Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at September 30, 2013 and December 31, 2012 are as follows:



(In thousands)	September 30, 2013		December 31, 2012
Commercial:
Business	$	3,634,461	$	3,134,801
Real estate – construction and land	363,194		355,996
Real estate – business	2,357,894		2,214,975
Personal Banking:
Real estate – personal	1,766,609		1,584,859
Consumer	1,489,066		1,289,650
Revolving home equity	421,569		437,567
Consumer credit card	787,215		804,245
Overdrafts	3,646		9,291
Total loans	$	10,823,654	$	9,831,384

At September 30, 2013, loans of $3.5 billion were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit obtained to secure public deposits. Additional loans of $1.4 billion were pledged at the Federal Reserve Bank as collateral for discount window borrowings.

Allowance for loan losses

A summary of the activity in the allowance for loan losses during the three and nine months ended September 30, 2013 and 2012, respectively, follows:



	For the Three Months Ended September 30							For the Nine Months Ended September 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	98,599		$	67,433	$	166,032	$	105,725		$	66,807	$	172,532
Provision	(2,885		)	7,031		4,146		(10,275		)	25,085		14,810
Deductions:
Loans charged off	913			12,174		13,087		3,879			36,405		40,284
Less recoveries on loans	3,144			3,297		6,441		6,374			10,100		16,474
Net loan charge-offs (recoveries)	(2,231		)	8,877		6,646		(2,495		)	26,305		23,810
Balance September 30, 2013	$	97,945		$	65,587	$	163,532	$	97,945		$	65,587	$	163,532
Balance at beginning of period	$	114,671		$	63,862	$	178,533	$	122,497		$	62,035	$	184,532
Provision	(2,479		)	8,060		5,581		(10,125		)	29,086		18,961
Deductions:
Loans charged off	1,795			12,480		14,275		7,502			39,710		47,212
Less recoveries on loans	1,720			3,473		5,193		7,247			11,504		18,751
Net loan charge-offs	75			9,007		9,082		255			28,206		28,461
Balance September 30, 2012	$	112,117		$	62,915	$	175,032	$	112,117		$	62,915	$	175,032

The following table shows the balance in the allowance for loan losses and the related loan balance at September 30, 2013 and December 31, 2012, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and are collectively evaluated. All other loans are collectively evaluated for impairment under ASC 450-20.



	Impaired Loans				All Other Loans
(In thousands)	Allowance for Loan Losses		Loans Outstanding		Allowance for Loan Losses		Loans Outstanding
September 30, 2013
Commercial	$	7,689	$	73,698	$	90,256	$	6,281,851
Personal Banking	2,607		30,183		62,980		4,437,922
Total	$	10,296	$	103,881	$	153,236	$	10,719,773
December 31, 2012
Commercial	$	5,434	$	80,807	$	100,291	$	5,624,965
Personal Banking	2,051		36,111		64,756		4,089,501
Total	$	7,485	$	116,918	$	165,047	$	9,714,466

Impaired loans

The table below shows the Company’s investment in impaired loans at September 30, 2013 and December 31, 2012. These loans consist of all loans on non-accrual status and other restructured loans whose terms have been modified and classified as troubled debt restructurings under ASC 310-40. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. They are discussed further in the "Troubled debt restructurings" section on page 14.



(In thousands)	Sept. 30, 2013		Dec. 31, 2012
Non-accrual loans	$	37,846	$	51,410
Restructured loans (accruing)	66,035		65,508
Total impaired loans	$	103,881	$	116,918

The following table provides additional information about impaired loans held by the Company at September 30, 2013 and December 31, 2012, segregated between loans for which an allowance for credit losses has been provided and loans for which no allowance has been provided.



(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
September 30, 2013
With no related allowance recorded:
Business	$	8,444	$	9,485	$	—
Real estate – construction and land	7,056		14,276		—
Real estate – business	6,048		9,038		—
	$	21,548	$	32,799	$	—
With an allowance recorded:
Business	$	18,026	$	20,549	$	2,740
Real estate – construction and land	22,970		24,934		2,687
Real estate – business	11,154		16,710		2,262
Real estate – personal	12,770		15,641		1,552
Consumer	4,647		4,647		134
Revolving home equity	643		643		2
Consumer credit card	12,123		12,123		919
	$	82,333	$	95,247	$	10,296
Total	$	103,881	$	128,046	$	10,296
December 31, 2012
With no related allowance recorded:
Business	$	9,964	$	12,697	$	—
Real estate – construction and land	8,440		15,102		—
Real estate – business	5,484		8,200		—
Real estate – personal	1,166		1,380		—
Revolving home equity	510		843		—
	$	25,564	$	38,222	$	—
With an allowance recorded:
Business	$	19,358	$	22,513	$	1,888
Real estate – construction and land	20,446		25,808		1,762
Real estate – business	17,115		23,888		1,784
Real estate – personal	14,157		17,304		857
Consumer	4,779		4,779		93
Revolving home equity	779		779		18
Consumer credit card	14,720		14,720		1,083
	$	91,354	$	109,791	$	7,485
Total	$	116,918	$	148,013	$	7,485

Total average impaired loans for the three and nine month periods ended September 30, 2013 and 2012, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended September 30, 2013
Non-accrual loans	$	32,570	$	4,866	$	37,436
Restructured loans (accruing)	40,881		25,163		66,044
Total	$	73,451	$	30,029	$	103,480
For the nine months ended September 30, 2013
Non-accrual loans	$	36,656	$	5,287	$	41,943
Restructured loans (accruing)	40,200		25,857		66,057
Total	$	76,856	$	31,144	$	108,000
For the three months ended September 30, 2012
Non-accrual loans	$	51,337	$	7,621	$	58,958
Restructured loans (accruing)	41,885		19,750		61,635
Total	$	93,222	$	27,371	$	120,593
For the nine months ended September 30, 2012
Non-accrual loans	$	59,159	$	7,399	$	66,558
Restructured loans (accruing)	44,063		21,204		65,267
Total	$	103,222	$	28,603	$	131,825

The table below shows interest income recognized during the three and nine month periods ended September 30, 2013 and 2012 for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 14.



	For the Three Months Ended September 30				For the Nine Months Ended September 30
(In thousands)	2013		2012		2013		2012
Interest income recognized on impaired loans:
Business	$	124	$	248	$	372	$	745
Real estate – construction and land	218		210		653		630
Real estate – business	48		72		145		216
Real estate – personal	64		22		192		65
Consumer	87		16		261		47
Revolving home equity	9		1		26		2
Consumer credit card	262		328		785		983
Total	$	812	$	897	$	2,434	$	2,688

Delinquent and non-accrual loans

The following table provides aging information on the Company’s past due and accruing loans, in addition to the balances of loans on non-accrual status, at September 30, 2013 and December 31, 2012.



(In thousands)	Current or Less Than 30 Days Past Due		30 – 89 Days Past Due		90 Days Past Due and Still Accruing		Non-accrual		Total
September 30, 2013
Commercial:
Business	$	3,616,498	$	5,837	$	596	$	11,530	$	3,634,461
Real estate – construction and land	342,953		11,126		83		9,032		363,194
Real estate – business	2,310,501		35,495		—		11,898		2,357,894
Personal Banking:
Real estate – personal	1,747,785		12,176		1,262		5,386		1,766,609
Consumer	1,473,403		14,008		1,655		—		1,489,066
Revolving home equity	419,333		1,576		660		—		421,569
Consumer credit card	769,906		10,050		7,259		—		787,215
Overdrafts	3,377		269		—		—		3,646
Total	$	10,683,756	$	90,537	$	11,515	$	37,846	$	10,823,654
December 31, 2012
Commercial:
Business	$	3,110,403	$	10,054	$	1,288	$	13,056	$	3,134,801
Real estate – construction and land	325,541		16,721		56		13,678		355,996
Real estate – business	2,194,395		3,276		—		17,304		2,214,975
Personal Banking:
Real estate – personal	1,564,281		10,862		2,854		6,862		1,584,859
Consumer	1,273,581		13,926		2,143		—		1,289,650
Revolving home equity	433,437		2,121		1,499		510		437,567
Consumer credit card	786,081		10,657		7,507		—		804,245
Overdrafts	8,925		366		—		—		9,291
Total	$	9,696,644	$	67,983	$	15,347	$	51,410	$	9,831,384

Credit quality

The following table provides information about the credit quality of the Commercial loan portfolio, using the Company’s internal rating system as an indicator. The internal rating system is a series of grades reflecting management’s risk assessment, based on its analysis of the borrower’s financial condition. The “pass” category consists of a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the “pass” category is monitored for early identification of credit deterioration. The “special mention” rating is applied to loans where the borrower exhibits negative financial trends due to borrower specific or systemic conditions that, if left uncorrected, threaten its capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. It is a transitional grade that is closely monitored for improvement or deterioration. The “substandard” rating is applied to loans where the borrower exhibits well-defined weaknesses that jeopardize its continued performance and are of a severity that the distinct possibility of default exists. Loans are placed on “non-accrual” when management does not expect to collect payments consistent with acceptable and agreed upon terms of repayment.



Commercial Loans
(In thousands)	Business		Real Estate-Construction		Real Estate- Business		Total
September 30, 2013
Pass	$	3,534,162	$	323,142	$	2,239,654	$	6,096,958
Special mention	63,931		1,636		52,241		117,808
Substandard	24,838		29,384		54,101		108,323
Non-accrual	11,530		9,032		11,898		32,460
Total	$	3,634,461	$	363,194	$	2,357,894	$	6,355,549
December 31, 2012
Pass	$	3,018,062	$	297,156	$	2,103,913	$	5,419,131
Special mention	58,793		11,400		38,396		108,589
Substandard	44,890		33,762		55,362		134,014
Non-accrual	13,056		13,678		17,304		44,038
Total	$	3,134,801	$	355,996	$	2,214,975	$	5,705,772

The credit quality of Personal Banking loans is monitored primarily on the basis of aging/delinquency, and this information is provided in the table in the above "Delinquent and non-accrual loans" section. In addition, FICO scores are obtained and updated on a quarterly basis for most of the loans in the Personal Banking portfolio. This is a published credit score designed to measure the risk of default by taking into account various factors from a borrower's financial history. The Bank normally obtains a FICO score at the loan's origination and renewal dates, and updates are obtained on a quarterly basis. Excluded from the table below are certain Personal Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At September 30, 2013, these were comprised of $228.3 million in personal real estate loans and $60.4 million in consumer loans, or 6.5% of the Personal Banking portfolio. At December 31, 2012, these were comprised of $224.5 million in personal real estate loans and $87.4 million in consumer loans, or 7.6% of the Personal Banking portfolio. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2013 and December 31, 2012 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
September 30, 2013
FICO score:
Under 600	1.8	%	5.5	%	2.0	%	4.0	%
600 - 659	3.2		10.5		8.2		11.8
660 - 719	9.7		24.5		15.4		33.6
720 - 779	26.6		28.2		29.5		28.2
780 and Over	58.7		31.3		44.9		22.4
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2012
FICO score:
Under 600	2.3	%	6.7	%	2.6	%	4.4	%
600 - 659	3.2		11.3		5.3		11.7
660 - 719	10.4		24.4		15.2		32.1
720 - 779	26.6		26.4		30.0		28.2
780 and Over	57.5		31.2		46.9		23.6
Total	100.0	%	100.0	%	100.0	%	100.0	%

Troubled debt restructurings

As mentioned previously, the Company's impaired loans include loans which have been classified as troubled debt restructurings. Total restructured loans amounted to $89.1 million at September 30, 2013. Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. Restructured loans are placed on non-accrual status if the Company does not believe it probable that amounts due under the contractual terms will be collected, and those non-accrual loans totaled $23.1 million at September 30, 2013. Other performing restructured loans totaled $66.0 million at September 30, 2013. These are primarily comprised of certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result were classified as troubled debt restructurings. These commercial loans totaled $44.7 million at September 30, 2013. These restructured loans are performing in accordance with their modified terms, and because the Company believes it probable that all amounts due under the modified terms of the agreements will be collected, interest on these loans is being recognized on an accrual basis. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $12.1 million at September 30, 2013. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At September 30, 2013, these loans totaled $9.2 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at September 30, 2013, in addition to the outstanding balances of these restructured loans which the Company considers to have been in default at any time during the past twelve months. For purposes of this disclosure, the Company considers "default" to mean 90 days or more past due as to interest or principal.



(In thousands)	September 30, 2013		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	23,167	$	7,969
Real estate - construction and land	28,631		3,507
Real estate - business	10,614		3,129
Personal Banking:
Real estate - personal	9,306		—
Consumer	2,058		—
Revolving home equity	3,232		—
Consumer credit card	12,123		710
Total restructured loans	$	89,131	$	15,315

For those loans on non-accrual status also classified as restructured, the modification did not create any further financial effect on the Company as those loans were already recorded at net realizable value. For those performing commercial loans classified as restructured, there were no concessions involving forgiveness of principal or interest and, therefore, there was no financial impact to the Company as a result of modification to these loans. No financial impact resulted from those performing loans where the debt was not reaffirmed in bankruptcy, as no changes to loan terms occurred in that process. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $1.4 million on an annual, pre-tax basis, compared to amounts contractually owed.

The allowance for loan losses related to troubled debt restructurings on non-accrual status is determined by individual evaluation, including collateral adequacy, using the same process as loans on non-accrual status which are not classified as troubled debt restructurings. Those performing loans classified as troubled debt restructurings are accruing loans which management expects to collect under contractual terms. Performing commercial loans have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they have similar risk characteristics as non-troubled debt commercial loans and are collectively evaluated based on internal risk rating, loan type, delinquency, historical experience and current economic factors. Performing personal banking loans classified as troubled debt restructurings resulted from the borrower not reaffirming the debt during bankruptcy and have had no other concession granted, other than the Bank's future limitations on collecting payment deficiencies or in pursuing foreclosure actions. As such, they have similar risk characteristics as non-troubled debt personal banking loans and are evaluated collectively based on loan type, delinquency, historical experience and current economic factors.

If a troubled debt restructuring defaults and is already on non-accrual status, the allowance for loan losses continues to be based on individual evaluation, using discounted expected cash flows or the fair value of collateral. If an accruing troubled debt restructuring defaults, the loan's risk rating is downgraded to non-accrual status and the loan's related allowance for loan losses is determined based on individual evaluation, or if necessary, the loan is charged off and collection efforts begun.

The Company had commitments of $12.8 million at September 30, 2013 to lend additional funds to borrowers with restructured loans.

The Company’s holdings of foreclosed real estate totaled $7.0 million and $13.5 million at September 30, 2013 and December 31, 2012, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.8 million and $3.5 million at September 30, 2013 and December 31, 2012, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.