Note 7 – Allowance for Loan Losses and Credit Quality

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision charged to earnings, and for loans covered by loss share agreements with the FDIC, through a charge to earnings and an indemnification asset, the FDIC loss share receivable. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Changes in the allowance related to impaired loans are charged or credited to the provision for loan losses.

The allowance for loan losses is maintained at a level which, in management's opinion, is adequate to absorb credit losses inherent in the portfolio. The Company utilizes both peer group analysis, as well as a historical analysis of the Company's portfolio to validate the overall adequacy of the allowance for loan losses. In addition to these objective criteria, the Company subjectively assesses the adequacy of the allowance for loan losses with consideration given to current economic conditions, changes to loan policies, the volume and type of lending, composition of the portfolio, the level of classified and criticized credits, seasoning of the loan portfolio, payment status and other factors.

In connection with acquisitions, the Company acquires certain loans considered impaired and accounts for these loans under the provisions of ASC Topic 310, which require the initial recognition of these loans at the present value of amounts expected to be received. The allowance for loan losses previously associated with these loans does not carry over. Any deterioration in the credit quality of these loans subsequent to acquisition would be considered in the allowance for loan losses. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan's or pool's remaining life.

A summary of changes in the allowance for loan losses, in total and for the covered loan and non-covered loan portfolios, for the six months ended June 30, 2011 and 2010 is as follows:


(dollars in thousands)	2011			2010
Balance, beginning of period	$	136,100		$	55,768
Provision charged to operations		15,461			26,100
Provision recorded through FDIC loss share receivable		26,706			25,337
Transfer of balance to OREO		(7,325	)		—

Loans charged-off		(5,962	)		(14,596	)
Recoveries		5,008			3,391

Balance, end of period	$	169,988		$	96,000


(dollars in thousands)	June 30, 2011
	Covered Loans			Non-covered loans			Total

Balance, beginning of period	$	73,640		$	62,460		$	136,100

Provision for loan losses before benefit attributable to FDIC loss share agreements		31,115			11,052			42,167

Benefit attributable to FDIC loss share agreements		(26,706	)		—			(26,706	)

Net provision for loan losses		4,409			11,052			15,461

Increase in FDIC loss share Receivable or discount		26,706			—			26,706
Transfer of balance to OREO		(7,325	)		—			(7,325	)
Loans charged-off		(225	)		(5,737	)		(5,962	)
Recoveries		510			4,498			5,008

Balance, end of period	$	97,715		$	72,273		$	169,988

(dollars in thousands)	June 30, 2010
	Covered Loans			Non-covered loans			Total

Balance, beginning of period	$	145		$	55,623		$	55,768

Provision for loan losses before benefit attributable to FDIC loss share agreements		32,696			18,741			51,437

Benefit attributable to FDIC loss share agreements		(25,337	)		—			(25,337	)

Net provision for loan losses		7,359			18,741			26,100

Increase in FDIC loss share receivable		25,337			—			25,337
Loans charged-off		(1,094	)		(13,502	)		(14,596	)
Recoveries		11			3,380			3,391

Balance, end of period	$	31,758		$	64,242		$	96,000

A summary of changes in the allowance for loan losses for non-covered loans, by loan portfolio type, for the six months ended June 30, 2011 and 2010 is as follows:


(dollars in thousands)
	Commercial Real Estate			Commercial Business			Consumer			Mortgage			Unallocated		Total
June 30, 2011
Allowance for loan losses
Balance, beginning of period	$	31,390		$	16,473		$	13,332		$	1,265		$	—	$	62,460
(Reversal of) Provision for loan losses		2,377			4,117			4,578			(20	)		—		11,052
Increase in FDIC loss share receivable		—			—			—			—			—		—
Loans charged off		(1,357	)		(523	)		(3,737	)		(120	)		—		(5,737	)
Recoveries		3,218			129			1,104			47			—		4,498

Balance, end of period		35,628			20,196			15,277			1,172			—		72,273

Allowance on loans individually evaluated for impairment	$	1,760		$	47		$	—		$	31		$	—	$	1,838
Allowance on loans collectively evaluated for impairment		33,508			20,149			15,277			1,141			—		70,435

Loans, net of unearned income
Balance, end of period	$	2,593,066		$	1,604,259		$	1,210,928		$	329,716		$	—	$	5,737,969
Balance, end of period: Loans individually evaluated for impairment		36,703			3,648			237			703			—		41,291
Balance, end of period: Loans collectively evaluated for impairment		2,556,363			1,600,611			1,210,691			329,013			—		5,696,678
Balance, end of period: Loans acquired with deteriorated credit quality		16,549			49,766			8,726			—			—		75,041
June 30, 2010
Allowance for loan losses
Balance, beginning of period	$	30,771		$	12,845		$	10,664		$	1,343		$	—	$	55,623
Provision for loan losses		10,662			3,283			4,592			204			—		18,741
Increase in FDIC loss share receivable		—			—			—			—			—		—
Loans charged off		(8,259	)		(466	)		(4,544	)		(233	)		—		(13,502	)
Recoveries		2,241			52			1,031			56			—		3,380

Balance, end of period		35,415			15,714			11,743			1,370			—		64,242

Allowance on loans individually evaluated for impairment	$	4,460		$	1,293		$	—		$	—		$	—	$	5,753
Allowance on loans collectively evaluated for impairment		30,955			14,421			11,743			1,370			—		58,489

Loans, net of unearned income
Balance, end of period	$	1,723,108		$	1,154,548		$	928,653		$	430,013		$	—	$	4,236,322
Balance, end of period: Loans individually evaluated for impairment		29,967			5,501			—			—			—		35,468
Balance, end of period: Loans collectively evaluated for impairment		1,693,141			1,149,047			928,653			430,013			—		4,200,854
Balance, end of period: Loans acquired with deteriorated credit quality		680			—			—			—			—		—

A summary of changes in the allowance for loan losses for covered loans, by loan portfolio type, for the six months ended June 30, 2011 and 2010 is as follows:


(dollars in thousands)
	Commercial Real Estate			Commercial Business			Consumer			Mortgage			Unallocated		Total
June 30, 2011
Allowance for loan losses
Balance, beginning of period	$	26,439		$	6,657		$	12,201		$	28,343		$	—	$	73,640
(Reversal of) Provision for loan losses		4,697			400			696			(1,384	)		—		4,409
(Decrease) Increase in FDIC loss share receivable		33,849			2,630			2,543			(12,316	)		—		26,706
Transfer of balance to OREO		(4,576	)		(54	)		(1,483	)		(1,212	)				(7,325	)
Loans charged off		(164	)		—			(41	)		(20	)		—		(225	)
Recoveries		275			—			133			102			—		510

Balance, end of period		60,520			9,633			14,049			13,513			—		97,715

Allowance on loans individually evaluated for impairment		—			—			—			—			—		—

Allowance on loans collectively evaluated for impairment		60,520			9,633			14,049			13,513			—		97,715

Loans, net of unearned income
Balance, end of period	$	805,764		$	158,460		$	264,136		$	234,317		$	—	$	1,462,677
Balance, end of period: Loans individually evaluated for impairment		—			—			—			—			—		—
Balance, end of period: Loans collectively evaluated for impairment		805,764			158,460			264,136			234,317			—		1,462,676
Balance, end of period: Loans acquired with deteriorated credit quality		132,798			4,162			50,176			48,069			—		235,205
June 30, 2010
Allowance for loan losses
Balance, beginning of period	$	—		$	—		$	—		$	145		$	—	$	145
Provision for loan losses		4,582			662			1,370			745			—		7,359
Increase in FDIC loss share receivable		14,227			2,649			5,482			2,979			—		25,337
Loans charged off		(720	)		—			(281	)		(93	)		—		(1,094	)
Recoveries		5			—			3			3			—		11


Balance, end of period		18,094			3,311			6,574			3,779			—		31,758

Allowance on loans individually evaluated for impairment		—			—			—			—			—		—

Allowance on loans collectively evaluated for impairment		18,094			3,311			6,574			3,779			—		31,758

Loans, net of unearned income
Balance, end of period	$	761,721		$	193,668		$	208,099		$	360,740		$	—	$	1,524,228
Balance, end of period: Loans individually evaluated for impairment		—			—			—			—			—		—
Balance, end of period: Loans collectively evaluated for impairment		761,721			193,668			208,099			360,740			—		1,524,228
Balance, end of period: Loans acquired with deteriorated credit quality		29,549			13,639			19,386			68,165			—		130,739

Credit Quality

The Company utilizes an asset risk classification system in compliance with guidelines established by the Federal Reserve Board as part of its efforts to improve commercial asset quality. "Special mention" loans are defined as loans where known information about possible credit problems of the borrower cause management to have some doubt as to the ability of these borrowers to comply with the present loan repayment terms and which may result in future disclosure of these loans as nonperforming. For assets with identified credit issues, the Company has two primary classifications for problem assets: "substandard" and "doubtful." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. Loans classified as "Pass" do not meet the criteria set forth for special mention, substandard, or doubtful classification and are not considered criticized.

The Company's investment in non-covered loans by credit quality indicator as of June 30, 2011 and December 31, 2010 is presented in the following table.


(dollars in thousands)	Commercial Real Estate Construction				Commercial Real Estate – Other					Commercial Business
Credit quality indicator by asset risk classification	June 30, 2011		December 31, 2010		June 30, 2011			December 31, 2010		June 30, 2011		December 31, 2010
Pass	$	295,838	$	236,830	$	2,076,248		$	1,422,506	$	1,547,578	$	1,322,977
Special Mention		36,762		17,918		77,182			25,524		41,831		7,455
Substandard		8,280		10,204		124,583			68,005		14,602		8,105
Doubtful		170		296		3,909			461		248		2,815

Total		341,050		265,248		2,281,922			1,516,496		1,604,259		1,341,352
Discount		—		—		(29,906	)		—		—		—

Non-covered commercial loans, net	$	341,050	$	265,248	$	2,252,016		$	1,516,496	$	1,604,259	$	1,341,352


	Mortgage – Prime				Mortgage – Subprime
Credit risk by payment status	June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010
Current	$	322,338	$	362,366	$	—	$	—
Past due greater than 30 days		7,378		7,620		—		—

Total	$	329,716	$	369,986	$	—	$	—

	Indirect Automobile				Credit Card
Credit risk by payment status	June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010
Current	$	245,171	$	253,109	$	43,821	$	42,298
Past due greater than 30 days		1,932		2,213		617		618

Total	$	247,103	$	255,322	$	44,438	$	42,916

	Home Equity				Consumer – Other
Credit risk by payment status	June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010
Current	$	737,851	$	551,101	$	166,468	$	99,420
Past due greater than 30 days		4,709		4,648		10,359		6,096

Total	$	742,560	$	555,749	$	176,827	$	105,516

As discussed in Note 4 to these unaudited consolidated financial statements, the fair value of loans acquired from OMNI and Cameron is preliminary and subject to refinement in subsequent periods as information subject to the closing date fair values becomes available. Credit quality information in the table above includes loans acquired from OMNI and Cameron at the gross contractual balance outstanding at June 30, 2011. Inclusion of these loans elevates classified assets compared to December 31, 2010 and compared to the actual carrying balance of these loans.

The Company's investment in covered loans by credit quality indicator as of June 30, 2011 and December 31, 2010 is presented in the following table. Loan discounts in the table below represent the adjustment of acquired loans to fair value at the time of acquisition in accordance with ASC Topic 805, as adjusted for income accretion and changes in cash flow estimates in subsequent periods.


(dollars in thousands)	Commercial
June 30, 2011	Real Estate
Credit quality indicator by asset risk classification	Construction		Other		Business		Total
Pass	$	88,595	$	349,457	$	104,394	$	542,446
Special Mention		18,953		66,289		5,968		91,210
Substandard		222,772		373,129		37,369		633,270
Doubtful		727		23,079		3,631		27,437

Total	$	331,047	$	811,954	$	151,362	$	1,294,363

Discount								(330,139	)

Covered commercial loans, net							$	964,224


	Mortgage
Credit risk by payment status	Prime		Subprime		Total
Current	$	268,461	$	—	$	268,461
Past due greater than 30 days		95,955		—		95,955

Total	$	364,416	$	—	$	364,416

Discount						(130,099	)

Covered mortgage loans, net					$	234,317


	Consumer
Credit risk by payment status	Indirect Automobile		Credit Card		Home Equity		Other		Total
Current	$	—	$	933	$	213,419	$	2,473	$	216,825
Past due greater than 30 days		—		91		51,496		76,629		128,216

Total	$	—	$	1,024	$	264,915	$	79,102	$	345,041

Discount										(80,905	)

Covered consumer loans, net									$	264,136


(dollars in thousands)	Commercial
December 31, 2010	Real Estate
Credit quality indicator by asset risk classification	Construction		Other		Business		Total
Pass	$	144,423	$	385,910	$	126,176	$	656,509
Special Mention		27,783		104,228		7,475		139,486
Substandard		245,872		402,397		39,462		687,731
Doubtful		5,245		17,951		1,390		24,586

Total	$	423,323	$	910,486	$	174,503	$	1,508,312

Discount								(468,445	)

Covered commercial loans, net							$	1,039,867


	Mortgage
Credit risk by payment status	Prime		Subprime		Total
Current	$	294,399	$	—	$	294,399
Past Due greater than 30 days		107,744		—		107,744

Total	$	402,143	$	—	$	402,143

Discount						(140,757	)

Covered mortgage loans, net					$	261,386


	Consumer
Credit risk by payment status	Indirect Automobile		Credit Card		Home Equity		Other		Total
Current	$	—	$	1,079	$	169,264	$	67,099	$	237,442
Past Due greater than 30 days		—		76		63,635		79,950		143,661

Total	$	—	$	1,155	$	232,899	$	147,049	$	381,103

Discount										(99,609	)

Covered consumer loans, net									$	281,494

Impaired Loans

Information on the Company's investment in impaired loans is presented in the following tables for the periods indicated.


(dollars in thousands)	At June 30, 2011							At December 31, 2010
	Recorded Investment		Unpaid Principal Balance		Related Allowance			Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Mortgage Loans
Residential – Prime	$	5,917	$	5,917	$	—		$	5,916	$	5,916	$	—
Residential – Subprime		—		—		—			—		—		—
Commercial Loans
Real Estate		37,187		37,187		—			21,539		21,539		—
Business		26,702		26,702		—			6,761		6,761		—
Consumer Loans
Indirect automobile		803		803		—			1,046		1,046		—
Credit card		431		431		—			378		378		—
Home equity		1,418		1,418		—			986		986		—
Other		9,784		9,784		—			5,713		5,713		—

With an allowance recorded
Commercial Real Estate		15,230		16,990		(1,760	)		6,532		6,738		(206	)
Business		—		47		(47	)

Total
Mortgage Loans		5,917		5,917		—			5,916		5,916		—
Commercial Loans		79,119		80,926		(1,807	)		34,832		35,038		(206	)
Consumer Loans		12,436		12,436		—			8,122		8,122		—


(dollars in thousands)	For the Three Months Ended June 30, 2011				For the Three Months Ended June 30, 2010
	Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾
With no related allowance recorded
Mortgage Loans
Residential – Prime	$	6,159	$	3	$	4,130	$	3
Residential – Subprime		—		—		—		—
Commercial Loans
Real Estate		34,152		62		16,285		24
Business		11,875		58		1,705		7
Consumer Loans
Indirect automobile		1,062		3		1,213		5
Credit card		436		—		257		—
Home equity		1,630		11		1,138		3
Other		6,390		4		5,356		23

With an allowance recorded
Commercial Real Estate		17,195		28		22,051		28
Business		47		—		—		—

Total
Mortgage Loans		6,159		3		4,130		3
Commercial Loans		63,269		148		40,041		59
Consumer Loans		9,517		18		7,964		31

(1)	Interest income recognized on impaired loans represents income recognized before loans were placed on nonaccrual status.


(dollars in thousands)	For the Six Months Ended June 30, 2011				For the Six Months Ended June 30, 2010
	Average Recorded Investment		Interest Income Recognized⁽¹⁾		Average Recorded Investment		Interest Income Recognized⁽¹⁾
With no related allowance recorded
Mortgage Loans
Residential – Prime	$	6,219	$	23	$	4,256	$	20
Residential – Subprime		—		—		—		—
Commercial Loans
Real Estate		32,104		134		17,567		59
Business		6,294		251		1,901		25
Consumer Loans
Indirect automobile		1,162		10		1,283		13
Credit card		393		—		233		—
Home equity		1,690		40		1,168		3
Other		6,114		11		5,505		61

With an allowance recorded
Commercial Real Estate		17,269		192		24,244		157
Business		47		—		—		—

Total
Mortgage Loans		6,219		23		4,256		20
Commercial Loans		55,714		577		43,712		241
Consumer Loans		9,359		61		8,189		77

As of June 30, 2011, the Company was not committed to lend additional funds to any customer whose loan was classified as impaired or as a troubled debt restructuring.