3,626 of loans, respectively, that were impaired loans acquired with no associated allowance for loan losses as they were accounted for in accordance with ASC Topic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality.

Following is a summary of changes in the allowance for loan losses:


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Balance at beginning of period	$	107,612		$	109,592		$	106,120		$	104,655
Charge-offs		(7,570	)		(8,636	)		(14,903	)		(16,285	)
Recoveries		631			845			1,228			1,467

Net charge-offs		(6,939	)		(7,791	)		(13,675	)		(14,818	)
Provision for loan losses		8,551			12,239			16,779			24,203

Balance at end of period	$	109,224		$	114,040		$	109,224		$	114,040


Allowance for loan losses to:
Total loans, net of unearned income								1.63	%		1.91	%
Non-performing loans								85.84	%		76.19	%

Following is a summary of changes in the allowance for loan losses by loan class for the three months ended June 30, 2011:


	Balance at Beginning of Period		Charge-Offs			Recoveries		Provision for Loan Losses		Balance at End of Period
Commercial	$	76,408	$	(3,739	)	$	189	$	5,100	$	77,958
Direct installment		14,767		(2,274	)		205		2,217		14,915
Residential mortgages		4,514		(169	)		23		112		4,480
Indirect installment		5,761		(604	)		156		392		5,705
Consumer lines of credit		4,612		(422	)		44		562		4,796
Commercial leases		1,254		(120	)		13		126		1,273
Other		296		(242	)		1		42		97

	$	107,612	$	(7,570	)	$	631	$	8,551	$	109,224

Following is a summary of changes in the allowance for loan losses by loan class for the six months ended June 30, 2011:


	Balance at Beginning of Period		Charge-Offs			Recoveries		Provision for Loan Losses		Balance at End of Period
Commercial	$	74,606	$	(7,028	)	$	329	$	10,051	$	77,958
Direct installment		14,941		(4,502	)		434		4,042		14,915
Residential mortgages		4,578		(407	)		31		278		4,480
Indirect installment		5,941		(1,537	)		294		1,007		5,705
Consumer lines of credit		4,743		(818	)		87		784		4,796
Commercial leases		1,070		(205	)		30		378		1,273
Other		241		(406	)		23		239		97

	$	106,120	$	(14,903	)	$	1,228	$	16,779	$	109,224

Following is a summary of the individual and collective allowance for loan losses and corresponding loan balances by class as of June 30, 2011:


	Allowance				Loans Outstanding
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Loans		Individually Evaluated for Impairment		Collectively Evaluated for Impairment
Commercial	$	8,440	$	69,518	$	3,776,287	$	115,156	$	3,661,131
Direct installment		—		14,915		1,039,270		—		1,039,270
Residential mortgages		—		4,480		676,574		—		676,574
Indirect installment		—		5,705		535,191		—		535,191
Consumer lines of credit		—		4,796		542,470		—		542,470
Commercial leases		—		1,273		93,273		—		93,273
Other		—		97		39,530		—		39,530

	$	8,440	$	100,784	$	6,702,595	$	115,156	$	6,587,439