Allowance for Loan Losses

The allowance for loan losses is management's best estimate of inherent risk of loss in the loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. The Corporation uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: (1) identification of loss allocations for individual loans deemed to be impaired, (2) loss allocation factors for non-impaired loans based on credit grade, loss experience, delinquency factors and other similar economic indicators, and (3) general loss allocations for other environmental factors, which is classified as “unallocated”.

Periodic assessments and revisions to the loss allocation factors used in the assignment of loss exposure are made to appropriately reflect the analysis of migrational loss experience. The Corporation analyzes historical loss experience in the various portfolios over periods deemed to be relevant to the inherent risk of loss in the respective portfolios as of the balance sheet date. The Corporation adjusts the loss allocations for various factors it believes are not adequately presented in historical loss experience, including trends in real estate values, trends in rental rates on commercial real estate, consideration of general economic conditions and our assessments of credit risk associated with industry concentrations and an ongoing trend toward larger credit relationships. These factors are also evaluated taking into account the geographic location of the underlying loans. Revisions to loss allocation factors are not retroactively applied.

Loss allocations for loans deemed to be impaired are measured on a discounted cash flow method based upon the loan's contractual effective interest rate, or at the loan's observable market price, or, if the loan is collateral dependent, at the fair value of the collateral less costs to sell. For collateral dependent loans, management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property.

Loss allocation factors are used for non-impaired loans based on credit grade, loss experience, delinquency factors and other similar credit quality indicators. Individual commercial loans and commercial mortgage loans not deemed to be impaired are evaluated using the internal rating system described in Note 5 under the caption “Credit Quality Indicators” and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower's financial condition, the borrower's performance with respect to loan terms, and the adequacy of collateral. Portfolios of more homogeneous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators and our historical loss experience for each type of credit product.

An additional unallocated allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors, including, but not limited to, portfolio composition; regional concentration; trends in and severity of credit quality metrics; economic trends and business conditions; conditions that may affect the collateral position such as environmental matters, tax liens, and regulatory changes affecting the foreclosure process; and conditions that may affect the ability of borrowers to meet debt service requirements.

Because the methodology is based upon historical experience and trends, current economic data as well as management's judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in our market area, concentration of risk, and declines in local property values. Adversely different conditions or assumptions could lead to increases in the allowance. In addition, various regulatory agencies periodically review the allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.

The following is an analysis of activity in the allowance for loan losses for the three months ended September 30, 2011:



(Dollars in thousands)
	Commercial
	Mortgages			Construction			Other			Total Commercial			Residential			Consumer			Un-allocated			Total
Beginning Balance	$	7,374		$	217		$	6,993		$	14,584		$	4,471		$	2,152		$	8,146		$	29,353
Charge-offs	(250		)	—			(378		)	(628		)	(103		)	(87		)	—			(818		)
Recoveries	1			—			92			93			3			10			—			106
Provision	478			(34		)	(171		)	273			484			315			(72		)	1,000
Ending Balance	$	7,603		$	183		$	6,536		$	14,322		$	4,855		$	2,390		$	8,074		$	29,641

The following is an analysis of activity in the allowance for loan losses for the nine months ended September 30, 2011:



(Dollars in thousands)
	Commercial
	Mortgages			Construction			Other			Total Commercial			Residential			Consumer			Un-allocated		Total
Beginning Balance	$	7,330		$	723		$	6,495		$	14,548		$	4,129		$	1,903		$	8,003	$	28,583
Charge-offs	(709		)	—			(1,573		)	(2,282		)	(368		)	(264		)	—		(2,914		)
Recoveries	5			—			238			243			4			25			—		272
Provision	977			(540		)	1,376			1,813			1,090			726			71		3,700
Ending Balance	$	7,603		$	183		$	6,536		$	14,322		$	4,855		$	2,390		$	8,074	$	29,641

The following table presents an analysis of the activity in the allowance for loan losses for the periods indicated:



(Dollars in thousands)

Periods ended September 30, 2010		Three Months			Nine Months
Balance at beginning of period		$	27,985		$	27,400
Charge-offs:
Commercial:	Mortgages	(25		)	(1,051		)
	Construction and development	—			—
	Other	(1,049		)	(2,145		)
Residential real estate:	Mortgages	(301		)	(588		)
	Homeowner construction	—			—
Consumer		(93		)	(222		)
Total charge-offs		(1,468		)	(4,006		)
Recoveries:
Commercial:	Mortgages	121			125
	Construction and development	—			—
	Other	22			52
Residential real estate:	Mortgages	—			76
	Homeowner construction	—			—
Consumer		5			18
Total recoveries		148			271
Net charge-offs		(1,320		)	(3,735		)
Provision charged to expense		1,500			4,500
Balance at end of period		$	28,165		$	28,165

The following table presents the Corporation’s loan portfolio and associated allowance for loan loss at September 30, 2011 and December 31, 2010 by portfolio segment and disaggregated on the basis of the Corporation’s impairment methodology.



(Dollars in thousands)	September 30, 2011				December 31, 2010
	Loans		Related Allowance		Loans		Related Allowance
Loans Individually Evaluated for Impairment:
Commercial:
Mortgages	$	12,228	$	229	$	18,360	$	629
Construction & development	—		—		—		—
Other	6,801		407		9,854		1,245
Residential real estate mortgages	5,821		554		4,699		258
Consumer	592		184		715		5
Subtotal	$	25,442	$	1,374	$	33,628	$	2,137
Loans Collectively Evaluated for Impairment:
Commercial:
Mortgages	$	561,127	$	7,374	$	500,263	$	6,701
Construction & development	18,518		183		47,335		723
Other	471,851		6,129		451,253		5,250
Residential real estate mortgages	685,647		4,301		640,321		3,871
Consumer	325,174		2,206		322,838		1,898
Subtotal	$	2,062,317	$	20,193	$	1,962,010	$	18,443
Unallocated	—		8,074		—		8,003
Total	$	2,087,759	$	29,641	$	1,995,638	$	28,583