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 provision charged to earnings that is partially offset by increases in 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 and reversed when losses are charged off for impaired loan pools or transferred as a component of the carrying value for OREO transfers.

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 initially recognizes these loans at the present value of amounts expected to be received. Further, the Company also accounts for non-impaired loans acquired in acquisitions by analogy to acquired impaired loans. The allowance for loan losses previously associated with acquired 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 and recaptures any previously recognized impairment up to the amount of the improvement in expected cash flows.

A summary of changes in the allowance for loan losses for the covered loan and non-covered loan portfolios for the six months ended June 30, 2012 and 2011 follows. The allowance for loan losses on the non-covered loan portfolio includes $3,828,000 related to the Company’s acquired non-covered portfolio at June 30, 2012. There was no allowance for loan losses on the Company’s acquired non-covered portfolio at June 30, 2011 or December 31, 2011.


(Dollars in thousands)	June 30, 2012
	Covered loans			Non-covered loans			Total
Balance, beginning of period	$	118,900		$	74,861		$	193,761

Provision for loan losses before benefit attributable to FDIC loss share agreements		12,815			9,570			22,385

Benefit attributable to FDIC loss share agreements		(10,633	)		—			(10,633	)

Net provision for loan losses		2,182			9,570			11,752

Increase in FDIC loss share receivable		10,633			—			10,633
Write-off on transfers to OREO		(12,689	)		(308	)		(12,997	)
Loans charged-off		(13,283	)		(4,397	)		(17,680	)
Recoveries		19			1,797			1,816

Balance, end of period	$	105,762		$	81,523		$	187,285


(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		26,706			—			26,706

Write-off on transfers 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

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, 2012 and 2011 is as follows:


(Dollars in thousands)
	Commercial Real Estate			Commercial Business			Consumer			Mortgage			Unallocated		Total
June 30, 2012
Allowance for loan losses
Balance, beginning of period	$	35,604		$	25,705		$	12,655		$	897		$	—	$	74,861
(Reversal of) Provision for loan losses		2,320			4,576			1,962			712			—		9,570
Write-off on transfers to OREO		(76	)		—			(6	)		(226	)		—		(308	)
Loans charged off		(1,154	)		(435	)		(2,562	)		(246	)		—		(4,397	)
Recoveries		654			61			1,061			21			—		1,797

Balance, end of period		37,348			29,907			13,110			1,158					81,523

Allowance on loans individually evaluated for impairment	$	1,307		$	201		$	—		$	187		$	—	$	1,695
Allowance on loans collectively evaluated for impairment		36,041			29,706			13,110			971			—		79,828

Loans, net of unearned income
Balance, end of period	$	2,660,509		$	2,180,479		$	1,470,156		$	235,221		$	—	$	6,546,365
Balance, end of period: Loans individually evaluated for impairment		28,841			2,402			226			1,612			—		33,081
Balance, end of period: Loans collectively evaluated for impairment		2,631,668			2,178,077			1,469,930			233,609			—		6,513,284
Balance, end of period: Loans acquired with deteriorated credit quality		34,650			560			4,971			—			—		40,181


(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
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		37,464			500			8,164			—			—		46,128

A summary of changes in the allowance for loan losses for covered loans, by loan portfolio type, for the six months ended June 30, 2012 and 2011 is as follows:


(Dollars in thousands)
	Commercial Real Estate			Commercial Business			Consumer			Mortgage			Unallocated		Total
June 30, 2012
Allowance for loan losses
Balance, beginning of period	$	69,175		$	9,788		$	18,753		$	21,184		$	—	$	118,900
(Reversal of) Provision for loan losses		2,821			848			62			(1,549	)		—		2,182
(Decrease) Increase in FDIC loss share receivable		11,238			1,097			(3,056	)		1,354			—		10,633
Write-off on transfers to OREO		(8,545	)		(119	)		(825	)		(3,200	)		—		(12,689	)
Loans charged off		(13,143	)		—			(9	)		(131	)		—		(13,283	)
Recoveries		16			—			3			—			—		19

Balance, end of period		61,562			11,614			14,928			17,658			—		105,762

Allowance on loans individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—	$	—
Allowance on loans collectively evaluated for impairment		61,562			11,614			14,928			17,658			—		105,762

Loans, net of unearned income
Balance, end of period	$	653,354		$	125,681		$	227,544		$	183,568		$	—	$	1,190,147
Balance, end of period: Loans individually evaluated for impairment		—			—			—			—			—		—
Balance, end of period: Loans collectively evaluated for impairment		653,354			125,681			227,544			183,568			—		1,190,147
Balance, end of period: Loans acquired with deteriorated credit quality		4,789			2,483			24,835			30,089			—		62,196


(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
Increase in FDIC loss share receivable		33,849			2,630			2,543			(12,316	)		—		26,706
Write-off on transfers 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		$	234,417		$	—	$	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			234,417			—		1,462,677
Balance, end of period: Loans acquired with deteriorated credit quality		132,798			4,162			50,176			48,069			—		235,205

Credit Quality

The Company utilizes an asset risk classification system in accordance with guidelines established by the Federal Reserve Board as part of its efforts to monitor 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 satisfaction of the loan balance outstanding 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. Asset risk classifications are periodically reviewed and changed if, in the opinion of management, the risk profile of the customer has changed since the last review of the loan relationship. Asset risk classifications for commercial loans reflect the classification as of June 30, 2012 and December 31, 2011.

The Company’s investment in non-covered loans by credit quality indicator as of June 30, 2012 and December 31, 2011 is presented in the following tables. Because of the difference in the accounting for acquired loans, the tables below further segregate the Company’s non-covered loans receivable between loans acquired and loans that were not acquired. Loan discounts in the table below represent the adjustment of non-covered acquired loans to fair value at the time of acquisition, as adjusted for income accretion and changes in cash flow estimates in subsequent periods.


(Dollars in thousands)	Non-covered loans excluding acquired loans
	Commercial Real Estate Construction				Commercial Real Estate-Other				Commercial Business
Credit quality indicator by asset risk classification	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Pass	$	280,744	$	249,669	$	1,860,169	$	1,689,455	$	2,045,629	$	1,729,279
Special Mention		21,495		18,274		56,409		62,868		27,895		46,225
Substandard		5,145		8,559		54,856		55,236		36,648		25,477
Doubtful		—		170		5,911		5,697		—		199

Total		307,384		276,672		1,977,345		1,813,256		2,110,172		1,801,180
Discount		—		—		—		—		—		—

Non-covered commercial loans, net	$	307,384	$	276,672	$	1,977,345	$	1,813,256	$	2,110,172	$	1,801,180


	Mortgage-Prime				Mortgage-Subprime
Credit risk by payment status	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Current	$	225,291	$	271,534	$	—	$	—
Past due greater than 30 days		8,993		7,065		—		—

Total		234,284		278,599		—		—
Discount		—		—		—		—

Non-covered mortgage loans, net	$	234,284	$	278,599	$	—	$	—

	Indirect Automobile				Credit Card
Credit risk by payment status	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Current	$	300,565	$	248,070	$	45,154	$	46,786
Past due greater than 30 days		1,786		2,385		539		977

Total	$	302,351	$	250,455	$	45,693	$	47,763

	Home Equity				Consumer-Other
Credit risk by payment status	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Current	$	871,770	$	741,968	$	161,311	$	129,640
Past due greater than 30 days		9,535		8,774		966		1,119

Total	$	881,305		750,742	$	162,277		130,759
Discount		—		—		—		—

Non-covered consumer loans, net	$	881,305	$	750,742	$	162,277	$	130,759


(Dollars in thousands)	Non-covered acquired loans
	Commercial Real Estate Construction						Commercial Real Estate-Other						Commercial Business
Credit quality indicator by asset risk classification	June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011
Pass	$	30,270		$	51,510		$	282,137		$	360,598		$	72,805		$	94,760
Special Mention		1,872			9,138			35,706			53,503			2,904			7,870
Substandard		5,972			5,441			62,153			75,161			2,159			4,057
Doubtful		—			—			—			—			3,544			—

Total		38,114			66,089			379,996			489,262			81,412			106,687
Discount		(3,922	)		(6,458	)		(38,408	)		(47,808	)		(11,105	)		(11,371	)

Non-covered commercial loans, net	$	34,192		$	59,631		$	341,588		$	441,454		$	70,307		$	95,316


	Mortgage-Prime						Mortgage-Subprime
Credit risk by payment status	June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011
Current	$	593		$	4,145		$	—		$	—
Past due greater than 30 days		379			369			—			—

Total		972			4,514			—			—
Discount		(35	)		—			—			—

Non-covered mortgage loans, net	$	937		$	4,514		$	—		$	—

	Indirect Automobile						Credit Card
Credit risk by payment status	June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011
Current	$	7,208		$	10,813		$	—		$	—
Past due greater than 30 days		279			439			—			—

Total		7,487			11,252
Discount		17			189			—			—

Non-covered consumer loans, net	$	7,504		$	11,441		$	—		$	—

	Home Equity						Consumer-Other
Credit risk by payment status	June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011
Current	$	57,935		$	73,822		$	16,368		$	16,067
Past due greater than 30 days		4,841			6,738			748			1,529

Total		62,776			80,560			17,116			17,596
Discount		(2,018	)		(4,839	)		(6,798	)		(1,511	)

Non-covered consumer loans, net	$	60,758		$	75,721		$	10,318		$	16,085

Credit quality information in the table above includes loans acquired at gross contractual balance outstanding at June 30, 2012 and December 31, 2011.

The Company’s investment in covered loans by credit quality indicator as of June 30, 2012 and December 31, 2011 is presented in the following table. Loan discounts in the table below represent the adjustment of covered loans to fair value at the time of acquisition, as adjusted for income accretion and changes in cash flow estimates in subsequent periods.


(Dollars in thousands)	Covered loans
June 30, 2012	Commercial
Credit quality indicator by asset risk classification	Real Estate- Construction		Real Estate- Other		Business		Total
Pass	$	51,056	$	255,221	$	46,680	$	352,957
Special Mention		16,756		68,362		11,536		96,654
Substandard		135,551		310,898		55,202		501,651
Doubtful		607		9,354		2,441		12,402

Total	$	203,970	$	643,835	$	115,859	$	963,664

Discount								(184,629	)

Covered commercial loans, net							$	779,035


	Mortgage
Credit risk by payment status	Prime		Subprime		Total
Current	$	204,160	$	—	$	204,160
Past due greater than 30 days		77,661		—		77,661

Total	$	281,821	$	—	$	281,821

Discount						(98,253	)

Covered consumer loans, net					$	183,568


	Consumer and Other
Credit risk by payment status	Indirect Automobile		Credit Card		Home Equity		Other		Total
Current	$	—	$	776	$	191,083	$	2,409	$	194,268
Past due greater than 30 days		—		50		70,977		624		71,651

Total	$	—	$	826	$	262,060	$	3,033	$	265,919

Discount										(38,375	)

Covered consumer loans, net									$	227,544


(Dollars in thousands)	Covered loans
December 31, 2011	Commercial
Credit quality indicator by asset risk classification	Real Estate- Construction		Real Estate- Other		Business		Total
Pass	$	59,936	$	282,974	$	72,563	$	415,473
Special Mention		17,336		87,409		10,965		115,710
Substandard		169,726		349,155		61,268		580,149
Doubtful		705		22,636		4,082		27,423

Total	$	247,703	$	742,174	$	148,878	$	1,138,755

Discount								(261,909	)

Covered commercial loans, net							$	876,846


	Mortgage
Credit risk by payment status	Prime		Subprime		Total
Current	$	233,305	$	—	$	233,305
Past Due greater than 30 days		94,553		—		94,553

Total	$	327,858	$	—	$	327,858

Discount						(111,584	)

Covered mortgage loans, net					$	216,274


	Consumer and Other
Credit risk by payment status	Indirect Automobile		Credit Card		Home Equity		Other		Total
Current	$	—	$	875	$	193,366	$	4,880	$	199,121
Past Due greater than 30 days		—		94		107,520		534		108,148

Total	$	—	$	969	$	300,886	$	5,414	$	307,269

Discount										(65,940	)

Covered consumer loans, net									$	241,329

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, 2012							At December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance			Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial Loans
Real Estate	$	28,530	$	28,530	$	—		$	32,267	$	32,267	$	—
Business		2,607		2,607		—			6,403		6,403		—

With an allowance recorded
Mortgage Loans
Residential – Prime	$	7,334	$	7,539	$	(205	)	$	4,763	$	4,910	$	(147	)
Residential – Subprime		—		—		—			—		—		—
Commercial Loans
Real Estate		1,876		3,183		(1,307	)		1,430		3,304		(1,874	)
Business		40		241		(201	)		40		219		(179	)
Consumer and Other Loans
Indirect automobile		862		867		(5	)		987		994		(7	)
Credit card		361		372		(11	)		391		403		(12	)
Home equity		6,406		6,462		(56	)		4,826		4,873		(47	)
Other		548		556		(8	)		608		619		(11	)

Total
Mortgage Loans	$	7,334	$	7,539		(205	)	$	4,763	$	4,910		(147	)
Commercial Loans		33,053		34,561		(1,508	)		40,140		42,193		(2,053	)
Consumer Loans		8,177		8,257		(80	)		6,812		6,889		(77	)


(Dollars in thousands)	For the Three Months Ended June 30, 2012				For the Three Months Ended June 30, 2011
	Average Recorded Investment		Interest Income Recognized ⁽¹⁾		Average Recorded Investment		Interest Income Recognized ⁽¹⁾
With no related allowance recorded
Commercial Loans
Real Estate	$	30,999	$	20	$	34,152	$	62
Business		2,693		—		11,875		58

With an allowance recorded
Mortgage Loans
Residential – Prime	$	6,458	$	—		6,159		3
Residential – Subprime		—		—		—		—
Commercial Loans
Real Estate		3,275		5		17,195		28
Business		242		—		47		—
Consumer and Other Loans
Indirect automobile		1,026		—		1,062		3
Credit card		374		—		436		—
Home equity		7,094		—		6,248		10
Other		661		—		1,771		3

Total
Mortgage Loans	$	6,458	$	—		6,159		3
Commercial Loans		37,209		25		63,269		148
Consumer Loans		9,155		—		9,517		18

⁽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, 2012				For the Six Months Ended June 30, 2011
	Average Recorded Investment		Interest Income Recognized ⁽¹⁾		Average Recorded Investment		Interest Income Recognized ⁽¹⁾
With no related allowance recorded
Commercial Loans
Real Estate	$	31,888	$	58	$	32,104	$	134
Business		3,951		2		6,294		251

With an allowance recorded
Mortgage Loans
Residential – Prime	$	6,535	$	16	$	6,219	$	23
Residential – Subprime		—		—		—		—
Commercial Loans
Real Estate		3,634		15		17,269		192
Business		244		1		47		—
Consumer and Other Loans
Indirect automobile		1,134		3		1,162		10
Credit card		399		—		393		—
Home equity		7,315		11		6,120		40
Other		731		2		1,684		11

Total
Mortgage Loans	$	6,535	$	16	$	6,219	$	23
Commercial Loans		39,717		76		55,714		577
Consumer Loans		9,579		16		9,359		61

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

As of June 30, 2012 and December 31, 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.