ALLOWANCE FOR LOAN LOSSES

We maintain an allowance for loan losses, or ALL, at a level determined to be adequate to absorb estimated probable credit losses inherent in the loan portfolio as of the balance sheet date. We develop and document a systematic ALL methodology based on the following portfolio segments: 1) CRE, 2) C&I, 3) Commercial Construction, 4) Consumer Real Estate and 5) Other Consumer.

The following are key risks within each portfolio segment:

CRE—Loans secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary sources of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the collateral type as well as the business prospects of the lessee, if the project is not owner occupied.

C&I—Loans made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the operations of the company is the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the company. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

Commercial Construction—Loans made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be complete, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.

Consumer Real Estate—Loans secured by first and second liens such as home equity loans, home equity lines of credit and 1-4 family residences, including purchase money mortgages. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy the debt.

Other Consumer—Loans made to individuals that may be secured by assets other than 1-4 family residences, as well as unsecured loans. This segment includes auto loans, unsecured loans and lines and credit cards. The primary source of repayment for these loans is the income and assets of the borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

We further assess risk within each portfolio segment by pooling loans with similar risk characteristics. For the commercial loan classes, the most important indicator of risk is the internally assigned risk rating, including pass, special mention and substandard. Consumer loans are pooled by type of collateral, lien position and loan to value ratio for consumer real estate loans. Historical loss rates are applied to these loan pools to determine the reserve for loans collectively evaluated for impairment.

The ALL methodology for groups of loans collectively evaluated for impairment is comprised of both a quantitative and qualitative analysis. A key assumption in the quantitative component of the reserve is the loss emergence period, or LEP. The LEP is an estimate of the average amount of time from the point at which a loss is incurred on a loan to the point at which the loss is confirmed. In general, the LEP is expected to be shorter in an economic slowdown or recession and longer during times of economic stability or growth, as customers are better able to delay loss confirmation after a potential loss event has occurred. In conjunction with our annual review of the ALL assumptions, we have updated our study of LEPs for our commercial portfolio segments using our loan charge-off history. Our study showed that the LEP for our commercial construction portfolio has lengthened and that our current estimated LEPs for the CRE and C&I portfolio segments did not materially change. We also lengthened the LEP for our consumer loan portfolio segments as economic conditions continue to improve. Another key assumption is the look-back period, or LBP, which represents the historical data period utilized to calculate loss rates. We lengthened the LBP for C&I, commercial construction and the consumer loan portfolio segments in order to capture relevant historical data believed to be reflective of losses inherent in the portfolios.

The changes made to the ALL assumptions were applied prospectively and did not result in a material change to the total ALL at September 30, 2014. Lengthening the LEP does increase the historical loss rates and therefore the quantitative component of the ALL. We believe this makes the quantitative component of the ALL more reflective of inherent losses that exist within the loan portfolio, which resulted in a decrease in the qualitative component of the ALL. The ALL at September 30, 2014 reflects these changes within the commercial construction and consumer portfolio segments.

Management monitors various credit quality indicators for both the commercial and consumer loan portfolios, including delinquency, nonperforming status and changes in risk ratings on a monthly basis.

The following tables present the age analysis of past due loans segregated by class of loans as of September 30, 2014 and December 31, 2013:



	September 30, 2014
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		Nonaccrual		Total Past Due		Total Loans
Commercial real estate	$	1,684,411	$	1,606	$	458	$	5,174	$	7,238	$	1,691,649
Commercial and industrial	943,389		317		234		2,426		2,977		946,366
Commercial construction	181,620		—		—		1,889		1,889		183,509
Residential mortgage	487,634		865		657		2,248		3,770		491,404
Home equity	414,279		2,380		265		1,735		4,380		418,659
Installment and other consumer	66,140		380		57		30		467		66,607
Consumer construction	2,995		—		—		—		—		2,995
Loans held for sale	3,126		—		—		—		—		3,126
Totals	$	3,783,594	$	5,548	$	1,671	$	13,502	$	20,721	$	3,804,315

	December 31, 2013
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		Nonaccrual		Total Past Due		Total Loans
Commercial real estate	$	1,595,590	$	1,209	$	207	$	10,750	$	12,166	$	1,607,756
Commercial and industrial	836,276		2,599		278		3,296		6,173		842,449
Commercial construction	139,133		1,049		751		2,742		4,542		143,675
Residential mortgage	481,260		828		1,666		3,338		5,832		487,092
Home equity	408,777		2,468		659		2,291		5,418		414,195
Installment and other consumer	67,420		382		44		37		463		67,883
Consumer construction	3,149		—		—		—		—		3,149
Loans held for sale	2,136		—		—		—		—		2,136
Totals	$	3,533,741	$	8,535	$	3,605	$	22,454	$	34,594	$	3,568,335

We continually monitor the commercial loan portfolio through an internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies. Loans within the pass rating generally have a lower risk of loss than loans risk rated as special mention or substandard.

Our risk ratings are consistent with regulatory guidance and are as follows:

Pass—The loan is currently performing and is of high quality.

Special Mention—A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in the strength of our credit position at some future date. Economic and market conditions, beyond the borrower’s control, may in the future necessitate this classification.

Substandard—A substandard loan is not adequately protected by the net worth and/or paying capacity of the borrower or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

The following tables summarize the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented:



	September 30, 2014
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	1,624,718	96.0	%	$	903,273	95.5	%	$	162,629	88.6	%	$	2,690,620	95.4	%
Special mention	41,628		2.5	%	27,809		2.9	%	12,747		6.9	%	82,184		2.9	%
Substandard	25,303		1.5	%	15,284		1.6	%	8,133		4.5	%	48,720		1.7	%
Total	$	1,691,649	100	%	$	946,366	100.0	%	$	183,509	100.0	%	$	2,821,524	100.0	%

	December 31, 2013
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	1,519,720	94.5	%	$	792,029	94.0	%	$	119,177	82.9	%	$	2,430,926	93.7	%
Special mention	57,073		3.6	%	34,085		4.1	%	15,621		10.9	%	106,779		4.1	%
Substandard	30,963		1.9	%	16,335		1.9	%	8,877		6.2	%	56,175		2.2	%
Total	$	1,607,756	100.0	%	$	842,449	100.0	%	$	143,675	100.0	%	$	2,593,880	100.0	%

We monitor the delinquent status of the consumer portfolio on a monthly basis. Loans are considered nonperforming when interest and principal are 90 days or more past due or management has determined that a material deterioration in the borrower’s financial condition exists. The risk of loss is generally highest for nonperforming loans.

The following tables indicate the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented:



	September 30, 2014
(dollars in thousands)	Residential Mortgage		% of Total		Home Equity		% of Total		Installment and other consumer		% of Total		Consumer Construction		% of Total		Total		% of Total
Performing	$	489,156	99.5	%	$	416,924	99.6	%	$	66,577	99.9	%	$	2,995	100.0	%	$	975,652	99.6	%
Nonperforming	2,248		0.5	%	1,735		0.4	%	30		0.1	%	—		—	%	4,013		0.4	%
Total	$	491,404	100.0	%	$	418,659	100.0	%	$	66,607	100.0	%	$	2,995	100.0	%	$	979,665	100.0	%

	December 31, 2013
(dollars in thousands)	Residential Mortgage		% of Total		Home Equity		% of Total		Installment and other consumer		% of Total		Consumer Construction		% of Total		Total		% of Total
Performing	$	483,754	99.3	%	$	411,904	99.4	%	$	67,846	99.9	%	$	3,149	100.0	%	$	966,653	99.4	%
Nonperforming	3,338		0.7	%	2,291		0.6	%	37		0.1	%	—		—	%	5,666		0.6	%
Total	$	487,092	100.0	%	$	414,195	100.0	%	$	67,883	100.0	%	$	3,149	100.0	%	$	972,319	100.0	%

We individually evaluate all substandard and nonaccrual commercial loans greater than $0.5 million for impairment. Loans are considered to be impaired when based upon current information and events it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan agreement. All TDRs are considered to be impaired loans and will be reported as an impaired loan for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is expected that the remaining principal and interest will be fully collected according to the restructured agreement. For all TDRs, regardless of size, as well as all other impaired loans, we conduct further analysis to determine the probable loss and assign a specific reserve to the loan if deemed appropriate.

The following table presents investments in loans considered to be impaired and the related allowance at the dates indicated:



	September 30, 2014						December 31, 2013
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Without a related allowance recorded:
Commercial real estate	$	21,028	$	26,366	$	—	$	26,968	$	35,474	$	—
Commercial and industrial	9,643		9,964		—		9,580		9,703		—
Commercial construction	8,143		11,831		—		7,391		12,353		—
Consumer real estate	7,000		7,553		—		8,026		9,464		—
Other consumer	111		115		—		124		128		—
Total without a Related Allowance Recorded	45,925		55,829		—		52,089		67,122		—
With a related allowance recorded:
Commercial real estate	—		—		—		—		—		—
Commercial and industrial	—		—		—		—		—		—
Commercial construction	—		—		—		681		1,383		25
Consumer real estate	45		45		45		53		53		53
Other consumer	22		22		10		33		33		19
Total with a Related Allowance Recorded	67		67		55		767		1,469		97
Total:
Commercial real estate	21,028		26,366		—		26,968		35,474		—
Commercial and industrial	9,643		9,964		—		9,580		9,703		—
Commercial construction	8,143		11,831		—		8,072		13,736		25
Consumer real estate	7,045		7,598		45		8,079		9,517		53
Other consumer	133		137		10		157		161		19
Total	$	45,992	$	55,896	$	55	$	52,856	$	68,591	$	97

The following tables present investments in loans considered to be impaired and interest income recognized for the periods presented:



	For the Three Months Ended
	September 30, 2014				September 30, 2013
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Without a related allowance recorded:
Commercial real estate	$	21,110	$	159	$	27,489	$	271
Commercial and industrial	9,702		63		10,995		68
Commercial construction	8,160		58		9,768		46
Consumer real estate	7,034		100		8,349		114
Other consumer	115		1		119		1
Total without a Related Allowance Recorded	46,121		381		56,720		500
With a related allowance recorded:
Commercial real estate	—		—		1,014		—
Commercial and industrial	—		—		—		—
Commercial construction	—		—		5,929		49
Consumer real estate	47		1		100		2
Other consumer	23		—		35		1
Total with a Related Allowance Recorded	70		1		7,078		52
Total:
Commercial real estate	21,110		159		28,503		271
Commercial and industrial	9,702		63		10,995		68
Commercial construction	8,160		58		15,697		95
Consumer real estate	7,081		101		8,449		116
Other consumer	138		1		154		2
Total	$	46,191	$	382	$	63,798	$	552



	For the Nine Months Ended
	September 30, 2014				September 30, 2013
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Without a related allowance recorded:
Commercial real estate	$	21,593	$	512	$	29,951	$	330
Commercial and industrial	9,477		177		11,964		203
Commercial construction	8,254		172		14,492		271
Consumer real estate	7,181		306		8,912		693
Other consumer	122		3		110		4
Total without a Related Allowance Recorded	46,627		1,170		65,429		1,501
With a related allowance recorded:
Commercial real estate	$	—	$	—	2,526		$	5
Commercial and industrial	—		—		—		—
Commercial construction	—		—		1,976		49
Consumer real estate	49		2		62		—
Other consumer	24		2		21		3
Total with a Related Allowance Recorded	73		4		4,585		57
Total:
Commercial real estate	21,593		512		32,477		335
Commercial and industrial	9,477		177		11,964		203
Commercial construction	8,254		172		16,468		320
Consumer real estate	7,230		308		8,974		693
Other consumer	146		5		131		7
Total	$	46,700	$	1,174	$	70,014	$	1,558

The following tables detail activity in the ALL for the periods presented:



	Three Months Ended September 30, 2014
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of period	$	20,733		$	13,004		$	4,759		$	6,705		$	1,379		$	46,580
Charge-offs	—			(37		)	(234		)	(436		)	(295		)	(1,002		)
Recoveries	(154		)	315			—			48			75			284
Net (Charge-offs)/ Recoveries	(154		)	278			(234		)	(388		)	(220		)	(718		)
Provision for loan losses	(602		)	616			653			446			341			1,454
Balance at End of Period	$	19,977		$	13,898		$	5,178		$	6,763		$	1,500		$	47,316


	Three Months Ended September 30, 2013
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of period	$	23,484		$	9,123		$	5,812		$	6,655		$	1,031		$	46,105
Charge-offs	(840		)	(759		)	(480		)	(585		)	(327		)	(2,991		)
Recoveries	617			167			481			122			63			1,450
Net (Charge-offs)/ Recoveries	(223		)	(592		)	1			(463		)	(264		)	(1,541		)
Provision for loan losses	(5,572		)	6,268			2,186			185			352			3,419
Balance at End of Period	$	17,689		$	14,799		$	7,999		$	6,377		$	1,119		$	47,983


	Nine Months Ended September 30, 2014
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of period	$	18,921		$	14,433		$	5,374		$	6,362		$	1,165		$	46,255
Charge-offs	(2,002		)	(1,070		)	(693		)	(983		)	(740		)	(5,488		)
Recoveries	1,681			3,564			140			272			284			5,941
Net Recoveries/(Charge-offs)	(321		)	2,494			(553		)	(711		)	(456		)	453
Provision for loan losses	1,377			(3,029		)	357			1,112			791			608
Balance at End of Period	$	19,977		$	13,898		$	5,178		$	6,763		$	1,500		$	47,316


	Nine Months Ended September 30, 2013
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of period	$	25,246		$	7,759		$	7,500		$	5,058		$	921		$	46,484
Charge-offs	(3,649		)	(2,682		)	(923		)	(1,822		)	(978		)	(10,054		)
Recoveries	2,939			457			536			630			242			4,804
Net (Charge-offs)/ Recoveries	(710		)	(2,225		)	(387		)	(1,192		)	(736		)	(5,250		)
Provision for loan losses	(6,847		)	9,265			886			2,511			934			6,749
Balance at End of Period	$	17,689		$	14,799		$	7,999		$	6,377		$	1,119		$	47,983

The following tables present the ALL and recorded investments in loans by category as of September 30, 2014 and December 31, 2013:



	September 30, 2014
	Allowance for Loan Losses						Portfolio Loans
(dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial real estate	$	—	$	19,977	$	19,977	$	21,028	$	1,670,621	$	1,691,649
Commercial and industrial	—		13,898		13,898		9,643		936,723		946,366
Commercial construction	—		5,178		5,178		8,143		175,366		183,509
Consumer real estate	45		6,718		6,763		7,045		906,013		913,058
Other consumer	10		1,490		1,500		133		66,474		66,607
Total	$	55	$	47,261	$	47,316	$	45,992	$	3,755,197	$	3,801,189

	December 31, 2013
	Allowance for Loan Losses						Portfolio Loans
(dollars in thousands)	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total
Commercial real estate	$	—	$	18,921	$	18,921	$	26,968	$	1,580,788	$	1,607,756
Commercial and industrial	—		14,433		14,433		9,580		832,869		842,449
Commercial construction	25		5,349		5,374		8,072		135,603		143,675
Consumer real estate	53		6,309		6,362		8,079		896,357		904,436
Other consumer	19		1,146		1,165		157		67,726		67,883
Total	$	97	$	46,158	$	46,255	$	52,856	$	3,513,343	$	3,566,199