5. Allowance for credit losses

Changes in the allowance for credit losses for the years ended December 31, 2012, 2011 and 2010 were as follows:


	Commercial, Financial, Leasing, etc.			Real Estate
2012	Commercial, Financial, Leasing, etc.			Commercial			Residential			Consumer			Unallocated		Total
	(In thousands)
Beginning balance	$	234,022		$	367,637		$	91,915		$	143,121		$	71,595	$	908,290
Provision for credit losses		42,510			5,211			34,864			119,235			2,180		204,000
Net charge-offs
Charge-offs		(41,148	)		(41,945	)		(44,314	)		(103,348	)		—		(230,755	)
Recoveries		11,375			6,198			6,342			20,410			—		44,325

Net charge-offs		(29,773	)		(35,747	)		(37,972	)		(82,938	)		—		(186,430	)

Ending balance	$	246,759		$	337,101		$	88,807		$	179,418		$	73,775	$	925,860

2011
Beginning balance	$	212,579		$	400,562		$	86,351		$	133,067		$	70,382	$	902,941
Provision for credit losses		66,240			44,404			57,081			101,062			1,213		270,000
Net charge-offs
Charge-offs		(55,021	)		(86,869	)		(58,351	)		(109,246	)		—		(309,487	)
Recoveries		10,224			9,540			6,834			18,238			—		44,836

Net charge-offs		(44,797	)		(77,329	)		(51,517	)		(91,008	)		—		(264,651	)

Ending balance	$	234,022		$	367,637		$	91,915		$	143,121		$	71,595	$	908,290

2010
Beginning balance	$	219,170		$	359,770		$	91,582		$	137,124		$	70,376	$	878,022
Provision for credit losses		58,438			159,023			52,960			97,573			6		368,000
Consolidation of loan securitization trust		—			—			2,752			—			—		2,752
Net charge-offs
Charge-offs		(91,650	)		(124,087	)		(71,016	)		(125,593	)		—		(412,346	)
Recoveries		26,621			5,856			10,073			23,963			—		66,513

Net charge-offs		(65,029	)		(118,231	)		(60,943	)		(101,630	)		—		(345,833	)

Ending balance	$	212,579		$	400,562		$	86,351		$	133,067		$	70,382	$	902,941

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any loan or lease type.

In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and detailed or intensified credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan by loan analysis of larger balance commercial and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system which is applied to commercial and commercial real estate credits on an individual loan basis. Loan officers are responsible for continually assigning grades to these loans based on standards outlined in the Company’s Credit Policy. Internal loan grades are also monitored by the Company’s loan review department to ensure consistency and strict adherence to the prescribed standards. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. As updated appraisals are obtained on individual loans or other events in the market place indicate that collateral values have significantly changed, individual loan grades are adjusted as appropriate. Changes in other factors cited may also lead to loan grade changes at any time. Except for consumer and residential mortgage loans that are considered smaller balance homogenous loans and acquired loans that are evaluated on an aggregated basis, the Company considers a loan to be impaired for purposes of applying GAAP when, based on current information and events, it is probable that the Company will be unable to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days. Regardless of loan type, the Company considers a loan to be impaired if it qualifies as a troubled debt restructuring. Modified loans, including smaller balance homogenous loans, that are considered to be troubled debt restructurings are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows.

The following tables provide information with respect to loans and leases that were considered impaired as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010.


	December 31, 2012						December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
With an allowance recorded:
Commercial, financial, leasing, etc.	$	127,282	$	149,534	$	33,829	$	118,538	$	145,510	$	48,674
Real estate:
Commercial		121,542		143,846		23,641		102,886		128,456		17,651
Residential builder and developer		115,306		216,218		25,661		159,293		280,869		52,562
Other commercial construction		73,544		76,869		6,836		20,234		24,639		3,836
Residential		103,451		121,819		3,521		101,882		119,498		4,420
Residential Alt-A		128,891		141,940		17,000		150,396		162,978		25,000
Consumer:
Home equity lines and loans		12,360		13,567		2,254		9,385		10,670		2,306
Automobile		49,210		49,210		14,273		53,710		53,710		11,468
Other		14,408		14,408		5,667		8,401		8,401		2,084

		745,994		927,411		132,682		724,725		934,731		168,001

With no related allowance recorded:
Commercial, financial, leasing, etc.		32,631		42,199		—		53,104		60,778		—
Real estate:
Commercial		78,380		100,337		—		71,636		91,118		—
Residential builder and developer		74,307		105,438		—		133,156		177,277		—
Other commercial construction		23,018		23,532		—		86,652		89,862		—
Residential		86,342		96,448		—		19,686		25,625		—
Residential Alt-A		31,354		58,768		—		34,356		60,942		—

		326,032		426,722		—		398,590		505,602		—

Total:
Commercial, financial, leasing, etc.	$	159,913	$	191,733	$	33,829	$	171,642	$	206,288	$	48,674
Real estate:
Commercial		199,922		244,183		23,641		174,522		219,574		17,651
Residential builder and developer		189,613		321,656		25,661		292,449		458,146		52,562
Other commercial construction		96,562		100,401		6,836		106,886		114,501		3,836
Residential		189,793		218,267		3,521		121,568		145,123		4,420
Residential Alt-A		160,245		200,708		17,000		184,752		223,920		25,000
Consumer:
Home equity lines and loans		12,360		13,567		2,254		9,385		10,670		2,306
Automobile		49,210		49,210		14,273		53,710		53,710		11,468
Other		14,408		14,408		5,667		8,401		8,401		2,084

Total	$	1,072,026	$	1,354,133	$	132,682	$	1,123,315	$	1,440,333	$	168,001


	Year Ended December 31, 2012						Year Ended December 31, 2011
	Average Recorded Investment		Interest Income Recognized				Average Recorded Investment		Interest Income Recognized
	Average Recorded Investment		Total		Cash Basis		Average Recorded Investment		Total		Cash Basis
	(In thousands)
Commercial, financial, leasing, etc.	$	151,314	$	2,938	$	2,938	$	163,485	$	3,306	$	3,278
Real estate:
Commercial		185,171		2,834		2,834		189,837		2,060		1,985
Residential builder and developer		249,191		1,563		1,102		317,296		1,948		860
Other commercial construction		99,672		5,020		5,020		105,947		926		684
Residential		132,888		5,284		3,300		99,107		4,271		2,286
Residential Alt-A		171,546		7,175		2,226		196,161		7,713		1,965
Consumer:
Home equity lines and loans		11,322		663		179		11,428		681		106
Automobile		51,650		3,470		724		56,862		3,850		1,060
Other		11,028		472		197		5,006		273		89

Total	$	1,063,782	$	29,419	$	18,520	$	1,145,129	$	25,028	$	12,313


	Year Ended December 31, 2010
			Interest Income Recognized
	Average Recorded Investment		Total		Cash Basis
	(In thousands)
Commercial, financial, leasing, etc.	$	244,687	$	4,834	$	4,810
Real estate:
Commercial		240,123		1,983		1,740
Residential builder and developer		252,229		1,716		746
Other commercial construction		60,416		371		357
Residential		62,104		3,028		1,755
Residential Alt-A		220,589		8,397		1,758
Consumer:
Home equity lines and loans		11,807		790		202
Automobile		54,221		3,684		1,233
Other		3,165		243		48

Total	$	1,149,341	$	25,046	$	12,649

In accordance with the previously described policies, the Company utilizes a loan grading system that is applied to all commercial loans and commercial real estate loans. Loan grades are utilized to differentiate risk within the portfolio and consider the expectations of default for each loan. Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible “pass” loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. All larger balance criticized commercial and commercial real estate loans are individually reviewed by centralized loan review personnel each quarter to determine the appropriateness of the assigned loan grade, including whether the loan should be reported as accruing or nonaccruing. Smaller balance criticized loans are analyzed by business line risk management areas to ensure proper loan grade classification. Furthermore, criticized nonaccrual commercial loans and commercial real estate loans are considered impaired and, as a result, specific loss allowances on such loans are established within the allowance for credit losses to the extent appropriate in each individual instance. The following table summarizes the loan grades applied to the various classes of the Company’s commercial and commercial real estate loans.


			Real Estate
	Commercial, Financial, Leasing, etc		Commercial		Residential Builder and Developer		Other Commercial Construction
	(In thousands)
December 31, 2012
Pass	$	16,889,753	$	21,275,182	$	922,141	$	2,307,436
Criticized accrual		735,292		804,132		85,520		186,843
Criticized nonaccrual		151,908		193,859		181,865		36,812

Total	$	17,776,953	$	22,273,173	$	1,189,526	$	2,531,091

December 31, 2011
Pass	$	14,869,636	$	19,089,252	$	1,085,970	$	2,254,609
Criticized accrual		701,202		999,085		140,787		282,399
Criticized nonaccrual		163,598		171,111		281,576		106,325

Total	$	15,734,436	$	20,259,448	$	1,508,333	$	2,643,333

In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s Credit Department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of the original balance of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis giving consideration to estimated collateral values.

The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes management’s subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable.

The allocation of the allowance for credit losses summarized on the basis of the Company’s impairment methodology was as follows:


	Commercial, Financial, Leasing, etc.		Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential		Consumer		Total
	(In thousands)
December 31, 2012
Individually evaluated for impairment	$	33,669	$	55,291	$	20,502	$	22,194	$	131,656
Collectively evaluated for impairment		212,930		280,789		66,684		156,661		717,064
Purchased impaired		160		1,021		1,621		563		3,365

Allocated	$	246,759	$	337,101	$	88,807	$	179,418		852,085

Unallocated										73,775

Total									$	925,860

December 31, 2011
Individually evaluated for impairment	$	48,517	$	71,784	$	29,420	$	15,858	$	165,579
Collectively evaluated for impairment		185,048		291,271		60,742		126,613		663,674
Purchased impaired		457		4,582		1,753		650		7,442

Allocated	$	234,022	$	367,637	$	91,915	$	143,121		836,695

Unallocated										71,595

Total									$	908,290

The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology was as follows:


	Commercial, Financial, Leasing, etc.		Real Estate
	Commercial, Financial, Leasing, etc.		Commercial		Residential		Consumer		Total
	(In thousands)
December 31, 2012
Individually evaluated for impairment	$	159,761	$	480,335	$	349,477	$	75,978	$	1,065,551
Collectively evaluated for impairment		17,599,755		25,123,758		10,854,591		11,480,188		65,058,292
Purchased impaired		17,437		389,697		36,769		3,211		447,114

Total	$	17,776,953	$	25,993,790	$	11,240,837	$	11,559,377	$	66,570,957


December 31, 2011
Individually evaluated for impairment	$	171,442	$	561,615	$	306,320	$	71,496	$	1,110,873
Collectively evaluated for impairment		15,539,232		23,281,585		7,560,104		11,950,849		58,331,770
Purchased impaired		23,762		567,914		56,741		4,945		653,362

Total	$	15,734,436	$	24,411,114	$	7,923,165	$	12,027,290	$	60,096,005