Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at September 30, 2018 and December 31, 2017 are as follows:



(In thousands)	September 30, 2018		December 31, 2017
Commercial:
Business	$	4,966,722	$	4,958,554
Real estate – construction and land	999,691		968,820
Real estate – business	2,726,042		2,697,452
Personal Banking:
Real estate – personal	2,120,672		2,062,787
Consumer	1,967,465		2,104,487
Revolving home equity	375,322		400,587
Consumer credit card	788,111		783,864
Overdrafts	11,534		7,123
Total loans	$	13,955,559	$	13,983,674

At September 30, 2018, loans of $3.7 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 $1.7 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, 2018 and 2017, 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	$	93,851		$	65,681	$	159,532	$	93,704		$	65,828	$	159,532
Provision	411			9,588		9,999		2			30,436		30,438
Deductions:
Loans charged off	485			12,515		13,000		1,213			39,203		40,416
Less recoveries on loans	314			2,887		3,201		1,598			8,580		10,178
Net loan charge-offs (recoveries)	171			9,628		9,799		(385		)	30,623		30,238
Balance September 30, 2018	$	94,091		$	65,641	$	159,732	$	94,091		$	65,641	$	159,732
Balance at beginning of period	$	92,739		$	65,093	$	157,832	$	91,361		$	64,571	$	155,932
Provision	24			10,680		10,704		1,026			31,564		32,590
Deductions:
Loans charged off	378			13,592		13,970		1,455			39,337		40,792
Less recoveries on loans	651			2,615		3,266		2,104			7,998		10,102
Net loan charge-offs (recoveries)	(273		)	10,977		10,704		(649		)	31,339		30,690
Balance September 30, 2017	$	93,036		$	64,796	$	157,832	$	93,036		$	64,796	$	157,832

The following table shows the balance in the allowance for loan losses and the related loan balance at September 30, 2018 and December 31, 2017, disaggregated on the basis of impairment methodology. Impaired loans evaluated under Accounting Standards Codification (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, 2018
Commercial	$	2,746	$	91,119	$	91,345	$	8,601,336
Personal Banking	898		17,641		64,743		5,245,463
Total	$	3,644	$	108,760	$	156,088	$	13,846,799
December 31, 2017
Commercial	$	3,067	$	92,613	$	90,637	$	8,532,213
Personal Banking	1,176		22,182		64,652		5,336,666
Total	$	4,243	$	114,795	$	155,289	$	13,868,879

Impaired loans

The table below shows the Company’s investment in impaired loans at September 30, 2018 and December 31, 2017. 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. 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 15.



(In thousands)	Sept. 30, 2018		Dec. 31, 2017
Non-accrual loans	$	8,369	$	11,983
Restructured loans (accruing)	100,391		102,812
Total impaired loans	$	108,760	$	114,795

The following table provides additional information about impaired loans held by the Company at September 30, 2018 and December 31, 2017, 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, 2018
With no related allowance recorded:
Business	$	4,871	$	8,936	$	—
	$	4,871	$	8,936	$	—
With an allowance recorded:
Business	$	75,324	$	75,612	$	2,262
Real estate – construction and land	412		416		11
Real estate – business	10,512		11,112		473
Real estate – personal	5,177		7,347		274
Consumer	5,309		5,309		48
Revolving home equity	68		68		—
Consumer credit card	7,087		7,087		576
	$	103,889	$	106,951	$	3,644
Total	$	108,760	$	115,887	$	3,644
December 31, 2017
With no related allowance recorded:
Business	$	5,356	$	9,000	$	—
Real estate – business	1,299		1,303		—
Consumer	779		817		—
	$	7,434	$	11,120	$	—
With an allowance recorded:
Business	$	72,589	$	73,168	$	2,455
Real estate – construction and land	837		841		27
Real estate – business	12,532		13,071		585
Real estate – personal	9,126		11,914		532
Consumer	5,388		5,426		67
Revolving home equity	204		204		11
Consumer credit card	6,685		6,685		566
	$	107,361	$	111,309	$	4,243
Total	$	114,795	$	122,429	$	4,243

Total average impaired loans for the three and nine month periods ended September 30, 2018 and 2017, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended September 30, 2018
Non-accrual loans	$	7,477	$	1,862	$	9,339
Restructured loans (accruing)	83,493		16,409		99,902
Total	$	90,970	$	18,271	$	109,241
For the nine months ended September 30, 2018
Non-accrual loans	$	7,888	$	2,261	$	10,149
Restructured loans (accruing)	81,543		17,426		98,969
Total	$	89,431	$	19,687	$	109,118
For the three months ended September 30, 2017
Non-accrual loans	$	8,938	$	4,238	$	13,176
Restructured loans (accruing)	42,930		18,691		61,621
Total	$	51,868	$	22,929	$	74,797
For the nine months ended September 30, 2017
Non-accrual loans	$	9,800	$	4,098	$	13,898
Restructured loans (accruing)	36,567		16,901		53,468
Total	$	46,367	$	20,999	$	67,366

The table below shows interest income recognized during the three and nine month periods ended September 30, 2018 and 2017, respectively, for impaired loans held at the end of each period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 15.



	For the Three Months Ended September 30				For the Nine Months Ended September 30
(In thousands)	2018		2017		2018		2017
Interest income recognized on impaired loans:
Business	$	939	$	473	$	2,817	$	1,418
Real estate – construction and land	6		10		19		30
Real estate – business	110		118		329		354
Real estate – personal	47		104		142		311
Consumer	79		79		238		236
Revolving home equity	2		7		6		20
Consumer credit card	129		162		386		486
Total	$	1,312	$	953	$	3,937	$	2,855

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, 2018 and December 31, 2017.



(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, 2018
Commercial:
Business	$	4,957,570	$	3,673	$	348	$	5,131	$	4,966,722
Real estate – construction and land	995,134		4,553		—		4		999,691
Real estate – business	2,708,294		16,281		—		1,467		2,726,042
Personal Banking:
Real estate – personal	2,110,198		7,571		1,136		1,767		2,120,672
Consumer	1,936,208		28,249		3,008		—		1,967,465
Revolving home equity	372,931		1,517		874		—		375,322
Consumer credit card	769,158		10,328		8,625		—		788,111
Overdrafts	11,199		335		—		—		11,534
Total	$	13,860,692	$	72,507	$	13,991	$	8,369	$	13,955,559
December 31, 2017
Commercial:
Business	$	4,949,148	$	3,085	$	374	$	5,947	$	4,958,554
Real estate – construction and land	967,321		1,473		21		5		968,820
Real estate – business	2,694,234		482		—		2,736		2,697,452
Personal Banking:
Real estate – personal	2,050,787		6,218		3,321		2,461		2,062,787
Consumer	2,067,025		32,674		3,954		834		2,104,487
Revolving home equity	397,349		1,962		1,276		—		400,587
Consumer credit card	764,568		10,115		9,181		—		783,864
Overdrafts	6,840		283		—		—		7,123
Total	$	13,897,272	$	56,292	$	18,127	$	11,983	$	13,983,674

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, 2018
Pass	$	4,772,286	$	987,352	$	2,649,964	$	8,409,602
Special mention	40,307		11,474		29,016		80,797
Substandard	148,998		861		45,595		195,454
Non-accrual	5,131		4		1,467		6,602
Total	$	4,966,722	$	999,691	$	2,726,042	$	8,692,455
December 31, 2017
Pass	$	4,740,013	$	955,499	$	2,593,005	$	8,288,517
Special mention	59,177		10,614		50,577		120,368
Substandard	153,417		2,702		51,134		207,253
Non-accrual	5,947		5		2,736		8,688
Total	$	4,958,554	$	968,820	$	2,697,452	$	8,624,826

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 real estate loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $205.4 million at September 30, 2018 and $219.2 million at December 31, 2017. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $170.3 million at September 30, 2018 and $145.0 million at December 31, 2017. As the healthcare loans are guaranteed by the hospital, FICO scores are not considered relevant for this program. The personal real estate loans and consumer loans excluded below totaled less than 8% 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, 2018 and December 31, 2017 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
September 30, 2018
FICO score:
Under 600	1.0	%	3.2	%	1.0	%	4.4	%
600 - 659	2.0		4.9		1.8		14.2
660 - 719	9.2		18.3		9.5		35.3
720 - 779	25.4		25.8		23.4		26.6
780 and over	62.4		47.8		64.3		19.5
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2017
FICO score:
Under 600	1.3	%	3.3	%	1.1	%	4.7	%
600 - 659	2.1		5.5		1.7		14.4
660 - 719	10.5		17.3		9.5		34.4
720 - 779	25.6		26.8		21.4		26.0
780 and over	60.5		47.1		66.3		20.5
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, as shown in the table below. 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. Commercial performing restructured loans are primarily comprised of certain business, construction and business real estate loans classified as substandard, but renewed at rates judged to be non market. These 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 and other small consumer loans under various debt management and assistance programs. Modifications to these loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company also classified as consumer bankruptcy certain personal real estate, revolving home equity, and consumer loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments. Other consumer loans classified as troubled debt restructurings consist of various other workout arrangements with consumer customers.



(In thousands)		September 30, 2018		December 31, 2017
Accruing restructured loans:
	Commercial	$	85,232	$	88,588
	Assistance programs	7,386		6,941
	Consumer bankruptcy	4,327		3,916
	Other consumer	3,446		3,367
Non-accrual loans		5,831		7,796
Total troubled debt restructurings		$	106,222	$	110,608

The table below shows the balance of troubled debt restructurings by loan classification at September 30, 2018, 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, 2018		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	79,963	$	28
Real estate - construction and land	408		—
Real estate - business	9,045		—
Personal Banking:
Real estate - personal	4,342		292
Consumer	5,309		89
Revolving home equity	68		—
Consumer credit card	7,087		591
Total troubled debt restructurings	$	106,222	$	1,000

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 loans under various debt management and assistance programs were estimated to decrease interest income by approximately $792 thousand on an annual, pre-tax basis, compared to amounts contractually owed. Other modifications to consumer loans mainly involve extensions and other small modifications that did not include the forgiveness of principal or interest.

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 having no other concessions granted other than being renewed at non-market interest rates are judged to 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 $7.7 million at September 30, 2018 to lend additional funds to borrowers with restructured loans.

Loans held for sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company has elected the fair value option for these loans. The election of the fair value option aligns the accounting for these loans with the related economic hedges discussed in Note 10. The loans are primarily sold to FNMA, FHLMC, and GNMA. At September 30, 2018, the fair value of these loans was $10.3 million, and the unpaid principal balance was $10.0 million.

The Company also designates student loan originations as held for sale. The borrowers are credit-worthy students who are attending colleges and universities. The loans are intended to be sold in the secondary market, and the Company maintains contracts with Sallie Mae to sell the loans within 210 days after the last disbursement to the student. These loans are carried at lower of cost or fair value, which at September 30, 2018 totaled $6.6 million.

At September 30, 2018, none of the loans held for sale were on non-accrual status or 90 days past due and still accruing.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $1.2 million and $681 thousand at September 30, 2018 and December 31, 2017, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $2.3 million and $2.7 million at September 30, 2018 and December 31, 2017, respectively. Upon acquisition, these assets are recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. They are subsequently carried at the lower of this cost basis or fair value less estimated selling costs.