Allowance for loan losses

The Corporation’s Credit Policy Division manages credit risk by establishing common credit policies for its subsidiary bank, participating in approval of its loans, conducting reviews of loan portfolios, providing centralized consumer underwriting, collections and loan operation services, and overseeing loan workouts. The Corporation’s objective is to minimize losses from its commercial lending activities and to maintain consumer losses at acceptable levels that are stable and consistent with growth and profitability objectives.

The allowance for loan losses is Management’s estimate of the amount of probable credit losses inherent in the portfolio at the balance sheet date. Management estimates credit losses based on individual loans determined to be impaired and on all other loans grouped based on similar risk characteristics. Management also considers internal and external factors such as economic conditions, loan management practices, portfolio monitoring, and other risks, collectively known as qualitative factors, or Q-factors, to estimate credit losses in the loan portfolio. Q-factors are used to reflect changes in the portfolio’s collectability characteristics not captured by historical loss data.

The Corporation’s historical loss component is the most significant of the allowance for loan losses components and is based on historical loss experience by credit-risk grade (for commercial loan pools) and payment status (for mortgage and consumer loan pools). Balances by credit-risk grade and payment status, as well as descriptions of the credit-risk grades are included in Note 4 (Loans). The historical loss experience component of the allowance for loan losses represents the results of migration analysis of historical net charge-offs for portfolios of loans (including groups of commercial loans within each credit-risk grade and groups of consumer loans by payment status). For measuring loss exposure in a pool of loans, the historical net charge-off or migration experience is utilized to estimate expected losses to be realized from the pool of loans.

If a nonperforming, substandard loan has an outstanding balance of $0.3 million or greater or if a doubtful loan has an outstanding balance of $0.1 million or greater, as determined by the Corporation’s credit-risk grading process, further analysis is performed to determine the probable loss content and assign a specific allowance to the loan, if deemed appropriate. The allowance for loan losses relating to originated loans that have become impaired is based on either expected cash flows discounted using the original effective interest rate, the observable market price, or the fair value of the collateral for certain collateral dependent loans. To the extent credit deterioration occurs on purchased loans after the date of acquisition, the Corporation records an allowance for loan losses, net of any expected reimbursement under any loss sharing agreements with the FDIC.

The activity within the allowance for noncovered loan losses, by portfolio type, for the quarters ended March 31, 2012 and 2011 is shown in the following tables:



	Quarter Ended March 31, 2012
	C&I			CRE			Construction			Leases			Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Allowance for loan losses, beginning balance	$	32,363		$	31,857		$	5,173		$	341		$	17,981		$	6,766		$	7,369		$	5,849		$	107,699
Charge-offs	(6,703		)	(669		)	(38		)	—			(5,238		)	(2,324		)	(1,583		)	(862		)	(17,417		)
Recoveries	545			81			263			37			3,180			645			630			57			5,438
Provision for noncovered loan losses	10,967			(3,491		)	(274		)	(44		)	(1,170		)	1,182			104			855			8,129
Allowance for loan losses, ending balance	$	37,172		$	27,778		$	5,124		$	334		$	14,753		$	6,269		$	6,520		$	5,899		$	103,849



	Quarter Ended March 31, 2011
	C&I			CRE			Construction			Leases			Installment			Home Equity Lines			Credit Cards			Residential Mortgages			Total
Allowance for loan losses, beginning balance	$	29,764		$	32,026		$	7,180		$	475		$	21,555		$	7,217		$	11,107		$	5,366		$	114,690
Charge-offs	(4,715		)	(1,851		)	(1,358		)	—			(8,091		)	(2,815		)	(2,318		)	(1,664		)	(22,812		)
Recoveries	526			1			81			32			3,719			699			647			89			5,794
Provision for noncovered loan losses	6,074			2,952			1,736			(27		)	3,526			1,782			(724		)	1,699			17,018
Allowance for loan losses, ending balance	$	31,649		$	33,128		$	7,639		$	480		$	20,709		$	6,883		$	8,712		$	5,490		$	114,690

The following tables present the allowance for noncovered loan losses and the recorded investment in legacy loans, by portfolio type, based on impairment method as of March 31, 2012, December 31, 2011 and March 31, 2011.



	As of March 31, 2012
	C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
Individually evaluated for impairment	$	972	$	2,478	$	224	$	—	$	1,902	$	66	$	92	$	1,505	$	7,239
Collectively evaluated for impairment	36,200		25,300		4,900		334		12,851		6,203		6,428		4,394		96,610
Total ending allowance for noncovered loan losses balance	$	37,172	$	27,778	$	5,124	$	334	$	14,753	$	6,269	$	6,520	$	5,899	$	103,849
Legacy loans:
Individually evaluated for impairment	$	6,079	$	32,112	$	8,929	$	—	$	32,378	$	5,522	$	2,060	$	18,076	$	105,156
Collectively evaluated for impairment	2,867,093		1,952,461		276,786		74,112		1,225,372		715,315		138,558		409,206		7,658,903
Total ending legacy loan balance	$	2,873,172	$	1,984,573	$	285,715	$	74,112	$	1,257,750	$	720,837	$	140,618	$	427,282	$	7,764,059



	As of December 31, 2011
	C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
Individually evaluated for impairment	$	2,497	$	1,599	$	99	$	—	$	1,382	$	31	$	108	$	1,364	$	7,080
Collectively evaluated for impairment	29,866		30,258		5,074		341		16,599		6,735		7,261		4,485		100,619
Total ending allowance for noncovered loan losses balance	$	32,363	$	31,857	$	5,173	$	341	$	17,981	$	6,766	$	7,369	$	5,849	$	107,699
Legacy loans:
Individually evaluated for impairment	$	8,269	$	36,087	$	9,320	$	—	$	33,571	$	4,763	$	2,202	$	17,398	$	111,610
Collectively evaluated for impairment	2,740,433		1,956,106		268,015		73,530		1,227,574		719,928		144,154		394,426		7,524,166
Total ending legacy loan balance	$	2,748,702	$	1,992,193	$	277,335	$	73,530	$	1,261,145	$	724,691	$	146,356	$	411,824	$	7,635,776



	As of March 31, 2011
	C&I		CRE		Construction		Leases		Installment		Home Equity Lines		Credit Cards		Residential Mortgages		Total
Ending allowance for noncovered loan losses balance attributable to loans:
Individually evaluated for impairment	$	156	$	3,932	$	1,622	$	—	$	336	$	8	$	162	$	896	$	7,112
Collectively evaluated for impairment	31,493		29,196		6,017		480		20,373		6,875		8,550		4,594		107,578
Total ending allowance for noncovered loan losses balance	$	31,649	$	33,128	$	7,639	$	480	$	20,709	$	6,883	$	8,712	$	5,490	$	114,690
Legacy loans:
Individually evaluated for impairment	$	4,629	$	53,551	$	12,555	$	—	$	8,333	$	1,307	$	2,836	$	13,031	$	96,242
Collectively evaluated for impairment	2,130,654		1,947,872		246,463		60,487		1,270,834		713,592		139,028		384,801		6,893,731
Total ending legacy loan balance	$	2,135,283	$	2,001,423	$	259,018	$	60,487	$	1,279,167	$	714,899	$	141,864	$	397,832	$	6,989,973

To the extent there is a decrease in the present value of cash flows from Acquired Impaired Loans after the date of acquisition, the Corporation records an allowance for loan losses, net of expected reimbursement under any loss sharing agreements. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. During the quarter ended March 31, 2012, the Corporation increased its allowance for covered loan losses to $41.1 million to reserve for estimated additional losses on certain Acquired Impaired Loans. The increase in the allowance was recorded in the quarter ended March 31, 2012 by a charge to the provision for covered loan losses of $10.8 million and an increase of $4.9 million in the loss share receivable for the portion of the losses recoverable under the loss sharing agreements.

To the extent credit deterioration occurs in Acquired Non-Impaired loans after the date of acquisition, the Corporation records a provision for loan losses only when the required allowance, net of any expected reimbursement under the loss sharing agreements exceeds any remaining credit discount. The allowance for losses on Acquired Nonimpaired loans, included in the allowance for noncovered covered loan losses on the consolidated balance sheets, was $0.4 million and $0.7 million as of March 31, 2012 and December 31, 2011, respectively. There was no allowance for losses on Acquired Nonimpaired loans as of March 31, 2011.

The activity within the allowance for covered loan losses for the quarters ended March 31, 2012 and 2011 is shown in the following table:



	Quarter ended March 31,
	2012			2011
Balance at beginning of the period	$	36,417		$	13,733
Provision for loan losses before benefit attributable to FDIC loss share agreements	10,831			20,510
Benefit attributable to FDIC loss share agreements	(4,899		)	(15,179		)
Net provision for covered loan losses	5,932			5,331
Increase in indemnification asset	4,899			15,179
Loans charged-off	(6,178		)	(5,838		)
Balance at end of the period	$	41,070		$	28,405

Credit Quality Disclosures

A loan is considered to be impaired when, based on current events or information, it is probable the Corporation will be unable to collect all amounts due (principal and interest) per the contractual terms of the loan agreement. Loan impairment for all loans is measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, at the observable market price of the loan, or the fair value of the collateral for certain collateral dependent loans. Impaired loans include all nonaccrual commercial, agricultural, construction, and commercial real estate loans, and loans modified as troubled debt restructurings (“TDRs”). Aggregated consumer loans, mortgage loans, and leases that are collectively evaluated for impairment are not included in the following tables.



	As of March 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no related allowance
Commercial
C&I	$	3,272	$	9,937	$	—	$	4,357
CRE	25,734		36,073		—		26,449
Construction	7,764		12,785		—		7,945
Consumer
Installment	—		—		—		—
Home equity line	—		—		—		—
Credit card	223		223		—		251
Residential mortgages	4,409		4,409		—		4,925
Subtotal	$	41,402	$	63,427	$	—	$	43,927
Impaired loans with a related allowance
Commercial
C&I	2,807		3,206		972		2,919
CRE	6,378		6,568		2,478		6,120
Construction	1,165		1,165		224		1,168
Consumer
Installment	32,378		32,378		1,901		32,504
Home equity line	5,522		5,522		66		5,556
Credit card	1,837		1,837		92		1,885
Residential mortgages	13,667		13,667		1,504		13,692
Subtotal	63,754		64,343		7,237		63,844
Total impaired loans	$	105,156	$	127,770	$	7,237	$	107,771

(a) These tables exclude loans fully charged off.

(b) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.



	As of December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no related allowance
Commercial
C&I	$	6,999	$	9,121	$	—	$	8,442
CRE	29,566		46,744		—		37,720
Construction	7,522		13,675		—		9,908
Consumer
Installment	—		—		—		—
Home equity line	—		—		—		—
Credit card	—		—		—		—
Residential mortgages	4,244		4,262		—		4,450
Subtotal	48,331		73,802		—		60,520
Impaired loans with a related allowance
Commercial
C&I	1,270		1,769		2,497		752
CRE	6,521		6,789		1,599		3,247
Construction	1,798		2,864		99		1,929
Consumer
Installment	33,571		33,621		1,382		33,742
Home equity line	4,763		4,763		31		4,996
Credit card	2,202		2,202		108		2,497
Residential mortgages	13,154		13,160		1,364		13,155
Subtotal	63,279		65,168		7,080		60,318
Total impaired loans	$	111,610	$	138,970	$	7,080	$	120,838

(a) These tables exclude loans fully charged off.

(b) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.



	As of March 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment
Impaired loans with no related allowance
Commercial
C&I	$	3,372	$	5,498	$	—	$	3,801
CRE	31,175		38,066		—		32,332
Construction	5,510		8,538		—		5,645
Consumer
Installment	—		—		—		—
Home equity line	—		—		—		—
Credit card	—		—		—		—
Residential mortgages	2,825		4,095		—		2,880
Subtotal	$	42,882	$	56,197	$	—	$	44,658
Impaired loans with a related allowance
Commercial
C&I	1,257		1,843		156		1,484
CRE	22,376		30,084		3,932		24,151
Construction	7,045		10,704		1,622		7,262
Consumer
Installment	8,333		8,342		336		8,016
Home equity line	1,307		1,307		8		1,334
Credit card	2,836		2,836		162		2,888
Residential mortgages	10,206		10,235		896		10,212
Subtotal	53,360		65,351		7,112		55,347
Total impaired loans	$	96,242	$	121,548	$	7,112	$	100,005

(a) These tables exclude loans fully charged off.

(b) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

In certain circumstances, the Corporation may modify the terms of a loan to maximize the collection of amounts due when a borrower is experiencing financial difficulties or is expected to experience difficulties in the near-term. In most cases the modification is either a concessionary reduction in interest rate, extension of the maturity date or modification of the adjustable rate provisions of the loan that would otherwise not be considered however, forgiveness of principal is rarely granted. Concessionary modifications are classified as TDRs unless the modification is short-term, typically less than 90 days. TDRs accrue interest if the borrower complies with the revised terms and conditions and has demonstrated repayment performance at a level commensurate with the modified terms for a minimum of six consecutive payment cycles after the restructuring date.

The substantial majority of the Corporation’s residential mortgage TDRs involve reducing the client’s loan payment through an interest rate reduction for a set period of time based on the borrower’s ability to service the modified loan payment. Modifications of mortgages retained in portfolio are handled using proprietary modification guidelines, or the FDIC’s Modification Program for residential first mortgages covered by loss share agreements (agreements between the Bank and the FDIC which afford the Bank significant protection against future losses). The Corporation participates in the U.S. Treasury’s Home Affordable Modification Program for originated mortgages sold to and serviced for Fannie Mae and Freddie Mac. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Acquired loans restructured after acquisition are not considered TDRs for purposes of the Corporation’s accounting and disclosure if the loans evidenced credit deterioration as of the acquisition date and are accounted for in pools. The Corporation has modified certain loans according to provisions in loss share agreements. Losses associated with modifications on these loans, including the economic impact of interest rate reductions, are generally eligible for reimbursement under the loss share agreements.

The following tables provide the number of loans modified in a TDR and the recorded investment and unpaid principal balance by loan portfolio as of March 31, 2012 and December 31, 2011.



			As of March 31, 2012
			Number of Loans	Recorded Investment		Unpaid Principal Balance
Noncovered loans
	Commercial
		C&I	15	$	3,388	$	6,031
		CRE	30	9,136		12,745
		Construction	27	4,593		5,250
		Subtotal	72	17,117		24,026
	Consumer
		Installment	1,506	32,378		32,378
		Home equity lines	184	5,522		5,522
		Credit card	454	2,060		2,060
		Residential mortgages	184	18,076		18,076
		Subtotal	2,328	58,036		58,036
Covered loans
	Commercial
		C&I	12	7,662		14,877
		CRE	23	54,824		60,075
		Construction	9	13,687		33,791
		Subtotal	44	76,173		108,743
		Total	2,444	$	151,326	$	190,805

(a) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.



			As of December 31, 2011
			Number of Loans	Recorded Investment		Unpaid Principal Balance
Noncovered loans
	Commercial
		C&I	14	$	2,512	$	4,336
		CRE	28	9,167		12,659
		Construction	22	3,323		3,985
		Subtotal	64	15,002		20,980
	Consumer
		Installment	1,547	33,571		33,621
		Home equity lines	174	4,763		4,763
		Credit card	496	2,202		2,202
		Residential mortgages	177	17,398		17,422
		Subtotal	2,394	57,934		58,008
Covered loans
	Commercial
		C&I	15	7,578		10,812
		CRE	21	57,786		62,159
		Construction	8	12,056		32,035
		Subtotal	44	77,420		105,006
		Total	2,502	$	150,356	$	183,994

(a) The differences between the recorded investment and unpaid principal balance amounts represents partial charge offs.

The pre-modification and post-modification outstanding recorded investments of loans modified as TDRs during the quarters ended March 31, 2012 and 2011 were not materially different. Post-modification balances may include capitalization of unpaid accrued interest and fees associated with the modification as well as forgiveness of principal. Loans modified as TDRs during the quarters ended March 31, 2012 and 2011 did not involve the forgiveness of principal, accordingly, the Corporation did not record a charge-off at the modification date. Additionally, capitalization of any unpaid accrued interest and fees assessed to loans modified in the quarters ended March 31, 2012 and 2011 were not material to the accompanying consolidated financial statements. Specific allowances for loan losses are established for loans whose terms have been modified in a TDR. Specific reserve allocations are generally assessed prior to loans being modified in a TDR, as most of these loans migrate from the Corporation’s internal watch list and have been specifically allocated for as part of the Corporation’s normal loan loss provisioning methodology. At March 31, 2012, the Corporation had $0.2 million in commitments to lend additional funds to debtors owing receivables whose terms have been modified in a TDR.

The following tables provide a summary of the delinquency status of TDRs along with the specific allowance for loan loss, by loan type, as of March 31, 2012 and December 31, 2011 including TDRs that continue to accrue interest and TDRs included in nonperforming assets.



	As of March 31, 2012
	Accruing TDRs							Nonaccruing TDRs							Total		Total
	Current		Delinquent			Total		Current		Delinquent			Total		TDRS		Allowance
Noncovered loans
Commercial
C&I	$	1,791	$	—		$	1,791	$	—	$	1,597		$	1,597	$	3,388	$	822
CRE	3,672		510			4,182		3,152		1,802			4,954		9,136		224
Construction	4,077		—			4,077		137		379			516		4,593		224
Total noncovered commercial	9,540		510			10,050		3,289		3,778			7,067		17,117		1,270
Consumer
Installment	31,167		1,134			32,301		—		77			77		32,378		1,901
Home equity lines	4,828		387			5,215		75		232			307		5,522		66
Credit card	1,997		60			2,057		—		3			3		2,060		92
Residential mortgages	15,099		—			15,099		2,918		59			2,977		18,076		1,504
Total noncovered consumer	53,091		1,581			54,672		2,993		371			3,364		58,036		3,563
Covered loans
Commercial
C&I	855		—			855		1,550		5,257			6,807		7,662		1,384
CRE	14,672		—			14,672		21,747		18,405			40,152		54,824		7,720
Construction	—		—			—		3,835		9,852			13,687		13,687		1,245
Total covered commercial	15,527		—		—	15,527		27,132		33,514		—	60,646		76,173		10,349
Total TDRs	$	78,158	$	2,091		$	80,249	$	33,414	$	37,663		$	71,077	$	151,326	$	15,182



	As of December 31, 2011
	Accruing TDRs							Nonaccruing TDRs							Total		Total
	Current		Delinquent			Total		Current		Delinquent			Total		TDRS		Allowance
Noncovered loans
Commercial
C&I	$	91	$	—		$	91	$	—	$	2,421		$	2,421	$	2,512	$	247
CRE	3,305		513			3,818		3,590		1,759			5,349		9,167		236
Construction	2,782		—			2,782		304		237			541		3,323		99
Total noncovered commercial	6,178		513			6,691		3,894		4,417			8,311		15,002		582
Consumer
Installment	31,635		1,802			33,437		—		134			134		33,571		1,382
Home equity lines	4,226		222			4,448		76		239			315		4,763		31
Credit card	2,073		110			2,183		—		19			19		2,202		108
Residential mortgages	13,694		707			14,401		1,635		1,362			2,997		17,398		1,364
Total noncovered consumer	51,628		2,841			54,469		1,711		1,754			3,465		57,934		2,885
Covered loans
Commercial
C&I	565		—			565		1,022		5,991			7,013		7,578		1,384
CRE	13,562		—			13,562		21,521		22,703			44,224		57,786		6,567
Construction	—		—			—		5,838		6,218			12,056		12,056		696
Total covered commercial	14,127		—		—	14,127		28,381		34,912		—	63,293		77,420		8,647
Total TDRs	$	71,933	$	3,354		$	75,287	$	33,986	$	41,083		$	75,069	$	150,356	$	12,114

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased, adjustments may be made in the allocation of the allowance for loan losses, or partial charge-offs may be taken to further write-down the carrying value of the loan. The following table provides the number of loans modified in a TDR during the previous 12 months which subsequently defaulted during the quarter ended March 31, 2012, as well as the recorded investment in these restructured loans as of March 31, 2012.



	As of March 31, 2012
	Number of Loans	Recorded Investment
Noncovered loans
Commercial
C&I	1	$	1,169
CRE	1	119
Construction	—	—
Total noncovered commercial	2	1,288
Consumer
Installment	122	2,798
Home equity lines	—	—
Credit card	43	314
Residential mortgages	—	—
Total noncovered consumer	165	3,112
Covered loans
Commercial
C&I	—	—
CRE	1	301
Construction	—	—
Total covered commercial	1	301
Total	168	$	4,701