4. 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 classes 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 residential mortgages including 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 and class taking into consideration portfolio segment-specific and class-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 unaudited interim 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 for the periods indicated:


	Three Months Ended March 31, 2019
	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 period	$	34,501	$	19,725	$	5,813	$	432	$	44,906	$	35,813	$	528	$	141,718
Charge-offs		—		—		—		(24)		—		(8,598)		—		(8,622)
Recoveries		37		31		—		—		250		2,452		—		2,770
Increase (decrease) in Provision		(2,745)		1,441		(432)		3		(245)		5,432		2,226		5,680
Balance at end of period	$	31,793	$	21,197	$	5,381	$	411	$	44,911	$	35,099	$	2,754	$	141,546


	Three Months Ended March 31, 2018
	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 period	$	34,006	$	18,044	$	6,817	$	611	$	42,852	$	31,249	$	3,674	$	137,253
Charge-offs		(475)		—		—		—		—		(6,625)		—		(7,100)
Recoveries		64		122		—		—		182		2,103		—		2,471
Increase (decrease) in Provision		770		1,088		(841)		(26)		186		4,271		502		5,950
Balance at end of period	$	34,365	$	19,254	$	5,976	$	585	$	43,220	$	30,998	$	4,176	$	138,574

The disaggregation of the Allowance and recorded investment in loans by impairment methodology as of March 31, 2019 and December 31, 2018 were as follows:


	March 31, 2019
	Commercial Lending
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	429	$	26	$	—	$	—	$	430	$	—	$	—	$	885
Collectively evaluated for impairment		31,364		21,171		5,381		411		44,481		35,099		2,754		140,661
Balance at end of period	$	31,793	$	21,197	$	5,381	$	411	$	44,911	$	35,099	$	2,754	$	141,546
Loans and leases:
Individually evaluated for impairment	$	10,073	$	3,907	$	—	$	—	$	15,529	$	—	$	—	$	29,509
Collectively evaluated for impairment		3,193,697		3,143,397		595,491		145,987		4,436,264		1,653,109		—		13,167,945
Balance at end of period	$	3,203,770	$	3,147,304	$	595,491	$	145,987	$	4,451,793	$	1,653,109	$	—	$	13,197,454


	December 31, 2018
	Commercial Lending
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Individually evaluated for impairment	$	108	$	32	$	—	$	—	$	396	$	—	$	—	$	536
Collectively evaluated for impairment		34,393		19,693		5,813		432		44,510		35,813		528		141,182
Balance at end of period	$	34,501	$	19,725	$	5,813	$	432	$	44,906	$	35,813	$	528	$	141,718
Loans and leases:
Individually evaluated for impairment	$	8,719	$	5,743	$	—	$	—	$	16,114	$	—	$	—	$	30,576
Collectively evaluated for impairment		3,200,041		2,985,040		626,757		147,769		4,423,504		1,662,504		—		13,045,615
Balance at end of period	$	3,208,760	$	2,990,783	$	626,757	$	147,769	$	4,439,618	$	1,662,504	$	—	$	13,076,191

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 the Company’s 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, credit cards, home equity lines of credit and residential mortgage loans.

Residential real estate 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 deserve 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 March 31, 2019 and December 31, 2018 were as follows:


	March 31, 2019
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Total
Grade:
Pass	$	3,102,106	$	3,000,806	$	594,368	$	144,874	$	6,842,154
Special mention		60,275		101,393		185		947		162,800
Substandard		41,389		45,105		938		166		87,598
Total	$	3,203,770	$	3,147,304	$	595,491	$	145,987	$	7,092,552


	December 31, 2018
	Commercial		Commercial
	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Total
Grade:
Pass	$	3,069,546	$	2,876,907	$	625,607	$	146,356	$	6,718,416
Special mention		57,012		91,298		200		1,223		149,733
Substandard		82,010		22,578		950		190		105,728
Doubtful		192		—		—		—		192
Total	$	3,208,760	$	2,990,783	$	626,757	$	147,769	$	6,974,069

There were no loans and leases graded as Loss as of March 31, 2019 and December 31, 2018.

The credit risk profiles based on payment activity for loans and leases that were not subject to loan grading as of March 31, 2019 and December 31, 2018 were as follows:


	March 31, 2019
(dollars in thousands)	Residential Mortgage		Home Equity Line		Consumer		Consumer - Auto		Credit Cards		Total
Performing	$	3,538,122	$	901,821	$	234,539	$	1,056,907	$	325,656	$	6,057,045
Non-performing and delinquent		5,842		6,008		5,121		26,036		4,850		47,857
Total	$	3,543,964	$	907,829	$	239,660	$	1,082,943	$	330,506	$	6,104,902


	December 31, 2018
(dollars in thousands)	Residential Mortgage		Home Equity Line		Consumer		Consumer - Auto		Credit Cards		Total
Performing	$	3,519,172	$	903,284	$	234,458	$	1,044,393	$	339,162	$	6,040,469
Non-performing and delinquent		7,929		9,233		5,448		33,739		5,304		61,653
Total	$	3,527,101	$	912,517	$	239,906	$	1,078,132	$	344,466	$	6,102,122

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 March 31, 2019 and December 31, 2018 were as follows:


	March 31, 2019
	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	$	1,415	$	307	$	350	$	2,072	$	3,201,508	$	3,203,580	$	190	$	3,203,770
Commercial real estate		225		129		—		354		3,146,950		3,147,304		—		3,147,304
Construction		—		—		89		89		595,402		595,491		—		595,491
Lease financing		—		—		—		—		145,987		145,987		—		145,987
Residential mortgage		1,353		399		—		1,752		3,538,122		3,539,874		4,090		3,543,964
Home equity line		3,083		477		2,448		6,008		901,821		907,829		—		907,829
Consumer		25,640		6,829		3,538		36,007		1,617,102		1,653,109		—		1,653,109
Total	$	31,716	$	8,141	$	6,425	$	46,282	$	13,146,892	$	13,193,174	$	4,280	$	13,197,454


	December 31, 2018
	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	$	1,293	$	—	$	141	$	1,434	$	3,207,052	$	3,208,486	$	274	$	3,208,760
Commercial real estate		—		—		—		—		2,989,125		2,989,125		1,658		2,990,783
Construction		91		—		—		91		626,666		626,757		—		626,757
Lease financing		47		—		—		47		147,722		147,769		—		147,769
Residential mortgage		2,274		1,012		32		3,318		3,519,172		3,522,490		4,611		3,527,101
Home equity line		5,616		775		2,842		9,233		903,284		912,517		—		912,517
Consumer		32,406		8,712		3,373		44,491		1,618,013		1,662,504		—		1,662,504
Total	$	41,727	$	10,499	$	6,388	$	58,614	$	13,011,034	$	13,069,648	$	6,543	$	13,076,191

The total carrying amounts and the total unpaid principal balances of impaired loans and leases as of March 31, 2019 and December 31, 2018 were as follows:


	March 31, 2019
			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
Impaired loans with no related allowance recorded:
Commercial and industrial	$	2,387	$	2,421	$	—
Commercial real estate		3,188		3,188		—
Residential mortgage		8,220		8,534		—
Total	$	13,795	$	14,143	$	—
Impaired loans with a related allowance recorded:
Commercial and industrial	$	7,686	$	7,686	$	429
Commercial real estate		719		719		26
Residential mortgage		7,309		7,695		430
Total	$	15,714	$	16,100	$	885
Total impaired loans:
Commercial and industrial	$	10,073	$	10,107	$	429
Commercial real estate		3,907		3,907		26
Residential mortgage		15,529		16,229		430
Total	$	29,509	$	30,243	$	885


	December 31, 2018
			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
Impaired loans with no related allowance recorded:
Commercial and industrial	$	4,449	$	4,498	$	—
Commercial real estate		5,016		5,016		—
Residential mortgage		9,112		9,426		—
Total	$	18,577	$	18,940	$	—
Impaired loans with a related allowance recorded:
Commercial and industrial	$	4,270	$	4,270	$	108
Commercial real estate		727		727		32
Residential mortgage		7,002		7,387		396
Total	$	11,999	$	12,384	$	536
Total impaired loans:
Commercial and industrial	$	8,719	$	8,768	$	108
Commercial real estate		5,743		5,743		32
Residential mortgage		16,114		16,813		396
Total	$	30,576	$	31,324	$	536

The following tables provide information with respect to the Company’s average balances, and of interest income recognized from, impaired loans for the three months ended March 31, 2019 and 2018:


	Three Months Ended
	March 31, 2019
	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized
Impaired loans with no related allowance recorded:
Commercial and industrial	$	3,418	$	29
Commercial real estate		4,102		171
Residential mortgage		8,666		100
Total	$	16,186	$	300
Impaired loans with a related allowance recorded:
Commercial and industrial	$	5,978	$	108
Commercial real estate		723		10
Residential mortgage		7,156		96
Total	$	13,857	$	214
Total impaired loans:
Commercial and industrial	$	9,396	$	137
Commercial real estate		4,825		181
Residential mortgage		15,822		196
Total	$	30,043	$	514


	Three Months Ended
	March 31, 2018
	Average		Interest
	Recorded		Income
(dollars in thousands)	Investment		Recognized
Impaired loans with no related allowance recorded:
Commercial and industrial	$	17,469	$	181
Commercial real estate		9,502		55
Construction		1,001		—
Residential mortgage		8,763		130
Total	$	36,735	$	366
Impaired loans with a related allowance recorded:
Commercial and industrial	$	145	$	2
Commercial real estate		887		10
Residential mortgage		7,685		84
Total	$	8,717	$	96
Total impaired loans:
Commercial and industrial	$	17,614	$	183
Commercial real estate		10,389		65
Construction		1,001		—
Residential mortgage		16,448		214
Total	$	45,452	$	462

Modifications

Commercial and industrial loans modified in a troubled debt restructuring (“TDR”) may involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Modifications of commercial real estate and construction loans in a TDR may 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. Modifications of construction loans in a TDR may also involve extending the interest-only payment period. Interest continues to accrue on the missed payments and as a result, the effective yield on the loan 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 may be comprised of loans where monthly payments are lowered to accommodate the borrowers' financial needs for a period of time, normally two years. 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 may already be on nonaccrual status and in some cases partial charge-offs may have already been taken against the outstanding loan balance. Loans modified in a TDR are 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 three months ended March 31, 2019 and 2018:


	Three Months Ended					Three Months Ended
	March 31, 2019					March 31, 2018
	Number of	Recorded		Related		Number of	Recorded		Related
(dollars in thousands)	Contracts	Investment(1)		Allowance		Contracts	Investment(1)		Allowance
Commercial and industrial	4	$	916	$	24	—	$	—	$	—
Residential mortgage	1		352		14	—		—		—
Total	5	$	1,268	$	38	—	$	—	$	—

⁽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 an extension of maturity dates, temporary interest-only payments, reduced payments, or below-market interest rates.

The Company had commitments to extend credit, standby letters of credit, and commercial letters of credit totaling $5.7 billion and $5.8 billion as of March 31, 2019 and December 31, 2018, respectively. Of the $5.7 billion at March 31, 2019, there were commitments of $1.1 million related to borrowers who had loan terms modified in a TDR. Of the $5.8 billion at December 31, 2018, there were commitments of $1.8 million related 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:


	Three Months Ended March 31,
	2019			2018
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	Contracts	Investment(1)		Contracts	Investment(1)
Commercial and industrial(2)	—	$	—	2	$	564
Total	—	$	—	2	$	564

⁽¹⁾

⁽²⁾

For the three months ended March 31, 2018, the maturity dates for the commercial and industrial loans that subsequently defaulted were extended.

Foreclosure Proceedings

There was one residential mortgage loan collateralized by real estate property of $0.3 million that was modified in a TDR that was in process of foreclosure as of March 31, 2019. As of December 31, 2018, there was one residential mortgage loan collateralized by real estate property of $0.3 million that was modified in a TDR that was in process of foreclosure.

Foreclosed Property

Residential real estate property held from one foreclosed residential mortgage loan included in other real estate owned and repossessed personal property shown in the unaudited interim consolidated balance sheets was $0.1 million as of March 31, 2019. Residential real estate properties held from one foreclosed residential mortgage loan and one foreclosed home equity line included in other real estate owned and repossessed personal property shown in the unaudited interim consolidated balance sheets was $0.8 million as of December 31, 2018.