Allowance for Loan Losses

6 Months Ended

Jun. 30, 2011

5. 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 loan loss for noncovered loans, by portfolio type, for the quarter and six months ended June 30, 2011 is shown in the following table:


For the quarter ended June 30, 2011
																Home			Credit			Residential
Legacy Loans	C&I			CRE			Construction			Leases			Installment			Equity Lines			Cards			Mortgages			Total
Beginning Balance	$	31,649		$	33,128		$	7,639		$	480		$	20,709		$	6,883		$	8,712		$	5,490		$	114,690
Charge-offs		(4,274	)		(2,608	)		(1,337	)		(127	)		(6,202	)		(2,762	)		(2,297	)		(1,351	)		(20,958	)
Recoveries		188			47			293			2			3,718			483			557			29			5,317
Provision		803			2,379			1,281			(2	)		(136	)		2,538			1,431			1,844			10,138

Ending Balance	$	28,366		$	32,946		$	7,876		$	353		$	18,089		$	7,142		$	8,403		$	6,012		$	109,187

Ending Balance: Individually Evaluated	$	290		$	3,169		$	1,038		$	—		$	662		$	20		$	28		$	1,209		$	6,416

Ending Balance: Collectively Evaluated	$	28,076		$	29,777		$	6,838		$	353		$	17,427		$	7,122		$	8,375		$	4,803		$	102,771


Loans:
Ending Balance	$	2,415,647		$	1,973,315		$	253,379		$	57,634		$	1,256,233		$	716,789		$	143,828		$	399,190		$	7,216,015

Ending Balance: Individually Evaluated	$	3,573		$	45,008		$	9,407		$	—		$	15,703		$	1,242		$	2,453		$	14,851		$	92,237

Ending Balance: Collectively Evaluated	$	2,412,074		$	1,928,307		$	243,972		$	57,634		$	1,240,530		$	715,547		$	141,375		$	384,339		$	7,123,778


For the six months ended June 30, 2011
																Home			Credit			Residential
Legacy Loans	C&I			CRE			Construction			Leases			Installment			Equity Lines			Cards			Mortgages			Total
Beginning Balance	$	29,764		$	32,026		$	7,180		$	475		$	21,555		$	7,217		$	11,107		$	5,366		$	114,690
Charge-offs		(8,989	)		(4,459	)		(2,695	)		(127	)		(14,293	)		(5,577	)		(4,615	)		(3,015	)		(43,770	)
Recoveries		714			48			374			34			7,437			1,182			1,204			118			11,111
Provision		6,877			5,331			3,017			(29	)		3,390			4,320			707			3,543			27,156

Ending Balance	$	28,366		$	32,946		$	7,876		$	353		$	18,089		$	7,142		$	8,403		$	6,012		$	109,187

Ending Balance: Individually Evaluated	$	290		$	3,169		$	1,038		$	—		$	662		$	20		$	28		$	1,209		$	6,416

Ending Balance: Collectively Evaluated	$	28,076		$	29,777		$	6,838		$	353		$	17,427		$	7,122		$	8,375		$	4,803		$	102,771


Loans:
Ending Balance	$	2,415,647		$	1,973,315		$	253,379		$	57,634		$	1,256,233		$	716,789		$	143,828		$	399,190		$	7,216,015

Ending Balance: Individually Evaluated	$	3,573		$	45,008		$	9,407		$	—		$	15,703		$	1,242		$	2,453		$	14,851		$	92,237

Ending Balance: Collectively Evaluated	$	2,412,074		$	1,928,307		$	243,972		$	57,634		$	1,240,530		$	715,547		$	141,375		$	384,339		$	7,123,778

The activity within the allowance for loan loss for noncovered loans for the year ended December 31, 2010 and the quarter and six months ended June 30, 2010 is shown in the following table:


	Quarter ended		Six months ended		Year ended
	June 30,		June 30,		December 31,
Allowance for Noncovered Loan Losses	2010		2010		2010
Balance at beginning of period	$	117,806	$	115,092	$	115,092
Loans charged off:
C&I, CRE and Construction		6,942		15,837		39,766
Residential mortgages		1,395		3,041		5,156
Installment		8,430		17,235		34,054
Home equity lines		2,761		4,831		7,912
Credit cards		4,010		8,178		13,577
Leases		617		637		896
Overdrafts		812		1,403		3,171

Total charge-offs		24,967		51,162		104,532

Recoveries:
C&I, CRE and Construction		430		802		1,952
Residential mortgages		38		63		263
Installment		3,081		5,098		13,047
Home equity lines		444		701		1,599
Credit cards		608		1,081		2,199
Manufactured housing		55		86		156
Leases		229		238		267
Overdrafts		253		485		864

Total recoveries		5,138		8,554		20,347


Net charge-offs		19,829		42,608		84,185
Provision for loan losses		20,366		45,859		83,783


Balance at end of period	$	118,343	$	118,343	$	114,690

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 Share Agreements. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. During the quarter ended June 30, 2011, the Corporation increased its allowance for covered loan losses to $33.4 million to reserve for estimated additional losses on certain Acquired Impaired Loans. The increase in the allowance from the prior quarter ended March 31, 2011 was recorded by a charge to the provision for covered loan losses of $15.2 million and an increase of $7.7 million in the loss share receivable for the portion of the losses recoverable under the Loss Share 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 Share Agreements exceeds any remaining credit discount. The Corporation recognized a provision for loan losses on Acquired Non-Impaired Loans of $0.9 million in the quarter ended June 30, 2011.

The activity within the allowance for loan loss for covered loans for the quarters and six months ended June 30, 2011 and 2010 and the year ended December 31, 2010 is shown in the following table:


	Quarter ended						Six months ended						Year ended
	June 30,						June 30,						December 31,
	2011			2010			2011			2010			2010
Balance at beginning of the period	$	28,405		$	—		$	13,733		$	—		$	—

Provision for loan losses before benefit attributable to FDIC loss share agreements		15,156			461			35,666			461			27,184
Benefit attributable to FDIC loss share agreements		(7,675	)		(193	)		(22,854	)		(193	)		(22,752	)

Net provision for loan losses, covered		7,481			268			12,812			268			4,432

Increase in indemnification asset		7,675			193			22,854			193			22,752

Loans charged-off		(10,201	)		(220	)		(16,039	)		(220	)		(13,451	)


Balance at end of the period	$	33,360		$	241		$	33,360		$	241		$	13,733

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. 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 classified as nonaccrual are excluded from impaired loans. 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.

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. Concessionary modifications are classified 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.

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. As of June 30, 2011 and December 31, 2010, TDRs on Acquired Impaired Loans were $51.0 million and $37.2 million, respectively. There were no TDRs on Acquired Impaired loans as of June 30, 2010.

Included in certain loan categories in the tables below are TDRs, excluding TDRs on Acquired Impaired Loans, of $41.9 million, $46.8 million and $61.4 million as of June 30, 2011, December 31, 2010 and June 30, 2010, respectively. The Corporation’s TDR portfolio, excluding Covered Loans, is predominately composed of consumer installment loans, first and second lien residential mortgages and home equity lines of credit. The Corporation restructures residential mortgages in a variety of ways to help its clients remain in their homes and to mitigate the potential for additional losses. The primary restructuring methods being offered to residential clients are reductions in interest rates and extensions in terms. 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. 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.

A summary of impaired noncovered loans is shown in the following tables as of June 30, 2011 and December 31, 2010, respectively.


As of June 30, 2011
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
Loans with no related allowance
Commercial
C&I	$	1,985	$	4,467	$	—	$	2,513
CRE		31,986		43,575		—		33,799
Construction		4,838		9,109		—		4,919
Consumer
Installment		—		—		—		—
Home equity line		—		—		—		—
Credit card		—		—		—		—
Residential mortgages		2,654		3,966		—		2,673

Loans with a related allowance
Commercial
C&I	$	1,588	$	2,010	$	290	$	1,588
CRE		13,022		18,600		3,169		13,566
Construction		4,569		7,181		1,038		4,591
Consumer
Installment		15,703		15,724		662		15,794
Home equity line		1,242		1,242		20		1,256
Credit card		2,453		2,453		28		2,524
Residential mortgages		12,197		12,284		1,209		12,206

Total
Commercial	$	57,988	$	84,942	$	4,497	$	60,976
Consumer		34,249		35,669		1,919		34,453

Total impaired loans	$	92,237	$	120,611	$	6,416	$	95,429


As of December 31, 2010
			Unpaid				Average
	Recorded		Principal		Related		Recorded
	Investment		Balance		Allowance		Investment
Loans with no related allowance
Commercial
C&I	$	12,172	$	15,045	$	—	$	12,816
CRE		34,003		40,619		—		35,238
Construction		10,120		14,710		—		10,833
Consumer
Installment		17,146		17,164		—		17,313
Home equity line		1,747		1,747		—		1,764
Credit card		3,081		3,081		—		2,926
Residential mortgages		1,992		2,765		—		2,027

Loans with a related allowance
Commercial
C&I	$	—	$	—	$	—	$	—
CRE		30,792		37,767		3,852		33,172
Construction		7,585		11,423		1,588		8,928
Consumer
Installment		—		—		—		—
Home equity line		—		—		—		—
Credit card		—		—		—		—
Residential mortgages		9,705		9,776		741		9,713

Total
Commercial	$	94,672	$	119,564	$	5,440	$	100,987
Consumer		33,671		34,533		741		33,743

Total loans	$	128,343	$	154,097	$	6,181	$	134,730

As of June 30, 2010, there was $73.9 million in impaired loans with an associated allowance of $9.6 million.

Interest income recognized on impaired loans during the quarters and six months ended June 30, 2011 and 2010 was not material.