Credit Quality and the Allowance for Loan and Lease Losses

3 Months Ended

Mar. 31, 2019

Credit Quality and the Allowance for Loan and Leases Losses

Credit Quality and the Allowance for Loan and Lease Losses

7. 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, 2019 ($ in millions)			Commercial	Mortgage	Consumer	Unallocated	Total
Balance, beginning of period		$	645	81	267	110	1,103
	Losses charged-off^(a)		(20)	(2)	(86)	-	(108)
	Recoveries of losses previously charged-off^(a)		3	1	27	-	31
	Provision for (benefit from) loan and lease losses		26	(1)	62	2	89
Balance, end of period		$	654	79	270	112	1,115
(a) For the three months ended March 31, 2019, the Bancorp recorded $11 in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.


				Residential
For the three months ended March 31, 2018 ($ in millions)			Commercial	Mortgage	Consumer	Unallocated	Total
Balance, beginning of period		$	753	89	234	120	1,196
	Losses charged-off		(35)	(4)	(64)	-	(103)
	Recoveries of losses previously charged-off		6	1	15	-	22
	Provision for (benefit from) loan and lease losses		(11)	3	37	(6)	23
Balance, end of period		$	713	89	222	114	1,138

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

				Residential
As of March 31, 2019 ($ in millions)			Commercial	Mortgage	Consumer	Unallocated	Total
ALLL:^(a)
	Individually evaluated for impairment	$	62	60	38	-	160
	Collectively evaluated for impairment		592	19	232	-	843
	Unallocated		-	-	-	112	112
Total ALLL		$	654	79	270	112	1,115
Portfolio loans and leases:^(b)
	Individually evaluated for impairment	$	346	734	272	-	1,352
	Collectively evaluated for impairment		70,659	15,768	21,050	-	107,477
	Purchased credit impaired		683	119	21	-	823
Total portfolio loans and leases		$	71,688	16,621	21,343	-	109,652

Includes $1 related to leveraged leases at March 31, 2019.
Excludes $190 of residential mortgage loans measured at fair value and includes $571 of leveraged leases, net of unearned income at March 31, 2019.

				Residential
As of December 31, 2018 ($ in millions)			Commercial	Mortgage	Consumer	Unallocated	Total
ALLL:^(a)
	Individually evaluated for impairment	$	42	61	38	-	141
	Collectively evaluated for impairment		603	20	229	-	852
	Unallocated		-	-	-	110	110
Total ALLL		$	645	81	267	110	1,103
Portfolio loans and leases:^(b)
	Individually evaluated for impairment	$	277	736	278	-	1,291
	Collectively evaluated for impairment		59,294	14,589	19,912	-	93,795
Total portfolio loans and leases		$	59,571	15,325	20,190	-	95,086

Includes $1 related to leveraged leases at December 31, 2018.
Excludes $179 of residential mortgage loans measured at fair value and includes $624 of leveraged leases, net of unearned income at December 31, 2018.

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, 2019 ($ in millions)		Pass	Mention	Substandard	Doubtful	Total
Commercial and industrial loans	$	49,621	995	1,209	37	51,862
Commercial mortgage owner-occupied loans		4,133	71	208	-	4,412
Commercial mortgage nonowner-occupied loans		5,924	102	248	-	6,274
Commercial construction loans		5,186	36	9	-	5,231
Commercial leases		3,809	38	62	-	3,909
Total commercial loans and leases	$	68,673	1,242	1,736	37	71,688

			Special
As of December 31, 2018 ($ in millions)		Pass	Mention	Substandard	Doubtful	Total
Commercial and industrial loans	$	42,695	779	853	13	44,340
Commercial mortgage owner-occupied loans		3,122	23	139	-	3,284
Commercial mortgage nonowner-occupied loans		3,632	27	31	-	3,690
Commercial construction loans		4,657	-	-	-	4,657
Commercial leases		3,475	72	53	-	3,600
Total commercial loans and leases	$	57,581	901	1,076	13	59,571

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, indirect secured consumer loans, credit card and other consumer loans. 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 Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018 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, 2019		December 31, 2018
($ in millions)		Performing	Nonperforming	Performing	Nonperforming
Residential mortgage loans^(a)	$	16,596	25	15,303	22
Home equity		6,355	80	6,332	70
Indirect secured consumer loans		10,028	3	8,975	1
Credit card		2,361	27	2,444	26
Other consumer loans		2,487	2	2,341	1
Total residential mortgage and consumer loans^(a)	$	37,827	137	35,395	120

(a) Excludes $190 and $179 of residential mortgage loans measured at fair value at March 31, 2019 and December 31, 2018, 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, 2019 ($ in millions)			Leases^(b)(c)	Days^(c)	or More^(c)	Past Due	and Leases	Accruing
Commercial loans and leases:
	Commercial and industrial loans	$	51,737	53	72	125	51,862	15
	Commercial mortgage owner-occupied loans		4,384	16	12	28	4,412	8
	Commercial mortgage nonowner-occupied loans		6,256	3	15	18	6,274	12
	Commercial construction loans		5,230	1	-	1	5,231	-
	Commercial leases		3,904	5	-	5	3,909	-
Residential mortgage loans^(a)			16,512	36	73	109	16,621	48
Consumer loans:
	Home equity		6,300	78	57	135	6,435	1
	Indirect secured consumer loans		9,907	110	14	124	10,031	9
	Credit card		2,301	44	43	87	2,388	38
	Other consumer loans		2,468	18	3	21	2,489	1
Total portfolio loans and leases^(a)		$	108,999	364	289	653	109,652	132 ^(d)

Excludes $190 of residential mortgage loans measured at fair value at March 31, 2019.
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, 2019, $97 of these loans were 30-89 days past due and $262 were 90 days or more past due. The Bancorp recognized an immaterial amount of losses during the three months ended March 31, 2019 due to claim denials and curtailments associated with these insured or guaranteed loans.
Includes accrual and nonaccrual loans and leases.
Total portfolio loans and leases 90 days past due and still accruing reflect a decrease of $4 million which occurred after the Bancorp’s Form 8-K was filed on April 23, 2019.

			Current	Past Due				90 Days Past
			Loans and	30-89	90 Days	Total	Total Loans	Due and Still
As of December 31, 2018 ($ in millions)			Leases^(b)(c)	Days^(c)	or More^(c)	Past Due	and Leases	Accruing
Commercial loans and leases:
	Commercial and industrial loans	$	44,213	32	95	127	44,340	4
	Commercial mortgage owner-occupied loans		3,277	1	6	7	3,284	2
	Commercial mortgage nonowner-occupied loans		3,688	1	1	2	3,690	-
	Commercial construction loans		4,657	-	-	-	4,657	-
	Commercial leases		3,597	1	2	3	3,600	-
Residential mortgage loans^(a)			15,227	37	61	98	15,325	38
Consumer loans:
	Home equity		6,280	71	51	122	6,402	-
	Indirect secured consumer loans		8,844	119	13	132	8,976	12
	Credit card		2,381	47	42	89	2,470	37
	Other consumer loans		2,323	17	2	19	2,342	-
Total portfolio loans and leases^(a)		$	94,487	326	273	599	95,086	93

Excludes $179 of residential mortgage loans measured at fair value at December 31, 2018.
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, 2018, $90 of these loans were 30-89 days past due and $195 were 90 days or more past due. The Bancorp recognized $2 of losses during the three months ended March 31, 2018, respectively, 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, 2019 ($ in millions)			Balance	Investment		ALLL
With a related ALLL:
Commercial loans and leases:
	Commercial and industrial loans	$	246	206		53
	Commercial mortgage owner-occupied loans		9	9		1
	Commercial mortgage nonowner-occupied loans		2	1		-
	Commercial leases		25	24		8
Restructured residential mortgage loans			457	454		60
Restructured consumer loans:
	Home equity		144	143		23
	Indirect secured consumer loans		5	5		1
	Credit card		46	44		14
Total impaired portfolio loans and leases with a related ALLL		$	934	886		160
With no related ALLL:
Commercial loans:
	Commercial and industrial loans	$	84	77		-
	Commercial mortgage owner-occupied loans		18	18		-
	Commercial mortgage nonowner-occupied loans		11	11		-
Restructured residential mortgage loans			297	280		-
Restructured consumer loans:
	Home equity		80	79		-
	Indirect secured consumer loans		2	1		-
Total impaired portfolio loans with no related ALLL		$	492	466		-
Total impaired portfolio loans and leases		$	1,426	1,352	^(a)	160

Includes $59, $724 and $226, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $159, $10 and $46, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at March 31, 2019.


			Unpaid
			Principal	Recorded
As of December 31, 2018 ($ in millions)			Balance	Investment		ALLL
With a related ALLL:
Commercial loans and leases:
	Commercial and industrial loans	$	156	107		34
	Commercial mortgage owner-occupied loans		2	2		1
	Commercial mortgage nonowner-occupied loans		2	1		-
	Commercial leases		23	22		7
Restructured residential mortgage loans			465	462		61
Restructured consumer loans:
	Home equity		146	145		22
	Indirect secured consumer loans		5	4		1
	Credit card		47	44		15
Total impaired portfolio loans and leases with a related ALLL		$	846	787		141
With no related ALLL:
Commercial loans:
	Commercial and industrial loans	$	137	125		-
	Commercial mortgage owner-occupied loans		9	9		-
	Commercial mortgage nonowner-occupied loans		11	11		-
Restructured residential mortgage loans			292	274		-
Restructured consumer loans:
	Home equity		85	83		-
	Indirect secured consumer loans		2	2		-
Total impaired portfolio loans with no related ALLL		$	536	504		-
Total impaired portfolio loans and leases		$	1,382	1,291	a^(a)	141

Includes $60, $724 and $237, respectively, of commercial, residential mortgage and consumer portfolio TDRs on accrual status and $147, $12 and $41, respectively, of commercial, residential mortgage and consumer portfolio TDRs on nonaccrual status at December 31, 2018.

The following table summarizes 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, 2019		March 31, 2018
			Average	Interest	Average	Interest
			Recorded	Income	Recorded	Income
($ in millions)			Investment	Recognized	Investment	Recognized
Commercial loans and leases:
	Commercial and industrial loans	$	258	2	497	5
	Commercial mortgage owner-occupied loans		19	-	22	-
	Commercial mortgage nonowner-occupied loans		13	-	34	-
	Commercial leases		23	1	6	-
Restructured residential mortgage loans			734	7	665	6
Restructured consumer loans:
	Home equity		224	3	258	3
	Indirect secured consumer loans		6	-	9	-
	Credit card		44	1	48	1
Total average impaired portfolio loans and leases		$	1,321	14	1,539	15


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)			2019	2018
Commercial loans and leases:
	Commercial and industrial loans	$	260	193
	Commercial mortgage owner-occupied loans		28	11
	Commercial mortgage nonowner-occupied loans		3	2
	Commercial leases		22	22
Total nonaccrual portfolio commercial loans and leases			313	228
Residential mortgage loans			25	22
Consumer loans:
	Home equity		80	69
	Indirect secured consumer loans		3	1
	Credit card		27	27
	Other consumer loans		2	1
Total nonaccrual portfolio consumer loans			112	98
Total nonaccrual portfolio loans and leases^(a)(b)		$	450	348
OREO and other repossessed property			48	47
Total nonperforming portfolio assets^(a)(b)		$	498	395

Excludes $14 and $16 of nonaccrual loans held for sale at March 31, 2019 and December 31, 2018, respectively.
Includes $11 and $6 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at March 31, 2019 and December 31, 2018, respectively, of which $6 and $2 are restructured nonaccrual government insured commercial loans at March 31, 2019 and December 31, 2018, 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 $214 million and $153 million as of March 31, 2019 and December 31, 2018, 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 Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2018 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.

The Bancorp had commitments to lend additional funds to borrowers whose terms have been modified in a TDR, consisting of line of credit and letter of credit commitments of $29 million and $66 million, respectively, as of March 31, 2019 compared with $24 million and $67 million, respectively, as of December 31, 2018.

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

			Recorded Investment		(Decrease)
		Number of Loans	in Loans Modified		Increase	Charge-offs
		Modified in a TDR	in a TDR		to ALLL Upon	Recognized Upon
March 31, 2019 ($ in millions)^(a)		During the Period^(b)	During the Period		Modification	Modification
Commercial loans:
	Commercial and industrial loans	13	$	34	(5)	-
	Commercial mortgage owner-occupied loans	3		4	-	-
Residential mortgage loans		136		18	-	-
Consumer loans:
	Home equity	21		1	-	-
	Indirect secured consumer loans	29		-	-	-
	Credit card	1,409		8	2	1
Total portfolio loans		1,611	$	65	(3)	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.

			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, 2018 ($ in millions)^(a)		During the Period^(b)	During the Period		Modification	Modification
Commercial loans:
	Commercial and industrial loans	12	$	72	13	-
	Commercial mortgage owner-occupied loans	2		-	-	-
Residential mortgage loans		247		33	1	-
Consumer loans:
	Home equity	25		2	-	-
	Indirect secured consumer loans	20		-	-	-
	Credit card	1,965		10	2	-
Total portfolio loans		2,271	$	117	16	-

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, indirect secured consumer loan 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 an 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, 2019 and 2018 and were within 12 months of the restructuring date:

		Number of		Recorded
March 31, 2019 ($ in millions)^(a)		Contracts		Investment
Commercial loans:
	Commercial and industrial loans	2	$	16
Residential mortgage loans		76		12
Consumer loans:
	Home equity	4		-
	Credit card	283		2
Total portfolio loans		365	$	30

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

		Number of		Recorded
March 31, 2018 ($ in millions)^(a)		Contracts		Investment
Commercial loans:
	Commercial and industrial loans	1	$	1
	Commercial mortgage owner-occupied loans	2		-
Residential mortgage loans		48		7
Consumer loans:
	Home equity	2		-
	Credit card	242		1
Total portfolio loans		295	$	9

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