5. Allowance for Loan and Lease Losses

The Company must maintain an allowance for loan and lease losses (the “Allowance”) that is adequate to absorb estimated probable credit losses associated with its loan and lease portfolio. The Allowance consists of an allocated portion, which covers estimated credit losses for specifically identified loans and pools of loans and leases, and an unallocated portion.

Segmentation

Management has identified three primary portfolio segments in estimating the Allowance: commercial lending, residential real estate lending and consumer lending. Commercial lending is further segmented into four distinct portfolios based on characteristics relating to the borrower, transaction, and collateral. These portfolio segments are: commercial and industrial, commercial real estate, construction, and lease financing. Residential real estate is not further segmented, but consists of single-family residential mortgages, real estate secured installment loans and home equity lines of credit. Consumer lending is not further segmented, but consists primarily of automobile loans, credit cards, and other installment loans. Management has developed a methodology for each segment taking into consideration portfolio segment-specific factors such as product type, loan portfolio characteristics, management information systems, and other risk factors.

Specific Allocation

Commercial

A specific allocation is determined for individually impaired commercial loans. A loan is considered impaired when it is probable that the Company will be unable to collect the full amount of principal and interest according to the contractual terms of the loan agreement.

Management identifies material impaired loans based on their size in relation to the Company’s total loan and lease portfolio. Each impaired loan equal to or exceeding a specified threshold requires an analysis to determine the appropriate level of reserve for that specific loan. Impaired loans below the specified threshold are treated as a pool, with specific allocations established based on qualitative factors such as asset quality trends, risk identification, lending policies, portfolio growth, and portfolio concentrations.

Residential

A specific allocation is determined for residential real estate loans based on delinquency status. In addition, each impaired loan equal to or exceeding a specified threshold requires analysis to determine the appropriate level of reserve for that specific loan, generally based on the value of the underlying collateral less estimated costs to sell. The specific allocation will be zero for impaired loans in which the value of the underlying collateral, less estimated costs to sell, exceeds the unpaid principal balance of the loan.

Consumer

A specific allocation is determined for the consumer loan portfolio using delinquency-based formula allocations. The Company uses a formula approach in determining the consumer loan specific allocation and recognizes the statistical validity of measuring losses predicated on past due status.

Pooled Allocation

Commercial

Pooled allocation for pass, special mention, substandard, and doubtful grade commercial loans and leases that share common risk characteristics and properties is determined using a historical loss rate analysis and qualitative factor considerations. Loan grade categories are discussed under “Credit Quality”.

Residential and Consumer

Pooled allocation for non-delinquent consumer and residential real estate loans is determined using a historical loss rate analysis and qualitative factor considerations.

Qualitative Adjustments

Qualitative adjustments to historical loss rates or other static sources may be necessary since these rates may not be an accurate indicator of losses inherent in the current portfolio. To estimate the level of adjustments, management considers factors including global, national and local economic conditions; levels and trends in problem loans; the effect of credit concentrations; collateral value trends; changes in risk due to changes in lending policies and practices; management expertise; industry and regulatory trends; and volume of loans.

Unallocated Allowance

The Company’s Allowance incorporates an unallocated portion to cover risk factors and events that may have occurred as of the evaluation date that have not been reflected in the risk measures utilized due to inherent limitations in the precision of the estimation process. These risk factors, in addition to past and current events based on facts at the consolidated balance sheet date and realistic courses of action that management expects to take, are assessed in determining the level of unallocated allowance.

The Allowance was comprised of the following:


	Year Ended December 31, 2016
	Commercial Lending
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Balance at beginning of year	$	34,025	$	18,489	$	3,793	$	888	$	46,099	$	28,385	$	3,805	$	135,484
Charge-offs		(348)		—		—		—		(799)		(18,791)		—		(19,938)
Recoveries		251		3,329		—		2		1,358		6,408		—		11,348
Increase (decrease) in Provision		(799)		(3,370)		720		(43)		(3,222)		12,386		2,928		8,600
Balance at end of year	$	33,129	$	18,448	$	4,513	$	847	$	43,436	$	28,388	$	6,733	$	135,494
Individually evaluated for impairment		380		7		—		—		705		—		—		1,092
Collectively evaluated for impairment		32,749		18,441		4,513		847		42,731		28,388		6,733		134,402
Loans and leases:
Individually evaluated for impairment	$	27,572	$	12,545	$	—	$	153	$	19,158	$	—	$	—	$	59,428
Collectively evaluated for impairment		3,212,028		2,330,950		450,012		179,887		3,777,301		1,510,772		—		11,460,950
Balance at end of year	$	3,239,600	$	2,343,495	$	450,012	$	180,040	$	3,796,459	$	1,510,772	$	—	$	11,520,378


	Year Ended December 31, 2015
	Commercial Lending
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Balance at beginning of year	$	31,835	$	16,320	$	4,725	$	1,089	$	44,858	$	27,041	$	8,931	$	134,799
Charge-offs		(866)		—		—		—		(618)		(18,312)		—		(19,796)
Recoveries		940		1,115		—		3		2,198		6,325		—		10,581
Increase (decrease) in Provision		2,116		1,054		(932)		(204)		(339)		13,331		(5,126)		9,900
Balance at end of year	$	34,025	$	18,489	$	3,793	$	888	$	46,099	$	28,385	$	3,805	$	135,484
Individually evaluated for impairment		—		—		—		—		592		—		—		592
Collectively evaluated for impairment		34,025		18,489		3,793		888		45,507		28,385		3,805		134,892
Loans and leases:
Individually evaluated for impairment	$	15,845	$	5,787	$	—	$	181	$	22,334	$	—	$	—	$	44,147
Collectively evaluated for impairment		3,041,610		2,158,661		367,460		198,498		3,510,093		1,401,561		—		10,677,883
Balance at end of year	$	3,057,455	$	2,164,448	$	367,460	$	198,679	$	3,532,427	$	1,401,561	$	—	$	10,722,030


	Year Ended December 31, 2014
	Commercial Lending
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Balance at beginning of year	$	34,026	$	16,606	$	4,702	$	1,078	$	42,028	$	25,589	$	9,210	$	133,239
Charge-offs		(2,298)		—		—		—		(1,086)		(15,291)		—		(18,675)
Recoveries		1,387		207		—		57		1,470		6,014		—		9,135
Increase (decrease) in Provision		(1,280)		(493)		23		(46)		2,446		10,729		(279)		11,100
Balance at end of year	$	31,835	$	16,320	$	4,725	$	1,089	$	44,858	$	27,041	$	8,931	$	134,799
Individually evaluated for impairment		571		52		—		—		740		—		—		1,363
Collectively evaluated for impairment		31,264		16,268		4,725		1,089		44,118		27,041		8,931		133,436
Loans and leases:
Individually evaluated for impairment	$	16,662	$	6,403	$	4,579	$	187	$	31,388	$	—	$	—	$	59,219
Collectively evaluated for impairment		2,680,480		2,041,062		465,482		244,111		3,306,633		1,226,603		—		9,964,371
Balance at end of year	$	2,697,142	$	2,047,465	$	470,061	$	244,298	$	3,338,021	$	1,226,603	$	—	$	10,023,590

Credit Quality

The Company performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of its lending policies and procedures. The objective of the loan review and grading procedures is to identify, in a timely manner, existing or emerging credit quality problems so that appropriate steps can be initiated to avoid or minimize future losses.

Loans subject to grading include: commercial and industrial loans, commercial and standby letters of credit, installment loans to businesses or individuals for business and commercial purposes, commercial real estate loans, overdraft lines of credit, commercial credit cards, and other credits as may be determined. Loans which are not subject to grading include loans that are 100% sold with no recourse to the Company, consumer installment loans, indirect automobile loans, consumer credit cards, business credit cards, home equity lines of credit and residential mortgage loans.

Residential and consumer loans are underwritten primarily on the basis of credit bureau scores, debt-service-to-income ratios, and collateral quality and loan to value ratios.

A credit risk rating system is used to determine loan grade and is based on borrower credit risk and transactional risk. The loan grading process is a mechanism used to determine the risk of a particular borrower and is based on the following eight factors of a borrower: character, earnings and operating cash flow, asset and liability structure, debt capacity, financial reporting, management and controls, borrowing entity, and industry and operating environment.

Pass – “Pass” (uncriticized loans) and leases, are not considered to carry greater than normal risk. The borrower has the apparent ability to satisfy obligations to the Company, and therefore no loss in ultimate collection is anticipated.

Special Mention – Loans and leases that have potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for assets or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard – Loans and leases that are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans and leases so classified must have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the distinct possibility that the bank may sustain some loss if the deficiencies are not corrected.

Doubtful – Loans and leases that have weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – Loans and leases classified as loss are considered uncollectible and of such little value that their continuance as an asset is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

The credit risk profiles by internally assigned grade for loans and leases as of December 31, 2016 and 2015 were as follows:


	December 31, 2016
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Total
Grade:
Pass	$	3,166,304	$	2,298,839	$	445,149	$	179,345	$	6,089,637
Special mention		41,719		23,859		3,789		368		69,735
Substandard		29,811		20,797		1,074		174		51,856
Doubtful		1,766		—		—		153		1,919
Total	$	3,239,600	$	2,343,495	$	450,012	$	180,040	$	6,213,147


	December 31, 2015
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Total
Grade:
Pass	$	2,995,180	$	2,119,933	$	366,695	$	198,296	$	5,680,104
Special mention		46,097		24,695		765		28		71,585
Substandard		12,220		19,682		—		174		32,076
Doubtful		3,958		138		—		181		4,277
Total	$	3,057,455	$	2,164,448	$	367,460	$	198,679	$	5,788,042

There were no loans and leases graded as Loss as of December 31, 2016 and 2015.

The credit risk profiles based on payment activity for loans and leases that were not subject to loan grading as of December 31, 2016 and 2015 were as follows:


	December 31, 2016
(dollars in thousands)	Residential		Consumer		Consumer - Auto		Credit Cards		Total
Performing	$	3,778,070	$	240,185	$	906,829	$	340,801	$	5,265,885
Nonperforming and delinquent		18,389		3,327		15,927		3,703		41,346
Total	$	3,796,459	$	243,512	$	922,756	$	344,504	$	5,307,231


	December 31, 2015
(dollars in thousands)	Residential		Consumer		Consumer - Auto		Credit Cards		Total
Performing	$	3,507,756	$	236,207	$	794,692	$	350,962	$	4,889,617
Nonperforming and delinquent		24,671		2,691		13,265		3,744		44,371
Total	$	3,532,427	$	238,898	$	807,957	$	354,706	$	4,933,988

Impaired and Nonaccrual Loans and Leases

The Company evaluates certain loans and leases individually for impairment. A loan or lease is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan or lease. An allowance for impaired commercial loans, including commercial real estate and construction loans, is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. An allowance for impaired residential loans is measured based on the estimated fair value of the collateral, less any selling costs. Management exercises significant judgment in developing these estimates.

The Company generally places a loan on nonaccrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection.

It is the Company’s policy to charge off a loan when the facts indicate that the loan is considered uncollectible.

The aging analyses of past due loans and leases as of December 31, 2016 and 2015 were as follows:


	December 31, 2016
	Accruing Loans and Leases
					Greater								Total Non
					Than or						Total		Accruing
	30-59		60-89		Equal to		Total				Accruing		Loans
	Days		Days		90 Days		Past				Loans and		and		Total
(dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Leases		Leases		Outstanding
Commercial and industrial	$	720	$	163	$	449	$	1,332	$	3,235,538	$	3,236,870	$	2,730	$	3,239,600
Commercial real estate		475		—		—		475		2,343,020		2,343,495		—		2,343,495
Construction		—		—		—		—		450,012		450,012		—		450,012
Lease financing		—		—		83		83		179,804		179,887		153		180,040
Residential		9,907		1,069		866		11,842		3,778,070		3,789,912		6,547		3,796,459
Consumer		17,626		3,460		1,870		22,956		1,487,816		1,510,772		—		1,510,772
Total	$	28,728	$	4,692	$	3,268	$	36,688	$	11,474,260	$	11,510,948	$	9,430	$	11,520,378


	December 31, 2015
	Accruing Loans and Leases
					Greater								Total Non
					Than or						Total		Accruing
	30-59		60-89		Equal to		Total				Accruing		Loans
	Days		Days		90 Days		Past				Loans and		and		Total
(dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Leases		Leases		Outstanding
Commercial and industrial	$	198	$	72	$	2,496	$	2,766	$	3,050,731	$	3,053,497	$	3,958	$	3,057,455
Commercial real estate		—		190		161		351		2,163,959		2,164,310		138		2,164,448
Construction		—		—		—		—		367,460		367,460		—		367,460
Lease financing		41		—		174		215		198,283		198,498		181		198,679
Residential		10,143		1,447		737		12,327		3,507,756		3,520,083		12,344		3,532,427
Consumer		15,191		3,056		1,454		19,701		1,381,860		1,401,561		—		1,401,561
Total	$	25,573	$	4,765	$	5,022	$	35,360	$	10,670,049	$	10,705,409	$	16,621	$	10,722,030

The total carrying amounts and the total unpaid principal balances of impaired loans and leases as of December 31, 2016 and 2015 were as follows:


	December 31, 2016
			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
Impaired loans with no related allowance recorded:
Commercial and industrial	$	22,404	$	22,608	$	—
Commercial real estate		11,598		11,598		—
Lease financing		153		153		—
Residential		9,608		10,628		—
Total	$	43,763	$	44,987	$	—
Impaired loans with a related allowance recorded:
Commercial and industrial	$	5,168	$	5,624	$	380
Commercial real estate		947		947		7
Residential		9,550		9,831		705
Total	$	15,665	$	16,402	$	1,092
Total impaired loans:
Commercial and industrial	$	27,572	$	28,232	$	380
Commercial real estate		12,545		12,545		7
Lease financing		153		153		—
Residential		19,158		20,459		705
Total	$	59,428	$	61,389	$	1,092


	December 31, 2015
			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
Impaired loans with no related allowance recorded:
Commercial and industrial	$	15,845	$	16,516	$	—
Commercial real estate		5,787		5,853		—
Lease financing		181		181		—
Residential		15,247		16,692		—
Total	$	37,060	$	39,242	$	—
Impaired loans with a related allowance recorded:
Residential	$	7,087	$	7,140	$	592
Total	$	7,087	$	7,140	$	592
Total impaired loans:
Commercial and industrial	$	15,845	$	16,516	$	—
Commercial real estate		5,787		5,853		—
Lease financing		181		181		—
Residential		22,334		23,832		592
Total	$	44,147	$	46,382	$	592

The following table provides information with respect to the Company’s average balances, and of interest income recognized from, impaired loans for the years ended December 31, 2016, 2015 and 2014:


	Year Ended
	December 31, 2016
	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized
Impaired loans with no related allowance recorded:
Commercial and industrial	$	25,676	$	925
Commercial real estate		9,304		704
Construction		113		—
Lease financing		170		5
Residential		12,289		756
Total	$	47,552	$	2,390
Impaired loans with a related allowance recorded:
Commercial and industrial	$	1,430	$	643
Commercial real estate		381		46
Residential		8,497		415
Total	$	10,308	$	1,104
Total impaired loans:
Commercial and industrial	$	27,106	$	1,568
Commercial real estate		9,685		750
Construction		113		—
Lease financing		170		5
Residential		20,786		1,171
Total	$	57,860	$	3,494


	Year Ended
	December 31, 2015
	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized
Impaired loans with no related allowance recorded:
Commercial and industrial	$	16,666	$	317
Commercial real estate		6,516		444
Lease financing		186		—
Residential		18,518		292
Total	$	41,886	$	1,053
Impaired loans with a related allowance recorded:
Residential		6,889		258
Total	$	6,889	$	258
Total impaired loans:
Commercial and industrial	$	16,666	$	317
Commercial real estate		6,516		444
Lease financing		186		—
Residential		25,407		550
Total	$	48,775	$	1,311


	Year Ended
	December 31, 2014
	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized
Impaired loans with no related allowance recorded:
Commercial and industrial	$	13,556	$	1,691
Commercial real estate		5,095		250
Construction		7,314		207
Lease financing		77		—
Residential		24,437		550
Total	$	50,479	$	2,698
Impaired loans with a related allowance recorded:
Commercial and industrial	$	1,917	$	—
Commercial real estate		1,400		83
Residential		9,100		274
Total	$	12,417	$	357
Total impaired loans:
Commercial and industrial	$	15,473	$	1,691
Commercial real estate		6,495		333
Construction		7,314		207
Lease financing		77		—
Residential		33,537		824
Total	$	62,896	$	3,055

Modifications

Commercial and industrial loans modified in a troubled debt restructuring (“TDR”) often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial real estate and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Lease financing modifications generally involve a short-term forbearance period, usually about three months, after which the missed payments are added to the end of the lease term, thereby extending the maturity date. Interest continues to accrue on the missed payments and as a result, the effective yield on the lease remains unchanged. As the forbearance period usually involves an insignificant payment delay, lease financing modifications typically do not meet the reporting criteria for a TDR. Residential real estate loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers' financial needs for a period of time, normally two years. During that time, the borrower's entire monthly payment is applied to principal. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly. Generally, consumer loans are not classified as a TDR as they are normally charged off upon reaching a predetermined delinquency status that ranges from 120 to 180 days and varies by product type.

Loans modified in a TDR are typically already on nonaccrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. Loans modified in a TDR will have to be evaluated for impairment. As a result, this may have a financial effect of increasing the specific Allowance associated with the loan. An Allowance for impaired commercial loans, including commercial real estate and construction loans, that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. An Allowance for impaired residential loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs. Management exercises significant judgment in developing these estimates.

The following presents, by class, information related to loans modified in a TDR during the years ended December 31, 2016, 2015 and 2014:


	Year Ended December 31, 2016
	Number
	of	Recorded		Related
(dollars in thousands)	Contracts	Investment(1)		Allowance
Commercial and industrial	7	$	14,933	$	377
Commercial real estate	6		9,709		7
Residential	12		5,159		234
Total	25	$	29,801	$	618


	Year Ended December 31, 2015
	Number
	of	Recorded		Related
(dollars in thousands)	Contracts	Investment(1)		Allowance
Commercial and industrial	5	$	11,888	$	—
Commercial real estate	4		5,649		—
Residential	21		11,906		592
Total	30	$	29,443	$	592


	Year Ended December 31, 2014
	Number
	of	Recorded		Related
(dollars in thousands)	Contracts	Investment(1)		Allowance
Commercial and industrial	5	$	13,791	$	—
Commercial real estate	6		4,529		52
Construction	2		4,579		—
Residential	30		17,028		740
Total	43	$	39,927	$	792

(1)

The recorded investment balances reflect all partial paydowns and charge-offs since the modification date and do not include TDRs that have been fully paid off, charged off, or foreclosed upon by the end of the period.

The above loans were modified in a TDR through temporary interest-only payments or reduced payments.

The Company had total remaining loan and lease commitments of $5.1 billion as of December 31, 2016 and $5.2 billion as of December 31, 2015. Of the $5.1 billion at December 31, 2016, there were commitments of $6.9 million related to borrowers who had loan terms modified in a TDR. Of the $5.2 billion at December 31, 2015, there were no commitments to borrowers who had loan terms modified in a TDR.

The following table presents, by class, loans modified in TDRs that have defaulted in the current period within 12 months of their permanent modification date for the periods indicated. The Company is reporting these defaulted TDRs based on a payment default definition of 30 days past due:


	Year Ended December 31,
	2016			2015			2014
	Number of	Recorded		Number of	Recorded		Number of	Recorded
(dollars in thousands)	Contracts	Investment(1)		Contracts	Investment(1)		Contracts	Investment(1)
Commercial and industrial (2)	—	$	—	3	$	6,153	1	$	299
Commercial real estate (3)	1		1,399	—		—	—		—
Residential (4)	—		—	7		2,281	7		2,490
Total	1	$	1,399	10	$	8,434	8	$	2,789

(1)

(2)

In 2015, all three commercial and industrial loans that subsequently defaulted were refinanced. In 2014, the commercial and industrial loan that subsequently defaulted was modified by extending the maturity date.

(3)

In 2016, the commercial real estate loan that subsequently defaulted was modified by extending the maturity date.

(4)

In 2015 and 2014, all 7 residential real estate loans that subsequently defaulted were modified by reducing interest rates, increasing amortizations, and deferring principal payments.

Foreclosure Proceedings

There was one residential mortgage loan of $0.5 million collateralized by real estate property that was modified in a TDR that was in the process of foreclosure at December 31, 2016 and four that were in process of foreclosure at December 31, 2015 totaling $1.3 million.

Foreclosed Property

Residential real estate property held from one foreclosed TDR of a residential mortgage loan included in other real estate owned and repossessed personal property shown in the consolidated balance sheets was $0.3 million at December 31, 2016. There were no holdings of real estate properties from foreclosed TDRs at December 31, 2015.