Loans and leases and the allowance for credit losses | 3. Loans and leases and the allowance for credit losses A summary of current, past due and nonaccrual loans as of March 31, 2019 and December 31, 2018 follows: Current 30-89 Days Past Due Accruing Loans Due 90 Days or More (a) Accruing Loans Acquired a Discount Past Due 90 days or More (b) Purchased Impaired (c) Nonaccrual Total (In thousands) March 31, 2019 Commercial, financial, leasing, etc. $ 22,701,500 141,555 1,047 283 — 245,819 $ 23,090,204 Real estate: Commercial 25,441,419 159,209 7,394 158 10,305 207,709 25,826,194 Residential builder and developer 1,738,846 2,190 — — 549 4,392 1,745,977 Other commercial construction 7,036,036 31,152 31,032 — 640 19,899 7,118,759 Residential 13,337,558 406,106 199,940 6,425 187,631 210,266 14,347,926 Residential — limited documentation 2,186,132 71,354 — — 79,658 84,863 2,422,007 Consumer: Home equity lines and loans 4,634,634 31,145 — 4,871 — 69,245 4,739,895 Recreational finance 4,295,732 22,549 — 235 — 10,972 4,329,488 Automobile 3,619,015 62,846 — — — 21,209 3,703,070 Other 1,257,839 14,420 4,844 32,023 — 7,237 1,316,363 Total $ 86,248,711 942,526 244,257 43,995 278,783 881,611 $ 88,639,883 December 31, 2018 Commercial, financial, leasing, etc. $ 22,701,020 39,798 2,567 168 — 234,423 $ 22,977,976 Real estate: Commercial 25,250,983 134,474 11,457 10 9,769 203,672 25,610,365 Residential builder and developer 1,665,178 20,333 — — — 4,798 1,690,309 Other commercial construction 6,982,077 43,615 14,344 — 641 22,205 7,062,882 Residential 13,591,790 404,808 189,682 6,650 203,044 233,352 14,629,326 Residential — limited documentation 2,278,040 72,544 — — 89,851 84,685 2,525,120 Consumer: Home equity lines and loans 4,758,513 25,416 — 5,033 — 71,292 4,860,254 Recreational finance 4,085,781 29,947 — 235 — 11,199 4,127,162 Automobile 3,555,757 79,804 — — — 23,359 3,658,920 Other 1,271,811 15,598 4,477 27,654 — 4,623 1,324,163 Total $ 86,140,950 866,337 222,527 39,750 303,305 893,608 $ 88,466,477 (a) Excludes loans acquired at a discount. (b) Loans acquired at a discount that were recorded at fair value at acquisition date. This category does not include purchased impaired loans that are presented separately. (c) Accruing loans acquired at a discount that were impaired at acquisition date and recorded at fair value. 3. Loans and leases and the allowance for credit losses, continued One-to-four family residential mortgage loans held for sale were $178 million and $205 million at March 31, 2019 and December 31, 2018, respectively. Commercial real estate loans held for sale were $166 million at March 31, 2019 and $347 million at December 31, 2018. The outstanding principal balance and the carrying amount of loans acquired at a discount that were recorded at fair value at the acquisition date and included in the consolidated balance sheet were as follows: March 31, December 31, 2019 2018 (In thousands) Outstanding principal balance $ 960,990 $ 1,016,785 Carrying amount: Commercial, financial, leasing, etc. 25,060 27,073 Commercial real estate 125,310 135,047 Residential real estate 442,260 473,511 Consumer 93,486 91,860 $ 686,116 $ 727,491 Purchased impaired loans included in the table above totaled $279 million at March 31, 2019 and $303 million at December 31, 2018, representing less than 1% of the Company’s assets as of each date. A summary of changes in the accretable yield for loans acquired at a discount for the three months ended March 31, 2019 and 2018 follows: Three Months Ended March 31 2019 2018 Purchased Other Purchased Other Impaired Acquired Impaired Acquired (In thousands) Balance at beginning of period $ 147,210 $ 96,907 $ 157,918 $ 133,162 Interest income (18,082 ) (9,717 ) (9,819 ) (15,112 ) Reclassifications from nonaccretable balance 11,189 4,865 908 207 Other (a) — 1,632 — (73 ) Balance at end of period $ 140,317 $ 93,687 $ 149,007 $ 118,184 (a) Other changes in expected cash flows including changes in interest rates and prepayment assumptions. Changes in the allowance for credit losses for the three months ended March 31, 2019 were as follows: Commercial, Financial, Real Estate Leasing, etc. Commercial Residential Consumer Unallocated Total (In thousands) Beginning balance $ 330,055 341,655 69,125 200,564 78,045 $ 1,019,444 Provision for credit losses 6,271 (4,203 ) (2,447 ) 22,883 (504 ) 22,000 Net charge-offs Charge-offs (8,500 ) (283 ) (3,372 ) (32,945 ) — (45,100 ) Recoveries 7,794 826 1,830 12,543 — 22,993 Net (charge-offs) recoveries (706 ) 543 (1,542 ) (20,402 ) — (22,107 ) Ending balance $ 335,620 337,995 65,136 203,045 77,541 $ 1,019,337 3. Loans and leases and the allowance for credit losses, continued Changes in the allowance for credit losses for the three months ended March 31, 2018 were as follows: Commercial, Financial, Real Estate Leasing, etc. Commercial Residential Consumer Unallocated Total (In thousands) Beginning balance $ 328,599 374,085 65,405 170,809 78,300 $ 1,017,198 Provision for credit losses 7,230 (5,225 ) 10,486 29,814 695 43,000 Net charge-offs Charge-offs (14,581 ) (1,366 ) (4,354 ) (36,451 ) — (56,752 ) Recoveries 4,823 223 1,510 9,669 — 16,225 Net (charge-offs) recoveries (9,758 ) (1,143 ) (2,844 ) (26,782 ) — (40,527 ) Ending balance $ 326,071 367,717 73,047 173,841 78,995 $ 1,019,671 Despite the allocation 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 which 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. 3. Loans and leases and the allowance for credit losses, continued I nformation with respect to loans and leases that were considered impaired as of March 31, 2019 and December 31, 2018 and for the three-month periods ended March 31, 2019 and 2018 follows. March 31, 2019 December 31, 2018 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance (In thousands) With an allowance recorded: Commercial, financial, leasing, etc. $ 201,337 220,116 50,192 153,478 175,549 46,034 Real estate: Commercial 102,247 119,062 10,449 110,253 125,117 11,937 Residential builder and developer 6,805 7,399 327 5,981 6,557 462 Other commercial construction 10,696 13,624 703 10,563 11,113 640 Residential 121,351 142,872 5,291 124,974 147,817 5,402 Residential — limited documentation 71,113 86,276 3,000 74,156 90,066 3,000 Consumer: Home equity lines and loans 47,363 52,583 9,025 47,982 53,248 9,135 Recreational finance 5,539 5,740 1,147 6,138 9,163 1,261 Automobile 3,522 3,603 729 3,527 3,599 729 Other 5,612 11,902 1,128 5,203 8,380 1,046 575,585 663,177 81,991 542,255 630,609 79,646 With no related allowance recorded: Commercial, financial, leasing, etc. 91,355 97,342 — 105,507 136,128 — Real estate: Commercial 125,289 138,095 — 113,376 124,657 — Residential builder and developer 2,756 2,781 — 2,593 2,602 — Other commercial construction 9,203 9,432 — 11,710 11,880 — Residential 19,535 25,771 — 15,379 20,496 — Residential — limited documentation 6,145 10,434 — 5,631 9,796 — 254,283 283,855 — 254,196 305,559 — Total: Commercial, financial, leasing, etc. 292,692 317,458 50,192 258,985 311,677 46,034 Real estate: Commercial 227,536 257,157 10,449 223,629 249,774 11,937 Residential builder and developer 9,561 10,180 327 8,574 9,159 462 Other commercial construction 19,899 23,056 703 22,273 22,993 640 Residential 140,886 168,643 5,291 140,353 168,313 5,402 Residential — limited documentation 77,258 96,710 3,000 79,787 99,862 3,000 Consumer: Home equity lines and loans 47,363 52,583 9,025 47,982 53,248 9,135 Recreational finance 5,539 5,740 1,147 6,138 9,163 1,261 Automobile 3,522 3,603 729 3,527 3,599 729 Other 5,612 11,902 1,128 5,203 8,380 1,046 Total $ 829,868 947,032 81,991 796,451 936,168 79,646 3. Loans and leases and the allowance for credit losses, continued Three Months Ended March 31, 2019 Three Months Ended March 31, 2018 Interest Income Recognized Interest Income Recognized Average Recorded Investment Total Cash Basis Average Recorded Investment Total Cash Basis (In thousands) Commercial, financial, leasing, etc. $ 265,248 3,038 3,038 272,172 783 783 Real estate: Commercial 225,374 1,091 1,091 181,846 3,147 3,147 Residential builder and developer 8,875 115 115 9,840 1,682 1,682 Other commercial construction 20,398 564 564 10,102 6 6 Residential 140,403 2,022 666 121,209 1,902 902 Residential — limited documentation 78,238 1,353 208 85,595 1,728 696 Consumer: Home equity lines and loans 47,556 416 62 48,797 414 86 Recreational finance 6,023 142 4 1,458 63 2 Automobile 3,530 54 19 13,125 224 15 Other 5,218 122 4 1,661 22 1 Total $ 800,863 8,917 5,771 745,805 9,971 7,320 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) March 31, 2019 Pass $ 21,734,455 24,686,100 1,535,068 6,870,882 Criticized accrual 1,109,930 932,385 206,517 227,978 Criticized nonaccrual 245,819 207,709 4,392 19,899 Total $ 23,090,204 25,826,194 1,745,977 7,118,759 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 3. Loans and leases and the allowance for credit losses, continued 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 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 $22 million, respectively, at March 31, 2019 and $29 million and $23 million, respectively, at December 31, 2018. 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 $19 million and $33 million, respectively, at March 31, 2019 and $21 million and $31 million, respectively, at December 31, 2018. 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. 3. Loans and leases and the allowance for credit losses, continued 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) March 31, 2019 Individually evaluated for impairment $ 50,192 11,479 8,291 12,029 $ 81,991 Collectively evaluated for impairment 285,428 326,516 47,028 191,016 849,988 Purchased impaired — — 9,817 — 9,817 Allocated $ 335,620 337,995 65,136 203,045 941,796 Unallocated 77,541 Total $ 1,019,337 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 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) March 31, 2019 Individually evaluated for impairment $ 292,692 256,996 218,144 62,036 $ 829,868 Collectively evaluated for impairment 22,797,512 34,422,440 16,284,500 14,026,780 87,531,232 Purchased impaired — 11,494 267,289 — 278,783 Total $ 23,090,204 34,690,930 16,769,933 14,088,816 $ 88,639,883 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 During the normal course of business, the Company modifies loans to maximize recovery efforts. If the borrower is experiencing financial difficulty and a concession is granted, the Company considers such modifications as troubled debt restructurings and classifies those loans as either nonaccrual loans or renegotiated loans. The types of concessions that the Company grants typically include principal deferrals and interest rate concessions, but may also include other types of concessions. 3. Loans and leases and the allowance for credit losses, continued The table that follows summarizes the Company’s loan modification activities that were considered troubled debt restructurings for the three-month periods ended March 31, 2019 and 2018: Post-modification (a) Number Pre- modification Recorded Investment Principal Deferral Interest Rate Reduction Combination of Concession Types Total Three Months Ended March 31, 2019 (Dollars in thousands) Commercial, financial, leasing, etc. 65 $ 30,615 $ 6,474 $ — $ 24,270 $ 30,744 Real estate: Commercial 15 9,241 987 — 7,967 8,954 Residential builder and developer 2 1,330 1,068 — — 1,068 Other commercial construction 1 418 — — 366 366 Residential 17 3,816 1,751 — 2,273 4,024 Residential — limited documentation 1 236 239 — — 239 Consumer: Home equity lines and loans 7 476 37 — 454 491 Recreational finance 4 88 88 — — 88 Automobile 20 317 280 — 37 317 Total 132 $ 46,537 $ 10,924 $ — $ 35,367 $ 46,291 Three Months Ended March 31, 2018 Commercial, financial, leasing, etc. 56 $ 47,994 $ 35,673 $ 624 $ 13,047 $ 49,344 Real estate: Commercial 20 6,780 5,824 — 927 6,751 Other commercial construction 1 752 746 — — 746 Residential 47 12,636 6,945 — 6,902 13,847 Residential — limited documentation 2 295 267 — 118 385 Consumer: Home equity lines and loans 14 1,348 4 — 1,348 1,352 Recreational finance 2 49 49 — — 49 Automobile 8 148 148 — — 148 Total 150 $ 70,002 $ 49,656 $ 624 $ 22,342 $ 72,622 (a) Financial effects impacting the recorded investment included principal payments or advances, charge-offs and capitalized escrow arrearages. The present value of interest rate concessions, discounted at the effective rate of the original loan, was not material. Troubled debt restructurings are considered to be impaired loans and for purposes of establishing the allowance for credit losses are evaluated for impairment giving consideration to the impact of the modified loan terms on the present value of the loan’s expected cash flows. Impairment of troubled debt restructurings that have subsequently defaulted may also be measured based on the loan’s observable market price or the fair value of collateral if the loan is collateral-dependent. Charge-offs may also be recognized on troubled debt restructurings that have subsequently defaulted. Loans that were modified as troubled debt restructurings during the twelve months ended March 31, 2019 and 2018 and for which there was a subsequent payment default during the three-month periods ended March 31, 2019 and 2018, respectively, were not material. The amount of foreclosed residential real estate property held by the Company was $81 million and $77 million at March 31, 2019 and December 31, 2018, respectively. There were $382 million and $391 million at March 31, 2019 and December 31, 2018, respectively, in loans secured by residential real estate that were in the process of foreclosure. Of all loans in the process of foreclosure at March 31, 2019, approximately 38% were classified as purchased impaired and 21% were government guaranteed. 3. Loans and leases and the allowance for credit losses, continued The Company’s loan and lease portfolio includes commercial lease financing receivables consisting of direct financing and leveraged leases for machinery and equipment, railroad equipment, commercial trucks and trailers, and aircraft. Certain leases contain payment schedules that are tied to variable interest rate indices. In general, early termination options are provided if the lessee is not in default, returns the leased equipment and pays an early termination fee. Additionally, options to purchase the underlying asset by the lessee are generally at the fair market value of the equipment. Effective January 1, 2019, the Company adopted new guidance related to lease accounting published by the Financial Accounting Standards Board (“FASB”). Under the new guidance, the accounting applied by lessors is largely unchanged from previous GAAP, however, the guidance eliminates the accounting model for leveraged leases that commence after the effective date of the guidance. A summary of lease financing receivables follows: March 31, December 31, 2019 2018 (In thousands) Commercial leases: Direct financings: Lease payments receivable $ 1,140,794 $ 1,155,464 Estimated residual value of leased assets 82,686 85,169 Unearned income (106,797 ) (110,458 ) Investment in direct financings 1,116,683 1,130,175 Leveraged leases: Lease payments receivable 82,841 85,007 Estimated residual value of leased assets 81,261 81,261 Unearned income (33,273 ) (33,717 ) Investment in leveraged leases 130,829 132,551 Total investment in leases $ 1,247,512 $ 1,262,726 Deferred taxes payable arising from leveraged leases $ 73,808 $ 74,995 Included within the estimated residual value of leased assets at March 31, 2019 and December 31, 2018 were $35 million and $39 million, respectively, in residual value associated with direct financing leases that are guaranteed by the lessees or others. At March 31, 2019, the minimum future lease payments to be received from lease financings were as follows: (In thousands) Twelve-month period ending March 31: 2020 $ 322,403 2021 302,912 2022 220,516 2023 148,313 2024 84,610 Later years 144,881 $ 1,223,635 |