Loans and Leases

9 Months Ended

Sep. 30, 2019

Loans and Leases Receivable

Loans and Leases

6. Loans and Leases

The Bancorp diversifies its loan and lease portfolio by offering a variety of loan and lease products with various payment terms and rate structures. The Bancorp’s commercial loan and lease portfolio consists of lending to various industry types. Management periodically reviews the performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed. The Bancorp acquired indirect motorcycle, powersport, recreational vehicle and marine loans in the acquisition of MB Financial, Inc. These loans are included in addition to automobile loans in the line item “indirect secured consumer loans”. The Bancorp maintains an allowance to absorb loan and lease losses inherent in the portfolio. For further information on credit quality and the ALLL, refer to Note 7.

The following table provides a summary of commercial loans and leases classified by primary purpose and consumer loans classified based upon product or collateral as of:
			September 30,	December 31,
($ in millions)			2019	2018
Loans and leases held for sale:
	Commercial and industrial loans	$	86	67
	Commercial mortgage loans		-	3
	Residential mortgage loans		1,137	537
Total loans and leases held for sale		$	1,223	607
Portfolio loans and leases:
	Commercial and industrial loans	$	50,768	44,340
	Commercial mortgage loans		10,822	6,974
	Commercial construction loans		5,281	4,657
	Commercial leases		3,495	3,600
Total commercial loans and leases		$	70,366	59,571
	Residential mortgage loans	$	16,675	15,504
	Home equity		6,218	6,402
	Indirect secured consumer loans		11,026	8,976
	Credit card		2,467	2,470
	Other consumer loans		2,657	2,342
Total consumer loans		$	39,043	35,694
Total portfolio loans and leases		$	109,409	95,265

Portfolio loans and leases are recorded net of unearned income, which totaled $404 million as of September 30, 2019 and $479 million as of December 31, 2018. Additionally, portfolio loans and leases, excluding PCI loans, are recorded net of unamortized premiums and discounts, deferred direct loan origination fees and costs and fair value adjustments (associated with acquired loans or loans designated as fair value upon origination) which totaled a net premium of $202 million and $296 million as of September 30, 2019 and December 31, 2018, respectively.

The Bancorp’s FHLB and FRB borrowings are generally secured by loans. The Bancorp had loans of $16.6 billion and $13.1 billion at September 30, 2019 and December 31, 2018, respectively, pledged at the FHLB, and loans of $48.1 billion and $42.6 billion at September 30, 2019 and December 31, 2018, respectively, pledged at the FRB.

The following table presents a summary of the total loans and leases owned by the Bancorp as of:
				90 Days Past Due
		Carrying Value		and Still Accruing
		September 30,	December 31,	September 30,	December 31,
($ in millions)		2019	2018	2019	2018
Commercial and industrial loans	$	50,854	44,407	15	4
Commercial mortgage loans		10,822	6,977	18	2
Commercial construction loans		5,281	4,657	1	-
Commercial leases		3,495	3,600	1	-
Residential mortgage loans		17,812	16,041	48	38
Home equity		6,218	6,402	-	-
Indirect secured consumer loans		11,026	8,976	10	12
Credit card		2,467	2,470	38	37
Other consumer loans		2,657	2,342	1	-
Total loans and leases	$	110,632	95,872	132	93
Less: Loans and leases held for sale		1,223	607
Total portfolio loans and leases	$	109,409	95,265
The following table presents a summary of net charge-offs (recoveries):
		For the three months ended		For the nine months ended
		September 30,		September 30,
($ in millions)		2019	2018	2019	2018
Commercial and industrial loans	$	29	28	67	102
Commercial mortgage loans		-	(1)	(1)	3
Commercial construction loans		-	-	-	-
Commercial leases		4	-	7	-
Residential mortgage loans		1	2	1	6
Home equity		2	3	8	9
Indirect secured consumer loans		13	9	34	28
Credit card		33	21	101	72
Other consumer loans		17	10	39	27
Total net charge-offs	$	99	72	256	247

The Bancorp engages in commercial lease products primarily related to the financing of commercial equipment. Leases are classified as sales-type if the Bancorp transfers control of the underlying asset to the lessee. The Bancorp classifies leases that do not meet any of the criteria for a sales-type lease as a direct financing lease if the present value of the sum of the lease payments and any residual value guaranteed by the lessee and/or any other third party equals or exceeds substantially all of the fair value of the underlying asset and the collection of the lease payments and residual value guarantee is probable.

The following table presents the components of the net investment in leases as of:
($ in millions)			September 30, 2019(a)
Net investment in direct financing leases:
	Lease payment receivable (present value)	$	2,415
	Unguaranteed residual assets (present value)		226
	Net discount on acquired leases		(6)
	Deferred selling profits		-
Net investment in sales-type leases:
	Lease payment receivable (present value)		357
	Unguaranteed residual assets (present value)		11
	Net discount on acquired leases		-

(a) Excludes $492 of leveraged leases at September 30, 2019.

The following table presents the components of the commercial lease financing portfolio as of:
($ in millions)		December 31, 2018
Rentals receivable, net of principal and interest on nonrecourse debt	$	3,256
Estimated residual value of leased assets		804
Initial direct cost, net of amortization		19
Gross investment in commercial lease financing		4,079
Unearned income		(479)
Net investment in commercial lease financing	$	3,600

Interest income recognized in the Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2019 was $22 million and $70 million, respectively, for direct financing leases and $4 million and $7 million, respectively, for sale-type leases.

The following table presents undiscounted cash flows for both direct financing and sales-type leases for the remainder of 2019 through 2024 and thereafter as well as a reconciliation of the undiscounted cash flows to the total lease receivables as follows:
		Direct Financing Leases	Sales-Type Leases
As of September 30, 2019 ($ in millions)
Remainder of 2019	$	220	19
2020		693	81
2021		514	91
2022		433	73
2023		262	43
2024		184	33
Thereafter		274	63
Total undiscounted cash flows	$	2,580	403
Less: Difference between undiscounted cash flows and discounted cash flows		165	46
Present value of lease payments (recognized as lease receivables)	$	2,415	357

The lease residual value represents the present value of the estimated fair value of the leased equipment at the end of the lease. The Bancorp performs quarterly reviews of residual values associated with its leasing portfolio considering factors such as the subject equipment, structure of the transaction, industry, prior experience with the lessee and other factors that impact the residual value to assess for impairment. At September 30, 2019, the Bancorp maintained an allowance of $20 million to cover the inherent losses, including the potential losses related to the residual value, in the net investment in leases. Refer to Note 7 for additional information on credit quality and the ALLL.

At December 31, 2018, the Bancorp maintained an allowance of $18 million to cover the losses related to the minimum lease payments. Any declines in residual value that were deemed to be other-than-temporary were recognized as a loss and included as a component of corporate banking revenue in the Condensed Consolidated Statements of Income.