Credit Quality and the Allowance for Loan and Lease Losses

3 Months Ended

Mar. 31, 2017

Credit Quality and the Allowance for Loan and Leases Losses

Credit Quality and the Allowance for Loan and Lease Losses

6. Credit Quality and the Allowance for Loan and Lease Losses

The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and leases are further disaggregated by class.


Allowance for Loan and Lease Losses
The following tables summarize transactions in the ALLL by portfolio segment:

				Residential
For the three months ended March 31, 2017 ($ in millions)			Commercial	Mortgage	Consumer	Unallocated	Total
Balance, beginning of period		$	831	96	214	112	1,253
	Losses charged-off		(46)	(6)	(55)	-	(107)
	Recoveries of losses previously charged-off		4	1	13	-	18
	Provision for loan and lease losses		37	5	32	-	74
Balance, end of period		$	826	96	204	112	1,238

				Residential
For the three months ended March 31, 2016 ($ in millions)			Commercial	Mortgage	Consumer	Unallocated	Total
Balance, beginning of period		$	840	100	217	115	1,272
	Losses charged-off		(60)	(4)	(52)	-	(116)
	Recoveries of losses previously charged-off		6	2	12	-	20
	Provision for loan and lease losses		81	-	37	1	119
Balance, end of period		$	867	98	214	116	1,295

The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:

					Residential
As of March 31, 2017 ($ in millions)			Commercial		Mortgage	Consumer	Unallocated	Total
ALLL:^(a)
	Individually evaluated for impairment	$	113	^(c)	68	42	-	223
	Collectively evaluated for impairment		713		28	162	-	903
	Unallocated		-		-	-	112	112
Total ALLL		$	826		96	204	112	1,238
Portfolio loans and leases:^(b)
	Individually evaluated for impairment	$	786	^(c)	656	354	-	1,796
	Collectively evaluated for impairment		55,587		14,537	19,565	-	89,689
	Loans acquired with deteriorated credit quality		-		2	-	-	2
Total portfolio loans and leases		$	56,373		15,195	19,919	-	91,487

Includes $2 related to leveraged leases at March 31, 2017.
Excludes $141 of residential mortgage loans measured at fair value, and includes $703 of leveraged leases, net of unearned income at March 31, 2017.
Includes five restructured loans at March 31, 2017 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party, with a recorded investment of $26 and an ALLL of $18.


					Residential
As of December 31, 2016 ($ in millions)			Commercial		Mortgage	Consumer	Unallocated	Total
ALLL:^(a)
	Individually evaluated for impairment	$	118	^(c)	68	44	-	230
	Collectively evaluated for impairment		713		28	170	-	911
	Unallocated		-		-	-	112	112
Total ALLL		$	831		96	214	112	1,253
Portfolio loans and leases:^(b)
	Individually evaluated for impairment	$	904	^(c)	652	371	-	1,927
	Collectively evaluated for impairment		55,548		14,253	20,224	-	90,025
	Loans acquired with deteriorated credit quality		-		3	-	-	3
Total portfolio loans and leases		$	56,452		14,908	20,595	-	91,955

Includes $2 related to leveraged leases at December 31, 2016.
Excludes $143 of residential mortgage loans measured at fair value, and includes $701 of leveraged leases, net of unearned income at December 31, 2016.
Includes five restructured loans at December 31, 2016 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party, with a recorded investment of $26 and an ALLL of $18.

CREDIT RISK PROFILE

Commercial Portfolio Segment

For purposes of analyzing historical loss rates used in the determination of the ALLL and monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Bancorp disaggregates the segment into the following classes: commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leases.

To facilitate the monitoring of credit quality within the commercial portfolio segment, and for purposes of analyzing historical loss rates used in the determination of the ALLL for the commercial portfolio segment, the Bancorp utilizes the following categories of credit grades: pass, special mention, substandard, doubtful and loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter.

Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated at least annually based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter.

The Bancorp assigns a special mention rating to loans and leases that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or lease or the Bancorp’s credit position.

The Bancorp assigns a substandard rating to loans and leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans and leases have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected.

The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

Loans and leases classified as loss are considered uncollectible and are charged-off in the period in which they are determined to be uncollectible. Because loans and leases in this category are fully charged-off, they are not included in the following tables.

The following tables summarize the credit risk profile of the Bancorp’s commercial portfolio segment, by class:

			Special
As of March 31, 2017 ($ in millions)		Pass	Mention	Substandard	Doubtful	Total
Commercial and industrial loans	$	38,187	1,255	1,630	2	41,074
Commercial mortgage owner-occupied loans		3,226	74	110	-	3,410
Commercial mortgage nonowner-occupied loans		3,429	25	60	-	3,514
Commercial construction loans		4,238	45	-	-	4,283
Commercial leases		4,007	56	29	-	4,092
Total commercial loans and leases	$	53,087	1,455	1,829	2	56,373

			Special
As of December 31, 2016 ($ in millions)		Pass	Mention	Substandard	Doubtful	Total
Commercial and industrial loans	$	38,844	1,204	1,604	24	41,676
Commercial mortgage owner-occupied loans		3,168	72	117	3	3,360
Commercial mortgage nonowner-occupied loans		3,466	4	69	-	3,539
Commercial construction loans		3,902	1	-	-	3,903
Commercial leases		3,894	54	26	-	3,974
Total commercial loans and leases	$	53,274	1,335	1,816	27	56,452

Residential Mortgage and Consumer Portfolio Segments

For purposes of monitoring the credit quality and risk characteristics of its consumer portfolio segment, the Bancorp disaggregates the segment into the following classes: home equity, automobile loans, credit card and other consumer loans and leases. The Bancorp’s residential mortgage portfolio segment is also a separate class.

The Bancorp considers repayment performance as the best indicator of credit quality for residential mortgage and consumer loans, which includes both the delinquency status and performing versus nonperforming status of the loans. The delinquency status of all residential mortgage and consumer loans is presented by class in the age analysis section while the performing versus nonperforming status is presented in the following table. Refer to the nonaccrual loans and leases section of Note 1 of the Notes to the Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2016 for additional delinquency and nonperforming information.

The following table presents a summary of the Bancorp’s residential mortgage and consumer portfolio segments, by class, disaggregated into performing versus nonperforming status as of:

		March 31, 2017		December 31, 2016
($ in millions)		Performing	Nonperforming	Performing	Nonperforming
Residential mortgage loans^(a)	$	15,160	35	14,874	34
Home equity		7,399	70	7,622	73
Automobile loans		9,570	2	9,981	2
Credit card		2,043	27	2,209	28
Other consumer loans and leases		808	-	680	-
Total residential mortgage and consumer loans and leases^(a)	$	34,980	134	35,366	137

(a) Excludes $141 and $143 of loans measured at fair value at March 31, 2017 and December 31, 2016, respectively.

Age Analysis of Past Due Loans and Leases
The following tables summarize the Bancorp’s recorded investment in portfolio loans and leases, by age and class:

			Current	Past Due				90 Days Past
			Loans and	30-89	90 Days	Total	Total Loans	Due and Still
As of March 31, 2017 ($ in millions)			Leases^(c)	Days^(c)	or More^(c)	Past Due	and Leases	Accruing
Commercial loans and leases:
	Commercial and industrial loans	$	40,930	46	98	144	41,074	3
	Commercial mortgage owner-occupied loans		3,388	3	19	22	3,410	-
	Commercial mortgage nonowner-occupied loans		3,506	1	7	8	3,514	-
	Commercial construction loans		4,283	-	-	-	4,283	-
	Commercial leases		4,090	-	2	2	4,092	-
Residential mortgage loans^(a)(b)			15,087	27	81	108	15,195	45
Consumer loans and leases:
	Home equity		7,351	64	54	118	7,469	-
	Automobile loans		9,503	60	9	69	9,572	6
	Credit card		2,018	27	25	52	2,070	21
	Other consumer loans and leases		807	1	-	1	808	-
Total portfolio loans and leases^(a)		$	90,963	229	295	524	91,487	75

Excludes $141 of residential mortgage loans measured at fair value at March 31, 2017.
Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of March 31, 2017, $77 of these loans were 30-89 days past due and $302 were 90 days or more past due. The Bancorp recognized $2 of losses during the three months ended March 31, 2017 due to claim denials and curtailments associated with these insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.

			Current	Past Due				90 Days Past
			Loans and	30-89	90 Days	Total	Total Loans	Due and Still
As of December 31, 2016 ($ in millions)			Leases^(c)	Days^(c)	or More^(c)	Past Due	and Leases	Accruing
Commercial loans and leases:
	Commercial and industrial loans	$	41,495	87	94	181	41,676	4
	Commercial mortgage owner-occupied loans		3,332	6	22	28	3,360	-
	Commercial mortgage nonowner-occupied loans		3,530	2	7	9	3,539	-
	Commercial construction loans		3,902	1	-	1	3,903	-
	Commercial leases		3,972	-	2	2	3,974	-
Residential mortgage loans^(a)(b)			14,790	37	81	118	14,908	49
Consumer loans and leases:
	Home equity		7,570	68	57	125	7,695	-
	Automobile loans		9,886	85	12	97	9,983	9
	Credit card		2,183	28	26	54	2,237	22
	Other consumer loans and leases		679	1	-	1	680	-
Total portfolio loans and leases^(a)		$	91,339	315	301	616	91,955	84

Excludes $143 of residential mortgage loans measured at fair value at December 31, 2016.
Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2016, $110 of these loans were 30-89 days past due and $312 were 90 days or more past due. The Bancorp recognized $2 of losses during the three months ended March 31, 2016 due to claim denials and curtailments associated with these insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.

Impaired Portfolio Loans and Leases

Larger commercial loans and leases included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp also performs an individual review on loans and leases that are restructured in a TDR. The Bancorp considers the current value of collateral, credit quality of any guarantees, the loan structure and other factors when evaluating whether an individual loan or lease is impaired. Other factors may include the geography and industry of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower, and the Bancorp’s evaluation of the borrower’s management. Smaller-balance homogenous loans or leases that are collectively evaluated for impairment are not included in the following tables.

The following tables summarize the Bancorp’s impaired portfolio loans and leases, by class, that were subject to individual review, which includes all portfolio loans and leases restructured in a TDR:

			Unpaid
			Principal	Recorded
As of March 31, 2017 ($ in millions)			Balance	Investment		ALLL
With a related ALLL:
Commercial loans and leases:
	Commercial and industrial loans	$	449	392		86
	Commercial mortgage owner-occupied loans^(b)		19	13		3
	Commercial mortgage nonowner-occupied loans		16	15		6
Restructured residential mortgage loans			472	468		68
Restructured consumer loans and leases:
	Home equity		192	191		29
	Automobile loans		11	11		1
	Credit card		49	49		12
Total impaired portfolio loans and leases with a related ALLL		$	1,208	1,139		205
With no related ALLL:
Commercial loans and leases:
	Commercial and industrial loans	$	264	242		-
	Commercial mortgage owner-occupied loans		28	22		-
	Commercial mortgage nonowner-occupied loans		74	74		-
	Commercial leases		2	2		-
Restructured residential mortgage loans			209	188		-
Restructured consumer loans and leases:
	Home equity		104	101		-
	Automobile loans		3	2		-
Total impaired portfolio loans and leases with no related ALLL		$	684	631		-
Total impaired portfolio loans and leases		$	1,892	1,770	a^(a)	205

Includes $277, $642 and $308, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $251, $14 and $46, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at March 31, 2017.
Excludes five restructured loans at March 31, 2017 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party, with an unpaid principal balance of $26, a recorded investment of $26 and an ALLL of $18.


			Unpaid
			Principal	Recorded
As of December 31, 2016 ($ in millions)			Balance	Investment		ALLL
With a related ALLL:
Commercial loans and leases:
	Commercial and industrial loans	$	440	414		94
	Commercial mortgage owner-occupied loans^(b)		24	16		5
	Commercial mortgage nonowner-occupied loans		7	6		1
	Commercial leases		2	2		-
Restructured residential mortgage loans			471	465		68
Restructured consumer loans and leases:
	Home equity		202	201		30
	Automobile loans		12	12		2
	Credit card		52	52		12
Total impaired portfolio loans and leases with a related ALLL		$	1,210	1,168		212
With no related ALLL:
Commercial loans and leases:
	Commercial and industrial loans	$	394	320		-
	Commercial mortgage owner-occupied loans		36	35		-
	Commercial mortgage nonowner-occupied loans		93	83		-
	Commercial leases		2	2		-
Restructured residential mortgage loans			207	187		-
Restructured consumer loans and leases:
	Home equity		107	104		-
	Automobile loans		3	2		-
Total impaired portfolio loans and leases with no related ALLL		$	842	733		-
Total impaired portfolio loans and leases		$	2,052	1,901	a^(a)	212

Includes $322, $635 and $323, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $192, $17 and $48, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2016.
Excludes five restructured loans at December 31, 2016 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party, with an unpaid principal balance of $26, a recorded investment of $26 and an ALLL of $18.


The following tables summarize the Bancorp’s average impaired portfolio loans and leases, by class, and interest income, by class:

			For the three months ended		For the three months ended
			March 31, 2017		March 31, 2016
			Average	Interest	Average	Interest
			Recorded	Income	Recorded	Income
($ in millions)			Investment	Recognized	Investment	Recognized
Commercial loans and leases:
	Commercial and industrial loans	$	683	1	645	2
	Commercial mortgage owner-occupied loans^(a)		43	-	71	-
	Commercial mortgage nonowner-occupied loans		89	1	165	1
	Commercial construction loans		-	-	7	-
	Commercial leases		3	-	5	-
Restructured residential mortgage loans			654	6	642	6
Restructured consumer loans and leases:
	Home equity		298	3	340	3
	Automobile loans		14	-	19	-
	Credit card		51	1	60	1
Total average impaired portfolio loans and leases		$	1,835	12	1,954	13

(a) Excludes five restructured loans associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party, with an average recorded investment of $26 and $27 at March 31, 2017 and March 31, 2016, respectively, and an immaterial amount of interest income recognized for the both the three months ended March 31, 2017 and March 31, 2016.


Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. The following table presents the Bancorp’s nonaccrual loans and leases, by class, and OREO and other repossessed property as of:

			March 31,	December 31,
($ in millions)			2017	2016
Commercial loans and leases:
	Commercial and industrial loans	$	484	478
	Commercial mortgage owner-occupied loans^(a)		28	32
	Commercial mortgage nonowner-occupied loans		9	9
	Commercial leases		2	4
Total nonaccrual portfolio commercial loans and leases			523	523
Residential mortgage loans			35	34
Consumer loans and leases:
	Home equity		70	73
	Automobile loans		2	2
	Credit card		27	28
Total nonaccrual portfolio consumer loans and leases			99	103
Total nonaccrual portfolio loans and leases^(b)(c)		$	657	660
OREO and other repossessed property			64	78	a
Total nonperforming portfolio assets^(b)(c)		$	721	738

Excludes $19 of restructured nonaccrual loans at both March 31, 2017 and December 31, 2016 associated with a consolidated VIE in which the Bancorp has no continuing credit risk due to the risk being assumed by a third party.
Excludes $9 and $13 of nonaccrual loans held for sale at March 31, 2017 and December 31, 2016, respectively.
Includes $4 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at both March 31, 2017 and December 31, 2016 and an immaterial amount and $1 of restructured nonaccrual government insured commercial loans at March 31, 2017 and December 31, 2016, respectively.

The Bancorp’s recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction was $273 million and $260 million as of March 31, 2017 and December 31, 2016, respectively.

Troubled Debt Restructurings

If a borrower is experiencing financial difficulty, the Bancorp may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. Within each of the Bancorp’s loan classes, TDRs typically involve either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date with a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. Modifying the terms of a loan may result in an increase or decrease to the ALLL depending upon the terms modified, the method used to measure the ALLL for a loan prior to modification, and whether any charge-offs were recorded on the loan before or at the time of modification. Refer to the ALLL section of Note 1 of the Notes to the Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2016 for information on the Bancorp’s ALLL methodology. Upon modification of a loan, the Bancorp measures the related impairment as the difference between the estimated future cash flows expected to be collected on the modified loan, discounted at the original effective yield of the loan, and the carrying value of the loan. The resulting measurement may result in the need for minimal or no allowance because it is probable that all cash flows will be collected under the modified terms of the loan. In addition, if the stated interest rate was increased in a TDR, the cash flows on the modified loan, using the pre-modification interest rate as the discount rate, often exceed the recorded investment of the loan. Conversely, upon a modification that reduces the stated interest rate on a loan, the Bancorp recognizes an impairment loss as an increase to the ALLL. If a TDR involves a reduction of the principal balance of the loan or the loan’s accrued interest, that amount is charged off to the ALLL.

As of March 31, 2017, the Bancorp had $115 million and $56 million in line of credit and letter of credit commitments, respectively, compared to $82 million and $57 million in line of credit and letter of credit commitments as of December 31, 2016, respectively, to lend additional funds to borrowers whose terms have been modified in a TDR.

The following tables provide a summary of loans, by class, modified in a TDR by the Bancorp during the three months ended:

			Recorded investment
		Number of loans	in loans modified		Increase	Charge-offs
		modified in a TDR	in a TDR		to ALLL upon	recognized upon
March 31, 2017 ($ in millions)^(a)		during the period^(b)	during the period		modification	modification
Commercial loans:
	Commercial and industrial loans	33	$	97	1	2
	Commercial mortgage owner-occupied loans	5		2	-	-
	Commercial mortgage nonowner-occupied loans	1		-	-	-
Residential mortgage loans		203		29	2	-
Consumer loans:
	Home equity	31		2	-	-
	Automobile loans	30		-	-	-
	Credit card	1,756		7	1	-
Total portfolio loans		2,059	$	137	4	2

Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.
Represents number of loans post-modification and excludes loans previously modified in a TDR.

			Recorded investment		Increase
		Number of loans	in loans modified		(Decrease)	Charge-offs
		modified in a TDR	in a TDR		to ALLL upon	recognized upon
March 31, 2016 ($ in millions)^(a)		during the period^(b)	during the period		modification	modification
Commercial loans:
	Commercial and industrial loans	24	$	56	(2)	-
	Commercial mortgage owner-occupied loans	7		6	(2)	-
	Commercial mortgage nonowner-occupied loans	2		-	-	-
Residential mortgage loans		243		36	2	-
Consumer loans:
	Home equity	64		5	-	-
	Automobile loans	78		1	-	-
	Credit card	2,592		12	2	1
Total portfolio loans		3,010	$	116	-	1

Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality which were accounted for within a pool.
Represents number of loans post-modification and excludes loans previously modified in a TDR.

The Bancorp considers TDRs that become 90 days or more past due under the modified terms as subsequently defaulted. For commercial loans not subject to individual review for impairment, loss rates that are applied for purposes of determining the ALLL include historical losses associated with subsequent defaults on loans previously modified in a TDR. For consumer loans, the Bancorp performs a qualitative assessment of the adequacy of the consumer ALLL by comparing the consumer ALLL to forecasted consumer losses over the projected loss emergence period (the forecasted losses include the impact of subsequent defaults of consumer TDRs). When a residential mortgage, home equity, automobile or other consumer loan that has been modified in a TDR subsequently defaults, the present value of expected cash flows used in the measurement of the potential impairment loss is generally limited to the expected net proceeds from the sale of the loan’s underlying collateral and any resulting impairment loss is reflected as a charge-off or an increase in ALLL. The Bancorp recognizes ALLL for the entire balance of the credit card loans modified in a TDR that subsequently default.

The following tables provide a summary of TDRs that subsequently defaulted during the three months ended March 31, 2017 and 2016 and were within twelve months of the restructuring date:

		Number of		Recorded
March 31, 2017 ($ in millions)^(a)		Contracts		Investment
Commercial loans:
	Commercial and industrial loans	2	$	1
Residential mortgage loans		57		9
Consumer loans:
	Home equity	5		1
	Credit card	450		2
Total portfolio loans		514	$	13

(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.

		Number of		Recorded
March 31, 2016 ($ in millions)^(a)		Contracts		Investment
Commercial loans:
	Commercial and industrial loans	1	$	-
	Commercial mortgage nonowner-occupied loans	1		-
Residential mortgage loans		53		7
Consumer loans:
	Home equity	6		1
	Credit card	423		2
Total portfolio loans		484	$	10

(a) Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.