Allowance for credit losses | 4. Allowance for credit losses Changes in the allowance for credit losses for the years ended December 31, 2018, 2017 and 2016 were as follows: Commercial, Financial, Real Estate Leasing, etc. Commercial Residential Consumer Unallocated Total (In thousands) 2018 Beginning balance $ 328,599 374,085 65,405 170,809 78,300 $ 1,017,198 Provision for credit losses 33,967 (41,181 ) 12,401 127,068 (255 ) 132,000 Net charge-offs Charge-offs (60,414 ) (12,286 ) (15,345 ) (143,196 ) — (231,241 ) Recoveries 27,903 21,037 6,664 45,883 — 101,487 Net (charge-offs) recoveries (32,511 ) 8,751 (8,681 ) (97,313 ) — (129,754 ) Ending balance $ 330,055 341,655 69,125 200,564 78,045 $ 1,019,444 2017 Beginning balance $ 330,833 362,719 61,127 156,288 78,030 $ 988,997 Provision for credit losses 41,511 6,715 16,094 103,410 270 168,000 Net charge-offs Charge-offs (64,941 ) (7,931 ) (20,799 ) (130,927 ) — (224,598 ) Recoveries 21,196 12,582 8,983 42,038 — 84,799 Net (charge-offs) recoveries (43,745 ) 4,651 (11,816 ) (88,889 ) — (139,799 ) Ending balance $ 328,599 374,085 65,405 170,809 78,300 $ 1,017,198 2016 Beginning balance $ 300,404 326,831 72,238 178,320 78,199 $ 955,992 Provision for credit losses 59,506 33,627 6,902 90,134 (169 ) 190,000 Net charge-offs Charge-offs (59,244 ) (4,805 ) (26,133 ) (141,073 ) — (231,255 ) Recoveries 30,167 7,066 8,120 28,907 — 74,260 Net (charge-offs) recoveries (29,077 ) 2,261 (18,013 ) (112,166 ) — (156,995 ) Ending balance $ 330,833 362,719 61,127 156,288 78,030 $ 988,997 Despite the allocations in the preceding tables, the allowance for credit losses is general in nature and is available to absorb losses from any loan or lease type. In establishing the allowance for credit losses, the Company estimates losses attributable to specific troubled credits identified through both normal and targeted credit review processes and also estimates losses inherent in other loans and leases on a collective basis. For purposes of determining the level of the allowance for credit losses, the Company evaluates its loan and lease portfolio by loan type. The amounts of loss components in the Company’s loan and lease portfolios are determined through a loan-by-loan analysis of larger balance commercial loans and commercial real estate loans that are in nonaccrual status and by applying loss factors to groups of loan balances based on loan type and management’s classification of such loans under the Company’s loan grading system. Measurement of the specific loss components is typically based on expected future cash flows, collateral values and other factors that may impact the borrower’s ability to pay. In determining the allowance for credit losses, the Company utilizes a loan grading system that is applied to commercial and commercial real estate credits on an individual loan basis. Loan grades are assigned loss component factors that reflect the Company’s loss estimate for each group of loans and leases. Factors considered in assigning loan grades and loss component factors include borrower-specific information related to expected future cash flows and operating results, collateral values, geographic location, financial condition and performance, payment status, and other information; levels of and trends in portfolio charge-offs and recoveries; levels of and trends in portfolio delinquencies and impaired loans; changes in the risk profile of specific portfolios; trends in volume and terms of loans; effects of changes in credit concentrations; and observed trends and practices in the banking industry. The following tables provide information with respect to loans and leases that were considered impaired as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016. December 31, 2018 December 31, 2017 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance (In thousands) With an allowance recorded: Commercial, financial, leasing, etc. $ 153,478 175,549 46,034 177,250 194,257 45,488 Real estate: Commercial 110,253 125,117 11,937 67,199 75,084 9,140 Residential builder and developer 5,981 6,557 462 5,320 5,641 308 Other commercial construction 10,563 11,113 640 4,817 20,357 647 Residential 124,974 147,817 5,402 101,724 122,602 4,000 Residential — limited documentation 74,156 90,066 3,000 77,277 92,439 3,900 Consumer: Home equity lines and loans 47,982 53,248 9,135 48,847 53,914 8,812 Recreational finance 6,138 9,163 1,261 1,496 3,680 299 Automobile 3,527 3,599 729 13,498 15,737 2,811 Other 5,203 8,380 1,046 1,724 2,192 357 542,255 630,609 79,646 499,152 585,903 75,762 With no related allowance recorded: Commercial, financial, leasing, etc. 105,507 136,128 — 89,126 115,327 — Real estate: Commercial 113,376 124,657 — 138,356 149,716 — Residential builder and developer 2,593 2,602 — 5,057 5,296 — Other commercial construction 11,710 11,880 — 5,456 9,130 — Residential 15,379 20,496 — 13,574 18,980 — Residential — limited documentation 5,631 9,796 — 9,588 16,138 — 254,196 305,559 — 261,157 314,587 — Total: Commercial, financial, leasing, etc. 258,985 311,677 46,034 266,376 309,584 45,488 Real estate: Commercial 223,629 249,774 11,937 205,555 224,800 9,140 Residential builder and developer 8,574 9,159 462 10,377 10,937 308 Other commercial construction 22,273 22,993 640 10,273 29,487 647 Residential 140,353 168,313 5,402 115,298 141,582 4,000 Residential — limited documentation 79,787 99,862 3,000 86,865 108,577 3,900 Consumer: Home equity lines and loans 47,982 53,248 9,135 48,847 53,914 8,812 Recreational finance 6,138 9,163 1,261 1,496 3,680 299 Automobile 3,527 3,599 729 13,498 15,737 2,811 Other 5,203 8,380 1,046 1,724 2,192 357 Total $ 796,451 936,168 79,646 760,309 900,490 75,762 Year Ended December 31, 2018 Year Ended December 31, 2017 Interest Income Recognized Interest Income Recognized Average Recorded Investment Total Cash Basis Average Recorded Investment Total Cash Basis (In thousands) Commercial, financial, leasing, etc. $ 263,018 7,873 7,873 240,157 3,894 3,894 Real estate: Commercial 194,451 10,880 10,880 207,616 4,497 4,497 Residential builder and developer 8,699 1,779 1,779 16,209 6,419 6,419 Other commercial construction 11,467 3,474 3,474 15,142 1,001 1,001 Residential 129,593 8,386 3,456 110,646 7,177 3,406 Residential — limited documentation 82,854 6,118 1,723 93,097 5,981 1,607 Consumer: Home equity lines and loans 48,591 1,698 289 47,323 1,681 400 Recreational finance 1,849 333 9 1,041 212 9 Automobile 9,262 690 69 15,045 1,025 81 Other 4,413 230 13 2,322 96 2 Total $ 754,197 41,461 29,565 748,598 31,983 21,316 Year Ended December 31, 2016 Interest Income Recognized Average Recorded Investment Total Cash Basis (In thousands) Commercial, financial, leasing, etc. $ 277,647 8,342 8,342 Real estate: Commercial 175,877 4,878 4,878 Residential builder and developer 29,237 2,300 2,300 Other commercial construction 19,697 644 644 Residential 98,394 6,227 3,154 Residential — 103,060 5,999 1,975 Consumer: Home equity lines and loans 36,493 1,325 410 Recreational finance 2,549 147 49 Automobile 19,636 1,242 99 Other 6,669 293 34 Total $ 769,259 31,397 21,885 Commercial loans and commercial real estate loans with a lower expectation of default are assigned one of ten possible “pass” loan grades and are generally ascribed lower loss factors when determining the allowance for credit losses. Loans with an elevated level of credit risk are classified as “criticized” and are ascribed a higher loss factor when determining the allowance for credit losses. Criticized loans may be classified as “nonaccrual” if the Company no longer expects to collect all amounts according to the contractual terms of the loan agreement or the loan is delinquent 90 days or more. Furthermore, criticized nonaccrual commercial loans and commercial real estate loans are considered impaired and, as a result, specific loss allowances on such loans are established within the allowance for credit losses to the extent appropriate in each individual instance. The following table summarizes the loan grades applied to the various classes of the Company’s commercial loans and commercial real estate loans. Real Estate Commercial, Residential Other Financial, Builder and Commercial Leasing, etc. Commercial Developer Construction (In thousands) December 31, 2018 Pass $ 21,693,705 24,539,706 1,546,002 6,890,562 Criticized accrual 1,049,848 866,987 139,509 150,115 Criticized nonaccrual 234,423 203,672 4,798 22,205 Total $ 22,977,976 25,610,365 1,690,309 7,062,882 December 31, 2017 Pass $ 20,490,486 24,380,184 1,485,148 6,270,812 Criticized accrual 1,011,174 723,777 140,119 164,812 Criticized nonaccrual 240,991 184,982 6,451 10,088 Total $ 21,742,651 25,288,943 1,631,718 6,445,712 In determining the allowance for credit losses, residential real estate loans and consumer loans are generally evaluated collectively after considering such factors as payment performance and recent loss experience and trends, which are mainly driven by current collateral values in the market place as well as the amount of loan defaults. Loss rates on such loans are determined by reference to recent charge-off history and are evaluated (and adjusted if deemed appropriate) through consideration of other factors including near-term forecasted loss estimates developed by the Company’s credit department. In arriving at such forecasts, the Company considers the current estimated fair value of its collateral based on geographical adjustments for home price depreciation/appreciation and overall borrower repayment performance. With regard to collateral values, the realizability of such values by the Company contemplates repayment of any first lien position prior to recovering amounts on a second lien position. However, residential real estate loans and outstanding balances of home equity loans and lines of credit that are more than 150 days past due are generally evaluated for collectibility on a loan-by-loan basis by giving consideration to estimated collateral values. The carrying value of residential real estate loans and home equity loans and lines of credit for which a partial charge-off has been recognized totaled $29 million and $23 million, respectively, at December 31, 2018 and $34 million and $25 million, respectively, at December 31, 2017. Residential real estate loans and home equity loans and lines of credit that were more than 150 days past due but did not require a partial charge-off because the net realizable value of the collateral exceeded the outstanding customer balance were $21 million and $31 million, respectively, at December 31, 2018 and $20 million and $32 million, respectively, at December 31, 2017. The Company also measures additional losses for purchased impaired loans when it is probable that the Company will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. The determination of the allocated portion of the allowance for credit losses is very subjective. Given that inherent subjectivity and potential imprecision involved in determining the allocated portion of the allowance for credit losses, the Company also provides an inherent unallocated portion of the allowance. The unallocated portion of the allowance is intended to recognize probable losses that are not otherwise identifiable and includes management’s subjective determination of amounts necessary to provide for the possible use of imprecise estimates in determining the allocated portion of the allowance. Therefore, the level of the unallocated portion of the allowance is primarily reflective of the inherent imprecision in the various calculations used in determining the allocated portion of the allowance for credit losses. Other factors that could also lead to changes in the unallocated portion include the effects of expansion into new markets for which the Company does not have the same degree of familiarity and experience regarding portfolio performance in changing market conditions, the introduction of new loan and lease product types, and other risks associated with the Company’s loan portfolio that may not be specifically identifiable. The allocation of the allowance for credit losses summarized on the basis of the Company’s impairment methodology was as follows: Commercial, Financial, Real Estate Leasing, etc. Commercial Residential Consumer Total (In thousands) December 31, 2018 Individually evaluated for impairment $ 46,034 13,039 8,402 12,171 $ 79,646 Collectively evaluated for impairment 284,021 328,616 48,326 188,393 849,356 Purchased impaired — — 12,397 — 12,397 Allocated $ 330,055 341,655 69,125 200,564 $ 941,399 Unallocated 78,045 Total $ 1,019,444 December 31, 2017 Individually evaluated for impairment $ 45,488 10,095 7,900 12,279 $ 75,762 Collectively evaluated for impairment 283,111 363,990 47,645 158,530 853,276 Purchased impaired — — 9,860 — 9,860 Allocated $ 328,599 374,085 65,405 170,809 938,898 Unallocated 78,300 Total $ 1,017,198 The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology was as follows: Commercial, Financial, Real Estate Leasing, etc. Commercial Residential Consumer Total (In thousands) December 31, 2018 Individually evaluated for impairment $ 258,985 254,476 220,140 62,850 $ 796,451 Collectively evaluated for impairment 22,718,991 34,098,670 16,641,411 13,907,649 87,366,721 Purchased impaired — 10,410 292,895 — 303,305 Total $ 22,977,976 34,363,556 17,154,446 13,970,499 $ 88,466,477 December 31, 2017 Individually evaluated for impairment $ 266,376 226,205 202,163 65,565 $ 760,309 Collectively evaluated for impairment 21,476,254 33,117,512 19,023,843 13,201,050 86,818,659 Purchased impaired 21 22,656 387,338 — 410,015 Total $ 21,742,651 33,366,373 19,613,344 13,266,615 $ 87,988,983 |