Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at March 31, 2019 and December 31, 2018 are as follows:



(In thousands)	March 31, 2019		December 31, 2018
Commercial:
Business	$	5,175,541	$	5,106,427
Real estate – construction and land	925,269		869,659
Real estate – business	2,859,614		2,875,788
Personal Banking:
Real estate – personal	2,125,087		2,127,083
Consumer	1,893,212		1,955,572
Revolving home equity	364,010		376,399
Consumer credit card	772,396		814,134
Overdrafts	5,593		15,236
Total loans	$	14,120,722	$	14,140,298

At March 31, 2019, loans of $3.8 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 $1.6 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 months ended March 31, 2019 and 2018, respectively, follows:



	For the Three Months Ended March 31
(In thousands)	Commercial			Personal Banking		Total
Balance at January 1	$	92,869		$	67,063	$	159,932
Provision	1,168			11,295		12,463
Deductions:
Loans charged off	527			14,204		14,731
Less recoveries on loans	133			2,885		3,018
Net loan charge-offs	394			11,319		11,713
Balance March 31, 2019	$	93,643		$	67,039	$	160,682
Balance at January 1	$	93,704		$	65,828	$	159,532
Provision	(894		)	11,290		10,396
Deductions:
Loans charged off	366			13,365		13,731
Less recoveries on loans	621			2,714		3,335
Net loan charge-offs (recoveries)	(255		)	10,651		10,396
Balance March 31, 2018	$	93,065		$	66,467	$	159,532

The following table shows the balance in the allowance for loan losses and the related loan balance at March 31, 2019 and December 31, 2018, 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 deemed to have similar risk characteristics, which 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
March 31, 2019
Commercial	$	1,720	$	66,739	$	91,923	$	8,893,685
Personal Banking	923		17,433		66,116		5,142,865
Total	$	2,643	$	84,172	$	158,039	$	14,036,550
December 31, 2018
Commercial	$	1,780	$	61,496	$	91,089	$	8,790,378
Personal Banking	916		17,120		66,147		5,271,304
Total	$	2,696	$	78,616	$	157,236	$	14,061,682

Impaired loans

The table below shows the Company’s investment in impaired loans at March 31, 2019 and December 31, 2018. 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 below.



(In thousands)	Mar. 31, 2019		Dec. 31, 2018
Non-accrual loans	$	12,167	$	12,536
Restructured loans (accruing)	72,005		66,080
Total impaired loans	$	84,172	$	78,616

The following table provides additional information about impaired loans held by the Company at March 31, 2019 and December 31, 2018, 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
March 31, 2019
With no related allowance recorded:
Business	$	8,381	$	14,376	$	—
	$	8,381	$	14,376	$	—
With an allowance recorded:
Business	$	46,736	$	46,873	$	1,241
Real estate – construction and land	414		419		11
Real estate – business	11,208		11,809		468
Real estate – personal	4,380		5,902		243
Consumer	5,365		5,365		34
Revolving home equity	39		39		1
Consumer credit card	7,649		7,649		645
	$	75,791	$	78,056	$	2,643
Total	$	84,172	$	92,432	$	2,643
December 31, 2018
With no related allowance recorded:
Business	$	8,725	$	14,477	$	—
	$	8,725	$	14,477	$	—
With an allowance recorded:
Business	$	40,286	$	40,582	$	1,223
Real estate – construction and land	416		421		11
Real estate – business	12,069		12,699		546
Real estate – personal	4,461		6,236		266
Consumer	5,510		5,510		38
Revolving home equity	40		40		1
Consumer credit card	7,109		7,109		611
	$	69,891	$	72,597	$	2,696
Total	$	78,616	$	87,074	$	2,696

Total average impaired loans for the three month periods ended March 31, 2019 and 2018, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended March 31, 2019
Non-accrual loans	$	10,347	$	1,973	$	12,320
Restructured loans (accruing)	53,607		15,437		69,044
Total	$	63,954	$	17,410	$	81,364
For the three months ended March 31, 2018
Non-accrual loans	$	8,523	$	2,928	$	11,451
Restructured loans (accruing)	79,258		18,773		98,031
Total	$	87,781	$	21,701	$	109,482

The table below shows interest income recognized during the three month periods ended March 31, 2019 and 2018, 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 below.



	For the Three Months Ended March 31
(In thousands)	2019		2018
Interest income recognized on impaired loans:
Business	$	1,008	$	760
Real estate – construction and land	6		24
Real estate – business	151		113
Real estate – personal	35		111
Consumer	80		80
Revolving home equity	1		2
Consumer credit card	146		128
Total	$	1,427	$	1,218

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 March 31, 2019 and December 31, 2018.



(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
March 31, 2019
Commercial:
Business	$	5,154,124	$	12,178	$	670	$	8,569	$	5,175,541
Real estate – construction and land	924,028		1,237		—		4		925,269
Real estate – business	2,844,335		13,412		121		1,746		2,859,614
Personal Banking:
Real estate – personal	2,113,316		7,335		2,588		1,848		2,125,087
Consumer	1,866,038		24,905		2,269		—		1,893,212
Revolving home equity	362,373		1,167		470		—		364,010
Consumer credit card	751,639		10,220		10,537		—		772,396
Overdrafts	5,315		278		—		—		5,593
Total	$	14,021,168	$	70,732	$	16,655	$	12,167	$	14,120,722
December 31, 2018
Commercial:
Business	$	5,086,912	$	10,057	$	473	$	8,985	$	5,106,427
Real estate – construction and land	867,692		1,963		—		4		869,659
Real estate – business	2,867,347		6,704		22		1,715		2,875,788
Personal Banking:
Real estate – personal	2,118,045		6,041		1,165		1,832		2,127,083
Consumer	1,916,320		35,608		3,644		—		1,955,572
Revolving home equity	374,830		875		694		—		376,399
Consumer credit card	792,334		11,140		10,660		—		814,134
Overdrafts	14,937		299		—		—		15,236
Total	$	14,038,417	$	72,687	$	16,658	$	12,536	$	14,140,298

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
March 31, 2019
Pass	$	4,954,297	$	876,805	$	2,761,215	$	8,592,317
Special mention	119,582		47,397		49,151		216,130
Substandard	93,093		1,063		47,502		141,658
Non-accrual	8,569		4		1,746		10,319
Total	$	5,175,541	$	925,269	$	2,859,614	$	8,960,424
December 31, 2018
Pass	$	4,915,042	$	866,527	$	2,777,374	$	8,558,943
Special mention	84,391		1,917		51,845		138,153
Substandard	98,009		1,211		44,854		144,074
Non-accrual	8,985		4		1,715		10,704
Total	$	5,106,427	$	869,659	$	2,875,788	$	8,851,874

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 section on "Delinquent and non-accrual loans". 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 the loans generally pertain to commercial customer activities and are often underwritten with other collateral considerations. These loans totaled $196.4 million at March 31, 2019 and $201.7 million at December 31, 2018. The table also excludes consumer loans related to the Company's patient healthcare loan program, which totaled $167.2 million at March 31, 2019 and $170.3 million at December 31, 2018. As the healthcare loans are guaranteed by the hospital, customer FICO scores are not obtained for these loans. 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 March 31, 2019 and December 31, 2018 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
March 31, 2019
FICO score:
Under 600	1.1	%	3.4	%	1.2	%	5.4	%
600 - 659	1.7		5.3		1.9		14.0
660 - 719	9.9		18.0		9.5		35.6
720 - 779	25.3		24.3		22.8		26.3
780 and over	62.0		49.0		64.6		18.7
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2018
FICO score:
Under 600	1.1	%	3.1	%	0.8	%	4.4	%
600 - 659	1.8		4.8		1.7		14.0
660 - 719	9.4		16.1		9.1		34.8
720 - 779	24.7		25.7		24.0		26.4
780 and over	63.0		50.3		64.4		20.4
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, 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)		March 31, 2019		December 31, 2018
Accruing restructured loans:
	Commercial	$	56,524	$	50,904
	Assistance programs	7,960		7,410
	Consumer bankruptcy	3,946		4,103
	Other consumer	3,575		3,663
Non-accrual loans		9,352		9,759
Total troubled debt restructurings		$	81,357	$	75,839

The table below shows the balance of troubled debt restructurings by loan classification at March 31, 2019, 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)	March 31, 2019		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	54,928	$	—
Real estate - construction and land	411		—
Real estate - business	9,462		—
Personal Banking:
Real estate - personal	3,503		217
Consumer	5,365		47
Revolving home equity	39		—
Consumer credit card	7,649		685
Total troubled debt restructurings	$	81,357	$	949

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. However, the effects of modifications to loans under various debt management and assistance programs were estimated to decrease interest income by approximately $1.0 million 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 $2.7 million at March 31, 2019 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 11. The loans are primarily sold to FNMA, FHLMC, and GNMA. At March 31, 2019, the fair value of these loans was $8.9 million, and the unpaid principal balance was $8.5 million.

The Company also designates certain 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 March 31, 2019 totaled $11.2 million.

At March 31, 2019, 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 $737 thousand and $1.4 million at March 31, 2019 and December 31, 2018, respectively. Personal property acquired in repossession, generally autos, marine and recreational vehicles (RV), totaled $2.6 million and $2.0 million at March 31, 2019 and December 31, 2018, 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.