Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at September 30, 2015 and December 31, 2014 are as follows:



(In thousands)	September 30, 2015		December 31, 2014
Commercial:
Business	$	4,406,854	$	3,969,952
Real estate – construction and land	534,425		403,507
Real estate – business	2,286,013		2,288,215
Personal Banking:
Real estate – personal	1,920,650		1,883,092
Consumer	1,886,806		1,705,134
Revolving home equity	428,940		430,873
Consumer credit card	756,093		782,370
Overdrafts	4,493		6,095
Total loans	$	12,224,274	$	11,469,238

At September 30, 2015, loans of $3.6 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 $1.4 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 and nine months ended September 30, 2015 and 2014, respectively, follows:



	For the Three Months Ended September 30							For the Nine Months Ended September 30
(In thousands)	Commercial			Personal Banking		Total		Commercial			Personal Banking		Total
Balance at beginning of period	$	86,329		$	65,203	$	151,532	$	89,622		$	66,910	$	156,532
Provision	(1,976		)	10,340		8,364		(6,089		)	25,630		19,541
Deductions:
Loans charged off	903			11,321		12,224		3,035			34,194		37,229
Less recoveries on loans	1,167			2,693		3,860		4,119			8,569		12,688
Net loan charge-offs (recoveries)	(264		)	8,628		8,364		(1,084		)	25,625		24,541
Balance September 30, 2015	$	84,617		$	66,915	$	151,532	$	84,617		$	66,915	$	151,532
Balance at beginning of period	$	98,928		$	62,604	$	161,532	$	94,189		$	67,343	$	161,532
Provision	(717		)	8,369		7,652		3,836			21,031		24,867
Deductions:
Loans charged off	686			11,414		12,100		3,034			35,917		38,951
Less recoveries on loans	1,431			3,017		4,448		3,965			10,119		14,084
Net loan charge-offs (recoveries)	(745		)	8,397		7,652		(931		)	25,798		24,867
Balance September 30, 2014	$	98,956		$	62,576	$	161,532	$	98,956		$	62,576	$	161,532

The following table shows the balance in the allowance for loan losses and the related loan balance at September 30, 2015 and December 31, 2014, disaggregated on the basis of impairment methodology. Impaired loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, and other impaired loans discussed below, which are deemed to have similar risk characteristics and 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
September 30, 2015
Commercial	$	1,829	$	32,513	$	82,788	$	7,194,779
Personal Banking	1,667		22,868		65,248		4,974,114
Total	$	3,496	$	55,381	$	148,036	$	12,168,893
December 31, 2014
Commercial	$	4,527	$	55,551	$	85,095	$	6,606,123
Personal Banking	2,314		25,537		64,596		4,782,027
Total	$	6,841	$	81,088	$	149,691	$	11,388,150

Impaired loans

The table below shows the Company’s investment in impaired loans at September 30, 2015 and December 31, 2014. 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 under ASC 310-40. 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 on page 14.



(In thousands)	Sept. 30, 2015		Dec. 31, 2014
Non-accrual loans	$	25,779	$	40,775
Restructured loans (accruing)	29,602		40,313
Total impaired loans	$	55,381	$	81,088

The following table provides additional information about impaired loans held by the Company at September 30, 2015 and December 31, 2014, 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
September 30, 2015
With no related allowance recorded:
Business	$	9,692	$	11,866	$	—
Real estate – construction and land	2,072		7,679		—
Real estate – business	1,535		2,969		—
	$	13,299	$	22,514	$	—
With an allowance recorded:
Business	$	8,292	$	10,252	$	681
Real estate – construction and land	3,327		4,939		288
Real estate – business	7,595		11,084		860
Real estate – personal	8,652		11,835		1,015
Consumer	5,461		5,461		70
Revolving home equity	492		492		13
Consumer credit card	8,263		8,263		569
	$	42,082	$	52,326	$	3,496
Total	$	55,381	$	74,840	$	3,496
December 31, 2014
With no related allowance recorded:
Business	$	9,237	$	11,532	$	—
Real estate – construction and land	4,552		8,493		—
Real estate – business	13,453		17,258		—
Revolving home equity	1,227		1,384		—
	$	28,469	$	38,667	$	—
With an allowance recorded:
Business	$	12,326	$	13,846	$	1,844
Real estate – construction and land	8,148		9,610		1,081
Real estate – business	7,835		15,025		1,602
Real estate – personal	9,096		12,465		1,441
Consumer	4,244		4,244		50
Revolving home equity	529		529		9
Consumer credit card	10,441		10,441		814
	$	52,619	$	66,160	$	6,841
Total	$	81,088	$	104,827	$	6,841

Total average impaired loans for the three and nine month periods ended September 30, 2015 and 2014, respectively, are shown in the table below.



(In thousands)	Commercial		Personal Banking		Total
Average Impaired Loans:
For the three months ended September 30, 2015
Non-accrual loans	$	21,119	$	5,179	$	26,298
Restructured loans (accruing)	13,399		18,221		31,620
Total	$	34,518	$	23,400	$	57,918
For the nine months ended September 30, 2015
Non-accrual loans	$	25,784	$	5,791	$	31,575
Restructured loans (accruing)	16,612		18,854		35,466
Total	$	42,396	$	24,645	$	67,041
For the three months ended September 30, 2014
Non-accrual loans	$	38,111	$	7,267	$	45,378
Restructured loans (accruing)	32,970		19,822		52,792
Total	$	71,081	$	27,089	$	98,170
For the nine months ended September 30, 2014
Non-accrual loans	$	38,099	$	7,320	$	45,419
Restructured loans (accruing)	37,157		20,660		57,817
Total	$	75,256	$	27,980	$	103,236

The table below shows interest income recognized during the three and nine month periods ended September 30, 2015 and 2014, respectively, for impaired loans held at the end of each respective period. This interest all relates to accruing restructured loans, as discussed in the "Troubled debt restructurings" section on page 14.



	For the Three Months Ended September 30				For the Nine Months Ended September 30
(In thousands)	2015		2014		2015		2014
Interest income recognized on impaired loans:
Business	$	63	$	146	$	188	$	438
Real estate – construction and land	22		97		66		290
Real estate – business	33		58		99		173
Real estate – personal	47		53		142		160
Consumer	87		72		261		215
Revolving home equity	6		7		17		20
Consumer credit card	186		236		558		707
Total	$	444	$	669	$	1,331	$	2,003

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 September 30, 2015 and December 31, 2014.



(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
September 30, 2015
Commercial:
Business	$	4,391,674	$	3,106	$	375	$	11,699	$	4,406,854
Real estate – construction and land	529,117		1,262		—		4,046		534,425
Real estate – business	2,277,384		3,575		—		5,054		2,286,013
Personal Banking:
Real estate – personal	1,904,280		8,695		2,695		4,980		1,920,650
Consumer	1,867,657		17,244		1,905		—		1,886,806
Revolving home equity	423,939		2,512		2,489		—		428,940
Consumer credit card	740,124		8,726		7,243		—		756,093
Overdrafts	4,204		289		—		—		4,493
Total	$	12,138,379	$	45,409	$	14,707	$	25,779	$	12,224,274
December 31, 2014
Commercial:
Business	$	3,946,144	$	11,152	$	1,096	$	11,560	$	3,969,952
Real estate – construction and land	397,488		827		35		5,157		403,507
Real estate – business	2,266,688		3,661		—		17,866		2,288,215
Personal Banking:
Real estate – personal	1,868,606		6,618		1,676		6,192		1,883,092
Consumer	1,687,285		16,053		1,796		—		1,705,134
Revolving home equity	428,478		1,552		843		—		430,873
Consumer credit card	764,599		9,559		8,212		—		782,370
Overdrafts	5,721		374		—		—		6,095
Total	$	11,365,009	$	49,796	$	13,658	$	40,775	$	11,469,238

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
September 30, 2015
Pass	$	4,304,836	$	527,590	$	2,211,387	$	7,043,813
Special mention	59,526		1,021		19,576		80,123
Substandard	30,793		1,768		49,996		82,557
Non-accrual	11,699		4,046		5,054		20,799
Total	$	4,406,854	$	534,425	$	2,286,013	$	7,227,292
December 31, 2014
Pass	$	3,871,569	$	385,831	$	2,184,541	$	6,441,941
Special mention	62,904		3,865		40,668		107,437
Substandard	23,919		8,654		45,140		77,713
Non-accrual	11,560		5,157		17,866		34,583
Total	$	3,969,952	$	403,507	$	2,288,215	$	6,661,674

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 "Delinquent and non-accrual loans" section. 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 Banking loans for which FICO scores are not obtained because they generally pertain to commercial customer activities and are often underwritten with other collateral considerations. At September 30, 2015, these were comprised of $256.9 million in personal real estate loans, or 5.1% of the Personal Banking portfolio, compared to $244.3 million at December 31, 2014. For the remainder of loans in the Personal Banking portfolio, the table below shows the percentage of balances outstanding at September 30, 2015 and December 31, 2014 by FICO score.



Personal Banking Loans
	% of Loan Category
	Real Estate - Personal		Consumer		Revolving Home Equity		Consumer Credit Card
September 30, 2015
FICO score:
Under 600	1.5	%	4.6	%	1.6	%	3.8	%
600 - 659	2.8		9.5		4.2		12.1
660 - 719	9.1		22.5		13.7		32.6
720 - 779	25.3		27.0		26.2		28.1
780 and over	61.3		36.4		54.3		23.4
Total	100.0	%	100.0	%	100.0	%	100.0	%
December 31, 2014
FICO score:
Under 600	1.4	%	5.2	%	1.8	%	4.1	%
600 - 659	3.1		10.2		4.4		11.8
660 - 719	9.9		22.9		13.7		32.4
720 - 779	26.7		28.0		32.8		27.8
780 and over	58.9		33.7		47.3		23.9
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. Total restructured loans amounted to $46.7 million at September 30, 2015. 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, and those non-accrual loans totaled $17.1 million at September 30, 2015. Other performing restructured loans totaled $29.6 million at September 30, 2015. These include certain business, construction and business real estate loans classified as substandard. Upon maturity, the loans renewed at interest rates judged not to be market rates for new debt with similar risk and as a result the loans were classified as troubled debt restructurings. These commercial loans totaled $12.5 million at September 30, 2015. 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. Troubled debt restructurings also include certain credit card loans under various debt management and assistance programs, which totaled $8.3 million at September 30, 2015. Modifications to credit card loans generally involve removing the available line of credit, placing loans on amortizing status, and lowering the contractual interest rate. The Company has classified additional loans as troubled debt restructurings because they were not reaffirmed by the borrower in bankruptcy proceedings. At September 30, 2015, these loans totaled $8.5 million in personal real estate, revolving home equity, and consumer loans. Interest on these loans is being recognized on an accrual basis, as the borrowers are continuing to make payments under the terms of the loan agreements.

The following table shows the outstanding balances of loans classified as troubled debt restructurings at September 30, 2015, 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)	September 30, 2015		Balance 90 days past due at any time during previous 12 months
Commercial:
Business	$	16,441	$	—
Real estate - construction and land	5,222		1,499
Real estate - business	5,502		—
Personal Banking:
Real estate - personal	5,276		—
Consumer	5,487		57
Revolving home equity	492		49
Consumer credit card	8,263		541
Total restructured loans	$	46,683	$	2,146

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. The effects of modifications to consumer credit card loans were estimated to decrease interest income by approximately $1.0 million on an annual, pre-tax basis, compared to amounts contractually owed.

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 have had no other concessions granted other than being renewed at an interest rate judged not to be market. As such, they 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 $1.6 million at September 30, 2015 to lend additional funds to borrowers with restructured loans.

Loans held for sale

Beginning January 1, 2015, certain long-term fixed rate personal real estate loan originations have been designated 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 10. At September 30, 2015, the fair value of these loans was $2.2 million, and the unpaid principal balance was $2.1 million. The unrealized gain in fair value was recognized in loan fees and sales in the consolidated statement of income. None of these loans were on non-accrual status or past due. Interest income with respect to loans held for sale is accrued based on the principal amount outstanding and the loan's contractual interest rate.

Beginning in the third quarter of 2015, the Company has designated 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 at various times while the student is attending school or shortly after graduation. At September 30, 2015, the balance of these loans was $2.0 million. These loans are carried at lower of cost or fair value, and none were on non-accrual status or past due.

Foreclosed real estate/repossessed assets

The Company’s holdings of foreclosed real estate totaled $3.1 million and $5.5 million at September 30, 2015 and December 31, 2014, respectively. Personal property acquired in repossession, generally autos and marine and recreational vehicles, totaled $3.1 million and $2.4 million at September 30, 2015 and December 31, 2014, respectively. These assets are carried at the lower of the amount recorded at acquisition date or the current fair value less estimated costs to sell.