Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at June 30, 2014 and December 31, 2013 are as follows:



(In thousands)	June 30, 2014		December 31, 2013
Commercial:
Business	$	4,095,253	$	3,715,319
Real estate – construction and land	442,093		406,197
Real estate – business	2,277,898		2,313,550
Personal Banking:
Real estate – personal	1,819,204		1,787,626
Consumer	1,637,841		1,512,716
Revolving home equity	423,566		420,589
Consumer credit card	760,289		796,228
Overdrafts	3,895		4,611
Total loans	$	11,460,039	$	10,956,836

At June 30, 2014, 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 $1.1 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 six months ended June 30, 2014 and 2013, respectively, follows:



	For the Three Months Ended June 30							For the Six Months Ended June 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	97,881		$	63,651	$	161,532	$	94,189		$	67,343	$	161,532
Provision	486			7,069		7,555		4,553			12,662		17,215
Deductions:
Loans charged off	1,218			11,752		12,970		2,348			24,503		26,851
Less recoveries on loans	1,779			3,636		5,415		2,534			7,102		9,636
Net loan charge-offs (recoveries)	(561		)	8,116		7,555		(186		)	17,401		17,215
Balance June 30, 2014	$	98,928		$	62,604	$	161,532	$	98,928		$	62,604	$	161,532
Balance at beginning of period	$	99,821		$	68,211	$	168,032	$	105,725		$	66,807	$	172,532
Provision	(800		)	8,179		7,379		(7,390		)	18,054		10,664
Deductions:
Loans charged off	2,261			12,430		14,691		2,966			24,231		27,197
Less recoveries on loans	1,839			3,473		5,312		3,230			6,803		10,033
Net loan charge-offs (recoveries)	422			8,957		9,379		(264		)	17,428		17,164
Balance June 30, 2013	$	98,599		$	67,433	$	166,032	$	98,599		$	67,433	$	166,032

The following table shows the balance in the allowance for loan losses and the related loan balance at June 30, 2014 and December 31, 2013, 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
June 30, 2014
Commercial	$	8,274	$	76,834	$	90,654	$	6,738,410
Personal Banking	2,461		27,891		60,143		4,616,904
Total	$	10,735	$	104,725	$	150,797	$	11,355,314
December 31, 2013
Commercial	$	8,476	$	78,516	$	85,713	$	6,356,550
Personal Banking	2,424		29,120		64,919		4,492,650
Total	$	10,900	$	107,636	$	150,632	$	10,849,200

Impaired loans

The table below shows the Company’s investment in impaired loans at June 30, 2014 and December 31, 2013. 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 13.



(In thousands)	June 30, 2014		Dec. 31, 2013
Non-accrual loans	$	43,260	$	48,814
Restructured loans (accruing)	61,465		58,822
Total impaired loans	$	104,725	$	107,636

The following table provides additional information about impaired loans held by the Company at June 30, 2014 and December 31, 2013, 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
June 30, 2014
With no related allowance recorded:
Business	$	8,673	$	10,709	$	—
Real estate – construction and land	7,058		14,876		—
Real estate – business	1,914		2,223		—
	$	17,645	$	27,808	$	—
With an allowance recorded:
Business	$	27,014	$	28,858	$	3,720
Real estate – construction and land	13,762		15,893		1,829
Real estate – business	18,413		27,780		2,725
Real estate – personal	10,512		13,684		1,129
Consumer	5,448		6,135		158
Revolving home equity	560		560		2
Consumer credit card	11,371		11,371		1,172
	$	87,080	$	104,281	$	10,735
Total	$	104,725	$	132,089	$	10,735
December 31, 2013
With no related allowance recorded:
Business	$	7,969	$	9,000	$	—
Real estate – construction and land	8,766		16,067		—
Real estate – business	4,089		6,417		—
Revolving home equity	2,191		2,741		—
	$	23,015	$	34,225	$	—
With an allowance recorded:
Business	$	19,266	$	22,597	$	3,037
Real estate – construction and land	17,632		19,708		2,174
Real estate – business	20,794		29,287		3,265
Real estate – personal	10,425		13,576		1,361
Consumer	4,025		4,025		85
Revolving home equity	666		666		2
Consumer credit card	11,813		11,813		976
	$	84,621	$	101,672	$	10,900
Total	$	107,636	$	135,897	$	10,900

Total average impaired loans for the three and six month periods ended June 30, 2014 and 2013, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended June 30, 2014
Non-accrual loans	$	35,908	$	7,131	$	43,039
Restructured loans (accruing)	40,167		20,745		60,912
Total	$	76,075	$	27,876	$	103,951
For the six months ended June 30, 2014
Non-accrual loans	$	38,093	$	7,347	$	45,440
Restructured loans (accruing)	39,285		21,086		60,371
Total	$	77,378	$	28,433	$	105,811
For the three months ended June 30, 2013
Non-accrual loans	$	36,384	$	4,949	$	41,333
Restructured loans (accruing)	41,053		25,141		66,194
Total	$	77,437	$	30,090	$	107,527
For the six months ended June 30, 2013
Non-accrual loans	$	38,733	$	5,501	$	44,234
Restructured loans (accruing)	39,854		26,210		66,064
Total	$	78,587	$	31,711	$	110,298

The table below shows interest income recognized during the three and six month periods ended June 30, 2014 and 2013 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 13.



	For the Three Months Ended June 30				For the Six Months Ended June 30
(In thousands)	2014		2013		2014		2013
Interest income recognized on impaired loans:
Business	$	181	$	141	$	361	$	282
Real estate – construction and land	142		215		283		430
Real estate – business	46		50		91		100
Real estate – personal	58		70		115		139
Consumer	71		91		142		182
Revolving home equity	7		10		14		19
Consumer credit card	228		253		456		506
Total	$	733	$	830	$	1,462	$	1,658

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 June 30, 2014 and December 31, 2013.



(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
June 30, 2014
Commercial:
Business	$	4,077,664	$	5,873	$	623	$	11,093	$	4,095,253
Real estate – construction and land	423,589		10,031		275		8,198		442,093
Real estate – business	2,256,513		4,911		—		16,474		2,277,898
Personal Banking:
Real estate – personal	1,802,553		9,559		1,235		5,857		1,819,204
Consumer	1,621,468		13,377		1,358		1,638		1,637,841
Revolving home equity	421,186		1,465		915		—		423,566
Consumer credit card	744,410		8,656		7,223		—		760,289
Overdrafts	3,622		273		—		—		3,895
Total	$	11,351,005	$	54,145	$	11,629	$	43,260	$	11,460,039
December 31, 2013
Commercial:
Business	$	3,697,589	$	5,467	$	671	$	11,592	$	3,715,319
Real estate – construction and land	386,423		9,601		—		10,173		406,197
Real estate – business	2,292,385		1,340		47		19,778		2,313,550
Personal Banking:
Real estate – personal	1,771,231		9,755		1,560		5,080		1,787,626
Consumer	1,492,960		17,482		2,274		—		1,512,716
Revolving home equity	416,614		1,082		702		2,191		420,589
Consumer credit card	777,564		9,952		8,712		—		796,228
Overdrafts	4,315		296		—		—		4,611
Total	$	10,839,081	$	54,975	$	13,966	$	48,814	$	10,956,836

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
June 30, 2014
Pass	$	3,993,646	$	418,424	$	2,161,318	$	6,573,388
Special mention	52,297		1,392		44,600		98,289
Substandard	38,217		14,079		55,506		107,802
Non-accrual	11,093		8,198		16,474		35,765
Total	$	4,095,253	$	442,093	$	2,277,898	$	6,815,244
December 31, 2013
Pass	$	3,618,120	$	372,515	$	2,190,344	$	6,180,979
Special mention	61,916		1,697		53,079		116,692
Substandard	23,691		21,812		50,349		95,852
Non-accrual	11,592		10,173		19,778		41,543
Total	$	3,715,319	$	406,197	$	2,313,550	$	6,435,066

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 June 30, 2014, these were comprised of $237.4 million in personal real estate loans and $7.1 million in consumer loans, or 5.3% of the Personal Banking portfolio. At December 31, 2013, these were comprised of $244.3 million in personal real estate loans and $47.5 million in consumer loans, or 6.5% 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 June 30, 2014 and December 31, 2013 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
June 30, 2014
FICO score:
Under 600	1.8	%	5.1	%	2.0	%	4.0	%
600 - 659	3.4		9.4		4.8		11.6
660 - 719	9.4		22.8		14.7		32.9
720 - 779	25.7		29.7		30.2		28.1
780 and over	59.7		33.0		48.3		23.4
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2013
FICO score:
Under 600	1.7	%	5.4	%	2.1	%	4.1	%
600 - 659	3.3		10.1		7.3		11.7
660 - 719	10.3		23.4		15.0		32.9
720 - 779	25.8		28.3		28.5		27.9
780 and over	58.9		32.8		47.1		23.4
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 $82.3 million at June 30, 2014. 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 $20.8 million at June 30, 2014. Other performing restructured loans totaled $61.5 million at June 30, 2014. 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 $42.1 million at June 30, 2014. 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 $11.4 million at June 30, 2014. 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 June 30, 2014, these loans totaled $8.0 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 June 30, 2014, 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)	June 30, 2014		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	32,239	$	7,606
Real estate - construction and land	20,173		4,664
Real estate - business	6,013		23
Personal Banking:
Real estate - personal	6,435		446
Consumer	5,468		1,672
Revolving home equity	560		—
Consumer credit card	11,371		1,415
Total restructured loans	$	82,259	$	15,826

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 $1.2 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 $9.5 million at June 30, 2014 to lend additional funds to borrowers with restructured loans.

The Company’s holdings of foreclosed real estate totaled $8.4 million and $6.6 million at June 30, 2014 and December 31, 2013, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $1.7 million and $2.8 million at June 30, 2014 and December 31, 2013, 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.