Loans | NOTE 3. LOANS For purposes of disclosures related to the credit quality of financing receivables and the allowance for loan losses, People’s United has identified two loan portfolio segments, Commercial and Retail, which are comprised of the following loan classes: • Commercial Portfolio • Retail Portfolio Loans acquired in connection with business combinations are referred to as ‘acquired’ loans as a result of the manner in which they are accounted for (see further discussion under ‘Acquired Loans’). All other loans are referred to as ‘originated’ loans. Accordingly, selected credit quality disclosures that follow are presented separately for the ‘originated’ loan portfolio and the ‘acquired’ loan portfolio. People’s United maintains several significant accounting policies with respect to loans, including: • Establishment of the allowance for loan losses (including the identification of ‘impaired’ loans and related impairment measurement considerations); • Income recognition (including the classification of a loan as ‘non-accrual’ • Recognition of loan charge-offs. The Company did not change its application of the accounting policies noted above or its methodology for determining the allowance for loan losses during the three months ended March 31, 2018. The following table summarizes People’s United’s loans by loan portfolio segment and class: March 31, 2018 December 31, 2017 (in millions) Originated Acquired Total Originated Acquired Total Commercial: Commercial real estate $ 9,877.3 $ 933.1 $ 10,810.4 $ 10,126.6 $ 942.1 $ 11,068.7 Commercial and industrial 8,026.0 548.1 8,574.1 8,129.9 601.2 8,731.1 Equipment financing 3,358.7 529.2 3,887.9 3,308.5 596.9 3,905.4 Total Commercial Portfolio 21,262.0 2,010.4 23,272.4 21,565.0 2,140.2 23,705.2 Retail: Residential mortgage: Adjustable-rate 5,785.8 134.9 5,920.7 5,782.6 144.0 5,926.6 Fixed-rate 798.7 114.8 913.5 758.0 121.1 879.1 Total residential mortgage 6,584.5 249.7 6,834.2 6,540.6 265.1 6,805.7 Home equity and other consumer: . Home equity 1,898.3 52.4 1,950.7 1,960.0 55.2 2,015.2 Other consumer 44.0 3.1 47.1 45.6 3.6 49.2 Total home equity and other consumer 1,942.3 55.5 1,997.8 2,005.6 58.8 2,064.4 Total Retail Portfolio 8,526.8 305.2 8,832.0 8,546.2 323.9 8,870.1 Total loans $ 29,788.8 $ 2,315.6 $ 32,104.4 $ 30,111.2 $ 2,464.1 $ 32,575.3 Loan origination fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized in interest income as an adjustment of yield. Depending on the loan portfolio, amounts are amortized or accreted using the level yield method over either the actual life or the estimated average life of the loan. Net deferred loan costs, which are included in loans by respective class and accounted for as interest yield adjustments, totaled $82.6 million at March 31, 2018 and $80.4 million at December 31, 2017. The following tables present a summary, by loan portfolio segment, of activity in the allowance for loan losses for the three months ended March 31, 2018 and 2017. With respect to the originated portfolio, an allocation of a portion of the allowance to one segment does not preclude its availability to absorb losses in another segment. Three months ended Commercial Retail March 31, 2018 (in millions) Originated Acquired Total Originated Acquired Total Total Balance at beginning of period $ 201.1 $ 3.4 $ 204.5 $ 29.7 $ 0.2 $ 29.9 $ 234.4 Charge-offs (3.4 ) (1.8 ) (5.2 ) (1.0 ) — (1.0 ) (6.2 ) Recoveries 1.0 0.3 1.3 0.4 — 0.4 1.7 Net loan charge-offs (2.4 ) (1.5 ) (3.9 ) (0.6 ) — (0.6 ) (4.5 ) Provision for loan losses 1.5 1.9 3.4 2.0 — 2.0 5.4 Balance at end of period $ 200.2 $ 3.8 $ 204.0 $ 31.1 $ 0.2 $ 31.3 $ 235.3 Three months ended Commercial Retail March 31, 2017 (in millions) Originated Acquired Total Originated Acquired Total Total Balance at beginning of period $ 198.8 $ 6.1 $ 204.9 $ 24.2 $ 0.2 $ 24.4 $ 229.3 Charge-offs (2.9 ) — (2.9 ) (1.7 ) — (1.7 ) (4.6 ) Recoveries 1.6 — 1.6 0.6 — 0.6 2.2 Net loan charge-offs (1.3 ) — (1.3 ) (1.1 ) — (1.1 ) (2.4 ) Provision for loan losses (2.4 ) — (2.4 ) 6.8 — 6.8 4.4 Balance at end of period $ 195.1 $ 6.1 $ 201.2 $ 29.9 $ 0.2 $ 30.1 $ 231.3 The following tables summarize, by loan portfolio segment and impairment methodology, the allowance for loan losses and related portfolio balances: Originated Loans Acquired Loans As of Individually Evaluated Collectively Evaluated Purchased March 31, 2018 for Impairment for Impairment PCI (1) Performing Total (in millions) Portfolio Allowance Portfolio Allowance Portfolio Allowance Portfolio Allowance Portfolio Allowance Commercial $ 138.5 $ 6.0 $ 21,123.5 $ 194.2 $ 351.8 $ 2.2 $ 1,658.6 $ 1.6 $ 23,272.4 $ 204.0 Retail 91.4 2.3 8,435.4 28.8 122.8 0.2 182.4 — 8,832.0 31.3 Total $ 229.9 $ 8.3 $ 29,558.9 $ 223.0 $ 474.6 $ 2.4 $ 1,841.0 $ 1.6 $ 32,104.4 $ 235.3 Originated Loans Acquired Loans As of Individually Evaluated Collectively Evaluated Purchased December 31, 2017 for Impairment for Impairment PCI (1) Performing Total (in millions) Portfolio Allowance Portfolio Allowance Portfolio Allowance Portfolio Allowance Portfolio Allowance Commercial $ 141.2 $ 4.6 $ 21,423.8 $ 196.5 $ 370.4 $ 2.8 $ 1,769.8 $ 0.6 $ 23,705.2 $ 204.5 Retail 94.0 2.4 8,452.2 27.3 128.1 0.2 195.8 — 8,870.1 29.9 Total $ 235.2 $ 7.0 $ 29,876.0 $ 223.8 $ 498.5 $ 3.0 $ 1,965.6 $ 0.6 $ 32,575.3 $ 234.4 (1) Purchased credit impaired The recorded investments, by class of loan, in originated non-performing March 31, December 31, (in millions) 2018 2017 Commercial: Commercial real estate $ 21.0 $ 23.7 Commercial and industrial 34.6 32.6 Equipment financing 47.7 44.3 Total (1) 103.3 100.6 Retail: Residential mortgage 35.4 32.7 Home equity 16.1 15.4 Other consumer — — Total (2) 51.5 48.1 Total $ 154.8 $ 148.7 (1) Reported net of government guarantees totaling $3.0 million and $3.1 million at March 31, 2018 and December 31, 2017, respectively. These government guarantees relate, almost entirely, to guarantees provided by the Small Business Administration as well as selected other Federal agencies and represent the carrying value of the loans that are covered by such guarantees, the extent of which (i.e. full or partial) varies by loan. At March 31, 2018, the principal loan classes to which these government guarantees relate are commercial and industrial loans (94%) and commercial real estate loans (6%). (2) Includes $18.3 million and $15.2 million of loans in the process of foreclosure at March 31, 2018 and December 31, 2017, respectively. The preceding table excludes acquired loans that are (i) accounted for as PCI loans and/or (ii) covered by a Federal Deposit Insurance Corporation (“FDIC”) loss-share agreement (“LSA”), which totaled $23.7 million and $25.1 million at March 31, 2018 and December 31, 2017, respectively. Such loans otherwise meet People’s United’s definition of a non-performing non-performing A loan is generally considered “non-performing” non-accrual non-accrual non-accrual All previously accrued but unpaid interest on non-accrual non-accrual non-accrual A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impaired loans also include certain loans whose terms have been modified in such a way that they are considered troubled debt restructurings (“TDRs”). Loans are considered TDRs if the borrower is experiencing financial difficulty and is afforded a concession by People’s United, such as, but not limited to: (i) payment deferral; (ii) a reduction of the stated interest rate for the remaining contractual life of the loan; (iii) an extension of the loan’s original contractual term at a stated interest rate lower than the current market rate for a new loan with similar risk; (iv) capitalization of interest; or (v) forgiveness of principal or interest. TDRs may either be accruing or placed on non-accrual non-performing non-accrual non-performing Impairment is evaluated on a collective basis for smaller-balance loans with similar credit risk and on an individual loan basis for other loans. If a loan is deemed to be impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported (net of the allowance) at the present value of expected future cash flows discounted at the loan’s original effective interest rate or at the fair value of the collateral less cost to sell if repayment is expected solely from the collateral. Interest payments on impaired non-accrual At March 31, 2018 and December 31, 2017, People’s United’s recorded investment in loans classified as TDRs totaled $172.4 million and $186.9 million, respectively. The related allowance for loan losses was $3.7 million at March 31, 2018 and $4.4 million at December 31, 2017. Interest income recognized on TDRs totaled $1.2 million and $1.3 million for the three months ended March 31, 2018 and 2017, respectively. Fundings under commitments to lend additional amounts to borrowers with loans classified as TDRs were immaterial for the three months ended March 31, 2018 and 2017. Loans that were modified and classified as TDRs during the three months ended March 31, 2018 and 2017 principally involve reduced payment and/or payment deferral, extension of term (generally no more than two years for commercial loans and five years for retail loans) and/or a temporary reduction of interest rate (generally less than 200 basis points). The following tables summarize, by class of loan, the recorded investments in loans modified as TDRs during the three months ended March 31, 2018 and 2017. For purposes of this disclosure, recorded investments represent amounts immediately prior to and subsequent to the restructuring. Three Months Ended March 31, 2018 Pre-Modification Post-Modification Outstanding Outstanding Number Recorded Recorded (dollars in millions) of Contracts Investment Investment Commercial: Commercial real estate (1) 4 $ 3.3 $ 3.3 Commercial and industrial (2) 13 15.1 15.1 Equipment financing (3) 9 7.5 7.5 Total 26 25.9 25.9 Retail: Residential mortgage (4) 5 0.8 0.8 Home equity (5) 12 0.9 0.9 Other consumer — — — Total 17 1.7 1.7 Total 43 $ 27.6 $ 27.6 (1) Represents the following concessions: extension of term (4 contracts; recorded investment of $3.3 million). (2) Represents the following concessions: extension of term (9 contracts; recorded investment of $11.6 million); or reduced payment and/or payment deferral (4 contracts; recorded investment of $3.5 million). (3) Represents the following concessions: reduced payment and/or payment deferral (6 contracts; recorded investment of $7.0 million); or a combination of concessions (3 contracts; recorded investment of $0.5 million). (4) Represents the following concessions: loans restructured through bankruptcy (2 contracts; recorded investment of $0.1 million); or reduced payment and/or payment deferral (3 contracts; recorded investment of $0.7 million). (5) Represents the following concessions: loans restructured through bankruptcy (7 contracts; recorded investment of $0.6 million); reduced payment and/or payment deferral (4 contracts; recorded investment of $0.3 million); or a combination of concessions (1 contract; recorded investment of less than $0.1 million). Three Months Ended March 31, 2017 (dollars in millions) Number Pre-Modification Post-Modification Commercial: Commercial real estate (1) 3 $ 3.9 $ 3.9 Commercial and industrial (2) 9 8.3 8.3 Equipment financing (3) 21 5.9 5.9 Total 33 18.1 18.1 Retail: Residential mortgage (4) 7 3.8 3.8 Home equity (5) 24 2.2 2.2 Other consumer — — — Total 31 6.0 6.0 Total 64 $ 24.1 $ 24.1 (1) Represents the following concessions: reduced payment and/or payment deferral (2 contracts; recorded investment of $2.2 million); or temporary rate reduction (1 contract; recorded investment of $1.7 million). (2) Represents the following concessions: extension of term (8 contracts; recorded investment of $7.4 million); or reduced payment and/or payment deferral (1 contract; recorded investment of $0.9 million). (3) Represents the following concessions: reduced payment and/or payment deferral (7 contracts; recorded investment of $2.3 million); or a combination of concessions (14 contracts; recorded investment of $3.6 million). (4) Represents the following concessions: loans restructured through bankruptcy (1 contract; recorded investment of $0.1 million); reduced payment and/or payment deferral (4 contracts; recorded investment of $1.3 million); or a combination of concessions (2 contracts; recorded investment of $2.4 million). (5) Represents the following concessions: loans restructured through bankruptcy (14 contracts; recorded investment of $1.1 million); reduced payment and/or payment deferral (4 contracts; recorded investment of $0.3 million); or a combination of concessions (6 contracts; recorded investment of $0.8 million). The following is a summary, by class of loan, of information related to TDRs completed within the previous 12 months that subsequently defaulted during the three months ended March 31, 2018 and 2017. For purposes of this disclosure, the previous 12 months is measured from April 1 of the respective prior year and a default represents a previously-modified loan that became past due 30 days or more during the three months ended March 31, 2018 or 2017. Three Months Ended March 31, 2018 2017 (dollars in millions) Number Recorded Number Recorded Commercial: Commercial real estate — $ — 1 $ 1.7 Commercial and industrial 7 4.6 2 1.4 Equipment financing 9 6.4 8 2.6 Total 16 11.0 11 5.7 Retail: Residential mortgage 2 0.5 7 2.5 Home equity 1 — 1 0.1 Other consumer — — — — Total 3 0.5 8 2.6 Total 19 $ 11.5 19 $ 8.3 People’s United’s impaired loans consist of certain loans that have been placed on non-accrual individually-evaluated As of March 31, 2018 As of December 31, 2017 (in millions) Unpaid Recorded Related Unpaid Recorded Related Without a related allowance for loan losses: Commercial: Commercial real estate $ 31.2 $ 29.9 $ — $ 37.7 $ 36.3 $ — Commercial and industrial 26.3 23.8 — 27.9 25.5 — Equipment financing 35.2 29.9 — 36.9 32.8 — Retail: Residential mortgage 65.7 58.8 — 67.6 60.8 — Home equity 23.6 19.8 — 24.0 20.2 — Other consumer — — — — — — Total $ 182.0 $ 162.2 $ — $ 194.1 $ 175.6 $ — With a related allowance for loan losses: Commercial: Commercial real estate $ 15.6 $ 13.1 $ 0.8 $ 11.7 $ 9.9 $ 0.9 Commercial and industrial 27.3 24.9 2.4 26.9 26.0 2.6 Equipment financing 17.0 16.9 2.8 11.6 10.7 1.1 Retail: Residential mortgage 11.1 11.0 1.7 11.4 11.4 1.7 Home equity 1.9 1.8 0.6 1.7 1.6 0.7 Other consumer — — — — — — Total $ 72.9 $ 67.7 $ 8.3 $ 63.3 $ 59.6 $ 7.0 Total impaired loans: Commercial: Commercial real estate $ 46.8 $ 43.0 $ 0.8 $ 49.4 $ 46.2 $ 0.9 Commercial and industrial 53.6 48.7 2.4 54.8 51.5 2.6 Equipment financing 52.2 46.8 2.8 48.5 43.5 1.1 Total 152.6 138.5 6.0 152.7 141.2 4.6 Retail: Residential mortgage 76.8 69.8 1.7 79.0 72.2 1.7 Home equity 25.5 21.6 0.6 25.7 21.8 0.7 Other consumer — — — — — — Total 102.3 91.4 2.3 104.7 94.0 2.4 Total $ 254.9 $ 229.9 $ 8.3 $ 257.4 $ 235.2 $ 7.0 The following table summarizes, by class of loan, the average recorded investment and interest income recognized on impaired loans for the periods indicated. The average recorded investment amounts are based on month-end Three Months Ended March 31, 2018 2017 (in millions) Average Interest Average Interest Commercial: Commercial real estate $ 45.1 $ 0.3 $ 51.9 $ 0.4 Commercial and industrial 48.8 0.4 70.0 0.5 Equipment financing 41.1 0.1 39.8 0.1 Total 135.0 0.8 161.7 1.0 Retail: Residential mortgage 70.7 0.5 71.2 0.4 Home equity 21.5 0.1 20.4 0.1 Other consumer — — — — Total 92.2 0.6 91.6 0.5 Total $ 227.2 $ 1.4 $ 253.3 $ 1.5 The following tables summarize, by class of loan, aging information for originated loans: Past Due As of March 31, 2018 (in millions) Current 30-89 90 Days Total Total Commercial: Commercial real estate $ 9,851.8 $ 13.0 $ 12.5 $ 25.5 $ 9,877.3 Commercial and industrial 7,995.8 11.1 19.1 30.2 8,026.0 Equipment financing 3,270.2 77.2 11.3 88.5 3,358.7 Total 21,117.8 101.3 42.9 144.2 21,262.0 Retail: Residential mortgage 6,536.7 23.1 24.7 47.8 6,584.5 Home equity 1,884.3 5.9 8.1 14.0 1,898.3 Other consumer 43.9 0.1 — 0.1 44.0 Total 8,464.9 29.1 32.8 61.9 8,526.8 Total originated loans $ 29,582.7 $ 130.4 $ 75.7 $ 206.1 $ 29,788.8 Included in the “Current” and “30-89 non-performing non-accrual Past Due As of December 31, 2017 (in millions) Current 30-89 90 Days Total Total Commercial: Commercial real estate $ 10,102.3 $ 11.0 $ 13.3 $ 24.3 $ 10,126.6 Commercial and industrial 8,099.0 14.9 16.0 30.9 8,129.9 Equipment financing 3,219.7 83.1 5.7 88.8 3,308.5 Total 21,421.0 109.0 35.0 144.0 21,565.0 Retail: Residential mortgage 6,487.3 32.8 20.5 53.3 6,540.6 Home equity 1,945.2 7.4 7.4 14.8 1,960.0 Other consumer 45.3 0.3 — 0.3 45.6 Total 8,477.8 40.5 27.9 68.4 8,546.2 Total originated loans $ 29,898.8 $ 149.5 $ 62.9 $ 212.4 $ 30,111.2 Included in the “Current” and “30-89 non-performing non-accrual Commercial Credit Quality Indicators The Company utilizes an internal loan risk rating system as a means of monitoring portfolio credit quality and identifying both problem and potential problem loans. Under the Company’s risk rating system, loans not meeting the criteria for problem and potential problem loans as specified below are considered to be “Pass”-rated loans. Problem and potential problem loans are classified as either “Special Mention,” “Substandard” or “Doubtful.” Loans that do not currently expose the Company to sufficient enough risk of loss to warrant classification as either Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are classified as Special Mention. Substandard loans represent those credits characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful possess all the weaknesses inherent in those classified Substandard with the added characteristic that collection or liquidation in full, on the basis of existing facts, conditions and values, is highly questionable and/or improbable. Risk ratings on commercial loans are subject to ongoing monitoring by lending and credit personnel with such ratings updated annually or more frequently, if warranted. The Company’s internal Loan Review function is responsible for independently evaluating the appropriateness of those credit risk ratings in connection with its cyclical reviews, the approach to which is risk-based and determined by reference to underlying portfolio credit quality and the results of prior reviews. Differences in risk ratings noted in conjunction with such periodic portfolio loan reviews, if any, are reported to management each month. Retail Credit Quality Indicators Pools of smaller-balance, homogeneous loans with similar risk and loss characteristics are also assessed for probable losses. These loan pools include residential mortgage, home equity and other consumer loans that are not assigned individual loan risk ratings. Rather, the assessment of these portfolios is based upon a consideration of recent historical loss experience, broader portfolio indicators, including trends in delinquencies, non-performing The portfolio-specific risk characteristics considered include: (i) collateral values/loan-to-value non-stated non-owner For example, to the extent LTV ratios exceed 70% (reflecting a weaker collateral position for the Company) or borrower FICO scores are less than 680 (reflecting weaker financial standing and/or credit history of the customer), the loans are considered to have an increased level of inherent loss. As a result, a loan with a combination of these characteristics would generally be classified as “High” risk. Conversely, as LTV ratios decline (reflecting a stronger collateral position for the Company) or borrower FICO scores exceed 680 (reflecting stronger financial standing and/or credit history of the customer), the loans are considered to have a decreased level of inherent loss. A loan with a combination of these characteristics would generally be classified as “Low” risk. This analysis also considers (i) the extent of underwriting that occurred at the time of origination (direct income verification provides further support for credit decisions) and (ii) the property’s intended use (owner-occupied properties are less likely to default compared to ‘investment-type’ non-owner LTV ratios and FICO scores are determined at origination and updated periodically throughout the life of the loan. LTV ratios are updated for loans 90 days past due and FICO scores are updated for the entire portfolio quarterly. The portfolio stratification (“High”, “Moderate” and “Low” risk) and identification of the corresponding credit quality indicators also occurs quarterly. Commercial and Retail loans are also evaluated to determine whether they are impaired loans. Such loans are included in the tabular disclosures of credit quality indicators that follow. Acquired Loan Credit Quality Indicators Upon acquiring a loan portfolio, the Company’s internal Loan Review function undertakes the process of assigning risk ratings to all commercial loans in accordance with the Company’s established policy, which may differ in certain respects from the risk rating policy of the predecessor company. The length of time necessary to complete this process varies based on the size of the acquired portfolio, the quality of the documentation maintained in the underlying loan files and the extent to which the predecessor company followed a risk rating approach comparable to People’s United’s. As a result, while acquired loans are risk rated, there are occasions when such ratings may be deemed “preliminary” until the Company’s re-rating For purchased performing loans, the required allowance for loan losses is determined in a manner similar to that for originated loans with a provision for loan losses only recorded when the required allowance for loan losses exceeds any remaining purchase discount at the loan level. For PCI loans, the difference between contractually required principal and interest payments at the acquisition date and the undiscounted cash flows expected to be collected at the acquisition date is referred to as the “nonaccretable difference”, which includes an estimate of future credit losses expected to be incurred over the life of the loans in each pool. A decrease in the expected cash flows in subsequent periods requires the establishment of an allowance for loan losses at that time. At March 31, 2018 and December 31, 2017, the allowance for loan losses on acquired loans was $4.0 million and $3.6 million, respectively. The following is a summary, by class of loan, of credit quality indicators: As of March 31, 2018 (in millions) Commercial Commercial Equipment Total Commercial: Originated loans: Pass $ 9,635.8 $ 7,681.0 $ 2,951.2 $ 20,268.0 Special mention 136.7 108.7 92.3 337.7 Substandard 103.9 235.0 315.2 654.1 Doubtful 0.9 1.3 — 2.2 Total originated loans 9,877.3 8,026.0 3,358.7 21,262.0 Acquired loans: Pass 879.4 473.9 529.2 1,882.5 Special mention 16.2 6.7 — 22.9 Substandard 37.5 67.5 — 105.0 Doubtful — — — — Total acquired loans 933.1 548.1 529.2 2,010.4 Total $ 10,810.4 $ 8,574.1 $ 3,887.9 $ 23,272.4 As of March 31, 2018 (in millions) Residential Home Other Total Retail: Originated loans: Low risk $ 3,312.3 $ 893.8 $ 28.3 $ 4,234.4 Moderate risk 2,765.9 606.6 5.9 3,378.4 High risk 506.3 397.9 9.8 914.0 Total originated loans 6,584.5 1,898.3 44.0 8,526.8 Acquired loans: Low risk 143.7 — — 143.7 Moderate risk 58.7 — — 58.7 High risk 47.3 52.4 3.1 102.8 Total acquired loans 249.7 52.4 3.1 305.2 Total $ 6,834.2 $ 1,950.7 $ 47.1 $ 8,832.0 As of December 31, 2017 (in millions) Commercial Commercial Equipment Total Commercial: Originated loans: Pass $ 9,859.3 $ 7,760.7 $ 2,899.9 $ 20,519.9 Special mention 159.4 124.0 91.8 375.2 Substandard 107.0 244.2 316.8 668.0 Doubtful 0.9 1.0 — 1.9 Total originated loans 10,126.6 8,129.9 3,308.5 21,565.0 Acquired loans: Pass 892.0 520.0 596.9 2,008.9 Special mention 14.8 15.2 — 30.0 Substandard 35.3 66.0 — 101.3 Doubtful — — — — Total acquired loans 942.1 601.2 596.9 2,140.2 Total $ 11,068.7 $ 8,731.1 $ 3,905.4 $ 23,705.2 As of December 31, 2017 (in millions) Residential Home Other Total Retail: Originated loans: Low risk $ 3,292.1 $ 925.6 $ 28.2 $ 4,245.9 Moderate risk 2,738.8 640.0 7.1 3,385.9 High risk 509.7 394.4 10.3 914.4 Total originated loans 6,540.6 1,960.0 45.6 8,546.2 Acquired loans: Low risk 148.0 — — 148.0 Moderate risk 65.7 — — 65.7 High risk 51.4 55.2 3.6 110.2 Total acquired loans 265.1 55.2 3.6 323.9 Total $ 6,805.7 $ 2,015.2 $ 49.2 $ 8,870.1 Acquired Loans Loans acquired in a business combination are initially recorded at fair value with no carryover of an acquired entity’s previously established allowance for loan losses. Fair value of the loans is determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted for an estimate of future credit losses and prepayments, and then applying a market-based discount rate to those cash flows. Acquired loans are evaluated upon acquisition and classified as either purchased performing or PCI. For purchased performing loans, any premium or discount, representing the difference between the fair value and the outstanding principal balance of the loans, is recognized (using the level yield method) as an adjustment to interest income over the remaining period to contractual maturity or until the loan is repaid in full or sold. Subsequent to the acquisition date, the method utilized to estimate the required allowance for loan losses for these loans is similar to that for originated loans. However, a provision for loan losses is only recorded when the required allowance for loan losses exceeds any remaining purchase discount at the loan level. PCI loans represent those acquired loans with specific evidence of deterioration in credit quality since origination and for which it is probable that, as of the acquisition date, all contractually required principal and interest payments will not be collected Such loans are generally accounted for on a pool basis, with pools formed based on the loans’ common risk characteristics, such as loan collateral type and accrual status. Each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Under the accounting model for PCI loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield”, is accreted into interest income over the life of the loans in each pool using the level yield method. Accordingly, PCI loans are not subject to classification as non-accrual Subsequent to acquisition, actual cash collections are monitored relative to management’s expectations and revised cash flow forecasts are prepared, as warranted. These revised forecasts involve updates, as necessary, of the key assumptions and estimates used in the initial estimate of fair value. Generally speaking, expected cash flows are affected by: • Changes in the expected principal and interest payments over the estimated life • Changes in prepayment assumptions • Changes in interest rate indices for variable rate loans A decrease in expected cash flows in subsequent periods may indicate that the loan pool is impaired, which would require the establishment of an allowance for loan losses by a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods serves, first, to reduce any previously established allowance for loan losses by the increase in the present value of cash flows expected to be collected, and results in a recalculation of the amount of accretable yield for the loan pool. The adjustment of accretable yield due to an increase in expected cash flows is accounted for as a change in estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is adjusted accordingly over the remaining life of the loans in the pool. PCI loans may be resolved either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party or foreclosure of the collateral. In the event of a sale of the loan, a gain or loss on sale is recognized and reported within non-interest re-assessment At the respective acquisition dates, on an aggregate basis, the PCI loan portfolio had contractually required principal and interest payments receivable of $7.65 billion; expected cash flows of $7.09 billion; and a fair value (initial carrying amount) of $5.42 billion. The difference between the contractually required principal and interest payments receivable and the expected cash flows ($560.1 million) represented the initial nonaccretable difference. The difference between the expected cash flows and fair value ($1.67 billion) represented the initial accretable yield. Both the contractually required principal and interest payments receivable and the expected cash flows reflect anticipated prepayments, determined based on historical portfolio experience. At March 31, 2018, the outstanding principal balance and carrying amount of the PCI loan portfolio were $553.2 million and $474.6 million, respectively ($587.7 million and $498.5 million, respectively, at December 31, 2017). The following table summarizes activity in the accretable yield for the PCI loan portfolio: Three Months Ended March 31, (in millions) 2018 2017 Balance at beginning of period $ 219.7 $ 255.4 Accretion (6.3 ) (7.6 ) Reclassification from nonaccretable difference for loans with improved cash flows (1) — — Other changes in expected cash flows (2) (5.9 ) (6.1 ) Balance at end of period $ 207.5 $ 241.7 (1) Results in increased interest accretion as a prospective yield adjustment over the remaining life of the corresponding pool of loans. (2) Represents changes in cash flows expected to be collected due to factors other than credit (e.g. changes in prepayment assumptions and/or changes in interest rates on variable rate loans), as well as loan sales, modifications and payoffs. Other Real Estate Owned and Repossessed Assets (included in Other Assets) Other real estate owned (“REO”) was comprised of commercial and residential properties totaling $10.6 million and $6.8 million, respectively, at March 31, 2018, and $9.3 million and $7.6 million, respectively, at December 31, 2017. Repossessed assets totaled $1.8 million and $2.5 million at March 31, 2018 and December 31, 2017, respectively. |