LOANS AND LEASES

Following is a summary of loans and leases, net of unearned income:

TABLE 6.1



(in millions)	Originated Loans and Leases		Loans Acquired in a Business Combination		Total Loans and Leases
December 31, 2018
Commercial real estate	$	6,171	$	2,615	$	8,786
Commercial and industrial	4,140		416		4,556
Commercial leases	373		—		373
Other	46		—		46
Total commercial loans and leases	10,730		3,031		13,761
Direct installment	1,668		96		1,764
Residential mortgages	2,612		501		3,113
Indirect installment	1,933		—		1,933
Consumer lines of credit	1,119		463		1,582
Total consumer loans	7,332		1,060		8,392
Total loans and leases, net of unearned income	$	18,062	$	4,091	$	22,153
December 31, 2017
Commercial real estate	$	5,175	$	3,567	$	8,742
Commercial and industrial	3,495		675		4,170
Commercial leases	267		—		267
Other	17		—		17
Total commercial loans and leases	8,954		4,242		13,196
Direct installment	1,756		150		1,906
Residential mortgages	2,036		667		2,703
Indirect installment	1,448		—		1,448
Consumer lines of credit	1,152		594		1,746
Total consumer loans	6,392		1,411		7,803
Total loans and leases, net of unearned income	$	15,346	$	5,653	$	20,999

The loans and leases portfolio categories are comprised of the following:


•	Commercial real estate includes both owner-occupied and non-owner-occupied loans secured by commercial properties;


•	Commercial and industrial includes loans to businesses that are not secured by real estate;


•	Commercial leases consist of leases for new or used equipment;


•	Other is comprised primarily of credit cards and mezzanine loans;


•	Direct installment is comprised of fixed-rate, closed-end consumer loans for personal, family or household use, such as home equity loans and automobile loans;


•	Residential mortgages consist of conventional and jumbo mortgage loans for 1-4 family properties;


•	Indirect installment is comprised of loans originated by approved third parties and underwritten by us, primarily automobile loans; and


•	Consumer lines of credit include home equity lines of credit and consumer lines of credit that are either unsecured or secured by collateral other than home equity.

The loans and leases portfolio consists principally of loans to individuals and small- and medium-sized businesses within our primary market in seven states and the District of Columbia. Our market coverage spans several major metropolitan areas including: Pittsburgh, Pennsylvania; Baltimore, Maryland; Cleveland, Ohio; and Charlotte, Raleigh, Durham and the Piedmont Triad (Winston-Salem, Greensboro and High Point) in North Carolina.

The following table shows certain information relating to commercial real estate loans:

TABLE 6.2



December 31	2018			2017
(dollars in millions)
Commercial construction, acquisition and development loans	$	1,152		$	1,170
Percent of total loans and leases	5.2		%	5.6		%
Commercial real estate:
Percent owner-occupied	35.1		%	35.3		%
Percent non-owner-occupied	64.9		%	64.7		%

As of December 31, 2018 and 2017, we had residential construction loans of $273.4 million and $248.3 million, representing 1.2% and 1.1% of total loans and leases, respectively.

We have extended credit to certain directors and executive officers and their related interests. These related-party loans were made in the ordinary course of business under normal credit terms and do not involve more than a normal risk of collection. Following is a summary of the activity for these loans to related parties during 2018:

TABLE 6.3



(in millions)
Balance at beginning of period	$	20
New loans	1
Repayments	(4		)
Other	(1		)
Balance at end of period	$	16

Other represents the net change in loan balances resulting from changes in related parties during 2018.

Loans Acquired in a Business Combination

All loans acquired in a business combination were initially recorded at fair value at the acquisition date. Refer to the Loans Acquired in a Business Combination section in Note 1, “Summary of Significant Accounting Policies,” for a discussion of ASC 310-20 and ASC 310-30 loans. The outstanding balance and the carrying amount of loans acquired in a business combination included in the Consolidated Balance Sheets are as follows:

TABLE 6.4



December 31	2018		2017
(in millions)
Accounted for under ASC 310-30:
Outstanding balance	$	3,768	$	5,176
Carrying amount	3,570		4,834
Accounted for under ASC 310-20:
Outstanding balance	602		835
Carrying amount	513		813
Total loans acquired in a business combination:
Outstanding balance	4,370		6,011
Carrying amount	4,083		5,647

The outstanding balance is the undiscounted sum of all amounts owed under the loan, including amounts deemed principal, interest, fees, penalties and other, whether or not currently due and whether or not any such amounts have been written or charged-off.

The carrying amount of purchased credit impaired loans included in the table above totaled $1.7 million at December 31, 2018 and $1.9 million at December 31, 2017, representing 0.04% and 0.03%, respectively, of the carrying amount of total loans acquired in a business combination as of each date.

The following table provides changes in accretable yield for all loans acquired in business combinations that are accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.

TABLE 6.5



Year Ended December 31	2018			2017
(in millions)
Balance at beginning of period	$	708		$	467
Acquisitions	—			445
Reduction due to unexpected early payoffs	(146		)	(128		)
Reclass from non-accretable difference	267			156
Disposals/transfers	(1		)	(4		)
Other	(1		)	(1		)
Accretion	(222		)	(227		)
Balance at end of period	$	605		$	708

Cash flows expected to be collected on loans acquired in business combinations are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as impairment through a charge to the provision for credit losses and credit to the allowance for credit losses.

The excess of cash flows expected to be collected at acquisition over recorded fair value is referred to as the accretable yield. The accretable yield is recognized into income over the remaining life of the loan, or pool of loans, using an effective yield

method, since the timing and/or amount of cash flows expected to be collected can be reasonably estimated (the accretion model). The difference between the loan’s total scheduled principal and interest payments over all cash flows expected at acquisition is referred to as the non-accretable difference. The non-accretable difference represents contractually required principal and interest payments which we do not expect to collect.

During 2018, there was an overall improvement in cash flow expectations which resulted in a net reclassification of $266.5 million from the non-accretable difference to accretable yield primarily driven by overall improvement in the primary credit quality indicators of the majority of the acquired loan pools as well as increases to variable/adjustable interest rates throughout the year. This reclassification was $155.8 million for 2017. The reclassification from the non-accretable difference to the accretable yield results in prospective yield adjustments on the loan pools and was also positively impacted by the sale of $56.5 million of acquired residential mortgage loans in the second quarter of 2018.

Credit Quality

Management monitors the credit quality of our loan portfolio using several performance measures to do so based on payment activity and borrower performance.

Non-performing loans include non-accrual loans and non-performing TDRs. Past due loans are reviewed on a monthly basis to identify loans for non-accrual status. We place loans on non-accrual status and discontinue interest accruals on loans generally when principal or interest is due and has remained unpaid for a certain number of days, or when the full amount of principal and interest is due and has remained unpaid for a certain number of days, unless the loan is both well secured and in the process of collection. Commercial loans and leases are placed on non-accrual at 90 days, installment loans are placed on non-accrual at 120 days and residential mortgages and consumer lines of credit are placed on non-accrual at 180 days, though we may place a loan on non-accrual prior to these past due thresholds as warranted. When a loan is placed on non-accrual status, all unpaid accrued interest is reversed. Non-accrual loans may not be restored to accrual status until all delinquent principal and interest have been paid and the ultimate ability to collect the remaining principal and interest is reasonably assured. The majority of TDRs are loans in which we have granted a concession on the interest rate or the original repayment terms due to the borrower’s financial distress.

Following is a summary of non-performing assets:

TABLE 6.6



December 31	2018			2017
(dollars in millions)
Non-accrual loans	$	79		$	75
Troubled debt restructurings	21			23
Total non-performing loans	100			98
Other real estate owned	35			41
Total non-performing assets	$	135		$	139
Asset quality ratios:
Non-performing loans / total loans and leases	0.45		%	0.47		%
Non-performing loans + OREO / total loans and leases + OREO	0.61		%	0.66		%
Non-performing assets / total assets	0.41		%	0.44		%

The carrying value of residential other real estate owned held as a result of obtaining physical possession upon completion of a foreclosure or through completion of a deed in lieu of foreclosure amounted to $6.3 million at December 31, 2018 and $3.6 million at December 31, 2017. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2018 and December 31, 2017 totaled $8.9 million and $15.2 million, respectively.

The following tables provide an analysis of the aging of loans by class segregated by loans and leases originated and loans acquired:

TABLE 6.7



(in millions)	30-89 Days Past Due		≥ 90 Days Past Due and Still Accruing		Non- Accrual		Total Past Due (1)		Current		Total Loans and Leases
Originated Loans and Leases
December 31, 2018
Commercial real estate	$	7	$	—	$	17	$	24	$	6,147	$	6,171
Commercial and industrial	5		—		19		24		4,116		4,140
Commercial leases	1		—		2		3		370		373
Other	—		—		1		1		45		46
Total commercial loans and leases	13		—		39		52		10,678		10,730
Direct installment	8		—		8		16		1,652		1,668
Residential mortgages	16		3		6		25		2,587		2,612
Indirect installment	11		1		2		14		1,919		1,933
Consumer lines of credit	5		1		3		9		1,110		1,119
Total consumer loans	40		5		19		64		7,268		7,332
Total originated loans and leases	$	53	$	5	$	58	$	116	$	17,946	$	18,062
December 31, 2017
Commercial real estate	$	9	$	—	$	25	$	34	$	5,141	$	5,175
Commercial and industrial	9		—		17		26		3,469		3,495
Commercial leases	1		—		2		3		264		267
Other	—		—		1		1		16		17
Total commercial loans and leases	19		—		45		64		8,890		8,954
Direct installment	13		5		9		27		1,729		1,756
Residential mortgages	14		3		5		22		2,014		2,036
Indirect installment	10		1		2		13		1,435		1,448
Consumer lines of credit	6		1		2		9		1,143		1,152
Total consumer loans	43		10		18		71		6,321		6,392
Total originated loans and leases	$	62	$	10	$	63	$	135	$	15,211	$	15,346



(in millions)	30-89 Days Past Due		≥ 90 Days Past Due and Still Accruing		Non- Accrual		Total Past Due (2) (3) (4)		Current		(Discount)/ Premium			Total Loans
Loans Acquired in a Business Combination
December 31, 2018
Commercial real estate	$	19	$	38	$	3	$	60	$	2,723	$	(168	)	$	2,615
Commercial and industrial	3		4		17		24		420		(28		)	416
Total commercial loans	22		42		20		84		3,143		(196		)	3,031
Direct installment	3		2		—		5		91		—			96
Residential mortgages	13		6		—		19		498		(16		)	501
Consumer lines of credit	8		3		1		12		461		(10		)	463
Total consumer loans	24		11		1		36		1,050		(26		)	1,060
Total loans acquired in a business combination	$	46	$	53	$	21	$	120	$	4,193	$	(222	)	$	4,091
December 31, 2017
Commercial real estate	$	35	$	63	$	4	$	102	$	3,657	$	(192	)	$	3,567
Commercial and industrial	3		7		6		16		698		(39		)	675
Total commercial loans	38		70		10		118		4,355		(231		)	4,242
Direct installment	5		2		—		7		142		1			150
Residential mortgages	17		15		—		32		676		(41		)	667
Consumer lines of credit	7		3		1		11		596		(13		)	594
Total consumer loans	29		20		1		50		1,414		(53		)	1,411
Total loans acquired in a business combination	$	67	$	90	$	11	$	168	$	5,769	$	(284	)	$	5,653


(1)	Approximately $14.7 million of originated past-due or non-accrual loans were sold during the second quarter of 2018.


(2)	Past due information for loans acquired in a business combination is based on the contractual balance outstanding at December 31, 2018 and 2017.

(3)

Loans acquired in a business combination are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of expected cash flows on such loans. In these instances, we do not consider acquired contractually delinquent loans to be non-accrual or non-performing and continue to recognize interest income on these loans using the accretion method. Loans acquired in a business combination are considered non-accrual or non-performing when, due to credit deterioration or other factors, we determine we are no longer able to reasonably estimate the timing and amount of expected cash flows on such loans. We do not recognize interest income on loans acquired in a business combination considered non-accrual or non-performing.


(4)	Approximately $28.5 million of acquired past-due or non-accrual loans were sold during the second quarter of 2018.

We utilize the following categories to monitor credit quality within our commercial loan and lease portfolio:

TABLE 6.8



Rating Category		Definition
Pass		in general, the condition of the borrower and the performance of the loan is satisfactory or better
Special Mention		in general, the condition of the borrower has deteriorated, requiring an increased level of monitoring
Substandard		in general, the condition of the borrower has significantly deteriorated and the performance of the loan could further deteriorate if deficiencies are not corrected
Doubtful		in general, the condition of the borrower has significantly deteriorated and the collection in full of both principal and interest is highly questionable or improbable

The use of these internally assigned credit quality categories within the commercial loan and lease portfolio permits management’s use of transition matrices to estimate a quantitative portion of credit risk. Our internal credit risk grading system is based on past experiences with similarly graded loans and leases and conforms with regulatory categories. In general, loan and lease risk ratings within each category are reviewed on an ongoing basis according to our policy for each class of loans and leases. Each quarter, management analyzes the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the commercial loan and lease portfolio. Loans and leases within the Pass credit category or that migrate toward the Pass credit category generally have a lower risk of loss compared to loans and leases that migrate toward the Substandard or Doubtful credit categories. Accordingly, management applies higher risk factors to Substandard and Doubtful credit categories.

The following tables present a summary of our commercial loans and leases by credit quality category segregated by loans and leases originated and loans acquired:

TABLE 6.9



	Commercial Loan and Lease Credit Quality Categories
(in millions)	Pass		Special Mention		Substandard		Doubtful		Total
Originated Loans and Leases
December 31, 2018
Commercial real estate	$	5,883	$	163	$	125	$	—	$	6,171
Commercial and industrial	3,879		180		81		—		4,140
Commercial leases	366		1		6		—		373
Other	45		—		1		—		46
Total originated commercial loans and leases	$	10,173	$	344	$	213	$	—	$	10,730
December 31, 2017
Commercial real estate	$	4,923	$	152	$	99	$	1	$	5,175
Commercial and industrial	3,267		133		92		3		3,495
Commercial leases	260		5		2		—		267
Other	16		—		1		—		17
Total originated commercial loans and leases	$	8,466	$	290	$	194	$	4	$	8,954
Loans Acquired in a Business Combination
December 31, 2018
Commercial real estate	$	2,256	$	168	$	191	$	—	$	2,615
Commercial and industrial	355		18		43		—		416
Total commercial loans acquired in a business combination	$	2,611	$	186	$	234	$	—	$	3,031
December 31, 2017
Commercial real estate	$	3,103	$	251	$	213	$	—	$	3,567
Commercial and industrial	604		26		45		—		675
Total commercial loans acquired in a business combination	$	3,707	$	277	$	258	$	—	$	4,242

Credit quality information for loans acquired in a business combination is based on the contractual balance outstanding at December 31, 2018 and 2017.

We use delinquency transition matrices within the consumer and other loan classes to enable management to estimate a quantitative portion of credit risk. Each month, management analyzes payment and volume activity, FICO scores and other external factors such as unemployment, to determine how consumer loans are performing.

Following is a table showing consumer loans by payment status:

TABLE 6.10



	Consumer Loan Credit Quality by Payment Status
(in millions)	Performing		Non-Performing		Total
Originated Loans
December 31, 2018
Direct installment	$	1,654	$	14	$	1,668
Residential mortgages	2,598		14		2,612
Indirect installment	1,931		2		1,933
Consumer lines of credit	1,114		5		1,119
Total originated consumer loans	$	7,297	$	35	$	7,332
December 31, 2017
Direct installment	$	1,739	$	17	$	1,756
Residential mortgages	2,020		16		2,036
Indirect installment	1,446		2		1,448
Consumer lines of credit	1,148		4		1,152
Total originated consumer loans	$	6,353	$	39	$	6,392
Loans Acquired in a Business Combination
December 31, 2018
Direct installment	$	96	$	—	$	96
Residential mortgages	501		—		501
Indirect installment	—		—		—
Consumer lines of credit	462		1		463
Total consumer loans acquired in a business combination	$	1,059	$	1	$	1,060
December 31, 2017
Direct installment	$	150	$	—	$	150
Residential mortgages	667		—		667
Consumer lines of credit	592		2		594
Total consumer loans acquired in a business combination	$	1,409	$	2	$	1,411

Loans are designated as impaired when, in the opinion of management, based on current information and events, the collection of principal and interest in accordance with the loan and lease contract is doubtful. Typically, we do not consider loans for impairment unless a sustained period of delinquency (i.e., 90-plus days) is noted or there are subsequent events that impact repayment probability (i.e., negative financial trends, bankruptcy filings, imminent foreclosure proceedings, etc.). Effective July 1, 2018, we changed our threshold for measuring impairment on a collective basis. Impairment is evaluated in the aggregate for newly impaired commercial loan relationships less than $1.0 million based on loan segment loss given default. Impairment is evaluated in the aggregate for consumer installment loans, residential mortgages, consumer lines of credit and commercial loan relationships less than $1.0 million based on loan segment loss given default. For commercial loan relationships greater than or equal to $1.0 million, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using a market interest rate or at the fair value of collateral if repayment is expected solely from the sale of the collateral. Consistent with our existing method of income recognition for loans, interest income on impaired loans, except those classified as non-accrual, is recognized using the accrual method. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Following is a summary of information pertaining to loans and leases considered to be impaired, by class of loan and lease:

TABLE 6.11



(in millions)	Unpaid Contractual Principal Balance		Recorded Investment With No Specific Reserve		Recorded Investment With Specific Reserve		Total Recorded Investment		Specific Reserve		Average Recorded Investment
At or for the Year Ended December 31, 2018
Commercial real estate	$	20	$	16	$	1	$	17	$	—	$	18
Commercial and industrial	46		20		13		33		4		32
Commercial leases	2		2		—		2		—		4
Other	—		—		—		—		—		—
Total commercial loans and leases	68		38		14		52		4		54
Direct installment	17		14		—		14		—		14
Residential mortgages	16		14		—		14		—		15
Indirect installment	5		2		—		2		—		2
Consumer lines of credit	7		5		—		5		—		5
Total consumer loans	45		35		—		35		—		36
Total	$	113	$	73	$	14	$	87	$	4	$	90
At or for the Year Ended December 31, 2017
Commercial real estate	$	27	$	22	$	3	$	25	$	1	$	25
Commercial and industrial	29		11		4		15		3		24
Commercial leases	2		2		—		2		—		1
Total commercial loans and leases	58		35		7		42		4		50
Direct installment	19		17		—		17		—		17
Residential mortgages	18		16		—		16		—		16
Indirect installment	6		2		—		2		—		2
Consumer lines of credit	5		4		—		4		—		4
Total consumer loans	48		39		—		39		—		39
Total	$	106	$	74	$	7	$	81	$	4	$	89

Interest income continued to accrue on certain impaired loans and totaled approximately $5.9 million, $6.1 million and $4.6 million during 2018, 2017 and 2016, respectively. The above tables include one loan acquired in a business combination with a specific reserve at December 31, 2018.

Following is a summary of the allowance for credit losses required for loans acquired in a business combination due to changes in credit quality subsequent to the acquisition date:

TABLE 6.12



December 31	2018		2017
(in millions)
Commercial real estate	$	2	$	5
Commercial and industrial	4		—
Total commercial loans	6		5
Direct installment	1		2
Total consumer loans	1		2
Total allowance on loans acquired in a business combination	$	7	$	7

Troubled Debt Restructurings

TDRs are loans whose contractual terms have been modified in a manner that grants a concession to a borrower experiencing financial difficulties. TDRs typically result from loss mitigation activities and could include the extension of a maturity date, interest rate reduction, principal forgiveness, deferral or decrease in payments for a period of time and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of collateral.

Following is a summary of the composition of total TDRs:

TABLE 6.13



(in millions)	Originated		Acquired		Total
December 31, 2018
Accruing:
Performing	$	18	$	—	$	18
Non-performing	17		4		21
Non-accrual	9		—		9
Total TDRs	$	44	$	4	$	48
December 31, 2017
Accruing:
Performing	$	20	$	—	$	20
Non-performing	20		3		23
Non-accrual	10		—		10
Total TDRs	$	50	$	3	$	53

TDRs that are accruing and performing include loans that met the criteria for non-accrual of interest prior to restructuring for which we can reasonably estimate the timing and amount of the expected cash flows on such loans and for which we expect to fully collect the new carrying value of the loans. During 2018, we returned to performing status $4.0 million in restructured residential mortgage loans that have consistently met their modified obligations for more than six months. TDRs that are accruing and non-performing are comprised of consumer loans that have not demonstrated a consistent repayment pattern on the modified terms for more than six months, however it is expected that we will collect all future principal and interest payments. TDRs that are on non-accrual are not placed on accruing status until all delinquent principal and interest have been paid and the ultimate collectability of the remaining principal and interest is reasonably assured. Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses which are factored into the allowance for credit losses.

Excluding purchased credit impaired loans, commercial loans over $1.0 million whose terms have been modified in a TDR are generally placed on non-accrual, individually analyzed and measured for estimated impairment based on the fair value of the underlying collateral. Our allowance for credit losses included specific reserves for commercial TDRs and pooled reserves for individually impaired loans under $1.0 million based on loan segment loss given default. Our allowance for loan losses includes specific reserves for commercial TDRs of less than $0.5 million at December 31, 2018 and 2017, respectively, and pooled reserves for individual loans of $0.5 million for those same respective periods, based on loan segment loss given default. Upon default, the amount of the recorded investment in the TDR in excess of the fair value of the collateral, less estimated selling costs, is generally considered a confirmed loss and is charged-off against the allowance for credit losses.

All other classes of loans whose terms have been modified in a TDR are pooled and measured for estimated impairment based on the expected net present value of the estimated future cash flows of the pool. Our allowance for credit losses included pooled reserves for these classes of loans of $4.0 million at December 31, 2018 and 2017, respectively. Upon default of an individual loan, our charge-off policy is followed for that class of loan.

Following is a summary of TDR loans, by class:

TABLE 6.14



Year Ended December 31	2018					2017
(dollars in millions)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial real estate	4	$	1	$	1	3	$	2	$	2
Commercial and industrial	10	—		—		3	3		3
Total commercial loans	14	1		1		6	5		5
Direct installment	80	4		4		641	5		5
Residential mortgages	15	1		1		43	3		2
Indirect installment	—	—		—		18	—		—
Consumer lines of credit	26	1		1		64	1		1
Total consumer loans	121	6		6		766	9		8
Total	135	$	7	$	7	772	$	14	$	13

The items in the above tables have been adjusted for loans that have been paid off and/or sold.

Following is a summary of originated TDRs, by class, for which there was a payment default, excluding loans that have been paid off and/or sold. Default occurs when a loan is 90 days or more past due and is within 12 months of restructuring.

TABLE 6.15



Year Ended December 31	2018			2017
(dollars in millions)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Commercial real estate	3	$	1	1	$	—
Commercial and industrial	1	—		—	—
Total commercial loans	4	1		1	—
Direct installment	7	1		131	1
Residential mortgages	4	—		6	—
Indirect installment	—	—		17	—
Consumer lines of credit	3	—		5	—
Total consumer loans	14	1		159	1
Total	18	$	2	160	$	1