ALLOWANCE FOR LOAN LOSSES

We maintain an 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 LTV 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 following tables present the age analysis of past due loans segregated by class of loans as of the dates presented:



	December 31, 2014
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		Non- performing		Total Past Due Loans		Total Loans
Commercial real estate	$	1,674,930	$	2,548	$	323	$	4,435	$	7,306	$	1,682,236
Commercial and industrial	991,136		1,227		153		1,622		3,002		994,138
Commercial construction	214,174		—		—		1,974		1,974		216,148
Residential mortgage	485,465		565		1,220		2,336		4,121		489,586
Home equity	414,303		1,756		445		2,059		4,260		418,563
Installment and other consumer	65,111		352		73		31		456		65,567
Consumer construction	2,508		—		—		—		—		2,508
Total	$	3,847,627	$	6,448	$	2,214	$	12,457	$	21,119	$	3,868,746



	December 31, 2013
(dollars in thousands)	Current		30-59 Days Past Due		60-89 Days Past Due		Non- performing		Total Past Due Loans		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
Total	$	3,531,605	$	8,535	$	3,605	$	22,454	$	34,594	$	3,566,199

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 and 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 present the recorded investment in commercial loan classes by internally assigned risk ratings as of the dates presented:



	December 31, 2014
(dollars in thousands)	Commercial Real Estate		% of Total		Commercial and Industrial		% of Total		Commercial Construction		% of Total		Total		% of Total
Pass	$	1,635,132	97.2	%	$	948,663	95.4	%	$	196,520	90.9	%	$	2,780,315	96.1	%
Special mention	23,597		1.4	%	30,357		3.1	%	12,014		5.6	%	65,968		2.3	%
Substandard	23,507		1.4	%	15,118		1.5	%	7,614		3.5	%	46,239		1.6	%
Total	$	1,682,236	100.0	%	$	994,138	100.0	%	$	216,148	100.0	%	$	2,892,522	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 present the recorded investment in consumer loan classes by performing and nonperforming status as of the dates presented:



	December 31, 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	$	487,250	99.5	%	$	416,504	99.5	%	$	65,536	99.9	%	$	2,508	100.0	%	$	971,798	99.5	%
Nonperforming	2,336		0.5	%	2,059		0.5	%	31		0.1	%	—		—	%	4,426		0.5	%
Total	$	489,586	100.0	%	$	418,563	100.0	%	$	65,567	100.0	%	$	2,508	100.0	%	$	976,224	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 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 related information on those impaired loans as of the dates presented:



	December 31, 2014						December 31, 2013
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With a related allowance recorded:
Commercial real estate	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and industrial	—		—		—		—		—		—
Commercial construction	—		—		—		681		1,383		25
Consumer real estate	43		43		43		53		53		53
Other consumer	20		20		11		33		33		19
Total with a Related Allowance Recorded	63		63		54		767		1,469		97
Without a related allowance recorded:
Commercial real estate	19,890		25,262		—		26,968		35,474		—
Commercial and industrial	9,218		9,449		—		9,580		9,703		—
Commercial construction	7,605		11,293		—		7,391		12,353		—
Consumer real estate	7,159		7,733		—		8,026		9,464		—
Other consumer	42		48		—		124		128		—
Total without a Related Allowance Recorded	43,914		53,785		—		52,089		67,122		—
Total:
Commercial real estate	19,890		25,262		—		26,968		35,474		—
Commercial and industrial	9,218		9,449		—		9,580		9,703		—
Commercial construction	7,605		11,293		—		8,072		13,736		25
Consumer real estate	7,202		7,776		43		8,079		9,517		53
Other consumer	62		68		11		157		161		19
Total	$	43,977	$	53,848	$	54	$	52,856	$	68,591	$	97

The following table summarizes investments in loans considered to be impaired and related information on those impaired loans for the years presented:



	For the Year Ended
	December 31, 2014				December 31, 2013
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With a related allowance recorded:
Commercial real estate	$	—	$	—	$	1,895	$	—
Commercial and industrial	—		—		—		—
Commercial construction	—		—		1,652		49
Consumer real estate	48		4		60		6
Other consumer	24		2		24		4
Total with a Related Allowance Recorded	72		6		3,631		59
Without a related allowance recorded:
Commercial real estate	20,504		684		29,314		929
Commercial and industrial	9,246		241		11,439		254
Commercial construction	8,145		227		14,112		326
Consumer real estate	7,027		396		8,714		436
Other consumer	56		2		114		6
Total without a Related Allowance Recorded	44,978		1,550		63,693		1,951
Total:
Commercial real estate	20,504		684		31,209		929
Commercial and industrial	9,246		241		11,439		254
Commercial construction	8,145		227		15,764		375
Consumer real estate	7,074		400		8,774		442
Other consumer	81		4		138		10
Total	$	45,050	$	1,556	$	67,324	$	2,010

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



	2014
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of year	$	18,921		$	14,433		$	5,374		$	6,362		$	1,165		$	46,255
Charge-offs	(2,041		)	(1,267		)	(712		)	(1,200		)	(1,133		)	(6,353		)
Recoveries	1,798			3,647			146			350			353			6,294
Net (Charge-offs)/ Recoveries	(243		)	2,380			(566		)	(850		)	(780		)	(59		)
Provision for loan losses	1,486			(3,145		)	1,285			821			1,268			1,715
Balance at End of Year	$	20,164		$	13,668		$	6,093		$	6,333		$	1,653		$	47,911



	2013
(dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Commercial Construction			Consumer Real Estate			Other Consumer			Total Loans
Balance at beginning of year	$	25,246		$	7,759		$	7,500		$	5,058		$	921		$	46,484
Charge-offs	(4,601		)	(2,714		)	(4,852		)	(2,407		)	(1,002		)	(15,576		)
Recoveries	3,388			2,142			531			651			324			7,036
Net (Charge-offs)/ Recoveries	(1,213		)	(572		)	(4,321		)	(1,756		)	(678		)	(8,540		)
Provision for loan losses	(5,112		)	7,246			2,195			3,060			922			8,311
Balance at End of Year	$	18,921		$	14,433		$	5,374		$	6,362		$	1,165		$	46,255

The following tables present the ALL and recorded investments in loans by category as of December 31:



	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	$	—	$	20,164	$	20,164	$	19,890	$	1,662,346	$	1,682,236
Commercial and industrial	—		13,668		13,668		9,218		984,920		994,138
Commercial construction	—		6,093		6,093		7,605		208,543		216,148
Consumer real estate	43		6,290		6,333		7,202		903,455		910,657
Other consumer	11		1,642		1,653		62		65,505		65,567
Total	$	54	$	47,857	$	47,911	$	43,977	$	3,824,769	$	3,868,746



	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