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Allowance for Expected Credit Losses and Credit Quality
3 Months Ended
Mar. 31, 2020
Receivables [Abstract]  
Allowance for Expected Credit Losses and Credit Quality ALLOWANCE FOR EXPECTED CREDIT LOSSES AND CREDIT QUALITY
Allowance for Expected Credit Losses Activity

On January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments. ASC 326 replaced the incurred loss model for determining the allowance for credit losses with a current expected credit loss model for financial assets carried at amortized cost, including loans, leases, and loan commitments. ASC 326 requires recognition of lifetime expected credit losses that takes into consideration all available relevant information including details of past events, current conditions and reasonable and supportable forecasts of future economic conditions. The transition adjustment on January 1, 2020 resulted in an increase of the AECL of $82.3 million. The increase in the AECL at transition primarily relates to required increases for residential mortgage loans to establish an estimate of lifetime expected credit losses for these longer dated loans as well as an increase on non-owner-occupied commercial real estate loans reflecting higher LGDs under the CECL model. See Note 2, Recent Accounting Pronouncements, for additional discussion on the adoption of ASC 326. As a result of the adoption of ASC 326, the AECL as of March 31, 2020 and the provision for expected credit losses for the three months ended March 31, 2020 are not comparable to historical periods.
A summary of changes in the allowance for expected credit losses for the three months ended March 31 was as follows:
(in thousands)
 
2020
 
2019
Allowance for loan and lease losses at beginning of period
 
$
146,588

 
$
140,571

Transition adjustment for ASC 326
 
83,194

 

Allowance for loan and lease losses, as adjusted
 
229,782

 
140,571

Provision for loan and lease losses
 
66,431

 
12,612

Transfer of balance to OREO and other
 

 
(2,885
)
Charge-offs
 
(12,119
)
 
(8,918
)
Recoveries
 
2,591

 
1,586

Allowance for loan and lease losses at end of period
 
$
286,685

 
$
142,966

 
 
 
 
 
Reserve for unfunded commitments at beginning of period
 
$
16,637

 
$
14,830

Transition adjustment for ASC 326
 
(875
)
 

Reserve for unfunded lending commitments, as adjusted
 
15,762

 
14,830

Provision for unfunded lending commitments
 
2,540

 
1,151

Reserve for unfunded commitments at end of period
 
$
18,302

 
$
15,981

Allowance for expected credit losses at end of period
 
$
304,987

 
$
158,947



The AECL at March 31, 2020 reflects a blend of economic forecasts to estimate expected credit losses over an eighteen month reasonable and supportable forecast period and then reverts to historical loss experience to arrive at lifetime expected credit losses. At January 1, 2020, the Company’s economic forecast assumed a relatively stable macroeconomic environment over the reasonable and supportable forecast period while recognizing that the economy was vulnerable to major shocks, fiscal policy missteps, other geopolitical events and the outcome of the pending U.S. elections. During the latter part of the first quarter of 2020, the global and U.S. economies experienced substantial disruptions as a result of the COVID-19 pandemic as well as continued pressure on oil prices. In light of the deteriorating economic conditions, the U.S. government has taken numerous actions through multiple stimulus packages to support both individuals and businesses during the unprecedented freeze on commerce in the U.S. Uncertainty remains as to the length of the COVID-19 pandemic as well as the success of the various stimulus packages to both support the economy during the pandemic as well as restore economic conditions when the pandemic subsides. As a result, the Company has updated its economic forecast to reflect the expected impact of COVID-19 and the possibility of recessionary conditions over the reasonable and supportable forecast period which has resulted in an increase in the AECL at March 31, 2020.


A summary of changes in the allowance for expected credit losses, by loan portfolio type, for the three months ended March 31 was as follows:
 
Three Months Ended March 31, 2020
 
Commercial
 
 
 
 
 
 
 
 
 
Real Estate
 
 
 
Consumer
 
 
(in thousands)
Construction
 
Owner-occupied
 
Non-owner-occupied
 
Commercial and Industrial
 
Residential Mortgage
 
Home Equity
 
Other
 
Total
Allowance for loan and lease losses at beginning of period
$
5,983

 
$
15,770

 
$
36,541

 
$
55,634

 
$
9,647

 
$
12,153

 
$
10,860

 
$
146,588

Transition adjustment for ASC 326
2,307

 
(8,163
)
 
29,850

 
(14,659
)
 
70,521

 
3,620

 
(282
)
 
83,194

Allowance for loan and lease losses, as adjusted
8,290

 
7,607

 
66,391

 
40,975

 
80,168

 
15,773

 
10,578

 
229,782

Provision for loan and lease losses
940

 
2,603

 
30,500

 
11,833

 
10,535

 
7,313

 
2,707

 
66,431

Charge-offs
(14
)
 

 
(240
)
 
(7,895
)
 
(450
)
 
(1,435
)
 
(2,085
)
 
(12,119
)
Recoveries
219

 
25

 
132

 
1,037

 
329

 
386

 
463

 
2,591

Allowance for loan and lease losses at end of period
$
9,435

 
$
10,235

 
$
96,783

 
$
45,950

 
$
90,582

 
$
22,037

 
$
11,663

 
$
286,685

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for unfunded lending commitments at beginning of period
$
4,010

 
$
345

 
$
1,629

 
$
6,478

 
$
562

 
$
2,078

 
$
1,535

 
$
16,637

Transition adjustment for ASC 326
1,025

 
627

 
(991
)
 
3

 
743

 
(812
)
 
(1,470
)
 
(875
)
Reserve for unfunded lending commitments, as adjusted
5,035

 
972

 
638

 
6,481

 
1,305

 
1,266

 
65

 
15,762

Provision for (reversal of) unfunded commitments
492

 
418

 
91

 
925

 
215

 
433

 
(34
)
 
2,540

Reserve for unfunded lending commitments at end of period
5,527

 
1,390

 
729

 
7,406

 
1,520

 
1,699

 
31

 
18,302

Allowance for expected credit losses at end of period
$
14,962

 
$
11,625

 
$
97,512

 
$
53,356

 
$
92,102

 
$
23,736

 
$
11,694

 
$
304,987


 
Three Months Ended March 31, 2019
 
Commercial
 
 
 
 
 
 
 
 
 
Real Estate
 
 
 
Consumer
 
 
(in thousands)
Construction
 
Owner-occupied
 
Non-owner-occupied
 
Commercial and Industrial
 
Residential Mortgage
 
Home Equity
 
Other
 
Total
Allowance for loan and lease losses at beginning of period
$
4,743

 
$
12,549

 
$
34,514

 
$
54,096

 
$
12,998

 
$
10,181

 
$
11,490

 
$
140,571

Provision for loan and lease losses
936

 
1,303

 
4,648

 
2,876

 
1,749

 
1,056

 
44

 
12,612

Transfer of balance to OREO and other

 

 

 

 
(2,881
)
 
(4
)
 

 
(2,885
)
Charge-offs

 
(72
)
 

 
(4,931
)
 
(28
)
 
(1,401
)
 
(2,486
)
 
(8,918
)
Recoveries
3

 
35

 
65

 
446

 
32

 
314

 
691

 
1,586

Allowance for loan and lease losses at end of period
$
5,682

 
$
13,815

 
$
39,227

 
$
52,487

 
$
11,870

 
$
10,146

 
$
9,739

 
$
142,966

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reserve for unfunded commitments at beginning of period
$
3,249

 
$
316

 
$
1,304

 
$
6,198

 
$
866

 
$
1,783

 
$
1,114

 
$
14,830

Provision for unfunded commitments
333

 
60

 
401

 
128

 
22

 
28

 
179

 
1,151

Reserve for unfunded commitments at end of period
3,582

 
376

 
1,705

 
6,326

 
888

 
1,811

 
1,293

 
15,981

Allowance for credit losses at end of period
$
9,264

 
$
14,191

 
$
40,932

 
$
58,813

 
$
12,758

 
$
11,957

 
$
11,032

 
$
158,947




Portfolio Segment Risk Factors
Commercial loans and leases include commercial real estate loans, commercial and industrial loans, and equipment financing leases. Commercial real estate loans include loans to commercial customers for medium-term financing of land and buildings or for land development or construction of a building. These loans are repaid from revenues through operations of the businesses, rents of properties, sales of properties and refinances. Commercial and industrial loans and leases represent loans to commercial customers to finance general working capital needs, equipment purchases and leases and other projects where repayment is derived from cash flows resulting from business operations. The Company originates commercial and industrial loans on a secured and, to a lesser extent, unsecured basis.
Consumer loans are offered by the Company in order to provide a full range of retail financial services to its customers and include residential mortgages, home equity, credit card and other direct consumer installment loans. Residential mortgage loans consist of loans to consumers to finance a primary or secondary residence. The vast majority of the residential mortgage loan portfolio is comprised of non-conforming 1-4 family mortgage loans secured by properties located in the Company's market areas and originated under terms and documentation that permit their sale in a secondary market. The Company originates substantially all of its consumer loans in its primary market areas. Loans in the consumer segment are sensitive to property values, unemployment levels, and other key consumer economic measures. Prior to January 1, 2020, residential mortgage loans were in a separate portfolio segment.
Credit Quality Indicators
For commercial loans and leases, the Company utilizes regulatory classification ratings to monitor credit quality. Loans with a "pass" rating are those that the Company believes will be fully repaid in accordance with the contractual loan terms. Commercial loans and leases that are "criticized" are those that have some weakness or potential weakness that indicate an increased probability of future loss. "Criticized" loans are grouped into three categories: "special mention", "substandard", and "doubtful".
Special mention loans and leases have potential weaknesses that, if left uncorrected, may result in deterioration of the Company's credit position at some future date. Substandard commercial loans and leases have well-defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful commercial loans and leases have the same weaknesses as substandard loans and leases with the added characteristics that the probability of loss is high and collection of the full amount is improbable. Substandard and doubtful loans are collectively referred to as "classified" loans and leases. Regulatory classification ratings for commercial loans and leases are updated annually.

For consumer loans, the Company utilizes FICO scores to monitor credit quality as these are widely accepted measures of a borrower's risk of non-repayment over the life of a loan. FICO scores are updated quarterly. Prior to January 1, 2020, the Company’s primary credit quality indicator for residential mortgage and consumer loans was the loan’s payment and delinquency status.

The Company’s investment in loans by credit quality indicator and year of origination is presented in the following tables. Asset risk classifications for commercial loans and leases reflect the classification as of March 31, 2020. FICO scores for consumer loans are updated on a quarterly basis. Credit quality information in the tables reflects the amortized cost basis of all loans, excluding $65.9 million of accrued interest, which is included as a component of other assets in the unaudited consolidated balance sheet.

 
Term Loans
 
 
 
 
 
 
(in thousands)
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Revolving loans
 
Revolving loans Converted to Term
 
Total
Commercial loans and leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate- Construction
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
45,117

 
$
336,900

 
$
599,002

 
$
172,612

 
$
65,200

 
$
51,622

 
$
40,147

 
$

 
$
1,310,600

Special Mention

 

 

 

 
10

 
105

 
2,156

 

 
2,271

Substandard

 

 
9,213

 

 

 
475

 
65

 

 
9,753

Doubtful

 

 

 

 

 
3

 

 

 
3

Total Real Estate- Construction
45,117

 
336,900

 
608,215

 
172,612

 
65,210

 
52,205

 
42,368

 

 
1,322,627

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate- Owner- occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
69,996

 
379,882

 
319,249

 
357,057

 
274,226

 
895,032

 
66,866

 

 
2,362,308

Special Mention

 

 
7,306

 
681

 
399

 
13,419

 
400

 

 
22,205

Substandard

 
234

 
1,011

 
8,204

 
3,518

 
23,856

 
387

 

 
37,210

Doubtful

 

 

 

 

 
2,416

 

 

 
2,416

Total Real Estate- Owner-occupied
69,996

 
380,116

 
327,566

 
365,942

 
278,143

 
934,723

 
67,653

 

 
2,424,139

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate- Non-owner-occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
261,614

 
1,323,506

 
961,036

 
987,814

 
867,303

 
1,867,101

 
130,929

 

 
6,399,303

Special Mention

 

 
806

 
1,497

 
10,248

 
14,561

 
1,900

 

 
29,012

Substandard

 
591

 
2,059

 
10,066

 
6,038

 
31,481

 
635

 

 
50,870

Doubtful

 

 
104

 

 

 
4,968

 

 

 
5,072

Total Real Estate- Non-owner-occupied
261,614

 
1,324,097

 
964,005

 
999,377

 
883,589

 
1,918,111

 
133,464

 

 
6,484,257

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
649,228

 
1,957,486

 
1,307,679

 
455,600

 
218,485

 
551,933

 
1,635,017

 

 
6,775,428

Special Mention
259

 
1,463

 
23,811

 
500

 
8,093

 
1,436

 
7,896

 

 
43,458

Substandard
4,102

 
16,838

 
3,023

 
20,486

 
1,151

 
19,194

 
5,846

 

 
70,640

Doubtful

 
5,323

 
9,517

 
2,353

 
648

 
2,474

 

 

 
20,315

Total Commercial and Industrial
653,589

 
1,981,110

 
1,344,030

 
478,939

 
228,377

 
575,037

 
1,648,759

 

 
6,909,841

Total Commercial Loans and Leases
$
1,030,316

 
$
4,022,223

 
$
3,243,816

 
$
2,016,870

 
$
1,455,319

 
$
3,480,076

 
$
1,892,244

 
$

 
$
17,140,864

(1) Includes equipment financing leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
Term Loans
 
 
 
 
 
 
(in thousands)
2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Revolving loans
 
Revolving loans Converted to Term
 
Total
Consumer Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
781 and above
$
45,204

 
$
332,402

 
$
263,099

 
$
185,336

 
$
153,118

 
$
387,923

 
$

 
$

 
$
1,367,082

723-780
72,666

 
452,401

 
360,319

 
233,243

 
199,457

 
410,212

 

 

 
1,728,298

700-722
14,430

 
94,286

 
93,264

 
49,705

 
47,736

 
116,470

 

 

 
415,891

660-699
8,549

 
103,361

 
83,700

 
37,108

 
54,661

 
144,238

 

 

 
431,617

620-659
3,273

 
39,018

 
26,883

 
15,701

 
15,481

 
94,296

 

 

 
194,652

580-619

 
13,756

 
11,717

 
8,358

 
11,281

 
51,387

 

 

 
96,499

579 and below
101,641

 
52,459

 
53,362

 
58,542

 
84,198

 
264,878

 

 

 
615,080

Total Residential Mortgage
245,763

 
1,087,683

 
892,344

 
587,993

 
565,932

 
1,469,404

 

 

 
4,849,119

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
781 and above
2,052

 
8,710

 
28,297

 
16,579

 
15,903

 
56,995

 
374,502

 
21,481

 
524,519

723-780
1,160

 
13,680

 
25,948

 
19,278

 
25,677

 
81,172

 
498,082

 
27,061

 
692,058

700-722
103

 
2,226

 
7,915

 
7,696

 
5,276

 
18,320

 
130,949

 
13,029

 
185,514

660-699
747

 
3,823

 
10,975

 
6,434

 
6,112

 
32,755

 
163,267

 
17,238

 
241,351

620-659
351

 
1,418

 
1,894

 
4,355

 
3,630

 
19,419

 
73,928

 
13,822

 
118,817

580-619
2,735

 
875

 
5,331

 
2,006

 
2,581

 
13,452

 
27,526

 
6,484

 
60,990

579 and below
5,988

 
2,742

 
10,009

 
5,850

 
2,592

 
18,201

 
45,334

 
12,788

 
103,504

Total Home Equity
13,136

 
33,474

 
90,369

 
62,198

 
61,771

 
240,314

 
1,313,588

 
111,903

 
1,926,753

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Consumer Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
781 and above
3,357

 
11,136

 
8,566

 
14,957

 
5,938

 
22,047

 
69,402

 

 
135,403

723-780
5,717

 
11,388

 
22,356

 
12,895

 
5,490

 
32,481

 
76,717

 

 
167,044

700-722
1,089

 
22,224

 
4,560

 
3,345

 
4,133

 
11,551

 
16,713

 

 
63,615

660-699
1,803

 
4,688

 
5,120

 
4,057

 
1,113

 
18,128

 
20,797

 

 
55,706

620-659
751

 
4,245

 
2,432

 
1,702

 
3,745

 
8,142

 
13,553

 

 
34,570

580-619
337

 
1,754

 
2,689

 
674

 
1,611

 
4,922

 
8,499

 

 
20,486

579 and below
22,670

 
2,038

 
3,282

 
3,137

 
2,585

 
106,144

 
8,216

 

 
148,072

Total Other Consumer
35,724

 
57,473

 
49,005

 
40,767

 
24,615

 
203,415

 
213,897

 

 
624,896

Total Consumer Loans
294,623

 
1,178,630

 
1,031,718

 
690,958

 
652,318

 
1,913,133

 
1,527,485

 
111,903

 
7,400,768

Total Loans and Leases
$
1,324,939

 
$
5,200,853

 
$
4,275,534

 
$
2,707,828

 
$
2,107,637

 
$
5,393,209

 
$
3,419,729

 
$
111,903

 
$
24,541,632


During the three months ended March 31, 2020, the Company converted $6.6 million of revolving home equity loans to term loans.